Q4 2019 Earnings Call

Greetings and welcome to the natural Health trends Corporation fourth quarter and full year 2019 earnings conference call.

This time, all participants are no listen only mode. If anyone should require operator assistance during the conference. Please press star zero on your telephone Keypad. As reminder, this conference is being recorded it is now my pleasure to introduce your host aerial Papermaster with Addo Investor Relations. Thank you you may begin thank you and welcome to natural health trends sport.

Quarter and full year 2019 earnings conference call. During today's call. There may be statements made relating to the future of both of the company are forward looking statements as defined in the private Securities Litigation Reform Act like 95, actual results performance or achievements could differ materially and those anticipated in such forward looking statements.

The result of certain factors, including those set forth in the company's filings with the Securities and Exchange Commission.

It also be noted, but today's call will be webcast live and can be found on the investor section of the company's corporate website and natural health trends Corp. Dot com.

Instructions can be found for accessing the archived version of the conference call and today's financial results press release.

If you did approximately nine am eastern time.

This time I'd like to turn the call over to crush sorry, President of natural health trends.

Thank you area and thanks to everyone for joining us with me today as Scott Davidson, Our senior Vice President and Chief Financial Officer.

2019, with a challenging year for our business.

Mid a host of macro economic and industry specific factors that created a highly difficult operating environment.

As a result total revenue declined to $77.6 million from $891.9 million in 2018.

In addition to China as 100 day campaign, and now last January which we voluntarily suspended member activity and negative sentiment stemming from social media as it relates to health products companies in China.

Additional development such as ongoing global trade <unk>.

Try this slowing economy and civil unrest in Hong Kong further contributed to the decline in total revenue.

Well these factories, where beyond our control I am pleased that we have continued to execute our strategy and run our operation sufficiently to ensure the retention of our top leaders who are key to our success.

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As our business had been under pressure.

We had been applying what we learn from our experience in this uncertain and evolving environment to help support our affected markets.

I like it also highlight the strength of our balance sheet.

Enable us to weather at the adverse market conditions and ensure inventory levels are sufficient to fulfill orders in a timely fashion.

Because of the persistent slowdown we have implemented a strategy to more effectively manage elements within our control.

Including number one making sure our instead of remain attractive to retain are leaders and member base.

Number two continuing to expand our operations into new geographies and number three further reducing our cost structure.

Oh, no walk through each of these in detail.

I remember it maintains solid water volumes throughout 2019 and continue to react positively to the incentives we put into place.

In the fourth quarter, specifically total orders increased over 12% from the third quarter 2019.

This led to a 5% sequential quarterly increase in revenue, partly due to our second half major event in October where over a 3000 attendees, including all of our top Beatrice came together for a few productive high energy days in Macau.

They are we unveiled two exciting new products.

Colored changing lip balm electric toothbrush.

Both of which we're very well received it quickly sold out.

I am thrilled with the alchemy, Macau, which grew our neither is continued to be highly engaged.

[noise] several flight training events throughout the year help further contribute to order volume improvements along with specialized training events, such as ours and H.T. University.

Additionally, we held various successful product promotions made possible by our effective inventory management, we are working to carry this momentum into 2020.

In terms of our geographical expansion priority.

I'm happy to report there are a number of our new emerging markets have been performing well.

We also made solid traction in Europe through our preferred customer base, one day in a moment.

In Peru total orders grew 43% in 2019 compared to last year.

By the strength of our solid leadership in the region.

We have some exciting new instead of TRID.

Product road shows incorporate events plant in Peru for 2020 with qualification period already under way.

With the help of our Peruvia leadership team, we are moving forward with building a presence in both Bolivia in Colombia.

In Bolivia, we have incorporated our legal entity and are currently engaging local service providers to support operations and obtain product registrations.

We expect to start accepting orders and hold our first in marketing event during the third quarter of 2020.

In Russia in Kazakhstan total orders grew by 13% in 2019 compared to 2018.

We believe there is a long runway for growth and expansion in Russia.

We officially entered the market in India in mid 2019, and since then have been making good progress, especially the order volume trends today.

We believe that India represents a significant opportunity.

Our preferred customer feature in Europe.

Continues to deliver impressive progress in the solid recurring revenue stream following the initiation other program in December 2017.

As a reminder, preferred customers are consumers of our product, who do not wish to engage in selling.

The number of prefer a customer accounts in 2019 grew 70% over 2018.

55% year over year improvement in prefer a customer itself.

We are evaluating how to roll out this feature into other markets given its promising performance.

The third piece of our strategy involves further reducing our cost structure.

As I mentioned, our last conference call. We've put a program in place in the first quarter of 2020 to position us for increase operating efficiencies.

So Dan we identified several areas, including headcount reductions as well as decreasing event spending.

We expect to realize annualized cost savings of approximately six and they have million dollars in 2020.

Lastly, I want to comment on the ongoing evolving situation in China about a corona virus.

Well, our first quarter results are typically affected by the Chinese new year, the Corona virus outbreak.

And the unprecedented government measures control it or posing further challenges.

Following the extended Chinese new year holidays, we are deploying product promotions and webcast training to overcome physical restrictions.

We are monitoring the situation closely and plan to adapt our marketing programs accordingly.

Therefore, we make a decision to move our first half major event last year Hell in March into the second half of 2020.

The health and safety of our employees members and customers remains a top priority.

Oh, so our understanding is that the Chinese government has to buy all remaining direct selling license applicants to withdraw applications.

We agree with the governments of life and we drew our application.

It is our expectation that we will be applied as soon as regulatory and legal circumstances are again ready, but doing so.

In summary.

2019 was a difficult year for our business.

So we are optimistic we are well positioned to execute our strategy.

2020 would not be without challenges.

As we experienced in 2019.

China was 100 day campaign did not officially concluded in April as defect are still felt today.

As I highlighted at the beginning of the call.

Negative sentiment stemming from social media associated with this program has created misperceptions about health products companies like ours that operate in good faith.

That said well the 100 day campaign adversely impacted our financial results in the short run.

We continue to support the actions taken by the Chinese government to remove companies that operate illegally.

Manufacture and sell counterfeit and stuff standard products and use both advertising and misleading claims.

The government efforts have already drastically benefited Chinese consumers.

Our leader it did an excellent job navigating a highly complex and complicated operating environment in 2018.

As evidenced by the positive order volume trends, we experienced in Q4.

Well, we remain cautious on both macro economic factors and the spread of the Corona virus in 2020.

I have confidence in our ability to help them the decline to our topline and improve our profitability through the strategic initiatives I discussed.

As we embark on the new year ahead I like to thank all of our leaders member employees and investors for their ongoing support of energy global.

With that I like to turn the call over to Scott Davis in our CFO to discuss our fourth quarter and full year 2019 financials in detail.

Scott.

Thank you Chris.

Total revenue for the fourth quarter was 17.8 million a decline of 57 per cent compared to 41.6 million in the fourth quarter of 2018, and an increase of five per cent compared to 70 million in the third quarter of 2019.

The decrease year over year was primarily due to the macroeconomic challenges, Chris discussed, which have continued to adversely impact our business.

For the full year 2019, total revenue was 77.6 million compared to 191.9 million in 2018.

Our active member base decreased 16% to approximately 57400 at December 31st from 68000 at September Thirtyth. It was down 41% from 97800 at December 31st last year.

Turning to our cost and operating expenses.

Gross profit margin, 71.4% declined from 78.8% in the fourth quarter last year, primarily as a result, especially product promotions designed for the quarter and her logistics cost.

For the full year, our gross profit margin was 74.1 per cent compared to 79.5% in 2018.

Commissions expense as a percent of total revenue for the fourth quarter declined to 40.9% from 48.6% in the prior year quarter due to lower incentive cost.

On a four year basis commissions expense was 45.8% of total revenue.

Roughly in line with 45.6% for 2018.

Selling general and administrative expenses for the quarter increased 1% to six 6.9 million from 6.8 million a year ago.

For the for your as you know he was 27.2 million a decrease at 13% from 31.3 million for 2018.

The decrease in for your issue Nabors is 2018 was primarily due to decrease in both employee related cost and credit card fees, which were partially offset by higher professional fees.

Our total operating expenses for the quarter also included a goodwill impairment charge of 1.8 million due to the early adoption of a new accounting standard pertaining to goodwill that arose from a merger transaction in March 2000 important.

As a result operating loss for the quarter was 3.2 million compared to operating income of 5.7 million in the fourth quarter last year.

For the full year 2019 operating loss was 7 million compared to operating income of 33.7 million in 2018.

We recorded income tax benefit of 106000 for the quarter compared to the income tax provision of 498000 recognized in the fourth quarter of last year.

For the four year, we recognize the income tax provision at 14000 compared to 3.5 million for 2018.

Net loss for the fourth quarter totaled 2.8 million or a loss of 27 cents per diluted share.

Compared to net income of five point Sixmillion were 49 cents per diluted share in the fourth quarter of 2018.

For the full year net loss totaled five point Sixmillion were 52 cents per diluted share compared to net income of 31 million or $2.74 per diluted share in 2018.

No our turn to our balance sheet and cash flow.

Total cash and cash equivalents were 96 million at December 31st down from 101.1 billion at September Thirtyth.

The decrease was due to our payment of 4.6 million in dividends and repurchase up $552000 worth of our common stock.

Net cash provided by operating activities was 110000 for the quarter and net cash used in operating activities was 18.6 million for the full year.

We repurchased just over 97000 shares of our common stock during the quarter at a average price up five dollarssix supports sense for a total of 552000.

As of December 31st 21.9 million. Other previously approved stock repurchase program remained available for future purchases.

For the full year 2019, we paid out 7.3 million in dividends.

Earlier this week on February Chad, our board of directors declared a quarterly cash dividend of 20 cents per share, which we payable on March 620, 20 into stockholders of record as of February 25th 2020.

We expect to pay a comparable quarterly cash dividend and 2020 and 2021 at the sole discretion of our board.

As Chris highlighted as result of our effective working capital management.

Our balance sheet remains strong with no debt and sufficient liquidity to run our operations and continue our stockholder return priorities.

That completes their prepared remarks.

I'll now turn the call back over to the operator.

Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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