Earnings Call Transcript - NATR Q4 2020

Nate Brower, General Counsel

Thank you. Good afternoon, and thanks to all of you for joining our conference call to discuss our fourth quarter and full year 2020 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through March 24, and via live webcast that will be posted on the Investor Relations portion of our website at www.naturessunshine.com.

Terrence Moorehead, CEO

Thank you, Nate. Good afternoon, everyone, and thank you for joining today's call. I hope you're all well and staying safe during the ongoing challenges of the pandemic. 2020 was certainly a challenging year, marked by unprecedented change from COVID-19, but our management teams around the world rose to the challenge as our fourth quarter results closed out a strong year, which we believe to be a transformational period for our company. During the fourth quarter, we saw net sales reach the highest level in the company's 48-year history, as performance eclipsed the record we set last quarter. In addition, we drove absolute growth across all four of our operating business units for the second straight quarter, and we generated record-breaking net sales growth and bottom line improvements for the full year. All this was made possible by our unwavering commitment to our vision, which drives us to share the healing power of Nature with everyone. Throughout 2020, our management team drove incredible results to transform our business and bring our business to life, while our practitioners and retailers showed remarkable stamina and determination to deliver the highest quality natural products to our customers. That combination and partnership helped make 2020 a tremendous success. Throughout the second half of the year, we benefited from improved field fundamentals and the strength of our recently revamped business model. In the fourth quarter, net sales increased 11% to $101.7 million, reflecting strong sales practices, growth in new customer acquisition, and continued positive response to our new branding and product launches.

Joseph Baty, CFO

Thank you, Terrence, and good afternoon, everyone. So, let's just jump into this. Net sales in the fourth quarter increased 11% to a company record of $101.7 million, compared to $91.7 million in the year-ago quarter. This increase was primarily driven by new product development and continued execution on our business transformation plans, along with growth in new customer acquisition within key markets. As Terrence mentioned, we achieved absolute growth across all four operating business units. Excluding the benefit of overall favorable foreign exchange rates, net sales increased 9% in the fourth quarter of 2020. On an absolute basis, net sales in Asia increased 2% to $36.9 million, compared to $36.1 million in the year-ago quarter. But on a local currency basis, this represented a 3% decrease, primarily due to a net sales decline in South Korea during the fourth quarter as a result of stricter lockdown restrictions, as well as a decrease in net sales across our other Asian markets. This decrease was partially offset by a 24% increase in sales in China and a 30% increase in sales in Japan due to the lift of lockdown restrictions and increased market penetration within these regions. Net sales in Europe increased 35% year-over-year in local currency to $23.6 million, compared to $17.2 million in the year-ago quarter, reflecting continued success from new product launches and stronger field fundamentals throughout Central and Eastern Europe. North American net sales increased 6% on a local currency basis to $34.7 million, compared to $32.9 million in the year-ago quarter. With the various strategic and e-commerce enhancements we have implemented to our transformation initiatives, we continue to capitalize on strong demand resurgence within the U.S. market and drive future growth in new customer acquisitions during the fourth quarter. Net sales in Latin America and other increased 21% in local currency to $6.6 million, compared to $5.6 million in the year-ago quarter, with the increase primarily due to new product launches and the continued success of our transformation initiatives in this market. Particularly with our advanced field fundamentals and digital resources for distributors, as Terrence mentioned. Gross margins remained flat at 74% compared to the year-ago quarter. Volume incentives as a percentage of net sales were also consistent at 34.1% for the respective fourth quarters. Selling, general and administrative expenses were $38.4 million compared to $32.7 million in the year-ago quarter. The increase was primarily attributable to variable costs associated with sales growth, incremental stock-based compensation, bonus related, restructuring expenses, as well as incremental support for future growth initiatives. As a percentage of net sales, SG&A expenses were 37.8% compared to 35.7% in the year-ago quarter. Excluding the impact of almost $0.7 million of restructuring expenses in the fourth quarter of this year, SG&A expenses were 37.1% of net sales compared to 35.7% in the year-ago quarter. Operating income in the fourth quarter was $2.2 million or 2.2% of net sales, compared to operating income of $3.9 million or 4.3% of net sales in the year-ago quarter. Excluding restructuring-related expenses, we generated $2.9 million of operating income or 2.9% of net sales for the current quarter, compared to $3.9 million and 4.3% of sales in the year-ago quarter. The reduction in margin is primarily related to incremental stock and bonus compensation of $2 million and marketing investment associated with our transformation initiatives. 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 $7.5 million in the fourth quarter, as compared to $7.6 million in the year-ago quarter. The lack of adjusted EBITDA growth from increased sales is primarily attributable to the timing of certain expenses, including incremental bonus amounts and investments made in support of the company's long-term growth, as Terrence has noted previously. Net income attributable to common shareholders for the quarter was $5.9 million or $0.29 per diluted share, as compared to $1 million or $0.05 per diluted share in the year-ago quarter. Turning to liquidity, we had cash and cash equivalents on December 31 of $92.1 million and outstanding debt of $3.7 million. For the full year 2020, we generated $37.7 million of cash from operations as compared to $8.5 million in 2019. Adjusted EBITDA for 2020 increased $5 million, including an almost 4-point margin increase. As we look back in 2020 and into the fiscal year ahead, we are proud of our stronger financial foundation. Our significantly improved financial health enabled us to invest in our business and positions us to return a portion of our cash to shareholders. As Terrence mentioned, today our Board of Directors declared a special cash dividend of $1 per share, payable on April 9 to shareholders of record as of March 29. In addition, our board authorized the repurchase of up to $15 million of the company's common shares. The repurchases may be made from time to time, as market conditions warrant and are subject to regulatory considerations. Future capital allocation strategy, including initiatives, will be balanced with our aim to continue investing ahead of sales growth. This includes strategic investments to support our customer acquisition and activation, where we have already made progress. Similar to the results we are reporting today, our investments in the next phases of our business transformation may increase our costs over the next several quarters. However, we expect the long-term benefit of these investments will sustain our growth for long-term operational improvements and result in increased operating and adjusted EBITDA margins. We believe the initiatives we have put in place this year have only just begun to fully optimize our platform. And we look forward to further enhancing and expanding our transformation in 2021. Now, I will turn it back to the operator for Q&A.

