Nature's Sunshine Products Inc (NATR) 2005 Q3 法說會逐字稿

Good morning and welcome to the Nature's Sunshine products third quarter 2005 operating results conference call.

Now, I will read the Safe Harbor statement. Statements made during this conference 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 Commission.

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 Huff, Chief Financial Officer. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions and comments following the presentation.

I would 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 conference call for the three months ended and nine months ended September 30, 2005. By now, I hope that each of the participants have a copy of our news release, and we'll be covering some of that information, but expect that you have that information available to you.

And we will begin by having our Chief Financial Officer, Craig Huff, go through some of the financial information and detail out some of the salient financial points that we think are important for you to understand.

I would begin by saying that overall, I believe, if you look at just the totals, the numbers may be somewhat disappointing, but I think is important you understand the different elements of this, because if you look at the United States business, we continue to make progress and we're pleased with the direction that that's going. And expect to see improved results going forward.

We're pleased with our international operations, and the progress that we've made there and so, those are two very strong parts of the business. We are somewhat disappointed with the results in Synergy, and as far as the sales and the earnings, but as Craig will go through some of the detail, we've addressed some of these issues and going forward, we believe this will continue to be a strong operating unit for our consolidated group of companies.

So, I think it is important that we cover those issues for you so that you understand that and then later on, if you have questions, we'll address those questions. Craig, will you cover the financial information as we continue here.

Thanks, Doug.

For the quarter sales revenue were 87.7 million compared to 84.5 million the prior year. That's an increase of 3.8%. Operating income was $4.6 million compared to $6.8 million. That's a decrease of 32%. One thing, the biggest impact of that dealt with Synergy.

Last year Synergy had operating income for the quarter of $1.9 million and this quarter, had a loss of almost $1 million. That's almost a $3 million turnaround in that business, again, because of the decisions that were made to go on the ground, and a couple of other things that I'll mention later.

Net income for the quarter was $4.3 million compared to $4.6 million. We had a significant tax benefit during the quarter, associated with some -- an event that took place in the quarter where we were able to recognize some benefit from our taxes, and so for the quarter, our tax rate was actually very, very low. EPS was $0.28 compared to $0.29 the prior year. Year-to-date, sales were $261.1 million, compared to $242.7 million. Than increase of 7.6%. Operating income was $15 million, compared to $15.2 million. Just a slight decrease.

Net income was the same year-over-year at $12.4 million. EPS was $0.80 a share compared to $0.81 last year. And our total outstanding shares as of the end of the third quarter were $15,250,000. So, the outstanding shares, even with our Dutch tender that we did, the weighted average shares went up just a little bit. Outstanding shares went up a little bit, because of options that were exercised during the third quarter.

Our international operations as Doug mentioned, continued to do very well. Sales were $29.9 million compared to $26.4 million. It is an increase of 13.4% over the prior year. Year-to-date, sales are $88.8 million compared to $76.6 million, an increase of 15.8%. Our international operations represent about 34% of our total consolidated sales.

Synergy worldwide sales were $20.4 million compared to $24.3 million the prior year. That's a decrease of 16%. And year-to-date, they were 61.1 compared to 60.1, an increase of 1.6%. Just as we talk about Synergy, as most of are you aware, when we went to on the ground, we no longer charge for freight. The total freight in the quarter, that was included in last year's sales were $2.7 million worth of freight income, that were not included in this year's sales. If you eliminate that, our sales would have still been down. They would have been down 5.7%, instead of the 16%.

Year-to-date, the freight income was almost $6.2 million through the nine months and sales would have actually been up 13.2%, if you ignore that -- the freight income, that freight impact because of switching to on the ground business.

Our domestic operations in the United States continue to improve. One thing that Doug has said he is wanted to see us in double digit growth. This is the first time we've been in double digit growth in the United States in six or seven years. Our sales for the quarter were $37.3 million, compared to $33.8 million, an increase of 10.5%. Actually the best returns that we've received on the sales line, in quite some time. So, we're very pleased with what's going on there.

Year-to-date sales are $111.3 million compared to $105.9 million the prior year, an increase of 5%. We feel very good with the direction that the U.S. sales division are going. Total distributors remain constant as they were at year-end of 665,000. Our total managers were at the end of the quarter were 21,600.

Just a breakdown in the different areas. From an international standpoint, our total distributors were 325,000, almost 326,000. That's a 7% increase over year-end. Our total managers were 11,900. That's an increase of 22.5% over year-end.

In the United States, our total distributors were 227,000, an increase of almost 2% over year end. And our total managers were 6,800, a little over that. Increase of over 14%. Synergy, total managers in Synergy were 2,850. That's about a 7% increase. Distributors though dropped to 112,000 compared to almost 139,000 at year-end. That's a 19% decrease.

