Nature's Sunshine Products Inc (NATR) 2002 Q1 法說會逐字稿

Good morning, and welcome to the Nature's Sunshine Products Incorporated first quarter 2002 operating results conference call. Statements made during this conference call concerning the company's business outlook or future economic performance, anticipated profitability, revenues, expenses, or other financial items, and product line growth, together with other statements that are historical facts are forward-looking statements as that term is defined under federal security laws.

Forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those set forth in such statements. Such risks, uncertainties, and factors include but are not limited to; foreign business risk, industry cyclicality, fluctuations in customer demand, and order pattern. The seasonal nature of the business changes in pricing and general economic conditions as well as other risks detailed in the company's filings with the Securities and Exchange. The company disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this conference call.

Our speakers today will be Douglas Faggioli, Executive Vice President and Chief Operating Officer, and Craig D. Huff, Chief Financial Officer. At this time all participants have been placed on a listen-only mode, and the floor will be open for question and comments following the presentation. I would not like to turn the floor over to Mr. Faggioli. Sir, the floor is yours.

Thank you. Good morning, and welcome to Nature's Sunshine conference call report on earnings for the quarter ended March 31st, 2002. We appreciate the opportunity to review with you the results of operation for the quarter, and to go into detail on some of the positives and some of the negatives that Nature's Sunshine experienced during the quarter.

I think we'll start the conference call by having our Chief Financial Officer, Craig Huff, review with you some of the information from the news release and some of the financial information, and I'd like to cover a few a things with regard to U.S. sales and international sales. Craig you want to take them through the information?

Thank you very much, Doug. It's a pleasure to be able to talk to you today although the results aren't what we expected, what we would like. I'd like to take this opportunity to say that I'm still very supportive of Nature's Sunshine and our ability to go forward as a very profitable company. This past quarter we had some challenges that we had to deal with as we right sized our business for the level of sales that we're currently experiencing.

For the first quarter, sales revenue were 75.9 million compared to 81.7 million, that is a decrease of seven percent over the prior year. Net income for the quarter was a loss of $.9 million. Earnings per share were a loss of five cents a share compared to 25 cents a share the prior year.

As we mentioned in the news released, and I think as we warned in the prior conference call, we've had some issues that we had to deal with during this quarter. One dealt with an investment that we made in a company called . We've talked about that a little bit over the last three quarters, dealing with this is our relationship with the company who has the ability to sell supplements through Sear's Health and Fitness stores, store within a store model. We had purchased $2 million worth of stock, and a $1 million loan associated with that. At this time we've determined that that is not a, that there's not a lot of value left in that, and not necessarily the idea of Sear's within Sear's, but within the corporation, and so we wrote that down. We were very positive on it for the first two months of the quarter, and then during March we, some things came up that we felt that it was necessary to write that off.

We also had non-recurring charges in the quarter of about 1.3 million. These dealt with right sizing our U.S. business, our Brazilian business. And so those non-recurring charges of 1.3 million will not go forward.

If you adjust the income for these two adjustments, after tax affect would have been, our net income would have been $1.8 million, about 11 cents a share. Still we're below the estimate that we were anticipating, but we feel very profitable as we go forward.

From our international business we continue to struggle with our Brazilian operation. Sales for the quarter in total international were 31.7 million compared to 35.7 million, that's a decrease of 11 percent. International has decreased as a percent of total sales from 46 percent down to 42 percent of consolidated sales.

From a segment reporting standpoint, Latin America was this year for the first quarter were $15.8 million in sales compared to 19.9 million the prior year. Asia-Pacific were 10 million compared to 10.3 million. And our other markets were 5.9 million compared to 5.5 million.

Just a couple things to make note of in our international business. The decrease in sales revenue in Brazil for the quarter we're actually an increase over the fourth quarter of last year, but compared to the first quarter we're down 3.1 million, about 75 percent of the total decrease in international.

