Nature’s Sunshine Products, Inc. (NASDAQ:NATR) Q1 2023 Earnings Call Transcript May 13, 2023
Operator: Good afternoon, everyone, and thank you for participating in today’s Conference Call to discuss Nature’s Sunshine Financial Results for the First Quarter Ended March 31, 2023. Joining us today are Nature’s Sunshine’s CEO, Terrence Moorehead; CFO, Shane Jones; and General Counsel, Nate Brower. Following the remarks, we’ll open the call for analyst questions. Before we go further, I’d 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 : Thank you. Good afternoon, and thanks for joining our conference call to discuss our first quarter 2023 financial results. I’d like to remind everyone that this call is available for replay via telephonic dial-in through May 23, 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 : Thank you, Nate, and good afternoon, everyone. I want to thank you for taking time to join today’s call to discuss our first quarter results. Today, I’ll provide some context for our first quarter performance and offer some insights on how we believe the business is progressing. Shane will then walk you through the specifics of our financials in more detail. We started the year on a strong note with reported first quarter net sales of $109 million or $113 million when excluding the impact of foreign exchange, which is a 2.4% increase versus prior year. Adjusted EBITDA was up 12%, coming in at $9.1 million. Overall, we’re pleased with the momentum we’re seeing as markets like Japan and Taiwan continued to deliver strong double-digit growth while most of our other markets delivered solid sequential improvements to the top line with meaningful progress and signs of stabilization in Central and Eastern Europe and digital initiatives starting to take hold in North America.
We continue to operate in an extremely challenging external environment, but the underlying fundamentals and strength of our business remained firmly intact. And the steps we’ve taken to create a more consumer-focused business continued to help us build momentum in the quarter. In Asia Pacific, we continued to deliver strong results with first quarter sales up 9% on a constant currency basis, driven by 58% growth in Taiwan and 21% growth in Japan on a local currency basis. Our investment in field activation help drive orders, stimulate new customer acquisition and offset lower sales in Korea and China. Remember, both Korea and China are still dealing with the residual effects of COVID restrictions and market closures that prevented them from conducting normal business activities.
They’ve only recently been able to focus on restoring customer growth after the restrictions were lifted in late 2022. We’re seeing encouraging signs as sales momentum continue to build each month in China as the country reopens. We’re hopeful this trend continues and are focused on restoring growth in 2023. I believe it’s worth noting that despite the challenges in Korea and China, Asia Pacific was still able to deliver a strong quarter due to the strength and diversity of our portfolio. And moving forward, we believe a continued focus on targeted new product introductions, next-generation branding and sustained investment in field activation will allow us to continue to drive profitable growth in the region. In Europe, sales were flat, up 0.3% versus prior year on a local currency basis.
We continue to see signs of stabilization in Central and Eastern Europe, both in terms of how people are reconfiguring their lives and our ability to adapt to the changing situation on the ground. Our team has done an outstanding job driving orders and attracting new customers despite the challenging environment. As we move through 2023, we believe continued stability in Central and Eastern Europe, combined with strong execution of our field fundamentals will create opportunities for us to deliver modest growth in the region. In North America, fourth quarter sales were relatively flat, down 3% versus prior year, primarily driven by a decline in average order size. Consumers continued to offset inflationary pressures by purchasing smaller quantities, delaying purchases or trading down to cheaper brands.
Our digital initiatives helped offset the negative sales impact from average order declines, delivering positive momentum from a 19% increase in new customer acquisition that led to strong growth in digital orders. What’s more? Our Subscribe and Thrive Autoship program represented about 26% of sales and continued to support repeat purchases. As we move forward, we believe there’s an opportunity to stabilize the North American business in the latter half of 2023 by expanding our digital footprint and increasing the number of nutrition health practitioners recommending our products, thus extending our leadership position as the #1 nutritional health practitioner brand. We also continued to make progress on our margin-enhancing and cost savings initiatives and have moved into the execution phase of the plan.
As a reminder, the structural changes we’re making to our product line and supply chain will provide significant improvements to gross margin, but many of the initiatives involve redesigning processes and revamping sourcing relationships, and this takes time. In the meantime, we’re implementing strategic price increases in Asia Pacific, Europe, LatAm and North America to help offset the impact of inflationary headwinds and improve profitability. Before I close, I’d like to briefly share some thoughts about our ESG program, where we recently released our second annual ESG report, which can be downloaded on the ESG section of our IR website. This year’s report shows that the implementation of our ESG strategies, along with the commitment of our employees who are striving for excellence is allowing the sustainability and transparency mindset to permeate every aspect of our business.
For example, in 2022, Nature’s Sunshine achieved measurable progress on our top 5 sustainability goals, including: first, moving to 100% solar power at our U.S. manufacturing facility, reducing greenhouse gas emissions by about 35%; second, expanding recycling efforts at 3 of our U.S.-based distribution centers, reducing waste to landfill by almost 30%; third, moving to more sustainable packaging by increasing the use of post-consumer recycled plastics to nearly 40%; fourth, conducting our second annual greenhouse gas inventory to better understand emissions impact; and finally, fifth, optimizing and reducing shipments both internationally and domestically to further decrease emissions. As we continue to apply sustainable practices and processes in our sourcing, manufacturing and supply chain, I’m confident we’ll have more progress to share.
