Nature's Sunshine Products Inc (NATR) 2013 Q4 法說會逐字稿

Greetings and welcome to that Nature's Sunshine Products fourth-quarter and full-year 2013 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Richard Strulson, General Counsel for Nature's Sunshine. Thank you, you may begin.

Good afternoon and thanks to all of you for joining our conference call to discuss our fourth-quarter and full-year 2013 financial results. This call is available for replay and a live webcast that we posted on our website at www.naturessunshine.com in the investing section.

With us today are Greg Probert, Chairman and CEO; Wynne Roberts, President and COO; Steve Bunker, Executive Vice President, CFO, and Treasurer; and myself Richard Strulson, Executive Vice President, General Counsel, and Chief Compliance Officer.

The press release which was issued this afternoon at approximately 4 PM Eastern time and the information on this call contains certain forward-looking statements which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties, or other factors which may not be under the Company's control. Forward-looking statements may cause the actual results, performance, or achievement of the Company to be materially different from the results, performance, or other expectations implied by these forward-looking statements.

These factors include but are not limited to those factors disclosed in the Company's annual report on Form 10-K under the caption risk factors and other reports filed with the Securities and Exchange Commission. The press release on the information on this call speak only as of today's date, and the Company disclaims any duty to update the information provided herein and therein.

I will now turn the call over to Greg Probert, Chairman and CEO of Nature's Sunshine Products.

Thanks, Rich and good afternoon, everybody. Thank you for joining us today. I'll start off with some high-level thoughts about our 2013 performance as well as provide an update on our key initiatives. Wynne Roberts will then provide a more detailed update on our business unit performance, and Steve Bunker will conclude our prepared remarks with additional detail on our fourth-quarter and full-year financial results.

To start, I'm extremely proud of our team's accomplishments over the past year. The fourth quarter reflects continued progress across both our NSP and Synergy businesses. In addition to Synergy's, record fourth-quarter sales and NSP Russia, Central, and Eastern Europe's fifth consecutive quarter of year-over-year sales growth, we experienced double-digit sales growth in both NSP Mexico and NSP South America.

We ended 2013 on a high note with positive momentum stemming from several product and sales initiatives, continued organizational developments, and the Oracle and Agile projects. We also successfully merged NSP Japan and Synergy Japan during the quarter, further strengthening our market position and profitability in that region. And finally, we're excited to have Rich Strulson on board as Nature's Sunshine new Executive Vice President, General Counsel, and Chief Compliance Officer as well as Yale Peebles, our new VP of Corporate Development.

To recap some financial highlights for the year, net sales revenue of $378 million was up 2.9% year-over-year or 3.7% in local currency. Top-line growth was led by strong performance in NSP Russia, Central, and Eastern Europe and Synergy worldwide. Our NSP Americas, Asia-Pacific, and Europe business also posted slight 0.3% growth year over year in local currency with programs and products launched in the first nine months of the year beginning to take traction.

That said, we expect some variability in our progress as these programs and products build towards a more sustainable level of momentum or contribute to our top-line growth in a meaningful fashion.

Operating income for the year totaled $24.1 million or 6.4 percent set of net sales, which is down in absolute dollars as well as a percentage of net sales basis from prior year. Impacting the year-over-year comparability are increased level of strategic investment as well as several one-time costs. Normalizing for the $4.5 million in one-time costs, as Steve will touch on in more detail, our operating income margin would have been approximately 7.6%, which is in line with our expectations.

Investment was a prevailing theme throughout 2013 as we looked to strengthen the foundation for future sales and earnings growth. Sales and marketing personnel, R&D, new product development, distributor training, sales incentive programs, and information technology were all key areas of investment throughout the year. While significant, we're confident these investments will better position us to drive sales growth in all our markets. As such we will continue to invest in the business but will adjust these investments to track in line with our revenue growth, and we are on track to restore our operating income margin to double-digits by the end of 2015.

As always we'll continue to carefully evaluate the sales growth and profitability potential in each of our markets as we allocate resources and prioritize investments order to best maximize the Company's return on invested capital.

We ended the year with a very strong balance sheet with over $29 million in cash flow from operations and $77.2 million in cash and cash equivalents and very little debt. We remain confident with our overall financial position and strong cash flow generation.

Importantly our financial position and strong free cash flow enabled us to drive significant shareholder value throughout 2013. Over the course of 2013, we paid four quarterly cash dividends of $0.10 per quarter as well as a special dividend of $1.50 in the third-quarter. Combined, we returned $30.4 million to Nature's Sunshine shareholders in 2013 representing annualized yield of nearly 12.1% at Friday's closing share price.

