Alan Quan - Vice-President Investor Relations Michael O. Johnson - Chairman and Chief Executive Officer John G. DeSimone - Chief Financial Officer Desmond J. Walsh - President.
April Scee - Sterne Agee CRT Timothy S. Ramey - Pivotal Research Group LLC Ethan Seath Devine - Indus Capital Partners LLC Michael A. Swartz - SunTrust Robinson Humphrey, Inc. Douglas Holm - Deccan Value Investors LP.
Good afternoon, and thank you for joining the First Quarter 2016 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 Alan Quan, the company's Vice President Investor Relations.
I would now like to turn the call over to Alan Quan to read the company's Safe Harbor language..
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 today's earnings release, and our SEC filings for a complete discussion of risks associated with these forward-looking statements in 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 that these non-GAAP financial measures assist management and investors in evaluating and preparing 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 our Chairman and CEO, Michael Johnson..
Thank you, Alan. We're pleased to report a strong first quarter and a really good start to the year, carrying over the positive momentum we reported in the first quarter of 2015. We're encouraged by the business performance which is driven by an opportunity worldwide to provide better nutrition and wellness in people's lives.
In the first quarter of 2016 our worldwide volume points grew 4.5% compared to the same period last year. Over 20 of our markets reported record quarterly volume. Our reported net sales during the quarter were up 1.3% or $1.1 billion on a constant currency basis.
Our sales increased 10.9% versus the first quarter of 2015 with notable performances in the U.S., Mexico, EMEA, and China. Stronger than expected top-line growth led to a better than expected bottom line. Adjusted EPS for the quarter increased 5.4% to $1.36 per diluted share compared to quarter one 2015.
This exceeded the high-end of our guidance which is $1.07. Reported EPS was $1.12 per diluted share, an increase of 21.7% compared to $0.92 per diluted share for the first quarter of 2015. John will take you through the numbers in more detail later in the call.
On our last earnings call, I talked about our mission, and how our nutrition products and members are serving the nutrition needs for customers in all stages of their life. We are more than a product on a retail shelf. Our products come with the caring and firm support of a Herbalife member.
We also discussed the deeper motivation and opportunity for nutrition in a world where healthcare costs are spiraling driven by obesity and other health and nutrition concerns.
In March, a major study was published in Lancet, a UK medical journal, which showed that one in eight adults in the world are obese, and that based on current trend, this number could rise to one in five adults by 2025. The study concluded that the need for healthy balanced nutrition and fitness around the world remains an urgent priority.
Recently, the United Nations launched A Decade of Action on Nutrition including tackling obesity and malnutrition. To tackle these gaps in health, the Director of the CDC said initiatives must be targeted within the local communities, if we are to improve health behaviors. This has been a priority for us for years.
Our members are working hard to improve nutrition through a grassroots, community-based network in more than 90 markets around the globe. Our city-by-city initiative to build a foundation for local leadership, systemized member training, and showing a daily consumption, and best practices is running in more than 900 cities worldwide.
This quarter we launched a new sales team education program for our infield sales managers in all of our regions to further support our members and their daily consumption, business building, and customer activities. Meanwhile, our members continued to demonstrate their initiative.
For example, using weight loss challenges to get customers to achieve meaningful weight loss goals. The key to our business, and what no other online nutrition brand or retailer can even approach is the deep, authentic connection that our members and our products around the world have with their customers.
We recently participated in our Annual Leadership Event in Macau, China, which was attended by over 6,000 Herbalife service providers. China is burdened with one of the highest numbers of men and women with obesity in the world.
Our nutrition clubs and preferred customer loyalty program are aimed at engaging Chinese consumers and improving their health and weight through Herbalife nutrition products, activity, and the support of our service providers.
In 2015, just one day in September, upwards of a 100,000 people participated in five kilometer races and wellness events we organized and sponsored across 100 cities. Over the year, more than 1 million people participated in wellness events we organized across the country. What's happening online is also exciting for our business in China.
WeChat is mobile phone based application enormously popular among the Chinese, who use it daily to manage their busy lives. Our Herbalife China team integrated WeChat into our online product ordering, and into our nutrition education and communication to service providers and customers.
