Nature's Sunshine Products' (NATR) CEO Gregory Probert on Q2 2014 Results - Earnings Call Transcript

| About: NATURE S (NATR)

Nature’s Sunshine Products, Inc. (NASDAQ:NATR)

Q2 2014 Results Earnings Conference Call

August 06 2014, 05:30 PM ET

Executives

Richard Strulson - Executive Vice President, General Counsel and Chief Compliance Officer

Gregory L. Probert - Chairman and CEO

Steve Bunker - EVP, CFO and Treasurer

Wynne Roberts - President and COO

Analysts

Brian Hollenden - Sidoti & Company

Greg Hillman - First Wilshire Securities Management

Nelson Obus - Wynnefield Capital Management

Operator

Greetings and welcome to the Nature’s Sunshine Products Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

I would now turn the conference over to your host, Mr. Richard Strulson, General Counsel and Chief Compliance Officer at Nature’s Sunshine Products. Thank you. Mr. Strulson, you may begin.

Richard Strulson

Thank you. Good afternoon everyone and thanks to all of you for joining our conference call to discuss our Second Quarter 2014 Financial Results. This call is available for replay in a live webcast that we posted on our website at www.naturessunshine.com in the Investor’s section. With us today are Greg Probert, Chairman and CEO; Wynne Roberts, President and COO; and Steve Bunker, Executive Vice President, CFO and Treasurer.

The press release which was issued this afternoon at approximately 4:00 p.m. Eastern Time and the information on this call contains certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors which may not be under the company’s control. 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, performance or achievement of the company may be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors 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 the other reports filed with the Securities and Exchange Commission.

The press release and the information on this call speak only as of today’s date and the company disclaims any duty to update the information provided herein and therein.

I will now turn the call over to Greg Probert, Chairman and CEO of Nature’s Sunshine Products.

Gregory L. Probert

Thanks Rich and good afternoon everyone. Thank you for joining us today. To start we’ve made several strategic advancements to-date in 2014. Our brand, product and channel strategies continue to take hold as Nature’s Sunshine furthers its transformation into a global organization with multiple brands and distributions channels.

Most notably we announced our entrance into China, one of the largest and fastest growing vitamin, mineral and supplement markets in the world through our joint venture with Fosun Pharma. And as we discussed before entering the Chinese market is the next logical step in our growth strategy. Our alliance with Fosun Pharma gives Nature’s Sunshine access to this important market through innovated differentiated model with a strong local partner. Through our joint venture we will enter both the Chinese direct selling market, the third largest and fastest growing direct selling market in the world with our Synergy brand as well as the Chinese retail channel with our Nature’s Sunshine brand.

Our agreement also represents the first transaction in which Fosun Pharma has coupled a major ownership position with the formation of a joint venture. The joint venture is also the first of its kind between a U.S. company and a Chinese company for direct selling products in China which we believe will mark a significant competitive differentiator in the market place. We view this joint transaction as both a testament to the strength of our existing business as well as Fosun Pharma’s confidence in our ability to establish a substantial business in China.

In addition to funding the joint venture we intend to use a portion of the net proceeds of Fosun Pharma’s investment in Nature’s Sunshine to pay a one-time cash dividend of a $1.50 per share contingent upon the transaction closing. We believe that the net present value of the joint venture combined with the return of excess capital to shareholders will be highly accretive to shareholder value. Partnering with Fosun Pharma instead of entering China independently will maximize shareholder value to a more robust revenue and lower cost model, faster speed to market with reduced execution risk.

While we expect the business will take two to three years to reach critical scale we expect that China will be an essential driver of our long-term growth and be one of our top two markets within five years. We are already executing against our operating plan in order to ensure we enter the market as quickly as possible. We have begun the regulatory approval process, and are taking steps to establish the necessary legal entity, commenced our hiring efforts, secured office space and analyzed which of our various products to register as part of our go-to-market strategy. All-in-all we are very excited about the partnership with Fosun Pharma and the joint opportunity we are pursuing in China.

