Mannatech Q2 2009 Earnings Call Transcript

| About: Mannatech, Incorporated (MTEX)
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Mannatech, Inc. (NASDAQ:MTEX) Q2 2009 Earnings Call August 5, 2009 10:00 AM ET


Gary M. Spinell - Vice President of Finance and Administration

Wayne L. Badovinus - President and Chief Executive Officer

Stephen D. Fenstermacher - Chief Financial Officer


Peter Park - Park West Asset Management


Welcome to the Mannatech Incorporated Second Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentations. (Operator's Instructions) As a reminder, this conference is being recorded. I would like to now turn the conference over to our moderator for today, Mr. Gary Spinell, Vice President of Finance and Administration. Thank you. Mr. Spinell, you may begin your conference.

Gary M. Spinell

Thank you. Good morning, everyone. This is Gary Spinell, and I welcome you to Mannatech's second quarter 2009 earnings call. 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 Mr. Wayne Badovinus, Mannatech's President and CEO.

Wayne L. Badovinus

Hello, and good morning, everyone. This is Wayne Badovinus, President and CEO of Mannatech. It is a pleasure to be here to update you on our progress. The economic environment and current foreign exchange market continue to create a challenging environment for most companies and Mannatech is no exception. At the same time, we are beginning to build on the foundation of sales and recruiting growth we described in our last call. We believe maintaining this recruiting growth and ultimately generating sales and profitability will be the result.

Our version of an economic stimulus plan or the Y.E.S. Plan as we call it, was launched in late January. There has been great associate enthusiasm and excitement about this plan, throughout North America and South Africa. Our domestic pack sales have increased dramatically compared to last year. Quarterly recruiting totals are at the highest level in over a year and attendance at our regional events is up appreciably compared to last year, and we continue to aggressively manage expense levels.

While many of our results are positive, the company still reported a net loss of $5.5 million or $0.21 per share in the second quarter of 2009. This compares to a net loss of $10.5 million or $0.40 loss per share for the second quarter of 2008.

Net income was negatively impacted due to the short-term costs associated with greater pack sales and expanding our customer base. Steve Fenstermacher, our CFO, will provide additional insight on this in a few minutes.

Our operating expenses for the second quarter of 2009 were $29.9 million, a 38.6% savings compared to the second quarter of 2008. We have now operated at lower levels of operating expenses for a full year. Second quarter 2009 sales were $77.6 million, a decrease of 10.6% from the same quarter in 2008.

Although North American market sales were lower than last year by 11.6%, they were up 8.8 compared to the first quarter of this year. International sales in the quarter were down 9.1% versus prior year results. This decrease was partly due to the challenging economy worldwide and negative foreign currency rates. At the same time we see evidence that our emphasis on Mannatech's business-building opportunity, our proprietary products, is beginning to generate increasing results.

International sales were actually slightly higher for the quarter in comparison to the second quarter of 2008 when calculated on a local currency basis. We see additional evidence the business is coming to life. Earlier I mentioned the increase in regional meeting attendance. Our message of a great business opportunity combined with a unique line of proprietary products is reaching many new demographics. There has been a much more diverse audience at our events, including many from the Hispanic community. In fact, this more diverse audience has required us to have translation capabilities available at our regional meetings in multiple languages.

Our increasing worldwide presence is creating growth around the globe. During the last quarter, an associate became our first Platinum Presidential from South Africa. Also of note we now have a Platinum Presidential who has a downline represented in all 12 countries in which Mannatech currently operates its business.

Our presidential level is a major achievement in our associate base. The platinum level has the distinction of being the highest level presidential, so the creation of a new platinum and the growth of existing platinums is very significant in relationship to our company's growth.

We also are seeing strong evidence of growth in our associate leadership levels. Our North American associates reach new leadership levels in the second quarter at double the rate of the first quarter. The increase was almost more than all of last year. Leadership level growth to date is 42% higher than all of last year combined. One of our key Mannatech athletes will reach presidential status in the next few months. Ten more are in position to also achieve this level in the next six months.

Earlier I mentioned we experienced strong recruiting growth in the second quarter. We are very excited and encouraged by these recruiting results as they represent the key leading economic indicator of our business. New associates and members added in the second quarter of 2009 totalled 43,953, representing an increase of 27.3% compared to the second quarter of 2008. This level was also 20.5% higher than our own first quarter of 2009 results.

The growth in pack sales and new associates was driven by three important factors. First, our annual incentive program ran through mid-June and resulted in a record number of winners. Second our Y.E.S. Plan and 499 All-Star Pack are clearly being perceived as a key entry point for business builders.

In these tough economic times, more and more people are turning to Mannatech as a business opportunity. Mannatech offers a great combination of proprietary unique products and global seamless downline commission structure.

Third, we have energized our regional meetings by focusing associates on training, building downlines, and effectively managing a growing business. The dramatic rise in recruiting has also generated strong growth in pack sales in North America. North American pack sales increased by a record 50% compared to the second quarter of last year. This is a substantial increase and demonstrates that our strong focus on growing sales and business building growth is generating significant results.

It is important to note that we have not yet launched our 499 All-Star Pack and the Y.E.S. Plan in our international markets other than Canada and South Africa. We are optimistic we can generate similar sales, pack, and recruiting growth, once the Y.E.S. Plan and the 499 Pack are introduced worldwide.

With sales rebounding and recruiting jumping dramatically, we are excited about the possibilities for future growth in our business. Before I provide additional perspective on our business and future opportunities, I will turn the call over to Steve Fenstermacher, our CFO, who will discuss our financial performance in more detail.

Stephen D. Fenstermacher

Thanks, Wayne, and good morning, everyone. To recap our second quarter, sales were $77.6 million for the quarter, our operating deficit was $11 million, our net loss was $5.5 million, and the deficit per share was $0.21.

As Wayne pointed out, Mannatech again made progress, however, in the second quarter by increasing our pack sales compared to last year, thus reversing that decline trend and also posting an increase in new recruiting as well.

These two key performance factors have always been regarded as leading indicators for future sales trends. While our sales total of $77.6 million for the quarter was down from Q2 of 2008 by 10.6%, we essentially equalled the sales level of last year's third quarter, and we beat the Q4 2008 and Q1 2009 sales as well.

We were up almost 10% in trend from first quarter sales in the second quarter. Our recruiting results were very encouraging, showing increases of at least 20% or greater against each quarter since a year ago. The combined effects of the popularity of the new All-Star $499 initial purchase pack and the motivational aspects of the annual travel incentive contest, drove our domestic business in the quarter on a very specific basis, in additional also to our international operations.

We saw pack sales grow 22% and our attraction of new associates improved 27%. We briefly described in earlier conference calls, our plan of commissions and bonuses related to sales of initial purchase packs and the program of great travel incentive trips for which our business builders qualify each spring.

We saw a tremendous response this year with increased recruiting in packs sales which surpassed several previous years' incentive period results. The short-term commission costs rose to levels which were higher than expected, but we also saw new associate signups which were better than had predicted.

Due to the recruiting success we also saw many more business builders qualify for the upcoming incentive trips which drove our accrual for incentive costs. We feel that our acquisition of new associates was the overriding need to return to more successful sales levels. And though the costs are evident, we look forward now to developing renewed sales growth and encouraging many of our recent associates to further build their new Mannatech businesses.

One specific item again impacted our product cost numbers. Our cost of goods sold rate was 15.8% for the quarter, above the 2008 prior year three-month period by 8/10th of one percentage point. The item that drove the cost rate higher was the notable increase in domestic pack sales against last year. The proportion or mix of pack sales rose 37% due to our improved recruiting. As we discussed on the first quarter conference call, currently the All-Star Pack carries a higher discount against regular associate product pricing. This encourages purchase and is also a selling tool for our business builders and the higher proportion of discounted sales increased product cost.

Commissions and incentives expense was 59.8% in the quarter which was an increase of 12.1 percentage points, compared to the 2008 second quarter. Paid commissions were up 8.8 percentage points from the prior year's quarter and thus accounted for the bulk of the overall increase as the incentive accrual was up 3.2 percentage points.

