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

The COVID-19 pandemic has clearly been disruptive to our people’s lives, but I’m incredibly proud of our team for their resilience, determination, flexibility and compassion for the people in our community. I’m especially grateful for our shipping and manufacturing teams that have been coming to work every single day throughout the crisis to keep our facilities fully operational and on top of the increasing demand for our products. Their courage, dedication and love for our company is an inspiration to us all.

With that in mind, when the crisis began, our first and primary goal was and continues to be the health and safety of our employees, distributors, partners and customers. We immediately implemented a series of protective measures to safeguard our people, including deep cleaning at all of our facilities, daily temperature scans at the beginning of each shift, training on proper hand washing and good hygiene, isolating work groups and either restricting or closing certain common areas, providing hand sanitizing stations throughout our buildings and requiring the use of masks for all associates and protective gloves for associates dealing with products. We also made sure to educate our team and strictly follow all CDC guidelines related to social distancing and personal hygiene to ensure our teams can effectively and safely continue working.

Convinced that we could safely keep our production and fulfillment operations open, we developed and executed plans to ensure our inventory and supply lines were secure and our global supply chain was prepared to deliver for our valued consumers around the globe. We simultaneously worked to transition our office staff to work remotely, and have done so without any major interruptions to customer service or the day-to-day business activities. So far, we are performing well. Our people have adapted to the situation, staying focused and executing our strategy and implementing the key initiatives designed to transform Nature’s Sunshine. As I step back and think about everything the team has done and what we’ve been able to accomplish, I’m very pleased with our progress. Consumers are counting on us now more than ever, and our team is delivering.

Now let me turn to the first quarter highlights to briefly review our operating trends and to share some of the progress we are seeing on our transformation initiatives. During the first quarter, we saw excellent performance in our business as net sales increased 7% in local currencies on a consolidated basis. The strong performance was led by sales in both North America and Europe as improved field fundamentals combined with increased consumer demand to drive higher than normal sales across all channels and product categories. We also saw a reversal of the long-term negative sales trends in Latin America with modest sales increases across the region. Sales in Asia Pacific were down as anticipated due to the timing and impact of COVID-19 in our largest markets. The early closure of business centers and the cancellation of all of our meetings in response to government shutdowns negatively impacted Asia Pacific to a greater extent and with more lasting impact.

A common driver across all of our global markets was the huge surge in demand for immune products as consumers looking for added protection emptied our warehouse of products like Silver Shield, Elderberry, Immune Defense and many other immune-related products. In total, global sales of immune products increased 110% for the quarter versus prior year. We also delivered strong improvements to operating profit as we continue to focus on gross margins, fixed overhead and SG&A. As a result, operating income increased 151%, and we finished the quarter with $64 million of cash and no debt.

In North America, we saw the positive momentum that started in Q4 of 2019 continue into the first quarter of this year. The unprecedented spike in demand for immune products provided significant sales growth, but interest quickly spread to adjacent categories as consumers also bought a wide variety of supplements to improve their health. Importantly, sales grew despite the fact that many of our distributors were impacted by retail store closures and the disruption to daily business activities, including the cancellation of face-to-face meetings and all sales events. While the environment continues to evolve, our North American business trends are promising, and we still have significant enhancements to the business that are scheduled to roll out over the coming months.

In Europe, we generated 34% local currency sales, driven by continued strong performance in Russia, as our initiatives continue to resonate with local consumers.

In Asia, net sales decreased 5%, which was a much more moderate decline than we anticipated. The team worked diligently to find new ways to motivate their distributors and serve customers while working remotely. As we discussed during our fourth quarter call a couple of months ago, we anticipated a significant decline due to COVID-19 and its impact on key markets like China, Japan and South Korea.

While there were certainly challenges, we’ve seen strong consumer demand partially offset the negative impact of our daily business activities. Our distributors have quickly adapted to the changes, while consumer interest in health and supplementation have increased significantly.

Despite the improvements to field fundamentals, progress on our growth strategies and the solid sales we saw in the first quarter, there is still and will continue to be a tremendous amount of uncertainty as the COVID-19 pandemic continues to reshape the economic landscape, present new challenges and impact our financial performance. As a result, I’m going to deviate from our standard policy and take a little bit more time to talk about more recent events.

