Nature's Sunshine Products Inc (NATR) 2023 Q4 法說會逐字稿

No, good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine financial results for the fourth quarter and full year ended December 31st, 2023. Joining us today are Nature's Sunshine, CEO Terrence Moorehead, CFO, Jean Shane Jones, and General Counsel, Nathan Brower. Following their remarks, we'll open the call for analyst questions.

Before we go further, I would like to turn the call over to Mr. Brower as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. It provides important cautions regarding forward-looking statements made.

Please go ahead.

Thank you. Good afternoon, and thanks for joining our conference call to discuss our fourth quarter and full year 2023 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through March 26th and via a live webcast that will be posted in the Investor Relations portion of our website at ir dot Nature's Sunshine.com.

The information on this call contains forward-looking statements. These statements are often characterized by terminology, 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 may be materially different from the results implied by forward-looking statements. Factors that could cause results to differ materially from those implied herein 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 information on this call speaks only as of today's date, and the Company disclaims any duty to update the information provided herein and now I would like to turn the call over to the CEO of Nature's Sunshine, Terrence Moorehead.

Terrence?

Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today's call to discuss our fourth quarter and full year results. Today, I'll provide some context for our performance, which has been fueled by the continued execution of our global strategies. I'll also share some insights on how we believe the business is progressing as we move into 2024 from there, Shane will take you through the specifics of our financials in more detail.

Starting with our full year results, we reported net sales of $445 million, making 2023 one of the strongest sales years in our company's history. When you adjust for the impact of foreign exchange, our 2023 sales were 453 million, up 7% versus 2022. This is a tremendous accomplishment given the backdrop of geopolitical unrest in Europe, elevated inflation, high interest rates and lagging consumer confidence. These results demonstrate that our high-quality products, strong field activation and omnichannel approach can drive strong financial performance even during periods of economic uncertainty and social unrest. 2023 was also the 1st year to benefit from our gross margin improvement initiatives. You'll remember that we committed to delivering $10 million of gross savings by focusing on several areas. First, reducing the cost of our ingredients, packaging and formulations, while maintaining quality and performance Second, improving efficiency and reducing waste from our manufacturing processes, and third, reducing costs related to logistics and transportation. I'm pleased to say that we've made excellent progress on these initiatives in 2023, as gross margins increased 110 basis points to 72.1%. Moving forward, we expect to meet or exceed our 10 million savings plan with quarterly fluctuations in gross margins throughout 2024 due to mix and so and seasonal promotions. Our 2023 gross margin performance, along with our top line momentum, aided our adjusted EBITDA grew for the year, which was up 26% versus 2022 to 40.4 million. The strong momentum in our business was also apparent in our fourth quarter results where we reported net sales of $108 million when excluding the impact of foreign exchange, which was a 6.6% year-over-year increase this was led by 13% growth in North America, followed by 7% growth in Asia Pacific on a constant dollar basis. The strong sales performance performance helped drive a 21% increase in adjusted EBITDA to 9.7 million.

A closer look at our fourth quarter results shows a meaningful breakthrough in North America, where sales were up 13% due to our strategic investment in digital and improved activation with our nutritional health practitioners and specialty retailers.

For the quarter, digital sales increased 97%, driven by new customer growth that was up 27% and increased and incremental Amazon sales. The strong launch of our new power line products also helped drive new customer growth as the introduction of our power greens power Beats and power meal products helped improve activation and drive orders across all channels. In 2024, we will build on this momentum by further expanding our digital footprint and increasing the performance of our nutritional practitioners and specialty retailers.

In Asia Pacific, sales were up 7%, primarily driven by Taiwan and Japan. Our investment in field activation continue to pay dividends in Taiwan, driving 49% order growth for the quarter. We saw a similar story in Japan with solid execution of field fundamentals and a continued focus on driving customers to our Subscribe and Thrive Autoship program that represents about 50% of sales to support field activation in Japan. We will continue to make strategic investments in the market with plans to open a new training facility that will double capacity and allow the team to support continued growth.

Another strong contributor to the fourth quarter was China that delivered an 8% sales increase on a local currency basis. Our digital live streaming model continued to attract new customers and drive strong order growth, and we will continue to invest in this innovative and powerful digital approach. Overall, we continue to be very positive on the long-term prospects of our business in China, but are cautious in the short term, given the economic conditions in Europe, sales were down 8%, primarily due to the prolonged war and its toll and the toll that it's taking on Eastern European markets and the surrounding area. Our team has done an excellent job attracting new customers and driving orders in Central Europe. And we continue to see a positive consumer response to our products and remain steadfast in our commitment to invest in field activation, improve sales tools and expand our geographic footprint in Central European markets in an effort to continue to capture the untapped potential these markets offer.

