Good afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine Financial Results for the Second Quarter Ended June 30, 2020. Joining us today are Nature's Sunshine CEO, Terrence Moorehead; CFO, Joseph Baty; and Executive Vice President 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 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..

Nathan Brower:.

Thank you, Nate. Afternoon, everyone, and thank you for joining today's call. I hope you're all staying safe and healthy during these challenging times as we continue to deal with the unprecedented uncertainty caused by the global effects of COVID-19, the economic turmoil, and social unrest.

Having said that, it's good to be here with all of you today to discuss our second quarter results and share our progress on some of the initiatives that we'll be implementing in the back half of the year.

With me today is our Chief Financial Officer, Joe Baty, who's going to walk you through our financial results in greater detail, but I'm going to kick things off today with a brief summary of the business. So let me begin by saying that our team here at Nature's Sunshine is doing well, and we continue to stay focused on moving the business forward.

I'm very pleased with our second quarter performance, especially given the challenging operating environment. Overall, we had another solid quarter. Despite delivering a 2% decrease in revenue on a local currency basis.

We made significant progress in several key markets like NSP U.S., which saw revenues increase for the second consecutive quarter, up 3% in local currency. Central Asia and Europe was up 14% on a local currency basis, and China was up 39% in local currency. I'll come back and talk about these markets a bit later..

Thank you, Terrence, and good afternoon, everyone. Net sales in the second quarter were $87.3 million compared to $90.7 million in the same quarter last year. On a local currency basis, net sales decreased 2% year-over-year.

Unfavorable foreign currency exchange rate fluctuations impacted net sales by approximately $1.5 million compared to the prior year. Net sales in Asia were $32.8 million compared to $35.2 million in the year ago quarter. The decrease was primarily attributable to the effects of market shutdowns brought on by the COVID-19 pandemic.

On a local currency basis, net sales in China increased 39%, Japan local currency sales increased 4%, and South Korea, sales declined 20%. Future results may continue to be negatively impacted by the pandemic and fluctuating foreign currency rates. Net sales in Europe increased 3% year-over-year to $15.5 million or 4% growth in local currencies.

The increase in net sales reflects growth in Central and Eastern Europe, including strong performance in Russia and despite of it effects of pandemic related market shutdowns. North America net sales were $34.5 million compared to $34.6 million in the year ago quarter.

As Terrence mentioned, the slight decline reflects the softened demand we experienced in April as a result of the fear based buying trends in the early days of the pandemic, which has since recovered, as customers begin to replenish their supplies and return to more normalized purchasers. The approximate 3% growth we experienced for NSP U.S.

during the second quarter supports this statement. We believe the various strategic and ecommerce enhancements we are launching in the coming months will set us up nicely to capitalize on the solid demand for resurgence coming from the U.S. market.

Net sales in Latin America and other were $4.6 million compared to $5.9 million in the year ago quarter, with the decrease primarily due to the substantial shutdown of certain LATAM markets. Gross margin was 73.6% compared to 73.7% in the prior year.

Volume incentives as a percentage of net sales were 33.4% compared to 34.5% in the same period last year. The decrease was driven by change in market mix, including China growth and the effects of various global market shutdowns due to COVID-19. Selling, general and administrative expenses were $28.5 million, down from $31 million in the prior year.

The 8% decrease was primarily due to savings from restructuring activities in the U.S. and Latin America, decreases in travel and event related costs as a result of COVID-19 and an unusual VAT refund in 2020. As a percentage of net sales, SG&A expenses decreased 150 basis points to 32.7% compared to 34.2% in the same period in 2019.

Excluding the impact of $0.4 million of restructuring expenses in the prior year and $0.1 million of VAT related income this year, SG&A expenses were 32.8% of net sales compared to 33.8% in the prior year period.

We reported a 45% increase in operating income to $6.6 million or 7.6% of net sales compared to operating income of $4.5 million or 5% of net sales in the prior year period.

