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Operator
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine's financial results for the fourth quarter and full year ended December 31st, 2022. Joining us today are Nature's Sunshine's CEO, Terrence Moorhead, CFO, Shane Jones, and General Counsel, Nate Brower. Following their remarks, we'll open the call for your 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.
Terrence Moorhead
Thank you. Good afternoon, and thanks for joining our conference call to discuss our fourth quarter and full year 2022 financial results. I'd like to remind everyone that this call is available for replay by telephonic dial-in through March 29th and by way of 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 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. Now I would like to turn the call over to the CEO of Nature's Sunshine, Terrence Moorhead. Terrence?
Linda
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. On the call with me is our new Chief Financial Officer, Shane Jones, and I'd like to take a moment to officially welcome Shane to Nature's Sunshine and say what a pleasure it is to have him as part of our management team. Shane joined the company in December and brings over 25 years of experience, having previously served as the chief financial officer at well-known companies such as West Marine, 1-800-CONTACTS, and Backcountry.com. In his role as CFO, Shane will be working closely with our management team to improve performance and drive sustainable, profitable growth across the business. He's already added significant value as we continue to take steps to mitigate external costs, pressures, drive efficiency, and build financial resilience into the business. Today, I'll provide some context to our fourth quarter and full year 2022 results. and give some details on how we believe the business continues to develop. Shane will then take you through the specifics of our financials in more detail. Turning to the fourth quarter, we continue to recalibrate and adjust to the changing macroeconomic environment and shifts in consumer behavior, but saw several encouraging signs in the quarter. First, Asia Pacific continued to deliver strong results as we've done a good job diversifying our portfolio in the region. We've contemporized the business and built strong field fundamentals that continue to create new opportunities for incremental growth. Second, our business in Central and Eastern Europe continued to show signs of stabilizing as we rewired operating practices to address the new reality on the ground and expanded our footprint to include a few new markets that helped partially offset the unique risks of doing business in that part of the world. Third, our digital initiatives continued to demonstrate strong potential to drive new customer acquisition, and the integration of our Amazon business into our internal processes is expected to enhance our focus and improve performance moving forward. And finally, the product stockout issues that slowed our business in the first half of 2022 appear to be returning to pre-COVID levels as we saw product availability improve across the board. At the same time, macroeconomic and geopolitical headwinds continued to negatively impact both our top and bottom line business dynamic in the fourth quarter. Despite the external headwinds, we were still able to move our key initiatives forward and deliver resilient results. Consolidated fourth quarter net sales on a reported basis came in at $103 million or $110 million when removing the impact of foreign exchange, which is a 6% decrease versus prior year. You'll remember, Last year's fourth quarter was the largest quarter in the company's history, with each of our operating business units delivering strong growth. Clearly, we're operating in an extremely challenging external environment, but we believe the underlying fundamentals and strength of our brand remain firmly intact, and that the steps we've taken to create a more diverse consumer-focused portfolio will build momentum as the external headwinds subside. Looking at the full year, we reported net sales of $422 million, making 2022 our second best year in the company's history. When you adjust for the impact of foreign exchange, our 2022 sales were $445 million, which is up slightly versus prior year. Again, a tremendous accomplishment given the unprecedented headwinds we faced. To be specific, foreign exchange wiped away about $23 million in sales for the year. A closer look shows that Asia Pacific drove our performance in the fourth quarter, as well as the full year, led by Japan and Taiwan. On a constant currency basis, Asia was up 5% in the fourth quarter and 16% for the full year. The growth was fueled by our investment in field activation that helped drive order growth and counteract the residual effects of China's zero COVID policy. It's worth noting that while China was a drag on the quarter, sales momentum increased each month as the country started to reopen. We're hopeful this trend continues, but the situation is fluid. Looking forward to 2023, 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 Asia in 2023. Our business in Europe continues to be resilient, with sales for the quarter and full year performing better than expected due to the incredible resolve of our team in Central and Eastern Europe. For the fourth quarter sales were down 17% and we're down 10% for the full year and constant currency versus last year's historic results macroeconomic and geopolitical challenges saw consumer spending declined sharply negatively impacting orders and average order. Fortunately, our investment in customer growth helps support geographic penetration in new markets like Turkey and the Baltic states, partially filling the gap from lost sales in Ukraine. As we move into 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, orders remained relatively flat versus prior year, but the business