Jul 30, 2013
Executives
Brett R. Chapman – General Counsel Michael O.
Johnson – Chairman and Chief Executive Officer Desmond J. Walsh – President John DeSimone – Chief Financial Officer
Analysts
Tim Ramey – D.A. Davidson John San Marco – Janney Montgomery Scott Scott Van Winkle – Canaccord Genuity Sandy Chen – IT Asset Management
Operator
Good morning and thank you for joining the Second Quarter 2013 Earnings Conference Call for Herbalife Limited. On the call today is Michael Johnson, the Company’s Chairman and CEO; the Company’s President, Des Walsh; John DeSimone, the Company’s CFO and Brett Chapman, the Company’s Chief Legal Officer.
I would now like to turn the call over to Brett Chapman to read the Company’s Safe Harbor language.
Brett R. Chapman
Before we begin, as a reminder, during this conference call, comments may be made that include some forward-looking statements. These statements involve risk and uncertainty, and as you know, actual results may differ materially from those discussed or anticipated.
We encourage you to refer to yesterday’s earnings release, and our SEC filings for a complete discussion of risks associated with these forward-looking statements and our business. In addition, during this call certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S.
Generally Accepted Accounting Principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measures assist management and investors in evaluating and comparing period-to-period results of operations in a more meaningful and consistent manner.
Please refer to the Investor Relations section of our website herbalife.com to find our press release for this quarter, which contains a reconciliation of these measures. Additionally, when management makes reference to volume during this conference call, they are referring to volume points.
I'll now turn the call over to Michael.
Michael O. Johnson
Thanks, Brett. Good morning and welcome to our second quarter 2013 earnings call.
Let me start by saying that Herbalife’s business is stronger than it’s ever been and the operating results announced yesterday are the best in the company’s history. It was a record performance from both top and bottom line perspectives.
Second quarter net sales of 1.2 billion is 18% above last year’s second quarter. Our adjusted EPS of $1.41 increased 29% compared to the prior year period and we generated $183 million in free cash flow.
The strong performance in the second quarter was an acceleration over the record results achieved in the first quarter. Volume points grew 14% year over year with growth in each of our six regions.
South and Central America grew 33%, Asia Pacific grew 1%, China grew 49%, EMEA grew 16% and Mexico grew 8%. North America’s growth rate was 11% in the quarter compared to 2012.
And more importantly its growth rate increased sequentially from the 4% in the first quarter. Sales of our top selling meal replacement product Formula 1 increased 16%, reflecting the ongoing expansion of daily consumption sales methods by our distributors which are making our products more accessible and affordable.
Formula 1 and our other nutritional products provide meaningful solutions to millions of consumers who seek to improve their health and to manage their weight. Obesity, while it continues to be a global epidemic that poses serious health concerns, as well as at tremendous financial burden on public health systems around the world.
Herbalife today has a mission for nutrition that is based on our belief that our independent sales force is helping mitigate the global obesity epidemic by offering high quality products, personalized coaching, and a social environment that inspires customers to eat better, engage with each other, maintain a healthy weight and pursue a healthy active lifestyle. We’ve never been more confident about our business.
And as a result included in our earnings announcement yesterday, we raised our guidance for the third time this year. The new guidance range points to 2013 being another record year with double-digit top and bottom line growth.
Over the past 7 months there has been a whole lot of misinformation spread about Herbalife. As a result, we believe that Herbalife has become one of the most researched companies on Wall Street.
We also believe that through the in-depth research conducted by so many firms, the investment community as a whole has come to the same conclusion that we already knew. Herbalife is a sustainable, financially strong company with a robust consumer base, loyal to our high quality nutritional products.
We have demonstrated the scale of our consumer base through studies performed by two highly respected research companies. The latest announced June 11th performed by the Nielsen company, a leading global information and measurement company, found that 3.3% of the U.S.
adult population or 7.9 million people have purchased an Herbalife product within the three month period prior to the study, of which 87% reported themselves to be non-distributors. This study along with previous independent studies have shown a large number of end users for our products with the vast majority being outside our network.
We also believe our sales channel direct sales is ideally suited to marketing nutrition products. Our distribution approach has evolved over the last three decades.
Our focus will continue to be on supporting our distributors. Their focus is on increasing customer contact through a wide variety of social models, which work together to drive better product results.
