Nature's Sunshine Products, Inc. ($NATR)

Thank you, Marissa. Good afternoon, and thanks for joining our conference call to discuss our first quarter 2026 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through May 21 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 the 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 quarterly reports on Form 10-Q, our earnings release issued today 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, Ken Romandy. Ken?

Thank you, Nik. And good afternoon, everyone. Thank you for joining our first quarter earnings call. I'm very pleased to report that we delivered a very strong first quarter, growing sales 9% and EBITDA 33% and reflecting continued momentum across our key strategic initiatives. We generated sales growth across all regions, led by North America with over 9% constant currency growth. driven by our digital channel strategy with strong engagement from both new and returning customers. A healthy increase on our active consultants across the globe also drove solid growth. Our first quarter performance underscores our focus on disciplined execution, strengthening consultant and customer acquisition, expanding our digital capabilities accelerating adoption of our Autoship subscription programs and improving gross margin. As we look ahead, we are confident that the key strategies of our vision for growth will drive accelerated, sustainable growth and long-term shareholder value. I will update you on the progress we've made in developing our vision for growth, a bit later in the call. After our CFO, Shane Jones, provides the details of our strong Q1 performance. Shane?

Thank you, Ken. We are very pleased to report another outstanding quarter with growth in constant currency terms across all our business units, North America, Asia, Europe and Latin America. This growth continues to be bolstered by our expansion into new digital channels, strong adoption of our subscription auto ship programs exceptional new customer acquisition and strong partnerships with our independent consultants across the globe. Our efforts to modernize the business, expand digital capabilities and strengthen engagement with both our customers and our independent consultants continue to drive momentum in the business. Now diving into specific financial performance. Net sales in the first quarter was $122.9 million, representing our strongest first quarter in company history and our third largest quarter ever. This represents a 9% increase versus the year ago quarter or a 7% increase excluding the impact of foreign exchange rates. Growth was driven by continued acceleration in North America, combined with strength in Asia Pacific and Europe. We continue to closely monitor the geopolitical tensions in Iran, given the expected impact on inflation and potential short-term impact on consumer buying patterns. However, as of yet, consumer demand remained strong as reflected in the robust sales growth that we're seeing. Looking at our results in more detail, starting with regional performance. In North America, we are building strong momentum driven by rapid growth in digital, while maintaining our core business across specialty retailers, practitioners, affiliates and independent consultants. Q1 sales grew 9% and year-over-year to $38.3 million, our best growth in over 5 years. Our digital business continues to produce very robust year-over-year growth, increasing 42% in Q1. This was fueled by continued strength in customer acquisition, coupled with robust adoption of our subscription Autoship program, leading to better retention and frequency from returning customers. Similar to the exceptionally strong growth that we've seen over the last several quarters, new digital customers increased 60% in Q1. We Likewise, subscription auto ship continued to perform very well in Q1, accounting for 48% of the digital sales coming through our website. As we've highlighted before, continued improvement in this metric is a leading indicator for future growth and profitability since the lifetime value of customers that utilize subscription auto ship is more than 3x higher than other customers. We're also very excited about the growth of our social commerce business within digital. While still relatively small, in Q1, this business grew triple digits year-over-year. Also, while subscription auto ship in this channel just launched in the second half of last year, it already makes up 23% of total social commerce revenue. We are excited to see the fundamentals of this business continue to move in the right direction, validating the strategic investments we are making and strengthening our confidence that we will meet and exceed the goals we have set. As we've said many times, digital momentum is a key component of our broader transformation and represents an important long-term growth lever for our business. Given the very strong momentum in digital, we expect continued mid- to high single-digit revenue growth in North America throughout 2026. Moving to our business in Asia Pacific. Sales grew 7% year-over-year to $52.2 million or 6% growth on a constant currency basis. This performance was driven by outstanding execution in China, Japan and Korea, where sales increased 40%, 16% and 14%, respectively, excluding the impact of foreign exchange. As outlined in our last earnings call, the turnaround in China has been driven by very strong adoption of our subscription Autoship program, which has grown from nothing at this time last year to more than 25% of total revenue today, combined with a double-digit increase in independent consultants. During Q1, these fundamental drivers were combined with a strong response to our field activation efforts yielding exceptional results. While we continue to be encouraged regarding the fundamentals of the