Nate Brower – Associate General Counsel Greg Probert – Chairman and CEO Joe Baty – Chief Financial Officer.

Analysts:.

Greetings, and welcome to the Nature’s Sunshine Products Second Quarter 2017 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. Nate Brower, Associate General Counsel of Nature’s Sunshine Products. Thank you. Mr.

Brower, you now have the floor..

Good afternoon. Thanks to all of you for joining our conference call to discuss our second quarter 2017 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 4:55 P.M.

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 will now turn the call over to Greg Probert, Chairman and CEO of Nature’s Sunshine Products..

Thanks, Nate. Good afternoon, everyone, and thank you for your participation in today’s call. Also joining me today is our Chief Financial Officer, Joe Baty. We reported second quarter net sales of $81.3 million, which were down 9.0% year-over-year.

While we saw a continued growth in NSP Russia, Central and Eastern Europe the growth was more than offset by declines in NSP Americas and Synergy WorldWide. Second quarter results for NSP Americas were negatively impacted by disruptions associated with the implementation of the Company’s Oracle ERP system.

As we’ve noted last quarter, we went live in both our NSP Americas and corporate operations in April. We anticipate that the amortization cost of the Oracle system would impact our earnings in the second quarter and beyond, as Joe discussed last quarter.

However, we also encountered unanticipated disruptions to certain operational functions within the organization that negatively impacted sales and earnings during the quarter. These operational challenges included increased wait times in our call center, difficulties with our online ordering system and a negative impact to promotional activity.

We are working diligently to correct these issues but continue to encounter challenges. While we are working to return to targeted levels of operational performance, we anticipate that continued implementation challenges could have an ongoing impact to revenue and profitability throughout the remainder of the year.

We will remain cautious with the pace of implementation until the challenges are corrected. In spite of these disruptions during the initial implementation, I am confident that the long-term benefits of the enhanced ERP system will be evident over the coming years. During the second quarter we continue to face pressure in Korea.

As many of our peers in a direct selling industry have also noted there is a challenging environment in this market as a result of geopolitical and economic issues. This environment may very well continue in the near or immediate term.

We have also faced incremental challenges associated with the distributor engagement, the combination of geopolitical and economic challenges and lower distributor engagement have impacted business activity, most notably recruiting. We are focused on activities to enhance distributor engagement and improve sales trends.

China sales included within our China and new markets category were flat year-over-year for the respective quarters. Last year during the second quarter we began our preopening product sales through Hong Kong and those early promotions were significant, creating a tough comparable for this year.

We did see sequential growth from the first quarter, we are still very early in the process of transitioning to direct selling. On May 16, the company announced that it received its direct selling license from China’s Ministry of Commerce.

The license allows Natures Sunshine to began to expand its business scope including direct selling activities within Mainland China. In the back half of the quarter, we progressed through the initial steps following licensure would include additional regulatory audit and certification.

While it’s still very early in the process, we saw a positive impact on our sales from the confidence and early momentum built from the announcement. We are now in a position to execute on our sales plan and expect sequential growth as our direct selling efforts progress in its key growth market.

All of us at Natures Sunshine are excited and pleased that our investments have put us in a position to capitalize on the large and robust Chinese direct selling market. However, we are only in the beginning stages building-off a relatively small base and will be deliberate on how we execute our growth plan.

We anticipate continued sequential growth and look to build a scalable and sustainable business over the coming quarters and years. Before I turn the call over to Joe for a more detail discussion of our second quarter results, I would like to discuss some efforts to address our cost structure and enhanced profitability.

We have begun a proactive review of all aspects of the business to become more efficient, reduce costs and improve profitability. We’ll review all functions and utilize benchmarking to better evaluate our cost structure for both direct and indirect costs. We have built a highly effective organization that I believe is best-in-class among our peers.

This review will ensure that we’re also best-in-class in terms of probability. Now let me turn the call over to Joe to discuss our results in greater detail..

Thank you, Greg and good afternoon, everyone. Net sales in the second quarter of 2017 were $81.3 million compared to $89.4 million in the same quarter last year. On a local currency basis, net sales declined by 8.9% year-over-year.

