Greetings and welcome to the Mannatech Incorporated Fourth 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’d like to introduce our moderator for the call today, Mr. Mark Nicholls, Chief Financial Officer. Mr. Nicholls, you may begin.
Thank you. Good morning, everyone. This is Mark Nicholls, and welcome to Mannatech’s fourth quarter 2011 earnings call. Today, you will hear from both me and Mannatech’s CEO and Chief Science Officer, Dr. Rob Sinnott. 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 speak only as of today. We also refer our listeners to review our SEC submissions.
Our operating results for year-end 2011 represented a number of challenges and success milestones. At the consolidated level, our net loss is $20.7 million, on net sales of $200.7 million. Clearly both our net loss and continued decline in net sales are issues, but as we will discuss later the activities undertaken in earlier quarters are showing positive results.
At this time, I’d like to make a few comments concerning the fourth quarter. The net loss for the quarter was $7 million as compared to a net loss of $3.7 million for the third quarter. A significant portion of the difference between quarters is attributed to expenses associated with litigation. During March 2012 we were able to resolve all outstanding litigation.
The fourth quarter net sales were $47.9 million, a 5% decrease from the third quarter net sales of $50.5 million due to lower pack and product volumes. For the quarter the cost of sales expense category increased and the gross profit decreased by 2.5% compared to prior quarter due to inventory obsolescence. The commission and incentives expense category declined by $1.3 million due to the lower volume of sales generated during the quarter.
Operating expenses for the fourth quarter were $25 million, an 11% increase over the third quarter operating expenses of $22.6 million. This increase in operating expense over third quarter is from the accrual of litigation costs associated with the March 2012 resolutions of all litigation.
If these accrued expenses are excluded, the recurring operating expenses would have shown a reduction when compared to the third quarter. As discussed in previous quarters, Mannatech undertook wide ranging expense reductions during the second quarter of 2011. For the last six months of 2011, we’ve reduced operating expenses by $4.5 million as compared to the first six months of 2011.
Despite continued decline in sales, Mannatech has increased its cash and cash equivalents by $736,000 as compared to the first half of the year. In reviewing the full-year, the net loss is $20.7 million or $7.80 per common stock share. Annual net sales were $200.7 million, down 12% from $228.1 million for 2010.
Operating expenses were $99.7 million during 2011, a reduction of $9.8 million compared to the $109.5 million incurred during 2010. The majority of this reduction occurred due to expense reduction activities during the second quarter. During these reductions we are able to reduce our global headcount by 20% as compared to 2010.
To summarize the review of the statement of operations, sales continued to decline from 2011, from 2010 levels. Cost of sales were elevated during 2011, primarily due to inventory obsolescence and operating expenses for 2011 declined from 2010 levels. Due to cost reduction activities, taken in the second quarter, the operating expenses for the last six months were lower than those incurred in the first six months.
In reviewing the balance sheet at year-end, I’d like to address several items. The first item is our cash and cash equivalents have declined by $3.5 million to a balance of $18.1 million at the end of 2011 as compared to the $21.6 million on hand at the end of 2010. It should be noted this decline of $3.5 million in cash and cash equivalents represents 17% of the net loss of $20.7 million reported for 2011.
Generally, the remainder of the net loss is comprised of non-cash items including depreciation, inventory obsolescence and accrued litigation cost. Second item is our inventory, which declined $6.2 million to a balance of $17.9 million at the end of 2011 as compared to the $24.1 million on hand at the end of 2010.
We continue to review each markets consumption of inventory to minimize inventory obsolescence. We are reviewing each product to maximize the company’s ability to market the product and as many countries as possible to avoid the incremental costs associated with formulation differences, such as the additional costs of manufacturing small product quantities. Third, as in prior quarters, we essentially have no long-term debt. Finally, during the fourth quarter we did not pay dividends, we did not repurchase shares and we did not initiate any equity raises through our agreement with Dutchess Capital.
As we previously discussed in the third quarter, Mannatech received a notice from NASDAQ in August concerning our compliance with the NASDAQ listing requirements. On January 9, 2012, we held a special meeting of the shareholders. At this meeting, 73% of the shareholders voted to approve the amendment of the Company’s articles of incorporation and effect a reverse stock split.
On the shareholders approval, the Board of Directors set the ratio of the reverse stock split to be 1-for-10. On January 17th, the stock began trading on a post split basis. The Company has received a letter from NASDAQ confirming the company’s compliance with its listing requirements.
At this time, I will turn the call over to Mannatech’s CEO and Chief Science Officer, Dr. Rob Sinnott.
Thank you, Mark and welcome onboard as the CFO of the Company. So to summarize for our investors, some of the key strategic moves of 2011, Mannatech increased its global footprint by opening five new countries, including Mexico. This gives our independent associates access to more than a 110 million previously inaccessible people.
This large population containing many new potential customers for our products is being developed by Mannatech Associates both on the ground in these countries and operating remotely using the global seamless down lines. For example recruiting in Mexico is being accomplished not only by Mexican nationals, but also by Mannatech Associates from Canada, South Africa, the United States, the EU and other countries that have business and personal relationships with Mexico.
