Gary Spinell - VP Finance and Administration
Wayne Badovinus - President and CEO
Steve Fenstermacher - CFO and SVP
Dan Mendoza - Agincourt Capital
Mannatech, Inc. (MTEX) Q4 2008 Earnings Call March 12, 2009 10:00 AM ET
Greetings and welcome to the Mannatech Incorporated Fourth Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my please to introduce your host, Gary Spinell, Vice President of Finance and Administration. Thank you Mr. Spinell, you may now begin.
Thank you and good morning everyone. This is Gary Spinell and welcome to Mannatech's fourth quarter 2008, earnings call. 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 that speak only as of today. We also refer our listeners to review our SEC submission.
Thank you, and now I will now turn the call over to Mr. Wayne Badovinus, Mannatech’s President and CEO.
Hello and good morning to everyone. This is Wayne Badovinus, President and CEO of Mannatech. It is a pleasure to be here to update you on the progress we are making at our company.
We have made significant and tangible strides in reshaping our business. In spite of the extremely difficult worldwide economy we are seeing indications of excitement and momentum building from our Associates. Our fourth quarter launch of Osolean our unique fat loss product has been a very real success.
In addition, in late January we launched our version of an economic stimulus plan. The ESP plan as we call it provides a lower product at costs or new associates entering the business. We also continue to aggressively manage our expense levels, and as announced at the end of February we are pleased to have reached a settlement with the Texas Attorney General and have that large distraction behind us.
As we reported we generated an operating profit of $4.6 million for the fourth quarter of 2008. This is the second quarter operating profit in a row and larger than, our third quarter 2008 operating profit.
We reported net income in the fourth quarter of $620,000 or $0.02 per diluted share. This compares to a net loss of $3.6 million or $0.13 per diluted share for the fourth quarter of 2007. We recorded pre tax income of $2.2 million in the quarter compared to pre tax loss of $4.7 million for last years fourth quarter.
Operating profit and net income were positively impacted by a partial reversal of litigation expense accrual. However, we have again made progress on the bottom-line compared to prior quarters of 2008. This progress was primarily achieved through the control of all expense categories. A culture of expense accountability is taking hold throughout the organization.
Our operating expenses for the fourth quarter of 2008 were $26.9 million, the lowest level in over a year. This was a 39% decrease compared to the fourth quarter of 2007 and down 19% compared to the third quarter of 2008. This is a considerable achievement and reflects the continued sense of the accountability and attention to detail across our organization. We are confident we can continue to effectively manage the business while maintaining strong expense control.
Fourth quarter 2008 sales were $76.5 million an increase of 22% from the same quarter of 2007.
A large portion of the sales shortfall came from our North American market which showed a decrease of 23.9% versus prior year.
International sales were below prior year, down 21.4%. This was also due to the slowing economy worldwide and a negative foreign currency exchange environment.
In comparison, our international sales would have declined only 10% when calculated on a local currency basis.
Geographic expansion continued as we had our official hard opening of South Africa the first week of October.
To-date we are pleased with the strong sales in South Africa. Additionally we announced Mannatech products are now being sold in Singapore during the fourth quarter.
Total independent associates and members at the end of the fourth quarter of 2008 were 531,000 over a trailing 12-month period. This represented a decrease of 7.7% year-over-year. The decrease was primarily due to a drop in domestic recruiting. The decline in new associates and members of 30.4% was partially offset by higher retention of continuing independent associates and members. Our continuing associates and members now was up 3.6% or 14,000 people.
It is noteworthy that our recruiting appear to regain some momentum in the fourth quarter. However, this momentum does not readily apparent in the recruiting totals we have provided. This is due to the nature of comparing 12-months tailing period and we are seeing evidence of this uptick in recruitment continuing with the excitement surrounding our economic stimulus plan.
We believe that the launch of Osolean our fat-loss product was the key driver in the uptick in recruiting in the fourth quarter. Also it has been the biggest seller in the company's history as a new product in this short amount of time. The demand was so strong that we briefly were sold out of the product in November. However, we now have sufficient supply to meet all demands in the future. The best news is this product is now available in all of our large international markets.
Additional challenges remain that in my 8 months here we have overcome each challenge we have encountered. I remain extremely confident that we are on-track to move the business forward. With our recent settlement with the Texas Attorney General we have concluded one of our last major outstanding litigations. This includes the [bio-faction] litigation and derivative lawsuits that were all settled last year.
The Attorney General Settlement marks the end of a 20 months process in which Mannatech worked diligently with the Texas Attorney General’s Office. We remain vigilant in our compliance efforts, compliance and instructional training course for associates is now firmly a part of our business culture. It is noteworthy that the Texas Attorney General’s stated that our products were not in question, no was the business model rather the focus was primarily related to prior selling practices, it should be noted that the settlement does not include any fine or penalty.
