Natural Health Trends Corp (NHTC) 2016 Q1 法說會逐字稿

Greetings and welcome to the Natural Health Trends Corporation first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Whitney Steininger of Addo Communications. Thank you. You may begin.

Thank you and welcome to Natural Health Trends' first-quarter 2016 earnings conference call. During today's 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, performance, 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 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'd like to turn the call over to Chris Sharng, President of Natural Health Trends.

Thank you, Whitney, and thanks to everyone for joining us. With me today is Scott Davidson, our Senior Vice President and Chief Financial Officer.

Our positive momentum continued with a strong start to 2016. Revenue for the first quarter of $74.3 million and net income of $11.3 million both achieved double-digit growth over prior year. Operating profit at $14 million doubled year-on-year.

Revenue growth for the quarter was driven by our strategic emphasis on leadership programs, product development, and promotional incentives. In January, we held a successful event in Hong Kong with more than 6,500 members and guests in attendance. At this event, we introduced an enhanced version of our Essential Probiotics product, our second-highest selling product at 14% of total sales, and announced exciting incentive programs for the year.

Earlier this month, we took our largest incentive trip ever, with more than 1,200 members, to New Zealand and Samoa. The qualification for this trip helped propel our 2015 results.

In the first half of this year, we are concurrently running two travel incentives to either Dubai or on a cruise. We're also looking forward to the August celebration of our 15th anniversary, which comes with its own performance-based incentive opportunities, including travel, lodging, and tickets to this highly anticipated event in Hong Kong.

We believe that our strategies in leadership focus, product development, and promotional incentives are driving growth in our active member base, which went from 62,010 a year ago, to 109,360 at the end of 2015, and 119,800 as of the end of March. We define active members as those who have placed at least one product order during the preceding 12 months.

Consumer demand for our product was strong during the first quarter. Our top three selling products -- Premium Noni Juice, Essential Probiotics, and Triotein -- are all part of our wellness line and comprised 50% of our first-quarter revenue.

In regard to Premium Noni Juice, we're pleased that we recently received the United States Department of Agriculture Organic certification from Quality Assurance International. The USDA Organic seal is one of the most reputable symbols of organic quality, and we believe this certification further validates our product quality.

StemRenu is a recent addition to our wellness product category and was launched in North America in mid-April and will be rolled out internationally in the coming months. StemRenu is based on a proprietary blend designed to help activate stem cell renewal and incorporates a Norwegian avian egg extract available only to NHT Global through an exclusive licensing agreement. Also in early April, we launched the ReStor product line in Europe and hosted two kickoff events in Sweden and Ireland.

In March, we introduced AquaPur, our US-manufactured water purification device, as the newest entry to our home product line in China. We completed a two-week multicity roadshow in conjunction with the launch, demonstrating the product to more than 5,000 consumers.

Reception of the product has been strong so far, with over $1 million in orders. As a Company, we are dedicated to enhancing the overall quality of life for our members, and the expansion of our home line was designed to accomplish this objective.

Furthermore, we are in the process of renovating our Beijing office to better showcase our growing home product line, which was first launched in China in May last year. The office is modest in size; only four employees at most have a desk there. The month-long renovations will not impact our business.

On April 2, we celebrated the grand opening of our Healthy Lifestyle Center Plus, or HLC Plus, in Vancouver, Canada. HLC Plus serves as a multifunctional retail space designed to provide members with the opportunity to personally experience our products as well as to conduct meetings. This HLC Plus is the second of its kind, following our first location in Monterey Park, California. We also plan to open additional HLCs in China in 2016 and are evaluating additional North American locations.

We're making good progress with our application for a direct selling license in China and have received positive feedback from government agencies about the actions we have taken thus far, though the timing of obtaining a direct selling license, or whether or not we can obtain one, is beyond our control and remains uncertain.

On the heels of a highly successful 2015, we are very pleased with our first-quarter results that reflect our positive momentum and the expansion of our product offerings into new geographies and categories. As always, we are committed to enhancing value for our shareholders and plan to continue executing against our $70 million stock repurchase program announced three months ago, which Scott will elaborate on shortly.

In closing, I'd like to thank our employees and members for all of your hard work and look forward to building upon this progress throughout the year. Now I'd like to turn the call over to Scott Davidson, our CFO, to discuss our first-quarter financials. Scott?

