Nature's Sunshine Products, Inc.

Everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine financial results for the second quarter ended June 30, 2022. Joining us today are Nature's Sunshine CEO Terrence Moorhead, CFO Joseph Beatty, 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 covers some important items. Nathan, please go ahead.

Good afternoon, and thanks for joining today's call. Before we start, I'd like to remind everyone that this call will be available for replay through August 23rd on the investor relations portion of our website, which is ir.naturesunshine.com. Of course, the information on this call speaks only as of today's date, which is August 9, 2022. The company disclaims any duty to subsequently update the information provided on this call. The information on this call includes forward-looking statements. These statements are not guarantees of future performance, and the actual results are subject to various risks that could cause them to be materially different from the results discussed or anticipated. For a discussion of these risks, please refer to today's earnings release and the company's SEC filing. Consistent with prior calls, non-GAAP financial figures may be provided during today's call. We believe these non-GAAP financial figures assist in comparing period-to-period results in a consistent and accurate manner. Please refer to today's earnings release for any required reconciliation of non-GAAP numbers. Now I would like to turn the call over to the CEO of Nature Sunshine, Terrence Moorhead. Terrence?

Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today's call to review our second quarter results as we continue to move forward in the face of unprecedented headwinds. The war in Ukraine, inflation, global supply chain pressures, and the lingering impact of COVID-19 have all been a challenge, but our vision to share the healing power of nature with people around the world remains undeterred. Despite the extraordinary challenges in the market, we were able to deliver second quarter sales of $104 million on a reported basis, or $109 million removing the impact of foreign exchange, which is slightly up versus prior year. Year-to-date sales are up 5.2% versus prior year in local currency, which is significantly ahead of the industry. We believe these outcomes illustrate the resilience and power of our brand and the advantages of our diverse portfolio. As expected, Second quarter margins contracted due to inflationary pressures on cost of goods, inventory reserves associated with the conflict in Ukraine, and continued investment in our growth strategies. For the quarter, adjusted EBITDA came in at $9 million, negatively impacted by about $4.4 million versus the prior year due to the above-mentioned factors. Importantly, Our transformation requires continued investment, and we don't want to jeopardize the strong gains we've made by backing off the strategies we believe will provide long-term, sustainable growth. Our strong balance sheet affords us this valuable opportunity, particularly in the current macroeconomic environment. With that said, we're working to tighten SG&A to provide margin relief where possible. Our new supply chain lead, Martin Gonzalez, has only been on the job for about eight weeks, but he's already championing an effort to drive out costs and improve supply chain productivity by refining processes, leveraging local supply networks, and improving efficiency. A closer look at the second quarter results shows sales were led by exceptional performance in Asia Pacific, where we continue to see historical sales. with 19% growth versus prior year in local currency and 26% growth year to date. Strong fundamentals, new product launches, and limited inflationary pressures help the business drive customer growth in the second quarter. Asian consumers appear to feel more positive about the economic situation than their European and American counterparts, according to consumer research. And the desire to spend after two years of the pandemic appears to be greater than the negative impact of any economic or global uncertainty. In Japan, second quarter sales were up an impressive 38% in local currency versus prior year, as consumers continued to be highly engaged throughout the period. This was one of our strongest quarters in Japan, driven by new products, the opening of a new sales center, and continued strength of our Subscribe and Thrive auto-ship program, which continues to represent about 50% of Japan's sales. Subscribe and Thrive has been gaining momentum for the past 12 to 18 months, as our distributors have increasingly incorporated it into their sales process. Distributors recognize that the only way clients are going to get healthy is that they commit to regularly taking their supplements, and that's why approximately 70% of new customers are brought into the company via a Subscribe and Thrive program. Year-to-date, Japan sales are up 36%, and the commitment to strong fundamentals should continue to support healthy growth moving forward. In Taiwan, the competitive nature of our top distributors continues to fuel growth. as sales in the second quarter surged 164% in local currency. Our team in Taiwan appears to be building the business the right way, focusing on field fundamentals and customer growth. Centered around a few core products and a highly regimented process, we continue to attract new customers and transfer sales fundamentals across the business. A new auto-ship subscribe and thrive program and digital capabilities are under development and should be available sometime in 2023. But there's still plenty of room for this team to drive growth as we move forward. Year-to-date, Taiwan's sales are up 196% versus prior year in local currency. In China, consumer sentiment has suffered from the recent surge in COVID-19 cases and the resulting lockdowns. As a result, second quarter sales were down 5.7% on a local currency basis, as the negative impact of COVID lockdown had a significant impact on the consumer's ability and willingness to spend. Fortunately, our manufacturing operations are located outside of Shanghai, and we've been able to continue operating without disruptions. The COVID lockdowns have not only impacted sales and orders in Shanghai, they've also impacted the business across the country, as consumers have been much more cautious with their spending and have been much more hesitant about making personal contact with others. With the lockdowns finally ending, we feel confident in our ability to restore