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Mannatech Inc. (NASDAQ:MTEX)

Q2 2012 Results Earnings Call

August 9, 2012 10:00 AM ET

Executives

Mark Nicholls – Chief Financial Officer

Dr. Rob Sinnott – CEO and Chief Science Officer

Analysts

Operator

Greetings. And welcome to the Mannatech Incorporated Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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.

Mark Nicholls

Thank you. Good morning, everyone. This is Mark Nicholls, and welcome to Mannatech’s second 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 events, risks, 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 brief comments concerning the second quarter. The second quarter 2012 net sales were $43.6 million, a 15.1% decrease from the second quarter 2011 net sales of $51.3 million.

The total number of active independent associates and members eligible to purchase our product based on a 12-month trailing period are approximately 378,000 as of June 30, 2012, compared to approximately 385,000 as of March 31, 2011, excuse me, June 30, 2011.

The recruitment of new independent associates and members accelerated in the second quarter of 2012 by $27.3 million -- 27.3% over the recruitment occurring in the first quarter 2012.

Recruitment of new independent associates and members in the second quarter of 2012 was approximately 27,570, compared to 20,000 in the second quarter of 2011, or an increase of 37.5%.

As stated in the first quarter 2012 earnings call, we view this as a positive development given new recruits, a leading indicator to our business. This is the second quarter for this leading indicator suggests the positive outlook, but we are cautious that our overall revenue trend has not changed at this time.

Net loss for the quarter was $2.4 million, or $0.93 a diluted share, as compared to a net loss of $5.2 million, or $1.98 per diluted share for the second quarter of 2011. A significant portion of the difference between quarters is attributed to our continued focus on reducing operating expenses. In the second quarter 2012, operating expenses were 44.7% of net sales, as compared to 49.1% in the second quarter 2011.

In the second quarter 2011, we under took a reorganization that dramatically reduced our headcount and associated expenses. Since then we are continued to identify areas to improving our operational efficiencies and reduce operating costs.

Our operating expenses in the second quarter of 2012 were $19.5 million, compared to $25.2 million in the second quarter of 2011.

The activities undertaken in the second quarter of 2012 included consolidating management responsibilities that created redundancy that led to a reduction in headcount and exploring opportunities to chang how we conduct our business. We recruit for redundancy related costs in the periods of reduction occurs.

For example, we recently began sourcing our distribution and warehousing functions to third-party logistic company for product fulfillment to our associates and members located in the United States.

We believe this arrangement presents an opportunity for Mannatech to reduce the time of delivery to an associate and member. Additionally, by subleasing our existing warehouse stake to the third-party logistics company, we are able to reduce our future operating expenses. I’ll refer listeners to the 8-K filed on July 9, 2012 for additional details.

For the quarter, gross profit as a percentage of net sales showed an increase of 0.8% as compared to the second quarter 2011. This improvement is primarily due to a decline in commissions and incentives expenses as a percentage of sales.

As mentioned above, we believe the increases in recruitment along with our continue identification of opportunities to improve our operational efficiencies are creating a foundation for growth and improved operating results.

For the six months of the year, net sales were [$88.1] million or down 13.8%, as compared to the $102.3 million net sales in the first six months of 2011.

Our gross profits for the first six months slightly improved 0.2% to $42.2 of net sales as compared to the first six months in 2011.

Operating expenses declined $11.5 million or 22% to $40.6 million for the first six months of 2012, compared to the $52.1 million of operating expenses for the first half of 2011.

Finally, our operating loss of $3.5 million for the first half of 2012 was an improvement of $5.7 million from the operating loss of $9.2 million reported in the first half of 2012.

In reviewing the balance sheet at June 30, 2012, our cash and cash equivalents have decreased by approximately $500,000 to a balance of $12.1 million at June 30, 2012, as compared to the $12.6 million on hand at March 31, 2012. This reduction in cash is primarily due to the purchases of inventories that occurred during the quarter.

Total liabilities decreased $100,000 to $32.3 million in the second quarter 2012, from a balance of $32.4 million at the end of the first quarter 2012. As in prior quarters, we essentially have no long-term debt.

Finally, during the second quarter 2012, we did not pay dividends, we did not repurchased shares in the open market and we did not initiate any equity raises through our agreement with Dutchess Opportunity Fund.

In summary, we remain committed to our 2012 primary goals of increasing sales volumes, becoming profitable and generating positive cash flow. We believe our second quarter results concerning recruitment of associates and members is a positive leading indicator for the long-term success of our business.

At this time, I'll turn the call over to Mannatech's CEO and Chief Science Officer, Dr. Rob Sinnott.

Dr. Rob Sinnott

Well, thanks for your comments, Mark, and thanks to everybody for joining us on the call this morning. During the second quarter of 2012, Mannatech's continued its focus on holding its sales proposition to increase the number of people recruiting into our company. In the second quarter, we saw the recruiting trend continue from the first quarter.

Newly independent associates and members for the second quarter of 2012 were 27,570, as compared with 20,048 in the second quarter of last year. So this is approximately, a 37% increase year-over-year.

Two major sales initiatives and one new value innovation product that were launched early in the second quarter 2012. These new items appeared to be gaining some good initial attraction with our network of independent associates and members.

We will continue pushing these sales initiatives to reinforce better stimulation by our global sales force. The structure of network marketing companies makes the sales force very deep and broad, so unlike a retail company it takes a relatively long time for new initiatives to permit the layers of the global organization.

The trick is to continually own and reinforce the message, and have the fortitude not to make dramatic changes in a course too often. As this will be disoriented sales force, which are mostly part-timers within network marketing business.

To navigate prospect in a lead follow-up system, is based on proven influencers of the associate behavior. It’s a sales system that is simple to use yet feature pack, making it equal and useful for both full time and part time Mannatech business builders.

Mannatech has aired in the past by introducing multiple prospecting and lead follow-up tools that prove too complicated and overbuild from those associates, particularly these are part time network marketers.

With the launch of Navig8, we finally have the simple low cost tool that combines the functionality that are associates desire the most, but without the unnecessary complications of our previous systems.

The most successful network marketing companies in our industry has systems that are useful and allow the sales force to be efficient and productive. With Navig8, I feel that Mannatech finally has a system that will work well for us.

Also, in the second quarter of 2012, we introduced the 4Free Discount Program in North America. 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 build the traditional network marketing business themselves.

We developed this program to simplify the referral process and allow our business builders to maximize their compensation. I'm very pleased that we have finally made this distinction and will treat the customer segment much more efficiently in the future.

This 4Free Program was officially launched in the North America on May 1st. We attribute much of the recruiting growth that we have seen in North America during the second quarter of 2012 to the 4Free Discount Program.

We are hopeful that we will be able to maintain these customers over the long-term and that we will be able to upsell these some of these members to Mannatech’s other product offerings. We also foresee that certain percentage of these members may eventually choose to become active business building associates.

Finally, during the second quarter, Mannatech introduced to the world, our value innovation strategy and the lead product in this strategy called NutriVerus. NutriVerus sets new standards for both technological innovation, value innovation, and 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 including its flagship Ambrotose Glyconutrient technology and our PhytoMatrix natural vitamin and mineral technology.

I, myself, more importantly, our associate leaders are very excited about the potential 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 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 customers for NutriVerus are the 500 million consumers worldwide that currently take a multivitamin multimineral supplement. Currently, Mannatech has captured only a small fraction 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 associates to members, we feel that we can capture many times the number of our current customers. After all, it’s 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 nutritional 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 results and 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 consumers. As a 16-year-old company, our leaders have many of these former consumers in their databases. 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 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 very quickly and then add to the products set as consumer demand reaches certain milestones.

We attribute much of our recruiting momentum in North America with the successful launch of NutriVerus during the second quarter of 2012. NutriVerus is still scheduled to launch in most of our other major global markets during the remainder of 2012.

Overall, I’m pleased with our recent progress towards delivering to the associates tools and products that they can put to good use. We are positively impacting associate recruiting in North America and expect that we will able to influence key business metrics in other markets as well.

As a management team, we have grown in our experience as our company has matured from a fast-growing start-up to some significant growth challenges. Over the past couple of years, we have renewed our extension to bottom-line expenses, focusing on core business activities and building on sales initiatives, that truly resonates with our unique set of independent associates.

As always, I thank you for your support and your continuing interest in our company.

Question-and-Answer Session

Mark Nicholls

We thank everybody for listening to the second quarter 2012 earnings call.

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