David Johnson - Chief Accounting Officer Rob Sinnott - CEO & Chief Science Officer.
Greetings and welcome to the Mannatech Incorporated Second Quarter 2015 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 our moderator for the call today, Mr. David Johnson, Chief Accounting Officer. Mr. Johnson, you may begin..
Thank you. Good morning, everyone. This is David Johnson, and welcome to Mannatech's second quarter 2015 earnings call. Today, you will hear from both me, and Mannatech's CEO and Chief Science Officer, Dr. Rob Sinnott. 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, 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. At this time, I'd like to make a few comments concerning our second quarter of 2015 operating results.
Net income for the second quarter of 2015 was $3.1 million or $1.15 a diluted share as compared to net loss of $692,000 or $0.26 per diluted share for the second quarter of 2014. The second quarter 2015 net sales were $46.7 million, a 0.9% increase from the second quarter of 2014 net sales of $46.3 million.
The net sales comparison for the quarter was affected by the loyalty program and foreign exchange. The loyalty program increased second quarter 2015 net sales by $3.2 million, compared to the same period of 2014. Constant dollars net sales for 2015 increased by $3.5 million or 7.6% as compared to the prior year.
We use constant dollars reporting to supplement our financial results presented in accordance with Generally Accepted Accounting Principles of United States or GAAP and disclose operating results that had been adjusted to exclude the impact of changes due to the 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 an additional perspective on trends.
In the second quarter 2015, we continue to face foreign currency headwinds, especially in our major currencies of Korean Won, Japanese Yen, Australian Dollar and the South African Rand. Net income was negatively impacted by approximately $0.5 million as compared to positive impact of $0.2 million in the second quarter of 2014.
Our effective tax rate improved to 25% in the second quarter of 2015 as compared to 183.7% for the same period in 2014. We believe the current effective tax rate reflects the general improvement to our global operating efficiencies. New associates for the quarter increased 10.2% as compared to the same period in the prior year.
This was offset by a decrease in new members resulting in recruiting of new independent associates and members, decreasing 18.7% in the second quarter of 2015 as compared to the second quarter of 2014. The number of new independent associates and members for the second quarter of 2015 was approximately 25,600 as compared to 31,500 in 2014.
The total number of active independent associates and members based on a 12-month trailing period was approximately 228,000 as of June 30, 2015, as compared to 239,000 as of June 30, 2014.
For the second quarter of 2015, our operations outside of North America accounted for approximately 59.7% of our consolidated net sales whereas in the same period in 2014, our operations outside of North America accounted for approximately 54.9% of our consolidated net sales.
Asia-Pacific net sales increased by $2.2 million or 10.3% to $23.6 million in the second quarter of 2015 as compared to $21.4 million for the same period in 2014. The number of active associates and members increased, and the revenue per active associated member increased. In constant dollars, the net sales would have increased 21% to $25.9 million.
The currency impact was primarily due to the depreciation of the Korean Won, the Japanese Yen and the Australian Dollar.
Europe, Mideast and Africa or EMEA net sales increased by $0.3 million or 7.5% in the second quarter of 2015 to $4.3 million as compared to $4 million for the same period in 2014 as active independent associates and members increased. In constant dollars, net sales for the three months ended June 30, 2015 would have increased 25% to $5 million.
The currency impact was primarily due to the depreciation of the South African Rand and the Euro. North America net sales decreased by $2.1 million or 10% in the second quarter of 2015 to $18.8 million as compared to $20.9 million for the same period in 2014 due to a decline in active independent associates and members.
Our operating income for the second quarter of 2015 is $4.6 million as compared to an operating income of $0.6 million for the second quarter 2014. Operating income improved as our cost of sales, commissions, and incentives and other operating costs decreased.
Cost of sales was $8.3 million, a decrease of 15.1% as compared to $9.7 million in the second quarter of 2014 due to foreign exchange and a smaller charge for obsolete inventory of $0.1 million during the second quarter as compared to a charge of $0.8 million during the same period in 2014.
Commissions and incentives were $18.9 million, a decrease of 4.5% as compared to $19.8 million in the second quarter of 2014 when we paid commissions associated with prelaunch activities in the Asia Pacific region. We recognized $2.8 million in revenue related to those activities during the third quarter of 2014.
Other operating costs were $5.9 million in the second quarter of 2014, a decrease of 13.9% as compared to $6.8 million in the second quarter of 2014 as travel cost, office expenses, and credit card processing fees decreased.
In reviewing the balance sheet at June 30, 2015, our cash and cash equivalents increased by approximately $2.7 million to a balance of $30.7 million as compared to $28 million on hand at December 31, 2014.
Cash flow from operating activities was $4.5 million inflow for the second quarter of 2015 as compared to $7.4 million inflow during the same period in 2014. During 2015, we invested $4.2 million net in the acquisition of finished goods inventory. During the same period in 2014, we had a net inventory investment of $0.9 million.
The 35% increase in inventory as compared to December 31, 2014 was proportionately spread across all geographic markets.
We invested $1.2 million in property and equipment and repaid approximately $1 million in capital lease obligations during 2015, as compared to approximately $1.2 million investment in property, equipment and capital lease payments of approximately $0.7 million in the same period of 2014.
