Greetings, and welcome to the Nature's Sunshine Products First Quarter 2020 Earnings Conference Call. . I would now like to turn the conference over to your host, Mr. Nate Brower, General Counsel of Nature's Sunshine Products. Mr. Brower, you now have the floor..

Good afternoon. Thanks to all of you for joining our conference call to discuss our first quarter 2020 financial results. This call is available for replay in a live webcast that will be posted on our website at www.naturessunshine.com in our Investors section. The information on this call may contain certain forward-looking statements.

These statements are often characterized by terminology 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. .

Thank you, Nate. Good afternoon, everyone, and thank you for joining today's call. I hope you are all well and staying safe and healthy as we adjust to the unique conditions under which we are currently living.

It's been an extraordinary start to 2020 as the effects of the COVID-19 pandemic continue to impact communities around the world and present business leaders with historic challenges and unprecedented change.

As such, I want to take this opportunity to thank you for your continued support of our company in our efforts to transform the business for the future.

I would also like to take a moment to recognize our health care workers, our first responders, state and local officials and the countless number of people who work to keep our communities safe and functioning, and to thank them for their dedication and support. Their collective efforts provide strength and hope when we need it most.

I would also like to recognize and thank my team at Nature's Sunshine. Amidst the stress and uncertainty, the team continues to stay focused, and has remained in good spirits despite the crisis, quickly adapting to our new reality, cognizant of the fact that people are counting on them to provide the products they need, want and trust.

As we work from home and practice social distancing, we've worked tirelessly to ensure our transformation initiatives continue to move forward without disruption. Our people are dealing with the rapidly evolving situation and working together to overcome each of the near-term obstacles as they arise.

Importantly, everyone in the company is dedicated to keeping our people safe, while combining forces to keep our company strong. The COVID-19 pandemic has clearly been disruptive to our people's lives, but I'm incredibly proud of our team for their resilience, determination, flexibility and compassion for the people in our community.

I'm especially grateful to our shipping and manufacturing teams that have been coming to work every single day throughout the crisis to keep our facilities fully operational and on top of the increasing demand for our products. Their courage, dedication and love for our company is an inspiration to us all.

With that in mind, when the crisis began, our first and primary goal was and continues to be the health and safety of our employees, distributors, partners and customers.

We immediately implemented a series of protective measures to safeguard our people, including deep cleaning at all of our facilities, daily temperature scans at the beginning of each shift, training on proper hand washing and good hygiene, isolating work groups and either restricting or closing certain common areas, providing hand sanitizing stations throughout our buildings and requiring the use of masks for all associates and protective gloves for associates dealing with products.

We also made sure to educate our team and strictly follow all CDC guidelines related to social distancing and personal hygiene to ensure our teams can effectively and safely continue working..

Thanks, Terrence, and good afternoon, everyone. Net sales in the first quarter of 2020 were $95.9 million compared to $91.3 million in the same quarter last year. On a local currency basis, net sales increased 6.6% year-over-year.

Unfavorable foreign currency exchange rate fluctuations impacted net sales by approximately $1.4 million compared to the prior year. Net sales in Asia declined 7.9% year-over-year to $31 million during the first quarter, but decreased 4.6% in local currencies.

As Terrence mentioned and discussed on our fourth quarter call, we anticipated the first quarter decline in Asia, primarily as a result of the COVID-19 pandemic. On a local currency basis, net sales in China declined 8.5%, declined 2.9% in Japan and declined to 6.5% in South Korea.

Future results may continue to be negatively impacted by the pandemic and fluctuating foreign currency rates. Net sales in Europe increased 32.2% year-over-year to $20.6 million or 33.5% growth in local currencies. The increase in net sales reflects growth in Central and Eastern Europe, including strong performance in Russia.

While first quarter results were not significantly impacted by the pandemic or oil pricing volatility, future quarters could be. North America net sales increased 6.1% on a reported basis, and 6.2% in local currency to $38.8 million.

The growth in North America reversed quarterly declines over the last couple of years, reflecting strong sales trends in March, primarily related to immunity support product demand resulting from the COVID-19 pandemic and improving underlying trends resulting from strategic initiatives enacted over the last year.

As Terrence referenced, we experienced some softening of demand in April. Net sales for Latin America and Other increased 0.5% year-over-year to $5.6 million, or a 2.4% increase on a local currency basis. Due to substantial shutdown of certain LatAm markets, future results could be impacted. Gross margin was 74.3%, flat when compared to the prior year.

