Transcript of Mannatech, Inc. (MTEX) Second Quarter 2008 Earnings Conference Call

Mannatech, Inc. (MTEX)

Second Quarter 2008 Earnings Conference Call

Gary M. Spinell - Vice President

of Finance and Corporate Communications

Wayne Badovinus - President and Chief Executive Officer

Stephen D. Fenstermacher - Chief Financial Officer

Peter Park - Park West Asset Management LLC

Thomas Quinn Mannatech, Inc.

Greetings and welcome to the Mannatech Incorporated second quarter 2008 earnings conference call. At this time, all participants are in a listen-only

mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being

recorded. It is now my pleasure to introduce your host for today s call, the new President and CEO Mr. Wayne Badovinus. Now I would like to introduce our moderator for the call today, Mr. Gary Spinell, Vice President of Finance and

Corporate Communications. Thank you Mr. Spinell. You may begin.

Gary M. Spinell Mannatech, Inc. Vice President of

Finance and Corporate Communications

Thank you. Good morning everyone. This is Gary Spinell and welcome to Mannatech s second

quarter 2008 earnings call. Before we begin the call I would 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. Thanks and now what I am going to do and excuse me I have the distinct honor to introduce Mannatech s new President and CEO, Mr. Wayne Badovinus.

Wayne Badovinus Mannatech, Inc. President and Chief Executive Officer

Thank you Gary. Hello and good morning to everyone. This is Wayne Badovinus, the new President and CEO of Mannatech. It is an honor to be here and speak

with you today. Since this

is my first earnings call with Mannatech I want to briefly introduce myself. I come with 43 years experience in major companies exhibiting special brand

identities such as Nordstrom, Eddie Bauer and Williams-Sonoma. In each of these companies the spotlight was on excellent customer service, high quality products, and profitability. Mannatech is no different than those companies that were founded on

their high quality attributes, yet today Mannatech is somewhat different due to its major challenges. I will discuss these challenges in a few minutes.

As we reported, second quarter 2008 sales and earnings continued their declining trend. Sales were $86.8 million, a decrease of 22.3% versus second quarter 2007. This compares to last year s sales of $111.7

million. Most of the sales shortfall came from our North American market, which showed a decrease of 31.8% versus the prior year. Three factors contributed to this sales underperformance in the domestic market. The Texas Attorney General s

litigation, a new focus on the wellness industry impacted all associates and members, and a slowing US economy.

International sales were

slightly below prior year down 2.2%. This was also primarily due to the slowing economy worldwide. We reported a net loss in the second quarter of $10.5 million or $0.40 per diluted share. This compares to net income of $1.5 million or $0.06

earnings per diluted share for the second quarter 2007. Net income was impacted by a number of accruals for litigation and severance expenses. We recorded a pre-tax loss of $16.9 million in the quarter compared to pre-tax income of $2.6 million for

last year s second quarter. Steve Fenstermacher, our CFO will discuss the details of our financial performance in a few moments.

independent associates and members at the end of the second quarter 2008 were 554,000 on a trailing 12-month period. This represented a decrease of 2.6% year over year. The decrease was primarily due to the drop in domestic recruiting. The domestic

market continues to be impacted by the overhang of the Attorney General litigation. The decline in new associates and members of 20.6% was partially offset by higher retention of continuing independent associates and members. Our continuing

associates and members count was up 7% or 26,000 people. I think it s important to note that despite the many business challenges our core of continuing associates have remained loyal to Mannatech and to our products. The auto ship rate which

remains over 70% is a reliable indicator of their product loyalty and usage.

Mannatech is at a transition point. The company began as an

entrepreneurial enterprise which required a less formal structure and management skill set. Today it requires a different skill set that incorporates rigorous planning, coordination, fine execution and follow through across a rapidly expanding

global organization and it will require excellence and accountability at every level of the organization.

There is also a cultural shift

that takes place in all companies as they scale. The Board and I believe that my 43 years of experience in building consumer brands for high profile corporations is a good fit with Mannatech s needs. This fit is important especially for the new

culture and the challenges that Mannatech faces today. To turn this business around we have moved quickly and decisively to address the issues.

When I joined the company in late June, I identified two immediate simultaneous priorities to shore up the bottom-line and at the same time to re-energize our sales associates and our employees. The management team and I have made some

tough decisions to address profitability. The most difficult one was reducing the corporate head count by 15%. At the same time, we implemented additional strict expense controls which included eliminating any

discretionary spending. Every expense category is being challenged. I have also tasked senior management with team accountability for controlling our

My other urgent priority was to re-energize our employees and independent sales associates. This required immediate and effective

two-way communication. Our business similar to other direct selling companies is driven by relationships at the local level. Therefore, the key was to engage our sales associates in their backyards. Their commitment to the company and their

confidence that Mannatech is always there to support their efforts is critical to the health of the business.

In early July, we launched a

10 city Whistle-Stop Tour to meet our associates. My time has been spent listening to their concerns and discussing their business building strategies. I also assure them that they can focus 100% of their time on recruiting and their down line. They

can feel confident that I have their back in making the corporate office highly efficient. To date, I have met personally with almost 900 associates in Colorado, Texas, Oregon and Missouri. In addition I have spoken with dozens of our top sellers by

telephone in the evenings. I have spent one hour each week listening to calls in our customer service area.

