Nature's Sunshine Products Inc (NATR) 2005 Q1 法說會逐字稿

Good morning and welcome to the Nature’s Sunshine Products first quarter 2005 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 statements. 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 obligations to update any forward-looking statement as a result of developments occurring after the date of this conference call.

At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments following the presentation. I would now like to turn the floor over to Mr. Faggioli. Sir, the floor is yours.

Thank you. Good morning and welcome to the Nature’s Sunshine Products conference call. This morning we’ll be reviewing the results of operations recently reported for the first quarter ended March 31, 2005. We hope that everyone listening has access to our copy of the news release that was issued, and we’ll begin this morning by having Craig Huff, our Chief Financial Officer, review the financial information. Craig?

Thank you, Doug. I appreciate this opportunity to report on the first quarter sales and earnings for Nature’s Sunshine Products. For the quarter, sales were $86.4 million compared to $77.7 million the prior year - an increase of 11%. Operating income was $5.6 million compared to $3.6 million, an increase of 54%. Net income for the same period was $4.0 million compared to $3 million, an increase of 33%. And our EPS on a diluted basis was $.26 compared to $.20 the prior year. Total outstanding shares as of the end of the quarter were 15,061,000 shares.

Going into our segment information, our international operations continued to grow at the rate that they were last year. Sales for the quarter were 28.6 million compared to 25.6 million, an increase of 12%. Our international operations represent about 33% of our consolidated sales growth.

Synergy worldwide sales were 20.2 million compared to 15.4 million the prior year. That’s an increase of 31.5%. They represent 23% of our consolidated sales. As was mentioned in our news release, sales continued during this quarter to be impacted because of our change to on-the-ground type of distribution system where we’re shipping our products directly from Japan rather than from the United States to the Japanese market. Sales incrementally were down from the fourth quarter to the first quarter. We feel like that things have hit where they were going to. Sales, as we mentioned, were actually up in March compared to February. We feel like things are going well in April and we feel that we are back on track to grow that business again in a way that we were historically.

Domestic sales continued to grow. We feel good that we have two quarters in a row with sales growth. Doug will talk a little bit more about the sales growth in the U.S. operation. Sales were 37.6 million compared to 36.8 million, an increase of 2.2%. And our United States operation represents about 44% of our consolidated group. Total distributors decreased 4% since year-end. Everywhere increased except in our Synergy, which we had anticipated and sort of told everybody about that with that change we knew there was going to be some shake out of a few distributors. Synergy’s distributors went down a number of distributors; whereas, our United States and our international distributors actually went up. Our managers increased 6% over year-end to 20,650 thereabouts and we feel good that there is a fairly good growth in our managers’ ranks. The United States, as most of you are aware, we had a price increase April 1. That has a tendency to cause our number of managers to go because people have a tendency to buy a little bit more in March than they normally would which qualifies a few more people to become managers. Historically, that has been drifted down a little bit. A few of those go away over the next 3 to 6 months. We still feel very good about the increase in the number of managers in the United States as well as in our international operations.

Balance sheet remains strong with total assets of $151.1 million. That’s up from $145.1 million last year. Cash and cash equivalents and our long-term investments actually increased and went up to $47.5 million from $43.9 million. And from an operation standpoint, our inventory remained relatively flat. It went up just slightly, less than a half a million dollars. Part of that is timing and getting prepared for our price increase that took place on April 1.

Our book value per share increased to $6.38 from $6.13 at year-end. And our return on shareholder’s equity was at 17%. One thing that you probably noticed was that we were able to bring our costs of goods sold down significantly as compared to last year. Last year there were some charges in the quarter that caused that to be as high as it was, but we’re at 17% for costs of goods sold. I feel good about that. We think that the rest of the year will probably be a little bit higher than but not significantly, between the 17% and 18% range.

Our volume incentives increased slightly to 38.8% from 38% last year. Again, that is because of the Synergy equation that is in there. But, we feel that that should be about where we are for the rest of the year. Our selling, general and administrative expenses for the quarter with $32.6 million from $29.2 million the prior year. That is an increase of about $3.5 million, which is what was spent in our Synergy operation. The actual increase in Synergy Japan that we launched in the fourth quarter – the total SG&A there was about $3.5 million, so the entire increase in our SG&A for the quarter in actual dollars was associated with our Synergy Japan operation before we went on the ground. SG&A as a percent of sales remained relatively flat compared to last year 37.8 compared to 37.6.

As we’ve mentioned on prior calls that our intent is to continue to decrease that, but have told everyone that first quarter and second quarter are usually higher SG&A as a percent of sales. We feel that we’ll be able to get that down. One thing that impacted us in the quarter which, I think probably impacted a lot of people, was the costs associated with our 404 allotted to on internal controls. We spent over $400,000 in the quarter, which we don’t those expenses going forward just for 404 - for audit fees and for the consults we had to help us with making sure that we are in compliance with that. And so, we feel that that will come down automatically as well as we continue to control our costs and cut some costs associated with – now that we’ve expanded Synergy to where we feel we have the overhead in place, but we’ll be able to decrease that now.

So, one thing also to mention is our other income, if you noticed, was down significantly. Last year, we had a fairly large exchange gain in our Dominican Republic operations. This year we had an exchange loss associated with our Synergy Japan operations. And so, those two offset – actually made the loss look bigger than it really is, but it’s all exchange gain and loss that is causing that issue.

The tax rate for the quarter was 29.5% compared to 33% last year. I feel good about where our taxes are going. We feel that we should end the year right around the 30% range. And so, we’re sort of in line with what we think the year-end should be.

