Good afternoon, and thank you for joining the second quarter 2020 earnings conference call for Herbalife Nutrition Limited. On the call today is Dr. John Agwunobi, the company's Chairman and Chief Executive Officer, John DeSimone, the company's President, Alex Amezquita, the company's Senior Vice President, Finance, Strategy and Investor Relations, and Eric Monroe, the company's Director, Investor Relations. I would now like to turn the call over to Eric Monroe to read the company's safe harbor language.
Before we begin, as a reminder, during this conference call, we may make forward-looking statements within the meaning of the Federal Securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements in our business, we encourage you to refer to today's earnings release and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Our forward-looking statements are based upon information currently available to us. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any future events or circumstances, or to reflect the occurrence of unanticipated events.
In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures assist management and investors in evaluating our performance and preparing period-to-period results of operations in a more meaningful and consistent manner, as discussed in greater detail in the supplemental schedules to our earnings release. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC. These reconciliations, together with additional supplemental information, are available at the investor relations section of our website, herbalife.com. When management makes reference to volumes during this conference call, they are referring to volume points.
I will now turn the call over to our Chairman and CEO, John Agwunobi.
Good afternoon, everyone. I hope that you and your family are staying safe and healthy. With today's release, we announced record-breaking quarterly net sales results for the company. We reported net sales of $1.3 billion, which grew 8.6%. Reported earnings per share grew 52%, and adjusted earnings per share grew 36% compared to the second quarter of 2019. As part of our pre-release a month ago, we announced that the second quarter of 2020 was also the largest quarter in our 40-year history in terms of volume points with record results in both our North America and our EMEA regions. Q2 also saw a record number of new members and preferred members joining the business. As a sign of the confidence that we have in our business and our long-term growth prospects, we announced last month that we made an offer to purchase $750 million of our common shares.
Alex will provide more details on this transaction later in the call. As the numbers and facts demonstrate, Herbalife Nutrition is performing at an exceptional level, and we believe our distributors' entrepreneurial spirit, combined with our quality line of nutrition products, will lead to continued growth. From a demand perspective, our business is backed by favorable consumer trends in an environment that has never been more responsive to what we bring to the table. According to a recent study from William Hood, health is the new top global consumer priority. We believe that individuals around the world have a heightened focus on consuming healthy, nutrient-dense foods and supplements. Additionally, individuals who are seeking an economic opportunity are finding our business model to be attractive. Our distributors are embracing technology to service their customers, which is helping them meet the increase in demand.
We are assisting our distributors as they rapidly adopt digital tools, and the positive effects of this are evident in our results. The investments we've made in technology have allowed our distributors and their customers to stay connected when face-to-face interactions are unable to take place. Our ongoing technology strategy is focused on improving distributor scalability, increasing distributor-to-customer connectivity, and enhancing the customer experience. We are encouraged to see increased usage of our digital tools, such as HN Connect, HN MyClub, and Engage. Let's dig a little deeper into our top four countries, starting with the U.S., where year-over-year volume points were at an all-time high and grew 38% for the quarter. This growth is a testament to our entrepreneurial distributors discovering innovative ways to run their businesses during the pandemic.
The percentage of our U.S. business growing through distributors who operate a nutrition club model, which represents the majority of our volume in the country, remains relatively consistent with pre-pandemic levels. Although we've seen nutrition club operators continue to grow sales by individual prepared consumptions, we have seen them modify their businesses and shift a higher proportion of their sales to home delivery when face-to-face interactions at clubs have been unable to take place. Additionally, U.S. distributors have seen more unique customers. The monthly average number of unique customers in the U.S. increased year-over-year by more than 25% in the second quarter. Moving on to China, where volume points grew 18% compared to the second quarter of 2019. During the quarter, we made further upgrades to our recently developed personal stores platform on WeChat, including new features such as live streaming and optimization of our landing page.
