Mannatech Inc., Q1 2008 Earnings Call Transcript

| About: Mannatech, Incorporated (MTEX)
This article is now exclusive for PRO subscribers.

Mannatech Inc. (NASDAQ:MTEX) Q1 2008 Earnings Call May 12, 2008 10:00 AM ET


Terry L. Persinger - Chief Executive Officer and President

Stephen D. Fenstermacher – Chief Financial Officer

Gary M. Spinell – Vice President of Finance and Investor Relations


Brian Alger – Strata Capital Management

James Mount – Multi-Financial Security

Peter Park - Park West Asset Management


Greetings and welcome to the Mannatech Inc. First Quarter 2008 Earnings Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Terry Persinger, President and CEO of Mannatech. Thank you. You may begin.

Terry L. Persinger

Good morning and thank you. This is Terry Persinger, President and CEO of Mannatech, and I welcome you to our First Quarter 2008 Earnings Conference Call. With me today are Steve Fenstermacher, Chief Financial Officer, and Gary Spinell, Vice President of Finance and Investor Relations. Before we discuss the quarter, I’ll turn the microphone over to Gary Spinell to read the Safe Harbor Statement.

Gary M. Spinell

Thank you, Terry. During this conference call, we may make forward-looking statements, which could 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, expect, potential, should and planned 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. Thanks and now I’ll turn the call back over to Terry.

Terry L. Persinger

Thanks, Gary. As we reported last Friday, first quarter sales and earnings were below last year’s first quarter. The continuing soft sales and recruiting trend began in mid-2007 partly due to the Texas Attorney General’s announcement of litigation. Sales and recruiting have also been impacted by our year-long transition to a new business development system that repositions our company at the forefront of the wellness industry.

Although we are disappointed with the current sales and earnings performance, we have made additional progress since our last call in addressing the issues and repositions the company for long-term growth.

Our balance sheet continued to show essentially no long-term debt, and for March 2008 we showed more than $60 million in total cash and investments. Sales in the quarter were $91.5 million, 12.7% below first quarter 2007 sales of $104.8 million.

The shortfall occurred in our domestic business, which was more deeply impacted by the overhang of negative publicity and ongoing litigation as well as the weakening domestic economy and the changeover to the new business development system. Domestic sales, which include the U.S. and Canada, declined 23% versus first quarter 2007.

In the same period international sales grew 14% over prior year, reflecting growth primarily in our Asian markets. Sales in the Republic of South Korea were up almost 50% a year ago, while Japan sales were up over 17% in the first quarter of 2008 compared to the same quarter in 2007. Australia was up slightly and is moving in a positive direction after over a year of soft sales.

For the first quarter 2008, we reported a loss of $2.3 million versus a first quarter 2007 net income of $6.9 million. On a pretax basis the first quarter of 2008, we reported a loss of $2.8 million compared to pretax income of $10.4 million for the same quarter in 2007. The loss per share was $0.09 in the quarter compared to $0.26 diluted earnings per share in first quarter 2007.

Net income was impacted by higher marketing and IT expenses along with higher depreciation expense. We made progress in reducing the base expenses compared to the fourth quarter of last year. However, operating expenses were up year over year due to the end-of-quarter launch of our new business development system and associate marketing materials. Steve Fenstermacher will discuss this in greater detail later.

Total independent associates and members at the end of the first quarter 2008 were 570,000 based on a trailing 12-month period. This was a year-over-year growth of 3.1% or an increase of 17,000 independent associates and members versus the first quarter of 2007. Continuing associates and member were up 10.1% or an increase of 36,000.

New recruits were down 9.6% predominantly in the domestic market. As I stated earlier, domestic recruiting has been impacted by the overhang of litigation along with the transition to a new business sales system end of quarter. As the first quarter ended, we announced a settlement in the class action litigation pending court approval.

We continue to be actively engaged in discussions with representatives of the Texas Attorney General’s office, which we believe have been productive. We expect these discussions to continue and ultimately provide the framework for resolution of this matter. Of course, we are still in litigation, and there are no assurances in litigation.