Another component we mentioned in our last conference call that caused international to decrease is we sold our Argentina operation. That represented close to $600,000 worth of sales last year that we didn't have this year. So if you take those two things into account our international business was flat. And with some of the devaluation problems we had and the political turmoil in Venezuela and a few other markets we feel fairly good about our international that we're right sized.

If you look going forward for Brazil the second quarter of last year is when all of our problems with the government started down there, and there import restrictions that they imposed, and so the comparables for the second quarter going forward should be very good.

Domestically our sales revenue were 44.2 million compared to 46.0 million. That's a four percent decrease over the prior year. Our Spanish markets grew about 10 percent during that quarter, so our Hispanic area continues to go fairly well.

Total distributors for the quarter end of March 31st were 570,000, total managers were 19,400. Total assets were 128.3 million with cash and cash equivalents and our long-term investments of 40.5 million. During the quarter we basically completed the expansion of our manufacturing facility that is up and running fully now, and we spent about 1.2 million associated with that, very, very, little remaining going forward in the $100,000 range.

Cash provided from operating activities was down to 3.4 million when you take into account the right off that we had. Inventory remained fairly level at 27.5 million, up .7 million for the year-end. And book value per share was about $5.80 a share.

That concludes the - well just one other thing that I have here. Total stock purchases that we made in the quarter on our buy back program were about 170,000 shares at an average price of 12.66 or 12.67 during the quarter. We spent 2.1 million in buying back shares. On our million share authorization we have close to 670,000 shares left available for us to purchase additional shares in the open market.

Our selling general administrative expense is an area that we have been concentrating on during this quarter in getting that under control. As we mentioned in our pre-earnings release we have implemented a number of procedures and a hiring freeze and budget cuts and efforts to control our selling, general, and administrative. This past quarter they increased to 35.7 percent of sales up from 29.9 percent the prior year.

We feel like with the things that we've put in place with the changes that we've made in our Brazilian, some of our Japanese operations, as well as significant changes we've made in our U.S. operations that we should be able to bring that SGNA back in line with where it has been the last, during the last year. And so although we have our challenges and the challenges that we faced during this last quarter, we feel that going forward there's some tremendous opportunity for us, and we feel like we've put in place the things necessary to return us to levels of profitability that are acceptable for us and for our shareholders. Thank you. Doug.

Thank you, Craig. Certainly from reading the news release and with all due respect to our Chief Financial Officer here, some of the financial information may lead you to believe that these are certainly trying times. I will tell you that I have looked at this, and I see some very positive things, and I certainly see some very challenging things as Craig has mentioned. I believe Nature's Sunshine as a company, and the officers of Nature's Sunshine that we have been very direct and open about both our challenges as well as talking to you about some of the things we think are going very well for us.

As Craig mentioned in the last conference call we talked about some of the problems we were facing particularly with Brazil and some of the other markets that I will mentioned here shortly, and I believe that we have a number of these things well in hand.

Craig talked to you a little bit about Brazil. Those of you who have listened to us before know we've had some very, some very difficult problems to deal with in Brazil particularly with importation. We think we're making some progress there.

Talked to the president of international and the Vice President that's over that area, and as well as Craig's people have been involved in helping us reduce costs in Brazil. And we're at the point right now unless something that we didn't anticipate happens we think that we can either break even, or make a little bit of money in Brazil going forward. So while it may be painful to take some of these one-time charges and restructuring charges, I think it's going to make us a stronger company going forward.

Certainly we would rather have had Brazil continue to be strong, and in the fairytales live happily ever after, but in business that doesn't' happen. So I think that's a challenge that we've taken, and our international people as well as our finance people I think have dealt with it in the best way possible. And we think going forward Brazil may not be our largest subsidiary and may not challenge Korea, which is doing very well, but we continue to support our managers and distributors in that country. And we feel very strongly about that, and we're going to continue to do that.

