Nature's Sunshine Products Inc (NATR) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Nature's Sunshine Products First Quarter 2017 Earnings Conference Call. (Operator Instructions) And this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Richard Strulson, General Counsel and Chief Compliance Officer of Nature's Sunshine Products. Thank you. Mr. Strulson, you now have the floor.

Thanks a lot. Good afternoon, everyone, and thanks for joining our conference call to discuss our first quarter 2017 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.

The press release, which was issued this afternoon at approximately 4:05 Eastern Time, and the information on this call may 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 within the company's control. These statements are often characterized by terminologies such as believe, hope, may, 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 Form 10-K under the caption Risk Factors and 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. Good afternoon, everyone, and thank you for participation in today's call. Also joining me today is our Chief Financial Officer, Joe Baty.

First quarter net sales of $83.1 million were up 0.8% year-over-year, led by 19.8% growth in NSP Russia, Central and Eastern Europe and $2.7 million of incremental e-commerce revenue from Hong Kong that helped offset softer sales in Synergy Asia, driven by geopolitical and economic challenges in South Korea that affected many of our peers as well and a modest decline in NSP Americas.

As we have discussed over the last several quarters, we are in the midst of a significant investment period, as we have built a capital and expense infrastructure in China in anticipation of a direct selling opportunity in this promising market. As of today, we have not yet received a direct selling license.

Additionally, we began the initial implementation of Oracle in April, which is likely to have a somewhat disruptive impact on revenue and expense levels as we progress through the implementation process. Specifically, we expect the disruption to operations during the second quarter for our NSP Americas division. We are working to manage expense levels during this investment period, including delaying incremental expenditures in China. However, we are making decisions focused on our long-term strategic growth objectives.

To this end, the Board of Directors has decided to suspend the quarterly dividend. The dividend suspension will support the company's objective to continue our strategic investment in China. The board will periodically evaluate our capital allocation and uses of cash in the future. We reported earnings of $0.11 per share during the first quarter, which include $0.08 per share of expenses directly related to our investments in China.

Let me now discuss our sales performance in further detail. NSP Americas sales declined 1.2% to $44.6 million during the first quarter. Canada posted 1.0% growth in local currency on continued adoption of the IN. FORM business model and the carryover impact of new product introductions last year. The United States was down 1%, primarily due to softer retail sales and general market conditions. NSP Latin America continued to face the product registration headwinds that have impacted sales over the last year, reporting a 3% decline.

Our IN. FORM business model, which is focused on both weight management and building a daily habit of health, continues to drive business in the U.S. and Canada. IN. FORM sales grew over 20% during the quarter, with continued certification growth and distributor groups participating. Penetration of IN. FORM continues to increase, as is apparent in the outperformance of this business model in North America. In April, we held our U.S. convention celebrating our 45th anniversary.

Turning to Synergy Worldwide. First quarter sales declined 8.5% year-over-year to $27.3 million or a 9.5% decline on a local currency basis. The change in trend regionally occurred in Synergy Asia, which declined 12.5% on a local currency basis. This decline was primarily the result of geopolitical and economic challenges that have affected the broader direct selling market in general and impacted our sales during the first quarter. Additionally, Synergy Asia is comparing against a very strong growth rate last year.

In Europe, sales declined 1.9% on a local currency basis, driven by lower sales in several Northern European markets. We'll continue to focus on driving the implementation of the Elite Health program across our Europe markets this year.

Following the limited-time offer of Elite Health Purify Kit, we'll now fully launch the Purify Kit and additional products to support the adoption of Elite Health across Synergy Europe. The Elite Health System is geared towards detox, weight management and a daily habit of health. Driving Elite Health is a key strategy for 2017 across Asia Pacific and Europe followed by introduction in Synergy North America later this year. During the first quarter, North America declined 6.1% versus prior year.

In NSP Russia, Central and Eastern Europe, net sales rose 19.8% in U.S. dollars to $7.6 million and increased 20.2% on a local currency basis. The continued improvement in growth trends reflects strong kit sales and pricing actions taken last year. We continue to adjust product discounts to reflect stability in currency rates and are focused on distributor engagement and additional market openings in Central and Eastern Europe.

