Robert A. Sinnott - CEO and Chief Science Officer Mark Nicholls - CFO.

Analysts:.

Greetings and welcome to the Mannatech Incorporated Fourth Quarter and Year End 2014 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 the call today, Mr. Mark Nicholls, Chief Financial Officer. Thank you Mr.

Nicholls, you may begin..

Thank you. Good morning everyone. This is Mark Nicholls, and welcome to Mannatech’s fourth quarter and year end 2014 earnings call. Today, you’ll 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.

We are pleased to announce increases of 7.1% in net sales, 167.9% in operating income, and 104.7% in net income during 2014 as compared to 2013. During the fourth quarter of 2014, we were hit by the same foreign exchange headwinds that affected most multinational companies.

While our fourth quarter 2014 GAAP results indicated a decrease of 2.8% in net sales as compared to the fourth quarter 2013, our net sales would have indicated a 0.6% increase using constant dollars which is a non-GAAP measure that excludes the impact of fluctuations in foreign currency exchange rates.

At this time, I'll make a few detailed comments concerning the fourth quarter of 2014. Net income was $1.9 million or $0.69 per diluted share for the fourth quarter of 2014 compared to net income of $2.6 million or $0.94 per diluted share for the fourth quarter of 2013.

Fourth quarter net sales for 2014 were $45.2 million, a decrease of 2.8% as compared to $46.5 million in the fourth quarter of 2013. Our net sales increased 0.6% in constant dollars, which is a non-GAAP financial measure that excludes the impact of fluctuations in foreign currency exchange rates.

For the three months ended December 31, 2014, our operations outside of North America accounted for approximately 57.5% of our consolidated net sales, whereas in the same period in 2013, our operations outside of North America accounted for approximately 53.3% of our consolidated sales.

Net sales for Asia/Pacific increased by $0.9 million, or 4.4%, to $21.5 million as compared to $20.6 million in the fourth quarter of 2013. The increase in net sales is primarily attributable to $1.3 million in net deferred revenue being recognized from our loyalty program and $0.6 million in Uth skin care products.

For the same period in 2013, we deferred $1.2 million in revenue from our loyalty program, and Uth skin care products had not yet been launched. The quarterly increases in this region were offset by a $1.2 million unfavorable impact on net sales due to fluctuations in foreign currency exchange rates.

Net sales for North America for the fourth quarter of 2014 decreased by $2.5 million, or 11.5%, to $19.2 million as compared to $21.7 million in the fourth quarter of 2013. The decrease in net sales was primarily due to a 10.8% decrease in the number of active associates and members in the region.

Net sales for Europe, the Middle East, and Africa for the fourth quarter of 2014 increased by $0.3 million, or 7.1%, to $4.5 million as compared to $4.2 million in the fourth quarter of 2013.

This increase was primarily due to a $0.3 million increase in Uth skin care product sales and $0.2 million in net deferred revenue being recognized from our loyalty program. For the same period in 2013, $2.3 million in revenue was deferred from our loyalty program and Uth skin care products had not yet been launched.

These increases were offset by a $0.4 million unfavorable impact on net sales due to fluctuations in foreign currency exchange rates for the region. At this time, I'll make a few comments regarding the year end 2014.

For the year ended December 31, 2014, we reported net income of $6.5 million or $2.40 per diluted share compared to $3.2 million or $1.18 per diluted share for 2013. Net sales for the year ended 2014 increased by $12.7 million to $190.1 million as compared to $177.4 million for the year ended 2013.

Using constant dollars, which is a non-GAAP financial measure, our net sales for 2014 increased by $14.1 million or 7.9% as compared to the prior year.

The number of active, new, and continuing independent associates and members, who purchased our products or packs during 2014 decreased by approximately 15,000 or 6% to 230,000 from 245,000 during 2013.

We are very happy with the strong growth in year-over-year net sales; however, we are providing additional clarity surrounding the comparability of 2014 net sales as compared to 2013. Net sales comparability for 2014 was impacted by two items.

The first item is the launch of the Uth skin care product in the fourth quarter of 2013 in North America and in the remaining markets during 2014. Our Uth skin care product has accounted for $11.2 million of the $12.7 million increase in net sales during 2014. The second item affecting comparability is the loyalty program.