Recapping a few financial highlights, net sales are up slightly on a constant currency basis, as continued strength and synergy allowed us to absorb the broader NSP declines. Once again Synergy had strong growth, posting its fourth consecutive record setting sales quarter led by Korea and Japan which delivered year-over-year growth of 108% and 59% respectively. Our strong product portfolio, sales program uptake and new organizational structure continued to drive accelerated growth in this region. New product and program adoption at NSP North America also continues to trend positively, as our strategy to lever science-based innovation to solve mega health problems resonated well with distributors resulting in strong engagement and adoption levels.

In fact AnxiousLess, our patent pending situational anxiety product saw its largest sales month since launch in May. Already AnxiousLess has reached 63% penetration of our Manager base. And our clinically-proven prostate balancing product, Equolibrium, which launched at our U.S. National Convention at the end of March has already reached penetration levels of 34%.

Our IN.FORM weight management program which launched nationwide in the first quarter continues to gain momentum and prove itself a powerful recruiting tool for new distributors and customers. Through the end of second quarter we certified over 775 coaches. And lastly our retail productivity tools continue to take hold. Overall we are pleased with the traction of our new product and program initiatives in the U.S. Through our new approach we have designed innovative products and duplicable business methods to make it easy to attract new distributors. In spite of progress in key program areas sales for NSP North America are down slightly over last year.

Part of the decline is explained by timing of our annual convention but we also continue to see underperformance within our Spanish segment. Reengaging Spanish leaders continue to be a top priority and our management team is working hand-in-hand with distributor leadership to improve performance in this segment. And as we’ve stated before while we are pleased with the early results of our new product and program approach we expect continued variability in our consulting performance as distributor training takes hold and adoptions levels rise building towards a more sustainable level of momentum.

Turning now to NSP Russia, Central and Eastern Europe. The political unrest in Russia and Ukraine has been well publicized and will come as no surprise that the heightened political tension that's a substantial net sales decline in NSP Russia, Central and Eastern Europe during the quarter, a trend we would expect to continue should the situation persist or worsen. That said, we are confident that our dedicated field leadership coupled with our strong and renewed partnership with our local partner would help us navigate through the current turmoil and provide a solid foundation to reignite growth once the situation stabilizes.

Now turning to profitability, operating income for the quarter totaled $5.8 million or 6.2% of net sales impacting year-over-year comparability are legal, financial and other cost associated with our corporate development activities during the quarter including our joint venture formation. Normalizing for this $1.9 million and one time professional fees as Steve will touch upon in more detail, our operating income margin would have been 8.2%, our highest margin since Q2 2013. We are pleased to deliver improved levels of profitability while advancing important initiatives in R&D, product development, distributor training and sales initiatives program, which we believe would solidify our foundation for future growth.

Speaking of investments we are excited to announce that just a few weeks ago we broke ground on our new $2 million research and development center and medical clinic at our corporate headquarters in Lehi. This facility will serve as home base for our team of world-renowned and award winning scientists and doctors doing research and product development. This in turn provides us with the capability to control the entire product development lifecycle from early proof-of-concept, to ingredient formulation to in-house medical studies that prove efficacy.

As we touched upon before we are paying heightened attention to product lifecycle management as part of our investments in R&D to be much more effective in developing innovative and product line strength going forward. Along those lines we expect to launch additional new products in 2014 which will address mega trend health conditions such as obesity inflammation, and insulin resistance.

In summary we are pleased with our early progress in 2014 as we continue our transformation to a global organization with multiple brands and distribution channels. We are especially pleased that our strong balance sheet and cash flow enable us to make these investments while also driving shareholder value. In addition to our previously announced one-time cash dividend related to Fosun investment I am pleased to announce that yesterday our Board of Directors approved a $0.10 per share regular quarterly cash dividend. The quarterly dividend in addition to the one-time dividends that has been announced in August 2013 and in June 2014 and the ongoing share repurchase program demonstrate our confidence in the company's growth prospects, strong cash flow generation and our commitment to return excess cash to shareholders.

With that, I'll turn the call over to Wynne to comment further on our operations.

