Nature’s Sunshine Products, Inc. (NASDAQ:NATR) Q1 2022 Earnings Conference Call May 5, 2022 5:00 PM ET
Nathan Brower – Executive Vice President and General Counsel
Terrence Moorehead – Chief Executive Officer
Joseph Baty – Chief Financial Officer
Conference Call Participants
Linda Bolton-Weiser – D.A. Davidson
Steven Martin – Slater
Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Nature’s Sunshine’s Financial Results for the First Quarter Ended March 31, 2022. Joining us today are Nature’s Sunshine’s CEO, Terrence Moorehead; CFO, Joseph Baty; and Executive Vice President and General Counsel, Nathan Brower. Following the 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 cautious regarding forward-looking statements.
Nathan, please go ahead.
Yes. Thank you. Good afternoon, and thanks for everyone joining our conference call today to discuss our first quarter 2022 financial results. I’d like to remind everyone that this call is available for replay by telephonic dialing through May 19 and through a live webcast that will be posted in our Investor Relations portion of our website at ir.naturessunshine.com.
The information on this call, may contains certain 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 forward-looking statements.
Factors that could cause results to differ materially from those implied in this call 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 information on this call speaks only as of today’s date, and the company disclaims any duty to update the information provided here in.
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. We appreciate you being here with us as we discuss our first quarter 2022 results. The operating environment we faced to start the year was certainly more challenging than any other quarter in our past. The lingering effects of COVID-19 and the Shanghai shutdown, the devastating war in Ukraine, an intensifying supply chain crisis and rampant inflations were a unique combination of headwinds we had to navigate in the first quarter.
Despite these unprecedented challenges, first quarter sales growth was strong up 10.3% in local currency versus prior year, reflecting the strength of our brand and the steps we’ve taken to build momentum in the business. We’re very pleased with our top line performance, especially given the heightened uncertainty and challenges to the market.
Our mission to share the healing power of nature with more people across the globe is undeterred, and it continued to show in our top line results. The first quarter was our seventh consecutive quarter of year-over-year net sales growth. First quarter adjusted EBITDA was $8.2 million negatively impacted by the confluence of headwinds, I discussed earlier.
Cost of goods was impacted by unplanned inventory reserves that were a direct result of the unique external factors impacting the business. SG&A also increase as we continue to invest in the business funding our Digital First initiatives and Field Energy programs designed to reengage distributor facing activities. All of our investments support our commitment to deliver long-term sustainable growth. Backing off now would impede our ability to keep the business moving forward.
Given the current headwinds, we are currently pleased to be discussing double digit year-over-year sales growth. That said, as the tail of the first quarter – as the tail end of the first quarter and April played out, we saw the headwinds have a more significant impact on the business and believe there is risk – there’s increased risk associated with our full year expectations. We’ll talk more about that later.
But I want to give you a better sense of what’s behind the first quarter growth by sharing a few highlights from each of our reviews and discussing some of the key drivers impacting performance. Asia Pacific continues to drive top line growth, with net sales up 34% in local currency, with the 251% increase in Taiwan, a 46% increase in China and a 33% increase in Japan.
In Taiwan, our highly motivated team of distributors continue to compete for the top position driving order growth through new customer acquisition. With a sales increase of 251% in local currency. The focus on field fundamentals is paying off as distributors are more focused on building and managing customer relationships.
Overall, we’re extremely pleased with the progress we’ve made in this market and we look forward to continued growth in 2022. In China, we saw first quarter sales increase 46% in local currency, despite the pressures brought on by the COVID-19 shutdowns in Shanghai. Our manufacturing and distribution facilities are located outside of Shanghai and were largely unaffected by the shutdowns, thus allowing us to produce and deliver products to customers around the country.
It’s still unclear when the government will lift the current wave of COVID lockdowns. So we’ll continue to leverage our digital toolkit, building omni-channel capabilities and improve our social media presence using tools like TikTok to drive growth and keep the business moving forward. Notwithstanding the likely short-term impact of the COVID-19 restrictions, we believe we still have tremendous growth potential in the Chinese market.
Moving to Japan, we report our ninth consecutive quarter of year-over-year growth, with sales up 33% in local currency. We continue to see exceptional growth driven by strong fundamentals and the continued success of our Subscribe & Thrive auto-ship program that promotes order growth with every new customer acquisition.
In South Korea, the team continues to deal with the pandemic restrictions and in the first quarter they also had to deal with several top distributors being diagnosed with our Omicron. Despite the challenges, sales were relatively flat, coming in down 0.3% on a local currency basis.
Looking ahead to the second quarter, the government has announced that meeting restrictions will be lifted and the team will be able to conduct face-to-face meetings for the first time in two years. This is a significant development and we’re also excited to be able to reintroduce some of the tried and true field incentives that it was certainly motivated our Korean sellers to drive sales. We believe these initiatives, along with several new product launches, will help put South Korea on a positive path to growth.