China business, the 40% growth seen in Q1 is unlikely to be repeated in the coming quarter. The double-digit growth seen in Japan and Korea during Q1 and came as a result of a very successful launch of our Lumara skin care products, along with strong year-over-year increases of independent consultants. We are very pleased with the commitment and strong execution from our independent consultants in these markets and believe that our focused, differentiated products, along with our knowledgeable, passionate consultants position us well for continued growth in the APAC region. We're also pleased with the continued strength in our European business, where Q1 sales increased 9% and versus the prior year to $26.4 million or 6% growth on a constant currency basis. These outstanding results were driven by 11% growth in Eastern Europe in local currency terms. The strength in Eastern Europe has been fueled by improved product availability as we have worked to ensure appropriate in-stock levels for our key products where we see high demand. This improvement was combined with outstanding execution from our independent consultants and some economic stabilization in the region. This remarkable growth is a testament to the perseverance and commitment of our staff in that area, given the continued war in the region. For the remainder of 2026, we expect continued mid-single-digit growth in Europe. Now turning to gross margin. We continue to build on the progress we've made over the past several quarters as gross margin increased 116 basis points to 73.2% compared to 72.1% a year ago. This improvement represents the benefit of our ongoing gross margin initiatives and favorable market mix. These initiatives include renegotiating logistics contracts, better conversion costs through improved manufacturing efficiency, improved sourcing, more disciplined pricing and other cost-saving measures. Despite some uncertainty regarding the short-term impact of the situation in Iran on inflation, we still anticipate continued modest improvement in gross margin. Therefore, during 2026, a gross margins are likely to average around 73%, which represents a significant step up from where we've been historically. Volume incentives as a percentage of net sales were 30% compared to 30.8% in the year ago quarter. The decrease was primarily due to the strong growth in our digital business as well as changes in market mix. Selling, general and administrative expenses during the first quarter were $43.5 million compared to $40.6 million in the year ago quarter. As a percentage of net sales, SG&A expenses were 35.4% for the first quarter compared to 35.8% a year ago. The $3 million increase versus prior year was primarily related to variable cost associated with the sales increase and compensation costs. While Q1 spend was less than the quarterly SG&A range communicated last quarter due to the timing of certain strategic investments, we expect quarterly SG&A of $45 million to $47 million for the remainder of the year as we ramp up these initiatives. Operating income increased 53% and to $9.5 million or 7.8% of net sales compared to $6.2 million or 5.4% of net sales in the year ago quarter. GAAP net income attributable to common shareholders for the first quarter was $5.1 million or $0.28 per diluted common share compared to $4.7 million or $0.25 per diluted common share in the year ago quarter. Adjusted EBITDA, as defined in our earnings release, increased 33% to $14.6 million compared to $11 million in the year ago quarter. The increase was primarily driven by the growth in sales and improvement in gross margin. Our balance sheet remains clean with cash and cash equivalents of $87.6 million at 0 debt. Inventory decreased to $67.1 million at the end of the first quarter, a $1.2 million decrease versus Q4 last year. We expect to see a moderate increase in inventory during 2026 to ensure appropriate in-stock levels and fulfill continued strong demand. Net cash used by operating activities was $1.8 million compared to cash provided of $2.6 million in the prior year period. We repurchased 20,000 shares for approximately or $24.54 per share during the first quarter ended March 31, 2026, with $16.9 million remaining on our 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 2026 outlook. We are reiterating the guidance issued last quarter, expecting full year 2026 net sales to range between $500 million and $515 million compared to $480 million for 2025. This equates to year-over-year growth of 4% to 7%. For adjusted EBITDA, we are guiding to a range of $50 million to $54 million representing year-over-year growth between 1% and 9%. This incorporates a cautious stance regarding the potential impact of the Iran conflict on both demand and cost. Also, as communicated previously, this guidance includes measured investments to improve our technology infrastructure, drive further customer acquisition, advanced geographic expansion, expand penetration in existing markets and accelerate product innovation. These investments will ramp in Q2 and Q3 of this year, thereby temporarily reducing the double-digit EBITDA growth rate seen historically and in Q1 2026. We continue to see strong momentum in the business, and believe that now is the time to make these key investments in order to position the company for sustained rapid growth in 2027 and beyond. Overall, we believe the business is well positioned to capitalize on current opportunities in a growing market and remain very optimistic about our ability to continue to unlock the substantial growth prospects that we see. The strategic initiatives we've been implementing are working, and we're confident in our ability to continue to accelerate growth in sales, profitability and free cash flow. Now I'll turn it back to Ken for some further commentary.