Also, this morning we announced that a federal court jury validated our glyconutrient patent by finding GlycoProducts International infringed Mannatech patent and trademark related to Ambrotose. We are extremely pleased by these outcomes and will continue to vigorously defend our technology and cutting-edge research and development in the groundbreaking field of glyconutrients.

We have 45 registered patents around the world, 5 in the U.S. and 40 internationally, and we have an additional 85 patents pending worldwide. We believe these favorable rulings reinforce our leadership position as a developer and provider of high-quality nutritional supplements. This, along with the class action food settlement, is very positive for our business associates and will help propel our business forward.

On our last call we discussed the key initiatives we are taking to address both the current performance issues and to position the company for long-term growth. Although it is too early to see the impact of our completed initiatives, we are making progress towards repositioning our company at the forefront of the wellness industry.

Building a global business development system requires that we provide our associates with the appropriate business materials and an infrastructure to support the new system. The goal is a global reproducible business system to provide steady growth on a global scale. We have completed major building blocks over the last year to enable future growth.

In early 2007 we launched our ERP system GlobalView, enhancing our global seamless downline commission capability to support existing international operations as well as further expansion. Last summer we implemented the initial phase of our wellness repositioning by directing all associates to discontinue usage of third-party materials and testimonials. And at the same time, we instituted 180-day satisfaction guarantee.

In October we subsequently enhanced our new business development system with the launch of a sales program called Ready, Set, Go. Earlier this year, we completed the next phase, which introduced a web redesign. This initiative is part of an ongoing goal to continually provide associates with state-of-the-art business tools.

The culmination of these efforts took place in March at our annual convention MannaFest. We announced the availability of the new materials as part of our global business development system. These materials are to be used in conjunction with our sales and marketing strategy Ready, Set, Go, Give, which emphasizes an outreach to potential customers with product samples.

We believe many new customers who become familiar with Mannatech products will join thousands of associates whose orders are on automatic shipment basis. In addition if customers are not satisfied, our new satisfaction guarantee allows them to feel comfortable that any unused product can be returned for up to six months after purchase for a full refund.

We also announced the global availability of our Optimal Skincare System and the launch of a new wellness product BounceBack. This supplement is an all-natural product that supports recovery after physical activity or overexertion.

Going forward, we believe that the new business development system will drive recruiting and reverse the decline in sales. Associates are now better equipped to not only present information on our proprietary products but also to detail the unique and attractive business opportunity Mannatech offers.

Mannatech combines one of the highest commission rates in the industry with proprietary leading-edge wellness products in a seamless downline commission structure. This business development system highlights the opportunity for potential income, which is particularly relevant in today’s weak economy.

In addition our new system strengthens the long-term earning opportunity. With the launch of our global system, we look to the remainder of 2008 to focus on four priorities. Number one is regaining sales and recruiting momentum in our domestic market; number two, restoring profitability through cost reduction; number three, integrating the new business development system throughout our associate downlines; and number four, geographic expansion.

I’d like to review each of these in a little more detail. While the business development system is being rolled out, our annual global travel incentive, which will come to a close at the end of May, is focusing on regaining sales and recruiting momentum. As associate excitement builds to meet the required travel goals, we are considering launching another domestic incentive program in June. We have found that incentives do work.

Now that the cost related to the new business system and manifest are behind us, our next priority is profit improvement. We are aggressively reviewing operational expenses across the company. At the same time, we are working to improve our gross profit margin.

Our focus in the next few quarters will be to work with our associates to fully integrate the new business development system throughout their downlines. We are pleased that the new system and support materials have been well received by associates, but as is always the case, integration throughout extensive associate base will take some time. We are currently conducting launch and follow-up activities in various locations as we roll out the new program.

And last as with the GlobalView system fully operational, we are now turning our sights towards geographic expansion and just announced the opening of South Africa last month. This market has a rich tradition of using nature’s biodiversity to help address quality of life and optimal health. We are in the midst of staging launch activities that will continue for a couple more weeks. The response last week has been great with several thousand having attended meetings throughout the country.

In addition to these initiatives and as an update, our CEO search continues as our Board has been actively interviewing well-qualified candidates. I will now turn the call over to Stephen Fenstermacher, our CFO. Steve?

