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Executives

Gary Spinell - SVP of Finance and Administration

Rob Sinnott - Co-CEO & CSO

Steve Fenstermacher - Co-CEO

Randy Bancino - President of Global Business Operations and Expansion

Analysts

Mannatech Inc. (MTEX) Q1 2010 Earnings Call May 6, 2010 10:00 AM ET

Operator

Welcome to the Mannatech Incorporated First Quarter 2010 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's Instructions) As a reminder, this conference is being recorded. Now I would like to introduce our moderator for the call, Mr. Gary Spinell, Senior 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 first quarter 2010 earnings call. Today, you will hear from Mannatech's CO CEOs Dr. Robert Sinnott and Stephen Fenstermacher.

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 Dr. Robert Sinnott Co-CEO and Chief Science Officer.

Rob Sinnott

Hello and good morning everyone, this is Rob Sinnott, Co-CEO and Chief Science Officer of Mannatech, I am joined on the call by our Co-CEO Stephen Fenstermacher and President of Global Business Operations and Expansion, Randy Bancino. I appreciate your interest in our company. I will make a few opening comments and then turn the call briefly over to Steve.

Since taking on the role of Co-CEO in December, Steve and I have been increasingly involved in all areas of the business. We’re extensively focused on moving the business forward. We’re making moderate yet key changes to several aspects of the business.

Mannatech has products that are second to none and a great compensation program. Therefore this fine-tuning is different that’s required to support our associates in reaching out to new customers. These actions are designed to result in potential growth, increased profitability and increased return for our shareholders.

Before I comment further on the quarter and our future, I’d like to turn the call briefly over to my Co-CEO Steven Fenstermacher.

Steve Fenstermacher

Thanks Rob and good morning everyone. The last few months have been extremely busy with our transition into positions as well as maintaining our prior responsibilities as Chief Science officer in Rob’s case and that’s Chief Financial Officer in my case. Both of these positions could be viewed as more than full time spots on their own. Not to mention addition Chief Executive duties as well.

We are fortunate that our entire senior staff has pitched in strongly to help distribute the load especially Randy Bancino, who is our head of international, handling operations and expansion too.

We’re grateful to these executives who have broadened their list of duties in the interest of returning Mannatech growth in greater profitability. We’re pleased with our team as their efforts will be critical to help us regain momentum. Rob now has commentary.

Rob Sinnott

Thanks Steve. The first quarter of 2010 was one of mix results for Mannatech. We continue to effectively manage our cost of sales, commissions and operating expense levels, while continuing to operate efficiently. The result for the first quarter was that all of these comps were below prior year levels. At the same time, our first quarter sales were below expectations. Sales and recruiting momentum slowed at the end of last year through the holiday period. In addition, this year’s annual incentive did not start until late February versus late January last year.

Lastly, there remains some lingering impact on our business worldwide related to the recent economic environment. Consequently our associates face some additional challenges in the marketplace. However, we are addressing these challenges which I will discuss in greater detail in just a few minutes. For the first quarter, we reported a net loss of $2.8 million or $0.11 per share in the first quarter of 2010.

This compares to a net loss of $4.8 million or $0.18 per share in the first quarter of 2009. However, our EBITDA was a positive $165,000 meaning that we’re cash flow positive from operations.

First quarter 2010 sales were $60.7 million, a decrease of 14% from the same quarter in 2009. North American sales declined 23% compared to the first quarter of 2009 reflecting the delay in starting the incentive program and residual recruiting challenges in the marketplace.

International sales were stable for the first quarter of 2010 compared to the same quarter of 2009. We are seeing pockets of significant growth and potential turnaround. For example, sales in south Africa, Taiwan and Singapore were up collectively 43% in the first quarter compared to the first quarter of last year.

Regarding recruiting activity, we added 20,930 new associates and members in the first quarter versus 36,462 added in the first quarter of 2009. Most of the decrease in recruiting occurred in North America. Total associates and members who made purchase in the past 12 months were approximately 485,000 as of the end of this quarter, compared to 527,000 at the end of March 2009.