The dividends coupled with our share repurchase program demonstrated our confidence in the Company's growth prospects, strong cash flow generation, and our commitment to return excess capital to shareholders. We are especially pleased to be able to drive enhanced shareholder returns while investing our strategic growth initiatives.

Now, let's turn to our strategic initiatives. R&D continues to be a top priority and as such I'd like to reiterate our two-pronged approach which enabled us to efficiently leverage the investments we're making. First is the development of our own unique intellectual property to create innovative differentiated products. And second creating value through first mover advantage by way of utilizing science-based public IP to develop cutting edge products.

2013 saw the successful launch of several new products including several in the area of weight management in NSP US, NSP Mexico, and Synergy Asia. Of particular note is the launch of our new situational anxiety product AnxiousLess, which is seen very strong uptake in the US market due to our unique formulation supported by clinical studies which provides a unique selling proposition of our other comparable products on the market.

We will launch several new products in 2014 addressing megatrend health conditions such as obesity, inflammation, and insulin resistance, as well as man's prostate health and cholesterol. We are paying heightened attention to product lifecycle management as part of our investments in R&D to be much more effective in developing innovative and product line strengthening going forward. We will begun construction of a state-of-the-art chemistry and molecular biology lab as well as a medical clinic in Q2 2014 to better support our R&D efforts.

Our newly established medical and scientific advisory board was created to serve as a resource to our Chief Scientific Officer Dr. Matthew Tripp and to help spearhead innovation on a global scale.

In addition to our R&D efforts, we are continuing to invest our local sales and marketing organizations. We have strengthened our on-the-ground sales forces in Russia, Europe, Mexico, Asia, and the United States. As I mentioned on our last call, the $40 million Oracle ERP and Agile products remain on track for an on-time implementation by mid-2016.

To recap, the Oracle ERP will provide us with a single integrated software solution and greatly enhance our ability to better streamline and integrate our people, processes, and business systems in all of our markets. Agile will serve as a product lifecycle management tool to facilitate delivering products to market faster and more efficiently in order to better serve our managers, distributors, and customers around the world.

In summary, we are very pleased with the progress made in 2013 with our growth initiatives and believe our daily consumption model uniquely positions us to capture increased market share in the future. Our mission and focus, however, remains the same -- to enhance the physical, material, and mental well-being of our field sales force and customers worldwide by providing health and lifestyle-oriented products and service of uncompromising quality and integrity.

We're continuing to build brand awareness and affinity across the major markets in which we operate with the goal of ensuring clarity of common purpose amongst our distributor base and employees.

Looking ahead, we're encouraged by the favorable industry trends and the significant growth opportunities that we see globally across all three of our business units. As part of our corporate development initiatives, we're exploring new product opportunities and look forward to keeping you updated on our progress on that front the future.

I'll now turn the call over to Wynne to comment further on our operations.

Thank you, Greg, and good afternoon, everybody. To reiterate, we were pleased with our 6.8% net sales growth on a local currency basis experienced during the quarter which contributed to a record revenue year and an annual growth of 3.7%. Synergy worldwide recorded a second consecutive record quarter for net sales whilst NSP Russia, Central, and Eastern Europe recorded its fifth consecutive quarter of growth. And NSP Americas, Asia-Pacific, and Europe net sales grew 2.4% in the quarter on a local currency basis, primarily driven by Mexico and Venezuela and offset by a slight decline in the US business.

And as Greg mentioned, several programs and products have been launched over the last several months aimed at building contributor recruitment and productivity. And whilst we are pleased with the earlier results, we do still expect some variability in our performance as distributor training takes hold and adoption levels raise, building towards a more sustainable level of momentum.

Net sales in NSP Americas, Asia-Pacific, and Europe during the quarter were $49.9 million or 53% of total Company sales. In local currencies, segment net sales increased by 2.4% from the same period a year ago. Relative strength was experienced in Mexico, Central, and South America and offset, as said before, by a slight decline in the United States and weakness in Japan.

In NSP US, which remains our largest market at 33% of total Company sales, net sales declined 1.7%. Nevertheless, we are encouraged by the early positive indicators of distributor engagements and take-up of the new products and programs mentioned above.

With regard to new products for example, our situational anxiety product AnxiousLess, launched in October, has already reached the penetration rate with our managers of 47% and continues to see high repurchase levels. In addition our weight management category achieved growth of 4% in the quarter and will be supported going forward by the formal launch of our IN.FORM distributor productivity program which will take place at our annual convention later this March -- this year in March 2014.

This program was introduced to a small group of 25 managers in October 2013 who have been trained in operating the program since December, and we will have 200 managers trained by the end of March.