continued to be challenged by average order declines from customers who bought about one less unit on average per order. This is consistent with the broader market where we saw consumers offsetting inflationary pressures by purchasing smaller quantities, delaying purchases, or trading down to cheaper brands. As a result, fourth quarter sales were down 14 percent while full year sales were down 11 percent our investment in digital activation continued to gain traction driving new customer acquisition and adding new members to our subscribe and thrive auto ship program which now represents about 26 percent of sales and continued to increase versus prior year we continue to see encouraging signs from our digital business as we move forward We believe there's an opportunity to stabilize the North American business in the latter half of 2023 by continuing to expand our digital footprint, bringing our Amazon business in-house, and by increasing the number of nutrition health practitioners recommending our products, thus extending our leadership position as the number one nutrition health practitioner brand. The fourth quarter also saw continued pressure on gross margins, with 180 basis points of lost margin from inflation and foreign exchange that negatively impacted cost of goods. Last quarter, I invited our new supply chain leader, Martin Gonzalez, to walk you through our plans to improve gross margin with a series of initiatives designed to streamline our operations and drive out costs. Since then, we've made significant progress on our $10 to $12 million gross savings targets. we've identified the specific savings initiative and have moved into the execution phase of the plan. It's important to note, however, that the benefit of these actions won't start being reflected in our results until the end of 2023, with the material impact coming in 2024. The structural changes we're making to our product line and supply chain operations will provide significant improvements to gross margin. But many of the initiatives involve redesigning processes and revamping sourcing relationships. Doing this requires time and resources to redesign workflows, reformulate products, test them, cycle through old inventory by selling off legacy products, and then selling the reformulated products into the market. Again, this is an end-to-end restructuring of our supply chain, so it requires time and resources to do it right. In the end, the results will be significant and meaningful. In the meantime, we're planning strategic price increases in Asia Pacific, Europe, LATAM, and North America to help offset the impact of inflationary headwinds and improve profitability. In challenging times like these, we believe it's more important than ever to stay focused, keep moving forward, and lean into our strategies, and that's exactly what we're going to do. as we move into 2023 we're focused on restoring growth and building positive momentum delivering low to mid single digit revenue growth for the year to achieve this we've streamlined our global strategies to focus on three key priorities brand power strategies will focus on creating more powerful new products to fuel customer growth Field Energy will focus on attracting a new generation of digitally enabled distributors, retailers, and nutrition health practitioners. And Digital First will focus on building customer acquisition and retention capabilities around the globe. In closing, I want to reiterate our steadfast commitment to successfully navigating this unique period of the market uncertainty. And I want to leave you with a few takeaways. First, The underlying fundamentals of our business are solid, and our ability to drive customer activation remains well intact. Second, we have a strong balance sheet with the appropriate level of cash and liquidity to fund our strategies and key initiatives. And third, we're fighting back against the external macroeconomic environment with a roadmap that improves gross margins and overall profitability to make us more valuable and more competitive in the future. With that, I'd like to turn the call over to Shane.
Shane Jones
Thank you, Terrence. It's great to be here today. Jumping right into our results. Net sales in the fourth quarter were $102.7 million, compared to $117.9 million in the year-ago quarter. This 13% decline was largely driven by reduced sales in China, Europe, and North America. As Terrence mentioned, excluding the impact from foreign exchange rates, Consolidated net sales decreased 6% in the fourth quarter versus last year. Gross margin in the fourth quarter was 72.2% compared to 74.0% a year ago. The decline was primarily driven by foreign exchange headwinds, increases in material production, transportation, and distribution costs, as well as changes in market mix. These headwinds were partially offset by a one-time $0.7 million add-back, related to the partial reversal of the reserves taken earlier in 2022 for the Russia and Ukraine conflict. Volume incentives in the fourth quarter declined 9% to $31.1 million compared to $34.4 million in the year-ago quarter. As a percentage of net sales, volume incentives were 30.3% compared to 29.1% in the year-ago quarter. The increase in volume incentives as a percentage of net sales is primarily due to changes in market mix. Selling general and administrative expenses during the fourth quarter declined 15% to $38.8 million compared to $45.4 million in the year-ago quarter. This reduction was driven by lower service fees in China, variable costs related to lower sales, and lower compensation costs. These reductions were slightly offset by a one-time impairment of fixed assets of $1.1 million. As a percentage of net sales, SG&A expenses were 37.8% for the fourth quarter of 2022 compared to 38.5% in the year-ago quarter. Reflective of the gross margin pressures, operating income was $4.2 million, or 4.1% of net sales, compared to $7.5 million, or 6.4% of net sales