One of the things that happened when we went on the ground in Japan, we lost some distributors, and gained them back last quarter. This -- there was a change made in the recognition of how a distributor is counted in Japan, because they're required to place an order immediately whereas most other places, you can sign up without placing an order, so Synergy Japan operation changed the way they recognized a distributor to having to have placed an order in the last three months rather than in the last six months, which caused a decrease in the Synergy Japan business.

Actually, for Synergy, this is a positive sign from -- that I'm going to give you. Actually had their largest recruiting month, in the month of September that they've ever had. More distributors recruited during that month. And so the change in the way they count distributors, caused an impact on that. Synergy from a -- going back to just sequentially, Synergy sales have been fairly flat the whole year. About $20.4 million each quarter. So, they're not decreasing quarter-over-quarter, but we are seeing some positives in the recruiting that's taking place.

From a balance sheet standpoint, as you're aware, we have $9 million outstanding on our short-term line of credit. It was used to -- as part of our Dutch tender. To help buy back those shares. Total assets right now, $154.8 million. That's almost an increase of $10 million in total assets over the end of the year. Cash and cash equivalents, $47.9 million compared to about $44 million. So, cash has actually gone up a little bit. A lot of that sitting in our foreign operations that we hope to be able get back in the coming quarter.

Return on shareholder's equity was up to 17.2%, and a book value per share was increased to 6.57%. As I mentioned, we have completed a Dutch auction tender during the third quarter, we bought back 513,000 shares, at a price of $21.75. Total cash used for that was about $11,500,000, including all of the charges associated with that.

Cost of goods sold year-to-date is 17.7% compared to last year of 18.7%. Volume incentives are at 39.5%, compared to 38.3%. Volume incentives continue to -- they're holding constant right now, but they're up just a little bit from what they were last year, COGS down.

SG&A, I'll talk more about this. The details of that, dealing with Synergy in just a second. For the quarter, we're at $32 million. That's 36.5% as a percent of sales. That's up slightly from last year. Or for the quarter. Last year, we were only at 34.1. Because of the income that Synergy made last year, that brought that down for last year. I'll cover those in just a second.

Year-to-date, we're at $96.9 million. That's just up slightly as a percent of sales from last year. We were at 36.8 last year. We're at 37.1. We anticipate being able to bring that down in the fourth quarter, with some things we put in place. Probably not going to hit the 2 to 2.5%, because of things that took place in the third quarter. Decrease in SG&A as a the percent of sales that was anticipated, but we feel we can still bring that down somewhat in the fourth quarter.

Other income was something that we had an issue with during this quarter. We had an exchange loss in the quarter of $515,000 compared to exchange gained last year of $140,000. That's a swing of about $655,000 in our exchange gains and losses. Most of that took place in the month of September, dealing with Synergy Japan, as well as with issues dealing with Synergy Japan and their commission, as well as in the DR of which had a devaluation take place in the month of September.

As I mentioned, our taxes, we feel that they're very good. We've had some real positive things happen this year. We've been able to -- because of specific events that have taken place, bring back in some income from that. Going forward, we anticipate the fourth quarter will be between 32% and 34% as a percent of sales.

Going to a couple of items dealing with the losses that were experienced with Synergy, there were two components that made that up. The biggest dealt with Synergy Japan. Next biggest dealt with Thailand. Synergy Thailand. Synergy Thailand sales have decreased close to 50% compared to last year. A lot of that took place here in this third quarter.

Couple of -- at different things that took place in the market that caused that. We hope to be able to turn that around. But with that decrease in sales there, Synergy Thailand had a loss of close to $400,000. They had some one-time charges associated with the convention that took place in September, as well as because of the decrease in sales, the way we recognize our obsolescence is based upon the number of months supply and inventory, and because their sales decreased, the number of months supply went up. We had a write-off, or reserve of about $80,000 that we took there. There is $150,000 in one-time charges associated with Synergy Thailand.

Synergy Japan, we anticipated last quarter that we would be able to turn that around. There were two issues that caused us problems during this quarter. The first dealt with an exchange rate issue on exchange rates, where in the payment of commissions were fixed, rather than a floating rate. And that caused us to end up having to pay more, because of the fixed rate that was in place.

That was changed as of the first of October, so that the exchange rate is floating so it will tie closer to the sales. Figure that that will save us quite a bit of money. We'll push them into a more profitable situation, as well as not having the price increase that was anticipated to go into effect. It is actually now scheduled to go into effect January 1, so it should impact the fourth quarter in a very significant way.

We anticipate that price increase to be a fairly significant one. It will cause margins to actually improve significantly. That's been in play -- put in place, and it has been -- it is being communicated as we speak now. So, as I mention, the exchange rate issue was taken care of October 1st and one other thing that is being put in place, there are a couple of other things.