Our retail productivity tools and training also launched in October and is aimed at our distributors who operate specialty stores as part of their business, and are also showing early progress. While sales overall for these outlets were flat for the quarter, we have seen a positive lift in sales among those stores that have begun adopting the tools.

In our Spanish segment, sales have been slower to adopt new programs and move towards recovery. To address this, we have restructured our restructured our field sales and support teams to better integrate the rollout of these programs and training in a more timely and effective manner, and we are already seeing the positive benefits of this with managers in the segment beginning to adopt the IN.FORM program.

Additionally in South and Central American regions, they are now being led by a single general manager who was appointed in the fourth quarter and has been focused on streamlining our go to market initiatives and generating efficiencies in our back-office support.

As I said before, while the early signs from these programs are encouraging, we do expect some variability in our performance as we build towards a more sustainable recovery.

In NSP Japan, we continue to see a decline in sales in the quarter and took the decision to merge the NSP operations with those of Synergy Japan to provide a more stable base for profitable growth. I will add further commentary on this in the discussion of Synergy Worldwide.

Moving on to NSP Mexico. In this market, we saw a 25.1% increase year over year in the quarter in local currency terms following an 8.9% growth in Q3 and which contributed to a full-year growth of 7.1%. Performance in the region continues to benefit from the appointment of our new general manager who has extensive experience in direct sales, distributor engagements initiatives, increased field activity, and new product launches including our weight management and energy products, all of which contributed to increased activity among our distributors.

Our investment in a new sales center and increased marketing and promotional activity also positively contributed to the strength of this large direct selling market in the quarter. Again, while this represents good progress, we are in the early stages of executing our strategy for this market, and it will take more time for the programs to become fully embedded to deliver the sustainable momentum we expect.

Net sales in NSP, Russia, and Central, Eastern Europe was $17 million for the quarter or 18% of total Company sales. Segment net sales in local currency increased over the prior-year quarter marking our fifth consecutive quarter of year-over-year growth with full-year sales growth of 8.4%. Once again, the growth was broad-based with all major markets -- Russia, Ukraine, and Belarus -- hosting strong increases. Our success in the region reflects the renewed focus of our executive management in this area, enabled by our reorganization last year; together with the success of our distributor recognition training programs implemented earlier in the year; and the continued focus and engagement of senior distributor leaders. In addition, new products, particularly in weight management contributed positively to our growth in this region.

Despite the robust net sales growth experienced in 2013, we must caution that we are already seeing the adverse impact on growth in February and March as a result of the political unrest in the Ukraine, which represents 42% of the Russia, Central, Eastern European business.

Given the political instability in the region it is difficult to guide to the full impact over the coming months at this time. In addition, we have the added uncertainty of the outcome of our dispute with our general dealer.

Turning to the Synergy Worldwide business, the fourth quarter marked it second consecutive record-setting sales quarter with total net sales of $28.5 million, representing 30% of total Company sales and growth of 15.4% in local currencies. For the full-year, net sales increased 8% led by strength in Asia, Scandinavian and Central Europe partially offset by declines in North America.

In Asia-Pacific, we saw robust year-over-year growth of 16.5% for the quarter and full year growth of 9.9%. This growth was led by South Korea where we continue to see the positive momentum generated in the third quarter continuing to build sequentially following the global summit held in Seoul in late September where we also launched our SLMsmart weight management program which is also positively impacting sales.

In Synergy Japan, sales declined 5.3% in local currency from the fourth quarter in the prior-year period. And declined 1.8% for the full year. To address the continuing disappointing sales in both Synergy Japan and NSP Japan, we have taken the decision to merge the two businesses and operate from January 1, 2014, as Synergy Japan.

This transition has been successfully completed with NSP distributors transitioning to Synergy and product lines from both companies remaining available to sale. This model is consistent with our operating model across Asia-Pacific and will provide a stable platform for growth and improve profit in the years to come.

Turning to Synergy Europe, total net sales growth for the region was 15.4% for the quarter in local currency; 9.9% for the full year. Growth occurred in both the Scandinavian and Central Eastern European regions and also was favorably impacted by the first full year of operation in Poland. We also expanded market coverage in the fourth quarter with the opening of Italy and Slovenia.

North America continued its downward trend in the quarter with net sales declining the prior-year period, albeit at slowing rates. We are addressing this through enhanced distributor training and promotions around our SLMsmart program, as well as renewed recruiting focus.

In summary, during the quarter we saw continued positive momentum in several areas of our business based on the early impact of investments we have made and continue to make in sales resource, new products, new business methods, and motivational programs.