in prior year. Gap net income attributable to common shareholders for the fourth quarter was $2.0 million, or 10 cents per diluted share, as compared to $13.4 million, or 67 cents per diluted share in the year-ago quarter. The change in GAAP net income reflects reduced operating income, as well as an unfavorable change in our income tax provision related to evaluation allowance for foreign tax credits and our expected utilization of NOLs in some markets. Adjusted EBITDA, as defined in our earnings release, was $8.0 million compared to $11.6 million in the fourth quarter of 2021. Moving on to our liquidity and our capital allocation plan. Our balance sheet remains clean with cash and cash equivalents of $60 million and only $1.2 million of debt. Inventory was flat in Q4 compared to where we ended Q3. In 2023, we expect to right-size the amount of inventory within our supply chain as we continue to meet strong demand in Asia and as China continues its reopening curve. As a part of our capital allocation plan, we continue to utilize our share repurchase authorizations. buying 909,000 shares in a full year for $13.6 million, or an average of $14.93 per share. As of December 31, 2022, $24.0 million remains of our share repurchase program. Looking beyond share repurchases, our healthy capital allocation structure positions us well to continue our digital transformation and strategic investments. Before moving to our outlook for 2023, I would like to address a situation we made public on February 24th. Our company was the victim of a sophisticated phishing attack that targeted Synergy Japan, which our team self-discovered on February 17th. The incident involved employee impersonation and fraudulent financial requests, which resulted in fraudulently induced wire transfers during the month of February. As a result of this event, we expect to record a one-time pre-tax charge of up to $4.8 million in the first quarter of 2023. To date, we have found no evidence of additional fraudulent activity and are working with our banking partners as well as federal and local authorities to investigate this matter and recover as much of the funds as possible. Now, turning to our 2023 outlook. So far during Q1, we have experienced a sequential improvement across most of our markets, and we expect to report sales growth for the whole year in the low to mid single digit range. Keep in mind that Q1 of 2023 will be compared to a relatively strong period last year when many of the headwinds we are facing weren't so pronounced. However, the comparisons ease as we move through the year. We do expect inflation and foreign exchange headwinds to continue to have a negative impact to our cost of sales in the first half of the year, but we would expect modest improvement in the second half. And as Terrence mentioned, the benefit of our gross margin improvement plan won't materially hit our P&L until 2024. In the meantime, we are taking price in certain products and geographies to combat inflation and improve gross margin. Despite market headwinds, most of which remain out of our control, we're very excited about and remain committed to the long-term growth opportunities for the business, and we are committed to pursuing opportunities to maximize value for our shareholders. Now I will turn it back to the operator.
Operator
Thank you, sir. We will now be taking questions from the company's publishing sell-side analysts. Our first question will come from Linda Bolton-Weiser with DA Davidson. Please proceed.
Linda Bolton - Weiser
Yes, hi. How are you? Hey, Linda.
Linda
How's it going?
Linda Bolton - Weiser
Good, good. So I guess I'll just start with, you know, it's good to hear your outlook for sales being up a little bit, you know, modestly in 2023. Was that low to mid-single-digit growth in local currency or on a reported basis for the year?
Shane Jones
Do you want to comment on that, Shane? That would be in local currency. Yeah.
Linda Bolton - Weiser
Okay. Gotcha. So as I think you said, the FX impact is kind of still there pretty negatively in the first quarter, and then it sort of would get less negative or better as the year progressed. Is that the way to think about that?
Shane Jones
That's correct. Yeah.
Linda Bolton - Weiser
Okay. And then, you know, again, I don't want to get you into making detailed projections, but when you get past the hard comparison and the less negative effects, I mean, do you think second quarter revenue can actually be up on a reported basis or is that a little unclear at this point?
Shane Jones
I would expect that it would be up. If you recall, most of the big hits that we took last year began in Q2, so the comp will get easier in Q2, which will allow us to have a positive comp in Q2.
Linda
Yeah, I think we built some of the strategies, too, to build momentum throughout the year, just in general.
Linda Bolton - Weiser
Mm-hmm. Okay. Well, that's good to hear.
Linda
Yeah.
Linda Bolton - Weiser
So... Again, I'm just wondering, so for your outlook, I guess you really didn't give profit or EBITDA or anything. Is there something that holds you back on that, giving guidance for the year on that front, given that you will have sales growth for the year?
Linda
No, I think we're just, again, you know, at this point, it's still early in the year. I think we feel good about the momentum, you know, that we have in the business. I think we have our expense base under control. We've got costs under control. But, you know, we kind of want to get the top line moving and kind of see where the business is going from there, and then we'll take it from there.
Linda Bolton - Weiser
Okay. Sounds good. And then... On inventory, you know, I didn't glance at your balance sheet yet, but what was the inventory at the end of the year? Was it actually down sequentially?
Shane Jones
It was flat sequentially to Q3.
Linda Bolton - Weiser
Uh-huh. So do you expect to have, like, kind of more reduction in inventory in 2023?
