Eric Monroe - Herbalife Nutrition Ltd. [05F4FP-E Rich Goudis] John G. DeSimone - Herbalife Nutrition Ltd. Richard P. Goudis - Herbalife Nutrition Ltd..

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:.

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..

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..

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..

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..

Our first question comes from the line of Doug Lane with Lane Research..

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Our next question is from the line of Mike Swartz with SunTrust..

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Our next question is from the line of Tim Ramey with Pivotal Research..

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Our final question comes from the line of Beth Kite with Citi..

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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..

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..

And, ladies and gentlemen, this does conclude today's conference call. You may now disconnect..