Volume coming from our China service providers' and sales representatives' personal stores accounted for approximately 23% of total sales in the country. Online meetings and trainings continue to be a focus in the region as the government continued to maintain strict controls over large in-person social gatherings. In the first half of the year, we've had over two million attend virtual trainings or seminars in China. China's first virtual extravaganza took place in the second quarter with approximately 81,000 attendees. India volume decreased by 15% during the quarter, but materially improved as the quarter progressed, coming off the lows of a 30% year-over-year decline in April to slight growth in the month of June. Restrictions imposed in the market due to the lockdown resulted in the closures of many access points and disrupted national transportation, impacting product delivery.
Toward the end of the quarter, the restrictions began to ease in non-containment zones, and by the end of June, the majority of our product access locations in the market were actually open. In Mexico, volume points were down 4% in the quarter, and we're encouraged to see a return to growth in new members for Mexico this quarter, with the month of June representing the largest number of new members in a single month since August of 2017. I would also like to call out the EMEA region, which set a volume point record and grew 21% in the quarter. The growth came from countries such as Spain, which was up 20%, Turkey, which was up 27%, France, which grew 55%, South Africa, which increased 88%, and the U.K., which grew an astonishing 90%.
Members in the region were able to adapt quickly to the new circumstances and transfer their businesses into a virtual environment. Given the continuing impact of COVID-19 on our business and the rapidly evolving landscape in response to these pandemic conditions, we are not providing guidance at this time. However, our year-over-year volume point growth rate improved each month during the second quarter, and we are encouraged that this trend continued in July. We remain confident in the long-term prospects of our business based both on the increasing demand for products we provide and on our focused growth strategy. This confidence is further supported by our strong financial foundation and the substantial investments we've made in our business. We have a proven track record of working through difficult situations, and I fully believe in our ability to overcome current and future challenges.
In closing, I want to thank everyone at Herbalife Nutrition for their hard work and diligence during these extraordinary times. I'll now turn the call over to Alex to review the financials.
Thank you, John. Second quarter net sales of $1.3 billion represented an increase of 8.6% on a reported basis compared to the second quarter in 2019. This was a record for the company despite the 550 basis points currency headwind driven by the significant strengthening of the U.S. dollar at the end of Q1. Adjusting for the change in foreign exchange rates, net sales for the quarter increased 14.1% year-over-year, excluding the impact from Venezuela. We reported net income of approximately $115.1 million or $0.82 per diluted share. Adjusted earnings per diluted share were $0.95, an increase of 36% compared to adjusted earnings per adjusted diluted share of $0.70 for the second quarter last year. The impact of currency fluctuations represented a year-over-year headwind of approximately $0.08 on results for the second quarter.
Note that our reported and adjusted results this quarter include expenses related to the China Growth Program of approximately $2.3 million or $0.01 per share. Reported gross margin for the second quarter of 79.7% decreased by approximately 65 basis points compared to the prior year period. The decrease was primarily driven by increased freight costs related to orders being shifted to home delivery versus member pickup as a result of COVID-19. Second quarter 2020 reported SG&A as a percentage of net sales was 35.7%, and adjusted SG&A as a percentage of net sales was 35.4%. Adjusted SG&A excluding China member payments was 26.3%, approximately 200 basis points lower than the second quarter in 2019. The reduction in expense was largely driven by a decrease in member promotion and event costs as a result of delays, cancellations, and reformatting of promotional events due to the COVID-19 pandemic.
However, we expect a significant portion of these reduced expenses to be spent in the third and fourth quarter. Our second quarter reported effective tax rate was approximately 28.5%, and our adjusted effective tax rate was 21.5%, which was lower than the prior year, primarily due to a favorable change in the company's geographic mix of income and a reduction in the income tax rate of certain foreign jurisdictions. During the first half of the year, we generated $385 million in cash flow from operations. This is a significant increase over 2019, as many of the timing accounts that negatively impacted cash flow in the first half of 2019 have now reversed. We currently have $1.7 billion of cash on hand, and our previously announced modified Dutch auction self-tender offer to purchase up to $750 million of shares is scheduled to expire on August 11th, unless the offer is extended.
