Natures Sunshine Products Inc Q3 FY2021 Earnings Call

Good afternoon, everyone, 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 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, and what we call the Right Stuff are already delivering exceptional results as shown by our top-line growth and margin expansion. We expect margin improvements to continue as we make ongoing improvements in 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 operating business units 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. Our workplace and employees were the recipients of multiple awards this quarter, including Happiest Employees by Comparably, and two of our leaders, Kelly Rich and Tracee Comstock, received American Business Awards for being accomplished women in business. We're extremely proud of our people and these achievements. Now I'd like to share a few highlights from each of our operating business units. In North America, sales were flat in the quarter following a challenging year-over-year comparison as distributors stocked up on product last year in anticipation of launching the new business model. I'm happy to say that now that we're a year into the new business model, we're very pleased with the upgrades that we've made to the business. NSP U.S. was up 0.3% versus the prior year due to the surge ordering from the distributors last year. However, looking ahead, we expect to finish the year strong, delivering impressive performance for the full year. Our digital initiatives continue to build momentum, exceeding expectations for the quarter while sales from our Subscribe and Thrive AutoShip program increased 35% versus the prior year. As I've mentioned in the past, Subscribe and Thrive orders offer significant benefits. So we're listening to our consumers and practitioners' feedback and fine-tuning and upgrading the customer experience, which will dramatically enhance the new customer journey starting later this year. Once again, we're very pleased with our progress in the U.S. and are ahead of where we thought we'd be at this time. In Canada, third quarter sales were up 5% in local currency, driven by an intensified focus on customer growth. The Canadian market continues to expand its AutoShip program and recently launched its Direct-to-Consumer initiative. Additionally, the launch of the new Synergy website is on track to launch in the U.S. in the fourth quarter, and we will be rolling out a new affiliate program for the Synergy business in the first quarter of 2022. Moving to Asia, sales for the quarter grew 24% in local currency, driven by a 36% growth in Japan and a 19% growth in China on a local currency basis. Our largest market in Asia, South Korea, had a sales decline of 6% on a local currency basis due to pandemic-related challenges. Our Korean business is built on a strong foundation of sales fundamentals and offers excellent potential, but the government-imposed COVID restrictions have created some short-term challenges. We expect the business to gain momentum in Q4 and deliver a strong finish to the year as South Korea's AutoShip program has continued to expand, increasing 32% for the third quarter versus the prior year, and we'll also be launching targeted initiatives to drive order growth. In China, we continue to deliver solid double-digit growth with the market reporting a 19% sales growth in local currency. Our focus is on building omnichannel capabilities and creating an improved digital toolkit. The focus appears to be paying off as we continue to see positive customer growth from several important digital platforms. Overall, we are extremely pleased with our progress in China and believe we still have tremendous growth potential in the market. As such, we'll continue to invest in the business to drive new and existing customer growth. In Japan, the reported sales growth was 36% for the quarter and 39% year to date, driven by strong order growth and a steady stream of new customers signing up to join our AutoShip program. AutoShip subscriptions in Japan were up 13% in the quarter, and we expect that the addition of these new subscribers will pay dividends moving forward, especially when supported by strong execution of field fundamentals. Finally, as mentioned last quarter, we're aggressively focusing on field fundamentals in Taiwan. This, along with friendly competition between distributors vying for top-tier positioning, led to sales growth of 423% on a local currency basis during the quarter. We look forward to driving continued growth across Asia. In Europe, we delivered another strong quarter with 21% sales growth on a local currency basis. The growth was led by our markets in Central and Eastern Europe, where our strong omnichannel approach has allowed us to overcome the negative effects of COVID. Sales in Russia were up 29% in local currency, driven by strong customer growth and improved digital activation from increased investments in social media influencers. In Poland, sales increased 21% on a local currency basis, and year to date, the business is up 36% in local currency as we continue to demonstrate the market's strong potential. Looking at Western Europe, sales were down 3.5% in local currency. However, we are still in advance of the launch of our transformation initiatives in Europe. Moving forward, we believe that our plans to relaunch the business in Western Europe will create significant growth opportunities, and we expect to start seeing positive momentum building in Q4 as we launch our Phase 1 transformation initiatives starting later this year and continuing throughout 2022. The relaunch will include the introduction of a new rebranding initiative, a stronger digital platform, the launch of a new consumer-driven website, and the introduction of some of the key elements from our award-winning business model that we launched in North America and Latin America last September of 2020. Finally, in Latin America, third quarter sales increased 1% in local currency, marking our fifth consecutive quarter of growth in the region. We saw a temporary interruption to some of our customer growth initiatives due to resurgent COVID restrictions. Year to date, however, our business in Latin America is up 18% versus the prior year in local currency, and the business has responded very well to our transformation initiatives. So we're pleased with the progress that we've made in Latin America, and I'd like to remind everyone that we're still on the front end of the transformation and continue to believe that Latin America offers significant growth potential. The strong performance across all of our operating business units demonstrates how our growth strategies are improving our ability to attract new customers while also improving sales and profitability. A meaningful part of our execution plan includes getting feedback and monitoring performance to help us fine-tune and realign our key initiatives to improve their effectiveness. And I'm proud to say that everyone at Nature's Sunshine is dedicated to keeping this positive momentum going. Now I'd like to move on to discuss our progress on our five global growth