Volume incentives as a percentage of net sales were 34.4% compared to 34% in the same period last year. The increase was driven by changes in market mix, including a lower mix of China revenue. Selling, general and administrative expenses were $31.1 million, down from $33.9 million in the prior year.

The decrease in SG&A is primarily due to savings from restructuring activities over the last year. As a percentage of net sales, SG&A expenses were 32.4% compared to 37.1% in the same period in 2019.

Excluding the impact of $1.6 million of restructuring expenses in the prior year and $0.5 million VAT-related income this year, SG&A expenses declined to 32.9% of net sales from 35.4% in the prior year period.

We reported operating income of $7.2 million or 7.5% of net sales compared to operating income of $3 million or 3.3% of net sales in the prior year period.

Excluding the previously mentioned unusual items relating to restructuring and VAT-related income, among others, we generated $6.7 million of operating income or 6.9% of net sales for the current quarter compared to $4.6 million or 5% of 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 and other income or loss, adjusted to exclude share-based compensation and certain noted adjustments, was $9.7 million in the first quarter of 2020 as compared to $7.3 million in the first quarter of 2019.

Net income attributable to common shareholders for the quarter was $2.9 million or $0.15 per diluted share as compared to $1.8 million or $0.09 per diluted share in the year ago period.

Adjusted net income attributable to common shareholders was $2.5 million or $0.12 per common share, compared to $2.7 million or $0.14 per common share in the prior year period. A reconciliation of adjusted net income to GAAP net income is provided in today's press release. Turning to liquidity.

We had cash and cash equivalents on March 31 of $64.1 million with no long-term debt. During the first quarter, we generated $13.5 million of cash from operations as compared to using cash of $3.9 million in the comparable prior year period.

The change in cash from operating activities on a year-over-year basis primarily reflected growth in net sales and profit dollars, changes in working capital, specifically a reduction in accounts receivable and inventories, assisted by an increase in accrued volume incentives, primarily due to the timing of cash receipts and payments and the timing of cash payments for income taxes.

We are pleased with our overall strength and liquidity. We also recognize that the COVID-19 pandemic and related impact on future financial results is uncertain but could be significant over the course of 2020 and beyond. Accordingly, at this time, our goal is to maintain and, hopefully, continue to improve our overall cash and liquidity position.

I would now like to turn the call back to the operator to facilitate questions and answers..

. Our first question is from Steve Martin with Slater Capital Management..

Great quarter in the face of all the -- I don't -- I mean, we all know what we're talking about. So can you -- you put words around April, May and the future. Can you be a little more specific as to how the changing status -- state of China, Asia, the U.S.

and Europe is impacting revenues and how it's impacting your sales functions?.

It's a tough one to answer because, again, as I tried to allude, things are moving around, we've had to cancel events, kind of canceled some incentive programs and introduce new ones. And so as a result, things that were planned and that we had a good sense for what we thought they'd deliver, now it's something different with a different time frame.

So there's just so much uncertainty right now, Steve. It's hard to answer your question directly. But what we do know is we're seeing an impact from it. And again, the closures and not being able to have meetings is having an impact. Of course, the team is fighting back with new products and new promotional concepts simultaneously.

We are also, as you can see, redoubling our efforts to support our distributors, where we really aren't trying to get back to focusing on being kind of our healers, focusing on the healing power of herbs and sharing those with everyone around the world. So again really playing to our strengths and our heritage.

But again, doing that in a very new manner. So tough to answer your question, again, given all the uncertainties out there..

Well, let me ask it slightly differently. Asia went into the soup earlier than we here in the U.S. and Europe, and came -- and has come out of the worst of the impact.

How did your business in Asia trend as Asia started to reopen?.

It's interesting. The trends are -- and I'll let Joe follow-up on this. The trends are, I'd say, good with our current people. And so we're not losing people, we're not losing customers.

The issue that we're seeing right now is a slowdown in new customer acquisition, again, in the face of not being able to have meetings, not being able to -- with canceling field events. And I'll let Joe follow-up on this with some -- maybe a little additional color..

Steve, as Terrence noted earlier, it's very difficult to quantify. I mean, trend-wise, overall, what I'd tell you is that if you look at the 3 key markets we have over there.

China, we can look at China and say, well, they appear to be back, fully engaged, in the sense that our office is fully open, our people are back on-site in the office, but there's still some limits as to the level of activity that our leaders can engage in.

