Q2 2019 Earnings Call

Greetings and welcome to the natural health trends second quarter 2019 earnings Conference call.

At this time all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Oreo Papermaster with Addo Investor Relations. Thank you you may begin.

Thank you and welcome to natural health trends second quarter 2019 earnings conference call. During todays 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 as a result of certain factors, including those set forth in the Companys filings with the Securities and Exchange Commission.

Should also be noted that today's call will be webcast live and can be found on the investor Relations section of the company's corporate website and natural health trends Corp. Dotcom instructions can be found for accessing the archived version of the conference call in today's financial results Press release, which was issued at approximately nine am eastern time.

At this time I'd like to turn the call over to Chris Sorry, President of natural health trends.

Thank you our real.

Thanks to everyone for joining us.

With me today is Scott Davidson, our senior Vice President and Chief Financial Officer.

To begin I'd like to discuss our second quarter performance as well as our initiatives to restore top line growth.

I would then hand, the call over to Scott to discuss our financials in greater detail.

Beginning with our second quarter results.

Total revenue was down 54% to $23.4 million compared to the second quarter of 2018.

As we previously disclosed.

We voluntarily suspended our member activities during the vast majority of the first quarter.

And extended that further to the entirety of the second quarter.

In response to the Chinese government January Eightth announcement of its 100 day campaign.

Throughout this campaign, which included a thorough review of certain food equipment.

Small appliance manufacturers and service providers.

That claim to promote beneficial health functions.

Our cooperation with the Chinese government's inspection investigation and document request has been our top priority.

No the campaign expire in late April .

There has been no official conclusion to formally in the program.

The operating environment in China remains difficult for companies like ours.

However, we were pleased with our leader its capabilities to come together and adapt our business operations to this new environment.

As a result.

Our second quarter revenue was up 21% compared to the first quarter of 2019.

Following the 100 days, we are maintaining our member activity moratorium in mainland China for the foreseeable future.

This entails a voluntary suspension of company sponsored business meetings and product road shows.

I would reiterate my comments from our last call.

That we strongly support the actions taken by the Chinese government.

<unk> root out bad products and deceptive practices in order to protect Chinese consumers.

I still believe that our proactive approach to member activities in China is the best way to position our company for longer term success, despite the injury adverse impact to our financials.

Throughout the quarter, we deploy several different promotions to encourage product purchases.

Which were very well received by our members.

Despite the overall year on year revenue decrease.

Our second quarter, Reorders actually increase over a year ago.

And accounted for more than half of our total revenue.

This is a very constructive development and reflects the underlying strength of our brand.

And the loyalty of our consumers.

Aside from what has been taking place in China.

We have been steadily ramping up activities in other promising markets, including Latin America, Southeast Asia and Europe .

Terrific progress has been made in Latin America led by Peru.

Our presence in Peru has more than doubled in size versus a year ago and has also grown sequentially quarter over quarter.

We held our Peru success for him in Lima in me.

Drawing in over 2000 attendees.

We are moving forward with building new bases in Bolivia in Colombia.

In Asia, we stage, our first flight training event for our Chinese vendors outside China with over 420 attendees in South Korea in early June .

And follow that up with any ban in Hong Kong with over 400 in attendance.

Of note.

Remember sentiment was all around very positive.

Considering the challenges our industry has been facing in China.

[noise]. Additionally.

The March introduction of Dallas.

Our latest skincare system before him well with sales, reaching and accumulate a $700000.

In Malaysia, we conducted a product road show for Premier Noni juice.

Which in addition to other product specific promotions encouraged strong product reorders.

In India.

We celebrated the Grand opening of our office in Mumbai, just six weeks ago.

At our April events in Mumbai, and Delhi, we introduced both alumina lugs in our skin Belgians firming system.

Generating $129000 in total sales during the second quarter.

Further product registrations should drive incremental sales during the second half of 2019.

We believe that India represent a significant opportunity.

In Europe .

We achieved great traction with our growing base of prefer or customers.

Well, those who enjoy our product as consumers and do not look to earn a commission on direct sales of our products.

The number of preferred customers grew both year over year and quarter over quarter, primarily in Sweden, where our preferred customer base was first developed in may of 2017.

We are logistic support and the success of the preferred customer base.

Our hope is that it will proliferate into other E U markets.

Lastly, we have a brand new European specific app in development to facilitate member communication and productivity.

Through this proprietary application we are working to develop an integrated enterprise system to unify the front end the backend software platforms.

Eventually for all markets.

More on this to come in future quarters.

In summary, while we face challenges in China that placed significant pressure all our top line.

We were very pleased with the high level of commitment.

Shown by our members through the difficult operating environment.

With that I'd like to turn the call over to Scott Davidson, our CFO to discuss our second quarter financials in detail.

Scott.

Thank you Chris.

Total revenue for the second quarter was 23.4 million.

They declined to 54% compared to 50.9 million in the second quarter of 2018, and an increase of 21% compared to $19.3 million in the first quarter of 2019.

The year over year decline was primarily the result of the 100 day campaign in China.

Our active member base decreased 10% to 70000 to 80 at June Thirtyth from 87300 at March 31st It was down 16% from 93000 at June Thirtyth of last year.

Turning to our cost and operating expenses.

Gross profit margin of 76.9% decline from 79.6% in the second quarter last year and improved from 73% in the first quarter of 2019.

The year over year decline in gross profit margin reflects product promotions and a higher logistics cost.

Commissions expense as a percent of total revenue of 48.7% increase from 43.8% in the second quarter last year and decreased from 49.1% in the first quarter of 2019.

The year over year increase as a percentage of net sales was largely due to higher cost of a special incentive program to help ease qualification status for our members during this extraordinary period.

Selling general and administrative expenses for the quarter decreased 18% to 6.6 million from 8.1 million a year ago and decreased 9% from $7.3 million in the prior quarter.

The decrease versus the same quarter a year ago was primarily due to a decrease in both employee related cost and credit card fees.

Partially offset by member related costs, <unk> costs and professional fees.

The decrease versus the prior quarter is due to less event calls as our first major been a bigger occurred in March.

As a result operating loss for the quarter was $4000 compared to operating income of 10.1 million in the second quarter last year and the operating loss of $2.7 million in the first quarter of 2019.

Our second quarter operating loss included 1.2 million of mainly team support product discounts.

And legal cost incurred during the quarter that we do not anticipate will be recurring at this elevated level going forward.

We recorded an income tax benefit of 28000 for the quarter due to the current period of loss.

This compares to an income tax provision of 1.1 million recognized in the second quarter last year.

Net income for the second quarter totaled 397000 or four cents per diluted share.

Compared to $9 million or 80 cents per diluted share in the second quarter of 2018, and a net loss of 1.9 million or 17 cents per diluted share in the first quarter of 2019.

Net cash used in operating activities was 3.7 million during the quarter, including a 1.7 million dollar installment payment on tax payables arising from the 2016 tax Reform Act compared to net cash provided by operating activities of 5.3 million in the second quarter of 2018.

Total cash and cash equivalents were 108.1 billion at June Thirtyth down from 118.7 million at March 31st.

During the quarter, we repurchased nearly 613000 shares of our common stock.

At an average price of $10.90 per share for a total of 6.7 million.

As of June Thirtyth 25.3 million of the previously approved stock repurchase program remained available for future purchases.

As always we will continue to evaluate our capital allocation strategy going forward to deliver increased value to our shareholders.

That completes our prepared remarks, I will now turn the call back over to the operator.

Thank you ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.