Natural Health Trends Corp (NHTC) 2009 Q2 法說會逐字稿

Good morning. My name is Brandy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Natural Health Trends second-quarter results conference call.

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

[Michelle Gladwell], you may begin your conference.

Thank you, Brandy. I would like to welcome you to the second-quarter 2009 earnings conference call for Natural Health Trends Corp.

I would like to first take care of some general administrative items. Your telephone lines have been placed on a listen-only mode until the question-and-answer 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 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, 2008, and our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.

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, August 12, 2009. 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, Michelle, and good morning, everyone. Despite a difficult operating environment in the second quarter, we continued to make progress towards the goal of cash flow breakeven.

Our cash used in operations was a negative $92,000, almost breaking even, an improvement compared to $486,000 cash used in the first quarter, or $1.5 million in the first half of 2008.

The other important milestone is that we fully redeemed the convertible debentures that come due in October 2009. The debentures were issued in October 2007, which also marks the beginning of a major organizational change within the Company.

The proceeds help the Company tremendously in restructuring the business and resolving legacy issues. Over the last two years, we have lowered our cost of doing business and tightened up operating efficiency to the extent that, since October of 2008, we have been able to meet required monthly redemption payments of almost $200,000 every month.

Servicing the debentures required taking cash out of the business, which has not, by any means, been easy. Certain accounting rules also dictated that most of the borrowed amount be expensed on our P&L, resulting in a charge against earnings of $1 million in the second quarter alone, another roughly $1.1 million charge in the third quarter, and a total of $5 million charged during the course of issuance. Now the debentures are paid off, we are debt-free.

In the second quarter, the product and service orders we took in were not as robust as we anticipated. The volume of orders, which is roughly revenue adjusted by the change in deferred revenue, was slightly greater in the second quarter, about $8.5 million compared to $8.2 million in the first quarter.

Coming into the second quarter, we were hoping for more.

In the second quarter, in our analysis, we had to reckon with the unexpected development that one of our members groups in greater China went through an internal reorganization. Certain subgroups were realigned to work separately instead of together. This change in the field required us to make adjustments to our marketing plan and effectively defer some marketing activities into the late third quarter or fourth quarter. This reorganization disrupted our marketing programs and the effects of the disruption have lingered on into the third quarter, which also includes our traditionally slower months of July and August.

To make the most out of the summer days, we started a reach-out program in greater China, essentially a series of road shows for us to visit multiple cities each week to promote awareness in the quality products that we offer. We have never done anything like this before. In the reach-out program, we are in front of new crowds every week; we are meeting with many of our grassroots members in their hometowns. The reception so far has been wonderful.

As part of our expanded global sales and marketing strategy, we have planned to proactively execute new marketing programs with an emphasis on smaller trainings, sales events and meetings closer to the local members in greater China. Working with our top leaders, these efforts will continue throughout the next few months.

Just a few days ago in August, we announced our eighth-year anniversary celebration promotion, an exciting program that will culminate in a training event in Hong Kong currently scheduled for early November.

The other exciting milestone we reached recently is that we had started, in July, to make shipments to our Russian members from a warehouse in Moscow. We made the investment of increasing expenses on the ground to engage Russian service providers in order to reduce shipping time and improve customer services.

Our Russian leaders are taking advantage of this development to build their business. The leaders are hosting a contest among Russian members to prepare for an October grand opening that we anticipate will be attended by more than 1,000 people. We are hopeful that the enthusiasm exhibited by the Russian members will eventually turn into more significant revenue for us. We anticipate that there will be a leadtime for material sales to come in after the initial investment, but so far, we are pleased with the progress.

We have also focused our efforts on improving the productivity of existing or newly recruited members. We have reduced the cost of acquiring new recruits by implementing performance-based spending plans, leading to an increase in average member productivity and therefore our ability to reduce the cash used in operations in a very challenging environment.

As we have previously stated, our expectation is that we will produce further cost savings of $500,000 per quarter, compared to the fourth quarter of 2008, to be fully realized in the third quarter of 2009. Cost savings are expected to be generated through reorganizations in information technology, logistics and office trends in the US, Hong Kong and Korea.

Finally, in the past year, we invested a tremendous amount of time and money dealing with legacy issues. We believe we're almost done with them now.

More importantly, in overcoming the legacy issues, we have emerged with a much stronger vision and culture. We will be focusing on this new vision and strategy in our Hong Kong and Moscow events. I believe more than anything else that paves the path to a more secure and consistent business for us in the future.

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

Good morning.

Net sales in the second quarter were $8.5 million compared to $9.9 million in the first quarter of 2009. Revenue in the first quarter benefited from the high level of unshipped orders in the beginning of that quarter.

As Chris previously mentioned, orders taken, which are roughly measured as revenue adjusted by the change in deferred revenue, were slightly greater in the second quarter at $8.5 million compared to $8.2 million in the first quarter. The increase from the first to the second quarter was across all of our main markets.

Gross profit margin was 70.4% during the second quarter of 2009 compared to 71.7% during the first quarter and 72% for the prior year. We have realized some benefits from the restructuring of shipping methods and the reduction in importation fees in Asia that became effective prior to the beginning of the second quarter, but the effect wasn't sufficient to overcome a decrease in reported revenue.

Distributor commissions were 39.2% of net sales for the second quarter, versus 38.3% in the first quarter and 37.3% in the second quarter a year ago. The increase quarter-over-quarter results from a greater number of members in our Hong Kong market achieving the qualification for an incentive trip promotion versus the previous quarter.

SG&A during the second quarter totaled $3.5 million, excluding $255,000 of non-cash stock compensation expense, which is a 16% decrease compared with $4.1 million in the second quarter of 2008. SG&A also declined from the $3.7 million incurred during the first quarter.

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

Brandy, we would like to open the forum for any questions.

(Operator Instructions). You have no audio questions at this time.

Okay, thank you, Brandy, and thank you, everybody, for calling in today. I look forward to reporting our progress to you next quarter. Thank you. Have a good day.

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