In Europe, first quarter net sales were surprisingly resilient, coming in almost flat, down 0.6% versus prior year on a local currency basis. The war in Ukraine is a significant challenge, with considerable impact across the region. It’s been devastating and heart wrenching to witness the violence that’s plagued the region over the past two months.
Our first priority continues to be supporting the Ukrainian people during these challenging times. Through our Impact Foundation, we made charitable contributions to ensure that our friends and partners in Ukraine had critical lifesaving resources. And we will continue to be supportive through our foundation. Thankfully, our key associates are all safe and accounted for and we are in regular contact with our team.
Most of whom have relocated away from the most dangerous areas of the country. Our distributor is also staying in close contact and some are holding calls and using social media to communicate and support each other. Many of our distributors have been displaced to Poland and Turkey and have been – and have expressed an interest in continuing their business in their new host country.
As you know, we already have a strong business in Poland that is perfectly capable of supporting a large influx of new distributors. And we will continue engaging these distributors to help keep them active in the business. Last year, we also opened a new sales center and office in Turkey. That will be an excellent opportunity for distributors that have relocated to this dynamic and growing market.
Turkey has a population of over 70 million people and a thriving nutritional supplements industry. We entered the Turkish market to capture new opportunities in the region but will now have a chance to support our displaced distributors and their families. We believe the Turkish market offers good potential for the business and may be able to offset some of the negative sales impact from Russia and Ukraine.
Of course, there is still a significant amount of uncertainty in the region and in the near-term, we expect to see a significant decrease in the Russia-Ukraine business. But there is a very real opportunity to recover some portion of that through the migration of distributors and the expansion of Turkey, as I mentioned earlier.
Given the developments in Ukraine and its impact on the surrounding area, we plan to only provide insights on central and eastern Europe as a whole moving forward. We believe this will provide a more relevant and accurate picture of how the business is progressing. Despite the challenges and disruptions to the business in Q1, Central and Eastern Europe grew 4.6% versus prior year in local currency.
The growth was driven by day-to-day tactical measures focused on fighting inflationary pressures impacting consumer spending and activating displaced customers in the region. Targeted promotional discounts and local sales meetings are examples of the tactics used to help stimulate activation in the quarter. Importantly, consumer behavior is still evolving and the go forward operating environment is highly dynamic.
Moving to Western Europe, we could see the ripple effects of the war in Ukraine as energy prices reached record highs, crowding out some discretionary spending for many consumers across Western Europe. Eurozone energy prices increased by more than 30%, while the UK saw energy prices increased more than 50% versus the same time last year.
These headwinds negatively impacted first quarter demand and sales in Western Europe were down 15% in local currency. Remember during the first quarter, we still had not implemented the planned re-launch of our Western European business. Western Europe represents 60% of the nutritional supplements market in Europe, but only represents about 14% of our European sales.
As I mentioned in the past, transforming our business in Western Europe is an important priority, but we’re still in the beginning stages of the process and expect to have a new website, our Subscribe & Thrive auto-ship program, an affiliate program, and fully represent – a replicated distributor website up and running by mid to late Q2.
By the end of Q3, we’ll start phasing in our new rebranding initiatives and by Q4, we plan to kick off our initial DTC campaigns with an expanded and upgraded product portfolio targeting new consumers. These are powerful initiatives that will strengthen our competitiveness, improve consumer appeal, and help us penetrate the large and growing nutritional supplements market in Western Europe. Fortunately, the market has the potential to be a much larger contributor to our portfolio over time.
In North America, the positive increase in orders and strong DTC customer growth was offset by average order declines from existing customers negatively impacted by product shorts and inflationary pressures. In the first quarter, sales decreased 4.7%, due primarily to a shortage of raw ingredients that prevented us from filling certain customer orders.
We estimate that our inability to source these key ingredients negatively impacted our North American net revenue by $2 million to $3 million, or about 5% to 8% of sales. Throughout 2021, our team was able to proactively mitigate port delays, raw material shortages and manufacturing constraints to meet demand while preserving our margins.
This was generally still the case in the beginning of 2022. However, as the quarter progressed, there was a sharp drop off in our ability to source a few key ingredients that make up the complex formulas in 40 to 50 top selling products. Not having these products, especially in a healthy selling environment, reduced net revenues in our North American business.
In addition to the supply chain issues, inflationary pressures may be impacting consumer behavior, with some consumers becoming more price sensitive. While buying patterns may be temporarily impacted, we continue to experience healthy order growth, reflecting the momentum we’ve created from our digital initiatives, our Subscribe & Thrive auto-ship program, and the continue to focus on our five global growth strategies.