Wynne Roberts

Thanks Greg. Good afternoon everybody. We were pleased with our second quarter net sales growth of 1.1% on a local currency basis particularly in light of the heightened political tensions in Ukraine and Russia which negatively impacted our net sales growth overall. Once again leading net sales growth during the quarter was Synergy Worldwide which posted its fourth consecutive quarter of record second sales led by strength in South Korea and Japan. Synergy’s performance more than offset the declines experienced across our NSP businesses.

Net sales in NSP Americas, Asia Pacific and Europe were $49 million or 52% of total company sales. In local currencies segment net sales decreased 5.4% from the same quarter a year ago. The decline was primarily due to lower sales in U.S. as well as the action taken to combine our NSP Japan business with our Synergy Japan business on the 1st of this year and the transition of our NSP United Kingdom business to an export market.

For the second quarter of 2.13, we had recorded revenues of $0.9 million for both NSP Japan and United Kingdom combined markets. NSP United States which remains our largest markets at 32% --36% of total company sales recorded a net sales decline of 5.1% in the quarter. The movements of our U.S. National Convention to March 2014 as compared to April 2013 and the attendant sales attributed to product launch promotion during the convention in that year adversely impacted our sales in the quarter as did continued softness in our Spanish segment. However we remain focused on reengaging distributors across the U.S. and we saw continued progress in the implementation on our new products and programs during the quarter.

As we communicated last quarter we are focused on products and program that it makes it easier for Managers to attract new customers as well as new distributors to Nature’s Sunshine and we continue to make improvements in those areas. Our new product sales performed well doing the second quarter. As Greg mentioned earlier, sales of AnxiousLess our anxiety -- our newly launched anxiety product reached $0.7 million of sales in the quarter reflecting a growth of 18% over the prior quarter and penetration into our distributor base continues to build reaching 63% of our Managers and 10% amongst members.

In addition AnxiousLess has exceeded our initial growth projections and has become one of our top recruiting products with a repurchase rate of over 80%. We also discussed last quarter the -- around new prostate health product Equolibrium, which achieved $0.5 million in the sales for the quarter. And Equolibrium again has already achieved penetration of 34% in our Manager base. The creation of these new products and programs will continue to be a key focus. Our strategy is to design targeted innovated and differentiated products and programs that fit within a duplicable business method but makes it far easier to attract new customers and distributors to our business.

While it will take time for these products and program to make a sustainable impact on sales we are encouraged by earlier adoption rates for these programs by our distributors and customer alike.

Turning to weight management, our U.S. sales in this category declined 25% year-over-year versus our sales in Q2, 2013, which should be strongly impacted by promotional sale following the launch of our weight management line at our U.S. national convention in April 2013. On the sequential quarter basis sales grew 4.9% over our Q1 2014 performance reflecting continued good progress and adoption of the program.

Our newly launched IN.FORM weight management program continues to gain momentum and almost double the number of certified coaches to 775 in the quarter and the early results enjoyed by distributors and customers from product benefits and business building are encouraging. In addition, our retail productivity tools designed to help managers with specialty stores in their business have increased penetration in the quarter and continue to support their businesses. While we are encouraged by the early posted indicators of distributor engagement and uptake of our new products and programs in the U.S. the impact clearly has not yet being reflected in our financial performance and we’d expect continued variability as we build to a more sustainable recover.

Net sales in Russia, Central Eastern Europe was $12.8 million in the quarter or 14% of total company sales. Segment net sales decreased 14.3% over the prior year quarter and have continued to vain as a results of the political uncertainty in the region which substantially disrupted distributor activity in Ukraine and to a more moderate extent in Russia and Belarus.

While segments -- net sales did decline in the months of April and May we continued to show support to our local distributors with the introduction of price and business building promotions in the beginning of June and we were pleased to see a post of impact from these during that month. Despite the uncertainty caused by the political climates in the region through our strong presence on the ground with our local partner we have been able to maintain service levels and continue to support our distributors across the markets. We further believe that the strong partnership together with the same service levels and our strong reputation for reliability and longevity and quality in these markets will put us in strong position to build momentum once stability returns.

Turning to Synergy worldwide business unit, as mentioned the second quarter marked its fourth consecutive record second sale quarter with total net sales of $32.5 million representing a 34% of total company sales and a growth of 23.9% year-over-year in local currencies. Net sales growth was led by strengthen at South Korea and Japan partially offset by declines in Europe and North America.