The ongoing personal contact, coaching and education between distributors and their consumers strengthens the sales of weight management, daily nutrition in our personal care products. This frequent personal contact enhances the consumers experience by improving their nutrition and health education as well as motivating them to begin and maintain wellness and weight management programs, all of which means greater success in achieving their goals.
Herbalife 24 is emerging as a product and a brand for endurance athletes and those looking for great sports nutrition. There are now Fit Club business models based on Herbalife 24 that are creating opportunities for a whole new generation of Herbalife customers and distributors.
We know a large percentage of our distributors or participants are simply discount customers who use our weight management, nutrition sports and personal care products primarily for their own use. Knowing that most of our participants are discount buyers, we have decided to change and simplify the terminology we use for participants in our network.
Beginning this quarter, the term we will use for participants will change from distributor to member. This change will require modifications to all participant agreements, rules and training materials.
It will take several quarters to implement across all platforms around the world. In the U.S.
however, the implementation will begin immediately and should be completed within a few months. We believe this change will be beneficial to our business as it will help simplify the understanding of our participant base.
This is another example of our build it better program, which has yielded numerous opportunities for our business and for our distributors as we focus on initiatives that make our company stronger, our products better, our customers better served, our direct selling model and business opportunity more successful and easier to understand and our brand even stronger. We believe the changes we are making will better serve our customers and help you as investors better understand and simplify our business.
These changes will help clarify misinformation introduced into the market and spread to special interest groups here in America who have been badly deceived about how our business really works. From an investment perspective, we continue to invest in our products and our brand.
Our extraction facility in Changsha, China is ramping up its production, an increased amount of the botanical ingredients in our products including teas will be manufactured in that facility. We will have invested $130 million in our Winston-Salem North Carolina manufacturing facility, which is expected to begin operations next summer as planned.
And this quarter we announced a new sports sponsorship with one of the world’s top athletes, Cristiano Ronaldo. Cristiano is an athlete who understands how vital good nutrition is when striving for world class performance.
We are excited to have Cristiano as a member of team Herbalife and we look forward to working with him to improve his performance on and off the field. I want to thank all the members of our Herbalife family, our members and sales leaders.
There are millions of customers around the world who use our products to improve their nutrition and health and who are ultimately responsible for our exceptional global growth. And of course our employees.
Despite the public market distractions, our focus remains on supporting our members, while implementing the numerous growth and infrastructure strategies we believe will help us deliver ongoing strong financial performance. We are experiencing tremendous growth around the world, driven by increased consumption of our products as a result of the global obesity epidemic and an ageing population.
Our members and sales leaders remain highly engaged, sharing great ideas to drive global growth while working closely with our management team to introduce new ideas and initiatives worldwide. All of us at team Herbalife are working harder, smarter, every single day to build it better.
Now over to Des for a more details update on our performance in our key regions.
Desmond J. Walsh
Thank you, Michael. As you’ve just heard, we had another record quarter, our 15th consecutive quarter of double digital topline growth and our 8th consecutive quarter of more than 1 billion volume points.
As Michael mentioned, we will soon begin implementing the nomenclature change, with new participants being termed members as opposed to distributors. So as we go through the discussion of the regional results, we will use the new terminology.
June was the strongest volume month ever in Herbalife’s history. Such performance is reflective of our ongoing momentum and the breadth of growth that we see across our markets.
Not only did 4 of our 6 regions post strong double-digit volume point growth but every region saw increases in average active sales leaders. Our members and sales leaders around the world actively continue their mission for nutrition, helping to provide great tasting, low calorie nutrition in communities amidst an increasing obesity epidemic.
They consistently execute daily consumption methods to build stable, growing businesses. Now let me provide some highlights and data on our regions.
The North American region had another record quarter. It posted 10% net sales growth and 11% growth in volume points, each compared to the prior year.
Average active sales leaders with volume points increased 10% and new members increased 4% compared to last year’s second quarter results. The per capita volume point penetration for the region in the last 12 months was 3.4.
