Nature's Sunshine Products Inc (NATR) 2004 Q4 法說會逐字稿

Good morning and welcome to the Nature's Sunshine Products, Incorporated fourth quarter 2004 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 not historical facts are forward-looking statements as that term is defined under federal securities 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 materials. Such risks, uncertainties, and factors include but are not limited to: Foreign business risks; 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, President and Chief Executive 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 questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Faggioli. Sir, the floor is yours.

Thank you. Good morning and welcome to the Nature's Sunshine conference call, where we'll be discussing the results of operations for the year ended December 31, 2004, as well as the quarter ended December 31, 2004,. We hope that all the listeners have access to or a copy of our news release that was issued on the numbers and we'd like to begin the conference call by having our Chief Financial Officer, Craig Huff, go through some of the important numbers and give you as much detail as we can as we begin this call and then I'll talk about some of the -- some of the issues that we see are important.

Craig, would you like to go through some of the numbers with us now?

Thanks, Doug. I appreciate this opportunity to be able to review the numbers for the year ended and for the fourth quarter.

For the quarter, our sales were 88.3 million, up from 68.8 million. That's a 28 percent increase over last year. Operating income was 6.5 million, up from 3.8 million, an increase of 71 percent.

Our net income for the quarter was 4.6 million, 4.7 million compared to 2.9 million the prior year, an increase of 59 percent. We feel very good about the things that have been done in this quarter, which resulted in an earnings per share of $0.30 per share compared to $0.21 last year.

For the year, our sales revenue were -- was 331.1 million compared to 260.2 million, an increase of 27 percent over the prior year. Operating income was 21.7 million, which was an increase of 181 percent over the prior year and net income was 17.1 million compared to 5.1 million the prior year, an increase of 235 percent.

For the year, our diluted earnings per share were $1.10 per share compared to $0.36 the prior year.

Our total outstanding shares at the end of -- of 2003 were 14,874,000 shares. I will talk just a little bit in a little while about the shares and the repurchase program that we have.

From our segment reporting, our international operations were 28.0 million, compared to 24.1 million the prior year. That's an increase of 15.9 percent for the quarter. International, for the quarter, represented 35 percent of our consolidated sales revenue. Or -- no, that was prior year, 35 percent. This year it's 32 percent of our consolidated revenue for the year-to-date numbers. Year-to-date sales revenue were 104.6 million compared to 89.6 million the prior year, an increase of 16.7 percent.

Our Synergy Worldwide operations for the quarter were 200 -- or 23.5 million compared to the prior year of 10.5 million, that's an increase of 124 percent. And year-to-date, Synergy was 83.6 million compared to 26.9 million, an increase of 210 percent. Synergy now represents approximately 25 percent of our consolidated sales revenue.

Our United States operation for the quarter were 36.8 million compared to 34.2 million the prior year. That's an increase of 7.7 percent. As many of you are aware, in the -- over the past few years, our -- our United States business has -- has declined or remained relatively flat, excuse me, and this is really our first quarter-over-quarter increase that we've had and so we feel very good about the United States right now, as mentioned in the news release. We feel like some of the programs that we put in place have started to take hold and we feel like things are going a lot better in our United States operations right now, which bodes very well for the future.

Year-to-date, we had some ground to make up from the decreases that took place in the first half of the year. The year-to-date sales were 142.8 million, compared to 143.6 million. That's down about a half a percent is all, and so we're able to recover a lot of the ground that we had lost in the first half of the year. And so we feel very good about where the United States is right now.

Total distributors worldwide were 665,000. That's an increase of 18 percent over the prior year. And total managers are 18 -- approximately 18,350. That's a 21 percent increase over the prior year.

The balance sheet remains strong. As many of you are aware, we -- we did a Dutch auction tender for a million shares and as part of that, we were able to fund the majority of that out of our cash that we had on hand. We did borrow $7.5 million on our short-term line of credit so we have outstanding right now $7.5 million on our line of credit that we hope to be able to pay off in the short -- very short time from now. So, total assets, 145.1 million, compared to last year of 125.6.

Our cash and cash equivalents actually -- and our long-term investments actually went up from last year, even in light of what we did with the repurchase. We were 43.9 million compared to 37.1 million. So, we feel good that we've still got the cash that we need to operate the business and should be able to pay down that line of credit that we have with the cash that we have.

Our inventory is an area that -- that we noticed a significant increase in. We were at 36.7 million compared to 26.5 million the prior year. An increase of 10 percent. If Synergy -- the inventory for Synergy this year was a little over $10.5 million and so that represents almost the entire increase in our inventory is associated with the Synergy operations and the growth of that business.

Return on shareholders' equity was 20.3 percent. Our book value per share was 6.13.

Cost of goods sold for the year decreased from last year. Last year it was 20 percent. This year we're at 18.9 percent. Volume incentives actually increased, though. Went from 36.1 percent last year up to 38.7 percent. So, there has been a little bit of eroding of our margins there from the volume incentive standpoint. The majority of that is associated with Synergy, where they pay out a higher volume incentive than do the Nature's Sunshine businesses.

One area that we feel very good about is one that we're concentrated very heavily on, and that's our selling, general, and administrative expenses. For the year, -- or for the quarter, our SG&A was 29.5 million. That -- that is 33.4 percent of sales. Last year for the fourth quarter, our SG&A was 39.6 percent of sales. And so, we've been able to decrease our SG&A for the quarter by about 6 percent of our sales and so we feel very good about that.

Is that where we want to end up? No. Year-to-date, our SG&A was 118.7 million, that represents 35.9 percent of sales. That's down from 41 percent last year and so we've had about a little over a 5 percent decrease in our SG&A as a percent of sales and so we feel that we've made some progress but we have a lot of room still to go. Our goal is to get down over the next couple of years to get closer to the 30 percent range. There's some things that -- dealing with some profitability of -- of markets, we want to make them more profitable and -- and with some streamlining of some operations that we still have, that we feel that we can get down to those numbers in the next couple of years.

