Greetings and welcome to the Mannatech Incorporated fourth 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 today, Mr. Mark Nicholls [ph], Acting Treasurer. Thank you, Mr. Nicholls, you may begin your conference.
Thank you. Good morning everyone. This is Mark Nicholls, and welcome to Mannatech’s fourth 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.
Thank you, Mark. Hello, good morning. I am Dr. Rob Sinnott, Co-CEO and Chief Science Officer of Mannatech. We appreciate your interest in our company. I would like to give you a very brief summary of some of the key accomplishments for 2010.
Through operating more efficiently and employing targeted expense reductions, Mannatech achieved a positive EBITDA for 2010 on total sales of $228.1 million. Additionally, our cash on hand buildup over the year to $21.6 million by year’s end. During 2010, we repositioned a large portion of the company’s development resources through the launch of Mexico in January 2011. We did this because Mexico was one of the most important international market openings we have ever undertaken.
According to the Direct Selling Association, Mexico is the sixth largest direct-selling market in the world. Our expansion in Mexico complements our existing presence in North America, while highlighting our continued focus on global expansion. Also, during the latter part of 2010, we experienced some stabilization and recovery of the company’s recruiting ability.
For example, during the fourth quarter of 2010, new independent Associates and Member levels were at 23,196, which was an improvement over third quarter 2010 new Associates and Member levels of 22,296. Finally, we are encouraged by the fact that sales held from third quarter through the fourth quarter of 2010. Both third and fourth quarters had total sales of $54.9 million. Traditionally, sales soften considerably in the fourth quarter due to business seasonality, but that affect did not occur this year.
I will now turn the call over to Steve Fenstermacher, Co-CEO and Chief Financial Officer.
Thanks Rob and good morning everyone. A retrospective on 2010 for Mannatech would include both stories of success as well as continuing challenges. We are pleased with the progress made in fortifying the financial condition of the company when compared to the ending balance sheet and cash flow statement of 2009.
The outstanding planning effort of the recent opening of Mexico and the successful market launch and promotion of the new Mannatech skin care line called LIFT. These are all examples of well-executed projects, which required coordinated activity across the company. On the challenge side, the improving but unpredictable and sluggish economic environment has not enhanced our sales model, as we and many of our competitors still report difficult domestic sales results.
To recap the results for Q4, total sales of $55.0 million rounded were down from 2009, about 22% due to lower pack and product volumes. Product revenue was reduced by about 15% and pack sales declined considerably. However, sales in Q4 were essentially even with Q3 of 2010, which could indicate that we have stabilized the sales and recruiting picture. Our Q4 operating deficit of $2.8 million was greater than last year, as Q4 2009 contained almost $2 million of favorable expense adjustments. Excluding those favorable adjustments would show very similar operating results in both comparative fourth quarters. And our net loss of $2.7 million for Q4 was greater than in 2009, due to a tax benefit of $1.9 million in the prior year against book tax expense in 2010 of $600,000.
We have spoken at length in previous conference calls about our efforts to provide new sales tools and support materials to our associate leaders, many of which were delivered in a sequence begun late last summer. Now, with the benefit of time to have these tools incorporated into their sales techniques, we believe that we can see the impacts beginning to emerge in the equivalency of the sales totals for Q3 and Q4. The steady decline in quarterly sales totals, which has spanned several years has slowed, and we are cautiously optimistic at this point as we move further into 2011.
Once again, our major cost areas moved back into historical ranges, as both cost of goods and commissions continued their trend of ratio improvement, and as always, expense control was continued in the quarter. A major point in recent results discussion has been our return to positive EBITDA in 2010. For Q4, we have reported EBITDA of $0.5 million, despite absorbing costs for our Mexico pre-opening preparations throughout the quarter. Mexico has successfully commenced operations in late January of 2011, and we spent $1.1 million in pre-opening costs in the second half of 2010, split roughly evenly between the two quarters.
Our cost of goods sold rate was 14.8% for the quarter, once again below the rate of 15.5% last year. This cost area was again favorably impacted by the modifications made to the All-Star Pack in both 2010 and 2009. We again added to our inventory reserve somewhat in Q4. As we look into 2011, we have significantly reduced our inventory levels, and we will continue to concentrate on deploying our inventory investment in an efficient manner.
Total commission costs of 41.3% in Q4 again were below our targeted historic range of 44% to 45%, and well under the 2009 rate of 44.2%. Our rate throughout the year has been favorable to that of 2009. Even so, our associate compensation rates remain among the highest in the industry and as we have emphasized on previous calls, the earnings possibilities carried by the Power Bonus program are very attractive to business builders.