However, we should caution that we are still in the early stages of returning to sustained growth and remain to expect some variability in our results for the time being. Now, I would like to turn the call over to Steve to review the financials.

Thanks, Wynne, and good afternoon, everyone. Net sales in the quarter were $95.5 million up 5.7% from $90.4 million in the same quarter last year. On a local currency basis, net sales increased 6.8% year over year. Cost of sales was $24.1 million up slightly from $23.8 million in the year-ago period.

Growth in net sales revenue combined with relatively flat growth in cost of sales drove 120 basis points of improvement in gross margin to 74.8% versus 73.6% in the year-ago period. As we've explained previously, volume incentives are a significant part of our network marketing program and are designed to provide incentive to reach higher product sales levels.

[Lineman set] varies slightly on a percentage basis by product due to pricing policies and commission plans in place and the sales mix in our various markets. Volume incentives accounted for 36.7% of net sales in the fourth quarter and were up very slightly, or 0.2% as a percent of net sales relative to the same period a year ago and were flat with last quarter.

Selling, general, and administrative expenses increased 21.7%, or $6 million, to $33.7 million in the fourth quarter of 2013 from the same period a year ago. The increase in SG&A was primarily due to a $2.2 million increase in the Company's investment in sales, marketing, and science personnel, as well as new product development, distributor training, and incentive programs designed to stimulate sales growth and drive global profitability.

In addition, the increased SG&A in the fourth quarter was impacted by one-time unusual cost of approximately $3 million. Most notably, these costs included $1.3 million one-time costs related to a five-year customs audit assessment in our Synergy South Korea market and $1.1 million of one-time restructuring costs in certain markets. As a result, operating income was $2.6 million or 2.7% of net sales in the fourth quarter 2013. This is compared to $5.8 million or 6.4% of sales in the fourth quarter last year. Excluding the one-time costs, operating income for the fourth quarter would have been $5.6 million or 6% of net sales.

For the full-year, selling, general, and administrative expenses increased by $13.9 million, or 13%, to $120.7 million as compared to the prior year. The increase was due to his $6 million of investment in sales and marketing personnel; R&D and new product development; distributor training in sales incentive programs; and $2.2 million in distributor conventions, meetings, and incentive trips. In addition, one-time costs for the full year were possibly $4.5 million, which included the items noted in the fourth quarter as well as $1.4 million of one-time severance costs and the acceleration of stock option expense incurred related to the resignation of our former chief executive officer.

Operating income for 2013 was $24.1 million, or 6.4% net sales, as compared to $34 million, or 9.3% of net sales, in 2012. Excluding the one-time costs, operating income in 2013 would have been approximately $28.6 million, or 7.6% of net sales.

Adjusted EBITDA, which is defined in our earnings release to exclude share-based compensation expense, was $4.6 million compared to $7.8 million in the same quarter a year ago.

The effective income tax rate in the quarter was 30.3% compared with 39.8% in the same quarter a year ago. The fourth quarter's effective tax rate was below the US federal statutory tax rate of 35%, which was primarily attributable to favorable US tax impact of foreign operations offset by adjustments to foreign valuation allowances and an increase in tax liabilities associated with uncertain tax positions.

Net income for the quarter was $1.8 million, or $0.11 per share, as compared to $4.5 million, or $0.28 per share, in the year-ago period. Moving to the balance sheet, cash and cash equivalents as of December 31 were $77.2 million down from $79.2 million at December 31, 2012. The lower cash balance reflects $24 million paid in a special one-time dividend, $6.4 million paid in regular quarterly dividends, and $2.5 million used to repurchase shares during the year. These uses of cash were partially offset by, among other things, cash flow from operations of $29 million for 2013 and drawings on our revolving credit facility of $10 million. Inventory at December 31 was down slightly from December 31, 2012, and we have $149 million in current assets with access to $15 million on our $25 million revolving credit facility.

With our strong balance sheet and consistent operating cash flow, our Board of Directors approved our regular quarterly cash dividend of $0.10 per share payable on April 7, 2014, to shareholders of record as of the close of business on March 28, 2014.

During the three months ended December 31, 2013, the Company repurchased 32,609 shares of its common stock under the share repurchase program or $600,000.

At December 31, 2013 the remaining balance available for repurchases under the program was $7.5 million. The regular quarterly dividend and the share repurchase program, combined with the previously paid special one-time dividend, represents the Company's strong cash flow and healthy order in cash balance, the Board's commitment to return capital to our shareholders, and our confidence in the long-term growth prospects of the business. We continue to have ample capital capacity to continue to make long-term investments in sales, marketing, science and product development initiatives, and overall operations and pursue strategic opportunities as they may arise while we remain focused on maximizing the Company's return on invested capital. This concludes my prepared remarks. At this point, I'd like to turn the call back over to Greg for closing remarks.