We continue to believe the repurchase of common shares is consistent with the company's long-term goal of maximizing shareholder value, and this tender offer provides a mechanism to return capital to shareholders who seek liquidity under current market conditions, and to allow shareholders who do not participate in the tender offer to share in a larger portion of the company's future potential. If fully subscribed, this offer will reduce our outstanding equity by approximately 10%-12%. This concludes our prepared remarks. Operator, please open up the line for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question will come from Wendy Nicholson with Citi. Please go ahead.
Hi. Just two questions if I can. First, just on the tender offer, given that the stock is above the offer range, what's your plan? Is there that expectation that you will bump up that tender range? If you could comment on that, would that be first? Just secondly, thinking about the business, I mean, the momentum is fantastic, and I think you've done a great job explaining how important things like the Tencent partnership have been for you. I guess my question is, we've sort of seen now a couple of other direct sellers also report strong numbers, and it does feel like, at least in the U.S. market, there has been just momentum in the industry, and maybe it's because people are at home and feeling entrepreneurial and looking for extra income.
I guess just my question is, do you think there's something to that from sort of a high level industry perspective? Or do you really think this is all very much Herbalife specific and a result of the initiatives that you've undertaken to grow your business? Sorry for the long question, but that's what I'm interested in. Thank you.
Thank you, Wendy. Thanks for the good questions. This is Alex. I'll start with the tender offer first. Obviously, the tender offer does not expire until next week, August 11th. We don't have a crystal ball in terms of what that stock price might be at the end of this tender. At this point, there's really not much more I can comment on what we might do until we see where we are. The offer that is out there is the offer that is out there. We'll see how the coming days play out.
Got it.
Yeah, this is John. I'll take the second question. I can speak specifically to Herbalife. I've read the releases of other companies. At Herbalife, and I'll start with numbers, we announced at the beginning of May that April was down 1% in volume, and we finished the quarter up over 12%, which means incredibly strong May and June. Now as Alex said in his remarks, or Dr. A said in his remarks, sequentially May was better than April, June was even better than May, that continued into July. There is a lot of momentum, I think when you kind of run the numbers, it might even be stronger than what we're seeing in the industry. I think there is some truth that globally, the industry is doing well for whatever reasons you want to ascribe to it.
It's really hard to know, right? I think we're actually exceeding those industry statistics, and we're doing it pretty much globally. I know there were three of six regions did not increase in the quarter, that really was mostly a weak beginning of the quarter. At the end of the quarter, we saw a lot of strength. As a matter of fact, every region in the month of June, new members were up double digits. Mexico was up 30% in June for new members. That really, I think sets us up, at least for the near term, sets us up well. Obviously, long term, the type of growth we're seeing now, it's got to flatten a little bit. I think it does give us a new foundation.
Yeah. John, this is John Agwunobi. I would just add to that answer, or rather, I would just urge everyone to look back at our Q4 2019 and our Q1 2020 results. You'll see, I believe, that ours is a company that the strategy is working in. It's been working since even before the more recent kind of external issues that have hit the entire marketplace. We're confident in our strategy, and we think that it underlies all of the numbers that you're seeing in Q2 and beyond.
Just if I can follow up on that, I think, maybe this is a point of clarification, the $2.3 million that you called out, I think as incremental investment in China, is that sort of an update and a sort of constant, whatever, fine-tuning of your investment spending in that market? I guess the question is, to keep the momentum going, how much more spending do you think you're going to need to do to continue to bolster those digital tools and keep them offering something new and compelling to the distributors?
Right. Wendy, just as a reminder, that $2.3 million that you've highlighted is investment that comes out of our China Growth and Impact Investment Program. That is monies that we receive from the Chinese government effectively that we commit to reinvest back into China in some way, shape, or form. Last year, we spent a lot of that money into our branding. Some of it went into our technology. It's just some form of investment that we make into China. I want to call that out. I would say that that's sort of a separate pot of investment that we make when we think about technology and overall infrastructure. Like the Tencent investments, that's part of what I would call more part of our run rate investments that we're making into China. Kind of two separate. We have sort of run rate investments.
