Herbalife's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Herbalife Ltd. (HLF)

Herbalife Ltd. (NYSE:HLF)

Q1 2013 Earnings Call

April 30, 2013 11:00 AM ET

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

Michael Swartz – SunTrust Robinson Humphrey

San Marco – Janney Capital

Scott Van Winkle – Canaccord Genuity

Operator

Good morning and thank you for joining the first 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 General Counsel.

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, and good morning, everyone and welcome to our first quarter 2013 earnings call. As reported in our press release and our 10-Q last night we once again achieved record performance, our year-over-year net sales increased 17% to $1.1 billion, our adjusted EBITDA increased 24% of $215 million which is based on our adjusted operating margin expanding 120 basis points to 17.2%.

Our adjusted EPS increased 44% to a $1.27. We generated a $112 million in free cash flow. We continue to return capital to our shareholders. We’ve repurchased approximately 4 million shares and our Board recently approved a $0.30 per share quarterly dividend. The strong performance we achieved in 2012 created momentum that carried into 2013 and resulted in a broad-based strength across to all our regions for our first quarter performance. The key driver of our business, volume points, grew 13% year-over-year. In fact, we experienced volume point growth in each of our six regions. South and Central America grew 33%, Asia Pacific grew 17%, China 15%, EMEA grew 11%, Mexico is up 8%, and North America was also up 4%.

I want to thank all the members of the Herbalife family, our more than 6,000 employees, who strive to build it better each and every day, our hundreds of thousands of active sales leaders, whose entrepreneurial spirit and commitment drive our performance and our millions of customers around the world, who every day use our products to improve their nutrition and health and who are ultimately responsible for our exceptional global growth.

Our guidance for the balance of the year which John will discuss in a few minutes, reflects our confidence that we will continue to experience strong business trends, and that 2013 will be another year of record financial performance. Driving the volume point growth was the strong engagement of our independent sales leaders.

During the quarter, we experienced an 18% increase in average active sales leaders. Their activity in the business continues to increase year-over-year and have seen in the growth in the average active sales leaders throughout several of our key markets, a 24% increase in China, a 19% increase in Brazil, 16% in Korea, 14% increase in Mexico, and a 9% in the U.S.

The last point to make on the topic of financials that we are very disappointed that our KPMG audit engagement partner was involved in the insider trading activity, which led to KPMG losing independence and thus nullifying the last three years of our audited financial statements. We’re working quickly to replace KPMG with another top accounting firm and we hope to be in a position in the next few weeks to provide you with the results of our evaluation and selection process. John will have additional comments regarding the process in just a few minutes.

The global obesity epidemic continues and it’s quickly becoming the largest public health issue on a global basis. This obesity macro trend is addressed directly and effectively by both our nutrition products and our distributors, our Meal Replacement shake is a worldwide market share leader and experience volume point growth of 15% in the quarter.

We also believe nutritional and weight-management objectives are better achieved with the social support group like those experienced in the numerous daily consumption sales methods used by our distributors around the world.

The nutrition club sales model which we’ve talked about for several years, along with other sales methods it improves access to our nutrition products by the consumers that need the most, along with the unique social and coaching support that help consumers achieve their goal, we take pride that our strong growth today and for years to come will be driven by our unique ability to combat a global health epidemic and improve our customers lives.

Our product development efforts are concentrated around the enhancement of the club experience and strengthening the meal replacement line. We recently introduced seasonal shake flavors similar to what you see at other consumer packaged goods companies, to create the excitement for our customers.

Late last year we launched an Express Meal Bar in our nutrition clubs and in the U.S. market to increase convenience for people on-the-go, given that success we have plans to roll it out to other markets in 2013 including our Mexican market during the second quarter. Looking forward, we’re currently developing a major line expansion in the form of meal replacement soups; these soups will encompass the same robust nutrition rich profile as our market leading shakes, while providing consumers with a healthy protein based low calorie, low-sodium meal. Our soup line will allow distributors and the nutrition club operators, the opportunity to provide consumers with one more Herbalife consumption each day. This will not only drive growth in our business, but also give our customers a greater variety of healthy nutritional choices to improve their lives.

Our product development and marketing teams working closely with our independent distributors continue to globalize successful products in our Hearth Health, personal care and sports nutrition lines. As our Herbalife24’s sports nutrition line continues to be rolled out around the world and our sponsored athletes who continue with their advocacy with strong personal product testimonials, we are seeing the products and the brand create excitement among more active consumer demographics. This is helping our current distributors, attract new customers to Herbalife, as well as providing a catalyst for the expansion of our fit camp daily method of operations.

We believe this is a very important trend in the company as our new sports line helps create a brand identity among the younger consumer demographic, one that is highly engaged in living healthy and having active lives. The average age of our new U.S. distributor in 2010 was 38 years old and year-to-date in 2013 it’s 35.6. The attendance of gen age distributors in our most recent U.S. extravaganzas was up more than 30%, as we build for the future, we continue to invest in our business. One of our key investments this year is our HIM Winston-Salem facility where we are building a world-class nutrition factory that will add up to 500 new jobs to our current global team Herbalife of more than 6,000 team members.

