Natural Health Trends Corp. (NHTC) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to Natural Health Trends Corporation First Quarter 2017 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, Kimberly Orlando of Addo Investor Relations. Please go ahead.

Thank you and welcome to the Natural Health Trends first quarter and 2017 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 materially differ 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 O'clock AM Eastern Time, instructions can be found for accessing the archived version of the conference call via the internet. At this time, I would 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. As I mentioned on our last conference call, we are still working to overcome to slow down we experienced since the third quarter of 2016. In addition, we move our first half major event from early January in prior years to March this year making a year-over-year comparison challenging. Also the stronger dollar made our products more expensive for our Chinese consumers. As a result, total revenue of $59.9 million declined by 19% compared to the $74.3 million in the first quarter of 2016 and was roughly flat with the $62.3 million in the fourth quarter. That said, our gross profit margin reach an all-time high of 81.2%. And due to our proactive expense management, our operating income margin of 21.7% expanded by nearly 290 basis points compared to the first quarter a year ago. Partially offsetting the factors affecting our top-line was heightened productivity in March, following our successful Ambassador Academy in Macau, which attracted over 6,000 members and guests. We were very pleased with the record turnout after moving the event to after the Chinese New Year, which we believe will improve the member experience longer-term. At the event, we introduce new products including our new NHT baby line, as well as [indiscernible] a new herbal supplement to promote long term brand health. [Indiscernible] generated over $520,000 in product orders during the month of March, a very encouraging start. In March, we completed a three week 12 city road show in China for our top selling product Premium Noni Juice. This promotion which kicked out at our Macau event was led by our Premium Noni Juice brand ambassador as a descended at the Samuel Islands where that Noni food stores, it did a fantastic job conducting product training for over 2,500 members and educating them on the benefits of this product. Our first domestic incentive trip of the year, what we call Fly High training just took place in Southwest China last weekend and it was our biggest Chinese incentive trip ever with more than 1,600 in attendance. Our first 2017 international incentive trip to Dubai is also coming up in May, but those that cannot attend in person, we expect our members on the trip will be sharing their experiences, excitement and energy life through various social media platforms to connect with other members and help encourage incremental product orders. In regard to a geographically expansion, we're making good progress to our goal of establishing a local presence in Malaysia, in Vietnam, and believe both markets should be up and running by the year end. Following opening in Mexico earlier this year, we also anticipate we will begin shipping products in Peru, in the second quarter. I would like to highlight that although still a small percentage of our overall sales, we have been experiencing strong growth in our European market in the triple digit range. We hosted two successful events in March; one in Gothenburg, Sweden and one in Helsinki. We hosted a third meeting in Oslo where our leaders in a Nordic regions continue to perform very well as do leaders in both Ireland and the Czech Republic. North America has been another bright spot with the highest growth occurring on the East Coast particularly in a tri state area. Despite of various expansion initiatives underway, China still remains our top priority. We are making progress with our application for direct selling license, however the training of obtaining the license and whether or not we can obtain one remains beyond our control. We will provide updated as material development arise. We respect to technological advancement, we rode out our updated proprietary business interface now called office in March in an effort to improved member communication and efficiency were alive. Within a month of going live over 30% of our total orders had been coming through in office. And we have received positive feedback with regard to the ease of use an expanded functionality. This newly design interface includes a streamline ordering process, educational product information, and added customization doing enrollment to help our members conduct business with greater ease. During the quarter we generated $13.8 million in cash flow from operations, consistent with levels achieved in the prior year quarter, and we go to capital allocation I'm pleased to announce that we had to clear another special dividend in the amount $0.35 per share. In addition we are increasing our regular quarterly dividend to $0.10 per share, which is up 11% over the prior quarter. Our strong balance sheet and working capital management for us the ability to return capital to our stockholders well simultaneously focusing on our growth initiatives. We will continuously evaluate our capital allocation priorities going forward in a concerted effort to build sustainable long term growth for our stockholders. But it would take time for the results of our strategic initiatives to bear fruit, we're confident in our ability to attract, motivate and retain a strong member base, as well as to expand our product offering into new geographies and categories. Before I turn it over to Scott, I would like to mention our charitable activities with a few programs underway. Our healthy walking event would take place in Eastern China in June. We participated as one of many corporate sponsor is in a similar program in Guangzhou a year ago. This time we decided to be the source sponsor and organize the activities ourselves. We would donate the proceeds to the China Youth Development Foundation and will unite our members with friends to support a great cause. Our [indiscernible] program co-sponsored by the United Nations Environment Program, China Green Foundation and the Climate Group is funded from sales of our air purifier product in China, but each air purifier stowed we will donate three trees to be planted in China's Western Region with a goal of planting at least 10,000 trees. Further in collaborations with the Chinese post-office, we also release a collection of NHT Global Stance the proceeds which would be donated to other charitable causes in China. These efforts help support our mission to enrich the life of our customers by staying committed to wellness and giving back to the community. With that I'd like to turn the call over to Scott Davidson our CFO to discuss our first quarter financials. Scott?

