Nature's Sunshine Products, Inc. (NATR) Q4 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Nature’s Sunshine Products Fourth Quarter 2017 Earnings Conference Call. All participants are in a listen-only mode and this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Nate Brower, General Counsel for Nature Sunshine Products. Thank you. Mr. Brower, you now have the floor.

Good morning and thanks to all of you for joining our conference call to discuss our fourth quarter and full year 2017 financial results. This call is available for replay in a live webcast that we posted on our website at www.naturessunshine.com in the Investors section. The press release which was issued this morning and the information on this call may contain certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks and uncertainties or other factors, which may not be within the company’s control. These statements are often characterized by terminologies such as believe, hope, may, anticipate, expect, will and other similar expressions. Forward-looking statements are not guarantees of future performance and the actual results, performance or achievement of the company maybe materially different from the results, performance or other expectations implied by these forward-looking statements. These factors 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 press release and the information on this call speak only as of today’s date and the company disclaims any duty to update the information provided herein and therein. I will now turn the call over to Greg Probert, Chairman and CEO of Nature’s Sunshine Products.

Thanks, Nate. Good morning, everyone and thank you for your participation in today’s call. Also joining me today is our Chief Financial Officer, Joe Baty. We are pleased to report 5.2% net sales growth in the fourth quarter led by growth across Synergy Worldwide, NSP Russia, Central and Eastern Europe and China. It’s been a very busy year for Nature’s Sunshine. After several years of investment, we received our direct selling license in China during the second quarter and have begun expanding our sales activities in this important market. Additionally, we have seen renewed growth in NSP Russia, Central and Eastern Europe and Synergy had a good finish to the year benefiting from enhanced distributor engagement in Korea. We began implementation of a new ERP system in the second quarter creating some disruption to our business that led to higher levels of distributor and customer attrition and negatively impacted sales in North America. However, we believe these disruptions are behind us and we are now focusing on improving North America’s trends. As we had indicated a couple of quarters ago, we are now well along in the process of evaluating our cost structure and the goal of ensuring our corporate infrastructure as appropriately sized to efficiently support our long-term effectives with a goal of improving profitability. During the fourth quarter, we took some initial actions to reduce our operating cost, which resulted in some restructuring and severance costs. We plan to continue to evaluate our cost structure and make changes where appropriate to ensure our corporate structure is appropriately sized. Before I turn the call over to Joe to discuss the financial results, let me provide some additional update on our business and our initiatives. Beginning with China, which is generating $7 million of revenue in the quarter, we continue to see year-over-year growth and the business continues to develop, including growth for the retail club model introduced last year. During the fourth quarter, we renewed our GMP license for Hangzhou manufacturing plant, where we plan to locally manufacture products and we continue to lay the groundwork for increased Chinese OEM manufacturing solutions to support upcoming launches. In November, we completed a successful conference in Suzhou with approximately 1,800 customers and independent service providers in attendance. We launched a new online training broadcast and product podcast program, enhance our distributor education and compliance platform and are progressing with development of a WeChat robot tool providing online support for customers. We continued to be encouraged about the development and the opportunity in this new market and our focus on building a long-term profitable business in China. We have built an infrastructure to support our expected growth and as such our market is not yet positively contributing to earning. As our business grows and we get through the initial development we do anticipate the market will become profitable. As I noted we have seen improvements in Synergy Worldwide as the year progressed, primarily in Korea, our largest Synergy market. We are pleased with the enhanced distributor engagement we are seeing particularly among our field leadership. In November, we had over 3,000 distributors attend our National Convention in Seoul, where we launched Vita Lift, Synergy’s first foray into the energy drink market. During the fourth quarter, we also launched a new global website enhancing the distributor and customer experience through streamline ordering and enrollment. In 2018, we anticipate to further build the partner strength in Asia Pacific region with the launch of new products and tools. In NSP America as we continue to report modest declines during the fourth quarter, we have seen a moderation in the pace of decline as the ERP driven customer service disruptions that began last April have been largely result. We planned to refocus our distributing customers on our products and business initiative. During the fourth quarter the NSP Americas team was successful in reactivating and re-engage customers and managers through win-back campaign. Although we continued to face a difficult year-over-year comparison in the first quarter, before we anniversaried last year’s disruption, we are seeing signs that the business is stabilizing. Moving to NSP Russia, Central and Eastern Europe, which was one of our strongest markets in terms of growth for both the fourth quarter and full year, we believe that our initiatives over the last year plus including pricing adjustments, regional product kit launches and evaluate new product opportunities have the business well positioned. The launch of our beauty care during the fourth quarter was the success providing strong initial sales. For 2018, we anticipate an effort to re-promote kits launched in 2017, including efforts to reinstate customers to the business and focusing on supporting distributor success. Our growth and stability in the market along with our strong product portfolio is attracting experienced direct sellers to our business. With that let me turn the call over to Joe for a detailed discussion of our fourth quarter financial results.