In April, the effects of COVID-19 intensified as office closures, canceled meetings and rescheduled events disrupted sales activation. The initial surge in demand from consumers looking to support their immune health, boost overall wellness and reduce anxiety showed signs of tapering off. More recent events, including the changes to the nature and timing of field incentives, shifting consumer promotions and the fact that we have experienced less new customers — we’ve acquired less new customers, all combined to negatively impact current results. As an example, the cancellation of incentive trips and field key events have changed the normal course of business through the second quarter and potentially beyond. Of course, we are actively assessing the social and economic impact of COVID-19 on our business, and while we expect long-term sales growth, there will continue to be uncertainty as to how our financial results for the second quarter and potentially beyond are impacted.

With that in mind, as we look forward, we remain focused on executing our global strategy and are seeing a strong early response to our efforts in each of our 5 key strategies. And I just want to review those quickly.

Our first strategy, brand power, is really just starting to come to life. This month, we are launching Phase 1 of our rebranding initiative, which includes the introduction of our new company positioning, our new logo, enhanced flip-top bottles that are 100% recyclable, new labels and color schemes and an updated website. We are also expanding our line of proprietary CBD products marketed under the qemp brand. qemp, spelled Q-E-M-P, which stands for quality hemp, is the most effective CBD on the market, offering better performance, better quality and better transparency in every bottle. In the second quarter, we’re introducing 2 new products to the line. First, qemp Relief CBD cream; and second, qemp ZERO, a new line of products with 0 THC. Our new qemp ZERO products offer performance on par with competitors’ regular CBD products, but again, qemp ZERO has 0 THC. We’re very excited about qemp, which offers our distributors an entirely new business opportunity, and we look forward to expanding our footprint in this dynamic, rapidly growing market.

We’re also expanding our popular Silver Shield brand with 2 new products in May. The first is a unique purifying hand cleanser called, Silver Shield BioGuard, which features our new proprietary power blend of 80% ethyl alcohol, our proprietary Essential Shield protective oils and our Silver Shield proprietary colloidal silver. The second product is a hand and body cream also sold under the BioGuard family, within the Silver Shield brand. The new cream is enhanced with coconut oil, hyaluronic acid and Silver Shield’s proprietary colloidal silver. All of the initiatives I’ve just discussed are part of our Phase 1 rebranding that will have multiple phases throughout the end of 2020.

Our second strategy, field energy, focuses on enhancements to how our distributors do business with their customers. You may remember back in 2019, we reimagined the distributor experience for our second largest market, South Korean, introducing completely new workflows, technology and a new state-of-the-art facility with consumer-facing retail space. But for the past year now, we have been working on a groundbreaking new business model that will launch in the second half of 2020 as an important component of our field energy transformation for our North American OBU. The proprietary new model is designed to enhance the distributor experience by offering a new suite of business tools, updated services and new customer-focused rewards. Without getting into the details right now, the new model integrates new consumer-facing programs that promote subscriptions, community, membership, referrals and free shipping with new dynamic distributor programs that introduce new sales kits, customer-driven rewards, quick pay, a single contemporized comp plan and a bridge program to support our distributors’ success while we make these changes. I’ll share more on this strategy in the future, but this is an important part of our plan on the road to relevance in North America.

Our third strategy, digital first, has become increasingly important as COVID-19 continues to impact consumer behavior. We have just launched Phase 1 of our new website, which features a new look and improved functionality, with more enhanced features and content to come. The new site also gives our distributors their own replicated websites and personal URLs that allow them to run their own digital business on our corporate website. The new site lets distributors do e-mail and social media campaigns and direct their customers to their personal Nature’s Sunshine website. New and existing customers can be tracked and served for improved customer management.

Our fourth strategy, manufacturing inc., has also become more relevant than ever, and I want to take a minute to — just to commend all of our competitors that offer GMP- and NSF-certified products to their customers. It’s important that companies in our industry provide safe and reliable products during times like these. Of course, it’s times like these when consumers are also looking for more. They are looking for products they can trust and that go above and beyond. And that’s why Nature’s Sunshine is not only GMP- and NSF-certified, we are also TGA-certified, which is pharmaceutical grade, Halal-certified, Kosher-certified, USDA organic-certified and ISO 9001-certified to meet the demanding needs and specifications of our health practitioners, nutritionists, herbalists and caregivers. It’s a standard that few, if any, in the industry can match, and we are committed to leading the way. Our industry-leading manufacturing, quality and safety protocols are exactly what consumers are looking for. And moving forward, our manufacturing facility, which has been renamed NSP labs, will begin to play a larger role in our consumer marketing efforts. And we will continue to expand our capabilities to address consumer needs as they evolve.