We are also making investments in research capabilities in our new botanical extraction facility in Changsha, China to develop unique botanical extracts and botanical combinations that will differentiate our nutrition products in the marketplace. Our team at Herbalife has built it better. Over the past 12 to 18 months, the pace of change has accelerated and the size of our investments has increased significantly. In February, we published the enhanced disclosure of gross distributor earnings, creating a simplified more comprehensive information for prospective distributors to understand before they make the decision to sign up with the company.

In addition, we’ve been working with our distributor leaders to simplify our business nomenclature, the wording we use to describe our business. We expect to announce significant changes to our nomenclature within the next 30 days. In our manufacturing area, we have begun product development work for those products that will be produced in our new HIM Winston-Salem facility. We anticipate the major facility renovation work will commence in June and conclude later this year.

Our investments in this facility are strategically important for our company to support our expected growth to become more vertical in the manufacturing of our top products and to ensure the production of the highest quality nutrition products in the market. And to support our strategy of more deeply penetrating into existing markets, which we call our city by city strategy, we continue to expand and localize our regional sales and marketing teams as well as continuing to make investments and creating additional product assess points around the world.

We ended 2012 with more than 600 access points and we expect to have in excess of 700 access points by the end of 2013. While these access points vary in format from large to small, they all have consistent Herbalife branding. Our 24/7 access point which we call the automated sales center continues to be tested and rolled out with tremendous excitement and engagement from our distributors. And to support our numerous growth strategies, we continue to add talented executives to strengthen our staff.

For example, we recently welcomed Pradip Mukerji as Senior Vice President of Research and Development, Pradip joins us from Abbott Nutrition where he held a significant leadership role in product development. We have created a new position for the company, the Head of Consumer and Distributor Insight. Strong leaders within this area will help further our knowledge of distributor and consumer behaviors and preferences. We expect to announce the hiring of a new executive to fill this role during the second quarter.

On the topic of research, we continue to make investments to better understand the preferences, desires and behaviors of our distributors and customers. Like most large consumer packaged goods companies, we know who we sell our products to and like those companies we then rely upon research tools and techniques to gain a better understanding of the end-use consumer. Lieberman recently concluded research assessing the satisfaction of Herbalife’s Hispanic current and former customers.

So let me share some key highlights with you. Overall, Hispanics rate Herbalife very highly, with 85% of those surveyed rating the company as excellent, very good or good. Herbalife is well regarded within the community. The company is principally known for its products, secondly for the business opportunity. Of those surveyed, 93% of recent users and 55% of former users would recommend the products to friends and family. And 82% of recent users rate the product quality as excellent or very good and 85% of all recent and former users rate the quality of the product as good, very good or excellent.

We continue to increase our investments in this critical area to help guide internal decisions on how to best serve our millions of end user customers. We also intend to continue to provide this type of data publicly in order to provide overwhelming confidence to investors and the public regarding the size and the scope of the consumption of our nutrition products. We also continue to increase our investments in our brand and our image stay tuned for some very exciting new sponsorships in the near future.

We’re experiencing tremendous growth around the world, driven by increased consumption of our products. Despite the public market distractions, our employees remained focused on supporting our distributors by implementing the numerous growth in infrastructure strategy that we believe will help us to deliver ongoing and strong financial performance. Our distributor leaders remain highly engaged, sharing great ideas to drive global growth. We’re working closely with management to introduce new ideas and the company language worldwide. All of us on team Herbalife are working harder and smarter every single day to build it better.

So, let me turn the call over to Des for a more detailed update on the performance in our key regions.

Des Walsh

Thank you, Michael. As you just heard, we had another record quarter, our 12th consecutive quarter of double-digit volume point growth, our seventh consecutive quarter of more than $1 billion volume points and 13% higher than last year’s first quarter results. We continue to be very pleased with the momentum we’re seeing in the underlying trends in our business as four, six regions posted strong double-digit volume point growth. Our distributors around the world continue to drive growth in their businesses through the consistent execution on daily consumption business methods.

There is an abundance of customers in the 88 countries around the world where Herbalife distributors operate. Everyday engaged distributors introduce the Herbalife product portfolio to new customers as higher obesity rates continue to effect communities. In the U.S. as in many markets, obesity rates continue to rise and by a way of example, more than three out of four Hispanics, aged 20 and over are obese. Obesity is a key public healthy issue for many markets and our distributors are dedicated to combating the growing obesity epidemic by supporting their customers with Herbalife products and encouragement to pursue a healthier active lifestyle.

Now, let me provide regional highlights and color on some key regions. Consistent with our worldwide record performance, the North American region, our oldest and most established region had another record quarter and posted 5% net sales and local currency net sales growth and almost 4% growth in volume points, each compared to the prior year period. Although new distributors decreased 3.5% in the quarter, average sales leaders with volume points increased 9% in the North American region, compared to last year’s first quarter results.

