Good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine's Financial Results for the Second Quarter Ended June 30, 2022. Joining us today are Nature's Sunshine, CEO, Terrence Moorehead; CFO, Joseph Baty; 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 23, on the Investor Relations portion of our website, which is ir.naturessunshine.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 filings. 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'd like to turn the call over to the CEO of Nature's Sunshine, Terrence Moorehead. 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 brands 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 8 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.…

Thank you, Terrence, and good afternoon, everyone. Net sales in the second quarter were $104.2 million compared to $109 million in the year ago quarter. This modest 4% decrease was largely driven by declines in Europe and North America. If we exclude Europe, which we knew was going to be challenging, as reported sales were down less than 1%. As Terrence mentioned, excluding impact from foreign exchange rates, consolidated net sales increased 50 basis points in the second quarter. On an absolute basis, net sales in Asia increased 9% to $47.4 million compared to $43.5 million in the prior year quarter. This represented a 19% increase on a local currency basis. The strong performance was primarily based on growth in Taiwan and Japan as a result of an increase in on-site events, new product launches, and further growth in the team's field fundamentals. Net sales in Europe on an absolute basis were $17.1 million compared to $21.5 million in the year ago quarter. On a local currency basis, net sales declined 16%. Throughout the quarter, the region continued to experience inflationary pressures combined with the negative impact from the war between Russia and Ukraine. As Terrence touched on earlier, Poland remained a primary driver for the region despite the inflationary environment and the natural pressures arising from mass immigration into the country. We're watching the Russia, Ukraine situation closely and believe it will remain fluid to the situation's overall uncertainty. North America's net sales were $34.1 million compared to $37.4 million in the prior year period. This decrease is largely attributed to the aforementioned supply chain and inflationary pressures in the region, which we believe was the primary driver for a reduction in per customer average order size during the quarter. Net sales in Latin America and other were $5.6…

Our first question will come from Linda Bolton-Weiser with D.A. Davidson.

So I just will start out with Europe, we had tempered our expectations and it was a fair amount better than we had projected. I know there was some inventory in Russia, Ukraine that might have been sold through. Are you posting any sales in Russia or Ukraine in the quarter? Or is that 0 at this point?

They're still selling through the inventory and we do have activity on the ground. Yes. And to some degree, Linda, we have just given that the performance in Eastern Europe has been better than we were thinking a few months ago. To some degree, we have replenished some of the inventory sitting there.

So do you expect to have situation to change? Or is it a winding down or do you think some little bit of business will continue there?

Yes. There's still a fair amount of uncertainty, obviously, in the market. But to the extent that we can continue to sell through inventory and to the extent that we can actually repatriate the dollars we'll continue to move forward as we have. Joe, do you have additional comments on that?

I would just add, Linda, as I just noted, the overall business in Europe, primarily Eastern Europe clearly have been better than we were anticipating last time in the guidance. So it wasn't guidance still on the last call. I stated that Europe could be down 30% to 40%. I just updated that guidance, say now maybe it's going to be down 15% to 25%. And that in large part is because we continue to move a lot of product to those folks that are strong believers in Nature's Sunshine, and addressing their health needs.

These products, if you think about that area of the world, our products really do represent a significant portion of their health care. And so they're important to the people on the ground there. So even in the Ukraine, we're seeing some of our distributors have temporarily opened up their stores to move inventory as the finding has moved East. So there is some activity still on the ground.

And then just switching a little to the North American business. I guess I'm a little surprised to hear a little bit of a shift or change in the business in terms of you're talking about competition. I'm just wondering a little, do you think there's some sort of channel conflict developing because your DTC has grown so rapidly? Do you think that could be negatively impacting the rest of the business?

No, we don't see that as a particular factor. And I was using the points on competition, simply to highlight what other competitors are doing in the market. It's not just us that are being affected by inflationary pressures. That was the only reason that I was highlighting that. Again, people are still ordering, the consumers are still there. They're still buying supplements. They're just a group of customers that are buying less. I mean, that's the dynamic we're seeing and it appears as if that's impacted by inflation. To a certain extent, it was impacted by product availability. But again, that's just the behavior that you're seeing in the market right now, and it seems to be consistent with us. Does that answer your question?

