Herbalife's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Herbalife Ltd. (HLF)

Herbalife Ltd. (NYSE:HLF)

Q1 2014 Earnings Conference Call

April 29, 2014 11:00 am ET


Don Bullock - SVP, IR

Sandy Cutler - Chairman & CEO

Rick Fearon - Vice Chairman & CFO


Rommel Dionisio - Wedbush Securities

Michael Schwartz - SunTrust

Scott Van Winkle - Canaccord Genuity


Good morning, and thank you for joining the First Quarter 2014 Earnings Conference Call for Herbalife LTD. On the call today is Michael Johnson, the company's Chairman and CEO; the company's President, Des Walsh; John DeSimone, the company's CFO; and Brett Chapman, the company's Chief Legal Officer.

I would now like to turn the call over to Brett Chapman to read the company's Safe Harbor language.

Brett 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 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 Michael.

Michael Johnson

Thank you, Brett. Good morning, everyone, and welcome to our first quarter 2014 earnings call. As these record results show, Herbalife's business is stronger than ever, which reflects broad consumer demand for our weight loss and nutrition product.

Some notable results in the quarter include net sales of $1.3 billion, which were 12% above last year's first quarter, and a volume increase of 9%. Net sales of our U.S. business increased to 8% this quarter with March being the largest sales month in U.S. history. In fact, in the U.S. alone a record 83,000 new members joined the company in the first quarter. Additionally, the activity level of our 72,000 U.S. sales leaders as measured by average sales leaders with volume increased 11% in the quarter.

Our adjusted first quarter EPS $1.50 increased 18% compared to the prior year period. Our first quarter global results reflected 11% increase in the average active sales leaders and 24% increase in the number of new members.

We generated $190 million in cash from operation and invested almost $50 million in capital expenditures to support the growth in our business and our Seed to Feed program, the highlight of what is our Herbalife innovation in manufacturing facility in Winston-Salem, North Carolina, where we will create more than 500 new jobs and ultimately ship American made products over 50 countries.

We have also increased our adjusted 2014 EPS guidance to a range of $6.10 to $6.30 which reflects our expectation that we will continue our positive momentum and continued share buyback to 2014. With our 18th consecutive record quarter and 85,000 new members in the United States this last quarter alone, what is the recipe in this wonderful success?

First, it's our outstanding product. We are consumption-driven company with real products, real demand and our members achieve real result. In the U.S., there were 7.9 million purchases of Herbalife product in a three-month period of which 87% were not sales leaders.

Nearly three quarters of our members join primarily for the discount on product they intend to consume themselves. Second, we have highly engaged and committed members and sales leaders. We offer a low investment opportunity, it's a low cost, low risk entry and exit. The entry cost ranges from $58 to $90 in the US with 100% refund guarantee and no monthly purchase requirement.

Finally, the social component of our business is our secret sauce. Members get the support they need to achieve the results they want. It's undeniable that people lose wait better in social support setting and equally important such a setting helps people better maintain their weight loss and good daily nutrition once they reach their healthy weight. Whether it's a Herbalife fit club or weight loss challenge or nutrition club, the model our members are employing improve the lives and well-being of our customers through sustainable, behavioral change.

This is the concept that Dr. Richard Carmona, the 17th U.S. Surgeon General recognized when performing his due diligence of the company prior to joining our board last October.

Now moving on to the regulatory complaints of our model, I would like to take a few minutes to provide you with some facts and figures that give us continued and complete confident. Our products are consumed and consumption is genuine fed by real demand.

In U.S., there were 7.9 million purchasers of Herbalife product in the three-month period of which 87% were not members. More than 90% of current purchasers, those purchasing in the past three months, say they intend to purchase products again. Few members have joined the business in the U.S. spent substantial time in the Herbalife business. Of those surveyed approximately half worked five hours or less in a month and they made an average of $158 in that month.

