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Executives

Gary Spinnell - VP of Finance and Adminsitration

Dr. Robert Sinnott - Co-CEO and CSO

Steve Fenstermacher - Co-CEO and CFO

Analysts

Mannatech Inc. (MTEX) Q2 2010 Earnings Call August 5, 2010 10:00 AM ET

Operator

Greetings and welcome to the Mannatech Incorporated second 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 Instructions) As a reminder, the conference is being recorded.

Now, I would like to introduce our moderator for call today, Mr. Gary Spinnell, Senior Vice President of Finance and Administration. Thank you, Mr. Spinnell, you may begin your conference.

Gary Spinnell

Thank you and good morning everyone. This is Gary Spinnell and I welcome you to Mannatech’s second quarter 2010 earnings call. Today you will hear from Mannatech's Co-CEO's, 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.

Dr. Robert Sinnott

Thank you, Gary. Good morning everyone. This is Rob Sinnott, Co-CEO and Chief Science Officer of Mannatech. I am joined on our call by Co-CEO Steve Fenstermacher and President of International, Randy Bancino. We appreciate your interest in our company. I will make a few opening comments and then turn the call briefly to Steve Fenstermacher.

Before I begin, I would like to provide some perspective on Mannatech’s business. Although sales softened in the quarter, on an operating basis we were cash flow positive and now have over $20 million in cash on the balance sheet, with essentially no long-term debt.

We continue to bring compelling research results to market. We are building new partnerships and our expansion plans are right on schedule. Once we have completed our key associate support initiatives later this year, our associates will having the convincing and comprehensive set of tolls and programs to interest new customers the world over.

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

Steve Fenstermacher

Thanks Rob and good morning everyone. We have now completed the first half of 2010 and the Mannatech along with many of our competitors can more clearly view the current landscape of nutritional supplement business along with the networking direct sale model. Many of our contemporaries so far this earning season have mentioned the difficult domestic sales environment in the United States and Canada. And that difficult environment also had a major impact on Mannatech’s domestic and over all sales results for the second quarter. Rob now has additional comments.

Dr. Robert Sinnott

Thanks Steve. The second quarter of 2010 was one of mixed results for Mannatech. Mannatech's cost of sales and commission expenses were lower than prior year and also lower as the percentage of sales. Also, expense levels remained low prior year levels and that’s all good news. At the same time, our second quarter sales were somewhat sluggish. Sales slowed in the first quarter of this year during a transition to new programs, being implemented at the start of the incentive program. And the incentive was pushed back into late February.

Some of this slowdown in momentum continued into the second quarter. Although we experienced an increase in recruiting and pack sales in the second quarter, compared to the first quarter, sales were impacted by a decrease in finished product sales.

Lastly, there remains some lingering impact on the business worldwide related to the recent economic environment. Consequently, our associates stated some additional challenges in the marketplace. However, we are addressing these challenges which I will discuss in greater detail in just a few moments.

For the second quarter we reported a net loss of $3.8 million or $0.14 per share. This compares to a net loss of $5.5 million or $0.21 per share in the second quarter of 2009. However, our EBITDA was positive by a $158,000, meaning that we were cash flow positive from operations in the second quarter.

Second quarter sales for 2010 were $57.6 million, a decrease of 26% from the same quarter in 2009. North American sales declined 32% compared to the second quarter of 2009. Last year’s sales were void by a one-time program designed to increase recruiting which drove North American sales levels higher for part of the year. Although the program enjoyed the significant increase in pack sales, it did not generate continuing automatic order sales.

International sales were soft during the second quarter of 2010 compared to the same quarter for 2009. Regarding recruiting activity, we added 22,775 new associates and members in the second quarter versus 20,913 in the first quarter of 2010, and compared to 43,953 added in the second quarter of 2009. Most of the decrease in recruiting occurred in our North American market. Total associates and members who made a purchase in the 12 months were approximately 450,000 as of the end of this quarter, compared to 532,000 at the end of 2009.

In a few minutes Steve will provide some additional detail on how costs continue at a lower level than in previous years. On our last call I stated how Steve and I strongly believe that massive changes are not required to our business for operations. Rather we believe in some distinctive fine tuning is the key to long-term success.

It is important to clarify a distinction in our strategy compared to last year. We often speak about our efforts to support associates. Our associates often lead with one of our three pillars when approaching new customers. Those pillars are number one, outstanding products; number two, the passion to help those in nutritional need and number three, our great business building possibilities.

No matter which approach or philosophies used to engage the new customers, the overall goal is to reach as many new customers as possible, (inaudible) requires us to help associates communicate in terms of all three pillars that are product, passion and possibilities. Where they may have been distinction in the three perspectives in the past, today they are quickly be coming one.

