Nature's Sunshine Products Inc (NATR) 2004 Q2 法說會逐字稿

Good morning. Welcome to the Nature's Sunshine Products, Inc. conference second quarter 2004 operating results conference call. Statements in this press release concerning the Company's business outlook or future economic performance, anticipated profitabilities, revenues, expenses or other financial items and product line growth together with other statements that are not 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 limbed; to foreign business risks, industry cyclalities, fluctuations, and 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 Commission. The Company disclaims any obligations to update any forward-looking statements as a result of developments occurring after the date of the press release.

Our speakers today will be Douglas Faggioli, President and Chief Executive Officer and Craig D. Huff, Chief Financial Officer. At this time all participants have been placed in a listen-only mode and the floor will be open for questions and comments following the presentation. I would like it turn the floor over to Mr. Faggioli. Sir you may begin.

Thank you, good morning and welcome to the Nature's Sunshine conference call and report on the results of operations for the second quarter and 6 months ended June 30, 2004. We're pleased to have this opportunity to report to you that the progress that we've made during the quarter and we'll begin by having our Chief Financial Officer, Craig Huff, go through the numbers with you. By now I expect or hope thaw all have a copy of the news release and have the information contained in that. And we'll have Craig go through the financial information and some selected items. And then I'll talk a little bit more about some of the sales issues and where we are as a company. Craig.

Thanks, Doug. I appreciate this opportunity to be able to relay the information that's conveyed in the news release, as well as a few other bits of information and to update you on some of the financial positions that the Company is in. For the quarter, sales were 79.6 million, compared to 63.6 million. That is an increase of 25% over the prior year.

Operating income for the quarter was 4.7 million, compared to 2.7 million the prior year. That's an increase of 75%. For the quarter net income was 4.8 million, compared to 1.1 million the prior year. That's an increase of 329%.

And diluted earnings per share was 31 cents a share compared to 8 cents a share compared to last year. During the quarter we also had just for your information, there were some 1-time charges associated with the restructuring of our operations in Japan. We've talked about that in the past, that we were going to bring them into profitability. Did some changes that have taken place there and are pleased to say that they are now in a profitable position, which in the past has been some significant losses. But there were some 1-time charges in the quarter of about $750,000.

Going forward, Japan will be profitable and we're very excited about that. We've been working on that for quite a while and are pleased that we're now in that position. Year to date, our sales revenue were 156.5 million, compared to 126.3 million. That is an increase of 24% over the prior year.

Operating income is 8.4 million, compared to 4.9 million. That's an increase of 69% over the prior year. Net income is 7.8 million compared to 2.7 million. That's an increase of 186%.

Diluted earnings per share, 51 cents per share, compared to 19 cents per share last year. As you can tell, we feel very good about the numbers that we have reported. As you probably noticed, there was a change that was made in our tax provision. I just wanted to explain that a little bit.

The Company during the quarter completed a study that we've been working on dealing with our foreign tax assets. And as a result of that study, we are able to book a benefit that was associated with that. Normally that would have been spread over the entire year. But based upon some recent SEC guidance, the entire benefit was recorded in the second quarter. And part of it was in the first quarter but the majority of it was in the second quarter. And so that's why you see the taxes the way they are.

For the year, we anticipate that the tax rate, the blended rate of all 4 quarters will be about 26%. For the last 2 quarters, the tax rate will be around 38% per quarter, somewhere in that area. We feel very good about the - - this stud and being able to take advantage of these foreign tax assets that we've been able to identify and we're quite booked that all in this quarter.

So there was an impact in the quarter on that and we just wanted to make sure that everyone aware of that and give that explanation. Right now we have outstanding shares of 15,040,000 shares. Now going on to our segment reporting. First, I'd like to begin with our Synergy Worldwide operations. That division, which as you can tell from the news release, we're very pleased with the results that have taken place there.

Sales for the quarter were 18.8 million, compared to 1.8 million the prior year. Not even going to give you the percent. It's well into the 4 digits. So Synergy now represents for the quarter 24% of our consolidated sales. Last year they represented 3%. So there's a marked difference in the growth of that operation.

Year to date, sales are 32 million compared to 3.4 million in the prior year. Year to date, their sales represent 20% of our consolidated sales now. In our international operations, in our International Division for the quarter sales were 26.3 million, compared to the prior year of 25 million. That's an increase of 5.2%.