Those are things like our Tencent partnership. There are investments, we have $105 million remaining in the China Growth Fund for other sorts of one-time investments that we make. As we receive monies for the China government, we will then invest those monies back into China.
Perfect. That's very helpful. Thank you so much. I really appreciate it.
Sure thing.
Thank you. Our next question will come from Hale Holden with Barclays. Please go ahead.
Thanks for taking the call. I guess some of the volume numbers that you posted were just extraordinary. I was wondering if you could just give us some context on maybe just some specific regions in the Americas and the U.K. number you gave, what you think is adding to that benefit. Then, Dr. A, I heard your comment that it's going to flatten out off a new baseline, but assuming that the current environment stays, how sustainable do you think it is?
Yeah, look. By the way, when we're talking about flattening out, what we're saying is some of these growth rates. I mean, by the way, in direct selling in general, growth can be spiky. It kind of stair-step its way up, and this is a stair, we think. We don't know when it'll come to a more normalized growth rate, but it inevitably will, and I think that was the point. As far as what's driving the growth, it's definitely distributor activity. That activity is being driven by engagement. Now, it's hard to quantify specifically if that's because people are home more or if just people are looking for good nutrition, which is something that's really important these days. There's really lots. There's not one thing, and it's just building on itself, that's what we're seeing.
I can't even, be honest with you, be more specific than that because it's not one thing.
I would just add that.
Le\t me ask it another way.
Oh, sorry. I would just add that there are two Johns in the room.
Right.
There's John A and there's John D. I think the comments related to flattening in the future came from John D.
Yep, sorry. I guess maybe if I put it another way, presumably the higher volume points mean that your distributors are doing better financially and they're more engaged on a go-forward basis. How do you guys ensure that this momentum continues when we move to a more normalized state of affairs?
Yeah. This is John A. I would note that a couple of things. First of all, I do think that on the consumer side, that people's behaviors have changed acutely in response to the pandemic. I would wager too that many of those behavior changes will have some persistence to them, right? There are going to be consumers out there that commit themselves to living healthier, more healthy, active, balanced lifestyles in the future, right? That's number one. On the distributor behavior side, yes, I think our distributors have worked extraordinarily hard over the course of this quarter. Yes, as a result, I think they'll see that in their rewards. Ours is a business that is built on momentum and what we call the marketing plan, the ability to set goals and to achieve those goals, and they're incremental. Those goals build on themselves.
As they hit a certain level in the marketing plan, they then kind of subscribe and aspire to hitting the next level. We do expect that the momentum, the energy that is being generated within our distributor base will continue on into the future. To my colleague, John D's comment, this is a business that kind of has stairsteps as it grows. At least traditionally, as we've looked to the past, that's kind of the pattern that we've seen. There's accelerated spurts in growth, followed by more moderated growth, followed by an acceleration again then in the future. That's kind of the way it works, or at least it has around the world in the past. I think we should expect to see the same as we go forward.
Great. Thank you very much.
Thank you. Our next question will come from Steph Wissink with Jefferies. Please go ahead.
Thank you. Good evening, everyone. I just have a couple of housekeeping questions, and then I'd like to unpack your category performance. The first question, Alex, is for you. You mentioned some of the savings, that you would re-spend those in the back half of the year. I'm wondering if you can just help us think through the SG&A rate in the back half as you recover some of those savings. Then secondly, I think, John DeSimone, you had mentioned that the July month was another month-over-month momentum. Should we anticipate it is better than June, or it has maintained June's run rate exit?