We also introduced a CEO series

via the webcast to associates. The third edition will be shown next week, but it will require the combined power of our associates in corporate headquarters working together to accelerate change. For that reason I have already held 44 small group

meetings at corporate headquarters to reignite enthusiasm. Each meeting was held with approximately 10 employees. We ve had a dialog about the importance of each of their roles in supporting our associates and the need for excellence in their

Our Whistle-Stop Tour is creating excitement and momentum across the organization and I plan to continue these meetings through

year-end. My next schedule stops are Seattle and Chicago. I found our associates to be enthusiastic, candid and I believe these meetings have been very productive. For example, a common refrain has been the need to complete an online order with

fewer clicks and fewer screens. Since this issue was raised we have made it a top priority to develop faster and more user-friendly website navigation.

Ensuring we meet needs of our associates comes naturally to me; after having spent 14 years at Nordstrom, a company that is synonymous with service excellence. These discussions have pointed to a clear need for

improved customer service including upgrading our call center and stream lighting the order process. Service excellence is an essential component of any effective sales organization. To make this a reality we are currently reviewing all of our

processes to deliver superior service.

Also, let me make a comment here about any misguided information that may be out there. Although I

have extensive retail and catalog business experience, we have absolutely no intention as a company to pursue either of these avenues of distribution. Both businesses would require immense amounts of capital. We currently have a great group of

independent associates who are capable of driving sales momentum exponentially once they are focused; we love our channel of distribution.

In addition to these urgent needs, an ongoing priority is to resolve all issues with the Texas Attorney General s office. As we said on the last conference call, we continue to be actively engaged in discussions with representatives

from that office. We believe these meetings have

been productive and we expect these discussions to continue and ultimately provide the framework for a satisfactory resolution of this matter.

We are currently developing three major business initiatives; first, to establish Mannatech, the brand as a source for superior quality wellness products;

second, to expand on our consumer segments in the sport fitness category, and third, to move more aggressively into the weight loss market. The Mannatech Board hired me because of my depth of experience in driving profitable growth while at the same

time building strong consumer brand identity.

Since inception Mannatech has developed leading edge wellness products. Many of our products

are acknowledged to be at the forefront of nutritional science; therefore, we have a great foundation to build a successful brand. For the last 10 years Mannatech s identity has been more synonymous with individual product benefits rather than

brand. I believe we have a business opportunity to establish Mannatech in the minds of consumers as a product leader in the wellness industry. We will be addressing this branding opportunity in the months ahead.

In the past two years, the company has increased R&D resources and expertise. We have also expanded the product portfolio beyond its core product

group of glyconutrients. These newer products include our unique Optimal Skin Care line and plant derived vitamin/mineral supplement vital matrix. I believe both of these products can obtain a greater portion of market share.

Most recently, we added to our fitness category with our newest product BounceBack. This product is for the daily exercise individual and the weekend

fitness weekend warrior. BounceBack has been proven to help relieve the soreness and fitness that follows heavy exercise. A third party research organization will soon be publishing its findings on a double-blind placebo crossover study. That study

indicates a considerable reduction in soreness and stiffness when using BounceBack as part of a daily exercise regimen.

opportunity lies with our sports-oriented group of products geared to consumers who are athletes. Over the years Mannatech s sport nutritional supplements have gathered a following by professional athletes who use them on a regular basis to

maintain optimal health and performance. The company has created Team Mannatech, a group of 163 current and former professional athletes who use and endorse Mannatech products. There is also a long list of athletes waiting to join the team. Team

Mannatech includes many well-known names; basketball legend, Nancy Lieberman and Butch Johnson, former Dallas Cowboys wide receiver are among them.

Sports nutrition today is an $18 billion business and is expected to continue growing over the decade ahead. We intend to enter this market more aggressively by leveraging the combined power of our unique sports products and the voices of

We are also moving aggressively into the weight loss market. We will soft launch a new product at our major training

convention, MannaQuest in September. This unique product focuses on fat reduction while minimizing the amount of lean muscle loss during a weight loss program. We believe this new product provides a great competitive position in the market. You will

hear more about these initiatives in the future.

Now Steve Fenstermacher will discuss our financial performance in more detail. Steve.

Stephen D. Fenstermacher Mannatech, Inc. Chief Financial Officer

Thank you Wayne and good morning everyone. The second quarter results for both sales and operating

earnings were again below last year. Several significant reserves were included in the quarter reflecting litigation and the recent personnel reduction. Our deficit of $0.40 per share in the second quarter compared unfavorably with the second

quarter of 2007 that showed earnings of $0.06 per share.

The second quarter 2008 deficit reflected the decreased level of domestic sales

and recruiting which was experienced over the last three months. Although we experienced an operating deficit in the quarter our financial condition continued to include a high level of liquidity. Our balance sheet continued to show essentially no

long-term debt and for June 30th, we held over $50 million in total cash.

The continuing slow sales pattern in North America did not

have a specific impact on our product cost numbers. Our cost of goods sold rate increased to 15% for the quarter, higher than the 2007 prior year three-month period by seven tenths of one point. Our product cost rates in the middle two quarters last

year were somewhat elevated due to customer satisfaction related product giveaways and reserves caused by problems encountered with certain new skin care items.

Rate in the second quarter this year was distorted by inventory reserves taken in several of our international countries related to some market specific product formulations made for those markets only. In addition,

reserves were taken for some promotional materials which are in the process of being replaced. Commission and incentives expense was 47.7% in the quarter, an increase by nine tenths of one point compared to the 2007 second quarter. Accrued travel

incentive costs were essentially even with last year in rate-to-sales while paid commissions were responsible for the overall rate increase.

Direct paid commissions rose in rate-to-sales reaching 45.3% which was higher than last year by nine tenths of one point. The increase reflected some recent changes in our associate compensation plan which took effect on a staggered timing