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Edited Transcript of MTEX earnings conference call or presentation 12-Mar-19 2:00pm GMT

Q4 2018 Mannatech Inc Earnings Call

COPPELL Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Mannatech Inc earnings conference call or presentation Tuesday, March 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfredo Bala

Mannatech, Incorporated - CEO & President

* David A. Johnson

Mannatech, Incorporated - CFO

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Presentation

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Operator [1]

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Greetings, and welcome to Mannatech, Incorporated Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Now I would like to introduce our moderator for today's call, Mr. David Johnson, Chief Financial Officer. Mr. Johnson, you may begin.

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David A. Johnson, Mannatech, Incorporated - CFO [2]

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Thank you. Good morning, everyone. This is David Johnson, and welcome to Mannatech's Fourth Quarter 2018 Earnings Call. Today, you will hear from both me and Mannatech's President and Chief Executive Officer, Al Bala.

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 may, will, should, could, would, expects, plans, intends, anticipates, believes, estimates, approximates, predicts, projects, hopes, potential and continues 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 will make a few comments concerning our 2018 operating results.

Our loss from operations was $0.5 million for the fourth quarter of 2018 as compared to $1.1 million of income from operations in the same period in 2017. Net loss was $1.6 million or $0.66 per diluted share for the fourth quarter of 2018 as compared to a $3.7 million loss or $1.37 per diluted share for the fourth quarter of 2017.

For the year 2018, loss from operations was $0.1 million as compared to $2.5 million of income from operations during 2017. Net loss was $3.9 million or $1.53 per diluted share as compared to a net loss of $1.8 million or $0.66 per diluted share for 2017.

Fourth quarter net sales for 2018 were $44 million, a decrease of $2.3 million or 5% as compared to $46.3 million in the fourth quarter of 2017. During 2018, our net sales declined 1.8%. Favorable foreign exchange during the year increased sales by $1.7 million.

Gross profit as a percentage of sales improved to 79.5% for the 3 months ending December 31, 2018, as compared to 78.7% for the same period of 2018 (sic) [2017]. During 2018, gross profit as a percentage of sales improved to 80.1% compared to 79.8% during 2017.

Commissions as a percentage of net sales were 40.2% for the 3 months ending December 31, 2018, as compared to 40.6% for the same period in the prior year. Commissions as a percentage of net sales for the year 2018 were 39.8% as compared to 40.4% during 2017.

Incentive costs as a percentage of net sales were 3.4% for the 3 months ending December 31, 2018, as compared to 2.8% for the same period in 2017. Incentive costs as a percentage of net sales were 2.5% for 2018 as compared to 1.8% for the same period of 2017.

For the 3 months ending December 31, 2018, overall selling and administrative expenses decreased by $0.2 million to $8.5 million as compared to $8.7 million for the same period in 2017. The decrease in selling and administrative expenses consisted primarily of a $0.1 million decrease in payroll-related costs and marketing costs and a $0.1 million decrease in warehouse costs.

For the year ending December 31, 2018, overall selling and administrative expenses decreased $1.3 million or 3.7% to $34.2 million as compared to $35.5 million for the same period in 2017. The decrease in selling and administrative expenses consisted of a $1.8 million decrease in payroll-related costs as we had a greater number of employees in the prior comparative period and a $0.2 million decrease in marketing costs. These decreases were partially offset by $0.6 million increase in stock-based compensation expense.

For the 3 months ending December 31, 2018, other operating costs increased by $1.2 million to $7.4 million as compared to $6.2 million for the same period in 2017. The decrease in other operating costs was primarily due to an increase in legal and consulting fees as well as travel and entertainment costs associated with our corporate-sponsored events.

For the year ending December 31, 2018, other operating costs increased by $2.8 million or 10.6% to $29.4 million as compared to $26.6 million for the same period in 2017. The increase was due to a $1.5 million increase in office expenses, largely attributed to the $1.3 million nonrecurring cost of moving to a new corporate headquarters; a $0.7 million increase in travel and entertainment costs associated with corporate-sponsored events; a $0.5 million increase in legal and consulting fees; a $0.2 million increase in bad debt expense; a $0.1 million increase in accounting and auditing fees, offset by a $0.1 million decrease in credit card fees and a $0.1 million decrease in auto and equipment lease costs.

