Nature's Sunshine Products Inc (NATR) 2014 Q2 法說會逐字稿

Greetings and welcome to the Nature's Sunshine Products second-quarter 2014 earnings conference call. (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 and Chief Compliance Officer at Nature's Sunshine Products. Thank you, Mr. Strulson. You may begin.

Thank you. Good afternoon, everyone, and thanks all of you for joining our conference call to discuss our second-quarter 2014 financial results. This call is available for replay in a live webcast that we posted on our website at www.naturessunshine.com in the Investors section. With us today are Greg Probert, Chairman and CEO; Wynne Roberts, President and CEO; and Steve Bunker, Executive Vice President, CFO, and Treasurer.

The press release, which was issued this afternoon at approximately 4 PM Eastern time and the information on this call, contain 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. These statements are often characterized by terminology such as believe, hope, make, anticipate, expect, will and other similar expressions.

Forward-looking statements are not guarantees of future performance, and the actual results, performance, or achievement of the Company may 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 Forms 10-K under the caption Risk Factors and the other reports filed with the Securities and Exchange Commission.

The press release and 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, everyone. Thank you for joining us today.

To start, we have made several strategic advancements to date in 2014. Our brand, product, and channel strategies continue to take hold as Nature's Sunshine furthers its transformation into a global organization with multiple brands and distribution channels. Most notably, we announced our entrance into China, one of the largest and fastest-growing vitamin, mineral, and supplement markets in the world, through our joint venture with Fosun Pharma. And, as we discussed before, entering the Chinese market is the next logical step in our growth strategy.

Our alliance with Fosun Pharma gives Nature's Sunshine access to this important market through innovative, differentiated model with a strong local partner. Through our joint venture, we will enter both the Chinese direct selling market, the third largest and fastest-growing direct selling market in the world, with our Synergy brand, as well as the Chinese retail channel with our Nature's Sunshine brand.

Our agreement also represents the first transaction in which Fosun Pharma has coupled a major ownership position with the formation of a joint venture. The joint venture is also the first of its kind between a US company and a Chinese company for direct selling products in China, which we believe will mark a significant competitive differentiator in the marketplace. We view this joint transaction as both a testament to the strength of our existing business, as well as Fosun Pharma's confidence in our ability to establish a substantial business in China.

In addition to funding the joint venture, we intend to use a portion of the net proceeds from Fosun Pharma's investment in Nature's Sunshine to pay a one-time cash dividend of $1.50 per share contingent upon the transaction closing. We believe that the net present value of the joint venture, combined with the return of excess capital to shareholders, will be highly accretive to shareholder value.

Partnering with Fosun Pharma instead of entering China independently will maximize shareholder value through a more robust revenue and lower cost model, faster speed to market, which reduces execution risk. While we expect the business will take two to three years to reach critical scale, we expect that China will be an essential driver of our long-term growth and be one of our top two markets within five years.

We are already executing against our operating plan in order to ensure we enter the market as quickly as possible. We have begun the regulatory approval process, undertaken steps to establish the necessary legal entities, commenced our hiring efforts, secured office space, and analyzed which of our various products to register as part of our go to market strategy. All-in-all, we are very excited about the partnership with Fosun Pharma and the joint opportunity we are pursuing in China.

Recapping a few financial highlights, net sales are up slightly on a constant currency basis as continued strength in Synergy allowed us to absorb the broader NSP declines. Once again, Synergy had strong growth, posting its fourth consecutive record-setting sales quarter, led by Korea and Japan, which delivered year-over-year growth of 108% and 59%, respectively. Our strong product portfolio, sales program uptake, and new organizational structure continued to drive accelerated growth in this region.

New product and program adoption in NSP North America also continues to trend positively as our strategy to leverage science-based innovation to solve mega health problems resonated well with distributors, resulting in strong engagement and adoption levels. In fact, AnxiousLess, our patent pending, situational anxiety product, saw its largest sales month since launch in May. Already AnxiousLess has reached 63% penetration of our manager base, and our clinically proven, prostate balancing product, Equolibrium, which launched at our US national convention at the end of March, has already reached penetration levels of 34%.

Our IN.FORM weight management program, which launched nationwide in the first quarter, continues to gain momentum and prove itself a powerful recruiting tool through new distributors and customers. Through the end of second quarter, we've certified over 775 coaches.

And lastly, our retail productivity tools continue to take hold.

