May 4, 2018
Executives
Eric Monroe - Herbalife Nutrition Ltd. [05F4FP-E Rich Goudis] John G.
DeSimone - Herbalife Nutrition Ltd. Richard P.
Goudis - Herbalife Nutrition Ltd.
Analysts
Douglas M. Lane - Lane Research Michael A.
Swartz - SunTrust Robinson Humphrey, Inc. Timothy S.
Ramey - Pivotal Research Group LLC Beth N. Kite - Citigroup Global Markets, Inc.
Presentation
Operator
Good afternoon, and thank you for joining the First Quarter 2018 Earnings Conference Call for Herbalife Nutrition Limited. On the call today is Rich Goudis, the company's CEO; Des Walsh, the company's Executive Vice Chairman; John DeSimone, the company's Co-President and Chief Strategic Officer; Dr.
John Agwunobi, the company's Co-President and Chief Health and Nutrition Officer; and Eric Monroe, the company's Director, Investor Relations. I would now like to turn the call over to Eric Monroe to read the company's Safe Harbor language.
Eric Monroe - Herbalife Nutrition Ltd.
Before we begin, as a reminder, during this conference call, comments may be made that includes 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 today's earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements in our business. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events except as required by law.
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 that these non-GAAP financial measures assist management and investors in evaluating our performance and preparing period-to-period results of operations in a more meaningful and consistent manner, as discussed in greater detail in the supplemental schedules to our earnings release. Please refer to the Investor Relations section of our website, herbalife.com, for additional supplemental information and to find our press release for this quarter which contains a reconciliation of these measures.
Additionally, when management makes reference to volumes during this conference call, they are referring to volume points. I will now turn the call over to our CEO, Rich Goudis.
[05F4FP-E Rich Goudis]
Good afternoon, everyone. Thank you for joining our first call as Herbalife Nutrition Limited.
We're excited about the name change, which was approved by shareholders at our April General Meeting, because we believe this new name is more reflective of our purpose to make the world healthier and happier and it better communicates our strategies and investments to position us as a leader in the nutrition industry. In the first quarter, we exceeded expectations as we return to growth in the U.S.
ahead of schedule and, as such, we raised our financial outlook for the year. This is an exciting time for the company.
In the area of products, we're introducing more products than ever before, the speed of introductions has increased, and the degree of collaboration on innovation with our distributor leadership has never been stronger. In the area of technology, our acute focus to develop tools that improve the efficiency and productivity of our distributors is accelerating with the continued beta test of HN-connect what we formerly called Salesforce.com project.
In the area of education and training, we continue to increase our focus and investments to enhance our distributor difference so our distributors in turn can help their customers achieve better results. And with our success in the U.S., where our first quarter of 2018 was greater than the highest quarter in 2017, we are clearly leading the industry.
For the quarter, volume, net sales and EPS, all exceeded our guidance. This is a testament to the hard work of our entrepreneurial distributors and the teamwork across our company.
And on the topic of teamwork, I'm thrilled to announce that once again we're included in the Forbes list, America's Best Midsize Employer for the third consecutive year. We also had very encouraging distributor metrics in the quarter.
Let me share a few highlights with you. Worldwide Average Active Sales Leaders increased 3% year-over-year following three quarters of decline.
And in the U.S., we welcomed over 67,000 new preferred members to our community of like-minded people, the highest number since we began segmenting the sign-up applications in the first quarter of 2017. In addition to our positive financial performance, we continue to execute initiatives designed to accelerate shareholder value.
A few recent key initiatives were the completion of the refinancing for a portion of our convertible notes and the commencement of our modified Dutch auction tender offer to buy back up to $600 million of our common shares. As you can see from our reported numbers and as you'll hear on this call, we're confident about our future and, as a result, we've raised our guidance for the full year.
John will give you the details of our financial performance and guidance in just a few minutes. Our success continues to be attributable to the dedication of our entrepreneurial distributors and the difference they play to help ensure their customers receive the proper nutrition education coaching and support and, of course, consumer great nutrition products to achieve their nutrition goals.
Distributors are our unique point of difference. They play an important role in their customers' lives, providing them with much needed nutrition education, support and encouragement and they create communities of like-minded people, whether nutrition clubs and fit camps, or through weight loss challenges and other methods of operation.
