Edited Transcript of NATR earnings conference call or presentation 11-Mar-20 9:00pm GMT

Now let me just switch gears and talk a little bit about the coronavirus and provide some perspective on the impact it’s having on our business. First and foremost, our focus is on the health and safety of our people, and that includes our employees, distributors and customers. To that end, we’ve taken a series of precautionary measures that include actions as small as adding hand sanitizers kind of throughout our buildings and providing training on proper handwashing techniques to all associates all the way up to canceling all international travel and reducing and eliminating large gatherings where — around the world. The good news is that, to date, none of our employees or distributors have been affected by the virus, and we’re working diligently to ensure that this continues to be the case. Of course, this issue is having a significant impact on our business in China as well as across Asia. Our Shanghai office just reopened to employees a couple of weeks ago, and many of the operations remain limited. All group meetings and activities have been suspended nationwide, and we’ve canceled our March National Convention. However, our sales leaders are adapting to the situation. They’re working online to maintain engagement and drive business transactions kind of wherever they can. We are also responding with targeted promotions focused on existing and new immune products.

South Korea has also been impacted where our training center is closed and our business centers are operating on reduced hours. And while there is clearly an impact of the coronavirus in Asia, and it’s been hit the hardest, this situation is — it really is fluid, and it’s still too early to fully understand how this will impact the business. So we’re going to continue to monitor the situation to ensure that we’re in a position to provide appropriate and measured response to whatever happens in the marketplace.

Now let’s turn our attention back to 2019, which was a transitional year for Nature’s Sunshine. In 2019, we launched our new global strategy designed to strengthen our business by improving our consumer appeal and dramatically improving profitability. So far, we’ve made excellent progress against our plan and early results can be seen in the significant improvements to profitability. 2019 operating profit almost tripled versus 2018, while EBITDA was up 78% versus prior year. These improvements range right on through the fourth quarter, where we had equally strong profit gains with operating profit up 4x versus prior year after seeing losses in the prior year, while EBITDA grew 89%.

In 2019, we began to strengthen the foundation of our business and restructured $10 million of cost out of the organization. As we move forward, our cost reduction initiatives will continue, but we’ll also be introducing several strategic initiatives that we’ve worked hard to develop during 2019 that are specifically designed to help drive revenue growth.

Let me walk you through some of the recent efforts and discuss our progress against each one of our 5 global growth strategies. Our first strategy, as you may remember, is called Brand Power. And that’s all about creating a more aspirational brand that excites, inspires and transforms the way people think and feel about our company. During the fourth quarter, we finalized Phase 2 of our global rebranding initiative, which focused on translating the consumer research from Phase 1 into a creative branding proposition. Phase 2 also focused on building style guides for all aspects of the brand, including packaging, website and all consumer-facing assets. Our new branding is scheduled to launch sometime at the end of April 2020 and will feature the introduction of new logos, new fonts, packaging, messaging and bold new brand imagery. We are excited for the rollout of our global campaign, which is nothing short of a relaunch of our company.

In the fourth quarter, we also implemented a soft launch of a new brand called qemp, that’s spelled Q-E-M-P, which stands for quality hemp. The qemp product line offers a unique proprietary range of CBD products that combine whole spectrum CBD oil, whole herbs and whole essential oils in a way that only Nature’s Sunshine can do.

As we discussed last quarter, we were excited to enter the CBD market and have created a unique and groundbreaking line of products that take CBD to the next level. Our emphasis on traceability and improved sourcing will allow Nature’s Sunshine to deliver active compounds that offer better performance, better quality and better transparency than any other company in the market, while improving the overall consumer experience. Again, we’re currently in a soft launch as we build out the systems to support what will be an entirely new business opportunity for our distributors. We look forward to updating you on the official launch as we move forward.

Our second strategy, called Field Energy, is about reimagining the Nature’s Sunshine experience. Our initial starting point focuses on strengthening field fundamentals and making it easier to do business with us, but we also want to improve consumer access by being more omnipresent. During the fourth quarter, we focused on strengthening field fundamentals by launching a new tool that tracks sales KPIs and gives field management a better understanding and control of the business. We also launched a new experience in South Korea, which features a new state-of-the-art facility, a new technology-driven ordering process and a new mobile app for distributors. The new experience is designed to improve effectiveness in recruiting, training and developing distributors and to give our distributors a more powerful set of tools to drive growth. We also have several groundbreaking projects underway in North America and Europe designed to modernize and improve how customers and distributors do business with Nature’s Sunshine. I’ll update you on these initiatives at a later date once we have more details to share.