Thanks to these and other customer focused initiatives our China business continues to grow as more consumer see Herbalife as a trusted, convenient, results driven nutrition brand.
By getting to know their customers and focusing on their individual needs, our members provide nutrition plans that are tailored, that are convenient, and most importantly that work.
Moreover, the member-customer relationships provide the community with encouragement and support that is typically necessary for someone to lose weight, get more physically active, or simply eat better.
In many of our markets around the world, there are clear and sustained consumer trends towards better health, this is particularly true among millennials, who will likely comprise over 50% of the global workforce in the next five years.
According to research millennial eating habits lean towards the low-fat, plant-based protein diets that can be consumed conveniently, and often as snacks throughout the day.
Our product range of convenient nutritious shakes and protein snack bars are well-positioned for these younger customers who value health, but don't always have the time in their day to prepare a full meal. A growing preference for plant-based protein is an opportunity also.
In 2015, a Lux Research report concluded that the growth of alternative protein sources, particularly plant based is poised to accelerate. Plant-based protein is the main ingredient of our Herbalife Formula 1, the number one brand in the world for meal replacement. And we are one of the largest sellers of protein isolate in the world.
Consistent with this consumer trend, we are planning to expand our plant-based protein ingredients early next year with protein shakes and boosters that utilize rice, pea, and quinoa.
To further fuel our momentum and opportunity globally, we are providing a wide range of sports nutrition products, and support to 53 athletics competing at the Rio Olympics in 19 of the Paralympic Games. We also signed sponsor agreements with the National Olympic Committees in Italy, Israel, Vietnam and Costa Rica.
These sponsorships support 20 countries. Our sports and nutrition scientists will provide nutritional assistance through one-on-one nutritional consultations. We are looking forward to helping these dedicated athletes maximize the benefits of sports nutrition to achieve their optimal performance.
In June, we will start launching our CR7 sports hydration drink in the Asian markets. As you know, we created CR7 with soccer superstar Cristiano Ronaldo. He continues to be a passionate advocate for nutrition, health, and our range of sports and personal nutritional productions, which he uses daily, as part of his training.
This week, members from a number of our regions will travel to Madrid to meet with Cristiano after winning the trip in local promotions. This is a reflection of his global appeal. I'd also like to give you an update about the FTC. We disclosed the last quarter that we are in discussions with the FTC.
We have updated our disclosures to report that while there are number of open issues, those discussions have progressed to an advanced stage, and the range of outcomes now include litigation or settlement.
We also announced that if a settlement is reached with the FTC, it would likely include injunctive and other relates – as well as a monetary payment with our best estimate of that payment being $200 million. Okay, let me pass it over to John for more details on the financials..
Thank you, Michael. I will start today, by reviewing the company's first quarter 2016 reported and adjusted results, including key market highlights. I will then discuss, the second quarter and our remaining full-year 2016 guidance.
First quarter reported worldwide net sales of $1.1 billion increased 1.3%, while local currency net sales grew 10.9%, both compared to the same period last year. This is the first time since third quarter 2014 that we have experienced positive year-over-year reported net sales growth in the period.
Worldwide volume points for the first quarter increased 4.5% compared to the first quarter 2015, which exceeded the high-end of our guidance range of 1.5%. Four of our six regions and approximately 70% of our markets experienced volume growth in the quarter, with over 20 of these markets setting quarterly volume records.
Adjusted EPS for the first quarter was a $1.36 per diluted share, which increased 5.4%, compared to the $1.29 per diluted share for the first quarter 2015, and exceeded the high end of our guidance range of $1.07. Reported EPS of $1.12 per diluted share, increased 21.7%, compared to the $0.92 per diluted share, reported in the first quarter of 2015.
This quarter marked the one year anniversary of the most recent marketing plan changes, which were implemented in February 2015. We believe that we have now largely cycled through the impact of these marketing plan changes throughout the majority of our markets. Moving on to our regional and market highlights.
