Good everyone, afternoon, and thank you for participating in today's conference call to discuss Nature's Sunshine financial results for the third quarter ended September 30, 2021. Joining us today are Nature's Sunshine's CEO, Terrence Moorehead; CFO, Joseph Baty; and executive vice president and general counsel, Nathan Brower. Before we go further, I'd would like to turn the call over to Mr. Brower as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Nathan, please go ahead.

Good afternoon, and thanks for joining our conference call to discuss our third quarter 2021 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through November 18 and via a live webcast that will be posted in the Investor Relations portion of our website at naturessunshine.com. The information on this call may contain 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 such statements. Factors that could cause results to differ materially from those implied herein include, but are not limited to, those factors disclosed in the company's annual report on Form 10-K under the caption Risk Factors and in other reports filed with the Securities and Exchange Commission. The information on this call speaks only as of today's date, and the company disclaims any duty to update the information provided herein. Now I would like to turn the call over to the CEO of Nature's Sunshine, Terrence Moorehead. Terrence?

Thank you, Nate, and good afternoon, everyone. Thank you for being with us today to discuss our third quarter results. I'm very happy to announce that the momentum behind our business continues to build, and we are reporting our fifth consecutive quarter of record net sales. Our reported consolidated third quarter net sales came in at $114.7 million, up 14% year over year or up 13% in local currency. Each of our four operating business units reported growth for the quarter, led by Asia Pacific and Europe, which were up 24% and 21%, respectively, in local currency. We also delivered strong bottom-line results as adjusted EBITDA increased 38% to $12.9 million. Now it's only been a little over a year since we began our transformation, but I'm pleased to say that our five global strategies: brand power, field energy, digital-first manufacturing inc. and what we call the Right Stuff are already delivering exceptional results as shown by our top-line growth and margin expansion. We expect margins to improve -- improvements to continue as we make ongoing improvements in the supply chain productivity and aggressively manage overhead costs as part of our transformation plans. Overall, our strategies have proven to be both powerful and unique, and it's that combination that has allowed us to stand out in the market. Before I discuss the highlights from each of our OBUs and provide an update on our global strategies. I want to take a moment to recognize our team. Our team continues to be focused and dedicated, and it's their resilience and determination that have allowed us to deliver five consecutive historic record-breaking quarters. I can't thank them enough. We're still in the early innings of our business transformation, but I'm excited that we have such a great team here at Nature's Sunshine.…

Thank you, Terrence, and good afternoon, everyone. Net sales in the third quarter increased 14% to a company record $114.7 million, compared to $100.3 million in the year-ago quarter. This marks the fifth consecutive quarter of record net sales. As Terrence mentioned, this increase was primarily driven by growth across all our operating business units due to the continued execution of business transformation initiatives, the launch of new products, and the easing of COVID-19-related restrictions in certain markets. Excluding foreign exchange rates, net sales increased 13% in the third quarter of 2021. On an absolute basis, net sales in Asia increased 27% to $48.4 million, compared to $38.1 million in the same year-ago quarter. This represented a 24% increase on a local currency basis. The increase was primarily attributable to strong growth in Japan, China, and Taiwan, due to execution of field fundamentals, customer growth, the launch of the l'amara brand, and improved digital tools. Net sales in Europe increased 21% on an absolute basis to $21.8 million, compared to $18 million in the year-ago quarter. This represented a 21% increase on a local currency basis. The increase reflects continuation of strong field fundamentals and customer growth throughout Central and Eastern Europe. North America net sales were up modestly to $37.7 million, compared to $37.6 million in the prior-year period. The increase is attributed to our business rebranding and rebuilding efforts and success with growth initiatives. But overall, Q3 2020 was a tough comparable period. As a reminder, in the prior-year period, we rolled out our new consultant sales and compensation plan. And as a result, certain consultants purchased higher inventory levels ahead of the launch. Net sales in Latin America and other increased 3% to $6.8 million, compared to $6.6 million in the prior-year period. This represented a 1%…

We'll take our first question from Linda Bolton-Weiser with D.A. Davidson.

Great. Thank you. Hi, Terrence and Joe. So can you talk a little bit about what affected your business in certain markets. We heard from some direct sellers that Asia was really problematic, but you actually did fairly well there, especially your big markets of Japan and China. What did you see in the rest of the areas, like I don't know if you're in Thailand and markets like that, but were there significant lockdowns in the rest of Asia, and you expect those to lift? Or can you just give us a little bit more color?