Excluding the previously mentioned unusual items relating to restructuring and VAT related income, we generated $6.5 million of operating income or 7.4% of net sales for the third quarter compared to $4.9 million or 5.4% of sales in the prior year period, primarily related to SG&A savings.

In addition, as Terrence mentioned earlier, we have been able to improve bottom line leverage as a result of streamlining processes and prudently managing costs across the business through our Right Stuff strategy.

Adjusted EBITDA, as defined in our press release as net income from continuing operations before income taxes, depreciation, amortization and other income or loss adjusted to exclude share-based compensation and certain noted adjustments increased 21% to $9.7 million in the second quarter of 2020 as compared to $8 million in the second quarter of 2019.

This increase was driven primarily by the aforementioned cost savings from reduced travel and event related expenses and ongoing restructuring activities.

Net income attributable to common shareholders for the quarter increased significantly to $5.8 million or $0.29 per diluted share as compared to $2.7 million or $0.14 per diluted share in the year ago period. Turning to liquidity. We had cash and cash equivalents on June 30 of $70.3 million with $5.4 million of debt.

For the first six months of 2020, we generated $14.4 million of cash from operations as compared to using cash of $1.1 million in the comparable prior year period, with the increase primarily due to change in working capital, including payment timing of certain current liabilities.

Overall, we are pleased with our balance sheet strength and liquidity. Although we recognize that the COVID-19 pandemic and related impact on future financial results remains uncertain, we believe our strong liquidity puts us in a favorable position to mitigate unexpected impacts in the future.

Accordingly, we remain committed to maintaining and continuing to improve our overall cash and liquidity position. Before opening the call to your questions, I wanted to echo the sentiment shared by Terrence.

While there remains much work to be done at Nature's Sunshine, we are quite pleased with the progress we have made so far and look forward to continued strong results from our global growth initiatives. Now, I will turn it back over to the operator for Q&A.

Operator?.

We'll go to our first question from Steven Martin with Slater..

Can you hear me?.

Yes, we hear you. Little shaky..

Let me take you off – is that better?.

That's great. Thanks..

So I know you don't like giving any forecasts but you've now come through the bulk of the pandemic, can you – in broad strokes, talk about what you're expecting for the back half?.

I wouldn't necessarily say we've gone through the bulk of the pandemic, based on the trend line that we're seeing in the marketplace. But I'd say we are – I'm excited about the strategies that we have in place. I think there are – that I outlined. I'm excited about the key markets that we mentioned that are of going in the right direction as well.

We still have to get through the implementation of these strategies and get them kind of landed successfully. But we've got great distributors. They're focused. I think we've got the best distributors in the world. Our practitioners in the U.S.

business are some of the smartest, most capable, most loyal people out there, and they are just – and I know that for a fact. We've had some meetings with some other outside experts, and they're so impressed as I have been with our people.

So Steve, I think we're doing everything we can to keep the momentum going and to build the foundation for growth for the future. But again, I still view there being a lot of uncertainty in the markets around the world, especially in Asia, especially in LATAM, even here in the U.S.

But again, we're trying to give ourselves a chance to win and a chance to compete..

Well, you know I'm not going to let you off the hook quite that easy. So when you look at the monthly progression of sale, I assume April was the worst of the three months.

Is that a fair assumption?.

It's Reasonably. Directionally, it's a reasonably fair assumption. But I wouldn't say, Steve, not to jump ahead. But I wouldn't say that it's – the trend line is – shows substantial upward movement over the quarter. There is an upward trend over the quarter, but not dramatic..

Okay. With respect to SG&A, there were a lot of ins and outs this quarter. And when you look at SG&A for the – and I know you've got a lot of initiatives kicking in, in the third quarter. And you had the VAT and you didn't have meetings. Give us some parameters on where SG&A should be. You were at $31 million for the first quarter.

You were at $28.5 million for the second quarter.

Within that range, what should the third and fourth quarter look like?.

Steve, as I think you know, we don't give that level of guidance. We don't give much guidance at all, as you know. But I would say directionally, let me just say, from an overall standpoint, we're pleased with the favorable trends we're seeing, even with the ins and outs in SG&A.

We clearly have an initiative to reduce SG&A as a percent of sales going forward. And that initiative was launched back a couple of years ago, and we're starting to clearly see some of the benefits of that even with, again, some of the ins and outs related to the pandemic.

But I'd tell you in regards to the second half is you can't look at any given quarter and somehow measure SG&A because there can be adjustments, fluctuations due to the level of events or that type of activity that's going on. And obviously in the second quarter, there wasn't much of that activity. The third quarter, there may be a little bit more.

So that in and of itself may lend itself to potentially some uptick as a percent in SG&A. At the same time, there's still a lot of uncertainty as to how exactly sales will play out in Q3 and Q4.

So while there may be, from a dollar standpoint, some uptick, it doesn't necessarily mean that as a percent of sales that you would see a meaningful increase..

I'm going to try it a different way. Looking at cost of goods sold and SG&A as baseball games.

Where are you in terms of ringing the costs out?.

Not using the new double-header format of the major leagues where those are seven-inning games. Using a typical baseball game analogy, I would say, we're in the sixth, seventh inning. Let me just jump to the operating income or EBITDA margin, Steve, frankly. Obviously, we have a lot of initiatives.

You're seeing the significant improvement in operating margin and EBITDA margin, but we're not done yet, okay? The longer-term pool and targets north of where they currently are. So to use, again, in reference to your baseball analogy, are we in the seventh inning stretch? I don't think so.

But we're also past the fourth, fifth inning, okay? All right..

Well, at the end of the day, you've done a great job taking the costs out, and I appreciate the sixth, seventh inning analogy. What really is going to drive the margin is top line growth because it's still – you've done a great job with sort of flattish kinds of revenues.

But the real – I think the real leverage into double-digit margins is going to come when you can translate all this – all what you're doing into topline growth. And along that line and changing subjects, if you can't get LATAM up and running or functioning better soon, time to cut your losses.

Too much attention, too much time, too much money for a market that just at the end of the day, I don't think there are too many countries there that are too screwed up. So let me ask one last question, and I do this every quarter. You're now up to $70 million. You were worried a year, a year and a half ago about consistent cash generation.

I would say your cash generation is pretty damn consistent. If you have a back half of the year equivalent or approximately equivalent to the first half of the year, you're going to be looking at $90 million of cash. You're going to be – you have no debt. You've got 20 million shares outstanding.

And I know you have some very smart people on your Board, and I'd like to know when somebody is going to do something with respect to reinstating the dividend or buying back stock or buying a slug of stock from your Chinese investor or something, but it is not productive at the end of the year to be sitting with $90 million worth of cash.

And I hope your Board members and control shareholders are listening..

Yes. It would be inappropriate for us to kind of, I guess, comment on anything that the Board hasn't announced. But again, right now in this environment, our strategy is to – and as you know, we have our one facility here in Spanish Fort serves our business around the world.

And so kind of in a COVID sensitive world, we are holding onto our cash and being cautious and being – playing it safe right now. But again, I think we're having – let me just say, we're having all the appropriate discussions at the Board level.

Joe, would you like to add anything to that?.

No, I think that sums it up. Steve, it's a fair question. But clearly, given the situation, and the uncertainty – well, I hope what you touched on earlier that maybe we're past the fifth or sixth inning on the pandemic. I don't know whether we are or we aren't, frankly. So – and until we see a little more light at the end of that tunnel.

As I noted in my comments, I believe our current position is to maintain and continue to build on our liquidity such that we'll be very well positioned if some unfortunate situation does arise. Having said all that, again, it's a fair comment for a question, and those conversations will continue to take place at the Board level..

Well, rest assured, I'm going to continue to ask the question..

Appreciate it..

All right. Thank you very much..

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

Okay. Well, again, once again, I want to thank everybody for listening to today's call. We look forward to speaking to you again in the future on our third quarter results. But again, in the meantime, stay safe, and thanks for all your support, and thanks for joining us. Have a great day..

Thank you..

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