Mannatech, Incorporated (MTEX) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Mannatech, Incorporated Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Now I would like to introduce our moderator for the call today, Mr. David Johnson, Chief Financial Officer. Mr. Johnson, you may begin.

Thank you. Good morning, everyone. This is David Johnson, and welcome to Mannatech's Second 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 will, continue, may, believe, intend, expects, potential, should, could, would anticipate, estimate, project, predict, hope, deal or 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. In addition to results presented in accordance with GAAP, I will discuss a non-GAAP financial measure, constant dollar net sales, which is sales that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars. I believe that this non-GAAP financial measure provides useful information to investors as it is an indicator of the strength and performance of our ongoing business operations. This non-GAAP financial measure should not be considered an exclusive alternative to accompanying GAAP financial measures. A reconciliation of this non-GAAP financial measure to the mostly directly compatible GAAP measure is available on our recently filed 10-Q under the heading Non-GAAP Financial Measures. At this time, I will make a few comments concerning our second quarter of 2018 operating results. Net loss was $0.4 million or $0.14 per diluted share for the second quarter of 2018 as compared to a net income of $1.8 million or $0.65 per diluted share for the second quarter of 2017. The second quarter of 2018 net sales decreased by $2.6 million or 5.3% to $45.1 million compared to net sales of $47.7 million for the second quarter 2017. For the 3-month period ending June 30, 2018, our net sales declined 7.3% on a constant dollar basis, favorable foreign exchange caused a $0.9 million increase in GAAP net sales as compared to the same period in 2017. For the 6-month period ending June 30, 2018, our net sales declined 5.1% on a constant dollar basis. Favorable foreign exchange caused a $2.7 million increase in GAAP net sales as compared to the same period in 2017. The net sales comparisons for the 3 and 6-month period ending June 30, 2018, and June 30, 2017, were also affected by the average value of product orders and the number of pack and associate fee orders placed. For the 3 months ended June 30, 2018, average product order value increased 15.2% to $205 as compared to $178 for the same period in 2017. We launched a new commission plan July 1, 2017, and the number of packs sold to and associate fees paid by new and continuing independent associates and preferred customers decreased 22.6% during the second quarter of 2018 compared to 23,779 as compared to 30,734 during the same period in 2017, as our associates consolidate their businesses to respond to this new commission plan. This consolidation also influences the total number of active associate positions held by individuals in our network, which was based on a 12-month trailing period ending June 30, 2018, and 2017, approximately 202,000 and 218,000, respectively. For the second quarter of 2018, our operations outside the Americas accounted for approximately 61.6% of our consolidated net sales compared to 59.1% of our consolidated net sales for the second quarter 2017. Asia Pacific net sales decreased by $0.2 million or 0.8% to $24.5 million in the second quarter of 2018 as compared to $24.7 million for the same period in 2017. This decrease was primarily due to a 19.8% decline in the number of active independent associates and preferred customers, which was partially offset by a 23.6% increase in revenue per active independent associate and preferred customer. During the 3 months ending June 30, 2018, the loyalty program increased sales by $0.6 million as compared to the same period in 2017. Foreign currency exchange had the effect of increasing revenue by $0.8 million for the 3 months ending June 30, 2018, as compared to the same period in 2017. The currency impact is primarily due to the strengthening of the Korean won, Japanese yen, Chinese renminbi, Australian dollar, Taiwanese dollar, Singapore dollar, partially offset by the weakening of the Hong Kong dollar. In Europe, Mid East and Africa or EMEA, net sales decreased by $0.2 million in the second quarter of 2018 to $3.3 million as compared to $3.5 million for the same period in 2017. The decrease was primarily due to a 21.6% decline in revenue per active independent associate and preferred customer, which is partially offset by a 20.2% increase in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of increasing revenue by $0.2 million for the 3 months ending June 30, 2018, as compared to the same period in 2017. Currency impact is primarily due to the strengthening of the South African rand, the euro and the British pound. America's net sales decreased by $2.2 million in the second quarter of 2018 to $17.3 million as compared to $19.5 million for the same period in 2017. This decrease was primarily due to a 9.6% decline in revenue per active independent associate and preferred customers as well as a 1.8% decrease in the number of active independent associates and preferred customers. Our operating loss for the second quarter of 2018 was $0.3 million as compared to an operating income of $2.8 million for the second quarter of 2017. During the second quarter of 2018, selling and administrative expenses decreased to $9.6 million as compared to $10 million during the second quarter of 2017. The decrease in selling and administrative expenses consisted of a $0.6 million decrease in payroll costs for our headquarters, Japan, Australia and Europe offices, a $0.4 million decrease and marketing related costs, offset by a $0.5 million increase in stock-based compensation expense and a $0.1 million increase in distribution and warehouse costs. For the 3 months ending June 30, 2018, other operating costs increased by $1.2 million or 18.3% to $7.9 million as compared to $6.7 million for the same period in 2017. For the 3 months ending June 30, 2018, other operating costs as a percentage of net sales increased 17.4% from 14% for the same period in 2017. The increase in operating costs was primarily due to a $0.5 million increase in travel and entertainment, a $0.4 million increase in office expenses, partially due to the nonrecurring office expenses we incurred with the corporate office move and a $0.3 million increase in other miscellaneous operating expenses. In reviewing the balance sheet at June 30, 2018, our cash and cash equivalents decreased 23.6% or $8.9 million to $28.8 million from $37.7 million as of December 31, 2017. During the 6 months ending June 30, 2018, we invested approximately $0.4 million in back office software projects, approximately $0.3 million in leasehold improvements and $0.3 million in furniture and equipment. We also required an additional $1.3 million in leasehold improvements for the new corporate offices through financing arrangements and an additional $0.9 million in back office software projects through capital financing arrangements. For the 3 and 6 months ending June 30, 2018, and 2017, the company's effective tax rate was approximately 360% (sic) [ 36.0% ] and 45%, respectively, as compared to 37% and 37% for the same periods in 2017. The effective tax rates for the 3 and 6 months ending June 30, 2018, were different from the federal statutory rate due to the mix of earnings across jurisdictions, add-back transactions from foreign loss positions in certain jurisdictions and the impact of the global intangible low tax income as a result of the Tax Cuts and Jobs Act. Our working capital defined as total current asset plus total current liabilities was $12.9 million as of June 30, 2018, compared to $22.8 million at December 31, 2017. Our net inventory balance increased by $0.9 million to $10.3 million at June 30, 2018, as compared to $9.4 million at December 31, 2017. During the 3 months ending June 30, 2018, finished goods inventory turns increased to 2.6 as compared to 2.5 for the same period in 2017. Also during the second quarter of 2018, we paid $0.3 million in dividends. In a Dutch auction tender offer, the company purchased 316,659 common shares of the company at a cash purchase price of $21 per share for a total cash investment of $6.6 million, excluding fees related to this tender offer. These common shares represented approximately 11.6% of the company's total outstanding shares at April 30, 2018. At this time, I will turn the call over to Mannatech's CEO, Mr. Al Bala.