One I will mention is that we will have an increase in our fuel surcharge so to speak with our freight in Japan, and be able to recover a significant portion of the freight that's been charged there, that we haven't in the past. Again, that was established back when we switched to on the ground. There would not be a freight charge. We're changing that. That will take place during the fourth quarter.

Just so that to give you a little bit of hopeful comfort on Thailand, I'll be visiting there in two weeks to address their SG&A issues, to bring those in-line. We'll be visiting Synergy Japan to make sure that they also are at the same time.

The other item that affected our operating income fairly significantly, was the ongoing issues with Brazil. We had an operating loss in Brazil of about $700,000. Mid-September, I was there. We put a bunch of things in place. Make some changes to that organization. And at this point, we anticipate that by the end of the -- after we make all of the changes because of the notifying of managers, and distributors, and things that will be going on, we anticipate by the end of the fourth quarter, they will be profitable. There will still be a loss associated with them in the fourth quarter, as we finish making the changes but by December, we should be to where we're fairly close to a breakeven situation.

So, being able to turn Synergy Japan around, increasing their profitability, the Thailand one and the Brazil operations, we feel that with those three things there, you're looking at $1.7 million in operating loss, that hopefully we can turn around most of that during the fourth quarter, hopefully by the first quarter, all of that will be turned around, so those no longer become issues.

That covers the financial items that I wanted to cover at this time. I'll turn the time back over to Doug.

Thank you, Craig. You did a good job in covering some of those details. I hope people understood those positives, as well as the negative. I would just like to stress certainly we had some challenges, particularly with Synergy. I'm still very confident, based on some the information that Craig has talked about, I'll sort of emphasize that. That we have a tremendous opportunity with Synergy. I have confidence in the management team that we have put in place. I've asked Craig to work closer with them on some of these financial issues that I believe have been addressed, and should have a significant impact on improving those operations as we go forward.

So, certainly the sales were not quite as strong as we had expected, but I believe from the contact that I've had with both the management and selected distributors in Synergy, that they're excited about their opportunities, the products, the things that they're developing, that we should see some improvement there. Craig covered of some the details, but just like to stress, that even though the sales and the earnings were not what we had expected them to be in Synergy, the most important thing that was very positive and as Craig mentioned, they had a very strong recruiting month in the quarter.

So, I think that's a very positive sign for Synergy, as well as some of these changes that we put in place, with the changing to the floating exchange rate. The pricing adjustments as well as the shipping adjustments. I'm confident we're going to see improvements in Synergy, and I have confidence again in the management and in Craig, in managing these expenses so that will become more profitable for us going forward.

We talked briefly about the United States, and you can probably see in the news release, this is very significant. I want to make sure that this gets emphasized, that we continue to see improvement in sales, which has been a high priority for us at Nature's Sunshine, to go from just a few quarters ago from decreasing sales to slightly increasing to increasing this last quarter at 10.5%. I think that's very significant improvement since you've seen sales I guess in the last six years, not be quite that strong. So, we see that's headed in the right direction. I feel very good about that.

Profitability in the U.S. wasn't exactly or as strong as it could have been because we have -- for those of you who are familiar with our Company, know that we have some very, very good operating margins, and what I would consider to be profit leverage in the United States.

That is still true today, even though we weren't up quite as much in profit in the last quarter. Mainly because of some of the things that Craig talked about. We had some increased costs for some legal bills, and things like that that looked like they're pretty much at an end. We don't expect that to go forward.

We're very pleased with the progress that's made in the U.S. While I'm talking about the U.S., I'll also mention that we've made progress -- I talked about this before, in terms of product management, introducing fewer products but trying to introduce more products that will have a greater impact on sales, as well as capture the interest of our distributors, as well as consumers. Some of you may have seen some news on this product that we're getting ready to launch. I think the launch date for this product is November 1st.

We don't typically talk about products before they're launched, but I think this one, I'll make an exception on, mainly because there's been some publicity about it, featured on "The Today Show." There was a short segment on this product. It is the Nature's Hoodia formula. It may help you with your weight management issues or goals, by reducing your desire to eat, and then supporting a healthy appetite. It has been used traditionally by tribesmen of the Kalahari Desert as a food source during times of food scarcity. Also to reduce the appetite, so we're really excited about this new product.

For those of you who follow this industry, know that Ephedra was banned and people were looking for something that could replace that. I think this will be a very good product for us. We're excited about the opportunities because of the people who have kind of been on it, as sort of a test situation before we send it out, have reported very good things to us, in terms of reduced appetites, feelings of increased energy, and so we're really excited about that product, which will be introduced first in the United States and then secondarily into some of our international markets so, it's something that we think is very positive.