In addition the settlement expressly states that the entry of the judgment is not a finding of wrong doing on the part of Mannatech. We are pleased with this settlement as we can now turn our full attention toward assisting our associates in building their businesses selling all natural proprietary products in the wellness industry, focusing on the wellness industry is a process we began two years ago.
During the past two years our Board of Directors and management team have seized the opportunity to move the company in a new direction that positions us for future growth. It is important to note that the company embarked down this path of repositioning before the Attorney General’s investigation began.
In addition to my own hiring in June of 2008, key changes include; hiring key seasoned executives starting back in 2006 to begin implementing the appropriate changes in operations, instituting a 180 day satisfaction program regarding any product purchase. Expanding the company's compliance departments with the addition of seven full-time employees and a team dedicated to identifying and correcting Mannatech related websites.
And finally, prohibiting the use of third party materials or testimonials claiming Mannatech products treat, cure, mitigate or prevent disease. During the past two years Mannatech is also focused on international growth, product quality, product development, information technology, brand development and marketing. We are committed to doing all that we can to support our independent sales associates.
I want to remind everyone once more that Mannatech's business model does not involve the concept of distributors. In some businesses distributors purchase product from the company and then must sell that product to earn income.
In addition, each distributor's may be paid directly for recruiting new people into the business. Mannatech's model does not involve either of these approaches instead our associates and members are our customers. They consume our products and interest other people in those products and interested customers then purchases product directly from Mannatech's website or via our call center. Hence we do not have associated with an extensive amount of product they need to sell nor do we encumber our associates with purchase requirement at the end of the quarter to meet our sales objectives.
On our last call I stated that in my experience, the turnarounds, the first evidence of success is demonstrated through the management and control of expenses, as effort generates an improvement visible on the operating line. Second, continued cost containment is critical to produce net income. Next an improvement in recruiting emerges followed lastly by an increase in sales.
Let's take a look at our track record so far. Reduction in expense, controlling and managing expenses is always ongoing, yet there is clear evidence that we have made significant strides in running our business at lower cost levels.
We are fully aware that cost containment needs to be joined by an increase in sales. Generating operating profits, we now have generated an operating profit for two quarters in a row.
Additionally, we have now generated our first net income in over a year. Improvement in recruiting, recruiting is showing signs of being revitalized due to our Osolean launch in the recent roll out of our economic stimulus plans.
Sales improvement, we know that momentum in recruiting is a leading indicator of future sales growth. We believe that if the initial uptick in recruiting continues for several more months sales will follow. So, where do we go from here?
As I had indicated we are on the right path to reenergize the associate base, increased recruiting, grow sales momentum and bring increasing value to our shareholders.
The success of Osolean is significant for several reasons. First, it proves again that Mannatech has the ability to consistently bring unique proprietary products to the marketplace.
Mannatech produces products that provide high quality and value to the customers. Second, the launch provides evidence of our movement into a new market segment, fat loss.
And third Osolean demonstrates our awareness of the broadening of the wellness markets. Last month we introduced Mannatech's version of an economic stimulus plan which we refer to as ESP.
We reduced our All-Star Pack from a $1,099 to $499 providing a more economical entry point for our new associates. This price point was achieved by reducing the amount of product in the pack without lowering margins; Associates find this entry point attractive for purchasing products at a lower investment and helping to begin building their business.
It is too early to determine the success of the program but the initial results are extremely encouraging.
Indications are that these results are indicative of an additional uptick in recruiting. We will have more results to provide during our first quarter earnings report in May.
We opened in South Africa and Singapore last year and our five year strategic plan is to open five to ten more market over the next five years.
Our annual convention MannaFest is underway as I speak to you today. Members and independent sales associates worldwide are attending the conference at the Dallas Convention Center.
Other MannaFest events include a keynote speech by John Maxwell and presentations from company executives and topmost sales associates, on topics such as product training, wellness, global business building and a focus on growing the leadership skills of our Associates.
Associates can achieve success by using key leadership skills to effectively manage their business. Mannatech continues to introduce new products that help its independent sales associates build and grow their businesses. This year the company will introduce Osolean powder single use packet, a convenient travel sized packet of Mannatech’s popular Osolean fat loss powder.
Lastly we have structured our 2009 budget by placing the bulk of our spending in support of key functions of sales, marketing and research and development. At the same time, we are maintaining or reducing expense levels in other functions.
Now Steve Fenstermacher will discuss our financial performance in more detail.
Thank you, Wayne and good morning everyone. Our fourth quarter operating results were positive at $4.7 million. However, as Wayne mentioned and as we pointed out in our earnings press release and the 10-K the settlement with the Texas Attorney General resulted in a partial reversal of the litigation accrual which had been set up in the earlier quarters.