Taxes, we still feel very good about our taxes. For the year we finished at a tax rate of 25.6 percent. That will probably come up a little bit next year, but we feel good that we've been able to cut our tax expense by as much as we have.

Again, I'm very thankful to be able to report these numbers and appreciate this opportunity. Things look very good for this past quarter and I will now turn the time back over to Doug so that he can report on -- on the other side of the business.

Thank you, Craig. I appreciate you going through the financials and some of the key numbers for us.

You know, I just overall would like to say, you know, it's been a year of dramatic improvement. Not to say that we've arrived. We've made a lot of progress. We still have, as Craig mentioned, at least in the financial area, a lot of progress yet to make.

We feel very challenged by the opportunities that we have and we look forward to the future as far as realizing more of the potential that we have as a company. Craig's covered the financial numbers so I won't mention really much in that regard, but we're very pleased with the progress that our subsidiary, Synergy Worldwide, has made. A number that Craig did mention, I think, was 25 percent of sales. It's enjoyed some very impressive growth, really, over the last year. And the opportunities for Synergy are very bright as we look forward, particularly in Asia. So I will talk a little bit about that, as well. And as Craig mentioned, Nature's Sunshine U.S., for the first time in a long time, is showing some growth, which is something we've been working at and feel very good about the leadership that we have in that area and the changes that they're making. I'll talk a little bit briefly about that, as well. And that's a very positive thing.

And we've also begun to focus with a little bit of the changes that we've made here as far as the reporting structure at Nature's Sunshine to focus on Nature's Sunshine International. And as Craig read those numbers, they've accomplished a lot this last year and yet we look forward to the things that we think that we can accomplish as we go forward. The numbers, in particular, in total, of the numbers of sales leaders: The end of the year we had 18,000 -- approximately 18,400 sales leaders. That's up like 21 percent from the prior year. That's an important and very impressive number for us.

The distributors, Worldwide distributors, I think Craig mentioned 665,800 roughly, 665,000 distributors. That's up 18 percent. Those are very important numbers for us and we're very tuned in to the -- to the growth in sales leaders and distributors and I guess overall we just -- we want to recognize the contributions that have been made by -- by management, the dedicated employees and in particular, the committed distributors and the things that they do to bring these products that help improve people's health, as well as improve their quality of life. So, it's just really a great business to be in and it's a great time to be involved in Nature's Sunshine as a whole.

As I mentioned, the future looks bright for really the -- the business units that we have and, you know, we mentioned that we have the opportunities as well as challenges and we just want to give a balanced view, as well, on some of the challenges that we face.

So, I just talked briefly about Synergy Worldwide. I mentioned that they had a great year, outstanding growth, and really a bright future and -- and great promise. Obviously -- and I probably don't have to tell most of you this -- you know, can you expect that kind of growth in a subsequent year? You know, just the sheer mathematics of it would suggest to you that you have a larger base so you might not get the same -- the same growth rate. But we're excited about the growth opportunities that they have, particularly in the Asian markets, Japan, in particular.

Synergy has suffered a little bit from growing pains, as you have something that grows that fast, you have to do everything you can to keep the administrative side of the business intact or looking forward to -- to being able to support the growth and spending on, you know, the infrastructure to support that. So it's been -- it's been an exciting year for them as well as a lot of pressure and challenges for them to meet.

And this year, during the fourth quarter, Synergy Worldwide converted to an on-the-ground -- we use the term on-the-ground business. It's a necessary step in the expansion plans that we have for Synergy and, you know, I -- just to be frank, you know, it's probably not something that went quite as well or quite as smoothly as we anticipated, but it was an important step that needed to be made or taken for the future development of Synergy and we look forward to the advancement of Synergy in Japan and Asia, in particular, as well as in the other markets that -- that they have opportunities into.

So, we've taken that step, we think about it as sort of an opportunity to build on a stronger foundation and move ahead in Synergy. So, we're grateful for the progress that they've made and the hard work of both the management and employees, as well as the distributors there and there's no question it's been a very key and important part to the future success of Nature's Sunshine.

Just mention briefly, Nature's Sunshine International division: it's made some very important progress this year. One of the markets that we're particularly impressed with has been Russia. It continues to grow at a -- an amazing rate, bringing the opportunity and the products of Nature's Sunshine to the former Soviet Union and the Russian Federation. The people that are working in that area have just done amazing things and we're confident in -- in their abilities and the success that they've brought to Nature's Sunshine.

So, it's really, again, another sign that it's -- it's an exciting time to be a part of Nature's Sunshine, particularly given some of the progress that we've made, but yet more the rest of the mountain that we have to climb and that's -- that's probably the more exciting part of this whole thing. So, we've been impressed with the growth that Nature's Sunshine International has experienced.

Another market that, although we didn't go into a lot of the detail on, has been a market that's kind of been up and down. Mainly challenged by currency issues, devaluations and those kinds of things, but once again, our market Venezuela that has contributed to Nature's Sunshine, International in the past, is contributing again in a very significant way.

Other markets, -- it almost feels like, and I hope nobody will criticize me later for this, it's almost like the Academy Awards, you know, you have to recognize so many people because so many things were accomplished and yet there are a lot of things that were accomplished don't get recognized, either on this call or on a day-to-day basis. But there have been so many things that have contributed to sort of the growing, what I would refer to as the growing momentum that we feel here at Nature's Sunshine, which is maybe the most important thing when it comes to multilevel marketing and these kinds of businesses, because the momentum is infectious and people feel it and it begins to enhance the growth and the growth opportunities that you have.

But markets like Mexico, that have been very strong for us, are strengthening again in Nature's Sunshine, International and it's very interesting how we've been able to look at kind of the opportunities that Synergy has and differentiate those from the opportunities that Nature's Sunshine, International has. And we feel very good about the progress in that differentiation, both in terms of products and in terms of the opportunities. So, we feel very good about that.