Overall we're pleased with the traction of our new product and program initiatives in the US. Through our new approach, we have designed innovative products and duplicatable business methods that make it easy to attract new distributors.

In spite of progress in key program areas, sales for NSP North America are down slightly over last year. Partly this volume is explained by timing of our annual convention, but we also continue to see underperformance within our Spanish segment. Re-engaging Spanish leaders continues to be a top priority, and our management team is working hand-in-hand with distributor leadership to improve performance in this segment. And as we've stated before, while we are pleased with the early results of our new product and program approach, we'll expect continued variability in our consolidated performance as distributor training takes hold and adoption levels rise, building towards a more sustainable level of momentum.

Turning now to NSP Russia, Central and Eastern Europe. The political unrest in Russia and Ukraine has been well publicized and will come as no surprise that the heightened political tension led to substantial net sales decline in NSP Russia, Central and Eastern Europe during the quarter, a trend we would expect to continue should the situation persist or worsen.

That said, we are confident that our dedicated field leadership, coupled with our strong and renewed partnership with our local partner, will help us navigate through the current turmoil and provide a solid foundation to reignite growth once the situation stabilizes.

Now turning to profitability, operating income for the quarter totaled $5.8 million, or 6.2% of net sales, impacting year-over-year comparability, our legal, financial, and other costs associated with our corporate development activities during the quarter, including our joint venture formation. Normalizing for these $1.9 million in one-time professional fees, as Steve will touch upon in more detail, our operating income margin would have been 8.2%, our highest margin since Q2 2013. We are pleased to deliver improved levels of profitability while advancing important initiatives in R&D, product development, distributor training, and sales initiatives programs, which we believe will solidify our foundation for future growth.

Speaking of investments, we're excited to announce that just a few weeks ago we broke ground on our new $2 million research and development center and medical clinic at our corporate headquarters in Lehi. This facility will serve as home base for our team of world renowned and award-winning scientists and doctors doing research and product development. This, in turn, provides us with the capability to control the entire product development lifecycle from early proof of concept, through ingredient formulation, to in-house medical studies that prove efficacy. As we touched upon before, 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.

Along those lines, we expect to launch additional new products in 2014, which will address megatrend health conditions such as obesity, inflammation, and insulin resistance.

In summary, we are pleased with our early progress in 2014 as we continue our transformation to a global organization with multiple brands and distribution channels. We are especially pleased that our strong balance sheet and cash flow enable us to make these investments while also driving shareholder value.

In addition to our previously announced one-time cash dividend related to the Fosun investment, I am pleased to announce that yesterday our Board of Directors approved a $0.10 per share regular quarterly cash dividend.

The quarterly dividend, in addition to the one-time dividends, have been announced in August 2013 and in June 2014, and the ongoing share repurchase program demonstrate our confidence in the Company's growth prospects, strong cash flow generation, and our commitment to return excess capital to shareholders.

With that, I will turn the call over to Wynne to comment further on our operations.

Thanks, Greg. Good afternoon, everybody. We were very pleased with our second-quarter net sales growth of 1.1% on a local currency basis, particularly in light of the heightened political tensions in Ukraine and Russia, which negatively impacted our net sales growth overall. Once again, leading net sales growth during the quarter was Synergy Worldwide, which posted its fourth consecutive quarter of record-setting sales, led by strength in South Korea and Japan. Synergy's performance more than offset the declines experienced across our NSP businesses.

Net sales in NSP Americas, Asia Pacific, and Europe were $49 million or 52% of total Company sales. In local currencies, segment net sales decreased 5.4% from the same quarter a year ago. The decline was primarily due to lower sales in the US, as well as the action taken to combine our NSP Japan business with our Synergy Japan business on the first of this year, and the transition of our NSP United Kingdom business to an export market. For the second quarter of 2013, we had recorded revenues of $0.9 million for both NSP Japan and the United Kingdom combined markets.

NSP United States, which remains our largest market at 36% of total Company sales, recorded a net sales decline of 5.1% in the quarter. The movement of our US national convention to March 2014, as compared to April 2013, and the attendant sales attributed to product launch promotions during the convention in that year, adversely impacted our sales in the quarter, as did continued softness in our Spanish segment. However, we remain focused on reengaging distributors across the US, and we saw continued progress in the implementation of our new products and programs during the quarter.