I would like to talk briefly about our international operations. International operations, as you can see in the news release, are increasing their sales grew 13.4% in the quarter, which is very positive. Their earnings grew in the quarter as well. So, we feel very good about that. One of the issues that Craig mentioned that he and our international management have addressed is we continue to have some losses in Brazil, but we feel like we've come to the end of that, and we expect to see that be more favorable going forward. So, with that, international should continue to do even better.

I just mention briefly the markets that are in the news release that were very pleased with the growth, particularly in Russia. Russia has been our largest subsidiary. We're pleased that the opportunity that we bring to those countries, that were formerly the Soviet Union, people are excited about the opportunity. It really -- the management we have in place there is doing an excellent job, and we're very pleased, as well as expecting to see some continued growth, are optimistic in expecting to see continued growth out of those markets. Mexico did very well in the quarter. We're very pleased with the growth that we're seeing there.

And Japan, some of you may know Craig and the management international worked to reduce their expenses, and to kind of turn that around. We're very pleased with the sales growth that we're getting there, and the earnings, differential in earnings. So, that kind of breaks down how we look at the U.S. and international.

I might just mention the U.S., we just had our National convention in the U.S. We had in attendance like approximately 2,200 people. The 'Habit of Health' program in the U.S. continues to have a great deal of appeal for people, we're averaging between 3,000 and 4,000 a month. That seems to be to be fairly consistent. Our best selling product, Thai-Go, continues to be a very strong seller for us, which is part of the 'Habit of Health' program.

The last thing I would like to touch on and Craig mentioned these numbers to you, but I would just like to say that from my perspective, very positive thing for us in both the U.S. and international markets, has been the continued growth of our sales leaders, or as we refer to them as managers. The U.S at the end of the third quarter, increased 16% over the prior year. Our total managers increased 19%. International is around 20% increase in managers. That's a very positive sign for us. We see that -- those of you who follow us know the business is based really on the growth and the numbers of the sales leaders, because they're the ones that recruit the distributors, and are really responsible for the growth of our sales.

So, we're pleased with what we see happening there, and the momentum we have in the numbers of managers, as well as the sales of positive things that have happening in the U.S. and International. Obviously we're focused and it is very important to us to see a turnaround situation in Synergy. We feel like the management there is committed to do that. Craig has been working with them on the financial issues. We think that we've addressed those, and expect to see improvement as we go forward.

So, with that, I think we would like to open the call up to questions from anybody that's on the line that may have a question for us.

Thank you, sir. [OPERATOR INSTRUCTIONS] Please hold while we compile the Q&A roster. Our first question is coming from Scott Van Winkle from Adams Harkness. Please pose your question, sir.

Couple of questions. First, trying to get a better handle on Synergy. Can you give me some numbers here? Synergy in the second quarter, the June quarter, what was the loss, and what was the distributor count?

The loss in the second quarter was $1.1 million. And the distributor count at the end of the second quarter was 125,600.

If I remember correctly, that was a pretty big bump up from the first quarter.

Right. It went from 103 in the first quarter up to 125. Fourth quarter of last year, it was 138. So it went from 138 down to 103, and then 125 and then to 112.

That seems pretty volatile. Is it just the way that it's calculated and having to make that order up-front, or is there something else there?

I think that thing that's causing the problems is we went on the ground which caused us to lose those 38,000. Then they started to come back then they changed the definition, so there's two or three different things that are taking place there, that are confusing the issue.

Got you.

Let me emphasize, Scott, as Craig mentioned earlier, they shortened the timeframe for distributors of Synergy to place an additional order, and I think the emphasis they've put on there is to discourage distributors to order shortly after their first order and sort of putting emphasis on that. As a result of that, it wound up purging more distributors in a shorter period of time. That's added to that volatility.

If you look at the end of October, you know, right around now, are you seeing that distributor count up a little bit, down a little bit? About the same?

Well, we usually don't get the reports until the end of the month. But what I can tell you is what Craig said earlier, they had their best recruiting month ever I think last month, and we see no change in really what that direction is. We can't tell you that was better than last month. We think that that momentum has continued on.

Okay. So, September was the best recruiting month ever.

Okay.

Sorry about that. The tax rate. Can you give us a little more detail -- you've had a tax rate bouncing around here for the last probably four or five quarters. What specifically was the benefit this quarter?

The benefit dealt with issues, for foreign tax credits dealing with 2001.

Okay.

That we were able to bring back in that we had not recognized back in 2001.

Okay.

We're sitting out there, knowing they were there. But we're able to recognize them now.

It is not something with the international businesses or something weird, the loss.

No.

Did you give a specific percentage increase in the price in Synergy that you're putting through now?

I didn't. Because I don't want to give the actual, because it hasn't been totally communicated to the field out there. But historically, Nature's Sunshine has been around 1% or 2%. This will be significantly greater than that.