Yes. I think as you mentioned, Linda, it is market by market. And so -- and I think I should say, first of all, that our business is so different from the other companies you mentioned. I think as I tried to emphasize our omnichannel approach, our consumer focus, really is allowing us to kind of speak and have a stronger reach out to consumers. And I think in some of those markets where we haven't built those capabilities out as strong yet, that's where we kind of get hit with some of these restrictions. And the restrictions are looser or tighter in some markets versus others. In Ecuador and Colombia and some of the Latin American markets. when they shut things down, they really shut it down, and just like transportation gets shut down and public transportation can get shut down, and it can be quite something. So I think Korea is another area where, again, just the nature of the history of the processes there and the way they do business, kind of very face-to-face and meeting intensive. It has been impacted in some of the instances where you can only get five people together, for example. In some of the other smaller markets, I think, like you mentioned, Thailand or Indonesia, they've been affected, but I don't think that really impacted our overall results. But overall, it's -- as you can see, we muscle through it. I think the strength of our strategies and our positioning has allowed us to push through. Does that answer your question?

Yes, absolutely. Thank you. Yes. I mean, your growth was, I mean, really, really terrific. The double-digit growth was impressive, especially since your comparison last year, I think, was the hardest in the third quarter.

Yes, yes.

Yes. So it was double digit against double digits, so that's really great. So the growth comparison is actually a slight bit easier in the fourth quarter, and you've got a lot of drivers. And I really didn't hear anything that would make me think things would get worse, maybe things would even get a little better. So I know you don't want to give guidance, but is it fair to say that the outlook for fourth quarter on top line is pretty good, I would say?

Yes. I don't know if we'll have our sixth consecutive historic quarter. But again, we're positioning ourselves to have yet another strong quarter, driven by all of the things that I've been talking about. And so I think what we're seeing is just good, solid kind of real momentum and sustainable momentum kind of across the business for the most part. So we're pretty good.

Yes, sounds like it. So you talked about the Synergy relaunch. I didn't quite catch what markets is that Synergy relaunch going to take place? And does that start here in the fourth quarter?

Yes. So that's going to be global. That will be a global relaunch. It will actually start in Europe and the U.S. in Q4, and they will start with largely putting in place some new digital capabilities. So they'll get a new digital platform that will allow them to move a little bit faster. And then the fast follow-on the back end of that will be some of the rebranding and some additional enhancements to this new website that we're going to be putting in place. There are also some new tools for the distributor base that are actually quite good. They're quite exciting. So that's a global change and -- but again, it's starting with Europe and North America this year and then kind of late type thing, first or second quarter next year in Asia.

Okay, great. And then I think you said your gross margin was up year over year, so that's really good. So you've got favorable things offsetting, I guess, cost pressures. What are you seeing in terms of the cost pressures in terms of materials or transportation or anything? What are you kind of seeing in that area?

We've seen some kind of issues. I'll let Joe elaborate a little bit more. Why don't you talk about that, Joe?

Linda, we experience some pressures? Yes. Having said that, again, given our proactive approach to building up raw materials and our inventory levels, we think we're managing some of those challenges reasonably well. It's difficult to predict long term where that's going to go. But at least so far, and you saw it in our uptick in the gross profit margin. That was, by the way, the quarter-over-quarter upside was favorably benefited by some inventory reserves we took in the prior-year quarter. But still, overall, year over year, our gross margin is pretty consistent. And we're feeling pretty good about our ability to manage some of those pressures, both near term and long term.

We've also got some supply chain strategies. I alluded to some of the new equipment that we're going to be kind of bringing into the facility that will help us improve -- dramatically improve productivity. We'll also look to do -- strategically do some local either production or sourcing in an effort to drive out some costs as well. So we've still got some headroom on gross margin, and we're going to chase after that.

Okay. That's good to hear. Also, when you talk about the personalization initiatives, which I guess you're kind of starting here in the fourth quarter, how are you set up in terms of your fulfillment? Because that's going to make an even higher percentage of your orders shipped directly to the consumer. So kind of how are you managing that? And is that starting predominantly just in the U.S. Initially?

Yes. That's the U.S. initiative right now. And so we're building that into, again, kind of just this overall digital focus, but it's going to -- it's interesting because instead of having to grab 10 bottles, the machinery packs those kind of 10 different pills or whatever they are. into individual packs. So we've got the kind of the systems and the machinery that will allow us to automate that whole process. So in some ways, a lit bit, it will simplify things for us. and it can drive out some cost as well. So again, we're going to start slow on this one so that we don't overheat the system. And -- but again, when you look at -- I was receiving correspondence from some of the early distributors that were pulling together programs, they were taking kind of before and after pictures of this big pile of a mess of bottles that someone would have to have and then just kind of the single packet that would replace that. So it's pretty exciting. And again, we're able to kind of stage up the capacity relatively easy if we need to.

Okay. That sounds good. And then just on the AutoShip program, is there any way you could say what percentage of revenue it was like in the U.S. and in Japan?