Thank you, Greg and good morning everyone. Net sales in the fourth quarter of 2017 were $88.3 million compared to $84 million in the same quarter last year. On a local currency basis net sales increased 3.8% year-over-year. The increase was driven primarily by growth in China, NSP Russia, Central and Eastern Europe and Synergy Worldwide, partially offset by a decline in NSP Americas. NSP America sales declined 4.9% to $40.7 million during the fourth quarter or 5.1% decline in local currencies. Sales in the U.S. were down primarily due to the interruptions in customer service as a result of the Oracle implementation earlier in the year. Sales in NSP Latin America were down 7.2% in local currencies reflecting the implementation of Oracle as well as continued headwinds relating to product registration that have affected sales over the last year. Synergy Worldwide net sales in the fourth quarter grew a 3.6% year-over-year to $31.7 million or a 0.4% increase on a local currency basis. This increase was primarily due to local currency sales growth in Asia Pacific and to a lesser extent North America. Net sales in Synergy Asia Pacific increased 0.6% on a local currency basis. In Europe Synergy sales declined 2.8% on a local currency basis, while sales in North America increased 5% over the fourth quarter last year. In NSP Russia, Central and Eastern Europe, net sales rose 7.9% to $8.9 million. On a local currency basis, net sales increased 6.3%. China net sales increased 200% to $7 million versus $2.3 million last year. We do not anticipate this level of growth in the first quarter, but continued to focus on building a long-term sustainable new market opportunity in China. As we noted in our press release earlier this morning, we have not finalized our provision for income taxes including the impact of U.S. tax reform among other items, which includes a remeasurement of our deferred tax assets and liabilities. As such, we have not included a full set of financial statements in today’s press release, but rather provided preliminary range of net loss for the respected periods. Nonetheless, let me provide you some quick highlights. We generated an operating loss of $2.8 million compared to operating loss of $1.4 million in the prior year period. Gross margin improved, while volume incentive expense also increased compared to the prior year. Primary driver of the higher operating loss was an increase in SG&A. The increase in SG&A was primarily due to $1.2 million of increased depreciation related to the Oracle ERP implementation expenses associated with increased infrastructure investment in China, the impact of independent service fees in China being classified in SG&A and the impact of non-recurring severance cost associated with our decision to evaluate our corporate cost structure. Adjusted EBITDA is defined in our press release as net income loss from continuing operations before income taxes, depreciation, amortization, stock-based compensation and other income or loss was $0.1 million in the fourth quarter of 2017 as compared to $0.6 million in the fourth quarter of 2016. As a result of the recent U.S. tax reform, we anticipate a non cash re-measurement of deferred cash assets and liabilities of approximately $14 million to $15 million during the fourth quarter. As I stated, we have not finalized our provision for income tax. As a result, we are providing a range for our expected net loss for the fourth quarter. We expect net loss attributable to common shareholders to be between $17 million and $18 million or $0.90 to $0.95 per common share, which is compared to a net loss of $6.7 million or $0.35 per diluted share in the year ago period. We anticipate that the re-measurement of deferred tax assets and liabilities account for $0.74 to $0.79 per common share over the fourth quarter loss. We expect to file our 10-K on Friday, March 16, including a full set of audited financial statements. I would now like to turn the call back to the operator to take Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Doug Lane with Lane Research. Please proceed with your question.