This compares to 7.4 in Mexico and 9.2 in Korea and supports our belief that there is tremendous opportunity for future growth in this our oldest and largest region. Within the North American region, the continued strength of the U.S.
market can be seen in a net sales growth of 11% and a volume point growth of 12% each versus the same quarter last year. Compared to the prior year period, average sales leaders with volume points increased 10% and new members in the U.S.
increased 4%. The growth in the U.S.
market is broad-based. As you know, we experienced the departure of a top U.S.
sales leader from Herbalife in January and another in June, related to the introduction of rules last September restricting the sale and use of paid advertising leads. As we stated at the time, and as is evident in the strength of the second quarter, the loss of these sales leaders has not had a material effect on our U.S.
business. The sequential growth from 3.8% in the first quarter to 11.9% in the second quarter was very strong and is a testament to the leadership, resilience and focus of our U.S.
members and sales leaders. In addition to this volume point growth, we are very pleased with the underlying trends that we are seeing in the U.S.
Approximately 80,000 new U.S. members joined in Q2, the largest increase ever for a market in Herbalife history.
The percentage of new sales leaders qualifying out of the 5K method has continued to grow and expanded more than 30% in the quarter. Historically sales leaders that qualify under the 5K method are more productive and more likely to have built businesses ground and daily consumption and steady long-term customers.
22 of the top 25 metro U.S. market posted growth in the second quarter over the same period last year.
Moving on to Mexico, local currency net sales for the quarter increased 12% and volume points increased 8% each as compared to the prior year period. For the second quarter, average sales leaders with volume increased 13% while new members decreased 1% both compared to the prior year.
The per capita volume point penetration in Mexico for the last 12 months was approximately 7.4. As you know, training and educating our members and their customers is a fundamental part of the Herbalife business.
In 2012, we launched a wellness tour covering 65 cities in the region with doctors from Herbalife’s nutrition advisory board. This year, the wellness tour in Mexico held 150 events in 100 cities seeing over 117,000 attendees.
These events drive ongoing attention and education about healthy lifestyles, building on the 2012 introductions of the Herbalife 24 product line to Mexico. Now let’s turn to China where local currency net sales increased 49% and volume points grew 49% in the second quarter compared to the prior year period.
Average asset sales leaders increased 18% over the same period last year. China's volume point per capita penetration for the last 12 months was about 0.2.
We are delighted to see growth and improved metrics in this region, driven by the introduction of daily consumption methods into the market. Earlier this year, we implemented first order limits in China.
We continue to see more nutritions open and while we are pleased with the progress of the China market, we remain cautious about expecting too much too soon. In the Asia-Pacific region in the second quarter, local currency net sales increased 1% and volume points increased 1% which is compared to the prior year period.
Average active sales leaders with volume grew by 15% and new members grew by 3% over the same quarter last year. The volume point per capita penetration in this region for the last 12 months was 0.6.
In the past two years in Asia Pacific, we've seen cumulative volume point growth of 38% and additional 169,000 members qualify at sales leaders. We are working with leadership within the Asia-Pacific region to focus on implementing best practices to help drive higher retention and sales leader activity rates.
These include an increased emphasis on the 5K sales leader qualification which increased from 22.5% of qualifying sales leaders in Q1 to 26.5% in Q2. The combination of these factors coupled with a difficult comp against Q2 2012 resulted in a very modest increase in volume points in Q2 2013.
However, we believe the core business in Asia is very strong as evidenced by the growth of average active sales leaders in the quarter by an impressive 15%. Within the Asia-Pacific region, Indonesia continued its strong performance with a 47% increase in local currency sales and a 69% increase in average active sales leaders as compared to the same quarter prior year.
Korea is one of our most established Asia-Pacific markets with per capita volume point penetration of 9.2. Lapping difficult comparisons from prior periods, local currency net sales decreased 3% as compared to second quarter of 2012.
During the second quarter, we saw more than 17,000 members and sales leaders at the Korean Extravaganza which illustrates the unified leadership and strong engagement by both members and sales leaders. In India, local currency net sales grew 4% and the average active sales leaders grew 26% over the same quarter prior year.
Increased product access through past operational initiatives and the successful adoption of the daily consumption business method drove much of this growth. With less than one volume point per capita penetration in India, we see significant growth potential in this market and through the introduction of first order limits and increased focused on the 5K sales leader qualification we're working with our leadership to create long-term sustainable business there.
Local currency net sales in the South and Central American region increased 50% and volume point in the region were up 33% each is compared to the second quarter of 2012. Average sales leaders with volume points in the region increased 30% and new members also increased 30% over last year's second quarter.
The per capita volume point penetration in this region for the last 12 months was 1.9. The region is supported by a strong and engaged leadership base which we know to be an integral part of driving growth.
