Natural Health Trends Corp (NHTC) 2016 Q3 法說會逐字稿

Greetings (technical difficulty) Natural Health Trends Corporation's third-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. Kim Orlando of Addo Investor Relations. Thank you, Mr. Orlando. Please go ahead.

Thank you and welcome to Natural Health Trends' third-quarter 2016 earnings conference call. During today's call there may be statements made relating to the 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 through the 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. Additionally, in today's financial results press release, which was issued at approximately 9 AM Eastern time, instructions can be found for accessing the archived version of the conference call via the Internet.

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

thank you, Kim. And thanks to everyone for joining us. with me today is Scott Davidson, our Senior Vice President and Chief Financial Officer.

Total revenue for the quarter was $70.7 million, a decrease of 13% year over year. For the first nine months of 2016 total revenue increased 18% to $225.4 million versus $191.2 million in the same period last year.

The third quarter of 2015 presented a challenging comparison for us due to a highly successful promotion we ran last year during an otherwise typically seasonally slower quarter. In addition, the Chinese ren depreciation against the Hong Kong dollar, 6% over the year to September, effectively increased the price of our products for our members residing in China, which we believe negatively impacted sales.

In addition, we believe the G20 summit, which was hosted in Guangzhou, one of our top performing markets, had a significant effect on this quarter's revenue. The Chinese government, to prepare for the high-profile event, implemented special measures such as temporarily relocating residents, emptying out entire districts, blocking urban traffic and shutting down businesses from July to early September.

Our local members' ability to organize any activity in the area were severely hampered.

Despite the revenue shortfall, we were able to increase our operating profit by 3% year over year and by 2% over the prior quarter to a record quarterly level of $15.2 million. This was due to the flexibility we built into many of our promotions and incentive programs.

Our active member base declined slightly from 126,440 at June 30 to 122,900 at September 30. However, on a year-over-year basis, active members were up 30%.

To re-energize our effect in markets, we developed a strategic plan which includes leader training and motivation, expansion in terms of both geography and product, and technological advancements to enhance member communications and productivity.

First of all, in the next few months we will emphasize training within the leaders groups. Our objective is to improve many of our leaders' effectiveness in selling our products.

In the fourth quarter, we will be running targeted promotions on top of our primary cash incentive, the supreme bonus program, to help facilitate recovery in our negatively impacted markets. In terms of new products, OcuFocus, which was presented during our 15-anniversary event, helped support vision health. The product is currently sold in the United States, Canada and Hong Kong with plans for Russia in 2017.

Food and Enzyme Toothpaste, developed by the prestigious Fudan University in China, is designed with antibacterial and anti-inflammatory properties. This product is currently available on our Chinese e-commerce platform.

In addition, our [standing new] products, introduced in mid April, is now available in North America, Europe, Hong Kong and Russia. We are currently preparing this product for our Southeast Asian market.

In regards to our geographic expansion just two weeks ago, we were in Singapore, staging an official opening for this region. We are also taking steps to establish local presence in Malaysia and Vietnam. We expect that both markets will be up and running in 2017.

Moreover, Peru is another business development project we are working on, currently identifying operational partners and initiating product registrations.

China is our ongoing priority. We have made further progress in the long and arduous process of direct selling license applications, though the timing of obtaining a license and whether or not we can obtain one remains beyond our control. We will keep you updated as material developments arise on this front.

Another initiative is technological advancements to improve member communications and productivity. We have been hard at work developing a proprietary software application, built on top of our proprietary business systems to help our members conduct business more efficiently. Our business system is used to process orders and commissions. The new features will provide our members more business tools. We plan to make it available to our members in early 2017.

Although our rapid growth moderated in the third quarter, we are working to build sustainable long-term growth and we will strive to get there while simultaneously returning cash to our stockholders.

Along with our quarterly cash dividend of $0.08 per share, we are very pleased to be able to declare a special dividend in the amount of $0.35 per share in addition to repurchasing nearly $24 million worth of our shares in the first nine months of 2016. I continue to be optimistic for the future of our Company.

Now I would like to turn the call over to Scott Davidson, our CFO, to discuss third-quarter financials. Scott?

Thank you, Chris. Total revenue for the third quarter was $77 million, a decrease of 13% compared to $80.8 million in the third quarter of 2015. Sales in Hong Kong, which accounted for 93% of our third-quarter revenue, decreased 13% year-over-year and revenue outside of Hong Kong decreased 2% year-over-year.

In regards to our costs and operating expenses, gross profit margin for the third quarter was 80.7% compared to 80.2% in the third quarter last year. Commissions expense as a percent of total revenue decreased to 43.3% compared to 49.6% in the third quarter last year, primarily due to reduced costs for the ongoing cash and other incentive programs.

Selling, general and administrative expenses increased 13% to $11.2 million versus $9.9 million a year ago, though declining 10% versus $12.4 million in the second quarter of 2016. The increase versus the prior-year period was mainly due to an increase in the cost of member training events, professional fees and event costs.

Operating income totaled $15.2 million, an increase of 3% compared to $14.8 million in the third quarter last year. As a percent of total revenue, our operating margin expanded to 21.5% as compared to 18.3% in the third quarter last year.

We recorded an income tax provision of $2.6 million for the expected partial repatriation of overseas profits, resulting in an effective tax rate of 17.7% for the third quarter. Net income was $12.6 million or $1.12 per diluted share as compared to net income of $14.5 million or $1.18 per diluted share in the third quarter last year.

During the quarter, we generated $5.9 million in cash provided by operations. Year to date, we generated $36.3 million in cash provided by operations. As of September 30, cash and cash equivalents totaled $114.5 million, an increase of $9.6 million compared to year end.

The increase was due to our cash provided by operations, offset primarily by our share repurchasing of just over 903,000 shares of our common stock for $23.7 million and income taxes paid of approximately $8 million as of the nine months ended September 30, 2016.

Our Board of Directors has declared a quarterly cash dividend of $0.08 per share, representing a 14% increase over the prior quarter. In addition, as Chris mentioned, we also announced a special cash dividend in the amount of $0.35 per share on our outstanding common stock.

Both dividends will be payable on November 25, 2016, to stockholders of record as of November 15, 2016.

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) [Hermann Mueller], (inaudible).

So the cash flow from operations was much lower this year than a year ago. I was wondering what the reason for this was. You now have a lot of cash on the balance sheet. And what is your plan for all this cash? Why are you doing a special dividend this quarter and not a stock buyback?

I'll take a portion of your question there.

The decrease in cash flow generated from operations has to do with the difference in the timing of our commission incentive payments plus the payment of US income tax. The amount of commissions and incentives on our balance sheet at the end of 2014 but payable in 2015 was not as significant as those at the end of 2015 but payable in 2016. We also paid $7.4 million in US taxes this year.

I think probably a better indicator is our profitability. Our operating profit for the first nine months is up 30%.

And I'd like to add that returning capital to our stockholders is an ongoing priority that's being evaluated on a regular basis. Our business continues to generate a lot of cash, and our Board is always looking for the most efficient and effective way to reward our stockholders with the cash that we generate.

So, going forward, the Board might decide to buy back more shares, pay special dividends or implement a combination of them in any given period. Thank you.

Thank you.

Elaine Maxwell, SPI.

I actually have two questions. I notice that your revenue was down compared to the previous quarter as well as prior year, but your operating profit was up both times. So I would like to ask you to explain a little bit more as of how that happened.

And then, secondly, in your comments I heard you talked about implementing more training, which seems to me more like a long-term program. And then also the trend to depreciation might be a long-term phenomenon, too. So are you saying that the business will not bounce back quickly?

Well, thank you. I think overall we do a very good job managing our expenses and protecting our profit margin. Many of our incentive programs and promotions are designed to be sensitive to the level of sales. And we have historically managed to grow our top line rapidly without needing outside capital because we have built our own working capital from operating cash flow.

In the case of the third quarter, as soon as we noticed that the level of sales turned out to be different from what we expected, we started to take measures to reduce spending.

But I'd like to emphasize that, just as importantly, while we take great care to make sure that our expense management will not harm our ability to continue growing as we focus on supporting the long-term growth.

We don't give guidance as a matter of policy. With that said, our third quarter this year was down from a year ago at $70 million. But as recent as three years ago in the third quarter, our revenue was only $14 million in 2013 and $30 million in 2014.

So we had managed a period of very strong growth, profitable growth, for several years. And as of now, more than 80% of the people that currently, in our business, buying our products and doing business with the Company, were not with us three years ago.

So I think providing more training to this fast-expanding organization is not only necessary but good for our growth, short term or long term.

Okay. Thanks, Chris.

We have reached the end of our question-and-answer session. I'd like to turn the call back over to management for any closing remarks.

Thank you very much for calling in. I look forward to reporting our fourth-quarter progress in a few months. Thank you.

Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Enjoy the rest of your day.