Synergy Asia-Pacific recorded net sales growth of 50.7% year-over-year driven by South Korea and Japan. In South Korea, the momentum continued to accelerate to triple digital growth building on last September’s global summit which was held in Seoul at which we launched our Slim Smart weight management program.

In Japan, growth in year-over-year net sales further reinforced the positive results of the merger of our NSP and Synergy Japan business at the start of the year which has been successfully completed. In addition to the merger of NSP and Synergy Japan, growth in the region has also been supported by a combination of new and invigorated distributor leadership supported by targeted promotions.

Turning to Synergy Europe, total second quarter net sales decreased 2.5% year-over-year in local currency. The successful resolution of temporary shipping restrictions imposed by the Norwegian food authority which has adversely impacted net sales in the fourth quarter of 2012 and had a favorable impact in the first-half of 2013’s net sales. Subsequent to this resolution our Norway market has not yet returned to its previous growth thus resulting in declining net sales across the region which offset positive growth in several other Europe markets.

We are looking forward in Europe to off summit in Barcelona at the end of September. We expect the positive response from our distributor base to the launch of our Slim Smart weight management program there as well as to extensions to our [inaudible] health line.

Synergy sales in North America reversed the downward trend from the prior quarter yet were down year-over-year due to the initial sales lift in that quarter from the launch of Slim Smart. Slim Smart product coupled with new product training and an increased number of meetings across the country are expected to gradually return the North America market to growth over time.

In summary, we are pleased we were able to report modest revenue growth in the quarter especially considering the adverse impact of sales coming from the -- stemming from the Ukraine crisis. We were also pleased to see continued increased rates of distributor engagements and adoption of our new products and program and look forward to updating you on our further progress next quarter.

I would now like to turn the call over to Steve to review the financials.

Steve Bunker

Thanks, Wynne, and good afternoon everyone. Net sales in the quarter were $94.3 million, or 0.7% from $93.7 million in the same quarter last year. On a local currency basis, net sales increased 1.1% year-over-year. Cost of sales was $23.4 million, up 33.3% from $22.6 million in the year-ago period. The increase in the cost of sales percentage during the quarter was primarily due to discounting associated with product promotions designed to stimulate sales growth.

The increase in cost of sales for the quarter resulted in a slight 60 basis points decrease in gross margin 75.2% versus 75.8% in the year ago period. As we’ve explained previously, volume incentives are a significant part of our network marketing program and are designed to provide incentive to reach higher products sales levels. Volume incentives vary slightly on a percentage basis by product due to pricing policies and commission plans in place, and by the sales mix in our various markets.

Volume incentives accounted for 36.9% of net sales in the second quarter up 0.9 % compared to the same period last year. Selling, general and administrative expenses were $30.3 million or 32.1% of net sales, up 5.6% from $28.7 million or 30.6% of net sales in the same period a year ago. Selling, general and administrative expenses increased due to professional fees of $0.8 million related to the company’s strategic alliance with Fosun Pharma and $1.1 million associated with the evaluation and negotiation with a company in our alternative distribution channel which we ultimately decline to pursue. Excluding these costs, selling, general and administrative expenses would have been down 1.2% from last year or 30.2% of net sales.

As a result operating income decreased 25.6% to $5.8 million or 6.2% of net sales from $7.8 million or 8.3% of net sales in the prior year period. Excluding the aforementioned business development cost operating income in the second quarter would have decreased by 1.7% from last year or would have represented 8.2% of net sales. Adjusted EBITDA as defined in our earnings press release to exclude a share-based compensation expense decreased 18% to $7.9 million from $9.7 million in the second quarter of 2013. Normalizing for one-time business development cost, adjusted EBITDA would have been $9.8 million.

The effective income tax rate for the second quarter of 2014 was 40.5% compared to 34.9% in the second quarter of 2013. The current quarter's effective tax rate was above the U.S. federal statutory tax rate of 35% which was primarily attributable to an increase in tax liabilities associated with uncertain tax positions. Net income for the quarter was $3.2 million or $0.20 per diluted share as compared to $6.1 million or $0.38 per diluted share in the year ago period.