This one-on-one, high-touch customer experience that our distributors create is critically needed in our industry because of the complexity of nutrition and the individual needs and personal differences among consumers. The distributor difference is especially important in weight management due to the behavior and lifestyle change consumers need in order to adopt a more healthy and active lifestyle.
This is our competitive advantage over traditional and online retailing of nutrition products and one that we intend to continue to strengthen. Our extensive product lineup is also important in helping the customers of our distributors achieve their desired results.
Our Seed to Feed program, where we've invested over $300 million since 2010, ensures we have traceability and control over key ingredients. And, today, we self-manufacture approximately 65% of our nutrition products in our state-of-the-art facilities, including our top products, to offer consumers more choice than ever before and provide us with the necessary flexibility and capacity to support future growth.
Additionally, we are expanding our portfolio of products to help our distributors attract new consumers and retain their existing customers longer. In the first quarter, new products and line extensions contributed to our growth as we launched more than 65 products globally.
Let me mention just a few to highlight our underlying strategies. In EMEA PRO 20 Select is off to a great start, launching in 12 markets in the region and ranking among on the top three selling SKUs in some markets.
As a reminder, this product expands consumer choice in our protein shake portfolio, leveraging trends in the natural food and beverage market by offering a convenient, water-mixable shake with more protein per serving, lower sugar and no artificial colors or sweeteners. We will look to build on this product success and introduce similar products in other key markets in the next 12 to 18 months.
Following our launch of the first new flavor of our top-selling product, NRGT, in Brazil last quarter, we introduced the second flavor, green apple, in Mexico in January. It has proven to be a popular product so far, ranking among the top 10 SKUs in the country.
Based on this success, we are exploring similar opportunities in key markets to create and satisfy consumer demand and drive increased consumption of our top-selling products. Early in the first quarter, we introduced our first Formula 1 Shake made specifically for nutrition clubs and it's currently among the top 10 SKUs sold in Brazil.
The product comes in an 80-serving size pouch delivering improved economics for our distributors. With the success of this product, we're evaluating and prioritizing additional markets to introduce a similar large format offering to help improve distributor economics for nutrition club operators around the world.
In February, for the Chinese Lunar New Year, we launched a limited edition Formula 1 red bean and koi seed flavor. This flavor was developed locally and is in line with our strategy to develop flavors that resonate specifically with consumers in each market.
This product had tremendous sales performance, selling out in only two months, further validating the success of this strategy and our ability to develop and manufacture local flavors of our top-selling products. In India, following the same strategy, we launched Formula 1 strawberry in January.
It has exceeded our initial sales forecast and is the second most popular SKU in that country. We also launched a complementary product, Formula 1 Dinoshake Strawberry, for kids.
And for the first time in India, we introduced our global top-selling Herbal Aloe concentrate to expand our digestive health offering. To wrap up the discussion on new products, let me give you one example of what we're doing and how we're working with our distributor leaders to accelerate new product introductions.
In March, we hosted 2,500 of our top leaders from around the world here in Los Angeles. An exciting highlight for me was having our distributors experience our concept café where our marketing and R&D teams shared samples of new products and innovative product concepts.
The reception to these new concepts was amazing and we're now working with our regional distributor product committees to prioritize many of the new products they sample. We anticipate that you'll see significant activity in the area of new products over the next 12 to 18 months, products that will expand our offering into new daypart segments along with products in new categories that will enable our distributors to attract new customers and extend the life cycle of their existing customers.
Increasing our investments in education and training is another key strategy for our company. Working with our top distributor leaders, we've created a new, more personal and intimate educational experience.
It was introduced at our premier leadership event in Los Angeles last month delivered via master classes and breakout sessions that enabled distributors to personalize their educational journey. We believe the more educated and better trained our distributors are, the more confidence they will have, and more value they will bring to their organizations and their customers.
We've also been on a journey to educate key thought leaders and influencers about the value of what we bring to communities around the globe. This strategy is playing out in key markets where we do business and it is extensive and ongoing.
On our last call, we talked about our participation in South by Southwest here in the U.S. So in this call, let me share an example of what we're doing in China.
Our local team in China is continuing their outreach to thought leaders. And later this month, we will partner with the Chinese Nutrition Society on National Nutrition Week, the largest official nutrition event in the country.