We feel very good about the direction that we’re heading right now. As I look at the stock this morning, I wasn’t real pleased with where that was heading considering the type of release that we have, but I feel that fundamentally the Company is still going strong. We are still growing, and we feel we’ll continue to do so coming along. So, that’s my report for the first quarter. So, we’ll now turn the floor back over to Doug.

Thank you, Craig. I would like to add to that looking at the results certainly you can see that there are some challenges, but as I look at this, I think there is cause for shareholders to be actually encouraged by the results. You know, just to not to review everything that Craig has said but just overall, as I look at it, we’ve had an increase in diluted earnings per share for the quarter of 30%. In a lot of areas in the world, that’s pretty darn good. I am pleased that we are up that much in earnings. Obviously, there were, as Craig mentioned, some expenses in the first quarter that weighed a little bit on the SG&A. Certainly something that he was predicting earlier, projecting and for the year. I still expect him to work with the other divisions of the company and reduce SG&A on an annul basis so that we get the results that we are looking for over the next couple of years and reducing SG&A and improving profitability.

As Craig mentioned, just briefly a little bit about the sales, we’re very encouraged by the U.S. continuing to show growth. Obviously, it’s not as much growth as we expect throughout the rest of the year and those of you who are a little more familiar with our company know that during the first quarter we had a price increase and I guess that’s both positive and negative. The positive is that the price increase wasn’t much of an increase in terms of driving sales. It also means that sales were not cold into the first quarter from others quarters--for the second quarter by pre-buying, or buying in anticipation of that price increase. So, we do expect the rest of the year to be stronger in the U.S., but we are pleased that it was able to show growth in the first quarter being compared to the prior year and the price increase of the prior year. So, that is still a very positive thing.

As Craig talked about, domestic managers were up 19% compared to the end of the year. Again, that’s a very positive sign for our U.S. business. We’re continuing to see a lot of positive signs in the U.S. The management group there is doing a great job in fueling the fire there and encouraging the growth. We had a very successful leaders’ conference. We’re continuing to see growth from the Habit of Health, the new product that is sort of the marquee product. As part of that, the Thai-Go is continuing to pose some very impressive gains. People are very excited about that product. And the new training program that is supporting the Habit of Health, the Untold Truth, is also a very positive thing. We’re seeing a lot more participation in that and growth in the interest, as well as the attendance at the seminars that we are holding. So, we feel very good about the direction of the U.S. and the things that we are doing as well as the management group there.

I talked briefly about Synergy. Craig mentioned that the sales were for the quarter very strong compared to the prior year, a 31% increase over the prior year. Sequentially, it was down from the fourth quarter, and we’re convinced that a big part of that was the change to the on-the-ground, and there have been some positive things as a result of that. Now, we are established there, and we did spend some additional money supporting that switch over. And we think that longer term that is going to be a very positive thing. Certainly like to see more growth in Synergy and see it contribute. We have the people working in Synergy, in particular, that I would consider to be the driver of that business, a man whose heart and soul is into this business and works very well with the distributors and sees a bright future as far as Synergy is concerned both in Japan and in other parts of the world. So, Synergy is a continuing story. Obviously, we’ve had a little bit of a struggle with that and the on-the-ground - a little bit of the sales coming off. But distributors are excited about the opportunities that they have there and the growth of Synergy as we go forward. And again, 31% increase in the first quarter is, in my book, pretty darn good.

Let’s turn to Nature’s Sunshine International. We had an increase of 12%. And if I could, I’ll just talk a little bit about Nature’s Sunshine International and the progress that we’ve seen there as it continues to unfold. As I mentioned, a 12% increase in sales I think bodes very well for international. We’ve got, I think, a lot of the right people in the right places working in key markets.

As mentioned in the news release, we’re very pleased with the results that we have in Nature’s Sunshine International. In particular, a few of the markets that I’ll just briefly mention that we’re very pleased with what’s happening in the Russian market. It continues to grow. It continues to be our largest international operation in Nature’s Sunshine. Continues to post impressive gains in sales and earnings. The people who are involved in that are quite encouraged by the results that we’re getting and the distributors who are involved in that. It seems to be a continuing growth story. So just briefly, international contributed for the quarter a growth of 12% and I think, and even though Craig followed the numbers here, I was quite impressed with how international contributed to earnings.

The operating income in our international operations was up something like 50%. Now also in the United States, the operating income from the United States operation was up something like 50%. So, there’s a lot of leverage in the Nature’s Sunshine business, both domestic and international and we’re encouraged by the signs that we see there. And obviously, we have some challenges which we feel like we can address and we’re doing that. This first quarter, seeing that kind of an increase in earnings in the first quarter, we think bodes well for the rest of the year, particularly given the opportunity we think we have in reducing our costs in, as Craig mentioned, a lot of areas and continuing to generally increase the operating revenue as well as net income.

I just wanted to mention just briefly that the other thing in international markets that we are encouraged by, in the way of product introduction, is that we just recently introduced Xambrosa (ph) into a number of international markets. For those of you who don’t know, Thai-Go is the domestic product. Xambrosa is the international product. The international people felt like they needed a little bit different name for the product. And initial results are in, and it looks like it’s going to sell very well in a lot of these international markets.

Continuing on in the international markets that are doing very well. Japan and Nature’s Sunshine had some impressive gains in sales and in operating income. We saw an improvement in sales in Japan of approximately 48% and the operating income there improved very significantly - about 80 or 90%. So, we’re seeing some growth and some signs of strength in a number of international markets as well as the U.S. And we feel like we’re addressing the issues that need to be addressed with Synergy. So overall, we look at this as a very positive sign for the rest of the year. Obviously, there’s work to be done, but with the management team that we have in place and the opportunities that we have, we feel like we’re going to be able to address those issues and move this company ahead. We were pleased with the growth that we had last year, and yet felt like there was a lot more to be done. That is how we feel now. We feel like we’ve experienced some growth, and yet there is a lot of work left to be done. We’re both encouraged by that as well as challenged by that and look forward to the things that we can accomplish this year as a company.