As an example, a closer look at Subscribe & Thrive reveals that 45% of our orders included a Subscribe & Thrive product in the first quarter. What’s more, 47% of our direct customers – excuse me, 47% of our direct customer sales came from Subscribe & Thrive in Q1. As these percentages continue to increase, we expect to see even stronger customer growth and stability over time.
The near-term challenges that we’re seeing in the market are significant. However, we believe our strategies are moving us in the right direction and that there’s still significant growth potential for our business. As such, we continue to invest ahead of growth and fine tune our key initiatives to improve the customer experience and move us closer to our long-term objectives. We’ve also implemented a price increase that will take effect in the second quarter.
Finally, in Latin America, first quarter sales decreased 4% in local currency due to a product availability issue caused by a local regulatory change. The issue has been resolved, but the team was unable to sell a few key products for several months while the appropriate adjustments were made.
Despite the unexpected challenges, the business continued to respond well to the new operating model, strengthening field fundamentals and focusing on customer activation. Our new leadership team is in place and focused on scaling the business with an initial focus on penetrating the large and growing nutritional supplement market in Mexico.
With a population of almost 130 million people and a supplement market growing 10% annually, we believe Mexico alone represents a significant opportunity for growth. We’re currently in the process of recruiting a new general manager for our Mexican business who will be tasked with building a high performance team and implementing a strategy to penetrate the market.
Turning to our five global growth strategies. We continue to make strong progress and feel confident in our ability to deliver long-term sustainable growth with improved profitability. Instead of walking you through each of the five strategies as I normally do, today, I’d like to focus on just two of our strategies Digital First, Manufacturing Inc. As I believe, these are particularly relevant in the current business environment.
I’ll drilldown on our other key strategies in future calls when I can dedicate more time to talk about Brand Power and the synergy rebranding and the new mega branding initiatives we’re working on and Field Energy and the adjustments we’re making to our affiliate program and the ongoing inroads we’re making with Subscribe & Thrive, and The Right Stuff with some of the initiatives we’re pursuing to strengthen gross margins and improve overall profitability.
I’ll start with Digital First, where we continue to focus on strengthening our website and improving the customer experience. We’ve partnered with our development team on a comprehensive website optimization project designed to strengthen performance and functionality.
We’re implementing new shop, products, and checkout pages to create a more appealing consumer experience and improve conversion rates. For example, we’re working to improve our contextual search tools to make it easier and faster for people to find the right product. We’re also making it easier for people to share products on their social network. Importantly, we’re also looking at ways to make the decision to sign up for Subscribe & Thrive our auto-ship program a more obvious risk free choice.
With our DTC business, sales exceeded expectations in the first quarter as traffic to the website continues to be strong. We’ve continued to build our digital capabilities and as a result, DTC sales have steadily increased and currently represent about 16% of total sales in the U.S. We expect the ongoing refinements and evolution of our Force of Nature digital campaign to continue to drive customer growth while the expansion of our newly developed CRM capabilities improves customer activation for new and lapsed customers.
Our DTC business through Amazon also represents a significant opportunity and is still relatively untapped. To give you a sense of the potential right now, due to our social media and CRM activities, our chlorophyll product hold the top three position among all chlorophyll products on Amazon, and there’s still significant potential for us to replicate that performance with other products in our portfolio.
Overall, we’ve made excellent progress on our DTC strategy, attracting new customers while also reactivating lapsed customers. The team in North America has done an outstanding job building our proof of concept and laying the groundwork for our DTC expansion into Western Europe later this year. Remember, all of our distributors have their own replicated websites, social media engagement tools, sharing tools, and have access to the same consumer facing assets that we use. So they have everything they need to build their own digital businesses. Over the next three years, our goal is to grow DTC to over 30% of our business. And as you can see, we’re already making good progress.
The next exciting chapter of our Digital First story is personalization. Right now we’re still in beta with our distributors, but we’re on track to launch the program to consumers in the latter portion of 2022. Personalization will allow customers to take charge of their own health by creating their own customized health programs.
Each program is based on the consumer’s individual goals and health needs. Designed by herbalists, physicians and nutritionists, our unique health assessment uses body system analytics to determine the unique components of each customer’s program. With over 600 products in our portfolio versus 78 to 80 products for our competitors, Nature’s Sunshine is uniquely qualified to provide personalized solutions for customers. And that’s exactly what our incredible retailers and practitioners have been doing for 50 years. We have more experience than anyone else out there in this area.
Moving to Manufacturing Inc, we continue to set the standard for world class manufacturing, quality and reliability. But the increased instability in the market, along with the ongoing global supply chain challenges, have made sourcing and logistics more difficult than ever.
Throughout 2021, we were able to avoid major supply chain issues by investing in inventory ahead of sales to meet the increased demand for our products. In the current environment, we’ve started to see more raw ingredients shortages and instances where the available materials are unable to meet our demanding specifications. Again, these are relatively new challenges that are generally unpredictable in nature. In response, we’re intensifying our focus on all aspects of our sourcing process.