The approval was reduced by more than $5 million in the fourth quarter, lowering our overhead expense to $26.9 million and was instrumental in the amount of our operating profit.
The other income and expense section below the operating profit line was a deficit of almost $2.9 million in the fourth quarter due to the extremely low currency exchange rates we encountered in the quarter.
The Australian dollar, the New Zealand dollar and the Korean Won weakened against the US dollar as the global financial prices swept across the world. These unfavorable exchange rates also impacted our sales line as fairly healthy foreign sales trends and strong introduction of our Osolean product to translated back into US dollars at historically low rates.
When compared to the exchange rates in the second quarter of 2008, the rate changes cost us up to $2 million per month in reported sales volume.
Without the tremendously reduced exchange rates we believe our operating results would have been more favorable reflecting the actual business trends in the local currencies of our Australian and Korean markets.
Mannatech has been focused on bringing our operating expenses in to tight control, and our fourth quarter expenses were the lowest in years.
Even when corrected for the litigation accrual, we were under the third quarter of 2008 by about $1 million. And the 2008 fourth quarter was below the year earlier 2007 fourth quarter by $10 million, or almost 24%.
We plan on continuing this level of expense control during these uncertain economic times. So that as our sales begin to show growth, we will be positioned to produce a strong incremental sales flow through profit rate.
Our financial condition was once again highly liquid. Our balance sheet continued to show essentially no long-term debt. And as of December 31st, we held over $38 million in total cash.
Wayne referred in his commentary to our annual sales event, MannaFest, which is being held here in Dallas, Fort Worth this week, and is attended by associates from around the globe. The costs for this annual event are significant and are contained within our first quarter results.
We have successfully reduced a number of MannaFest expenses this year in areas which are transparent to our attendees. However, the cost to put on this event does reduce our financial results for Q1 each year.
We believe that our associates will leave MannaFest, however, with a great deal of enthusiasm and determination to successfully grow their business and we look forward to reporting their progress through the rest of the year using our new economic Stimulus plan.
The continuing slow sales pattern in North America had a minor impact on our product cost numbers. Our cost of goods sold rate was 15.1% for the quarter, above the 2007 prior year three-month by nine-tenth of one percentage point.
The rates reflected our decision to send a complementary free product to each of our North American associates who waited for new Osolean product while we where in backorder, shortly following the Osolean introduction. This was one of those good problems to have, when due to the extremely strong demand for our new product; we had to closely coordinate with our supplier for rapid acceleration of additional production.
We quickly satisfied the backorders and stabilized our international rollout introduction schedule. The complementary product which we sent to our domestic associates was a recognition of their value to Mannatech.
The cost rate also reflected some competitive price modifications in our skincare product line. Commission and incentives expense was 43.6% in the quarter, which was an improvement of four-tenths of 1 percentage point, compared to the 2007 fourth quarter.
Both accrued travels incentive cost and paid commissions were lower than the prior year comparison period. Paid commissions dropped in rate to sales to 41.3%, lower than last year by 1.1 percentage point. The decrease reflected lower tax sales as well as some recent changes in our associate compensation plan, which took effect last summer due to regulations in several of our international markets.
These changes should help stimulate new recruiting efforts and also modify slightly the overall commission rate. Part of the decrease also reflected changes in product mix to proportion of sales generated from each country and the mix of sales as well.
Incentive cost were 2.3 percentage points in sales versus last year, which was 4.3% in rate. The fourth quarter incentive contest, this year generally had higher hurdles or qualification for the prices and we added some new parameters to the fourth quarter contest here in North America.
In order to qualify, the key four qualifiers had to show growth in their businesses compared to the third quarter actual levels in addition to satisfying other requirements. We are looking at the results of this contest to see how it impacted the business.
We believe the parameters were effective, but the economic environment of the fourth quarter made many operating statistics difficult to interpret. We want to continually emphasize growth in all phases of our incentive spending to benefit our shareholders, the company and our associates as well.
Total operating cost of $26.9 million accounted for 35.2% of sales. This rate in total was almost 10 percentage points below last year, and the dollar level was lower by $17.3 million, or 39%.
Depreciation was four percentage points in rate and about $100,000 higher than 2007. Compared to last year, selling and administrative costs in total were down $3.3 million. Much of the reduction was due to lower salary and personnel costs reflecting the reduction in force of last July.
Also in 2007, these costs were increased due to the higher level contract work required on the computer system and several consulting projects in our sales and marketing area related to consumer satisfaction.
In addition, outgoing freight costs declined in part due to negotiated rate reductions.
Compared to the 2008 third quarter selling and administrative expenses were reduced by another $1.1 million. Other operating cost decreased $9.2 million compared to Q4 of 2007 when corrected for the 2008 litigation accrual reduction.