Our third strategy, called Digital First, is about developing a next-generation digital platform. In the fourth quarter, we finalized our Phase 1 designs for a new web platform. The new designs offer improved functionality, new shopping cart features and improved user experience, more powerful search capabilities, asset sharing capabilities and will reflect our new branding. One significant enhancement to the new website is that it will allow distributors to have their own fully replicated websites, which will allow them to drive customers to their business with an easy, more attractive consumer-focused experience. The new website is scheduled to launch as a beta at the end of April, and additional tools and enhancements will be added throughout the year, and we will continue to make targeted investments in our digital capabilities as we move forward.

Our fourth strategy, Manufacturing, Inc., focuses on expanding our award-winning supply chain capabilities. During the fourth quarter, we worked hard to extend our quality advantage over the competition by attaining our USDA organic certification and by attaining the ISO 9001 quality certification. These 2 new certifications in addition to our existing GMP, NSF, TGA, Halal and Kosher certifications further distinguishes Nature’s Sunshine as a leader in this market. As we move forward, we will continue to build out our industry-leading manufacturing capabilities to extend our competitive advantage.

Our fifth and final strategy, called the Right Stuff, is the foundation for developing high performance teams. The result of these efforts were again evident in our strong margin and net income growth during the fourth quarter. During 2019, our restructuring activities eliminated about $10 million of annualized cost, and we have additional savings initiatives planned for 2020. The launch of our new operating business units, which are now organized by region, are already producing results. We’ve become more nimble, responsive and closer to the consumer, which allows us to more effectively drive performance. For example, during the fourth quarter, our OBUs were able to move more quickly to target changes that reduced unprofitable sales and promotions. While the actions negatively impacted sales, they fully supported our focus on profitability. We’ve also started to see some early signs that our efforts in North America may be having a positive effect as staff count increases versus prior year. For the first time, we’re above prior year. The intensified focus on addressing specific regional issues and targeted consumer needs will continue to be our focus as we move forward. Again, we’re still in the early days, but we’re very excited about the initiatives we’re rolling out and are committed to transforming the business to drive sales and profit growth. Our new website, branding, enhanced field tools, qemp CBD launch and the significant pipeline of innovations that we’ve built are just the starting point for our global transformation.

Now let me turn to the fourth quarter operating highlights. During the quarter, net sales were down 5% in local currency on a consolidated basis. This was largely due to unprofitable sales in Asia and North America, which was partially offset by strong performance in Europe. Specifically, in Asia, net sales decreased 11% as a result of the changes made to our promotions in China, where the fourth quarter decline was anticipated. While China sales were unfavorable to the strong fourth quarter a year ago, we were pleased to hold our quarterly sales level consistent with the third quarter. A decline in South Korea was driven by lower events and incentive performance, partially offset by continued growth in Japan.

In North America, sales were down 6% versus prior year, reflecting our planned exit of many unprofitable sales and promotions. As I noted, we’re seeing encouraging signs in North America as the team continues to work on strengthening field fundamentals, redirecting and reallocating resources and streamlining processes to drive out costs. We expect to make continued progress and see further benefit once we launch our new website and implement new digital marketing tools.

In Latin America, sales declined 9% on a local currency basis as the market continues to struggle under the current operating structure. Our restructuring plans are underway, and our goal is to start building a cluster organization in the second half of 2020. The new streamlined organization will focus on managing LATAM as a single business with the regional sales and marketing team tasked with driving performance on a single plan. We’re also working to strengthen local sourcing in an effort to accelerate new product launches and improve gross margins. While the LATAM transformation is a multiyear project, we should expect to see meaningful changes as we close out the year.

Finally, in Europe, we generated 18% local currency sales growth, driven by strong performance in Central and Eastern Europe. Our momentum in Russia continues to reflect the strength of our local initiatives over the last couple of years. Our teams in Russia and Poland have focused heavily on our field energy strategies, working to improve our field fundamentals and drive activation.

Now let me turn the call over to Jon Lanoy to walk you through our financial results in greater detail. Jon?

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Jonathan Lanoy, Nature’s Sunshine Products, Inc. – VP of Finance & Corporate Controller [4]

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Thank you, Terrence, and good afternoon, everyone.