Paid commissions increased in rate to sales to 54.1%. The increase reflected the effect of both higher domestic and international pack sales as the All-Star Pack carries a high overall bonus and commission rate. The tremendous improvement in our domestic recruiting and the popularity of the All-Star Pack was largely responsible for the increase, with the recruiting numbers triggering a high number of power bonuses and related additional bonuses. These include the fast start and matching bonuses which are monetary rewards for new business-builder associates who grow their downline under specific parameters. Part of the increase also reflected changes in product mix and the proportion of sales generated from each country.

Incentive costs were 5.6% of sales versus last year, which was 2.4% in rate. The first quarter starts the annual travel incentive contest for our associates and the qualifying periods extends essentially through the second quarter. We accrue the costs for our travel winners during both the first and the second quarters. The increased recruiting figures reflect the impact of the attractive incentive travel prizes, along with the reduced cost to purchase the All-Star Pack.

We saw a significantly greater number of winners this year which could indicate a larger group of business-building associates joining Mannatech. About 2,200 won trips this year versus about 900 in 2008. From our perspective on these incentive contests, we will emphasize growth in all phases of our incentive spending to benefit all of our stakeholders. The current pack sales and recruiting results suggests that this incentive will have been effective in that regard.

When we start to roll out the phase two portion of the new All-Star Pack program to our international markets this fall, we will implement some changes to the wide array of pack bonuses paid in the commission plan. These changed parameters will continue to provide strong motivation for both new and existing business-building associates, but will also provide greater predictability of costs and better economics for the company during periods of strong associate recruiting and customer attraction.

As we've mentioned, Mannatech is focused on controlling our operating expenses very tightly. We noted in our last several conference calls that our expense levels were the lowest in years. Our operating costs in the second quarter of 2009 were even lower than the Q4 2008 and the Q1 2009 figures excluding the litigation accrual adjustment in the fourth quarter.

Our total operating costs of just under $30 million were brought down about 21% versus the prior year quarter, a reduction of almost $8 million when adjusted for the litigation charge taken a year ago. Including that charge, our costs were reduced $18.9 million or 37% from last year. We plan on continuing this level of expense control during these uncertain economic times so that as our sales begin to show growth we will be positioned to produce a strong incremental sales flow through profit rate.

Total operating costs of just under $30 million accounted for 38.6% of sales. As we pointed out, this rate and total was down notably from last year and the total gross dollar level was lower by $18.9 million. Compared to last year, selling and administrative costs in total were down by about $4.5 million. Much of the reduction was due to lower salary and related personnel costs, reflecting the reductions in force we chose to take over the course of the last year.

Depreciation was $3.1 million or four percentage points in rate and about $100,000 higher than in 2008. Other operating costs were decreased $14.6 million or 39% compared to Q2 of 2008. This category includes travel, professional fees such as legal and audit, credit card discount, and other banking fees and other such costs.

The largest specific reduction was in legal expenses. We've pointed out that the major items of litigation have been settled, and last year included a large charge to earnings related to litigation. We controlled expenses in virtually every facet of the other operating costs classification and we continue to watch all expense areas closely.

We plan to maintain essentially this tight level of corporate support while a number of our sales and recruiting programs are undergoing refinement and implementation.

Other income and expense showed a positive currency translation impact for the first time in many quarters. We have seen some strengthening in the Australian and the New Zealand dollars and in the Korean won also. The Japanese yen has largely maintained its relative position.

Net loss for the quarter was $5.5 million compared to $10.5 million in the 2008 quarter. Our loss per share was $0.21 diluted for the quarter, last year was a deficit of 40.

Our balance sheet continued to show essentially no long-term debt, and as of June 30th we held $23 million in cash, along with $8.9 million in various types of restricted cash.

Our ending inventory of $31.1 million was relatively flat versus December and up slightly from March. We have safety stocks of several of our fairly expensively larger volume product components and these are responsible for a significant portion of our inventory balance. We paid a dividend of $0.02 per share during the quarter using about $500,000 in cash. We again did not repurchase shares during the quarter.

We had roughly $1.2 million in capital additions, once again mostly system related enhancements which centered on our web presence. We recently launched a new and enhanced version of our website which has proven to be popular, reliable, and much easier to use than before.