CNS is a non-profit organization dedicated to bringing together academics, research institutions and industries to advance the research and application of nutrition science for health, well-being and disease prevention. This year's event will be titled Healthy Weight, Eat Smart and Exercise Smart.
As a major sponsor since 2015, our experts will be featured alongside CNS officials giving keynote presentations and conducting media interviews. This partnership in China is a key strategy to further strengthen our position as a premier nutrition company in this important market.
And we believe our participation will help ensure we continue to be part of the conversation about the future of nutrition through our positive solutions to global megatrends such as obesity. As I look to the future, I'm excited about the possibilities we have as we invest in our high-touch, high-tech approach to nutrition and continually strengthen our distributor difference.
Since 2010, we've invested over $300 million in technology, creating an enviable and leverageable global Oracle-based platform. A key element of our strategy to leverage our technology investments is the launch of HN-connect using Salesforce.com.
Our beta test went live in the U.S. in January with a small group of distributors who are testing several journeys that have been developed with their help.
These journeys include email campaigns that personalize the customer experience and automate task for our distributors based on the specific needs of their customers. Automating marketing tasks and personalizing the customer experience or artificial intelligence, including suggestive selling, gives our distributors the freedom they need to focus on the true difference they make in people's lives through personal support, coaching, other one-on-one relationship activities, and creating communities of like-minded people in person and online.
HN-connect was first showcased at our kickoff leadership event in Orlando earlier this year and again in March at our event for global leaders in Los Angeles, where some of our investors also had a chance to experience these new tools. Early feedback from our distributors has been positive.
As we move through the summer months, we will continue to build functionality working with our distributor leaders in preparation for a broad launch of Phase 1 later this year. Additionally, we're evaluating future market introductions after the U.S.
rollout is complete. Before we move on to John and the financial update, I would be remiss if I do not publicly thank Des Walsh for his leadership as our President since 2010.
On May 1, Des moved into his new role as Executive Vice Chairman. His dedication, passion and strong distributor relationships have contributed greatly to our success.
And, more importantly, his development of our future leaders has set us up for an amazing future. Let me also congratulate again John DeSimone and Dr.
John Agwunobi on their promotions to Co-President this week. In addition to our solid growth strategies, our quality products and our amazing distributors and employees, it's our incredible bench strength of talented executives that makes us also optimistic about our future.
Additionally, the quality leaders who are willing to serve on our board of directors also makes us confident about the future. Last month, we welcomed four new board members whose expertise will help our company deliver on our purpose of making the world healthier and happier.
They are: Nick Graziano, Portfolio Manager for Icahn Enterprises; Al LeFevre former Chief Financial Officer at Jarden Corporation, a leading provider of consumer products; Juan Miguel Mendoza, independent Herbalife Nutrition distributor for 25 years and a member of our prestigious Chairman's Club since 2013; and Margarita Paláu Hernández, Founder and CEO of Hernandez Ventures, a private firm engaged in the acquisition and management of a variety of business interests. And, finally, I'd like to extend our heartfelt thanks and gratitude to those who just stepped off the board: Dick Birmingham, who is a board member since our IPO; Pedro Cardozo, an independent distributor who served for eight years; and Keith Cozza, CEO of Icahn Enterprises, whose exemplary service and leadership helped see us through a critical time in our company's history.
Now, I'll turn it over to John for the financial details.
John G. DeSimone - Herbalife Nutrition Ltd.
Thank you, Rich. Today, I will start by discussing the company's first quarter 2018 reported and adjusted results which will include key market highlights.
I will then review the second quarter and full-year 2018 guidance, and conclude by providing a brief update on our share repurchase program. First quarter reported net sales of $1.2 billion represented an increase of 6.8% compared to the prior year.
Volume points for the first quarter were $1.4 billion. And despite a very challenging comparison, it nearly matched the prior year's first quarter led by the U.S.
returning to growth ahead of plan. This is also the third quarter in a row where five of our six regions showed sequential improvements in volume point trends.
We reported net income of $82.1 billion or $1.08 per diluted share for the first quarter of 2018, compared to a reported net income of $85.2 million or $0.98 per diluted share for the first quarter of 2017. Adjusted earnings per diluted share were $1.40, compared to $1.24 per share for the first quarter of 2017.
The adjusted diluted EPS figures continue to exclude items we consider to be outside of normal company operations what, we believe, will be useful to investors when analyzing period-over-period comparisons of our results. Please refer to our first quarter 2018 earnings press release issued today for additional details on these adjustments.
Our first quarter adjusted diluted EPS exceeded the high end of our guidance range of $0.90 to $10. This EPS beat was driven by higher-than-expected sales, as well as excess tax benefits from the exercise of equity grants, partially offset by lower gross margins.
Reported gross margin for the first quarter of 79.6% decreased by approximately 180 basis points compared to the prior-year period. This decrease was driven primarily by foreign currency fluctuations and increased self-manufacturing costs from a planned inventory reduction, both of which were discussed on last quarter's conference call.
Additionally, we experienced higher inventory write-offs in the quarter, partially offset by the favorable impact of retail price increases. First quarter 2018 reported and adjusted SG&A as a percentage of net sales were 39.1% and 38.5%, respectively.
Excluding China member payments, adjusted SG&A as a percentage of net sales was 29.1%, approximately 50 basis points higher than the first quarter of 2017. The increase was primarily driven by a change in revenue recognition accounting rules implemented in 2018 that increased both net sales and SG&A by approximately $6 million.
This accounting rule relates to the accounting of sales to importers, a model we use for approximately 3% of our net sales. This change in accounting rules had no impact to net income.
Our first quarter reported and adjusted effective tax rate were 10.2% and 10.6%, respectively. This was significantly lower than our expectations primarily due to excess tax benefits from the exercise of equity grants generated during the quarter along with other discrete benefits.
Excluding the impact of equity grant exercises, our adjusted effective tax rate would have been approximately 1,600 basis points higher. Shifting now to our regional market highlights.
In the U.S., the momentum we previously observed continued as we returned to growth a quarter earlier than expected. We look to build off the strength in the first quarter and expect to see trends continue to improve during the second quarter.
In China, Q1 2018 volume points decreased 22%. As a reminder, this decline in China was expected because volume points in Q1 of last year was higher than it otherwise would have been due to a price increase implemented at the beginning of April 2017, which resulted in our distributors and customers buying extra product in March 2017 in front of this price increase.
Normalizing Q1 2017, for the impact of the price increase, China would have been relatively flat compared to the first quarter of last year. Turning to Mexico, we saw a meaningful improvement in trends in the quarter with volume points down just 2% coming off declines of 9% and 8% in Qs 3 and 4, respectively.
During the first quarter of 2018, we tested a small volume point value change on a few products in Mexico that benefited the comparison in the quarter by approximately 170 basis points. The Asia Pacific region showed 10% year-over-year growth with notable performances from India, Indonesia and Malaysia while EMEA grew 7%, its 32nd consecutive quarter of growth.
Moving ahead to guidance, worldwide volume point guidance for 2018 has been updated to a range of 3% to 7% growth. This reflects the beat of volume point in the first quarter along with slightly higher expectations for the U.S.
for the remainder of the year. Our combined volume point projections for the remaining markets are primarily unchanged from the guidance provided a quarter ago.
For the second quarter 2018, we estimate volume points to grow in a range of 4% to 8%. With respect to full-year net sales guidance, we are raising previous estimates of 5.5% to 9.5% growth by 350 basis points to a range of 9% to 13% growth.
This reflects the better-than-expected results from the first quarter and a favorable movement in currency since last quarter. Currency is expected to have an approximate 330 basis point tailwind to full-year net sales, which is 150 basis points higher than our previous guidance.
For the second quarter 2018, we estimate net sales to be within a range of 8.5% to 12.5% growth, which includes an approximate 370 basis point currency benefit versus prior year. Our currency impact for the full year and second quarter both exclude Venezuela, due to the hyper inflationary impact of currency, rate exchanges and associated price increases in that market.
Full year reported diluted EPS is estimated to be in a range of $3.95 to $4.35. And adjusted diluted EPS guidance is expected to be in a range of $5.05 to $5.45, up from the previous ranges of $3.82 to $4.22 and $4.60 to $5, respectively.
Full-year reported and adjusted diluted EPS include a currency benefit of $0.26, an increase from $0.13 included in our previous guidance. Second quarter reported diluted EPS is estimated to be in a range of $0.90 to $1.10 and adjusted diluted EPS to be in a range of $1.15 to $1.35.
Second quarter reported and adjusted diluted EPS include a projected currency tailwind of $0.07 compared to the second quarter of 2017. These estimates are all on a pre-stock split basis.
And as a reminder, our shareholders approved the stock split effective May 7, with the stock split distribution date of May 14. We are also slightly lowering our capital expenditure expectations for the year to a range of $110 million $140 million.
Additionally, second quarter capital expenditures are expected to be within a range of $25 million to $35 million. Full-year effective tax rate guidance remains unchanged at 30% to 35% on a reported basis and reduced 23% to 28% on an adjusted basis, primarily reflecting the excess tax benefits recognized in the first quarter.
Second quarter effective tax rate guidance is 36% to 41%, while the adjusted effective tax rate is expected to be in a range of 29% to 34%. Lastly, I'd like to make a few comments in regard to cash, debt and our share repurchase activity.
Since we spoke last quarter, we announced multiple strategic initiatives designed to enhance shareholder value. As part of this plan, in March, we completed a new convertible debt offering of $550 million that effectively resulted in a refinancing of approximately $475 million of our outstanding convertible notes that mature in 2019.
Additionally, we announced a self-tender offer seeking to repurchase up to $600 million of common shares, which we expect to close on May 24. We believe the completion of the refinancing allows greater flexibility in our use of capital, while the tender offer is consistent with our long-term goal of returning value to shareholders.
Our guidance assumes the entire $600 million tender is completed later this month. At the end of the quarter, we had $1.3 billion in cash, $2.2 billion in total debt, and approximately $900 million in net debt, all prior to the execution of the tender.
Thank you, and this concludes our prepared remarks. Operator, please open the line for questions.
Operator
Our first question comes from the line of Doug Lane with Lane Research.
Richard P. Goudis - Herbalife Nutrition Ltd.
Douglas M. Lane - Lane Research
John G. DeSimone - Herbalife Nutrition Ltd.
Douglas M. Lane - Lane Research
John G. DeSimone - Herbalife Nutrition Ltd.
Douglas M. Lane - Lane Research
John G. DeSimone - Herbalife Nutrition Ltd.
Douglas M. Lane - Lane Research
John G. DeSimone - Herbalife Nutrition Ltd.
Douglas M. Lane - Lane Research
John G. DeSimone - Herbalife Nutrition Ltd.
Douglas M. Lane - Lane Research
John G. DeSimone - Herbalife Nutrition Ltd.
Douglas M. Lane - Lane Research
Operator
Our next question is from the line of Mike Swartz with SunTrust.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc.
Richard P. Goudis - Herbalife Nutrition Ltd.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc.
John G. DeSimone - Herbalife Nutrition Ltd.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc.
Richard P. Goudis - Herbalife Nutrition Ltd.
John G. DeSimone - Herbalife Nutrition Ltd.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc.
John G. DeSimone - Herbalife Nutrition Ltd.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc.
John G. DeSimone - Herbalife Nutrition Ltd.
Operator
Our next question is from the line of Tim Ramey with Pivotal Research.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Timothy S. Ramey - Pivotal Research Group LLC
John G. DeSimone - Herbalife Nutrition Ltd.
Operator
Our final question comes from the line of Beth Kite with Citi.
Richard P. Goudis - Herbalife Nutrition Ltd.
Beth N. Kite - Citigroup Global Markets, Inc.
John G. DeSimone - Herbalife Nutrition Ltd.
Beth N. Kite - Citigroup Global Markets, Inc.
John G. DeSimone - Herbalife Nutrition Ltd.
Beth N. Kite - Citigroup Global Markets, Inc.
John G. DeSimone - Herbalife Nutrition Ltd.
Beth N. Kite - Citigroup Global Markets, Inc.
Richard P. Goudis - Herbalife Nutrition Ltd.
Beth N. Kite - Citigroup Global Markets, Inc.
Operator
And there are no more questions. At this time, I would like to turn the call back over to Mr.
Rich Goudis for closing remarks.
[05F4FP-E Rich Goudis]
Okay, thank you. Listen, this is clearly an exciting time for our company, and we look forward to updating you on our business in August.
Thank you.
Operator
And, ladies and gentlemen, this does conclude today's conference call. You may now disconnect.