For example, we’ve expanded our supplier base, identifying more reliable second and third tier backups for key ingredients. We’ll also be looking to build vertical farming relationships to shore up supply. And we’re and we’re going to tighten up our S&P process to ensure we have appropriate cross-functional alignment and integration. We believe these initiatives will help normalize and improve supply chain performance over time.
Our plan to upgrade and automate our manufacturing facility, along with the expansion of our global supply chain footprint, will provide additional performance enhancements. We’re currently conducting an independent facility review to ensure we’re not only maximizing the efficiency and effectiveness of our current manufacturing space, but that we also maximize the potential of the new state of the art solid dose, liquid, and powder lines we plan to install. Importantly, our goal is to expand and diversify our capabilities while reducing costs. To drive these initiatives forward and take our supply chain to the next level.
We’ve made an exciting change to our organization. Effective May 16, Martin Gonzalez will join Nature’s Sunshine as Executive Vice President of Global Supply Chain and serve on the company’s executive committee. Martin joins us from our reforming, where he served as Vice President of Operations and Excellence and brings over 30 years of supply chain experience from such notable companies as Unilever, Molson Coors, SABMiller and Sara Lee. He has a proven track record of leading successful transformations and delivering both savings and growth through supply chain improvements.
We’re excited to welcome Martin to Nature’s Sunshine and are confident that his experience, attention to detail and dynamic leadership will help will help transform our supply chain capabilities. All of these changes are important, but our commitment to the environment and to improving our sustainability and transparency lay at the core of who we are, which is why I’m so pleased we’re aggressively moving this to the forefront of our business.
To start, we recently conducted a full assessment of our environmental footprint and greenhouse gas inventory, and the results were published in our inaugural ESG report earlier this year. The report can be downloaded from our IR website and outlines a series of goals designed to move Nature’s Sunshine toward an environmental leadership position in our industry.
Our initial goals include a 50% reduction in Scope 1 and 2 greenhouse gas emissions by 2025, achieving 100% renewable energy in our owned manufacturing facilities by 2023. Having zero waste in land – to landfill and at all of our U.S. distribution centers by 2025 and a 35% reduction in waste at our owned manufacturing facilities by 2025. These are just our initial objectives. But Nature’s Sunshine has been a force of nature for the past 50 years, and we’re committed to achieving our environmental, social and governmental goals – and governance goals.
Before I turn the call over to Joe, I just want to reemphasize our resolve to move the business forward in these challenging times. We’re committed to investing in our strategies and continuing the progress we’ve made, transforming the business, the entire team of Nature’s Sunshine is dedicated to deliver our long-term objective to drive growth and profitability in our business.
With that, I’d like to turn the call over to Joe, who’ll walk you through our first quarter financials in more detail and provide more insight into 2022 results. Joe?
Thank you, Terrence, and good afternoon, everyone. Before getting into specific financial details for the first quarter, I also want to share some overall thoughts regarding our expectations for 2022. For starters, over the course of 2021, we were increasingly more excited about the prospects for Nature’s Sunshine, for 2022 and more importantly, for the long term.
The fourth quarter of 2021 represented the sixth consecutive quarter of sales growth and for full year 2021, all four business units generated top-line growth. As reported, sales were 444 million, reflecting an increase of 15% versus 2020. We entered 2022 with targeted expectations of continued solid growth supported by our recent success, organic growth initiatives and overall market expectations for our health and wellness focused categories, among other factors. We were also very pleased with the as reported growth and adjusted EBITDA, amounting to $49 million for 2021. The increase reflected continuing operating and EBITDA margin improvement versus prior years and a very healthy level of liquidity.
We entered 2022 with expectations of continued EBITDA growth, primarily driven by top line growth expectations. We believed operating and EBITDA margins would improve modestly, primarily as a result of leveraging SG&A and reduced volume incentive expenses, partially offset by continued investment in long-term growth initiatives, including DTC marketing, distributor advance and market and initiative related personnel costs, among other considerations. Beginning in the first half of 2021, we recognized a certain level of inflationary and supply chain pressures on our business. Accordingly, coupled with our sales growth expectations, we consciously invested in and committed to higher levels of raw materials and finished goods inventories.
We were not successful in turning desired access to all key raw materials at year end 2021. But we were confident our continued pursuit of such in 2022 and beyond, coupled with the pending price increase, would address much of the perceived inflationary in supply chain costs and availability pressures we were anticipating. For much of the first quarter of 2022, our actual financial results approximated expectations. However, as commonly understood and as Terrence discussed, a number of events and conditions occurred and/or changed for the worse in the back half of the first quarter.