Our international division represents now 33% of consolidated sales. Year to date sales are 54 million, compared to 49 million. That's an increase of 10.3%. Going down to reporting of the individual segments within our international operations, our Latin American markets were 13.7 million, compared to 13 million the prior year. That's an increase of 5%.

Our other markets are 9.9 million for the quarter compared to 7.7 million. That's an increase of 28.6%. And our Asia Pacific segment was 2.7 million compared to 4.3 million in the prior year. That's a decrease of 37%. That decrease that took place in the Asia Pacific markets is mainly associated with our operations in Korea. And I'll let Doug talk about what is happening there and the positive news that we see coming from that area.

Year to date, from a segment standpoint, our Latin American segment was 27.6 million. That is an 11.7% increase year to date. Our other markets are 20.3 million. That's a 33.6% increase year to date. And our Asia Pacific are 6.1 million, that's a decrease of 33 % year to date. In our United States operations, for the quarter our sales were 3.4 or 34.5 million compared to 36.8 million.

That's a decrease of 6.4% for the quarter and year to date, they are - - they were 70.4 million, compared to 73.8 million. That's decrease of 4.6%. One thing that we mentioned in the news release was that we were negatively impacted by a significant devaluation in our Dominican Republic operation, which is part of our United States operation.

Eliminating that for the quarter, our sales would have only been down about 4% in the U.S. and year to date would only be down about 2.5%. And so that devaluation did have a significant impact on our United States operations. Our total distributors worldwide are 613 - - almost 614,000.

That is an increase of 9% over year end. And our total managers are - - about 17,200. That's an increase of 13% year to date. Going to our balance sheet, we continue to have a very strong balance sheet with no long-term debts. Our operating line has been paid off, as you're aware of.

Our total assets are 140.8 million, compared to year end of 125.6 million. Cash and cash equivalents in our long-term investments continue to remain strong at almost 42 million, compared to 37 million at year-end. So we're able to continue to generate cash and are able to utilize that in the best way the Company sees that we can .

Our inventory, that is an area that has increased significantly since year end. We were at 26.5 million at year end. And we're now at 32 million. That's a $5.5 million increase in inventory. The entire reason for that increase has been for the support of our Synergy operations and have - - we've had to bring that kind of inventory in to make sure that we continue to offer the customer service that we have experienced with all of our customers. Year to date, our cost of goods sold is 18.9%.

That's down from the 20.5% that we were at least year for the 6 months. So we're pleased with that. The reason - - part of the reason for that decrease is because of the Synergy. Their cost of goods sold is slightly less than what the other operations are. But their volume has been slightly higher and so those 2 numbers have a tendency to offset the volume incentives and the cost of goods sold of that. But we are pleased to see that coming down.

One area that we talked about in the past is our selling, general and administrative, and our desire to lower that percentage from our year end number, which was in the 40 - - about 40% of sales, to get that down 4% or 5% by the end of the year. Right now we're at 37.1%. So we're down about 3% from year end.

We anticipate that in the second half of the year that we'll be able to continue to see that decrease and get that down to the 4% or 5% that we've talked about in the past. Historically the second half of the year we're able to decrease our SG&A as a percent of sales. Partly because of the - - we have some significant accruals associated with our conventions and our trips and incentives that we provide for our different manager groups throughout the world. And so most of those take place in the first half of the year. So we anticipate that the second half we will see a significant decrease in our SG&A as a percent of sales.

You will notice though that the SG&A in dollars went up almost a little over $5 million for the year. And -- for the year it's up $9 million but for the quarter it's up about $5 million. The - - that is almost entirely associated with Synergy. Those - - as we've built that business and had to build the infrastructure around that as that's grown so drastically, we've had to increase our expenses there.

So all that have is associated with Synergy. We've been able to decrease our SG&A in the U.S. and in our other international operations and so - - which is what we undertook place September and October. And so we feel good about those. But have had to increase those expenses associated with Synergy. That is the report that I have on the financial position at this time. I'd like it turn the time back over to Doug for his comments.

