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Mannatech, Incorporated (NASDAQ:MTEX)

Q3 2011 Earnings Conference Call

November 3, 2011 10:00 AM ET

Executives

Mark Nicholls – VP, Treasury & Tax

Steve Fenstermacher – Co-CEO and CFO

Rob Sinnott – Co-CEO & Chief Science Officer

Operator

Greetings and welcome to the Mannatech Incorporated Third Quarter 2011 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, Vice President, Treasury & Tax. Thank you. Mr. Nicholls, you may begin.

Mark Nicholls

Thank you. Good morning, everyone. This is Mark Nicholls, and welcome to Mannatech's third quarter 2011 earnings call. Today, you will hear from both Mannatech CEOs, Dr. Robert Sinnott and Steve 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 terminologies 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 may speak only as of today. We also refer our listeners to review our SEC submissions.

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

Steve Fenstermacher

Thanks Mark. Good day, everyone. Our third quarter of 2011 saw continued progress in a number of areas, which we believe are important to the business.

Over the Labor Day weekend, we held MannaQuest, our annual North American sales event in Seattle. We were quite pleased with strong attendance for MannaQuest, which was essentially sold-out for us with almost 1,200 in attendance.

At this event, our Executive Vice President of Sales, Al Bala, announced a new incentive for our domestic market. The new incentive rewards qualifying downline growth and personal business growth with an iPad. This iPad can become the cornerstone for building a successful Mannatech business by showing our website, our videos, and our online tracking software to new recruits and product consumers.

Also, for those who continue to progress up the associate ranks in Mannatech, new business builders can qualify for substantial cash awards as well. We believe this change in direction for our incentive activity will result in greater activation of new recruits and emphasize the value within the Mannatech compensation system.

We began thinking of ways to add excitement and interest to our incentives months ago and this new program has caused greater activity almost from the day it was announced. We are concluding the planning for additional changes to the incentive program currently so that for 2012 all Mannatech associates will have the opportunity to invest in their own business futures, qualifying as – such as the iPad and cash payments as well.

We believe these changes to our incentives will resonate with both new and established associate leaders, and once again demonstrate that our commission plan is the best in the industry.

Also in Q3, we continued the rollout of our Give for Real program in our international markets. This program, which funds donation of our PhytoMatrix natural vitamin and mineral blend to underprivileged children around the world, was initiated in our domestic market in the summer of 2010. We are now beginning the program in our other markets and by year-end the overall donation should essentially double what the domestic market is generating.

Give for Real is a donation-through-consumption program and so Mannatech associates fund our donations by growing their downlines and increasing their level of recruiting. We've chosen to incorporate a direct marketing distribution and compensation model into our social entrepreneur business strategy. This allows us to financially reward individuals who choose to participate in our world-changing fight against under-nutrition in direct proportion to their level of activity.

So by December, Give for Real should be supplying our natural nutrient blend to about 60,000 needy children every month. Our associates in our foreign countries have expressed to us their strong desire to participate in this giving program. And so, Give for Real is now a reality in their recruiting and business activities.

We have also put the finishing touches on a few improvements to our global seamless commission plan as well. These changes encourage leadership and we will be monitoring the commission plan to confirm that the desired activities are being rewarded correctly. These changes have been rolled out also and will be fully in effect by December.

This past spring an idea for promoting our Optimal Support Packets product, when ordered along with bulk Ambrotose powder, was created and implemented to provide a strong value innovation for our loyal consumers. Our history in Mannatech has revolved around technical innovation in bringing our Real Food Technology to the fore. These days, in this continuingly uncertain and difficult economic environment, we feel that continued combination of economic and value innovation is the best direction for Mannatech.

So, an associate consumer can receive our Optimal Support Packets product at a value price by ordering through our regular Auto Order system in combination with bulk Ambrotose powder. These OSP packets are individual convenience packs, which contain our premium PhytoMatrix natural vitamin and mineral tablets, our Plus tablets, and our AO antioxidant capsules. This combo kit creates incremental sales, it provides an economic discount to the consumer, and it has given our associate leaders in the U.S. and Canada a reason to reconnect with both existing and newer people in their downlines, as well as those who had cancelled their orders.

The combo kit has generated excitement and renewed associate activity, and we have seen thousands of former consumers take advantage of this value-oriented offering. We had seen some inventory shortage over the summer due to the popularity of this combo, but now our inventories have been replenished. So our associate leadership is working to fully promote this combination product.

We are looking at rolling the combo kit out to some of our international markets next year and other logical product combinations maybe developed in the coming months, which could provide incremental sales volumes to us and our field sales associates as well.

Turning to our financial results for Q3, total sales of $50.5 million were down 8% from 2010 due to lower pack and product volumes. Product revenue was reduced by 5.5% and pack sales declined 20%. Foreign currency exchange impact was favorable for Q3, adding about $2.5 million compared to last year.

Our third quarter sales figure of $50.5 million was down only about $800,000 or 1.6% from the second quarter of 2011. Normally, the third quarter shows a more significant decline from second quarter levels due to the impact of the annual travel incentive qualifying period in Q1 and Q2.

We are cautiously pleased that Q3 remained relatively strong this year. In fact, our domestic recruiting in September and October was the strongest two-month period so far in 2011. This higher level of recruiting is directly related to the new iPad incentive and makes us feel confident that we've made the right decision regarding our incentives.

Our cost of sales and commissions and incentives expense categories were slightly elevated against last year for the quarter and the gross profit rate was reduced by 1.7 percentage points. However, compared to the recent 2011 second quarter, gross profit rate was favorable by 1.0 point and was actually slightly higher in dollars, even with a smaller sales decline.