As we communicated last quarter, we are focused on products and programs that make it easier for managers to attract new customers, as well as new distributors to Nature's Sunshine, and we continue to make improvements in those areas.

Our new product sales performed well during the second quarter. As Greg mentioned earlier, sales of AnxiousLess, our newly launched anxiety product, reached $0.7 million of sales in the quarter, reflecting the growth of 18% over the prior quarter, and penetration into our distributor base continues to build, reaching 63% of our managers and 10% amongst members.

In addition, AnxiousLess has exceeded our initial growth projections and has become one of our top recruiting products with a repurchase rate of over 80%.

We also discussed last quarter the March launch of our new prostate health product, Equolibrium, which achieved $0.5 million in sales for the quarter. And Equolibrium, again, has already achieved penetration of 34% in our manager base. The creation of these new products and programs will continue to be a key focus of ours.

Our strategy is to design targeted, innovative, and differentiated products and programs that fit within a duplicatable business method that makes it far easier to attract new customers and distributors to our business. While it will take time for these products and programs to make a sustainable impact on sales, we are encouraged by the early adoption rates of these programs by our distributors and customers alike.

Turning to weight management, our US sales in this category declined 25% year-over-year versus our sales in Q2 2013, which had been strongly impacted by promotional sales during the launch of the weight management line at our US national convention in April 2013. On a sequential quarter basis, sales grew 4.9% over our Q1 2014 performance, reflecting continued good progress and adoption of the program.

Our newly launched IN.FORM weight management program continues to gain momentum, and we almost doubled the number of certified coaches to 775 in the quarter. And the early results enjoyed by distributors and customers from both product benefits and business building are encouraging.

In addition, our retail productivity tools, designed to help managers with specialty stores boost their business, have increased penetration in the quarter and continue to support their businesses.

While we are encouraged by the early positive indicators of distributor engagement and uptake of our new products and programs in the US, the impact clearly has not yet been reflected in our financial performance, and we'd expect continued variability as we build to a more sustainable recovery.

Net sales in Russia, Central and Eastern Europe were $12.8 million in the quarter or 14% of total Company sales. Segment net sales decreased 14.3% over the prior year quarter and have continued to wane as a result of the political uncertainty in the region, which substantially disrupted distributor activity in Ukraine, and to a more moderate extent in Russia and Belarus. While segment net sales did decline in the months of April and May, we continued to show strong support to our local distributors with the introduction of price and business building promotions in the beginning of June, and we were pleased to see a positive impact from these during that month.

Despite the uncertainty caused by the political climate in the region, through our strong presence on the ground with our local partner, we have been able to maintain service levels and continue to support our distributors across the markets. We further believe that this strong partnership, together with these same service levels and our strong reputation for reliability and longevity and quality in these markets, will put us in a strong position to build momentum once stability returns.

Turning to Synergy Worldwide business unit, as mentioned, the second quarter marked its fourth consecutive record-setting sales quarter, with total net sales of $32.5 million, representing a 34% of total Company sales and a growth of 23.9% year over year in local currencies. Net sales growth was led by strength in South Korea and Japan, partially offset by declines in Europe and North America. Synergy Asia-Pacific recorded net sales growth of [50.7%] year over year, driven by South Korea and Japan.

In South Korea the momentum continued to accelerate to triple-digit growth, building on last September's global summit which was held in Seoul, at which we launched our Slim Smart weight management program.

In Japan, growth in year-over-year net sales further reinforced the positive results of the merger of our NSP and Synergy Japan businesses at the start of the year, which has been successfully completed.

In addition to the merger of NSP and Synergy Japan, growth in the region has also been supported by a combination of new and reinvigorated distributor leadership supported by targeted promotions.

Turning to Synergy Europe, total second-quarter net sales decreased 2.5% year over year in local currency. A successful resolution of temporary shipping restrictions imposed by the Norwegian Food Authority, which had adversely impacted net sales in the fourth quarter of 2012, had had a favorable impact in the first half of 2013's net sales.

Subsequent to this resolution, our Norway market has not yet returned to its previous growth rate, thus resulting in declining net sales across the region, which offset positive growth in several other European markets.

We are looking forward in Europe to our summit in Barcelona at the end of September. We expect a positive response from our distributor base to the launch of our Slim Smart weight management program there, as well as to extensions to our ProArgi9 heart health line.

