Nature’s Sunshine Products, Inc. (NASDAQ:NATR) Q2 2019 Results Earnings Conference Call August 8, 2019 5:00 PM ET
Nathan Brower – Executive VP, General Counsel & Secretary
Terrence Moorehead – President, CEO
Joseph Baty – CFO & Executive VP of Finance
Conference Call Participants
Jurriaan Hofman – Robeco
Greetings, and welcome to the Nature’s Sunshine Products Second Quarter 2019 Earnings Conference Call. [Operator Instructions] And this conference is being recorded. I would now like to turn the conference over to your host Mr. Nate Brower, General Counsel of Nature’s Sunshine Products. Thank you, Mr. Brower. You may now have the floor.
Good afternoon, and thanks to all of you for joining our conference call to discuss our second quarter 2019 financial results. This call is available for replay in a live webcast that we post — that we will post on our website at www.naturessunshine.com in the Investors section.
The information on this call may contain certain forward-looking statements. These statements are often characterized by terminologies such as belief, hope, may, anticipate, expect, will, and other similar expressions.
Forward-looking statements are not guarantees of future performance and the actual results may be materially different from the results implied by forward-looking statements. Factors that could cause results to differ materially from these — from those implied herein, include but are not limited to, those factors disclosed in the company’s annual report on Form 10-K under the caption Risk Factors and other reports filed with the Securities and Exchange Commission.
The information on this call speaks only as of today’s date, and the company disclaims any duty to update the information provided herein.
I will now turn the call over to Terrence Moorehead, CEO of Nature’s Sunshine Products.
Thank you, Nate, and good afternoon, everyone, and thank you for joining us for today’s call. I’m pleased to be here with you today to discuss our second quarter results and to share some emerging thoughts regarding progress on our strategic transformation.
With me is our Chief Financial Officer Joe Baty, who will walk you through our financials in greater detail, but I’m going to kick things off today with a brief summary of the business.
Overall, we had a very productive second quarter which started with the announcement of our 5 global strategies and included a series of restructuring initiatives and the launch of a new regional organization.
For the quarter, we generated just over 2% growth in local currency net sales. However, we continue to see the positive impact of our strategic restructuring initiatives, with net sales — excuse me, with net income showing significant improvement, increasing from being negative last year to a positive $2.9 million this year.
Growth in EBITDA was also very strong, increasing over 80% for the quarter. We’ll continue to identify opportunities to drive our costs, as we simultaneously implement growth strategies designed to enhance our competitive position in the market.
Speaking of being more competitive, as we discussed last quarter, our vision is to be more consumer-focused with the objective of being more modern, more flexible and more profitable in everything we do.
Last quarter, I shared details of our multi-year strategy designed to unleash the potential of our business, reimagine our brand and redefine herbal traditions to make the healing power of nature accessible to everyone.
Our plan focuses on 5 global strategies, and we’re making progress upon each one of them. Our first strategy, brand power, is all about creating a more aspirational brand that excites, inspires and transforms the way people think and feel about our company. We’ve already completed an in-depth market and consumer research product — project. And in response to what we’ve learned, we’re working to update logos, packaging design, consumer messaging and brand imagery to more effectively emphasize our performance edge.
We’re also working on plans to revitalize our portfolio with innovative new products that will allow us to expand into new high-growth categories. I’ll be prepared to share more information on this at an appropriate date, but for now, let me simply say this is a key strategy for our business.
Our second strategy, field energy, is all about reimagining the Nature’s Sunshine experience. The starting point is a basic mastery of field fundamentals, but will ultimately include an effort to deliver more personalization and be more omnipresent. Right now, the team is working on an initiative to make buying and selling Nature’s Sunshine easier and more attractive by updating and modernizing sales programs and by improving our technology. We’re also in the process of opening a retail test store as a prototype and learning lab for the hundreds of brick-and-mortar locations that we currently have around the world. In both cases, the goal is to be more effective in driving customer growth.
Our third strategy called, digital first, is all about developing a next-gen digital platform. We’re currently in the process of redesigning our website to improve functionality end user experience, and then we’ll move on to create an expanded and more powerful digital toolkit. Our goal is to move from managing transactional relationships to creating more personal and sustainable life style relationships by improving the consumer experience.
Our fourth strategy, manufacturing inc., focuses on creating award-winning supply chain capabilities. The strategy emphasizes improvements to our industry-leading quality and service, while leveraging production capacity to support new business opportunities. Right now, we’re in the process of attaining ISO 9001 quality certification, and we expect to receive our organic certification later this year. We’re already GMP, NSF, TGA, Halal and Kosher certified. So we’re building a strong foundation of excellence upon which to grow our business.