The events and conditions include, among others, the major Russia-Ukraine conflict, much more heightened inflationary and supply chain pressures, including double digit cost increases for many raw materials, expanded product availability issues, and increased transportation, distribution, and production expenses, expanded COVID-related lockdowns in certain markets, including China. Reduction in disposable income for much of the U.S., and for certain other markets population. And a strengthening dollar against many currencies as the back half of the first quarter and April it played out. We are recognizing the impact of our previous expectations for 2022.
Given significant future uncertainty relating to the current conditions, future actual results may be different. We do not and are not providing formal guidance, but I want to share overall directional commentary for 2022. At this time, given the fluidity of many of these issues, I’m not going to provide breakout by business unit. Current expectations for 2022, which can change, include the potential that top-line sales could reflect a low to mid-single digit decline versus the 2021 sales of $444 million.
In addition to the impact from the Russia-Ukraine conflict, we recognize our results in the U.S. and other markets are being negatively impacted by the heightened inflationary and supply chain issues. In addition, increased COVID concerns in certain markets, including the Shanghai, China, shut down pricing pressures and foreign currency exchange rates represent a risk to as reported sales. We are experiencing a meaningful increase in transportation, distribution, and production related expenses above and beyond the impact of inventory related charges for the first quarter. Our cost of goods sold rate reflected a full point to point and a half of erosion as compared to prior periods.
While we believe this situation will be corrected long-term for 2022, we believe our cost of goods sold rate, excluding further inventory related charges related to the Russia-Ukraine conflict may continue to reflect an increase versus 2021. Based on a reduction in sales expectations. Operating margin improvement from our ability to leverage SG&A may not materialize. In fact, SG&A as a percentage of net sales may reflect an increase year-over-year.
However, due to our strong belief in the long-term potential and success for Nature’s Sunshine, our investment and growth initiatives will continue. Given these expectations, adjusted EBITDA margin, including the add back of certain inventory related charges, may decline to the high single digit versus the 11% for 2021. We are very excited about and remain committed to the long-term, top and bottom-line growth opportunities for the business. We have an active share repurchase plan in place and we are committed to pursuing opportunities to maximize value for our shareholders.
Now more specifically in the first quarter, net sales in the first quarter increased 8% to $110.5 million, compared to $102.4 million in the year-ago quarter. As Terrence mentioned, this increase was driven by continued growth across our Asia-operating business unit. Excluding foreign exchange rates, net sales increased 10% in the first quarter of 2022. On an absolute basis, net sales in Asia increased 29% to $46.1 million, compared to $35.8 million in the prior year quarter.
This represented a 34% increase on a local currency basis. The increase was primarily attributable to strong customer growth in China, Japan and Taiwan, supported by our digital tools. Net sales in Europe declined 2% on an absolute basis to $21.8 million, compared to $22.2 million in the year ago quarter. On a local currency basis, net sales were flat.
During the quarter, Poland was our fastest growing European market as our team focused on field fundamentals and customer growth throughout Central and Eastern Europe. As Terrence mentioned, we’re watching the Russia-Ukraine situation very closely. Russia, together with Ukraine and Belarus, represented approximately 13% of our consolidated revenues for the quarter. Sales in this region dropped sharply in March, and this trend is expected to continue.
Our partners continue to sell through their available inventory. However, in an obviously challenging environment. Well, the situation is very fluid. We currently expect overall Europe sales for 2022 to decline approximately 30% to 40%, as compared to 2021.
As of March 31, Eastern Europe, including Poland, had net assets of approximately $5 million, which primarily consisted of inventories. North America net sales declined 5% to $36 million, compared to $37.8 million in the prior year period. The decrease is primarily attributed to our inability to source key product ingredients as a result of heightened supply chain issues over the course of the quarter and an overall reduction in the customer average order size.
We believe the reduction is primarily attributable to significant inflationary pressures. We continue to pursue all alternatives to minimize the ongoing impact of inflationary and supply chain pressures on the North America business. Net sales in Latin America and other decreased 1% to $6.6 million, compared to $6.7 million in the prior year period. This represented 0.2% decrease on a local currency basis, which is primarily due to fluctuations in foreign currency for the quarter.
Gross margin decreased to 68.8%, compared to 73.7% in the year ago quarter. Nearly half of the decline stemmed from an estimated $3.1 million charge, primarily related to inventory impairment associated with our operations in Russia and Ukraine. The remainder of the margin decline was driven by changes in inventory, valuation, reserves and other markets, production, transportation and distribution cost increases and incremental price related promotions. Results for our second quarter will assist in determining the full-year costs sales rate.
The subsequent quarters, excluding incremental inventory related charges, may reflect an approximate full point increase versus the prior year. Volume incentives as a percentage of net sales were 30.9%, compared to 33.4% in the year ago quarter. This decrease is attributable to changes in market mix and our growth in China. The decrease also reflects cost savings from the September 2020 launch, where new consultant sales and compensation plan in North America and Latin America.