To sum up, our critical pulse points, domestic recruiting and pack sales, are improving and have strengthened since the launch in late January of our new All-Star plan. The Mannatech opportunity and the benefits of Mannatech products are helping to provide and maintain financial and physical wellness for our associates and consumers.

We continue to believe this combination together is the best available in our industry and the promise of our recent positive trends is very exciting. The tough decisions in cutting our expense levels and lowering our breakeven point are being maintained. The current difficult economic conditions require close and constant monitoring of costs, which will continue while we cultivate the early signs of recruiting and sales growth.

Thank you for your attention, and now Wayne has final comments.

Wayne L. Badovinus

Thank you, Steve. I have now been at Mannatech for a little over one year. We have accomplished a great deal and learned a lot in the past 12 months, and now we are clearly focused on what we will accomplish in the next 12 months. Looking back, we've created a sense of accountability and attention to detail across our organization for expense control. As stated earlier, our operating expenses are running consistently well below prior year. We settled all outstanding major litigation. The second quarter was the first full quarter in almost two years in which we did not have to divert a considerable amount of time and resources to litigation.

We are now fully focused on growing the business. We launched two major products, OsoLean fat loss powder and BounceBack capsules, which have both proven to be powerful products to the field. We stabilized the declining sales trend and appear to have turned the corner on recruiting. The last six months' recruiting results are extremely noteworthy, and Mannatech was recently named the official nutritional company of the US Open of the International Sports Karate Association. This is the world's most prestigious martial arts organization and competition.

But it is even more fun to talk about the future. Although we have improved sales in recruiting in North America, we are not standing still. Rather, these results indicate just the beginning of where we believe this business is going. It is imperative that you know we are working diligently to launch an extensive number of initiatives in the next six months.

First, the 499 All-Star Pack and Y.E.S. Plan will launch in Europe this fall and will be launched in our Asian markets in January. Second, two weeks ago we announced we will open four markets in Europe in one day; Austria, the Netherlands, Norway, and Sweden. Doing so will create a synergistic impact by proving European associates increased ability to build their business throughout the European Union. This expansion also provides a platform for further expansion.

Third, we finalized the major modernization of our website, The site is receiving a significant amount of traffic as associates transition. Fourth, two additional new products that exemplify the Mannatech brand of unique and proprietary product will launch by the end of the third quarter. Fifth, we are working on other products to expand personal health and wellness. Sixth, updated business tools with a fresh vibrant look and message are soon to be available to our associates. And lastly, our team Mannatech athletes continue to be a great example of how dedicated people can use their skills to manage a growing business.

Athletes understand the power of personal health and wellness. They also understand that the same dedication and discipline learned through success in sports is also required to build a Mannatech business. Their results are impressive and will be a growing part of Mannatech in the future.

This is a long list of initiatives that we have under way. There has never been a time when the entire company has been in the process of launching such a wide variety and quantity of projects, products, and programs, in a short period of time. Our results have improved in the past year and we believe the numerous programs we are launching will expand the foundation for growth in our business. And now we will take any questions you have.

Question-and-Answer Session


(Operator's Instructions) Your first question comes from the line of Peter Park.

Peter Park - Park West Asset Management

Hi. How should I think about commissions as a percentage of sales going forward? Is the second quarter a blip or should we think about it being permanently higher like this?

Wayne L. Badovinus

Hi, Peter, good morning. The commissions rate in the qualifying period each year for our travel incentive contest generally shows an elevation compared to the third and fourth quarters of the year, if you go back and take a look at quarter-over-quarter comparisons.

This year we were very pleased by the high level of recruiting success and frankly by the sheer numbers of new associates attracted to the business and our products. The accompanying number of specific bonuses which I mentioned during the main portion of the call which were triggered by many, many of the new associates that have joined us, elevated the rate higher than we've seen in the past couple of years due to a certain extent because those numbers are much lower in general terms, and the approach that appears to have been taken by a number of our existing and new associates as well is directed towards directly building their downline businesses to a much higher degree than we've seen over the last couple of years.

So I would project that the elevation seen a little bit in the first quarter and then much higher in the second quarter, will begin to return to much more normalized levels as we transition through the third quarter, and further on from there different parameters will be in effect concerning a number of those bonuses, okay?

