Natures Sunshine Products Inc Q2 FY2023 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine's Financial Results for the Second Quarter Ended June 30, 2023. Joining us today are Nature's Sunshine's CEO, Terrence Moorehead; CFO, Shane Jones; and General Counsel, Nate Brower. Following their remarks, we'll open the call for analyst questions. Before we go further, I would like to turn the call over to Mr. Brower as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Nate, please go ahead.

Thank you. Good afternoon, and thanks for joining our conference call to discuss our second quarter 2023 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through August 23 and via a live webcast that will be posted in the Investor Relations portion of our website at ir.naturessunshine.com. The information on this call contains forward-looking statements. 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 may be materially different from the results implied by forward-looking statements. Factors that could cause results 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 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. Now I would like to turn the call over to our CEO, Terrence Moorehead.

Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today's call to discuss our second quarter results, which represent the second strongest quarterly sales in the company's history. Today, I'll provide some context for our second quarter performance and offer some insights on how we believe the business is progressing. Shane will then take you through our financials in more detail. In the second quarter, we continued to gain strength, building on the positive momentum we experienced in the first quarter, with reported second quarter net sales of $117 million or $119 million when excluding the impact of foreign exchange, which is a 14% increase versus the prior year. The growth was led by continued strength in Asia Pacific, followed by further stabilization in Europe and a return to growth in North America and LatAm. Adjusted EBITDA was up 26%, coming in at $11.3 million due to strong sales growth as well as gross margin expansion from a favorable product mix and price increases. While the external operating environment continues to be challenging, the underlying fundamentals and strength of our business remain firmly intact, and the steps we've taken to create a more powerful consumer-focused business continued to help build momentum in the quarter. Fueled by increased strategic investment, our global growth strategies, brand power, Field Energy, and a digital-first approach, continued to gain traction, building momentum and strength across our operating business units, each of which delivered positive growth in the second quarter. In Asia Pacific, we continued to deliver strong results with record-breaking second quarter sales that delivered a 22% increase on a constant currency basis. Our Field Energy initiatives were a key driver as investment in field activation that focused on sales incentives and training helped drive order growth. Similarly, our brand power initiatives that focused on rebranding our websites and consumer-facing imagery helped attract a new, younger group of customers that also contributed to order growth in the second quarter. As a reminder, several of our markets are still recovering from the COVID restrictions that prevented them from conducting normal business activities for an extended period of time. China was hardest hit by the restrictions and has only recently been able to focus on restoring customer growth after the restrictions were lifted. Fortunately, our business in China has responded well to the improved market conditions, and we're already seeing greatly improved results with a positive outlook moving forward. Overall, we expect strong growth throughout Asia Pacific in the second half of the year as we continue to invest in field activation to drive customer and order growth and invest in new rebranded packaging and several new product launches. In Europe, sales were up 23% versus the prior year on a local currency basis, driven by targeted investments to stabilize Central and Eastern Europe. Specifically, our investments in Field Energy that focused on developing more relevant tools and incentives to support and motivate distributors and realign field fundamentals to address the changing situation on the ground have helped drive order growth and activation. Additionally, our investments in a new clean energy warehouse and revised distribution network have also helped stabilize the business and improve efficiency. Finally, our brand power initiatives focused on strengthening customer appeal with rebranded imagery and packaging. We also took the opportunity to implement some strategic price increases across the region. Our European team has done an outstanding job driving sales and attracting new customers, despite the challenging macroeconomic and geopolitical environment. As we move forward, we believe continued stability in Central and Eastern Europe, combined with strong execution of our field fundamentals, will create opportunities for us to deliver growth across the region in the second half of the year. In North America, we've reached an important milestone as second quarter sales turned positive, increasing 2% versus the prior year. The shift in momentum was primarily driven by our investment in digital and field activation initiatives that allowed us to overcome the headwinds that have negatively impacted the market for the past year. Our digital initiatives continued to gain momentum with North America digital sales increasing nearly 40% year-to-date, with the expectation of stronger growth through the second half of the year fueled by a substantial increase in new customer acquisition. Our digital and CRM initiatives appear to be headed in the right direction. But what's equally pleasing is that we also saw a significant improvement in the overall business as our investments helped fuel growth in both orders and average order. In the second half of the year, we look forward to building on this momentum by further expanding our digital footprint and increasing the number of nutrition health practitioners recommending our products. Moving on to our supply chain initiatives. We continued to make progress on our margin enhancing and cost-saving initiatives and have moved into the execution phase of the plan. As a reminder, the structural changes we're making to our product line and supply chain will provide significant improvements to gross margin, but many of the initiatives involve redesigning processes and revamping sourcing relationships, and this takes time. We remain confident we will achieve our objectives and add significant value. Looking ahead, we remain positive about the future, as this quarter's results are indicative of the strong underlying fundamentals of our business. As we build momentum, we'll continue to invest in our key growth strategies and expand our competitive advantage to improve shareholder value. And with that, I'd like to turn the call over to our Chief Financial Officer, Shane Jones.