Just to comment briefly, many of you probably saw the ruling by actually a Federal judge in the Salt Lake City area in favor of a company Nutriceuticals indicating that the FDA had not followed the proper procedures when banning the ephedra. I see that as a very positive thing for our industry. Not necessarily do I view that as an opportunity to bring back ephedra. That’s something that needs to be monitored, and we will watch that certainly. We believe that ephedra was very effective. We had a lot of people who were using that product quite successfully over quite a few years. Although that would be very nice that is something that I guess remains to be seen.

I think more positively this recent ruling is an indication that there is a lot of support for these products and people are interested in them, as well as the FDA will have to follow proper procedures in trying to ban other products. And so, I think that kind of puts us in a better environment in terms of products that potentially could be discontinued or those kinds of challenges. So, we feel very good about that. Really there are a lot of things happening that we find encouragement in our industry as well as in our business. I was just out telling someone the other day that this is a business that I just love to be in, mainly to see the improvement that our products bring to people’s lives, to the opportunity that the distributors experienced - also improved their lives financially. It’s a great business to be in, and we look forward to the successive quarters that we’ll be able to report on.

With that, Elsa, we’d like to open this call up to any questions or comments that people listening to the call might have.

(OPERATOR INSTRUCTIONS.)

Scott Van Winkle, Adams Harkness, Inc.

A couple things on Synergy. Can you remind us again the weakness in Synergy following the on-the-ground effort? It had to be more than just moving to fulfilling product out of the local market, just focus on what the disruption was on the sales side.

I will mention my thoughts and if Craig wants to add something then he is certainly welcome to do that.

We mentioned, I think it was in the last conference call that it impacted sales and the conversion to on-the-ground, as I mentioned at that point in time, didn’t go as well as it probably should have, mainly because there was a little bit of urgency to convert to that and the management there felt like the sooner they could convert to that the sooner the growth would accelerate actually. So I think that was the main driver to converting to the on-the-ground.

The business before was personal import so it wasn’t available for shipment within Japan. It had to be shipped from the United States. We now have approvals and things in place to ship products from on the ground. And the conversion hindsight is 20/20. I don’t claim to be perfect, and neither does the management at Synergy. But looking back on that, there probably should have been more notice to distributors about the conversion, and a longer period of time to convert over. Essentially necessitated inputting a lot of data as far as sign-ups and people who were on the PI program couldn’t be automatically converted to the on-the-ground. And so, it was really more of an administrative issue that frankly wasn’t handled as well as it could have been.

Now that it is converted to on-the-ground, the products – not all of the products – but a number of those products are available for sale in Japan. What that means is that they can be physically shipped to Japan and then orders can be placed from Japan. As you might imagine, that accelerates the distributor or the consumer receiving the product.

The other advantage to the on-the-ground business is the personal import, as the name applies, is not available for resale. It is for your own personal use. And so, the thinking and it is very important to understand this is that the business can really do a lot better if the products can be made for resale. So now, the distributor on the on-the-ground products can buy and resell those products as well as signing distributors up directly to do that. And so, obviously, there’s a clear advantage to do that. Our difficulties/problems were as a result of not really anticipating the demand and the administrative work required to convert to on-the-ground.

Scott, I don’t know if that addresses your issue or not. If there are further questions, I would be happy to respond.

My first thought in the last quarter was that it was an inventory issue. That you didn’t have product in Japan to be available to fulfill it. It sounds like I was wrong, and it’s more difficulty in actually placing an order for the distributors or maybe products weren’t all approved for shipment within Japan. Am I right there?

No, you’re right but it is not exactly the issue, though. You have a number of products that were approved and a number that were not. The difficulty was in the people re-signing up to participate in the on-the-ground business and managing the sheer volume of the sign-ups and converting that over. There was some confusion from people not knowing what products were a personal import and which were on-the-ground and sort of dividing that out. A lot of these were systems issues. I wouldn’t say this was necessarily an inventory issue, but the idea of converting on-the-ground is something that’s necessary. You have to get to that. Some of these problems need to be explained in a way that people understand them so the business can move on. Certainly, we didn’t take enough time. We didn’t publicize it as well as it probably should have been. But it’s a necessary conversion that we needed to do.

What has been the effect on the active distributor count in Synergy?

I think Craig has those numbers. It actually has been result of decrease in numbers of distributors and slight decrease, I think, in numbers of managers.

The distributors actually for Synergy lead us—the distributors decreased by about 27% - went down from about 138,000 down to about 100,000 and that started to turn around again in March. But that—I think that’s a key issue that Doug mentioned and that is that that conversion over – the confusion of having to basically re-sign up and re-put in your orders and those kinds of things had a lot bigger impact. Originally, we talked about with the management of Synergy doing this over about a 120-day period. Instead, they did it over a 30-day period. And so, I think that’s where the distributor loss came from is 70 people just didn’t re-sign back up.

And how did--you mentioned that the turn-around in the distributor count in the month of March? How did the Synergy sales track throughout the quarter? I don’t want to ask you for too much detail, but I’d love to see the trend throughout the quarter month-to-month.

Well, you had--the month of January was actually the strongest month of the quarter. February went down significantly, and then March came back up. And so, without getting into the details of the individual month, January was the strongest of the three months.

If you adjusted March for 31 days, with March—I mean, sorry, February for 31 days, would March and February have been about the same?

No, March still would have been up.

Okay. And is there a seasonal boost in the January period for any reason?