In summary, our fourth quarter and full year 2023 results demonstrate the strong underlying fundamentals of our business, and we're very pleased with our performance and excited about our plans for 2024. Once again, I would like to leave you with the following thoughts. First, our business continues to outperform the market with sales growth, driven by strategic investments in digital field activation and brand-building initiatives working in combination. These investments have allowed us to attract and retain more new customers, drive order growth and build momentum in the market, significantly outpacing market growth Second, our gross margin savings initiatives are on track to deliver the 10 million of gross savings we discussed. The team has verified the savings, and we've already started to see the benefits of our plans as gross margin improved in 2023. Over the coming year, we expect to see continued progress Third, and finally, we've built a strong financial position with a strong balance sheet and strong positive cash flow that will allow us to continue to invest in our growth strategies as we move forward. We're still operating in a challenging external environment, but our team is focused. They continue to execute our strategies well, and we expect to take this positive momentum through 2024 and beyond.

With that, I'd like to turn the call over to our Chief Financial Officer, Shane Jones.

James.

Thank you, Joe. We continue to be excited about the positive momentum that we're seeing in North America and Asia Pacific, resulting in another strong quarter and full year.

Net sales in the fourth quarter were $108.9 million compared to $102.7 million in the year-ago quarter, representing a 6% increase versus prior year. This was driven by 13% growth in North America and 6% growth in Asia Pacific. Consolidated net sales for full year 2023 finished at 445.3 million compared to 421.9 million in the previous year. Representing 6% growth or 7% growth, excluding the 7.5 million headwind from foreign exchange rates.

Looking at sales by market in Q4, North America sales grew 13% versus last versus last year. The double digit growth in North America sales was a result of strong growth from both our digital business and our core business of practitioners and retailers as Terrence mentioned, in Q4, our digital business was up 97% with new customer growth of 27%. For full year 2023, North America sales increased 5% to 139.8 million, driven by a 58% increase in digital. Asia Pacific also saw continued growth with sales increasing 6% or 7% on a local currency basis. This was driven by local currency growth in Taiwan, Japan and China of 21%, 9% and 8% respectively. This above market growth was driven by our continued emphasis on field energy, along with a healthy increases in customers and transactions. Full year 2023 sales in Asia Pacific were 201.3 million, representing growth of 8% or 13%, excluding the impact of foreign exchange. Sales in Europe during Q4 decreased 5% or 8% on a local currency basis. This is reflective of the continued impact of the war as well as macroeconomic challenges that are pressuring consumer spending and demand, especially in Eastern Europe.

Net sales in Europe for the full year 2023 increased 3% or 1% on a local currency basis to 81.8 or 81.1 million in Latin America. Our continued focus on field energy sales tools and business fundamentals is generating customer growth and activation. However, the sales impact of those efforts remains muted as sales increased only 5% or 1% on a currency neutral basis. Full year sales in Latin America were 21.8 million, a 3% increase versus prior year or 1% excluding the impact of foreign exchange. Gross margin in the fourth quarter decreased 30 basis points year over year to 71.9%. This modest decrease was a result of our cost saving initiatives being offset by increased promotional activity during targeted windows, such as cyber five inflationary pressures and market mix. The market mix impact was due to stronger growth in North America, where gross margins are lower, but contribution margin is higher than other regions. As Terrence mentioned for the year, our gross margins improved 110 basis points or 4.9 million versus prior year, driven primarily by our savings initiatives previously outlined. We are encouraged by the progress that we're seeing against these initiatives and reiterate our commitment to reach at least 10 million and savings volume incentives as a percentage of net sales were 30.1% compared to 30.3% in the year-ago quarter. The slight decrease was primarily due to the changes in market and channel mix.

Selling, general and administrative expenses during the fourth quarter were 39.9 million compared to 38.8 million in the year-ago quarter. The slight increase on a dollar basis was driven by increased incentive compensation, variable costs related to sales growth and investments to drive digital growth as a percentage of net sales, SG&A improved 120 basis points to 36.6% for the fourth quarter of 2023. Operating income increased to $5.7 million or 5.2% of net sales compared to 4.2 million or 4.1% of net sales in the prior year. Gaap net income attributable to common shareholders for the fourth quarter was 9 million or $0.46 per diluted share as compared to 2 million or $0.1 per diluted share in the year ago quarter the higher GAAP net income was primarily the result of strong sales growth and operating income improvement in the quarter, as well as favorable changes in our valuation allowances related to foreign tax credits compared to the fourth quarter of last year. Adjusted EBITDA, as defined in our earnings release increased 21% to 9.7 million compared to 6.1 million in the fourth quarter of 2022. The strong growth in EBITDA was attributable attributable to our sales growth, along with leverage on SG&A for full year 2023 adjusted EBITDA was 40.4 million, 26% higher than prior year, driven by sales growth and improved gross margin. Our balance sheet remains strong with cash and cash equivalents of 82.4 million and no outstanding debt. Operating cash flow less capital expenditures for 2023 produced $31 million in free cash flow compared to negative free cash flow of $8 million in 2022. As part of our capital allocation plan, we continue to utilize our share repurchase authorization buying 424,000 shares during 2023 for 6.4 million for an average of $15.9 per share as of December 31st, 2023, 17.6 million remains of our 30 million share repurchase program.

