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Executives

Gary Spinell – VP, Finance and Administration

Wayne Badovinus – President and CEO

Steve Fenstermacher – SVP and CFO

Mannatech, Incorporated (MTEX) Q3 2009 Earnings Call Transcript November 4, 2009 10:00 AM ET

Operator

Greetings, and welcome to the Mannatech Incorporated third quarter 2009 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.

Now, I would like to introduce our moderator for today’s call Mr. Gary Spinell, Vice President of Finance and Administration. Thank you, Mr. Spinell, you may begin.

Gary Spinell

Thank you and good morning everyone. This is Gary Spinell and welcome to Mannatech’s third quarter 2009 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 and speak only as of today. We also refer our listeners to review our SEC submission.

Thank you. And now, I will turn the call over to Mr. Wayne Badovinus, Mannatech’s President and CEO.

Wayne Badovinus

Hello, and good morning everyone. This is Wayne Badovinus, President and CEO of Mannatech. It is a pleasure to be here to update you on our progress.

For the past few years, the third quarter has been a challenge our business. Our annual incentive program ends in June and associate activity has a tendency to slow in the summer vacation months.

Following this pattern we have seen a moderation in recruiting and sales momentum in the third quarter. However, although we experienced slower sales in this quarter, we experienced only a mild reduction in recruiting impact sales as compared to the second quarter of this year. Our company is evolving but we are not standing still. In fact, there are many encouraging signs of potential long-term growth.

Quarterly recruiting and pack sales in the third quarter were higher than a year ago. Attendance at our regional events continues to be up over 50% compared to last year. We expanded our operations into four additional countries in Europe, all in a single day in September. And we launched, what we believe, is the highest quality Omega-3 product in the market place. While many of our results were positive, the Company still reported a net loss of $9.2 million or $0.35 per share in the third quarter of 2009. This compares to a net loss of $429,000 or a $0.02 loss per share for the third quarter of 2008.

Commission costs as a percentage of sales are quickly trending downward. However, these costs negatively impacted net income as they remained higher than historical levels in the third quarter. Also, our reported net loss was increased by an adjustment in the tax provision. Steve Fenstermacher our CFO will provide additional insight on these items in a few minutes.

Our operating expense for the third quarter of 2009 continued to run at lower levels. For nine months of 2009, our operating expenses were over 23% lower than during the same time last year. Third quarter 2009 sales were $71.3 million, a decrease of 8.6% from the same quarter in 2008. Although total American market sales were lower than the third quarter of last year by 12.9%, pack sales were up 47% compared to the third quarter of last year.

International sales in the quarter were down only 2.5% versus prior year results. Several countries including Canada and South Africa generated higher sales for the quarter compared to last year.

As I mentioned earlier, Mannatech is progressing through a major evolutionary stage. We are building a whole new generation of associates. These associates are tech savvy, younger than our historical associate base, are health conscious and eager to build a business, and they are from all corners of the world from different countries and national origin.

Mannatech is becoming more culturally diverse. For example our U.S. Asian associate population is expanding rapidly. We are reaching out to this new associate base through new forms of social media such as Facebook, Twitter and YouTube. These new associates in the U.S. and around the world will become the new leaders of our business as they work in conjunction with our proven veteran associates.

Building this new generation of associates is a process that cannot be rushed. Obtaining this goal requires us to plan, act and then execute. To paraphrase John Wooden, the legendary UCLA basketball coach, we must be quick, but not hurry. We are fully focused on attracting this as many of this new generation of associates as quickly as possible.

The next step in achieving our long-term profitability is through retention of our new and existing associates. Retention is best demonstrated in ongoing finished products and auto ship sales. Although our finished product sales have decreased over the past couple of years, we are seeing encouraging signs of potential growth in our finished product sales.