For the year ending December 31, 2018, our tax provision was $4.4 million, and for the comparable period of 2017, $4.3 million. For 2018, the company's provision was impacted by the mix of earnings across jurisdictions, the valuation allowance recorded on losses in certain jurisdictions and the impact of the global intangible low tax income, GILTI, as a result of the Tax Cuts and Jobs Act passed last year. For 2017, the company had a significant increase in its rate due to the impact of this act. Items increasing the provision that year included the Section 965 transition tax, return to provision of prior adjustments and a change in the valuation allowance.

The approximate number of new and continuing independent associate and preferred customer positions held by individuals in Mannatech's network and associated with purchases of our packs and products as of December 31, 2018, and 2017 were approximately 200,000 and 215,000, respectively. Recruiting decreased 2.4% in the fourth quarter of 2018 as compared to the fourth quarter 2017. The number of new independent associate and preferred customer positions in the company's network in the fourth quarter of 2018 was approximately 20,000 as compared to 21,000 in 2017.

In reviewing the balance sheet, at December 31, 2018, our working capital, defined as total current assets less total current liabilities, decreased to $8.8 million at December 31, 2018, as compared to $22.8 million at December 31, 2017.

During 2018, our finished goods inventory turns decreased to 2.41 compared to 2.78 during 2017. Our net inventory balances increased to $12.8 million at December 31, 2018, as compared to $9.4 million at December 31, 2017.

Total current liabilities increased by $0.2 million to $33.6 million at December 31, 2018, as compared to $33.4 million at December 31, 2017.

Our cash, cash equivalents and restricted cash decreased by 34.6% to a balance of $30.6 million as compared to $46.8 million on hand at December 31, 2017. Our net cash outflow during 2018 was $16.2 million as compared to a net cash inflow of $10.1 million for the same period of 2017.

For the year ending December 31, 2018, on declining sales and profitability, we used $0.2 million cash to fund operations compared to the same period of 2017 when operations generated $10.3 million in cash.

During the year ending December 31, 2018, we invested $2.2 million in computer hardware and software, $1.9 million for leasehold improvements and $0.5 million in office furniture and equipment.

For the year ending December 31, 2018, our financing activities included repayment of $1.5 million for capital lease obligations. We are proud to return shareholder value with $3.1 million for dividends paid to shareholders and the repurchase of $7.5 million in our common stock.

At this time, I will turn the call over to Mannatech's CEO, Mr. Al Bala.

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Alfredo Bala, Mannatech, Incorporated - CEO & President [3]

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Thank you, David. And hello, everyone, and thank you for joining us on our fourth quarter earnings call for 2018. I'm Al Bala, Mannatech's CEO and President, and I'll discuss the company's fourth quarter and, generally, the year 2018.

As David outlined, our net sales for the fourth quarter was down 5% compared to the same quarter last year with an operating loss of $0.5 million. There are 2 primary reasons for this. Number one, an intentional shift from less profitable promotional activities during the holiday season, which impacted revenues but also will serve to strengthen our margin as well. We had a change in senior leadership in South Korea, our largest market, and the market experienced a temporary slowdown that has already begun to turn around as the sales field and top leadership embraces our newly hired general manager.

However, for the year 2018, our overall loss from operations was slight at $90,000 compared to income from operation of $2.5 million in 2017. There are 3 primary reasons for this loss.

Firstly, as we scaled up capabilities in Hong Kong, we experienced $1 million higher shipping and warehousing costs. We knew going into this very strategic move that we would have to sacrifice some margin for a short time as we scale up our logistic infrastructure to better support our customer experience and continued market expansion. An aggressive plan is in place for correcting these margins in 2019.