Stephen D. Fenstermacher

Thank you, Terry, and good morning, everyone. The first quarter results for both sales and operating earnings were again below last year and also failed to achieve our expectations. Our deficit of $0.09 per share improved from the fourth quarter of 2007 by about 30% with Q4 posting a loss of $0.13 per share.

We spoke in the last earnings call of the reserves, which related to several pieces of litigation in Q4. The first quarter 2008 deficit, however, largely reflected the decreased level of domestic sales and recruiting, which was experienced over the last three months.

Despite the reduced operating earnings in the quarter, our financial condition remains strong. Our balance sheet continued to show essentially no long-term debt, and for March 2008 we showed $58 million in cash.

The continuing slow sales pattern in North American could have been expected to cause some distortion in our product cost rate, but instead we were able to control our supply chain cost rate to the more normalized level we achieved in the fourth quarter of 2007.

Our cost-of-goods-sold rate was lowered to 14.1% for the quarter, essentially even with the 2007 prior year three-month period. Our product cost rates in the middle two quarters last year were elevated due to customer satisfaction-relation product giveaways and reserves caused by problems encountered with certain skincare items.

The rate in the fourth quarter saw a return to a more normal level, which has continued into 2008. We now have our skincare products manufactured in Japan for sale here in North America and were pleased with the initial sales reaction of our associates since the reintroduction of the skincare line during this first quarter.

Commission and incentives expense was 46.4% in the quarter, which was down slightly from the 2007 fourth quarter but was up 1.6 percentage points compared to the 2007 first quarter. Accrued travel incentive costs were essentially even with last year in rate while paid commissions were responsible for the overall increase.

Paid commissions rose in rates of sales reaching 43.3%, which as higher than last year by 1.6 percentage points. The increase reflected changes in the overall product mix, the proportions of sales generated from each country and the mix of pack sales and product sales as well.

We stage our Global Associate Travel Incentive qualifying period each year beginning in January and ending in mid-May, during which our independent associates can win great travel packages by increasing their Mannatech businesses above specific growth hurdles. We accrue the expected cost for these trips during the first and second quarters during qualification, so these two quarters usually show heavier incentive charges when compared to the second half quarters.

Incentive costs were 3.1% of sales in Q1, which was even against 2007. Each operating region around the world participates in the travel incentive, and each region hosts their associate winners at a specific regional resort as their prize. These travel incentives have become very popular with our associates and can usually be counted upon to generate a greater excitement level as well renewed business growth activity.

Total operating costs of $39.8 million accounted for 43.6% of sales. This rate in total was 11.8 percentage points above last year or $6.5 million. Depreciation from the new GlobalView system increased by about $1.6 million and was 3.3 percentage points in rate.

Compared to last year, staff costs were up over $1.1 million due to the unfavorable variance in internal salaries, which in Q1 of 2007 were still capitalized due to the ongoing configuration work on the GlobalView system.

Contract work, mainly on the system and several consulting projects in our sales and marketing area, also resulted in cost increases from last year as well. The cost of development of Go-Give, our new business development system, was largely contained in the quarter and involved considerable internal assets as well as significant outside consulting expense deployed against the project.

We hold our annual global associate event here in Dallas/Fort Worth each March called MannaFest. This event gathers together Mannatech associates from around the world and provides a forum to discuss with them new products and plans, which have been prepared by the company.

We utilized this opportunity to provide specific training and background to our associates concerning the new business development system entitled Go-Give. As Terry explained, this concept allows and encourages our independent associates to show and demonstrate the products offered by Mannatech to people who are interested in supplements and possibly the business opportunity as well.

This concept folds product demonstration and explanation into the ability to give gifts of product samples to interested people in a manner which fits the giving philosophy of Mannatech and also can create a welcome experience for the associate as well as the recipient of the gift.

We believe the concept and related materials were well received by the associate as we are pleased with the initial reactions in the field. It is too early to gage the impact but we have been impressed with the level of enthusiasm expressed by our associate leaders concerning the program.