Finally, we continue to make excellent progress on our right stuff strategy with positive results from our cost savings and gross margin initiatives. As we progress through 2020, these enhancements are expected to become increasingly apparent in our financial results.

To close, I’m very pleased with how our global organization has responded to the recent challenges, and we are committed to moving forward on our strategies and reaching our goals. We are clearly faced with a challenged economic environment and significant uncertainty, but our team is focused and we’re adapting as quickly as possible to the current environment.

Now let me turn the call over to Joe, who’s going to walk you through our financial results in greater detail. Joe?

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Joseph W. Baty, Nature’s Sunshine Products, Inc. – Executive VP, CFO & Treasurer [4]

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Thanks, Terrence, and good afternoon, everyone. Net sales in the first quarter of 2020 were $95.9 million compared to $91.3 million in the same quarter last year. On a local currency basis, net sales increased 6.6% year-over-year. Unfavorable foreign currency exchange rate fluctuations impacted net sales by approximately $1.4 million compared to the prior year. Net sales in Asia declined 7.9% year-over-year to $31 million during the first quarter, but decreased 4.6% in local currencies.

As Terrence mentioned and discussed on our fourth quarter call, we anticipated a first quarter decline in Asia, primarily as a result of the COVID-19 pandemic. On a local currency basis, net sales in China declined 8.5%, declined 2.9% in Japan and declined to 6.5% in South Korea. Future results may continue to be negatively impacted by the pandemic and fluctuating foreign currency rates.

Net sales in Europe increased 32.2% year-over-year to $20.6 million or 33.5% growth in local currencies. The increase in net sales reflects growth in Central and Eastern Europe, including strong performance in Russia. While first quarter results were not significantly impacted by the pandemic or oil pricing volatility, future quarters could be.

North America net sales increased 6.1% on a reported basis, and 6.2% in local currency to $38.8 million. The growth in North America reversed quarterly declines over the last couple of years, reflecting strong sales trends in March, primarily related to immunity support product demand resulting from the COVID-19 pandemic and improving underlying trends resulting from strategic initiatives enacted over the last year. As Terrence referenced, we experienced some softening of demand in April.

Net sales for Latin America and Other increased 0.5% year-over-year to $5.6 million, or a 2.4% increase on a local currency basis. Due to substantial shutdown of certain LatAm markets, future results could be impacted. Gross margin was 74.3%, flat when compared to the prior year. Volume incentives as a percentage of net sales were 34.4% compared to 34% 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 $31.1 million, down from $33.9 million in the prior year. The decrease in SG&A is primarily due to savings from restructuring activities over the last year. As a percentage of net sales, SG&A expenses were 32.4% compared to 37.1% in the same period in 2019. Excluding the impact of $1.6 million of restructuring expenses in the prior year and $0.5 million VAT-related income this year, SG&A expenses declined to 32.9% of net sales from 35.4% in the prior year period. We reported operating income of $7.2 million or 7.5% of net sales compared to operating income of $3 million or 3.3% of net sales in the prior year period. Excluding the previously mentioned unusual items relating to restructuring and VAT-related income, among others, we generated $6.7 million of operating income or 6.9% of net sales for the current quarter compared to $4.6 million or 5% of sales in the prior year period.

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 $9.7 million in the first quarter of 2020 as compared to $7.3 million in the first quarter of 2019.

Net income attributable to common shareholders for the quarter was $2.9 million or $0.15 per diluted share as compared to $1.8 million or $0.09 per diluted share in the year ago period. Adjusted net income attributable to common shareholders was $2.5 million or $0.12 per common share compared to $2.7 million or $0.14 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 had cash and cash equivalents on March 31 of $64.1 million with no long-term debt. During the first quarter, we generated $13.5 million of cash from operations as compared to using cash of $3.9 million in the comparable prior year period. The change in cash from operating activities on a year-over-year basis primarily reflected growth in net sales and profit dollars, changes in working capital, specifically a reduction in accounts receivable and inventories, assisted by an increase in accrued volume incentives, primarily due to the timing of cash receipts and payments and the timing of cash payments for income taxes. We are pleased with our overall strength and liquidity. We also recognize that the COVID-19 pandemic and related impact on future financial results is uncertain but could be significant over the course of 2020 and beyond. Accordingly, at this time, our goal is to maintain and, hopefully, continue to improve our overall cash and liquidity position.

I would now like to turn the call back to the operator to facilitate questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Steve Martin with Slater Capital Management.

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Steven L. Martin, Slater Capital Management, L.L.C. – Manager [2]

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Great quarter in the face of all the — I don’t — I mean, we all know what we’re talking about. So can you — you put words around April, May and the future. Can you be a little more specific as to how the changing status — state of China, Asia, the U.S. and Europe is impacting revenues and how it’s impacting your sales functions?

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

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It’s a tough one to answer because, again, as I tried to allude, things are moving around, we’ve had to cancel events, kind of canceled some incentive programs and introduce new ones. And so as a result, things that were planned and that we had a good sense for what we thought they’d deliver, now it’s something different with a different time frame. So there’s just so much uncertainty right now, Steve. It’s hard to answer your question directly. But what we do know is we’re seeing an impact from it. And again, the closures and not being able to have meetings is having an impact. Of course, the team is fighting back with new products and new promotional concepts simultaneously. We are also, as you can see, redoubling our efforts to support our distributors, where we really aren’t trying to get back to focusing on being kind of our healers, focusing on the healing power of herbs and sharing those with everyone around the world. So again really playing to our strengths and our heritage. But again, doing that in a very new manner. So tough to answer your question, again, given all the uncertainties out there.

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Steven L. Martin, Slater Capital Management, L.L.C. – Manager [4]

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Well, let me ask it slightly differently. Asia went into the soup earlier than we here in the U.S. and Europe, and came — and has come out of the worst of the impact. How did your business in Asia trend as Asia started to reopen?

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

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It’s interesting. The trends are — and I’ll let Joe follow up on this. The trends are, I’d say, good with our current people. And so we’re not losing people, we’re not losing customers. The issue that we’re seeing right now is a slowdown in new customer acquisition, again, in the face of not being able to have meetings, not being able to — we’re canceling field events. And I’ll let Joe follow up on this with some — maybe a little additional color.

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Joseph W. Baty, Nature’s Sunshine Products, Inc. – Executive VP, CFO & Treasurer [6]

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Steve, as Terrence noted earlier, it’s very difficult to quantify. I mean, trend-wise, overall, what I’d tell you is that if you look at the 3 key markets we have over there. China, we can look at China and say, well, they appear to be back, fully engaged in the sense that our office is fully open, our people are back on-site in the office, but there’s still some limits as to the level of activity that our leaders can engage in. So while we see hope that things will get better, it’s still very difficult to try to predict how it’s going to play out. When we look into Korea and Japan, the other 2 key markets within our Asia business unit, we can look and say, well, they were impacted in Q1, but if anything, we’d say it’s maybe impacted more in the latter part of the quarter versus the early part of the quarter. So trend-wise, that says, well, maybe that’s going to carry over into Q2 and maybe even in beyond that a little bit. So it’s — they’re not as back to full mode as say China in some fronts because of the pandemic. So there’s a little more uncertainty. Now we know that our leaders are clearly doing everything they can to continue to maintain and support and grow their businesses. Having said that, they’re still facing some struggles in being able to open new markets to, again, to get those new customers onboard and so forth, and so on. So it’s just very fluid. It’s very difficult to try to quantify. But as we noted, and as Terrence noted, and as I noted in my comments, clearly, at least looking at Q2, the overall business could be impacted negatively by the COVID-19 situation.

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Steven L. Martin, Slater Capital Management, L.L.C. – Manager [7]

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Okay. You guys have done a great job on the cost controls and reducing expenditures. And you and I have talked about that a number of times. Where are you in that process from the standpoint of — put it in baseball terms, are you in the third, the sixth or the ninth inning?