Thanks, Steve. In closing, I would like to say we are pleased with our 2013 performance and our strong close to the year. The fourth-quarter marked a continuation of our positive momentum with broad-based net sales growth. New records were achieved in Synergy as well as in NSP Russia and Central and Eastern Europe. NSB Mexico saw accelerated growth, and NSP US continues to show early signs of traction.

That said, we expect the political unrest and uncertainty in Russia, Ukraine to present a headwind to 2014 growth, and we believe adverse weather conditions throughout much of the US early in the year could damper near-term growth in our largest business segment. Nevertheless our long-term focus and strategy remains intact. We will continue to invest in strengthening our business around the world to distributor leadership and engagement, product innovation, and geographic and channel expansion. We look forward to doing so while continuing to deliver enhanced value and return to our shareholders.

Lastly, I want to congratulate both our distributors and employees worldwide who work tirelessly each and every day to help people live healthier and more rewarding lives. That concludes our prepared remarks. Operator, please open up the call for questions.

(Operator Instructions) Brian Hollenden, Sidoti and Company.

Can you quantify the potential impact of the political unrest in Ukraine and Russia, and what can you do to mitigate any losses in those markets?

So, Brian, it's Wynne here. It's a little tough right now to quantify it. I think the situation there has been unfolding. I'll give you some example of what's been happening in the market with the unrest in Kiev during February month, obviously communication was difficult. Transport links were impaired; distribution center was closed. And distributors found it hard to hold their meetings.

As of right now, I spoke to our President of Russia, Central, Eastern Europe this morning, and he had been speaking to distributors in Crimea overnight who obviously as of right now can't get access to product.

So it's a little early at this stage for us to give a full impact. Obviously, there has been an impact, as I referred to in my remarks in February, but we will give a fuller impact on our next call in just a few weeks time when we see the full Q1 impact and see if we see some settling down of the situation. But I think in my remarks, I indicated the size of the Ukrainian business to the Russia, Central, Eastern Europe business. It's about 42% of their total business so.

Thanks for that color, it's helpful. In Synergy, sales were up 14.8%, new membership up 3.8% for new managers. And then number of new distributors were down 5.4%. Can you tell us little bit more about what's going on there?

It's a little bit of a mix issue, Brian. It's counterintuitive that we have two regular quarters and you see that happening. Really what the impact is mix between different markets where we have seen very strong growth in Korea and more moderate results from places like Indonesia and Thailand. And the average value of an order and the average value of distributor in those smaller markets is lower, and the average value of a distributor order in Korea is higher. So it's mix between the markets, frankly. Does that make sense?

Yes, that makes sense. One more final question, and I'll turn it over. NSP Russia, Central, and Eastern Europe. You guys launched your new weight management program, can you let us know more about how that program is going and what your expectations are from the program?

Yes, I think we're very encouraged by it. We soft launched it early in 2013. We launched the SmartMeal replacement shake as part of an overall program, and to date in the region, sales have increased a little over $1 million since the soft launch in second quarter of that category. So I think our -- it always takes a while when you start a new sales motion for distributors to watch the early adopters start to have success and then follow the early adopters. And I think we've been pretty encouraged by the take up so far.

All right, thank you I'll jump back into the queue.

Nelson Obus, Wynnefield Capital.

A couple of smaller questions and then I'll get back in line and maybe ask a bigger one or two. But I think there were 2-point-some million dollars of I guess I'd call them extraordinary costs in the fourth quarter. Is it fair to say that they were not added back in in adjusted EBITDA of 4.6 or are they in that adjusted EBITDA number?

No, they have not been added back into that number.

Okay so that's sort of an accounting ruling even though they are one time right?

Yes, yes.

Okay, this little dustup you're having with the general distributor whatever in Russia? First, just two questions. Without getting too specific, what's the nature of it? And number two, does that have anything to do with the entity that you bought out a number of years ago to give you effective control of that region?

So I'll answer the second part first Nelson. No, it's not related to the previous arrangement. It's our current general dealer. And in our K, we have outlined the details and nature of the contract dispute. And I think we fairly well laid it out there. But broadly speaking, it's a contract that's been in place since 2007, renewed annually by both parties. In July 2013, the general dealer began work withholding certain monies on that contract, and we are -- we've been working to negotiate a resolution to that dispute over fees since then. And you'll see in our filing that we have a clause in the contract for resolving dispute through arbitration which we intend to follow.

