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Mannatech, Inc. (NASDAQ:MTEX)

Q3 2010 Earnings Call

November 04, 2010 10:00 am ET

Executives

Gary Spinell - SVP of Finance & Administration

Dr. Rob Sinnott - Co-CEO & CSO

Stephen Fenstermacher - Co-CEO & CFO

Analysts

Operator

Greetings, and welcome to the Mannatech Incorporated third 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, this conference is being recorded.

Now, I would like to introduce our moderator for the call, Mr. Gary Spinell, Senior Vice President of Finance & Administration. Thank you Mr. Spinell, you may begin.

Gary Spinell

Thank you, operator, and good morning everyone. This is Gary Spinell and I welcome to Mannatech's third quarter 2010 earnings call. Today you will hear from Mannatech's Co-CEOs, Dr. Rob Sinnott and Stephen Fenstermacher.

Before we begin the call, I would like to 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. Rob Sinnott, Co-CEO and Chief Science Officer.

Dr. 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 International, Randy Bancino. We appreciate your interest in our company. I will make a few opening comments and then turn the call briefly to over to Steve.

Before I begin I would like to provide some perspective on Mannatech's business. Our third quarter, new associate and member recruiting levels were almost equal to the second quarter levels. Historically, second quarter recruitment levels are boosted by our annual sales incentive. So this year's third quarter recruiting results are encouraging metrics.

We continue to have cash on hand with over $21 million in available cash on the balance sheet, lower accounts payable compared to last quarter and essentially no long term debt. On prior calls we mentioned our goal of producing key associate tools and programs. These instrumental tools and programs were implemented this quarter and met with considerable enthusiasm by our associates.

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

Stephen Fenstermacher

Thanks Rob and good morning everyone. 2010 has presented us with a continuously challenging economic environment here in our domestic market as well as abroad in our international markets. We've worked diligently to the first nine months of the year to supply our field associates with the strongest ray of support, online and promotional items possible. We believe that these tools will allow our associates to compete effectively for new consumers and business builders even in this unsure economy. The next several quarters will show us how our associates will use these tools and we will continue to support their recruiting efforts both here at home as well as around the world in 2011.

Rob now has comments on the quarter.

Dr. Rob Sinnott

Thank you, Steve. Our third quarter sales for 2010 at $54.9 million, we're down slightly from the second quarter 2010 sales at 57.6 million. The decrease related to lower sales in North America whereas our international sales were basically flat for the second quarter of this year. In addition, our recruiting for the quarter experienced a modest 2% decline from our second quarter recruiting considering that our annual incentive ended in the second quarter.

We are fully aware that we face challenges in regaining full recruiting momentum but remain focused on continuing to implement programs to achieve this goal. Network marketing businesses have a strong psychological component. When our independent associates believe in the company, believe in management and believe in themselves, their momentum of the business can shift rapidly towards growth.

Mannatech has seen this during much of our 16 year history. However, during recent years both internal and external factors had contributed to a shift in the company's momentum away from growth and profitability. During early 2010 the senior management team of Mannatech including two new Co-CEOs, a new President of International and a new Senior Vice President for North America divides this strategy for restarting growth in North America and continuing Mannatech's growth abroad.

The strategy involves focusing the company's resource on just a handful of key initiatives which were to support the associates' ability to grow their businesses in a dramatically changed business environment. These key initiatives were outlined in previous quarterly earnings calls.

By staying focused on these initiatives during the first three quarters of the year, Mannatech was able to launch several exciting new tools and programs during the latter half of 2010, and lay the complex groundwork for successful expansion in New Mexico in early 2011. In September 2010, Mannatech host its annual MannaQuest convention for our associates in Chicago. At the event Mannatech was able to deliver some great new tools, training and products which had been under intensive development, some from a year or more.

