Natural Health Trends Corp. (NHTC) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Natural Health Trends Corporation first Quarter 2016 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 of Addo Communications. Thank you, you may begin.

Thank you. And welcome to Natural Health Trends first quarter 2016 earnings conference call. During today's call, there may be statements made relating to the future results of the company, there 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 9:00 AM 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 Senior Vice President and Chief Financial Officer. Our positive momentum continues with the strong to 2016. Revenue for the first quarter of $74.3 million and net income of $11.3 million both achieved double-digit growth over prior year. Operating profit at $14 million doubled year-on-year. Revenue growth for the quarter was driven by our strategic emphasis on leadership programs, product development, and promotional incentives. In January, we held a successful event in Hong Kong with more than 6,500 members and guests in attendance. At this event we introduced an enhanced version of our essential probiotics product, our second highest selling product at 14% of total sales, and announced exciting incentive programs for the year. Earlier this month, we took our largest incentive trip with more than 1,200 members to New Zealand and Samoa. The qualification for this trip helped propel our 2015 results. In the first half of this year we are concurrently running two travel incentives to either Dubai [ph]. We are also looking forward to the August celebration of our 15th Anniversary which comes with its own performance space incentive opportunity including travel, lodging and tickets to this highly anticipated event in Hong Kong. We believe that our strategies in leadership focus, product development, and promotional incentives are driving growth in our active member base which went from 62,010 a year ago to 109,360 at the end of 2015, and 119,800 as of the end of March. We define active members as those who have placed at least one product order during the preceding twelve months. Consumer demand for our product was strong during the first quarter. Our top three selling products; Premium Noni Juice, Essential Probiotics and Triotein, are all part of our wellness line and comprised 50% of our first quarter revenue. In regard to Premier Noni Juice, we're pleased that we recently received the United States Department of Agriculture Organic Certification from Quality Assurance International. The USDA organic seal is one of the most reputable symbols of organic quality and we believe this certification further validates our product quality. StemRenu is a recent addition to our wellness product category. And with launch in North America in mid-April, it will be rolled out internationally in the coming months. StemRenu new is based on the proprietary blend designed to help activate stem cell renewal and incorporates a Norwegian AVR extract available only to [indiscernible] through an exclusive licensing agreement. Also in early April we launched the restored product line in Europe and hosted two kick-off events in Sweden and Ireland. In March, we introduced Aqua Pure, our U.S. manufactured water purification device as the newest entry to our home product line in China. We completed a two-week multi-city roadshow in conjunction with the launch demonstrating the product to more than 5,000 consumers. Reception of the product has been stronger so far with over $1 million in orders. As a company we are dedicated to enhancing the overall quality of life for our members, and the expansion of our home line was designed to accomplish this objective. Furthermore, we are in the practice of renovating our Beijing office to better showcase our growing home product line which was first launched in China in May, last year. The office is modest in size, only four employees and most have a desk there. The month loan renovations will not impact our business. On April 2, we celebrated the grand opening of our Healthy Lifestyle Center Plus or HLC Plus in Vancouver, Canada. HLC Plus serves as a multi-functional retail space designed to provide members with the opportunity to personally experience our product as well as to conduct meetings. This HLC Plus is the second of its kind following our first location in multi-park California. We also plan to open additional HLCs in China in 2016 and are evaluating additional North American location. We're making good progress with our application for direct selling license in China and have received positive feedback from government agencies about the actions we have taken thus far though the timing of obtaining a direct selling license or whether or not we can obtain one, is beyond our control and remains uncertain. On the news of a highly successful 2015, we are very pleased with our first quarter results that reflect our positive momentum and expansion of our product offering into new geographies and categories. As always we are committed to enhancing value for our shareholders and plan to continue executing against our $70 million stock repurchase program announced three months ago which Scott will elaborate on surely. In closing, I'd like to thank our employees and members for all of your hard work and look forward to building upon this progress throughout the year. Now I'd like to turn to call over to Scott Davidson, our CFO; to discuss our first quarter financials. Scott?