I'd like to mention briefly the U.S. growth. Craig mentioned, it's something that -- it's been quite a number of quarters since we've been able to experience a little bit of momentum and growth in the U.S., and that was -- that was something that's very important to us. In part because we see the U.S. as a great opportunity, given the demographics, the aging population, the importance for people to use these kind of products in their everyday life and the benefits that they can get from using these products. As well as the opportunities that -- that people have in terms of preventative uses of products like these. So, we're really kind of excited to see the growth that we see as possible in the U.S. and, you know, a little bit of the start to that.

We're very encouraged by that and look forward to seeing if we can gain momentum in this next -- in this coming year. So, one of the reasons that I mentioned before, we're excited about the U.S. growth, is the opportunity, plus the distributors who are in the U.S. business and seeing their -- their excitement grow and the opportunities that -- that they have before them. The other side of it is there's a lot of leverage, earnings -- what I'd call earnings leverage in getting the U.S. to grow.

I'll just mention briefly some of the things that are impacting that are -- or have had an impact, has been the -- the new Untold Truth Seminar training programs that our U.S. training department has put together and their goal of educating a million people this year on -- on the opportunities they have to improve their health and preventative things that they can do.

And the other thing -- and I've mentioned this before -- was the Habit-of-Health, or the 90-Day Challenge. We've had some very impressive numbers with regard to that. I just mention briefly that it's something that, you know, we put a lot of emphasis behind and we think it's one of the drivers to -- continuing to grow the business. We had something like 4300 new participants in the Habit-of-Health this quarter. And the number of participants, both new and existing numbers, is sort of slowly and steadily increasing, which is kind of the thing that we were hoping to achieve with that. In the second half of the year, there were already over 40,000 Habit-of-Health packages purchased since the inception of this program.

The other interesting thing -- and I won't get into too much of the details -- but it's one of the things that our people in the U.S. and -- and this program have been sort of monitoring very closely. And that's the number of recurring purchases or the percentage comparison of those who are on the Habit-of-Health and how they continue to purchase versus those who were the non Habit-of-Health distributors who signed up, and that's been a very, I'd say, remarkable change in the increase of that.

Just to give you one idea: after four months, of the people who are on Habit-of-Health, roughly 32 percent of those people followed up with either additional orders or continued on to that program, versus what we used to have, or -- the comparison of non Habit-of-Health, something like 9 percent. So that's a dramatic improvement, which we look at it as an indication of something that's going to help the business as we go forward. So that was one of the things that, you know, we thought was important to talk about.

I just mention briefly, because I've talked about this before, our Thai-Go product, which is our number one seller. It was introduced earlier in 2004 and then VitaWave, which is a vitamin-mineral nutritional liquid nutritional supplement.

And I'll just mention briefly, one more product that we think is going to be an important new product this year in the U.S. and that is our Nature's's Cortisol formula. The idea of this is to help regulate the -- the hormone of cortisol produced in the adrenal glands in response to stress and other things. So, the idea of regulating that to help people manage their weight and actually help them lose weight. That product was introduced not too long ago and has already jumped up to one of the top three sellers in the Company.

So, you know, we see some opportunities both in the U.S. and International and also, in particular, in Synergy. And so we think we have kind of a balanced situation here. Our challenge, as I mentioned before, is to get the momentum maybe up to a higher level. Craig's talked about one of the challenges we have and that is to improve our -- our return to shareholders on the bottom line. He also mentioned our Dutch auction tender offer, which we thought went as well as it could have gone.

But yet, I mention some of these things and I say the true strength of Nature's Sunshine is in our future and the things that we hope to be able to accomplish this next year, in terms of gaining momentum and returning more to the bottom line and really creating more shareholder value for our shareholders.

I feel like maybe I'm going on a little bit too long about some of these things and so, I'd say at this point maybe we should open this up to questions. Carly, do you --

Thank you, the floor is now open for questions. If you have a question or a comment, please press the number 1 followed by 4 on your touch-tone phone. If at any point, your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received and we do ask that while posing your question to please pick up your handset to provide optimum sound quality.

Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star, 1 on your touch-tone phone. Once again, to ask a question, that's star, 1 on your touch-tone phone. Please hold while I poll for questions. Thank you.

Your first question is coming from Mitch Golden of RH Capital.

Hi, gentlemen. Congratulations on the quarter.

Hi, Mitch.

I had a couple of questions, if you don't mind.

Sure.

The U.S. was a very impressive performance and I know you guys have been working on that. Can you just talk about your outlook for that business? Is it conceivable that it continues to grow at this high single digit rate over the next year? Or is this more one-time in nature? What's your confidence, just in the trajectory here?

Well, I wish I could give you more precise guidance on that, Mitch. You know, unfortunately, I can't and I probably shouldn't, but let me just give you overall my, you know, kind of my expectation. You know, this was important for us to get -- and I think I may have mentioned this in a previous call -- a little bit of momentum started by getting an increase, and we hadn't had an increase in the U.S. in really quite some time. But that's the start. We think that, you know, whether it stays at the same level or kind of goes up and down a little bit, our objective is a much higher growth rate from that. It's certainly -- you know, we ought to be in the range, okay, of 15 to 20 percent.

Now, can we achieve that this next year? You know, I guess if everything went right, yeah, but I don't think I would go out and say that. I think we'll probably have a little bit of up and down growth in the U.S. until we get really to that stronger growth of the 15 to 20 percent, but that's certainly achievable. If we were to look forward to next year, you know, for the year, 8 to 10 percent would surely be great. I mean, I think we're really looking more at, you know, 5 to 10. We can certainly do better than that, but I don't think it's going to be a straight line. This is a huge improvement for us to see a little bit of growth out of the U.S. and sorry I can't give you more guidance than that, but that's kind of the way I look at it.

Next question, just on Synergy, which -- while up year-on-year, was down sequentially, and was curious if you can talk through that. Just the sequential trends.

