Natural Health Trends Corp (NHTC) 2008 Q4 法說會逐字稿

Good morning. My name is [Berverlynn] and I will be your conference operator today. At this time, I would like to welcome everyone to the Natural Health Trends fourth-quarter 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, they will be a question and answer session. (Operator Instructions). Thank you.

Ms. Bono, you may begin your conference.

Thank you, Beverlynn. I would like to welcome you to the fourth-quarter 2008 earnings conference call for Natural Health Trends Corp. I would like to first to take care of some general administrative items.

Your telephone lines have been placed on listen-only mode until the Q&A segment of today's call. This call is being recorded; if you have objections, you may disconnect at this time.

Forward-looking statements in this conference call do not constitute guarantees of future performance. Such future forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those anticipated. For a more detailed discussion of the risks and uncertainties of the Company's business, please refer to the annual report on Form 10-K for the fiscal year ended December 31, 2007 and the 10-K for 2008 that will be filed in the next week or so. You may also refer to our quarterly reports on Form 10-Q filed with the SEC.

All forward-looking statements are made as of today, based on information available to us today and as required by law. The Company assumes no obligation to update any such statements.

The content of this conference call contains time sensitive information that is accurate only as of today, March 17. At the end of our remarks, there will be time for your questions.

At this time, I will turn the call over to Chris Sharng, President of Natural Health Trends.

Thank you, Jean, and good morning, everyone.

Natural Health Trends entered 2009 as a company significantly different from the past thanks to many positive changes implemented in 2008. We are now much leaner and more focused on delivering superior health and wellness products through a global distribution system that also provides an opportunity for satisfied product users to create their own business selling our products.

In the past year, our company faced many operational, financial and legal challenges. We invested a tremendous amount of time dealing with legacy issues and evaluating every aspect of our business. As a result, we have emerged with these past issues largely behind us and with a much stronger position for NHT Global.

A critical part of that new vision includes an aggressive change in our corporate culture. Reforming our culture became the guiding objective in our operational decisions. Personnel were streamlined, legal liabilities were mitigated, and our spending has been reduced to a level well below the $4.5 million quarterly target we had previously communicated.

Through successful sales events and strong distributors, we stabilized our revenue in 2008. With an enhanced infrastructure designed to support our distributors' excess, we are looking forward to a productive 2009.

The changes and additions to our management team have also reflected the changing goals we have set for not Natural Health Trends. We recently announced the appointment of Linda Lucas Padilla as Senior Vice President of Marketing. With extensive experience in our industry, Linda is driving our global product development and marketing.

This new position for Natural Health Trends demonstrates our commitment to a disciplined approach to the development, launch and support of new products. With the experience of a professional management team and outstanding employees we have assembled, we intend to give our distributors extended product offerings from which to accomplish their goals.

We had a strong finish for the year 2008. The higher level of deferred revenue at the end of 2008, compared to that of September, represents more orders were received but not shipped as of December 31 versus three months ago.

We are optimistic about the current momentum our greater Chinese members have generated following a prolonged Chinese New Year Festival period that ended in mid-February. We've been actively planning new 2009 marketing programs, including a new focus on smaller training, self-events and meetings in greater China that have begun in the last few weeks.

We are also excited about the progress in one of our newest and most promising markets, Russia. We have selected a service partner in Russia and are planning to activate an in-market customer service facility by the end of June.

Taiwan successfully launched Essential Probiotics in February, an innovative product designed to improve intestinal health. We plan to introduce Essential Probiotics to our markets in Hong Kong and China soon.

Our new men's cosmetic line, Gallant, was recently introduced to our Chinese Consumer Business under it the Skindulgence brand name. Early reception is very positive. We had planned for expanded promotions. The Chinese business is based on a network of eight branches in major cities of the country and has been cash positive since last September.

In Hong Kong, we launched a new Go package that included a number of products newly registered for the Chinese market, including the exclusive NHT Trio Team nutritional product. With a highly anticipated new incentive trip to Japan and a new recognition plan, the members are enthusiastic about our expanded plans for 2009. With exciting new product development plans evolving and our global brand strategy focused on creating wellness traditions, the current trend in revenue and expenses we're witnessing after the Chinese New Year bodes well for a solid year.

At the end of the fourth quarter, we implemented a price increase and the restructuring of the shipping methods. Mainly in Hong Kong and also in Europe and North America, that should further bolster our gross profit margins starting in the first quarter. (inaudible) we had planned for and largely executed additional cost savings measures to further reduce expenditures in Information Technology, personnel, logistics and office rent in the US, Hong Kong and Korea. In total, that should produce cost savings of $500,000 per quarter to be fully realized by June.

As a final note, I would like to take a moment to share personal observations with respect to the extraordinary times we live in. Everyday, we read and watch media coverage about the global financial meltdown and economic turmoil. I believe this macroeconomic environment presents a huge opportunity for our business and distributors as more people come to realize that they need alternative ways to achieve their goals, to utilize their skills and to simply supplement their income. NHT Global is well positioned to support those objectives.

Now, Scott Davidson, our CFO, will provide you with some details on the quarterly financials.

Thank you, Chris, and good morning, everyone. I would like to share with you our fourth-quarter 2008 financial results.