Within the North American region, the U.S. also had another record quarter with net sales growth of 6% and volume point growth of 4% versus the same quarter last year. Compared to the prior year period, new distributors in the U.S. decreased 4% and average sales leaders with volume points increased 9%. As you know, we introduced additional regulation in relation to the Internet leads business last September, which resulted in one of our top U.S. distributors leading Herbalife and other distributors using leads to transition to other business methods. The impact of these changes, U.S. volume points would have increased more than 7% which was impressive even that the region was lapping a very strong 23% comparison in Q1 2012.

In addition to this volume point growth, we are very pleased with the underlying trends that we are seeing in the U.S., approximately 70,000 new distributors joined in Q1, the fourth largest increase in Herbalife U.S. history. The percentage of active U.S. supervisors with volume hit another record in Q1 with an increase of 9% over the prior year. The percentage of new sales leaders qualifying under the 5K method has continued to grow and expanded more than 10 percentage points in the quarter. Historically, sales leaders that qualified under the 5K method are more productive and more likely to have those businesses grounded in daily consumption and steady long-term customers.

18 of the top 25 metro U.S. markets posted growth in the quarter that outpaced the overall country growth, the strong trends continue. March was the highest volume month ever for the U.S. and the U.S. growth rate in April accelerated over Q1. The tremendous and ongoing growth of our U.S. business is a testament to the demand for our products, the need for great tasting, low calorie nutrition and the tremendous ability of our distributors to remain focused on creating and mentoring more customers everyday and the value of Herbalife products coupled with a healthy active lifestyle.

Moving onto Mexico, local currency net sales for the quarter increased 11% and volume points increased 8% each as compared to the prior year period. For the first quarter, new distributors decreased 7% compared to the prior year and average sales leaders with volume increased 14% for the quarter. The non-residential club model continues to grow in Mexico and is a driver of greater access to our products for consumers across the country.

During 2012, we launched Herbalife 24 in Mexico and as we have seen in the markets that have had the Herbalife 24 products for a few quarters, the excitement generated by the line is attracting number of distributors, more focused on building a customer base around the healthy active lifestyle. We will continue to increase product access in this market for distributors’ ability to get product quickly is vital to sales growth.

Asia-Pacific continues its strong performance with broad based growth throughout the region. During the first quarter, local currency net sales increased 20% and volume points grew 17% each as compared to the prior year period. For the first quarter, new distributors increased 17% versus the prior year. The growth was in the region continues to be driven by the expansion of daily consumption business methods and the high degree of distributor engagement. Average sales leaders with volume points increased 23% in the quarter over the same quarter in 2012. The success of daily consumption in the early adoptive markets within the Asia-Pacific region has lead to the proliferation clubs in countries throughout the region, including India, Malaysia, Indonesia and Vietnam.

The local currency net sales in the South and Central American region increased 44% and volume points in the region were up 34% each as compared to the first quarter of 2012. Average sales leaders with volume points in the region increased 28% and new distributors increased 54% over last year’s first quarter. The continued growth in this region is largely driven by three key factors that working concept with each other. Very engaged distributor leadership, the expansion of daily consumption business methods and the price adjusted IBPs.

We have seen that the price adjusted IBPs strive excitement in the region, and it is now apparent that those new distributors are equally productive as those in other regions, we are evaluating expanding this concept now to other regions. Venezuela continues to growth strongly with an increase of 57% in the new distributors compared to the first quarter of 2012. One of the things that we continue to be pleased with in the South American region is the daily consumption is moving out of the early adoptive markets in the regions and is now driving sales throughout numerous countries in the region.

Within the South and Central American region, we need to mention the stability that we are continuing to see in Brazil. Brazil experienced volume point growth of approximately 24% in the first quarter as both nutrition clubs and traditional business methods continue to experience growth.

Turning to EMEA, during the first quarter, local currency net sales increased approximately 10% and volume points in the region grew 11% compared to the same period in the prior year. New distributors for the first quarter were down 5% compared to the prior year period. Average sales leaders with volume points in the region were up 12% in the quarter compared to the first quarter 2012.

Daily consumption in numerous formats, Nutrition Clubs, fit camps, weight-loss challenges, or office clubs are beginning to drive growth across the region. And like the U.S., we believe that we’re seeing a lot of athletic distributor group in Western Europe embrace the Herbalife24 product and brand through adaptations of daily consumption that embrace the healthy active lifestyle.

Within EMEA, Russia had another impressive quarter, compared to the first quarter of 2012, this quarter’s volume points were up approximately 23%. Russia continues to be a market that exemplifies the benefits of a market built on daily consumption, systemized training, a unified distributor leadership group, high utilization of the 5K Qualification, and a city-by-city focus.

Russia has had strong volume point growth now for the past 12 quarters. The strength of these core metrics illustrates the benefits created by building a business on a strong stable foundation grounded in daily consumption, coupled with systemized training and local focus on city-by-city.

