Nature's Sunshine Products, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature Sunshine's financial results for the first quarter ended March 31st, 2022. Joining us today are Nature Sunshine's CEO, Terence Moorhead, CFO, Joseph Beatty, and Executive Vice President and General Counsel, Nathan 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 harbour statement. within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautious regarding forward-looking statements. Nathan, please go ahead.

Yeah, thank you. Good afternoon, and thanks for everyone joining our conference call today to discuss our first quarter 2022 financial results. I'd like to remind everyone that this call is available for replay by telephonic dial-in through May 19th. and through a live webcast that will be posted in our investor relations portion of our website at ir.naturesunshine.com. The information on this call may contain certain forward-looking statements. These statements are often characterized by terminologies such as believe, hope, may, anticipate, expect, will, and other similar expressions. Forward-looking statements are not guarantees of future performance, and the actual results may be materially different from the results implied by forward-looking statements. Factors that could cause results to differ materially from those implied in this call include but are not limited to those factors disclosed in the company's annual report on form 10k 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'd like to turn the call over to the ceo of nature sunshine terence moorehead terence Thank you, Nate, and good afternoon, everyone.

We appreciate you being here with us as we discuss our first quarter 2022 results. The operating environment we faced to start the year was certainly more challenging than any other quarter in our past. The lingering effects of COVID-19 and the Shanghai shutdown, the devastating war in Ukraine, an intensifying supply chain crisis, and rampant inflation were a unique combination of headwinds we had to navigate in the first quarter. Despite these unprecedented challenges, first quarter sales growth was strong, up 10.3% in local currency versus prior year, reflecting the strength of our brand and the steps we've taken to build momentum in the business. We're very pleased with our top-line performance, especially given the heightened uncertainty and challenges to the market. Our mission to share the healing power of nature with more people across the globe is undeterred, and it continues to show in our top-line results. The first quarter was our seventh consecutive quarter of year-over-year net sales growth. First quarter adjusted EBITDA was $8.2 million, negatively impacted by the confluence of headwinds I discussed earlier. Cost of goods was impacted by unplanned inventory reserves that were a direct result of the unique external factors impacting the business. SG&A also increased as we continued to invest in the business, funding our digital-first initiatives and field energy programs designed to reengage distributor-facing activities. All of our investments support our commitment to deliver long-term sustainable growth. Backing off now, would impede our ability to keep the business moving forward. Given the current headwinds, we are currently pleased to be discussing double-digit year-over-year sales growth. That said, as the tail end of the first quarter in April played out, we saw the headwinds have a more significant impact on the business and believe there's increased risk associated with our full-year expectations. We'll talk more about that later, but I want to give you a better sense of what's behind the first quarter growth by sharing a few highlights from each of our OBUs and discussing some of the key drivers impacting performance. Asia Pacific continues to drive top-line growth with net sales up 34% in local currency, with a 251% increase in Taiwan, a 46% increase in China, and a 33% increase in Japan. In Taiwan, Our highly motivated team of distributors continue to compete for the top position, driving order growth through new customer acquisition. With a sales increase of 251% in local currency, the focus on field fundamentals is paying off, as distributors are more focused on building and managing customer relationships. Overall, we're extremely pleased with the progress we've made in this market, and we look forward to continued growth in 2022. In China, we saw first quarter sales increase 46% in local currency, despite the pressures brought on by the COVID-19 shutdowns in Shanghai. Our manufacturing and distribution facilities are located outside of Shanghai, and we're largely unaffected by the shutdowns, thus allowing us to produce and deliver products to customers around the country. It's still unclear when the government will lift the current wave of COVID lockdowns, So we'll continue to leverage our digital toolkit, building omnichannel capabilities, and improve our social media presence using tools like TikTok to drive growth and keep the business moving forward. Notwithstanding the likely short-term impact of the COVID-19 restrictions, we believe we still have tremendous growth potential in the Chinese market. Moving to Japan, We report our ninth consecutive quarter of year-over-year growth, with sales up 33% in local currency. We continue to see exceptional growth driven by strong fundamentals and the continued success of our Subscribe and Thrive Autoship program that promotes order growth with every new customer acquisition. In South Korea, the team continues to deal with the pandemic restrictions, and in the first quarter, They also had to deal with several