Selling, general and administrative expenses were $40.6 million, compared to $33.6 million in the year ago quarter. The increase was primarily attributable to higher service fees associated with strong revenue growth in China. Investments we made to support long-term growth, including costs associated with sales, events and direct-to-consumer marketing expenses. As a percentage of net sales, SG&A expenses were 36.8% in the first quarter of 2022, compared to 32.8% in the year ago quarter.
As noted, we intend to continue investment initiatives to drive long term growth. Reflective of the gross margin pressures in higher SG&A spend, operating income was $1.3 million or 1.2% of net sales, compared to $7.6 million or 7.5% of net sales in the year ago quarter. GAAP net income loss attributable to common shareholders for the first quarter was a loss of $3 million or $0.15 per diluted share, as compared to income of $4 million or $0.20 per diluted share in the year ago quarter. The loss is primarily due to a significant valuation adjustment of certain deferred tax assets reflected in the provision for income taxes.
Adjusted EBITDA is defined in our press release as net income loss from continuing operations before income taxes, depreciation and amortization and other income or loss adjusted to exclude share based compensation and certain noted adjustments was $8.2 million, compared to $11.6 million in the first quarter of 2021.
Moving on to where liquidity and capital allocation plan. Our balance sheet remains clean with cash and cash equivalents at March 31 of $66.5 million and only $2.1 million of debt. As part of our capital allocation plan, we continue to utilize our share repurchase authorization by 451,000 shares in the first quarter for $8 million or an average of $17.67 per share. Of our $30 million share repurchase program announced in March 2022, $29.6 million is available as of March 31.
Looking beyond share repurchases, our capital allocation structure positions us well to continue our marketing and business transformation efforts being implemented. During the quarter, inventory, net of the increase in valuation reserves increased approximately $4 million due to continued proactive purchasing of raw materials in order to stay ahead of supply chain headwinds and to meet customer demand.
Well, this may not seem to align with our earlier comments about being out of stock in several ingredients, please note, we buy hundreds of other ingredients across our portfolio of products. Despite near-term challenges, we continue to make investments on our business transformation strategy and expect these investments to position us to drive further operational improvements for the business.
Now, I will turn the time back over to the operator for Q&A. Operator?
Thank you. [Operator instruction] We have a question from Linda Bolton-Weiser with D.A. Davidson. Please go ahead. Your line is open.
Yes. Hi. How are you doing?
Hey, Linda. How you doing?
Good, good. Hi. So a lot of moving parts going on in your business right now, but thank you for the directionality on some of the numbers and stuff. That’s very helpful. I guess, first of all, can you just explain a little bit about the ingredient shortage situation? And is it possible like – can you give some idea of like what percentage of your SKUs are affected or just something like that? And also, can you explain like are product substitutions possible or is it certain SKUs are just like totally unavailable and there’s no substitution? Like, why is it that this like would make such a big impact on sales growth?
Yes. I think I’ll start with product substitutes. In some instances, there are substitutes and so someone might pick up something, but it really does depend, every product doesn’t have a direct substitute. Okay. So let me just put it that way. And the products that were particularly impacted in the U.S. in the first quarter were top-selling products. So I’m not sure if I could tell you what percentage of the products are impacted here, but specifically, no, it was actually a relatively small number of ingredients.
And as I mentioned, it was that affected 40 to 50 products. And so if you’re missing – sometimes if we’re missing two ingredients that may impact quite a few products. And those products may have multiple ingredients in them. So if they’re missing one ingredient out of ten, we can’t produce it. So as I mentioned, this is not something that is regularly happens to us.
But I think the situation is, as you know, intensified in the marketplace, just with respect to some ingredients not being available. I think we’ve addressed the specific issues that I highlighted in my commentary right now. But that does not mean that there won’t be other ingredients that don’t become available going forward. Is that helpful?
Yes. Yes, I think so. Yes. So let me just switch gears a little bit then to the sales growth. I mean, you talked about all the different regions and all the different moving parts. I mean, Asia was terribly strong. It was really good in the quarter. And then you mentioned the reopening of South Korea with the restrictions lifting. So that’s seems like that’s going to be a huge positive.
That should be good news.
Yes. So I’m just trying to figure out like with all those moving pieces, I mean, do you think Asia Pacific as a region can grow in the year – in the full year? And is there any way to gauge like to tell us like second quarter? Like what are the trends you’re seeing now, I guess, is what I’m asking in China, like in April? I mean, is it like down like 50% or like just what are the trends right now in China?
