Al Bala - President and CEO David Johnson - CFO.

Analysts:.

Greetings, and welcome to the Mannatech Incorporated Fourth 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’d like to introduce your 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 fourth 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 may, will, should, could, would, expects, plans, intends, anticipates, believes, estimates, approximates, predicts, projects, hopes, potential and continues and other 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.

As part of this presentation, we will use constant dollar reporting to supplement our financial results presented in accordance with generally accepted accounting principles in the United States, or GAAP and disclose operating results that have been adjusted to exclude the impact of changes due to translation of foreign currencies into U.S.

dollars, including changes in net sales, gross profit and income from operations. We use these non-GAAP measures to provide investors with additional perspectives on trends. At this time, I will make a few comments concerning our fourth quarter of 2017 operating results.

Fourth quarter net sales for 2017 were $46.4 million, an increase of $3.8 million or 8.9% as compared to $42.6 million in the fourth quarter of 2016. On a constant dollar basis, net sales for fourth quarter 2017 increased by $2.8 million as compared to the prior year.

As for the year, overall net sales decreased by $3.6 million to $176.7 million for 2017 as compared to $180.3 million for 2016. During 2017, our net sales declined 3.3% on a constant dollar basis. Favorable foreign exchange during 2017 benefited our sales by $2.3 million.

Income from operations was $1.1 million for the fourth quarter of 2017 as compared to $0.2 million loss from operations for the same period in 2016. The fourth quarter was significantly impacted by the Tax Cuts and Jobs Act.

The income tax provision in the fourth quarter was $4.4 million, net loss was $3.7 million or $1.37 per diluted share for the fourth quarter of 2017 as compared to a $1.1 million loss or $0.42 per diluted share for the fourth quarter of 2016.

For 2017, income from operations was $2.5 million for 2017 compared to $0.7 million income from operations during 2016. The 2017 net loss was $1.8 million or $0.66 per diluted share as compared to a net loss of $0.6 million or $0.22 per diluted share for 2016.

Our operations outside of the Americas accounted for approximately 63.7% of our consolidated net sales for 2017. For the 3 months ended December 31, 2017, net sales for the Americas decreased by $1.1 million or 6.8% to $15.1 million as compared to $16.2 million for the same period in 2016.

During the year, sales for the Americas decreased by $6 million or 8.5% to $64.2 million as compared to $70.2 million during 2016. For the 3 months ended December 31, 2017, Asia Pacific net sales increased by $4.8 million or 20.9% to $27.8 million as compared to $23 million for the same period in 2016.

Net sales comparisons for the fourth quarter were affected by the impact of fluctuations in foreign exchange rates. In constant dollars, fourth quarter net sales would’ve been $27 million. Currency impact was primarily due to the appreciation of the Korean won and Australian dollar, partially offset by the depreciation of the Japanese yen.

During 2017, Asia Pacific sales increased by $2.6 million or 2.7% to $98.8 million as compared to $96.2 million for 2016. For the 3 months ended December 31, 2017, net sales for Europe, the Middle East and Africa, EMEA, increased by $0.1 million or 2.9% to $3.5 million as compared to $3.4 million for the same period in 2016.

In constant dollars, net sales for the fourth quarter of 2017 would’ve been $3.3 million. The currency impact was primarily due to the appreciation of the euro and the South African rand. During 2017, EMEA sales decreased by $0.2 million or 1.4% to $13.7 million as compared to $13.9 million for 2016.

As a result of higher sales, product mix and favorable exchange rates, gross profit increased by $2.2 million to $36.5 million for the same – for the 3 months ending December 31, 2017, as compared to gross profit of $34.3 million for the same period in 2016.

On July 31, 2017, we revised our Associate Compensation Plan, which was designed to stimulate business growth and development of our active business-building associates and to maximize the buying experience of our preferred customers. In doing so, the company hopes to better utilize commission dollars to stimulate company growth.

2017 Associate Compensation Plan provides revised income streams, new leadership levels, and titles and modified various volume requirements for our associates. In addition, this compensation plan redesignated members as preferred customers and modified their pricing structure.

Commissions as a percentage of net sales were 40.6% for the 3 months ending December 31, 2017, as to 39.3% for the same period in the prior year. During 2017 and ‘16, commissions as a percentage of net sales were 40.4% and 39.1%, respectively.

These increases were due to transition costs, as we transitioned from our legacy commission plan to the launch of our new commission plan on July 31. For the 3 months ending December 31, 2017, selling and general administrative expenses decreased by $0.3 million to $8.7 million as compared to $9 million for the same period in 2016.

The decrease in selling and administrative expenses consisted primarily of a $0.8 million decrease in payroll costs and $0.2 million decrease in stock-based compensation, partially offset by a $0.5 million increase in marketing cost and a $0.2 million increase in warehouse costs as we expanded our non-direct selling business in China.

For the 3 months ending December 31, 2017, other operating costs decreased by $0.7 million due to lower legal, consulting and office expenses.

Legal costs were lower in spite of a $0.2 million settlement, and office expenses were lower in spite of $0.3 million costs related to the company moving our corporate headquarters, which will occur during the first and second quarters of 2018.

With revision of our Associate Compensation Plan, we would expect our associates to consolidate their distribution networks. And the approximate number of new and continuing associate member positions held by individuals within the Mannatech network and associated with the purchase were approximately 215,000 and 222,000, respectively.

The number of new independent associate member positions in the network for the fourth quarter 2017 were approximately 21,000 as compared to 25,900 at the same time in 2016. As I mentioned earlier, the U.S. tax legislation had a significant impact on Mannatech’s fourth quarter tax provision, which was $4.4 million. The tax legislation changed the U.S.

statutory rate to 21%, effective January 1, 2018. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is now generally 21%. And this remeasurement increased our tax provision during the fourth quarter.

