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Mannatech, Incorporated (NASDAQ:MTEX)

Q3 2013 Results Earnings Call

November 14, 2013, 10:00 AM ET

Executives

S. Mark Nicholls - Chief Financial Officer

Robert A. Sinnott - Chief Executive Officer and Chief Science Officer

Analysts

Operator

Greetings. And welcome to the Mannatech Incorporated Third 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 would like to introduce our moderator for today’s call, Mr. Mark Nicholls, Chief Financial Officer. Mr. Nicholls, you may begin.

S. Mark Nicholls

Thank you. Good morning, everyone. This is Mark Nicholls, and welcome to Mannatech’s third 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 third quarter of 2013 operating results, and our balance sheet at September 30, 2013.

The third quarter of 2013 net sales was $44.4 million, a $1.4 million increase or 3.3% from the third quarter of 2012 net sales of $43 million. During the third quarter of 2013 the company launched a global loyalty program, where customers can earn loyalty points from qualified automatic orders, which can be applied to future purchases. The company defers the dollar equivalent in revenue of these points until the points are applied or forfeited.

The deferred revenue associated with the loyalty program for the third quarter 2013 was 2.5 million. Additionally the company launched the final phases of our compensation plan which enhanced the compensation received by associates during the third quarter 2013. We believe these enhancements led to a change in our sales mix during the third quarter as revenue from pack sales was 24.5% compared to 7% for the same period in 2012.

The majority of this increase is due to existing associates purchasing upgrade packs which are typically purchased by business building associates. Recruiting of new associates and members increased 4.4% in the third quarter of 2013 as compared to the third quarter of 2012. The number of new independent associates and members for the third quarter of 2013 was approximately 28,800 as compared to 27,600 in 2012. The total number of active independent associates and members based on a 12 months trailing period was approximately 239,000 as of September 30, 2013 as compared to 233,000 as of September 30, 2012.

For the third quarter of 2013, our operations outside of North America accounted for approximately 57.8% of our consolidated net sales, whereas in the same period in 2012 our operations outside of North America accounted for approximately 51.9% of our consolidated net sales.

Fluctuations in foreign currency exchange rate had an overall unfavorable impact on our net sales outside of North America of approximately $1.6 million for the third quarter of 2013. Asia Pacific net sales increased by $4.2 million or 23.6% to $22 million in the third quarter of 2013 as compared to the same period in 2012. This increase in revenue is attributable to an increase in the number of active associates and members. These improvements were partially offset by revenue deferral of $1.2 million due to the royalty program and a $1.2 million unfavorable impact on our net sales due to fluctuation in foreign currency exchange rates.

Europe, Middle East and Africa or EMEA net sales decreased by $800,000 or 17.8% in the third quarter of 2013 to $3.7 million, as compared to the same period in 2012. Increases in sales due to increases in the number of active associates and members were offset by the decrease in revenue generated per associate and member.

Additionally we experienced a $400,000 unfavorable impact on our net sales due to fluctuation in foreign currency exchange rates. North America net sales decreased by $2 million or 9.7% in the third quarter of 2013 to $18.7 million as compared to the same period in 2012. This decrease is due to revenue deferral of $1.2 million due to the loyalty program and a net decline of 5.6% in active associates and members.

Our gross profit as a percentage of net sales decreased to 79.2% for the third quarter of 2013, as compared to 79.8% for the third quarter of 2012 primarily due to an increase in our freight cost associated with inventory replenishment.

Our operating income for the third quarter of 2013 is $429,000 as compared to operating income of $1.1 million for the third quarter of 2012. Our operating income was reduced as total expense operating expenses increased by approximately $1.5 million for two primary reasons when compared to the third quarter of 2012. The first reason for the increase in operating costs is commission and incentive cost increased by $982,000 as compared to the third quarter of 2012. This increase was primarily due to the commission rate increasing for sales associated with Asia Pacific region. We believe changes in our future sales mix will have a positive impact on our overall commission rate.

The second reason for the increase in total operating expenses for the third quarter of 2013 as compared to the third quarter 2012 is the company had an adjustment to transaction taxes in the third quarter of 2012 which created an $800,000 benefit during that quarter which created an unfavorable comparison for the quarter.

Our income tax expense was $980,000 as compared to a tax benefit of $663,000 in the third quarter of 2012. Additionally we experienced an unfavorable fluctuation in foreign exchange currency rates during the third quarter 2013 as compared to the third quarter 2012. For these reasons we generated a net loss for the third quarter of 2013 of $801,000 or $0.30 a diluted share as compared to net income of $2.2 million or $0.83 per diluted share for the third quarter of 2012.