Moving to the balance sheet, cash and cash equivalents as of June 30, 2014 were $68.8 million, down from $77.2 million at December 31, 2013. The lower cash balance reflects approximately $11.6 million in capital expenditures, $3.2 million of ordinary dividends, the pay down of existing liability and the pay down of approximately $1.7 million on our long-term debt. Subsequent to quarter end we also repatriated $11.3 million in foreign cash through intercompany dividends.

Inventory at June 30th was down 3.4% from December 31, 2013 and we have $139 million in current assets with access to $15 million on our $25 million revolving credit facility as of quarter end. Given our strong balance sheet and consistent operating cash flow, our Board of Directors approved a regulatory cash dividend of $0.10 per share payable on August 29, 2014 to shareholders of record as of the close of business on August 18, 2014. In addition, we have agreed to pay a special cash dividend of $1.50 per share contingent upon the close of the transaction to form a joint venture with Fosun Pharma in China. Due to a blackout period beginning in mid-December and the subsequent negotiations with Fosun Pharma, we did not repurchase any shares of common stock during the quarter under the share repurchase program in 2014. Therefore as of June 30 we had $7.5 million available for repurchases.

To enhance our ability to repurchase shares, the company intends to establish a 10(b)5-1 plan, which allows for the periodic purchase of our shares based on pre-established criteria without restriction as to open windows. In summary, our ample capital capacity enables us to continue to make long-term investments in sales, marketing, science, product development initiatives and overall operations as well as to pursue strategic opportunities as they may arise and as always we remain focused on maximizing the company's return on invested capital.

I'd now like to turn the call back over to Greg for some closing remarks.

Gregory L. Probert

Thanks Steve. In closing, we are very pleased with our results for the first half of 2014 and look forward to updating you in the future regarding our continued progress on our growth initiatives. I would also like to thank our thousands of distributors and employees worldwide for their dedication and hard work. That concludes our prepared remarks. Operator, please open up the call for questions.

Question-and-Answer Session

Operator

At this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Brian Hollenden with Sidoti & Company. Go ahead with your question please.

Brian Hollenden - Sidoti & Company

Hi guys. Thanks for taking my call. I was hoping you could talk a little bit about the ERP system implementations and what benefits you have seen from the system so far?

Gregory L. Probert

Brian, could you say that again say it please. You were a little faint please.

Brian Hollenden - Sidoti & Company

Yes is that a little better?

Gregory L. Probert

Yeah that’s much better thank you.

Brian Hollenden - Sidoti & Company

I was just wondering if you can comment a little bit on where you are in the ERP system implementation and then what benefit you are seeing from that system?

Gregory L. Probert

So, we began the implementation process of the project in September last year, Brian and we expect our targeted go-live date is July next year 2015. So, right now we are we are right in the middle of the project in terms of you know defining the process as redefining the processes that we need to adapt and so on defining our data elements. For those of you may be familiar with ERP implementation we are in the middle of conference room pilot two right now where we are testing for the first time live data that is being transition from our existing legacy systems to test flows through the now Oracle system. But the go-live day will be July 2015 and obviously we won’t see any real benefit from the system until post go-live.

Brian Hollenden - Sidoti & Company

Okay. And then can you just talk briefly about what those benefits will be once you are live with what additional information it will give you into your business?

Gregory L. Probert

Sure. I think right away across the business we are going to have a benefit. First of all in terms of financial reporting for the first time we will have a common system globally in OR operating units with a unified Chartered Accountant in market obviously we have the unified chartered accounts on a consolidated basis now. It will make reporting easier. We will be able to report much faster. It will enable us to make enquiries into our financial results on a much faster basis to ensure that we have good data quickly with which to react and manage the business.

In terms of manufacturing it will provide us with a much more rigorous ability to drill down into the various elements of our manufacturing cost, both from a raw material, manufacturing labor and overhead efficiencies as well as inventory deployment and management around the world and give us great visibility into that.

