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Mannatech, Inc. (NASDAQ:MTEX)

Q1 2012 Earnings Call

May 10, 2012 10:00 am ET

Executives

S. Mark Nicholls – Chief Financial Officer

Robert A. Sinnott, MNS, PhD – Co-Chief Executive Officer and Chief Science Officer

Analysts

Operator

Greetings and welcome to the Mannatech Incorporated First Quarter 2012 Earnings Conference Call. (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. Thank you, Mr. Nicholls. You may begin.

Mark Nicholls

Thank you. Good morning, everyone. This is Mark Nicholls and welcome to Mannatech’s First Quarter 2012 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 risks, events, uncertainties, and other factors and speak only as of today. We also refer our listeners to review our SEC submissions.

At this time, I’d like to make a few comments concerning the first quarter. The first quarter 2012 net sales were $44.5 million, a 12.6% decrease from the first quarter 2011 net sales of $50.9 million. The total independent associates and members based on a twelve month trailing period are approximately 372,000 as of March 31st, 2012, compared to approximately 392,000 as of March 31st, 2011.

During the first quarter of 2012, new independent associates and members increased by 11.4%, or by 21,659, compared to 19,435 in the first quarter of 2011. We view this as a positive development given new recruits are a leading indicator of our business. Although a positive, this is the first leading indicator and does not indicate a change in trend at this time.

The net loss for the quarter was $1.4 million, or $0.53 a diluted share, as compared to a net loss of $4.8 million, or $1.81 per diluted share, for the first quarter of 2011. A significant portion of the difference between quarters is attributed to our continued focus on reducing operating expenses.

In the first quarter 2012, operating expenses were 47.6% of net sales as compared to 52.8% in the first quarter 2011. The largest reduction occurred in the selling and administrative expenses, which decreased by 28% when compared to the first quarter 2011 expense levels.

As discussed in prior calls, the decreases in operating expenses as compared to earlier periods is due to continually improving our operational efficiencies, a task that is rooted in last year’s second quarter reorganization. For the quarter, gross profit as a percentage of sales showed a minimal decline of 0.2% as compared to the first quarter 2011. In summary, the earnings before interest, taxes, depreciation and amortization, or EBITDA, for the first quarter of 2012 was a positive $402,000 as compared to a negative EBITDA for the first quarter 2011 of $2.1 million.

In reviewing the balance sheet at March 31st, 2012, I’d like to address several items. The first item is our cash and cash equivalents have decreased by $5.5 million to a balance of $12.6 million at March 31st, 2012 as compared to the $18.1 million on hand at December 31st, 2011. A large portion of the decrease in cash and cash equivalents are the approximately $2.7 million in litigation settlements paid in March, 2012.

The expenses for the Marinova and Charm [ph] litigations were accrued in December 2011. The settlement of both cases in March 2012 was previously reported as a subsequent event in the 2011 Form 10-K. In addition to these accrued expenses, we used cash to further reduce our trade payables to continue improving the quality of our balance sheet.

A second area of asset decrease is property and equipment that have accumulated depreciation. The first quarter 2012 balance decreased from $9.6 million at the beginning of the quarter to $7.2 million at March 31st, 2012, primarily due to depreciation expense during the first quarter. As in prior quarters, a large portion of the depreciation expense is from our Enterprise Resource Planning system, which went into operation in 2007.

The full book value has been fully recognized as of March 31, 2012, therefore there should be no further depreciation expense associated with these assets. Inventory net of reserves for the quarter ended March 31st, 2012 was essentially unchanged from December 31, 2011.

Total liabilities decreased $4.2 million to a balance of $32.4 million at March 31st, 2012. The net decrease in total liabilities was primarily due to the payment of accounts payable, accrued expenses and commissions in SNE [ph] as payable. As in prior quarters, we essentially have no long-term debt.

Finally, during the first quarter 2012 we did not pay dividends, we did not repurchase shares on the open market and we did not initiate any equity raises through our agreement with Dutchess Capital. However, due to the previously disclosed reverse stock that occurred in January 2012, we did repurchase fractional shares.

In summary, we remain committed to our 2012 primary goals of increasing sales volumes, becoming profitable and generating positive cash flow. We believe our first quarter results concerning recruitment of associates and members is a positive leading indicator for the long-term success of our business. Major noncash depreciation expense associated with our Enterprise Resource Planning system is completely recognized by the end of the first quarter.

Finally, our commitment to profitability is continually driving us to increase sales and reduce operational expenses. At this time, I will turn the call over to Mannatech’s CEO and Chief Science Officer, Dr. Rob Sinnott.

Robert Sinnott

Thank you, Mark, and thanks, everybody, for being on the line, particularly to our investors. MannaFest 2012 was held in Fort Worth on April 12th through 14th and it was viewed as a major success by the associates and the management team. There was an upswing in associate member recruiting in North America leading up to MannaFest that has continued after the event.

