Earnings Transcript for MTEX - Q3 Fiscal Year 2018

Executives: Al Bala - President and CEO David Johnson - CFO

Analysts:

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

David Johnson: Thank you. Good morning, everyone. This is David Johnson, and welcome to Mannatech's third 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, feel 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 and 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 to 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 most directly comparable 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 third quarter of 2018 operating results. Our third quarter income from operations was $1.7 million compared to $0.7 million for the same period last year. Due to taxes, our net loss was $1.7 million or $0.69 per diluted share for the third quarter of 2018 as compared to a net income of $1.4 million or $0.50 per diluted share for the third quarter of 2017. For the three months ended September 30, 2018, the company's effective tax rate was 167.8% as compared to a benefit of 58.5% for the same period in 2017. The effective tax rate for the 3 months ending September 30, 2018, were different from the federal statutory rate due to the mix of earnings across our jurisdictions, valuation allowances recorded on foreign losses in certain jurisdictions and the impact of the new global intangible low-tax income, GILTI, as a result of the Tax Cuts and Jobs Act. The third quarter of 2018 net sales increased by $1 million or 2.4% to $43 million compared to net sales of $42 million for the third quarter of 2017. For the 3-month period ending September 30, 2018, our net sales increased 2.9% on a constant dollar basis, while unfavorable foreign exchange caused a $0.2 million decrease in these GAAP net sales as compared to the same period in 2017. The net sales comparisons for the 3 months ended September 30, 2018 and 2017 were also affected by the average value of product orders and the number of pack or associate fee orders placed. For the 3 months ending September 30, 2018, the average product order increased 6.1% to $194 as compared to $183 for the same period in 2017. The number of packs sold to associate fees paid by new and continuing independent associates and preferred customers increased 16.8% during the third quarter of 2018 to 28,754 as compared to 24,609 during the same period of 2017. The total number of active associate positions held by individuals in our network based on a 12-month trailing period ending September 30, 2018 and 2017 was approximately 202,000 and 219,000, respectively. For the third quarter of 2018, our operations outside of the Americas accounted for approximately 69.1% of our consolidated net sales, compared to 66.4% of our consolidated net sales in the third quarter of 2017. Asia Pacific net sales increased by $2.2 million or 9% to $26.6 million in the third quarter of 2018 as compared to $24.4 million in the same period of 2017. In Europe, Mid-East and Africa, or EMEA, net sales decreased by $0.4 million or 11.4% to $3.1 million in the third quarter of 2018 as compared to $3.5 million in the same period of 2017. Americas net sales decreased by $0.8 million or 5.7% to $13.3 million in the third quarter of 2018 as compared to $14.1 million for the same period in 2017. Our operating income for the third quarter of 2018 was $1.7 million as compared to the operating income of $0.7 million for the third quarter of 2017. During the third quarter, selling and administrative expenses decreased to $8.1 million as compared to $8.2 million during the third quarter of 2017. This decrease in selling and administrative expenses consisted of a $0.2 million decrease in payroll costs in our headquarters, Japan, Australia and Europe offices, and a $0.1 million decrease in distribution and warehouse costs, offset by $0.1 million increase in stock-based compensation expense and a $0.1 million increase in contract labor costs. For the three months ending September 30, 2018, other operating costs decreased by $0.4 million or 7.3% to $5.7 million. For the 3 months ended September 30, 2018, other operating costs as a percentage of net sales decreased to 13.2% from 14.6% for the same period of 2017. The decrease in operating costs was primarily due to a $0.8 million decrease in travel and entertainment costs and a $0.1 million decrease in other miscellaneous operating expenses. This was partially offset by a $0.4 million increase in legal and consulting fees and a $0.1 million increase in office expenses. In reviewing the balance sheet at September 30, 2018, our cash and equivalents decreased by 31.9% or $12 million to $25.7 million from $37.7 million as of December 31, 2017. During the nine months ended September 30, 2018, we invested approximately $0.8 million in back-office software projects, approximately $0.5 million in leasehold improvements and $0.5 million in furniture and equipment. Our working capital defined as total current assets less total current liabilities was $10.5 million as of September 30, 2018, compared to $22.8 million at December 31, 2017. Our net inventory balances increased by $3.3 million to $12.7 million at September 30, 2018, as compared to $9.4 million at December 31, 2017. We invested in inventories. We introduced Ambrotose LIFE in our growth markets. Finally, I'm proud that we have invested $7.4 million to repurchase common stock pursuant to a tender offer and open market repurchases. And also, we've returned $1.9 million in dividend payments back to our shareholders. At this time, I will turn the call over to Mannatech's CEO, Mr. Al Bala.

Al Bala: Well, thank you, David, and hello, everyone, and thank you for joining us on our third quarter earning call for 2018. I am Al Bala, Mannatech's CEO and President, and I'd like to discuss the company's third quarter. As David outlined, our net sales in the third quarter was up by $1 million compared to the same quarter last year, with an operating income of $1.6 million. There are two reasons for this increase

Operator: These statements have not been evaluated by the Food and Drug Administration. These products are not intended to diagnose, treat, cure or prevent any disease. Thank you for listening to Mannatech's third 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.

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