Net sales in the fourth quarter of 2019 were $91.7 million compared to $97.4 million in the same quarter last year. On a local currency basis, net sales decreased 5% year-over-year or 5.8% as reported. Unfavorable foreign currency exchange rate fluctuations impacted net sales by $0.8 million compared to the prior year. Asia net sales declined 13% year-over-year to $36.1 million during the fourth quarter, but decreased 11.4% in local currencies. On a local currency basis, the decline was driven by a 26.2% decrease in China and a 5.9% decline in South Korea, offset by growth in Japan.

Net sales in Europe increased 17% year-over-year to $17.2 million or 18% growth in local currencies. The increase in net sales reflects the continued growth in Central Eastern Europe, including strong performance in Russia. North America net sales in the fourth quarter declined 6.3% on a reported and local currency basis year-over-year to $32.9 million. In addition to lower recruiting rates that are not offsetting attrition in NSP Americas, we took aggressive measures to eliminate unproductive sales and promotions, laying the groundwork for a healthier revenue growth in the future. Net sales for Latin America and other decreased 9.7% year-over-year to $5.6 million or decreased 9.4% on a local currency basis. The decline on a local currency basis reflects product and support limitation.

Gross margin increased 20 basis points to 74% compared to a year ago. The gross margin increase was driven primarily by favorable changes in market mix, cost efficiencies and reserves for obsolete inventory recorded in the prior year. Volume incentives as a percentage of net sales were 34.1% compared to 32.8% in the same period last year. The increase was driven by changes in market mix, including a lower mix of China revenue.

Selling, general and administrative expenses were $32.7 million, down $8.4 million year-over-year. The decrease in SG&A is primarily due to savings from prior restructuring activities. And as a percentage of net sales, SG&A expenses were 35.7% compared to 42.2% in the same period a year ago. Excluding the impact of almost $10 million of restructuring expenses in the fourth quarter 2019 and $1 million of CEO transition expenses, $0.8 million of restructuring expenses and $0.2 million gain on property sales in the fourth quarter, SG&A expenses declined 35.6% of net sales from 40.1% in the prior year.

We reported operating income of $3.9 million or 4.3% of net sales compared to an operating loss of $1.2 million or 1.3% of net sales in the prior year. Excluding previously mentioned unusual items related to restructuring and other prior gain, we generated $3.9 million of operating income or 4.3% of sales compared to an operating loss of $0.8 million or 0.8% of sales in the prior year.

Adjusted EBITDA, as defined in our press release as net income from continuing operations before income taxes, depreciation, amortization and other income or loss, adjusted to exclude share-based compensation and certain noted adjustments was $7.6 million in the fourth quarter of 2019 compared to $4 million in the fourth quarter of 2018. Net income attributable to common shareholders for the quarter was $1 million or $0.005 (sic) [$0.05] per diluted share compared to a loss of $2.9 million or $0.15 per diluted share a year ago.

Adjusted net income attributable to common shareholders was $1 million or $0.05 per common share compared to adjusted net loss of $1.2 million or $0.06 per common share in the prior year. A reconciliation of adjusted net income to GAAP net income is provided in today’s press release.

Turning to liquidity. We remain in a solid financial position with cash and cash equivalents on December 31 of $53.6 million with no long-term debt. For the full year 2019, we generated $9.7 million of cash from operations compared to $21.8 million in the comparable prior year period. The change in cash from operating activities on a year-over-year basis primarily reflects changes in working capital, specifically a reduction in accrued liabilities and an increase in inventory that was partially planned, reflecting planned sales growth in the fourth quarter.

I would now like to turn the call back over to the operator to facilitate Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from [Steven Martin] from Monness, Crespi & Hardt.

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Unidentified Analyst, [2]

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So very encouraged by the EBITDA growth this quarter. Although we’ve got a lot of initiatives for the coming year, how does that fit into the cost structure? And are we going to see SG&A or some other costs pop up? And then secondly, the corollary to that is, is this going to be the answer to driving or getting North America sales to reverse?

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [3]

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Okay. So first, with respect to SG&A, we are committed to maintaining the discipline of kind of driving our SG&A cost down, our overhead down. We’re kind of preaching and talking to this concept of 0 overhead growth and negative overhead growth. We recognize that our operating margins are kind of not where we want them to be still. So we want them to be kind of, I’ll say, competitive within our peer set within the industry. We also have an aspiration and plans to improve our gross margins as well. So again, recognizing that our gross margins — that there’s room for opportunity for us to improve our gross margins.

So what I would say is the push to implement new strategies is not at the expense of profitability. We really don’t have that luxury. It’s — our focus is on finding opportunities to more efficiently drive sales. And we kind of saw that in the fourth quarter of this year, where we recognized that some of the things that the business units were doing just weren’t profitable. And so we backed off on them. And we’re able to effectively either hold our business or drive profitability in the direction we wanted to go to.

