Nature's Sunshine Products Inc (NATR) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Nature's Sunshine Products' Third Quarter 2017 Earnings Conference Call. (Operator Instructions) And this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Richard Strulson, General Counsel and Chief Compliance Officer of Nature's Sunshine Products. Thank you, Mr. Strulson. You may now have the floor.

Thanks. Hi, everyone, and thanks to all of you for joining our conference call to discuss our third 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, 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'll 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 your participation in today's call. Also joining me today is our Chief Financial Officer, Joe Baty.

We are pleased to report an improved third quarter, with net sales of $89.3 million representing growth of 4.5% year-over-year and 9.8% sequentially.

We saw sales growth return to Synergy WorldWide, where Synergy reported the highest sales quarter in the company's 18-year history. We also posted strong growth in China, along with continued growth in NSP Russia, Central and Eastern Europe, partially offset by declines in NSP Americas.

While we continue to see declines in NSP Americas, sales have begun to stabilize as the disruptions associated with the implementation of the company's Oracle ERP system in April have moderated. We continue to be in the process of implementation and have more work to do to complete implementation. However, we are pleased to report that we have seen improvement in the operational challenges that materialized in our call center and online ordering system.

During the third quarter, we saw improvements in Korea, where revenue was up 3% in local currency. As we noted last quarter, we have been focused on increasing distributor engagement and saw a return to positive sales comparisons and an improved focus on core products in the market.

Next week I will be attending our Korea National Convention, where we're expecting over 4,000 attendees. With Korea sales recovering, it allows the strength in Japan to contribute to good growth for the region. Sales in Japan increased 113% in local currency versus the prior year. China sales, included within our China and New Markets category, displayed strong growth following the receipt of our direct selling license that we announced in May. On a local currency basis, third quarter sales in China increased 33% sequentially and 58% year-over-year.

While it remains early with regard to our expanded business activities, we are pleased with the sales trends and the response since receiving our direct selling license. I just returned from Xuzhou, where we had nearly 2,000 independent service providers attend our national convention. The attendance was up from 1,000 during our last event in May.

We are seeing good activity in several aspects of our business in China. We launched general trade in July and are seeing good growth in customers and independent service providers. This year, we introduced a retail club model, where independent service provider opens and operates his or her own storefront. There were 60 retail clubs launched in China during the third quarter, and the model appears to be working well, with good reorder rates. I had the opportunity to visit 2 clubs during my recent visit, and I'm encouraged by the club opportunity in addition to the traditional direct selling model also being utilized in China.

Before I turn the call over to Joe for a more detailed discussion of our third quarter results, let me comment on the review of our cost structure I mentioned last quarter. We have begun to review both our direct and indirect costs and continue to believe that there is an opportunity to enhance profitability. We'll update you on our initiatives as they are deployed.

Now let me turn the call over to Joe to discuss our financial results.

Thank you, Greg, and good afternoon, everyone. Net sales in the third quarter of 2017 were $89.3 million compared to $85.4 million in the same quarter last year. On a local currency basis, net sales increased 4.3% year-over-year. As Greg noted, the increase was primarily driven by recovered growth in Synergy WorldWide and significant growth in China as well as continued growth in NSP Russia, Central and Eastern Europe, slightly offset by a decline in NSP Americas.

NSP Americas sales declined 4.5% to $41.3 million during the third quarter. Net sales in NSP North America declined 4.6% in local currencies, with sales in the U.S. down 4.3%, primarily due to the interruptions in customer service as a result of the Oracle implementation Greg discussed.

Sales in NSP Latin America were also impacted by the implementation of Oracle as well as continued headwinds relating to product registration that have affected sales over the last year.

NSP Latin America was down 8.1% on a local currency basis. Synergy WorldWide net sales in the third quarter grew 10.7% year-over-year on a local currency basis to $34.5 million. This increase was primarily due to sales growth in Asia Pacific and North America regions, partially offset by declines in Europe.

Net sales in Synergy Asia Pacific increased 16.5% on a local currency basis. In Europe, Synergy sales declined 8.4% on a local currency basis, while sales in North America increased 5% over the third quarter last year. In NSP Russia, Central and Eastern Europe, net sales rose 9.8% in local currencies to $7.1 million. We continue to see consistently improved results as a result of currency stabilization and the benefits of product promotions that are driving distributor engagement.