Another tax, increasing our cost, is the one-time transition tax based on our total unrepatriated earnings and profits, not previously subject to U.S. income tax. These other impacts of the tax legislation added $3.4 million expense to the fourth quarter tax provisions. Without this tax legislation, our tax provision would have been $0.9 million.

In reviewing the balance sheet at December 31, 2017, our cash and cash equivalents increased by 31.4% or $9 million to a balance of $37.7 million as compared to $28.7 million cash and cash equivalents on hand at December 31, 2016.

For the year ended December 31, 2017, cash flow from operating activities increased by $10 million as compared to the same period in 2016. During the year ended December 31, 2017, we invested $1.1 million in computer hardware and software, $0.1 million for leasehold improvements and $0.1 million for office furniture and equipment.

In summary, our net cash inflow for 2017 was approximately $9 million as compared to cash inflow of $3.3 million for the same period in 2016. Our working capital, defined as total current assets less total current liabilities, increased to $22.8 million at December 31, 2017, as compared to $20.8 million at December 31, 2016.

During 2017, our finished goods inventory turns increased to 2.78 compared to 2.73 during 2016. Our net inventory balance decreased to $9.4 million at December 31, 2017, as compared to $12 million at December 31, 2016.

Total current liabilities increased by $3.4 million to $33.4 million at December 31, 2017, as compared to $30.0 million at December 31, 2016.

For the year ending December 31, 2017, our financing activities included repayment of $1.6 million capital lease obligations, payments of $1.4 million for dividends to our shareholders and the repurchase of $0.2 million of our common stock. 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 fourth quarter earning call for 2017. I am Mannatech’s CEO and President, and I would like to discuss the company’s fourth quarter.

As you just heard earlier from our CFOs report, in the fourth quarter, we experienced a strengthening of our net sales with an increase of $3.8 million or 8.9% compared to the fourth quarter of 2016 and a quarter-to-quarter net sales increase of $4.37 million or 10.2% compared to Q3 of 2017.

Our net sales increase was a result of some very strategic seasonal limited-time offer promotions in some of our fastest growing markets including Korea, Hong Kong and China e-commerce.

With the continued maturing of our newly introduced compensation plan, designed to incentivize a proper behavior for our existing associates, especially in the area of new customer acquisition and product sales, we experienced an increase in the size of fourth quarter average order by 28.6% compared to last year and 13.1% fourth quarter compared to third quarter.

The new compensation plan also promotes a very strong culture of rank advancement, which is propelling many of our associate leaders globally to new ranks, creating a healthy environment for sales growth. In Q4, we celebrated at Asia MannaFest, our annual event held in Seoul, Korea, which honors our Asian independent sales associate.

There we launched the premium line of Luminovation as a follow-up to the mass-market line of skin care products launched in Q2. Korean beauty or K-beauty is the most exciting trend in skincare today, and we are delighted to have such an innovative, powerful line of skincare to offer our associates and customers.

We enjoyed strong sales of the new premium line, and we are evaluating where to introduce this incredible line of product next. We also had very strong promotional sales in Q4 in our Asian market, taking advantage of Singles’ Day in Hong Kong and in our China e-commerce business and the worldwide phenomenon of Black Friday.

These Q4 sales initiatives, along with the continued maturing of the new compensation plan, have helped to mitigate the impact of pack sales losses that we incurred in prior quarter. The strategic elimination of pack sales commission helps us to better align with industry-wide new compensation plan directives.

We are experiencing a steady rise of sales from our cross-border e-commerce business in China, while we continue to invest in human resources, logistics, infrastructure and e-commerce technologies to further market share gains.

With the introduction of the new compensation plan, we have also experienced the consolidation effect among our associates, some with multiple positions in the company.

This account consolidation has in part been responsible for the reduction in a number of new and continuing independent associates and members position held by individuals in Mannatech from 222,000 to 215,000, a 3% reduction, while as discussed earlier, we have seen an increase of the average orders by 28.6% year-over-year comparing 2016 to 2017.

In Q4, we experienced a 19% decline in recruiting, which is largely attributable to the change in associate behavior, favoring new customer acquisition over new associate recruiting.

While the impact on sale has been positive in a short term, we continue to work on sales initiatives and digital tools that will create more opportunities for associates to attract new associates.

A declining sales trend in the Americas, especially in the U.S, has prompted some of our recent management change in Q1 of this year, including the nomination of a new President of North America, Mr. Landen Fredrick, to provide greater focus to the region.

We believe the fourth quarter results represent a very positive step for the new Mannatech after 2 years of a very arduous, transformative journey, which included a complete rebrand of the company, a new compensation plan, expansion in China through a cross-border e-commerce platform and the introduction of new blockbuster product categories such as our TruHealth family of products, which focuses on healthy fat loss and body composition, and has quickly become our second largest family of products globally.

The fourth quarter results demonstrate our commitment to shareholder value to strong institutional cost control as demonstrated by the continued lowering of our selling and administration expenses, which helped to create a very positive operating income for the fourth quarter of $1.1 million as compared to a loss of $0.2 million for the fourth quarter of 2016, thus increasing our cash and cash equivalents by 31.4% or $9 million to $37.7 million from $28.7 million as of October 31, 2016.

I am pleased with the quarter’s result, because while we continued to invest in the company and ramp up major elements of the new Mannatech, we are still able to deliver profit and provide very positive results to our shareholders.

With a continued focus on top line growth, cost management and bottom line profit, we will strive to accelerate Mannatech’s global growth opportunities and market share expansion in a very dynamic and globally vibrant wellness and direct sales industry. We thank you very much for joining us here today..

Thank you for listening to Mannatech’s Fourth Quarter 2017 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 the SEC submissions. This concludes today’s call..