Net sales in the fourth quarter were $11.1 million, roughly unchanged from the third quarter. Sales in Hong Kong increased $744,000 or 10% quarter-over-quarter, while sales from North America and Europe increased nearly $300,000 or 30% over the same time frame due to sales into Russia and its adjacent countries.

These increases in revenue were reported in spite of the increase in unshipped product in both markets totaling $869,000 in the aggregate. Also, our eCommerce business in China increased sales by $154,000, or 44%, quarter-over-quarter, due to new product introductions of such as TriFusion max in August 2008. This increase in sales was largely offset by decreases in Taiwan and in Korea.

Gross profit margin was 72% during the fourth quarter. As we previously communicated, we anticipate continued improvement in gross margin as a result of a price increase and a restructuring of shipping methods in Hong Kong. Both of these changes were effective at the end of the fourth quarter. Thus, benefits were not reflected in our income statement until 2009. Further, we expect our margins to benefit from a reduction in importation fees in Asia affected towards the end of the first quarter of 2009.

Distributor commissions were 40.5% of net sales for the fourth quarter versus 41.5% in the third quarter of 2008. We believe that our commission rate will ultimately sell around 40% of product sales.

During the fourth quarter of 2008, we derecognized $2.2 million of commission liabilities in certain international markets for previous years, as we determined that it is probable that these commission payments will not the claimed.

SG&A during the fourth quarter total $3.9 million, including $133,000 of non-cash stock compensation expense, compared to $4.4 million in the third quarter of 2008, which included $128,000 of non-cash stock compensation expense.

Operating loss was $815,000 compared to operating loss of $1.3 million during the previous quarter. We generated cash from operations of $90,000 during the fourth quarter, compared to cash used of $1.3 million in the third quarter. The improvement in both operating loss and cash flow from operations results from better alignment of commission payout with sales and our continued success in reducing operating costs.

Now, I would like to turn the forum back over to Chris.

Thank you, Scott. We would like to open up the forum to a session of questions and answers.

(Operator Instructions). [Dale Padmore].

Good morning. A couple of questions -- first of all, I noticed, under the NASDAQ listing rule, it still says that you guys are having issues there. Could you tell me what you are going to do to get back online with the NASDAQ listing rules?

You mentioned you have a couple of questions. Any other, Dale?

The other question is about the write off of your commissions. Is that really the only or the de-organization or whatever you called that -- is that the really the only way that you were able to pull off a profit is by pulling that money back?

Okay. I can answer the first one and I will have Scott answer the second question that you raised. We are currently going through a period that NASDAQ has given us to get back in compliance with the closing bid price at greater $1. I think we had sufficient time and we are not going to have to be strictly qualified for that standard until early September. I'm hoping that the basic business is going to improve and we will be able to show, so the basic stock price will be improved as such that we will be in compliance in due time.

What does the stock price has to be, Chris, over $1?

Over $1, that's right.

So you believe the stock price will be over $1 by this summer then?

well, Dale, I cannot control the stock price. I think the business continues to progress and we continue to make improvements to our results. Therefore, the financial statements will show that.

But what will happen though, Chris, is, come September, will they delist you? Will you just be over the counter then?

I cannot control the stock price. We will show that (multiple speakers).

That was not my question Chris. If you're not there by September, will Natural Health Trends be taken off the NASDAQ and put over the counter? That is my question.

No. When it comes to September, NASDAQ will go through another review process and there will be more time given. They will look at not just the closing bid price but also other listing requirements. September is one milestone.

Dale, to answer your second question about the commission derecognition, the nature of the derecognition was that we had some previous checks, previous commission checks in prior years that weren't settled by the members. So, we deemed them noncollectible, or they won't get settled. So we derecognized that.

Do you mean --.

As far as net income, it is true that was a big part of our net income for Q4. However, we -- if you look at the P&L, we realize that below the line in other income. So in terms of loss from operations, we did show a loss. But as Chris mentioned previously, we expect to receive a big pickup in the latter part of 2009 from our cost-saving initiatives.

But, bottom line, had you not -- like, that $2.2 million was just sitting on the books there. So what you are saying is that people either didn't collect it or you're not paying it because they did not deliver. So by you saving that money basically made your numbers look better. Your numbers would have basically looked worse had you not, right?

Yes. That's what I said, Dale. Bottom line -- it makes our number look better. It has no impact on loss from operations.

No, I think it's a good thing. You're not paying something that you should not be paying out and I'm glad you have got the accounting thing -- practices in place to make sure that you are not paying out commissions on things that were not delivered. That is something that needs to be, I think, taken care of because it's just a period that was happening.

Okay, well, I guess we'll have to see what happens until June. I hope you guys get here up there by January or June, because I'm in at a very high, high-level entry rate and the loss I'm showing on my books because of this is quite substantial. So that is the reason for my questions. Thank you very much.

Thank you.

(Operator Instructions). There are no further questions at this time. Mr. Sharng, do have any closing remarks?

Thank you very much and thank you to our investors, employees and distributors for calling in. I look forward to reporting our progress to you again next quarter. Thank you.

This concludes today's conference call. You may now disconnect.