Natures Sunshine Products Inc

NASDAQ:NATR

Earnings Call Analysis

Strengthened Margins and Robust 2024 Guidance

In 2023, the company achieved a 3% increase in European net sales and a 5% rise in Latin America, albeit muted by currency effects. Quarterly gross margin dipped slightly due to promotions and market mix, while annual gross margins improved by 110 basis points, mainly from cost savings. The fourth quarter saw significant GAAP net income growth from $2 million to $9 million year-over-year, while adjusted EBITDA grew 21% to $9.7 million. The full year's adjusted EBITDA rose by 26% to $40.4 million, reflecting sales growth and margin improvement. With a strong balance sheet and $31 million in free cash flow, the company looks to 2024 with sales guidance at $455 to $480 million, indicating a 3% to 9% growth in constant currency, and expects adjusted EBITDA between $42 million and $48 million.

Robust Sales Despite Economic Headwinds

In a year faced with challenges such as geopolitical unrest and inflation, the company posted net sales of $445 million, marking one of its best sales performances. Adjusted for foreign exchange, the sales figure reaches $453 million, constituting an impressive 7% growth over the previous year. This resilience highlights the company's strength in offering high-quality products and its robust multi-channel strategy.

Gross Margin Improvements and Cost-saving Initiatives

2023 saw the first fruits of a commitment to save $10 million through various cost-saving strategies, including ingredient and packaging cost reductions, manufacturing efficiency improvements, and lower logistics expenses. This resulted in a 110 basis point increase in gross margins to 72.1%. The company anticipates continued success in achieving its savings target, although gross margins may fluctuate throughout 2024.

Q4 Performance and North American Market Breakthrough

The fourth quarter showed a strong 6% YoY increase in net sales to $108 million, removed of foreign exchange effects, with North America leading the charge at 13% growth and Asia Pacific at 7%. The company's digital sales leaped by 97%, attributed to new customer acquisition and expansion in the Amazon business. New product lines also contributed significantly, and this momentum is expected to carry forward through the expansion of the digital footprint and practitioner performance.

Asia Pacific and China Market Insights

In Asia Pacific, Taiwan and Japan's focus on field activation yielded substantial growth, with Taiwan alone seeing a 49% order growth. Doubling down on efforts in Japan, a new training facility is planned to support even more growth. Meanwhile, China's digital live streaming model spurred order growth, although caution is advised in the short term due to the local economic climate.

Europe and Latin America Face Slower Growth

The company experienced an 8% decline in European sales, mainly due to the ongoing war in Eastern Europe, which impeded growth in surrounding markets. Nonetheless, there is a persistent effort to attract new customers and expand in Central European markets. Latin America saw muted gains with a 5% increase, or 1% on a currency-neutral basis, emphasizing the need for stronger customer growth and activation despite high efforts.

Enhanced Profitability and Solid Financial Position

The year concluded with a notable 21% rise in quarterly adjusted EBITDA to $9.7 million and a 26% increase annually to $40.4 million, driven by sales growth and gross margin improvements. Operating income rose to 5.2% of net sales, and diluted earnings per share surged from $0.10 to $0.46. The company remains well-capitalized with a robust balance sheet featuring $82.4 million in cash and cash equivalents, and no outstanding debt.

2024 Financial Outlook

Looking ahead, company leadership provided net sales guidance for 2024 of $455 million to $480 million, despite anticipating a 100 basis point headwind from foreign exchange. This translates to a constant currency growth range of 3% to 9%. Adjusted EBITDA is expected to fall between $42 million and $48 million, signaling a confident step forward based on the solid groundwork laid during the past year.

Earnings Call Transcript 2023-Q4

[Operator]

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 31, 2023. 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.

Nate, please go ahead.

[Nathan Brower, executive]

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 26 and via a live webcast that will be posted in the Investor Relations portion of our website at ir.naturessunshine.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 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 first 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 seasonal promotions. Our 2023 gross margin performance, along with our top line momentum, aided our adjusted EBITDA growth 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% 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 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 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 Beets 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 health practitioners and specialty retailers.

In Asia Pacific, sales were up 7%, primarily driven by Taiwan and Japan. Our investment in field activation continued 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 & 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 it's -- 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, improved 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. Shane?

[Shane Jones, executive]

Thank you, Terrence. 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 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 the 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 -- sorry, $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 the 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 of 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. This 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 $0.10 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 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 or an average of $15.09 per share. As of December 31, 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're 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 million 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 million 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 in driving outsized shareholder returns in 2024 and beyond.

Now I will turn the time back to the operator.

[Operator]

[Operator Instructions] And your first question comes from Linda Bolton-Weiser from Davidson.