Looking beyond share repurchases, our healthy capital allocation structure positions us well to continue our digital transformation and other strategic initiatives.

Now I would like to introduce our 2024 outlook. We are very excited about both the immediate and long term growth prospects of the business and remain committed to driving improved efficiency and profitability. Therefore, we are providing full year 2024 net sales guidance of 455 to 480 million. Please note this includes an estimated 100 basis point headwind to growth due to foreign exchange. As such, our guidance equates to constant currency growth of 3% to 9%. In addition, we expect adjusted EBITDA to range between 42 and 48 million. Overall, we are very excited about the progress made in 2023 and continue to focus on driving strong execution against our digital and other key strategic initiatives as we do so, we are confident that we will continue the strong momentum established in 2023 and driving outsized shareholder returns in 2024 and beyond. Now I will turn the time back.

Yes.

Thank you, sir. Apologies, ladies and gentlemen, we will now conduct the question and answer session. If you have a question please press star followed by the number one on your telephone keypad. And if you wish to cancel your request, please press star two. And your first question comes from Linda Bolton Weiser from Davidson. Your line is now open.

Yes, hello, Tom.

So lender.

Hi, hi. So I was wondering about on the quarter in the fourth quarter, what would you say was there any particular regions that came in fair amount better than what you expected? And then anything that was softer than expected? Just a little color would be helpful.

You're saying you want to start with that?

Yes, absolutely, Linda. First of all, let's start with North America. Yes, we had very strong growth as you see in North America, double-digit growth there. And as we had reflected, that's really how our digital growth was very, very strong, 97% there driven by both customer count increase and a healthy increase from our Amazon business and then in addition, our core business there performed very well as well. So very pleased with what we're seeing and the momentum there. A lot of good things happening there and as far as areas where it were not quite as good as we would have hoped. If you look at Europe, there continue to be struggles with Europe and they continue to work through a lot of those issues that are there. But nonetheless, both economic as well as other issues in that area are putting a cap on our ability to to grow in the short term.

And with regard to Europe, is there any way to break down the performance a little bit roughly tell us how Eastern Europe was VERSUS Western Europe in the quarter?

Yes, hold on that.

Okay.

Yes.

So in the as we look at the total European business, as you know, that on a I'll just talk local currency basis was down 8%. And if we look at Eastern Europe, Eastern Europe is down 10% and then Western Europe down 13% and at Central Europe up SLIGHTLY.

Okay.

Third, even though we're seeing it fair amount of the pressure we're seeing in Eastern Europe is just related to exchange rates there and the value of the dollar impact negatively impacting people's ability to buy right now. So once we get some stability there again, we expect those markets to grow. It start to stabilize for us and move in the right direction.

And at this point, are you booking any revenue in Russia or Ukraine or is there pretty much the euro at this point?

We are going to continue to have revenue in both those locations at this point and so order, is there any is there any way to quantify there?

We aren't disclosing the specifics of those at this point, but but I will tell you that the Ukraine business has stabilized and is actually growing slightly. It's really the Russian business.

Yes, Ukraine is up significantly and it was up double digit. Actually, Ukraine was up double digits versus prior year. So we continue to drive business through our Ukrainian team there on the ground building customer growth, still servicing orders. So they're actually doing quite a quite a good job. We've got some nice stability there. So most of the downward pressure would be driven by the ruble and kind of further Eastern market Eastern European market.

Okay. And then on your North American performance was pretty pretty encouraging. Would you say it's sustainable or was it a little bit? Is it going to be lumpier based on the new product launches that you've had that drove that growth or maybe you could just give a little more color.

