Natural Health Trends Corp. (NHTC) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Natural Health Trends Corporation Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando of ADDO Investor Relations. Thank you. You may begin.

Thank you and welcome to Natural Health Trends third quarter 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 due to 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 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. Total revenue for the third quarter of $40.1 million declined by 43% from the third quarter of 2016 and by 22% from the second quarter of 2017, while we had made progress to revitalize sales growth, certain short-term factors exerted significant adverse effects and masked a quarter that was otherwise indicative of positive developments. The difficult market conditions we have been experiencing since the third quarter of 2016 were further compounded by the 20 anniversary of Hong Kong's handover in July, as well as China's Communist Party's 19 National Congress in October, which tempered economic activities. These events impacted the operations of our logistics partners and detracted from our leaders' ability to organize meetings, which hinder our progress in comparison to the prior quarter. However we view both occurrences as short-term issues. Despite the challenging environment on-site and follow-up orders for the Kuala Lumpur event in August were substantially greater than those of the Macau event in March. A number of our emerging markets still achieved impressive sales growth during the quarter including Peru, Northern Europe, Southeast Asia, and Japan. We also had a positive response to our most recent product introduction, notably OcuFocus, NaturalGlo, and CogniMax. Further we were able to maintain a strong gross profit margin of nearly 80% and generate an operating income margin of over 21%. Our ability to preserve healthy margins is due to the strong allegiance of consumers to our products and our continued proactive expense management to better align our cost structure with the more limited upside opportunities we have been seeing in the field. To help counter the slowdown and drive momentum in Asia, we recently enhanced our incentive programs and adjusted our bonus and reward program in an effort to provide more resources to up and coming members. We enhanced our matching bonus program in July to motivate our top leaders to have their down-line members earn increased commissions. Instead of basing it on performance for two consecutive months in a quarter, rank advancement cannot be achieved with any two consecutive months throughout the year. Exchange was what we see by our leaders who are expected to take advantage of it in the coming months. We held two incentive trips during the quarter. In late September we hosted a six day cruise for more than 1,300 members through East China Sea from Shanghai to Noshiro Port in Japan. In addition our qualifying European members traveled to [indiscernible] in late September overall specimen during the trips was very positive. And we remain optimistic that these programs would generate incremental product orders and continue engagement in the business. The qualification period for our new incentive trip to Australia lies through the end of the year. It is designed to focus on strengthening team development and permitting existing member advancement in our international recognition program. In early October, we sponsored [indiscernible] near Shanghai were more than 1,400 members were intendance. We also just completed our second domestic Fly High training with 1,200 guests attending in Shandong, Eastern China, as well as hosted a charity walk with 1,600 people participating in Taiyuan in Northern China. Our fast growing European business has centered in Sweden, Finland and Ireland. To capitalize our Northern Europe continued strong performance with double-digit growth we planned two upcoming events in December. In [indiscernible] European Success Forum will take place in Stockholm. In conjunction with this we will host an incentive program in Stockholm for our qualifying leaders in the region. Furthermore our [indiscernible] Royal Summit incentive towards our top leaders will be in Sweden in December. We expect these programs will increase productivity among our active members and create silence around our products to drive further growth in Europe. Expansion into new international markets remains an important priority. As we mentioned in July we celebrated our official opening in Peru with more than 600 members in attendance. We have still to receive multiple registration approvals for our top selling products including premium managers, [indiscernible] since opening this market we have involved more than 9,000 Peruvian members and product orders continuing to surpass our expectation totaling $200,000 in the third quarter and $670,000 year-to-date. We believe this speaks to the high quality of our Peruvian member base and local team leadership. We have our second half major event end of this year as the ambassador of county in Kuala Lumpur in August following the receipt of approval for a direct selling license in Malaysia, this two day event was over 5,300 mostly Chinese attendees included product training, member recognition, and new product launches. New product introductions at this event included Biocell-sc and RESP Care embedded RESP care. Biocell-sc is a clinically proven plant stem cell infused way of our BioCell Mask. RESP care is a liquid nutritional supplement uniquely formulated to help protect lungs from airborne toxins. To further deploy our growing U.S. member base on the East Coast we are building our third North American healthy life style center plus or HLC Plus in the Southern New Jersey. As a reminder HLC Plus is a brick & mortar multifunctional space designed to provide members with opportunity to personally experience our product as well as a place to conduct meetings and training. We anticipate a grand opening would take place in early 2018. In China, we are still in progress with our application for a direct driving license, however the timing of obtaining the license and whether or not we can obtain one remains beyond our control. We are working with the Chinese Government due to proper steps and we will provide updates as material development arise. Before I conclude I'd like to touch on our allocation of capital. We generated $15.3 million in cash flow from operations during the first nine months of 2017 and are comfortable with our overall liquidity position. We paid out over 90% of our cash flow from operations in dividends and remain in a position to continue to return cash to our stockholders given our strong balance sheet and management of working capital. Despite the long and short-term challenges that has continued to overshadow our positive momentum, we are confident in our ability to revitalize sales in our Asian market. We have been able to retain all of our top leaders since the slowdown began a year ago and are actively working to enhance our sales force. With that, I would like to turn the call over to Scott Davidson, our CFO, to discuss our third quarter financials in detail. Scott?