Thank you, Chris. Total revenue for the first quarter was $74.3 million, an increase of 83% compared to $40.7 million in the first quarter of 2015. Sales in Hong Kong which accounted for 92% of our first quarter revenue increased 83% to $68.2 million compared to $37.3 million in the first quarter of 2015. First quarter revenue outside of Hong Kong increased 84% to $6.1 million from $3.4 million in the prior quarter. As played in the commonwealth of independent states, revenue outside of Hong Kong increased 96% over the prior quarter. Our e-commerce sales in China were up 562% year-over-year from $501,000 to $3.3 million driven by strong air and water purifier sales. Now turning to our cost and operating expenses. Gross profit margin for the first quarter was 80.8% compared to 78.1% in the first quarter of 2015, primarily due to both higher product margins and little over adjusted cost. Commission expense as a percent of total revenue increased to 47.2% compared to 45.2% in the first quarter of 2015, primarily due to increased cost by the ongoing cash and other programs. This was in line with our full year 2015 rate of 47.8%. Selling, general and administrative expenses were $10.9 million versus $6.4 million a year ago, and $11.5 million in the fourth quarter of 2015. The increase versus the prior year period was primarily due to increase in employee related costs and incentive program accruals, professional fees, a VIP cost, and other facility costs, as well as the increase in credit card fees due to higher net sales. Now onto profitability measures for the quarter; operating income totaled $14 million, an increase of 102% compared to $6.9 million in the first quarter of 2015. As a percent of total revenue, operating income increased to 18.8% as compared to 17% in the first quarter of last year. Net income was $11.3 million or $0.95 per diluted share as compared to $6.7 million or $0.54 per diluted share in the first quarter last year. We recorded additional income tax provision of $2.4 million for the expected partial repatriation of overseas profits resulting in an effective tax rate of 19.2% for the first quarter. Net income excluding the impact of the additional tax charge would have been $13.6 million or $1.15 per diluted share. Turning to the balance sheet and cash flow, as of March 31, cash and cash equivalents totaled $99.6 million, a decrease of $5.3 million compared to year-end. The decrease was due to our share repurchase activity in which we repurchased just 720,000 shares of our common stock for $18.3 million. Our total shares outstanding is now 11,470,000 versus 12,139,000 at the end of 2015. As announced on January 13, our Board of Directors authorized and increase in the stock repurchase program to $70 million. We expect a follow-through on executing against the remaining $41.7 million available under the program. Our cash provided by operations during the quarter was $13.8 million. We also continue to return value to our shareholders through quarterly cash dividends in which we paid out $576,000 during the first quarter. And on April 21, 2016, our Board of Directors declared a quarterly cash dividend of $0.06 per share on outstanding common stock, representing a 20% increase over the prior quarter. The dividend will be payable on May 20, 2016, to stockholders of record as of May 10. In summary, we are pleased with our overall financial strain which allows us ample liquidity to pursue our growth strategy while concurrently returning value to our shareholders. That concludes our prepared remarks. I will now turn the call back over to the operator to begin the question and answer session. Operator?

Thank you. [Operator Instructions] First question comes from Matthew Larson from Morgan Stanley. Please go ahead.

Good morning, everybody. Thanks for taking the call, couple of questions please. The license in China you addressed it and you're still working on it, in general is this something that's difficult to obtain it if so what sort of cost?

Yes, we were not able to connect. First of all thank you for coming in Matt. The license application is very long process. We try to work it diligently even though we have no control over the outcome and that we expect that it's going to take a long time. I think it's a difficult and challenging process. But during the process we get to learn a lot about the Chinese market and we're getting contact with people in the government that will be good, I think for our business over the long term.

Is there any way to obtain one through a joint venture with a local and indeed it might already be a licensed?

I think that is possible but even though we have gone down the path of developing our own product and developing a number of the parameters that are required in the director involved of our own working in partnership with our leaders. So this is the path that we have chosen and then we will I think give it a shot and we have made our presentation to the Chinese officials at various levels and we will like to see what happens.