Manifest carries a considerable cost into each first quarter and this we developed some new designs for the events to concentrate a attendee interest on specific subject. This involved additional costs as we added significantly to the event on a year to year comparison. We consciously planned to make Manifest 2008 the best event we have ever staged. We are looking forward to see how the new business development systems blooms and impacts the business over the remainder of 2008.

In addition we had increased professional costs in several categories. Higher audit expense was due to the timing of the engagement of BDO Seidman as our independent external auditors in the fall of 2007. And higher consulting costs in the IT area as last year most of these types of expenses were eligible for capitalization.

However, legal costs decreased compared to the first quarter of 2007. You may recall that we announced the settlement of the class action lawsuit in late March. We are looking forward to completion of the other suit involving the company and moving forward to address the challenges of growing the business on a global basis.

Our pre-tax loss of $2.8 million was related to all of these factors previously discussed and was 3.1% of sales falling from the $10.4 million pre-tax profit of a year ago. EPS was a deficit of $0.09 cents per share based on the net loss after tax figure of $2.3 million.

Once again our balance sheet in March was still strong with $58 million in cash and essentially no long-term debt. Our financial position is strong with equity continuing to comprise the bulk of our capital structure.

Our ending inventory grew about $2.3 million to $26.1 million reflecting two items. First the product samples and related materials for the go gift program arrived in late March to coincide with the launch at Manifest. And also our domestic skin care product re-launch kicked off in February with fresh, new inventories manufactured in Japan.

Our supply chain staff was again successful in limiting inventory investment in our other established products through continued work against product lead times and good flow estimation processes. We will continue to focus on this project throughout 2008.

We paid a dividend of $0.09 cents per share during the quarter which was about $2.4 million in cash usage. And also in April our board declared our 17th dividend payment again for $0.09 cents per share for which the date of record is June 5th, 2008. The payment dates for the dividend is June 26th, 2008. Mannatech intends to encourage long-term ownership of its stock to our continue dividend program.

We did not purchase shares in the market during the first quarter. We have an open to buy allotment of $20 million from the board so that under certain market conditions we may engage in additional repurchases. Recent events have constrained us from going into the market for stock buy backs.

In summary we acknowledge that we do have continuing challenges in the North American market related to sales and associate recruiting. And also that we have additional challenges related to our operating costs in some areas.

However, we feel that a significant step was taken in the first quarter concerning our legal issues with the settlement of the class action suit. And we have begun the new go give business development system which should be rolled out in the rest of our markets around the world by the fourth quarter 2008. Thanks for listening to our call. And now Terry has some wrap up comments.

Terry Persinger

Thank you, Steven. Although we are not satisfied with the current results we have made significant stride in the turning the corner by creating a business development system that strengthens our associate business opportunity. At the same time the repositioning of our business addresses the ever growing consumer demand for optimal and wellness products.

The new system is now in the hands of our associates and our goal is to help them fully integrate this program into their day-to-day business activities. We are confident that this new model lays the foundation for future growth. We know all this will take some time. I have every confidence that our management team and associates will continue to drive the necessary initiatives to generate growth and improve our ability to return value to our shareholders.

Thank you for your continued support and participation. Now I will turn the call over for questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen at this time we will be conducting the question-and-answer session. (Operator Instructions) Our first question comes from the line of Brian Alger with Strata Capital Management.

Brian Alger – Strata Capital Management

Good morning guys. Thanks for hosting the conference call.

Terry Persinger

Good morning.

Brian Alger – Strata Capital Management

A number of questions, I guess first on the cash flow side of things. Obviously a tick down, I am curious in terms of prioritization of managing the cash, are we looking at continuing the dividend basically regardless? And if that is the case do we take precedence or preference to that over reducing costs whether that is through lowering commissions or internally?

Stephen D. Fenstermacher

Well specifically I will address a comment that I made in the body of our presentation. The company and the Board of Directors believes that dividend payment is important and continues to stress dividend payment. We have become very regular with our dividends and the intent of the board under normal operating conditions, I believe is to continue with payment of dividends.

In terms of contrasting dividend payment to other opportunities for the company, I do not think there is really a comparison there. We want to continue to work to make our operating numbers much more efficient. We have had specific projects to address over the course of the last year.