top distributors being diagnosed with Omicron. Despite the challenges, sales were relatively flat, coming in down 0.3% on a local currency basis. Looking ahead to the second quarter, the government has announced that meeting restrictions will be lifted and the team will be able to conduct face-to-face meetings for the first time in two years. This is a significant development And we're also excited to be able to reintroduce some of the tried and true field incentives that have historically motivated our Korean sellers to drive sales. We believe these initiatives, along with several new product launches, will help put South Korea on a positive path to growth. In Europe, first quarter net sales were surprisingly resilient, coming in almost flat down 0.6% versus prior year on a local currency basis. The war in Ukraine is a significant challenge with considerable impact across the region. It's been devastating and heart-wrenching to witness the violence that's plagued the region over the past two months. Our first priority continues to be supporting the Ukrainian people during these challenging times. Through our Impact Foundation, we made charitable contributions to ensure that our friends and partners in Ukraine had critical, life-saving resources, and we will continue to be supportive through our foundation. Thankfully, our key associates are all safe and accounted for, and we are in regular contact with our team, most of whom have relocated away from the most dangerous areas of the country. Our distributors also stay in close contact, and some are holding calls and using social media to communicate and support each other. Many of our distributors have been displaced to Poland and Turkey and have expressed an interest in continuing their business in their new host country. As you know, we already have a strong business in Poland that is perfectly capable of supporting a large influx of new distributors, and we will continue engaging these distributors to help keep them active in the business. Last year, we also opened a new sales center and office in Turkey that will be an excellent opportunity for distributors that have relocated to this dynamic and growing market. Turkey has a population of over 70 million people and a thriving nutritional supplements industry. We entered the Turkish market to capture new opportunities in the region, but will now have a chance to support are displaced distributors and their families. We believe the Turkish market offers good potential for the business and may be able to offset some of the negative sales impact from Russia-Ukraine. Of course, there is still a significant amount of uncertainty in the region. And in the near term, we expect to see a significant decrease in the Russia-Ukraine business. But there's a very real opportunity to recover some portion of that through the migration of distributors and the expansion of Turkey, as I mentioned earlier. Given the developments in Ukraine and its impact on the surrounding area, we plan to only provide insights on Central and Eastern Europe as a whole moving forward. We believe this will provide a more relevant and accurate picture of how the business is progressing. Despite the challenges and disruptions to the business in Q1, Central and Eastern Europe grew 4.6% versus prior year in local currency, The growth was driven by day-to-day tactical measures focused on fighting inflationary pressures, impacting consumer spending, and activating displaced customers in the region. Targeted promotional discounts and local sales meetings are examples of the tactics used to help stimulate activation in the quarter. Importantly, consumer behavior is still evolving, and the go-forward operating environment is highly dynamic. Moving to Western Europe, we could see the ripple effects of the war in Ukraine as energy prices reached record highs, crowding out some discretionary spending for many consumers across Western Europe. Eurozone energy prices increased by more than 30%, while the UK saw energy prices increase more than 50% versus the same time last year. These headwinds negatively impacted first quarter demand, and sales in Western Europe were down 15% in local currency. Remember, during the first quarter, we still had not implemented the planned relaunch of our Western European business. Western Europe represents 60% of the nutritional supplements market in Europe, but only represents about 14% of our European sales. As I've mentioned in the past, transforming our business in Western Europe is an important priority, but we're still in the beginning stages of the process. and expect to have a new website, our subscribe and thrive auto-ship program, an affiliate program, and fully represent a replicated distributor website up and running by mid to late Q2. By the end of Q3, we'll start phasing in our new rebranding initiatives, and by Q4, we plan to kick off our initial DTC campaigns with an expanded and upgraded product portfolio targeting new consumers. These are powerful initiatives that will strengthen our competitiveness, improve consumer appeal, and help us penetrate the large and growing nutritional supplements market in Western Europe. Fortunately, the market has the potential to be a much larger contributor to our portfolio over time. In North America, the positive increase in orders and strong DTC customer growth was offset by average order declines from existing customers negatively impacted by product shortage and inflationary pressures. In the first quarter, sales decreased 4.7% due primarily to a shortage of raw ingredients that prevented us from filling certain customer orders. We estimate that our inability