Yeah, I will let Craig go through the numbers. Let me just overall touch on something that I mentioned earlier and that -- you know it was essentially a change for us in the fourth quarter. As I mentioned, there was a conversion to on-the-ground business versus the personal import business. It didn't go as smoothly as we would have liked to have seen that go. You know, maybe we would have gotten some flattening out as a result of that anyway, but it was an important step. We feel like both the management and the top leaders of Synergy look at this as, you know, kind of a base to -- to be able to establish, you know, even, if not, you know, the same level of growth or much greater.

You know, obviously it's going to be harder given the mathematics of a larger base, but the opportunity for Synergy in Japan and other markets in Asia is still huge. And, you know, I think this -- maybe there's a little bit of slowing, a little leveling off, but I look at it as a way of kind of, you know, catch your breath and take off again. So I'll let Craig comment on the negative specifics, on the numbers.

Just so that everybody has the numbers that Mitch is talking about, the sales for the -- for Synergy for the third quarter were 24.3 million and for the fourth quarter were 23.5 million. So, we were down slightly quarter-over-quarter. But like Doug said, I think that because of that change and shifting people from the personal import over to on-the-ground, there were some things that took place there that I think, first quarter, second quarter, will rectify themselves and we will see that grow again.

Okay. Just last question, if I might, just on the SG&A: I think you said -- and just want to get a sense of timing, still targeting 30 percent type of percent of revenue there. Is that over the next few years, so you're likely to see, say, a point a year type of timeframe? Has most of the low-hanging fruit at this point, I assume, been picked?

Let's put it this way: if it takes me a percent a year, I don't know that Doug will be patient enough for that to happen. Our goal was 10 percent over a three-year period when we started this. We've accomplished 5 percent of that so far. So, I would anticipate that, you know, the other 5 percent coming over the next couple of years.

Now, there's -- there is still, shall we say, some low-hanging fruit in some of our international markets that are not quite as profitable. There's -- as we'd like them to be. That we feel that we can -- we can take care of. Some of the new markets in Synergy, that -- Synergy, overall, is. profitable, but there are a couple of new markets that, as we make profitable, will impact that.

And so I don't think that it's -- it's going to be -- I want to word this the right way -- that it's -- it's not going to be easy but it's not going to be real hard to get to those numbers. It's just a matter of focusing on, as we hit -- as we work on one thing and move along, we should be able to see that. See that -- be able to accomplish that.

Now, one thing to keep in mind, you'll notice that for the year we were close to 36 percent but for the quarter we were down at 33 percent. The -- historically, the way the quarter-to-quarter goes, first and second quarter SG&A is usually higher than third and fourth quarter and I would anticipate that this year. Again, I don't see that -- that first and second quarter are going to be down at the 33 percent range and so I think we'll see first and second quarter again because of some accruals for conventions and things that take place in the first half of the year, we'll see first quarter increase a little bit as a percent of sales and then the last two quarters of the year, again, we'll see it decrease. But overall it will step down. I just want to make sure everybody is aware of that.

Mitch, if I could add -- this is Doug Faggioli. I want to give Craig credit here. He's very preceptive, I'm not that patient. So, I just want to make that point.

The other one is, I appreciate the efforts that Craig and his team have made, both in trying to bring SG&A in line, and they've made significant progress this year, as well as, you know, they have that same challenge and opportunity in the next -- really, the next couple of years. But in addition to that, as he mentioned earlier, they've been able to bring the tax rate down, as well.

And so, particularly given the need, and as I mentioned before, the importance to support the growth of Synergy. That's something we feel very strongly about, that we want to be able to support the growth of Synergy. And so, we've been sending, you know, what we need to there to support that. So, to be able to accomplish what he and his team did and really the rest of the management here, in a year when we were increasing spending in certain areas of the Company, I think is really quite an accomplishment, but we need to improve that as we go forward. So, I just wanted to add that to Craig's comments.

Thanks, Doug.

Thank you.

Thanks, Mitch.

Thank you. Your next question is coming from Evan Steen from Eos Partners.

Hey there, guys. Nice quarter.

Thank you.

You know, a couple of my questions were answered, but let me start on technical ones, which you referred to before, was the shares outstanding.

Yes.

Could you just give us an indication of what we should use for average shares outstanding? And I guess maybe what the amount of options outstanding as well are, after the tender and exercises that have gone -- gone on in the last quarter? But I -- I guess what I am really trying to get at is, what the average share count we should be using for next year?

Okay, the -- interesting, because with the million share buyback, the shares didn't go down. They actually went up a little bit and so -- the outstanding shares. And so, I think that's a good question. Okay, as I mentioned, the outstanding shares right now are 14,000,874. To give you -- on a diluted basis, there's about 500,000 incremental shares that go into the calculation for EPS. That will change, again, because of the options that are still outstanding that you mentioned.

Last year we had a total of almost 1.7 million that -- shares of options that were exercised. In the fourth quarter, there were 780,000 shares that were exercised.

Going -- looking into next year, we still have outstanding and -- and Doug and I will both admit that we gave too many options five or six years ago, that are all expiring here in the next year, between now and when the -- this year is over, 2005 is over. In fact, of those -- there's about 600,000 shares that expire this year in 2005 and so I would anticipate that -- that those 600,000 shares will come out over the next three quarters, I would say. And will become part of it, but they will be weighted.

And so I would think that the 15.5 or so that we used for the quarter is probably going to be representative of what will be for the year, for 2005. I know that's a long way of getting around that, but I think that it is important to know how many shares were exercised this last year, as well as the fourth quarter and then that million shares that we bought back, I think, will impact it because we did bring it down by that million. We would have been a lot higher if we wouldn't have bought that million back. So, going next year, again, I think 16 -- 15.5 is probably a reasonable number.

And that, I guess, explains why the cash is a little higher than I would have thought in Q4 --

Yes. Yes, because we did get a lot of cash in from the exercise.

Okay. Perfect.

The next thing was with regards to -- you mentioned Synergy. The distributors you mentioned year-over-year were up substantially and you see good growth there. The question I have is -- and I'm just assuming this is the answer -- that there's some seasonality in terms of how many distributors were added in Q4 versus, say Q1, Q2, Q3? Because the increase in Q4 to Q3 was up but -- but not nearly as -- as dramatically as it was during the middle of the year. My assumption right there is that it's -- given what you said is going on with the U.S. and stuff, it's just some sort of seasonality to it.