growth as the market recovers. We expect to see strength of building by the end of the year, and we continue to feel good about our ongoing potential in the market. Year to date, China is up nearly 17%, and our long-term outlook remains strong. In South Korea, second quarter sales were down 7.6% in local currency, as the market continues to rebound from the long-term effects of the pandemic and the COVID restrictions that put our business on hold for two years. Fortunately, the restrictions have finally been lifted, offering South Korean consumers some much-needed relief. Of course, it will take time for things to return to normal, but with the COVID barriers removed, we've already started conducting face-to-face meetings and have reopened our branch facility after a two-year hiatus. Once again, it will take time to close the gap from the significant COVID losses, but our focus on new customer acquisition and reactivating and engaging existing customers will help. In fact, the team just had one of their most successful new product launches, which demonstrates the power of our team when we have the freedom to leverage their strengths. While South Korea is still struggling with the residual effects of COVID, we expect to see positive momentum in the latter portion of the year, continuing into 2023. In Europe, the business struggled to overcome macroeconomic and geopolitical headwinds, but still exceeded expectations. Sales in the second quarter were down 16% on a local currency basis. As consumer pessimism reached an all-time high, spending patterns changed due to inflation, and the war in Ukraine continued to create uncertainty. In Western Europe, rising prices followed by the invasion of Ukraine have eclipsed COVID-19 as the number one concern for most consumers. In response, European consumers are reprioritizing their budget, buying smaller quantities, delaying purchases, or trading down, turning to private label, discounters, or more affordable brands. As a result, our second quarter sales declined 23% in local currency. Remember, however, we still haven't launched our transformation initiatives in Western Europe, so these results were somewhat expected. Importantly, We're still on schedule to relaunch the business in Western Europe later this year and into 2023. In the second quarter, we successfully introduced a new digital platform that includes a new website, new web tools, subscribe and thrive auto-ship capabilities, an affiliate program, customer sharing tools, and replicated websites for all of our distributors. In the third quarter, we will work with our new ad agency to introduce components of the new rebranding. And by the fourth quarter, we'll start introducing new products designed to support customer acquisition and market penetration. We should expect to start seeing positive momentum in Western Europe as we move through 2023. In Central and Eastern Europe, sales were down 15% versus prior year in local currency, a remarkable achievement given the extreme war-torn conditions under which the team is operating. Our distributors in Central and Eastern Europe continue to show their grit and determination as their desire to share our products remains strong and their commitment to our business remains unwavering, as does our commitment to them. Performance in markets like Poland continue to drive results and offset losses elsewhere. The situation is still highly volatile, but we continue to demonstrate an ability to sell through the inventory that's on the ground. Year-to-date, sales are only down 5% versus prior year in local currency. In North America, sales were down 8.5% in the second quarter, largely driven by average order declines. While our customers are still ordering their Nature's Sunshine supplements, we have a select group of customers buying about one unit less per order on average. This appears to be consistent with what's happening in the market, as consumers are offsetting inflationary pressures by buying smaller quantities, delaying purchases, trading down to private label, trying different retailers, or trying new brands. In response, we've seen more and more competitors aggressively slashing prices, offering consumers heavy discounts on products they normally buy. As a premium brand built on quality, we formulate our products using superior ingredients, including wild-crafted and specialty blends that don't necessarily offer the same latitude to dramatically slash prices like some competitors. To help counter the impact or reduce consumer spend, we're increasing our focus on reactivating lapsed and inactive customers using our newly enhanced CRM capabilities that allow us to target consumers more effectively. Second quarter sales were also negatively impacted by an increase in the number of product shortages versus Q2 of the prior year, with less than $1 million of lost sales, or about 20% of the North American sales decrease for the quarter. Product shortages are driven by the limited availability of a few key ingredients that impact multiple products. Despite the global supply chain crisis and related sourcing issues, we saw a dramatic improvement in product availability versus the first quarter of 2022 and expect to see continued improvement through the remainder of the year as our supply chain team works to restore pre-pandemic service levels. Despite the overall sales declines, Our digital business continues to build momentum, adding new customers and contributing sales growth in the quarter. We continue to invest in our DTC business and are making changes to both our creative and media planning to accelerate growth through the balance of the year. Finally, in Latin America, second quarter sales were down 15% in local currency, driven by product availability issues, increased macroeconomic pressures, significant social unrest that slowed sales in several markets the temporary interruption to our customer growth initiatives has slowed our progress but the market has responded well to our transformation initiatives and we continue to be confident that the market offers significant growth potential year-to-date sales are down 8% in local currency but again we're still on the front end of our transformation and are very pleased with the progress our new leadership team has made and building talent, and creating a roadmap to deliver sustainable growth. Turning to our global strategies, we continue to execute our plans and are making steady progress. Today, I'd like to give you a brief update on two of our global growth strategies, brand