Mannatech, Incorporated (MTEX) Q4 2013 Earnings Conference Call March 19, 2014 10:00 AM ET
Mark Nicholls - CFO
Robert Sinnott - CEO & Chief Science Officer
Greetings, and welcome to the Mannatech Incorporated Fourth Quarter and Year End 2013 Earnings Conference Call. As a reminder, this conference is being recorded.
Now, I would like to introduce our moderator for the call today, Mr. Mark Nicholls, Chief Financial Officer. Mr. Nicholls, you may begin, sir.
Thank you. Good morning, everyone. This is Mark Nicholls, and welcome to Mannatech's fourth quarter and year end 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 terminology 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 would like to make a few comments regarding the year end 2013. For the year ended December 31, 2013, we reported net income of 3.2 million or $1.18 per diluted share compared to a net loss of 1.4 million or $0.52 loss per diluted share for 2013. Net sales for 2013 increased by 4 million to 177.4 million as compared to 173.4 million for 2012.
We have supplemented our financial results presented in accordance with generally accepted accounting principles in the United States or GAAP, and disclosed operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars including net sales, deferred revenue, gross profit and income from operations.
We refer to these adjusted financial measures as constant dollar items, which are non-GAAP financial measures. We use these non-GAAP measures to provide investors with an additional perspective on trends.
To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current year results and prior year results at a constant exchange rate which is the prior year's rates. Currency impact is determined as the difference between actual growth rates and constant currency growth rates.
As previously discussed, net sales for 2013 increased by 4 million or 2.3% to 177.4 million from 173.4 million for 2012. However, in terms of constant dollars, net sales for 2013 increased by 9 million or 5.2% as compared to the prior year.
Our growth in net sales was primarily due to changes made during 2013 to the independent associate compensation plan. We believe these enhancements led to a change in our sales mix during 2013 as revenue from pack sales was 14.8% of total net sales compared to 6.6% for the same period in 2012.
The majority of this increase is due to existing associates purchasing upgrade packs which provide the business building associate additional promotional materials and additional products. The number of new and continuing independent associates and members who purchased our products or packs during 2013 increased by approximately 16,000 or 7% to 245,000 from 229,000 during 2012.
During the third quarter of 2013, we implemented a global loyalty program for our associates and members who purchased products using a qualified automatic order. Participating associates and members can earn loyalty points which can be applied to future purchases. We defer the dollar equivalent and revenue for these loyalty points until the points are applied or forfeited. At December 31, 2013, we deferred global net sales of 5.5 million due to the loyalty program.
Net sales for North America for 2013 decreased 5% to 82.2 million as compared to 86.5 million in 2012. This decrease in revenue is due to the net sales deferral in the North American region of 2.6 million for the loyalty program and net reduction in active associates and members which was offset by an increase in the revenue for active associates and member for the region.
For 2013, our operations outside of North America accounted for approximately 53.7% of our consolidated net sales, whereas in 2012, our operations outside of North America accounted for approximately 50.1% of our consolidated net sales.
Net sales for Asia-Pacific region increased 13.7% to 80.3 million as compared to 70.6 million in 2012. This increase was due to an increase in the number of active associates and members in the region which was offset by a decrease in the revenue generated for active associate and member, that was partially attributed to the net sales deferral of 2.4 million for the loyalty program and a 3.7 million unfavorable impact on net sales due to fluctuations in foreign currency exchange rates.
Net sales for Europe, the Middle East and Africa decreased 9.1% to 14.9 million as compared to 16.3 million in 2012. While the number of our active associates and members increased in this region, this was offset by a decrease in average revenue per associate and member.
We experienced a 1.3 million unfavorable impact on net sales due to fluctuations in foreign currency exchange rates.
Our gross profit margin decreased by 0.3% to 79.7% during 2013 from 80% during 2012. Our commissions and incentives as a percent of net sales was 42.6% for both 2013 and 2012.
Total operating expenses fell by 3.2 million to 136.6 million in 2013 from a 139.8 million in 2012 due to reductions in selling and administrative costs and depreciation and amortization expense reductions.
Operating income was 4.8 million or 2.7% up net sales for 2013 as compared to an operating loss of 1 million or 0.6% of net sales for 2012. Other income was adversely affected in 2013 by $1 million charge related to Korea's customs tax audit covering fiscal years 2008 through 2012.
At December 31, 2013, we had a net accrual of 190,000 for the customs audit, which was paid in January 2014. We generated a $1 million foreign exchange loss during 2013 as compared to $600,000 foreign exchange gain in 2012.
Finally, we generated a tax benefit of 365,000 in 2013 as compared to a tax expense of 1.1 million in 2012. In the last few years, due to the lack of profitability in certain markets, we have been required to provide evaluation allowance against many of our differed tax assets including net operating loss carry forwards. This has previously caused us report tax expense in years which reported losses before income tax.
During 2013, many of their markets reported income before income tax, which allows to the use of net operating losses as well as public differed tax assets. This led to a reduction in evaluation allowances placed on some differed tax assets, which reduced the tax exposure of certain markets into reporting net tax benefits in 2013.
At this time, I'd like to make a few comments concerning the fourth quarter of 2013. Net income was 2.6 million or $0.94 per diluted share for the fourth quarter of 2013 compared to net income of 300,000 or $0.10 per diluted share for the fourth quarter of 2012.
Fourth quarter net sales for 2013 was 46.5 million, an increase of 9.9% as compared to 42.3 million in the fourth quarter of 2012. Our net sales increased 13.5% in constant dollars, which is a non-GAAP financial measure that excludes the impact of fluctuations in foreign currency exchange rates.
Net sales for Asia-Pacific increased 16.4% to 20.6 million as compared to 17.7 million in the fourth quarter 2012, due to a 21.8% increase in the number of active associates and members in the region. The increase was offset by a 1.1 million unfavorable impact on net sales due to fluctuations in foreign currency exchange rates.
Net sales for North America for the fourth quarter of 2013 increased 5.9% to 21.7 million as compared to 20.5 million in the fourth quarter of 2012. The increase in revenue was due to 13.7% increase in the revenue generated per active associate and member, which is offset by a decline in the number of active associates and members in the region.
Net sales for Europe, the Middle East and Africa increased 2.4% for the fourth quarter of 2013 to 4.2 million as compared to 4.1 million in the fourth quarter of 2012. This increase was primarily due to a 13.9% increase in the number of active associates and members, which is offset by 400,000 unfavorable impact on net sales due to fluctuations in foreign currency exchange rates for the region.
In reviewing the balance sheet at year end, I'd like to address several items. The first item is -- our cash and cash equivalents have increased by 6 million to a balance of 20.4 million at the end of 2013 as compared to the 14.4 million on hand at the end of 2012.
Cash flow from operating activities was positive 8.6 million for 2013 as compared to a negative 1.5 million for 2012. Our working capital, defined as total current assets plus total current liabilities increased by 2.4 million or 21.6% to 13.5 million as of December 31, 2013 from 11.1 million at December 31, 2012.
Second item is our net inventory, which declined 1.2 million to a balance of 14 million at the end of 2013 as compared to the 15.2 million on hand at the end of 2012. During 2013, we had net reduction in raw materials and finished products of 800,000 and an increase in the reserve for (indiscernible) up 400,000.
Third, as in prior quarters, we essentially have no long-term debt. Finally, during the fourth quarter we did not pay dividends, we did not repurchase shares. Our agreement with Dutchess Opportunity Fund to raise capital expired on October 28, 2013 with no scarce of our common stock in issued pursuing to the agreement.
In conclusion, 2013 appears to have been a turnaround year for Mannatech. For the first years since 2007, we increased our sales year-over-year, and operated profitably. Our general liquidity is improving as our inventory levels continue to improve, and our expense controls remain in place globally.
At this time, I'll turn the call over to Mannatech's CEO and Chief Science Officer, Dr. Rob Sinnott.
Thank you, Mark. Good morning to Mannatech's investors, customers, associates and employees. Mannatech is continuing its long march forward.
In the fourth quarter of 2013, we continued our year-over-year sales increases. Fourth quarter net sales for 2013 were $46.5 million, an increase of 9.9% compared to $42.3 million in the fourth quarter of 2012. Continuing our global sales growth has been one of the key goals that we have been driving towards with our global initiatives.
Mannatech's current management team takes the long-term approach as being most beneficial for our shareholders, associates and employees. We value organic revenue growth and continually improving organizational efficiency to keep our business vibrant and healthy over the long-term.
Sustainable sales growth combined with expense discipline is the chosen path forward for Mannatech. We plan to continue our growth through making wise investments in projects that have the most probability for success.
In the fourth quarter of 2013 we launched Uth Skin Care Cream in the United States and Canada. The quality, benefits and positioning of this product were spot on with our customer's desires.
New features of proprietary glyconutrient technology that is very much in line with Mannatech's core Ambrotose technology. The story around this product is fresh and new, yet the technology is well developed and familiar to our associate leaders.
The pre-marketing and launch activities which started in the fourth quarter of 2013 generated an immediate [ground flow] (ph) of activity in many of our associate leaders, and resulted in strong incremental sales for these two North American test markets.
During 2014, we plan to launch Uth Skin Care Cream in many of our major markets globally. We will apply the lessons learned during the launch of Uth Skin Care Cream in North America to optimize the experience for our independent and associates.
During 2013, we achieved two of our biggest goals, increased sales and increased profitability. This gives us good foundational work sum in 2014. Constant improvement is our mantra.
We will continue to cease on opportunities for better efficiency in Mannatech's global organization. We will continue our efforts towards inventory control and supply chain optimization, with the goal of making sure our products are continually faster, fresher and more affordable for our targeted global consumers.
We will strive to keep improving our SG&A, so that the company can benefit from increased sales and support prudent expansion of the company into promising new technological and geographic areas.
We will take measured steps towards breaking trend in areas that are underperforming. And we will continue investing in our international markets which are showing strong growth rates.
We continue observing patterns of strong growth in some Asian and African countries and understand better their underlying drivers. We are actively facilitating the transfer of best practices such as leadership development, systematic training and recognition among our field leadership, some areas where strong growth is occurring to areas where positive momentum remains elusive.
Right now, the tide is rising for Mannatech. The successes are not yet spread evenly around the globe. Knowledge transfer amongst our global organization is critical to our future success.
Mannatech is rapidly becoming a learning organization, where we seek out and share best practices that are compatible with our unique culture.
We are pleased with our progress thus far. So, we will not be satisfied until we are best-in-class at everything that we do.
2013 was Mannatech's first profitable year since 2007. It's been a hard fought journey to get to this point, and we have no plans to go back.
Through the hard work and dedication of our employees and associates, we are driving back to where we believe Mannatech rightfully belongs. Among the ranks of vibrant successful companies who have diligently nurtured groundbreaking new technology, and can successful market it to the world.
We thank our shareholders, our customers, our associates and our employees for their support and diligence in making our collective vision a reality.
Thank you presenters, and thank you ladies and gentlemen. This does conclude today's call. Thank you for your participation, and have a wonderful day. Attendees, you may log off at this time.
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