To the U.S., volume point outperformed our expectations and increased 7.2% compared to the prior year quarter. This is the first time since the first quarter of 2014 that the U.S. has shown positive year-over-year volume growth in a quarter. We believe that our U.S.
members have adjusted well to the marketing plan changes and are focused on building long-term, sustainable businesses. This first quarter performance is demonstrating the benefits of that focus. Volume points in China increased 36.5%, compared to the first quarter 2015, due in part to the seasonal product launch of our sweet corn Formula 1 flavor.
And also in part due to the earlier timing of the Chinese New Year holiday compared to 2015. China continues to illustrate stable business fundamentals and sales representatives and service providers have fully embraced the focus on daily consumption throughout their clubs and the encouragement of healthy, active lifestyles for their customers.
In the first quarter, Mexico posted approximately 6.1% volume growth, compared to the prior year quarter. Members in Mexico continue to adapt to the new 16% VAT, which was imposed during the third quarter 2015.
Although this quarter was another strong performance in Mexico, we continue to expect a 16% VAT increase to have an impact in the year-over-year sales growth, until it is annualized in the third quarter of this year, and this is reflected in our guidance.
Over 70% of the markets in the EMEA region showed volume point growth in the quarter, resulting in a regional volume point increase of 14.1% compared to the prior year period.
With countries such as Italy, Spain, and Belgium displaying positive momentum, volume points for Russia were flat in the quarter due to a high comp in the first quarter of 2015, and local currency net sales for Russia grew 10.6%, compared to the prior year period.
The macroeconomic conditions continue to be challenging in Brazil as volume points declined to 20.9% in the first quarter 2016. Volume in South America and Central America region decreased 15.5%, compared to the prior year period. However, excluding Brazil and Venezuela, volume points in the region increased 1.6% for the first quarter.
Asia-Pacific volume points decreased 6.2% compared to the prior year period, driven by a volume point decline in Korea of 28.8%. Korea's first quarter performance was within our expectations. Volume points for the Asia-Pacific region excluding Korea increased by 1.8% compared to the prior year period.
This increase was largely driven, by stronger than expected results in Indonesia and Vietnam. Moving on to our financial highlights for the first quarter, as previously mentioned, compared to the first quarter of 2015, worldwide reported net sales of $1.1 billion, increased 1.3% and 10.9% on a constant currency basis.
Worldwide volume points in the quarter increased 4.5%, compared to the same period last year. First quarter 2016 adjusted EPS increased 5.4% to $1.36 per diluted share, compared to the $1.29 per diluted share for the first quarter 2015, which significantly exceeded the high end of our guidance range of $1.07 per diluted share.
Compared to our first quarter guidance, the increase in our adjusted EPS was primarily due to higher than expected volume in net sales, lower expenses as a result of our continued focus on cost management, and a $0.05 favorable impact due to delayed expenses that would be spent later this year.
On a reported basis, first quarter net income was $95.8 million or $1.12 per diluted share, which increased by 22.5% and 21.7% respectively, compared to $78.2 million or $0.92 per diluted share, compared to the first quarter 2015.
First quarter net income and diluted EPS was negatively impacted by $27.5 million or $0.32 per share respectively due to currency fluctuations.
Our reported EPS continues to include additional items, we consider to be outside of normal company operations or we believe that will be useful to investors when analyzing period-over-period comparisons of our results. These adjustments are detailed in today's earnings press release.
Reported gross margin for the first quarter increased by approximately 50 basis points versus the prior year period.
Gross margins included the favorable impact of country mix of 81 basis points, retail price increases of 66 basis points, core savings through strategic sourcing and self manufacturing of approximately 40 basis points, which were partially offset by the unfavorable impact of foreign currency fluctuations of a 170 basis points.
For the first quarter, SG&A as a percentage of net sales was 38.1%, a decrease of approximately a 90 basis points, compared to the prior year period. Excluding non-GAAP items detailed in today's press release, SG&A was 37% of net sales, an increase of 48 basis points compared to the prior year period.
Excluding China member payments in the non-GAAP items, SG&A as a percent of net sales was 27.9%, which is a reduction of approximately 155 basis points compared to the prior year period. This is due to delayed expenses and the continued focus on cost management.
Our first quarter adjusted effective tax rate was a 30.2%, which was 20 basis points above the high end of our guidance range. In March 2016, the company closed a term loan to a final payment of $229 million. Our current portion of our long-term debt now consists of $410 million, which is due next March 2017.