In closing, the strategies that transformed our business have created a strong foundation for growth and continue to support our progress during the first quarter. Our brand power initiatives are delivering more powerful new products, more relevant messaging and fueling more meaningful customer growth. Our field energy initiatives are attracting a new younger generation of digitally enabled distributors, retailers and nutrition health practitioners. And our Digital First initiatives are building new customer acquisition and retention capabilities that will serve us for years to come. In short, we continue to focus on improving consumer appeal, leveraging core capabilities, building competitive advantage and improving productivity to drive revenue and profitability.
We’re pleased with the progress we’re making and the opportunities that lie ahead. Our growth strategies continue to gain traction, and I want to reiterate our passion, dedication and unwavering commitment to successfully navigating this unique period of market uncertainty. We remain focused on restoring growth and delivering low to mid-single-digit revenue growth for the year. With that, I’d like to turn the call over to our Chief Financial Officer, Shane Jones. Shane?
Shane Jones : Thank you, Terrence. It’s great to be here. Let’s jump right into results. Net sales in the first quarter were $108.6 million compared to $110.5 million in the year ago quarter. This 1.7% decline was largely driven by reduced sales in China and North America. As Terrence mentioned, excluding the $4.6 million unfavorable impact from foreign exchange rates, consolidated net sales increased 2.4% in the first quarter versus last year. Gross margin in the first quarter was 70.8% compared to 68.8% a year ago. The increase was driven by prior year inventory valuation reserves taken as a result of the conflict between Russia and Ukraine, offset by cost increases related to inflation and unfavorable FX. We estimate the combination of FX and inflation decreased gross margin by nearly 100 basis points year-over-year in the quarter.
Volume incentives as a percentage of net sales were 30.5% compared to 30.9% in the year ago quarter. The decrease is primarily due to changes in market mix. Selling, general and administrative expenses during the first quarter were $43.6 million, including onetime charges of $4.8 million related to a criminal social engineering scheme directed at one of our wholly-owned subsidiaries, and $1 million in professional fees related to the external investigation of that scheme, offset by a $0.7 million reduction related to a China VAT refund. Excluding these onetime charges, SG&A expenses during Q1 were $38.5 million compared to $40.6 million in the year ago quarter. This decrease was driven by lower service fees as a result of the decline in China’s net sales and the timing of events and expenses of approximately $1.3 million that were delayed to the second quarter.
As a percentage of net sales, SG&A, excluding the onetime charges was 35.5% for the first quarter of 2023 compared to 36.8% in the year-ago quarter. Reflective of the impact of the onetime charges, operating income was $0.2 million or 0.2% of net sales compared to $1.3 million or 1.2% of net sales in prior year. GAAP net income attributable to common shareholders for the first quarter was $0.9 million, or $0.04 per diluted share as compared to a loss of $3 million or $0.15 per diluted share in the year ago quarter. The higher GAAP net income is mostly driven by a valuation adjustment of certain deferred tax assets that occurred in our first quarter last year. Adjusted EBITDA, as defined in our earnings release, was $9.1 million compared to $8.2 million in the first quarter of 2022.
The increase was driven by $1.3 million of timing related to SG&A expenses. Our balance sheet remains clean with cash and cash equivalents increasing to $66 million and only $1 million of debt. Inventory declined slightly in Q1 compared to where we ended Q4. As part of our capital allocation plan, we continue to utilize our share repurchase authorization, buying 90,000 shares in the first quarter for $0.8 million or an average of $9.16 per share. As of March 31, 2023, $23.2 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 investments. Now turning to our outlook. During Q1, we experienced sequential improvements across most of our markets, and continue to expect to report sales growth for the full year in the low to mid-single-digit range.
As it relates to our second quarter, please note that we expect to ramp up expenses associated with our digital growth and other strategic initiatives. In addition, as previously mentioned, the timing of some events in Asia and North America have moved from Q1 into Q2. Therefore, we expect our SG&A in Q2 to be elevated versus Q1 and prior year. While these investments will result in a sequential decline in our adjusted EBITDA in Q2, we believe they are necessary to fuel our high-value growth initiatives and accelerate sales into the second half of this year and beyond. With respect to gross margins, in the near term, we expect our supply chain initiatives and targeted price increases to be offset by continued inflation in foreign exchange headwinds.
Therefore, Q2 gross margins are likely to be close to what we saw in Q1 with modest improvement in the second half of the year and meaningful improvements in 2024. Overall, we’re very excited about the long-term growth opportunities for the business. We remain committed to driving improved efficiency and profitability and are working to pursue opportunities to maximize shareholder value. Now I will turn the time back to the operator.
Q&A Session
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Operator: [Operator Instructions] Your first question comes from Linda Bolton-Weiser from Davidson.
Operator: [Operator Instructions] There are no further questions at this time. Please proceed.
Terrence Moorehead : Okay. Well, 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 second quarter 2023 results in August of this year. Thanks again for joining us. And again, we look forward to hearing from you soon. Take care.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