to source these key ingredients negatively impacted our North American net revenue by $2 to $3 million, or about 5% to 8% of sales. Throughout 2021, our team was able to proactively mitigate port delays, raw material shortages, and manufacturing constraints to meet demand while preserving our margins. This was generally still the case in the beginning of 2022. However, as the quarter progressed, there was a sharp drop-off in our ability to source a few key ingredients that make up the complex formulas in 40 to 50 top-selling products. Not having these products, especially in a healthy selling environment, reduced net revenues in our North American business. In addition to the supply chain issues, inflationary pressures may be impacting consumer behavior, with some consumers becoming more price sensitive. While buying patterns may be temporarily impacted, we continue to experience healthy order growth, reflecting the momentum we've created from our digital initiatives our Subscribe and Thrive Autoship Program, and the continued focus on our five global growth strategies. As an example, a closer look at Subscribe and Thrive reveals that 45% of our orders included a Subscribe and Thrive product in the first quarter. What's more, 47% of our direct customer sales came from Subscribe and Thrive in Q1. As these percentages continue to increase, we expect to see even stronger customer growth and stability over time. The near-term challenges that we're seeing in the market are significant. However, we believe our strategies are moving us in the right direction and that there's still significant growth potential for our business. As such, we continue to invest ahead of growth and fine-tune our key initiatives to improve the customer experience and move us closer to our long-term objectives. We've also implemented a price increase that will take effect in the second quarter. Finally, in Latin America, first quarter sales decreased 4% in local currency due to a product availability issue caused by a local regulatory change. The issue has been resolved, but the team was unable to sell a few key products for several months while the appropriate adjustments were made. Despite the unexpected challenges, the business continued to respond well to the new operating model, strengthening field fundamentals and focusing on customer activation. Our new leadership team is in place and focused on scaling the business, with an initial focus on penetrating the large and growing nutritional supplement market in Mexico. With a population of almost 130 million people and a supplement market growing 10% annually, We believe Mexico alone represents a significant opportunity for growth. We're currently in the process of recruiting a new general manager for our Mexican business who will be tasked with building a high-performance team and implementing a strategy to penetrate the market. Turning to our five global growth strategies, we continue to make strong progress and feel confident in our ability to deliver long-term sustainable growth with improved profitability. Instead of walking you through each of the five strategies as I normally do, today I'd like to focus on just two of our strategies, Digital First and Manufacturing Inc., as I believe these are particularly relevant in the current business environment. I'll drill down on our other key strategies in future calls when I can dedicate more time to talk about brand power and the synergy rebranding and the new mega-branding initiatives we're working on, field energy, and the adjustments we're making to our affiliate program and ongoing inroads we're making with Subscribe and Thrive, and the right stuff with some of the initiatives we're pursuing to strengthen gross margins and improve overall profitability. I'll start with digital first, where we continue to focus on strengthening our website and improving the customer experience. We've partnered with our development team on a comprehensive website optimization project designed to strengthen performance and functionality. We're implementing new shop, product, and checkout pages to create a more appealing consumer experience and improve conversion rates. For example, we're working to improve our contextual search tools to make it easier and faster for people to find the right product. We're also making it easier for people to share products on their social network. Importantly, we're also looking at ways to make the decision to sign up for Subscribe and Thrive, our auto-ship program, a more obvious, risk-free choice. With our DTC business, sales exceeded expectations in the first quarter as traffic to the website continues to be strong. We've continued to build our digital capabilities, and as a result, DTC sales have steadily increased and currently represent about 16% of total sales in the U.S. we expect the ongoing refinements and evolution of our force of nature digital campaign to continue to drive customer growth while the expansion of our newly developed CRM capabilities improves customer activation for new and lapsed customers. Our DTC business through Amazon also represents a significant opportunity and is still relatively untapped. To give you a sense of the potential, Right now, due to our social media and CRM activities, our chlorophyll product holds the top three positions among all chlorophyll products on Amazon, and there's still significant potential for us to replicate that performance with other products in our portfolio. Overall, we've made excellent progress on our DTC strategy, attracting new customers while also reactivating lapsed customers. The team in North America has done an outstanding job building