Thank you, Craig. Appreciate you going through the numbers and as you can tell, we're very pleased with the results of operations for the quarter and the 6 months and the progress that we've made and more importantly, the progress that we think that we can continue to make as a Company. And just very pleased with the efforts of really the officers, the employees, as well as the distributors of Nature's Sunshine.

We have -- as I said, made some progress in there's obviously still a lot more that we feel like we can do. Craig talked a little bit -- or actually, quite a bit about our financial results. But as you can tell, Synergy has become a very important part of the Nature's Sunshine financial position. And we're very pleased with the results that they've been able to achieve. And, you know, again, the distributors and the employees of Synergy and the efforts that they have put forth and the things that we're doing, they're really adding to the financial picture of Nature's Sunshine. And we really appreciate, you know, what's happening there.

I just want to mention briefly, that we've just recently opened Synergy in Korea. Those of you who have followed us for some time may know that Korea was the Nature's Sunshine operation and at one point it was our largest subsidiary. And we had a number of issues there and they've really come off in terms of sales and the profit contribution that it was making. And the decision was made by the president of International to convert that to a Synergy country, and that has now been accomplished and they opened in July. And I'll just tell you, without a lot of detail, it seems to be off to just a great start.

They were able to achieve I think through sales of yesterday, more than double what the previous month sales were as Nature's Sunshine. So we think that that's off to a great start. Synergy is also in the process of opening up Australia as part of the strategy of tying together some of the Asian markets and the markets that are complimentary to the Asian markets. So we're very pleased with what's happening in Synergy.

The sales that they're achieving and the growth that they're achieving and the growth in distributors. Which is really important to us as a Company and really reflects the strength of our Company. So we're - - again, we just kind of touched on that but we're happy with what's happening there. Overall, we're very pleased with the total numbers of managers. As can you see from the report, there's over 17,000 managers worldwide and there's over 610,000 distributors worldwide.

So we think that those are good indicators of where we're headed as a Company. And again, we obviously have more challenges and things that we want to accomplish. And feel like we have a good start on that. And really looking forward to the greater things that we can accomplish. Craig mentioned a little about bit about the U.S. was obviously impacted by the devaluation in the Dominican Republic. And it obviously was a big impact to us. But, you know, the things that we're doing there and the meetings that we're holding now, I think are an indication of the strength of that market as part of the United States. But there's no question of the devaluation and impact on both the people in the Dominican Republic as well as our business. But it's something we think that can deal with as we move forward. And I think we were looking at, Craig, what October, November to see kind of a better comparisons for at least for the Dominican Republic.

The other thing that impacted the U.S. obviously less than the the Dominican Republic was the ephedrine alkaloid, not the ephedrine - - ephedra products that we were selling but it was really the alkaloids that affected a couple of our top-selling products. [Analiadrodnia and Cetacortopholia] were alkaloids that were in some of our top-selling products, the Chinese cleanse in the U.S. and that product is called VSC and it took us a little longer to reformulate and get those products out.

I'm pleased to m mention that they're out again, available in reformulated versions in July. So that is something that we think is going to help us as we go forward. In the U.S., we've talked a little bit about the launch of our new Thai-Go product, very successful launch.

In nearly less than 2 months I think - - I want to say in about a month and a half of our quarter, we sold like $1.3 million worth of Thai-Go in just the U.S. This is a product that will be introduced internationally as well. It takes a little longer to get product approvals and to get those markets ready for this product.

And it obviously will be under a different name. But we think that this product is going to be very successful worldwide. And we're looking forward to the impact that this product can have on our international market and the Nature's Sunshine Group. So in addition to Thai-Go, those of you who followed us for some time, may be aware of the Habit-of-Health and the 90-Day Challenge.

I'm very pleased to report a little bit on the progress of that program. We're - - I think we currently have 5,500 people signed up on that program. Which is really a good indication of the interest in not only Thai-Go but the products that are associated with that. So we feel like we're making some very good progress in the U.S.

And that the numbers for the quarter, obviously, were not reflective of where we think we are going to be as we move forward. And so just want to keep doing the right things and we have confidence in not only our employees but our managers and distributors. And with his move forward, we just believe that we're doing the right things and we're going to keep doing the things that we think with are going to make us successful longer term as a Company.