Was your question specifically with regard to Synergy or in total?

Actually, both. It's hard to distinguish because I don't know how many distributors, you guys haven't broken out number of distributors in the Synergy division.

Well, the Synergy division, I won't speak to, you know, by quarters, but it's up significantly for the year and I don't think we saw, you know, much of any kind of a slowing there. I think if you looked at the U.S., Nature's Sunshine U.S., you know that was virtually flat or -- or pretty much flat really until kind of the end of the year started to pick up a little bit because of, you know, the fall in kind of the momentum in sales. So, it may -- I don't know if that addresses your question --

Yes, I guess simplistically, if I look at the total Worldwide distributors by quarter -- 582, 614, 652, 655. I think -- I think amongst other things, the reason the stock was down so much this morning was A), the Synergy number, and B), the distributors, if you just looked out at sequentially quarter-to-quarter, you added 3,000 this quarter versus close to 40,000 the previous quarter. I think that's what people are sort of panicking over.

And what I'm asking you is if there's some seasonality to it or what's the explanation for the drop-off in the sequential distributors added?

Okay. Yes, you know, you can't be quite as scientific as saying it's going to be this percent sequentially. I look at it and say, yes, there's some seasonality to it, but I'd say more than that, there's kind of -- it kind of goes in -- you know, it's not a straight line. It's kind of a jagged line. And as we look at it and say, you know, look at the growth that we've experienced both in Synergy and as a company, that's very positive to us. But I think when you get to the point of saying, you know, sequentially, it was off a little bit and that's a problem, we don't see that. You're going to get kind of leveling off and then kind of starts to pick up again.

You don't get a straight line in, really, most of these companies. That's kind of part of the nature of the beast, if you understood what I'm saying there. We're not troubled by that. You know, if somebody is, then I think they're going to miss an opportunity.

Okay. And then the last question was you mentioned, speaking with regards to the U.S., that you definitely saw the first pickup, which is great because obviously it's still your largest percentage and it hasn't really performed that well over the last couple of years. Could you talk about some of other new products -- you mentioned one that is already in the top three, and sort of what new products are introducing for this year?

And then from a financial sense, you know, I'm only guessing for what the margins were in the quarter, but if you're going to be aiming at a certain point for, you know, close to double-digit growth, my assumption is the margins here are going to follow and the margins have been depressed for a very long time. And so -- so from a financial standpoint, I don't know what the margins were, the operating income for the quarter. I can only guess. But maybe you can speak for broadly, as you did with regards to revenue, where you think the margin might be headed over the next two or three years if the revenue growth pans out as you hope.

Why don't I answer that before Doug talks about the products a little bit more. And I"ll speak specifically about the U.S. Historically the U.S. has been a very, very profitable business. Has great margins, great returns and because of the depressed sales that we've had, those margins have been cut. We feel that there -- that as the U.S. business grows, we have a huge opportunity to increase our margins. Because really everything is -- is pretty much fixed. As we bring in the sales dollars, there's not a lot of SG&A that has to be added to -- to support a lot bigger U.S. business. And so I think from that standpoint, the margins in the U.S., if we can grow that business, we've got a real opportunity there.

And it's really the same with -- with Synergy. Synergy has -- although they have a little lower margins than the U.S. have, we've built the organization during this last year to where, as we continue to grow that business, we won't have to add a lot of overhead associated with that. And so if we can continue to grow the sales in the U.S. and Synergy, then our margins should increase quite a bit.

Okay. Excellent. And with regards to the products?

Yeah, let me just briefly touch on that. We don't tend to talk about products that we're going to come out with. But let me just tell you the focus here.

In the past, we'd come out with a lot more products and by -- sometimes it's a new and sometimes it's a "new" and sometimes it's a "new and improved." But we've had such good success with kind of narrowing the focus of new product introductions, which gives us a better chance to support them from both an incentives standpoint as well as a promotional standpoint, and just getting word out about the products.

You know, one of the challenges for Nature's Sunshine has been sort of the broad product offering. It's great because people who are interested in -- you know, in really covering the breadth of products, you know, there's something there for whatever their interests are. It's also hard for to us promote 600 products, okay? So, we've tried to narrow the focus and I will just tell you with Thai-Go, which we introduced this last year that became our number one selling product, which is really quite an accomplishment. You know that doesn't happen all that often for us, or at least didn't used to in the past, but with the introduction of Thai-Go, we were able to support it with incentives, promotions, and continued to promote it throughout the year, rather than just, you know, kind of introduce it and see how it goes and then move on to something else. So, we've kind of narrowed the focus.

But by doing that, Thai-Go this last year, if you were to take total new product introductions, which includes "new and improved," it's something like 12 percent of sales this year, which, you know, is kind of on the upper end of what we're used to seeing. But Thai-Go itself accounted for about a third of those sales. So, by -- by narrowing the focus, we've been able to generate a little bit more in -- in sales individually as products and it kind of streamlines the process for us of supporting them through promotions and that kind of thing. But Thai-Go itself was about a third of that.

The other product that I mentioned before, but I will just mention again, that we think is doing very well is this vitamin mineral liquid supplement called VitaWave. That's started off and it's gotten into the top -- I think it's the top 5. I'd have to go back and look at it, but as I recall, it's the top 5.

And the fact this new Cortisol product that we've just introduced has already -- and again, it's early to say because it was just introduced and there's some, you know, some interest around it so there was some buying on that. I can't say that it's going to stay there, but it got as high as number 2 on its product introduction. That doesn't usually happen for us, okay? And so, what we've done is we've kind of narrowed the focus. And so that's why we're not talking about a lot of different products, we're just talking about a few products.

Okay. Excellent.

The Cortisol is probably the only one I would mention as far as the new products that's just been introduced.