Secondly, due to a higher-than-anticipated participation, our expenditures on incentive, especially in Hong Kong, and our 3 major global events were higher than planned, specifically, our Leadership Summit, our Global and Korean manifests. Management has developed cost control processes to prevent these kinds of issues in the future.

Thirdly, we incurred a nonrecurring $1.3 million cost to move our headquarters to a new building in Flower Mound, Texas. This relocation helped us to better serve our employees, customers and independent sales associate while avoiding a large rent increase. We feel that the efforts and investment made in our relocation and the new compensation program, along with launching several new products, has us well positioned for growth.

The first new product we launched in 2018 was Ambrotose LIFE. Our Ambrotose product have been at a call for most of our 25 years. Ambrotose LIFE marked a significant improvement in our Ambrotose offering. We introduced Ambrotose LIFE early in 2018 in the U.S. and launched it in other markets throughout the year.

The second new product we launched in 2018 was an all-in-one EMPACT+ performance drink mix. EMPACT+ recently received approval from the Banned Substances Control Group, BSCG, allowing it to use by all professional and amateur sports organization, professional sports leagues, NCAA and Olympic athletes.

The third new product we launched in 2018 was Mannatech Men's PRIME 7. This comprehensive men health product was introduced as a limited time-only product in the fourth quarter and quickly sold out. We have made it a permanent addition to our product line, and we'll be rolling it out into additional markets.

The fourth new product we launched in 2018 is our Uth Lash Serum. It is our first cosmetic product, and it is -- it was also introduced as a limited time-only product in the fourth quarter. It also sold out rapidly, and we have now made it a permanent addition to our product line.

To make -- to help make things easier for our associate to begin new selling conversations, we introduced a sampling program for our products EMPACT+, Ambrotose LIFE and our TruPLENISH shake. We have continued to attract new independent associate and preferred customers to the company, and our focus on creating a culture of recruiting has begun to bear fruit. We attracted 84,860 new independent associates and preferred customers into our ranks over the last 12 months. We welcome that growth, and we believe that it is a leading indicator that we will watch very closely.

As we look across the globe, our activity in Asia continues to go well, particularly in Hong Kong. For the year 2018, we saw a 20.9% increase in revenue per active associate and preferred customer, which can be in part explained by the consolidation of accounts due to the maturation of the compensation plan.

Overall, sales in Asia increased by 2.9% to the tune of $2.9 million, which we largely attribute to excitement surrounded the release of Ambrotose LIFE in Hong Kong and Korea. Our Thailand incentive for Greater China also helped incentivize growth in our Hong Kong market.

Across Europe and the Middle East and Africa, or the EMEA region, South Africa revenues continue to grow, with revenue up about 4.6% year-over-year. In the Americas, sales were slightly down overall as order volume continues shifting to Hong Kong and Greater China. Our bright spot this year continues to be Mexico, which recorded double-digit growth in both sales volume and the enrollment of new independent associate and preferred customers.

We have been working to strengthen our network and marketing language and proposition in a strategic effort to bolster recruiting and attracting new associates. And it has been a very positive sign to be attracting so many new customers and independent associates. We are very strategically facilitating the development of hotspots in North America, where the Chinese-speaking audience is growing such as in Texas, California and Washington state.

Lastly, in concert with our Board of Directors, we have made it a point to return more cash to our shareholders by temporarily increasing the dividends to a $0.50 per share during the second and third quarter of 2018. These dividend payments coincided with a recent stock buyback that highlights our commitment to continuing to increase shareholder value. As we remain -- and we remain committed to creating shareholder value through a continued program of institutional cost control and by continuing to strategically invest in the development of new products and programs, which can improve our top line growth and bottom line profitability.

Thank you for joining us on the call here today.

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Operator [4]

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Thanks for listening to Mannatech's Fourth Quarter 2018 Earnings Call. As a reminder, the company's information and filings can be found on the company's Investor Relations website at ir.mannatech.com or by reviewing the SEC submissions. This concludes today's call.