In a few minutes Steve will provide additional details about how cost continues at lower levels than in previous years. In regards to sales momentum, Steve and I strongly believe that massive changes are not required to our business model or for our operations. Rather we strongly believe that’s some distinct fine tuning is the key to our long-term success.

In early April, our senior management team identified seven strategic initiatives for the company. The team already has resources in motion towards completion of these initiatives, so this was a major affirmation of our collective consensus on the requirements to our long-term success. These strategies are number one, to drive our North American sales by focusing on the retention of new associates.

To this end, we are building programs to help associates work with new associates to build their business thereby growing our finished product sales. In addition, we are focusing on recruiting of the ethnic markets in the United States.

Yesterday, we issued a press release related to Cinco de Mayo highlighting our efforts to attract the Hispanic consumers in the United States. This action is a strategic forerunner to our entry into Mexico next year. We are also focusing on other ethnic markets in the United States, for example the Asian markets.

Initiative number two, to expand our international presence. For the first quarter, our international sales accounted for 47% of total company sales. We planned for this percentage to continue growing especially over the next two to three years.

International expansion is one of our top priorities and Randy Bancino our President in Global Operations and Expansion is leading an experienced team to make this a reality. We recently announced our plans to begin operations in Mexico in the first quarter of next year.

Mannatech offers real nutritional solutions for the Mexican market. That is demanding substance and a real opportunity that can transcend the borders through our global seamless compensation plans. We have identified several other countries for expansion over the next two to three years.

Initiative number three, growing our sales and recruiting in existing markets. We have new general managers heading up two of our countries. In addition, we are taking a more country specific approach to the ease of more incentive dollars in recruiting goals. For example, we anticipate additional growth in South Africa as we open up a meeting facility there in late May. Associates will also be able to pick up product at this location that they have purchased online.

This facility as well as additional facilities that we anticipate opening over the next 18 months. We’ll greatly expand our abilities to service and reach out to many new customers in South Africa.

Initiative number four, rekindling the passion that associates have that link them to our history. To do so, we are re-focusing on the story of Mannatech, its history and its product. Associates can easily share this redefined story as we move ahead after three years of extensive challenges.

Initiative number five, stream line our website. Changes have been underway for several months on the continued streamlining of the web site experience. These changes include a fresher more updated look and feel as well as great product content. These key changes are designed to make the user experience more exciting and more informative, resulting in a higher percentage of converting customers who complete the first time purchase. We fully understand the value of having a website that helps encourage the new customers to become an associate and purchase our products.

Initiative number six, further strengthen the communication pathway between our associates and the corporate office. To do so, we are re-designing the process of how our North American advisory council can be most effective.

Our approach is to streamline the two-way communication from all level of the associated downline and through associate leadership to corporate management. At the same time, associates can communicate key training and product information downward through their organizations. This flow of information will help ensure that all associates are more quickly informed of key product and sales training information.

Initiative number seven, we are highly focused on ensuring that we have sufficient cash flow to fund daily operations and expansion for the foreseeable future. As noted, we have been producing positive operating cash flow for the last two quarters and we are determined to continue this as we increase our shareholder value.

In addition to these initiatives, we are aware that there is a shift taking place in our associate base, we are focused on supporting the North American associates to once again become passionate about the unique growth opportunity that is available with Mannatech.

In today's complex economic and social environment, increasing sales and recruiting requires our associates to have a different approach than a few years ago. To date be successful and effective, associates must think not only in terms of delivering the world's best wellness products to consumers but also growing the skills to manage their business and their downlines.

Today consumers are more concerned about value than ever before. Our associates can provide information on how Mannatech's products of unmatched quality and a greater overall value than the cheaper store brands.

To support our associates we are focusing incentive dollars and our marketing and sales effort on associates who are bringing the passion to their business, these associates are making a required effort to grow their business by helping to train their down lines, having several weekly meetings and continually examining new approaches to increasing sales and recruiting.

