Richard Strulson – Executive Vice President, General Counsel and Chief Compliance Officer Greg Probert – Chairman and Chief Executive Officer Joe Baty – Executive Vice President and Chief Financial Officer.

Analysts:.

Greetings and welcome to the Nature’s Sunshine Products’ Fourth Quarter and Full-Year 2016 Earnings Conference Call. All participants are in a listen-only mode and this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Richard Strulson, General Counsel and Chief Compliance Officer of Nature’s Sunshine Products. Thank you, Mr. Strulson. You now have the floor..

Thanks a lot. Good afternoon, everyone, and thanks for joining our conference call to discuss our fourth quarter 2016 financial results. This call is available for replay in a live webcast that we posted on our website at www.naturessunshine.com in the Investors section.

The press release which was issued this afternoon at approximately 4:05 Eastern Time and the information on this call may contain certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors, which may not be within the company’s control.

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, performance or achievement of the company may be materially different from the results, performance or other expectations implied by these forward-looking statements.

These factors 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 press release and the information on this call speak only as of today’s date and the company disclaims any duty to update the information provided herein and therein. I’ll now turn the call over to Greg Probert, Chairman and CEO of Nature’s Sunshine Products..

Thanks Rich. Good afternoon everyone and thank you for your participation in today’s call. Also joining me today is our, Chief Financial Officer, Joe Baty. Fourth quarter sales of $84 million were up 4.9% year-over-year, led by Synergy Asia Pacific and $2.3 million of incremental sales in China and new markets during the quarter.

We continued to execute well against our growth strategies during the fourth quarter. However, our results were negatively impacted by unusual items and expenses associated with our investment in China and the lack of a direct selling license that led to reported loss during the quarter.

Specifically, we took reserves against much for the inventory we’ve built in anticipation of launching our direct selling operations in China, which did not occur on the timeline expected. We have not yet received a direct selling license and are not sure when or whether we will.

Additionally, we continue to report a heightened level of SG&A in China in preparation for whether or when we receive a license. Finally, significant deferred tax asset valuation allowances taken during the fourth quarter increased the tax rate and added to the quarterly loss. We reported a loss of $0.35 per share during the fourth quarter.

That included $0.15 per share of expenses directly related to our investments in China and inventory reserves, and another $0.18 per share of non-cash costs associated with the deferred tax asset valuation allowances. We continue to generate positive earnings and cash flow from our core NSP and Synergy operation.

Let me now discuss our sales performance in further detail. With NSP Americas, we delivered the 10th consecutive quarter of growth in NSP United States. Canada was down primarily due to lower convention sales in the prior year, as a location change and impacted attended.

The challenges in NSP Latin America continued, although the rate of decline moderated from the third quarter level. In total NSP Americas’ sales declined 0.8% to $42.8 million nearing to the fourth quarter. Our IN.FORM business model, which is focused on both weight management and building a daily habit of health, continue to drive the U.S.

business to continued year-over-year growth. We will focus additional efforts to grow this business system in the U.S. as we push to expand its use across other NSP Americas markets. There are now approximately 2,100 coaches certified and 312 groups started during the quarter, and the penetration of IN.FORM continues to decline.

In 2017 we look to expand the IN.FORM portfolio to drive higher utilization of the recent online certification program launched during the third quarter and increased training and certification event. Additionally in the coming quarters we’ll be testing other digital tools and retail and field engagement programs to support the U.S. market.

Our retail channel was effectively flat year-over-year during the quarter while the practitioner channel was up modestly. In Latin America, sales decreased 5.5% year-over-year in local currency, an improvement from the rate of decline during the third quarter.

The primary challenge in Latin America continues to revolve around product registration and a reduced product assortment as a result. We’ll continue to work towards enhancing our product offerings in this region including a transition towards IN.FORM program products which are more regulatory friendly.