The loyalty program was launched in the third quarter 2013. Under the terms of the program, customers have one year following the vesting of their loyalty points to redeem products, otherwise the loyalty points are forfeited.

Accordingly, we anticipated the third and fourth quarter of 2014 would have a higher rate of redemptions and forfeitures than previous quarters. For comparison purposes, the loyalty program increased 2014 net sales by $1.2 million as compared to the same period last year.

Excluding the effects on net sales comparability of the Uth skin care product launch and the loyalty program, net sales would have increased $0.1 million for the year ended 2014 as compared to the same period in 2013.

For 2014, our operations outside of North America accounted for approximately 57.5% of our consolidated net sales, whereas in 2013 our operations outside of North America accounted for approximately 53.7% of our consolidated net sales.

Net sales for Asia/Pacific increased by $12.1 million or 15.1% to $92.4 million as compared to $80.3 million in 2013. Net sales for North America for 2014 decreased by $1.4 million or 1.7% to $80.8 million as compared to $82.2 million in 2013.

Net sales for Europe, the Middle East, and Africa increased by $2 million or 13.4% to $16.9 million as compared to $14.9 million in 2013. Our gross profit as a percentage of net sales increased by 0.1% to 79.8% during 2014 from 79.7% during 2013. Our commissions and incentives as a percent of net sales was 39.6% for 2014 as compared to 42.6% in 2013.

Operating income was $12.8 million or 6.7% of net sales for 2014 compared to $4.8 million or 2.7% of net sales for 2013. We generated $3 million foreign exchange loss during 2014 as compared to $1 million foreign exchange loss in 2013. Finally, we generated a tax expense of $3.3 million in 2014 as compared to a tax benefit of $0.4 million in 2013.

Our effective tax rate is 33.9% in 2014 as profitability is progressively being restored in all of our markets. We continue to have certain markets that lacked profitability requiring us to provide a valuation allowance against many of our deferred tax assets including net operating loss carry forwards and foreign tax credit carry forwards.

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 $7.6 million to a balance of $28 million at the end of 2014 as compared to $20.4 million on hand at the end of 2013.

Cash flow from operating activities was $9.4 million for 2014 as compared to $8.5 million for 2013. Our working capital defined as total current assets less total current liabilities increased by $2.7 million or 19.7% to $16.4 million as of December 31, 2014 from $13.7 million at December 31, 2013.

The second item is our net inventory which declined $3.4 million to a balance of $10.6 million at the end of 2014 as compared to the $14 million on hand at the end of 2013. During 2014, we had a net reduction of raw materials and finished products of $3.3 million and an increase in the reserve for losses [ph] of $0.1 million.

Third, as in prior years, we essentially have no long-term debt. Finally, during the fourth quarter, we did not pay dividends and we did not repurchase shares. 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. Today, we are reporting our fourth quarter and year-end results. I am pleased that we are continuing our forward progress.

As Mark Nicholls just detailed, we have significantly increased our overall financial health during 2014 by increasing net sales by 7.1% over prior year. Also during the year, we exhibited increased operational efficiency and doubling of net income.

We were also able to increase our cash and working capital, which gives the company options that it did not have in recent years. The financial improvements are the result of maintaining our focus on things that are working to increase our global sales and our operational efficiency.

Through diligent management of the operation and some excellent sales strategies being applied, we have begun to turn the company around. Currently, we have profitable growth strategies that are working well in several countries in all three major regions of our global network.

Our effort to expand these strategies to more countries does appear to be gaining traction. Expanding these profitable growth strategies and improving operational efficiencies will remain our top goal for 2015 through 2017.

Our global rollout of Uth skin care was completed as planned during 2014 and resulted in $13.8 million of net sales during the year. The initial sales results show that skin care products do have a place in our global portfolio. During 2015, we will be further developing our skin care sales strategy based on what has worked for us and what hasn’t.

We will refine our selling strategy. We believe that there is untapped potential here that can help us to grow Mannatech's market share of high quality beauty products. We continue to be very excited about how the Three Point Plan, leadership, development, and training system has begun catching on in the EU and North America.

Successful associate leaders from South Africa have been training European, American, and Canadian associate leaders using their systematic approach. As a result, we are seeing early signs of growth in the EU and early stages of adoption in North America that are very encouraging.