And just so you're aware, Evan, that Cortisol was actually introduced in January. So, there's -- none of those numbers are in -- in the fourth quarter numbers. So --

Okay. Sounds good. Okay. Well now, it sounds like things are going -- it sounds like, you know, the U.S. getting on track is an enormous positive that, you know, it's still the largest part of the Company revenue-wise and it's great to see that it's getting some positive momentum after all these years -- or quarters, I should say. So, congratulations and keep up the good work. Thanks.

Thank you.

Thank you. And as a reminder to everyone, if you'd like to ask a question, please press star, 1 on your touch-tone phone at this time. Your next question is coming from Peter Reed from CL King and Associates.

Good morning, guys.

Good morning, Peter.

Hey, could you go into a little more detail about the transition from on-the-ground to personal import? I mean, what does that mean, exactly? And what does the conversion entail?

Sure. Up to this point -- or, as I said, up to the fourth quarter, Synergy was, at least in Japan, not -- not in all the markets it operates in -- but in Japan, was a personal import and that means that the product was not available for resale. In other words, the distributors that were buying that product were buying it for their own use and they weren't able to resell the product because we it -- we didn't have an on-the-ground business, we weren't -- we didn't have products approved for sale in Japan. It essentially allows them to resell the product. That's the key difference.

And so, by establishing an on-the -- what we refer to as an on-the-ground business, the products that are approved for import can be sold in Japan and then sold by the distributors or resold to other people. Which really gives us, you know, the -- kind of the next step in the development of Synergy, is that, you know, by doing that, we can get -- we think we can get more momentum, we can get greater sales and generate, you know, more excitement about the business, because, you know, you essentially have more of a -- a physical presence and, you know, there's more opportunity for the distributors because, obviously, they can resell the product. So, it really expands the horizon for Synergy. So, in that regard, it was an important step for us to take.

And the only thing I mentioned is, you know, it didn't go as smoothly as we wanted it to. And part of that, hindsight is 20/20 and part of that, you know, it could have been coordinated better, it could have been publicized better. But, you know what? You've got to take things as they come and, you know, we learn from that and do a better job next time.

But we think the distributors are, you know, are -- you know, on our team, so to speak, and they're glad that we've taken the step and, you know, things are going to smooth out so that we can start to take off again in Synergy to the same degree that we were doing before. But it's an important step to be on the ground. I don't know if that answers your question or not.

Well, it does, but I guess it raises some more questions.

Okay.

So, was Japan a meaningful contributor to Synergy sales while it was a personal import business?

Yes. Oh, yes. It was like, you know, Craig will have to correct me here, because he's my numbers guy, but I think it's like 80 percent of the business. Yes.

Of Synergy?

Yes.

So, I mean in reality were these people just buying the stuff for themselves, or were they -- or, I don't know if you want to even say that.

Well, no, I'll respond to that. I mean, I can't say 100 percent, but, you know, we had an agreement -- a distributor agreement, where they signed and said, "I understand this is for my own use and it's not for resale" and we didn't -- we didn't -- usually in these kind of businesses you get some feedback that, you know, if people are doing things that they aren't supposed to do and we weren't getting that kind of feedback. So, while I can't give you a 100 percent guarantee, I'm pretty confident that they were just using it for their own use, yes.

Right. So, where was the compensation for them, then? They were just -- I mean, there was no sales commission for them or anything like that, was there? If they were just buying it for their own use?

It's not to the same extent that you can have now. And --

Right. I mean now the whole formula --

Right. Now it's opened up.

So, it sounds to me like the growth of Synergy was really more just the success of the product. People liked the product and more people found out about it, more were using it, but it wasn't as if they were selling it to their friends and neighbors or anything like that?

No, the -- the best thing -- not the best thing, but one of the things they could do is they could encourage other people to sign up and buy, as well. And so, there -- it's not to the same degree -- I think you kind of hit the nail on the head. The reason I say this opens up the horizons for Synergy, is it allows the reselling and the recruiting to become, you know, much more meaningful now. And so that's what we're excited about, and that difference. So, you know, you're right, but not entirely because, you know, they still were being compensated for, you know, kind of recruiting other people and that kind of thing, but not to the degree if they could resell the product like they'll be able to now with -- at least the products that will be on the ground.

Oh. So -- but -- but -- they were being compensated for getting other people to buy the product?

Yes.

There was an incentive to do that?

Yes. Well, I mean, you know, that's an integral part of direct selling. So, yes --

Yes. Well, that's why I'm confused about the personal import side. So, they were getting other people to buy it and they were personal imports themselves, but there was a -- a commission paid to the person who referred them?

Right. But not -- not to the extent of what can be done now. I guess that's the point of what I'm trying to make. Yes, they were being compensated, that's an important part of the business, but not to the degree that they will be able to benefit from having on-the-ground products, is what I'm trying to say.

Okay. All right. And were there any costs incurred in the quarter during this transition? Or it was just...

Well, there were a lot of costs associated with launching the business in Japan. It's not cheap to get in there, such as warehousing costs that we hadn't been incurring in the past. The office rent. We have a full staff over there now that we didn't have. They were all here. And so there have been some decreases in costs in the U.S. a little bit, but in the fourth quarter, there were some costs in Japan that -- that had not been reduced in the U.S. at that point. We should see a reduction in the U.S. as time goes on. That's a -- that's one of those things that we should be able to cut some more expenses out of.

Right. But you've kind of been building up that infrastructure in Japan throughout the year?

Yes. Probably more for the third and fourth quarter rather than the first and second.

Right. Okay. So, by all rights, going forward, you should really see an acceleration in Japan now that they can resell? Is that fair to say?

Yes.

Yes.

Okay. And that's your biggest network of distributors for Synergy anywhere?

Yes, by far.

Okay. Okay. Well, that sounds good. Okay.

And then the gross margin was down year-over-year and sequentially. Is that just a function of the mix again?