Thank you, Shane. Well done. As I reviewed on our earnings call last quarter, Nature's Sunshine has a very strong foundation, driving today's results and 1 upon which we can build an accelerated vision for growth. The key pillars of this foundation include 2 very strong brands, steeped and heritage in quality. . Nature Sunshine and Synergy operating in a large global and rapidly growing category of natural health supplements, a globally diverse business operating in over 40 countries around the world exceptional product development capabilities, sourcing and blending hundreds of nature's best ingredients from around the world and scientifically verifying their effectiveness. An army of independent consultants, passionately representing our products every day around the world, a rapidly growing digital business, penetrating new channels driven by a subscription model that enables consistent recurring revenue streams, a rock-solid balance sheet with nearly $100 million in cash and no debt. And last but not least, a passionate, mission-driven organization dedicated to elevating people's lives globally through improving their health and economic well-being while delivering industry-leading results for our shareholders. To build upon this foundation, we have developed what we call Nature's Sunshine vision for growth. with the goals of doubling our sales to $1 billion and to leverage our infrastructure to achieve a 15% EBITDA margin over time. The key elements of our Vision for Growth plan include: one, continued rapid expansion of our digital business; two, explore distribution in select U.S. brick-and-mortar retail channels working in a complementary and harmonious manner with our existing business; three, deeper penetration in our direct selling markets. The U.S. and China, the world's largest consumer markets are 2 markets where we see terrific opportunities. For example, our Asian brand synergy is very small in the U.S. but rapidly growing. So we are doubling down to expand U.S. synergy distribution as a key growth driver. Four, expansion into new high-value markets. This year, we will enter Germany, our largest new market that we've entered since China in 2016. And the largest supplemental supplement market in Europe. Looking ahead, we plan to expand to attractive new Asian markets utilizing our very powerful Synergy Asia sales system. Five, we will drive growth through sharper brand positioning and product innovation behind both Nature's Sunshine and Synergy brands. Our new product pipeline is very strong over the next 2 years and we will share the details of these new product launches as their launch dates draw near. Six, leveraging our supply chain for scale efficiency with excess capacity in our manufacturing facility, we can drive higher variable margins with volume growth. In addition, we'll be investing in automation to drive further efficiencies. And lastly, 7, with nearly $100 million in cash and a debt-free balance sheet, we are well positioned to pursue bolt-on accretive acquisitions and to leverage efficiencies in our manufacturing plant. By executing this vision for growth, we believe $1 billion in sales is within our grasp. We believe the sun has never shined brighter for Nature's Sunshine, and I look forward to sharing more about our vision for growth in the near future. Thank you for your time today and your continued support of nature of Sunshine. I would now like to turn the call back to the operator for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from Susan Anderson with Canaccord Genuity.

Nice to see another really strong quarter. Maybe if you can talk about the 15% EBITDA margin longer term. I'm just curious if you could give us an idea of the building blocks to kind of get there, I guess, how much driven by gross margin expansion versus SG&A leverage? Or should we think about it as kind of being equal between the 2?

I'll let Shane -- Susan, great to hear your voice, and I hope we'll catch up soon personally. I'll give you a general answer, and then Shane has got a got a very -- a latter approach to how we're going to do this. It's really through scale. If we get the volume growth accelerated and we have good cost discipline, we can get the scale, and it comes in several areas. It's not just 1 big idea. It comes in several areas up and down the P&L.