I'd have to get back to you on that. I don't think I have that kind of right now. Again, the programs are still -- they're still new. And so -- and some of the numbers that I've shared in the past, the growth numbers, that's just based on versus prior year. But I have talked about the percentage of orders that have a Subscribe and Thrive product in them. And I think in October, we were up to around touching 40% in the U.S. business. So that doesn't mean that every single product in those orders was a Subscriber and Thrive order. But if you've got 40% of your orders with -- or customers with a Subscriber and Thrive product in them. That means they're coming back next month also. And that's just -- that's a revolutionary for us. So that's great.

Okay. That sounds good. I'll leave it there. Thank you very much, and good luck.

Thank you.

We'll take our next question from Bill Dezellem with Tieton Capital.

Thank you. I wanted to talk a little bit about the SG&A, and you had mentioned that in the press release that there were three components to that. And if we understand correctly, we want to see SG&A go up relative to the Chinese compensation. So that actually is a good thing if we understand correctly. But then you also mentioned the cost associated with the business transformation. We're curious, how long do you anticipate those to last -- or are they more permanent in nature rather than transitionary? What insights can you share there, please?

I think we've got several quarters -- when it comes to investing in things like personalization or our DTC initiatives and some of the other customer growth initiatives, we'll be investing -- slightly investing ahead of growth on those for several quarters. So we'll probably have to take a cycle, Bill to invest ahead of growth because the residual payoff on doing that is quite substantial. We'll have other initiatives in the hopper to help kind of fund those. And so we're still maintaining and actually having a policy of kind of growing our margins going forward. So the business will continue to make progress in terms of operating margin growth and EBITDA margin growth. But we will be kind of fueling growth and investing in growth where it makes sense. And again, everything that we're seeing right now in all of the -- all of our analytics are telling us that digital is a great investment opportunity for us, personalization, a huge opportunity for us, as well as some of these things like just creating awareness around Subscribe and Thrive and the affiliate program. But all of them have great residual paybacks on the back end.

All right. So you were kind not to say it. But if I interpret your answer correctly, I was being a bit myopic focusing on the SG&A as a percentage of revenues because in total, you would anticipate that margins will be expanding even if SG&A is going to grow as a percentage?

That's correct.

Yes. Bill, I would just add to agree with what Terrence is saying. But just to add real quickly, yes, you got it. I mean, you've got -- we have an operating margin year to date in 2021 of a little over 8%. Obviously, the third quarter was even -- was closer to 9%. But as we sit here today and we think about 2022, from an operating margin standpoint, we certainly -- even with some additional spending behind the initiatives and so forth, we would expect that our operating margin for the year to improve over 2021.

Okay. Thank you, both.

Yes, absolutely. Good talking to you.

We'll take our next question from Steven Martin with Slater.

Hi, guys. Great quarter.

Hey, Steve. How are you doing? Thank you. Thank you so much.

Good. Most of my questions have been answered -- asked and answered. You talked about inventory being up about $9 million. When you look out over the next couple of quarters, is that the new level? Or should we expect it to continue to expand?

Well, what I'd tell you first is the expanding, that's not necessarily a bad thing because that means that we're continuing to experience growth. But just from an overall standpoint, Steve, yes, we're at $57 million or so. Could that bump up over the next two or three quarters? Yes. But I don't -- we don't see dramatic increases. A lot of that -- 60% of that increase is in raw materials. We're trying to get ahead of that and some of the flight challenges from getting raw materials in the door. So that should level off the raw material side of it. But you may see a little more upward movement on it. But overall, you also should see it start to settle out .

It's an important initiative, Steve. Steve, it is an important initiative. I mean, again, when you've got Japan growing 30-plus percent, China hovering around consistently 20%; Taiwan, 400-plus percent. It kind of just keep going around the world, Russia, Poland, etc., etc., etc. We don't want to get caught flat-footed. So I think it's the right strategy for us. We feel really comfortable with it. And again, just trying to stay ahead of it without –

Yes. Terrence, I wasn't criticizing or commenting on the $9 million.

No, no, no.

I was just really asking is that sort of the new level going forward? Or will it continue to be a use of cash?

Yes. No, absolutely.

Okay. Along those lines, new products, you launched a whole bunch of new products, especially the beauty product recently. Can you talk about the performance of some of the new products?

Still doing very well. l'amara, our skincare product was a tremendous hit. It launched first in Asia, and that's where I think we have kind of most visibility to the launch. It's kind of just selling out and beyond their forecast in their kind of first couple of months. So again, doing really quite good. Some of the other products that we've launched were some, I think we want some collagen products performed excellently in Europe, really continue to provide support. And I think, Steve, we've just kind of been launching these products. They're packaged beautifully. We've got great marketing behind them, and they really do just speak to consumers. And so kind of just right product at the right time. And so something that historically, if you kind of go way back when Nature's Sunshine, that's something that we were always really good at when we were driving double-digit growth year after year. And so that's the focus of what we're trying to do now. So it seems like those new products are doing quite well for us.