But I think there's some progress that's been made there. Certainly there's a lot of other things that we need to address. Those of you who have been watching the news somewhat see the political upheaval in Venezuela, and while I wont turn this into a political commentary I'm not too familiar with many presidents of countries who have been ousted and then a couple of days later put back in. Surely you know there's been a lot of problems there, and we've been affected by it in Venezuela. Not as much as we thought we might have been affected from an exchange standpoint, but it certainly has affected our sales there. Our sales are down 26 percent in Venezuela, although during this period of upheaval we've been able to manage the income in Venezuela and it's up something like 50 percent.

In local currency I think Venezuela sales were off something like 10, 11 percent. So you can see the impact of the currency, but again, Venezuela is a good market for us. We're going to continue to work with that and see if we can't work through some of the political problems that they're experiencing now.

I mentioned Brazil, Venezuela, I'd like to touch briefly on Japan. For those of you who know this has been somewhat delayed in coming, but we just had our official re-launch of Japan. Talking to President of International and then the founders that were, that attended that re-launch. Apparently it was a very successful re-launch. We had a group of about 500 what I would consider to be very strong sales leaders at that meeting.

As I've mentioned before we have a very good GM in that market. I'm probably the one that's most interested in seeing this market be successful even though there are other people in the company that are very interested in it as well. I just don't want to give up on this market. It's a good market. I think maybe we've got all the right elements there. Hopefully we'll be able to report to you on the progress that is being made since the re-launch in Japan in the next conference call. So there's something in international I think that's been very positive.

We just recently opened a new market in Singapore. Early indications are that that's going to go very well for us. We're thinking that might even lead to other things. As I've mentioned in previous conference calls we've been a little hesitant to open other markets, trying to focus entirely on Japan, and now we're moving ahead and opening up some other markets. So I think that's fairly good.

Two other markets that I would mention to you, Korea, which has been a very good market for us. It's continuing to grow, maybe not at historical rates, but Korea for the quarter is up 12 percent. Russia is another market that seems to be catching on for us. We're very pleased with what's happening in Russia. Russia is up 60 percent. Both the people there, as well the people in international that work with that market are very optimistic about the progress.

So we do have some bright spots that I think are going to fuel the growth in international. Craig mentioned we're not happy with where we are. Even given Brazil and some of these other challenges that we have, we want to grow our international business, and so we're in the process of opening new markets and trying to fuel the markets that are doing well. And I think we've addressed some of the issues, and we continue to be confident that we're addressing the issues going forward.

Just grateful that the managers and distributors in some of these markets that have struggled have stayed with us and have been loyal to us, and I think that it is another testament to the strength of Nature's Sunshine, you know, it really has been pretty much a product driven company. We just celebrated a 30-year anniversary with our founders of the company and I think that's another testament to the strength of Nature's Sunshine. Been in business 30 years, I think it's strong. Craig can tell you that we have strong balance sheet, strong cash flow, and we're certainly addressing some of the challenges that we're facing.

I'd like to talk a little bit about U.S. sales. In the quarter our U.S. sales were not as strong as we had hoped that they would be. And I want to talk to you a little bit about why I think that was, and certainly that I think they can be strong again. And some of the things that we're doing to ensure that they strengthen.

I'll tell you, the first quarter is usually driven by an incentive, it's not really an incentive, a promotion, it's not really a promotion, it's typically a price increase in the first quarter which March sales because buy in anticipation of the price increase which is effective April 1st. Well I think what we saw this quarter, because it was not much of price increase, it was one percent. There was not a lot of pre-buying. And so year-to-year comparisons in the U.S. for March were not very strong.

It's good and bad news. It's good in the sense that it probably will continue to be stronger going forward, say April and possibly May because there isn't a lot of pre-buying in March in anticipation of price increase. I guess the bad news is the first quarter was not quite as strong as we would like to have seen it.

Another thing that I think impacted the first quarter was we had an incentive in place during the last four months of the previous year, and we call this Vision for Tomorrow, essentially it was rewarding those people who are growing their business. We've done a lot of analysis particularly in the English-speaking arena in our business in the U.S., and we see pockets of very successful managers and distributors. And even though we're going to do a little bit more work on that and try to multiply that within the business so to speak, we're confident that it's just from doing the basics.