I think it was I think it was a bit kind of all in for us. Again, additional was clicking. The new product launches of the power line were very strong. One of our strongest launches, it kind of was certainly within the last decade and then the tremendous response and activation that we saw with our practitioners and specialty retailers was that also. So we believe we'll have continued strength in digital. Our goal is to continue to stabilize our kind of core business with the practitioners and retailers and build on the power line sales going forward. We don't want to have a launch them and leave them type of strategy. That's one of our key master brands. So we're going to be supporting that wind and building our footprint around that fact of the power line going forward.

So we do expect to see continued strength in North America. You've heard Shane and myself talk about how North America has turned the corner and we really don't want to look back but I don't necessarily expect to see double-digit growth every quarter from North America, but we do expect to see continued strength, especially driven by our digital business, which continues to drive new customer growth and order activations in percentage of North America is digital sales now say about 25% at 25%?

Yes.

Okay. And then, Tom, you mentioned maybe some variability in gross margin by quarter in 2024, depending on a couple of things, I guess promotional cadence maybe is one two. Is there any color you could give to help in modeling how that will go through the year?

Ken, you want to take that one?

Yes.

So as Terrence mentioned, is going to be some variability there in other words, it's not going to be a stair step up every single quarter now just ratably in a straight line. And part of that is because of promotionality. Part of that is just as we're working through old inventory, that's the cost savings and things that we're going, what we're doing are coming through in different amounts.

And then on top of that, you've got the year-over-year amounts that you're going over as well. So what we would say is, as you look through the year as a whole, we are very committed to getting to the numbers that we've talked about, that won't necessarily mean that.

Yes, that will be exactly by quarter to help answer you.

Yes, but you did say that gross margin should be up for the full year in 2020.

For absolute absolute, we were about 10 basis points last year. Clearly to get to our $10 million, we'll need a very good year again this year as well.

And the other thing to realize, Linda, is if you think about our promotionality, there's definitely seasonality to that. For instance, the Cyber five period in Q4, obviously, that's a more promotional period. That's something that we started for the first time this year. We were actually involved in Cyber five period when we hadn't done that before for the first time, very successful for us by the way, but that has some impact on gross margin. And then likewise in Q1, there is a little bit more than as much necessarily as Q4, but there is a little bit more promotionality there as well.

And then Q2 and Q3.

Yes.

Okay. I think that's very helpful in the room, maybe you could give a little more color on what you're seeing in Asia and in particular, I think you said, what was it a new new training center in Japan? Maybe like what you think that will do in terms of helping to drive performance there?

Yes.

So if I start with Japan, the team's done a great job there driving people into the business getting them into Subscribe and Thrive. So roughly 70% of the people that join us go right into a Subscribe and Thrive Autoship of that, that kind of nets out to us right now about 50% of sales. So I think we've got a great engine of driving customer growth. The new kind of training center is going to double their capacity if it's just in a new facility to train just train staff to train people don't just allow us to to put kind of more people through the through the system. So I think that's somewhat speaks for itself. We're doing more, I of cut field activation, upfronts, building the team in Korea to get our Korean business back on its feet and back on track. Taiwan continues to be a powerhouse. So we expect to see continued strength in Taiwan. And as I said, kind of China, we're just keeping our eye on China. I think we've had a we had a great run in 2023. There's a fair amount of uncertainty around the economy in China going forward. So I think we should expect to see maybe some lumpy performance in China, but still very good outlook overall for the business there on an ongoing basis that help you?

Yes, yes. Thank you. And then finally, the last thing I wanted to ask about was, in the long term, you used to have some longer-term multiyear sort of EBITDA margin target, target type of objectives. Is that something you are you still thinking about and like what kind of numbers you're talking about getting to eventually on your margin profile?

Yes, I don't think our outlook on that has changed and you want to provide some more color around that?

Absolutely. As we've talked about are there are several things that will help us to continue to enhance our margins. Our gross margins. So we are sorry, our EBITDA margins as we get our gross margins improved. And a lot of the initiatives that we're doing, where we've committed to 10 million or more to be able to drive that out over the longer term, there's probably been more than that. And so that will enhance that as well as just as we leverage the SG&A that we have. And even just from a mix perspective, as we mix to channels that are more profitable, all of those things over time should help us go from the EBITDA margins that we have today to at least mid single or mid double digits and probably closer to high double-digit?

Yes, exactly.

Okay. That's it for me.

Thank you, Greg.

Thanks, Linda.

At this time.

This concludes our question and answer session. I would now like to turn the call over back to Mr. Moorehead for closing remarks.

Okay.

Thank you. And we'd like to thank everybody for listening to today's call, and we look forward to speaking with you when we report our first quarter 2024 results in May of 2024 So thanks again for joining us and take care and have a great evening.

Ladies and gentlemen, this concludes the today's conference. You may now disconnect. Thank you for your participation.