Synergy sales in North America reversed the downward trend from the prior quarter, yet were down year over year due to the initial sales lift in that quarter from the launch of Slim Smart. The Slim Smart product, coupled with new product training and an increased number of meetings across the country, are expected to gradually return the North American market to growth over time.

In summary, we are pleased we were able to report modest revenue growth in the quarter, especially considering the adverse impact on sales stemming from the Ukraine crisis. We were also pleased to see continued increased rates of distributor engagement and adoption of our new products and programs and look forward to updating you on our further progress next quarter.

I'd now like to turn the call over to Steve to review the financials.

Thanks, Wynne, and good afternoon, everyone. Net sales in the quarter were $94.3 million or 0.7% from $93.7 million in the same quarter last year. On a local currency basis, net sales increased 1.1% year over year. Cost of sales was $23.4 million, up 3.3% from $22.6 million in the year ago period. The increase in the cost of sales percentage during the quarter was primarily due to discounting associated with product promotions designed to stimulate sales growth. The increase in cost of sales for the quarter resulted in a slight 50 basis point decrease in gross margin of 75.2% versus 75.8% 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 an incentive to reach higher product sales levels. Volume incentives vary slightly on a percentage basis by product due to pricing policies and commission funds in place and by the sales mix in our various markets. Volume incentives accounted for 36.9% of net sales in the second quarter, up 0.9% compared to the same period last year.

Selling, general, and administrative expenses were $30.3 million or 32.1% of net sales, up 5.6% from $28.7 million or 30.6% of net sales in the same period a year ago. Selling, general, and administrative expenses increased due to professional fees of $0.8 million related to the Company's strategic alliance with Fosun Pharma and $1.1 million associated with the evaluation of and negotiation with the Company in an alternative distribution channel, which we ultimately declined to pursue.

Excluding these costs, selling, general, and administrative expenses would have been down 1.2% from last year or 30.2% of net sales.

As a result, operating income decreased 25.6% to $5.8 million or 6.2% of net sales, from $7.8 million or 8.3% of net sales in the prior year period. Excluding the aforementioned business development costs, operating income for the second quarter would have decreased by 1.7% from last year or would have represented 8.2% of net sales.

Adjusted EBITDA -- as defined in our earnings press release to exclude share-based compensation expense -- decreased 18% to $7.9 million from $9.7 million in the second quarter of 2013. Normalizing for one-time business development costs, adjusted EBITDA would have been $9.8 million.

The effective income tax rate for the second quarter of 2014 was 40.5% compared to 34.9% in the second quarter of 2013. The current quarter's effective tax rate was above the US federal statutory tax rate of 35%, which was primarily attributable to an increase in tax liabilities associated with uncertain tax positions.

Net income for the quarter was $3.2 million or $0.20 per diluted share as compared to $6.1 million or $0.38 per diluted share in the year ago period.

Moving to the balance sheet, cash and cash equivalents as of June 30, 2014, were $68.6 million, down from $77.2 million at December 31, 2013. The lower cash balance reflects approximately $11.6 million in capital expenditures, $3.2 million of ordinary dividends, the paydown of existing liabilities, and the paydown of approximately $1.7 million on our long-term debt. Subsequent to quarter end, we also repatriated $11.3 million in foreign cash through intercompany dividends.

Inventory at June 30 was down 3.4% from December 31, 2013, and we have $139 million in current assets with access to $15 million on our $25 million revolving credit facility as of quarter end. Given our strong balance sheet and consistent operating cash flow, our Board of Directors approved a regular quarterly cash dividend of $0.10 per share payable on August 29, 2014, to shareholders of record as of the close of business on August 18, 2014.

In addition, we have agreed to pay a special cash dividend of $1.50 per share contingent upon the close of the transaction to form a joint venture with Fosun Pharma in China. Due to a blackout period beginning in mid-December and the subsequent negotiations with Fosun Pharma, we did not repurchase any shares of common stock during the quarter under the share repurchase program in 2014. Therefore, as of June 30, we had $7.5 million remaining available for repurchases. To enhance our ability to repurchase shares, the Company intends to establish a 10b5-1 plan, which allows for the periodic purchase of our shares based on pre-established criteria without restriction as to open windows.

In summary, our ample capital capacity enables us to continue to make long-term investments in sales, marketing, signs, product development initiatives, and overall operations, as well as to pursue strategic opportunities as they may arise. And as always, we remain focused on maximizing the Company's return on invested capital.

I'd now like to turn the call back over to Greg for some closing remarks.