Thank you, Chris. Total revenue for the first quarter was $59.9 million a decrease of 19% compared to $74.3 million in the first quarter of 2016. Sales in Hong Kong, which accounted for 91% of our first quarter revenue decreased 20% year-over-year. Outside of Hong Kong, China revenue decreased 47%, well North America and Europe increased 37% and 297% year-over-year respectively. Sales were roughly in line with the fourth quarter of 2016 despite two fewer days in the calendar as well as a major holiday to selling ship. Our acted member based decline start to approximately 114,000 at March 31, from 119,000 at December 31 and from 120,000 at March 31 last year. In regards to our cost in operating expenses our gross profit margin for the first quarter expanded to 81.2% from 80.8% in the first quarter of last year due primarily to reduce shipping cost. Commission expense as a percent of total revenue decreased to 43.4% from 47.2% in the first quarter of last year and as in line with the full year 2016 rate. Selling, general and administrative expenses for the quarter decreased 13% to $9.5 million versus $10.9 million a year ago. The decrease in both commission expense and SG&A versus the prior period reflects the cost reduction measures we successfully implemented last quarter. Operating income for the quarter totaled $13 million reflecting a decrease of 7% compared to $14 million in the first quarter of last year. However, as a percent of total revenue our operating income margin expanded to 21.7% compared to 18.8% in the first quarter last year. We continued to recognize the income tax provision for the respective partial repatriation of overseas profit. Resulting in effective tax rate of 21% for the first quarter compared to 19% in the prior year period. Net income totaled $10.4 million or $0.93 per diluted share as compared to net income of $11.3 million or $0.95 per diluted share in the first quarter of last year. As Chris shared, our Board of Directors declared a quarterly cash dividend of $0.10 per share representing a 11% increase over the prior quarter. In addition, we also announced a special dividend in the amount of $0.35 per share on our outstanding common stock. Both dividends will be payable on May 19th 2017 to stock holders that record as of May 9th [ph]. Finally, I would like to welcome Marcum as our new independent registered public accounting firm, beginning with our Q1 review. Given Marcum strong presence in both the U.S. and China and it's growing SEC practiced we believe the firm is well positioned to support our company as we continue to grow. That completes our prepared remarks. I would now like to turn the call back over to the operator to begin the question-and-answer session. Operator?

Thank you, sir. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Perry Bright, a private investor.

Hi Chris, I see that revenue was down 19%, but the bottom line did not change much and the margin improved. How did you do that, are you hurting your future growth with this cost reduction? Thanks.

Thank you, Perry for calling in. I think we always have a process of evaluating our opportunities and risk compared to the cost benefits of reacting to what's in front of us. And since we face the headwind in the second half of 2016, which many of the bankers were outside of our control, we still see a lot of prospects for growth, but we think that especially on the auto reach of this prospect for growth opportunities for us to chase them and may be very expensive, it may cause a lot of money. And I think in the long term my stockholders are better served and that we are stronger company, if we do a better job protecting our margin and protecting our profitability, so you see that both in our financial statements and our financial results for the first quarter.

Thank you.

The next question comes from Will Hamilton of Manatuck Hill. Please go ahead.

Hey good morning guys. Just a question, could you possibly quantify the impact of moving the investor event from January to March with there's some push of orders that you would have normally gotten into Q2 to Q1.

Will I think that is a decision that we made based on customer services, I can't quite quantify the effect of making the changes. We see that in January usually we were able to generate a lot more orders in January in prior years, but then a lot of that orders are hung up and backed up custom because of the Chinese New Year holidays and many of the necessary parties in the logistics process were up and we were not able to deliver. And the logistics process within China is longer to begin with, and we usually take that as a week, it's not month to resolve that backlog, so this year we decided to forego that earlier opportunity and instead improve our customer services. I think that over the long term this is a better decision, but we won't be able to quantify and effect of this change.

Okay. So then if I just look at your bookings, just in the revenues in deferred revenues about $64 million, which is up on slightly from Q4 and almost similar to Q3, check viewed as a sign that I mean the business well down year-over-year is actually starting to stabilize and sequentially maybe up in Q2?.

Well, I think that is remarkable observations. I do agree that I think right now at this point of our business development a sequential comparison quarter-to-quarter is more meaningful for us. And I also think that the seasonality of each and every particular quarter is diminished, and even though there are some holidays in particular in the first quarter, but over the longer term is not as important as use to be. I agree to that. I think the product order is being generated each and every quarter seems to be around this level, this particular level and we're hoping that we can do better. But I agree with your observation.

Okay, great. And then so in theory, I mean you're probably not going to answer this, but I mean second we can see growth year-over-year and you lap easier comparisons and the business continues to pick up momentum again?

We won't be able to give guidance as a matter of policy, but we do have a lot of good programs line up and as you've heard earlier that we have an incentive trip, we had two incentive trips going on this rest of the year, and though we have also a revised opinion enhanced the spring bonus that proved effective in the prior years, so we feel good about 207.

Okay last question just StemRenu providing color on how much of revenues it was in the quarter?

Yeah, Will, its Scott. StemRenu was around 3% of our revenue for Q1.

Okay. That still growing?

Yeah, we introduced StemRenu late last year and it had a good start. I expect it to grow, it's a good product. But we introduced other products in Q1 as well, so maybe it's a little bit subdued in Q1.

Okay, thanks.

Thank you.

There are no further questions. So this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.