The U.K. continues to be a good example of how daily consumption can begin to drive market change. This quarter, we experienced 67% growth in volume and then 83% increase in new distributors in the U.K., our oldest market in the EMEA region, largely driven by the success of the weight-loss challenge concept and the distributor's focus on a healthy, active lifestyle, distributors have also taken these fit club concept and began implementing it throughout the UK. Many distributors are also achieving success which shared office approaches. The UK highlights the fact that our business opportunity offers many and varied approaches to achieving business success all of which are focused on consumer led daily consumption.

Now let’s turn to China, where local currency net sales increased 19% and volume points grew 15% in the first quarter compared to the prior year period. While we continue to believe that our sales leader’s in China are making progress at culturating the concept for daily consumption, we are still working to find tune the nuances of this model, that will work best in this market.

We continue to see more nutrition clubs open and while we are pleased with the progress of the business in China we remain cautious about expecting too much, too soon from this market. We are focused on building a sustainable business there on a solid foundation of long-term customers and we are prepared to move more slowly and take time to achieve the desired results.

Before I turn the call over to John, let me take a moment to review some of the initiatives we have in progress to help accelerate our business and increase understanding of our business model in the market. As Michael mentioned a few moments ago, over the past 12 to 18 months we have begun working to implement various elements of our build it better program. There were more than a dozen build it better projects at various stages of completion, but let me walk you through a few that have been implemented already this year.

In February, we introduce the enhanced statement of average growth compensation for the U.S. market. This new statement was designed to make it even clear to all existing and future distributors of the commissions and royalty has been earned by distributors at Herbalife where in 2012. This new statement also included a cover page, telling all new distributors attracted by the Herbalife business opportunities while doing the benefit of becoming a wholesale customer, but building business at Herbalife is not as similar to our June membership, results varying was time, energy and the dedication that one puts into it.

Building a business is hard work. There are no shortcuts to riches and no guarantees of success. However for those distributors, who devote the time and energy to develop a stable base of customers and then mentor and train others to do the same, there is ample opportunity for personal growth and an attractive part of full time income.

The statement also remains those who are interested in becoming a distributor that there is no need to spend a significant amount of money on the sales aids along materials to build a Herablife distributorship. Over the course of 2013, we will rollout similar statements in other markets. Another build it better initiative is our nomenclature project. We know that the majority of people becoming Herablife distributors do sell in owner to see the discount on Herablife products.

This was validated by a study by Lieberman Research which found that 73% of formal distributors say that they’re joining to be able to purchase products at a discount for their own use. In addition, at the end of the first quarter, 77% of our $3.6 million distributors had not sponsored another distributor and where therefore single level distributors whose principle economic opportunity was based only on purchasing Herablife product at a preferred price for their consumption and that of their families. Some of these distributors may also be retailing products for a profit.

As Michael mentioned a few minutes ago, the nomenclature of change is expected to be finalized over the next 30 days. And once it is, we will begin to implement it in literature, marketing materials and applications around the world.

A third build it better initiative is the introduction of a rule that prohibits the purchase of leads by any of our distributors beginning in June this year. While we recognize the legitimacy of leads as a way of doing any business, Herbalife has decided to eliminate such purchases entirely. This decision was not made lightly, but this method has been misunderstood outside of Herbalife and addressing it in this way will eliminate the misperceptions.

Our distributors are successfully creating long-term customers through the daily consumption of our nutrition products and the unique support they provide. Sales of distributors utilizing methods involving leads are insignificant in the context of our worldwide business and the majority of distributors who have been using paid advertising leads have been transitioning to other methods of building their Herbalife business.

Fourth based on the success in the test markets of Russia and Turkey, the first order limitations that we have been discussing with both investors and distributors for the past year or so have began and will continue to be rolled out in addition markets such as India, Israel and Vietnam. We have seen over time that the new distributors who made more modest initial purchases and built up their customer base before they make the decision to become a supervisor were more successful and productive and this is a trend we wish to continue to see adopted around the world.

Driving, engagement and activity at local level is helping our distributors to drive deeper, engaging customers at a grassroots level. When we look at how distributors take Herbalife products to customers, one method is daily consumption through nutrition clubs. We estimate that we ended the first quarter with approximately 54,000 commercial or nonresidential clubs, registered by distributors in our database. As part of our build it better program, we are also implementing rule that will prohibit a distributor from opening a club in their first 90 days in the business. We believe that this will enhance a success of new club operators and continue to faster even greater success of this model in the future. We will update you on these and other building better initiatives over the course of the year.

Now I’m passing the call over to John to review the financials. Let me keep the opportunity to (inaudible) distributors for another very strong quarter. This quarter’s results were a testament to their engagement, their resilience and their continued focus on creating and mentoring new customers on our products everyday and over time converting many of these product users to distributors who go on do the same.

John DeSimone

Thank you, Des. I’ll begin by reviewing our financial results and comparing them to both the first quarter of last year and to the guidance for this quarter that was given in February. I’ll then comment on the initial guidance we provided yesterday for the second quarter as well as the updated guidance we provided for full year 2013. I will then discuss the process the audit committee is conducting to select new orders and provide some comments regarding the filing of yesterday’s 10-Q. I will then conclude with an update on our share repurchase program, including our repurchase outlook given KPMG’s obligation to withdraw its previous opinions on our financial statements.

With regard to our financial results, yesterday, we reported first quarter net sales of $1.1 billion, an increase of 16.5% as compared to the first quarter of 2012. Local currency net sales for the period actually increased by 18.1%, but this was partially offset by an unfavorable FX impact of 1.6%. As Des has already reviewed in detail, our volume and net sales results by region and key country, I’ll now discuss our margins.

Our gross profit margin for the first quarter improved by approximately 20 basis points, as compared to the first quarter 2012. Savings on our seed to feed strategy and price increases benefitted gross margin in the quarter, partially offset by the unfavorable impact of currency rates and higher inventory write-downs.

Before moving to operating margin, please note that our reported first quarter results included approximately $24.6 million of unusual expenses that we consider to be outside the range of normal operations. We have therefore excluded these expenses from our adjusted first quarter results. These expenses include $15.1 million or $0.10 per share from the impact of the Venezuelan currency devaluation, and $9.5 million or $0.07 per share related to expenses incurred responding to a tax on the Company’s business model.

The following comments regarding operating margin, effective tax rate and adjusted EPS all exclude these charges.

First quarter adjusted operating margin of 17.2%, which exclude the items noted previously, improved by approximately 120 basis points compared to the prior year. The improvement was primarily driven by lower recorded foreign currency gains and losses as last year’s first quarter included $9.1 million in recognized FX losses, compared to $600,000 recorded this year, resulting in a net favorable impact of approximately $8.5 million or 89 basis points, compared to the prior year’s quarter.

Our Q1 adjusted effective tax rate was approximately 220 basis points lower than our effective tax rate for Q1 2012. The variance is primarily due to shifts in our geographic mix as well as benefits from discrete items. First quarter adjusted earnings per share of $1.27 was $0.39 higher than our earnings per share for the first quarter 2012. As previously noted the improvement was primarily driven by growth in sales, improvements in margin and decrease in the effective tax rate also benefitting the quarter with the effect of the share repurchase program.

Since the end of the first quarter 2012, the company has repurchased approximately $640 million in stock of 14.3 million shares. Comparing first quarter adjusted EPS to the previous guidance provided in February adjusted EPS of $1.27 was $0.20 per share higher than the high-end of the guidance range. This beat was primarily driven by $0.07 of timing of expenses which have been reface into the balance of the year, plus an additional benefit of $0.07 of general expense under spend and $0.04 due to our favorable effective tax rate.

Before moving on to new guidance for 2013 provided in yesterday’s release. I want to note a couple of items. With respect to Venezuela, our guidance continues to assume a rate of 10 to 1 for the balance of the year and does not include any further charges or write-downs associated with our Venezuelan operation of all our denominated cash. Our guidance also excludes any ongoing expenses incurred responding to a tax on the company’s business model.

In the first quarter these costs were approximately $9.5 million, we now expect these full year 2013 cost to be in the range of $25 million to $40 million. For all currency assumptions we use the average closing exchange rates during the first two weeks of April, with the exception of Venezuela as previously disclosed. [Not a] guidance from a volume point perspective, we are raising our full year 2013 volume growth expectations by 50 basis points compared to previous guidance and now expect volume growth of 9% to a 11%.

We’re also raising our adjusted EPS guidance for 2013 by $0.15 per share to both the low and high end of our previous guidance range. We now expected adjusted EPS to be in the range of $4.60 to $4.80, representing an improvement over 2012 of between 13.6% and 18.5%. Compared to the previous guidance provided in February, currencies negatively impacting the balance of the year by $0.07 per share.

Also negatively impacting the forecast for the balance of the year is the timing of expenses noted in my comments regarding Q1 results. These expenses are now expected to incur in the second and third quarters and we are anticipated to be partially offset by a lower effective tax rate than previously expected.

For the second quarter we are providing initial guidance of volume point growth of 7% to 9%, which is on top of a very strong 23% and 17% volume growth we experienced in Q2 above 2012 and 2011. Adjusted EPS in the second quarter is expected to be between a $1.14 per share and a $1.18 per share.

I would now like to discuss the process of obtaining new orders, today after we were informed by KPMG that their independence was impaired the audited committee quickly initiated the process to select a new independent auditor. As you know Herbalife is a global company with presence in 88 countries, the independence review and analysis for each of these countries for each of 2010, 2011 and 2012 and for each accounting firm is complex and takes time this selection process which has been overseen by the board’s audit committee has [alluded] quickly and it’s nearing completion, it would be inappropriate to discuss any additional details relating to the process or providing interim status report until the process is complete.

I will like to note that given that we do not currently have independent auditors, we have filed our 10-Q without the SAS 100 review. And therefore, without the required SOX 906 certifications, the 10-Q is complete in all other aspects, including SOX 302 CEO and CFO certifications, as to the accuracy of the financial information. The Q1 10-Q will be amended with the 906 certifications to reflect [where] the SAS 100 review had been completed by the auditors, once new auditors are engaged and have completed their work.