Yes. Also, a question just on the SG&A expense. I know you think about it in terms of a ratio, but it was actually the dollar amount was a little bit lower than we had thought. Is that a good amount to consider going forward on a quarterly basis, like on a dollar amount basis?

Joe, do you want to take that?

Yes. Linda, I think you can appreciate there's always going to be a little bit of variation in the dollar amount from one quarter to the next just based on actual sales because a portion of that is the percent historically related to sales. Some of it is relatively fixed and so forth. But directionally, I would say, for the near term, it's a pretty good number to go off, but it won't be exact.

And then, I know your general commentary here around what to expect a little bit. Did I catch it right that you said your 11% EBITDA margin could possibly get impacted by 3 to 4 percentage points in 2022? Is that what you said?

Yes. I think I said full 3 to 5 percentage points. So I guess, you do the math, obviously, that as we sit here today and obviously, our views may change, but the EBITDA margin could be somewhere in that 6% to 8% range.

So just to confirm, I saw on the last call, you were maybe talking more about high single digits. So does this represent a little bit of a more conservative view toward it?

Well, it certainly represents an update from what I stated before. And what I stated before, I think I excluded incremental inventory-related charges was, as I noted, our COGS rate in this quarter was impacted 70 bps from additional inventory-related charges and so forth. But maybe a little bit of a softened comment versus last time, but not, in my view, a major change from what I stated before.

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

This is not a very uplifting phone call. I'm sorry, it just wasn't. Is there anything positive we can look forward to for the back half?

Well, I think we continue to push on forward on all fronts. Top line, as I mentioned, should continue on the trend that the towards and I think, Steve, what we're really working towards is playing the long term here and making sure that we continue to drive for the top line and bottom line that we've been talking towards. I think that's what our strategies are designed towards, that's what our actions are focused on getting the gross margins get back on track from a costing standpoint, getting SG&A in alignment where we can and then continuing to press on top line and fight through the external headwinds. That's just what we have to do. And Joe, do you have any additional comments on that?

Yes. I mean, we certainly recognize the challenge of this year's overall profitability versus the prior year's profitability, Steve. We recognize that and talk about it and are focused on what we can do to improve that going forward. Clearly, as Terrence just mentioned, the focus is not to make a decision that in the near term helps things, but in the long term is a bad decision. So we continue to invest on these initiatives and so forth. We have the capital and the wherewithal to do that. And then obviously, from a cost of goods sold rate, from a gross profit margin standpoint, you recognize that losing a couple of full points there for external related reasons, it's difficult to overcome just from a profitability standpoint. But as Terrence also mentioned, we have our new Head of Operations here. He's actively working on a number of initiatives that we can implement over the upcoming months, quarters, years and so forth that we believe will help address those pressures. But trying to assess and evaluate what the long-term expectations are for inflation and some of those factors, I think you can appreciate that's very difficult to do.

I totally understand that, but your sales shortfall was not that great. Your profitability shortfall is reasonably significant. And it doesn't sound like, when I understand there are some cost pressures, but it you haven't named anything that is an offset on SG&A or anywhere else. Everything was just negative. I mean for instance, are there going to be officer bonuses this year? Where is the offset? Where is the cost savings? Where is some level of reduction that reflects the headwinds that you're facing? Joe, not verbiage. Dollars and cents.

Dollars in cents, you want me to respond in dollars?

I want something other than words.

Well, let me start with your first call out the officer's bonus question. It's very clear, and we fully understand at this point that the overall officers or management bonus pool in 2022 will be substantially less than it was in the prior year. If any bonuses are paid at all in 2022, we recognize that we've consciously made a decision in connection with the Board and so forth that look, given this year's profitability versus last year, that's clearly one of the things that to use your language, we're probably going to need to give up, and then get things squared away to obviously try to get to a better situation in 2023, so some of that can return. I can also say, clearly, from an overhead standpoint, we referenced SG&A, we have not made a decision to make any dramatic changes in personnel at this point. And that's one of the things as we sit here today, we don't know that that's the right decision to make major changes on headcount or stuff like that. So you can say that is that something that we would look at, maybe, but it's not as of today because we believe still that the upside growth wise and so forth, once we get past some of these external factors is pretty significant for the company. And as we called out, Asia, obviously, is performing very well. Obviously, Eastern Europe we understand squarely hindered by the war. We got Western Europe is impacted by inflationary pressures. Obviously, we want to make significant changes today, then all of a sudden, that situation changes dramatically 6 months from now. We're not sure that, that's the right move, and I can say the same thing to some degree here in North America as well. But I can assure you, we continue to evaluate it. We understand and fully recognize the year-over-year reduction in what you want to talk in terms of adjusted EBITDA or operating income. And we're looking everything suit-the-nuts as to what we can do to improve efficiencies, remove costs from the overall business. But again, we don't want to make a short-term decision that may make financial sense, but it's the wrong decision in the long term.