Just appreciate Craig and his group, both the tax people as well as the financial people they've made some very good progress. He talked a little bit about the impact of the taxes on this quarter. It's really quite a significant accomplishment and it's going to help us go forward.

It's just another sign that we try to do - - try to improve everything we're doing here at Nature's Nature's Sunshine. That we don't want to be satisfied with the past results or where we were. And we want to continually be able to reflect the strength and the potential of this Company as we move forward. Because essentially we owe to the distributors, the employees and to our shareholders. And so we're pleased with the things we've been able to accomplish and I guess, you know, we'll open this up for kind of comments at this point or questions, if you have those. And we'll respond to those and then kind of wrap this up.

Thank you. The floor is now open for questions. If have you a question or comment, please press the number star, followed by 1 on your touch-tone keypad at this time. If any at any point your question has been answered, you may remove yourself from the queu 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 pick up your handst to provide optimum sound quality. Once again, that's star followed by 1 for any questions, please. The first question is coming from Mitch Golden of RH Capital. Please go ahead.

Hi, Mitch.

Mitch has actually dropped from the queu. The next question is coming from Greg [Hillman]. Please go ahead.

Good morning, gentlemen.

Hi, Greg.

Hi. Number 1, are there any managers from Synergy in the room with you right now?

No.

No.

Okay. Just on Synergy, I was just wanting, your manager count that you know you gave earlier, did that include, you know, the Synergy managers and distributors?

Yes, that's total managers and total distributors for Synergy, Nature's Sunshine combined.

Okay. And, you know, in terms of Synergy, did you - - I mean, we talked to you one time before. Did you ever get a break down of the largest selling products, you know, as percentage? You know, for like the top, you know, couple of products, you know, like the top 3?

Yeah, we haven't really given a break down but I'll just run through a couple of those for you, if you'd like, Greg. No reason I can't do that. One of our top selling products in Japan, which is as you know is our largest market for Synergy is SynerMax. It's a liquid dietary supplement product designed to increase energy and longevity and general well-being as well as anti-oxidant value. It's really a great product. That's 1 of the top products. The other product that does very well in Japan is a product calls [Avita Pack]. It's essentialy a vitamin, mineral and nutritional supplement that really contains a lot of different herbs and supplements to really, you know, give you a sort of give you a total package of health and well-being. So that sells very well in Japan.

That does very well. They're very sort of focused and concentrated on skin care and those kind of things. So they have a -- like a DNA repair, enzyme that sells very well. And as well as an advanced face cream and those kind of things. So of the top 10, you probably have 7 that are skin care related in Japan. It's a little different in the U.S. market and, you know, for the U.S. market their top selling product would be a product called Pro Arginine. it's a little bit different take on the L-Arginine. But that would be in the U.S. But really the strength of Synergy is in Japan and that's where a lot of the effort and focus has been. So that's essentially the top few products in Synergy.

Okay. Doug. Just finally one last question about Synergy. Could you give me any idea of sales acceleration? You know, going like the last, you know, sort of the for the last 3 months. You were talking about - - you reported a quarter but do you have monthly sales data to give you - - to give us a better idea of acceleration?

We haven't really given out monthly sales data but I'll rely on Craig because really they've been growing month to month, you know, at pretty impressive rates. Somewhere between 10 to 20% month to month, so I mean, you can to the math there. It's pretty strong.

Yeah.

Okay. Great. And is that in increasing the acceleration or is it, you know, like - - so are we on an inflection point of the curve? I mean, I guess but anyway, your point is just basically there's really extremely strong sales growth and even possibly acceleration there?

When you talk about something that's growing month to month at those kind of rates and, you know, as we talked a little bit about our U.S. and, you know, the confidence we have there and the things that we're doing, you know, obviously from the news release, the U.S. was a little weak. And so the growth in Synergy and some of the international markets, I don't want to forget those, really more than offset the weakness in the U.S. So you can tell from that that is very strong and when something grows, you know, again I tend to be a little understated but if it's growing in the range of 10 to 20% month to month, that's not bad.

Yeah.

And 1 thing that Doug mentioned that, you know, with the launch of Korea as a Synergy market and with the opportunity that we have going into Australia, we think that Synergy should continue that at least for the next little while.