In April, the company concluded the $30 million purchase of 189,000 square foot office building in Torrance, California, which we have occupied since 2006, and called Herbalife Plaza.
This was an opportunistic transaction that was the result of our execution of our right of first refusal to a sales agreement the landlord had entered into with a third-party. This purchase is representative of our continued commitment to the Southern California area.
Moving on to the second quarter guidance, and the remainder of the full year 2016 guidance. Worldwide volume point guidance for 2016 has been updated to a range of 2% to 5% growth.
This reflects a full year increase of approximately 30 million volume points due to the beat in the first quarter, partially offset by a larger than previously expected decline in Brazil. Volume point guidance for the second quarter is estimated to be within a range of 1.5% to 4.5% growth.
Adjusted diluted EPS guidance for the full year has been raised from a range of $4.05 to $4.50 to new range of $4.40 to $4.75, which is implied due to the favorable currency movements over the last two months.
We have adjusted full year EPS guidance to reflect the better-than-expected results in the first quarter 2016, partially offset by decline in Brazil, due to the macro conditions as well as the delayed expenses previously noted.
Full year currency headwinds are now estimated to be approximately $0.70 per diluted share, which is a $0.10 improvement over the guidance provided a quarter ago.
Second quarter adjusted diluted EPS guidance is estimated to be in a range of a $1.10 to a $1.20 per share, which include an unfavorable currency headwind of approximately a $0.20 per diluted share, compared to the same quarter of 2015.
Net sales guidance for the full year of 2016 has been raised from a decline of 0.5% to a growth of 2.5% to a new range of a growth of 1.5% to 4.5%. This reflects the favorable impact of currency and a better than expected results in the first quarter of 2016.
On a constant currency basis, full-year adjusted net sales guidance is now within the range of 6% to 9% growth. Worldwide net sales guidance for the second quarter is expected to be in a range of flat to 3% growth, taking into account the impact of currency.
Our capital expenditures for the second quarter are expected to be in a range of $65 million to $75 million, and for the full-year, we are now projecting a range of $145 million to $175 million and a previous guidance range of $105 million to $135 million.
This increase in capital expenditure forecast is primarily due to the $30 million purchase of the Torrance office facility that I previously mentioned. Lastly, our effective tax rate guidance remains unchanged in the range of 28% to 30% for the second quarter and full-year 2016. This ends my prepared comments.
I will now turn it back over to Michael before taking questions. Thank you..
Thank you, John. So to summarize, (21:03) we started the year by exceeding guidance on both the top-line and the bottom-line. Despite the challenging currency environment driven by the strong U.S.
dollar and likes of which we've not seen in over a decade, we returned to a year-over-year reported net sales growth for the first time in five quarters and it feels great. Our updated guidance reflects the confidence that we have for the remainder of the year as we continue to hold the line on expenses while investing prudently towards the future.
We were just in Winston-Salem for our Board and Annual General Meeting held at our Herbalife Innovation and Manufacturing facility. It was an opportunity for our board to see the investment and progress we're making in our Seed to Feed program and the quality and capacity of our HIM capabilities.
As of March 2016, approximately 54% of all Herbalife nutrition products are manufactured in-house at HIM facilities around the world. We're a company and a community that evolves and seeks to get better every single day.
The positive momentum in our performance is due to the confidence, hard work, and the passion of our members and the total value they offer to their sustainable business built to service for customer's nutrition needs. Members continue embrace the marketing plan changes as shown by our results.
The attendance and energy that we see at our member events can often indicate members' confidence in our business and it's higher than it's ever been. In March, we held our yearly global leadership meeting with over 2,500 members.
We saw a strong attendance at leadership development events across North America and several cities reported record number of attendees. We expect 25,000 to join similar leader development events across 11 cities in Mexico in May. In April, an impressive 11,000 members attended the Extravaganza in Brazil.
Later this month, we anticipate high attendance at our Asia Pacific Extravaganza in Singapore, and in Bangalore, India. We are proud to help people around the world achieve better nutrition, lead healthier lives and achieve their personal goals through Hearbalife products in the personalized service of our members.