Not really. In fact, I would assume that it would have probably been just the opposite of that, so with Chinese New Year and that kind of stuff. There is in the recording of the distributors there is for the Synergy group there’s a sort of a 90-day period where they stay as a distributor even if they haven’t placed an order. After that 90 days, they drop off if they haven’t placed an order. That is sort of why that distributor order comes up in the first quarter than at the time that it probably really happened in the fourth quarter. There’s just that timing issue that they are still an active distributor until they don’t place an order for 90 days.

On the gross margin, the products that are selling strong – I know Thai-Go, obviously, it’s--is it carrying a better than gross margin or were you able to just squeeze a little bit right across the board even ahead of the price increase.

It does carry a real good gross margin, but we were able to squeeze some things we have--didn’t have any, should I say charges, for anything during the quarter. The inventory group and the management group of our operations is doing a fantastic job of controlling inventory and (unintelligible) and those kinds of things. I think it is a squeezing but also some of the new products we have introduced do have very good margins.

Do you expect that this type of gross margin level to continue?

I don’t know that it will continue at the level it was this quarter, but we anticipate that it will improved from what it was last year in the 17 to 18% range thereabouts.

The SG&A increase year-over-year in the quarter you attributed to the Synergy business on the ground.

Yes.

Was a portion of that up front costs that are going to fall off a little bit now that you have made the transition or is this the ongoing SG&A figure we should expect from Synergy?

I would anticipate that it will come off a little bit. So, as we--because we took two businesses and basically—or one business and created two businesses, we have—there’s sort of a double SG&A that we have had to pare back the U.S. business. With Synergy on the ground now that should come down also now that we are established and have everything running. So, we anticipate that that will actually come down some.

Gregg Hillman, First Wilshire Securities Management.

Follow-up on the prior person’s question, how much will the SG&A come down because of Synergy in the next quarter?

You know, I would guess that total Synergy SG&A for the entire group was right around 7.8 million. That’s all of the Synergy companies. I would anticipate that that should come down probably close to $1 million would be my estimate.

$1 million less. Okay. What was the utilization of your plant in (inaudible) for the quarter? Do you have any idea?

Well, it’s in the range, Gregg, of about 80% and that sounds high. But we have a great deal of flexibility as we continue to grow sales and demand for the product because we can bring in more equipment, and we don’t need to add necessarily physical structure or infrastructure. We have that. We have to add more equipment and more employees, so we think we can be very flexible with that. In fact, we believe that we can essentially double our sales from here with the current manufacturing facility that we have. And the reason that we sort of manage it that way is to avoid extra overhead and that kind of thing. And so, we watch that every closely and as we need more equipment we can bring that on. That gives us the flexibility that we need.

Can you talk about, like, the top selling products for Synergy in Japan versus Nature’s Sunshine products in Japan?

That would be very different. Obviously, because all of the Synergy products are different than the Nature’s Sunshine products. I can mention a couple of top selling products for Synergy, and obviously, they would not be Nature’s Sunshine products. They would be totally proprietary to Synergy. Mainly you are looking at Japan the Vita-Pack that is essentially a combination of vitamins, minerals, plant nutrients, digestive enzymes. Essentially what a person would need for total nutrition. That would be a big selling product in Synergy.

As I talked before, there is also the Zenamax (ph) which is essentially a liquid dietary supplement that contains a number of things but is essentially an organic folic acid complex containing a broad spectrum of essential trace minerals, vitamins, amino acids, enzymes, that kind of thing. It has been very popular in Japan.

As I’ve talked before, they also have a number of skin care related products, the DNA repair cream and some other things that sell very well in Japan. If I were to mention to you the products in Japan --for instance, the Vita-Pack, Zenamax, repair cream, skin renewal, reparative conditioner, and revitalizing toner. In Japan also we sell one of our marquee the Proargeni (ph) that I have talked about before. It is a very popular product in Synergy in general. Again, these products are a proprietary for Synergy. They wouldn’t be products that would be sold by Nature’s Sunshine. They would just be Synergy products and vice versa. Nature’s Sunshine doesn’t sell a Synergy product, and Synergy doesn’t sell Nature’s Sunshine products.

I don’t know if that addresses your question or not.

And then, what were the largest selling NSP products in Japan?

Let’s see. I am trying to think what those would be.

They have a number of different multi-vitamins. It is more along the same line as the regular Nature’s Sunshine products where the vitamins and the herbal products. There is nothing that is major to the extent that there is with Synergy that is limited to fewer products. They have a fairly broad product line there. That’s essentially the way it is in comparison between Nature’s Sunshine and Synergy. Synergy has fewer products and more concentration on the fewer products. Whereas, Nature’s Sunshine offers the broader spectrum of products.

I would mention one more thing as you asked that question. Sorry, I was a little bit flat-footed on that one. One of things that I mentioned earlier that has just been introduced into Nature’s Sunshine Japan that seems to be doing very well is the Xambrosa product, which is essentially the Thai-Go with the international name of Xambrosa. The packaging is different for international as well. That seems to be doing very well. I think there was a lot of excitement on the Nature’s Sunshine business in Japan for the Xambrosa, and we have some high expectations for that in Japan.

And finally, Doug, could you talk about Russia a little bit - international? Number one, what percentage of international sales is Russia, and what is helping to drive that in terms of products and distributor interest?