our proof of concept, and laying the groundwork for our DTC expansion into Western Europe later this year. Remember, all of our distributors have their own replicated websites, social media engagement tools, sharing tools, and have access to the same consumer-facing assets that we use. So they have everything they need to build their own digital businesses. Over the next three years, our goal is to grow DTC to over 30% of our business, and as you can see, we're already making good progress. The next exciting chapter of our Digital First story is personalization. Right now, we're still in beta with our distributors, but we're on track to launch the program to consumers in the latter portion of 2022. Personalization will allow customers to take charge of their own health by creating their own customized health programs. Each program is based on the consumer's individual goals and health needs. Designed by herbalists, physicians, and nutritionists, our unique health assessment uses body system analytics to determine the unique components of each customer's program. With over 600 products in our portfolio versus 78 to 80 products for our competitors, Nature's Sunshine is uniquely qualified to provide personalized solutions for customers. And that's exactly what our incredible retailers and practitioners have been doing for 50 years. We have more experience than anyone else out there in this area. Moving to Manufacturing Inc., we continue to set the standard for world-class manufacturing quality and reliability. But the increased instability in the market, along with the ongoing global supply chain challenges, have made sourcing and logistics more difficult than ever. Throughout 2021, we were able to avoid major supply chain issues by investing in inventory ahead of sales to meet the increased demand for our products. In the current environment, we've started to see more raw ingredient shortages and instances where the available materials are unable to meet our demanding specifications. Again, these are relatively new challenges that are generally unpredictable in nature. In response, We're intensifying our focus on all aspects of our sourcing process. For example, we've expanded our supplier base, identifying more reliable second- and third-tier backups for key ingredients. We'll also be looking to build vertical farming relationships to shore up supply, and we're going to tighten up our S&OP process to ensure we have appropriate cross-functional alignment and integrations. We believe these initiatives will help normalize and improve supply chain performance over time. Our plan to upgrade and automate our manufacturing facility along with the expansion of our global supply chain footprint will provide additional performance enhancements. We're currently conducting an independent facility review to ensure we're not only maximizing the efficiency and effectiveness of our current manufacturing space, but that we also maximize the potential of the new state-of-the-art solid dose, liquid, and powder lines we plan to install. Importantly, our goal is to expand and diversify our capabilities while reducing costs. To drive these initiatives forward and take our supply chain to the next level, we've made an exciting change to our organization. Effective May 16th, Martin Gonzalez will join Nature's Sunshine as Executive Vice President of Global Supply Chain and serve on the company's Executive Committee. Martin joins us from Bowery Farming, where he served as Vice President of Operations and Excellence and brings over 30 years of supply chain experience from such notable companies as Unilever, Molson Coors, SAB Miller, and Sara Lee. He has a proven track record of leading successful transformations and delivering both savings and growth through supply chain improvements. We're excited to welcome Martin to Nature Sunshine and are confident that his experience, attention to detail, and dynamic leadership will help transform our supply chain capabilities. All of these changes are important, but our commitment to the environment and to improving our sustainability and transparency lie at the core of who we are, which is why I'm so pleased we're aggressively moving this to the forefront of our business. To start, we recently conducted a full assessment of our environmental footprint and greenhouse gas inventory, and the results were published in our inaugural ESG report earlier this year. The report can be downloaded from our IR website and outlines a series of goals designed to move nature's sunshine towards an environmental leadership position in our industry. Our initial goals include a 50% reduction in scope one and two greenhouse gas emissions by 2025, achieving 100% renewable energy in our owned manufacturing facilities by 2023, having zero waste to landfill at all of our U.S. distribution centers by 2025, and a 35% reduction in waste at our owned manufacturing facilities by 2025. These are just our initial objectives, but Nature Sunshine has been a force of nature for the past 50 years and we're committed to achieving our environmental, social, and governance goals. Before I turn the call over to Joe, I just want to reemphasize our resolve to move the business forward in these challenging times. We're committed to investing in our strategies and continuing the progress we've made transforming the business. The entire team at Nature Sunshine is dedicated to deliver our long-term objectives to drive growth and profitability in our business. With that, I'd like to turn the call over to Joe, who will walk you through our first quarter financials in more detail and provide more insight into 2022 results. Joe?