David Johnson - Chief Financial Officer Al Bala - President and Chief Executive Officer.

Greetings and welcome to the Mannatech, Incorporated First Quarter 2017 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 first quarter 2017 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, uncertainties and other factors and speak only as of today. We also refer our listeners to review our SEC submissions.

In addition to the results presented in accordance with generally accepted accounting principles, or 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 the 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 first quarter of 2017 operating results.

Net loss was $1.2 million or $0.46 per diluted share for the first quarter of 2017 as compared to a net income of $0.6 million or $0.21 per diluted share for the first quarter of 2016. The first quarter of 2017 net sales decreased by $0.1 million or 0.2% to $40.6 million compared to net sales of $40.7 million for the first quarter of 2016.

The net sales comparisons for the 3-month period ended March 31, 2017 and 2016 were affected by the loyalty program and the number of product orders placed. The loyalty program increased first quarter 2017 net sales by $0.4 million as compared to the same period in 2016.

The number of orders decreased 6.8% during the first quarter of 2017 to approximately $262,000 as compared to $281,000 during the same period of 2016. The total number of active associate positions held by individuals in our network based on a 12-month trailing period ending March 31, 2017 and 2016 was approximately 220,000 and 218,000, respectively.

For the first quarter of 2017, our operations outside of the Americas accounted for approximately 61.8% of our consolidated net sales compared to 60.7% of our consolidated net sales in the first quarter of 2016.

Asia-Pacific net sales increased by $0.5 million, or 2.3%, to $21.9 million in the first quarter of 2017 as compared to the same period in 2016. This increase was primarily due to a 7.9% increase in the number of active independent associates and members partially offset by a 5.1% decrease in revenue per active independent associate and member.

During the three months ending March 31, 2017, the loyalty program increased Asia-Pacific sales by $0.3 million as compared to the same period in 2016. In constant dollars, net sales for the first quarter would have been $21.2 million.

The currency impact is primarily due to the strengthening of the Korean won, Australian dollar, Japanese yen, Taiwanese dollar, New Zealand dollar and Hong Kong dollar, partially offset by the weakening of the Singapore dollar and the Chinese renminbi.

In Europe, Mideast and Africa, or EMEA, net sales decreased by $0.1 million in the first quarter of 2017 to $3.2 million as compared to the same period in 2016. The number of EMEA active independent associates and members decreased by 0.2%, and revenue per active independent associate and member decreased 2.9%.

During the first quarter of 2017, the loyalty program in EMEA increased net sales by $0.1 million compared to the same period in 2016. In constant dollars, net sales for the first quarter would have been $2.9 million.

The currency impact is primarily due to the strengthening of the South African rand, partially offset by the weakening of the British pound. Net sales in the Americas decreased by approximately $0.5 million in the first quarter of 2017 to $15.5 million as compared to $16 million in the same period in 2016.

The decrease was partially due to a 7.7% decline in the number of active independent associates and members, partially offset by a 4.9% increase in revenue per active independent associate and member.

In reviewing our statement of operations, our operating loss for the first quarter of 2017 was $2 million as compared to an operating income of approximately $0.5 million for the first quarter of 2016. Commission expense for the three months ending March 31, 2017 increased by 8.6% or $1.3 million to $16.5 million.

For the three months ending March 31, 2017 commissions as a percentage of net sales increased to 40.6% from 37.4% for the same period in 2016 due to commission expense on the launch in certain Asia-Pacific markets of new products available after MannaFest, our annual convention held in April of 2017.

Incentive costs for the first quarter of 2017 increased by 50%, or approximately $200,000 to $0.6 million as compared to $0.4 million for the same period in 2016 due to incentives in our growth markets. During the first quarter of 2017, selling and administrative increased to $8.6 million as compared to $8.1 million during the first quarter of 2016.

The increase in selling and administrative expenses consisted of a $0.3 million increase in marketing related costs and a $0.3 million increase in payroll costs in our headquarters, Korea, Hong Kong, Colombia offset by a $0.1 million decrease in stock-based compensation expense.

For the three months ending March 31, 2017, other operating costs increased by $0.1 million, or 1.3%, to $7.7 million as compared to $7.6 million for the same period in 2016. For the three months ending March 31, 2017, other operating costs as a percentage of net sales increased to 18.9% from 18.6% for the same period in 2016.

Included in this cost is $0.5 million legal settlement. Partially offsetting increases in legal costs are decreases in travel and entertainment. For the three months ending March 31, 2017 and 2016, the company’s effective tax rate was 36.5% and 31% respectively.

For the three months ending March 31, 2017, the effective tax rate generated a tax benefit due to the loss before income tax. In reviewing the balance sheet at March 31, 2017, our cash and cash equivalents increased by 2.4%, or $0.7 million, to $29.4 million from $28.7 million as of December 31, 2016.

Our working capital, defined as total current assets less total current liabilities, is $21.1 million as of March 31, 2017 compared to $20.8 million at December 31, 2016. Our net inventory balance increased by $1.4 million to $13.4 million at March 31, 2017, as compared to $12 million at December 31, 2016.

During the quarter, we purchased inventory in advance of introducing new products at MannaFest in April of 2017 and as part of the introduction of TruHealth to new markets. Moreover, we purchased inventory for China.

During the three months ending March 31, 2017, finished good inventory turns increased to 2.37 as compared to 2.24 for the same period during 2016. During the three months ended March 31, 2017, our accounts payable increased as we purchased this inventory. Our tax receivable was the source of cash during the quarter.

During the three months ended March 31, 2017, we invested approximately $0.2 million in back-office software projects, approximately $0.1 million in leasehold improvements in various international offices and training centers, and less than $0.1 million in office equipment. Also during the first quarter of 2017, we paid a $0.3 million dividend.

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

Well, thank you, David. Hello, everyone and thank you for joining us on our first quarter earnings call for 2017. I am Mannatech’s CEO and President and I would like to discuss the company’s first quarter of 2017.

The first quarter results showed a story of Mannatech’s continued investment in its ongoing transformation and commitment to our future success. In the first quarter, Mannatech prepared for our annual global MannaFest event in Las Vegas.

This was the very first time we held such an event outside of Texas, and it was the signal, the beginning of a new era for Mannatech. At this event, we launched two major new products and continued the socialization of our new comp plan to be launched in July of 2017.

And this continued socialization is in order to mitigate the normal slight business slowdown, that tend to occur prior to comp plan launch.

The efforts we put into the preparation for our global event, MannaFest event in April this year, and for the launch of the compensation plan later this year, represented major investment which we are already seeing strong returns.

For example, this investment helped to increase our attendance to our global event and also to achieve record sales at MannaFest during the first week of April. With the excitement generated by the new product, we saw a significant increase in orders at this 3-day event.

The new products GlycoCafe, which is the most complete coffee infused with Glyconutrients and GinMAX, a powerful dual-layer ginseng supplement that is the first of its kind represent consumer-friendly products at competitive price, easily shared with immediate impact.

Mannatech has taken two commoditized products and applied our innovative development processes and technologies to result in two unique creations that offer customers valuable benefits and that sales associates can offer an easy entry point for our Ambrotose product and other patented technologies.

The record sales at MannaFest have us feeling positive about the first quarter investment that we made to get these great products to the market. To support the July 1 implementation of the new compensation plan, the company held numerous meetings with all our independent sales associates from around the world.

The new compensation plan will represent a new outlook for just about all of our associates, including how they build their business and earn so they can spend much of the first – and we spend much of the first quarter speaking to our top leaders directly in all of our major markets. The feedback has been tremendous.

And many of our leaders who are waiting for details about the compensation plan in the first quarter have since begun to ramp up the operation in anticipation of the comp plan launch in July 1, 2017.

After numerous meetings with our global leaders face-to-face about the new compensation plan, we saw more enthusiasm and confidence from the field about how it will drive new opportunities and growth, which is the goal of the new compensation plan.

We feel confident that the investment in the compensation plan in the first quarter, which included expert consultations, extensive modeling work and testing as well as developing multiple iterations, will support a smooth and successful implementation starting on July 1.

The new compensation plan will allow us to leverage the power of our outstanding product by rewarding sales volume, the building of a strong customer base and development of leaders in the field.

It was designed to reward the right kind of behavior, drive early engagement, drive sales volume through customer acquisition and leadership development, and positively impact our sales associates in a way that will help energize their business into the future.

Along with our ramping up for MannaFest, the new product launches and the new compensation plan, there were a number of positive trends we saw in the first quarter.

First, we saw that sales of our TruHealth Fat-Loss System continues to grow TruHealth was front and center at MannaFest where we saw the positive results of hundreds of participants globally in the New You in 90 challenge. The results we saw were powerful and will help to continue the growth of the TruHealth Fat-Loss System.

TruHealth is now available in most of our markets, and we continue to invest in support into our new growth market as well, specifically, Colombia and China.

In Colombia, we have streamlined and focused our operation; while in China, our cross-border e-commerce business model is finding traction and attracting numerous amount of new customers and we would expect to continue to see that growth to happen.

In the first quarter, we continued to see sales in our Asian markets increase, driven by increased activity across the board by our sales associates. The Asian markets also showed great interest in the new product launch in the second quarter, with large pre-orders and general enthusiasm about the GinMAX ginseng product.

In the Americas, we are continuing to see revenue per associate increase, which we believe is driven by the continued consumption of the TruHealth Fat-Loss System.

While our net sales year-over-year were essentially flat, we believe the investment in the new products and the new compensation plan will have this company on a steady path for future growth. Throughout the quarter, we continue to see the excitement in anticipation of the new product and compensation plan.

And we look forward to continue to bring our product line to a worldwide consumer base in order to drive top line revenue, bottom line net profit, while maximizing shareholder value and improve overall revenue growth. Thank you for joining us today on this call and we’ll talk to you soon..

Thank you for listening to Mannatech’s first quarter 2017 earnings call. As a reminder, company information and filings can be found at the company’s Investor Relations website, ir.mannatech.com, by reviewing SEC submissions. This concludes today’s call..