One thing, you know, that I know you didn't ask this but it gives me a chance to sort of say it I mean, we've talked before a little more specifically a little bit about Russia and the sales and that kind of thing. And the growth we're experiencing there. There are other international markets for Nature's Sunshine that are growing, Russia in particular.

It's growing rapidly?

Yes.

Okay. Thank you very much.

Thanks, Greg.

Thank you. The next question is coming from [Ava Horowitz] of [Yama Capital]. Please go ahead.

Hi, Doug.

Hi, [Ava] how are you?

Good. Nice quarter.

Thanks.

I have just a few questions here.

Okay.

One is U.S. Last quarter U.S. was down 0n profitability quarter to quarter. This year's quarter versus last year quarter. I was wondering if you could break out an operating basis how the U.S. did this quarter?

I'll let Craig do that, but I'll just mention to you, I think that profitability was pretty good. And 1 thing that we didn't mention earlier that we have kind of been talking about, and you may be aware of this, [Ava] is in the U.S. in particular, we expect to do better in the second half because our convention accruals really affect the first half and not the second half. And so we expect to improve in SG&A in the U.S. as well as overall profitability. But I think the U.S. had pretty good profitability in the second quarter.

We were -- even with the decrease in sales in the U.S. for the quarter, which with a was about close to $2.5 million, down in the quarter, our profitability was almost the same. It was just down slightly from what it was a year ago for the quarter. So even with the $2 million decrease, we were able to maintain the profitability that we had last year.

Okay.

And that comes through the cuts that we've made as well as the -- making things more efficient around here.

Okay. How much was the accrual by the way for this quarter?

For which?

For the conference or whatever it's called.

During this quarter, we have - - I'm just going it talk to the U.S. numbers because there's a lot of little ones in other markets, but in the U.S. for our convention and tack trip, there was a total of about 1.2 million.

In this quarter?

In this quarter. And that's because the qualification for convention ended in May. We did that a little earlier in year. We sort of finalized that in May rather than in June. So it would have been more had the qualification ended in June. But you're esentially talking somewhere around 500, 600,000 a month second half that the U.S. won't be burdened by.

Okay. Is this more than last year?

It's a little bit more than last year because of a - - an incentive that we put in place that we talked about last Fall, which was called Sunshine Select. And so it's a little bit more than last year, but it's fairly similar. The convention itself is about the same. But the tack is a little more because of Sunshine Select.

Okay. One other question here on the weighted average shares outstanding. Why did shares go from 14.14 million to 15.52 on a fully diluted basis?

Because of the stock price. We - - there are a lot of - - as you're probably aware, we do have about 2.3 million shares that are under option. And now the majority of those are in the money. And so that has - - that caused the diluted number of shares to go up significantly. We did have a number of people who - - there was really no one in upper management other than 1 person who had some options expire that exercised options last quarter. And so those became into the pool. And so that's really the whole reason though is because of the share price.

Okay. Fair enough. Now, have I 2 more questions. One is on Synergy in Korea. Could Synergy in Korea or you're going to into you an Australia. I would imagine Australia would not be as big as Japan. But could Korea become the similar in size to what Japan is doing?

Really, there's a great opportunity in Korea and I'll bring in Australia as well. But Korea for us there, as you know, Japan is continuing to grow and I - - there's absolutely no reason that Korea couldn't be the size of Japan, you know, currently. Obviously it's got a later start. So, you know, it may take a little bit longer. But we're very optimistic about the opportunity we have with Synergy in Korea. Now, Australia for most people may not seem like, you know, that big a market. It really is because it ties into this whole, you know, Asian Pac/Rim country kind of thing. Because a lot of people have contacts in Australia and - - you know, are excited about Australia. We're not going to get that going probably until August. Yeah, we're, excited about Korea as well as continuing growth in Japan. This is really something we're really excited about.

Okay. And the size of Korea, right now, could you - - did you mention how big - - how much in sales you're doing in Korea?

No, we just started in Korea as Synergy in July. And the first, you know, couple of weeks of sales are bigger, more than double what the sales were for June in Korea as Nature's Sunshine. So I think that's pretty good indication of the, you know, the opportunity we have there.

Okay. Now, you also mentioned that you -- or that you took - - Japan is profitable and you took a charge of 700,000.