Turning to Synergy Worldwide, fourth quarter sales rose 5.4% year-over-year to $30.6 million or 4% on a local currency basis. Growth was driven by Synergy Asia Pacific which contributed 11.1% local currency growth. Europe declined 16.3% in local currency and North America declined 1.8% versus the prior year.

In Q4 we did not see the carryover effect of the European Summit held in the third quarter, because new product introductions occurred at year end instead of at the time of the event. We therefore look to drive implementation of the Elite Health program across our Europe markets this year.

Following the limited time offer of Elite Health Purify Kit, we’ll now fully launch a Purify Kit and additional products to support the adoption of Elite Health across Synergy Europe. During the fourth quarter we launched Elite Health in a few Asian markets including Korea and Japan.

The Elite Health system is geared towards detox, weight management and a daily habit of health. Driving an Elite Health is a key strategy for 2017 across Asia Pacific and Europe, followed by rollout in Synergy North America later this year. In NSP Russia, Central and Eastern Europe, net sales rose roughly 2.1% in local currency and U.S.

dollars to $6.9 million. The stabilization of trends in the market reflects our efforts to improve the relative pricing of our products with the discount introduced in the second quarter of 2016, and successful product launches including the introduction of new products kits across the region.

During Q4, we launched a healthier immune kit and plan additional kit launches during 2017. We are encouraged by the stabilization and continued profitability of NSP Russia, Central and Eastern Europe after a significant foreign currency and economic challenges that impacted this region over the last several years.

Now turning to China and new markets; fourth quarter net sales increased to $3.7 million versus $1.0 million in the prior year period, although declining subsequently from $4.4 million in the third quarter.

During the fourth quarter we again recorded incremental pre-opening product sales through Hong Kong that drove the majority of the year-over-year sales increase. As I noted earlier in the call, we have not yet received a direct selling license in China.

As a result, our sales are below our expectations yet we have maintained an elevated level of SG&A to support the expected launch. Given the sales shortfall, we had to take reserves against the inventory we’ve built in anticipation of launch.

We’re working to keep the infrastructure in place, for weather and when we launch direct sales, while adjusting our expectations for timing. Joe will further discuss the financial impact of the China situation in his remarks.

We are in the favorable position of having strong and profitable businesses in NSP and Synergy Worldwide that collectively afford us the opportunity to make investments in anticipation of new market and growth opportunities.

We’ll continue to focus on the core product strategies that support our core operations while preserving a significant infrastructure in China as we await the issuance of a direct selling license. With that, let me turn it over to Joe to discuss the financials..

Thanks, Greg and good afternoon everyone. Net sales in the fourth quarter of 2016 were $84 million, up 4.9% from $80 million in the same quarter last year. On a local currency basis, net sales grew by 4.6% year-over-year. As Greg noted, the growth was driven primarily by Synergy Asia Pacific and the product sales through Hong Kong.

Gross margin declined 180 basis points to 71% from 72.8% in the year ago period. The gross margin decline was primarily driven by the accrual of $1.7 million in inventory obsolescence reserves during the fourth quarter.

The reserves were associated with inventory build in anticipation of a potential direct selling launch in China, which did not occur on the timeline expected and the sales and related inventory turnover did not meet expectation.

Volume incentives accounted for 35.2% of net sales in the fourth quarter compared to 36.4% of net sales in the same period last year. In dollars, volume incentives increased approximately $0.4 million to $29.6 million as a result of the higher sales volume.

The decline in volume incentives as a percentage of sales was driven by changes in segment market mix, including the pre-opening products sales through Hong Kong for which no volume incentives are paid. Selling, general and administrative expenses were $31.5 million, up $4.6 million compared to $26.9 million in the same period a year ago.

As a percentage of net sales, selling, general and administrative expenses were 37.5% in the fourth quarter compared to 33.6% in the prior year.