Shane Jones
Absolutely. Absolutely. We will be working that down. Obviously, we'll have some growth that we'll add to some of that, but we will more than offset that growth with just right-sizing the amount of inventory that we have because we have more than we likely should have had at the end of the year.
Linda Bolton - Weiser
Okay. And then just in terms of your businesses, Good to hear that China is maybe showing some glimmers there. That's good. Can you just talk about – can you talk about – I mean, is there any more color you can give us about China, just in terms of the pace of recovery or what you're actually seeing there?
Linda
Yeah, as I mentioned, you know, we're starting to see some momentum, you know, come back into the business. There's still a fair amount of uncertainty on the ground there. Consumer behavior has not, you know, simply returned to kind of where it was prior to the zero COVID policy. So as I mentioned, you know, we're hopeful that the trend line continues, but I'm going to say it's still a bit early to tell, but again, I think we feel good that we're getting positive momentum there.
Linda Bolton - Weiser
Mm-hmm. Okay. And then can you talk a little bit more about Eastern Europe, just what's going on there in terms of, like, is the sale being booked from Russia and Ukraine actually zero at this point, or is there still a little bit? And then what are those new markets you referred to, sort of?
Linda
Yeah, so, you know, what we're seeing is, We're able to get inventory reliably into the markets. We're able to get it into the hands of the people that, you know, kind of where we want it to go. And then we're able to get, you know, kind of repatriate the dollars kind of once the inventory is on the ground there and it's sold in. So when I talk about, you know, us getting some stability, you know we really are seeing that that kind of type of stability where the business is moving forward people are selling uh and that would include both in Russia and in Ukraine uh albeit obviously Ukraine is at a is at a depressed level uh the performance that we're seeing in Turkey and the Baltic states uh you know at this point in time is providing again some partial it's partially filling the gap that we would have seen from Ukraine. So I think we feel really good about that. I think the team on the ground has done an outstanding job rewiring everything from how we get the product on the ground to how we deliver it to people, to how we get payments. So it's been a lot of work. so I think we've again we've reached this stability this level of stability of all things you know kind of staying equal and all things you know holding steady uh we feel pretty good about that and then we've got the uh the the dollars coming in from Turkey and the Baltic states still new markets for us but you know it's enough that it's actually uh I'd say meaningful to relative to what we were losing in uh in the Ukraine hope that's helpful
Linda Bolton - Weiser
yes yes thank you um and then i guess just finally i'd like to ask about north america um because i guess you know you're still having some declines there and i just kind of wonder about maybe the consumer pressures still facing some inflationary pressures and things like that and yet you're kind of talking about taking price um Maybe you can just give us a little more color about how you're managing that business there in North America.
Linda
Yeah, that's an important one, especially when it comes to taking some price there. And what we're specifically looking at is some of our specialty products, especially the botanicals, where we really kind of own some of these therapeutic areas. There is an opportunity for us to take price on some of those products, so we're going to do that. We'll be kind of looking at all of our products and all of the pricing, again, just to sharpen our pencil and make certain that we're hitting relevant price points. You know, kind of just some of the prices are, you know, we just landed on them. And I think there's a better price point that people would be willing to pay and they wouldn't even notice the change, but it would make a difference to us. We are still experiencing and dealing with an inflationary market where consumers are making different choices than they were versus, you know, the marketplace in 2021. So that does have some implications in terms of what we can do, our marketing and promotion strategies. But we do believe there's opportunity for us to take price. We're still able to drive customer growth. We are seeing good customer growth there. Again, but what's happening is as we're bringing in new customers, we're just seeing the average orders are different than they were, you know, just 12 months ago. So we're going to keep hammering away at this. We do have other initiatives kind of in the mix, too, as I had mentioned. across our digital platform, and then as well looking towards our nutritional health practitioners to try and expand the number of people that we're bringing in there. That's an important initiative for us in 2023 and going forward. There are several hundred thousand health practitioners out in the marketplace that we're not tapping into right now that would be ideal you know, kind of distributors for our product. And so we're going to be much more aggressive at trying to capture them in 2023 and beyond.
Shane Jones
And if I could just add on a little bit there, on the price increases in North America especially, we've been very thoughtful, very careful about the way we're doing that, and frankly are really measuring our elasticity of demand when we're doing it so we can learn from that as well.
Linda Bolton - Weiser
Okay.
Operator
um okay i'll leave it there if anybody else has questions thank you very much okay thanks linda all right at this time this concludes our question and answer session i would now like to turn the call back over to mr morehead for closing remarks okay thank you hey i'd like to thank everybody for listening to today's call
Linda
And we look forward to speaking with you when we report our first quarter 2023 results in May of 2023. Thanks again for joining us and take care.
Operator
Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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