Let's be real clear about that. I'm sure you know. I just want to make sure that other people know that we're talking about Nature's Sunshine.

Right, the Nature's Sunshine part, yeah. Okay. Not the Synergy.

It was about 750,000, the charge that we took in the quarter.

In this quarter?

In this quarter.

And that didn't show up any you didn't have any line for that.

It wasn't significant, so part of it was in SG&A and part of it was down in the other income section. That's why we have a loss in the other income section is because there were some capital items that in closing some warehouses and that kind of stuff. So it's spread out so there's not 1 separate line for that.

Okay. But I mean, the -- this won't happen again.

No.

So the bottom line is we can assume in theory to add another $750,000 back to your operating income on a go-forward basis?

Right.

Okay.

With Japan being profitable, it will actually be more than that, so - -

Okay. Right. Exactly. Okay. And final question is, U.S. which is obviously the big question, I think you mentioned that you had put a new guy in place there, am I correct?

Yeah.

There's a new guy heading up the division?

Well, yeah. It's -- he's been given responsibility for operations. The guy who was there before is still involved. It will be essentially sort of a period of time where he's kind of handing off responsibilities and that kind of thing. But there is somebody right now that's totally in charge of U.S. operations that is new.

Okay. And how long has he been there?

He's been with the company about 11 years.

No I'm saying the U.S., running the division.

Yeah, that's actually been something that we did starting a little bit of an adjustment period but I think we started that late last year.

Okay.

He's now fully in charge of the U.S. operations.

Okay. Doug, your best guess, I'm not going to hold you to it, but what's your best guess when we'll actually see the U.S. start to turn or really stabilize? Where we're not going to see anymore declines in sales? You know, what point do you feel confident that we should start to see results?

Well, [Ava] I think you know how important this is to me and how much attention we've given to the U.S. And, you know, the people that are there, you know, working very diligently on making this happen and, you know, we're seeing some very positive signs of that, you know, really early in July. I mean, it's too early to say you know, starting in July the rest of the year. But I think we're hopeful that, you know, the second of is going to be a lot stronger than the first half. Maybe that translates into, you know, a third or fourth quarter we start to see those gains because, you know, we're doing a lot of the right things. You know, this launch of Thai-Go, the Habit-Of-Health the 90-Day Challenge, you know, these are things that are getting us focused in the right direction on the right things. And so I guess since you said you weren't going to hold me to it, I'm hopeful to see that in the third quarter if not in the fourth quarter.

I think we're very close to that. You know, we've had some problems with the devaluation and the DR and some other issues that affected us. I didn't mention but we changed our whole training program to focus more on sort of these training modules. This idea of sort of focusing more on the training more on what we want to accomplish and, you know, we are really doing a lot of the right things. Obviously, the numbers are the judge of that. So I'm hopeful that the fourth quarter you're going to see, you know, those -- what you're asking for there.

All right.

Actually, I would like to see it in the third quarter but I'm hopeful that it's in the fourth quarter.

I think you guys have really done a good job turning around the Company and there's a still lot to come. Which is beautiful.

We're actually excited about that and appreciate your comment [Ava.] But you know we've made progress and we're very happy with how far we've come. And just excited about the potential and what greater things that we can accomplish as a Company.

All right great. Thanks, Doug.

Thank you [Ava].

Thank you. The next question is coming from [Evan Steen] of EOS Partners. Please go ahead.

Hi, there guys, nice quarter.

Thank you.

Most of my questions have been answered but could you just once again refresh my memory with regards to the Synergy and why it has been just, you know, simply just the results have been incredible and that's an understatement? And you just said you flipped it over in Korea and already you're doubling the sales like in the first month. So I guess what I'm asking is what do they do or what are the products or how is it sold differently that enables these results to be so much better than the results that you guys have done under the Nature's Sunshine model in the same countries?

Okay. Yeah, that's a good question. And, you know, the answer is going to start out fairly basic. You know, 1 of the things that Synergy offers is a very agressive marketing plan. And we felt for many years that we needed to be more aggressive in the Asian markets. That was really sort of our handicap if you will is that you know, we had been successful in countries where, you know, we had our standard - - not standard but our basic marekitng plan. And felt good about what we were doing. But in the Asian markets we knew we needed to be matter aggressive in marketing plans.