Three major initiatives launched on time at MannaFest. First, the Navig8, Prospecting and Lead Follow Up system was made available for associate subscriptions. The uptake on this system in just the last few weeks has been very good with over 1,500 subscribers thus far. This system is particularly interesting to me because it was primarily designed by a successful platinum presidential associate with good knowledge of multilevel marketing fundamentals and a good historical record of recruiting new associates into Mannatech, though the system is based on proven influencers of associate behavior rather than on purely theoretical design.

At MannaFest 2012, we also introduced the 4Free discount program. This program gives members discounts that they may apply against their future purchases by referring other members. This program recognizes the fact that a high percentage of consumers refer other consumers to our associate business builders rather than building a traditional network marketing business themselves.

We developed this program to simplify the referral process and allow our business builders to maximize their compensation. I am pleased that we have finally made this distinction and will treat the consumer segment much more efficiently in the future. This 4Free program was officially launched in North America on May 1st.

At MannaFest 2012, Mannatech also introduced the world to our value innovation strategy and the lead product in this strategy called NutriVerus. I believe that NutriVerus is the first product of its kind and sets new standards for both technological innovation and value innovation and it features a novel delivery system that allows the vast majority of consumers to add natural nutrition to their daily routine with very little effort and no need to take pills, tablets or capsules.

Market data shows that 95% of all dietary supplements consumed in the United States today are comprised of synthetically made chemicals as their active ingredients. NutriVerus Powder is different from these synthetic competitors. Mannatech’s NutriVerus Powder is a clear alternative for those customers looking for complete naturally sourced nutrition.

In addition, the product leverages the technology of more than 60 global patents granted to Mannatech over the years, including its flagship Ambrotose glyconutrient technology and our PhytoMatrix natural vitamin and mineral technology. I, myself, and more importantly, our associate leaders are very excited about the potential of Mannatech’s NutriVerus Powder to change the way that people address their daily nutritional needs.

For several years now, Mannatech has been dedicated to offering nutritional products based on Real Food Technology solutions. NutriVerus Powder represents the apex of this philosophy. NutriVerus Powder combines natural vitamins and minerals with natural antioxidants and Mannatech’s patented glyconutrient technology into a simple, affordable solution for the entire family.

NutriVerus is available in a high-potency powder form and it is designed to be completely neutral in its flavor profile. Therefore, this innovative approach allows consumers to add the product easily to anything that they eat or drink, substantially boosting its nutritional value. Ordinary food that people consume every day becomes extraordinarily nutritious with the addition of NutriVerus.

The primary target consumers for NutriVerus are the 500 million consumers worldwide that currently take a multivitamin multimineral supplement. Currently, Mannatech has captured only a small fraction of 1% of this potential market, so as illustrated, the upside potential is definitely worth going after. With proper messaging and communication through our network of well over 350,000 global associates, we feel that we can capture many times the number of our current customer base.

After all, it is a proven fact that a substantial portion of customers in developed countries will pay slightly more for a product that is perceived as natural versus a standard product composed primarily of highly processed and synthetic ingredients. Not only is NutriVerus distinguished from 95% of the competition by virtue of its natural nutrient content, but also through value innovation, the price is very competitive with many of these competing products as well.

Since the launch of NutriVerus, our associates have been actively going after consumers that may have been forced to discontinue the use of our products because of economic hardship. The associates that I’ve heard from are experiencing good success rates at reactivating these consumers and getting them back to purchasing products from Mannatech using NutriVerus as a cost-effective nutritional solution.

In marketing campaigns, we are encouraging this type of mining of old customers. As a 16-year-old company, our leaders have many of these former consumers in their database. They represent a low-hanging fruit that can be harvested efficiently and fairly quickly.

Finally, I believe that NutriVerus is a great way of launching new countries globally. It was designed to be a global product so that it could be produced as one formulation and packaged in one uniform sized container. Different countries’ specific labels can then be applied on demand. This will greatly simplify the manufacturing logistics and registration of this product in different countries.

In the future, Mannatech can use NutriVerus as a lead product to open new countries and then add to the products set as consumer demand reaches certain milestones. Overall, I am very pleased with our recent progress towards delivering the associates’ tools and products that they can put to good use. In recent months, I have sensed associate enthusiasm unlike I have seen any time during my seven-year tenure at Mannatech.

The increase that we are seeing in recruiting is widely, though not universally, regarded in the MLM industry as a positive leading indicator. We are seeing substantial recruiting increases in North America where the 4Free discount program and NutriVerus have just launched simultaneously on May 1st, but in all fairness, some questions still remain. Number one, can the associates parlay these tools and products into business success? Personally, I think they can, given the proper support, encouragement and the incentives to achieve.

And second, can Mannatech as a corporation parlay these efforts into the revitalization and profitability over the long term? Again, I think that we can if we remain partnered with our associates to grow the top line sales revenue and simultaneously maintain and build upon our bottom line discipline at the corporate headquarters and at our international offices.

It’s no easy trick and there’s not much room for error or inefficiency. In our business, there’s a huge psychological momentum factor that requires a skilled hand to navigate. I believe that this senior management team all realize this and are being very proactive in addressing these issues unflinchingly. We have made commitments to each other and so I’m sharing these commitments with you.

I thank you for your time and attention to examine our recent corporate endeavors.

Operator

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a great day.

Question-and-Answer Session

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