Thanks, Steve. In closing, we're very pleased with our results for the first half of 2014 and look forward to updating you in the future regarding our continued progress on our growth initiatives. I would also like to thank our thousands of distributors and employees worldwide for their dedication and hard work.

That concludes our prepared remarks. Operator, please open up the call for questions.

(Operator Instructions). Brian Hollenden, Sidoti & Company.

I was hoping you could talk a little bit about the ERP system implementation and what benefits you have seen from the system so far.

Brian, could you say that again? You are a little faint, please.

Yes. Is that a little better?

Yes, that's much better, thank you.

I was just wondering if you could comment a little bit on where you are in the ERP system implementation and then what benefits you are seeing from that system?

So, we began the implementation process of the project in September last year, Brian, and we expect -- our targeted go live date is July next year, 2015. So right now we're right in the middle of the project in terms of defining the processes, redefining the processes that we need to adapt and so on, and defining our data elements. For those of you who may be familiar with ERP implementations, we're in the middle of conference room pilot two right now, where we are testing for the first time live data that has been transitioned from our existing legacy systems to test those through the new Oracle system. But the go live date will be July of 2015, and obviously we won't see any real benefit from the systems until post go live.

Okay. And then can you just talk briefly about what those benefits will be once you are live, and what additional information it will give you into your business?

Sure. I think right the way across the business we're going to have a significant benefit. First of all, in terms of financial reporting. For the first time, we will have a common system globally in all our operating units with a unified chartered account in market. Obviously we have unified chartered accounts on a consolidated basis now. It will make reporting easier. We will be able to report much faster. It will enable us to make inquiries into our financial results on a much faster basis to ensure that we have good data quickly with which to react and manage the business.

In terms of manufacturing, it will provide us with a much more rigorous ability to drill down into the various elements of our manufacturing costs, both from a raw material, manufacturing, labor, and overhead efficiencies, as well as inventory deployment and management around the world, and give us greater visibility into that.

In terms of sales and marketing and the driving of our business with our distributors and customers, it will enable us to really much more effectively and much more quickly profile the performance of our distributors by region, by rank, by product sales, and so on, so that we can understand what's working where a lot faster and design and respond accordingly with more effective sales programs.

So I think really across the business we are going to see a substantial improvement in our ability to dissect, understand, and react in a positive way and in a much more timely way going forward.

Okay. Thanks. And then switching over to the Fosun partnership, how quickly do you expect the products to hit the retail channel in China?

Brian, it's Greg. Yes, we're looking for a launch in the retail business sometime next year. It's going to be somewhat dependent on the licensing process, which, as I mentioned in my comments, we're already engaged in that process with the regulatory bodies. So we hope that it will be sometime towards the middle of next year.

Okay. And then once you start selling in China, how quickly do you get to a breakeven level? And then longer-term, does the business have a higher than company average operating margin? If you can talk about that a couple of years out.

Well, yes, and I think we've said that it takes us two or three years to get to critical mass, and so it's going to take that time, and certainly that's contingent upon getting into the market as quick as we can. And we're doing those things to get there as quick as we can, but it will take us two to three years to get to a critical mass.

And then longer-term, after you've reached the critical mass, do you anticipate a normalized operating margin to be higher than the overall Company average, or is it a similar type of profitability?

Yes, I think, as we've mentioned, China has the potential to be a very good market. We've said that I think within five years one of our top two markets. And that will allow us to continue to leverage our fixed SG&A costs on a global basis, not just to China but our NSP core business. We should see some better leverage costs and also get to a point over that period of time with operating margins at the level of our peers.

Okay. And then I'll just ask one other question, and I'll jump back into the queue. I was just wondering if you can give us a little bit more color. I'm looking at the active distributors number, year over year about an 8%, 8.5% decline. Just wondering if you can talk a little bit about how you get that number going in the other direction? How do you increase the distributor base?

So, I think we have to -- Brian, it's Wynne again. We address that obviously in different ways in the different business units. And one of the things to look at -- if you look at the active distributors and customers by segment, in NSP Americas, Asia Pacific, Europe and in Russia, Central and Eastern Europe, you'll see that the number of active distributors and customers and managers does trend downwards as the revenue trends down.

In Synergy there's an odd correlation there, where you look -- Synergy we're reporting very strong growth, but the active distributors and customers is trending down year over year in the quarter. But the managers is trending up, as you would expect. The reason for the trend down in Synergy in the active distributors and customers is that -- it's actually due to mixing markets.