Thank you, Chris. As discussed total revenue for the third quarter was $40.1 million reflecting a decrease of 43% compared to $70.7 million in the third quarter of 2016. Sales in Hong Kong which accounted for 87% of our third quarter revenue decreased 47% year-over-year to $35 million. Outside of Hong Kong revenue increased 6% year-over-year to $5.1 million. Our active member base declined to approximately 99,700 at September 30 from 107,300 at June 30 and from 122,900 at September 30 last year. In regards to our cost and operating expenses, our gross profit margin for the third quarter was 79.6% compared to 80.7% in the third quarter last year. The slight reduction was due to lower revenue this year offset by reduced shipping cost. Commissions expense as a percent of total revenue decreased to 39.4% from 43.3% in the third quarter last year primarily due to less cost incurred for our third quarter [indiscernible] expected. Excluding this benefit, commissions expense as a percent of net sales for the third quarter of 2017 would have been consistent with the prior quarter. Selling, general and administrative expenses for the quarter decreased 33% to $7.5 million versus $11.2 million a year ago. The decrease in SG&A versus the prior year period reflects the proactive cost reduction measures we have been implementing since the fourth quarter last year. Operating income for the quarter totaled $8.5 million, a decrease of 44% compared to $15.2 million in the third quarter last year. As a percent of total revenue, our operating income margin was 21.2% compared to 21.5% in the third quarter last year. We continue to recognize a income tax provision for the expected partial repatriation of overseas profits. The effective tax rate of 14% for the third quarter compared to 18% in the prior year period was due to a true-up of foreign tax credits generated for prior tax years. Net income totaled $7.3 million or $0.65 per diluted share as compared to net income of $12.6 million or $1.12 per diluted share in the third quarter last year. Cash and cash equivalents as of September 30, 2017, were $127 million which was down from $136.3 million at June 30. During the quarter, we paid out $4.1 million in dividends as well as $5 million related to federal income taxes. On October 30, our board of directors declared a quarterly cash dividend of $0.12 per share as well as a special cash dividend of $0.15 per share both of which will be payable on November 24 to stockholders record as of November 14. That completes our prepared remarks. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Jeff Lund, a Private Investor. Please proceed with your question.

Hi Chris, this is Jeff. I had a question about your dividend plan for the quarter; the current tax filed [ph] in Congress calls for some changes to corporate taxes why not to wait to see what happens with that plan?

Thank you, Jeff for calling in. The board is committed to returning capital to our shareholders and the review of capital allocation and capital return is ongoing and we don't prepared to know anymore than the market what is going on in DC with respect to this tax bill. We do keep an eye on it and so that it's incorporated in our thinking. The board is absolutely confident in the business prospects for our business in the near-term and also in the long-term and is very comfortable with the liquidity situation that we have now. So, I would strongly emphasize that the dividend and also potentially stock repurchase continues to be available for us to return capital. Thank you for your question.

Our next question comes from the line of Gordon [indiscernible] Private Investor. Please proceed with your question.

Hi Chris. A couple of months ago the Chinese Government was reported to announce a new policy of cracking down on payment schemes. Now you talked about the effects of the Hong Kong handover and the National Congress. So I was wondering that this in anyway affect the third quarter?

Thank you for calling in Gordon. Indeed the Chinese government about two months ago announce a policy or campaign to crack down an anti-Pyramid scheme and even in our field we have observed that the pyramid schemes had become increasingly ramping and aggressive and in certain cities they have impacted us negatively. We think that this is a good policy; and we think that we will like to see that this policy will be effectively and thoroughly implemented and maintained for the long-term, and it will be good for our business. Thank you for calling.

Thank you. We have reached the end of the question-and-answer session. And with that the conclusion of today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.