Additionally, we see the expanded use of the five-pay qualification method in South and Central American market which gives us confidence in the long-term growth and stability as members and sales leaders continue to build their business sustainably over time. Venezuela continued to grow with a 51% increase in new members and 58% increase in average active sales leaders both as compared to second quarter 2012.
We believe that daily consumption coupled with an increased utilization of the 5K qualification methods are making a significant difference in the growth of this market. Within the South and Central American region, we continue to see strength in Brazil.
Volume points grew 30% and average active sales leaders grew 26% in the second quarter over the same period prior year. The ongoing adoption of nutrition clubs as well as traditional business methods contributed to this growth.
Turning to EMEA, during the second quarter, local currency net sales increased approximately 15% and volume points in the region grew 16% compared to the same period in the prior year. Average sales leaders with volume points in the region was up 12%, and new members was up 13% over the prior year period.
In EMEA per volume point penetration in the last 12 months was about 0.7 which we believe speaks to the scale of the opportunities that remains in this region. Effective implementation of daily consumption business methods for nutrition clubs, fit camps and weight loss challenges drove performance across the region.
We continue to see the development of a younger, more athletic member based in Western Europe that has embraced the Herbalife24 product line and an active lifestyle and enthusiastically introduced them to their customers. Within EMEA, Russia had robust second quarter.
Compared to the second period prior year, volume points increased 20%. Our Russian leadership has helped to develop a disciplined city by city focus that includes systemized training applied daily consumption methods and utilization to the 5-K qualification method.
The UK our oldest market in EMEA continues its impressive performance. This quarter we experienced 92% growth in volume and a 56% increase in average active sales leaders.
The early stage success of weight loss challenges, office clubs and sit camps in the market ignited the member base and drove engagement with the larger group of consumers. We are seeing other markets in the region begin to implement elements of the business methods that have been so successful in the UK.
Encouragingly, we are beginning to see signs of growth emerge in other markets in Western Europe, which have been flat for several years and which contributed to the record 16% volume point growth in EMEA this quarter as compared to the same quarter of last year. Now in passing the call over to John to review our financials, let me take the opportunity to pay tribute to our members and sales leaders for another very strong quarter.
Their resilience, steadfast engagement and dedication to their customers are evident in the record-breaking second quarter results. We are proud of their accomplishments and continue to support their endeavors in creating and mentoring new customers and ensuring the value of Herbalife's products around the world.
John DeSimone
Thank you, Des. As Michael said earlier in the call, we had a great quarter.
But before reviewing our second quarter financial performance and the full year guidance provided in yesterday's announcement, let me provide an update on the reaudits. Similar to last quarter, we filed our second quarter 10-Q without the SAS 100 review and therefore without the required SOX-906 certifications.
10-K is complete in all of the respects including 302 CEO, CFO certifications as to the accuracy of financial information. When completed the 10-Q will be amended with the 906 certifications to reflect that it stands 100 review has been completed by PWC as part of the reaudits of the prior three years.
The management and the audit committee believes that the financial statements covering the reference periods daily present in all material respects, the financial conditions and results of operations of the company as of the end of and for the reference periods and we continued to be relied upon. And at the company's internal controls over financial reporting or the factor during these periods.
With respect to progress of the reaudits of 2010 through 2012 and the SAAS 100 reviews for each of the first two quarters of 2013, we expect to be completed and up to date no later in the end of this calendar year. Let me now review our financial results.
Concerning the both to the second quarter of last year and to the guidance for this quarter that was provided to you in April. And then I'll comment on the updated guidance we provided yesterday.
With respect to our financial results yesterday, we reported second quarter net sales of $1.2 billion, an increase of 18.2% compared to the second quarter 2012. Local currency net sales for the period increased 17.4% with a favorable FX impact of 0.8% as compared to the prior period.
Since this is already reviewed in detail the volume and net sales results by region and key country, I'll now discuss our margins . Our gross profit margin for the second quarter decreased approximately 53 basis points as compared to the second quarter of 2012.
The net decrease to gross margin was primarily due to the unfavorable impact of currency with higher cost and price increases offsetting each other. Before moving on to operating margin, please note that our reported second quarter results included some unusual items that we consider to be outside the range of normal operations.