And the depreciation from the new system is now annualizing in our second quarter. And obviously that is not a direct cash situation but we do intend to make our operating numbers more efficient on a continuing basis. And we believe that we are making good progress towards the additional consulting costs that have been necessary and moving those out throughout the remainder of 2007. Okay?

Brian Alger – Strata Capital Management

Yes that was hopeful. And I guess looking at the sales decline year on year, obviously a lot of things have occurred since first quarter of ’07 and I know it is difficult to quantify. But maybe if you could take a stab at it, how much of the decline in North America, I think you said it was a little over 20% year on year, how much of that decline do you think it is attritable to the lawsuit from the Texas AG versus how much is due to swelling economy and people having less disposable income to spend on supplements?

Terry Persinger

Well, this is Terry Persinger. You are right. It is hard to quantify. But you need to remember that these are independent self-directed associates whose confidence in what they are doing and in the company is very, very important. So it is hard to quantify the effect of the attorney general effort. But it is has been very, very large. The economy influences are probably building as we speak. So it is hard to give you a percentage between the two but I think both are a factor.

Brian Alger – Strata Capital Management

Okay. So maybe as the Texas AG issue winds itself it down, we probably still need to be cognitive of what is going on in the economy?

Terry Persinger

Oh yes I think so.

Brian Alger – Strata Capital Management

Okay. And one last one guys if I might. You mentioned that there was a number of recent events that prevented you from buying back shares. Can you maybe tell us what those events were?

Stephen D. Fenstermacher

Well, I cannot go into specific detail but obviously with having several pieces of litigation going on concurrently there are situations which the company is aware of that the normal investor would not be aware of. In those cases we are treating our situation very conservatively and hopefully as things wind down we will be able to address that situation in the market.

Brian Alger – Strata Capital Management

Great, guys thanks for answering the question.

Stephen D. Fenstermacher

Thank you.


(Operator Instructions) Our next question comes from the line of James Mount [ph] with Multi-Financial Security [ph].

James Mount – Multi-Financial Security

Thank you. Good morning. My question is on the go giver program and the third party tool, did I understand that you have taken third party tools out all together or are they still being reviewed by the company or like to [Inaudible] back or what is the deal on that?

Terry Persinger

I actually meant to say that certain third party materials are taken out. I noticed when I went over the body of it I left that out. So we are evaluating certain third party materials and also greatly increasing the materials that we produce in house to support the go give concept. Throughout this, this is a huge exchange for us.

But it gives us the opportunity to make sure that we have a congruent sales program worldwide. Because we are finding that it is just huge because – for instance. We have a number of Korean associates on the West Coast and throughout the United States. When you consider that the approaches in both South Korea and United States have to be coordinated better. So this can have a huge impact on our business.

James Mount – Multi-Financial Security

Okay so those are still allowed then as long as the company has reviewed them, is that basically what I am hearing you say?

Terry Persinger

That is correct. As long as we have review and certify them.

James Mount – Multi-Financial Security

Okay, thank you.


(Operator Instructions) Our next question comes from the line of Peter Park with Park West Asset Management.

Peter Park - Park West Asset Management

Hi. Can you give us a sense of what the impact of currency was on your sales and margins? Thanks.

Stephen D. Fenstermacher

Yes this is Steve. On a net basis we had very little impact of currency in the quarter. We are operating in a sufficient number of international market that, these days, with the movements of many different currencies both up and down we are not specifically under the influence of one change or another versus the dollar. So it was relatively small for the quarter.

Peter Park - Park West Asset Management

Do you have it in numbers? Because you are obviously in a lot of different geographies.

Terry Persinger

Yes that is an item we have not disclosed specifically.

Peter Park - Park West Asset Management

Was the impact of currency positive as it relates to your impact on sales? Because I think the US dollar is weaker against most of those currencies.

Terry Persinger

Yes it was favorable by relatively small amount.

Peter Park - Park West Asset Management

Okay. Thanks.

Terry Persinger

Thank you.


(Operator Instructions) Seeing as there are no further questions I would like to turn the call back to management for any concluding remarks.

Stephen D. Fenstermacher

We just want to thank everyone for their participation and for their clarifying questions and we look forward to the next quarter and the next call.


Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!