To keep our associate base excited and productive, we have held regional YES events across the country for the last six months, which concludes with our major gathering in Chicago later this week. Our YES designation relates to our $499 pack launched in January which was part of our new promotion that focused on your economic stimulus plan.

At these events, we focus specifically on teaching our new and existing associates how to successfully build a business. Programs ranging from basic goal setting, management tools, communication skills and even techniques to achieve a winning mindset were presented. We believe it is critical to provide all of our associates the key tools to grow their business.

Consequently, we have produced the most complete package of marketing and business tools in our company’s history. For the first time, associates now have a comprehensive set of brochures, DVDs and appropriate messaging that they can use to convey our very compelling wellness message. And we believe that we are creating a new base of associates whose goal is to join our existing veteran associates and be a part of Mannatech for many years.

We continue to see signs of steady progress. Many of these new associates have reached the designation of regional, national and Executive Director in just a few months. In particular, Canada, South Africa, Korea and the U.S. have experienced significant increases in regional and national director positions in the last three months. Also, we have had an increase in Presidential position since the end of the second quarter. For our associate base, the achievement of Presidential status is a major accomplishment.

Earlier I mentioned we experienced recruiting growth in the third quarter. We are very excited and encouraged by these recruiting results, as they represent the key leading indicator of our business. New associates and members added in the third quarter of 2009 totaled 36,689 representing an increase of 27% compared to the third quarter of 2008. This level was also 6.7% higher than our fourth quarter of 2008.

The consistent growth in recruiting is evidenced by an increase in pack sales in North America. North American pack sales also increased by 47% compared to the third quarter of last year. It is important to note, we have not yet launched our $499 All-Star Pack and YES Plan in our pacific rim markets.

We are optimistic we can generate similar sales pack and have recruiting growth once the YES plan and the $499 pack are introduced in these markets next year.

On September 5, 2009, we believe we are accomplishing something no other company in our industry has achieved. We launched business operations in Norway, Sweden, Austria and the Netherlands all in one day. Seeing this expansion to 37 million people through the combined populations of these four additional markets is certainly an indicator that Mannatech has taken a very aggressive stance in expanding to international markets that are favorable to our industry. In addition, it demonstrates our continued goal to support our associate field leaders in Europe.

We also recently launched the highest quality Omega-3 supplement in the direct selling industry. This product is called Essential Source Omega-3. The product is a powerful addition to our product portfolio because Omega-3 fatty acids are the number one selling supplement worldwide. Omega-3 has a salutary effect on brain function and heart health.

Before I provide additional perspective on our business and future opportunities, I will turn the call over to Steve Fenstermacher, our CFO. He will discuss our financial performance in more detail.

Steve Fenstermacher

Thanks, Wayne and good morning, everyone. Our third quarter result in summary were sales of $71.3 million. Our operating deficit was $8.6 million; our net loss was $9.2 million and the deficit per share was $0.35.

As Wayne pointed out, Mannatech again made progress in the third quarter by increasing our pack sales more than 17% compared to last year, continuing to improve the trend seen since the end of 2008, and also positing an increase in new recruiting as well, with that figure up about 27% compared to last year.

These two key performance factors have always been regarded as leading indicators for future sales trends. Our sales total of $71.3 million for the quarter was off from 2008 by 8.6%, but our product sales of more than $52 million for Q3 remained essentially even with Q2 of this year. And, we were up about 1% in total from 2009 Q1 sales in the third quarter.

Our overall results appear to indicate stabilization which must occur before growth can begin. In addition we opened four new European countries in early September, Austria, Norway, Sweden and the Netherlands more than doubling presence in Europe over one weekend and presenting our EU associates with a much larger population to introduce to Mannatech products and opportunities as well.

The continued popularity of the new All-Star $499 initial purchase pack large drove our domestic business again in addition to our international operations. We saw pack sales grow 17% and our attraction of new associates again improved 27%.

Our annual program of travel incentive trips for which our business builders qualify each spring finished in June, but we saw a continuing response this year with increase recruiting and pack sales in Q3.