Is the general dealer effectively a distributor?

No, they're not a distributor, well, not a distributor in the direct selling terms. What they do for us there is -- until last year they were our feet on the ground over there, our only feet on the ground. We now have one person there as we referred to in the last call. They import the product; they warehouse the product; they distribute the product to 200 dealer centers that we have around the region. They pay distributor commissions; they support with some sales and marketing efforts. So, they operate as a very broad ranging partner on the ground in the markets.

So we effectively outsourced this to them when we bought back the prior party's stake in Central Europe. Is that a fair statement that that's when our relationship began with them?

I don't know that it's right to say outsourced. I think the resolution or the contract that we have with the general dealer began before the resolution. It began in 2007. I think the resolution you're referring to was in -- before my time. I think it was late 2010. 2011.

Yes, it was.

2011.

Okay, but it doesn't sound like a deal breaker. I just want to focus on one thing on the balance sheet, which is an area that I've watched over the years carefully. First of all, you mentioned in text we had some kind of a one-time charge involving an audit in Korea of tax. And I assume that that was something that we under-reserved for, but I also wanted to tie that to something on the balance sheet called liability related to unrecognized tax benefits of which did tick up a little bit here. But the specific question is these are all the challenge tax treatments around the world, and we've worked them down to the $10 to $12 million range. Is that a fair statement?

So it's sort of a two-part question. Number one is that charge that we see in the fourth quarter reflect an under-reserved for tax questions? And am I right about that component on the balance sheet being tax challenges that we haven't work through. That is a much lower number than we've seen in the past if we go back couple of years.

Yes, you are right Nelson in one sense. The liability for unrecognized tax benefit is related to income taxes around the world, and we have worked that number down significantly as we've worked through issues -- as statutes of limitations have run in different markets. But the customs audit assessment, which was a five-year custom audit assessment, is unrelated and not recorded in that because it's not an income tax liability. It's a customs liability. And so, it would be accrued up in accrued liabilities, and it's really the first customs audit that we've had in Korea for many years.

All right I mean do we have a bunch of -- so that would be then within the -- well, accrued liabilities if I'm looking at this right, only $4 million. Is that right? So we don't have a lot of other additional custom things going on. Is that fair to say?

That's fair to say.

Okay I'll get out and see if anybody else is a question or two and jump back in afterwards.

Gregg Hillman, First Wilshire Securities Management.

First of all, Greg, can you just talk -- what is the difference between a Valium and an AnxiousLess pill in terms of effect?

You weren't coming across, Gregg. Could you repeat your question?

Yes, what's the difference between a Valium and an anxiouslessness pill in terms of effect on a person?

You are asking a nonscientist that question, but obviously AnxiousLess is a botanical product, all natural from actually an African botanical plant. So, we are able to with our lab and our new scientific officer Matt Tripp who is able to actually take that raw material which is actually available from some other people in the market, but we are one of the first ones to introduce a unique proprietary blend. So he's able to blend some other products with it, and we actually just got back some of the research I alluded to in my comments that showed that our proprietary blend actually increases the bioavailability of that raw material. So again that's a strategy that we've been talking about for the past couple of quarters of really using either public IP, which his product is, and doing unique formulations and then doing studies that we can have unique mechanisms of action and hopefully, ultimately get IP around that.

I can't say biologically how it works differently, but the great thing for us is all-natural does work. We have done some great tests. Our clinical showed an increased bioavailability by over 50%. And I think one of our fastest selling products in the history of the Company because one it's unique. I think, two, it's a feel product, so you can feel this after about 20 minutes. It's great for situational anxiety.

Okay, and if you think it has a shot at becoming the next Silver Shield something like that?

We hope so. We're relaunching at convention next week. We're relaunching all the science we have around it. So these clinicals will be done after the launch. Really sort of a soft launch. This will be a relaunch of the product at convention, and I think, as we talked about, it's penetrated our manager base very, very effectively. And now, we're trying to get it to penetrate our existing consumer base. So if you look at the penetration, there's still a lot of headroom, and we're very confident that as our managers become more knowledgeable about the product, and now arming them with its clinical research data, that they have a really unique product. And it's also a great feel product. So we have great expectations for this.

Okay. And then Wynne, can you review the weight loss products you have? Number one, what is weight loss as a percentage in Synergy versus as a percentage in NSP? And how does the offering differ for each of those segments of the Company. Also how do you go to mark -- are they marketed differently in those two different divisions of the Company?

Okay, so let's talk about the positioning first. We actually detailed the relative size of that segment in each of the business unit segments in the K, and I'll refer to those in a couple minutes.