As with the previous three years of financials, the management and the audit committee are comfortable with the financial statements, covering their reference periods, fairly present a, material respects of financial condition and results of operation of the company as of the end of, and for the reference periods. And they continue to be relied upon. And if the Company’s internal controls over financial reporting was effective during these periods.

Finally, let me address our share buyback and debt. As noted in our February release, the Company repurchased $162 million of stock during the first quarter of 2013, all of which was repurchased prior to our February earnings call. During the Company’s open trading window, subsequent to February’s call, which began on February 22 and ended on March 10, the Company did not buy back any additional stock. We were precluded from doing so, because we were in the early stages of preparing for an additional debt arrangement that if completed, will be used to repurchase a meaningful amount of company stock.

However, given the wedged inside of trading activities of our prior KPMG audit engagement partner, and KPMG’s obligation to then withdrawer’s prior audit opinions, we had no choice but to temporarily halt this specific debt deal, while there may be alternatives of financing a large buyback. Our current thinking is to be more conservative regarding share repurchase and we might have been otherwise. At least, since our first time, we gained more visibility into the time frame, the new auditors will need to re-audit our financials. We will continue to repurchase stock on an opportunistic basis utilizing our strong cash flow from operations. We have just under $800 million remaining on our $1 billion authorization. Thank you, this end our prepared comments.

We will now open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from Tim Ramey of D.A. Davidson.

Tim Ramey – D.A. Davidson

Good morning and thanks a lot.

Michael O. Johnson

Good morning.

Tim Ramey – D.A. Davidson

John, obviously your very last comment there was extremely interesting, the idea of a large leveraged repurchase. I understand you probably can’t say a lot more than you just did, but it is – if there were other sources of financing available to you than your current bank group, might that idea revive? Do you think that you won’t have that sorted out, until you have the complete audit filed for the three years in question? Can you give us a little more color on that?

John DeSimone

Sure. As you know management and the Board of Directors, our Board have historically been committed to returning money to its shareholders through the buyback. We still believe that’s a very effective way to return value to our shareholders. We were going down a path, that path is now been blocked because of the KPMG issues, but I do think there are other financing options, we will explore those, there is no commitment at this time we would be in the early stages of even reviewing the options available, but as always we will look for ways to drive shareholder value and if appropriate we may do something.

Tim Ramey – D.A. Davidson

That’s terrific. Thanks so much.

Operator

The next question is from Michael Swartz of Suntrust.

Michael O. Johnson

Good morning Michael.

Michael Swartz – SunTrust Robinson Humphrey

You guys had touched upon this early in the call, but could you maybe give us some more color on the lower price to IBPs in Central and South America and maybe some more granularity of what you are seeing there and your plans to roll that out in other markets?

Des Walsh

Yeah, hi, Michael. So, Michael what we did in South America was we actually tried to test the concept of a IBP pricing which was related to income levels in the country, because what we realized is that the cost of a 50 of these seller IBP is very modest, but a comparable cost in certain markets in South America might be large or relative to income levels.

And so, we tried to take an objective standard which resulted in the IBP pricing certain markets reducing by as much as 30% or 40%. What was really interesting to us was we anticipate that this result in a significant number of incremental people electing to take a look at Herbalife, what we are very pleased to see though was that because of the tremendous distributor infrastructure for training and mentoring new distributors that the activity rates of those new distributors was very high. And so, that gave us encouragement that this test was something that we should continue, because effectively the, although we had an expanded group of distributors coming into the business we have similar productivity. So, we expanded the test we’re continuing it for further 12 months and at end of that period then we’ll make a decisions where this is something that we should evaluate for rollout in other markets.

Michael Swartz – SunTrust Robinson Humphrey

Okay, but no kind of timeline or no near-term plan to roll that out in other markets.

Des Walsh

Not at this time Michael because again what we want to identify is the success factors because it’s not just about a lower priced IBP, it’s about bringing more people into the business and having that infrastructure in place to support success.

Michael Swartz – SunTrust Robinson Humphrey

Okay, great. Thanks Des. And then John just on the guidance, some of the commentary around share buybacks, is your guidance still kind of incorporate the $50 million in quarterly buy backs?

John DeSimone

Not in the second quarter, but it does in the third and fourth quarter.

Michael Swartz – SunTrust Robinson Humphrey

Okay. Okay, great thanks.

Operator

Your next question is from [Sandy Chin] [ph] of Visium Asset Management.

Unidentified Analyst

I have question for John and question a Des. John can you just clarify, did you say that you guys have done a meaningful tender of the stock as on the KPMG incident that hadn’t happened and halted these plans. So can we assume that if you do announce some new order that you can resume the plans to tender or do some sort of buyback?

John DeSimone

To be clear what I said is we’re in the process of putting together a meaningful new debt arrangement that if completed would have been used to buy back stock the word tender was not used in the format for which we would have repurchased the stock was not yet defined. But again management believes in the financial statements as they were issued, we believe in the future of the company and we think a buyback is a good opportunity of returning value to shareholders in the long term.

Unidentified Analyst

Okay. Can you clarify that $0.07 FX, is that for the quarter or what’s your FX assumption for 2013?

John DeSimone

So the $0.07 was the negative currency impact for the balance of the year compared to the prior guidance we gave in February. On a year-over-year basis 2013 versus 2012 this actually a $0.19 headwind so the $4.80 would have been $0.19 higher had the currency assumptions been the same. Venezuela is the biggest piece of that.

Unidentified Analyst

So if that changes then you could go back to maybe $5, or 4.99?

John DeSimone

Venezuela won’t change.

Unidentified Analyst

That won’t change, okay. Helpful and then Des I have a quick question, there has been a lot of concern that Herbalife’s U.S. business is deteriorating essentially because - do you think that there is any credence from this impact of the U.S. business from adverse media and a lot of press; do you seen anything with your distributors what they are saying or seeing, I know North American volumes were up 4% in the quarter, is that an appropriate run rate for the second quarter or even looking out to 2013, I know you said that April is better than the first quarter but can you just give us any update on how April is looking in the back double-digits or what you are seeing?

Des Walsh

Yeah, certainly Sandy we’re happy to do so.

Unidentified Analyst

Thank you.

Des Walsh

So firstly Sandy we believe that the noise out there is not having any material effects in our business. Our distributors are totally focused on the business and what really matters Sandy is let’s not just look solely at volume points, let’s look at the underlying trends in the business. What we saw in the first quarter is approximately 70,000 new distributors joined Herbalife in the United States the fourth largest increase in Herablife U.S. history the percentage of supervisor activity rate was up 9% the adoption of the 5K program now you know hitting 39% in the U.S. which clearly a long-term indicator of committed stability and then 18 of our top 25 metro US market posted growth.

So those are the important underlying trends all of them very strong – all of them all growing very well for the future. And then just reverting to volume points, obviously what we had with successive growth during the quarter March was the highest volume point month ever in the U.S. April even stronger. So we are frankly very confident about the strength of our U.S. business and the success that lies ahead, and hope we believe is it in successive quarters we’re going to see a higher volume points in the U.S. and then in the first quarter.

Unidentified Analyst

Thank you, helpful.

Des Walsh

Sure.

Operator

Your next question is from John San Marco of Janney Capital.

John San Marco – Janney Capital

Thank you, guys. Did the liberalization of the return policy – did that have any impact on sales in the U.S. or, you know, the same question for Mexico?

Des Walsh

No material impact or of any kind, John.

John San Marco – Janney Capital

Okay. In both countries?

Des Walsh

Both countries.

John San Marco – Janney Capital

I guess then just thinking more broadly about all the policy changes you’ve made over the past year, are there any that you expect to have material impact or you’re pretty comfortable that all of them will just sort of, you’ll smooth right over them with business strength?

Des Walsh

We believe that, John, for this reason, if you look at the changes that are happening today, the reason we called it Building it Better, is because they are intended to build it better. This is a program that we actually began 12 or 18 months ago, and you look at the various – as the nomenclature project we believe, will have significant impact, in terms of making it [clear] [ph], the categorization within, what today we call distributors in relation to even the first order limitation. Far from slowing down the business we’ve actually helped - this has helped build a stronger base. So all of these changes individually, clearly represent change and obviously we have to work with our distributor leadership to manage that change, so that it doesn’t become a distraction, but certainly we believe that all of these changes will actually contribute to the strong foundation and future growth.

John San Marco – Janney Capital

Great, thanks. And then just one more on the specific change around the lead generation rules, is that – I guess per clarity, is that a global rule or U.S.-only?

Michael O. Johnson

That will be a global rule, but from a practical perspective, Internet leads are not a significant factor in many of our other regions. It’s then predominantly a U.S. issue. And even with then, within the U.S., John, the important thing and there has been, again some misperceptions around there. So, the volume of business that is done in, traditionally in the lead area has been immaterial in the context of our overall business. Secondly, for many years now, our (inaudible) have been transitioning away from the intellect lead business to business that is more focused on daily consumption. They have been very successful in doing so and that’s how we believe that the remaining very small group of distributors that are using leads will be very successful in transition just as other had before them.

John San Marco – Janney Capital

Great, thank you.

Michael O. Johnson

Sure.

Operator

Your next question from (inaudible).

Unidentified Analyst

Good morning and thank you for taking my question. You mentioned that 77% of your distributors have not sponsored another distributor this year. I was hoping you could clarify where this statistic is coming from and then how it reconciles with some of your comments back in January that 90% of the distributors were buying just for self consumption. I know you’ve clarified this several times, but I’m just hoping there is an easy explanation for the [disconnect].

Michael O. Johnson

Yeah. I think some of those statistics are getting confused. The 90% statistic presented in January was that 90% of the consumers in the U.S. that we surveyed were not distributors. So that is on the survey side, so that’s from bottoms up. Top down within those that do sign off that are in the network, 73% join primarily for the discount on personal consumption and close to 80% never sponsor anybody which is a pretty consistent metric with a fact that 73% join primarily for the discount on self consumption.

Unidentified Analyst

Okay. And then just one quick other question, there have been some issues with your Chairman’s Club website recently, it’s down again this morning, but yesterday at no longer showed two Chairman’s Club distributors, I was wondering, if you could clarify whether these two distributors are still with Herbalife and if not what percentage of revenues they represented?

Michael O. Johnson

So, John, let me see if I can just kill out one stone dead, because this is so typical of how these rumors begin right, so on a regular basis, we’re actually updating videos, we’re constantly involved in maintenance of various kind, and so what you’re seeing is such a reflection of that, in relation to the issue of speculation about distributors leaving, let me just say that the nature of our business is that if the distributors were to leave by definition they want to communicate with their entire downline organization, because their goal would be perhaps transition throughout the company and bring that through with them, so nobody needs to sort of speculate on base of looking at websites and looking at us through other companies leaving, because believe me whether, if somebody does leave the first thing they want to do is send out a mass communication to all other people to say, hey, I’m going you want to come with me.

So let me also say that we have no changes in our Chairman’s Club members, our Chairman’s Club members are committed to the business, committed to working with their organizations into stronger Herbalife.

Unidentified Analyst

That’s great, I appreciate it, guys.

Michael O. Johnson

Thank you.

Operator

And your final question from Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle – Canaccord Genuity

John, there is over $700 million in cash carried in the balance sheet at quarter end, why would that cash to run down or I should say the debts were all down to put that cash in the balance at quarter end?

John DeSimone

Yeah, I think there’s only a component of that was the drawn down piece, there was about $365 million that was in the U.S., and normally we paid down a revolver with that but given the circumstances of the opportunities that we have to buyback stock at various points in time there were event driven opportunities that are not with company event driven but more from our attractors that we want to be in a position to react quickly so we drew down $0.5 million in January and we have used $162 million of that repurchase stock and the rest is sitting on the balance sheet with flexibility to execute a buyback as we see fit.

Scott Van Winkle – Canaccord Genuity

Great, thanks. And then, there are follow-up in the Sandy’s question about the U.S. in April, was there anything specific that kind of cause the business to accelerate the last couple months or maybe just a little bit traction in January and February?

John DeSimone

I’m not so sure that it’s a distraction is simply a transition, so what you’ve got obviously is you’ve got first of all, you’ve got a very high comps, so first quarter of 2012 we had a 23% increase so that comp obviously a very difficult comp, the comp get easier as we go into the second and in third quarter and then I think it’s also the natural momentum of the business, we had our summit in Paris which was attended by our top leadership obviously a very motivating inspiring event where we shared our stories of success and so, typically, we see distributor come back and went like this and just get reengaged, reenergized and so on. So, but again I think the important thing is just focus on the underlying trends of the business which was strong and healthy and that’s what gives us confidence regarding the future coupled with that accelerating momentum in March and April.

Scott Van Winkle – Canaccord Genuity

Great, and then one last one. On the North Carolina facility what should we expect when that open, does it bring any different capability, does it kind of accelerate may be some margin pickup, is it any, is it radically different from the facility in Southern California?

John DeSimone

From a manufacturing prospect standpoint, it’s very similar capabilities to what we have in Southern California, it got a slowly different design from a capacity standpoint, it got a lot of ability to large runs and small runs where in Southern California its mostly large runs, but similar to Southern California will be powders and liquids When we get that up in running which would be the middle of next year, we expect a ramp up to be a little quicker than it was in Southern California. The transition of products from co-packers to that facility has been negotiated with the co-packers, so they onboard with it contractually, so we’ll have the support. And then as we get closer to the execution of the first running that facility will be an update on the profile of the financials. Thank you.

Michael O. Johnson

Okay, I just want to, this is Michael, I want to thank you everyone for being with us today and especially congratulations everybody on team Herbalife. We had another great quarter. And the realization of this is the underlying catalyst for a successful track record. Frankly then the emergence of the public health issues, which are sad, but they are associated with obesity. And here in the US and around the world, we’re seeing the obesity epidemic just getting out of control. What that means for us is more customers and better product brings more results for people and our record finance performance, its broad, it’s across all six of our regions. We expect to report additional performance record as we progressed through the year. You heard John and Des and myself talk about that today.

Our nutrition product results drive confidence in our brand and confidence in our product, gives our product an incredibly permanent place amongst other nutrition products. We are truly a nutrition company of great level. We are a company that will always take the high road. We will operate with integrity everyday. We’ll provide transparency to our business. We’ll make changes that are necessary to help to improve our business, our brand and our image. We are confident and we are extremely confident that our products drive results that our business model creates opportunity. Our brand is growing and our image is improving.

We will continue to work to build Herbalife better every single day to raise the awareness of all the things that are great about our company. So again thanks to all our supporters for your confidence and seeing what we see, and we look forward to speaking with you all next quarter.

Operator

Thank you. This concludes today’s conference. You may now disconnect.

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