Active distributors in different parts of the world -- the cost to be an active distributor is set at different levels according to economic conditions in different parts of the world. And so what we have seen is we have lost some ground in Southeast Asia in the quarter and in recent months, whilst we've gained ground in the much more affluent markets of Korea and Japan. And so as a result, the average active distributor value is lower in Southeast Asia than it is in Korea and Japan, and so that accounts for that difference in numbers.

In the US and Russia, obviously getting them going in the right direction is dependent on adoption of our sales programs and our new product programs. And so in Russia, I think it's fairly evident, getting them going in the right direction in general in a significant way, is going to depend on a return to stability in that region of the world from a political basis. Although we are seeing already -- and we haven't broken it out in the Q -- but we are seeing already that whilst Ukraine continues to be significantly challenged and Russia and Belarus have been soft, we have seen a modest uptick in June in our response to promotions and programs that we launched in June to better support distributors in the area in this tough time.

So, we're taking action with our products and programs in the region to tick it up. In the US, the launch of the new products, the launch of the IN.FORM program, the retail productivity tools, as well as a newly reorganized sales force that is aligned by states, by program, and by key distributor leaders, is going to be very effective I think in bringing the US back to growth, and the distributor numbers up.

Okay. Thanks. I appreciate the information.

Gregg Hillman, First Wilshire.

Continuing on Synergy, particularly in Korea and Japan, was that a record year in Korea, or did Korea peak before and you are coming back to its prior level?

No, this is a record year in Korea.

Okay. And how much penetration is -- how high is up in Korea? How big do you think that could get? And also what's driving it? Is it Slim Smart, or is it ProArgi9? How would you explain what's going on in Korea?

So I think the reason that we are experiencing the positive momentum in Korea and the accelerating momentum is due to a combination of factors. I think, as always, good momentum depends on good distributor leaders, which we have in Korea. They have a very good, robust, repeatable, duplicatable business method and training method that they follow. They are well supported by our local management, and I think the products placed into the business methods obviously are critically important as well.

So you take those factors together and all of those working together over a long period of time have built up to a point where we're seeing this gathering momentum and growth.

In terms of the long-term potential of the market, I think we're not going to make any commitments as to the levels we'll achieve right now, but we know the market has huge potential. We believe we're occupying a very strong place in the market with strong products. And if you look at the momentum, the sales figures achieved by many of our competitors, that's indicative of the opportunity that we have in Korea.

Okay. And Japan -- and is Korea -- and how much bigger is Korea than Japan right now in terms of sales? They are like 3 times the size of Japan?

No, it's about 4.5 to 5 times bigger.

4.5 to 5 times bigger. Okay, okay. That's pretty encouraging. And then finally could you turn to Europe, particularly Western Europe, and talk about how your strategy there is evolving, and what do you expect to happen there, both in NSP and Synergy?

Well, primarily Synergy because we only operate in one market in Western Europe, which is Poland, with NSP. So, in the markets in Synergy, if we go back a couple of quarters, we explained that whilst we -- over the last few years, we planted seeds with Synergy in Europe and had some good market growth. We hadn't done a really good job of supporting the distributors in those markets with strong corporate support.

So beginning middle of last -- second quarter of last year, we started to expand our resource, our corporate resource in Europe significantly, placing people in key markets to work closely and build partnerships with the local distributor leaders and build growth strategies with those leaders. And we're starting to see the impact of that in several markets across the region right now. Unfortunately, it's overshadowed at the moment by the adverse impact that we've seen from Norway, as mentioned in the prepared remarks.

But in general, we're seeing some positive momentum in several markets, and I think we expect to see that momentum continue going forward. We are launching new products at our European summit in Barcelona to expand the product range in September. We will be opening another major new market in 2015, and we'll announce that closer to the time.

And we just expect to continue to see the stronger support that we're providing to the region, together with the new products and obviously the supporting promotions to continue to build growth in the European region.

Okay. Great. And then finally, can you explain what the Norway thing was and whether that's over now or what was going on with that?

Yes, it's over. So, in late -- I think it was late November or early December 2012, we had a labeling discrepancy in the Norwegian market, that resulted in questions from the Norwegian Food Authority and required clarification on our labeling. Pending that clarification, the shipment of our products into the market were suspended for about six or seven weeks, I think, and in the back end of 2012. That did result obviously in an interruption in what was a gathering positive momentum in the Norwegian market.