We thank our members, our employees, and our shareholders for being part of this journey and helping build a company and a community that is really making a difference. With that, let's go onto Q&A..
Our first question is from the line of April Scee with CRT..
Pretty additional information on the FTC today. And apologies for all the questions that I'm going to ask as a result of that.
So, first just the $200 million estimate, can you just help us understand how that was derived and what your confidence level is around that? And secondly on the injunctive release hopefully you can provide a very broad range of outcomes on that, given your willingness to share such a precise number for the fine? Or maybe, just comment on it relative to all of the self regulation that you've done so far? And then maybe, one this is behind you what the optimal capital structure would be and what's your view is on a dividend? And then, I have two quick follows ups, I promise I have nothing to deal with the FTC..
Yeah. Hi, April. This is John, I'll do my best to answer, and in some cases not answer, (24:23). With respect to the FTC, I think you need to understand the accounting rules to maybe better describe what's in our disclosure.
We don't yet have an agreement, what we have is the reasonable possibility of an agreement that's a threshold, from a contingent liability standpoint that requires us when we file the 10-Q to provide the estimate of the range of a payment we might make, we have provided that, and that range is just the number, it's still an estimate, but it's the best estimate we have now, but we do not yet have a deal.
And there is lots of things still outstanding, and there's nothing more we can say other than what's in the disclosure, and I would read it carefully if I were you, and make sure I understand it.
And then, with respect to dividend, we don't really have a comment at this point that will be a board decision probably long after, we get through the current days..
Okay. That's helpful. And then just trying to understand your fiscal 2016 guidance a little better, it looks a little bit conservative, maybe like you're just flowing through the March quarter beat.
From our perspective FX has gotten more benign since the end of the quarter, your organic growth is better than expectations during the March quarter, so I was just wondering if there are other moving pieces that we should be thinking about, with some of the organic growth timing related or anything out there we should be thinking about as we model through the rest of the year?.
Yeah. I think the one meaningful change looking forward and what we're seeing in Q1 that's bringing us down a little bit in the projections is Brazil. We've taken that down quite a bit from what we had previously expected.
There's a lot of macroeconomic challenges in that marketplace I think, Avon announced today they were down, I want to say somewhere around 7% in Brazil, (26:25) last week was down 10%.
So, we've taken that number down and that has flowed through the rest of the year and I think that's why it may look to you like we're conservative the rest of the year, but it's not the case, it's our best estimate at this point..
Okay.
And then just a little bit more clarity on the acceleration in China in the quarter and what drove that, but maybe more importantly how much runway has left for that level of growth, and just the pushback that we sometimes get from clients on how much visibility you have in that market, and the sort of comfort that you can provide that you won't run into some of the issues that other direct sellers have in that market?.
Yes. So let me answer this maybe in two parts. So, first with respect to Q1, we launched a new product and new flavor of Formula 1 China, that had a lot of pipeline fill that helped the quarter out, probably represented about a fifth of the growth in China in the quarter.
I think the comps are getting much more difficult, and you can see a significantly lower growth rate going forward, I don't think it's sustainable at the current levels, and that's reflected in our guidance. Part of that is because, obviously the comps get a lot more difficult in China..
Okay. And then, just a question on the visibility that you have in the market. I know, it's a tougher market to have visibility on your even for the bigger or more traditional multinational company.
And so, how do you get visibility on the market and how do you have comfort that you're not going to run into some of the issues that the other direct sellers have had in that market?.
We have – I think, we have decent visibility, we have a preferred customer program in that marketplace, but which we see a lot of transactions and that helps us model the business maybe better than companies that don't have such a program, creates more transactions for the company. So I think, that helps a little bit.
I'll pass it on to Des, who might want to organize that answer..
Yeah. I think, the other thing we'd add April is that China is primarily a nutrition club market, and therefore for that reason we have significant visibility, we're regularly in clubs, we have a tremendous field presence throughout China and so, through the clubs we have great visibility and contact with direct consumers.
So, I think, that those – that combination of factors really gives us the level of visibility that would be very different from a competitor in the market..
Okay. That's very helpful. Thank you very much guys..
Sure..
And our next question is from the line of Tim Ramey from Pivotal Research Group..