In June, Mannatech announced wide-ranging expense reductions and cuts. Our Q3 results showed lower G&A costs on a quarter-to-quarter comparison of $2.6 million or more than 10%, even with Q3 containing the costs for our MannaQuest event. When compared to the third quarter of last year, we reduced our operating expenses by $4.9 million or almost 18%.

These significant cost reductions have been difficult, but necessary for Mannatech to strengthen our financial position. We are pleased with our ability to reduce expenses and still provide strong associate support and customer service levels, and we will continue to find additional ways to cut more costs as we move into 2012.

Our Q3 operating deficit of $1.6 million was favorable to last year by $2.1 million, reflecting the impact of the expense reductions and overcoming the sales shortfall. Q3 operating result was also favorable to Q2 2011, by $2.7 million again. The expense reductions were responsible for the quarter-to-quarter improvement.

Internally, one of our primary performance metrics is termed operating cash flow. This key internal dashboard item is defined as operating profit with depreciation added back. Our depreciation for the quarter was $2.6 million, largely from the systems investment we made several years ago. The system depreciation expense will end next March after five years.

In Q3, this internal figure, excluding depreciation, was positive and reached $1.1 million. This indicates that the ability of the business to generate cash and operate profitability has been enhanced by our cost-cutting decisions. We still have work to identify more reductions and we plan to continue to implement cuts and further (inaudible).

Other income was negative for the quarter at $1.6 million, reflecting primarily currency translation. Pretax results showed a deficit of $3.1 million and the net loss was $3.6 million. Deficit per share was $0.14.

Our balance sheet for September 30 continued to show essentially no long-term debt. The cash balance of $20.8 million was higher than the June Q2 figure by $3.5 million and within $800,000 from December 2010. Inventories were $19.9 million, down by $4.2 million from the December balance. We are continuing to concentrate on improvements to our balance sheet. Managing carefully our inventory investment and our payables are central to that focus.

We again did not pay dividends in Q3. We did repurchase a very small number of shares in July in the open market. Again, we did not initiate any equity raise through our agreement with Dutchess Capital. Capital additions of $115,000 consisted of minor additions to our computer systems.

Mannatech received notice from NASDAQ in August that the Company was out of compliance with the stock price requirement to maintain listing on the NASDAQ Global Select Market. The Company has until February 7, 2012 to correct the situation and regain compliance. The management and Board of Directors have researched several methods to regain compliance and have decided to pursue a reverse stock split. We wish to retain our listing on the NASDAQ Global Select Market, but we cannot guarantee that we will regain listing compliance.

In summary, we will continue to reduce costs and lower our breakeven point. But we also realize that Mannatech will return to financial strength through increased sales. We are cautiously optimistic concerning our new incentives and the encouraging associate domestic recruiting movement. We will continue to support our associates as strongly as possible to encourage their business building activities.

Thank you for listening. And now, Dr. Rob Sinnott has several comments.

Rob Sinnott

Well, thanks, Steve. Good morning, Mannatech investors. I only have three brief comments that I'd like to make.

Number one, we set out at the very beginning of 2011 with the goal of getting our headquarters expenses back in line in order to make us competitive again. This required carefully planning and surgery in order to achieve the necessary financial goals without damaging our future ability to develop and sell innovative health products.

I'm pleased to report that we did achieve the financial targets that we set and the resulting reductions in force were as such in nature that they have resulted in greater efficiency and focus in our corporate headquarters.

Number two, too many Mannatech associate and corporate staff, our North American MannaQuest event was perceived as one of the best events that the Company has ever put on. The title of the show was Celebrating the Entrepreneur, with the content of the three-day show being very timely and impactful.

For the first time, there was a true balance between business builder training, technical training, and activities designed to foster an emotional connection with Mannatech. We had just short of a sell-out crowd at this event and even more importantly, the initiatives launched at this event immediately resonated with the field. Within days of the event we saw measurable increases in recruiting in our Canadian and U.S. markets and these have continued at a high level ever since the early September event.

Number three, I believe that we have the strongest management team that Mannatech has ever had to lead us through the rest of this year and into 2012. We will continue to manage our headquarters expenses and will increase the efficiency and profitability of all of Mannatech's global markets.

Our recently released MAP program, the incentive program, has done wonders for recruiting in our North American market and it will continue to be built out and refined to become an engine for sustainable growth and a return to profitability. There is already interest in building – there is already interest building in our international markets about the MAP program, so that when it's properly honed it will likely be expanded to become a global initiative.

Also, the recent negative media coverage about dietary supplements actually plays directly into Mannatech's hand. Back in 2005, Mannatech designed the first multivitamin, multimineral dietary supplement where all the vitamins and minerals are derived from natural sources. We brought that product called PhytoMatrix to market in 2006 and have since rolled it out globally.

As consumers start looking closely at their vitamin supplements and realize that the vast majority of supplements sold on the market today are synthesized from coal tar and petroleum, we believe that there will be a tremendous opportunity for Mannatech's Real Food Technology solutions. After all, this model is already proven.

It's a fact that greater than 30% of U.S. consumers choose to purchase natural and organic food products when they shop even though these products carry a higher price tag. So if we can capture even a fraction of this percentage who currently use synthetic vitamin supplements, it could potentially be millions of new customers for Mannatech in our future.

It has been a great experience helping to lead these initiatives at corporate and in the field. I look forward to even better progress as we close out this year and continue into 2012.

Thank you for listening. We will now take any questions that you may have.

Question-and-Answer Session

Operator

(Operator instructions)

Rob Sinnott

Okay. Seeing that there is no questions, we thank you for listening and we'll look forward to updating you again next quarter. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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