Former Mexican President Vicente Fox delivered a key note address at the event. The speech tied in nicely with the other activities related to Mannatech's plan launch of the Mexican market in January 2011. Additionally at MannaQuest, we also began the global rollout of our brand new LIFT skin care system which contains Mannatech's proprietary glyconutrient technology.

Many associates we see product training and view the results of our human clinical studies, which showed significant and dramatic effects on skin appearance and structure. Participants were able to sample the products for themselves at the exposition center with training provided by noted as [physician], author and radio personality, Ms. Susie Galvez. Many associates took advantage of the fact that full size sets were available for pre-order at the event for late September delivery.

Now that the global rollout of LIFT is underway, several additional countries such as Australia, New Zealand, Korea and Japan have also launched a LIFT skin care line during the recent national conventions. The global rollout has gotten extremely well logistically and is supported by extensive marketing resources. The LIFT skin care line will be the subject of intensive, focused promotions throughout 2011 to support the establishment of the line globally.

Also at MannaQuest the company launched the MannaQuest suite. This suite of tools for associates to conduct online prospecting and follow-up has long been desired by the associate base to help them develop and track communications with business prospects. The cost effective suite tools also gives business builders an easy way to track and manage their down line organizations. In short, MannaQuest helps associates supply a new level of business logistics and a system prospecting new associates via email and social networking.

We were also able to deliver to the associates in engaging new prospecting video entitled a healthy dose of reality. This short, approximately seven minute professionally produced DVD still what was the perceived gap in the prospecting process.

Through this short video presentation new prospects are given a clever and compelling introduction to Mannatech has to offer in the area of personal wellness, business opportunity and positive global impact. This video has already risen to become one of Mannatech's most viewed online videos. Also for the first time at MannaQuest associates were able to receive training and certification to participate in the alliance between Mannatech and the ISKA, the International Sport Karate Association. This alliance is intended to open up a new vertical market for Mannatech in the growing sports nutrition category.

Basically the first stage of the Mannatech-ISKA alliance completed during the spring in summer of 2010 was to obtain iron's key certification for several of our Mannatech products that are applicable to sports training and athletes. This certification allowed Mannatech to begin using the designation ISKA certified for elite athletes on certain products and marketing material.

The second stage involved Mannatech's prominent positioning at ISKA martial arts events throughout the United States to build its brand. The second stage began at the ISKA US Open martial arts tournament held in Orlando, Florida in July 2010. Mannatech's sponsorship of this world-class event resulted in great exposure for Mannatech within the martial arts community including national coverage on the ESPN sports network.

Working with prominent leaders in the martial arts community, Mannatech was able to develop comprehensive training, tools and certification for Mannatech's associates so that they can approach this market effectively and have success. We see this Mannatech ISKA initiative and its not only an introduction to the martial arts community but as an introduction to the much larger community of global athletes to desire the safe, high quality nutritional products which Mannatech is known for.

Mannatech's Give for Real social entrepreneurship program which was launched in July, appears to have the desired business impact by helping increase auto order renewals and decrease auto order cancellations during subsequent business periods.

Through enthusiastic participation of Mannatech's independent associates in North America, during its first quarter of operation, the Give for Real program has generated around $80,000 that Mannatech will donate towards the worth charitable cause of conquering global malnutrition in developing countries.

This Give for Real program has attracted the attention of influential world leaders such as former Mexican President, Vicente Fox and his wife Martha Fox. Their charitable organization Vamos Mexico will be one of the first recipients of nutritional aid under this program. As a result of the Give for Real program and the various tools and new products launch at MannaQuest, it appears that North American Associates are now getting back to business in a more intensive way.

I received numerous emails and letter to this effect in recent weeks. I want to share a portion of one of these letters with you, which I feel reflects the tone of many of these communications. The message from the associate reads dear Dr. Sinnott, since I wrote my heartfelt letter to you prior to MannaQuest, I feel compelled to write a post MannaQuest update. Let me start by saying MannaQuest was excellent. It was what I needed, what my team needed, in fact what we all needed. The spirit was intentionally positive.

My team of (inaudible) and I are all in massive action mode. We are submitting our business action plan to our presidential, who is working with a group of us to achieve the next leadership level. With the large number of initiatives, our major problem is not to get (inaudible) because of so many choices. However we are loving all the options.

The message goes on to detail, specific examples of how their teams are using the Mannatech ISKA alliance, the Give for Real program and the new prospecting DVD, a healthy dose of realty as a great combination for growing our associate business. We will be reinforcing and feeding these growth initiatives, begun in 2010 throughout 2011. We feel that the associates will become more comfortable and more effective over time by using the tools, training and products that Mannatech has provided them with.

We will stay focused on these items and refine them in a logical fashion. We have chosen what we feel is the best direction to benefit both the associates and the company and we plan on staying this course into the future. From a budgetary standpoint, management will continue to budget tightly and continue empowering expenses through greater efficiency and prudent targeted expense reductions.

Our goal remains to improve cash flow and profitability and increase shareholder value.

And now I will turn the call over to Steve Fenstermacher, Co-CEO and Chief Financial Officer. Steve.

Stephen Fenstermacher

Thanks Rob. To recap results for Q3; total sales of $54.9 million were down about 23% due primarily to lower pack volume. Product revenue was reduced by about 13% but the pack sales decline was significantly greater. We'll speak to that in a moment.

Our operating deficit of $3.7 million showed improvement of almost $5 million or 57% compared against last year as expense reductions more than offset the results of lower sales for the quarter. And our net loss of 1.3 million for Q3 improved against 2009 by $7.9 million or 86%.

This difference in pack sales that we mentioned 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 price in the domestic market in January 2009. This change significantly adjusted down the cost to start a Mannatech home-based business.

As we've noted previously the new pack price proved to be very popular here in our domestic market. Our recruiting increased throughout most of 2009 due to the reduced pack price combined with the commission bonus levels which were then in effect. However, the price modification in our international markets has not generated the higher level of recruiting through the nine months of 2010 that we saw in our home market last year in 2009.

International recruiting did move somewhat following the All-Star pack price change but the difference was much smaller than that which was seen in the domestic results in 2009. So far in 2010, our results in the domestic market have declined. So our focus and effort must continue to increase. Mannatech has funneled energy and resources to provide our US and Canadian associate leadership with tools and support which they can use to effectively compete in the current sales environment.

Over the past 10 months we've addressed the needs expressed by our presidential group with a number of items launched in August and additional tools introduced at our MannaQuest event held in Chicago in September. We re-launched the Mannatech domestic website in June featuring updated and reworked product and opportunity content along with a revised and easier to use ordering sequence. The new site has been received with an enthusiastic welcome.

Our Live for Real campaign which was launched at Mannatech in March is continuing. And several new recruiting and prospecting tools became available in September. We have strong expectations 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.

Once again the modifications made to the All-Star pack last fall have resulted in bringing our major cost areas back into historic ranges as both cost of goods and commissions continued their trend at (inaudible) improvement. A major point in recent results discussions has been our return to positive EBITDA to the past several quarters. Although third quarter EBITDA was slightly negative, the primary cause for the deficit was pre-opening expenditure in anticipation of our expansion into Mexico in January 2011.

Our cost of goods sold rate was 14.4% for the quarter well below the rate of 16.7% last year. This cost area was again favorably impacted by the modifications made to the All-Star Pack, which also reduced commission expense. We added slightly to our inventory reserves and closed out our prior line of skin care items. Our new line of skin care products entitled LIFT was just recently introduced. This array of skin care products has new formulation and striking packaging and has returned exceptional test results. We are very excited about this recent launch and we have high expectations for this line of great products.

Total commission costs of 42.1% in Q3 again were below our targeted historic range 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 third quarter was the lowest so far in 2010 and was favorable to last year by 7.4 percentage points. Our commission rates remain among the highest in the industry and the earnings possibilities carried by the Power bonus program are very attractive to business builders.