Peter Park - Park West Asset Management

So you mean that those bonuses will be cut in future periods because —

Wayne L. Badovinus

Actually, the parameter for triggering the bonuses will be strengthened.

Peter Park - Park West Asset Management

So making it harder for people to get those bonuses.

Wayne L. Badovinus

There will be additional results required in order to trigger the bonuses, Peter.

Peter Park - Park West Asset Management

Got it, okay. Let's talk about your cash position, can you walk me through your cash that's available domestically and walk us through how you will fund yourself in future periods?

Wayne L. Badovinus

Well as you're aware we operate in a number of countries around the world and that gives us the ability to move cash to areas where we need it on a fairly regular basis. So we do have quite a bit of movement of cash that goes on during a given quarter and from month to month. There are different times when inventory investment is required, say in some of our international operations and our Swiss office coordinates that. There are other times when we have other needs here. So we have the ability to move the cash around to the points where we specifically need it.

If you look on a quarter-to-quarter basis, the change from the end of March to the end of June in our primary cash number on the balance sheet really reflects the somewhat higher direct paid bonuses and commissions in the second quarter, Peter.

Peter Park - Park West Asset Management

No, that's not where I'm going with this. So what I typically do is I look at your cash that's unrestricted on your balance sheet, which as of March was $26.4 million, and then it's disclosed in the 10-Q that there's $15.7 million that's offshore. There's roughly, I think $2.3 million that you need to pay out for a post-employment related royalty stream, and then you've got — at that time you had $1.6 million for dividends that are payable for the rest of 2009 if you keep going at your run rate. And I had $5 million in cash that you need to pay out for the Texas Attorney General.

So that leaves a pro forma net unrestricted domestic cash position of less than $2 million, and I'm wondering how you're going to fund yourself with cash, given that on a go forward basis? That's my question.

Wayne L. Badovinus

Well, I'm not familiar with all of the timing assumptions which you have made in your calculations, Peter. We also have received a tax refund which, in the March and the June balance sheets is shown as a receivable, but the filing has occurred and since the end of the second quarter period we've also received that cash refund —

Peter Park - Park West Asset Management

Is that the $6.7 million, you received that in cash?

Wayne L. Badovinus

A portion of it.

Peter Park - Park West Asset Management

And when will you receive the rest?

Wayne L. Badovinus

There are different timing periods that relate to different years.

Peter Park - Park West Asset Management

If you keep incurring losses in the future, how much can you get back in taxes from the government?

Wayne L. Badovinus

Well I can't give you a specific figure, but there are operating loss situations and carry-backs which will provide a certain amount, however, I have to make the point that with the current recruiting that we've seen the changes we expect to see in the next couple of months in our overall rate picture, especially the commissions rate, we are doing everything we can to return the company to profitability as rapidly as possible.

Peter Park - Park West Asset Management

Got it. On the balance sheet you have the commissions and incentives payable that went up from $14 million to let's say $16.7 million in the second quarter. What will that number look like going forward? Is it just higher now because you had so much success with your downline recruiting, et cetera, and so that number will trend down in the future periods?

Wayne L. Badovinus

Actually, Peter, what you see on the balance sheet is somewhat of an accrual situation. As you're aware, our accounting is on a quarterly calendar basis so we're looking at March 31st and June 30th. The business with our associates in the field runs on 13 28-day operating periods and commissions are paid on the specific dates during those 28-day operating periods on a 17-day lag basis. Not to take you through all of the details here, but as the company grows with higher sales of pack and/or products, the commissions number in sheer dollars would be expected to continue to grow as well, but the payment date of those commissions is not specifically related to the calendar, if you will, it is related to the 28-day period.

So depending on where we are in the 28-day operating period, you could see a higher number in commissions payable if the payment for the prior period is yet to be made et cetera, so you see where those details come in?


(Operator's Instructions) And there are no further questions at this time. Mr. Spinell, are there any closing remarks?

Gary M. Spinell

Thank you all very much for being with us today, and we look forward to speaking with you at the end of the next quarter.


Thank you, ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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