Natures Sunshine Products Inc

NASDAQ:NATR

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine's financial results for the second quarter ended June 30, 2024. Joining us today are Nature's Sunshine's CEO, Terrence Moorehead; CFO, Shane Jones; and General Counsel, Nate 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 that provides important cautions regarding forward-looking statements. Please go ahead.

[Nathan Brower, executive]

Thank you. Good afternoon, and thanks for joining our conference call to discuss our second quarter 2024 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through August 22 and via a live webcast that will be posted in the Investor Relations portion of our website at ir.naturesunshine.com.

The information on this call contains forward-looking statements. 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 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.

Now I would like to turn the call over to the CEO of Nature's Sunshine, Terrence Moorehead. Terrence?

[Terrence Moorehead, executive]

Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today's call to discuss our second quarter results. Today, I'll provide some context into our second quarter performance and offer insights into how the business is progressing in the current environment. From there, Shane will take you through our financials in more detail.

I'd like to begin by saying that we continue to make progress on our global growth strategies, addressing near-term challenges while driving change and creating new opportunities for the future. In the second quarter, net sales were $110.6 million, down 3% on a local currency basis, driven by continued macroeconomic headwinds in Asia Pacific, a temporary disruption to our North American business and a tough comparison versus last year, which was one of the strongest quarters in the company's 52-year history.

Coming into the quarter, we knew we'd be facing some new challenges as macroeconomic headwinds, foreign exchange and waning consumer confidence in Asia, especially China, continued to intensify. Similarly, in North America, the macroeconomic environment led consumers to be more careful with their spending as persistent inflation slowed consumer demand. The change in consumer landscape motivated us to further improve our competitiveness, upgrade capabilities and find new ways to make -- doing business with Nature's Sunshine easier and more attractive.

With that as a backdrop, in the second quarter, we made several meaningful changes to the business that we believe will boost our competitiveness and have significant positive impact on our long-term performance. While taking the important step to upgrade capabilities and realign our go-to-market approach has short-term implications, we firmly believe the actions we've taken will help build an important foundation for long-term profitable growth.

To that end, we've taken 3 actions to improve our outlook. First, we upgraded and reimagined our digital platform in North America to strengthen our digital capabilities and mobile first performance, which led to improved site load speeds, conversion rates and stability. We also added new digital capabilities like multiple payment methods and the potential to introduce next-gen capabilities like artificial intelligence and machine learning. This is an exciting and challenging migration.

Second, we rebalanced our consumer proposition in several key Asia Pacific markets, placing a greater emphasis on consumer-friendly product packs that offer easy and accessible health solutions to drive customer growth and support repeat purchases. And finally, we took the initiative to streamline overhead and improve productivity by reducing over $5 million of annualized expenses in addition to the cost savings that we've previously communicated.

I'd like to spend a few minutes briefly discussing each one of these actions in more detail. A closer look at our first action demonstrates our commitment to building a strong digital ecosystem in North America. As I mentioned earlier, in the second quarter, we upgraded our digital platform to improve performance and expand our capabilities. The change represents an important next step as we've now introduced a new mobile-first platform.

Today, about 65% of our digital transactions occur on mobile devices. So the move to mobile first is an important leap forward and an important component of our strategy to serve our distributors and customers better. In the first 45 days on the new site, we've already seen a positive impact. Load speeds are 3x faster. Conversion rates are up 20% and digital sales increased 22% in the quarter, despite moving to the new platform and the new site.

Of course, since we introduced an entirely new digital platform, we expected to see some disruption to orders as the new site recalibrates and realigns with social media platforms and search algorithms, distributors and customers learn how to navigate the new site and as we address any service issues associated with the launch. In the second quarter, North America sales were down 3% due to slower consumer spend from persistent macroeconomic pressure and from the expected temporary disruption to the business associated with the digital transformation.

While the transformation offers better tools, better support and a more powerful platform that will make it easier to do business with us, it will take some time for our nutritional health practitioners and specialty retailers to fully adapt to the new system. Based on our experience, our distributors will certainly want to ensure that their customers have an easy, seamless shopping experience and that they're getting the appropriate and accurate credit for their sales that they've generated before they fully commit.

With respect to our second action, focused on rebalancing the consumer proposition in Asia Pacific, we added more consumer-friendly product packs to help drive customer growth in an increasingly challenging macroeconomic environment. When combined with our Subscribe and Thrive auto-ship program, the strategy is expected to produce strong, sustainable growth. In the second quarter, we saw exactly what we expected in our top Asian markets like Taiwan and Japan that recently introduced the strategy.

Strong growth in new customers and orders offset by a temporary decrease in average order size, which led to slightly lower sales growth in the short term. As a result -- as the team continues to build customers and drive participation in Subscribe and Thrive, we expect to see strong growth in the future.

