Natural Health Trends Corp. (NHTC) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Natural Health Trends Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Whitney Steininger. Thank you, you may begin.

Thank you. And welcome to Natural Health Trends fourth quarter and full year 2015 earnings conference call. During today’s call, there may be statements made relating to the future results of the company that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results, performance, or achievements could differ materially from those anticipated in such forward-looking statements through the result of certain factors, including those set forth in the company’s filings with the Securities and Exchange Commission. It should also be noted that today’s call will be webcast live and can be found on the Investors section of the company’s corporate website at www.naturalhealthtrendscorp.com. Additionally, in today’s financial results press release which was issued at approximately 4 pm Eastern Time, instructions can be found for accessing the archived version of the conference call via the internet. At this time, I’d like to turn the call over to Chris Sharng, President of Natural Health Trends.

Thank you, Whitney. And thanks to everyone for joining us. With me today is Scott Davidson, our Chief Financial Officer. 2015 was a record year for our company and we are proud of all we have accomplished. Revenue for the year of $264.9 million, a net income of $47.2 million, both posted triple digit growth over 2014, driven by in by our leadership program, product development and promotional incentive. In addition, we generated $81.3 million in operating cash flow. Before I get into details on the quarter, I want to take a few minutes to address the rumours that had been distributed online of our business. I will also talk about what we are doing to review these allegations. As we referenced in press releases issued on January 11 and 13, we remain aware of online posting alleging a Chinese government investigation as well as so called raids of our offices in Beijing and Guangzhou. We believe the Chinese accusers working in tandem with the parties responsible for the online posting had been aggressively pressing the Beijing City government to investigate and yet have been unsuccessful. In light of their concerted attempts to damage our brand, reputation and shareholder value, we are working very hard to defend our company. We are in regular contact with several government agencies in Beijing and Guangzhou to ensure NHT Global’s compliance with the law. We are not under investigation and maintain good government relation. In addition, I would like to mention the steps our board has taken to demonstrate its commitment to enhancing shareholder value through the authorization of an increase of our existing stock repurchase program from $15 million to $70 million. We are optimistic of our long term prospect and believe our stock is a very attractive investment. This decision reflects the confidence we have in our business. Now let’s talk about the quarter. We held a successful event in Hong Kong in January with more than 6,500 in attendance. At this event, our members and guests were introduced to an enhanced version of our Essential Probiotics product line and learn about our 2016 Supreme bonus plan, and other exciting incentive programs for the upcoming year. Our Supreme Bonus program offers annual supplemental rewards for our members, based on their overall performance and advancement in our international recognition program. In April of this year, we will be taking our largest incentive trip ever with more than 1000 members who qualify in 2015 for our New Zealand and Samoa incentive trip. We continue to see strong consumer demand for our product, our top three selling products during the quarter were Premium Noni Juice, Essential Priobiotics and Triotein, all part of our wellness line and comprised roughly 50% of our revenue. Our new home goods product line was introduced in China during the second quarter of 2015. We are very pleased with the performance of our air purifier which was recently awarded the seal of approval from Allergy UK, a leading testing and certification agency. Since its launch in May 2015, revenue from air purifiers had exceeded $3.4 million. We will be introducing the newest addition to our home goods product line late in the first quarter with a U.S. manufacturer water purification device ideal for home use. As a company, we are dedicated to enhancing the overall quality of life for our member. Our expansion into the home goods line was designed to do just that, by improving our Chinese member’s air and water quality on a daily basis. In North America, our members located in the southern California area are utilizing our first physical store in the City of Monterey Park, for meetings, trainings and sharing of our product line as well as for the benefit of free shipping and order pickup. This store opened in late November represents our commitment to enhancing member services. We currently had 25 member operate at healthy lifestyle centers in China and have plans to open an additional company operated HLC Plus in Vancouver in late March. Similar to the HLC Plus in Southern California, our Vancouver center is located in one of the premier shopping malls in the area. This store will serve as a product showcase in customer service point and has an excellent order pick up location. We are continuing the process of applying for direct-selling license in China. In addition to submitting required documents we have taken concrete steps to prepare implementing a new business model. These steps include leasing 11 locations for a chain of service stations, establishing a manufacturing facility, sourcing more Chinese made products and committing resources to a media campaign. We have positive feedback from various government agencies about what we have done thus far. While the timing of obtaining our direct-selling license for whether or not we can obtain one is uncertain. We are hopeful that our license will enable us to drive growth that will be incremental by leveraging our brand recognition in China as well as our Hong Kong distribution infrastructure. We look forward to 2016 and the important milestone that the year represents for NHT Global, our 15th anniversary. I like to thank our employees and members for the many accomplishments we achieved throughout the year and look forward to building upon this progress in 2016. Now, I’d like to turn the call over to Scott Davidson, our CFO to discuss our fourth quarter financial. Scott?