As an associate expresses their passion to help others with their nutritional needs, the associate will next turn to describing the quality and scientific validation of our products. Finally, reaching out to more customers encourages daily business building activity. No matter which approach the associate uses first, the process automatically involves the use of all three pillars. Consequently, Mannatech has provided significant support tools and validation to all three of these approaches. In the end the goal is the same to deliver the highest quality proprietary products to as many people as possible and help them prove their quality of life.

All of these actions are designed to resolve potential growth, increased profitability and increased return for the shareholders.

In regards to reigniting sales momentum, on our last call I mentioned major initiatives senior management had identified for long-term success. Considerable effort continues on each of these initiatives with important milestones and accomplishments already achieved.

The following is an update on our key initiatives. International expansion is one of our top priorities and Randy Bancino, our President of International, is leading an experienced team to make this a reality.

In May we announced our plans to begin operations in Mexico in the first quarter of next year. However, we have been at work for well over a year on this launch. We are determined to open Mexico at full speed with hundreds of North American associates poised to quickly expand their business in Mexico.

Mannatech offers an attractive opportunity to the Mexican market that demands a variety of high quality products, combined with an effective business building program. We are excited about out international markets as each one will hold their international conventions within the next few months.

To highly focus on costs of sales and expenses, we have increased our operating profit collectively from our international market. We recently issued a press release announcing the results of a partnership with the ISKA, the International Sport Karate Association, consisting of over 15 million members from 50 countries.

ISKA's endorsement of Mannatech’s products speaks volume about our quality and our science. The ISKA has not endorsed another nutritional company in its 25-year history.

Another important achievement related to Mannatech’s products. Mannatech’s R&D efforts remain front and center as last month we announced our ambrotose related patents were again upheld in litigation against several companies. In addition, last week we received a patent on our PhytoMatrix technology in South Africa. We anticipate receiving patents from many more countries, including the US on this technology and several other Mannatech technologies.

A few weeks ago we announced our Give For Real program. This unique donation through consumption initiative which is designed to help customers and social entrepreneurs meet the needs of malnourished children around the world. Our Give For Real program is unique to the direct-selling industry, and a lot of the company and our independent sales associates to have an impact on people’s nutrition across the globe.

We also launched our updated and expanded website. We added a fresh vibrant look to our mannatech.com website in mid-June. Our associates really appreciate the new look. We increased the efficiency of placing orders and the great product content. We fully understand the value of having a website that helps encourage the new customers to become associates and purchase our products. And financially, we are very focused on ensuring we have sufficient cash flow to fund daily operations and expansion for the foreseeable future.

As noted, we have produced positive operating cash flow for the last three quarters and are determine to continue this as we increase our shareholder value. In addition, it is important to note that our accounts payable balance has decreased by $5 million since December of 2009, while our cash and cash equivalents on the balance sheet grows by over $3 million since December 2009.

Before I put some final thoughts on our business and future opportunities, I will turn the call over to Steve Fenstermacher, Co-CEO and CFO, who will discuss our financial performance, as well as share his insights into the future of Mannatech.

Steve Fenstermacher

Thanks Rob. For Q2, total sales were down about 26% due primarily to lower pack volume. Product revenue was reduced by about 11%. The pack sales were significantly lower. This change in pack sales reflected the change in our international markets to reduce the All-Star Pack price in a similar fashion to the lowering of the All-Star Pack in the domestic market in January of 2009.

This change lowered the cost to get started with a home-based business and the new pack price proved to be very popular here in our domestic market. Our recruiting increased throughout most of 2009 due to the pack price change combined with the commission bonus levels which were in effect then. However, the price modification in our international markets did not generate the higher level of recruiting in the first-half of 2010 that we saw in our home market last year in 2009.

International recruiting did increase nicely following the All-Star Pack price change but the difference was not the dramatic up-tick which was seen in the 2009 United States and Canadian results. This year our recent results in the domestic market have shown a reduction. So our concentration of efforts must not only continue but must increase.

Mannatech has devoted much energy and applied great resources to provide our US and Canadian associate leadership with support which they can use to effectively compete in the current sales environment. Over the past seven months, every major need expressed by our presidential group has been noted and improved with several successful items launched and a number of additional items slated for launch date this month in August.

We re-launched the Mannatech domestic website in June, featuring updated and reworked product and opportunity content along with revised and easier to use ordering sequence. The new site has been received with an enthusiastic welcome and another operational improvement went live this past weekend. Our Live For Real campaign which was launched at manifest in March is growing stronger and several new recruiting and prospecting tools will become available before September. We have strong expectation for these tools which were developed in cooperation with our associate council and our platinum presidentials in order to incorporate as much field experience as possible.

Another important item in the second quarter was the continued recovery to a positive operating cash flow or EBITDA. Our depreciation in the quarter was $3 million, so when that figure is added back to our pre-tax deficit we posted a positive EBITDA for the third consecutive quarter. Once again the modifications made to the All-Star Pack last fall have resulted in bringing our major costs series back into historical ranges as both costs of goods and commissions continued their trend of ratio and improvement.

