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Mannatech, Inc. (NASDAQ:MTEX)

Q2 2013 Earnings Call

August 7, 2013 10:00 AM ET

Executives

Mark Nicholls – CFO

Rob Sinnott – CEO and Chief Science Officer

Operator

Greetings. And welcome to the Mannatech Incorporated Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded.

Now, I’d like to introduce our moderator for the call today, Mr. Mark Nicholls, Chief Financial Officer. Mr. Nicholls, you may begin.

Mark Nicholls

Thank you. Good morning, everyone. This is Mark Nicholls, and welcome to Mannatech’s second quarter 2013 earnings call. Today you will hear from both me and Mannatech’s CEO and Chief Science Officer, Dr. Rob Sinnott. Before we begin the call, I will first read the Safe Harbor Statement.

During this conference call, we may make forward-looking statements, which can involve future events or future financial performance. Forward-looking statements generally can be identified by the use of phrases or terminologies such as will, continue, may, believe, intend, expects, potential, should, and plan, or other similar words or the negative of such terminology.

We caution listeners that such forward-looking statements are subject to certain events, risks, uncertainties, and other factors and speak only as of today. We also refer our listeners to review our SEC submissions.

At this time, I’d like to make a few brief comments concerning our second quarter of 2013 operating results, our balance sheet at June 30, 2013.

We are pleased to announce net income for the second quarter of 2013 is $784,000 or $0.30 a diluted share as compared to a net loss of $2.5 million or $0.93 per diluted share for the second quarter of 2012. Recruiting of new associates and members increased 31.2% in the second quarter of 2013, as compared to the second quarter of 2012.

The number of new independent associates and members for the second quarter of 2013 was approximately 36,200 as compared to 27,600 in 2012. The total number of active independent associates and members based on a 12-month trialing period, was approximately 240,000 as of June 30, 2013, as compared to 230,000 as of June 30, 2012.

This increase in total number of active independent associates and members was due to an increase in the recruitment of both associates and members as the phase introduction of compensation plan changes targeting associates was implemented primarily during the second quarter of 2013.

We implemented enhancements to our sign-up packs globally during the second quarter of 2013, which we believe will lead to increases in the recruitment of business building associates.

In July 2013, we launched the final phases of our compensation plan, which enhanced the compensation received by associates for the sale of finished products.

The second quarter of 2013 net sales was $44.8 million, a $1.2 million increase or 2.7% from the second quarter of 2012 net sales of $43.6 million. North American net sales decreased by $1.5 million or 6.6% in the second quarter of 2013, to $21.3 million as compared to the same period in 2012. This decrease is primarily attributable to a decline in the amount of revenue generated per active associate and member.

For the second quarter of 2013, our operations outside of North America, accounted for approximately 52.4% of our consolidated net sales, whereas in the same period in 2012, our operations outside of North America, accounted for approximately 51.7% of our consolidated net sales.

Fluctuations in foreign currency exchange rates, had an overall unfavorable impact on our net sales outside of North America of approximately $1.1 million for the second quarter of 2013.

Asia Pacific, net sales increased by $2.9 million or 17.1% to $19.9 million in the second quarter of 2013 as compared to the same period in 2012. This increase in revenue is attributable to an increase in the revenue – in the number of active associates and members, and an increase in the revenue generated per active associate and member.

Excluding the 800,000 unfavorable impact of foreign currency exchange rates, the change in Asia Pacific net sales for the second quarter of 2013 would have been an increase of 21.8% as compared to the same period in 2012.

Europe, Middle-East and Africa or EMEA, net sales decreased by $200,000 or 5.3% in the second quarter of 2013 to $3.6 million as compared to the same period in 2012. Excluding the $300,000 unfavorable impact of foreign currency exchange rates, the change in EMEA net sales would have been essentially flat as compared to the same period in 2012.

We improved our gross profit as a percentage of net sales to 80.6% for the second quarter of 2013, as compared to 79.7% for the second quarter of 2012, primarily due to a reduction in the amount of inventory identified as obsolete, being reserved or written off. This reduction was offset by an increase in reserve associated with the customs audit for fiscal years 2008 through 2012.

The total being assessed by the Customs Authorities is approximately $1.9 million. We’ve reported, $900,000 in taxes payable on our consolidated balance sheet related to this event with $500,000 related to customs charges being reported as cost of sale, and $400,000 related to surtaxes on customs impact being recorded as other expense.

An additional $700,000 is recoverable back, which has no effect on our Statement of Operations. These amounts being approved are based on our current estimates of the possible outcome of our (inaudible) Administrative Review processes.

Our operating income for the second quarter of 2013 is $1.6 million as compared to an operating loss of $1.4 million for the second quarter of 2012. Total operating expenses decreased by approximately $1.6 million as compared to the second quarter of 2012. This decrease is due primarily to decreases in payroll and payroll related costs, and a reduction in office and occupancy costs.

Offsetting the reductions and operating expenses, commissions and incentive costs increased by $500,000 as compared to the second quarter of 2012, primarily due to an increase in the number of North American associates qualifying for the travel incentives. And North America travel incentive qualification period concluded during second quarter of 2013.

In reviewing the balance sheet, at June 30, 2013, our cash and cash equivalents have increased by approximately $3.4 million to a balance of $17.8 million as compared to the $14.4 million on hand at December 31, 2012.

Cash flow from operating activities was positive $6 million for the first six months of 2013, as compared to a negative $4.4 million for the first six months of 2012. Our working capital defined as total current assets plus total current liabilities increased by $500,000 to $11.6 million from $11.1 million at December 31, 2012 primarily due to a reduction in uncertain income tax positions.

During the second quarter of 2013, we settled the U.S. Federal income tax audit and agreed to a net tax deficiency of $800,000 for the 2005 to 2009 tax year plus the payment of interest accrued through June 30, 2013 of $200,000.

In connection with the settlement of the audit, we reclassified amounts owed to the IRS, and previously reported as uncertain tax positions as taxes payable resulting in $1 million tax benefit in the second quarter of 2013, and an increase in working capital. Total liabilities increased by $800,000 to $28.1 million at June 30, 2013 as compared to $27.3 million at December 31, 2012.

As in prior quarters, we essentially have no long-term debt. Shareholder’s equity increased in the first six months of 2013 by $600,000 due to net income of $1.4 million being generated in the first six months of 2013, offset by $800,000 decrease in comprehensive loss due to the effects of foreign currency translation over the same period.

Finally, during the second quarter of 2013, we did not pay dividends, we did not repurchase shares on the market, and we did not initiate any equity raises through our agreement with Dutchess Opportunity Fund.

At this time, I will turn the call over to Mannatech’s CEO and Chief Science Officer Dr. Rob Sinnott.

Rob Sinnott

Thank you, Mark. Good morning to Mannatech’s investors, associates and employees. Last year, through the dedication of our employees and our field associates were able to turn Mannatech around and make it a profitable business once more.

Subsequently we have maintained that profitability through financial discipline. This year, we have begun to execute on a focused strategy to increase top-line sales revenue. For the second quarter 2013, Mannatech has reported first year-over-year sales growth in six years.

We are pleased with the progress that we have made during the recent past, but really we’ve only just begun. With this kind of work we will never be finished. There will always be room to increase the efficiencies in our supply chain, improve our customer service and provide effective support for our associates.

We will continue learning and applying best practices to all areas of our business. We will continue developing and honing our team, to ensure that our talent pool is deep, sustainable and motivated to continually improve.

As is evident in our net sales reported by region, our sales growth is not uniform across the world. Mannatech like other global organizations has been affected by a shipping, cultural and business climate. Consumer preferences and spending patterns have shifted dramatically and probably permanently. So it’s a good thing that our business model is entrepreneurial, global and highly adaptable.

One example is that Mannatech is evolving as a company with a particular appeal in Asian cultures. We are finding that in Asia, our high-quality products and our entrepreneurial business model appeal to very large and increasingly affluent audiences.

In Asian cultures, natural health products have well established role in daily life. And there is a time on a tradition of preventive healthcare. The reputation of headwinds that dietary supplements, stays in westernized countries are not nearly as strong in Asia. So for this and other reasons, Asia Pacific is a region of high potential for Mannatech that is proven that it can support top-line growth for the company.

Next year in 2014, Mannatech will celebrate its 20th year in business. We’re using this opportunity to reorient some of our longer established markets. In these markets, we believe that improving business training and streamlining communication channels with our independent associates will provide the support that they need for increasing sales and retention. Through some focused actions, we believe that we might revive growth in these markets.

Overall, I have confidence that Mannatech has plenty of room for growth in all of our countries in operations. None of them appear to be anywhere near saturation point for our unique proposition. So it’s simply a matter of taking concepts that are proving to be successful and spreading these out to more people in more countries.

Finally, I commit that our team will remain focused on the essentials of running a vibrant, successful business venture. We will not forget the lessons that we have learned over the past several years. These lessons will serve us well and provide us with advantages that our competition doesn’t have. For example, our associate compliance process and the scientific validation of our top selling product have been bolstered over the past several years to become full strength through the company at a time when these improvements are becoming increasingly valuable within our industry.

Mannatech has built a sustainable advent in the marketplace with our reputation for high quality, natural based nutritional products. Our focus on preferentially using natural vitamins and Vito nutrients versus synthetic ingredients separates us from the vast majority of our competition.

Also Mannatech’s patent portfolio which the company had the foresight to start developing in the mid-1990s has now yielded over 90 patents issued globally.

Our chain our systematic research and intellectual property development has continued without pause throughout the entire history of the company. This gives us much more protected space in the rapidly growing wellness industry and almost all of our competitors have forever will obtain.

This is a huge asset, in an industry that has significantly raised the bar on validation of health supplements, in some countries to a standard almost as high as mainstream pharmaceutical.

So, in summary, we are pleased with our progress but we are not satisfied yet. We have plenty to keep us busy for years to come. We have so much potential I guess unlocked. The road ahead is not perfectly straight or smooth, but it is visible and it’s navigable by us. The world is in constant motion, so there will always be challenges.

However, our attitude is now very different. Rather than seeing challenges of threats, we view them as opportunity to further distance ourselves from our competitors, as the wellness industry matures and consolidates.

Thank you very much for your interest in Mannatech.

Operator

That concludes today’s conference call. You may now disconnect.

Question-and-Answer Session

[No Q&A session for this event]

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