Hi, Steph. Thanks for the questions. I'll take both of those questions. The first on the expense. In my remarks, I mentioned that our adjusted SG&A, excluding member payments, improved by about 200 basis points over last quarter, 2019 or Q2 2019. The expenses that we anticipate being delayed to the back half of the year, if those expenses occurred this quarter, that would be about 100 basis points of that 200 basis points. Hopefully, that gives you some idea of magnitude. Related to the second question with respect to July, yes, in fact, that is what we're saying. We're saying the growth rate that we saw in July is in excess of the growth rate that we had in June.
Excellent. Thank you. Then I want to unpack your category performance. It looks like your sports fitness business, and even your targeted nutrition business, were both extremely strong, both up in the mid-teens. Can you talk a little bit about what you're seeing within those businesses? Are you gaining new customers? Are customers entering the brand in those two areas and then traveling across the category portfolio? Maybe give us some perspective on what you're seeing kind of within your category performance.
Yeah, obviously, sports nutrition and targeted nutrition are, on a relative basis to our weight management part of the portfolio, a smaller piece of the portfolio. When you see overall our company growing at the growth rates that you are seeing, when you have that amount of growth on the smaller base, I think if you look at our sports nutrition category, generally quarter-over-quarter, you're seeing that double-digit growth, even when we are experiencing more moderate levels of growth. I just think this is an attractive category. Obviously, sports nutrition is a big opportunity. We talk about sports nutrition and targeted nutrition as being the big opportunities for us to penetrate with us having market-leading position in the weight management side. This is just very much on trend with the strategy, the second pillar of our strategy, technology being the other.
Great. Thank you very much.
Thank you. Our next question will come from Doug Lane with Lane Research. Please go ahead.
Yeah. Good afternoon, everybody. Just to start, Alex, when you call out the $6.1 million of COVID expenses, what exactly are those kind of expenses?
Yeah, those are expenses that we have to perform today above and beyond what normal operations are. For example, sanitation. For example, compensation for employees going above and beyond what they would have to do in a non-pandemic situation. Expenses like, you might have just seen our recent press release where we had to cancel the Herbalife24 Triathlon Los Angeles, and we had some costs that were sunk into that now there's no return on that investment. Those are just sunk expenses. It's those types of things that we're experiencing as it directly relates to COVID-19 impact.
Okay, got it. Thank you. Just a follow-up on the product questions. I think in the last call, we were talking about some of your immunity products being particularly strong, Immunity Essentials, things like that. Is that still the case, or is the strong volume really broad-based at this point?
Yeah, I would say the strong volume is broad-based. Again, it's a little bit of the answer that I just gave to Steph. Clearly, targeted nutrition is growing at a double-digit rate, and so part of that portfolio does include our immunity products. We're encouraged to see that growth in those areas, those new market areas for us. The growth, if you look across the portfolio, I would say is broad-based.
Okay, fair enough. Lastly, Dr. A, I appreciate your comments on the momentum of the business, which seems to be pretty common across direct selling, where you see momentum build and then it eases a little bit in particular regions, and that I totally get. The question I have is with your Asia Pacific region, which has been growing double digits for the last two years plus, and all of a sudden it went negative this quarter. I know you talked about India being down 15%, but there's got to be something more than just India there.
By the way, just to be very clear, when you look at our global business and the impact that the pandemic has had on it, by any accounts, APAC has been under that umbrella longer than any other region in our business. It started there. Places like Korea, India, Indonesia, and a few other locations have been particularly impacted by their government's responses to the pandemic. India, especially, I think. Let me hand this off to John D., and he'll jump in with a little more detail. I would just kind of point to the fact that it is principally COVID-related and with India in the forefront.
Yeah, just kind of to profile it out a little bit. As we said in the May call, that Asia was hit specifically hard because of some of the infrastructure challenges in many of those countries. Not just India, but Indonesia, Korea. In June, the end of the month, Asia actually had growth again. You can see that in April when we released, volume was down almost 14% in Asia, and it finished only down 5% in Q2. It definitely had some momentum that built during the quarter, or momentum might be the wrong word. It's probably more of a solution-oriented set of programs that were put together in Asia to overcome some of the challenges. I think that was very successful, and India itself was actually flattish in exiting the quarter.