Now turning to China and new markets. First quarter net sales increased to $3.5 million versus $1.0 million in the prior year period. During the first quarter, we again recorded incremental preopening product sales through Hong Kong that drove the majority of the year-over-year sales increase. As I noted earlier in the call, we have not yet received a direct selling license in China. As a result, our sales were below our initial expectations, yet we have maintained an elevated level of SG&A to support the expected launch.

With that, let me turn it over to Joe to discuss the financials.

Thank you, Greg. And good afternoon, everyone. Net sales in the first quarter of 2017 were $83.1 million, up 0.8% from $82.4 million in the same quarter last year. On a local currency basis, net sales grew by 0.4% year-over-year. As Greg noted, the growth was primarily driven by NSP Russia, Central and Eastern Europe and the product sales related to preopening product sales through Hong Kong, offset by a decline in net sales in the Synergy Worldwide segment, while NSP Americas was down modestly.

Gross margin increased to 73.9% from 73.3% in the year-ago period. The gross margin increase was primarily driven by market mix and the weakening of the U.S. dollar when compared to several international currencies. Volume incentives accounted for 34.9% of net sales in the first quarter compared to 36.3% of net sales in the same period last year. The decline in volume incentives as a percentage of sales was driven by changes in segment market mix, including the preopening product sales into China through Hong Kong for which no volume incentives are paid. Recall that in China, the company pays independent service fees, which are included in selling, general and administrative expenses.

Selling, general and administrative expenses were $30.3 million, up almost $2.0 million compared to $28.4 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses were 36.5% in the first quarter compared to 34.4% in the prior year. The increase in SG&A was primarily due to incremental independent service fees related to preopening product sales through Hong Kong, expenses associated with increased infrastructure investment in China and expenses related to increased infrastructure and headcount in Synergy Europe and Asia Pacific.

We reported operating income of $2.1 million or 2.5% of net sales compared to operating income of $2.1 million or 2.6% of net sales in the prior year period. Adjusted EBITDA, as defined in our press release as net income or loss from continuing operations before income taxes, depreciation, amortization, stock-based compensation and other income or loss, increased modestly to $4.3 million in the first quarter of 2017 as compared to $4.2 million in the first quarter of 2016.

The effective income tax rate for the first quarter of 2017 was impacted by our inability to benefit from certain foreign-based operating losses. This resulted in a significant increase in our effective tax rate compared to statutory rates. The effective tax rate was 44% for the first quarter of 2017. Higher-than-statutory effective rates may continue, at least in the near term.

Net income attributable to common shareholders for the quarter was $2.2 million or $0.11 per share as compared to net income of $2.1 million or $0.11 per diluted share in the year-ago period. Our expectations for new markets in 2017 continue to be modest. However, we are working to protect our infrastructure in anticipation of the direct selling launch in China. As such, we anticipate ongoing losses related to China that will negatively impact 2017 financial results.

Additionally, as we noted last quarter, beginning in the second quarter, there will be a significant increase in annualized depreciation and other related expenses that will run through the P&L, as we went live with the Oracle implementation on April 2. We currently estimate incremental costs of approximately $7 million on an annualized basis going forward. This includes approximately $5 million in depreciation expense, as the Oracle asset is depreciated over a 10-year life, and a reduction of capitalized in-house ERP development cost and an increase in other expenses aggregating to approximately $2 million.

Turning to the balance sheet. Cash and cash equivalents at March 31 were $33.1 million. For the first quarter of 2017, we generated $0.8 million of cash from operations and invested $2.7 million in capital expenditures. The largest component of capital expenditures in the first quarter of 2017 was in support of our Oracle ERP initiative, which the company began to implement on April 2.

Inventory was $49.3 million at the end of the first quarter, up from $47.6 million at the end of 2016. The increase primarily reflects inventory buildup in anticipation of implementing the new ERP system as well as timing and growth considerations. We returned $1.9 million in dividends to shareholders and had net borrowings of $3.3 million on our revolving credit facility in the first quarter.

I will now turn the call back to Greg for his concluding remarks.

Thanks, Joe. Thank you again for your support and for participating in today's call. Have a great day.