In terms of sales and marketing and driving of our business with our distributors and customer it will enable us to really much more effectively a much more quickly profile the performance of our distributors by region, by rank, by product sales and so on, so that we can understand what working with a lot faster and design and respond accordingly with more effective sale program. So I think really across the business we are going to see a substantial improvement in our ability to dissect understand and react in a positive way and in a much more timely way going forward.

Brian Hollenden - Sidoti & Company

Okay, thanks and then switching over to the Fosun partnership how quickly do you expect the product to hit the retail channel in China?

Gregory L. Probert

Hey, Brian it’s Greg. Yeah, we are looking for a launch in the retail business sometime next year. It’s going to be somewhat dependent on the licensing process which as I mentioned in my comments we are already engaged in that process with regulatory bodies. So we hope that it will be sometime towards the middle of next year.

Brian Hollenden - Sidoti & Company

Okay. And then once you start selling in China how quickly do you get to a breakeven level and then longer-term does the business have a higher then company average operating margin, you can talk about that kind of couple years out?

Steve Bunker

Yes, we’re and I think we said it take us two or three years to get to a critical math and so it’s going to take that time and certainly that’s contingent upon as getting into the market as quick as we can and we are doing those things to get there as quick as we can but it will take us two to three years to get to a critical mass.

Brian Hollenden - Sidoti & Company

And then longer-term after you reach the critical mass do you anticipate the sort of the normalized operating margin to be higher than the overall company average or is it a similar type of profitability?

Steve Bunker

Yeah, I think as we have mentioned you know China has the potential to be you know very good market and we have said that you know within five years one of our top two markets and that you know will allow us to continue to leverage our fixed SG&A cost on a global basis and not just the China but our industry core business, we should you know see some better leverage costs and also get to a point over that period of time with operating margins the level of our peers.

Brian Hollenden - Sidoti & Company

Okay. And then I’ll ask one another question and jump back into the queue. I was just wondering if we could you can give us a little bit more color, I am looking at the active distributors number kind of year-over-year about 8 to 8.5% decline. I am just wondering if you can talk a little bit how you get that number kind of gong in the other direction how do you increase the distributor base.

Wynne Roberts

So, I think we have to -- Brian it’s Wynne again. We address that obviously in different ways in the different business units and one of the things to look at if you look at active distributors and customer by segment in NSP America, Asia-Pacific, Europe and in Russia Central Eastern Europe you will see that the number of active distributors and customers and Manager does trend downwards as revenue trends down.

In Synergy there is kind of an odd co-relation there where you look -- like Synergy we are reporting strong growth but the active distributors and customers is trending down year-over-year in the quarter. But the Managers are trending up as you’d expect. The reason for the trend down in synergy in the active distributors and customers is that it’s actually due to mix in markets, active distributors in different parts of the world, the cost to be an active distributor it’s at a different levels according to economic conditions in different part of the world. And so, what we have seen is we have lost some ground in South East Asia in the quarter I mean recent months whilst we have gained ground in the much more affluent markets of Korea and Japan. And so as a result the active distributor value is lower in South East Asia then it is Korea and Japan and so that accounts for that difference in numbers.

In the U.S. and Russia obviously getting the gun in the right direction is dependence on adoption of our sales programs and our new product programs. And so in Russia I think it’s fairly evident getting them going in the right direction in general in a significant way is going to depend on a return stability in region of the world from a political basis. Although we are seeing already and we haven’t broken it out in the Q but we are seeing already that whilst Ukraine continues to be a significant challenge and Russia and Belarus are being soft, we have seen a modest uptick in June in our response to programs -- promotions and programs that we launched in June to better support distributors in the this area in this tough time. So, you know we are taking action with our product and program in the region to take it up.

In the U.S. the launch of the new products the launch of the -- program the retail productivity tools as well as a newly reorganized sales force that is aligned by stage, by program and by key distributor leaders is going to be very effective I think in bringing the U.S. back to the growth and distributor and the number is up.

Brian Hollenden - Sidoti & Company

Okay, thanks I appreciate the information.

Wynne Roberts

Thanks.

Operator

Our next question comes from the line of Greg Hillman with First Wilshire. Go ahead with your question please.