Now reviewing the balance sheet at September 30, 2013, our cash and cash equivalents have increased by approximately 5 million to a balance of $19.4 million as compared to the $14.4 million on hand at December 31, 2012. Cash flow from operating activities was positive $8.2 million for the first nine months of 2013 as compared to a negative $3.1 million for the first nine months of 2012. Our working capital defined as total current assets plus total current liabilities decreased by $100,000 from $11.1 million on hand at December 31, 2012.

Total liabilities increased by $6.2 million to $34.1 million at September 30,2013 as compared to $27.9 million at December 31, 2012. As in prior quarters we essentially have a long term debt. Shareholders’ equity increased in the first nine months of 2013 by $745,000 due primarily to net income of $627,000 being generated in the first nine months of 2013.

Finally during the third quarter of 2013 we did not pay dividends, we did not repurchase shares on the open 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, CEO and Chief Finance Officer, Dr. Rob Sinnott.

Robert A. Sinnott

Good morning to Mannatech’s Investors, customers, associates and employees. Mannetech is a great company that’s continuing to make forward progress. In the third quarter of 2013 we have realized our first year-over-year consolidated sales increase in five years. This has been one of the key goals that we have been driving towards with our global initiatives. We feel that this sales increase reflects desirable organic growth.

As we have communicated in the past sustainable sales growth, combined with expense discipline is the real path forward for Mannatech. Sales growth is essential to having a vibrant growing business. In the third quarter of 2013 we continue to implement some scheduled changes to our associate compensation plan. These changes were undertaken in order to support continued recruiting activity and sales growth globally.

Recruiting for the quarter was up 4.4% over the third quarter last year and sales were up 3.3% year-over-year. So we are pleased with our continuing progress on these fronts. In the third quarter we also implemented a customer loyalty program that essentially replaces an upfront 10% discount on auto orders with a 20% product credit for customers who stay on auto order for at least three months.

We went into this exercise knowing that there would be some costs associated with building, communicating and training our associates and customers about these new programs. We also knew that implementation of the loyalty program would result in a deferred revenue situation that would someone have obscure our financial results in the short term.

We carried through with these plans because they are the right moves to make for the long term health of our business. They incentivize our associates and our customers according to industry best practices. The costs associated with the compensation plan changes are offset by the requirement that we keep our compensation plan fresh and rewarding for the associates who are helping us to grow the business. The deferred revenue situation caused by implementation of our loyalty program impacted our financials by about $2.5 million. This does make the quarterly and year-over-year comparisons a bit cloudier. But again we feel that the benefit outweigh the downside. Loyalty programs are a proven way to increase customer retention.

Our social entrepreneurship initiative Mission 5 million M5M ha gained a lot of traction with our global associates this year. The message of social responsibility and business with a larger purpose has resonated with our customers and business builders alike. We multiplied our attendance at the North American Branson event where Mission 5 million was given top billing along with featured presenter Dr. Ben Carson.

Since that event in late August attended by over 1,000 customers and associates Mannatech has sponsored a 20 City M5M Roadshow across the United States and Canada. The tour culminated this past weakened at the Mannatech M5M leadership events in Frisco, Texas, which drew well over 1,000 attendees for business training and leadership development to support the M5M mission.

Both personal development and business skills training are proven drivers of success in our industry. So I am glad to see our associates and the company coming together in such a strong way to embrace these events. We continue to see some opportunities for better efficiency in our organization. We will redouble our efforts towards inventory control and keeping SG&A at levels where the company can benefit from increased sales.

We are continuing to support our international markets, which are showing strong growth rates. Our international business has grown from 51.9% of our total consolidated net sales last year to 57.8% this year. This is a big shift in our business in just one year. Accordingly we will continue investing in our international business growth in pursuit of new customers and associates.

We are seeing our best growth in Asian and African countries with strong traditions of natural healthcare. I think this is a key insight for us that will guide us to make more investment in areas that are culturally and politically embraced in integrated health approach and value the integrity of a high quality American brand.

Last but certainly not least we have high expectations for our new cosmetic product UTH, spelled U-T-H which just launched this week in North America. We feel strongly that UTH has the potential to reinvigorate our North American marketplace and some of our more mature global markets because it introduces new customers and associates to our glycine nutrient story in a fresh and easy way.

In just a few days since it became available to the public UTH is already proving to be one of our best revenue generating product launches in the history of Mannatech. As the tagline for UTH states this product represents ageless beauty whose time has come. I think the timing is perfect to launch this fresh new product as Mannatech sales and recruiting appear to be rebounding.

We thank our shareholders, our customers, our associates and our employees for their support and diligence in making our collective vision a reality. This concludes our Q3 investor call. Thank you again for your interest and attention.

Operator

Ladies and gentlemen, thanks for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

Question-and-Answer Session

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