It is. As Synergy -- Synergy does pay out a higher commission or volume incentive than does the Nature's Sunshine organization. So, as it has grown, then that volume incentive is where we lose a little bit on the margin now. Their cost of goods sold is a little bit less and so cost of goods sold has come down a little, but volume incentive has gone up more than the cost of good sold has gone down. That's why we've had the erosion. So --

But -- but the volume incentive shows up on the volume incentive line.

Right.

As I'm looking at gross margin, it was down 110 basis points year-over-year? Am I looking at that right?

No, actually for the -- if you look at the -- and I don't have it broken out, I'm just looking at the cost of goods sold. We were at 20 percent last year. We went down to 18.9. So, we actually -- if you ignore the volume incentives, then we actually improved 1.1.

I thought I was looking at an 80.4 percent gross margin versus 81.5. Did I do my math wrong?

Yes.

I did, huh?

Sorry.

Okay. All right. That does it then, thank you.

Thanks, Peter.

Thank you. Your next question is coming from Avo Horowitz of Ewing Capital.

Hi, congratulations on a good quarter.

Hi.

And I think the best part of the whole thing was I think that the U.S. has finally turned. It's actually -- I want to focus on that part of the business, given that it's such a large part. In your past Qs, you break out the operating profitability of the U.S. division and I was wondering if -- which has been actually quite low, and I'm wondering if there is some way you can break out the profitability for this quarter of the U.S. division.

In the K I can. Right now they are -- I'm getting feedback on the phone right now, so... the -- for the fourth -- for the year, profit increased in the U.S., okay? Significantly from what it was in the past. I don't want to give out specific numbers, but in the K it will. And so --

Okay. I mean, quarter-to-quarter -- meaning, this quarter versus last quarter versus the '03 -- Q4 '03, it was up significantly?

Yes.

Okay. So -- okay, but you don't want to break it out. Now, you also made a -- okay, fair enough.

You made another comment that, you know, most of the infrastructure is there, as we know. I'm wondering if you could comment on, you know, what does every percentage growth rate contribute in terms of profitability now that, you know, we're starting to grow again and the fixed base is already there?

If you -- if you look at it -- you know, there will be a little bit of SG&A there. We're still looking. But if for every dollar in sales, operating income, you know, your 20 to 30 percent of that has the potential of passing to the bottom line. Or to the pretax line. Because our fixed costs are there. So, your 20 to 30 percent of every sales dollar could pass down.

Okay. Now, Habit of Health. That's only in the U.S., right?

Yes, it has been, primarily because Thai-Go and products that go along with that have been associated with the program in the U.S. International is just now rolling out their equivalent of the Thai-Go product called Zanbroza and we think that's going to do very well internationally, but they're not using the same kind of program, at least initially.

Okay. Okay. Now, yes, I -- just on the point beforehand that Peter Reed was making, I saw the same thing as he did. On the sheets that you sent out to everyone, the costs of goods sold line, you did 17.35 million this quarter -- this year. And last year in Q4 you did 12.773. So, you just divide that through the sales revenue, you get 19.64 percent in cost of goods versus 18.3.

Right. He was talking for the year and so the numbers I was talking about were the year numbers.

I'm talking for the quarter, then.

Okay. For the quarter, yes, it did go up and that was -- there were a couple of things associated with on-the-ground, products that we couldn't sell over there so there was a little bit of a charge in cost of goods sold in the quarter for Synergy that impacted that. It won't be impacting it going forward.

So, overall, the general rule with that, Synergy's margins on a gross margin basis are actually higher.

That's correct.

Okay. Now, I think one of the projects that you guys have been focused on also is limiting new product introductions but having better in shows and sort of reducing the number of SKUs that you have out there. I'm wondering if you could comment on how that's going? And, you know, if we're already starting to see that in this quarter, in terms of, you know, inventory turns and a smaller number of SKUs?

Yes, we've been working, as you know, on managing and rationalizing the product line and I think we've made a lot of progress there and one of the things that we've done in order to keep our sales leaders happy is those products that are sort of slower sellers, but they are, you know, are still a number of people that are very interested in the products. We've had to pass on a little bit of a price increase in those products and as a result of that, they still buy those products at kind of the same level and it's increased the profitability so we've been able to carry those.

But looking at the new product introductions, that's been a significant improvement for us because we've been able to target, you know, selected new products as we introduced them and support them better as they're brought out. But, yes, I think that's been, you know, a vast improvement for us. As I mentioned, I think we're somewhere around 100 -- sorry, 18 million in the U.S. in new products and a third of that was this new product, Thai-Go.

Okay. That's very good.

Yeah. I think it's very impressive.

Just, my final question is Synergy, and I know everybody's focused on this, but you're in -- is it three markets you're in right now? It's -- you recently entered into Australia, if I'm correct.

We're actually in 7 markets there.

Oh, 7. Okay.

Yes, we're in the U.S., the small business in the U.S., Australia, Japan, Korea, Singapore, Taiwan and Thailand.

Okay. And the most newest -- the newest markets are which of these 7?

Australia is the newest.

Okay.

Korea and Singapore used to be Nature's Sunshine markets but got converted over to Synergy.

Okay. And what is the feedback of Australia? I'm just curious of the new markets, how they're doing with respect to the older markets?

Well, the thought was Australia was more of a tie-in to the kind of the Asian markets and frankly it hasn't gone quite as well as we would have expected it to go, but the other markets, I think Korea and Singapore are doing quite well and the other markets that we're getting ready to go into, we expect to do very well with the Synergy.

Okay. Fair enough. All right, that's it. Congratulations -- maybe you guys should think about doing another Dutch tender for another million shares. I'd do a plug for that. Given that we're really at the same level as we were last year, It just -- what it really did is take out the options. Maybe you should consider doing another million share repurchase.

That went very well. Very successful and it's something that, you know, we'll look at and we'll put you down as you are in favor of the next one.

Absolutely.

Okay.

Thanks, Doug.

Thanks, Avo.

Thank you. Your next question is a follow-up question coming from Mitch Golden of RH Capital.