In regards to our products we continue to deliver our real food technologies, our latest product introduced at our annual Mannatech Convention in March is a simply delicious snack bar, this bar is USDA organic certified and is produced with clean and sustainable solar energy. Its preservative free, low calorie, high protein and high fiber. These snack bars were made specifically for the health conscious consumer and the person on the go. We recently issued a press release announcing the results of an independent study that demonstrated that our proprietary Ambrotose technology exerted prebiotic effects. The study conducted at a top European Research Institute in Belgium investigated the effects of Ambrotose technology on the structure, composition and metabolism of the human gastrointestinal tract using state-of-the-art GI tract simulations and sophisticated microbiological analysis.

This study indicates that Ambrotose technology can have wellness benefits in the GI tract. As the study indicates and those before it, we continue to see positive scientific data come from research on the helpful value of Ambrotose technology in the human body.

Now, before I provide some final thoughts on our business and future opportunities, I’ll turn the call over to Steve Fenstermacher, Co-CEO and CFO, who will discuss our financial performance as well as share his insight on the future of Mannatech, Steve?

Steve Fenstermacher

Thanks Rob. For Q1, our total sales were down about 14% due to lower finished product movement as well as pack volume product revenue was reduced by about 10%. The pack sales were lower by only 27%. This change in pack sales reflects the fact that a year ago in January. We reduced the All-Star Pack price by more than 50% in our domestic market going from $1,100 or more down to $499. This move was made to respond to the unfavorable economic situation which was growing rapidly with slowing consumer spending and growing unemployment all around the country. This change lowered the cost to get started with the home-based business. And the new pack price proved to be very popular.

Our recruiting increased throughout 2009 due to the pack change. However, we have not seen the expected impact of this higher prior year recruiting as of yet probably due to a number of factors. Those who bought All Star Packs last year have probably encountered the difficulties of breaking into direct sales in an uncertain economic environment.

We obviously keep track of the sales trends of our public competitors and it seems that virtually all of these companies have recently reported declining domestic businesses as we have seen. This situation makes it very important for us to concentrate on our domestic market. To this end, we are devoting energy and resources to provide our United States and Canadian associate leadership with the best of rail support we can bring to them including fresh new marketing ideas and promotional materials, a refreshed new website and personal web pages and recruiting tools.

Our [Live for Real] campaign which was launched at Manifest in March is growing stronger and we did see an uptick in recruiting in March going along with the kick-off of the annual travel associate incentive contest.

Many of these new sales support items and promotional materials will be delivered in June and we are looking forward to the impact that this new items and web presents will have in our domestic business.

Another important item in the first quarter was the continued recovery to a positive cash flow or EBITDA. Our depreciation in the quarter was almost $3 million, so that figure is added back to our pre-tax deficit. We posted a positive EBITDA for the second consecutive quarter compared to the 2009 figure of an EBITDA deficit of almost $4 million.

Our Manifest event in March each year has a cost of about $12.2 million and this expense is contained completely in the first quarter. The fact that we posted a positive EBITDA while absorbing an incremental expenditure like that in the quarter is very encouraging.

Once again, the modifications made to the All-Star pack last fall have resulted in brining our major cost areas back into historical ranges as both cost of goods and commissions continued their ratio improvement.

Our cost of goods sold rate was 14.2% of sales for the quarter compared to 16.6% last year. This cost area was again favorably impacted by the modifications made to the All Star Pack, which also reduced commission expense.

We have recently begun to analyze our supply chain operations with additional emphasis on our freight and shipping costs. This area of expense showed improvement from the prior year results.

Total commission costs were 44.5% of sales in Q1 returned to our historic target level in the range of 44% to 45% and the changes which were put into effect in late September had the desired impact of placing us back into that range.

Our commission rates remained among the highest in the industry and we are continuing to concentrate on developing and encouraging many of our new associates from 2009 to focus on building their new Mannatech businesses. The commissions figure includes accrual for the travel incentive contest as well paid commissions and both were favorable to the comparable 2009 period, most of the variance came from direct paid commissions.

Our 2010 incentive travel contest began in late February and we are looking forward to the results of this year’s contest. We emphasized growth in our incentive contest rules, so we expect to see impact in the coming months.

The contest runs for a total of 20 weeks through late July. We’ve mentioned repeatedly, that Mannatech has focused strongly on controlling our operating expenses. We’ve noted during conference calls that our expense levels have been the lowest in years and this trend was continued in Q1.

Our total operating costs in the quarter were lower than the prior year figure by almost 10% and our domestic expenses were reduced by almost 13% even with the cost of Manifest included in the quarter.

We are maintaining this level of expense control on a continuing basis so that as our sales begin to show growth, we will be positioned for a strong incremental flow through rate to profit.

These components again led to our operating results improving compared to the prior year and reaching a positive EBITDA for Q1. We previously stated that we have enhanced the ability of the business to produce positive EBITDA and our current sales level by returning our operating ratios to their historical ranges.

While expense control remains a necessity, increases in finished product sales and continued recruiting success are the vehicles to restoring earnings growth in the future.

Our balance sheet continued to show essentially no long-term debt and at March month end, we held almost $15 million in cash along with $7.5 million in various restricted accounts. The new general manager in South Korea has been instrumental in freeing up about $1.4 million in previously restricted funds there. Also, we received our United States income tax refund last week, boosting our cash balance by about $8 million.

Our ending inventory of $30.9 million was roughly even with the December Q4 balance. We maintain safety stocks of several of our fairly expensive larger volume product components and these represent a large portion of our total inventory balance.

Dividends were not paid in the quarter and we again, did not repurchase shares during the quarter. We invested roughly $400,000 in capital additions to the website and our computer system.

We have continued development of our new web site and currently, we have a team working on the project which includes a number of field associate leaders as well as internal marketing and IT department members.

In summary, we’ve now returned to our historical operating ratios and for 2010, our target is to successfully develop and grow many of those new business builders who joined Mannatech last year. We’re concentrating on helping our domestic associate leaders regain momentum and begin to grow and develop their downlines.

The projects Rob described, all focus on necessary pressure points of the business. And we intend to maintain these projects as well as our tight expenses control in order to rekindle growth in earnings and in shareholders value. Thank you for your attention. And Rob now has final wrap up comments.

Rob Sinnott

Well thank you Steve. At our Manifest convention held in March we unveiled Mannatech's new looking feel product approach called Live for Real. Live for Real promises more than tag line, it truly reflects the way of life for our company and our independent sales associates globally.

Our real products, real passion and real possibilities philosophy supports people looking to change their life through personal commitment to healthy living and dedication to building a vibrant personal business.

Mannatech's promise behind Live for Real philosophy is number one, real products, Mannatech's co-products are based on Mannatech's real food technology solutions which offers food source ingredients that contains standardized levels of natural and plant source nutrients at nutritionally effective levels.

Real passion, people behind the promise who share stories from the art and real giving to charitable organization such as MannaRelief. Real possibilities, in incur cum earning opportunity to fund a wellness program or build a business through a wellness consultant approach.

Steve and I believe that it will take some time for our business to make a full recovery. But there is no doubt that we have a great associate base, products that are second to none and a generous compensation program.

As our associates see that there are many ways to rekindle the passion related to Mannatech. We have the potential to regain momentum and increase shareholder value. Thank you for listening and now we’ll take your questions.

Question-and-Answer Session

Operator

(Operators Instructions). We’ll pause for just a moment to compile the Q&A roster. (Operators Instructions). Presenters, there are no questions at this time.

Rob Sinnott

Hi, this is Rob. At this time if there are no further questions, thank you all very much for taking your time to listen to us today and we will look forward to speaking with you again at the end of the next quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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