Thank you. As Terrence mentioned, we're seeing positive momentum across nearly all markets, resulting in a strong quarter. Net sales in the second quarter were $116.5 million compared to $104.2 million in the year-ago quarter. This 11.9% increase was driven by continued strong sales momentum in Asia, led by Taiwan and China, stable improvement in Central and Eastern Europe, and North America returning to growth. Excluding the $2.6 million unfavorable impact from foreign exchange rates, consolidated net sales increased 14.4% in the second quarter versus last year. Looking at sales by market in Q2, Asia-Pacific continued to see robust growth with sales increasing 21.7% on a local currency basis. China's reopening, along with the resurgence of growth there, was a key driver of this increase, with local currency sales growth of 37.7%. Taiwan also continues to see meaningful momentum, and the opening of our new office in Kaohsiung helped to drive local currency growth of 40.6%. Likewise, in Japan, our investments in Field Energy continued to drive strong sales momentum, resulting in local currency sales growth of 16%. Sales in Europe during Q2 continued to see healthy gains increasing 24.2%. These outstanding results were driven by Eastern and Central Europe, where sales were up 32.2% and 21.3%, respectively, despite the challenging macroeconomic and political landscape. In North America, Q2 sales hit an inflection point, returning to growth with sales increasing 1.7% versus last year. Recent investments in our digital initiatives were key to this turnaround as the North America digital business grew 36.2% during Q2. In addition, digital customers ordering directly from our website increased 52% versus the prior year. In Latin America, we continued to focus on Field Energy, sales tools, and business fundamentals. That groundwork is beginning to yield results as sales in Latin America increased 6.5% in Q2, driven by Mexico, where sales were up 10.7% versus last year. Gross margin in the second quarter increased 90 basis points to 72.6% compared to 71.7% a year ago. The increase was due to market mix, price actions across various markets, and lower transportation and distribution costs. These improvements were partially offset by higher material and production costs and the previously mentioned unfavorable foreign currency exchange. Volume incentives as a percentage of net sales were 30.3% compared to 30.8% in the year-ago quarter. The decrease was primarily due to changes in market mix. Selling, general and administrative expenses during the second quarter were $42.3 million compared to $36.9 million in the year-ago quarter. This increase was driven primarily by increased service fees in China as the market continues to recover, increased variable costs related to sales growth, and investments to drive our digital growth and strategic initiatives. As a percentage of net sales, SG&A was 36.3% for the second quarter of 2023 compared to 35.4% in the year-ago quarter. Operating income was $7.0 million or 6% of net sales compared to $5.8 million or 5.5% of net sales in the prior year. GAAP net income attributable to common shareholders for the second quarter was $2.4 million or $0.12 per diluted share as compared to $0.5 million or $0.03 per diluted share in the year-ago quarter. The higher GAAP net income was primarily the result of the strong sales growth in the quarter as well as a lower provision for income tax compared to the second quarter of last year. Adjusted EBITDA, as defined in our earnings release, increased 26% to $11.3 million compared to $9 million in the second quarter of 2022. The increase was driven by the improvement in sales and gross margin. Our balance sheet remains clean, with cash and cash equivalents of $69 million and only $0.5 million of debt. Inventory declined slightly in Q2 compared to where we ended Q1. As part of our capital allocation plan, we continue to utilize our share repurchase authorization, buying 99,000 shares year-to-date for $0.9 million or an average of $9.28 per share. As of June 30, 2023, $23.1 million remains of our $30 million share repurchase program. Looking beyond share repurchases, our healthy capital allocation structure positions us well to continue our digital transformation and other strategic initiatives. Now turning to our 2023 outlook. During Q2, we continued to experience sequential growth across nearly all of our markets. Due to this momentum, we now expect to report 2023 full year sales between $440 million and $455 million, representing year-over-year growth between 4% and 8%. With respect to gross margin, we continue to make good progress on our supply chain initiatives and we expect meaningful improvement in 2024 and beyond. For the remainder of 2023, we expect only modest improvement versus 2022 as early benefits from our initiatives in pricing are partially offset by continued inflation and foreign exchange headwinds. We also expect SG&A, excluding the one-time charges related to Japan, to be sequentially higher during the second half of the year due to investments in our strategic growth initiatives along with the timing of events. As a result, we expect adjusted EBITDA for the full year to be between $34 million and $38 million. Overall, we're very excited about both the immediate and long-term growth opportunities for the business, and we remain committed to driving improved efficiency and profitability and are working to pursue opportunities to maximize shareholder value. Now I will turn the time back to the operator.

