Nature's Sunshine Products, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine's financial results for the third quarter ended September 30th, 2022. Joining us today are Nature's Sunshine's CEO, Terrence Moorhead, Executive Vice President of Global Supply Chain, Martin Gonzalez, Interim CFO, John Lenoy, and General Counsel, Nate Brower. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr. Brower as he reads the company's safe harbor statement within the meeting of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Nate, please go ahead.

Yeah, thank you, Sarah. Good afternoon, and Thanks for joining our conference call to discuss our third quarter 2022 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through November 17th 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, Those are statements often characterized by terminology such as believe, hope, may, anticipate, expect, and other similar expressions. Forward-looking statements are not guarantees of future performance, and the actual results may be materially different from the results implied by forward-looking statements. Factors that could cause results to differ materially from those implied herein, but include but are not limited to those factors disclosed in the company's annual report on Form 10-K under the caption, Risk Factors, and other reports filed with the Securities and Exchange Commission. The information on this call speaks only as of today's date, and the company disclaims any duty to update the information provided herein. Now, I would like to turn the call over to the CEO of Nature Sunshine, Terrence Moorhead. Terrence?

Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today's call to review our third quarter results. The resilience of our portfolio was on display in the third quarter, where, despite unprecedented external headwinds, we delivered third quarter sales of $105 million on a reported basis or $112 million when removing the impact of foreign exchange. To put these results in perspective, Our third quarter sales were only down 2% versus prior year on a constant dollar basis, and year-to-date sales were actually up 3% in local currency. Both measures reflect the underlying strength of our business, especially given the current environment where it has become more difficult to drive customer engagement. What's more, due to inflationary pressures and volatile foreign exchange rates, everything has become more expensive. As a result, third quarter gross margins contracted as inflation and foreign exchange negatively impacted cost of goods by approximately $3 million or roughly 300 basis points versus Q3 of the prior year. Sales declines driven by foreign exchange also negatively impacted profitability by an additional $3 million, which contributed to adjusted EBITDA of $6.8 million for the third quarter, versus $12.9 million in Q3 of the prior year. As I shared last quarter, we are committed to meeting these challenges head-on and now have a detailed plan to deliver the $10 to $12 million of gross savings to help improve profitability. I've invited our new supply chain lead, Martin Gonzalez, to join us today so he can briefly walk you through our plans. But first, I want to share a few more comments about the quarter to help provide some perspective. Despite the challenges from the external headwinds, we continue to gain traction from three key strategic investments. First, our investment in field activation continues to gain traction in markets like Taiwan, Japan, and South Korea, where sales increased 97%, 22%, and 8%, respectively, on a local currency basis. While we believe the underlying fundamentals of our business in China remain strong, sales struggled in the third quarter, down 31%, driven by deteriorating macroeconomic conditions and the hangover effects from China's zero COVID policy. Once external headwinds abate, we hope to see a return to growth. Overall, Asia Pacific led the company's third quarter results, delivering 12% sales growth in local currency and 21% sales growth year-to-date. Second, our investment in digital activation continues to gain traction in North America, as digital sales increased 22% in the third quarter. We've continued to invest in digital, and as a result, we've been able to attract new customers, double the effectiveness of our CRM campaigns, and our Subscribe and Thrive Autoship program now represents about 27% of sales. Solid gains from digital were more than offset by average order declines from existing customers who continue to order Nature Sunshine products, but are purchasing about one less unit per order on average. This is consistent with the broader market trend where we see consumers offsetting inflationary pressures by purchasing smaller quantities, delaying purchases, or trading down to cheaper brands. Overall, North America sales were down 16% in the third quarter. Finally, our investment in customer growth has helped us gain some early traction in both Central and Eastern Europe and Latin America. In Central and Eastern Europe, initiatives in Poland, Turkey, and several Baltic states helped partially offset the gap created by the war in Ukraine. We're still preparing for the relaunch of the business in Western Europe, where economic challenges have customers buying and spending less, negatively impacting orders and average order size. Overall, Europe's third quarter sales were better than expected as we grew 13% on a sequential basis versus the second quarter, and we're only down 6% versus prior year in constant dollars. This is a tremendous result and speaks to the skill, determination, and resilience of our regional leadership teams. In Latin America, customer growth initiatives helped attract more new customers in the last two months of the third quarter than in the first and second quarters combined. The positive momentum was offset by a decrease in orders from existing customers impacted by the depressed economy. So LATAM's third quarter sales were down 14% in local currency. We're still on the front end of our transformation and are pleased with the progress our new leadership team has made recruiting new talent, and creating a roadmap for the future. Importantly, we're not sitting idly waiting for the effects of the global headwinds to pass. We're fighting back by continuing to invest in our growth strategies and by launching a comprehensive initiative to optimize gross margins and reduce SG&A. As I mentioned earlier, we've identified a series of initiatives to drive out costs, and improve productivity over the next 18 months. With that in mind, I'd like to invite our new Head of Supply Chain, Martin Gonzalez, to update you on our plans related to gross margin. Martin?