Hi, guys -- and I hate to belabor, but just a little more on Synergy. Two questions: The first, given that the transition, as you talked in Peter's question from the personal import to on-the-ground and you also talked about the higher volume incentives.

Yes.

As you make this transition, how does that impact that line item?

And then the second one, and -- it's just a little more color, since the change, as you indicate, seems to be pretty positive in fostering growth, curious why still sequentially it didn't pick up, unless it was very disruptive to people on the ground. So, I'm just wondering what really -- what would have happened in terms of disrupting the folks that would have led to this decline, given that the change you were implementing seemed to be pretty positive?

Sure. I'll mention, and I'll let Craig talk a little bit more to the margins, but just overall, at least from my perspective, and taking kind of the sales look at it, Synergy is a great opportunity for us as a company and that's what we're really doing is investing in that because we see the potential of it in Asia and really in some of these other markets that they're in and so the theory, at least for us, is, you know, they have a little bit higher margins in terms of cost of goods sold and, you know, the volume incentives tend to offset that. But what we're expecting is, over time, that those will either offset or actually be a little bit more positive to us as we get the growth and the momentum that, you know, we're expecting and that we see going forward.

As far as the disruption, yes, that was what I tried to elude to and you're not going to let me get away with it, I guess, but, yes, it didn't go as well as we expected. Obviously they've got a lot of people in the sales field and, you know, it could have been communicated a little bit better. But just the sheer volume of converting people over to on-the-ground is a big administrative headache, in terms of entering new applications and getting those on there and, you know, the distributors -- and rightfully so -- are expecting to see those on immediately so they can buy product and do that kind of thing, and we were a little slow in getting those on there, and I think caused a little frustration to some of these distributors and that's where kind of the drop-off in the personal import was not offset by the purchases on -- on the ground and that's why you saw a little sequential slowing there.

But I go back to what I said before. It was something that we needed to do, to really open the horizon for us. You know, it's probably not the equivalent of investment spending, but eventually we needed to do that. Could we have done it better? Yes, but now that we're there, we think that it gives us the opportunity to grow from the base that we have and hopefully offset, as you were talking about, a little bit of this -- a little bit of weakness on a sequential basis, which is certainly a trade-off that we would make for the future of that company because we think the future is going to be better as a result of making this change or we wouldn't have made it.

As far as whether it will have an impact on margins with Synergy going on the ground, the payout in Synergy is capped and so we will be paying the same percent that we were paying, it will just be going to people in a different way. So, the people in Japan will be able to get a little bit more money rather than their uplines getting it because they're on the ground, but the percent should have no impact on the volume incentives or on the financials. So...

Great, thank you, guys.

Okay, thanks.

Thank you. Your next question is a follow-up question coming from Peter Reed of CL King and Associates.

Hi. So, from a sales activity standpoint, these distributors in Japan, who before were basically just signing people up into their organization, but not selling or reselling the products, will now be doing both? They will be bringing new people into the organization and at the same time selling product to who? To those people they're bringing into the organization? Or to other nondistributors? I guess I'm just trying to get clarification.

That's a good question. Really both, Peter. You have essentially the opportunity to sell products at retail that you didn't have before and you get the markup. And Synergy markup is a very healthy markup for that, to be able to sell at retail, and see, you weren't able to do that before. You were still able to recruit people who could buy for their own use, but you weren't able to sell to people, let's say, for instance, that didn't even want -- who didn't want to be distributors. You didn't have that retail opportunity and this really adds to it -- the retail opportunity, but it's really more than that and I'm not probably explaining this to you very well, but it's the idea, if I'm going to recruit you, say, look, you know, you've got the opportunity to make this, just selling the product at retail and also as you recruit people, here's the marketing plan and how that works, so really, now, you have both.

Whereas before you could sign somebody up and it was kind of limited because they could import products for personal use, couldn't really sell retail, they could encourage other distributors to sign up. And this just really opens kind of the door, if you will, for both -- both retail selling as well as recruiting and -- and, you know, making commissions off of those people that come in and buy the product and they don't have to just buy it for their own use. They can buy it for, you know, other people or extended family or sell to other people. So, it really, if you will, gives them a greater opportunity, is what we're trying to --

Yes. So, I mean in terms of order of magnitude, it sounds like -- I mean, is this a potential to, you know, I would think more than double sales. It sounds to me like you're just increasing the number of people you're going to be selling to, geometrically, and you're talking about a huge opportunity. But do you guys have a sense of order of magnitude, what this means?

Well, I mean, not that we're willing to make a projection on, but you are right, I am ready to recruit you now because you get the idea of geometric growth and that's really what we're looking for in Japan and the reason that we made this conversion. And so, yes, we think this enhances the opportunity we have there and, you know, we'd have to go through a little bit of -- as I mentioned before, you know, administrative problems of getting people on and making sure everybody understands and that kind of thing. And we we think that it really enhances our opportunities for growth there beyond what we had before, which was, you know, very, you know, great, to say the least, but we think this opens the door up for us in that market.

Right. Okay. And I -- just for the record, I was talking about fourth quarter gross margins before.

Okay, sorry!

I interpreted it as year-end.

So, you redeemed yourself, Peter.

All right.

The calculator still works!

Thank you. There appear to be no other questions at this time. Gentlemen, I'd like to turn it back over to you for any closing remarks.

Okay. I just want to thank you for your participation, your interest in Nature's Sunshine and really there were a lot of good questions which, you know, brought out the opportunity for us to kind of expand on some of the points and just overall, I'd say I think we had a very good quarter, a very good year. And we're very pleased with that. But more importantly, as I mentioned before, we look forward to the future and the potential that we think we have as a company to really move ahead and accomplish the things that we have laid out over the next couple of years as our challenges and our opportunities.

Of course, we continue to have challenges and we'll face those, but we're really more focused on the opportunities we have to grow and expand as a company and to -- to reward our shareholders through greater shareholder value. And so we appreciate your interest and support and we look forward to the things that we can report to you this year as we go forward.

Thank you and goodbye.

Thank you.

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