Not to offend the skeptic (29:09) who noticed that the DoJ language has been dropped from your statement in the third quarter and the fourth quarter.
So, can you confirm that the DoJ inquiry is past tense?.
I can confirm if the DoJ language has been dropped from our disclosure..
Okay. And so, I assume that means that, there is no current seeking of information..
I think, we tend to disclose any kind of material investigation, and we have withdrawn that language. So, I think, that's pretty self explanatory from our perspective..
Okay. The – the overall volume performance was pretty impressive, and even in places just like North America where your numbers were pretty good.
Is there anything you would particularly point to that is driving results in a big mature market like North America?.
Yeah.
Sure, certainly very easy comps right? I mean, last year in the first quarter, things were down quite a bit in the U.S., and so, that easy comp and the annualization of the marketing plan change, which had a significant impact last year in the first quarter, is one of the big key benefits we get to see in this year's numbers, right if we get to account that..
And on the evolution of the marketing plan changes, you had been hopeful and projected that, we might see that normalize and be not a negative to volume but a positive to volume.
Would you argue that, we're kind of on the other side of that curve at this point?.
Yeah. I think, in most cases in most markets we have cycled through those changes and things and the members have adapted to the new plan.
So, yeah, I think that's an accurate statement, I mean there is a little bit of that still in Q1, because it was the last of the changes when implemented in February last year, so Q2 will be a full quarter comp or partial quarter comp Q1?.
Yeah, I think Tim, I shouldn't agree with that, the one thing I would say is that certainly end markets like Korea and Brazil, we continue to see the negative impact, which is the direct result of cycling through those changes and we're going to see those continue to impact us for the next couple of quarters, certainly..
Sure. And then just one more for you, John.
On the balance sheet, probably not a lot you can say, but it's in a very clean state, and you're at the point where you're sort of quantifying risks with the FTC, is this a point when you can go back to the banks and talk about a little more flexibility on debt to EBITDA or do you really need to see those numbers on a piece of paper?.
Yeah. I don't think we're in that position. I don't think we can rely on that for some time. So we're not managing it accordingly, we're just – we're keeping the cash, we have to pay off our debt, it's $410 million due in 10.5 months, or about 10 months from now.
We need to be in a position to do that, and be able to take care of any possible settlement, should we (32:57) with the FTC..
All right. Okay. Thanks so much. Congratulations..
Thanks, Tim..
Our next question is from the line of Ethan Devine with Indus Capital..
Hi, good evening. So, it looks like the U.S.
has turned in earnest and that some of the issues in that market were temporary, so if we look at the markets that are currently experiencing volume point declines, are the ones you would categorize as having structural issues or would you think that ultimately they'll prove to be temporary factors as well?.
Well, I'm going to pass this to Des, I was going to say this, when you look Brazil and Korea are kind of the two that come to mind.
And Brazil has got macroeconomic challenges that have nothing to do with our company, when you see that across the industry, but with that, I'll pass it over to Des, and he can respond on some more specifics in the market..
Yeah. So, Mike, I don't think there is anything structurally significant in either market, what we have taking place in both Brazil and Korea is the similar change and adaptation that we've seen happen in other markets like the U.S. and Mexico.
So, I think certainly in the long run, both are addressable and we have leadership strongly engaged with our local management teams in doing so. But I think, we're going to continue to see the impact of those changes affect us possibly through the remainder of this year..
Understood. Thank you..
Our next question comes from the line of Mike Swartz with SunTrust..
Just wanted to touch on – you are talking about starting to cycle some of these business plan changes with the first order limitations and things of that nature.
I guess as we look out, let's call it 12-months, 24-months, I mean, do you have a line of sight to getting back to kind of the high single-digit type volume growth that we had gotten used to prior to 2014?.
Hey, Mike, it's John. I'll answer that one. So, for this year, we're looking at – looking at this year volume growth of 2% to 5%, that's throughout the next three quarters, combined with the 4% plus we had in Q1. So, it's kind of stable at that point.
I think when it gets to 2017, we'll see where we are at the end of this year and provide you some more insight as we move through this year..
And then just on the act – I apologize, I hopped on late here, but the act – average actives this quarter were flat.