power and digital first. And let's start with brand power because, as you know, the power and attractiveness of a brand becomes increasingly important consumers are forced to make tough trade-offs about where and how to spend their money we see this dynamic unfolding more frequently in today's high inflationary environment where consumers are choosing between brands based on a variety of factors such as price quality reliability results service relationship and more in many ways A company's brand represents the desirable set of attributes beyond price that keep consumers coming back even when price is an issue. One of the main reasons we see so many people come to Nature's Sunshine and stay with us is because once they get to know our brand, they understand that when they buy Nature's Sunshine supplements, they're not only getting the best, highest quality products in the world, they're also buying from a company they can trust. So it's extremely important that we continue to focus on ways to strengthen our brand to ensure we continue to be relevant to today's consumer in more meaningful ways than just price. With that as a backdrop, Nature Sunshine continues to boldly move forward. And in the second quarter, we took the extraordinary step of transitioning our U.S. manufacturing operations to 100% solar energy, a major step forward for our company and for our brand. What this means is that all the products produced in our U.S. manufacturing facility, which is about 80% of our sales worldwide, are now made with 100% pure renewable energy from the sun. As you can imagine, This is an important move and a meaningful differentiator for consumers that appreciate where their products come from and how they're made. Remember, 66% of consumers say they would pay more for sustainable brands, and for millennials, that number increases to 73%. What's more, 64% of core supplement users try to buy brands that are transparent about what's in their products, how they're made, and how they're sourced. These same consumers also associate being more eco-friendly with higher quality. So this is yet another move to solidify Nature's Sunshine as a brand of choice. You've also heard me talk about making a shift towards mega-branding as we move into 2023 and beyond. As our brand power strategy continues to evolve, we will provide added focus on a few key products to help drive growth, and we're already starting to identify a few potential mega-brand products for 2023. The first is chlorophyll, a long-term staple for Nature's Sunshine that supports a healthy gut and body, with a proven ability to drive sales. A great tasting product that's truly effective, consumers around the world love our chlorophyll. Rejuvenate is another product that has mega brand potential, delivering some of the best cardiopulmonary benefits in the market. Rejuvenate is an incredible product driven by the power of bees and our clinically proven S7 complex. Whether you're concerned about high blood pressure, cholesterol, or if you just want clean energy to fuel performance, Rejuvenate is an incredible product. Finally, a significant new product innovation will launch in 2023 that will support foundational nutrition and make it easier for customers to shop with Nature Sunshine. I'm not going to talk about the details today, but I will say that sharing the healing power of nature will be much easier and more effective than ever before. Our extensive and diverse product line will continue to be a differentiated source of advantage, especially for those who need specialty applications. However, our mega-branding strategy will be instrumental in helping focus our messaging and strengthen our consumer identity. These gateway products will help introduce new consumers to the vast array of high-quality Nature's Sunshine products that other consumers have loved for years. Moving to digital first, we continue to drive sales and strengthen capabilities across the business. In the first half of 2022, DTC initiatives delivered positive results with sales expected to be up by as much as 50% for the year. Early results have demonstrated an ability to not only drive new customer acquisition, but also reactivate lapsed and inactive customers. While we've seen meaningful success, we're still in the early stages of the strategy and are learning more about consumer buying patterns and preferences, so we expect to see continued growth as we build momentum and DTC becomes a more important part of our business. In fact, our progress to date is quite notable. In the first half of 2021, DTC was about 5% of North American sales. Today, DTC represents about 13% to 15% of sales with an expectation that it will reach 18% to 20% by the end of the year. Also, it's important to point out that all of our distributors have the exact same digital tools that we're using. so we hope to see them become more engaged with the technology over time. This is a powerful tool that can help expand and diversify their businesses, so we'll continue to encourage distributors to leverage and expand their digital network as a source of future growth. To take DTC to the next level, we're adjusting our creative to broaden consumer appeal, making changes to our website to improve conversion rates, and making changes to our media strategy to increase efficiency and effectiveness. These changes will take place over the next six to nine months and are expected to help continue to drive growth. In 2023, we will continue to expand our digital capabilities with the launch of our unique personalization initiative. Personalization is an exciting opportunity for consumers to build their own personalized nutrition plans by answering a few simple questions about their health, giving them access to the best products and program in the market. We're still in beta testing, but we expect personalization sales to meaningfully accelerate over the 2024-2025 timeframe, so we're getting started now. Before passing the call over to Joe, I would like to reiterate our steadfast commitment to successfully navigating this unique period of market volatility and uncertainty. We fully expect to continue our proactive investment in our five global growth strategies, facilitated by our strong balance sheet and team of experts on the ground, and remain confident in our ability to provide long-term value to all of our stakeholders. With that, I'd like to turn the call over to Joe, who will walk you through our second quarter financials in more detail and provide more insight into our 2022 expectations. Joe?