Kim Orlando - Investor Relations, Addo Investor Relations Chris Sharng - President Scott Davidson - Senior Vice President and Chief Financial Officer

Greetings and welcome to the Natural Health Trends Corporation Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] and as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms Kim Orlando of Addo Investor Relations. Thank you. Ms. Orlando, please go ahead.

Thank you and welcome to Natural Health Trends third quarter 2016 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 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 Kim and thanks to everyone for joining us. With me today is Scott Davidson, our Senior Vice President and Chief Financial Officer. Total revenue for the quarter was $70.7 million a decrease of 13% year-over-year. For the first nine months of 2016 total revenue increased 18% to $225.4 million versus a $191.2 million in the same period last year. The third quarter of 2015 presented a challenging comparison for us due to a highly successful promotion we ran last year during an otherwise typically seasonably slower quarter. In addition, the Chinese yuan depreciation against the Hong Kong dollar 6% over the year to September effectively increased the price of our products for our members residing in China which we believe negatively impacted sales. In addition, we believe the G20 Summit which was hosted in Hangzhou one of our top performing markets had a significant effect on this quarter’s revenue. The Chinese government to prepare for the high-profile event implemented special measures such as temporarily relocating residents, emptying out entire districts, blocking urban traffic and shutting down businesses from July to early September. Our local member’s ability to organize any activity in the area were severely hampered. Despite a revenue shortfall we were able to increase our operating profit by 3% year-over-year and by 2% over the prior quarter to a record quarterly level of $15.2 million. This was due to the flexibility we built into many of our more promotion and incentive program. Our active member base declined slightly from 126,440 at June 30 to 122,900 at September 30. However, on a year-over-year basis Active Members were up 30%. To reenergize our effective market, we develop a strategic plan which includes leader training and motivation, expansion in terms of both geography and product and technological advancements to enhance…

Thank you, Chris. Total revenue for the third quarter was $77 million a decrease of 13% compared to $80.8 million in the third quarter of 2015. Sales in Hong Kong which accounted for 93% of our third quarter revenue decreased 13% year-over-year and revenue outside of Hong Kong decreased 2% year-over-year. In regards to our cost and operating expenses, gross profit margin for the third quarter was 80.7% compared to 80.2% in the third quarter last year. Commissions expense as a percent of total revenue decreased to 43.3% compared to 49.6% in the third quarter last year primarily due to reduced cost for the ongoing cash and other incentive programs. Selling, general and administrative expenses increased 13% to $11.2 million versus $9.9 million a year ago, so declined 10% versus $12.4 million in the second quarter of 2016. The increase versus the prior year period was mainly due to a increase in the cost of member training events, professional fees and event cost. Operating income totaled $15.2 million an increase of 3% compared to $14.8 million in the third quarter last year. As a percent of total revenue, our operating margin expanded to 21.5% as compared to 18.3% in the third quarter last year. We recorded an income tax provision of $2.6 million for the expected partial repartition of overseas profits resulting in an effective tax rate of 17.7% for the third quarter. Net income was $12.6 million or $1.12 per diluted share as compared to net income of $14.5 million or $1.18 per diluted share in the third quarter last year. During the quarter, we generated $5.9 million in cash provided by operations. Year-to-date, we generated $36.3 million in cash provided by operations. As of September 30, cash and cash equivalents totaled $114.5 million an increase of $9.6 million compared to year end. The increase was due to our cash provided by operations offset primarily by our share repurchasing of just over 903000 shares of our common stock for $23.7 million and income taxes paid of approximately $8 million of the 9 months ended September 30, 2016. Our Board of Directors has declared a quarterly cash dividend of $0.08 per share representing a 14% increase over the prior quarter. In addition as Chris mentioned, we also announced a special cash dividend in the amount of $0.35 per share on our outstanding common stock. Both dividends will be payable on November 25, 2016 to stockholders of record as of November 15, 2016. 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 ladies and gentlemen. [Operator Instructions] And our first question comes from the line of Mr. Herman Mullar [ph] from Nulogos [ph]. Please go ahead sir.

Hi, so the cash flow from operations was much lower this year than the year ago. I was wondering what the reason for this was, you now have lot of cash on the balance sheet and what is your plan for all this cash. Why are you doing special dividend this quarter and not stock buyback? Thank you.

Hi Herman [ph], yes this is Scott. I will take a portion of your question there. The decrease in cash flow generated from operations has to do with the difference in the timing of our commission and incentive payments plus the payment of U.S. income tax. The amount of commissions and incentives on our balance sheet at the end of 2014 but payable in 2015 was not as significant as those at the end of 2015 but payable in 2016. We also paid 7.4 million in U.S. taxes this year. I think probably a better indicator is our profitability, our operating profit for the first nine months is up 30%.

And I would like to add that retaining capital to our stockholders is an ongoing priority. It’s being evaluated on a regular basis. Our business continues to generate a lot of cash and our board is always looking for the most efficient and effective way to reward stockholders with the cash that we generate. So going forward the board may decide to buyback more shares, pay special dividends or implement a combination of them in any given period. Thank you.

Thank you.

And our final question comes from the line of Ilene Maximo [ph] from SPI [ph]. Please go ahead ma’am.

Hello, actually I have two questions. I noticed that your revenue was down compared to the previous quarter as well as prior year but your operating profit was up both times. So I would like to ask you to explain a little bit more as of how that happened and then secondly, in your comments I heard you talked about implementing more training which sounds to me more like a long term program and then also the currency depreciation might be a long term phenomenon too. So are you saying that the business will not bounce back quickly?

Thank you. I think overall, we do a very good job managing our expenses and protecting our profit margin. Many of our incentive programs and promotions are designed to be sensitive to the level of sales and we have historically managed to grow our top line directly without needing outside capital because we build our own working capital from operating cash flow. In the case of the third quarter as soon as we noticed that the level of sales turned out to be different from what we expected, we start to take measures to reduce spending. But I would like to emphasize that just as importantly while we take great care to make sure that our expense management would not harm our ability to continue growing as we focus on supporting long term growth. We don’t give guidance as a matter of policy. With that said, our third quarter this year was down from a year ago at $70 million but as recent as three years ago in the third quarter our revenue was only $14 million in 2013 and $30 million in 2014. So we have managed a period of very strong growth, profitable growth for several years and as of now more than 80% of the people that currently in our business buying our products and doing business with the company were not with us three years ago, so I think providing more training to this fast expanding organization is not only necessary but good for our growth, short term or long term.

Okay thanks Chris.

We reached the end of our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Thank you very much for calling in. I look forward to reporting our fourth quarter progress in a few months. Thank you.

Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Enjoy the rest of your day.