We did receive a positive impact to the tune of about $1.4 million in Q1 of 2013 from pent-up sales taken in late 2012 that we were unable to ship, which creates an adverse comparison that we referred to in the prepared remarks. Following that resolution -- and it is completely over with; there has been no further issues in the market -- following that resolution, however, we have been unable to regain the positive momentum that we had in Norway ahead of that issue arising. So whilst we still have relatively stable sales right now in the market, the comparisons to the early part of last year are difficult because of the loss of momentum.

Okay. Thank you.

Nelson Obus, Wynnefield Capital Management.

I just had two quick questions. One, obviously these programs that are beginning to gain some traction are intended to promote a daily use of the product. Is this something you track right now? I guess my real question is how many of your products now are focused on daily use, or is this whole thing just devolving in terms of your tracking it?

So, the way we track it right now, Nelson -- Nelson, this is Wynne again.

Yes. Hi, there.

The way we track it, we break it out actually into two sets of products. Because the way we think about IN.FORM is it is a weight management program, but it's also positioned inside our overall program of the transformational habit of health. And to refresh people's memory, the transformational habit of health has three pillars. The first pillar is weight management and nutrition, the second pillar is daily essential supplementation, and the third is targeted care.

So, we track our sales into that program right now in two ways. The first is weight management sales, and the second is other products, which may be either daily essential supplementation products or targeted care products. And what we're finding right now is weight management and -- it depends on which group is running -- but on average, we're seeing roughly a 50-50 split in product sales in groups running with the IN.FORM right now.

So we're seeing our weight management products being promoted, but we're also seeing a pull from the other two pillars as well, which is, from our perspective, very positive.

Got it. Okay. And this is probably a question for Steve, but you guys have done a great job over the years dealing with tax challenges, and I just wonder if you could take us through the income tax situation. It sounds like, from reading it quickly, that a country may have made a claim on you that required you putting something into the balance sheet and, if I read this right, increasing your tax rate. Could you just go through that? I realize it's an ongoing battle that you've generally won.

Yes, well, and let me just -- you are referring to the fact that the rate was at -- up a little bit from the statutory rate at 40.5%.

And you seem to have tied that to an increasing -- to an issue of an additional question tax liability, which we understand is the course of -- that's the cost of doing business in multiple countries. I understand that.

Right. It's not really specific to one country, but it's an increase in our liability related to unrecognized tax benefits. And at times, we look at that tax positions that we take, and if we take a little bit more aggressive tax position that we think is right, it may result in an increase in that liability for a period of time or until an audit -- the IRS completes an audit. It may be related to the fact that a country is growing fast, and our transfer prices don't quite keep up with that growth as they roll through inventory. And so there are a number of things that can give rise to an increase in that tax liability. And we did have a little bit there that pushed the rate up this quarter.

As you know, we also had some favorable things in the first quarter related to a business structure that we put in place a few years ago that gave rise to some tax benefits where we were able to monetize some net operating losses in a number of countries and free up foreign tax countries in other countries. So, although we had a little bit higher rate this quarter, we had a very large benefit last quarter and year to date a benefit. And so we continue to monitor our tax strategies and programs to limit our taxes on a worldwide basis.

So those numbers are not -- they are not country specific? They are a combined analysis of your tax department? Do I understand that right?

Yes, I think that's an accurate statement. At times, the larger countries -- and for example, Korea, a country that's growing fast may give rise to a liability because we changed transfer prices in accordance with the transfer pricing rules. But as those transfer prices flow through inventory on a country that's growing fast, it may give rise to an increase in that liability for a period of time.

And, look, I don't want to get into nitpicking, but how -- just in general terms, how would that calculation affect the overall tax rate number? I am just trying to understand that. I understand how it would be a balance sheet situation, but somehow this has now become a P&L issue. And just in layman's terms, how does that happen?

Well, yes, that's a good question, Nelson. It is an increase in the balance sheet, but to get to the balance sheet, it flows through the tax provision in the P&L as an accrual, even though it's not been assessed and it's not something that we've paid.

Got it. Okay. All right. I see. So there's an incremental -- I see. You take a position. So there's an incremental charge, you flow it through the P&L and it affects the tax rate. I got it. That's essentially what's going on.

That's exactly right.

Okay. Thanks.

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