Craig will have to help me out with the percentage. But I think I want to say, help me out with it here, but I think they’re about 25 percent of Nature’s Sunshine international - in the range of 25 to 30. It’s been really exciting watching that. The person who’s been driving that, essentially working with the people over there and expanding into different countries of the former Soviet Union and in a number of other countries that are involved in that. The distributors play a more active role in helping decide which country is going to be open. That doesn’t mean that they say “open this country” and we open that. He essentially challenges them to reach a certain level of sales in some of these countries and then the Company will do more to support them in those areas. Listening to him as he travels and works with these distributors, they’re very excited about the opportunity, about the products and it is kind of exciting to watch something like that just kind of continue to generate greater sales and greater earnings. So, we have some high expectations for that as well.

Do you know where it was a year ago as a percentage of international sales?

I think it was smaller because of the other countries that were in there and because due to the growth of the Russian operation essentially if you want to call it that. I think it was down around 20%. Both Greg and I think that was about where it was, between 25 and 30 now.

Thanks very much. I appreciate that.

Evan Steen, EOS.

It is always exciting on the quarter release here. First suggestion for you guys. I don’t know when the Board meets but you should get yourself a stock buy back plan announced publicly. You have like I know close to $50 million in cash. I don’t know how much debt but you probably have a little bit of debt. You have a market cap of 224 million and it--I understand some people may not be exactly clear on what was expected, but it is times like this, not that you could buy today, you would have to wait, obviously, but it would be a good thing in terms of the shareholder base to know that the company is there. Particularly since you just tendered for a million and 1650 seems kind of confusing.

Anyhow, the question I had on Synergy – the numbers you gave us today clear up a lot of questions that I think people have because they didn’t quite understand exactly what was going on. But, could you comment on what you have gotten done? I think you mentioned it a little bit in the press release, sort of sales returning back to a more normal sort of year-over-year basis after the six months or whatever that you have been switching over. Could you give us some sort of parameter when you say normal? Obviously, you are not going to be growing 100% per year. I think the fears of the market perhaps this morning were it would be flat or perhaps negative going forward. I think that’s why the stock reacted so sharply. So maybe without giving too much detail, maybe you could just give us some sort of qualitative direction on what you have seen once it has sort of normalized to where everybody now is on the same page and the distributors who were sort of lost were lost? You are basing off, I guess, about 100,000 or so?

I think I can comment generally on that. Obviously, we don’t put out projections and things like that. It makes it a little bit more difficult for me to give you a meaningful response, but I can tell you that we are not really excited about the fact that it’s down sequentially from the fourth quarter. We are kind of encouraged by the fact that it is up 31% over the prior year for the first quarter. We do expect that kind of growth. The reality is that there’s a huge potential, particularly in Japan for Synergy. Synergy has great products, marquee products, things that they have focused on. Their marketing plan –-people are very excited about their marketing plan and the opportunity of Synergy. So it essentially just needs to be focused on re-energizing or communicated on the ground conversion and the effort put back into because I have a great deal of confidence in the guy who is essentially driving the sales of that business and how he works with their leaders and distributors.

I guess if we are looking forward, it should be in the range of--we are looking here as far as year-to-year comparisons – I think it could actually be a lot higher than that. It’s up in the range of 30+%. I think that is pretty good. Does it have the potential of being up 100% or more? It certainly does. Would I project that? No, not given where we are today. But I think as we see that continue to penetrate into certain of these markets, particularly the Asian markets, I think there is certainly that potential. Can I guarantee that? No, I want to make that real clear, but I am confident in the efforts of the individual that has been driving those sales. He is confident and optimistic about the future of Synergy, and so we continue to support it. We expect to support it. We may have to trim a little SG&A as we go forward, but we are certainly going to see that opportunity given a chance to grow.

That sounds great. The next question is on the U.S., which was up again, not quite as much as the fourth quarter but I’m sort of playing around with the numbers and you alluded to it. It seems like the margins are up substantially. Could you just give us a sense of how you see that moving forward for this year—not only for this year, but for the next two or three years? I know you have made a lot of changes. I know you spoke about it in the fourth quarter that you felt eventually you didn’t understand why it shouldn’t get back to a higher margin as well as a much higher top line. Could you explain a little bit of the fall-off in the revenue growth between Q1 and Q4 and contrast that with the sharp improvement of margins and then sort of what new products you have and the new things you have? You mentioned you are getting more people at these training sessions, so on and so forth. Could you just sort of flesh that out a bit?

As I mentioned in the other call, some people heard this and some didn’t, I can’t project exactly where the sales are going to go. But the encouraging part for us is that the U.S. is starting to show some growth again and would that be a straight line. I mentioned that it wouldn’t. I certainly would like to see it above this level, but I am encouraged by the growth given the price increase quarter. It didn’t seem to drive the sales that much because the price increase itself wasn’t that significant, but by comparison to have an increase in this quarter is very positive.

I’d like to see the U.S. obviously do a lot better because of the earnings leverage that is there. The margins, as you mentioned and as Craig covered earlier, are very good. The profitability of that business is very strong, particularly with the sales increases.

I don’t want to throw out a number that you are going to hold me to later, but I certainly hope that we will be able to show in the range of around 5%, if not the 5 to 10% for the U.S. But as far as going forward, I would like to see that momentum sort of gain strength as we go through the quarters. I would like to see more of an increase in the second, third and fourth as we go forward so that we can get to maybe the next year of growth in the range of 10, maybe even 15% depending on the next year or two. Certainly, the potential is there. It is a terrific market for these products.

Our distributors are well-equipped to help consumers understand these products and the benefits of the products as well as the marketing plan are well suited for the product-oriented business that we have. The combination is there. I did mention that the training, the Untold Truth, which really does focus more --we have really tried to do a lot to focus and simplify because Nature’s Sunshine has such a broad market and such a broad array of products to market. We have tried to focus on smaller number of products. We tried to make it easier for everybody and support that with the training. Before we had such a wide array of training that people could select to and now this is a lot more focused on the health and health benefits of the Habit of Health products that we have. I just think it’s a more targeted approach and we are seeing some results from that.

We’re seeing meetings in areas that you wouldn’t expect to have very many people at come up to 100 to 200 people coming to these sorts of intensive training meetings. That is a very positive thing for us. We’re seeing growth in the attendance at our training, and we do perhaps more training than a lot of other companies competitive with us and that is a very positive sign to see the growth in the training, the people who are attending that focus that we have. The thing that I point to that won’t mean as much to you but means a lot to me is just seeing the level of interest and excitement of the people who attend the meetings whether it is at a leaders conference or a convention type of a meeting, there just seems to be a renewed interest in the things that we are doing and the group that is driving this seems to be able to capture that interest. So, I don’t know if that addressed your issue.

Yes, it does. By the way, the numbers you gave out for the 137 versus 100 --really I think the market sort of looks at overall distributors as sort of a leading indicator. And, I think this morning people were like, oh, geeze, why are the distributors down and when I back out these numbers I can see clearly, as you mentioned, the domestic being up and the international being up and that is an encouraging sign so I am glad to see that.

Last question, I saw the share count went up and I know that you had options being exercised but maybe you can just give me a little clarity as to how many shares we should use going forward and how many of those options are exercised. It seems like there were a fair amount exercised during the quarter.

There were, in the last quarter and the first quarter, there were 186,000 shares that were exercised. Total outstanding options right now is 1.276 million and of those that expire in 2005 there’s about 500,000 that are left. Now, at the price –- we haven’t seen the price lately so this isn’t on this call, but at this price, I don’t know that there will be a lot of options that will be exercised. But depending upon what happens with the share price. So, I would think that going forward the diluted shares right now sit at about fifteen four. I wouldn’t anticipate this year when you throw in the averages that it would be much higher than fifteen five on a diluted basis.

Okay. And the last question which I mentioned in the beginning. You are churning out cash, I know some of it is international so it is hard to get at but by my calculations you are clearly going to have over 50 million. It seems like you are generating north of 20 million a year free cash flow. Just curious when the board meets next and sort of what management’s--you pointed out about buying back shares to sort of take care of some of the option exercises and or increasing the dividend.

Obviously, we can’t speak for the board and that is something that has to be looked and part of that is, as you mentioned, Craig being able to bring back some of the cash from some of the other markets. But, I can tell you that we believe very much in the future of this company. The strength of this company is in part generating a lot of the cash that you talked about, and we see this as a good investment to invest in the company. The only question would be the timing increase in my mind because I believe that especially at these levels as an outstanding investment. But, we need to look cash flow and whenever Craig is able to consolidate some of these balances we will be making a proposal at that point to invest in the stock that is in the market because this frankly way undervalued.

Okay, that sounds good. I think you had a good quarter.

We do, too.

Keep up the good work.

Abba Horowitz (ph), Yankov Capital(ph).

I just wanted to make sure you are not having a liquidity crisis, right?

No.

Okay, because the way the stock was acting I thought that may be the case. Okay, beautiful.

I have a couple questions for you. Just on the operating income line, actually post operating line, the income before income taxes, what is the differential between the other income - 856 last year and this year only $74,000?

Yes.

I’m wondering, is there a number you can give us? I know there are a lot of moving parts here but is there maybe a number you can give us that on an ongoing basis, some sort of range which you expect from that number?

You know, the exchange gains and loses are hard to predict and despite hedging.

In some of the markets you really –- you get into the South America markets and it really becomes hard to do. Where we run into problems is when we have inner-company balances is where these exchange gains and loses that impact the income statement come from. To give you an idea, last year we had an exchange gain for the quarter in 2004 of about $750,000. This year, and it was all because of Japan, because the yen weakened against the dollar at the end of the month of March, we had a loss of $220,000. So, you have a million dollar swing there that took place. If you ignore those then we’re going to sit right around –if you ignore the exchange gains and loses we will be right around 200,000, 250,000 of other income every quarter but those exchange, I can’t predict those.

Okay, assuming that- –there was also that $400,000 extra expense that you have for 404, right?

Yes. I wish that was all that there was but there was a lot last year, too.

Okay, but I’m putting all of these numbers together and if you put that on a post tax basis that is close to $.02 a share that cost you, correct?

Right.

The 404. And then if we take another $200,000 post tax, you know we do 200 times seven, that is probably another good almost another penny a share and I’m not including the differential between the 856 and 74. We’re talking you guys could have potentially done another $.03 on the EPS line had these one time items not hurt you?

That is correct, very easily.

Okay. Now, on an ongoing basis, for the rest of the year, the next three quarters, are we going to have any more SOCs expenses, any more one time things that you guys can see or should the course be pretty smooth for the next couple quarters?

As far as SOCs, we will—there’s an ongoing in-house expense which is not in the 400,000 plus that I mentioned. We will have those ongoing expenses, but we won’t really get back into where we have to get the auditors back in until next year, until December and into January of next year for their next review. So for 404 expenses I think we can say should pretty much disappear. As far as other one time expenses, I don’t anticipate that, at this point, that there will be any other one time expenses. If we do something, if we have to restructure Brazil or a few markets like that there may be something, but I don’t anticipate that at this point. The one thing also though in the, as I’ve mentioned in the past, the first and second quarter are heavily weighted with our convention cost accruals which get into the 3, 4 or $5 million range that flows into the first two quarters that are not in the second half of the year. There is a timing of when those expenses come in. They come in the first half of the second half. We anticipate that the second half, SG&A wise, when we don’t have those expenses, will be a lot lower than what it currently shows.

Now, how much have you accrued for the conference or convention?

Right now, I’m just trying to think, probably overall, I’m a little over $2 million right now that’s in the first quarter that wasn’t in the fourth quarter or third quarter of last year. Now, that doesn’t take into account some of my foreign markets that I’m not sure exactly what they have. But in the US, that is about what I have in the US.

Should it equal amounts in the second quarter?

Not quite as much because the qualification period only goes through May and so there won’t be quite as much to hit in the second quarter but there will still be a substantial amount.

Okay. Very good. So that will come down and you won’t have that extra 404. So, in theory, I could almost add another almost $.02 to your bottom line to Q2 just because you are not going to have the 404 expense in Q2?

Yes.

And, you’ll have a smaller accrual also coming from the convention center.

That’s true.

Okay. Now, very important, on the Synergy business. Obviously, the hit that you took was in Q1 and it started to improve at the end of Q1. On this Synergy business, can you talk about profitability of that business for Q1 and then assume that we have reasonable rebound in Q2, which is basically what we are seeing now in April as well, what kind of profitability swing would we see from Q1 to Q2?

If you are just looking at it from an operating income standpoint, Synergy as a consolidated group was profitable. Because of the exchange loss that came, it pushed them into a loss situation on a net income basis but on an operating income basis it was a lot lower than we would have wanted. But, they made about $400,000 on 20 million of sales. Okay, so there is a huge opportunity for us to make some improvements there. Let’s assume that the sales were there 20 million, we should see a significant improvement in the operating income line on Synergy even if we stayed at the 20 million in sales, and we should see a significant improvement in the second quarter on their operating.

Okay. I guess you won’t give me that number?

No, I’m not.

I was wondering --margin wise could you at least give that to us because there are no analyst that cover this? There are really no numbers out there and we all saw what happens when you don’t have numbers and people don’t understand your company what can happen to a stock price which is actually rebounding now. Could you give us at least just a sense of the Synergy business, what kind of operating margins potentially you guys could do? Some sort of range that you have a goal, internal goal for it?

I would say, right now, correct me here - our operating margin is .31%. Our goal over the next year say would be to get that up around the 5% range and then improve it after that. That is where we’d like to get to. Where we will be next quarter, I can’t say but we could move up at least a couple percents.

I am just wondering, on an operating basis, your operating margin this quarter was 6.4%. Obviously, this is not your yearly operating margin and I’m wondering just as you guys have certain goals regarding SG&A, is there some sort of operating margin that you could see as your optimal operating margin that you feel in the next couple of years you can achieve and if so, what is that?

What we’ve talked about in the past is we’d like to see that at least in the double digits, up to the 10% range. At least that. We feel that is our goal at this point is to get that up to about the 10% range.

I have two more questions. One is the US--I want to first of all congratulate you guys on having another quarter of positive growth. I think that was a long time in coming. I know you are not looking for an explosive growth there at least in the short term but I’m wondering if in this environment, could you maybe quantify a little bit the environment because this is so important to your profitability if you can quantify a little bit of the environment that you are seeing in the US. Are there little fixes that you did to get this growth or is a larger change that you are experiencing or is it the products that are taking hold. If you could give us just a little bit of an overview of what is going on the US?

Yes. I think it’s a combination as I have mentioned a few times, maybe people are tired of me saying this, but I get kind of excited about really the opportunity in the US. You know a lot of people look at it and say, well, it is a very competitive market, consumers have a lot of choices and that kind of thing. I look at it and say, because I am one of these because of the aging of baby boomers and I look at advantages of the experiences I’ve had with the product and say, you know what? People in the US, an expanding number of people need these products and it is up to us to show them the benefits that they can get from these products and secondarily from the marketing plan and the opportunity from that. I think it’s a terrific opportunity. I’ve talked before about this business, we have so many trained distributors who are knowledgeable about these products and how to help people with these products. Those sales force or with that force for good, if you will, out there, we have tremendous opportunity to touch the lives of a lot of people and we’ve seen that start to pick up and change the momentum in the US business. The interest in the products that we’re selling and our marketing plan and they way we sell the products. It is up to us to reach more people with these products. The opportunity for us-–obviously you don’t go from declining to 20% but I can tell you that my expectation, whether it is in the next couple of years, our US business ought to be growing in the range of 15-20%. That’s my expectation and the management of the US business shares that same expectation. So, that’s what we are driving for. They’ve kind of pared back the product offerings but they’ve been coming out with some really, what I consider, to be block buster products. I mean the one I mentioned, the Thai-Go, we talked a lot about and on the last call I mentioned a new product that we’ve just offered that seems to be off to a great start is Nature’s Cortisol Formula, obviously designed to help people to try to manage their weight. So I think the opportunity for us is the aging population, people who are interested in weight management. And when you say the environment –-I mean—-I know this was a something I talked about earlier but, you know, the ruling recently in Federal Court that said the FDA didn’t follow proper procedures in banning ephedra. I personally think ephedra was a great product and we had a lot of success with that. I think the environment is there or the opportunity is there for us. It is up to us to take advantage of that and I’m excited about what I think we can do and I think the US sales group is excited about what they think they can do.

Okay. You have a new sales guy, a young dynamic guy in the US who took over, I think about a year ago or a year and a half ago?

Yes, not quite that long but go ahead.

I guess these are the fruits of his labor.

Yes, he and his team and he would be the first to say that this is a team effort but he is driving it and a lot of people are reacting favorably towards him. He has a lot of good ideas and I have a lot of confidence in him.

Excellent. My final question is, there is a tendency after the quarter is announced for a slew of insiders’ sales coming onto the market. I’m wondering maybe you could just outline for us what the expectations for this quarter are and when the blackout period resumes where they no longer can sell?