Yes, good morning everybody. Just want to start with China in quarter you had good growth in $7 million – I mean $7 million in sales and lost about $0.05 a share. Can you give us an approximation or where you think breakeven is on a quarterly sales run-rate for China?

Let’s start with full year base, I mean, our breakeven from an operating income standpoint has got to be in the give or take low to mid 30 range so if we can get to $8 million, $9 million range in profitability for sales in China, then we should be breakeven plus based on our current structure.

Okay, really close. What was – you mentioned the first quarter growth in China probably will be as fast as fourth quarter, which is understandable given the rates you are posting here, but what went on in China in the fourth quarter to generate such strong growth?

Well, hey, Doug, it’s Greg. I think several things. We obviously had a big convention and that always drives distributor engagement and like I said we had almost 2000 of our independent service providers and direct sellers there. So, that’s always a key and we do two conventions a year, we do one in Q1 and we do one in generally Q3, it was earlier this year because of the timing of Congress that was happening, but in 2018, we will do one in March and one in September. So, I think that was one reason. I think two, we continue to open up our retail clubs and so that doesn’t happen every month. That’s little spotty in terms of doing it one month a quarter, so I think we continue to see interest in opening the clubs. And I think just general momentum as well as we start to build the business and we are obviously attracting lot of leaders and independent service providers, I think which is a combination of general momentum convention as well as strong opening of retail clubs.

Okay. And then lastly, it sounds like you are happy with how the North America business is trending, stabilizing, I think it’s what you said and so should we look for once we anniversary the ERP implementation in the second quarter numbers to start to have positive again for NSP North America?

Yes.

Yes. The short answer is yes.

No, I mean it sounds like, I just want to confirm, so okay that sounds good. And Greg, can you just step back and take a minute to remind me what the strategy is in China with regards to the clubs versus direct selling model?

Right. So that the clubs are – I think as you are seeing the evolution in China of sort of direct selling model, I think it’s becoming very product and customer focus more than in the past for a decade or is more business opportunity focus. So we think a mix between the direct selling model and focusing on sort of the traditional modeling and opening up these clubs is a good balance to give us really the strong growth that really building a sustainable business built upon consumption of product in a large sustainable customer base. So these are people that are willing to open up look – small little stores, we call them retail clubs, but they are not walk in store for us in the sense of a Starbucks, but there are prices where they do customer acquisition, they do customer training, they do displays of our product, our science, so they are actually fairly sophisticated. And we also believe it’s strong, it helps us with the government in terms of having fixed locations and bricks and mortar facilities and so I think it’s a good balance for us from a growth standpoint and from a stability standpoint.

Okay, thank you.

[Operator Instructions] Gentlemen, it appears there are no further questions in the queue – we do have a question now from the line of Steven Mark with [indiscernible]. Please proceed with your question.

Yes. The cost reduction program, I got on a little late, did you quantify how much money you thought it was going to save on a going forward basis?

The cost reduction plan?

Yes.

The initiative that we have in place, I mean based on what we have done so far we expect annual savings of give or take $3 million…

And that’s cash savings?

That is cash savings. However, as Greg noted in his comments, we are in the – more in the front end of that initiative. That initiative will continue out here for the foreseeable future as we continued to look to for cost efficiencies and cost savings within the overall organization.

Is some of that based on the ERP system allowing you to reduce expenses?

Very modestly related to the ERP system, just more taking a look at how we can streamline the business and deal with the headcount efficiencies and so forth, so very modestly that’s to ERP.

Alright. Thank you very much.

There are no further questions in the queue at this time. I would like to hand the call back to management for closing comments.

Thank you again for your support and for participating on today’s call. Have a great day.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.