China and new market sales increased to $6.4 million versus $4.4 million last year, an increase from $4.9 million in the second quarter. Gross margin decreased to 73.7% from 74.8% in the year ago period. The gross margin decrease was primarily driven by changes in our sales mix by market as well as foreign currency fluctuations. Volume incentives accounted for 34.4% of net sales in the third quarter compared to 34.7% of net sales in the same period last year. The decrease in volume incentives as a percentage of sales was driven by changes in segment market mix, primarily driven by growth in China service fees paid to distributors, which are accounted for in SG&A rather than volume incentives.

Selling, general and administrative expenses were $32.9 million, up $3.7 million compared to $29.2 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses were 36.9% in the third quarter compared to 34.2% in the prior year. The increase in SG&A was primarily due to $1.2 million of increased depreciation related to the Oracle ERP implementation, expenses associated with increased infrastructure investment in China and the impact of independent service fees in China being classified in SG&A.

We reported operating income of $2.2 million or 2.4% of net sales compared to operating income of $5.1 million or 5.9% of net sales in the prior year period. Adjusted EBITDA, as defined in our press release as net income from continuing operations before income taxes, depreciation, amortization, stock-based compensation and other income or loss, was $4.7 million in the third quarter of 2017 as compared to $7.1 million in the third quarter of 2016.

The effective income tax rate for the third quarter of 2017 was 0% as a result of reversal of certain transfer pricing tax reserves offset by adjustment of certain valuation allowances and losses related to China that presently do not provide future tax benefit.

Net income attributable to common shareholders for the quarter was $2.4 million or $0.13 per diluted share as compared to net income of $4.2 million or $0.22 per diluted share in the year ago period.

Turning to the balance sheet. Cash and cash equivalents on September 30 were $47.7 million and long-term debt was $19.2 million. For the first 9 months of 2017, we generated $8 million of cash from operations compared to $5.1 million in the prior year. Capital expenditures year-to-date were $3.9 million.

I would now like to turn the call back to the operator to facilitate Q&A.

(Operator Instructions) Our first question is with Doug Lane from Lane Research.

Let's talk about a couple things. It sounds like an interesting inflection point here. You mentioned the drag on sales and profitability from ERP in the second and third quarters, and that this could be impacting future quarters as well. But I mean, it sounds like we're -- it shouldn't be impacting any worse than it was in the second and third quarters. So could we characterize the situation as being, yes, it's a drag, but not as much of a drag as we had in the second and third quarter?

Yes, we can characterize it -- Doug, this is Joe Baty. But we continue to see improvement regarding the implementation and the drag or the impact is clearly going down as this plays forward, and we expect the impact in Q4 to be less than it was here in this current quarter.

Okay. And looking at China here, the losses in China, the rate improved a lot from the first half, $0.03 in the quarter versus a $0.15 for the year. So I mean, could we be looking at a breakeven point at some quarter in 2018 for China?

Yes, Doug, this is Greg. Yes, I think the way to look at it is we're going to continue to invest. And I think we're early stages, and we want to continue to drive the business and create strong momentum. So with that investment, I think you can still expect to see us get to a breakeven point towards the back half of next year.

Okay. So that -- that's getting pretty good traction. And then you've been talking about Korea being a drag. And I guess, from where I sit, I'm just sort of reintroduced to the company here. But a return to positive sales growth seems to be pretty good progress. Now do you think that's sustainable? Or do you think it could go either way for the next couple of quarters as you sort things out?

No, we feel comfortable. I think, as we said, we have some distributor engagement issues earlier in the year. That's been resolved, and I feel it's very, very engaged. As I mentioned, I'm going over there next week. We're having over 4,000 people at the Korea National Convention. The field's very excited. We're launching a brand-new product next week. It's an energy product that we've already sort of pre-launched and are having tremendous sales. So I think the field's back engaged. We've also attracted some new leadership from some other companies, so I feel very good about continued strong performance in Korea.

Well, that's definitely a positive relative to recent trends, that's for sure. And then lastly, I know -- we knew each other from Herbalife, and other than scale, where they're a much bigger company, is there anything structurally about Nature's Sunshine that would be different from Herbalife from a margin structure standpoint as you go through your analysis of cost opportunities?

No, I think it's slightly different in the sense that if you look at the mix of the businesses that we have, we have Synergy brand as well as these -- the traditional NSP practitioner business. So it's slightly different model, but in terms of, I think, driving cost out, it's pretty consistent. I think what you'd look at, at any company. And so Joe and I and the management team are taking a hard look at that, and I think we'll be able to talk in more detail about it at the next earnings call.

(Operator Instructions) There seems to be no further questions at this time. I would now like to pass the call over to Greg Probert for closing remarks.

Thank you. Thanks, again, for your support and for everyone participating on today's call. Everyone have a great day, and we'll talk to you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.