Let's talk about Asia in the third and fourth quarter. Do you expect Japan to continue its strength?

We expect Asia overall, and I'm not going to break it down by market. I think Terrence touched on the markets. I would say that overall, we expect Asia to continue to grow in the second half.

Terrence, you referenced the Korean restrictions have been lifted and the Chinese lockdowns have ended. Do we expect that China and Korea are going to start growing in Q3? On a year-over-year basis?

Yes. I think what we'll start to see, Steve, is the momentum to start picking up in those markets. The impact of basically being on hold for 2 years in South Korea has been significant. So they're out in the market. They're having meetings. They're getting face to face. People are actually coming back into the brand and using those facilities. So we do expect to see momentum building certainly on a sequential basis. I can't say versus year-over-year. But I do expect to see that gap closing, Steve. In China, that situation maybe it's a little bit more tenuous. But again, my expectation there and our expectation is that they'll start building momentum as well and fighting to gain that back. But as I mentioned, there's still some hesitancy with consumers to not only spend their money but also to interact with others.

So you can't tell me when China or Korea will be positive on a year-over-year basis?

I think our outlook is as we get closer to 2023, we should start to see some more positive momentum. Is that fair, Joe.

Yes, that's fair.

Joe, can you talk about the tax rate, what it might look like in the back half of the year? Will it be more normal?

It should be a little more normal, Steve. I mean just to expand again a little bit on what I said. I mean the company typically has deferred tax assets because there are differences between tax and financial reporting, whether they're related to foreign taxes or net operating losses and so forth and so on. The Russia business is that a lot of that Eastern Europe business actually flows through our US tax return. Because of some of the challenges over there, coupled with some of the heightened inflationary impact on the North America business, our US taxable income is currently forecast is not as robust as it was, say, 6 months ago or a year ago. And as a result, some of those tax assets that we thought we could utilize in reducing US taxable income may expire before they can be utilized such we have to take a valuation charge against us. So that led to a fairly high rate here in the second quarter. Playing that forward, obviously, we do believe that the overall North America situation is solely but surely going to improve. But again, it's hard to sit here and predict how those external factors are going to play out, but that's certainly the hope. I would think and believe that the volatility of that tax rate should be less in, say, the back half than it was in the first half. More importantly, though, I would say, just putting aside the tax rate, which includes both noncash and cash components to it. The thing that I focus in on is what is the overall effective cash tax rate, and that, in my mind, has not changed dramatically from where we were before. And in round numbers, that's where we think it's somewhere in the very high 20s to low to mid-30s.

Follow up from Linda Bolton-Weiser from D.A. Davidson.

I just wanted to ask about pricing because I think you had made a price increase of about 5% around April. Can you remind me what reason that has been? And what kind of results you see? Do you think that has affected the business at all?

The price increases were actually in North America and Western Europe. And so the impact of those consumers are extremely price sensitive. That's all I can say. I don't know what else to say about it. Yes, that's it. Joe, do you have any --

So you think you have suffered a little bit of demand degradation because of the price increases?

Yes. We believe that as it's played out, it's always difficult to prove that, but we believe that may have impacted the overall revenue or let us to say, promote a little heavier. Then maybe we would have just given the heightened price sensitivity, again, given the inflationary pressures that headwinds that folks are feeling.

Especially in Europe.

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

I want to thank everybody for listening to today's call. We look forward to speaking with you again when we report our third quarter 2022 results in November. And thank you again for joining us. Take care.

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