Operator, Operator

Thank you. We'll now take our first question from Steven Martin with Slater. Please go ahead.

Steven Martin, Analyst

Yes. Hi, guys. Regulations on the revenue increase. I guess we're all surprised the cost increase was so great. I was asking about costs, where do you see going forward, because it was all the G&A line. So what do you expect in 2021?

Terrence Moorehead, CEO

I'll let Joe address that. Obviously, we expect to see continued expansion in our margins and overall profitability. But Joe, do you want to give a little bit more color on that?

Joseph Baty, CFO

Sure. Hey, Steve, how are you doing?

Steven Martin, Analyst

Good.

Joseph Baty, CFO

I'll tell you, directionally, yes, we expect, because I noted in my comments that we may have some incremental costs associated with certain of our initiatives, and spending a bit ahead of growth, if you will. Having said that, looking at 2021 overall, while we don't issue guidance per se, I would just say that we clearly expect our overall margins to be north of where they are in 2020. If that helps to answer your question.

Steven Martin, Analyst

It does. And once Korea strengthens itself out, what do you - can you give us, I mean, you're getting better with this. Can you give us a range of what your expectation is for top-line growth in 2021?

Terrence Moorehead, CEO

Well, again, I won't necessarily give you specific direction, but as we've seen in our other markets, when the COVID-19 restrictions are eased in South Korea, we expect the unleashing of our potential there. We've built such strong field fundamentals and a well-oiled operating machine based on relationships. When you throw something like COVID into the mix, it really slows things down. So, I think our expectation is that we would return to the kind of normal growth rates and the historical performance we would have seen in that market. But again, that will be determined by when that market can open up, as well as our ability to build out more digital capabilities on the ground there. We are working on that, Steve. But it'll take a little bit of time for us to put that infrastructure in place. It's a core component of our strategy and we are building those capabilities right now.

Steven Martin, Analyst

What's the status of that market now? Is it still closed up?

Terrence Moorehead, CEO

They actually have some additional restrictions in place, largely on meetings and how people can get together. That impacts a large part of the South Korean business dynamic. They are working with some new initiatives, including a new business app designed to facilitate meetings and training into a digital platform. But that is just launched this quarter. So, I don't want to make any predictions on the impact that that's going to have. The better the tools and more contact you have, the more helpful it is.

Steven Martin, Analyst

Okay. I do applaud the Board's decision to pay a special dividend and buy back shares; I think that's a great use of cash. With $90 million in cash, I hope you're reasonably aggressive about how you use buyback. One other question on debt. You took out that Bank of America loan, obviously in April, and you took some more of it out. Given your cash position, is the reason why you're keeping it out?

Joseph Baty, CFO

We have a couple of lines of credit, Steve. At the end of the day, we're trying to maintain our banking relationship, and the money is very cheap. Given that we paid back the PPP loan, we turned around and built a little bit against our equivalent line. If we feel compelled, we can obviously pay it back.

Steven Martin, Analyst

Okay. And CapEx thoughts for this year?

Joseph Baty, CFO

For 2020, we are looking at somewhere in the range of $5 million to $6 million. Given the number of initiatives we have, it's certainly possible that CapEx for 2021 could be 1x or 2x times what it was in 2020.

Steven Martin, Analyst

Got it. Are you experiencing any supply disruptions as a result of shipping, given that you’re doing most of your manufacturing?

Joseph Baty, CFO

For the most part, no, we're not. That’s not to say that we haven't experienced a hiccup or two, sometimes related to domestic strikes trying to get product out of our facilities. But for the most part, we've been relatively unscathed by disruptions both on the distribution side and on the supply side.

Steven Martin, Analyst

Got you. All right. I will go and I'll talk to you next week sometime, Joe.

Joseph Baty, CFO

All right. Thank you, Steve.

Operator, Operator

Thank you. We will hear next from John Hollander with CAG Advisors.

John Hollander, Analyst

Thank you for taking my call. First question to you on the metrics that you use to manage your business. Through Q2 of 2020, your earnings releases included the number of distributors and managers. Those numbers have been removed for Q3 and again, in this earnings. Can you give me an update on what metrics investors should be looking at to analyze your business?

Joseph Baty, CFO

Well, first off, regarding the removal of distributor information, it's not required data. Based on the introduction of our new business model back in September, we consider some of that data less relevant. There is now a focus on differentiating between what your customers are versus who the distributors and leaders are. As Terrence touched on in his comments, I would recommend that you focus on the new data points he mentioned, which provide a good roadmap as to some of the metrics we look at going forward. We are focused on growth, building our customer base, and distributor base. We've seen success with programs like Subscribe and Thrive and the significant increase in customer activation.

John Hollander, Analyst

Okay. Can you give any data points as to what percent of your sales are coming from the digital side?

Terrence Moorehead, CEO

Those numbers are still somewhat preliminary. I would say that percentage is still relatively low at around 10%. However, most of our distributors are doing business with us digitally, so the volume of digital transactions overall is very high. The amount coming from consumers is still relatively low. Again, we just launched our new platform and website on September 1, 2020, so we're relatively new in this journey.

John Hollander, Analyst

Okay. So I assume you guys don't have metrics such as customer acquisition costs or anything like that?

Terrence Moorehead, CEO

Yes, not yet. We just started testing some of that database marketing work in the November timeframe, and we'll be rolling out additional initiatives going forward. This is part of the digital campaign or force of Nature campaign. We are making sure that all of our distributors have the same tools and capabilities we have. Each of our distributors, practitioners, and retailers will have fully functional websites and sharing tools to help create their own digital business.

John Hollander, Analyst

Okay. That's helpful. Can you provide a quick sense of how you think about working capital?

Joseph Baty, CFO

Regarding working capital going forward, I would say that considering our decent growth in 2020, we believe this growth will continue. We'd like to see that growth increase, which will drive a bit of an uptick on inventory. Cash receivables for us are primarily credit card-related, so they convert to cash quickly. We don't foresee any major pressures on cash usage due to working capital going forward. There will always be timing considerations but we don't see working capital growth as a significant use of cash for us.

John Hollander, Analyst

So, obviously, we're nearing the end of Q1. I wanted to follow up on our discussion about Korea and other geographies in Q4. Can you comment on how things are trending for Q1, especially with some reopening worldwide post-COVID?

Joseph Baty, CFO

At this time, no, we are not going to provide comments regarding Q1. We've already provided a little bit about how we believe 2021 will unfold. We clearly expect to experience growth, an improvement in our profitability, and so forth. Our next earnings release is early May, at which point we'll be able to discuss the first quarter and the outlook for the rest of 2021 in more detail.

John Hollander, Analyst

Okay. As a final question, I've noticed the line item for non-cash lease expense on the cash flow statement. Can you comment on that?

Joseph Baty, CFO

If your question pertains to adjusted EBITDA, the non-cash items for us are primarily depreciation and stock-based compensation. There's a table in the earnings release that breaks this down. Regarding the new accounting standard for leases, you have to evaluate and put lease liabilities on the books, which includes some amortization associated with that liability. But it's an asset and a liability, and I don't consider that an adjustment to EBITDA; it's a gross-up for accounting purposes.

John Hollander, Analyst

That's helpful. I thought it might have been leases with staff.

Joseph Baty, CFO

Yes, that's one of those accounting nuances.

John Hollander, Analyst

No problem. Thank you for your time. Very good quarter. That's the end of my questions.

Joseph Baty, CFO

Well, thank you for your questions.

Terrence Moorehead, CEO

Thanks, John. Thanks for the questions.

Operator, Operator

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

Terrence Moorehead, CEO

Okay. Well, thank you very much. I just want to take a moment to thank everybody for participating and listening to today's call. We look forward to speaking with you again when we report our first quarter 2021 results in May. Until then, stay well and we look forward to speaking with you all soon. Take care. Bye now.

Operator, Operator

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