In summary, our net cash inflow for the first six months of 2015 was approximately $2.7 million as compared to a net cash inflow of $6.1 million for the same period of 2014. Our working capital defined as total current assets less total current liabilities increased by $3.4 million to $19.8 million as compared to $16.4 million at December 31, 2014.
Our net inventory balances increased by approximately $3.7 million to $14.3 million at June 30, 2015 as compared to $10.6 million at December 31, 2014. Total liabilities increased by $2.8 million to $38.5 million at June 30, 2015 as compared to $36 million at December 31, 2014.
Finally, during the first and second quarter of 2015, we did not pay dividends and we did not repurchase shares on the open market. At this time, I will turn the call over to Mannatech's CEO and Chief Science Officer, Dr. Rob Sinnott..
Thank you, David. Good morning to Mannatech's investors, employees, and associates. We are pleased to share our second quarter results with you today. As David Johnson just explained the financials to you in detail, I will only summarize in briefly.
Versus second quarter last year, net sales were improved 0.9%, at the same time net income was dramatically improved at $3.1 million versus negative $0.7 million during the same period last year. Cost of sales was reduced by 15.1% as compared to the second quarter of 2014.
And we took a much smaller, $0.1 million for obsolete inventory versus $0.8 million during the same period last year. New associates for the quarter increased by 10.2% compared to the same period in the prior year. This was offset by a decrease in new members resulting in a decrease of 18.7% for the combined category of associates and members.
Pack sales are up $1.6 million or 21.9% for the quarter. Packs are purchased by new associates and existing associates who wish to build Mannatech business. During the past year we took the following actions to regrew and retain associates and increase pack sales.
We launched aggressive marketing and educational campaigns, we initiated additional incentives and we opened new international markets. In summary, we are sticking to the basics of good management and applying best practices globally. We are beginning to see good results.
We have programs that are working globally to lift sales and recruiting in certain areas. So it continues to be a matter of transplanting these successes into our other global markets. We are executing on the five strategic mandates that we set for 2015 through 2017.
Not all the mandates will be completed this year as some are longer term projects that will have their first major public impacts in 2016.
These strategic mandates are; number one, to increase sales in all markets while maintaining profitability, to increase top line sales through campaigns, strategic product launches, incentives and international expansion.
We are also further increasing our operational efficiency in terms of supply chain cost and inventory control, and honing profitability in all our global operations. We have specific targets for net sales growth and net income that we are working to achieve.
Number two, we are designing and will implement permanent changes to our compensation plan which will simplify the plan. Currently we have one of the most generous compensation plans in the industry, we wish to keep the generous payout but we must simplify the plan to better link performance with maximum reward.
We are pleased that this is being handled systematically and aggressively since it is so important to our associates, our leaders, and our business model. Number three, in our industry leadership development, recognition, rewards, and productive events are key motivators for our independent associates.
So we are implementing best practices from around the globe to enhance this culture within Mannatech. We have seen that we're a systematic leadership development, recognition and events are taking place. Our leaders are happier and maximally productive.
Number four, Mannatech is updating its product messaging and branding to catch the attention of today's consumers. Mannatech has a fine reputation for top quality health products but the aura around our brand and the stories that we use to communicate our proposition will be targeted for today's consumers.
Therefore we have several projects underway to make our story simpler and crisper with elements that resonate well in today's crowded marketplace. This huge project is rolling out in stages. We have already begun producing crisper marketing material while longer term work around our branding is underway.
The public can expect to see a much fresher Mannatech continue to emerge through the remainder of 2015 and deep into 2016. Number five, our fifth major enterprise wide mandate is to simplify online ordering, enrollment and electronic communications with our global associates.
Our technology in these areas is out of date and has become a rate limiting step for our business expansion. We are determined to fix this and leapfrog from our current place to become a leader in simple online ordering, enrollment and business management for our associates.
Overtime other companies have totally changed the expectations of people towards simplicity, ease of ordering and quick service. We are now undertaking a full replacement of the system with a goal to have a modern replacement system up and running in the first half of 2016. It will be a positive and very noticeable change.
We believe that it will delight our customers and unlock new business potential when ordering enrollment moves from a time consuming process to a simple step in their business day.
The combined effect of executing these five mandates, I believe will continue transforming Mannatech's business and move us forward as a leader in the direct selling nutrition industry.
Also some great things are happening for Mannatech globally, in June I had the good fortune of participating in the Mannatech vision program events in Asia, in Hong Kong, Taiwan, and Japan. As always visiting Asia and working closely with the associates and staff there is invigorating to me.
I love the fast pace of Asia, and I'm very proud of how Mannatech has overtime build a vibrant business in Asia. Entrepreneurial drive in Asia is simply off the charts. This combined with strong work ethic and in honorable place for natural health products makes Mannatech a perfect match for growth in Asia.
Overall, I think Mannatech has the ability to manage its own destiny. Our future is bright, wherever there is the convergence of entrepreneurial drive, good work ethic, and desire to improve wellness in overall quality of life. The future is ours to own when we execute on well laid plans. I am so proud to be part of Mannatech's return to growth.
To our shareholders, employees, and thousands of associates worldwide, thank you, and god bless as you continue to support the exciting new Mannatech..
Thank you for listening to Mannatech's second quarter 2015 earnings call. As a reminder company information and filings can be found at the company's investor relations website at ir.mannatech.com or by reviewing the SEC submissions. This concludes today's call. Thank you..
End of Q&A:.