Reliv' International, Inc.
Q3 2008 Earnings Call Transcript
Published:
- Operator:
- Good day ladies and gentlemen, and welcome to the Third Quarter 2008 Reliv International Earnings Conference Call. My name is [Francine] and I will be your coordinator for today. (Operator Instructions) Today we have with us Mr. Robert Montgomery, Chairman, President, and CEO, and Steve Albright, Chief Financial Officer. I would now like to turn the presentation over to your host for today's conference, Mr Robert Montgomery. Please proceed, sir.
- Robert Montgomery:
- Hello everyone and welcome to Reliv International's Conference Call in which we will report on our results for the third quarter of 2008. I'll be joined on the call today by Steve Albright, Chief Financial Officer at Reliv. Before we begin Martin Burks will read our Safe Harbor statement.
- Martin Burks:
- Thanks, Bob. Statements made in this conference call that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include but are not limited to statements containing words such as may, should, could, would, expect, plan, anticipate, believe, estimate, predict, potential, continue, or similar expressions. Factors that can cause actual results to differ are identified in the public filings made by Reliv with the Securities and Exchange Commission. More information on factors that could affect Reliv's business and financial results are included in it's public filings made with the Securities and Exchange Commission, including it's annual report of Form 10-K and quarterly reports on Form 10-Q. Copies of which are available on the company's Web site www.reliv.com. With that said, I'll turn the call back over to Mr. Montgomery.
- Robert Montgomery:
- Thank you, Martin. The third quarter was not as strong as we had hoped, but we believe based on anecdotal evidence the significant problems in the U.S. economy in September played a role in our sales decline. But we also know that in tough economic times many people turn to direct selling as a means of earning additional income, and we're encouraging our distributors to explore this avenue in responsory efforts. We believe that this economic environment offers a growth potential for Reliv. Our sales force is excited about the new product, which we will launch in Chicago on November the 8th. Over the two weeks following the launch a number of our senior executives will conduct meetings in eight cities to introduce the new product in person, and to continue generating excitement. And we will continue to look at other opportunities and other incentives to support sales in the fourth quarter. We've taken steps to reduce our expenses, particularly internationally. When U.S. sales start growing again we should be able to leverage those reductions for improved earnings. I'll now turn the call over to Steve Albright who will cover our financial results in more detail. Steve.
- Steve Albright:
- Thank you, Bob. Reliv's net sales for the third quarter totaled $23.9 million, down 5% compared to sales in the third quarter of 2007. In the United States net sales for the third quarter was down 5.4% to $20.8 million. Sales in July were strong prior to the price increase that went into effect upon August the 1st. This was followed by a soft August, as we expected. However, sales in September did not recover as much as we had anticipated. We believe September sales were hurt somewhat due to incentive trips that took a number of top producers out of the field on two weekends during the month. We also held our quarterly training for new business builders, newly qualified master affiliates during the month. When we scheduled these incentive events we tried to spread them out in order to avoid any possible negative impact on sales. In these cases these dates were unavoidable. Sales outside the United States were down slightly in the third quarter from $3.1 million to $3.0 million. Part of the decline was due to slower sales in Europe as a result of the restructuring of our European operations, which we announced in the second quarter. Sales in the Philippines were also down in part due to the economic uncertainty in September and in part because the distributor leaders and corporate staff were out of the field in August due to conferences and holidays. Net income for the quarter equaled $536, 000, or $0.04 per diluted share, compared to net income of $901,000 in the third quarter of 2007, or $0.06 per diluted share. For the first nine months of 2008, Reliv's net sales were $76.1 million, compared to $86.4 million for the same period in 2007. Net income for the first three quarters of 2008 was $2.6 million, or $0.17 per diluted share, compared to $4.3 million, or $0.27 per diluted share for the same period last year. Excluding the second quarter, after tax charge of $110,000 for restructuring European operations, we would have earned $2.7 million in the first nine months, and diluted earnings per share would have come in at $0.18 per share. For the first nine months of 2008 U.S. sales were up 14.6%, and international sales were up 10.5% compared to the first nine months of 2007. Our worldwide distributor base as of September 30, 2008, was approximately $68,540, or 2.8% below the total distributor base at the end of September, 2007. Our retention rate remains strong at 64%. Sponsoring in the quarter decreased compared with the same quarter last year; although, sponsoring outside the United States increased. Our gross margin for the third quarter was 81.3%, compared to 83.8% to the year ago quarter. The price increase effective August 1st helped moderate the rise in cost of goods sold, particularly related to increasing ingredient costs, but due to lower plant utilization we were not able to make up all of the difference. Operating margin in the third quarter of 2008 was 4.7% versus 4.5% in the third quarter of 2007. Selling general and administrative expenses were down approximately $789,000 in the third quarter of 2008, compared to the prior year quarter. As a percentage of sales, SG&A expenses declined 1.3 percentage points. The decrease in SG&A is a result of general cost reductions in the U.S. coupled with the lower SG&A in Germany subsequent to the restructuring. We generated cash from operations of $3.6 million in the first nine months of 2008. As of September 30 we have $5.8 million in cash and cash equivalents. During the third quarter we purchased 1,141,000 shares of Treasury stock for $6.78 million. This included a purchase of approximately 1 million shares from a major stockholder at $6 per share. Now I'll turn the call back over to Bob.
- Robert Montgomery:
- Thank you, Steve. As we look into the fourth quarter and early next year, I see some very promising signs. On the sales front, we're confident that the new product will give us the boost. The economic situation presents a challenge for all companies, but as a direct selling company these times also provide us an opportunity similar to the one that we capitalized on in 2001 and 2002. Many of our distributors with us during that time saw the great result that can push our business forward even during difficult times. But many of our distributors have joined us since that last recession. Our distributors are hearing the message that this is a great time to offer the Reliv business opportunity to other people. People who have lost their jobs or are concerned that they might lose them are prime candidates for starting a Reliv business. A Reliv business may help them continue to pay down their mortgages and pay other bills. It can also help them put more money into savings, and give them a bigger cushion in case their jobs do disappear. We will continue to drive this message home to our distributors, because we believe this can help us improve our sales significantly. While also offering a solution to a potential problem that many people face today, we really believe that our Auto Ship Program that was launched during the third quarter will benefit us in the long term. We also, of course, continue to look for the proper moment to offer special incentives that can provide a shot in the arm to sales. All in all I think we have a good chance of growing in the fourth quarter, and of entering 2009 on an upswing. We're excited because we now have more than 2,500 distributors that have signed up for our U.S. National Conference in February. And we believe that the excitement coming over the next months will lead to more people that will sign up to be at this conference. One of the big advantages of Reliv today is that we are well positioned financially. Reliv has little or no debt, and we also know that the wellness market remains strong here in the United States and around the world. Our dedication to making nutrition simple and our total commitment to making the highest quality nutritional products on the market are solid growth strategies. This is a great time to be promoting our outstanding Reliv business opportunity. We give our distributors the tools that they need to be successful, starting with the proven Reliv success system. And I'm confident that we will capitalize on the potential growth opportunities that we have internationally. Thank you for joining us on this call today. We'll now open the call to questions. Operator, may we have your assistance please?
- Operator:
- Thank you, sir. (Operator Instructions) Your first question comes from Scott Van Winkle – Canaccord Adams.
- Scott Van Winkle:
- A few questions, just quickly first – what was the other income line, can you break that down a little bit for me?
- Steve Albright:
- A couple things. One, we've got an investment in a hedge fund that took a bit of a hit in the third quarter, and that was about $125,000. And also in the U.S. dollar went back north in later in the third quarter, we've got some non-currency foreign exchange charges that are in there.
- Scott Van Winkle:
- Do you have some hedges on foreign currency?
- Steve Albright:
- Unfortunately we don't have, because the cash flows aren't strong enough to have a lot of them. I mean, basically we've got some set up for Canada – that's our strongest cash flow supplier – so we've got some hedges that are in good spots, but those won't last forever. And no one is sure what the currency is going to do these days, but the others, we've got some natural hedges set in place, but not a lot of cash flow is coming back, so not formal hedges.
- Scott Van Winkle:
- And did you say that the International Conference, Bob, is in February?
- Robert Montgomery:
- It's not an International Conference, no, this will be one that will be for the U.S. basically, Scott, in Texas.
- Scott Van Winkle:
- You have something you haven't done in the past?
- Robert Montgomery:
- No, we typically have done this sort of thing where we've really had more than we're having now. We have redone things in a way that we're having two a year now at this point, two major conferences. One in the summer, which is our International Conference, typically in July or August, and then the other one that will be held in the early part of the year, January, February, and in this case February. We have had a number of regional conferences before that time, but we're using a little different format now is what we're doing.
- Scott Van Winkle:
- And around the new product launch, you mentioned that you'll be out on the road and you'll do several meetings. Is there anything on the incentive side around the product? Is there anything special besides the product on its merits only? Give it a little kicker maybe in the compensation plan or something like that?
- Robert Montgomery:
- We haven't felt that that was necessary to do that. There's enough excitement that's being generated with the introduction of this new product that to do anything in the way of any add-on incentives was not something we felt we needed to do.
- Scott Van Winkle:
- And I know you don't want to tell everybody what it is. Maybe you can just whisper it in the phone and only I'll listen?
- Robert Montgomery:
- If you promise.
- Scott Van Winkle:
- And it looks like that you're still kind of tearing down your SG&A a bit. I mean, I know it's usually down sequentially from Q2 to Q3, seasonally. It just looks like you're kind of getting tighter. Is there an effort to keep wringing costs out of the business in this environment?
- Steve Albright:
- Scott, this is Steve. Yes, we're trying to look at where we can trim back largely here and there, and not repeat certain things we maybe have done in the past. Some of this is directly related to sales, obviously, but in general we've got at about $789,000 in reductions. About $500,000 of that is in the U.S. Obviously we're seeing the benefits of the German restructuring now and that SG&A, if you just compare it this year to last, it was down $580,000, so we've got kind of taken hold now. And then we just made a few little trims here and there, but it's just kind of a general theme of trying to tighten the belt around here.
- Scott Van Winkle:
- And, Steve, you talked about capacity utilization being one of the reasons gross margin was a little bit softer this quarter than a year ago, or last quarter.
- Steve Albright:
- Yes.
- Scott Van Winkle:
- The volumes weren't significantly different. Was it a timing in production, or how should I think about that? Are you going to get a benefit of another month on your price increase in the fourth quarter, but the volumes probably won't change much?
- Steve Albright:
- From a production standpoint, yes, there's a little bit of a timing issue in the third quarter. As we went through the first half of the year production – sales weren't meeting the production forecasts and made a little more concerted effort over the summer months to dial back on our inventories a bit. We got some things on the balance sheet getting ready for this product launch, obviously, in November, so that's why you don't see it ahead of total dollar production in inventory yet. But we're trying to kind of keep our inventories in line and that kind of hit us in terms of our production numbers in the third quarter.
- Scott Van Winkle:
- In periods like this in the U.S. where you've got a little weaker economy, you've got very high cost of travel between – gas, obviously, has come down, but trying to get a flight these days for less than $500 or $1,000 seems impossible. Do those kinds of things impair the senior distributors from kind of getting out and travelling, doing meetings, getting in front of the field, does that have any impact? And I certainly agree with you about the countercyclical nature of the business opportunity, but I'm wondering if the rest of the pressures kind of lean on your master affiliates, particularly your senior ones.
- Robert Montgomery:
- I think it does have an affect, Scott. One of the things that we've heard and we know this to be the case is that a lot of our people drive a long way to go to their weekly meetings, and this is not true necessarily in the major metropolitan areas, but when you get out into some of the rural places – Montana and some of the places out west – people drive for several hours to get to the Saturday train for instance. And I'm sure it's the gas prices, and even hotel prices have a bearing on that. We've heard that.
- Scott Van Winkle:
- And the last question for Steve, the million share repurchase. Was that done right at the end of the quarter? Just from the standpoint of me trying to forecast for ShareComp
- Steve Albright:
- That was done – trying to get the date of that – it was towards the end of July. It was in July or early August.
- Scott Van Winkle:
- So the ShareComp probably comes down a little bit more in the fourth quarter from that .8 average.
- Steve Albright:
- Yes.
- Scott Van Winkle:
- Good luck with the new product.
- Operator:
- I'm sorry; we have no further questions in the queue. I would now like to turn the call over to Mr. Robert Montgomery for closing remarks.
- Robert Montgomery:
- Thank you, everyone, for joining us on this call today. We appreciate your support very much. Good day.
- Operator:
- Thank you for your participation in today's conference. This concludes the presentation. Good day.