We've made some changes and tried, you know, over a number of years really to get in particular Japan and well as the other Asian markets, Korea and other markets. But the real key for Synergy is several things. It's a much more aggressive marking plan as a Company. The products I think are very well suited for the markets. I don't want to minimize that. The management team, I give, you know, all the credit in the world for the things that they've been able to accomplish with Synergy.

But where I'm really getting to is the thing that really makes this go, okar,are the sales leaders. You get the top sales leaders that get attracted to this because of the marketing plan, because of the products. And then they travel internationally and sponsor. That is the real key. And we've had that happen.

We've had a number of top leaders that have really been impressive. They have really put a lot of effort to going to these countries and recruiting. And so really in answer to your question, it's a lot of things. Because as you know, Synergy, we've owned Synergy for 4 years. Okay and their sales were declining, weren't able to kind of get that spark going. We made some management changes there and the guy who's running Synergy is great, frankly, for the business. But when you really look at it, it's these top sales leaders that get excited, get interested in the marketing opportunities, the products. And go and recruit and do that in some of these other countries.

It's really quite a sacrifice to travel to some of these countries and do that. And that's really kind of what's got it going. Now, having said that, part of what's going to continue to fuel Synergy is this excitement of just the growth that they're experiencing. And you know the word is getting out on this and more people are getting attracted as a result of that. The last point is a very key point for us and that is Synergy has a seamless marketing plan.

That means that you go into one country and recruit. It's all part of the same marketing plan. They're not, you know, significant differences on a country by country basis. And so if you want to recruit internationally, it's as if you stayed in one country and recruited. So it's really a combination of all of those things. I don't know if that - - if you fully understand what I'm saying, but that really is what makes it go.

Okay. No, no, that that's a very good response. One other question. Are you guys at any point going to break out the numbers of directors and/or managers between Synergy and the rest of that Company. Because obviously when I'm looking at the numbers and this is 1 of the key factors, is the number of distributors keeps growing. And that's only portends what's going to happen in the future. But it's tough to get a sense of Synergy and non-Synergy or even domestic and foreign. I think at one point in the past you did break out domestic distributors and foreign distributors.

Right. We've talked about that and, you know, I won't saw we're at the point that we're going to do it. But obviously as this continues to grow and become more and more significant to Nature's Sunshine, we'll get to the point where it will make sense to show that separately. I don't know if we're talking in the next quarter or so. I think it will get there and we'll start talking specifically about that. Craig, do you want to add to that?

I -- without going into the numbers, I can tell you that Synergy distributors are increased 60% over year-end and our international distributors increased 15% over year-end. So domestic was down just slightly. But -- so without giving you the numbers, I mean, they are both international and Synergy are increasing significantly. So --

Okay. Excellent. And then the last thing was, I just got confused on the other call when you were saying there was these accruals and then he asked how much more the increase. Is that to imply that the $1.5 million or roughly that amount on a quarterly basis disappears from the P&L for the U.S. for the second half of the year?

Yes.

On a quarterly basis?

Yes.

But one - - like last year, your results, particularly in the third quarter, were particularly 0 I forget?

Right. The reason for that is we had a restructuring and we don't want to call it restructuring. It was but we didn't treat it as such. We laid off about 50 people in the third quarter, right at the very end of September and took some charges, about $2.5 million worth of charges in the third quarter of last year to start this process of bringing the Company to where we want it now. And so that was the reason that the third quarter of last year was so bad was because of those charges that we took.

Okay. But the only question I have is on apples to apples, what I was getting at was you - - it seems like the seasonality of having accruals in the first half and much less accruals in the second half happens every year so- -

Yeah.

So you're comparing apples and apples. It's not like you didn't have lower accruals in the second half last year. So --

That --

That's why I got got confused.

That's true. But if you - - when you consider the cuts that we've made we will see that benefit. But we've also seen the benefit even with the higher accruals for the first half of the year, we're starting to see the savings come from the things that we did.

Okay.

So that should - - in addition to the accruals, it should accelerate in the second half of the year.

Okay. Got you. Okay. Excellent quarter. Thanks very much.

Thanks a lot.

Thank you. The next question is coming from Mitch Golden of HR Capital. Please go ahead.

Hi guys. Sorry, I got cut off earlier.

Hi, Mitch.

Just to understand a little bit more on the gross margin in the SG&A line. The gross margin improvement, is that all just a mix shift towards Synergy, which is the higher margin segment?

We have seen some - - by bringing Synergy's products in-house and as well as some efficiency gains, there's some of that, but the majority of that is a shift to the Synergy products. So from a gross margin standpoint, that falls a lot on the Synergy, so --

Got it. The SG&A was higher and you mentioned a lot of that was Synergy, but also some of the charge, the restructuring charge was in there.

Yeah.

Can you tell me how much of the restructuring charge was included? And also you guys reit your desire to take out 4 to 5 points of margin on the SG&A line, which would get you down from the fourth quarter to around 34%, 35%. Even with the growth in Synergy, are you still forecasting that margin level?

Yes.

On the SG&A side?

Yeah, we still feel comfortable that we should be able to get down to the 35% range and feel comfortable about that. The dollar increase in SG&A was completely attributable to Synergy. And so the other markets we've been able to maintain the cuts that we have had in place. And have been able to actually improve the margins a little bit there. Synergy is hitting that critical mass, shall we say, where we don't think we're going to have to increase the SG&A significantly. And then taking into account that Korea has been losing money and should be profitable now because of the increase in sales for this that's been accomplished there. Through switching it over to Synergy and making Japan profitable. We think that the SG&A should come fairly significantly as we move forward.

Got it. And just if you could, the split on that restructuring charge between the SG&A line and the other income?

There's about 200,000 that went in the SG&A and the remainder is down in the - - so what about 550 is down in the other income section.

Got it. Thank you. I'll go back in the queu.

Okay. Thanks.

Thank you. The next question is coming from Peter Reed of C.L. King. Please go ahead.

Thanks. Good morning, guys.

Good morning, Peter.

How's it going?

Good. How are you doing?

Good. Thank you. Hey on the SG&A, just to clarify, you're saying by the end of the year you expect to exit the year down 400 to 500 basis points, so - - on a full-year basis, it's going to be some blend of the 4 quarters which would be more like 300 basis points?

No, we're looking for the year to be down around - - for the year-end to be down around 35%.

Versus the 40.5 last?

Right.

So that means back half SG&A is going to be in the 33% 34% neighborhood, is that --?

What's that it will take to get it down to that number.

Right. Because we're, working at 37.7 through the first half?

Yeah.

Okay. And was Synergy profitable this quarter with that big incemenetal--

Yes.

It was --

Even with the increased SG&A, very profitable.

Okay. Wow. Okay. And just 1 more question. In the first quarter you had positive other income of the balance 850,000.

Uh-huh.

And now you just told us that you had about 550,000 of that charge in other income but you still would have dropped down - - what did that work out to - - like 400,000 or something like that.

The difference on that is we did have an exchange gain on some investments that went into the first quarter that caused the first quarter to be significantly higher in the other income section.

I see.

Which we didn't have that gain in the second half.

Right.

Second quarter.

Okay. And were you expecting this increase in SG&A, is that investment for Synergy?

Yes.

Okay. Great.

As the sales continue, we've got to add, people to take the orders and customer service and we've been building out warehouse in Japan and Korea and all those different things together to build that infrastructure, we were expecting that, so --

So a lot of that investment is behind you now.

The people are now in place and those kind of things. If they continue to grow at the rate which we thought that we will, we will have to add more but we won't have to add as significant as we have.

Right. Okay. Great. Well, we'll be watching with great interest.

Thanks.

All right.

Thank you. As a reminder, that's star followed by 1 for any questions at this time, please. There appears to be no further questions, gentlemen.

All right. Thank you for joining us. We're - - can I reiterate, we're pleased with the quarter we've been able to report. Obviously have some challenges and maybe more importantly we're excited about the potential and the opportunities that we have going forward. You know, just I've got a lot of gratitude and appreciation for the, you know, officers, employees of Nature's Sunshine and Synergy that are working hard to bring about these results. And we've got a lot of things planned that we hope that are going to come out the way we want to. But you know, we appreciate you listening to us today. And we're trying to achieve everything we can for our employees, our distributors and our shareholders. We look forward to speaking with you again as the year progresses. Thank you.

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