Our fifth and final strategy called, the right stuff, is all about creating high-performance teams. The goal is to be more efficient and productive, and we’re already seeing the positive impact of our right stuff strategies in the form of improved operating margins, which are up over 145%, as reported, year-to-date. We’ll continue to implement right stuff initiatives with the goal of improving profitability further.
So those are our 5 growth strategies. And based on the strong growth we’re seeing in the nutritional supplements industry and the strategic road map we’ve put in place, we continue to believe there are significant growth opportunities for our company.
To support our strategies and take our company to the next level, we’ve restructured the organization to create 4 regional operating business units or, OBUs, as we call them. Under the new structure, each OBU will be responsible for driving strategy and building market share for both the Nature’s Sunshine and Synergy brands. The idea is to provide more targeted-strategic direction, more relevant consumer focused and a more powerful management and management support in each region where we do business.
We’ve appointed Dan Norman, Executive Vice President and President for Asia Pacific, which includes China, Korea, Japan and Southeast Asia. In his new role as the OBU leader for APAC, Dan will lead the transformation of our largest business unit and help capture what we believe is one of our largest growth opportunities.
Bryant Yates has been appointed Executive Vice President and President for Europe, which includes Europe and Central and Eastern Europe. Bryant will be responsible for strengthening business fundamentals and capturing the tremendous untapped potential in the market in his new role as the OBU leader for Europe.
Eddie Silcock joined Nature’s Sunshine in April 2019 and will continue in his role as Executive Vice President and President of North America. In his role as the OBU leader for North America, which includes the U.S. and Canada, Eddie will be responsible for turning around the U.S. business and reimagining our sales model to strengthen our consumer appeal.
Latin America, which includes our businesses in Mexico and Central and South America, will report directly to me, as we begin a major transformation initiative to turn around this business. Our goal is to create a more profitable business unit and build a regional operating model with local management to key members of the executive team helping to spearhead the effort to turn around our Latin American business. One such strategy is up and running, and we’ve seen improved results, an OBU leader will be put in place.
Now let me turn back to the second quarter operating highlights. As I noted, we saw just over 2% growth in local currency net sales on a consolidated basis, with growth in key Asian markets and Europe, while North America and LatAm continue to experience modest declines.
We posted 4% local sales growth in Asia, with each of our 3 largest markets in the region, South Korea, Japan and China, showing positive sales growth. Growth was more moderate in South Korea this quarter, increasing 4% on a local currency basis. However, we continue to see strong field fundamentals and a solid trend line, so we expect strong growth for the full year.
China experienced a disruption to sales from the government’s 100-Day review of the industry, which slowed business activity. However, our China business continue to enjoy positive growth. For the quarter, we generated 2% growth on a local currency basis and are up 24% for the first 6 months of the year. We continue to believe we have significant long-term growth opportunities in this market.
In Japan, new product launches and sales programs to increase activity contributed to 7% of local currency growth. Our European OBU generated 11% local currency growth, reflecting continued strong momentum in Central and Eastern Europe. Key highlights include Russia, which contributed 18% growth, driven by strong field fundamentals around order growth. While Poland delivered 28% local currency growth, driven by increased consumer penetration.
In North America, net sales decreased 2% on a local currency basis. The rate of decline in North America continues to moderate, as we see signs of improved fundamentals in recruiting and retention. The new North American leadership team is aggressively moving forward the transformation plan and that our key growth initiatives are expected to launch later this year, so we expect to see continued strengthening as we move forward.
Sales in Latin America declined 2%, as weak fundamentals and SKU reductions continue to negatively impact performance. To reverse this trend, our strategy is to leverage local capabilities to accelerate new product introductions and fill key product gaps, while simultaneously restructuring and streamlining the organization to strengthen best practices and improve competitiveness.
Now let me turn the call over to Joe, who is going to walk you through our financial results in greater detail. Joe?
Thank you, Terrence, and good afternoon, everyone. Net sales in the second quarter of 2019 were $90.7 million compared to $91.3 million in the same quarter last year. On a local currency basis, net sales increased 2.3% year-over-year or decreased 0.6% as reported. Unfavorable foreign currency exchange rate fluctuations impacted net sales by $2.6 million compared to the prior year.
Asia net sales declined 1.6% year-over-year to $35.2 million during the second quarter, but increased 4.2% in local currencies. On a local currency basis, the growth was driven by a 4.2% increase in South Korea, a 7% increase in Japan and a 1.9% increase in China.
Net sales in Europe increased 8.3% year-over-year to $15.1 million or 11% growth in local currencies. The net sales increase reflects continued growth in Central and Eastern Europe.
North America net sales in the second quarter declined 2.7% year-over-year to $34.6 million or a 2.4% decline on a local currency basis. As anticipated, we continue to see lower recruiting rates that are not offsetting attrition in NSP Americas, and this trend may continue in the near term. However, new leadership and initiatives have been put in place to support our North America operations.