Okay. The goal is to offset the freight income?

The freight income that was there, as well as the higher volume incentives, the commissions that are paid.

Okay.

So, there will be -- the price increase -- there won't be as much corresponding increase associated with the commissions.

Okay.

So, we should increase our margins.

Okay.

And it is important, Scott, if I can add to that, I know that Craig was dealing with that question, but they haven't had a price crease in really quite some time. That's why it is going to be higher as well, just the margin issue, because of the shipping. Also they haven't really had a price increase for some time.

Okay. If I remember correctly, you weren't -- distributors weren't getting incentives based on the freight income, correct?

That's correct.

So, why, with freight income down so much, would the volume incentives be relatively flat year-over-year as a percentage of sales?

As a percentage of sales, I don't have Synergy as a percentage of sales as of last year right here in front of me.

I thought we had a little more variance with that freight income coming off.

I'll call you on that though, Scott.

And if you look at the U.S. market, congratulations on the trends there, do you still think that that's being driven by the 'Habit for Health' and the 90-day challenge, untold truth, the training efforts you're putting through?

I think those are helping but I have to tell you, I think I have to give a lot of credit to both the management group in that area as well as the distributors. There is kind of a feeling, this is hard for you to probably relate to, but there's a feeling of renewed commitment and interest in Nature's Sunshine, because of the new products and because of the new programs, and because of the incentives, because of the way things are being run, I would have to say it is a combination of all of that.

Certainly the 'Habit of Health' has helped, and you can see that in the product sales and how there's a big shift, and as far as the sales mix. I would say it is the management working with the distributors, and sort of the feeling of renewed commitment, both on the employees as well as the distributors. I would say that's a big part of it as well.

Last year, the fourth quarter on a sequential basis up from Q3, last year was very strong sequential gains in revenue in the domestic market. Was there something specific that drove that last year?

We had a particularly good month. I think it was November. There were some promotions that were put in place then. The field responded very positively to that. It isn't like you can do the same exact thing every year.

But they've been working on plans for October, November and December to measure up against that quarter from the prior year. So, I just think it is a sign of increased numbers of distributors and managers. I'll bring you back to the US manager number, so far, compared to last year, we're up 16%. I think that's a very good indicator for us, and kind of the direction of where we're headed.

Okay. And the last question, you know, about this Hoodia product, two questions. First of all, it seems like we're in an environment where, when we're talking about diet aids that aren't traditional meal replacements, the regulatory environment, not just in the U.S. but even outside the U.S. is getting very aggressive. How do you navigate these operation cure-all effects in the U.S. on health claims. And second, has Hoodia kind of peaked already?

I don't think so. I think it is just starting to generate interest. It was just recently featured on "The Today Show." Our formulation, we've been working on, is a combination. It is not just Hoodia, which I think makes it a better product. So, we're going to introduce that in November, on November 1st, actually. We think based on the early responses from some of our sales people, as well as our employees, we think that will be a very good seller for us. We don't know that until we introduce it. All of these good indicators are there, number one.

Number two, regulatory environment, you asked an excellent question. We rely very heavily on our scientific people, as well as our outside FDA legal counsel to make sure that we do not make claims, or say things about a product that will create a problem, because we have a long track record of knowing how to do this and doing it right, and so whatever claims we make from it, are going to be good claims that can be made, and that people will understand. Also from our scientific standpoint, making sure the product is safe and effective, is an important part of that. For us, that's how we navigate the regulatory environment. In addition to that, we keep very meticulous records on any sort of adverse event reports that we get on any of our products.

One last question then I'll let somebody else in here. On Brazil, you know, I recognize what you're doing down there, and Craig went down there and is looking to re-organize. Is there anything happening that's making it more difficult to reduce expenses? Are there government rules on workforce reductions? Why is it taking longer than you anticipated?

There's really not any restrictions on that. Part of it was a management thing. Things are turning around, turning around so you give them that little bit of time to do that. It finally got to the point that we said, you've had your time. I hate to be brutal, but now it is time to cut where it hurts. And that's taking place. We're actually moving warehouses, and moving offices going into very small facilities, rather than what we were in.

There is some cutback of employees, changing of programs. Everything we -- I hate to bring up the freight issue, but that was a huge issue there that has been fixed. Price increase again. Things where management didn't want to do things to affect the field, but when sales get to the point you can't affect them, it is time to make those changes.

Those have all been put in place as of November 1st, everything should be done, other than the moving of the office. They were given the time to try and do it. And the resistance is now gone. So, there really wasn't much of a choice.

Okay. And when in the quarter did you kind of come to that conclusion, and make the final changes?

Well, I was down there the second week third week of September. And so, again, you've got to communicate things to the field. Those kind of things. That's why most things take effect November 1st.

Okay.