strategies, and I'm going to start with brand power. The packaging and marketing collateral updates that we've made are receiving a strong reception from customers and distributors alike, and we expect the Nature's Sunshine rebranding will be completed for all of our markets by the end of 2021. In our Synergy business, we're making progress with the rebranding initiatives that will refresh and reposition the business for future growth. The end-to-end rebranding will focus on all aspects of the business and is designed to strengthen our ability to attract and retain customers focused on an active lifestyle. Lastly, on brand power, our Force of Nature campaign is another important strategy that continues to be effective at driving activation for both existing and new customers. In summary, we're seeing a positive response from our key stakeholders and believe that our brand power initiatives will continue to play an important role in our business moving forward. On Field Energy, our North American and Latin American operating business units are in the process of fine-tuning and introducing Phase 2 enhancements to improve the consumer appeal of key programs like Subscribe and Thrive and the affiliate program. We're also on track to introduce some of the key elements of the new business model into our Western European markets later this year. As I stated on the last earnings call, we continue to gather data to understand which initiatives in the model are most effective. Subscribe and Thrive is one initiative that is proving to be a successful strategy delivering sustainable benefits. The number of orders with Subscribe and Thrive products continues to increase. And as mentioned last quarter, we believe there are still meaningful opportunities to increase consumer engagement. Our affiliate program is another important initiative that will see increased attention in coming months. The program consists of a growing number of enthusiasts that are using our products and then sharing and recommending them through their social network to friends, family, and acquaintances. Now that we've had an opportunity to review the program over the past few quarters, we feel confident about more aggressively promoting the program in the market. Turning to Digital First, Direct-to-Consumer is proving to be a more attractive opportunity than we originally expected as early results have been very positive. By the end of the year, we will have accumulated just over three-quarters of data on consumer sales trends, and we will be mining that data to identify trends, patterns, and modalities to help us garner insights to more effectively drive customer growth and accelerate Direct-to-Consumer growth in the future. Leveraging this data, we will continue to invest in new customer acquisition and plan to accelerate our investments in 2022. One of the most dynamic elements of our digital-first strategy is the launch of our new personalization initiative that will be kicking off later this month with a limited test to ensure proof of concept. As a reminder, personalization allows our distributors to offer customized solutions to their customers via personalized pill packs based on each customer's individual health needs or goals. The pill packs will be conveniently packaged into morning, afternoon, and evening packs and will automatically be shipped to the customer's home each month. Over time, the program will also allow customers to build their own personalized nutrition plans by answering a simple questionnaire. This will give us access to an entirely new group of customers who want to have the best products and program in the market but also want to choose how they access our brand based on their personal preferences. Overall, we believe personalization is a unique opportunity to revolutionize the customer experience. And we are extremely excited to help more people experience the healing power of nature when we launch the program later this year. Moving to Manufacturing Inc. Our manufacturing and quality teams continue to deliver the highest level of quality and purity available. They're doing a great job addressing and overcoming the challenges from the global supply chain issues. We continue to effectively manage these challenges by consistently working to stay ahead of demand to minimize the impact on our business. As we've shared previously, we started taking action even before others were really talking about the global supply chain crisis because we wanted to ensure that we stayed ahead of the situation. As such, we continue to aggressively invest in inventory to help protect our forecasted sales growth. Now as you know, at Nature's Sunshine, we take great pride in our industry-leading manufacturing capabilities. It's part of what makes us unique and special. We believe that if you're serious about nutrition and creating the best supplements in the market, then you manufacture your own products. We're one of the few companies to do that. As I shared last quarter, we're excited to be upgrading our manufacturing capabilities in 2022 with new state-of-the-art high-speed equipment. The new equipment will further upgrade our capabilities, improve productivity, and strengthen the reliability of our supply chain. As a reminder, our small batch processing allows us to respond quickly to shifting supply and demand trends and gives us the ability to use rare and superior-grade ingredients like wildcrafted herbs and botanicals. Unlike the mass-marketed and bulk-produced products in the market, Nature's Sunshine expertly crafts each product to deliver the freshest and most potent supplements available, the results that you can feel. Finally, we continue to make progress in building a high-performance organization through our Right Stuff initiatives. In the third quarter, we continued to deliver historic improvements to our profitability. Operating profit increased a significant 83% up to $10 million, while operating margins improved 320 basis points. Similarly, adjusted EBITDA increased 38% to $12.9 million for the quarter, representing the largest third-quarter profit in the history of the company. EBITDA margins increased to 190 basis points. As we move forward, we've tightened our plans to strengthen profitability, and we remain committed to delivering continued improvements in the future. Looking ahead, we expect our business to continue to deliver strong results as we execute our five global growth strategies and leverage our strong financial and operating foundation. Rest assured that as we continue to make progress in the business, we're also looking closely at our capital allocation strategy to ensure that we're effectively putting our capital to work, which Joe will discuss in more detail shortly. In closing, we're on a journey to transform Nature's Sunshine, and despite being in the early stages, our results during the quarter and in the past year have shown that we've made tremendous progress and are building momentum for the future. With that, I'd like to turn the call over to Joe, who will walk you through our third quarter 2021 financial results in more detail. Joe?