The fundamental business plan if you will of Nature's Sunshine being a people to people health business is a strong one. There's a demand for these products. And it's up to us to find the incentives and the sales support to help our managers reach out and touch more lives with our products.

The Hispanic sales in the United States, we've talked to you about that a number of times, of increase 10 percent in the first quarter, which is about where it was in the first quarter of last year as far as an increase, and wound up for the year at around 20 percent. Hispanic sales continue to be strong for us. We're very pleased with what's going on there. Our Hispanic division opened up a new market for us, the Dominican Republic. That has contributed to their sales increase.

And something that is fairly, not fairly, I don't want to be too shy about this, but I'm very pleased with, and that is for the first time in the history of the company our Hispanic division has over 2000 managers. And that typically increases at about, you know, March because, a little bit because of the price increase. I mentioned that that was not as dramatic an impact this year as it has been in prior years, so I think that's really a note worthy accomplishment that they were able to achieve growth of over 2000 managers in the United States.

Talking a little bit about what we're going to do going forward, I mentioned in a previous call about our . Even though the , which is a product put out by a company called that we have an exclusive arrangement with for multi-level marketing, was announced at our leader's conference which is typically not attended by anywhere near the numbers that we have at our national convention. We already have 300 placed with our managers. So we're very excited about the possibility of this new technology.

And for those of you who don't know what this is it's essentially a way to measure your resting metabolic rate. And some people will say well, you know, what good is that. Well anybody that's trying to diet, it's like trying to balance your checkbook. You have to know what the deposits are as well as the withdrawals. And if you only know what your deposits are and you don't know what your withdrawals are you can't balance your checkbook. It's the same when you're trying to lose weight.

I can tell you that I personally use this . I learned what my resting metabolic rate was, and then you hit a handheld or a PDA that has this program on it called a balance log and you track your calories. Well not just your calories, but the nutritional content of your food, and it's really eye opening to go through this. And I can tell you even though it may not sound like a lot to you I really struggled with trying to get 10 pounds off. I exercised a lot. I tried to eat the right foods, but I found that the balance log really helped me get that extra 10 pounds off. And I'm going to try to keep it off at this point.

So I think that's going to be a great technology for us. We plan to introduce the at both our rising star convention in June, and our national convention in September. In the meantime starting with the rising star and going until the national convention in September we are going to go out on the road with what we call the express. It's actually going to be named something else, they haven't given me the final name of it yet. But the idea is to visit the managers, some of the managers to have this and help them promote it, and help people understand what the possibilities are from this technology.

And I think that's something that's really going to give us an edge in the U.S. market. The thing that probably wont mean as much to those of you who are listening to the conference call as it does to our people internally is when I talk to our U.S., the people who are involved in the U.S., it's the Vice President of Sales and the President of the U.S. sales, one thing that is, seems to be a recurring theme is the vibrance of our sales force. I think that's the key to taking our business forward, so we're please with their optimism, with their attitude, with the way that I think we've dealt with a lot of these issues.

And in the end I will tell you that I have a great deal of confidence in Nature's Sunshine Products. We've met these challenges. There are going to be more challenges going forward, and I think we're going to meet those head on. I've just got to say that I've got a lot of confidence in this company; it's 30-year tradition of being able to meet challenges and overcome those. I'm pleased with the growth, and I'll just end with that, with the growth and the sales leaders really throughout the world.

Craig mentioned the number it's about 19,400 that's an increase of eight percent over year-end. And it looks like the majority of that increase in terms of percent is coming from the domestic market. Domestic managers increased approximately 20 percent in the quarter from year-end. International was just up slightly and so consolidated managers were up eight percent since the end of the year. And that's probably the key to this business. Those of you have heard me talk about that before is we're really dependent upon the sales leaders and the distributors because those are the people who are buying and reselling the product. And their dedication and their loyalty and the way they go about helping other people with these products is really an inspiration to us, and I think is also another testament to the strength of Nature's Sunshine.