The commission's figure includes accrual for the travel incentive contest as well as 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. In many ways the incentive activity was parallel to the overall consolidated sales picture as they were some very successful contestants but many fewer than in 2009. About 750 associates are in the trip this year. That number is down compared to last year but was much closer to the general level we saw in 2008 as well as in prior years.

We focused on our continued operating expense control. A point of emphasis in 2010 has centered on containing our expense levels to record the lowest total overhead spending in years. This trend was continued in Q3 of 2010. Our total operating cost in the quarter were lower than the prior year quarter figure by almost 16% and our domestic expenses were reduced 19% continuing the controls similar to the expense patter of recent quarters.

We are continuing to maintain this level of expense control, anticipating future sales growth and positioning for a strong incremental flow through profit rate.

These components again led to our operating results improving compared to the prior year and reaching a positive EBITDA again for Q3, excluding the Mexico pre-opening expenses. We previously stated that we have enhanced the ability of the business to 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 are necessary to restore earnings growth in the future. Our balance sheet continued to show essentially no long term debt and at September 30 we held $21.7 million in cash along with $5.6 million in various restricted accounts mostly in South Korea.

Inventories were reduced by $2.7 million compared to June and were down $5.9 million from year end 2009. Reductions in both raw material and finished products were both achieved, which helped in our overall gains in cash and payables. We received the US income tax refund in the second quarter. So our tax receivable remained at a low balance.

Our current liabilities were reduced from the June balance by $2.7 million and further reduced from their December balances by $9.3 million. We've concentrated strong on gradual improvements to our balance sheet and our third quarter balances demonstrated the results closed asset management.

Dividends were not paid in the quarter and we did not repurchase shares during Q3. Capital additions consisted of continued development of the website and our system. Our new website launched in June and the team which worked on the project included a number of field associate leaders as well as our internal marketing and IT departments.

In summary, we've shown a reliable return to our historic operating ratios and for the remainder of 2010 we're concentrating on the Mexico launch slated for January 2011 along with helping our domestic associate leaders regain momentum and growing and developing their down lines.

The areas Rob spoke are in many ways our focus points and we must continue to concentrate on these projects as well as our tight expense control in order to see growth in earnings and shareholder value.

Thanks for your attention and Rob has some closing comments.

Dr. Rob Sinnott

Thank you, Steve. It's been a very interesting challenge during 2010 to lead a rebalancing of all the factors which have historically made Mannatech grow. Relationships and trust with our independent business owners cannot be underestimated. Without constant input of attention and energy, this relationship can grow rusty and cause damage to the overall business.

During the last few months I have attended numerous regional associate meetings throughout North America as well as country conventions in Korea and Japan. I believe that the response from our associates is stronger now than it has been in the past three years.

Last week at Korea's convention, attendance exceeded expectations. We are fully aware that increased sales starts with associate enthusiasm and interest. And that enthusiasm and interest appears to be remerging.

Also during periods of rapid growth such as Mannatech experience several years back, expenses can grow out of line with the overall business through in prudent investments and inefficient management of resources. At some point these inefficiencies must be addressed, and they are now being addressed.

I am confident that this current management team understands the complex factors which govern Mannatech's success. We are dedicated to keeping our attention focused on these factors which drive its top-line while surgically reducing expenses to improve the bottom-line. I have seen first hand the powerful effects when all the driving factors are in alignment to create momentum. With fortitude we will stay this course, confident that we will see continuing improvement in our business over time by adhering to the principals of [attentive] management.

Thank you and we will now answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Presenters there are no questions at this time.

Dr. Rob Sinnott

Thank you. This is Rob. And if there is no further questions, thank you all very much for taking the time to listen to us today and we'll look forward to speaking with you at the end of next quarter.

Operator

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

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