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 the 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, rebuilding efforts, and success with growth initiatives. 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. 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% increase on a local currency basis. The increase is primarily due to the continued success of our transformation initiatives in Latin America, including the changes in our business model and the increased market demand for our products. Gross margin improved approximately 150 basis points to 74.4%, compared to 72.9% in the prior-year period. The increase in gross margin is primarily attributable to changes in market mix, including growth in China and inventory obsolescence reserves recorded in the prior year. Volume incentives as a percentage of net sales were 31.2%, compared to 34.2% in the year-ago quarter. The decrease is primarily due to changes in market mix and growth in NSP China, where volume incentives are included in SG&A. The decrease also reflects overall cost savings from the September 2020 launch of our new consultant sales and compensation plan in North America and Latin America. Selling, general and administrative expenses were $39.5 million, compared to $33.3 million in the year-ago quarter. The increase was primarily attributable to higher costs associated with the implementation of business transformation initiatives, growth in markets with higher variable costs, and as previously noted, sales growth in China. As a percentage of net sales, SG&A expenses were 34.4% in the third quarter of 2021, compared to 33.2% in the year-ago quarter. Excluding the impact of value-added tax refunds, SG&A expenses as a percentage of net sales increased to 35.1% in the third quarter of 2021, compared to 33.1% in the year-ago quarter. Operating income for the third quarter increased 82.9% to $10 million or 8.7% of net sales, compared to operating income of $5.5 million or 5.5% of net sales in the year-ago quarter. GAAP net income attributable to common shareholders for the quarter was $4.9 million or $0.24 per diluted share, compared to $6.8 million or $0.34 per diluted share in the year-ago quarter. The year-over-year decrease is primarily attributable to noncash foreign currency losses in the current year and a favorable effective income tax rate in the prior year. 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 38% to $12.9 million in the third quarter compared to $9.4 million in the year-ago quarter. Shifting to a discussion regarding our liquidity and capital allocation plan. We had cash and cash equivalents on September 30 of $75.5 million and $2.7 million of debt. For the nine months ended September 30, we generated $20.3 million of cash from operations compared to $26.8 million in the prior-year period. We remain very healthy from a cash flow perspective. But as a follow-up to the decline in operating cash flows, it's important to point out that during the quarter, we had inventory levels that were $9.7 million higher than the prior-year period, primarily reflecting an increase in raw materials and finished goods. We dynamically managed our inventory levels to meet demand and mitigate supply chain challenges, as Terrence mentioned. These efforts are ongoing. Additionally, our cash position reflects the impact of our share repurchase program. Share repurchases are one important piece of our capital allocation plan, which has the ultimate goal of increasing shareholder value. Year to date, we have repurchased 350,000 shares at an aggregate cost of $6 million. Beyond share repurchases, our capital allocation plan supports investments we are currently making and plan to make as part of our business transformation. These investments are expected to modestly increase our costs over the next few quarters, but we expect the long-term benefit of these investments will allow us to sustain our growth and drive further operational improvements for years to come. As we go forward, we are continuously assessing the capital allocation plan and are conversing as a management team and with the board to look at a variety of alternatives, both organic and inorganic, to ensure we are using our capital to the greatest extent to drive customer acquisition and activation and increase total shareholder value. Before we jump into Q&A, I want to wrap up by saying that our team did a great job pulling off another record sales quarter for the third quarter. As I stated last quarter, the second half of 2020 represented a tough comp for the second half of this year. So I want to thank all our team members for continuing to execute on our strategies. We look forward to sharing continued growth for the last quarter of 2021, and we'll continue to work closely with our team and partners to mitigate supply chain and pandemic-related challenges. Now I'll turn it back over to the operator for Q&A.