No. I mean, China is probably the most challenging market that we see right now, because of the shutdown. And I’ll let Joe kind of add some color commentary to that. But going back to your original question, yes, we do believe that Asia is a strong growth market in 2022. We have very kind of high expectations and for the performance to continue. And I would say that China is that one large uncertainty because the Chinese government hasn’t given any direction or guidance in terms of when the shutdowns might cease or be eased for that matter. Joe, do you have some additional commentary about that?
Yes. What I would add, Linda, and please weigh in if we’re not fully addressing your question, but just specific to China and the trends. Okay. We saw even though the Asia business, including China in the first quarter, clearly reflected a healthy increase, we started to experience some pressures on our China business in the month of March, because of the COVID shutdown. So moving into Q2, trend wise, at least for that market, you probably think more in terms of, well, China quarter-over-quarter maybe in and of itself. Best case may be closer to flat.
But it’s all subject to the uncertainty surrounding just the extent of this COVID shutdown and whether, and that includes whether it expands or they find relief or whatever. The other thing I’d point out, just in relation to Asia, I mean, we’re pretty excited that there’s going to be some relief provided on the pandemic front in South Korea. I would think more in terms of the upside from that will take a little bit to kick in.
So it’s more of a potential upside on the back half of the year versus the first half. But we’re certainly happy about that situation. And as Terrence mentioned, overall, yes, Asia in and of itself, subject to especially this – what we call the Shanghai China shutdown, we do believe represents growth in 2022 or 2021.
Okay. Thank you. That’s very helpful. Just let me ask, though, what you just said about China best case flat. Do you mean flat versus the first quarter or year-over-year? Just elaborate what you meant by that.
Well, that’s a good question. I was talking more specific to second quarter over second quarter, year-over-year. Yes. You asked about the trends and so both measure the trend based on what we saw in March. Clearly saw some softening as you would expect, because they’re in full shutdown mode in Shanghai.
Okay. But to be honest with you, flat is, quite frankly, much better than I would think. So it sounds like they’re continuing to somehow sell products and operate even while in shutdown…
Yes, they are.
Is that the case?
Yes. Well, again, the – our manufacturing facilities are outside of Shanghai and we do business all throughout the country. So there’s still opportunities there.
Okay. Thank you. That’s very helpful. And then I started jump around. But this is a bigger picture question about North America. And I mean, you really spoke very positively about DTC and you said now it’s like 15% of revenue in the U.S. So that’s coming along. But I wonder, are you absolutely sure that there’s no channel conflict developing, because you’re pointing to a weakness, I guess, in certain areas here. I know the shortage of the products situation, but are you absolutely sure that there’s no channel conflict developing as you develop the DTC in North America?
I think what we’re seeing, Linda, is, well, two things. The first is that our DTC efforts, as I mentioned, are reactivating lapsed customers. And so new customers – they are activating new customers and lapsed customers. Those lapsed customers are largely customers of distributors, and they get paid for that, okay. So that benefits them. And then as far as the core business, we’re not seeing an exodus of distributors kind of leaving the business, they continue to order. So order growth continues to be strong.
So that’s why I emphasize that fact of the core numbers and the core distributors continue to move forward with our business. They’ve got all those same tools and they have other additional opportunities to drive their businesses as well.
Okay. Thanks. And just one last one for me. Just when you mentioned about the investing in the various areas of manufacturing, I see the importance of that, but that sounds like a capital intensive kind of thing. Is your CapEx going to pick up here in the next few years? I guess for this year, I’m expecting not $10 million to $11 million. Can you just give some color on that?
Joe, you want to take that?
Yes, well, it turns for reference to our new EVP of supply chain, and we’re obviously excited to see Martin come aboard here in the next couple of weeks. So we’ll be better prepared to speak to our future plans once he’s had a chance to assess the situation and spend some time getting directly involved. As far as for 2022, it’s our current plans are somewhere in that $6 million, $8 million, $10 million, I mean, there are certain things that we’re straight, we’re striving to acquire and purchase. But along with the materials, there’s certain equipment that’s on backorder as well. So some of that may spill into 2023, to be honest. But you’re not – you’re reasonably close with your plus or minus $10 million figure. And as far as that goes, okay? But there’s a second part of the question that I missed, we covered it.
No, I think, no, you got it. You covered it. Thank you. I’ll take the rest offline. Thank you very much.
Thank you, Linda.
Thanks a lot. Thanks for the questions.
[Operator Instructions] We do have a question from Steven Martin with Slater. Please go ahead. Your line is open.
Yes. Hi, guys.
I guess all good parties have to come to an end at some point. Let me ask a couple of questions. Following up on windows. If China is flat in the second quarter and Taiwan and Japan continue to be positive and South Korea finally returns to positive, that would imply that Asia could have another good quarter, albeit not as good as it was should – it would have had.
Yes. I mean, it’s one way of looking at it. I mean, again, we’re trying to be a little cautious on the second quarter, Steve, because of all the previous pressures noted and so forth. I mean, you had a lot of moving pieces there and let’s specifically China, again, we’re sort of taking that one week at a time with this situation.