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [8]

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We’re probably still — I don’t — we’re not in the seventh inning stretch yet. So we’re in the fourth, fifth inning?

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Joseph W. Baty, Nature’s Sunshine Products, Inc. – Executive VP, CFO & Treasurer [9]

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Yes. We’re certainly — we’ve completed half of the game, Steve. But in my mind, and I think in Terrence’s mind, we’re never going to be done, right? We’re always going to be looking for additional margin pickup opportunities to become a little more mean and mean and pick up some additional cost efficiencies. But just as far as the overall strategy and trying to drive costs out of the business and go through some restructuring and so forth, we’re clearly midway through that game. But the current situation may make certain things a little more difficult, but we’re still full steam ahead on margin improvement long-term for this business.

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Steven L. Martin, Slater Capital Management, L.L.C. – Manager [10]

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Okay. And on the manufacturing side as opposed to the expense side, where do you stand on improving your manufacturing cost structure?

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [11]

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Can you talk about that?

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Joseph W. Baty, Nature’s Sunshine Products, Inc. – Executive VP, CFO & Treasurer [12]

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Well, again, you will see that on a quarter-over-quarter basis, our gross profit margin was relatively flat. And you can — we can sit and look at that and look at the overall mix and so forth. But the level of promotions and so forth that we’re doing, that’s going to impact that margin. But having said that, we are not where we expect to be long-term on our gross profit margin or for any of the margins, operating margin or EBITDA margin, looking at it more long term. But just looking at manufacturing and overall COGS rate, we still believe there’s room for improvement in there. And we believe there will be improvement depending on how this year plays out. Again, where there’s all the uncertainty, we’ll have to see. But playing it forward into 2021 and 2022, we do expect to see some further manufacturing efficiencies and some pickup on our gross profit margin.

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [13]

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There are a couple of things we’re working on, Steve. Everything from really scrubbing down our formulations, to kind of looking at supplier list and consolidating there and negotiating better, all the way through to local manufacturing, which can have significant benefits also. You look at a couple of areas of the business where we’re shipping kind of water across the sea or kind of where we’re sending it, there are opportunities for us. And so we’re pursuing all of those. Some closer in than others, but we’re pursuing them all.

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Steven L. Martin, Slater Capital Management, L.L.C. – Manager [14]

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All right. Can I ask one last question? CapEx and investment spending over the balance of the year, sort of what had you expected? And have you adjusted it to reflect what’s going on?

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Joseph W. Baty, Nature’s Sunshine Products, Inc. – Executive VP, CFO & Treasurer [15]

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Well, you saw in the first quarter, we spent a little over $1 million. And we do have several initiatives that Terrence has referenced today and in prior comments that the plan, as we sit here today, is to continue with some of those initiatives. I mean, frankly, we may look to scale back some over the course of the year. We’ll see how it plays out, especially as we complete a little bit more of Q2 and look at some of those initiatives as to whether — just in trying to preserve cash and so forth, whether it makes sense to push out some less critical capital expenditures into, say, 2021. But just from an overall standpoint, putting aside the key initiatives, we don’t anticipate any substantial increase in our CapEx, say, from what you have seen in the last couple of years.

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [16]

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I think what we’re trying to do, Steve, is to make sure that we are strategic in our focus here. And as Joe mentioned, we want to be very conservative with our cash and make sure that we are protecting our cash position, while at the same time funding those strategic initiatives that are really going to help us during times like these. So we do need to focus on things like digital to make sure that we have the requisite capabilities just to stay relevant and be competitive in the marketplace.

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Operator [17]

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This concludes the question-and-answer session. I would now like to return the conference back over to Mr. Terrence Moorehead for any closing remarks.

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Terrence O. Moorehead, Nature’s Sunshine Products, Inc. – President, CEO & Director [18]

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Okay. Well, thanks again, everybody, for all of your support, for participating in today’s call and for everything you do for our company. We look forward to updating you on our next call. And please, hope everybody stays safe and healthy during these uncertain times, and have a great day. Thanks very much. Bye now.

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Joseph W. Baty, Nature’s Sunshine Products, Inc. – Executive VP, CFO & Treasurer [19]

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Thank you.

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Operator [20]

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This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.