In 2011, we launched sales and marketing initiatives designed to support our associates as they work to grow their businesses. Initiatives such as the Real Switch Challenge were revealed at our annual MannaQuest event in Seattle, and were rolled out to selected test markets during the fourth quarter. Three of these programs associates have the ability to earn an iPad, trips, and cash bonuses by meeting milestones over the course of 18 months.
In the North American test market, this longer term incentive will replace short-term travel incentives with the goal of achieving steady, consistent business growth. From December 2011 to the present we are seeing favorable recruiting trends in our U.S. and Canadian markets that we believe are attributable to this program. We will continue to monitor the progress of this incentive program, hone it for optimal effects and then roll it out to additional markets during 2012.
Also related to North American activities, we continue to support the accelerating growth of our business among ethnic markets, particularly, the Chinese and Korean ethnic markets in Canada and the United States. We’ve been seeing strong recruiting trends in these markets since 2011 that we’re supporting with events, marketing materials, web pages and customer service that are tailored specifically to their languages and their cultures.
During 2011, we also introduced several new products at our global markets, including our Omega-3 with Vitamin D3 supplements. Mannatech has also partnered with Texas Women’s University to develop the Nutrition and Personal Health Coaching program for Mannatech Associates. Pre-recruitment for these classes began in the fourth quarter of 2011 and the course is launched in January of 2012.
Currently the first three classes are fully subscribed and are underway with Mannatech Associates from Canada, the United States, Mexico, Japan, Singapore, Australia, South Africa and the Netherlands in roll. These activities along with targeted research collaborations continue to add value and credibility to the company.
With the settlement of two legal cases, which were charged to the fourth quarter of 2011, I have been informed by our Chief Legal Officer for the first time in many years, the Company has now completed all overhanging litigation matters. This is an important milestone for the Company that I believe will improve both the Company’s finances and the morale of our employees and our associates. Settling these cases was not without cost, but it has been an important goal of management to put these cases behind us and focus on prudent growth going forward. So, I am very pleased to see this chapter closed.
As Mark Nicholls said, despite the substantial expenses taken in the fourth quarter, we were able to increase cash by $736,000 in the last six months of 2011. Admittedly this number is not huge, but it’s a step in the right direction. With good programs in place, an increase in recruiting is a leading indicator that we would expect to see as we move down the path towards recovery. Our focus this year is to accelerate the recruiting trend and parlay that into profitability for the Company. Our intention to managing cost has made the Company more efficient, focused and has put our SG&A more inline with other companies in our industry.
Finally, the growth of sales of our Ambrotose based products during 2011 is a very encouraging sign for me, because growth in sales of this flagship technology was sighted on previous earnings calls as the strategic goal of the company. It shows that our ability to refresh the interest of our associates and our product offerings is certainly not beyond our reach. As expected when we commit to a specific goal as a team and execute on basic, but well thought out steps we can have a positive impact on sales.
I thank the members of our Management team for their full engagement in these activities, and I especially thank our associates for getting out there and recruiting with renewed vigor.
Thank you for listening, and we will now open up the floor for questions.
Thank you. (Operator Instructions) And your first audio question is from the line of Bill Smith. You may proceed.
Hi. Good morning. Could you talk a little bit about inventory obsolescence and what causes that and I mean, is there a lack of marketing research, maybe you could just help us little bit understand what – how that comes about and what – how you’re focused on that going forward?
Sure. This is Mark Nicholls. Generally, we sell dietary supplements and being dietary supplements, they’ve a defined life. One of the things that we do is, as we approach the term of that life, we proactively before expiration start to take that off the shelf for sale.
So, the first part of the answer is that through inventory control measures, we’re proactively taking stuff off the shelf prior to expiration. So that’s the first cause. But the second cause is as we’ve been working through this multi-year inventory build up, part of what keeps ticking away is time and the inventory turns for the older product have slowed down. So, the chief cause is the prior-year over-ordering for the future demand versus the current sales trend.
We’re constantly improving our processes though. One of the things that over the last few years we’ve been working on is forecasting. We proactively take into work with our manufacturers to decrease the order sizes, the minimum order quantity sizes that we must make in manufacturing the products.
And finally, the other thing that we’re proactively doing is we’re harmonizing products as we can across the various countries. Being in several different countries, not all countries accept the same formulations, so we’re faced with the challenge of harmonizing as much as we can and still meet the – our associates and consumer demands for our products. So, this is a continual work in process, but we’re happy that inventories are coming down to levels that will reflect our sales level. Thank you for your question.
And could you talk a little bit about what the shelf life has been on those products?
Well, generally, shelf life varies product-to-product. And it’s a much bigger question, but I mean you can have products that on average have an 18-months shelf life. Some are going to be – have a lower shelf life, some will have a higher shelf life. So we’ve many different products, so it’s a hard question to concisely answer, but generally those are the timeframes that we’re looking at.
And then also on the settlement of the litigation, could you talk about what those costs were in terms of the settlement?
Well, as we discussed in the press release, the settlement for the contractual was $2.6 million. And that’s really what I can address at this time.
Okay. Thank you. I didn’t see that. Thank you.
And this concludes the question-and-answer session. Ladies and gentlemen, your conference call has come to a close. You may now disconnect, and have a good day.
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