To get it a little bit more little more specifics for you. So we're basically today in a little over 10%. So as we look at what we need to do to get there. So there's 3 blocks of that. So part of that, which should be about 1 point of that is going to be coming from gross margin. And gross margin, that's just continuing to do what we're doing as well as Ken talked about, the scale portion as well. as we put more volume through our manufacturing plant, we're underutilized today, we'll be able to be more efficient and be able to drive efficiencies there. So that's about 1 point of that. About 2 points of that is through our volume incentives line. As you can see, we've brought that down significantly over the last year. And really, the biggest push of what's making that happen is just our digital business, which where we don't pay the commissions or don't pay as much commission as we do in our other parts of our business. As that we mix more to digital, that will continue to come down. So that's about 2 points. And then the final piece is just leveraging our SG&A as we continue to grow. That's also another 2 points. And as we talked about, that's not reducing head count or anything like that. It's really just leveraging as we grow. So it's a 1 and 2.

Perfect. That's really helpful. And then maybe I saw you guys appointed a new Chief Technology Officer. I guess does this signal -- I mean digital has obviously been very strong and very successful, particularly in the U.S. I guess, this kind of signal that you're going to continue to focus on that area and maybe even continue to expand the products offered on the DTC side as you see a lot more opportunity there longer term?

Yes. The hiring of a CTO is crucially important. We have a really good IT group here. However, technology, as you know, in every business is just -- it's a game changer these days, everywhere from your base infrastructure all the way to the use of AI. And we needed a leader that came from very different experiences in the industry, both from evolving our base ERP system as a company. We face some end-of-life end-of-life dates in 5 or 6 years on our Oracle ERP system. We have to figure out what's the next step there in our ERP system to absolutely putting the pedal to the metal on digital growth. There's so much more we can do there and the use of as well as how do we digitally enable our independent consultants. So for instance, we just launched an app that allows independent consultants to do their entire business by phone. And there's so much more we can be doing with that. We just launched it, but there's so much more we can be doing that. And John Hanacek, our new CTO, has a lot of experience in doing things like that. And so we're really taking technology and driving it all across base infrastructure digital growth direct-to-consumer as well as how do we digitally enable the tens of thousands of independent consultants we have around the world. And that's a lot of our investments this year. A lot of our investments this year, as we talked about, why we're not continuing the typical digital -- the most recent double-digit EBITDA growth and only do around single-digit EBITDA growth this year was because we're making enhanced investments. A lot of it's in technology.

Okay. Great. And then maybe last question, if you could just give some color on the brands and products that drove the strong growth in each region. Then how -- I guess, also maybe how you're thinking about new products you expect to roll out new products to each of the regions this year.

I don't want to get specific about new products too much in advance. We will let you know as they occur. But when you think about what brands drove the growth, Nature's Sunshine is our brand in the U.S. in Latin America, North America, Latin America, Europe and in China. And then the rest of the Asia Pacific region, Korea, Taiwan, Japan, Southeast Asia, that's synergy. So when we say APAC growth, it's kind of both brands because Nature Sunshine is in China and the rest of Asia has synergy. So hopefully, that will give you a little bit of indication as to what brands are driving the growth. So both brands drove great growth in this quarter and continue to do over time. New products they're mattering. We don't do the same new product everywhere. They're all on different time frames. We do have a very promising product that we're launching for the first time ever, a pan-Asian launch, meaning our 3 biggest Asian country, Korea, Japan and Taiwan are all going to be launching the same product with the same formulation at the same time through our very, very powerful Asia sales system. It's never been done before. So they are gearing up for that. We will -- as we get closer to the date, we'll say what that product actually is. But it's a really -- it's a way to leverage the power of that system unlike we ever have done before.

Great. Okay. Excited to see what that is. Thank you so much for all the details.

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

Thank you, Merisa, and we'd like to just thank everybody for listening to today's call, and we look forward to speaking with you when we report on our second quarter 2026 results. Have a great night.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation.