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Mannatech Inc. (NASDAQ:MTEX)

Q1 2011 Earnings Call

May 5, 2011 10:00 am ET

Executives

Mark Nichols – VP, Treasurer and Tax

Steven Fenstermacher – Co-CEO and CFO

Operator

Greetings. And welcome to the Mannatech Incorporated First Quarter 2011 Earnings Conference Call. At this time, all participants are in 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 Nichols, Vice President, Treasurer and Tax. Thank you, Mr. Nichols. You may begin.

Mark Nichols

Thank you. Good morning, everyone. This is Mark Nichols, and welcome to Mannatech’s first quarter 2011 earnings call. Today you will hear from Mannatech’s Co-CEO and Chief Financial Officer, Steven 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 Steve Fenstermacher, Co-CEO and Chief Financial Officer.

Steven Fenstermacher

Thank you, Mark, and good day, everyone. The first quarter of 2011 was a very busy time for Mannatech. We start each year with a planning session in January, which includes our Global Associate leadership. This year we spent a week working with our Presidential Associate leaders to refine the approaches and activities, which will form our tactical plan for the New Year.

Our session last January with the Presidential Group built upon the foundation which was formed in the second half of 2010. Rob Sinnott, my Co-CEO and Mannatech’s Chief Science Officer, has noted on prior calls that a variety of new products, promotional materials and opportunities will made available to our independent associates since July of 2010.

These include the gift for real charitable donation through consumption program, which helps undernourished children around the world and make social entrepreneurship one of Mannatech’s core initiatives.

The planning meeting in January was largely devoted to planning and training our associates. So they could more fully integrate these programs and begin to utilize their possibilities more directly.

Also by the week later, we initiated our operations in Mexico with offices in Guadalajara and Mexico City and product pick up facilities in those cities, as well as a distribution center located in Monterey.

We are excited about the potential of Mexico for our associates as Mexico is considered to be the sixth largest direct selling market in the world. Having such a strong market to our already large portfolio of operating countries strengthens the positions of Mannatech and our independent associates. And to date, we’ve been greatly impressed with the drive and determination of our new Mexican independent associates, along with a number of emerging leadership positions there.

The first quarter begins our annual travel incentive, where independent associates can earn wonderful resort trips. And it is also when we hold Manifest, the annual global gathering of our independent associate leaders here in Dallas Forthworth. This event is in March each year and we hosted our independent associate leaders from around the world.

In addition to exchanging and discussing their experiences with each other, they also gained unique insights from a number of our high level pertinential [ph] speakers regarding growth and recruiting by incorporating social entrepreneurship and the Give for Real donation through consumption program.

The feedback from our independent associates about this year’s event indicates that many of them experienced a renewal of enthusiasm from Mannatech. Indeed, while Manifest occurred only weeks ago, we have seen improvement in the general trend of recruiting since the event in early March.

To recap our financial results for Q1, total sales of 50.9 million were down about 16% due to lower pack and product volumes. Product revenue was reduced by about 15% and pack sales declined considerably reflecting a reduction of pack rising in our international markets since early 2010.

Foreign currency exchange impact was favorable for Q1 adding about $1.6 million compared to last year. Our Q1 operating deficit of $4.9 million was greater than last year reflecting the impact of lower sales and costs associated with initial operations in Mexico.

And our net loss of $4.8 million or $0.18 per share for Q1 was greater than in 2010 due to the same items. Once again our major cost areas remained in the general historical ranges as both cost of goods and commissions continued their trend ratio stability and improvement. And expense control also continued in the quarter.

Our cost of good sold rate was 14.2% for the quarter and was even with last year’s rate, even though we added to our inventory reserves in Q1. Our inventory levels again will reduce and we will continue to concentrate on deploying our inventory investment in an efficient manner.

Total commission costs of 42.6% in Q1, again, were favorable to our general historic range of 44% to 45% and well under the 2010 rate of 44.5%. Our associate compensation rates remained among the highest in the industry and the earnings possibilities carried within our global seamless downline commission 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 2010 period. Again most of the variance came from direct paid commissions.

We continued to focus on operating expense controls and this resulted in favorable totals compared to last year. Operating expenses were reduced by about $1 million, even including costs in the quarter with the actual Mexico launch. Excluding the Mexico costs, our operating expenses would have been lower by more then $2.1 million or about 8%.

We previously stated that we have targeted positive EBITDA at our current sales level by returning our operating ratios to their historical ranges. While this annual commitment remains in place, the first quarter of the year is burdened by greater expense compared to other quarters.

The considerable cost of Manifest has contained entirely in the first quarter and heavier accrual begins in the quarter for the associated travel incentive. We also bear some costs in the quarter related to the January Presidential Planning Session. These types of cost reduce our results in Q1 but we maintain our commitment to generating positive EBITDA for the full annual cycle.

Our balance sheet was improved compared to March 2010 and continued to show essentially no long-term debt. The cash balance of $17 million was down from December 2010 as we funded the launch of operations in Mexico but was favorable to March last year by $2.3 million.

Inventories were $21.8 million, down by $2.3 million from 2010 year end for almost 10%. Reductions in both raw materials and finished products were both achieved which once again helped in our overall gain and current liabilities.

As before, we’d continued to concentrate on continual improvement to our balance sheet. We do think inventory investment and managing our payables carefully are both central to that focus.

We didn’t pay dividends in Q1 and there were no repurchases of shares in the quarter. We also did not initiate any equity raise through our agreement with Dutchess Capital. Capital additions of $0.3 million consisted primarily of our offices and facilities in Mexico.

Also, we’d like to acknowledge the tremendous efforts of our Mannatech’s staff in Japan in dealing with the disastrous impacts of the earthquake and tsunami in March. As you know, the Japanese transportation systems were heavily impacted by electrical power interruptions related to damage of one of their nuclear generating plants.

Many of our staff members decided to remain at the Mannatech office in Tokyo for days at a time to ensure that our independent associates would continue to receive their monthly auto orders. Associate customer support would continue to be available and we could continue to report our financial results in a timely and accurate manner.

The pride, determination and grace under pressure shown by our staff in Japan have been remarkable. Also, Mannatech Japan made a large quantity of our PhytoBurst, nutritional chews, available to Japanese national authorities for use and disaster relief, which were hardly accepted and promptly used.

We are very proud of our staff and associates in Japan and we wish them the best, because their country rebuilds in the aftermath of such disruption. From the business standpoint, while shipment were staggered initially in the weeks following the earthquake, orders and recruiting have returned close to the same levels as before the problem occurred. Once again, Mannatech Japan has performed abruptly [ph] and they haven’t advised us to expect relatively low long-term disruption.

We are now concentrating on further developing the Mexican market, which just launched in late January 2011 along with continuing to support our associate leaders in growing and developing their down-lined organizations. We must focus on these projects to foster a sales and recruiting rebound as well as tighten our expense control in order to seek growth in earnings and in shareholder value.

Recent improvement in recruiting is encouraging and we’ll continue to watch this trend in the coming months as recruiting is a leading indicator of the direction of the business.

We’ll now take any questions.

Question-and-Answer Session

Operator

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

Steven Fenstermacher

Thank you for listening to our call and we look forward to updating you again next quarter.

Operator

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

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