Thank you, Chris and thank you to everyone for joining us today. Total revenue for the fourth quarter was $73.7 million, an increase of 108% compared to $35.4 million in the fourth quarter of 2014. Sales in Hong Kong which accounted for 92% of our fourth quarter revenue, increased 120% to $67.7 million compared to $30.7 million in the fourth quarter of 2014. Fourth quarter revenue outside of Hong Kong increased 27% to $5.9 million from $4.7 million in the prior year quarter. Excluding the Commonwealth of Independent States, revenue outside of Hong Kong increased 41% over the prior year quarter. Our ecommerce sales in China were up 187% year-over-year, from 547,000 to $1.6 million as a result of strong air purifier sales. Now turning to our cost and operating expenses. Gross profit margin for the fourth quarter was 79.5% compared to 78.9% in the fourth quarter of 2014. Commission expense as a percent of total revenue decreased to 45% compared to 46.9% in the fourth quarter of 2014, due to less recognized cost for our year long incentive programs. Selling, general and administrative expenses were $11.5 million, versus $5.2 million a year ago. As a percent of total revenue, SG&A increased to 15.5% as compared to 14.8% in the fourth quarter of 2014, primarily due to employee related incentive program accruals and credit card fees. Now on profitability measures for the quarter. Operating income totaled $13.9 million, an increase of 129% compared to $6.1 million in the fourth quarter of 2014. As a percent of total revenue, operating income increased to 18.9% as compared to 17.1% in the fourth quarter of 2014. Net income was $13.7 million or $1.13 per diluted common share as compared to net income of $5.8 million or $0.45 per diluted common share in the fourth quarter of 2014. Turning to our balance sheet and cash flow. As of December 31, 2015 cash and cash equivalents totaled $104.9 million, an increase of $10.3 million compared to September 30, 2015 due to cash provided by operations. Our cash balances net of $5 million used to repurchase just over 106,000 shares of our common stock during the quarter as well as approximately $600,000 used to pay cash dividend. And as announced on January 13, our Board of Directors authorized an increase in the stock repurchase program from $15 million to $70 million. We expect to be active in the market in repurchasing shares of our common stock soon. Since November 2014 we have repurchased 906,882 shares of our common stock at a cost of $20.6 million. That concludes our prepared remarks. I will now turn the call back over to the operator to begin the question and answer session. Operator?

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Hanson with Redwood Investment Management. Please state your question.

Yes. First congratulations, Chris and Scott on a very excellent quarter. Your ability to motivate and train your employees or your sales agent is truly incredible. Thank you. My first question has to do with the Hong Kong event and the reception of your new programs. Could you tell us about the high points of the event? The people that were there, the people that were turned away, and what the feedback was on the new products that are coming here, the enhanced Probiotics etcetera? Thank you.

Thank you, Andrew. Thank you for calling in. We had a very successful event in January, early January in Hong Kong, and we have 6,500 people at the event. They are very, very excited about the products and the programs we introduced in this event. We talked about the enhanced version of this Essential Probiotics. We talked about our new Supreme Bonus Programs. And we think that we have a very exciting set of programs that will strongly motivate our associates and we are off to a very strong start for the year.

The follow-on -- enhanced on our bonus program, will that have any meaningful impact on the ratio of commissions to sales?

Yes, Andrew, we would like to manage our commission expenses as a percent of revenue in the range that is similar to our 2015 numbers on a full year basis. That will be our goal going forward.

