Nature's Sunshine Products, Inc. (NATR) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Nature’s Sunshine Products Third Quarter 2018 Earnings Conference. [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 now have the floor.

Good afternoon, and thanks to all of you for joining our conference call to discuss our third quarter 2018 financial result. 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 information on this call may contain certain forward-looking statements. These statements are often characterized by terminology, 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 may be materially different from the results implied by forward-looking statements. Factors that could cause results to be – to differ materially 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 by 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. Our Chief Financial Officer, Joe Baty, is unable to join us today. So I have with me our Corporate Controller, Jon Lanoy. It’s my pleasure to join you today for my first quarterly conference call as Chief Executive Officer. I’ve only had a few weeks on the ground, but my initial priorities have focused on understanding the business, our people, the processes and capabilities, all of which have made Nature’s Sunshine a great company for the last 45 years. There’s a lot to absorb, and we’ve developed a very rigorous onboarding progress – process to help move things forward. And from there, we’ll shift gears to focus on building a strong team, creating a strategic roadmap, ensuring up our operational discipline in an effort to drive growth, improve profitability and enhance shareholder value. So I look forward to sharing our progress with you over the coming quarters. Let me begin today with a brief overview of our third quarter results, and then I’ll turn the call over to Jon to walk you through the results in greater detail. For the third quarter, we reported a modest decline in net sales of 0.4% on a local currency basis and earnings per share of $0.08 per diluted share. Our sales performance continues to reflect strong growth in Synergy Asia Pacific, NSP Russia, Central and Eastern Europe and China. This growth was offset by declines in NSP America and in Synergy in Europe and America. Strong sales momentum in South Korea, which increased 27% during the third quarter, continues to drive Synergy Asia Pacific. In China, the third quarter growth of 19% is compared with our initial launch, following the receipt of our business license and the significant ramp-up of our business a year ago. We continue to be optimistic about our long-term growth opportunities in China, and I recently returned from the market where I was able to see our operations and meet our local team. As I mentioned, there’s still tremendous potential in that market. Net sales in NSP Americas remain below prior year, and the team is still in the process of strengthening our positioning in that market. There has been a lot of effort in this much more mature segment of the company over the last year to improve customer service and engage our distributor base, and we look for additional opportunities to strengthen our business in the U.S. and across the Americas. Now let me turn the call over to Jon to walk you through our results in greater detail. Jon?

Thank you, Terrence, and good afternoon, everyone. Net sales in the third quarter of 2018 were $88.8 million compared to $89.3 million in the same quarter last year. On a local currency basis, net sales decreased 0.4% year-over-year or 0.5% as reported. The relatively consistent year-over-year net sales comparison was driven primarily by a $2.8 million decline in net sales in NSP Americas and a $1.2 million decline in Synergy Europe, which was offset with a $1.3 million increase in Synergy Asia Pacific, a $1.2 million increase in NSP Russia, Central and Eastern Europe and a $1.1 million increase in NSP China. Net sales were also negatively impacted by $0.1 million of unfavorable foreign currency exchange rate fluctuations. NSP North America sales declined 5.7% year-over-year to $32.9 million during the third quarter or a 5.4% decline in local currencies. Sales in NSP Latin America declined 12.5% year-over-year to $5.6 million or a 10.6% decline in local currencies. We continue to see lower recruiting rates that are not offsetting attrition in NSP Americas, and this may – this trend may continue into 2019. Synergy WorldWide net sales for the third quarter grew 0.1% year-over-year to $34.5 million or a 0.2% decrease on a local currency basis. Net sales in Synergy Asia Pacific increased 4.1% year-over-year on a local currency basis, driven by continued strong sales momentum in South Korea, our largest international market. We continue to see good distributor engagement and a favorable economic environment in this market. Sales in Europe declined 18.5% year-over-year. And sales in North America declined 1.8%, both on a local currency basis and over the third quarter of last year. In NSP Russia, Central and Eastern Europe, net sales rose 15.1% year-over-year to $8.8 million or 15.4% on a local currency basis. We’re seeing good trends in Russia and Poland, and our continued Asian developing market-specific product hits also remains a driver of growth. NSP China net sales increased 19.3% year-over-year to $7 million or an 18.9% increase in a local currency basis. Recall that the company received its business license late in the second quarter of last year. As such, we are lapping significant growth in year-ago period during the third quarter, as Terrence mentioned we continue to believe that the additional management resources we’ve devoted to this market have favorably impacted distributor engagement and the leadership development. Gross margin increased 20 basis points to 73.9% compared to the year-ago period. The gross margin increase primarily reflects changes in our market mix. Volume incentives as a percentage of net sales decreased to 34.3% in the third quarter compared to 34.4net sales in the same period last year. The slight decrease in volume incentives as a percentage of sales was driven by changes in market mix, including growth in markets where volume incentives as a percentage of net sales are lower than the consolidated average, partially offset by growth in NSP China, where service fees are accounted for in SG&A rather than volume incentives. Selling, general and administrative expenses were $31.6 million, down $1.3 million year-over-year. The decrease in SG&A is primarily due to a $1.7 million gain from the sale of land during the quarter, which was partially offset by an increase in the service fees in China and other employee-related benefits. As a percentage of net sales, SG&A expenses were 35.6% in the third quarter compared to 36.9% in the prior year. We reported operating income of $3.5 million or 4% of net sales compared to operating income of $2.2 million or 2.4% of net sales in the prior year period. Adjusted EBITDA, as defined in our press release as net income or loss from continuing operations before income taxes, depreciation, amortization, stock-based compensation and other income or loss, was $6.1 million in the third quarter of 2018 as compared $4.7 million in the third quarter of 2017. Net income attributable to common shareholders for the quarter was $1.5 million or $0.08 per diluted share as compared to net income of $2.4 million or $0.13 per common share in the year-ago period. Note that the tax rate during third quarter was 57.6%, well above the statutory rate of 21%. The disparity is driven by foreign losses, primarily in China, which at the present do not provide a future tax benefit as well as other net unfavorable foreign tax-related items. Turning to liquidity. We remain pleased with our – the benefits of our balance sheet management efforts, including the reduction of inventory levels and the paydown of long-term debt. We ended the third quarter improved net cash position. Cash and cash equivalents on September 30 were $47.9 million, and long-term debt was $1.8 million. For the first nine months of 2018, we generated $14.2 million of cash from operations, up from $8 million in the comparable period year prior – the prior-year period. Primary uses of cash during the first nine months of 2018 included an $11.3 million net paydown of long- term debt and capital expenditures of $4 million. I would now like to turn the call back to the operator to facilitate Q&A.

And it does appear that there are no questions at this time. [Operator Instructions] And again, there are no further telephone questions at this time. I’d like to turn the call back over to Mr. Moorehead for any additional or closing remarks.

Okay. Well, again I’d like to thank everybody for joining the call today and for all of your support. And we look forward to working with you, and I look forward to digging more into the business and following up on future calls as we move forward. So thanks again and have a great day.

And this concludes today’s conference. Thank you for your participation. You may now disconnect.