Our cost of goods sold rate was 14.0% for the quarter, well below the rate of 15.8% of last year and slightly favorable to Q1 of 2010. This cost area was again favorably impacted by the modifications made to the All-Star Pack which also reduce commission expense. Inventory reserves for our soon to be replaced skincare line were increased somewhat in the quarter, in preparation for the introduction of our new line entitled LIFT. This array of skincare products has new formulations and striking packaging. And it has returned exceptional tests results. We are very excited about this upcoming launch and to potential buzz around this new product line is very positive for the fall of 2010.

Total commission costs of 42.5% in Q2 again were below our targeted historic level of 44% to 45%. The reduced level of pack sales caused lower costs for the set of All-Star related bonuses, such as the power bonus and the fast start bonus.

Our rate for the second quarter improved from the first quarter by two full percentage points and dropped over 17 percentage points compared to last year when they all start bonuses rose so rapidly. Our commission rates remain among the highest in the industry and one of our concentrations is on developing many of our new associates to focus in building their new Mannatech businesses.

The commissions figure includes accrual for the travel incentive contest, as well as paid commissions, and both sections 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 saw moderate levels of response to the contest. In many ways, the sluggish incentive activity was parallel to the overall consolidated sales picture, as there were some very successful contest winners but many fewer than in 2009. A total of about 750 associates won the trip this year. That number is down compared to last year but much closer to the general level, we saw back in 2008 and in years prior.

We have repeatedly spoken about our continued strong focus on operating expense control. A point of emphasis during conference calls has centered on our expense levels being the lowest in years. This trend was continued in Q2 of 2010. Our total operating costs in the quarter were lower then the prior year quarter figure by almost 10%, and our domestic expenses were reduced by almost 14%, very similar to the expense pattern we reported in Q1. We are maintaining this level of expense control on a continuing basis, so when our sales begin to show growth, we will be positioned for strong incremental flow through rate to profit. These components again lead to our operating results improving compared to the prior year and reaching a positive EBITDA again for Q2.

We previously stated that we have enhanced the ability of the business produce positive EBITDA at our current sales level, by returning our operating ratios to their historic ranges. While expense control remains a necessity, increases in finished product sales and continued recruiting success or the vehicles to restoring earnings growth in the future.

Our balance sheet continued to show essentially no long-term debt and the month end on June we held almost $21 million in cash along with $7 million in various restricted accounts.

Inventories were reduced by $2.8 million compared to March and were down $3.2 million from year end 2009. Reductions in both raw materials and finished products were achieved, which helped in our overall gains in cash and payables. We received the United States income tax refund in the second quarter, so our tax receivable was reduced to a minimal level.

Our accounts payable and accrued expenses together were reduced from their March balances by $1.3 million, and further reduced from their December balances by $5.7 million. We have concentrated strongly on gradual improvements to our balance sheet and our June balances demonstrated the results of closed asset management.

Dividends were not paid in the quarter and we did not refer to shares during the quarter conserving cash as much as possible.

Capital additions consisted of continued development of the website and our system. The new website launched in June and the team which worked on the product included a number of field associate leaders, as well as internal marketing and IT department members.

In summary, we’ve shown a reliable return to our historical operating ratios, and for the remainder of 2010, we are concentrating on helping our domestic associate leaders regain momentum and begin to grow and develop their down lines.

In addition to preparing our field leaders and our systems for the Mexico launch slated in January 2011. The areas Rob spoke of are in many ways our pressure points and we must focus on these projects, as well as our tight expense control in order to see growth and earnings in shareholder value.

Thanks for your attention and now I'll turn the call back to Rob

Dr. Robert Sinnott

Well, thank you Steve. As we had explained to you in some detail, the plans that we are currently executing globally are designed to bring Mannatech back into a strong positive growth curve. We are essentially a debt-free company with cash on hand to fuel our initiatives and plenty of room to grow globally.

I was very encouraged by what I thought our North American regional event held in Vancouver, British Colombia late last week. For the first time in recent memory, we had several hundred people in attendance and a Mannatech regional event with a vast maturity being fresh prospects and new associates.

The demographic of the audience included many first generation Asian immigrants and others who were attracted Mannatech’s reputation for high quality scientifically validated products and our excellent compensation plan. Collectively, the group viewed Mannatech as a very viable option for building and rewarding a prosperous career. I believe that we will be seeing much more of this kind of activity with certain large segments of the population who view Mannatech as an efficient cost effective way to become self-employed. Mannatech’s management is determined to return to strong year-over-year growth and profitability for the sake of our shareholders and our customers alike.

We have charted a point on the horizon and our sailing steadily toward that point. The journey has not been without [rough ease] but we are making forward progress towards our goal. Thank you for attending today. Now we can open this phone call up to questions.

Question-and-Answer Session

Operator

(Operator instructions) There are no questions at this time.

Dr. Robert Sinnott

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

Operator

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

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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