So while we see hope that things will get better, it's still very difficult to try to predict how it's going to play out.

When we look into Korea and Japan, the other 2 key markets within our Asia business unit, we can look and say, well, they were impacted in Q1, but if anything, we'd say it's maybe impacted more in the latter part of the quarter versus the early part of the quarter.

So trend-wise, that says, well, maybe that's going to carry over into Q2 and maybe even in beyond out a little bit. So it's -- they're not as back to full mode as a China in some fronts because of the pandemic. So there's a little more uncertainty.

Now we know that our leaders are clearly doing everything they can to continue to maintain and support and grow their businesses. Having said that, they're still facing some struggles in being able to open new markets to, again, to get those new customers onboard and so forth, and so on. So it's just very fluid. It's very difficult to try to quantify.

But as we noted, and as Terrence noted, and as I noted in my comments, clearly, at least looking at Q2, the overall business could be impacted negatively by the COVID-19 situation..

Okay. You guys have done a great job on the cost controls and reducing expenditures. And you and I have talked about that a number of times.

Where are you in that process from the standpoint of -- put it in baseball terms, are you in the third, the sixth or the ninth inning?.

We're probably still -- I don't -- we're not in the seventh inning stretch yet.

So we're in the fourth, fifth inning?.

Yes. We're certainly -- we've completed half of the game, Steve. But in my mind, and I think in Terrence's mind, we're never going to be done, right? We're always going to be looking for additional margin pickup opportunities to become a little more mean and mean and pick up some additional cost efficiencies.

But just as far as the overall strategy and trying to drive costs out of the business and go through some restructuring and so forth, we're clearly midway through that game. But the current situation may make certain things a little more difficult, but we're still full steam ahead on margin improvement long-term for this business..

Okay.

And on the manufacturing side as opposed to the expense side, where do you stand on improving your manufacturing cost structure?.

Can you talk about that?.

Well, again, you will see that on a quarter-over-quarter basis, our gross profit margin was relatively flat. And you can -- we can sit and look at that and look at the overall mix and so forth. But the level of promotions and so forth that we're doing, that's going to impact that margin.

But having said that, we are not where we expect to be long-term on our gross profit margin or for any of the margins, operating margin or EBITDA margin, looking at it more long term. But just looking at manufacturing and overall COGS rate, we still believe there's room for improvement in there.

And we believe there will be improvement depending on how this year plays out. Again, where there's all the uncertainty, we'll have to see. But playing it forward into 2021 and 2022, we do expect to see some further manufacturing efficiencies and some pickup on our gross profit margin..

There are a couple of things we're working on, Steve. Everything from really scrubbing down our formulations, to kind of looking at supplier list and consolidating there and negotiating better, all the way through to local manufacturing, which can have significant benefits also.

You look at a couple of areas of the business where we're shipping kind of water across the sea or kind of where we're sending it, there are opportunities for us. And so we're pursuing all of those. Some closer in than others, but we're pursuing them all..

All right.

Can I ask one last question? CapEx and investment spending over the balance of the year, sort of what had you expected? And have you adjusted it to reflect what's going on?.

Well, you saw in the first quarter, we spent a little over $1 million. And we do have several initiatives that Terrence has referenced today and in prior comments that the plan, as we sit here today, is to continue with some of those initiatives. I mean, frankly, we may look to scale back some over the course of the year.

We'll see how it plays out, especially as we complete a little bit more of Q2 and look at some of those initiatives as to whether -- just in trying to preserve cash and so forth, whether it makes sense to push out some less critical capital expenditures into, say, 2021.

But just from an overall standpoint, putting aside the key initiatives, we don't anticipate any substantial increase in our CapEx, say, from what you have seen in the last couple of years..

I think what we're trying to do, Steve, is to make sure that we are strategic in our focus here. And as Joe mentioned, we want to be very conservative with our cash and make sure that we are protecting our cash position, while at the same time funding those strategic initiatives that are really going to help us during times like these.

So we do need to focus on things like digital to make sure that we have the requisite capabilities just to stay relevant and be competitive in the marketplace..

This concludes the question-and-answer session. I would now like to return the conference back over to Mr. Terrence Moorehead for any closing remarks..

Okay. Well, thanks again, everybody, for all of your support, for participating in today's call and for everything you do for our company. We look forward to updating you on our next call. And please, hope everybody stays safe and healthy during these uncertain times, and have a great day. Thanks very much. Bye now..

Thank you..

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day..