As Greg noted, the decrease was driven primarily by significant declines in net sales in Synergy Worldwide and NSP Americas as well as year-over-year reduction in China and new market sales partially offset the growth in NSP Russia, Central and Eastern Europe. NSP Americas sales declined 11.9% to $39.4 million during the second quarter.

Net sales in the United States were down 11.3% and Canada declined 7.8% on a local currency basis primarily due to the interruptions in customer service as a result of the Oracle implementation Greg discussed.

Sales in NSP Latin America were also impacted by the implementation of Oracle as well as continued headwinds relating to product registration that have affected sales over the last year. NSP Latin America was down 14% on a local currency basis.

Synergy WorldWide net sales in the second quarter declined 8.2% year-over-year to $30.4 million on a local currency basis. This decrease was primarily due to sales declines in the segments Asia Pacific in Europe regions offset by modest growth in North America.

The decline in Synergy Asia was primarily driven by South Korea, were sales declined 21.8% on a local currency basis. As Greg noted, economic conditions and the distributor engagement challenges that impacted sales may continue for the foreseeable future and therefore they continue to negatively impact the Company’s reserves in Korea.

In Europe sales declined 7.1% on a local currency basis, while sales in North America increased 4.1% over the second quarter of last year. In NSP Russia, Central and Eastern Europe net sales rose 6.1% in local currencies to $6.7 million.

We continue to see improved results from currency stabilization and the benefits of new product introductions and markets expansion. China and new market sales decreased to $4.9 million versus $5.4 million last year, but increased from $3.5 million in the first quarter.

The decrease year-over-year was entirely associated with new markets with sales in China flat year-over-year given Greg reference to last year’s promotional activity, compared to the first quarter we saw a good growth in China. Gross margin decreased to 73.9% from 74.2% in the year ago period.

The gross margin decrease was primarily driven by market mix and the weakening of the U.S. dollar when compared to several international currencies. Volume incentives accounted for 34.8% of net sales in the second quarter compared to 34.5% of net sales in the same period last year.

The increase in volume incentives as a percentage of sales was driven by changes in segment market mix. Selling, general and administrative expenses were $31.8 million up $0.5 million compared $31.3 million in the same period a year ago.

As a percentage of net sales selling, general and administrative expenses were 39.1% in the second quarter compared to 35% in the prior year.

The increase in SG&A was primarily due to expenses associated with increased infrastructure investment in China and $1.2 million of increased depreciation related to the Oracle ERP implementation partially offset by an adjustment to certain reserve balances.

We reported operating income of $23,000, compared to operating income of $4.2 million or 4.8% of net sales in the prior year period.

Adjusted EBITDA is 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, decreased to $3.1 million in the second quarter of 2017 as compared to $6.2 million in the second quarter of 2016.

The effective income tax rate for the second quarter of 2017 was impacted by our inability to benefit from certain foreign based operating losses. This resulted in a significant increase in our effective tax rate compared to statutory rates.

The effective tax rate was 190.5% for the second quarter of 2017 higher than the statutory effective rates may continue for the foreseeable future. Net loss attributable to common shareholders for the quarter was $0.2 million or $0.01 per share as compared to net income of $2.6 million or $0.14 per diluted share in the year ago period.

As we have previously noted there is a significant increase in annualized depreciation as evident in the second quarter related to the Oracle implementation that went live on April 2. Additionally, we anticipate an increase in other annualized expenses aggregating close to $2 million.

Turning to the balance sheet, cash and cash equivalents on June 30 were $31.8 million. For the first six months of 2017 cash from operations in use of $0.7 million and we invested $3.1 million in capital expenditures. The largest component of capital expenditures for 2017 year-to-date was in support of our Oracle ERP initiative.

Inventory was $51 million at the end of the second quarter, up from $47.6 million at the end of 2016. The increase primarily reflects inventory buildup in anticipation of implementing the new ERP system as well as significant timing considerations. I would now like to turn the call back to the operator to facilitate Q&A..

Operator:.

Ladies and gentlemen we have reached the end of the question-and-answer session. I’d now like to turn the call back to management for closing remarks..

Well. Thank you again for your support and for participating on today’s call. Have a great day. Thank you..

Thank you..

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