The commissions 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. Again, our focus on our continued operating expense control resulted in favorable total compared to a year ago. Operating expenses were reduced by $1.6 million, even including about $500,000 in pre-opening costs in the quarter for the Mexico launch.
We are continuing to maintain this level of expense control, anticipating future sales growth and positioning the company for incremental flow-through profit. These components again led to our operating results, improving compared to the prior year and reaching a positive EBITDA again for Q4. We previously stated that we have enhanced stability of the business to produce positive EBITDA at our current sales level by returning our operating ratios to their historical ranges. While expense control remains a necessity, increases in finished products sales and continued recruiting success are necessary to restore earnings growth in the future. Our EBITDA achieved for 2010 was the first positive for that operating measure since 2007.
Looking at the full year of 2010, sales came in at $228 million, and while that figure was below the 2009 level, our gross profit actually increased by about $1.5 million, reflecting our adjustments to cost of goods sold and the unusually high commission levels in the 2009 year. We reduced operating expenses by $12.6 million or more than 10%, and as a result, our operating results improved by $14.1 million or 55%. The net loss of $10.6 million for 2010 was better than the prior year by $6.8 million or 39%, even with the large tax benefit in the 2009 numbers.
We brought the deficit per share down to $0.40 per share compared to $0.66 per share in 2009. Our balance sheet was considerably improved in 2010 and continued to show essentially no long-term debt. At year-end, we held $21.6 million in cash, along with $3.5 million in various restricted accounts mostly in South Korea. Inventories of $24.1 million were reduced by $7.2 million, or 23% compared to December of 2009. Reductions in both raw materials and finished products were both achieved, which helped in our overall gains in cash and payables.
We received the U.S. income tax refund during the second quarter. So, our tax receivable remained at a low balance. Our current liabilities at year-end were reduced from the 2009 balance by $10.5 million or 25%. Our AP balance was cut by nearly 50%. We have concentrated a great deal on continual improvements to our balance sheet and we are pleased that the fourth quarter balances clearly show the results of tight asset management. We didn’t pay dividends in 2010 and we did not repurchase shares during the year. We also did not initiate any equity raise in 2010 through our arrangement with Dutchess Capital. Capital additions of $1.8 million for the year consisted primarily of continued development of our IT systems.
In summary, the comparative sales declines of the past several years have been slowed, and possibly could be reaching a point of stability. We have made a reliable return to our historic operating ratios and we have brought the company to a positive EBITDA. We are now concentrating on developing the Mexican market, which launched in January 2011, along with continuing to focus on our associate leaders to support their momentum in growing and developing their down lines. We must concentrate on these projects to foster a sales and recruiting rebound, as well as our tight expense control in order to see growth in earnings and in shareholder value.
Thank you for your attention. And now, Rob, has comments regarding the future for Mannatech.
Thank you, Steve. In mid-January, Mannatech held its Annual Presidential Summit. Qualified presidential directors attended this annual sales and training event, which included both general sessions and country-specific meetings. In short, the purpose of this global summit is to kick off the New Year by sharing with our top-producing associates what will be the major corporate initiative this year and also to get feedback on the conditions affecting our global customers, so that the company can proactively address these issues.
This year’s summit meeting was attended by an enthusiastic leadership base and was very productive. The company was able to present very clear details about the four major sales initiatives that we will focus on during the entire year of 2011. While one initiative is new, three initiatives are actually continuations of programs begun during 2010 and have already gained positive traction with our field associates. So, we expect these initiatives to power us through 2011.
Our overall goal is to grow shareholder value through prudent actions that support long-term growth of the company. I want to provide some details about these initiatives, so that you can understand where we are focusing our energy and our resources. The first is our Gift for Real social entrepreneurship program. This is really much more than just the sales initiative. It’s a new way of presenting our business to the world, including prospective new associates.
Mannatech has always been a generous and socially responsible company. Even during recent times when the company has been challenged, Mannatech and its associates have continued charitable donations to MannaRelief, the non-profit organization that provides undernourished children with dietary supplements to help them grow up healthy and strong.
In July 2010, Mannatech launched the Gift for Real program in North America, which enables our associates to help sustain and expand this worthy cause, with a giving-through consumption program. Basically for each month that a North American associate or customer is on automatic order of qualifying products, a small portion of the associate commission pool is donated to provide undernourished children in developing countries with Mannatech’s Real Food Technology solutions. This provides a direct link between the associates and the consumer consumption and the sustenance of a child in need.
So, by simply using our products, our customers are changing the world in a measurable way for another individual. On the surface, Gift for Real may seem simplistic, but it’s innovative on a number of fronts. First, Mannatech’s Real Food Technology solutions provide both the means and the end toward addressing poor nutrition globally. In developed countries, people can purchase Mannatech products to supplement their own personal nutrition, and by doing so, they are providing the same type of high-quality natural supplementation to another person in a developing country who cannot afford a diet that provides proper nutrition.
Second, this program is powered by a large number of associates and customers, which comprise a network marketing business. For example, in North America alone, Mannatech associates and customers are currently providing Real Food Technology solutions to support around 35,000 children in developing countries. That’s a pretty significant impact and it will grow much larger as Gift for Real is rolled out globally.
Third and probably most importantly, this program is innovative, because it changes the Mannatech organization from simply being another network marketing company to a true social entrepreneur network. Through Gift for Real, Mannatech, which is a for-profit corporation, provides sustainable funding for MannaRelief, a non-profit organization to provide the nutritional support for children in need. This kind of relationship defines social entrepreneurship and it will change the world. It’s more than just a charitable handout by a corporation or individual, it’s a win-win-win business proposition that benefits the associates, the company, and thousands of children in need.
It is truly the wave of the future in business models and Mannatech is the first company in our industry to implement these mechanisms and to make us a true social entrepreneur as conventionally defined.
Since it was first introduced in July 2010, this initiative has struck an emotional chord with our associate leadership and helps strengthen the bond between the associates and the company. In addition to doing good for kids in need, we also believe that this will have a positive effect on Mannatech’s associate recruiting and retention rates.
The second major initiative is called The Year of Ambrotose. Mannatech has declared that 2011 is The Year of Ambrotose. During this year, we will focus a large portion of our marketing and PR efforts back on to our flagship product, Ambrotose, as it celebrates its 15th year of commercial success. In the dietary supplement industry where new things come and go generally with a short lifespan, Ambrotose has built up a huge following and reputation that makes it extremely rare and valuable. It deserves to have a huge spotlight shined on it again.
Fortunately, Mannatech took the long-term view with Ambrotose and made sure that it was protected as valuable intellectual property and continues to be the subject of extensive scientific research. Ambrotose Technology is currently covered by over 45 global patents, several of which have been successfully defended in the court to shut down unlawful competition. This along with over a dozen published scientific papers and third-party validated claims, places Ambrotose Technology among the most elite product offerings in the entire nutrition industry. Also, with almost 19 million units sold thus far, Ambrotose is both a commercial as well as a technological success story.
So, during 2011, we can all expect to see renewed emphasis placed on Ambrotose and the Ambrotose family of products. We will be going back into the history of the product and also announcing some developments that will keep the technology fresh and relevant for today’s nutritional consumers. This proposed approach towards reinvigorating our flagship technology has garnered strong support with our field leaders. So, we know that they will be cooperating fully with us on to achieve the maximum impact from this year-long initiative.
The third major initiative is integrative health. During 2011, Mannatech will begin rolling out a comprehensive initiative to educate our associates about the concept of integrative health and the role of Mannatech’s scientifically validated nutrition products in an integrative health approach. Basically, integrative health is using multiple scientifically validated approaches. For example, dietary supplements, exercise, dietary modification and spiritual support, plus current standard of care medical principles to preserve and/or recover optimal health.
While integrative health is not exactly a new concept, it’s a concept whose time has now arrived. Backed by a strong consumer support and unrelenting escalation of healthcare costs, more and more mainstream healthcare professionals and even government officials are coming to see integrative health as a very viable solution to modernize the national healthcare systems that are increasingly unaffordable and therefore unsustainable such as in the United States.
In 2010, the Patient Protection and Affordable Care Act was passed on Capitol Hill. This Act specifically references integrative health and creates a counsel for the coordination and leadership of integrative health at the federal level with an emphasis on prevention, wellness and health promotion practices. With annual U.S. healthcare expenditures at around $2.4 trillion, capturing even a minute fraction of this shifting momentum towards integrative health will make a huge difference in the size of Mannatech’s global business. Mannatech is positioning our sales to capture this wind of change and to use it to power our global growth.
Our fourth major initiative involves Mannatech’s venture with the International Sports Karate Association, known as ISKA. Around mid-year 2010, Mannatech kicked off an alliance with the International Sports Karate Association, whereby certain Mannatech products, specifically those holding NSF GMP certification would be certified by ISKA as approved for their elite athletes. This relationship was pursued as a corporate initiative for two major reasons. First, ISKA-affiliated martial arts studios represent a sizable new market for Mannatech’s high-quality nutritional supplements.
Each studio could potentially enroll as a sponsor organization and encourage their students and their families to enroll on monthly auto orders to help support the studio’s operations. The mathematics is fairly straightforward. There are hundreds of ISKA-affiliated studios with thousands of students enrolled for martial arts training. It is known that most athletes consume dietary supplements and elite athletes such as martial artists are thought to be more selective than ordinary consumers about purchasing high-quality dietary supplements which they can trust.
It is also expected that a certain percentage of students order family members who initially enroll has customers would recognize the financial benefits of being a Mannatech associate and would pursue the business opportunity as well. The second consideration supporting this Mannatech-ISKA alliance was to enhance the ability associates to approach other sports disciplines such as football programs, soccer and gymnastics programs. The endorsement of Mannatech’s products by a credible, well-established organization such as ISKA should have predictable spillover effects into any other sport as well.
Its associates have the necessary tools, training and discipline to confidently approach an ISKA martial arts studio and there is no reason they couldn’t approach any other sports league or training facility and enjoy a similar level of success. Dietary supplement usage is high among athletes of all kinds, and it could be assumed that appreciation of supplements that are of high quality, safe and enhanced performance naturally is not restricted to one particular sport.
And finally, while not a sales initiative per se, prudent global expansion is very much a part of Mannatech’s feature. Through the latter half of 2010, a large percentage of Mannatech’s corporate resources were purposefully redirected towards launching Mexico in January 2011. We were able to successfully redirect corporate resources including marketing, IT, regulatory affairs, product development, and many more areas towards a flawless execution of this task, and it worked out well for us as a company.
Opening new global markets allows us to reach millions of new potential associates and customers. Mannatech has currently tapped into only a small fraction of the countries available to us. Several potentially huge international markets remain pristine and undeveloped for Mannatech. Now that Mannatech has greatly improved on its ability to execute well-planned market openings and can plug them into our associates global seamless down lines, the pace of development into new global markets will increase from this point forward.
My mentor in the MLM business told me some 15 years ago that there is no magic formula to this business. It’s like training for the Olympics. If you stick to the fundamentals and put it an appropriate amount of work every single day, you can reasonably expect success. I have found his advice very useful during 2010 as Co-CEO. This year, Mannatech (inaudible) fundamentals of our core business, and we all worked very hard towards focused goals. We shed all the unnecessary projects and nurtured the projects which showed the highest potential.
I believe the results thus far have been very encouraging. Obviously, there is still a lot of work left to do, but we are going to confidently stay the course in the direction we have been moving, because it does appear to be having a positive impact. For the good of the company, we must move the business back in the right direction by motivating our associates, expanding prudently into international markets and continuing work to bring our SG&A back in line with points in Mannatech’s history when we were highly profitable.
From my viewpoint, we have now jettisoned Stage One of the company’s history and are poised to ignite Stage Two of Mannatech’s growth. I believe that Stage Two would carry us to new countries and fresh opportunities with exciting potential. As a final note, I want to make Mannatech shareholders aware that our Annual International MannaFest Event will be getting underway this afternoon at the Dallas Convention Center. The opening session will start at 4:30 PM today. This evening session will include a keynote address by globally-recognized neurosurgeon and philanthropist, Dr. Ben Carson. Dr. Carson is both a professor at Johns Hopkins Medical School where he has directed Pediatric Neurosurgery for over a quarter of a century, and he is also a recipient of the Presidential Medal of Freedom, the highest civilian honor in the land.
Additionally, there will be morning and evening general sessions each day on Friday and Saturday. This convention features associates training, new product launches, and an exposition center where global associates can learn firsthand about all of Mannatech support systems to help grow their business.
We are expecting around 2,000 enthusiastic attendees, representing all the countries in which Mannatech operates. Of course, the associate from Mexico will be attending MannaFest for the very first time since we just opened the business in Mexico in late January. Yet we are expecting several dozen associate leaders from Mexico to take part in this event and training, which we take to be a very encouraging sign of integration of this new country into the global Mannatech organization.
So, thank you for your attention and your interest in Mannatech. We will now answer any questions that you may have.
(Operator instructions) Presenters, there are no questions at this time.
This is Rob Sinnott, at this time, if there are no further questions, thank you for your attention and interest in Mannatech. We look forward to speaking with you at the end of next quarter.
Thank you. This concludes today’s conference call. You may now disconnect.
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