I’ll go back in the queue. Thank you much.

Thank you.

Our next question comes from Ann Roger [ph] a Private Investor. Please state your question.

Hi. I would like to say that I was a longtime investor of your staff until recently. Well, with regard the allegations of whether your offices in China were graded [ph] or not. I was looking carefully at the Chinese Direct Sales Law. I found that your business model and your paying structure for your members or distributor seem to run against the Chinese laws and more well from the way you do your business and your structure is more like say, [pyramid team] according to Chinese law. So that made me think that your operation in China is practically from borrowed time, because the Chinese authority may go after you or shut you down, it’s just a matter of time. So my question to you, the first, are you going to drastically change you business model and distributor pay structure to comply to the Chinese laws? And two, if not do you honestly believe you can obtain direct sales license in China anytime in the future? And then finally with those [indiscernible] running in the background, how are you going to sustain your growth given the fact that about 80% or more of your growth came from China alone? I would appreciate your answer to all those questions? Thank you.

Thank you, Ann. Thank you for calling in. I disagree with your interpretation of our compliance of the Chinese law, and our position in our opinion have been very clear in all of our public filings in writing. We don’t believe that we’re doing anything that is in violation of the Chinese law. We have a Hong Kong business that is taking orders in Hong Kong, fulfilling in Hong Kong, paying commissions in Hong Kong. We’re not doing anything knowingly in violation of any Chinese law or in any jurisdiction for that matter. Now, we don’t know whether we will get a direct selling license in China and we don’t know if we could get it and when we could accomplish that. We have no control with that process. But we are working actively, proactively, and interactively with multiple Chinese government agencies and complying with their legal requirements for obtaining this direct selling license. And we are taking specific concrete steps in complying with what’s required in the law. We are hopeful with that we could eventually get a license and we understand that that’s going to take some time and we have no prediction over how long that will take. We think we have a very good plan and we are executing that plan effectively in pursuing long term growth. We have demonstrated that we could grow our business. We are selling high quality consumer products to growing Chinese middle-class consumers. They long for good quality products and we are able to provide that through our training, through our product development and through our leadership development program. Thank you.

Our next question is a follow-up from the Line of Andrew Hanson with Redwood Investment Management. Please state your question.

Yes. I would like to focus on capital allocation if you refer to it, and this is a four-part question. First one being are you considering raising the dividend? Second one being, how much cash is actually required for the business just as a back of the end flow of estimate if I take your cash with all of your current liabilities, it looks like you could have as much as $43 million or so in free cash? Third, what are the regulatory restrictions on timing of a buyback? And finally, what’s the ability and the cost to repatriate the funds? I believe that the majority of the cash is held in Hong Kong? Thank you.

Thank you, Andrew. I hope I cover all your questions.

Thanks, Chris.

Yes. We have not decided in the upcoming dividend declaration and we will take that into consideration how much the Board will authorize in terms of dividend. We think that we have adequate level of cash balance. We operate in a market that has high operational risk and we have a great deal of concentration risk as well. So, we do need the level of cash that we have now to run the business. Of course as we announced, we pray -- we currently, we place a higher priority in returning capital to the shareholder to buyback shares. We buy buy our internal blackout window and then so, after the blackout window and -- so we will start repurchasing shares in the market and that should happen soon, and that we’re hoping that we could see better valuation for our stock and then we think that our stock is a very good investment.

When should the blackout window end?

It will come up very soon, after today’s call, yes.

Got you. Thank you. Thanks much.

Thank you, Andrew.

Our next question comes from Matthew Larson with Morgan Stanley. Please state your question.

Actually my question which was in reference to when the blackout window ended was just answered, but I will throw [ph] in that previous caller who was questioning in the same way that some short sellers had questioned your business model. If they aren’t sure about whether or not your enterprise is at a level that they’re comfortable with the investors, they should just not invest in your firm. I mean that’s kind of how I look at it, but thank you very much gentlemen and I look forward to following your company in the near future.

Thank you for calling in Matt. Thank you.

This does conclude today conference. Thank you everyone for your time and your participation. You may disconnect your lines at this time.