You know, I’m going to let Craig comment on that as well but it is hard to predict when people have options. I’m just going to say a couple of things about option. They are free to sell during the window and obviously, we don’t want them to hurt the stock price and so we do kind of monitor that and there is a limited time that they can sell. I would guess with the reaction to what I think is an outstanding release here being kind of negative you may some people decide that they don’t want to participate in that. I certainly can’t speak for them, but I think a lot of the volume I expected that to dry up or drop off essentially. You know, we haven’t been granting many more options with the new rules, or at least were going to take affect in June and now they have been deferred or possibly will be deferred. We don’t like the idea of expensing options and so we’re not at this point thinking we’ll be granting any more options so this could be a situation where whatever that pool is will eventually dry up and then there aren’t any.

Okay, beautiful. Doug, great job, as always, and one of the few managers we can depend on.

Well thank you Abba. I appreciate your comments.

(OPERATOR INSTRUCTIONS.)

Scott Van Winkle, Adams Harkness.

A quick question on volume incentives, they were flat sequentially but they are up probably three or four points in the last few years. Has that been driven by Mix in the Synergy?

Yes, yes it has. It is totally associated with Synergy. There was one other program that was put in place about a year and a half ago, maybe two years ago, it was called Sunshine Select which incentivized people where they could get an additional commission if they grow their business a certain size and add people and that added probably about .5% to the US but other than that everything is being driven but Synergy.

Okay. And, given that the Habit of Health is focused on a much smaller number of SKUs, have you been able to measure what impact those products growth have had on your sales. I’m wondering if the couple percent growth you saw on this quarter, 10 last quarter in the US, how much of that was maybe just the products focused on Habit of Health.

Well, we’ve seen an increase in what we call a core module of products and we’ve seen an increase in those as well as when we talk about Thai-Go seeing an increase in that. I don’t know that you would necessarily relate it to the increase because there has been an increase not only in numbers of products but kind of a general trend in the United States in almost every region is seeing sort of an increase in sales there so it’s not just tied to that. It was one way to focus people on a core group or products to get them started and have them be able to go out and talk to other people about those products. I don’t know that we’ve focused the increase just on that. It’s just been one of the things that’s been helpful in getting that momentum back again.

Doug, I have kind of a bigger picture question. I heard your comments on ephedra and the Utah ruling. You know I think a lot of people in the industry are actually concerned about this. Concerned that Congress is going to get involved now that the FDA’s power has been questioned to some extent on supplements. Did you have any thoughts there?

Well, yes and I hope I don’t go on too long because as you know I did follow that very closely and I do interpret it as a positive. Not in the sense that, you know, we are a responsible company. We want people to be responsible with formulation of these products but keep in mind the government, and I’m trying to remember if it was in ’97, they themselves were trying to come out with a new monograph or a little bit lower monograph on Ephedra products. Essentially, they had something out there that said this level was safe and so they kind of bypassed all of that with this and trying to prove benefit and cost kind of a thing. A lot of publicity has come out about, and again I am not trying to put down anybody else’s products, but we don’t combine ephedra and caffeine and we’re very responsible with it. We had a lot of products that even just the alkaloids in it in small amounts and they were very safe and effective products. And I believe that this is a safe and effective product if it is managed properly. The FDA had some concerns obviously the high profile athlete, the pitcher, and I think there was sort of a rush to judgment with that. I think the FDA has responsible job to manage companies that are going to put out products that could be harmful and protect consumers and that kind of thing but there is a procedure and a process they’re supposed to follow and this ruling essentially says that they were supposed to follow that. Now, the FDA may appeal this and that kind of thing so we have to see where that winds up. But I think the positive statement here is look, you’re not just going to go around banning the sale of some of these supplements without the scientific evidence and the scientific proof that it really poses a threat or potential harm. That is how I view it and again I am disappointed with lost ephedra because we had a very good experience with that and I can show you the record. That is really how I view it.

Number one, the price increase on April 1, what was that for overall, Synergy or the United States?

This is essentially the US and Craig’s a little closer to that but I think we averaged - very low, it was like, I think the average was 1% if you take all the products out on a weighted average basis is something like 1% now. Slower selling products got a higher percentage and dollar increase just because it cost us more to make smaller batches and we found some people like to have the products available. Obviously, if we can make money on it we can make that available. But, I think it was about 1%. That’s just the US.

Okay. Are you going to do any road shows any time soon or do any investment conferences?

Yes, we’ve looked at that and we’ve had a number of invitations. We are interested in doing that. I won’t broadcast that over here but we are interested in participating in those and we are willing to do that.

When will that start? In the spring or the fall or when?

Second quarter.

Second quarter. Okay, so it is going to happen relatively soon. And then finally, you alluded to two individuals that are helping, one is the guy who is head of Synergy I believe. Which individual were you referring to at Synergy?

The name?

Yes, the name of the person.

Dan Higginson. Dan Higginson is sort of the sales mind there and is pushing the sales and works well with distributors. We’re very pleased with the things he can do and I think he has a bright future.

And who is the person you alluded to at NSP--USA?

Greg Halliday.

Greg Halliday. Thanks very much. Those were the only questions I had.

Thanks, Gregg.

I would just like to express my appreciation for those of you who have participated in the call and listened in on the call. We hope we have been able to address some of the issues and concerns because, as I mentioned before, we saw this as a very positive quarter. A lot of things look very positive with it in particular the earnings. Going forward we looked at some of the positive things that we expect and I will just summarize it by saying we believe in the Company. We believe in what we are doing. We believe in the future. We appreciate your interest and your support and we particularly appreciate our distributors and managers that are informing the public about our products, in particular, our shareholders who supported us and continue to have an interest. So, thank you and we look forward to speaking again after the second quarter. Have a good day.