Net sales for Latin America and Other decreased 3.2% year-over-year to $5.9 million or a 1.8% decline on a local currency basis. The decline in net sales was mainly due to decreases in distributor retention and average purchase size.
Gross margin increased 30 basis points to 73.7% compared to the year ago period. The gross margin increase was driven primarily by favorable changes in market mix and manufacturing efficiency. Volume incentives as a percentage of net sales were 34.5%, consistent with the same period last year.
Selling, general and administrative expenses were $31 million, down $2.3 million year-over-year. The decrease in SG&A is primarily due to savings from prior restructuring activities. As a percentage of net sales, SG&A expenses were 34.2% compared to 36.5% in the same period of 2018. Excluding the impact of $0.4 million in restructuring-related charges, second quarter SG&A expenses were 33.8% of net sales.
We reported operating income of $4.5 million or 5% of net sales compared to operating income of $2.2 million or 2.4% of net sales in the prior year period. Excluding the previously mentioned restructuring charges, we generated $4.9 million of operating income or 5.4% of net sales in the current quarter.
Adjusted EBITDA, as defined in our press release as net income or loss from continuing operations before income taxes, depreciation, amortization and other income or loss adjusted to exclude share-based compensation and certain noted adjustments, was $8 million in the second quarter of 2019 as compared to $4.4 million in the second quarter of 2018.
Net income attributable to common shareholders for the quarter was $2.7 million or $0.14 per diluted share as compared to $0.1 million or $0.00 per common share in the year ago period. Adjusted net income attributable to common shareholders was $2.9 million or $0.15 per common share compared to adjusted net loss of $1.2 million for $0.07 per common share in the prior year period. A reconciliation of adjusted net income to GAAP net income is provided in today’s press release.
Turning to liquidity. We remain pleased with the benefits of our balance sheet management efforts. Cash and cash equivalents on June 30 were $46.3 million, with no long-term debt. For the first 6 months of 2019, we used $1.3 million of cash in operations compared to generating $9.4 million in the comparable prior year period. The change in cash from operating activities on a year-over-year basis primarily reflected changes in working capital, specifically a year-to-date reduction in accrued liabilities.
I would now like to turn the call back to the operator to facilitate Q&A.
Of course, thank you. [Operator Instructions] And I’ll take our first question from Jurriaan Hofman from Robeco. Please go ahead.
Hi. Thank you very much. First of all, can you comment just on the cost-savings initiatives? So costs seem to have gone down quite significantly. Just how far you — far along are you on the cost-saving program? And secondly, can you provide some more insights in the trends with regards to sales representatives in China and Korea, please?
On your first question regarding our cost — or I should say strategic restructuring, we had a fairly significant look and take at our corporate overhead and really just largely focused on kind of reducing some bad account in areas in restructuring the team on a corporate basis. And so the combination of doing that, plus some process changes and general efficiencies are the source of the changes. So we believe the savings are sustainable and they’re built into our baseline operating model.
In terms of where are we on the process? I won’t necessarily comment on that fully, but I will say that our plan and our approach is based around kind of 2 central principles. One is 0 overhead growth and another is negative overhead growth, which we affectionately call ZOG, zero overhead growth, and NOG, negative overhead growth.
And again, the idea there is to on an ongoing basis continue to drive out inefficiencies and drive cost out of the business. I did reference the changes that we’re going to be making in Latin America. But this is an ongoing process for us to improve our profitability, become more, I guess, competitive from the standpoint of our overall SG&A utilization. And so again, it’s a major piece of our strategy and it’s a major piece of our — what we call the right stuff strategy.
With respect to staff growth and representative growth, I think, you mentioned in China and Korea. The teams continue to work aggressively. We got a great management team on the ground. I think, in Korea, we’re seeing actually really quite good business fundamentals.
And when I talk about field fundamentals, I would be talking about recruiting, retaining people and retaining them. And so I think we’re seeing really good strong fundamentals in Korea. We’re seeing continued progress in China. And again, I think that’s reflected in the fact that we continue to grow in the market despite any disruptions there.
Okay. And on overheads, so how many employees did you have at the end of the second quarter?
We don’t disclose that level of detail. But just say that, obviously, we took a $1.6 million charge in the second quarter. And that clearly included number of folks, but we don’t disclose the exact number.
[Operator Instructions] At this time, it does not appear to be any further questions. So I’d like to turn the conference back to the presenters.
Okay. Well, there are no other questions, again, I want to thank you all for your support in participating in today’s call, and have a great day. Thank you very much.
This concludes today’s call. Thank you for your participation. You may now disconnect.