The increase in SG&A was primarily due to incremental independent service fees related to pre-opening product sales through Hong Kong, expenses associated with increased infrastructure investment in China, an increase in personnel related costs and a reduction of capitalized internal development cost related to the enterprise resource planning or ERP system.

We reported an operating loss of $1.4 million or 1.7% of net sales compared to operating income of $2.2 million or 2.8% of net sales in the prior year period.

Adjusted EBITDA as defined in our press release as net income or loss from continuing operations before income taxes, depreciation, amortization, stock-based compensation and other income or loss declined $2.6 million in the fourth quarter of 2016 as compared to $4.6 million in the fourth quarter of 2015.

The decline is primarily due to the increase in selling, general and administrative expense. The effective income tax rate for the fourth quarter of 2016 was significantly impacted by $3.4 million of valuation allowances taken against deferred tax assets during the fourth quarter of 2016.

In addition, our inability to benefit from certain foreign based operating losses resulted in a significant increase in our effective tax rate. We recorded $4.3 million of income tax expense despite the $3.1 million pre-tax loss.

Net loss attributable to common shareholders for the quarter was $6.7 million or $0.35 per share as compared to net income of $3.7 million or $0.19 per diluted share in the year ago period. Included in the net loss beyond the China related item, so I will discuss in a moment was a $1.8 million foreign currency loss. U.S.

dollar strengthened against virtually all currencies during the fourth quarter. As noted, fourth quarter loss was significantly impacted by investments in China made in anticipation of receiving a direct selling license during 2016, we build infrastructure in China to fully support a direct selling operation.

In addition to our capital investments to date $1.8 million of incremental China related infrastructure expenses and $1.7 million of inventory reserves during the fourth quarter contributed to the reported net loss. Further, our current operating losses in China are in a very simplified sense non-tax deductible.

We cannot effectively net them against taxable income generated in other markets. Long-term we hope to net those – net these losses against future taxable income. However, we cannot reasonably estimate future income at this time given current losses compounded by not knowing when or whether we receive a direct selling license.

Until such time that our China operations generate sustainable operating income, our effective tax rate will continue to reflect the impact of losses that are not deductible for income tax purposes.

The heightened uncertainty regarding future China based financial results also led to reassessment of deferred tax assets relating to utilization of foreign tax credits. We recognized $3.4 million in valuation allowances or income tax expense against the related deferred tax assets in the fourth quarter.

We enter 2017 with modest expectations for new markets. However, we are not – we are working to protect our infrastructure in anticipation of a direct selling launch in China, as such we anticipate ongoing losses related to China that will negatively impact 2017 financial results.

Turning to the balance sheet cash and cash equivalents at December 31, were $32.3 million. For 2016, we generated $3.4 million of cash from operations and invested $11.5 million in capital expenditures.

The largest component of capital expenditures in 2016 was in support of our Oracle ERP initiative, which is currently being tested ahead of implementation. Once Oracle is implemented it is important to note that there will be a significant increased in annualized depreciation and other related expenses that will run through the P&L.

We currently estimate incremental cost of approximately $7 million, on an annualized basis going forward. This includes approximately $5 million in depreciation expense as the Oracle asset is depreciated over an estimated 10-year life and a reduction of capitalized in-house ERP development cost of approximately $2 million.

Inventory was $47.6 million at the end of the fourth quarter, up from $38.5 million at the end of 2015. The increase primarily reflects inventory buildup in anticipation of implementing the new ERP system as well as timing and growth considerations.

We returned $7.5 million in dividends to shareholders and had net borrowings of $7.2 million on a revolving credit facility. The Board of Directors approved the cash dividend of $0.10 per share that will be paid on April 3, 2017 to shareholders of record as of the close of business on March 22, 2017.

I will now turn the call back to Greg, for his concluding remarks..

Thank you again for your support and for participating in today’s call. If you have any follow-up questions, please do not hesitate to reach out to us. Have a great day. Thank you..

Q - :.

Thank you. This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation..