David Johnson - CFO Al Bala - President & CEO.

Analysts:.

Greetings and welcome to the Mannatech, Incorporated Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. Now, I would like to introduce our moderator of 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 third 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 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 the 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 performance of our ongoing business operations. This non-GAAP financial measure should not be considered an exclusive alternative to the accompanying GAAP financial measures.

A reconciliation of this non-GAAP financial measure to the most directly comparable measure is available on our recently filed 10-Q under the heading Non-GAAP Financial Measures.

On July 1, 2017, we revised our associate compensation plan, which was designed to stimulate business growth and development for our active business building associates and to maximize the buying experience of our preferred customers. In doing so, we hope to better utilize commission dollars to stimulate company growth.

The 2017 compensation plan provides revised income streams, new leadership levels and titles and we've modified various volume requirements for our associates. In addition, the 2017 compensation plan re-designated members as preferred customers and modified their pricing structure.

At this time, I will make a few comments concerning our third quarter of 2017 operating results. Net income was $1.4 million or $0.50 per diluted share for the third quarter of 2017 as compared to a net income of $1.3 million or $0.46 per diluted share for the third quarter of 2016.

The third quarter of 2017 net sales decreased by $6.1 million or 12.8% to $42 million, compared to net sales of $48.1 million for the third quarter of 2016. In connection with the 2017 compensation plan, pack sales have been replaced with associate fees, which provide associates the right to earn commissions, benefits and incentives.

Pack sales historically had an average value of $197 during the fiscal year of 2017 before we implemented the 2017 compensation plan on June 30 and now average is approximately $50 for those associate fees.

Specifically within the Americas during the three months ending September 30, 2017, pack sales decreased by $0.5 million from approximately $800,000 to approximately $300,000 as compared to the same period in 2016.

For the third quarter 2017, our operations outside of the Americas accounted for approximately 66.4% of our consolidated net sales, compared to 60.5% of our consolidated net sales in the third quarter of 2016.

Third quarter 2017 Asia-Pacific net sales decreased by $1.1 million or 4.3% to $24.4 million as compared to $25.5 million for the same period in 2016.

We saw a 4.7% decrease in revenue per active independent associate and preferred customer, which was partially offset by a 0.4% increase in the number of active independent associates and preferred customers.

During the three months ending September 30, 2017, the number of product orders in Asia Pacific decreased by approximately 4,000 from 117,000 to 113,000 as compared to the same period in 2016.

During the three months ended September 30, 2017, pack sale revenue in Asia Pacific decreased by $4.2 million from $5.6 million to $1.4 million as compared to the same period in 2016.

For the three months ended September 30, 2017, EMEA net sales across Europe, Middle East and South Africa decreased by $0.1 million or 2.8% to $3.5 million as compared to $3.6 million for the same period in 2016.

This decrease was due to a 13.5% decline in revenue per active independent associate and preferred customer, which was partially offset by a 9.3% increase in the number of active independent associates and preferred customers.

During the three months ended September 30, 2017 the number of product orders in this EMEA region increased by 3,000 approximately 33,000 to 36,000 as compared to the same period in 2016.

During the three months ended September 30, 2017 pack sale revenue in EMEA decreased by $0.4 million from $0.5 million to $0.1 million as compared to the same period in 2016.

For the three months ended September 30, 2017 net sales in the Americas decreased by $4.9 million or 25.8% to $14.1 million as compared to $19 million for the same period in 2016.

The decrease was primarily due to a 21% decrease in revenue per active independent associate and preferred customer and a 6.1% decline in the number of active independent associates and preferred customers.

During the three months ending September 30, 2017 the number of product orders in the Americas decreased by 9,000 from 97,000 to 88,000 as compared to the same period in 2016.

During the three months ending September 30, 2017 pack sale revenue in the Americas decreased by $0.5 million from $0.8 million to $0.3 million as compared to the same period in 2016.

In reviewing our statement of operations, our operating income for the third quarter 2017 was $0.7 million as compared to an operating income of $0.5 million for the third quarter of 2016.

Commission expense for the third quarter ended September 30, 2017 decreased by 7.9% or $1.5 million to $17.6 million as compared to $19.1 million for the same period in 2016.

As a result of adopting the new compensation plan for the three months ending September 30, 2017 commissions as a percent of net sales increased to 42% from 39.8% for the same period in 2016.

Incentive costs for the three months ending September 30, 2017 decreased by 12.5% or about $100,000 to $0.7 million as compared to $0.8 million for the same period in 2016. For the three months ending September 30, 2017 incentives as percentage of net sales remained the same percentage of 1.7%.

For the three months ended September 30, 2017 selling and administrative expenses decreased by $1.7 million or 17.3% to $8.2 million as compared to $9.9 million for the same period in 2016. This decrease consisted of $0.8 million decrease in payroll costs. Last year we had a greater number of employees and a $0.4 million severance charge.

We also witnessed a $0.8 million decrease in marketing related costs and a $0.1 million decrease in stock-based compensation. For the three months ended September 30, 2017 other operating costs decreased by $1.4 million or 18.8% to $6.1 million as compared to $7.5 million for the same period in 2016.

This decrease was due to a $0.7 million decrease in legal and consulting costs, a $0.1 million decrease in several expense categories such as office expenses, credit card fees, travel and entertainment and research and development.

In addition, the decrease was further caused by a $0.4 million impairment of internally developed software which occurred last year during the third quarter. These decreases were partially offset by $0.1 million increase in both professional fees and bad debt expense.

In our review, the balance sheet of September 30, 2017, our cash and cash equivalents increased by 23.3% to $6.7 million or $6.7 million to $35.4 million to $28.7 million as of December 31, 2016.

During the nine months ended September 30, 2017, we invested approximately $0.9 million in back-office software projects, approximately $100,000 in leasehold improvements in various international offices and training centers and approximately $100,000 in office equipment.

For the three months ended September 30, 2017 and for September 30, 2016, the company's effective tax rate was a benefit. Our working capital defined as total current assets, less total current liabilities is $22.3 million as of September 30, 2017, compared to $20.8 million at December 31, 2016.

Our net inventory balance decreased by $1.4 million to $10.6 million at September 30, 2017 as compared to $12 million at December 31, 2016. During the nine months ended September 30, 2017, finished goods inventory turn decreased to 2.73 as compared to 2.83 for the same period in 2016.

Accounts payable balance at September 30, 2017 increased to $6.1 million as compared to $5.2 million at December 31, 2016, primarily due to event costs. Also during the third quarter, we paid $0.4 million in dividends and stock repurchases. At this time, I will turn the call over to Mannatech's CEO, Mr. Al Bala..

Thank you, David and hello everyone and thank you for joining us on our third quarter earning call for 2017. I am Mannatech's CEO and President and I would like to discuss the company's third quarter of 2017.

However, before discussing the third quarter results, I would like to acknowledge the passing of the legend of the direct selling industry and a very dear friend of the Mannatech family, Mr. Allen Kennedy. Mr. Allen Kennedy served on the Mannatech Board of Directors from 2002 to 2015.

Allen served as a member of the Board as an Independent Director on key committees and retired from the Board in 2015 when he last served as the Chairman of the Compensation Committee. Mr. Kennedy was a direct selling associate and a Hall of Famer will also served as CEO of Nature's Sunshine and a President of the Tupperware Company.

Our thoughts and prayer go to the family. On July 1 after two years of design work, computer modeling and socializing with our key associate leaders from around the world, we launched our much anticipated new compensation plan.

This new compensation plan was designed to be a simpler, more aggressive compensation plan that would serve as a catalyst to ignite our sales force globally. The new compensation plan is very consumer-centric and provides income stream to promote and incentivize key associate behaviors that can create and enable long-term viable businesses.

The plan includes 10 new leadership levels and titles which provides for a better associate experience and profitability in the first 90 days and enables a smooth transition from level to level. The new compensation plan makes a clear distinction between preferred customer and those who choose to build the business.

And the new plan mandatory pack sales have been replaced with a modest yearly associate fees of around US$50, which provide associates the needed tools, training and a right to earn all commissions, benefits and incentives.

The elimination of pack sales during the three months ending September 30, 2017, caused a pack sale decrease globally of $5.1 million as compared to the same period in 2016 and contributed to the overall sales decline that we experienced in the third quarter.

While the sales decline was more pronounced in the month of July when we first launched, we saw a steady increase of sales volume over the next two months and we believe that our associates are quickly adjusting to the new comp plan as demonstrated by the unprecedented number of new associate ranks achieved in the quarter and a 1.6% increase in overall recruitment of new independent associates and preferred customers.

Our plan to transition cost from the old to the new comp plan contributed to the overall increase in commission expense as a percentage of net sales to 42% from 39.8% for the same period in 2016.

This new compensation plan is a key element along with our rebrand technology enhancement and our aggressive new product pipeline that make up what we call the new Mannatech. In the third quarter we launched a new skin care line Luminivasion developed and created in Korea for our Korean market.

Luminivasion consists of 8 skin care products that feature exclusive technologies and is part of the K beauty trend of advanced beauty and skin care products very popular around the world especially in Asia.

Luminivasion launched in July where we saw great sales right off the bat and we are expecting that this new skin care line and additional enhancement to this line will be a strong part of Mannatech's product portfolio going forward.

Our sales from the cross-border e-commerce business in China are lagging behind expectation but we are seeing a steady increase in customer activities and we continue to invest in human resources and logistic infrastructure in the region to further market share gain.

We believe the third quarter results we present a very positive step for Mannatech and demonstrates that commitment to shareholder value.

While our overall revenues were down by $6.1 million from last year, we exhorted strong institutional control that managed costs helping to create a positive profit margin for the third quarter of $1.4 million as compared to a net income of $1.4 million for the third quarter 2016, and increased our cash and cash equivalents by 23.3% or $6.7 million to $35.4 million from $28.7 million as of December 31, 2016.

To do this we streamlined operations in Europe and a number of other regions and adopted business practices to ensure that cost management is front and centered. I'm pleased with the quarter's results because we continued to invest in the company and ramp up major elements of the new Mannatech.

We were still able to generate a profit and provide positive results to our shareholders. We are moving forward with a sense of optimism and confidence as the final pieces of the new Mannatech are coming together. We continue to focus on cost management and profit.

We will continue to strive to accelerate Mannatech's global growth opportunities for the next few years. So today thank you for joining us for the call and will pass it back on to our Operator. Thank you..

Thank you for listening to Mannatech's third quarter 2017 earnings calls. 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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