We don’t want to be overly optimistic because we’re still not sure that should shut down or expand into other markets. So and then as I tried to address Linda has been quite robust, her comment about South Korea, I would think more in terms of the upside for us in 2022 versus 2021 for South Korea and getting past some of the pandemic limitations and restrictions is more of a second half kind of opportunity, say versus first half, right. But the business in Taiwan, Japan continues to do well. But as we sit here today, we are in a bit cautious on Asia overall for Q2. We don’t – as we sit here right now, we don’t expect the same level of growth as for Q1 over Q1. But we do expect growth for the year over the year.
Okay. But on North America and you saw – you implied or you said that you saw some of the stock out issues. Are you still out of stock on some products or magnitude?
We believe we’re slowly but surely getting on top of that situation, Steve. But honestly, when you literally, as I put it out in my comments, buying hundreds of ingredients, while I can sit here today and say, okay, we’re in great shape on the vast majority of them, and there’s just these 25 or 30 that we’re short on. I mean the way the situation is playing out and eight supply chain challenges and so forth and so on, it’s not to say that a new 10 or 15, we could have problems with all the altogether new 10 or 15 or 20, over the next two or three months. But obviously, we’re actively trying to stay on top of that. We like to believe that in large part we’ve got a healthy amount of stock on hand. But there are – there continue to be challenges. But we believe slowly but surely the impact of those out of stocks is declining, okay.
All right. SG&A for a second, recognizing what’s going on in the world and what’s going on with your business? I don’t want you – I would never suggest that you cut your sort of growth expenses. But what can you guys do to mitigate? You’ve always been such great expense managers in the past. What do you do? What can you guys do to try to soften the blow versus Q1 for the rest of the year?
Yes. I’d just open up. There are always things that we’re looking at and that we work on. We try and be very tight with our expense controls. But kind of structural changes, don’t happen quite as quickly as you’d like from one quarter to the next. So I’m going to leave it at that. But Joe, you have the additional commentary.
Yes, I mean, I think Terrence captured it, Steve. I mean you’re right. It’s difficult for you to see and static you don’t have the full breadth of our financials, but we’ve obviously given our updated thoughts on 2022 sales. They’ve already taken a pretty in-depth look at our SG&A build span, the detail, the level of discretion that comes into play on a lot of that.
And we’ve already made certain moves related to expected travel and so forth and so on to rein that in somewhat. But what we’re not doing at this point is making or looking at major changes to our overhead structure or personnel structure because we clearly believe in the long-term potential for the business. And at the end of the day, we don’t want to make a bad near-term decision that clearly cost us in the long-term.
So we continue to evaluate going forward like we can assure you that we’re taking a hard look at SG&A spend especially some of that discretionary structure aspect of it. But we believe in the long-term health of the business. So as we sit here today, yes, we could see a bit of an increase in SG&A as a percent of sales, but it’s because of our belief in the long-term potential for the business.
And one of the things I don’t wanted to Steve, I don’t want to do anything in 2022 that’s going to put us out of the game in 2023 and 2024, if you know what I mean.
And that’s why I said right up front, I wouldn’t expect you to do that. Okay.
Let me change subjects to a mathematics and mathematical on the share buyback, I was really pleased to see that you bought back 450,000 shares. But I guess my question is, if I look at your balance sheet, the shares outstanding only declined to 50. Did you issue 200,000 shares for a stock-based compensation?
Well, we didn’t necessarily issue 250,000 shares in the quarter, but we very well may have had 250,000 shares invested during the quarter, either because they had met their time restriction, right, had passed. And maybe two, three years ago, there was a grant made that had a two or three-year vesting period and it got to cleared the vesting hurdle in the first quarter. So those become – those shares become issued now standing. And the other, we have a number of RSUs or price-based stock units. And if you hit certain price levels, those will vest, as well and become shares outstanding. So I think it’s more of the latter, what I just said.
But no, I didn’t just flat out issue a quarter million shares during the quarter. What have been the stock grants? The stock grants from prior periods at best at during the quarter.
All right. Well, given that you’ve still got $29 million of the $30 million outstanding, I would hope you’re giving where the stock is. And given where it may trade in the near-term, I would hope that you guys continue to be aggressive and we see an actual a real decline in the share count.
Well, thank you. I noted in my comments [indiscernible] plan is alive and active.
All right. Thank you very much. I’ll leave it to someone else.
And this concludes our Q&A session. I would now like to turn the call back to Mr. Moorehead for closing remarks.
Okay. Thank you. Well, I’d like to thank everyone for listening to today’s call. And we look forward to speaking with you when we report our second quarter 2022 results in August. Again, thanks for joining us. Take care.
That concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.