You've shown growth for most of the – at least recent memory serves me right, what was the biggest driver of that during the quarter?.
Just to be clear before I pass it to Des, we're talking average active sales figures..
Yeah, so Mike, if you remember that one of the changes in our marketing plan that took place in November of last year was the reduction in the cumulative qualification from sales leader from 5,000 volume points to 4,000 volume points.
And when we made that change, we had a significant number of people who achieved the level of sales leader, purely because of the overnight reduction in that qualification amount, and many of those individuals would not have qualified to become the level of sales leaders, and therefore as we go into this year, when we go through requalification and we look at that number again.
It's the elimination of that group or if you take out that group, that is the primary driver of the – of that number, that reduced number in certain markets..
Okay.
But in terms of average actives in the next several quarters, we should start to see, I would assume that improve sequentially?.
I think it depends on the market because obviously, we have other factors impacting us, but in general, I think we're now seeing that number stabilize and it will come back to growth, but again it's a market by market issue..
Okay.
And then, John with regards to the updated full-year guidance, I mean it looks like, again I apologize, I missed some of this, but it looks like you're raising guidance by $0.25 to $0.35 between the low end and high end, currency is $0.10 to that, you beat first quarter by $0.29 to $0.39 that tells me that the rest of the year you are kind of taking $0.14 out of it.
I think I heard that Brazil was part of that.
Are there any other pieces that I should be thinking about?.
Yeah, so there's two pieces to Brazil, so they are around a $0.10 impact from lower volume in Brazil, but there's also an incremental tax in Brazil, think of it as the equivalent of their sales of VAT tax that's going to hit us by $0.08 in the back half of the – in the last three quarters of the year.
This is a new tax that was implemented at the beginning of this year..
Okay. Great. That's it..
And our last question comes from the line of Douglas Holm with Deccan Value..
Nice results. Just two questions from me.
So, first in Mexico, there was obviously a 16% VAT implemented in the third quarter of 2015, (38:22), that effective 16% price increase would have an impact on volumes, but we haven't seen that headwind materialize yet, volume is up 4% last quarter and 6% this quarter, so I guess why are you expecting it to have an impact now and incorporating that into the guidance?.
Yeah, so it actually has had an impact, I think the market has done a really good job overcoming it as much as they can and across Mexico had a meaningful impact from the marketing plan change that we're comping now.
So, I think the point is that once we lap the VAT in the second quarter, again into the third quarter, we are unlikely to see any impact in the VAT going forward..
Got you. And then I also noticed that you guys increased your full year CapEx by about $40 million.
Is that all due to the California office purchase you guys referred to earlier in the call and then maybe you can talk through the rationale for buying the office building?.
Sure. So almost of all of it is the building out, the rest of it is just FX. So as the dollar weakened a little, the translation of some capital across the globe when it comes back to the U.S, gets to be a high number, but $30 million of it was the building.
We are not in the business of buying real estate, we tend not to own any – want to own any administrative buildings. This was more opportunistic and I view it as a chance to actually make a little money. We had a right of first refusal in our lease agreement, we've been in this location for over 10 years now.
We have five years left on the lease, and because we considered a short-term tenant with only a five-year lease remaining, the sales price on the building that the current owner tried to sell to a third-party was lower than what we thought the market value was and we exercised that letter of first refusal with the goal – likely goal anyway and this we viewed at this point in time is to enter into a longer-term lease and do a sales leaseback and make some money on it.
So, it's not a shift in strategy, you will – if that – it gets executed in the way we hope it will, your CapEx number will be what you see, but then you'll see the best number going the other way hopefully later in this year..
Okay. Great. Thanks..
And that – that's all the questions we have in queue at this time..
So, let me close the call today by thanking everyone and just kind of remind you, our strategy of Herbalife is actually pretty simple, improve every single day, produce a really great high-quality product, build the business opportunity based on customers and the daily use of our products, improved the health and nutrition of all of our communities and bring value to all of our constituencies.
So, many thanks to all of our members, employees, customers and (41:04) shareholders for your continued efforts and support, we really appreciate it. We look forward to speaking with you at the end of the next quarter. Thanks..
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect..