Mannatech, Inc. (NASDAQ:MTEX)
Q2 2014 Earnings Conference Call
August 06, 2014 10:00 a.m. ET
S. Mark Nicholls – Chief Financial Officer
Dr. Robert A. Sinnott – CEO and Chief Science Officer
Greetings, and welcome to the Mannatech Incorporated Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded.
Now, I’d 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 second quarter 2014 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 would like to make a few brief comments concerning our second quarter 2014 operating results.
The second quarter of 2014 net sales was $46.3 million, a 3.4% increase from the second quarter of 2013 net sales of $44.8 million. Net loss for the second quarter of 2014 is $692,000 or $0.26 a diluted share as compared to net income of $784,000 or $0.30 per diluted share for the second quarter of 2013.
Recruiting of new associates and members decreased 13% in the second quarter of 2014 as compared to the second quarter of 2013. The number of new independent associates and members for the second quarter of 2014 was approximately 31,500 as compared to 36,200 in 2013.
In 2014, we implemented new incentive programs in major countries that changed the qualification criteria as well as extended the qualification period for the various travel incentives as compared to the incentive programs in 2013. We believe these changes had a negative impact on the comparability of the recruiting of new associates and members in the second quarter 2014 as compared to second quarter of 2013.
The total number of active independent associates and members based on a 12-month trailing period was approximately 239,000 as of June 30, 2014 as compared to 240,000 as of June 30, 2013.
For the second quarter of 2014, our operations outside of North America accounted for approximately 54.9% of our consolidated net sales, whereas in the same period in 2013 our operations outside of North America accounted for approximately 52.4% of our consolidated net sales.
Asia/Pacific net sales increased by $1.5 million or 7.5% to $21.4 million in the second quarter of 2014 as compared to $19.9 million for the same period in 2013 due to growth in the number of active associates and members. Europe, Middle East and Africa or EMEA net sales increased by $400,000 or 11.1% in the second quarter of 2014 to $4 million as compared to $3.6 million in the same period in 2013.
North America net sales decreased by $400,000 or 1.9% in the second quarter to $20.9 million as compared to $21.3 million for the same period in 2013 due to a decline in active associates and members.
Our operating income for the second quarter of 2014 is $600,000 as compared to operating income of $1.6 million for the second quarter of 2013. During the second quarter of 2014 we conducted prelaunch activities of our Uth skin care product in our Asia/Pacific region. As a result we have approximately 2.8 million in preorders at June 30, 2014 which are currently classified as customer deposits on our balance sheet that can be recognized as revenue upon fulfillment in a subsequent period.
Second quarter 2014 operating income was negatively impacted by the expensing of the $1.3 million in commissions related to the preorders, excluding that commission expense related to the preorders our operating income would have been $1.9 million for the second quarter 2014 as compared to $1.6 million for the same period in 2013.
Our cash and cash equivalents have increased by approximately $6.1 million to a balance of $26.5 million at June 30, 2014 as compared to $20.4 million on hand at December 31, 2013.
Cash flow from operating activities was $7.4 million in the first half of 2014 as compared to $5.3 million during the same period in 2013. During the first six months of 2014, we invested $700,000 in leasehold improvements in our Korea office and training centers and $500,000 for computer hardware and software. During the same period in 2013 we invested $300,000.
Our working capital, defined as total current assets plus total current liabilities decreased by $1.1 million to $12.5 million as compared to $13.6 million at December 31, 2013. The decrease in working capital is primarily related to deferred revenue and deferred commissions primarily related to our loyalty program.
At June 30, 2014, our total deferred revenue and deferred commissions on our balance sheet was $11.3 million, and $4.8 million respectively. Our net inventory balances decreased by approximately $500,000 to $13.5 million at June 30, 2014 as compared to $14 million at December 31, 2013.
Total liabilities increased $9.3 million to $41.9 million at June 30, 2014 as compared to $32.6 million at December 31, 2013. In addition to increases in deferred revenue of $4.9 million which is primarily due to our loyalty program and increases in customer deposits of $3.1 million which are primarily due to the previously discussed preorders of our Uth skin care cream.
Taxes payable increased $1.1 million primarily due to prior year adjustments. These prior year adjustments and our uneven performance in various markets increased our effective tax rate above the Federal Statutory rate. We believe these tax rates are transitional and we are engaged in additional activity to accelerate topline growth and to ensure all markets contribute to overall profitability. We anticipate the effective tax rate to decline as profitability is achieved more uniformly across all regions.
At this time, I'll turn the call over to Mannatech's CEO and Chief Science Officer, Dr. Rob Sinnott.
Dr. Robert A. Sinnott
Good morning to Mannatech's investors, customers, associates and employees. You just heard a detailed analysis of the financial results from our CFO, Mr. Mark Nicholls. Now I'll give you a little color commentary and what we see as some of the big things influencing Mannatech at this particular point in time.
We are pleased with our continuing increase in net sales for the second quarter, we had a 3.4% increase in year-over-year net sales when comparing Q2 2014 back to Q2 2013. Our operating expenses remain largely in line with our budget, but we did have some timing issues that increased expenses and resulted in a loss for the quarter. We regret this situation, but believe that it’ll be a temporary situation as we improve our operational efficiency and expand our proven Three Point Plan sales system globally.
The analogy that comes to mind is starting a large diesel engine that hasn’t been run in a while. When it first starts up it will backfire and sputter before it starts producing immense power. That’s exactly how I see Mannatech right now, the engine is installed anymore, but it’s definitely not to full power yet. More specifically when the company was running unprofitably over the past several years, some inefficiencies had crept into our business that are just now becoming visible as our sales are increasing.
Uneven sales growth in our countries of operation and shifts in associate buying patterns have taken a toll on our inventory and our global tax situation. We are aware of the causes and we are committed to implementing solutions which include operational efficiencies and holding to benchmarks of profitability in all our countries of operation.
We are implementing supply chain improvements in order to better project future demand, decrease our lead times, better control manufacturing and shipping costs and to reduce inventory held in our warehouses. Well, our quarterly recruiting numbers appear to be down year-over-year, we have identified the causes for that slight decline. The timing of incentives have changed. Like many companies in our industry, we experience spikes in recruiting activity near the end of an incentive period. To change that we have lengthened the qualification period and changed the requirements for our incentives this year so that they mostly end in the third quarter rather than in the second quarter.
To accelerate sales growth, we are actively facilitating the adoption of the Three Point Plan, business building strategy in North America, Europe and Australia. We expect that this plan will have positive effects on our sales, recruiting and retention as has been seen in other areas where it’s been adopted. Also, we believe that we’ve been able to positively influence new customers towards placing auto orders since this is an integral part of the Three Point Plan. We support this shift because we believe that having customers on recurring auto order is very valuable to the company.
We are holding our pennies in strategy to foster continuing growth in Asia. Many of the lessons that have been developed and tested in fast growing Asian countries, such as Korea are readily transferrable to other countries in the region. The high density population centers and the social behaviors characteristic of Asian industrial cities are conducive to certain sales strategies that we have discovered and we are perfecting.
We believe that we can refresh growth in Japan and Taiwan where we have long established businesses and we believe that we can unlock new growth in Hong Kong and Singapore by prudent investments in key sales infrastructure and a product pickup location. We also intend to restructure our warehousing and distribution patterns in some Asian countries to increase economic efficiencies and reduce import duties which adversely affect our pricing and our profitability.
We have continued our global rollout of Uth skin care cream which began in late 2013. To-date this revolutionary skin care product containing our proprietary Glyconutrient technology is available in 21 of our 23 countries. The remaining two countries will launch Uth skin care cream during the month of August. This has been one of our strongest product launches in recent history and has been readily adopted by many associate leaders globally.
Mannatech is a world respected brand, we are especially known for having high quality effective healthcare products. We have several sustainable advantages in the marketplace by having a large patent portfolio, in excess of 90 patents issued to-date globally and a 20 year track record in the industry that lends us credibility when people are looking for company to join for the long-term.
Finally, our Mission 5 Million China Run which features ultra-endurance athlete Jason Lester running 2,500 miles of the China Wall in 100 days sponsored by Mannatech and powered by Ambrotose will expose thousands of existing and potential associates to Mannatech’s social entrepreneurship mission with our goal to reach 5 million children affected by malnutrition globally. The Mission 5 Million China Run is a mission of goodwill that is also remarkable and newsworthy athletic achievement. We believe that we will garner much attention for Mannatech’s great products and our social mission to positively affect the world.
We are very excited about this event. We have put much time and attention into communicating get out to a global audience via multiple media channels. This epic event is scheduled to begin in just a few days from now on August 8, it’ll be a historic event.
In all, I believe that our fundamental business position is continuing to strengthen and our prospects in the global marketplace are growing brighter each day. We have good things to offer in support of entrepreneurs who are seeking a viable legitimate business opportunity. We are making good progress to improve our performance and correct our inefficiencies.
In a rapidly changing world, we are finding new outlets for the goods and services that we have to offer. We still have a long way to go and our work will never fully deep complete, but we are working diligently to gain in the network marketing space and we are making progress.
So in conclusion, I thank our shareholders, our customers, our associates and our employees for their support and diligence in making our collective vision a reality. Thank you.
Thank you for listening to Mannatech’s second quarter 2014 earnings call. As a reminder, company information and filings can be found at the company's Investor Relations website ir.mannatech.com or by reviewing SEC submissions. This concludes today's call.
[No Question-and-Answer session in this call]
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