Natural Health Trends Corp (NHTC) 2014 Q3 法說會逐字稿

Good day and welcome to the Natural Health Trends Corp. third-quarter 2014 financial results call. (Operator Instructions) At this time, I will like to turn the conference over to Jeff Stanlis with Hayden IR. Please go ahead.

Thank you. I would 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 or as defined in the Private Securities Litigation Reform Act of 1995. Actual results, performance, or achievements could differ materially from those anticipated in such forward-looking statements or 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 investor section of the Company's corporate website at www.naturalhealthtrendscorp.com. The link is also included in the press release that accompany today's results.

In addition, in the press release announcing the financial results, there are instructions for accessing the archived version of the conference call via the Internet.

At this time, I would like to turn Chris Sharng, President of Natural Health Trends, for opening comments. Mr. Sharng?

Thank you, Jeff, and thanks to everyone for joining us today. With me is Scott Davidson, our CFO.

The third quarter was another stellar quarter for Natural Health Trends. We posted revenue of $31.8 million, a 125% increase over the same quarter last year. This brings our year-to-date total through the first nine months of 2014 to $89.2 million.

And once again, our business model is enabling us to improve our profitability as we scale. Our gross margin continued to improve year over year, reaching 78.8%, and we delivered a 308% year-over-year increase in our net income. In fact, for the first nine months of 2014, our net income has exceeded that for the full year of 2013 by more than 250%.

During the third quarter, we had the highest order levels of the year. As always, the timing of shipments can lead to quarter-to-quarter revenue fluctuations. This was evident in April, when orders unship at the end of March or ship in April, boosting the second-quarter revenue. This also explains the modest sequential revenue decrease and is in line with our statements in the last conference call.

These strong results are further enhancing our balance sheet. We announced the fourth consecutive quarter of a cash dividend. In addition, the Board has decided to pursue a NASDAQ listing.

Furthermore, the Board approved a special one-time stock repurchase of up to $5 million of the Company's common shares. Such repurchases are expected to begin soon in November and be completed by January 2015. At a current evaluation, the Board believes that this repurchase program will create value for our shareholders and represents a good use of our capital.

With our products selling to customers in more than 40 countries and more than 48,500 active distributors, we remain committed to continuous improvement in our training and promotional programs, with particular focus in China, Hong Kong, and Taiwan. Our investment has proven effective in driving incremental sales and income.

During August, we held a highly successful Macau event, gathering more than 3,000 attendees. More recently, we had two major events in China in early October. Additionally, we are excited about the new Singapore entity we just established at the end of September and held an event there for potential members. As part of our effort to grow our geographic presence, we believe Singapore will act as the hub for Southeast Asia.

Now I would like to turn the call over to Scott Davidson, our CFO, to discuss the financial details. Scott?

Thank you, Chris, and thank you to everyone who is joining us today. Total revenues for the quarter were $31.8 million, an increase of 125% compared to $14.2 million in the third quarter last year.

For the nine months, revenues of $89.2 million were up 167% compared to the same period last year. We saw strong growth in Hong Kong, Taiwan, China, and North America, offsetting revenue decreases in the Commonwealth of Independent States, which was adversely impacted by geopolitical unrest.

Net income was $5.4 million, or $0.42 per share, compared $1.3 million, or $0.12 per share, in the third quarter last year. For the nine-month period, net income increased 480% to $14.6 million, or $1.16 per share, compared to $2.5 million, or $.22 per share, in the same period last year.

Turning to the balance sheet, cash increased to $39.8 million as of September 30 from $14.6 million at December 31, 2013. You may have noticed that the cash increase is substantially ahead of earnings, because much of our incentives for distributors and employers will not be paid for until after the end of the year.

Also, we announced a fourth consecutive quarterly cash dividend on common stock of $0.01 per share. This dividend is payable on December 3 to stockholders of record on November 25.

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) Mike Hughes, SGF Capital.

Just on the listing, it's my understanding you need to have an audit and maybe compensation committee in place in order to be NASDAQ listed? Do you have those committees in place and if not, what's the timeline for that?

Well, thank you, Mike, for calling in and your question -- we currently -- we do not have those committees in place just yet. And there are some other additional steps that we had to take to get ourselves ready and we are doing everything we can to be qualified for a NASDAQ listing.

We don't have a specific timeline in mind, but we are doing everything we can to get ourselves listed as soon as possible.

Okay. Will you need to add a couple more Board members in order to qualify?

Yes. That's right.

Okay, okay. Okay, good. And then I just want to think about the seasonality of the business. The fourth quarter, at least last year, was very strong. Is there kind of a seasonal pickup in the fourth quarter that we should look for? How does that usually play out for you?

Mike, I think the seasonality of the business is becoming less and less obvious over the last few years. I used to point out that the fourth quarter started with national holidays in China and that, a few years ago, had a significant impact on our volume.

So we tend to look at the fourth quarter as being lighter, but that has not been the case for last year or the year before, as you noticed. So I would say that seasonality is not significant. And as a policy, we do not give guidance. But we feel very confident and comfortable with how the business is going right now.

Okay. And then just on the disclosure in the Form 10-Q. And I think you talk about this last quarter, too, just the potential to get the license in China, potentially investing $10 million in that market. Would most of that be CapEx or would there actually be a step up in the operating expenses of the Company, too, if you did that?

Yes, Mike. The license application is a long, arduous process that we have no control over timing. But we will be preparing many, many steps, because I think they will be beneficial to the business as well.

Now with that said, the $10 million of investments that we will make in China, I think part of that will be set aside as required by the Chinese law for a consumer protection fund. And it remains on our balance sheet, but it will be reclassified as restricted cash. And there will be some capital spending. There will be some operating expenses.

Okay. And then one last one for you. Just any new products in the pipeline that we should look forward to over the next few quarters?

We have new products in our pipeline for the next two years all lined up. And so every quarter, we are planning to launch new products and we try to time our major events for also the readiness of our new products. And the next time when we have a major event will be in January in Macau or Hong Kong. At that time, we will introduce our new products.

Okay, great. Thank you very much.

(Operator Instructions) Louie Toma, Craig-Hallum Capital Group.

Hi, guys. Great quarter. I just had a couple questions. The first one is are you guys seeing any impact from the unrest in China?

Louis, I think you are referring to the protests in Hong Kong. And if my interpretation of your question is correct, no, I don't see any impact on our business.

Okay. No, that's exactly what I was asking. And then secondly, you mentioned that you had the highest level of orders. If you normalized the orders for the timing effect, would you have seen a sequential increase in revenue had the orders not fallen to the next quarter?

Yes. I think that's a very important question. We do see a sequential increase in orders. From our end -- in the first quarter, the orders were approximately $29 million. But a lot of their orders were not shipped because they happened to be on the last one or two days of the quarter. And some part of that orders at the end of March were shipped in the second quarter.

The second quarter, our orders overall were about $30 million and the third quarter, our orders were $32 million. And in the revenue estimate that was typically put out two weeks after the quarter end, we explained the increases or decreases in our deferred revenue. And that reflects the fact that how much of the unship orders were at the end of the quarter from quarter to quarter.

Got it. That makes sense. Okay, thank you very much. That's all I had.

Chris Irons, GeoInvesting.

Hi, guys. How are you? I just have two questions for you, please. The first question is do you guys have any explanation as to why you are unable to ascertain a direct selling license in China? What is holding you up there?

We had put in applications twice before and we did not receive a definitive answer. I think the first time was 2004 or so and the last time was 2007. And after awhile, the application itself became stale.

So to answer your question, I don't know why. And they did not reject us, but also the application did not proceed any further. And we don't have an active application in now because there are many other steps that we have to still prepare.

So one of the things that we are working on right now is that we need to get ourselves a production certificate, for instance. So working on a production facility and that requires some capital spending. And that therefore, some of the capital moving in into China.

We see this as a longer process for us to try it again. It's not getting held up or anything like that. We will continue trying.

Okay. And my second question is reading through the annual report, I can see that you guys are basically operating in China via this e-commerce platform, where it looks like the products are coming out of Hong Kong.

Can you explain how that is legal and how that kind of circumvents having a direct selling license? Can you just explain how that relationship works?

Yes. We are not operating in China. We have a e-commerce platform in Hong Kong. The orders come into Hong Kong and orders are fulfilled in Hong Kong, the revenue is recognized, and the ownership of inventory is cut off in Hong Kong.

A third-party carrier or delivery company would take over the ownership and the shipment of the product before the border. So we completely operate within Hong Kong. We have sought and received legal opinions and the opinion is that from the professional services firm that we're not in violation of any law in China.

Okay. Because the filing states that you guys -- that members purchase the Company's products via the Hong Kong-based website or the e-commerce platform in China. And I'm just trying to figure out the order of operations, in which somebody in China orders a product.

And then again, what is the supply chain from there forward. The product is being manufactured in Hong Kong and then being shipped to the customer in China? Is that correct or no?

Yes, Chris, we have two different platforms in Hong Kong that most of the products are manufactured in the US. And we had some Korean made and some Hong Kong made products.

The vast majority of the products come from the US. And the process goes through what I just described. We have a separate consumer purchase platform in China. Those products are made in China for the most part and the Chinese members could purchase from that website separately and the fulfillment will be within China. So these are two different platforms.

(Operator Instructions) At this time, we have no further questions. I will like to turn the call back over to Mr. Sharng for any additional or closing comments.

I like to thank you again. Thank you, everybody, for calling and joining in. I look forward to hearing from you and being able to speak to you in a few months about our fourth-quarter and full-year results. Have a good day.

That does complete today's conference. We thank you for your participation.