China is a different situation. The widely publicized economic slowdown continued to negatively impact our business as second quarter sales decreased 26% versus prior year on a local currency basis. The current economic environment has put more pressure on Chinese consumers who are still willing to try new products but are more demanding and more hesitant to place repeat orders. We continue to believe that our digital live streaming model is a powerful tool that's proven to be effective at driving customer acquisition and activation.

But in the current economic environment, our consumer proposition faces new challenges. As we continue to move forward, we'll tackle the challenge head on by strengthening sales tools and expanding our live streaming training. Most importantly, we'll also focus on honing and refining our consumer proposition to increase consumer appeal, which will help us expand frequency and reach and restore velocity to our digital live streaming model. This will take some time to fully implement.

Overall, Asia Pacific saw second quarter sales decrease 3% in constant currency, primarily driven by China. Excluding China, Asia Pacific's second quarter sales were up 4% in local currency. Looking forward, we believe we're taking the appropriate actions needed to deliver strong sustainable long-term growth and have a high degree of confidence in the team's ability to execute the strategy.

Finally, our third action focused on leveraging the business more effectively. And in the second quarter, we took the initiative to reduce $5 million of annualized expenses. The cost savings are comprehensive and include everything from streamlining fixed overhead to eliminating unproductive expenses. As we move forward, we will continue to leverage SG&A to drive additional efficiencies.

In closing, we're pleased with the direction we're taking and continue to be excited about the long-term potential of our omnichannel business. We believe the recent changes we've made will give our consumers a better shopping experience and give our distributors a more powerful set of tools to build their business. Ultimately, that will allow us to attract and retain more customers, drive order growth and build sustainable profitable growth to create shareholder value.

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

[Shane Jones, executive]

Thank you, Terrence. Moving on to our second quarter results. Consolidated net sales in the second quarter were $110.6 million compared to $116.5 million in the year ago quarter. a 5% decrease versus the prior year or 3% decrease, excluding the impact from foreign exchange rates. As Terrence discussed, this decrease was driven by some temporary impacts due to upgrading our digital platform in North America and adjustments to our customer proposition in Asia Pacific, combined with more cautious consumer sentiment in most markets and deteriorating macroeconomic conditions in China.

Looking at sales by market in the second quarter. Asia Pacific sales were down 9% to $50.0 million and down 3% on a local currency basis driven primarily by a decline in our China business. Our China business accounted for most of the decline, with sales down 29% or 26% on a local currency basis, due to deteriorating economic conditions that continue to pressure consumer demand. We're sharpening our field fundamentals and improving our consumer proposition but believe it will take some time to get back on a growth trajectory in China.

In Japan, sales for the quarter were down 12%, but were essentially flat on a local currency basis. While we're seeing a double-digit increase in orders and customers in Japan, the transition to product bundles with slightly lower prices has resulted in a short-term offset in average order value or AOV. As we move forward, we expect the AOV headwind to subside and grow to reaccelerate.

Our Taiwan business continued its momentum as they reported 2% sales growth or 7% growth on a local currency basis, which was driven by a strong year-over-year increase in customers and orders combined with increased adoption of our subscription offering partially offset by a lower AOV.

In Korea, sales were down 3% or up 1% on a local currency basis as they continue to build out their sales capabilities and fundamentals by increasing the number of touch points with potential customers and increasing the frequency of promotions. We believe Korea is heading in the right direction, and we expect continued measured improvement.

North America sales in the quarter declined 3% versus last year. This decline was a function of a more cautious consumer combined with a temporary decline in distributor orders associated with the transition to our new digital platform with enhanced capabilities. North America digital growth was also somewhat impacted by economic conditions and the website transition with Q2 year-over-year sales growth dipping slightly on a sequential basis to 22%. This growth was bolstered by an increase in repeat orders and average order value. As Terrence noted, we are already seeing an improvement in key performance indicators, such as conversion and are confident that the new platform positions us well to provide an enhanced shopping experience for both customers and distributors.

Looking at our Europe business, we continue to grow in the second quarter as sales increased 2% or 1% in local currency. Central Europe continued to perform exceptionally well, growing sales by 22% or 17% in local currency, largely driven by the strong performance of our power line products as well as a growing number of customers and good field execution. We expect the tailwinds in this business to continue through the remainder of the year.

Now shifting to margins. Gross margin in the second quarter decreased 125 basis points to 71.4% compared to 72.6% a year ago. The decrease was primarily driven by the impact of inflation and unfavorable foreign exchange as well as the timing of our price increases. Inflation and foreign exchange headwinds have been larger than originally planned, and we are taking a cautious and measured approach to additional price increases.

As a result, we are still expecting to achieve our $10 million gross profit savings goal this year. The impact of those savings on our call -- the impact of those savings on our consolidated financials may be somewhat masked in the short term. Volume incentives as a percentage of net sales were 31.4% compared to 30.3% in the year ago quarter. The increase was primarily due to the timing of promotional incentives and changes in market mix.