The second question was, are the strategies that we’re planning the silver bullet for North America? And what I would say is I think they’re certainly the right strategies, Steve. We know we have to fix the brand. We know — well, we’ve done extensive research. We made significant investments in talking to consumers and talking to our distributors. So we know that there’s a branding proposition issue and a positioning issue that needs to be addressed. And we really do have a groundbreaking kind of new branding proposition that we’re going to be launching kind of a little bit later in the second quarter and an entire campaign that will come along with that. So — and we’re really excited about that. We also know that we have to be more digital in order to be relevant and competitive in the marketplace. And so we’re building out those capabilities. We’re going to start by walking, and then we’ll build momentum on the back end of that. So we know that’s the right thing for us to do. We know that we need to kind of rethink and work the sales experience especially here in the U.S., where consumers want to be — they want to be paid faster. They want it to be easier. They want it to be much more streamlined and simple. They don’t want to have to deal with kind of a lot of the traditional things that the company has done in the past. So we’ve got really in-depth plans and exciting plans in each one of those 3 big bold areas. I’m not going to say that any one of them is a silver bullet. And I wouldn’t say also that as soon as we launch them on kind of the day of the launch, that, that will be a transformative moment. However, I do believe that it will — and I’m confident that it’s going to put us on the right path. And that we’re going to continue to build these things out. We’re going to continue to work with the field. There’s a lot of exciting stuff in there, and you’ll start to see it.

But again, this is everything that the market is telling us, everything that consumers are telling us. We’re pursuing it in a bold, innovative groundbreaking manner. And so we just have to kind of get after it. Does that answer your question?

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Unidentified Analyst, [4]

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Yes, I think it does. And you guys have done — you haven’t been there that long. You’ve done a great job of sort of getting the business, cleaning up the profitability. Even at these low rates, you’re generating $30-plus million of EBITDA. You’ve got a share — your stock is trading right now at about 3 — a little over 3x that $32 million of EBITDA. You used to pay a dividend. You don’t anymore. You’ve got $50-something million of cash that is not being productive. And I want to know what you plan to do with it. A year or 2 ago, the answer was, well, the business is rocky, so we can’t make commitments. Well, the business isn’t rocky anymore. You’ve got it under relative control and I’m not saying earnings are where we want it to be. But you sold a lot of stock to the Chinese, and they haven’t really delivered what we thought they were going to deliver. And so now that cash is sitting there doing nothing. And I would propose to you that you could pay out a dividend, you could buy back shares, but you should do something with it because it’s killing your return on equity and your return on investment.

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [5]

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Yes. So I won’t comment for the — on behalf of the entire Board of Directors, but we realize — the same kind of data points that you’ve pointed out, we certainly realize as well. We do want to make sure that we are in a position to invest in the business and invest in a lot of those things that I was talking about. But at the same point in time, we’re very sensitive to the shareholders as well. And so we’re having discussions with the Board on this very topic.

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Unidentified Analyst, [6]

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All right. One other. Is there something you guys can do to address the tax rate because all the EBITDA, because of the taxes, you’re not taking a whole lot to the bottom line? And what is it you guys can do to fix that?

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [7]

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That’s a good question. Jon, do you want to talk to this?

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Jonathan Lanoy, Nature’s Sunshine Products, Inc. – VP of Finance & Corporate Controller [8]

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Yes, maybe I’ll take a swing at that. Our tax position because we operate in so many markets is very difficult. It’s very complex. And then we do have markets still where we don’t have profitable operations, where we maybe aren’t taking the benefits that we would like to take on those. And so that pushes our rate up a little bit. Also, some of the impact of the change in the tax legislation. We’re not able to leverage some of that as much either. I think as we continue to see improvements in the operating results of the business and continue to push income up, those things will have less impact on our rate. So as we grow profits, our rates should start to improve.

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Unidentified Analyst, [9]

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Right. But when — you’ve got markets you don’t make money in, okay? And at what point do you sort of decide that maybe we shouldn’t be in that market? And are you really getting benefits out of those markets?

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [10]

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We’ve actually got very aggressive restructuring to address those issues. So part of that, I talked about Latin America. That’s an aggressive overhaul of that entire region. And then we’ve got a couple of other select markets as well. So we’ve got really direct initiatives and a direct focus on profitability in every single one of our markets. And to your point, if we can’t make it in any one of these markets, we’ll get out of them. And we just have to exit them. In the past, however, I’m just not convinced that we had pursued enough creative options to find that path towards profitability. And kind of based on what I’ve experienced in the past and what I see in the business right now, we should be able to be very profitable in every market that we do business in. It’s just the kind of the — just working through that path to get there. And we don’t have a tremendous amount of patience with that either. So it will happen quickly.