As I mentioned Craig can talk to you about the balance sheet, cash position, the relatively small amount of debt if any on the balance sheet, but the real asset to Nature's Sunshine are the managers, distributors, and the dedicated employees we have trying to take this business forward. Yes, we've got challenges, but certainly we're facing those challenges, and we're going to move ahead. With that I'd like to open it up for questions to those of you who have listened to the call. If you have questions you'd like to pose to use we'd be happy to entertain those questions at this time.

Thank you. The floor is now open for questions. If you have a question or a comment please hit the number one followed by four on your touch-tone phone. If at any point your question is answered you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We do ask that while you pose your questions that you please pick up your handsets to provide optimum sound quality. Once again that is one followed by four on your touch-tone phone at this time. One moment please while we poll for questions.

Thank you. Our first question is coming from . Please state your affiliation and proceed with your question.

Omner Investments. Craig in of the case for the financials under long-term investments, the equity securities piece to that has gone from up 600,000 to five million six.

Yes.

And then there was a write down for the fourth quarter of a million four. Could you just explain to us what the five million was invested in? Was it liquid securities? Was it this Canadian operation?

Yes, I'd be glad to. The five million that was added, I'll cover the negative one first, was . That was the $2 million that we invested actually in stock, and then the million in loan was really in the form of, there were significant warrants that were associated with that. And so that loan was really looked at as warrants on stock. So that three million there was in that long-term investment. The reason for the write down in the fourth quarter is that stock decreased. We purchased most of that around $3.25 and at the end of the year it was down to 60 cents. So that's why the write down in that investment on the balance sheet to the lower of cost or market.

Since that time, since the K was filed, that three million has been totally taken off the books because of the, we just don't think we're going to get anything back from that. The stock, the stock in is now at the end of the quarter was down to about eight cents a share. And so that's the three million.

The other two million was as Doug mentioned the . We had an opportunity as we received that exclusive, it wasn't conditional upon us, investing in it, but we thought that was a, would be a tremendous investment for us. They are a private company. They just filed their S1 to go public, and they filed it within the last two weeks I think it was. And so we invested $2 million in them, and we feel like that's a tremendous investment opportunity. We bought preferred stock, but if they go public here in the next couple months that turns into common stock that is freely tradable after an exclusion period there.

And so that makes up the total five million that's there. The three million is now gone. The two million we think there's tremendous opportunity there as we go forward. The and their other product that they sell in the medical arena for devices that are very similar to the but give doctors a little bit more information I think has a tremendous opportunity. I feel very good about that investment. So that makes up the total investment of five.

What underwriter did they sell it with?

Boy I...

It's if we go to the ...

Yeah.

OK.

That's right, it's .

And then just one other question, the operating income, and I presume that EBTDA margin for the U.S. and for international, U.S. is about 9.9 and the international is only about four. What are you guys doing to bring these margins, the international margins up to comparable levels with the U.S.?

Those are, that's part of the things that we've done during the first quarter. That 1.3 million in non-recurring expenses, we've cut a lot of things, we've laid a bunch of people off in a couple of our international markets, and we've restructured our synergy operation in Japan, and so if you look at Brazil, just take that one for instance. They had a significant loss during the quarter, and during the second and third quarters of last year, or third and fourth quarters of last year.

As Doug mentioned, as we mentioned in our prior news release, we have implemented the reductions, enforces, and changes in that market to where for the second quarter will be profitable, and you'll see those margins come back up. For international you'll see our come back down as a percent of sales. And then also we should see our U.S. EBTDA number go up because of the controls we've put in place in the U.S. and the modifications to some of the programs that we've done. So I think that there's still more to be addressed, but we've hit the biggest item.

We, as I mentioned in the last conference call and a little bit in this one, we sold Argentina which wasn't profitable. They're still an export market, so we still support the distributors and managers down there, and so that will help us. Brazil will help us. And a couple of the other markets that we're currently working on that I can't really say, but we should see those margins come back up, if not fully in the second quarter then it should be by the third quarter. We should see some real positive results from them.