Selling, general and administrative expenses during the second quarter were $38.6 million compared to $42.3 million in the prior year. The decrease was driven by the cost-saving actions taken to streamline our business as well as lower service fees in China. As a percentage of net sales, SG&A expenses were 34.9% in the second quarter compared to 36.3% in the year-ago quarter.

As Terrence mentioned in his remarks, the actions that we've taken in Q2 to eliminate unnecessary costs throughout the organization, amount to over $5 million of annualized savings. Therefore, we are well positioned for the future and we'll continue to see the benefit of those actions for the remainder of this year and going forward.

Operating income decreased to $5.6 million or 5.1% of net sales compared to $7.0 million or 6% of net sales in Q2 last year. GAAP net income attributable to common shareholders for the second quarter was $1.3 million or $0.07 per diluted common share compared to $2.4 million or $0.12 per diluted share in the year ago quarter. Adjusted EBITDA, as defined in our earnings release, decreased to $10.4 million compared to $11.3 million in the year ago quarter.

Our balance sheet remains clean with cash and cash equivalents of $68.7 million and 0 debt. Inventory was $62.3 million at the end of the second quarter, which is $4.6 million less than we ended 2023. Net cash provided by operating activities was $3.5 million compared to $17.3 million in the prior year period, which was primarily driven by the timing of accrued liabilities.

As part of our capital allocation plan, during the second quarter, we repurchased 348,000 shares for $5.9 million or an average price of $16.89 per share. As of June 30, 9.9 million remains -- $9.9 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 turning to our 2024 outlook. Given our second quarter results and the short-term impacts from the changes discussed, we are lowering our guidance ranges for net sales and adjusted EBITDA. We now expect full year 2024 net sales to range between $436 million and $445 million. This includes an estimated 200 basis point headwind to growth due to foreign exchange. As such, our guidance equates to constant currency growth of 0% to 2% for the year. For adjusted EBITDA, we now expect to range between $39 million and $42 million.

In summary, we have taken the necessary measures to ensure that we are well positioned to provide the highest quality products and best-in-class experience for both our customers and distributors. We are confident that those actions will drive sustainable and profitable growth as we move into 2025 and beyond. Now I will turn the time back to the operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Linda Bolton-Weiser from D.A. Davidson.

[Song Xue, analyst]

This is Christina Xue on for Linda. I was wondering, can you guys like quantify the dollar sales for the temporary disruption that's in the North America segment?

[Terrence Moorehead, executive]

I'm sorry, we couldn't hear the question.

[Song Xue, analyst]

Sorry, can you hear me now?

[Terrence Moorehead, executive]

Yes, yes. It was just a little fuzzy on our end.

[Song Xue, analyst]

I was wondering like if you guys could like quantify the temporary disruption in the North America segment for the quarter -- the dollar sales impact, if that's possible?

[Terrence Moorehead, executive]

Yes. Look, let me turn that over to Shane. I think because there were several things. There's a lot of stuff going on with the consumer spending. And so Shane, do you want to take a crack at that and I'll follow-up?

[Shane Jones, executive]

No, absolutely. So if you look at we were down about 3%. Of that 3%, roughly half of that is really attributable to consumer sentiment and other headwinds that we're seeing and then half of it is related to the temporary disruptions that we had.

[Song Xue, analyst]

That's helpful. And I have a follow-up. So it looks like in the sales -- revised sales guidance, there could still be like a sales growth in the second half of the year. So I was wondering if you could talk about how -- where the potential growth can come from?

[Terrence Moorehead, executive]

Yes. And we've tried to be somewhat conservative, obviously, with the kind of go-forward outlook. Do you want to talk Shane about kind of where we think there could be some upside?

[Shane Jones, executive]

Yes. No, absolutely. As we look at it, we're still very confident in our digital business in North America. And so as you saw, that grew 22% which was actually a sequential decline from 30-plus percent in previous quarters. As Terrence alluded to, with the change over to the new platform, we're seeing some good things in a lot of the metrics that we're looking at that encourage us about the future and as far as conversion rate, retention and other metrics. So that's really where we would expect growth to accelerate throughout the rest of this year.

[Terrence Moorehead, executive]

And I think we expect to see continued performance in Europe as well.

[Shane Jones, executive]

Yes, yes. Europe, very strong results that are likely to continue, especially Central Europe.

[Operator]

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Moorehead for closing remarks.

[Terrence Moorehead, executive]

Okay. Thank you very much. We'd like to thank everybody for listening to today's call. And we look forward to speaking with you when we report our third quarter 2024 results in November of this year. Thanks again for joining us, and we'll talk to you soon. Take care.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.