The moving of the warehouse and some of the other kind of things, we have to go out and get the new warehouse, the new offices, those kinds of things, we'll take further into the fourth quarter. So, that's why I say that by the end of the fourth quarter, we should be in the position that we want to be.

Great. Thank you.

Thank you. Our next question is coming from Mr. David Block, from The Seidler Companies.

Thank you, good morning. Congratulations on double digit growth in the U.S. I know you've been working very hard to get there. It is great to see. I hate to start with a sour apple but SG&A in the quarter was up about 11% year-over-year. You guys addressed that in in your prepared remarks. What was the dollar amount of what can be viewed as nonrecurring items in SG&A in the quarter, and then I have a follow-up on SG&A?

Probably the total that was -- I would guess there's probably -- you know, I don't have the actual number, but just from my recollection, there's probably upwards of about 600,000 or $700,000 in the quarter that you have things that were associated with Synergy that are there, as well as some of the U.S. expenses and international. 600,000 or 700,000 of one-time charges during the quarter.

Okay. Can you talk a little bit of detail about the progress you're making toward getting to your 30% of sales goal for SG&A?

Probably the biggest thing that has to happen is with Synergy. When you don't charge for freight, when sales really aren't increasing, and you have your organization -- perfect example, is we had a contract when we went into Japan for temporary employees, which expires the first of November. 15 employees disappear as of the 1st of November which we couldn't get rid of, because we have a contract.

You'll see a significant savings there, as of November going forward. Those are the kind of things, with Brazil, with anticipated Brazil being profitable, and when you lose $700,000 and almost all of that is in the SG&A line, because we're not paying a huge amount in our commissions there. Cost of goods sold is a little bit high, but we'll bring that in-line.

Really, the biggest thing there is in SG&A expenses that are in Brazil. Those two things right there, with the Synergy, and with Brazil, the losses associated with Thailand that were not anticipated with their fairly rapid decrease in sales for a couple of months, that's what has caused our SG&A to stay up rather than getting down to closer to where we anticipated.

Just focusing on the U.S. for a second. You addressed what is driving, or what drove the double digit growth in the quarter. Do you think the growth you put up in the third quarter is sustainable going forward?

Yes, I do, David. Unfortunately, I'm a sales guy and I'm sort of optimistic. But I think I've told you before and others that I believe that the U.S. can grow very significantly, our business here. I don't expect to see it top out for -- until we get and maybe not even then. I can expect to see us growing 15% to 20%. Is that next quarter, probably not.

I'm pleased we're up to double digits, but it may stair step up. I'm not able to predict that exactly for you. I'm pleased with the progress we're making. The level of excitement in both our distributors and our field people. That's very positive. It is going to go from 10 to 20.

I would like to see that obviously, but we need to get up to 10, 12, you know, in that range, and up to 15 to 20 over the next couple of years. That's what we're focused on and that's what we expect to see. I can't tell you that will be next quarter, or exactly when it will happen. I'm just pleased that we seem to be making progress towards that. I know I didn't answer your question, but that's how I view that.

Can you go over again what impact foreign currency and higher energy prices had on your business in the quarter?

I'll let Doug talk about the higher oil prices, but the foreign currency, we had two markets that impacted us significantly. First one was a DR with the devaluation. They've been fairly flat. The has some major devaluations a couple of years ago, but they've been fairly flat.

In the month of September, all have a sudden, they had probably a 10%, 15% increase in their exchange rate. That one impacted us. The other one is Japan. They went from about 109 to 115. That area in the month of September. Impacted us big-time.

Exchange losses as I mentioned were $555,000. It came from those two markets. Almost all of that came in the fourth quarter or in the third month, so in the month of September. So, that's the impact to us from an income statement standpoint. I'll let Doug cover the energy prices.

I think the energy prices are starting to affect us somewhat but I'll tell you, our operations people are very good at managing those. We're seeing some fuel surcharges and they work very closely with our carriers to minimize that, where they can. And we're coming up on the end of the year, and we'll have to start looking at what kind of a change we would have to make for shipping. Whether we do something like that in the interim.

But having said that, I want to mention something that may seem off the wall to you, but with all of the hurricanes and problems that people have had in that area, one of our markets that's increasing pretty significantly as a percent, obviously it is not our largest market, but Florida has done very well through this whole period of time there. Their sales increase during the quarter was approaching 18%.

So, I think that's a very positive sign that people that have to suffer through these hurricanes and handle those problems, that continue to do things like that. The fuel surcharges, you know, I think they're probably going to continue until you see some change in that. But I believe we can deal with that, between our operations people and looking at pricing probably going forward.

Thank you very much.

Thanks, David.