We have therefore excluded these expenses from our adjusted second quarter results. They are as follows: $8.1 million of pre-tax expenses or $0.07 earnings per share related to expenses incurred responding to a tax on the company's business model; $3.5 million of pre-tax expenses or $0.02 earnings per share; a one-time cost incurred during the quarter associated with our reaudits.
These costs may ultimately be recovered but until a definitive agreement is in place, the cost will be expensed as incurred as will in recoveries. We expect to continue to call off this item in the future.
The third unusual item in the quarter was a tax benefit of $0.02 related to the first quarter devaluation of the Venezuelan Bolivar. The following comments regarding the company's second quarter operating margins, effective tax rate and EPS, all exclude these three items just discussed.
Second quarter adjusted operating margin of 16.7%, which excludes the items just mentioned, decreased by approximately 137 basis points, compared to the prior year. A little more than 100 basis points of this decrease is a result of higher SG&A expenses, which exclude China service provider expenses.
SG&A was negatively impacted primarily by two items, higher recorded currency losses as this year's quarter included $7.9 million in recognized FX losses compared to only $800,000 recognized in last year's P&L, resulting in a net unfavorable impact of approximately $7.1 million. This change accounts for approximately have the add force basis point change.
The second item impacting SG&A as a percentage of sales and sales events which increased by approximately $6.5 million versus the second quarter of last year. Now let's move onto our effective tax rate.
Our second quarter adjusted effective tax rate was approximately 410 basis points lower than our effective tax rate for Q2 2012. The variance is primarily due to shifts in our geographic mix as well as some benefits from discrete items.
Second quarter adjusted earnings per share of $1.41 was $0.32 or 29% or 28% higher than our earnings per share for the second quarter of 2012. As previously noted, the improvement was primarily driven by growth in sales and decrease in our effective tax rate along with the lower share base due to our ongoing buyback activity.
Comparing second quarter EPS to previous guidance provided in April, adjusted EPS of $1.41 was $0.23 cents per share higher than the high-end of our guidance range primarily driven by top line performance but also benefited by $0.04 of timing of expenses, which have been rephased into the balance of the year and $0.06 due to favorable effective tax rate. Before moving on to the new guidance provided for 2013, I want to know a couple of items, with respect to Venezuela, our guidance continues to assume a rate of 10 bolívars to $1 for the balance of the year, it does not include any further charges or right downs associated with our Venezuelan operation of bolívar denominated cash.
Our guidance also excludes any ongoing expenses incurred responding to a tax on the company's business model and the reaudit related expenses or any recoveries of such costs. In the second quarter, these pre-tax costs were approximately $8.1 million to $3.5 million respectively.
For all currency assumptions, we use the average closing exchange rates during the first two weeks of July with the exception of Venezuela as previously disclosed. The currency rates assumed in our guidance reflect movements that are meaningfully worse than the rates utilized a quarter ago.
As such there is a $0.18 per share negative impact to the back half for the year due to the strengthening dollar compared with the guidance provided in April. If not for this currency impact both the third quarter and implied fourth quarter guidance provided yesterday were $0.09 per share higher.
From a volume point perspective we're we are raising a full year 2013 volume growth expectations by 250 basis points compared to the previous guidance and now expect the volume growth in the range of 11.5% to 13.5%. As Michael mentioned for the third time this year we are raising our adjusted EPS guidance for 2013.
We are taking the low end of the range up $0.23 per share and the high end of the previous range up by $0.15 per share. We now expect adjusted EPS to be in the range of $4.83 to $4.95.
The full year adjusted EPS guidance includes a year-over-year currency headwind of approximately $0.30 per share. For the third quarter we are providing initial guidance point growth of 11.5% to 13.5% which is on top of strong 17% and 23% volume growth we experienced in Q3 of both 2012 and 2011 respectively.
Adjusted EPS in the third quarter is expected to be between $1.9 and $1.13. This adjusted EPS range for the third quarter includes the negative headwind of approximately $0.13 per share versus the prior year and $0.09 per share adverse impact compared to the rates we utilized in the guidance we provided a quarter ago.
Finally, I will address our share buyback program. Over the last couple of years, our guidance included $50 million of share repurchase per quarter.
This indicates our intention to at least execute a portion of our buyback program on a routine basis. Even though in many quarters, we significantly exceeded that amount.
Last quarter, we did not include any repurchase in our guidance for Q2 as a result of KPMGs forced resignation. We wanted to wait until we had new auditors on board, which would provide us better visibility into the timing of securing reaudited statements.
With PWC on board and our confidence in having reaudited statements by year end, our guidance provided yesterday includes the assumption that the company will resume its buyback program. We have included 50 million per quarter in our forecast but we believe that our balance sheet is under levered and we have available cash and therefore we may decide that based on the discretion provided to us by our board to repurchase more in the amount including in the guidance.
Thank you. This ends our prepared comments.
We will now open up the call for your questions.
Operator
(Operator Instructions) Your first question comes from the line of Tim Ramey of D.A. Davidson.
Tim Ramey – D.A. Davidson
John, I noted the fact that there were fully restated balance sheets for '10, '11 and '12 in the 10-Q filed last night. And it came to the balance sheet without an income statement so you must be pretty close on the re-look at the financials.
Why do we think that it is far out at the end of the calendar year?
John DeSimone
I think my words, Tim, were no later than the end of the calendar year.
Michael O. Johnson
It's going to be when it's going to be and as soon as this is ready we're going to release it. I think the outside timeline at the end of this year it is possible that it's done earlier.
But it's a complex, time consuming process and we want to make sure we set expectations that we can achieve.
Tim Ramey – D.A. Davidson
Sounds good. And then obviously one of the reasons why you're unable to repurchase stock at lower levels was the KPMG resignation.
I know that you certainly have a very good cause of action against KPMG, will you add on both recovery of excess audit fees as well as other damage that may have been caused by their senior audit partners?
Michael O. Johnson
Tim, we can't comment on potential proceedings. Sorry.
Operator
Your next question comes from the line of John San Marco with Janney Capital Markets.
John San Marco – Janney Montgomery Scott
I have a follow-up on your scripted comments John about capital allocation. Has the amount of cash that you need to keep on hand around the business does that change at all form two years ago when you just held about 250 or so?
John DeSimone
No, it hasn't changed. I think what we spoke about on the last earnings call was just a need to get the new orders around Board and have some clarity as to what the timeline was.
I think we made it clear that prior KPMG's resignation we were looking to enter into the debt deal, that deal fell apart, we now know we are under levered. No commitment on anything specific that we will do.
But we will always look to great value for our shareholders and that includes looking at our capital structure.
John San Marco – Janney Montgomery Scott
Okay, thanks. On Latin America, I was wondering if you could just sort of bit talk about in bigger picture sense, it was maybe the last segment you had accelerate out of '08 slow down and now it's been -- this is the biggest driver of growth.
I guess what do you do there differently today, has it been impactful and what's the opportunity to take that to other regions?
Desmond J. Walsh
So John this is Des. So, I think a couple of things, so a significant factor in South and Central America is obviously Brazil.
A number of years ago, we sat down where there should be the leadership, we really work with them to improve business practices and retention rates and activity rates in Brazil. And since then, we've actually seen significantly stronger performance and consistent performance in Brazil, most recently in second quarter, 30% growth but of course John, it's not just about the growth and volume points because not only do we have 30% of growth in volume points in Brazil, we have a 26% increase in average active sales leaders.
So it's about productivity, it's about engagement. In the Spanish speaking market, the Latin America has been obviously again tremendous leadership by our distributors there, but it's been a focus on daily consumption, focused on more and more training, more institutionalized support and frankly better product access throughout the region.
So a whole combination of distributor leadership, engaged leadership, the factors and the company’s approach in terms of regionalization city-by-city and essentially the same strategy that has driven our growth in South and Central America is the same thing, that's our strategy around the world. It's daily consumption, systematized training, locations and a city-by-city approach.
John San Marco – Janney Montgomery Scott
And then I was wondering if you can address the decline in total number of distributors during the quarter, was that driven or just maybe if you could -- what you can detail on that number?
Desmond J. Walsh
So our focus today overall, John, is on productivity and engagement and not pure numbers. Obviously we are thrilled to see the significant number of new distributors joining us in United States as I've said in the prepared comments.
The number of new distributors, new members in the second quarter, 80,000 new distributors came to us like in the second quarter, a record number. So we're very pleased to see that but overall our focus is on activity and engagement and helping our members -- to sale people.
John DeSimone
This is John. Let me add one other thing too that's unique in the quarter.
So in the first quarter when our sales leaders were – one, they were not retained, they were demoted to senior consultant for 90 days and actually dropped out of the system in the second quarter. We actually see that movement in this reported period.
John San Marco – Janney Montgomery Scott
And do you think that had an incremental impact versus historical 2Qs and was that a bigger number this year?
John DeSimone
No, this is part of the campaign, that was something we were testing as part of the business that we didn't do last year.
Operator
Your next question comes from the line of Scott Van Winkle with Canaccord Genuity.
Scott Van Winkle – Canaccord Genuity
Des, I was wondering if you could talk a little bit more about Asia-Pacific and kind of you know sum-up you talked about markets puts and takes here and there. I am trying to wondering overall you mentioned some good metrics and average active supervisors, what the expectations are on volume and revenue in that region.
And then I would love to hear a little more commentary on the disparity between the revenue of this last quarter and the average active if you could.
John DeSimone
Yeah. Scott so on age specific really two key massages there.
The first obviously in Korea, Korea represents about a third of our total business in the Asia-Pacific region. Korea as you know has achieved this tremendous volume points per capita just over nine significant number.
So in Korea, I think we've reached just a natural plateau in the business while our distributors while the company regroups. That's something that traditionally happens in many markets and we believe that there is still growth ahead in Korea.
But we're working with our Korean leadership now to focus on retention because retention has been one of our challenges there and so that's really our key focus on training, on retention and then frankly just overall more increased product access more training regarding clubs and so on. In the other markets in Asia Pacific region again a focus on the 5K qualification you know that we've introduced the first order limitation in India.
And seeing the combination of 5-K, the first order limitation. Again our focus is on building a stronger foundation for growth ahead.
Volume point penetration in the entire Asia-Pacific region is 0.6 and as you compare that to the advance markets like Korea, you will see there is huge opportunity for growth ahead. So, in the third quarter we predict slightly increased growth and then fourth quarter acceleration growth.
So, overall we are going to have a growth story in Asia-Pacific. What you are seeing in Asia-Pacific today something that you saw in Brazil few years ago and China more recently where we want the distributor leadership to putting a stronger foundation for future growth.
Scott Van Winkle – Canaccord Genuity
I appreciate the commentary on China. Are there any other metrics that I think for three to four years you've ended your China commentary with that cautionary statement at the end.
Are there any other metrics we should watch or think of when we look at China kind of taking off this quarter?
Michael O. Johnson
So Scott, China -- we'll always be cautious about China because the reality is that we operate there in a market that is obviously subject to change at any time that we know we do, we have a tremendous relationship and we do a lot of focus in terms of government relation government activity. So the government is totally aware that we're a good call for citizen, but at the end of the day it's China.
So, we're very pleased with what we see in China we see an accelerating business, we see tremendous strength in our fundamentals that's shown in the numbers in terms of presented active leaders. All the key metrics are very positive in China but frankly whether it's now or one year or five years or 10 years I think you're always going to hear as -- the same conservative team regarding China.
Scott Van Winkle – Canaccord Genuity
Is there -- are there any parallels you can make between China and maybe other market more mature market where you saw the pain type of trajectory, is China just a different environment because of the different operating model?
Michael O. Johnson
So it's a different environment because of the same operating model, but the some fundamental deploy and that is that our business is focused on daily consumption. It's about people consuming our products every single day and that's the commonality whether it's China or whether it's any other market in the world.
Operator
The next question comes from the line of Sandy Chen with Asset Management.
Sandy Chen – IT Asset Management
You noted John that you guys are under levered and that seems to be quite understatement. You have about 850 million in cash and 950 million in debt.
So you are about 0.1 debt to EBITDA. Can you talk about what you think will be a normal leverage amount, the group average for consumer is about 1.5 times.
So, you could take on another 1 billion in debt and that you’re audits on and if you use that for share repurchases or dividends, it could shrink your float by 15%. Is this the right way to think about what you guys have and how you would use your cash?
Could you just rank order to cash use and then talk about the -- walk through the mechanics of, are they doing a tender offer as to where did you want 2 billion in the share repurchase program?
Michael O. Johnson
Yeah, obviously I can hear all those. First, we have a tremendous history of share repurchase having new purchase of $1.7 billion since 2007.
If you know where it stands a bit and you know us well. Regarding appropriate debt levels that is a decision for forward.
As you can imagine, I think we have communicated that investment grade debt level is not necessary investment grade debt but types of multiples that you'd see an investment grade company is something we would be comfortable with, that's something that has consistently been communicated. As far as the buyback goes and the execution of the buyback, I think that will be based on circumstances, the time we decide to do buyback.
Yes, we’d do a buyback.
Sandy Chen – IT Asset Management
And that timing and when your audited financials are complete.
Michael O. Johnson
No, I think what I said in my comments is we're back and we expect to be back in the market now that we have PWC on board and that we have visibility to the completion of the re-audits.
Sandy Chen – IT Asset Management
Is that just normal open market share repurchase program?
Michael O. Johnson
Yeah, that's what's included in our guidance.
Sandy Chen – IT Asset Management
And so what do you have left in your share repurchase program 750 million?
Michael O. Johnson
Little more -- almost 787.
Sandy Chen – IT Asset Management
And could you go back to the board as soon as that would be complete to ask for more if necessary?
Michael O. Johnson
Yes, we will deal with that in time, that will be a board discussion. Again we have a strong history, Sandy, I mean you know us very well.
We generated a lot of cash, we're not M&A oriented, that cash first and foremost goes into investing in our future, in our growth and then it goes back to our investors and with a heavy overweight so with share repurchase. And that's been a consistent theme for Herbalife now for six years.
Sandy Chen – IT Asset Management
Okay. I guess just you have 850 million in cash on hand but in there are repurchase programs 780.
So you could fund all of that with what you have currently without having with that market?
Michael O. Johnson
Look, we have a lot of cash as I've said in my opening remarks and we are under-levered and we'll do what we think is best for the long-term interest of our shareholders.
Operator
Your next question comes from the line of Tim Ramey with D.A. Davidson.
Tim Ramey – D.A. Davidson
Yeah. Thanks for the follow-up.
Guys maybe you could shed a little bit more light on the new classification which is a great initiative. Are you actively going to renegotiate or retry agreements for the existing distributors, or do you just plan to have this kind of cycle through the normal re-up period?
And is there any change to member economics i.e. the cost to become a new member versus the cost to become a distributor previously?
Michael O. Johnson
Yeah. So, Tim, no cost, no change, this is literally a normal site to issue to bring that greater clarity when people look at our business models.
So, essentially part is about to happen is that we are introducing a new member application and so, effectively, there really is no change, it will cycle through over the period of time. But very shortly, we'll have a new member application in the United States.
If somebody coming to us will complete that they will return a member and then when they qualify the sales leader they will become the sales leader. So essentially it's really a sense of substitution of the term distributor for the term member, recognizing that the majority of people who historically completed a distributor application are joining for the purpose of a wholesale discount.
They have no intention of doing the business as you know over 70% people did not -- never included anybody over 70% of people based on the consumer research signed up just to become a wholesale member. So, this change is simply reflective of the reality of our business and is intended clarity to an existing situation
Tim Ramey – D.A. Davidson
Des, some of your peers have used an auto ship agreement as sort of an inducement to sign-up as to what their nomenclature is preferred member or preferred distributor or preferred customer. Wouldn't that have been an opportunity for you to do sort of something like that?
Desmond J. Walsh
Tim, we don't favor order ship significantly for this reason. In our business it's all about the personal interactions between a distributor and their customers.
And so from that perspective the idea of simply product shipping automatically just doesn't automatically gel with that. We want to encourage regular contact.
If you think about it, that's one of the magics of a nutrition club. The fact is we've got regular contact three, four, five times a week between distributor and their customers.
So frankly order ship programs for people just receiving products automatically. Certainly if a customer wishes to have something like that, we certainly explore but frankly as a matter of policy, it's not something that we really support and it's one of the points of difference between Herbalife and our competitors.
Operator
At this time, there are no further questions. Presenters, do you have any closing remarks?
Michael O. Johnson
Well, this is Michael and I just want to thank everybody for their questions and for participating today. We are obviously extremely proud of our distributors, our team members, everybody involved with Herbalife, our vendors all the products excellence is taking place in the company.
As we said in today's call, our business has never been stronger and our guidance reflects our confidence that our business will continue to strengthen as we close out 2013. So get here at Herbalife and as we build it better and every day we believe this velocity will continue to make our company extremely valuable to you, our investors.
So, we look forward to seeing you all on our -- and being with you all on our call next October or this October. So thank you very much onward and upward.
Operator
This concludes today's conference call. You may now disconnect.