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 do you expect those to lift? Or can you just give us a little bit more color?

Yes. As you mentioned, it varies by market. First, it's important to note that our business operates quite differently from the companies you referenced. Our omnichannel strategy and consumer focus enable us to engage more effectively with our customers. In some markets where we haven't fully developed our capabilities, we face more restrictions. These restrictions can vary significantly between locations. In countries like Ecuador and Colombia, when lockdowns occur, they are comprehensive, affecting transportation and public services. Additionally, Korea has its own unique challenges due to its historically face-to-face business practices, which have been impacted by restrictions limiting gatherings. Smaller markets, such as Thailand and Indonesia, have also faced difficulties, but these did not significantly affect our overall results. Overall, we are managing to navigate through these challenges. Our strategic strengths and positioning have helped us endure these circumstances. Does that address 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.

So it was double digits 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 the fourth quarter on the 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. So I think what we're seeing is just good, solid, 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 that Synergy relaunch is 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. 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 quite good and quite exciting. So that's a global change, 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. 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. 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 bringing into the facility that will help us improve and dramatically improve productivity. We'll also look to do strategically 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 currently the U.S. initiative. We're integrating it into our overall digital strategy. It's interesting because instead of handling 10 bottles, the machinery will package 10 different pills or items into individual packs. We have the systems and machinery needed to automate this entire process, which will simplify things for us and help reduce costs. We'll start gradually to avoid overwhelming the system. I've received feedback from some early distributors who are documenting the transformation from a large, messy pile of bottles to a single packet that replaces it. It's quite exciting, and we can easily scale up our capacity if necessary.