Thank you. We will now take questions from our analysts. Your first question comes from Linda Bolton-Weiser from D.A. Davidson. Linda, please go ahead.

Yeah. Hello. Congratulations on a good quarter.

Hi, Linda.

Hi, I was wondering if you mentioned how much China was up within Asia Pacific.

China was up 37.7% for the quarter on a local currency basis.

Okay. I'm trying to understand if that was against a very easy comparison. Did the declines begin last year? Actually, the sales were only down slightly in the second quarter last year. So, it seems like there will be even easier comparisons in the next couple of quarters in China. Is that correct?

We have some relatively easier comps coming forward, yes.

I'm curious whether you believe the growth will accelerate further or if you expect it to remain around the 30% growth rate.

We're encouraged by what we're seeing in China. Obviously, 37.7% growth is a good metric. We hope to be able to get better than that, but at least at this point, counting on at least getting that and then building from there.

Yeah. We like what we're seeing happening in China.

So can you remind us what model specifically you use in China? Is it omnichannel kind of like it is here in the U.S. or are there little stores? Like, what's the model there in China?

Most of their sales come through digital activation. Their distributors are utilizing influencers to drive sales on platforms like TikTok and WeChat. They also excel in conducting live webinars. Overall, it's primarily a digital platform supported by a network of influencers.

Okay. That sounds good. I think you mentioned digital orders in North America were up 36%, but ordering directly on the website was 52% growth. Is the difference between those like Amazon? Is that the difference? Like the digital orders, they sort of include...

No. Let me clarify, the 52% is a customer count number. The number of new customers ordering from our website is up 52%. So it's a slightly different number.

Yeah. So as we've said, we've intensified our focus and investment on digital. We're seeing a significant uptick in new customers coming on board, and that's driving sales and orders.

So the 36% growth, is that orders or sales?

That is sales and that includes all of digital, yes, all of North America digital.

And how much as a percentage of North American sales is that now?

We haven't been disclosing that number. Yes, so the digital portion is roughly 20% to 25%.

Yes.

Okay. I know we've talked about this before, but I do worry about the potential for channel conflict between direct selling and digital selling. Are you experiencing any negative feedback or issues with your stores or direct distributors related to your digital activities?

I think what we're seeing is that a rising tide lifts all ships, and that seems to be proving true. As we more aggressively promote our message in the marketplace, we're noticing increased online activation, as well as improvements in our other business segments. This means we're successfully activating many of our distributors and reaching inactive and lapsed customers productively as well. So far, things are looking good.

Okay. And about North America, it's encouraging to see growth there. I'm curious if the growth is primarily due to an easier comparison to last year or if you're actually noticing some improvement in consumer buying behavior.

No. We're actually seeing improvements in buying behavior. Historically, we were seeing our order count hold steady, but average order was significantly down. This is the first time in a while that both orders and average order have been growing. So that's an encouraging sign for us.

I mentioned inflection point because we expect to see that growth strengthen rather than diminish.

Okay. That sounds good. And on your supply chain initiative and your cost reduction, I know there were some numbers put around that. Can you remind me like was there an amount for 2023 and there's something for end of 2024 or what was that target?

Shane, you want to take that one?

Yeah. We talked about a $10 million savings target that we're working to accomplish over 24 months. And so if you do the math on that, then it's a little less than 300 basis points.

And I think we'll start to see...

We'll begin by acknowledging that due to the timing and our ability to realize progress, we have initiated this process. We are observing significant advancement and are still in the execution phase. However, the results will not be reflected in the P&L until 2024.

It just takes time to work through the installed inventory base.

Right. Okay. And then I think you mentioned price increases in EMEA. Like what magnitude were those roughly?

Shane?

So we've made price increases in more than just EMEA. We've actually done price increases across most of our markets, averaging about 3%.

Okay. I think that’s all for me. Thank you so much.

Thank you.

Great. Thank you.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Moorehead for closing remarks.

Okay. Thank you. And we'd like to thank everybody for listening to today's call. And we look forward to speaking with you again when we report our third quarter 2023 results in November of this year. Thanks again for joining us. Take care.

Ladies and gentlemen, this does conclude today's conference call. We ask that you disconnect your lines at this time. Thank you for your participation.