Natural Health Trends Corp (NHTC) 2014 Q2 法說會逐字稿

Good day and welcome to the Natural Health Trends Corporation's second-quarter 2014 financial results call. Today's conference is being recorded. At this time I would like to turn the conference over to Jeff Stanlis of Hayden IR. Mr. Stanlis?

Thank you. I'd like to point out that during the course of the conference call there may be statements made relating to future results of the Company that are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results, performances or achievements could differ materially from those anticipated in such forward-looking statements as a 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 the webcast for today's conference call may be found on the Internet by visiting the investors section of the Company's corporate website at www.NaturalHealthTrendsCorp.com, or using the link in the press release. In addition, in the press release announcing the financial results there are instructions for accessing the archived version of the conference call via the telephone and the Internet.

At this time, I'd like to introduce Chris Sharng, the President of Natural Health Trends, for opening comments. Chris, go ahead.

Thank you, Jeff, and thanks to everyone for joining us. With me is Scott Davidson, our Chief Financial Officer. Our strong momentum carried us through the second quarter. Revenue for the quarter was a triple-digit increase over the same quarter last year. Our year-to-date total already exceeded what we reported for the full year in 2013. And just as importantly, we managed the comp pressure and continued to improve our profit margin. Our net income for the first six months at $9.2 million exceeded the $4.1 million in net income for all of 2013.

Our Board of Directors for the third consecutive quarter authorized payment of an increased quarterly cash dividend, reflecting our improved financial performance. I should point out that, in addition to strong orders taken in the quarter, financial statements in the second quarter were further bolstered by orders taken in March that were not shipped until April. With 42,000 active distributors in more than 40 countries, we devote considerable resources to continuous improvements in our training and promotional programs, with particular focus in the greater Chinese market.

During the quarter we conducted a number of educational events around Alura, a female intimacy product. We held several in-market product training sessions in Vladivostok during April, as well as a major product training session in Taiwan, and another one in Vancouver. We also held a ReStor Vital roadshow in China during May and an event in Almaty, Kazakhstan, during June. Our aggressive promotional schedule included our ongoing supreme bonus program and a Spain incentive trip for 120 of our leaders from Hong Kong and Taiwan. Leaders in those markets are now trying to qualify for an incentive trip to Germany.

Cash and trip promotions are ongoing for all of our markets. Through detailed planning and execution in leadership development, training, marketing, products, incentives, and services, we expect to continue growing our business in the long-term. I'd like to now turn the call over to Scott to discuss the financial details. Scott?

Thank you, Chris. Good morning, everyone. Revenues for the quarter were $34.2 million, an increase of 223% compared to $10.6 million in the second quarter last year. For the six months, revenues of $57.4 million were up 198% compared to the same period last year. Gross profit margin for the second quarter was 78% compared to 75.8% in the same period last year.

Net income was $6.1 million or $0.49 per diluted share compared to $904,000 or $0.08 per diluted share in the second quarter last year. For the six-month period net income increased 671% to $9.2 million or $0.76 per diluted share compared to $1.2 million or $0.11 per diluted share in the same period of last year. The dividend declared yesterday by the Board of Directors included a cash dividend of $0.0196 per share on outstanding preferred stock, which represents the accrued unpaid dividends through the declaration date and a cash dividend of $0.01 per share on common stock outstanding. This dividend is payable in cash on August 27 to stockholders of record on August 19.

That concludes our prepared remarks. I will now turn the call back over to the operator to begin the question-and-answer period. Operator?

(Operator Instructions). John Cason.

Congrats on a great quarter. I was just wondering if you could talk a little bit about the distributor growth and how you are driving that. Are you recruiting these people organically? Are you essentially gaining at the expense of some competitors? And what -- do you have a target for a six-month outlook?

Yes. The distributor count increase in general is co-related with our overall sales growth. And I think we have an effective in developing our leaders in the field. And we work with our leaders to develop marketing program and bringing in more consumers and also the people that initially or eventually are interested in making a business out of our products. And I think our marketing program overall -- that includes training and development and new products -- are successful and effective in adding more distributors to our business.

Is the Q2 results on top line and on the revenue line -- is that going to be a tough comparison for the next two quarters, considering the decrease in deferred revenue?

We are not, as a policy, giving guidance. But I would like to point out that we don't want to hide that fact that the second quarter did benefit from the decrease in deferred revenue, as you noticed. So I just want to make sure that everyone is aware of that.

Got it, okay. And any obstacles that will get in the way in terms of getting a NASDAQ listing for this Company?

That's something that we will work on in the future, but for now our top priority is a tremendous opportunity in the market in our business. So we will prioritize over time.

Got it.

Thank you very much, John.

Just two more questions. Just on the cash position, any sort of -- the dividend obviously is a great thing, and it's nice to see that it's increasing -- but with the rate in which the cash is building relative to the dividend growth, is the cash hard to access because it's in Hong Kong? Or do you expect to put that cash to use at some point in the near future?

Yes, John. And we made a little bit more disclosure this time in our Q as well. And essentially what we say is that our substantial profit profile is relatively recent. We do have plans for the current cash on the balance sheet. And we mentioned that $10 million or so of the cash is going to move into China for business development, with the potential of helping an application in the future for a direct selling license in China, for instance. And the rest is just for working capital for now. And we are conscientious of the cash accumulation, which is very recent, and we will continue to examine what to do with it, always with the benefit to the shareholders in mind.

All right, great. Thanks and congrats on a great quarter.

Thank you very much, John, again.

(Operator Instructions). Mike Hughes with SGF Capital.

The last gentleman got most of my questions, but just a couple of follow-ups. On the $10 million number that you disclosed in the filing, over what timeframe would you deploy that capital?

Our plan is to move that cash into China in the next 12 to 18 months. And some of the cash will remain on our balance sheet as restricted cash, which is required by Chinese law as a consumer protection deposit. And we will put that in a designated account that the government requires. And the rest of the capital is to -- that is to be moved into China will support ongoing expenses and also some capital projects.

Okay. And then just what is the Board's thought about the dividend at a $0.01 level, kind of inconsequential? Is that something that potentially moves up? Or beyond the $10 million, you still have a very strong balance sheet. So just what are your thoughts on the dividend or a buyback?

I think at this point we wanted to start a dividend program. The substantial profit that we are reporting is a recent phenomenon. And it is good to start a dividend program. We will continue to evaluate our cash balance versus the size of the business and our working capital needs and ongoing, longer-term capital needs. And then we will take all those factors into account with respect to cash.

Right. And then, as far as listing the stock at a more formal exchange, I guess you would have to reconstitute the audit, the compensation committees. How long would that process take? Have you looked into that at least at this point?

Our priority is to work on the market opportunities right now. We have not really looked into that. It is something that we will consider down the road.

Okay, thank you very much.

(Operator Instructions). Craig Bach, The Market's Edge.

Excellent quarter, guys. My question was answered. Thank you.

(Operator Instructions). Michael Potter with Monarch Capital Group.

Congratulations on a great quarter. Just a couple questions -- you mentioned the pickup in deferred revenue from Q1 into Q2. How much was that?

It was $4.7 million.

$4.7 million? Okay, great. And Chris, you mentioned the capital projects as well, capital projects in China. Can you give us an example of what that may be? Because I'm -- again, this has never really been -- one of the benefits of this company or one of the most attractive things of an investment in this company is that it's not capital intensive. Can you give us some examples of what you are going to be doing or investing in, in China, other than the permitting?

Yes, I can give you one example, is that we are working on what is now a multipurpose facility in southern China. And we had set up this facility in a place very near Macau, and we have built training facilities and meeting rooms and a template for our healthy lifestyle ventures for demonstration purposes. And we are taking existing leaders through and we are having business meetings there. And we are adding capabilities to this facility. We would like to have light assembly, for instance, in this facility.

And so we will have some capital spending. I think it will be very good for the long-term for the Chinese business, not to mention the fact that I think the government at the local and the central level would love to see that kind of infrastructure investment, that we are in it for the long haul. So that would be one example.

And how much does that entail? What does that entail, this multipurpose facility?

We have not figured out a specific number for that particular facility, among some other projects. But everything will be included in the numbers that we mentioned.

Okay. And then I may have missed it, but did you give the distributor count at the end of the quarter?

It's a little over 42,000.

42,000; and where was it at the end of Q1 and at the end of December?

I think at the end of Q1 it was more or less 35,000. I don't have that figure in front of me. But of course it's in our Q, so, let's see. 35,000.

Okay. And where we at the end of last year?

I don't have that figure in front of me, Michael.

Okay, all right. Well, it's a great pick-up certainly Q2 versus Q1, that's for sure. Okay. Thanks, guys. I'll get back into the queue.

(Operator Instructions). John Cason.

Thanks, guys. Just a question on the EBIT margin. Obviously, we have seen pretty good operating leverage thus far. What do you see as a run rate/profitability/margin level? And one of the things is capital investments in China, the expense -- there already is investments that you are putting in China going to be expensed and create some sort of headwind on that side?

We think the operating margin for the first half is a fair representation of our long-term goal. The second quarter is a little bit more than the first quarter. But the first half is a fairer indication because of the shift in deferred revenue. So that's our objective. And the capital expenditure in China will be undertaken with caution and shouldn't be sacrificing our operating margin.

Got it, thanks.

(Operator Instructions). It appears that we have no further questions. I'll turn it back to management for any additional or closing remarks.

Thank you, Greg. And thank you, everyone, again for joining our call today. I look forward to speaking to you soon about our third-quarter progress. Thank you very much and have a good day.

Once again, that does conclude today's conference. We thank you for your participation.