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Unidentified Analyst, [11]

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All right. One last, if I may. I know you don’t love to give guidance, but when you look out to 2020 with all the initiatives and a trailing 2019 EBITDA of somewhere around $32 million — $31 million, directionally, should we expect that the EBITDA — recognizing that there are some things related to the virus, coronavirus, et cetera. But directionally, should we expect the EBITDA to improve again this year?

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [12]

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Let’s say, I can’t comment right now directly on the forecast for corona, and there’s so many unknowns out there. But let me just say that our strategy is designed to continue to drive the top line, as you can see, based on the things I talked about, and we have very specific initiatives in place to help us drive out costs from the business from a SG&A standpoint and from a gross margin standpoint. So if that’s helpful for you. That’s what we’re kind of directionally as a management team trying to accomplish.

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Operator [13]

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(Operator Instructions) Our next question is from [Darrell Casalina — Casalino], I’m sorry, a private investor.

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Unidentified Shareholder, [14]

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Yes, a couple of points. I want to pyramid off of something the previous caller talked about. I’ve been an investor in Nature’s Sunshine for many years, and it’s been kind of a disappointing experience financially. And I’m just curious, I just think you should spend a little bit more attention on either a onetime dividend for shareholders because we certainly deserve it or share buyback. That’s my first point.

And the second thing I want to share with you is I understand what you’ve done in reference to measures to keep employees safe and everybody associated with NATR safe about — with coronavirus. But what steps are you taking in a positive way, in a healthy way, to have Nature’s Sunshine product empty on the shelf, so to speak, and sell into the coronavirus scare? I know I walk into stores, and there are certain products I can’t buy. And I spoke to a very savvy investor, worth billions today, and I said, what do you think the play is in the stock market right now? I don’t want to go short. I want to go long. And he said to me, vitamin companies. And I said to him, I’m in a vitamin company, hasn’t been too good. So it’s just interesting how big financial people are looking at vitamin companies right now for the long term. And I want to feel comfortable that my company, Nature’s Sunshine, not to say take advantage of, but man, you guys have — you’re wide open right now in this virus thing to really push vitamins.

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [15]

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Yes, that’s a great comment. And we’ve got some very good products like our Silver Shield products that is — and some other immune support type products. Obviously, we can’t and would not make any claims around curative solutions for the coronavirus or any other virus. But in terms of supporting your immune system, that really is an area that — I mean, we’re selling through our — and people are stocking up on our Silver Shield product right now. And if you’ve never used it, you should grab some because it really is a great product. And just when you start feeling the symptoms of cold come around. I mean, personally, I’ve used it, and it just makes you kind of feel better. But there is a huge opportunity there for us to build out the immune products. We’re going to be pushing that much more aggressively in Asia. It is our belief that after this kind of whole thing — turning in after this that there’s going to be much heightened sensitivity towards people of — taking care of your immune system, and that’s going to be not only in Asia, but here in the States as well. So that’s one area in particular where we’re building it out.

There are some other adjacent opportunities like gut health, people in general, who have healthy guts that does tend to support the immune system better as well. We happen to be particularly good in that area, and we’re going to be making those connections kind of in a relevant manner. But yes, I agree with you on both of your comments. Kind of the first one, we’re certainly going to be addressing something with just again, with how we make sure that the shareholders get their returns and secondly, on taking — I don’t want to say taking advantage of, but certainly making sure that we are poised to have a positive impact on folks that want to protect themselves in an environment where disease and infection are increasingly a risk to our societies. Does that answer your question, [Darrell]?

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Unidentified Shareholder, [16]

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[Can I ask another question?]

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [17]

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We have a problem hearing you.

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Operator [18]

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And I do apologize to this. We have reached our limit, and we will turn the call back over to management.

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [19]

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Okay. Well, again, thank you, everybody, for joining us today. I want to say how much we appreciate your ongoing support and participation with the company. We really are, again, excited about the future that lies ahead of us and are doing everything we can to transform the business, get us to a new place, and we’re excited about the future that lies ahead. So again, I want to thank you, and have a great day. Take care.

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Operator [20]

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Thank you. This concludes the end of our conference. You may disconnect your phone lines.