Good. G&A, you were talking about G&A before, and I'm going to exclude sort of the marketing and the various expenses related to growing the top line. When you isolate out the corporate component, how do -- how is that growing, not growing, flat, etc., because that's really where a lot of your leverage is going to come from going forward?

Yes. Joe, do you want to talk about that a little bit?

And what I would tell you is overall, I think you're trying to separate variable see from fixed. And so my response to that would be, of course, on a year-to-year basis, you may see the fixed growth given payroll increases and those types of things. But we feel very good about the fixed overhead structure that we have now. I mean, there may be given the growth that we're experiencing, I expect to experience in going forward, we may add some additional folks and so forth. But we're already starting to leverage our fixed overhead, right? With the sales growth. And again, that's coming into play with the improvement in the operating margin, and we expect that to continue going forward. So there will be some additions, but nothing too dramatic.

And we're still pursuing our strategy on a present to sales basis of 0 or negative overhead growth. So you should expect that going forward.

Great. One last one, and I know you don't like to -- well, let me know, actually, I have one next to last one. Last. year, in the fourth quarter, you give some advanced extra spending, which you highlighted, and it helped drive the business obviously in 2021. When you look out to the fourth quarter, is there anything unusual that we should expect? And I guess that leads into my fourth -- my last question, which is recognizing that you're not -- you don't want to give guidance and Linda had asked you some questions about the fourth quarter. Should the fourth quarter look like the third? Should -- I don't know how to ask you without asking it. I've been trying for years.

Yes. Well -- and you're right. We don't give formal guidance. But directionally, what I would tell you, Steve, is that we obviously spent incremental dollars in this quarter, the third quarter, say, versus the year-ago quarter, and you can see that in the SG&A line. So as compared to the current quarter, the quarter just ended. I don't know that I would anticipate anything incremental as a percent, okay? Certainly, it'd be pretty modest. So directionally, what I would say is from an EBITDA margin or operating margin standpoint, I would think more in terms of the quarter just ended, say, versus the fourth quarter of the prior year. Does that help?

Yes, that helps. And given that we're now in -- almost halfway through the fourth quarter, and you've seen additional market closings, COVID-related, etc. how does the fourth quarter look from a market closing standpoint versus the third quarter?

Market closings, I mean, obviously, the -- a few references is in regards to pandemic-related challenges and so forth, I mean we haven't seen any dramatic shifts one way or another. I mean you can see maybe there's a market or in Central America that all of a sudden will see some more restrictions or whatnot. Terrence touched on some of the challenges we've had in Korea. But still that market is a very good market for us. But yes, half -- well, not halfway, but partway through this fourth quarter, we're not seeing anything from a -- due to the pandemic that's causing us major concerns or that would result in a major shift in what we would expect to realize in Q4, say, versus how the third quarter played out.

I think we're also seeing maybe less dramatic responses from Western countries versus Eastern. So in Korea, for example, if they get any type of outbreak or sign there's a very strong reaction to that and very immediate. So it kind of varies by market, but I think Joe is exactly right. I don't know if we expect to see anything, more or less going forward.

Well, it sounds to me like the market that has still affected the most is Korea. Is that a fair conclusion?

Well, it's fair if you think in terms of just the size of the market scale, right? I mean we wouldn't say that we haven't felt some significant pressures in certain markets. And like I said a moment ago, in Central America, for example. But just based on scale, yes, the one that's been most impacted or for us, most challenging in 2021, say, versus 2020 has been or 2019, if you went pre-pandemic is clearly Korea.

Well, and would you say that it is the -- and maybe that's what you were saying, would you say it is the one that has -- from a top-line standpoint, been the biggest diminution to what it would have been without the pandemic, if that's the right question?

I would agree with that.

Yes. I think directionally, that's fair.

Absolutely.

I mean it's not to say that we're seeing erosion in Korea this year, right? I mean we'd love to see more growth. But overall, we haven't seen much growth, but we also haven't seen a lot of erosion either. So it's an ongoing situation. But obviously, overall for Asia, we're pretty pleased.

All right. I guess, if I might, you've had some major shifts in your shareholder base this last quarter or some that we suspect and some that we're not sure of. Anything you would care to comment on about Red Mountain or any of the others?

No, I don't have any commentary on our shareholders right now, Steve.

Okay. I will let you go, and looking forward to the next quarter.

That's great. Thanks so much. Great talking to you. Thanks for the questions.

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

Okay. Well, thank you. And again, we'd like to thank everyone for listening to today's call, and we look forward to speaking to you again when we report our fourth quarter and full year results in -- for 2021 in March. So again, thank you for joining us, and take care, and look forward to talking to you soon. Bye now.

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.