Jeff Stanlis - IR Chris Sharng - President Scott Davidson - CFO.

Charles Brian - Upside Capital Andrew Hansen - Redwood Investment Management James Williams - Newbridge Securities Jordan Qu - Valuestone Capital Michael Potter - Monarch Capital Group.

Welcome to the Natural Health Trends Corporation Second Quarter 2015 Financial Results Call. As a reminder today’s conference is being recorded. And at this time, I would like to turn it over to Jeff Stanlis. Please go ahead, sir..

Thank you. I’d like to point out that during the course of the conference 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 statement 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 not on the Internet by using Investors section of the company’s corporate website at www.naturalhealthtrendscorp.com.

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 introduce Chris Sharng, President of Natural Health Trends for opening comments. Go ahead..

Thank you, Jeff and thanks to everyone for joining us today with me, and Scott Davidson, our CFO. Our momentum and strong financial performance continued in the second quarter. Today we reported quarterly revenue of $69.7 million and net income of $12.3 million more than doubling last year's figures on both counts.

In addition we have generated $40 million in operating cash flow and $36 million in free cash flow year-to-date. Hong Kong accounted for a 93% of our second quarter revenue, increasing a 105% over last year and at the same time we’re seeing strength in North America where sales increased more than 200% during the quarter.

South Korea with an increase of more than 350% and a 275% increase in our ecommerce sales in China. Strengthening consumer demand combined with our growing [indiscernible] of distributors and supported by our training, marketing and incentive programs are working effectively to drive this impressive growth.

The well-publicized economic slowdown in China to this point has not impacted our results and we continue to see strong demand for our products in China and in other markets.

In fact I believe that the re-orientation of the Chinese economy to our consumption will present more opportunities for businesses like ours who work to introduce high quality consumer products to the increasing affluent Chinese consumers. China is our most important business development project and the primary focus of our resources.

In June, we funded a bank deposit account in the amount of CNY20 million or $3.3 million in an anticipation of submitting a direct selling license application in the next few months. A deposit is required by the Chinese laws to establish a consumer protection fund.

Our current activities do not require this license, however our long term growth objectives will benefit from our securing a license. This will enable us to drive incremental growth leveraging our growing brand recognition in China and Asia as well as our Hong Kong distribution infrastructure.

Including this investment we expect that upto $10 million of our available cash may be invested in our Chinese entity within the next 12 months. For the purposes of establishing China based manufacturing capabilities, opening additional healthy lifestyle centers or branch offices. Increasing public awareness of the company as well as our products.

Building our service stations, in other market building projects. The second quarter was an active one for product launches as we introduced two new beauty products within China. Our complete renewal anti-aging hair care and men skin care.

We also launched our home goods product line within China by preselling our indoor and car air purifiers and finally we launched a urban [ph] free version of our Alura product called Alura Lux.

In the areas of our leadership development and incentive programs for our more than 76,000 active distributors during April we held our leader meeting with the top Hong Kong leaders where we further updated our growth strategies and in May the 400 Chinese qualifiers enjoyed a reward trip to Germany.

During the second quarter we generated $22.9 million in operating cash flow compared to $4.5 million in the year ago period and bring our year-to-date total operating cash flow to $39.5 million.

The strong and steady growth of revenue and earnings continue to generate substantial free cash flow that provides us with the flexibility to reinvest in our business for continued growth as well as return a portion of the cash directly to our shareholders through cash dividend and share repurchases.

In addition to what we just announced, 33% increase in our quarterly cash dividend to $0.04 a share. We also announced our plant to purchase upto $15 million of our common stock through December 2016 with $5 million of which executed immediately. 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 for joining us today. Total revenues for the quarter 69.7 million, an increase of 35.5 million or 104% compared to 34.2 million [Technical Difficulty] in the second quarter last year. We felt strong growth in Hong Kong with revenues increasing 105% in the second quarter compared to the same period last year.

We also saw increases in North America, South Korea and Taiwan as well as an increase in our China ecommerce business. These increases were partially offset by decline in the common wealth of independent states. Second quarter revenue outside of Hong Kong was up 91% over last year.

The number of active distributors of our products increased 23% sequentially to 76,400 as of June 30. Gross profit margin for the second quarter was 39.8% compared to 78% in the same period last year. In the second quarter net income was 12.3 million or $0.98 per diluted share compared to 6.1 million or $0.49 per diluted share last year.

Turning briefly to the balance sheet, we ended the quarter with cash and cash equivalent of 74.4 million and increase of 29.6 million compared to December 31, 2014 due primarily to cash provided by operations as a result of the increase in product orders including those orders reflected in our deferred revenue balance.

This increase in cash is net of 6.1 million repurchase approximately 278,000 shares of our common stock and 3.3 million [indiscernible] consumer protection fund in China. This 3.3 million remains on our balance sheet and is reflected as non-current restricted cash. 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]. And we will go first to Charles Brian with Upside Capital..

So just a couple of questions, follow-up on conversations we have had in the past. Just remind us what drives our distributor commissions.

We notice that had been pretty steady at 45ish% of revenue and it surprisingly jumped to about 50%, you still have very good gross margins but just remind us what drives distributor commissions and why we saw that change in the second quarter and then I’ve one quick follow-up..

Majority of the number as reported in that line commissions is our commission engine, so pay our commissions to people that sell our products and that number hasn’t changed all that much.

Now what has changed is the -- supplemental commissions that we pay out in the form of incentive rewards that includes attached reward we call supreme bonus also based on performance and that money goes to supplement the mid-level leaders in our organization that really comprises most of the activities in the market and that also goes to road incentive trips.

We had a trip earlier this year in Germany, the performance qualification period was last year. Now we’re running a trip that will go to New Zealand next year. The number of qualifiers for program such as Supreme Bonus and the incentive trips had gone up as our volume went up.

It went up more than what we expected and also we’re increasing the cost per capita for the incentive trips. So that constitutes the increase in our commissions..

Just I guess two quick ones to kind of go together, can you just give us a percentage of the cash and you continue to upgrade cash flow. What percentage of that cash of the 74.4 million is held in the U.S.

versus overseas?.

At this point Charles, vast majority of the cash is overseas outside the U.S..

Can you just give me a specific number, I didn’t find that disclosure in your financials..

Charles, approximately about 2 million is currently held in the U.S. and the rest is overseas..

And with the buyback, is the intent to continue to buyback from -- we spoke about in the past -- it escapes my mind, the director the insider who you guys have been buying stock from in the last buyback directly, is the intent to use a portion of the buyback to buy stock directly from the related party again?.

I think our intention is to make sure that our buyback does not invariantly change the proportion of ownership of the largest shareholder who is on our board. And so he actually doesn’t really want to participate but we want to make sure that execution is fair to all shareholders in terms of control and that’s why we include Mr.

[indiscernible] as part of the program. Yes and to answer your question, when we do so we are going to make sure that that continues to be the case..

[Operator Instructions]. And we will go next to Andrew Hansen with Redwood Investment Management..

I got a couple of questions at this time.

First one has to do with the balance sheet account called the amounts in distributor eWallet, could you give us some color on what this means and then what it role it plays in your total compensation system?.

eWallet is a payment plan, a payment vehicle that we use to distribute commissions and it works like a debit card and we issue the debit cards and we put the credits on those cards as commissions earned and if the cash is not withdrawn by our distributors then the cash remains on our balance sheet, but it is a liability item because they earn the money and we keep one side of balance sheet of cash and the other side would recognize the liabilities that currently sits on eWallet..

And the deposits are in which currencies?.

So Andrew, the eWallet is currently utilized in only our Hong Kong business. So we credit each of their accounts in Hong Kong dollars and of course the period end the aggregate balance is translated back to U.S. dollars..

And I take it also the balance of your cash balances is held in Hong Kong dollars too?.

The cash that is held in Hong Kong is either held in Hong Kong dollars or U.S. dollars. That is accurate..

Okay, second question is regarding taxes. At this point you’re benefiting from NOLs and you’re accumulated debts at -- when do you expect to pay Texas and secondly do you’ve an idea of what the rate will be at that point/.

Andrew, at this point before most recent analysis stock buyback has about $31 million of net operating losses still available in the various firms. We cannot predict when we will use it up but I can tell you that net operating losses are only for the purpose of bringing cash back to the U.S. for stock repurchase and cash dividend.

We don’t know yet what the effective tax rate will be once we use up the operating losses. It's a subject matter that we’re looking into right now..

Is that a question of where income is recognized? The tax issue? And if so what's the Hong Kong rate?.

It's a complex matter, our tax planning and our current transfer price regime that has been in place for some time we pay an effective tax rate of 17.5% in Hong Kong for the income that is left in Hong Kong and approximately 2.5% of our Hong Kong revenue is taxable income in Hong Kong.

The rest of the profits is moved to a trading company in Cayman Islands and they are kept offshore. And we don’t plan to change this transfer price regime but we’re looking into other things for a better tax planning once the net operating losses are exhausted..

And we will go next to Susan Jiang [ph], a private investor..

I checked the website of the Hong Kong operation, also China, I was born in China, I'm a U.S. citizen. So I’ve a couple of questions. Just the question, you’ve a new product in China market air cleaning [ph] for clean air -- what's the name of your product, it's a new product introduced in July to sell to China.

So clean air, I thought the price in Chinese media is that something you will start to sell in China?.

We’re excited about this new introduction. We call it air purifier, we sell it indoor air purifier and it also comes with also a car air purifier and it's becoming available in July and it's only for China..

So this product a good potential in China to sell because I know China has better air quality in some cities, some areas, do you project this product can be a very good popular, new product in China market?.

I agree. I think that it's something that we will like to explore more and the home goods category is something that we had not had so far and that we like to develop more home appliance. We understand I think the social environment in China and the Chinese market pretty well and we have existing distribution.

I think we can push this product to our consumers..

Also another question -- I saw the press release, you said you’re applying license for the excess baggage in China, is that right?.

We are getting ready, there are many components in the application form. So we put a deposit there, we'll get a certificate from the China construction bank that we have done. So for example, we got a manufacturing certificate and we're billing us on service stations in the City of Guangzhou where we'll apply for our permit.

Now we're in the process of gathering documents to get ready..

Yes, I almost kind of – what's the time constraint you can get the permit, few months or half a year or a year, what's the timeframe, an estimate?.

Susan, I cannot forecast when we could get a license or permit. If we get a permit or license, we expect along an interactive process with the government. I expect that we will have to make a lot of follow-up effort, it would be adjustments, it will be consultation.

I don't expect a quick result but I really don't know the length of time that we'll require or the result of this process..

Okay, yes, I almost fair because the China market has important value that stalks through various sites, right, through online. And you have a normal local intern [ph] to show customers, to show potential – plus you can also do directly spending, this is still online only right.

Is that right?.

Yes, I appreciate your comment..

Actually, now quickly I checked that Hong Kong verifies also because I'm interested in another product of yours. I'm not buying here because I just start to learn. I want to express starting end of June to July you have all the Hong Kong verified, like at least five products out-of-stock, also the stock. So about two weeks already.

So that means you sell a lot, actually the best part of the last two years I don't see many posting about all the stock.

Although problem for now almost stopped, and I will assume because you sell very fast that all those stock, my question is how soon can you replace all the stocks because I checked on product, it's almost on hold at least for two weeks, there is still no stock.

So do we know the situation there because no stock you cannot sell more, right, why is the stock on hold or not replaced?.

Yes, I appreciate your question. June was our largest month ever. We had a huge volume and lots of orders come in, and compared to more than 30 products that we sell, I personally will like to see that our product would never be out-of-stock.

But those five items that you saw that we were out-of-stock have already been replenished and so we continue to ship, and they are relatively minor, the out-of-stock situation. We are very happy with our ordering profile at this point..

And we'll go next to Dan Mazher [ph] with Harvest Capital..

Hi, thanks for taking my question. Good morning, congrats on solid numbers. I was wondering there has been a lot of volatility in the revenue per distributor, it's – I think it was roughly, I think it was down the last couple of quarters and then had a pretty big jump this quarter.

And can you just kind of walk through what the best way to look at that is and what the volatility would strive driving the volatility?.

Dan, I'm glad you know this Dan, personally I didn't keep track of the revenue divided by this junior account. I think it has to do probably with the mixture of the distributors, maybe some of the people that have come back and placed repeat purchase orders and that will drive the dollar amount per purchase or per distributor account lower.

But in general, the correlation – a strong correlation is between the number of distributors in our revenue overall, and I tend to look at that..

Okay, that's – I'll take a look at that later. And then just as a follow-up, I think it was Andrew who asked – you've had a big jump in pretax dollars, so I'm kind of surprised that you have an adverse valuation allowance on the deferred tax asset given number of years of pretax profitability and then the big jump recently.

What is the process that you're – I mean, you obviously study that I would expect on a quarterly basis, but why haven't you reversed that valuation allowance yet?.

Dan, we work with our outside tax professionals provision preparation, and through our discussions with them it's mainly based on intent, so intent to bring those funds back and whether you have a plan or not. And at this point we really don't have a plan to fully utilize those funds in the US therefore we haven't reversed the valuation allowance..

Okay. So it's not being signed just – I mean I thought it was basically GAAP profitability, you can often drive the reversal of valuation allowance..

Yes, there can be opportunities for us to invest those funds abroad and they never come back..

Okay.

And so the – with the buyback with limited cash on the US is the limiting factor or will you have to pay some taxes as you utilize that cash for buybacks?.

While the net operating losses are available, we incur minimal taxes, 2% to bring the cash back for returning to the shareholders..

Yes, we actually have to pay the AMT tax, even though we utilize the NOL as long we bring it back, we still are obligated to pay the AMT..

Okay. Yes, I could follow-up on the tax at a latter point. Thanks for taking my question..

Thanks, Dan. Thank you very much..

[Operator Instructions] And we'll take a follow-up from Andrew Hansen at Redwood Investment Management..

Thanks again. I wanted to dig down a little bit more on what's happening in the real Chinese economy as it sounds [ph] finance and stock market, most people got panicked and fall back.

If I step back because two kinds of things; first is, in general, a weak stock market beats the wealth spending but very few participants relatively speaking with potential population in China in the market. Secondly, we've got government policy which clearly intends to increase the consumption sector.

Third, direct selling companies seem to do better when economic conditions are softer and with second income earner or maybe the primary income earner wants to make more money, it's a great way of doing it; that's one set of observation.

The other one is, as you've come back from the April meeting in Germany with a broad number of distributors, you had a great tune, maybe it did bat little bit more.

Can you explain how you see your distributors reacting, whatever it is?.

Yes, hi, I personally travel a great deal in China and for years and years I've seen these wide areas [ph] that has no traffic, I'm seeing secondary cities with a placio of municipal buildings and two or three international airports, I've seen residential/commercial high rises completely unoccupied turning dark at night.

I think that the reduction investment is good for China, it will reduce the wasteful spending and this massive purchasing power is now driven to oil consumption, it's a correction in the economy that is good for China overall. The connection between won't effect and consumption as a whole is much weaker in China.

The stockholding population is small, not only speaking compared to the other countries.

We do have some leaders who make good money and they play in the stock market and I see them not now more focused doing our business just to stay a little bit disillusioned with investment return in the stock market but they are such a small, small portion of the society.

I see that maybe opportunity is lost a little bit for companies in China that would like to raise equity money but overall it's not a bad thing, it's a very, very weak effect on us.

We are in the consumer sector, we see that consumers are increasingly more affluent and see that they will like to buy very high quality products, there is a strong marketing cache in products developed and made in the US and that's how we approach the market; we go to the market, housing that our products have good quality because they are made, they are designed from the US we ship overseas to China.

I think that overall, I have very strong confidence in the economy as a whole and also in it's effect on us..

Thanks for your thoughtful answer. And it bring to mind the CFO, Karen said last year, cache US products in China..

Yes, thank you for your question Andrew..

Welcome..

And we'll go next to James Williams with Newbridge Securities..

Hi Chris, very nice quarter, incredible momentum you're carrying into 2015.

I just had a question with your stock now uplifted and the market cap where it is right now, are you tracking any interest at all for any research because my feeling is if there is a lot you can tell where the stock is at in the day there has been a bunch of short selling in the stock and I'm so glad that they have recovered a day, that's great to say but it seems like a lot of your shareholders are in the retail hands.

So I was wondering if any brokerage coverage you've reached out to that society to see if they might be able to come aboard to maybe shift your shareholder base a little bit more from retail, more to the institutional side..

Thank you, James, I appreciate your questions, your comment is well noted. We have not done that yet and there has been many other priorities but I have known that your comment very well..

Okay, thank you very much Chris..

Thank you for calling in..

And we'll go next to Jordan Qu with Valuestone Capital..

Hi Chris, thank you for the upgrades of the results for the last quarter. .

Thank you for calling in Jordan..

What's the growth ratio for North America, in the last quarter what are your outcome? And the second question is, what's the three top products last year?.

Okay. Jordan, in North America here are sales increase about 220% in the quarter, and it's about 170% in the first half, and that comprising the Canada and the United States.

Our top three selling products are the premium juice, it's although less than 30% of our products, and then our second best selling product is essential probiotics, it's designed and manufactured by a Korean vendor. And then our third best product is a whey protein product called Triotin [ph]..

Thank you very much..

Thank you..

And we'll go next to Michael Potter with Monarch Capital Group..

Hey guys, congratulations on a terrific quarter.

Just a couple of questions, Chris, can you give us little bit more detail about the retail strategy, I know it's small but the retail strategy that you are establishing in North America?.

Yes, Mr. Potter, it's little harder to hear you. I see that we have a project that is building out now, it's a healthy lifestyle center along the line of what we already have in China. We have something close to 20 of them, all around China and they are operated by our members.

The one's in the US and Southern California will be operated by the company, it's a joint venture with some of our Chinese leaders and we like to have a presence here where the Southern California members could come into our center to look at what we have on offer in our total portfolio.

We like to provide a place where they could get some service in person, they could pick up products, take an exchange products that they like, and they can also have meetings here. We are also looking into a similar undertaking in Vancouver, we have now a bigger Canadian business then the US, both are growing.

And so we will build out a healthy lifestyle center in the Canadian city called Richmond near Vancouver in British Columbia. The net are retail, it's really in collaboration with the leaders..

It is the reach of the Asian communities in North America?.

Absolutely, yes..

Okay..

Like our center is - in Southern California is in the Chinese community called multipart, enrichment is very Chinese influence..

Okay, terrific.

And when does the Southern California facility open or has it opened already?.

Our target is in the fourth quarter of this year, and then a little bit further back for Vancouver..

So that will be a – Vancouver will be a 2016 event?.

Most likely, yes..

Okay.

And then one quick question on receiving direct license, assuming the company does receive it, does this change the economics of our business in anyway in China so it improve on the economics in some manner if we have this direct license?.

I'm definitely hopeful that it will be a positive effect on our business.

Even though I don't really know the outcome of our application and how long it would take but I'm hopeful that we will get a license and a securing of this license will help our business in China and we're hoping that we can reach more consumers, we can have more distributions in more cities and provinces, and we will have better name and recognition.

I think all of those things will help our growth..

So this change of model in anyway of how we're going to I guess either sign up the distributors or the conditions that we pay?.

It will not change our model outside of China but within China there will be a different business model and in China we will sell a different line of products, in the beginning only cosmetics and home appliances hopefully, and then we will pay a single level commission, no more than 30% directly related to the self-effort made by the individuals.

We probably will incur a higher percentage of overheads compared to the revenue because we are required to have service stations and bench offices everywhere we operate. And so the P&L will look different but I'm hoping that that will incremental benefit to our current financial statement..

All right, terrific. Thanks guys, I'll get back in the queue..

Thank you, Michael..

And that does conclude the Q&A portion of today's conference call. At this time I would like to turn it back over to management for closing comments..

Thank you, Erin, and thank you everyone for calling in today. I look forward to speaking to you soon about our third quarter progress. Thank you. Have a good day..

And that does conclude today's conference call everyone. We thank you for your participation and you may now disconnect..