OK, so for the balance of the year we can see EBTDA margins internationally and domestically improve well over where they are now?

Yes.

Great, OK.

Thank you. Our next question is coming from . Please state your affiliation and proceed with your question.

. I guess my question is two fold. If you can help me reconcile the, I guess the 11 cent number that you said to the five cent loss that you posted, and then any other steps other than, other than the cutting of work force to get you, to get your back up to levels that they were at more in the 2001?

Well, the reconciliation for the, from the five cent loss up to the 11 cent gain, if you tax effect , that $3 million write down, and if you tax effect the $1.3 million of non-recurring losses, that ends up putting you up to about a 1.8 almost a 1.9 million in net income rather than the loss of .9, and so that 1.8, 1.9 with our diluted number of shares puts it to 11 cents.

Then that's comparable to the 10 cent number that you, that you all, I guess on April 5th?

It's probably the recurring, there were a couple of charges that weren't part of our $3 million with on some accounts receivable that we wrote off that changed it just a little bit. I would say that there's probably a penny and a half that we were a little bit lower by about a penny and a half from our release. We said three to four cents and we ended up being a five cent loss. That extra penny dealt with some accounts receivable in that we reserved for above the three million. So other than that it's equivalent to what we reported in the earnings release.

OK.

And then what was the other question?

On the .

On the , those, there's a number of different things that we've done. Some of them are small. Some of them are big. The biggest ones deal with the reduction in work force. When we were in - and I'll just use Brazil as an example, we were a $25 million company, and now we're a $6 million company. We thought that thing were going to continue on at the, we'd be able to get those registrations back in, so we maintained our organization until this first quarter trying to keep that. We wanted to keep our people. We wanted to keep people loyal. And it just finally came to where we said we had to make some cuts. Although it's not the majority of the 1.3 it's a significant amount of it that's associated with that restructure. And so that's the biggest single item that is associated with the changes in the .

In the U.S. as I mentioned a hiring freeze in place. We've asked for significant budget cuts. Not cuts that will impact the growing of the business, but to just again, right size the business in the U.S., and we feel that those, although I don't want to go into the specific things we've done there, we feel that those going forward will have a major impact on it.

OK, thanks.

Thank you, once again the floor is still open to your question and comments. If you have a question or a comment you may press one followed by four on your touch-tone phone. Our next question is a follow up coming from .

Craig, this isn't a criticism. It's just really an observation. You know there's five million Japanese company for five million, and this for three, and now this other little one for two, which totals a little over 10 million. I'm just wondering if the board should analyze this and see that it's really a better investment to be buying 10 or $11 million worth of your stock.

You know I, that's, we've been reflecting on the things that we've been doing, and what is the best use of that. I think that's a valid comment.

Thanks.

Gentlemen, it appears we have no further questions at this time. Do you have an additional or closing comments.

Yeah, I'd just like to say in closing that we're very appreciative of the managers and distributors and their dedicated efforts in helping people with the products of Nature's Sunshine. We're appreciative of our employees for their support and their loyalty, as well as our shareholders. And as I mentioned earlier in the news release, and some of the numbers may look like these are trying times, but we feel very good that Craig and his people as well as the rest of the company have dealt with some difficult issues. That's when you find out what you really have inside you, and I think we get these challenges behind us that Nature's Sunshine will continue to be the great company that it is. One of the things that I recognize the founders for in our 30-year anniversary was their persistence. We're certainly persistent. We're going to continue to be persistent. We believe in our business, and going forward we are very confident that we can get this headed to the direction that we want it to be headed and that continuing shareholders are going to be rewarded for that. We appreciate your time and interest this morning. Thank you.

Thank you. A replay of this broadcast will be available until Sunday, May 6th at 12 midnight. You may access this replay by dialing 1-877-519-4471. The PIN number is 3235568. International callers may dial 973-341-3080 and use the same PIN number. This replay is also available through World Investor Link Web Site, www.vcall.com. This does conclude today's teleconference, please disconnect your lines at this time and have a wonderful day.