Thank you, Chris. Total revenue for the first quarter was $74.3 million, an increase of 83% compared to $40.7 million in the first quarter of 2015. Sales in Hong Kong, which accounted for 92% of our first-quarter revenue, increase 83% to $68.2 million compared to $37.3 million in the first quarter of 2015.

First-quarter revenue outside of Hong Kong increased 84% to $6.1 million from $3.4 million in the prior year quarter. Excluding the Commonwealth of Independent States, revenue outside of Hong Kong increased 96% over the prior-year quarter.

Our e-commerce sales in China were up 562% year-over-year, from $501,000 to $3.3 million, driven by strong air and water purifier sales.

Now turning to our costs and operating expenses, gross profit margin for the first quarter was 80.8% compared to 78.1% in the first quarter of 2015, primarily due to both higher product margins and lower logistics costs. Commissions expense as a percent of total revenue increased to 47.2% compared to 45.2% in the first quarter of 2015, primarily due to increased cost for the ongoing cash and other incentive programs. This was in line with our full-year 2015 rate of 47.8%.

Selling, general, and administrative expenses were $10.9 million, versus $6.4 million a year ago, and $11.5 million in the fourth quarter of 2015. The increase versus the prior-year period was permanently due to an increase in employee-related costs and incentive program accruals, professional fees, event costs, and other facility costs, as well as the increase in credit card fees due to higher net sales.

Now, on to profitability measures for the quarter. Operating income totaled $14 million, an increase of 102% compared to $6.9 million in the first quarter of 2015. As a percent of total revenue, operating income increased to 18.8% as compared to 17% in the first quarter last year.

Net income was $11.3 million or $0.95 per diluted share, as compared to $6.7 million or $0.54 per diluted share in the first quarter last year. We recorded an additional income tax provision of $2.4 million for the expected partial repatriation of overseas profits, resulting in an effective tax rate of 19.2% for the first quarter. Net income, excluding the impact of the additional tax charge, would have been $13.6 million or $1.15 per diluted share.

Turning to the balance sheet and cash flow, as of March 31 cash and cash equivalents totaled $99.6 million, a decrease of $5.3 million compared to year-end. The decrease was due to our share repurchase activity in which we repurchased just over 720,000 shares of our common stock for $18.3 million. Our total shares outstanding is now 11,470,000 versus 12,139,000 at the end of 2015.

As announced on January 12, our Board of Directors authorized an increase in the stock repurchase program to $70 million. We expect to follow through on executing against the remaining $41.7 million available under the program.

Our cash provided by operations during the quarter was $13.8 million. We also continued to return value to our shareholders through quarterly cash dividends in which we paid out $576,000 during the first quarter.

And on April 21, 2016, our Board of Directors declared a quarterly cash dividend of $0.06 per share on outstanding common stock, representing a 20% increase over the prior quarter. The dividend will be payable on May 20, 2016, to stockholders of record as of May 10.

In summary, we are pleased with our overall financial strength, which allows us ample liquidity to pursue our growth strategy while concurrently returning value to our shareholders. That concludes our prepared remarks. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) Matthew Larson, Morgan Stanley.

Good morning, everybody. Thanks for taking the call. A couple questions please.

The license in China: you addressed it, and you're still working on it. In general, is this something that's difficult to obtain? And if so, at what sort of cost? Hello?

I'm sorry, Whitney. Your line is live.

Hi, did you -- were you able to --?

Yes, I'm so sorry, yes.

Okay. That's fine.

We were not able to connect. First of all, thank you for calling in, Matt.

Sure.

The license application is a very long process. We try to work it diligently, even though we have no control over the outcome, and we expect that it's going to take a long time.

I think it's a difficult and challenging process, but during the process we get to learn a lot about the Chinese market and then we get in contact with people in the government that will be good, I think, for our business over the long term.

Is there any way to obtain one through a joint venture with a local entity that might already be licensed?

I think that is possible. But even though we have gone down the path of developing our own products and developing a number of the parameters that are required (technical difficulty) selling [law] on our own, working in partnership with our leaders. So this is the path that we have chosen.

We will actually give it a shot. We have made our presentation to the Chinese officials at various levels, and we would like to see what happens.

Okay. Just a couple more questions on that, if you don't mind. You discussed the opening of the Beijing office; there's a few employees there. Is this an office to just service some of the, I guess, the expediting of your product that you sell online in China, or to lay the groundwork for potentially getting a license in the future?

We have various offices around the country, and Beijing is one of the branch offices. The purpose of the office is, first and foremost, we have four employees; they can go there to work. And we have a training room there that can seat about 20, 30 people.

And that -- the office has been small and very modest. And since last year we launched a very different line of product in the home product line. We would like to decorate the office so that it could present better this air purifier that we introduced last year and the water purifier earlier this year.

Right.

And that will, hopefully, make the training room more presentable. That's our goal.

Got you. The reason I asked you is because there was a hit piece from some, I'll call it some hedge fund or somebody, some entity, that would benefit from the decline of your price, who made a claim that some of your offices were, I guess, not conforming to local law; as, I guess, establishing you all as a multilevel marketing organization, which you're not, because you're an online Company.

So I was wondering if there some risk by maintaining these offices, to allow people to make false claims.

Yes, the blog that you refer to, around March 14, was completely false. The office has been there, and we think it's a good way of doing business.

If the government has any question for us, they know where to find us. We are not in hiding.

And our customers know where to find us, and we can provide customer services and provide information. So we are here to stay. We're here to do business, and having an office in general is a good idea and we will continue to do so.

Okay, great. Then one last question. Sorry, then I'll let somebody else answer one. How about guidance going forward in the next quarter or for the rest of the year?

Matt, as a matter of policy, we don't give guidance. But I feel very good about our momentum.

I feel that our people are very motivated. They are looking forward to a strong year, and so am I. So I feel very good about what we're doing, but we don't give guidance.

Okay. Fair enough. Thanks so much for your time, sir.

Well, thank you, sir. Thank you.

(Operator Instructions) Will Hamilton, Manatuck Hill.

Good morning, guys. Just a question on gross margins. They were up pretty nicely year-over-year; sequentially, too. So is that near-81% level you think a sustainable level through this year?

Well, I think so. This is one area that we actively manage. We try to develop our product mix in a way that we drive resources and our support behind better-margin products, number one.

And number two is, every time we introduce a new product we have the goal of further improving our gross profit margin. That's a very important item that can give us more resources to develop the market.

We also had some help on the market, too. Recently you probably know that ocean freight has gone down, and so we have a very long supply chain and the freight helps us too.

We think that over the long term this gross profit margin is sustainable, and I'd like to further improve it, too.

Okay, thanks. Then you mentioned Chinese e-commerce sales of $3.3 million. Is that entirely made up of the air and water purifier? Just to confirm. Are there other (multiple speakers)?

Yes, about two-thirds of that is air purifier and a little bit of water purifier. We just started taking orders and making shipments of the water purifier at the end of the first quarter.

And then we had some other items. We have a skincare line; we have an essential oil; and we have some eye care line -- I mean eye cream lines. So those products there are growing as well.

But we have felt the most impact from the home product line in air purifier and water purifier.

Are those sold through your members or distributors? Or is that just straight to consumer, and there is no commission then?

Right. They place an order online with us, with a Chinese subsidiary; and then we ship directly to the consumers. There's no commission.

Okay. So it's a higher-margin sale then?

That's right. That's exactly right.

Okay. That's helpful, to understand that. Then, Chris, I just wanted to get your thoughts on the StemRenu product which you've launched in North America and you mentioned taking international in the next couple months.

Do you think that this could be a big driver? Or just -- I know you don't like to provide guidance, but it seems like a differentiated product, but just trying to frame the upside potential of it.

Well, we feel very good about this product. We stumbled upon an opportunity, and one of our -- two of our leaders in North America recruited this team that comes with the product. So we have some new distributors that come with StemRenu; they are based in California and some of them are in Georgia.

We are staging events now to introduce them to our products, Premium Noni Juice and Alura and our products. And we will be introducing their product, StemRenu, to our market most likely in the summertime in Greater China.

So I think this is a great opportunity. I don't know how much we can do with it, but I look forward to developing the synergy of the product and also with this group of new members.

Okay, thank you.

Thank you. This concludes the question-and-answer session. This also concludes the conference. Thank you for your participation. You may disconnect your lines at this time.