Earnings Call Transcript - NATR Q1 2021

Nathan Brower, Executive Vice President and General Counsel

Thank you. Good afternoon, and thanks to all of you for joining our conference call to discuss our first quarter 2021 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-ins through May 20th, and via a live webcast that will be posted in the Investor Relations portion of our website at naturessunshine.com. 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 differ materially from those implied on this call 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 in 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'd like to turn the call over to the CEO of Nature's Sunshine, Mr. Terrence Moorehead. Terrence?

Terrence Moorehead, CEO

Thank you, Nate and good afternoon, everyone, and thank you for joining today's call. It's a pleasure to be here with you today as we continue our journey to transform our company. We continue to make excellent progress against our global strategies as we build momentum and strengthen our business. As a result of our efforts, I'm pleased to say that Nature's Sunshine was recently honored by the American Business Awards with six Stevie awards. The awards include recognition for digital website achievements, management achievement, brand renovation of the year, organizational recovery, most valuable COVID response, and customer service team of the year. The awards are a reaffirmation of the work we've done, but of course, our goal is to continue to transform the business and deliver exciting and innovative change that delivers historic results. And in the first quarter of 2021, we continued to make progress on our journey while delivering another quarter of record-breaking results. I'm pleased to announce our third consecutive quarter of net sales over $100 million. And once again, for the third consecutive quarter, we delivered the largest sales in the 49-year history of our company, outperforming the previous two quarters that also delivered historic results.

Joe Baty, CFO

Thank you, Terrence, and good afternoon, everyone. So let's jump right into it. Net sales in the first quarter increased 7% to a company record of $102.4 million, compared to $95.9 million in the year-ago quarter. This is the third consecutive quarter of record net sales. This increase was primarily driven by our execution of our business transformation plans, new product developments, and growth in new customer acquisition across markets. Excluding foreign exchange rates, net sales increased 4% in the first quarter of 2021. On an absolute basis, net sales in Asia increased 16% to $35.8 million, compared to $31 million in the year-ago quarter. This represented a 9% increase on a local currency basis. The increase was primarily attributable to strong sales in China and Japan, which saw year-over-year increases of 38% and 44%, respectively. Net sales in Europe increased 8% to $22.2 million, compared to $20.6 million in the year-ago quarter. This represented a 5% increase on a local currency basis. The increase reflects the continued success of new product launches and stronger field fundamentals throughout Central and Eastern Europe. Poland had an especially strong quarter with 40% year-over-year local currency growth. North America net sales were $37.8 million, compared to $38.8 million in the year-ago quarter. The slight decrease is attributed to the fact that the first quarter of 2020 was a tough comparison as it takes into account the impact of U.S. consumers stockpiling consumer goods at the start of the pandemic. Net sales in Latin America and other increased 21% in local currency to $6.7 million, compared to $5.6 million in the year-ago quarter, with the increase primarily due to the continued success of our transformation initiatives in these markets, particularly with our revamped field fundamentals and the new compensation plan as Terrence mentioned. Gross margin was 73.7%, compared to 74.3% in the year-ago quarter. The reduction reflects the impact of inventory reserves, changes in market mix, and certain supply chain challenges. Volume incentives as a percentage of net sales were 33.4%, compared to 34.4% in the year-ago quarter. The decline is due to changes in market mix, including growth in NSP China. The improvement also reflects initial savings from the prior year launch of our new business model and compensation plan in North America and Latin America. Selling, general, and administrative expenses were $33.6 million, compared to $31.1 million in the year-ago quarter. The increase was primarily attributable to sales growth and higher costs associated with the implementation of our business transformation initiatives. As a percentage of net sales, SG&A expenses were 32.8%, compared to 32.4% in the year-ago quarter. Excluding the impact of capital allocation-related expenses in the first quarter of this year and VAT refunds in the prior-year quarter, SG&A expenses were 32.6% of net sales, compared to 32.9% in the year-ago quarter. Operating income in the first quarter improved to $7.6 million or 7.5% of net sales, compared to operating income of $7.2 million or 7.5% of net sales in the year-ago quarter. Excluding the impact of the current year capital allocation expenses and prior year refunds, we generated $7.8 million of operating income or 7.8% of net sales for the current quarter, an increase of 17%, compared to $6.7 million or 6.9% of sales in the year-ago quarter. The increase is primarily attributed to the aforementioned net sales increase. 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, increased 20% to $11.6 million in the first quarter as compared to $9.7 million in the year-ago quarter. Net income attributable to common shareholders for the quarter increased significantly to $4 million or $0.20 per diluted share as compared to $2.5 million or $0.15 per diluted share in the year-ago quarter. Turning to liquidity, we had cash and cash equivalents on March 31st of $91.3 million or $71.4 million post-funding of the special dividend and $3.3 million of debt. For the quarter, we generated $2.7 million of cash from operations as compared to $13.5 million in the prior year quarter. The quarter-over-quarter difference is primarily due to timing-related working capital changes. For 2021, we expect future capital allocation initiatives will continue to include strategic investments to support our customer acquisition and activation. While we anticipate that the investments we are currently making and plan to make as part of our business transformation will increase our SG&A and capital expenditure costs going forward, we expect the long-term benefit of these investments will allow us to sustain our growth and drive future operational improvements for years to come. Furthermore, we will closely monitor overall return on investment on our investments and adjust as deemed appropriate. We look forward to sharing more information in the future as we continue our strategic and transformative investments. Now, I will turn the time back to the operator for Q&A.

Operator, Operator

Thank you, sir. And we'll take our first question today from Jon Hollander with Chesapeake Advisory Group.

Jon Hollander, Analyst

Hi, everyone, and thanks for the time and congratulations on a very nice quarter.

Terrence Moorehead, CEO

Thanks, Jon. Thanks for joining the call.

Jon Hollander, Analyst

I just wanted to ask a little bit about CapEx. On the prior call, I believe the guidance was to about 2 times the spending of year-end 2020. For this quarter in the financials, we can see about $1 million was spent on CapEx. Could you update the CapEx guidance? Is that still in line with 2 times last year?

Joe Baty, CFO

No, I think that's where we expect to be in 2021. Yes, there was only $1 million in the first quarter, but as I pointed out in my comments, we do believe over the subsequent quarters, our investment in CapEx will increase. But overall, we're somewhere in that 2X multiple for 2020, which was approximately $5 million.

Jon Hollander, Analyst

Great. Thank you. When you think about that CapEx spend, do you have a target return like return on invested capital that you use?

Joe Baty, CFO

Well, we certainly look at the long-term return on all our capital expenditures. But I would say, generally, while it may be different for each particular investment, just overall, we expect those capital investments to pay for themselves in a relatively short period of time in the neighborhood of two to three years.

Jon Hollander, Analyst

Okay. Thank you. On the prior call, I'd asked about which metrics were tracked. And I was referred to the prior comments, which track the Subscribe and Thrive and also track the numbers, really. On this call, it doesn't seem like those numbers moved very much. The prior call was a reference of 25% of orders from Subscribe and Thrive, in this call, again, 25%. And then also in the prior call, 300% increase in people joining the affiliates. And I guess on this call was 300% of affiliate-generated orders. I was just hoping you could comment if these are the right metrics we tracked.

Terrence Moorehead, CEO

Yeah. I think those are - again, we're still early on in the launch process. So I just wanted to give you kind of a sense that we are tracking and moving in the right direction. You know we actually continue to build momentum in both of those areas. As we see the progress that we're making and getting more learnings on each one of those key programs, we're fine-tuning. You know our goal is to kind of get to a very different place. But again, you're talking about a relatively large installed base of consumers with something like Subscribe and Thrive. So even as we're amassing more and more orders, the incremental gains are relatively small at this point in time. But again, our expectation is that we'll see some pretty dramatic movement on that in the future. And obviously, you can just kind of do the math on it. For every percentage of orders that we're getting that are in Subscribe and Thrive, the incremental orders that we receive really does have an impact on the lifetime value of consumers. So it's an area where we really do want to focus. And on the affiliate program, again, I provided some general numbers around growth. That's what I'm sharing at this point in time because we're so early in the program. But again, the residual off of one person, one consumer sharing with two, three, four, five other people is a nice new addition to the business. And we're still dealing with relatively small baseline numbers. But the impact is starting to appear.

Jon Hollander, Analyst

Okay, great. Thank you. Also, just one more brief question. In the beginning of the call, there was a comment about gross margin being impacted by packaging and other COVID-related costs. Are you able to quantify that a little bit? Was it 20 bps, 50 bps, or 100 bps?

Terrence Moorehead, CEO

Do you want to take that one, Joe?

Joe Baty, CFO

Well, the overall change in gross profit margin was clearly less than 100 bps. But you know, it's a combination of different things that led to the approximate 60 bps decline in gross profit margin, including some inventory reserves and a couple of other promotional situations. But in regards to the pandemic, I can't quantify exactly. We did have some situations where we had to airfreight some inventory and so forth. So, out of that 60 bps, maybe a third of it is associated with that kind of activity.

Jon Hollander, Analyst

Okay, thanks. And then, I'm sorry, just one last question I had right now. I forgot to ask was what percent of sales in Q1 were digitally driven?

Terrence Moorehead, CEO

You got that number, Joe?

Joe Baty, CFO

I don't have that number off the top of my head. We can make note of that and get back to you if you still request.

Jon Hollander, Analyst

Okay, great. Thank you very much for your time. Those are all my questions. Congratulations again on the very nice quarter.

Terrence Moorehead, CEO

Thanks, Jon. Yeah, thanks for the questions.

Operator, Operator

We'll hear from Steven Martin with Slater.

Terrence Moorehead, CEO

Hey, Steve. How's it going?

Steven Martin, Analyst

Good, good. Can you hear me?

Terrence Moorehead, CEO

Yeah. I can hear you okay.

Steven Martin, Analyst

Okay. Just a couple of things. Last year, you deferred your April 1st price increase. Did you take that later in this year or did you…?