Greg Hillman - First Wilshire Securities Management

Yeah, good afternoon gentlemen. Continuing on synergy particularly in Korea and Japan was that have had a record year in Korea did Korea peak before in your like coming back to its prior level?

Gregory L. Probert

No, this is record year in Korea.

Greg Hillman - First Wilshire Securities Management

Okay. And how much penetration is there like how high is up in Korea, I mean like how big do you think that could get, or and also what’s driving it, is it SLIM SMART or is it [Felogini] far or is it, how would you explain what’s going on in Korea?

Gregory L. Probert

So I think the reason that we are experiencing the positive momentum in Korea and the accelerating momentum is due to a combination of factors. I think as always good momentum it depends on good distributor leaders which we have in Korea. They have a very good robust repeatable, duplicable business method and training method that they follow. They are well supported by our local management. And I think the products placed into the business method obviously and is particularly important as well.

So you take those factors together and all those working together over a long period of time and have built up to a point where we are seeing this gathering momentum in growth.

In terms of the long-term potential of the market, I think we are not going to make any commitments as to the levels we'll achieve right now, but we know the market has huge potential. We believe we are occupying a very strong place in the market with strong products. And if you look at the sales figures achieved by many of our competitors that's indicative of the opportunity we have in Korea.

Greg Hillman - First Wilshire Securities Management

And Japan, and is Korea -- and how much bigger is Korea than Japan right now in terms of sales, they are like three times, five times?

Gregory L. Probert

No, it's about 4.5 to 5 times bigger.

Greg Hillman - First Wilshire Securities Management

4.5 to 5 times bigger? Okay. Okay. That's pretty encouraging. And then finally could you turn to Europe, particularly Western Europe and talk about how your strategy there is evolving and what you expect to happen there, both NSP and Synergy?

Gregory L. Probert

Well primarily Synergy because we only operate in one market in Western Europe which is Poland with NSP. So in the markets in Synergy I think if we go back a couple of quarters we explained that whilst we, over the last few years we planted seeds with Synergy in Europe and have some good market growth, we haven’t done a really good job of supporting the distributors in those markets which want corporate support.

So beginning middle of last, I think in second quarter of last year we started to expand our resource, our corporate resource in Europe significantly placing people in key markets to work closely and build partnerships with the local distributor leaders and build growth strategies with those leaders. And we are starting to see the impact of that in several markets across the region right now. Unfortunately it’s overshadowed at the moment by the adverse impact that we've seen from Norway as mentioned in the prepared remarks but in general we are seeing some positive momentum in several markets.

And I think we expect to see that momentum continue going forward. We are launching new products at our European Summit in Barcelona to expand the product range in September. We will be opening another major new market in 2015, and we will announce that closer to the time. And we just expect to continue to see the stronger support that we are providing to the region together with the new products and obviously the supporting promotions to continue to build growth in the European region.

Greg Hillman - First Wilshire Securities Management

Okay. Great. And then finally can you explain what the Norway thing was and whether that's over now or what was going on with that?

Gregory L. Probert

Yeah, it’s -- so in late to I think it was December, November or late November or early December 2012, we had a labeling discrepancy in the Norwegian market, that results in question from the Norwegian food authority and required clarification on our labeling. Pending that clarification, shipment of our products into the market was suspended for about six or seven weeks I think. And in the back end of 2012, that did result obviously in an interruption in what was a gathering positive momentum in Norwegian market. We did receive a positive impact to the tune of about $1.4 million in Q1 of 2013 from pent up sales taken in late through 2012 that we were unable to ship, which creates an adverse comparison that we referred to in the prepared remarks.

Following that resolution and it is completely over, there has been no further issues in the market and following that resolution however we have been unable to regain the positive momentum that we had in Norway ahead of that issue arising. So whilst we still have relatively stable sales right now in the market the comparisons to the early part of last year are difficult because of the loss of momentum.

Greg Hillman - First Wilshire Securities Management

Okay. Thank you.

Operator

Our next question comes from the line of Nelson Obus with Wynnefield Capital Management. Go ahead with your question please.

Nelson Obus - Wynnefield Capital Management

Yeah. Hi. I just had two quick questions. One, obviously these programs that are beginning to gain some traction are intended to promote a daily use of the product. Is this something you track right now and I guess my real question is how many of your products now are focused on daily use or is this whole thing just evolving in terms of you tracking it?

Wynne Roberts

So the way we track it right now, Nelson this is Wynne again.

Nelson Obus - Wynnefield Capital Management

Hi.

Wynne Roberts

The way we track it, we break it out actually into two sets of products, because the way we think about IN.FORM is, it is a weight management program but it's also positioned inside our overall program of the Transformational Habit of Health and to refresh people’s memories the Transformational Habit of Health has three pillar, the first pillar is weight management and nutrition, the second pillar is daily essential supplementation and third is targeted care.

So we track our sales into that program right now in two ways. The first is weight management sales and the second is other products which maybe either daily essential supplementation products or targeted care products. And what we're finding right now is weight management and it depends on which group is running but on average we are seeing roughly a 50-50 split in product sales, in groups running with the IN.FORM right now. So we are seeing our weight management products been promoted but we're also seeing a pull from the other two pillars as well which is from our perspective very positive.

Nelson Obus - Wynnefield Capital Management

Okay. Got it. Okay. And this is probably a question for Steve but you guys have done a great job over the years of dealing with tax challenges. I just wonder if you could kind of take us through the income tax situation, it sounds like from reading it quickly that the country had may have made a claim on you that required you putting something into the balance sheet and if I read this right, increasing your tax rate. Could you just go through that, I realize it's an ongoing battle that you've generally won?

Steve Bunker

Yes, well and let me just -- you are referring to the fact that the rate was at up a little bit from the statutory rate at 40.5%.

Nelson Obus - Wynnefield Capital Management

And you've seem to have tied that to an increasing, to not an issue of it but an additional question, tax liability which we understand is the cost, I mean that’s the cost of doing business in multiple countries, I understand that?

Steve Bunker

Right, it's not really specific to one country, but it’s an increase in our liability related unrecognized tax benefits. And at times we look at the tax positions that we take and if we take a little bit more aggressive tax position that we think is right, it may result in an increase in net liability for a period of time or until an audit, the IRS completes an audit or it may be related to the fact that a country is growing fast and our transfer prices don't quite keep up with that growth as they roll through inventory. And so there are number of things that can give rise to an increase in that tax liability. And we did have a little bit there that pushed the rate up this quarter.

As you know we also had some favorable things in the first quarter related to the business structure that we put in place a few years ago that gave rise to some tax benefits where we were able to monetize some net operating losses in a number of countries and free up foreign tax credits in other countries. And so although we had a little bit higher rate this quarter, we had a very large benefit last quarter and year-to-date a benefit. And so we continue to monitor our tax strategies and programs to limit our taxes on a worldwide basis.

Nelson Obus - Wynnefield Capital Management

So those numbers are not, they are not country specific, they are sort of a combined analysis of our tax department, is that -- am I understanding that right?

Steve Bunker

I think that’s an accurate statement. At times the larger countries and for example Korea, a country that’s growing fast may have -- give rise to a liability because we changed transfer prices in accordance with the transfer pricing rules. But as those transfer flow through inventory in a country that’s growing fast, it may give rise to increase in that liability for a period of time.

Nelson Obus - Wynnefield Capital Management

And -- I don’t want to get nitpicking, but how, just in general terms how would that calculation affect the overall tax rate? I am just trying to understand that. I mean I understand how it would be a balance sheet situation but somehow this has now become a P&L issue and I am -- just in layman’s terms how does that happen?

Steve Bunker

Yeah, it’s a good question, Nelson. It is an increase in the balance sheet but to get to the balance sheet it flows through the tax provision in the P&L as an accrual, even though it’s not been assessed and it’s not something that we have paid.

Nelson Obus - Wynnefield Capital Management

Got it, okay, all right. I see. So there is an incremental, I see you take a position, so there is an incremental charge, you flow it through the P&L and it affects the tax rate. I got it. So that’s essentially what’s going on.

Steve Bunker

That’s exactly right.

Nelson Obus - Wynnefield Capital Management

Okay, thanks.

Operator

Thank you. There are no other questions in the queue. So this will conclude today’s teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.

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