Thank you, David. Hello, everyone, and thank you for joining us on our second quarter earnings call for 2018. I am Al Bala, Mannatech's CEO and President, and I would like to discuss the company's second quarter. Our second quarter kicked off in April with our annual global event, MannaFest 2018, where 10 days from around the world, we introduced the most powerful Ambrotose product ever, Ambrotose LIFE powder. For more than 20 years, Ambrotose has been recognized as one of the most powerful nutritional supplements in the world, one that supports the immune system, improve cognitive functions and supports gastrointestinal health. We have sold more than $3 billion worth of Ambrotose, and we believe the newly formulated Ambrotose LIFE will do more than -- for people's health than any other combination of product ever developed. Attendees were also introduced to another product in the sports and fitness category, we call it EMPACT+. The new all-in-one fitness drink is the first sports drink to ever combine the major elements of fueling, hydration and recovery into a single drink. The EMPACT+ fitness drink is a natural alternative to sports and energy drink that contains stimulants, artificial colors and/or artificial sweeteners. This new drink is designed to increase endurance and shorten recovery time in elite athletes and anyone with an active lifestyle. It's also a wonderful complement to our popular to our TruHealth Fat-Loss line of product launched in 2016. We sold more than $4 million worth of product in one weekend, a testament to the enthusiastic response of our global leaders to the newly introduced Ambrotose LIFE and EMPACT+. Sales of these new products at the MannaFest 2018 global event contribute to the highest April month sales in many years. Ambrotose LIFE was made available in the U.S. on May 23, 2018. The launch of Ambrotose LIFE was supported by a tour of multiple cities across the United States and Canada. In July, Ambrotose LIFE was launched in Hong Kong to great acclaim. We will be launching Ambrotose LIFE in our largest market, Korea, in September, along with Australia, New Zealand and Singapore, followed by several other markets later in 2018. An Ambrotose LIFE clinical trial is underway, and we anticipate it completing near the end of the year with published results later in 2019. In June, we also launched the EMPACT+ sampling program. Our independent sales associates have sent out thousands of samples to date, driving new enrollment and higher sales. To promote the unique benefit of EMPACT+ to athletes -- elite athletes, Mannatech was the title sponsor of the Buffalo Springs IRONMAN event, providing support material and sample of EMPACT+ to participants and attendees. In Q2, we introduced -- we increased the number of new users to our existing Mannatech+ sales and recruiting app by 69% over Q1. This increased total of active users by 10% overall versus Q1 and increased the number of recruiting message shared by 17% over Q1. In Q2, we experienced a steady increase of sales from our business in Hong Kong and e-commerce activities in the Mainland China. We continue to invest in human and e-commerce technology infrastructure to further gain market share in the Greater China region. In the second quarter, we continued to see the effect of the maturing of our new compensation plan, which was launched in July of 2017. It was intentionally designed to clearly delineate preferred customers from business-building associate, while strategically favoring new customer acquisition. New associates, through a modest registration fee, clearly choose to be business-building associates, separating them from those who previously joined Mannatech as associate to just get a better discount on product. This has resulted in an increase in average order size from $178 to $2,005 (sic) [ $205 ], an increase of 15.2% during the same period in 2017. We expect to see the year-to-year comparison become more relevant, predictive and insightful in Q3 once we have completed a full year within the new compensation plan. We remain committed to shareholder value through strong institutional cost control while strategically investing in inventory and other -- of new product globally to ensure continued top line and net profit growth. We thank you for joining us today -- here today, and I will pass it back to our operator. Thank you.

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