Terrence Moorehead, CEO

Hey, Steve. We're having trouble hearing you right now. Could you - I don't know if you're calling on a cellphone.

Steven Martin, Analyst

Yeah. No, I took it off speaker. I was having a hard time. So what I asked was, last year, you had an April 1st price increase that you deferred due to the pandemic. Did you take it this year to offset some of your cost increases?

Terrence Moorehead, CEO

We actually took the price increase in, I believe it was April, Joe this year...

Joe Baty, CFO

Yes. We certainly believe it's going to offset a meaningful portion of them, yes. Now, again, it's difficult to predict how it all plays forward. But as Terrence mentioned in his comments, we believe we did a very good job in being proactive and trying to strengthen our overall supply chain position and so forth to do as best as we can, minimize the impact. But there's still some uncertainty on that as it plays forward.

Steven Martin, Analyst

Got it. With respect to Korea, what's your expectation on timing of that market sort of starting at least to return to normal?

Terrence Moorehead, CEO

You know, I think we'll expect to see some relief relatively soon this year. But as I mentioned, you know, I won't be able to really unleash the power of that team until the restrictions at least have been eased. You know they still can't have meetings face-to-face with more than, I think it's five people, and they really do rely on a high-touch market for them. But they've got a lot of things going on. They've launched a new app to supplement their training that they would normally do in person, and they've put literally hundreds of product and training videos. So this was relatively recently introduced. So you know they really are kind of working around the clock to try and figure out a new way to drive activation. And so we'll see some uptick in their performance shortly. But again, we won't be able to unleash that market until some of those restrictions come down.

Steven Martin, Analyst

Okay. And I know we're still coming out of pandemic-related issues like Korea. We've talked in the past about guidance and you're being prepared to give us some range - even with a range, where do you feel we are in that process?

Terrence Moorehead, CEO

You know right now, we really are still driving through the transformation. So I've kind of got two things I'm managing, Steve. One is making sure that the transformation initiatives that we're putting in place are solid and sustainable, which everything that we're seeing would support that, again, both in the U.S., in Latin America, and in the key areas where we're focused, like China and Japan. So we're really starting to see some good stability in those markets. But I'd say we are still in the learning process. And then, of course, you overlay on top of that COVID and the uncertainty that lies with that. So I don't think we have a high enough degree of confidence to give full guidance yet, but we do have that real confidence in our business, real confidence in the momentum going forward. We're still several quarters away probably from providing some solid guidance to you. Joe, do you have any additional comments on that?

Joe Baty, CFO

No, I think Terrence responded appropriately, Steve, to your question.

Steven Martin, Analyst

All right. And…

Terrence Moorehead, CEO

No, I was just going to say, this being our third consecutive quarter of $100 million, remember, two quarters ago, I said $100 million. Don't expect that to be the new trend line. We don't know yet, and then we delivered another one. Now we've delivered our third consecutive quarter above $100 million. So again, I think we're starting to build momentum each one of those quarters, larger than the previous one. Strategy is starting to really come online and gain some traction. So again, we feel really good about the business internally. And again, as soon as we can, we'll start to unveil more to you.

Steven Martin, Analyst

Okay. I applaud, as you know, your special dividend, and I know you talked about capital allocation. You announced a buyback, recognizing that it was towards the end of the quarter. Do you have a target for the buyback in the way of share count reduction? Do you have a goal of utilizing X amount of dollars per year? Because you still are going to throw off $20-plus million of cash. And you're still cheap, and it would be great if the share count got reduced a little.

Terrence Moorehead, CEO

Yeah. Well, I'll start, and I'll let Joe follow-up. You know we've announced the buyback; we put the parameters around it. We will be as appropriately as aggressive as we can in pursuing that. I don't want to be too forward-looking on that. But you know we have the authorization, and we're going to take the opportunities as we can. Joe, do you have any additional comments?

Joe Baty, CFO

I would just add to Steve, obviously, we did pay out a special dividend close to $20 million about one month ago, right? We did that. We did announce the stock repurchase plan. Set aside $15 million for that. And I'd just say, you know we intend to use that money appropriately and wisely. And it's a little bit early to comment specifically on targets and so forth. But I would just say, we do have a fully integrated capital allocation policy. We certainly want to maintain cash reserves and also make sure we have plenty of liquidity to invest in the business. And to the extent that we end up concluding that there's excess capital, one way or the other, we'll look to send that back to our shareholders.

Terrence Moorehead, CEO

Yep.

Steven Martin, Analyst

All right. Thanks a lot, guys.

Terrence Moorehead, CEO

Thanks, Steve.

Joe Baty, CFO

Thanks, Steve.

Terrence Moorehead, CEO

Good talking to you.

Operator, Operator

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

Terrence Moorehead, CEO

Okay. Well, again, I want to thank everybody for participating in today's call. And again, you know we look forward to speaking with you again when we report our second-quarter results in August. So with that, I'll conclude the call. Thanks again.

Joe Baty, CFO

Thank you.

Terrence Moorehead, CEO

Take care, everybody.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.