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

Hi there, guys. Most of my questions have been answered. The U.S. domestic distributors -- can you just reconcile -- I understand you said the managers were up -- it is up dramatically from year-end, but the distributor count didn't really change very much from the beginning of the year, yet the sales were really starting to pick up. Can you just walk me through the relationship between the two? Is it just that the people that you have are obviously selling more, or at what point do you feel that you'll start to get a decent pickup in the distributor growth itself as well?

That's a good question. And I do tend to focus on the sales leaders, as a number but your question is a good one, because at least in the U.S., distributor count is fairly flat. And so I think it was up like 2%. It is up like 2%. Where are your sales coming from?

Obviously the sales leaders are driving those sales to either people who are not distributors, or just are consumers of the product, and we would like to see the distributor number increase, because that's where the sales leader number comes from, but really, the numbers of sales leaders when you think about it, they account for a minimum of $1,000 a month in sales. And so, as you get more of those, then they increase.

The distributor can be $100 to $200 a month and in their own purchases, if they're just consuming for themselves, whereas a sales leader can be somebody that's selling to people who are not distributors, or just are consumers, or not signed up as distributors. That gives them a chance to then sign those people up at some point as a distributor, so that they can buy it wholesale. Clearly, the manager or the sales leader is the one that sells in much greater volume than just the distributors.

Clearly distributors are important but what's going to drive the sale -- think about it. We have 665,000 distributors worldwide, and 21,600 sales leaders. The key indicator for us is really that 21,600. I know that probably doesn't totally address your question, but that's just really how the business works.

Okay. That's fair enough. Can you talk about cash repatriation? With regard to the special tax break this year, and I know you guys have looked at that and even with the buyback, you still have a lot of cash. I know some of it, or a decent chunk, is sitting overseas. I'm curious what the outlook on that is?

Well, we looked at that legislation to allow you to bring those back and it really didn't impact us. Wouldn't be able to see the benefit. We've been working for the last year and a half, on the tax planning strategy to be able to repatriate the dollars without having a significant impact from our taxes. That would normally come from that. We're anticipating that that will be in place in the fourth quarter.

And we should be able to start repatriating some of that money actually in the fourth quarter, of bringing that back into the U.S. Without a significant impact on the tax rate. So, we're hoping that the majority of that available cash in our foreign operations can be brought back into the U.S., to pay off the operating line that we use for the tender, and then be able to have that available for future expansion, or for whatever -- the Board decides they want to do with the cash.

With regards to that, can you just give me a sense of what the Board feels comfortable -- like how much cash they need before -- in other words, I don't see any reason why you couldn't do another tender for a million shares or something, or half a million shares certainly. Is this how the Board looks at it? You're sitting with 40 million plus net cash plus I'm not quite sure you have in the other long-term other asset item, but you'll generate a lot of cash next year as well. Sort of what the philosophy is, on either dividend increase or share buyback and how much cash you guys have to have, and at what level you feel comfortable using some of that cash?

I'll let Craig address the details as far as the numbers, but I'll tell you overall philosophy, we want to make sure that the Company's adequately funded. We were very pleased with the strong balance sheet, and that's one of the things that our distributors can rely on a very solid company, as a result of how conservatively-financed we are. But we believe in the Company, and we believe in what we're doing. You know that we've done a couple of Dutch auctions, and buybacks before that.

Outside the need for capital, and I'll tell you there is one project that we're looking at and you know, we haven't committed significant amount of capital to this, but as we look at China, there is a possibility that that could require a pretty good capital contribution to get that market open. Obviously we're going to take our time and do it right. We're not in a rush to make mistakes that are costly. But you know, that's a significant capital requirement for us. We're pretty well set, as far as our manufacturing capacity, other than we may have to add additional equipment. Our infrastructure is in place for that.

So, beyond the need for sort of immediate capital requirements, market expansions, you know, most likely we'll be investing in our own stock. So, that's kind of how -- I look at it, and I think the Board shares that view more or less, you know, that way. The great thing about Nature's Sunshine is we do generate a lot of cash, as you pointed out. That's one of the strong points for us that allows us to buy back our own stock.

Okay. Then one last thing. I think it was on the last call, this is with regard to earnings estimates from the sell side and guidance, in that area. I think it was on the last call, you said you felt comfortable for the year.

Obviously, there was a bunch of stuff that happened in the third quarter that it didn't quite get you there. But can you give me any sense, forget about next year, but just with regards to the fourth quarter, so that I guess the Street, or the people or shareholders, get some sense of what's expected versus what you guys are looking at. I don't even know -- I think the estimates were $0.40 or $0.42, or something like that.

Obviously Synergy is taking a little bit longer, and you got Brazil which is turning mid-quarter, you know, versus the U.S. which is doing quite well, and internationally, doing quite well. But any -- I don't need numbers but any sort of qualifying sort of leaning one way or another, or things that might need to happen in order to get toward that number, or just anything so that, you know, for instance, you don't get a big disparity between a Street estimate, and what you guys are viewing the world as?

Right. I think that there's just sort of, giving you the way I'm look at it. If I don't have an exchange issue, you know, that's a significant event, that at this point, I'm not anticipating that it goes on again. I think that Brazil, although I wouldn't anticipate a $700,000 loss, you know, I could see cutting that in half at least. I'm adding on top of the numbers that we have for this quarter.

Synergy, again, I would anticipate that we ought to be able to cut that significantly, the $1 million operating loss there, as well as the margins in our international and U.S. business, actually in the fourth quarter improve. So, although I'm not -- I feel good about the opportunity to significantly improve what we did in the third quarter.

Okay. And then the tax rate, I should just use 30% for Q4?

30 to 32%, something like that.

Okay, perfect. Thanks very much.

Okay.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Scott Van Winkle from Adams Harkness. Please pose your question.

More follow-ups. If we look at last year, and I think this has generally been the trend, that SG&A falls in the back half of the year relative to the first half? Am I correct in that?

You're correct.

Well then, is it due to the training that happens in the first half of the year?

Most of it deals with our conventions take place in the second half of the year, but because there's qualifications to go to those, they're accrued for in the first half of the year.

Okay.

So that's why the second half has a tendency to be more profitable than the first half.

Okay, so, if we look sequentially from Q2 to Q3, your loss in Brazil, I don't think went up sequentially.

Right.

Your loss in Synergy came down a touch, maybe 10% sequentially. Why wouldn't we have seen SG&A in a dollar amount, had been -- why wouldn't SG&A in dollars have been down more sequentially?

Part of it deals with the U.S. and additional convention costs that we had that actually slopped into -- went into the month of July, where we had -- Doug mentioned that we had 200, or a little over 2,000 people there. That was a little higher than what was anticipated. It was accrued at the end of June, so we had to accrue some additional expenses there. As well as with our tax trip that took place, so there were a little bit of expenses that were associated with that. I'm just looking at where our other additional expenses came.

SG&A compared to last year, we had some significant increases in our Russian operation, where SG&A actually was up about $750,000 comparing the Q3 of this year to Q3 of last year. Because of the increasing expenses, increase in sales in Russia, we have significant increases in expenses there.

And then also, in Columbia, we had significant increase in expenses as they've turned their sales around, and got that going. The U.S. represents probably about $700,000 of that, that we had additional expenses that shouldn't go into the fourth quarter also. That were not in the second quarter.

Okay. And are there any severance costs that we would expect in Q4? Obviously that those in Japan that were on a temporary work contract, I can't imagine there would be severance there. Anything we might expect from other markets, or Brazil, or what have you?

No, Brazil, everything is already taken care of in Brazil, as far as the severance costs there. Those are government required costs. Those are picked up as each employee -- each month as we work. So, there shouldn't be any additional costs there, as far as severance costs go.

Adding on to the previous question about trying to get an idea about the fourth quarter, and I appreciate your thoughts on some of those cost savings sequentially, if we look at revenue, you've got a real difficult comparison domestically in revenue with the promotions last year in November and of course, Synergy is certainly going to be down year-over-year. You know, if Synergy is flat sequentially, which the distributor count might indicate would be fairly close, and the U.S. market is, you know, up just a little bit year-over-year. You could end up with flat revenue year-over-year. Am I way off base there?

I sure hope you are!

Why do you think I'm being conservative in that assumption?

I'm not going to give you a number, but I expect the U.S. to continue to grow. I expect international to continue to grow, and Synergy needs to start showing some growth. So, without throwing out a number, you're right.

We do look to the sales leader numbers. We look to the new product introductions that at least in the U.S., are going to be -- we hope, very favorable in November, in addition to the promotions that we're doing there, and we expect to be up more than what you're talking about, flat. That would be totally disappointing to me. I can tell you that.

My forecasts are currently a little more than that, but I'm just kind of thinking through worst case. Okay. Thank you very much.

All right. Thanks, Scott.

Thank you. At this time, there appear to be no further questions from the phone lines at this time.

Okay. I would like to make some closing remarks. I appreciate your interest and your questions and you know, understanding of the quarter. I think just to reiterate, I think I'm very pleased with the progress we made in the U.S., international and the growth of sales leaderess and the profitability improvements.

As Craig outlined, there are some challenges for us at Synergy. We feel like we can address those, Craig's working very closely with the management there. Expect to see some improvement there and we think overall, we're making some good progress, and we expect to see that reflected in the numbers in the fourth quarter, and more importantly, going forward.

So, we feel like we've addressed a lot of these issues, and we expect to see improvement as we continue on. Thank you for your interest and for your questions. We look forward to discussing this further for you at the end of the next quarter. Thank you.