Oh, that's good color. Thanks, John.
Thank you. Our next question will come from Ivan Feinseth with Tigress Financial. Please go ahead.
Hi, thank you for taking my call, and congratulations on another great quarter.
Thank you, Ivan.
Thank you.
All right, were there any specific standout products in the quarter? Also, any products that surprised you as far as the demand or lack of demand? Were there any products that you ran low on or ran out of and had shortages, that if you had more, you would've done better?
Look, there was no major surprises. We had some product launches. They did pretty much as expected. I will say there were some product shortages, because demand was higher than expected from the lead time that we need to build product, especially for some of the products that are not made by us, and some of those manufacturers had their own issues because of closures and things like that. Toward the end of the quarter, we definitely had some out-of-stocks. I think we recovered it pretty quickly. Whether that ended up being lost sales or not, I'd rather not say. I think whether that was redirected to other products temporarily, or it was caught up later in the quarter, I'm not sure. There was definitely some out-of-stock issues, which is not unexpected when you have such a dramatic shift in trends.
Any products that you thought were going to sell well but didn't?
No. No surprises.
Not that I'm aware of. To your point, your other question about whether or not there's one that did more better than expected, across the board, we've seen growth across all categories. If that's a surprise, that's a fact, though. Across all our categories, we've seen really good growth.
As far as, let's say, tools that your agents are using, since most everybody has had to go to more online rather than in-person meetings. What kind of process have you learned from that, and thoughts of putting new platforms in place to support sellers going forward?
Yes. This is John D. Let me hit what I think is one of the more important takeaways from the movement toward more technology. That was really forced upon everybody. Certainly, it's a virtual world now, and our distributors have embraced that. I think the bigger takeaway is that out of the need for more technology, I think there was more demand for segmentation. As you know, we segment our business in a small number of markets. Now we have plans that by the end of next year, volume or 80% of the volume, maybe even up to 90% of our volume, will come from markets that are segmented. That's a big advantage that's coming out of what I think is just the increased use of technology. There's lots of different kinds of technology.
As markets segment, they'll have access to the different technologies that are out there.
When you say more segmented markets, you mean as far as product lines that sell well or?
No, it's a preferred member. I'm sorry. There's a little history here.
Oh, okay.
We've been using some terms that are, maybe it's outdated, but there was a point in time where everybody who signed up was-
Yes
a distributor, then we segmented to have just customers be able to sign up as just customers and not do the business.
No, no, I'm familiar with that.
Yeah. That, having the option to sign up as just a customer is something that will be in markets that represent 80%-90% of our volume by the end of next year. A lot of technology that goes into programming and getting it executed, that's why it takes till the end of next year. That's a big step forward.
As far as increases in new distributors, what areas have you seen driving that, and what products do new distributors tend to lead off with or focus on?
Yeah. I think the most important part of the new distributor equation that we're seeing is our distributors are getting younger. We're getting a lot more millennials and Gen Zers than we've had in the past. We already saw that movement starting. It's even bigger now. Even in Mexico now, the majority of new members joining are millennials or younger. That was a market that was not quite there a year ago. That's a big advantage. That's the demographics we see coming in. I'm not familiar with, off the top of my head, whether their product portfolio purchases is different than the average. Certainly nothing stands out in my mind. I'm just not that familiar with it. I don't track it that way.
That's really the single biggest advantage of what I would say is the demographics coming into the business right now.
What do you think is driving that?
Again, it goes back to the question that was asked earlier, which is what's driving the business? There is no one thing. I think there's a lot of momentum. I think the awareness of the importance of good nutrition has never been better. I think our product line, more than anything, is probably what's driving it, or at least what's helping distributors get confident and drive the business is people. We have solutions to real issues around obesity and around healthy, active lifestyle and just basic nutrition. I think that's probably the most important thing.
Do you think, though, younger people are coming on as distributors, or younger people are coming on as customers? The younger people, if they're coming on as distributors, are coming because they're more entrepreneurial and looking for the business opportunity?