So we talked about the NSP business first because our positioning and our range is slightly different whether it's NSP or Synergy. I think it's important to note first that NSP in the US and same in Russia, our distributor base are pretty expert in natural products and passionate about natural products. And their method of operation with our 600 products is we have a program called the Transformational Habit of Health that we talked about on the last call. That Transformational Habit of Health has three broad pillars.

Weight management and nutrition, daily essentials supplementation, and then targeted care. And so, the weight management is actually positioned obviously is one of the pillars and can be an entry pillar into those -- the overall Nature's Sunshine program. I think that in and of itself is a unique positioning before we come to the program specifics.

And the way I tend to think about the Transformational Habit of Health for -- to someone who is not familiar with the business, I kind of think about it like taking care of your car. if you want to take care of your car you put the best fuel in the car. That's your weight management and your nutrition. If you want to retain optimum performance, you do the scheduled maintenance. That's daily essentials supplementation. But occasionally, your car will need specific help for an issue that it's dealing with, and you take it to the specialist. That's our targeted care program.

And I think that positioning and the broad offer that Nature's Sunshine has enables the weight management to have a stronger value to the clients and the consumer.

For the program itself, just a couple of areas that within the Nature's Sunshine program, weight management program itself that I think position us significantly strongly compared to competitors. The first is the range of protein meal replacements that we offer. We offer a super food with 30 grams of protein that is a pea and rice protein. We offer soy with 15 grams -- we offer -- of protein per serving. We offer Love and Peas, which is a pea and rice, 20 grams per serving. And we offer whey, which is a 26 gram -- whey protein which is 26 gram serving. That range of our protein source and levels of protein, I think, is far broader than the majority of the competition in the market and allow us to tailor the program to specific individual needs.

When you lay on top of that the support products that we have with the program, including our cleanse products in which we are experts and represent roughly 10% of our overall volume, that gives us a unique broad positioning and a very specific positioning in the weight management category. I could go on with Synergy as well, but I think that gives you an idea for the Nature's Sunshine (inaudible).

Yes, that's great but just on Synergy, what percentage of weight loss is the Synergy right now?

So Synergy, since its inception, bear in mind we only launched really in Synergy, the soft launch was in the US second quarter of last year and then in Asia in September at the event. Right now, it's 3.7% of total. It represents about $4 million.

Okay and then just -- do people ever work any adverse effects from L-arginine?

Not specifically, no, Greg. We obviously get adverse events reported. From time to time specific individuals have issues, but there's no significant issues that we're experiencing with the L-arginine product and the pro-arginine that we sell.

Okay, good. Thanks for your comments, Wynne.

Nelson Obus, Wynnefield Capital.

Yes, I may have interpreted this wrong, but it appeared as though when you dissect the North America NSP business that the Latino component is underperforming the non-Latino component. Is that correct?

Yes, that's correct, Nelson.

What do you think the general cure for that might be?

So we think that the main reason is that we have been operating -- and it's those two segments, the Anglo segment, the Hispanic segment separately within our sales infrastructure. And as a result of that, we determined that they were much slower in or we were slower in the introduction of new programs. And therefore, they were slower in the uptake of new programs that we were launching.

So what we did late last year in the fourth quarter, we integrated our own sales and marketing management for the US business and integrated and structured so that we would deliver the new programs to both the Spanish segment and the Anglo segment simultaneously.

I think that was a very late development in the fourth quarter, and we are already seeing a very positive response to that in terms of meeting attendances and registrations for trainings. Obviously, it will take a little bit of time to turn the business back up, but we're actually very, very encouraged with the results of the change.

Is this a correct statement that the way you had it before the transition from a SKU to sort of a wellness category resonated better with the non-Latino distributors? Is that a fair statement? (multiple speakers)

I think that's a fair statement. But I also think the other piece that has really helped -- both parts of the business, Nelson, were lacking a duplicable business method that they could rally around, that all distributors could rally around. And I think we found with the IN.FORM program and with the retail productivity tours that we're now leasing and training across both segments of the distributor base, I think that's really having a very positive impact as well.

I got it. I'm just curious -- Japan real quick. First of all, it makes a lot of sense, obviously, if you've got an area that's not performing very well to combine the legacy company with Synergy in that business. But they really are very different entities.

So I'm just curious how that works and what is your analysis of Japan is because it obviously has -- should have some potential given their interest in wellness products et cetera. Why it's been -- so it's really two parts. Why it's been so difficult to get traction there, and how you actually managed to combine those two go-to-market strategies, which are quite different.

So I think one of the things that's important to be aware of, Nelson, is the fact that in the rest of Asia excluding Japan, we have actually conducted this merger of NSP entities in Asia and Synergy entities in Asia some time ago back in -- around 2004, 2005, and have been operating them as Synergy entities ever since that time. And they were an integration of the product programs -- limited product programs from NSP with the Synergy program. So that's been a long-standing arrangement in our different markets in Asia. The only exception was NSP Japan.

And what we saw was -- frankly, it was a small business. It was very difficult to justify and support effectively as a standalone business in those markets. And by keeping them separate, keeping Synergy Japan and NSP Japan separate, we were also making it harder for distributors from different markets to operate into Japan because the business model and the product range was different.

So, I think we've done the merger for two reasons. One is we think we'll get some -- well, we know we'll get substantial operating efficiencies from those mergers. And we have been able to integrate the two distributor bases, we think, quite successfully in the past in other markets in Asia. We have now done it in Japan, and the early signs are that our expectations are paying off.

I mean in a nutshell what do you think the problem has been in Japan?

In the different businesses, in NSP Japan, underinvestment in a long period of time -- over a long period of time, frankly. And it got to the point where the business had fallen to a point where we couldn't really justify reinvesting substantially for that size of business. It would've taken too long.

And I think in the Synergy business, it's been a mix of issues, primarily distributor leaders that have become inactive for the most part. And I think what the merger is doing is enabling successful distributor leaders from other parts of Asia help to sponsor in Japan now and also we are able to attract new distributors. We've already seen the merger attract new distributor leaders to the business.

So you certainly haven't given it up. Last question where I'll go up to like 100,000 feet. Obviously, this whole multilevel marketing thing is in every paper every day thanks to this high profile dustup between larger-than-life hedge fund managers, which now bring in all sorts of political characters. But I'm just curious about the industry association. Obviously, they must be in a different place than they were a year ago. I guess Direct Selling Association. Just quickly give us an overview of kind of what -- of how you fit into that and what you think they're doing although may be there reassessing what they should do every day given the chaos there?

Nelson, this is Greg. I think we talked about this a little bit on the last earnings call --

Yes, but I think it's changed -- it may have changed a little.

(laughter) it certainly hasn't gotten any less interesting that's for sure. But like I said last time, I rejoined the Board of Directors of the DSA. And actually I'm going there a week from Monday back to Washington, DC to attend a board meeting, and then we're actually having a dinner with Speaker Boehner will and the head of the US Chamber of Commerce.

I think in short that the DSA has been much more aggressive at reaching out to Senators and Congressmen in terms of educating them on the benefits of the direct selling industry, the number of jobs it creates, how it works, and how to differentiates legitimate MLM from a pyramid scheme, according to FTC regulations. So, I think that's going very well. There was a rally a couple of months ago in DC where a lot of the distributors from various companies and some key management met with various Congressmen.

So all in all, I think it's going very well, and I think a lot of noise is obviously in the papers on people going for headlines as opposed to really what's happening on the floor of Congress. So, we're very optimistic that the industry will prevail, and in some way, it's actually not a bad thing. It's a lot of noise and aggravation for all of us, but I think to have the light shined on our industry. And we will show that -- a very legitimate industry that's been around for hundreds of years.

I think that's not a bad thing in the long run because I think it will put will some of this to rest once and for all.

You know it does strike me that the shorts have found more more political spokesmen for their position than they've actually found victims. Of course, we are -- we still remain in a free market situation. Not everybody can be a winner. So I hope this gets played out.

It just gets me nervous when a bureaucratic agency gets involved because they are notoriously ineffective and -- (multiple speakers) political (inaudible).

Nelson, as you know, that agency has been very involved in this industry for many, many years and has looked at all the big players in this industry for many, many years and has issued directives that we all follow in the way that we craft our business and disclose our business.

So again I think that light being shown on our industry is ultimately a positive thing. And if it keeps -- in all industries there are companies that don't necessarily play by the rules. So those types of companies are driven out of our industry, that's not a bad thing. And those companies like ourselves that are very legitimate that been around for decades, we have no issue with the government whether it's the SEC or FTC or Senators or whomever looking at us.

Last comment, question. What I'm a little bit concerned about is they'll create paperwork needs on the part of distributors to track where their products go so that it becomes a disincentive for people to become distributors. And that is kind of what I'm -- that's what the government is good at, you know?

We'll have to wait and see, Nelson.

Okay, let's hope that -- let's hope they keep reducing their budget, okay? So they can only pay medical and pension benefits, okay?

Thank you, that's all the time we have to questions today. I'd like to close the call. You may disconnect your lines at this time. Thank you for your participation.