We also believe that the Three Point Plan can be successfully transplanted to markets in Australasia and Asia to help the leaders there achieve sustainable growth of their businesses. We are enthusiastic about our continuing growth prospects in Asia, particularly in Korea.

Our associate leaders working in unison with our regional president are unlocking some very innovative growth strategies. Asia is a hotbed of entrepreneurial drive. Asian entrepreneurs appreciate Mannatech's network marketing business model, and there is strong appreciation for the premium quality products designed and produced in the United States.

There is also strong appreciation of an integrative, natural approach to preserving wellness. We are learning how to appeal successfully to Asian consumers. We are then applying this knowledge and momentum to other Asian countries in which Mannatech operates. On the operations front, Mannatech is striving for continual improvements.

We can become more profitable by actively managing our forecasting, our contract manufacturing relationships, our warehousing, and transport logistics to tighter standards. We have specific short-term and long-term goals to increase profitability by more tightly controlling the cost of goods sold and the costs associated with selling products.

We will work with our existing manufacturing partners and explore ways of controlling comp while maintaining our very high quality standards. There are definitely things that we can do to improve here. During 2014, much of our supply chain was mapped and baseline metrics were established.

During 2015, we will be looking at some sore spots and implementing changes to improve the performance metrics. This is job one for our global operations team. Of the factors affecting global business today, there are several that we are paying careful attention to.

Political instability and terrorism continue to be real threats that can affect people psychologically. If significant events were to occur, it could affect our business by affecting people's willingness to travel or conduct meetings.

To mitigate these risks, we are implementing tools and training to make remote meetings, for example via Skype, an integral part of our business. In recent times we are also seeing increasing regulatory activity globally, which has the potential to affect direct selling companies and companies which develop and market dietary supplement products.

While direct selling and network marketing are reputable and proven business models, there are a few companies in the network marketing space that have come under fire in a very public way. The eventual resolution or dispensation of these matters will provide some practical insights for the industry going forward.

Right now we are very confident that Mannatech is operating at or above the level of all existing regulations. We have shown through our past that we are prepared to adapt our business to stricter standards if the need arises.

On the dietary supplement front there have been some renewed attacks on dietary supplements in the United States, which is still one of Mannatech's biggest markets. We are extremely confident in the high quality and validation behind our products.

Rather than this being a weakness for us it is actually one of the strengths that helps to differentiate Mannatech products from much of the dietary supplement products sold in the United States. One of the most feared outcomes for the dietary supplement industry as a whole would be new regulations, possibly including some sort of premarket approval.

While this outcome is not likely, at least for some time, people should know that Mannatech has been complying with much stricter regulations, including premarket approval in several of our countries of operations for almost a decade.

In markets such as Canada, which have implemented stricter testing and premarket approval for natural health products, Mannatech has been able to meet these new requirements while some of our competition have had to withdraw from the Canadian marketplace.

Running a profitable, efficient business that spans almost two dozen countries on five continents is not an easy task. We have a very competent and experienced team, who can manage the existing operations while planning prudent growth strategies for the future. So, in summary, Mannatech is a company that has a lot going in its favor.

We have very strong products and intellectual property that make us very valuable and help protect us from competition. Just recently, Mannatech crossed over the threshold of securing 100 global patents for our products and our technology.

This level of intellectual property protection is extremely rare in both the direct selling and dietary supplement industries. It helps give Mannatech a sustainable advantage in the global marketplace that would cost our competitors a large amount of time and resources to try and duplicate.

We have a 20-year track record of success that has helped our management team build a wealth of experience. We have survived many tests and challenges that probably would have sunk other companies. Several of our competitors are now facing some of the same compliance and legal challenges that we have survived and have made us stronger.

Now with growth momentum building and spreading, I feel that our prospects for 2015 through 2017 are very bright. In many ways Mannatech is built to last because of the way we have responded to our challenges and used them to make us stronger and better. With every quarter that passes we strive to become a better and better company.

Our Management and Board of Directors are united in this goal. So I thank our team of global employees, our approximately 230,000 independent associates and shareholders for their continuing support to make Mannatech the best company that it can possibly be. Thank you..

Thank you for listening to Mannatech's fourth quarter and year end 2014 earnings conference call. As a reminder the company’s information and filings can be found at the company’s investor relations website ir.mannatech.com or by reviewing the SEC submission. This does conclude today’s conference call. Everyone have a wonderful day..