The commission costs dropped about 10 percentage points from almost 60% of sales in Q2 to 49.6% in Q3. Our target level is in the historic 44% to 45% range. But we also saw new associate signups which were better than comparison periods. We feel that adding new associates was the primary need to return to more successful sales levels.

Our commission costs are moving back to more normal levels and we are concentrating on developing renewed sales growth and encouraging many of our recent associates to focus on building there new Mannatech businesses.

One specific item impacted our product cost numbers. Our cost of good sold rate was 16.7% for the quarter compared to 14.2% last year. Several items drove the cost rates higher. Again the notable increase in domestic pack sales against last year, the proportion or mix of pack sales rose 27% due to our improved recruiting.

As we discussed in the Q1 and Q2 conference calls, the All-Star Pack carried a higher discount against regular associate product pricing to encourage purchase and to act as a selling to offer associates, and this higher proportion of discounted sales increased product cost. The rate of discount was reduced in early September in the domestic market in Europe and in South Africa also.

Commission and incentives expense was 49.6% in the quarter which was up 8 percentage points compared to the 2008 third quarter, it was a reduction of 10.2 percentage point from Q2, 2009. Paid commissions accounted for the bulk of the overall increase from the prior year as the incentive accrual was up only two-tenths of one percentage point. The paid commissions were 48.1% in rate per sales for the quarter. The increase reflected the effect of higher domestic pack sales as the All-Star Pack carried a high overall bonus and commission rate.

The tremendous improvement in our domestic recruiting and the popularity of the All-Star Pack in new recruits was largely responsible for the increase, with recruiting number triggering a high number of power bonuses and related additional bonuses such as the fast start and matching bonuses, which are monetary rewards for new business-builder associates who grow their downlines under specific parameters. Part of the increase also reflected changes in product mix and the proportion of sales generated from each country.

As mentioned earlier, the discount and the bonuses for the All-Star Pack were modified in early September to allow better gross profit results, while still offering great income opportunity to Mannatech associates.

Incentive cost were 1.3% of sales very similar to last year in rate. The first quarter starts the annual travel incentive contest for our associates and the qualifying periods extends essentially through the second quarter. We accrue the costs for our travel winners during both the first and the second quarters. The increased recruiting figures reflect the impact of the attractive incentive travel prizes, along with the reduced cost to purchase the All-Star Pack.

We saw a significantly greater number of winners this year which could indicate a larger group of business-building associates joining Mannatech. About 2,200 Associates one trip this year versus about 900 in 2008. The third quarter has relatively little incentive activity impacting the financial statements. We’ll continue to emphasis growth in our incentive contest. When we rollout to Phase II portion of the new All-Star Pack program to our international market early next year.

We will implement some changes to the wider way of pack bonuses paid in the commission plan similar to the modifications made in the domestic and Euro markets in September. These change parameters will continue to provide strong motivation for both new and existing business builder associates. But we’ll also provide greater predictability of cost and better economics for the company, during the periods of strong associate recruiting and customer attraction.

As we’ve mentioned Mannatech has focused on controlling our operating expenses very tightly. We noted in our recent conference calls that our expense levels were the lowest than years. Our operating costs in the 2009 third quarter were even lower than the Q3 2008 figure by about 2%. And our domestic overhead expense was cut about 5% from last years figure when we had just begun our program of aggressive cost controls. 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.

Total operating cost of $32.7 million included expenses related to opening our four new European country markets in early September. While these costs were well-controlled and relatively minimal a reduction against last year would have been greater excluding those [ph]. Compared to last year, selling and administrative cost in total were down by $1 million. Again the reduction was due to lower salary and related personal cost reflecting the reduction in force we choose to take over the course of the last year.

Depreciation was $3.1 million and about $100,000 lower than 2008. Other operating cost were up about $350,000 compared to Q3 of 2008, largely due to preparatory activities associated with the launch in early September of our new European countries. This category includes travel, professional fees such as legal and audit cost, credit card discount and other banking fees and other such expenses. We controlled expenses and virtually every facet of the other operating cost classification, and we continue to watch all expense areas closely.

Our operating result was a loss of $8.6 million, the higher overall commission expense level, and our depreciation together accounted for the deficit in the quarter.

Other income and expense showed a positive currency translation impact again. We’ve seen strengthening in the Australian and New Zealand dollars and also in the Korean Won. The Japanese Yen has largely maintained its relative position. Currency deterioration had negatively affected us since the trend changed in Q3 of 2008. Other income in total was favorable $900,000 for the quarter compared to a negative last year of $700,000. And NOL carry forward valuation added to our tax provision for Q3, bringing the net loss to $9.2 million, or $0.35 per share.

Our balance sheet continued to show essentially no long-term debt, and at September 30th we held $22.6 million in cash, along with $9.4 million in various restricted accounts.

Our ending inventory of $29.4 million was down almost $2 million from December and under the balance of both June and March. We have safety stocks of several of our fairly expensively larger volume product components, and these represent more than one-third of our total inventory balance. No dividends were paid in Q3 and again we did not repurchase shares during the quarter.

We had roughly $600,000 in capital additions, mostly website and system related enhancements. Several months ago we launched a new and enhanced version of our website which has proven to be popular, reliable, and much easier to use than before. A number final touches and improvements were added to the new site just this week. And we’re looking forward to bringing the rest of our web traffic to the new site in the near future.

Our year-to-date figures were sales of $220 million and net loss of $19.5 million and per share was a deficit of $0.74.

Overall our most impressing issues domestic recruiting and pack sales, continue to improve since the launch in late January of our new All-Star plan. The benefits of Mannatech products and the Mannatech opportunity are helping our associates and consumers to maintain financial and physical wellness.

We continue to believe this combination together is the best available in our industry and our recent positive trends are encouraging. The moderating trend of our commission expense, which was seen in the third quarter, is expected to continue through Q4, so that we will see a more normalized historical run rate in the next few quarters. We’ve made the tough decisions in cutting our expense levels and lowering our breakeven point.

We’re supplying more and better sale tools and promotional materials to our business building associates than ever before. The current tough economic conditions are touching Mannatech and most other companies in a number of ways. And so we’re required to continue close and constant monitoring of our trend and costs, while we encourage continued recruiting in sales growth.

Thank you for your attention. And now Wayne, has some wrap up comments.

Wayne Badovinus

Thank you, Steve. It’s very important to recognize that the market place is coming our way. For the first few years in the business Mannatech had to educate people about why it made sense to spend money to stay well. In other words the mindset was, I spend money when I am ill, I don’t spend money when I am well, that general perception is changing.

People are increasingly interested in staying well as a means of controlling their medical expenses and as a means of just feeling better. In other words the time of wellness has arrived. At the same time people are concerned about there long-term financial help. Today’s economy has brought financial help to the forefront for millions of people around the world.

Our goal is to continue bringing unique proprietary products to the world that help address our customer’s health and financial situation. We remain committed to our strategic approach of providing products for overall optimal health, weight management and fitness and skincare. Mannatech offers a great mix of unique and proprietary products that meet our customers need for high quality, real food supplements.

We are making progress on recruiting in pack sales and believe we have stabilized our finished product sales. In addition our commission costs are going back into historical levels, when we combine this with our recent expansion in Europe and further expansions slated for next year, we believe we are moving the company forward for long term profitable growth.

And now we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And there are no questions at this time.

Wayne Badovinus

Thank you all very much for being with us today. And we’ll look forward to speaking with you at the end of next quarter. Thank you, again.

Operator

Thank you for participating in today’s Mannatech Incorporated third quarter 2009 earnings conference call. You may now disconnect.

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