Okay. And just a couple more questions on that if you don't mind I mean you discussed the opening of the Beijing office, a few employees there. Is this an office to service some of the, expediting of your product that you sell online in China or to lay the groundwork for potentially getting a license in the future?

We have various offices around the country and Beijing is one of the branch offices and purpose of the office is first and foremost we have four employees that can go there to work. And we have a training room there that can feed about 20 to 30 people and that the office has been small and very modest and since last year we launched a very different line of product, a home product line. We would like to decorate the office so that it could present better the Air purifier that we introduced last year and the water purifier earlier this year right. And that will hopefully make that training a little more presentable, that's our goal.

And the reason I ask is because there was a kit piece from some, I'll call it some hedge funds or somebody some entity that would benefit from the decline of your price who made a claim that some of your offices were not conforming to local law as I guess establishing you all as of multilevel marketing organization which you're not because you're an online company so I was wondering if there was some risk by maintaining these offices to allow people to make false claims.

If the, blog that you refer to around March 14 was completely false. And the office has been there. We think it is a good way of doing business. If the government has any question for us they know where to find us and we are not in hiding and our customers to know where to find us and we can provide customer services and provide information. And so we're here to stay and we are here to do business and having an office, in general is a good idea. And we will continue to do so.

Okay. Great, one last question, sorry and then I will get somebody to answer one. How about guidance going forward in the next quarter or for the rest of the year?

Matt as a policy we don't give guidance. But I feel very good about our momentum. I feel that our people are very motivated. They are looking forward to a strong year. And so am I so I feel very good about what we're doing but we don't give guidance.

Okay, fair enough. Thanks so much for your time, sir.

Thank you sir.

Our next question comes from Will Hamilton from Manesakyo [ph]. Please go ahead.

Good morning guys.

Hey Will, good morning.

Just a question on the gross margins, they are up pretty nicely year-over-year, sequentially too. So is that sort of near 81% level, you think a sustainable level through this year?

Well I think so, I know this is one area where we actively manage, we try to develop our product mix in a way that we enjoy resources and our support behind better margin products, that's number one and number two is every time we introduce a new product we have the goal of further improving our gross profit margin. That's a very important item that can give us more resources to develop the market. And we also have some help on the market too. I mean, recently you probably that ocean freight has gone down and so we have a very low supply chain and to help us to. We think that over the long term this gross profit margin is sustainable and I'd like to further improve it too.

Okay. And then you mentioned the Chinese e-commerce sales of $3.3 million. Is that made up entirely of the air and water purifier just to confirm?

Well you have about two thirds of that is Air purifier and a little bit of water purifier. We just started taking orders and making shipments by the end of the first quarter. And then we have some other items that we have some skin care line. We have essential oil and we have some I care line, I cream line. So those products, they are growing as well. But we have felt the most impact from the home product line air purifier and water purifier.

So are those sold through your distributor, your members or distributors? Or is that straight to consumer and there is no sort of commission?

Right. They place an order online with us, with the Chinese subsidiary and then we ship directly to the consumers. There's no commission.

Okay. So it's a higher margin sale then?

That's right. That's exactly right.

Okay, that's helpful. And then Chris I just wanted to get your thoughts on the stamina renew product which you have launched in North America and mentioned international in the next couple of months. And do you think that this could be a big driver, I know you don't like to provide guidance but it seems like a differentiated product but just trying to frame the upside potential of it.

Well, we feel very good about this product and we stumbled upon an opportunity and two of our leaders in North America recruited this team that comes with the product. So we have some new distributors that come with their renewal, they are based in California and some of them are in Georgia. We are staging events now to introduce them to our product and premier noni juice in a little bit in our product and we will be introducing their products, very new, to our market most likely in the summertime in greater china. So I think this is a great opportunity. I don't know how much we can do with it but I look forward to developing the synergy of the product and also with this group of new members.

Okay. Thank you.

Thank you, Will.

Thank you. This concludes the question and answer session. This also concludes the conference. Thank you for your participation. You may disconnect your lines at this time.