On this subject I would like to point out that the settlement cost for the Attorney General complaint will be paid out in the series of payments over a number of months with the final installment due in the third quarter of 2010.
This structured settlement plan allows Mannatech a great opportunity to manage our working capital effectively over the next six quarters while satisfying our responsibilities to the Texas Attorney General office.
Regarding other operating costs, we controlled expenses in virtually every facet of this classification including travel, accounting and audit fees, other professional services and many other smaller but important cost areas. We also reduced our staff again in January of 2009 reflecting the difficult sales and economic environment all of us are seeing.
In total since last summer more than 100 employee, consultant and contractor positions have been eliminated in our home office alone. We have also chosen to suspend certain employee benefits during this tough sales month. These decisions have been difficult and were necessary to improve sales (inaudible) does not reduced even though fewer people are available to address these needs.
Our remaining co-workers realized the importance of continuing to execute our business plan at the highest level and the recent introduction in late January 2009 of the new $499 All-Star Pack was achieved due to exceptional performance by all departments of the company. We appreciate their hard work and we acknowledge their dedication to Mannatech.
We plan to maintain essentially this tight level of corporate support for the short to intermediate term. While the number of sales and recruiting programs are undergoing refinement and the implementation.
Net profit for the quarter was $600,000 or 0.8% of sales. Our earnings per share were $0.02 for the quarter. Reviewing our annual numbers total net sales came to $333 million for 2008 this represented a decline of $80 million a 19% mostly in our domestic market.
Our cost of goods sold remained essentially even at 14.6%, commission and incentive expense dropped eight-tenth of 1 percentage point to 45.0%. And total operating expenses dropped $7.2 million or 4.6% to $149 million due to our strong focus on cost control in the second half of 2008.
Our operating deficit was $14.5 million for the year of which more than half was related to cost of the [service], the class action suite and the Attorney General complaint.
Outside of these items the remaining operating losses were incurred essentially in the first and second quarters of 2008. Our pre-tax loss was $18.2 million as the previously mentioned currency exchange rates declined caused unfavorable other income and expense of $5.3 million for the year. Net loss was $12.6 million compared to profit of $6.6 million in 2007.
The net loss per share was $0.48 and the 2007 earnings per share were $0.25. Our balance sheet for December 31 remained strength with $38 million in total cash and essentially no long-term debt.
Current liabilities were reduced by almost $11 million from the prior 2007 levels. Also equity continued to provide the bulk of our capital structure. Our ending inventory grew about $7.6 million to $31.3 million versus 2007 primarily reflecting our raw materials balance. We have safety stocks of several of our larger volume product component and these are largely responsible for the growth in the inventory compared to the last year.
We paid a dividend of $0.02 per share during the quarter using about $500,000 in cash. Total dividend paid for 2008 were $5.8 million or $0.22 per share. We did not repurchase shares during 2008. We do have an allotment from the Board so under certain market conditions we may engage in additional repurchases. We had roughly $5.6 million in capital additions in 2008 once again mostly systems related enhancements and those investments were made largely in the first-half of the year.
In summary, we feel that Mannatech has made many tough decisions in altering our expense structure and lowering our break-even point significantly. We believe strongly that our new products and revised tax structure give our associates an advantage in these uncertain times and that they will continue the promising early results seen since the introduction of the new All-Star Pack in the last week of January.
Thank you for listening to our call and now Wayne has some final comments.
Thank you, Steve. From our first meeting last July or last August, I tried to provide you with a roadmap for Mannatech's future. The roadmap included specific goals that we intended to achieve. Today you have seen that another goal has been achieved as we generated our first quarterly net income in over a year.
I am clearly aware more challenges lie ahead. For now what we told you would be accomplished, has been accomplished. As you know turnarounds do not occur overnight, particularly in these difficult economic conditions and Mannatech is in the middle of a turnaround.
But be certain that we are moving through the turnaround with a pragmatic, consistent and deliberate approach that has already proven to yield positive results.
We are seeing signs that the business is in fact being revitalized. We see recruiting improvements and sales growth in our future. We remain incredibly excited and encouraged about the future of our business. This is a new day and a new time for Mannatech and as you have seen we have successfully completed the first step in our journey. And now we will be happy to take your questions.
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from Dan Mendoza of Agincourt Capital.
Dan Mendoza - Agincourt Capital
Hi, I had a couple of questions. Can you talk a little bit about what your recruitment goals are for 2009? What would constitute success for --
If there are no questions we will conclude the conference call.
Dan Mendoza - Agincourt Capital
Thank you all very much.
Dan Mendoza - Agincourt Capital
This concludes today's teleconference; you may disconnect your line at this time. Thank you for your participation.
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