Well, I think across the board, we're getting younger, both on the customer side and the distributor side. I don't want to impute what their goal is. A lot of them come in as customers first and then move over to the distributor side. I do think the business opportunity is attractive. I think there's a lot of momentum and excitement. That's part of it, but there's a whole host of reasons that people join. Again, products. The fuel. Distributors might be the engine of the company, but the product's the fuel.
Yes. All right. Thank you very much, and congratulations again.
Thank you, Ivan.
Thank you. Our next question will come from Karru Martinson with Jefferies. Please go ahead.
Good evening. Just in terms of the unique customer increase that you had in North America, the 25%, we've touched on the technology, could you talk to us, how are the distributors reaching that connectivity so that they can actually retain these customers who perhaps have tried your products here in the pandemic for the first time? How do you keep that customer in-house going forward?
Well, look, I'll give you a multilayer answer. First is segmentation, which allows customers to sign up, which gives informational access to the distributors to be able to stay in contact with them. It's the tools built around segmentation to help automate some of the opportunities to keep engagement high. Of course, there is the receiving tools that are made available, certainly in the U.S., but they're outside the U.S. now, and they're going to be in a lot more markets where there's a lot more transactions, field-level transactions, that are captured in a database that can be used to keep that interaction more frequent. It's more about community and connectivity, and the information will be more available with these tools.
Okay. When you talked about the SG&A rate in the second half, we have the 100 basis point shift being higher. Is that kind of a return to some of your in-person sessions? How do we think about what the pandemic lockdown is going to do on that side of the equation? Is that something that we should look at for next year?
Yeah. It's not necessarily a return to in-person. I think primarily that is just a shift from what was going to be in-person in Q1, Q2, moving to virtual events or virtual different types of promotions that are just largely hitting in Q3 and Q4. What needs to happen effectively is there needs to be an absorption by the distributor base in a particular market of, okay, if we can't go with plan A, we want to go with plan B and C. It just takes some time to develop what those new promotions and what those new events might be. What was going to happen in the second quarter is now just happening later in the year as those plans are being developed.
Okay. Just lastly, the higher freight costs you referenced as you ship to more residences, is that something that over time you kind of negotiate those costs down, or is that just a new part of the business that we just have to absorb?
It's not necessarily a new part in and of itself. What we're seeing, and this is a little bit in John A.'s comments, for example, in the U.S., where you had Nutrition Club distributors or distributors that own a Nutrition Club, they effectively represented about the same amount of volume in the quarter, but they shifted the way that they received product and got product to their customers from in-person to more of a direct ship to home. You're using home delivery in that vehicle to get products from effectively our warehouse to the customers.
What we don't know yet is, as things evolve, as these conditions evolve, how are we going to offset, how are we going to think about, is this the new way, is this the new shift in shipping, or do we return back to effectively how our supply chain was designed to be optimal? This is something that we're going to have to see how that develops and react accordingly.
Thank you very much, guys. Appreciate it.
Well, ladies and gentlemen, thank you for participating in today's question and answer session. I would now like to turn the call back over to Dr. John Agwunobi for any closing remarks.
Thank you. I'll keep this short. First, thank you all for the work that you do following us and for your questions today. I'll just point out the obvious here for a quick moment, and that is, ours is a company that's had a strategy that's been in place for quite a few years now, at least over the last 24 months. I would ask you to take a look at the trajectory of our business. You'll begin to note that the business and the strategy were working even before the pandemic. It's true, and I think appropriate to state, that during the pandemic, that strategy's impact would appear to have accelerated. That strategy continues to work. We continue to drive it, and even after the pandemic, we feel really confident that our strategy is going to deliver on our goals.
With that, I would just point out one last thing, which is, I think it's worth noting that our distributors around the world have worked extraordinarily hard over the last quarter, over the last two quarters, actually over the last four quarters. Their work is directly related to the results that we're talking about today. With that, I'll just say thank you. Stay safe, and see you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.