[Linda Bolton-Weiser, analyst]

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

[Terrence Moorehead, executive]

Shane, do you want to start with that?

[Shane Jones, executive]

Yes, absolutely. Linda, first of all, we'll start with North America. We have very strong growth, as you see, in North America, double-digit growth there. And as we reflected, that's really -- 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.

As far as areas where we're 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 grow in the short term there.

[Linda Bolton-Weiser, analyst]

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?

[Terrence Moorehead, executive]

Yes, just hold on a second.

[Shane Jones, executive]

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

[Linda Bolton-Weiser, analyst]

Okay. So it does...

[Terrence Moorehead, executive]

Again, a fair amount of pressure that we're seeing in -- 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 start to stabilize for us and move in the right direction.

[Linda Bolton-Weiser, analyst]

And at this point, are you booking any revenue in Russia or Ukraine? Or is that pretty much 0 at this point?

[Terrence Moorehead, executive]

Yes, go ahead.

[Shane Jones, executive]

We continue to have revenue in both those locations at this point in time.

[Terrence Moorehead, executive]

So order...

[Linda Bolton-Weiser, analyst]

And is there any -- is there any way to quantify that?

[Shane Jones, executive]

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

[Terrence Moorehead, executive]

It was up double digits. Actually, Ukraine was up double digits versus prior year. So we continue to drive business through our Ukrainian team. They're on the ground building customer growth, still servicing orders. So they're actually doing 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 European markets.

[Linda Bolton-Weiser, analyst]

Okay. And then your North American performance was 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.

[Terrence Moorehead, executive]

I think it was a bit kind of all in for us. Again, digital was clicking. The new product launches of the Power Line were very strong, one of our strongest launches kind of certainly within the last decade. And then the tremendous response and activation that we saw with our practitioners and specialty retailers was good also. So we believe we'll have continued strength in digital.

Our goal is to continue to stabilize and our kind of the 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 one and building our footprint around that -- 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 activation.

[Linda Bolton-Weiser, analyst]

And what percentage of North America is digital sales now?

[Terrence Moorehead, executive]

Shane, about 25%?

[Shane Jones, executive]

That's 25%, yes.

[Linda Bolton-Weiser, analyst]

Okay. And then 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. Is there any color you could give to help in modeling how that will go through the year?

[Terrence Moorehead, executive]

Shane, do you want to take that one?

[Shane Jones, executive]

Yes. So as Terrence mentioned, there's going to be some variability there. In other words, it's not going to be a stair-step up every single quarter, just ratably in a straight line. Part of that is because of promotionality. Part of that is just as we're working through old inventory, as the cost savings and things that we're going -- that 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 it will be exactly by quarter to get to that.

[Terrence Moorehead, executive]

Does that help you?

[Linda Bolton-Weiser, analyst]

Sorry, you -- but -- yes. But you did say that gross margin should be up for the full year in 2024?

[Shane Jones, executive]

Absolutely. Absolutely. We were up 110 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 the Cyber Five period, where 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 -- not as much necessarily as Q4, but there is a little bit more promotionality there as well. And then Q2 and Q3, less so.

[Linda Bolton-Weiser, analyst]

Okay. That's very helpful. And then 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 training center in Japan? Maybe like what you think that will do in terms of helping to drive performance there?

[Terrence Moorehead, executive]

Yes. So if I start with Japan, the team has done a great job there, driving people into the business, getting them into Subscribe & Thrive. So roughly 70% of the people that join us go right into a Subscribe & Thrive autoship. That kind of nets out to, 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, that's going to double their capacity. It's just a new facility to train staff, to train people. It will just allow us to put kind of more people through the system. So I think that somewhat speaks for itself. We're doing more, I will call it, field activation upfront, kind of 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 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. Does that help you?

[Linda Bolton-Weiser, analyst]

Yes, yes.

[Terrence Moorehead, executive]

Good.

[Linda Bolton-Weiser, analyst]

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

[Terrence Moorehead, executive]

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

[Shane Jones, executive]

Absolutely. As we've talked about, there are several things that will help us to continue to enhance our margins, our gross margins. So we -- or sorry, our EBITDA margins. As we get our gross margins improved and a lot of the initiatives that we're doing, we've committed to $10 million or more to be able to drive that out over the longer term, there's probably even more than that.

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 2 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 digits.

[Terrence Moorehead, executive]

Yes, exactly.

[Linda Bolton-Weiser, analyst]

Okay. That's it for me.

[Terrence Moorehead, executive]

Great. Thanks, Linda.

[Operator]

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.

[Terrence Moorehead, executive]

Okay. Thank you. And we'd like to thank everybody for listening to today's call. 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. Have a great evening.

[Operator]

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