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 will need to follow up on that. I don't have that information available at the moment. The programs are still new, and the growth figures I mentioned previously are compared to the prior year. However, I did mention the percentage of orders that include a Subscribe and Thrive product. In October, we reached approximately 40% in the U.S. business. This indicates that not every product in those orders was a Subscribe and Thrive order, but with 40% of orders or customers including a Subscribe and Thrive product, it shows they will be returning next month as well. This is a significant achievement for us, and it's exciting.

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 discuss SG&A, and you mentioned in the press release that there are three components to that. If I understand correctly, we expect SG&A to increase in relation to the Chinese compensation, which is a positive development. However, you also mentioned costs related to the business transformation. How long do you expect those costs to persist, or are they likely to be more permanent rather than temporary? What insights can you provide on this?

I believe we will be investing in areas like personalization and our direct-to-consumer initiatives, along with other customer growth strategies, for several quarters. We may need to incur some costs ahead of growth because the return on those investments can be significant. We will have additional initiatives to help support this investment. We are committed to growing our margins moving forward. The business will continue to see improvements in operating margin and EBITDA margin growth, but we will also invest in growth where it makes sense. Our current analytics indicate that digital investments are highly promising for us, personalization presents a major opportunity, as do campaigns like Subscribe and Thrive and our affiliate program. All of these initiatives have strong potential for future returns.

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, I would like to concur with Terrence's points. To add briefly, our operating margin year to date in 2021 is just over 8%, and the third quarter was closer to 9%. As we look ahead to 2022, we expect our operating margin to improve compared to 2021, even with some increased spending on various initiatives.

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 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?

What I want to emphasize is that the increase is not necessarily negative; it indicates we're still experiencing growth. Currently, we're around $57 million. Will that increase over the next two or three quarters? Possibly, but we do not anticipate any significant rises. A substantial portion, 60%, of that increase is due to raw materials. We're working to address that along with the challenges of getting those materials delivered. This should help stabilize that side of things, although there may be some slight upward movement. Overall, you can expect it to start leveling out.

It's an important initiative, Steve. With Japan growing over 30 percent, China consistently around 20 percent, and Taiwan over 400 percent, we can't afford to be caught off guard. This approach feels right for us, and we are confident in it. We aim to stay proactive.

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

No, no, no.

I was just really asking if 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 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 the right product at the right time. That's something that historically, if you 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. So that's the focus of what we're trying to do now. It seems like those new products are doing quite well for us.

Good. Regarding G&A, I want to focus on the corporate component while excluding marketing and other expenses related to revenue growth. Can you clarify how that is changing—whether it’s growing, staying flat, or declining—since that will be crucial for your leverage moving 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 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 going forward, we may add some additional folks and so forth. But we're already starting to leverage our fixed overhead with the sales growth. 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 question, and I realize you may not want to discuss this, but I have one more before the final one. Last year, in the fourth quarter, you mentioned some additional spending which clearly benefited the business in 2021. As we approach the fourth quarter, is there anything unusual we should anticipate? This leads into my ultimate question, acknowledging that you prefer not to provide guidance and that Linda has already asked some fourth-quarter questions. Should we expect the fourth quarter to resemble the third? I’m trying to figure out how to ask this without being direct, but I’ve been trying for years.

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, I don't anticipate anything incremental as a percent, okay? Certainly, it'd be pretty modest. So directionally, I would think more in terms of the quarter just ended versus the fourth quarter of the prior year. Does that help?

Yes, that helps. Considering we are almost halfway through the fourth quarter and with additional market closures related to COVID, how does the fourth quarter appear from a market closing perspective compared to the third quarter?

Market closings, I mean, obviously, 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, halfway, well, not halfway, but partway through this fourth quarter, we're not seeing anything 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.

I would agree with that.

Yes, I think directionally, that's fair.

Absolutely.

Would you say that, from a top-line perspective, it has been the biggest decline compared to what it would have been without the pandemic?

I would agree with that.

Yes. 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 for 2021 in March. So again, thank you for joining us, and take care. I 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.