This is consistent with both industry and Herbalife's specific surveys that suggest most who intend to work and sell part time to make extra income. Current members are overwhelmingly satisfied with their experience. 91% say that they will definitely or probably continue. 63% of former distributors would recommend their experience to others and that number increases to 94% of those who operated nutrition clubs.

With regard to the Federal Trade Commission, as we have said publicly, Herbalife welcomed the inquiry given the tremendous amount of misinformation in the marketplace, and we are cooperating fully. We are confident that Herbalife is incompliance with all applicable laws and regulations across the board because facts are on our side. For example, during the past two years in the U.S., when we have enhanced our refund and buyback policy and required new members to acknowledge such policy, it is telling that in the face of daily negative headlines by a short seller, our product refund and return rate has continued to decline with 2013 rates being the lowest in history at 0.2%. This trend is in direct contradiction to what one might expect that the short seller's piece was even closely accurate.

Herbalife is proud to have the industry gold standard in consumer protection. The company provides complete 100% money back guarantee including shipping cost for any unsold product purchase within the past 12 months for the member to lead the business. We require all new members to acknowledge that they are aware of our buyback policy. We enclose a brochure in every order in the U.S. that communicates our buyback policy. In fact nearly 1 million brochures were distributed during the past two and a half months alone. We provide clear, accurate and timely disclosures to perspective members regarding potential income in our statement of average gross compensation.

The reality, backed by statistics and study, is that the overwhelming majority members have realistic expectations. Regarding rumored investigations let me be clear. Herbalife takes its disclosure obligations seriously. We do not intend to make any additional comments regarding any of these matters unless and until there are material development.

I also want to discuss the steps the board is taking to accelerate cash returns to shareholders. It is the belief of management and the board that we have the opportunity to create long-term value for shareholder by repurchasing the stock now, while the overhang of the short-selling campaign that contracted our multiple.

To help maximize this opportunity, we are redirecting the cash that would have otherwise been used for dividend over the next two years to a share repurchase to be completed in May and June. This decision demonstrates the board's continued confidence in the current strength of our business and our future cash flow generation.

Our strong financial position and current market valuation make this repurchase an attractive use of our capital. We continue to be grateful to our loyal shareholders, our outstanding sales leaders, our passionate members and our dedicated employee.

Now let's turn it over to Des for a more detailed update on our performance in our key regions.

Des Walsh

Thank you, Michael. By all measures we have demonstrated solid performance in the first quarter of 2014. Our results mark our 18th consecutive quarter of double-digit top line growth with 12 percent growth over the same period in 2013.

We expect our strong business momentum in the first quarter of 2014 to continue throughout the year and it is being driven by our members' engagement with their customers and their ongoing dedication to Herbalife's mission for nutrition.

Five of our six regions posted volume point growth and local net sales growth, while average active sales leaders with volume point increased in every region over last year's first quarter.

This exceptional growth exemplifies the unstoppable dedication of our sales leaders to provide their customers with the advice, support and nutrition product they need to achieve their health and wellness goal. The adoption of regionalization and city-by-city initiatives over the last few years have helped built a firm foundation for united leadership, systemized training and the sharing of daily consumption best business practices among members.

The strong momentum we see at the start of 2014 proves the sustainable nature of this strategy and thereby the significant potential ahead of it. Our members are off to a strong start in 2014 despite media noise they are focused on what they do best executing on their mission to make low calorie effective nutrition available to consumers every day.

Now, let me provide some regional highlights and color on our key region. The North American region had another impressive quarter. It posted 12% in net sales growth and 9% volume point growth, each compared to the same period prior year. Average active sales leaders with volume points increased 9% and new members increased 20%, compared to first quarter of last year.

During the quarter, the region held several large sales training events around the country where attendance was up 112% compared to similar events in the prior year period. These results include a 76% increase in attendance of the January spectacular events compared to the prior year and an 8% increase in the February FFL event. That strength has continued into April where we have seen 47% increase in attendance at the North American leadership weekend, the development weekend for the general market.

We believe that increased participation in these events is pivotal for the long-term success of our members and the proper execution of our gold standard practices, which I will soon discuss in further detail.

Within the North American region, the strength of the U.S. market is demonstrated in net sales growth of 8% and volume point growth of 9%, each versus the same quarter last year. Compared to the prior year quarter, average active sales leaders with volume points grew 9% and new members increased 20%.

We are pleased with the following developments in the U.S. market over the year. First quarter 2014 marked the largest collective entrant of new members in Herbalife U.S.'s history with approximately 85,000 new members. The substantial increase in new members is credited to our robust momentum from the prior year. And I believe demonstrates the strong public confidence and interest in our company, our products and our business model.

Furthermore, 22 of the top 25 metro U.S. markets posted significant growth in the first quarter, another indication of the continued strength in our most established market.

While we are extremely proud of our progress in the U.S., there is still momentous white space opportunity for our members and we expect to see increase growth in this region for the full year 2014 and beyond.

Now, let's turn to Mexico, where local currency net sales for the quarter increased 12% and volume points increased 7 %, each as compared to the prior year period. For the first quarter, average sales leaders with volume increased 6% compared to the prior year.

Unlike many other consumer goods companies, the growth in the quarter occurred despite an increase in taxes during the quarter which speaks to the depth of the customer and member demand for our products.

Mexico's business fundamentals continue to strengthen as members transition their daily consumption business practices from operating residential nutritional clubs to commercial clubs. Commercial clubs are typically held in larger venues and operate longer hours, which allow more customers to partake in the social activities, classes and services offered by members.

Our feedback for members in regards to this transition has been extremely positive. To further advance business fundamentals in the region, an important initiative we remain focused on is our commitment to bring products closer to members in order to better support daily consumption business through improved product access. Several years ago, we launched a partnership with a retailer in Mexico Waldo to serve as pickup or fulfillment centers for key Herbalife product. We have added New Herbalife an additional third party relationship, which has allowed us to increase the number of pickup locations by more than 50% by the end of 2013 and we will continue to add some additionally through 2014. Looking ahead, we will continue to add pickup and fulfillment centers to better serve our members in this region. We expect this to contribute to further increase in sales and volume points in the region.

Let's move on now to China where local currency net sales increased 95% and volume points grew 91% in the fourth quarter, each as compared to the prior year period. Average active sales leaders increased 40% over the same period last year. The strength of our business in China continues to grow. And we are confident in our ability to operate in this region.

As we have always stated, the rules related to the direct selling industry are unique in China. We continue to be transparent with our operation and remain comfortable with our structure and business model in the market.

A progressive adoption and acculturation of daily consumption business methods as well as the implementation of first order threshold and 5K sales leader qualification have been a meaningful driver of the growth in this market and also further strengthen the foundation of its base. Our focus in China has been and will continue to be building a sustainable business foundation for long-term customer. And we remain committed to moving slowly and methodically to achieve these desired results.

Last year, China piloted a preferred customer program that identified and provided further benefits to repeat customers. We currently have over 200,000 preferred customers in China and we look forward to continuing to expanding this concept to some additional markets over the next couple of quarters.

Next, the Asia-Pacific region. In the first quarter, local currency net sales decreased 5% and volume points decreased 6%, each as compared to the prior year period as we continue to focus on improving sales leader attention in this key region. As a reflection of this focus, the percentage of average active sales leaders with volume increased another 4%, compared to the prior year. Also, new members grew 4% over the same quarter last year. As a result, of our Build It Better focus and the active engagement of member leadership in improving underlying metrics in key market such as Korea, we believe that Asia-Pacific will likely return to positive volume growth over the course of 2014.

Speaking of Korea, this market accounts for approximately one third of Asia-Pacific volume and in Q1, local currency net sales for the quarter declined 10%, as compared to the prior year period. Leadership continues to engage and education new members and customers as well as guide the market through a healthy transition to daily consumption DMO practices. We believe that increased focus on sales leader activity and retention together with education on the benefits of daily consumption will result in further improvement to net sales and volume point growth.

In India, local currency net sales increased 12% percent and average active sales leaders with volume increased 16% over the same quarter of prior year. Factors that promoted sales leader activity included improved access to products on the successful localization and implementation of nutrition clubs. Furthermore, the first order threshold introduced earlier in the year favorably contributed to the market's development. We will continue to implement first order threshold in several other Asia-Pacific countries over the course of 2014.

Turning now to the South and Central American region, local currency net sales in the first quarter increased 24% and volume points in the region were up 4%, each as compared to the prior year quarter.

Average sales leaders with volume points in the region increased 19% and new members increased 46% over last year's first quarter.

In Venezuela, volume points decreased 56% and average active sales leaders decreased 11%, each as compared to first quarter of the previous year. The strict currency restrictions in Venezuela have made repatriation very difficult and impacted product supply in the market.

Herbalife Venezuela will begin to develop relationships with local manufactures over the next two years, and in doing so, we will be able to better serve local member. We believe that this process with fortify the country's long-term strategy of protecting profit and sustainability, as well as promoting market self-sufficiency.

In Brazil, local currency net sales grew 26%, volume points increased 16% and average active sales leaders grew 21% in the first quarter, each as compared to the same period last year. The expansion of traditional and daily consumption business methods, as well as (inaudible) product launches have supported the increase in market momentum.

Moving on to EMEA, local currency net sales increased 26% and volume points ….

Moving on to EMEA, local currency net sales increased 26% and volume points grew 25% each as compared to the first quarter in 2013. Average sales figures with volume points in the region was up 17% and new members improved 56% over the prior year period. Members in this region continued to develop and utilize the complementary business methods of weight loss challenges, fit club and nutrition which supported new customer outreach and improved service customization based on client needs. We are encouraged by the consistent execution and successful localization of daily consumption business methods exhibited in both Western and Eastern Europe throughout the quarter.

In Russia, local currency sales grew 39% and average active sales leaders increased 23% each over the first quarter of 2013. We believe that city by city initiative, ongoing adoption of the commercial nutrition club and strong branding effort by the company and members including our sponsorship of FC Spartak Moscow have increased market recognition and consumer confidence. New members increased 68% over the first quarter in 2013.

Throughout the quarter the UK market consistently executed its TDMO strategy and as a result has continued to exploring notable growth. Local currency net sales in the UK increased 64% and volume points grew 64% each as compared to the first quarter of 2013. the numerous weight loss challenges held during the year paired with the consistent client support exhibited at nutrition clubs enable customers to experience the efficacy of our nutritious products and the dedicated service our Herbalife member.

Over the last few quarters nearby markets have observed the UK's growth and has strategized to adopt similar business practices. Markets such as Germany, France and Spain have found success localizing and implementing their daily consumption business practices and consequently experience 16%, 11 and 43 volume point growth in Q1 respectively over the prior year.

Before I turn it over to John I want to highlight a new initiative and pledge by our company which is referred to as the Herbalife gold standard in consumer protection and which we introduced in February. The gold standard includes the following guarantee. Clear and consistent communication of potential income before becoming a member, no startup cost for those interest in membership, full refund of the entry kit within 90 of enrolment if a member resigns for any reason and 100% money back promise for unsold product purchased within 12 of membership termination.

Furthermore, the gold standard highlights our members pledge to abide by strict product chain guidelines and avoids misrepresenting Herbalife products as medical, therapeutic or curative. Since all members must acknowledge the gold standard in writing before they becoming a member we eliminate any question that members are unaware of a promised consumer protection practices or the facts surrounding Herbalife's business opportunity.

In the U.S., we have already had over 100,000 new members acknowledged protection before they even began the member application process. In addition, we have already distributed approximately 1 million pamphlets promoting the gold standard in order shipped to U.S. members in the past 60 days. If there are any existing member who had been misled by misrepresentations about excessive income or product line or wish to leave the business and would like to return excess inventory we want to know about it. To-date, despite this 1 million pamphlets and other member communication regarding the gold standard we have seen no increase in our product return.

In addition to the written acknowledgement of the gold standard required of all new members, we will promote the gold standard in other new member materials and training materials for all levels of members. We are proud to offer this industry leading standard in consumer protection and believe that this another important milestone in our build it better mission.

In closing, let me thank all our members and sales leaders who had another great year. We are inspired by their passion, dedicated and entrepreneurial spirit. Our collaboration improves public health around the world by providing support, education and access to affordable excellent nutrition our members empower consumers on a daily basis to truly achieve a healthy, active lifestyle.

John DeSimone

Thank you, Des. First, I'll review the company's first quarter 2014 reported and adjusted results and I'll provide updated information on the second quarter and full year 2014 guidance and finally I'll discuss our share repurchase strategy.

For the first quarter, the company reported record net sales of $1.3 billion representing an increase of 12.4% against the first quarter of 2013. Local currency net sales for the period increased 16.9% with an unfavorable FX impact of 4.5% as compared to the same period last year. Since Des has already provided significant regional detail around our line point and net sales results, I'll now turn to margins.

Our gross profit margin for the first quarter improved by approximately 20 basis points versus the first quarter of 2013 primarily a result of price increases and foreign currency fluctuations partially offset by the unfavorable impact of higher inventory write-downs and other costs. On a sequential basis, gross profit margins were essentially flat compared to the fourth quarter.

Before moving to SG&A and operating margin, note that our first quarter reported include four specific items that we consider to be outside the normal range of operations what we believe will be useful to investors when analyzing period to period comparisons of our results. We have, therefore, excluded these expenses from our adjusted non-GAAP first quarter financials. They are as follows: expenses related to the impact of a new Venezuelan exchange rate. As of March 31, 2014, the company has changed to remeasurement rate for its business in Venezuela. The official is 6.3 bolivars to a dollar. The new CCAD1 rate of 10.7 has changed consistent with what we believe is done by many U.S. companies with businesses in Venezuela and which resulted in a pretax charge of $89.3 million, $86.1 million of which is reported in SG&A while $3.2 million is recorded in other expense line below operating income. The EPS impact of this write-down is $0.66.

During the first quarter of 2013, the company recorded a pretax charge of $15.1 million or $0.10 per share in changing the Venezuelan exchange to 5.3 to $1 to 6.3 to $1. The impact in both periods are excluded from our normalize non-GAAP operating results. As of March 31, 2014, our cash balance in Venezuela at a 10.7:1 is at $137.5 million.

Also excluded from normalized non-GAAP operating results are expenses incurred in response to a tax on the company's business model. In the first quarter there were $4.3 million of pretax expenses or a $0.03 impact on EPS this year down from $9.5 million or $0.07 per share during the first quarter of 2013.

Also excluded are expenses incurred related to FTC inquiry. For the first quarter $0.9 million of pretax expenses or $0.01 per share of EPS. Also excluded are non-cash interest costs of $5.8 million or $0.06 impact to EPS associated with the convertible bond offering in February.

Through valuation analysis it was determined that annual effective interest rate on the convert is approximately 6.2% while the actual cash interest is only 2%. The difference will be normalized as a non-GAAP adjustment throughout the life of the bond consistent with how other companies handle these non-cash cost of the convertibles.

On a reported basis, SG&A and royalties combined, as a percentage of sales for the first quarter, was approximately 515 basis points higher than last year as a result of the devaluation of the Venezuelan bolivar. Excluding the devaluation for both periods SG&A and royalties combined was approximately 33 basis points lower than a year ago. SG&A excluding royalties for non-GAAP items previously noted and China sales representative and service provider cost was essentially flat as a percentage of sale compared to the first quarter of a year ago.

Adjusted operating margin 17.3% increased approximately 10 basis points compared to the adjusted margin during the comparable last year. The entire benefit was realized in the gross margin line previously discussed.

Moving on to our effective tax rate, our first quarter adjusted effective rate was approximately 100 basis points higher than our effective tax rate of Q1 2013 but in line with expectations provided in our previous guidance. The increase versus the prior year was a result of a net benefit from discrete events in Q1 2013 that did not repeat. First quarter adjusted earnings per share $1.50 was $0.23 or 18% higher than our earnings per share for the same in 2013. The improvements were primarily driven by the growth in the top line and a lower share base due to our share buyback activity. These items were partially offset by higher effective tax and approximately $0.11 of unfavorable impact from foreign currency.

Comparing first quarter adjusted EPS to the previous guidance provided in February adjusted EPS of $1.50 was $0.21 higher than the high end of the guidance range. This was primarily driven by higher revenue and lower expenses. The lower expenses include approximately $0.08 of delayed expenses that have been reprofiled into the rest of the year.

In the first quarter 2014, Herbalife generated cash flow from operations of $191 million, an increased of 39% compared to 2013 net of about $50 million in capital expenditures for the three-month period. The company's free cash flow for the quarter was approximately $140 million.

Before moving on to new guidance for the second quarter and full year 2014 provided in yesterday's release, I want to note a couple of items. With respect to Venezuela, our guidance assumes a GAAP rate of 10.7 bolivars to $1 for the balance of the year and excludes the potential impact of any future devaluation of the Venezuelan bolivar and any future repatriation of significant cash balances in the country. Our guidance also excludes any ongoing expenses incurred responding to attacks on the company's business model and the FTC inquiry, as well as the impact of non-cash interest costs associated with the company's convertible notes.

For all currency assumptions, we have used the average closing exchange rates during the first two weeks of April with the exception of Venezuela exchange rate previously noted. This is consistent with our historical practice. Overall, the currency rates assumed in our current guidance are neutral for the balance of the year as compared to the previous guidance.

Well, let's now turn to second quarter and full year 2014 guidance expectation. From a volume point perspective, we expect volume growth of 7% to 9% for the second quarter. Additionally, we are raising our full year 2014 volume growth expectations by 150 basis points compared to previous guidance, and now expect volume point growth of 8% to 10% for the full year.

We are initiating our adjusted EPS guidance of second quarter to be in the range of $1.51 to $1.55 per share representing improvement of the 2013 adjusted EPS between 7.1% and 9.9%. This guidance range includes one favorable foreign currency impact of approximately $0.17 per share. For the full year, we are also raising our adjusted EPS guidance by $0.25 per share to both the low and high end of our guidance range.

We now expect adjusted EPS between the range of $6.10 $6.30 per share, representing an improvement over 2013 adjusted EPS between 13.6% and 17.3%. This improvement to the full year EPS guidance include the absorption of the previously mentioned $0.08 of delayed Q1 expenses into the balance of the year. This improvement also includes a $0.13 benefit from today's announcement to accelerate the cash returns to shareholders, our repurchasing an incremental $216 million of stock in second quarter above what was included in our previous guidance.

In yesterday's press release, the company's board of directors approved incremental share repurchase of $216 million to be completed by the end of the second quarter. In order to facilitate this program, we are terminating quarterly dividend and accelerating the cash return to shareholders. Company now expects to repurchase a total of $581 million of its common stock during the second quarter of 2014 as part of it's previously announced $1.5 billion of share repurchase program. The $581 million is comprised of approximately $215 million expected to be purchased in April, part of the 10b5-1 trading plan, plus a $50 million previously included in guidance and the $216 million. But otherwise, was expected to be returned to shareholders in the form of quarterly dividend over the next eight quarters.

The company plans to repurchase the stock over the month of May and June, possibly through a contractual alignment once the trading window opens on Wednesday. Additionally, our guidance continues to include $50 million in repurchases per quarter for both Q3 and Q4. We expect to continue to repurchase stock on a routine basis.

Thank you. This ends up prepared comments. You can now open up the call for your questions.

Question-and-Answer Session


(Operator Instructions)

And your first question comes from Rommel Dionisio with Wedbush Securities.

Des Walsh

Hi, Rommel.

Rommel Dionisio - Wedbush Securities

Well, thank you. Yeah. Thanks. Good morning. Just a couple of follow-up questions on China. You obviously are posting some very strong growth there. Could you just give us an update, first of all, in terms of how many regions you have got regional approvals for what the addressable market is, I think you have got most of the country by now? But -- and second, given the strong growth that you have posted in that market, if there is going to be some requirements to boost your production capacity there as well? Thanks.

Des Walsh

Yeah. Hi, Rommel. Good morning. This is Des. So on the currency, we have licenses in 26 provinces and that covers obviously all of the major metropolitan areas a vast majority of the country. We obviously are very pleased with the growth we are seeing in China. And we certainly have an aggressive program in place to identify additional manufacturing opportunities in order to cope with the growth that we see ahead.

Michael Johnson

Actually a very tough subject, very intuitive for you to recognize that we are going to introduce some capacity enhancement in China in the near future.

Rommel Dionisio - Wedbush Securities

Can you share with us the capacity utilization rate at the moment? Are you romping up close to 100% or do you still have a couple of quarters to go until you get there?

Michael Johnson

Now, we are about 66% of our capacity within China on a monthly basis. So some time over the next 18 months when we do make sure we have new capacity ready to go.

Rommel Dionisio - Wedbush Securities

Okay. Perfect. Thanks again and congratulations on the quarter.

Des Walsh

Thanks, Rommel.


Your next question comes from Michael Schwartz with SunTrust.

Michael Schwartz - SunTrust

Hey. Good morning everyone.

Unidentified Company Speaker

Good morning, Mike.

Michael Schwartz - SunTrust

Just wanted to touch on the U.S. business. I know you do not break it out anymore on the conference call but just in terms of how at least historically we have looked at the market in terms of the Latino and general market, do you have any more information about how they are growing?

Michael Johnson

Well, we stop breaking at our seniors ago because they somewhat blended together. When it was originally broken out separately, it was broken out because the Latino community was operating a nutrition club model though much of the general market community was not. That has changed as of -- we're on 2010, in addition, the only way we broke out Latino distributors was based on their language of choice. If they chose Spanish speaking applications Latino, if they did not we consider them general market, we did not ask for any background on that point. And over time, more of our Latino that choose they're bilingual it's a new generation and they're choosing English speaking application. So strictly speaking from a, just looking at the number of distributors that are Spanish speaking versus non-Spanish speaking it's around 50:50, but the implications there are that the general market includes now some Latino distributors or members.

Michael Schwartz - SunTrust

Okay. So the lines have blurred a little bit then?

Michael Johnson

The lines have been blurred now for the last three years. Correct.

Michael Schwartz - SunTrust

Okay. And then just in terms of the new facility in North Carolina, can you give us an update where you stand when we should expect production the kind of ramp up and the potential cost savings from '14 or '15 how you are looking at it?

Michael Johnson

Sure, so the first life production run will happen May, which is slightly ahead of schedule. We are on budget. We expect to ramp up beginning the end of May this year really an 18 month ramp up from an increasing dilution stand point, the operations will be above $0.03 dilutive this year, which is included in our guidance, and accretive next year we have not given any specific members around how accretive, but we will as we move closer to the end of the year.

Michael Schwartz - SunTrust

Okay. Great. Thanks for the color.


(Operator Instructions) And your comes from Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

Hi thanks. Sticking on the US as a topic, I know you can't talk anymore about the regulatory comments, beginning of the call, but can you talk about your public relations efforts? It seems like it's stepped up a little bit and you became more responsive over the last month. Has there been any change in PR and as well as your outreach efforts to distributors?

John DeSimone

Hi Scott, this is John, I will take that. Our efforts are what they are in response to the situation we are in. We are in a campaign. That campaign is something that we think is beneficial to long-term value creation of our stock and for our shareholders and we will do whatever it is we feel we need to. You sense that is stepped up, maybe that's the case, but at the end of the day, there is a proactive and a reactive piece I think you will sense that both that stepped up and we will continue to step up.

Scott Van Winkle - Canaccord Genuity

And on the distributor side, is there any change in communication to present your point of view?

Des Walsh

Yeah, Scott, this is Des. Our communication with distributors has remained consistent throughout and I think you see the impact of that; obviously, tremendous distributor confidence. You see it reflected distributor engagement, you see it reflecting those numbers that we shared in terms of meeting attendance, 112% increase compared to the same period prior year. You see it reflected in activity rates in terms of average checks of sales leaders and you see it also enters the new members. So as we announced another record for the United States despite all the noise, approximately 85,000 new members came to us just in the first quarter of 2014. So certainly our distributor communication strategy has been very effective for the last 15 months and that same strategy is going to continue.

Michael Johnson

I reiterate something that's on the call earlier which is that the month of March was the largest sales in the history of the US.

Scott Van Winkle - Canaccord Genuity

And then Des, I think you made a comment about April having good attendance as well at events. Is there any other metric as far as new member growth or something of that nature in the month of April where the news flow seemed to turn a little more negative?

Des Walsh

I think you see it reflected in our Q2 guidance. Scott, we have tremendous momentum going into the second quarter, you see it reflecting the guidance and that gives you the answer you are looking for.

Scott Van Winkle - Canaccord Genuity

Great, thanks. A couple of markets, following up on Rommel's questions about China, you posted 90% volume growth and about 40% growth in sales leader activity. Is that -- what's the driver of the productivity improvement we're seeing in that number?

Des Walsh

I think what you are seeing reflected there is just increased focus on daily consumption; we have more customers. The preferred customer program has been hugely successful. This is a pilot program in China, but we have 200,000 people now sign up as preferred customers. We are seeing that drive productivity rates and activity rates in the club. So really a whole combination of factors but all product consumption based.

Scott Van Winkle - Canaccord Genuity

Yes, Des, how does the preferred customer model there differ from maybe just being a member in other markets?

Des Walsh

Those requires a modest fee to participate, probably the equivalent of about $2 or $3 and we turn to that especially think that it's a loyalty program, Scott. So what it is that it gives our individual members there the opportunity to provide various incentives to those who signed up as preferred members, it could be for attendance of the club, it could be referring other members of the club, just a variety of different local activity. So it's a way of creating loyalty, creating a relationship, and in addition those preferred customers have the ability to order directly from the company. So a variety of different benefits. We are obviously tracking it very careful, we are excited about it and create an additional focus and we are now looking at expanding an adapted version of that pile into other markets in the Asia-Pacific regions.

Scott Van Winkle - Canaccord Genuity

And then moving on to Venezuela, I think Venezuela's 4% of sales in the quarter. Do you have a number excluding the revaluation cost? Do you have a number as what kind of percentage Venezuela is of operating profit? Is it a profitable market given the scenario there?

John DeSimone

So that is an interesting question. So it ultimately will depend on whether we can repatriate the cash or not. If we can repatriate the cash it's profitable, if not it's about a breakeven market for us. Our objective long-term is to partner with a local manufacturer who has access to dollars. So we are not concerned with repatriating currency to pay for product. So I think worst case, our expectations would be breakeven best case, it could be a long-term profitable market.

Scott Van Winkle - Canaccord Genuity

Great. And then John, on the share repurchase, just to kind of help with the numbers, do you have an ending diluted share count for Q1, trying to work the averages and roll in the incremental buyback, makes it a little bit of challenge?

John DeSimone

Ending for '12? I have on the top of my head the ending on a basic basis for the end of the year, which is about 86 million, 85 million shares, somewhere in that range. You can back -- I do not know what the end of Q1 was, you can easily back into it based on our assumptions on future buyback. Right, there is $50 million sent in Q4, $50 million sent in Q3, $581 million sent in Q2. We have a share price that assume -- you can do your own math and determine what it was at the end of Q1. But we will get back to you also to confirm it. But it -- so something you can calculate.

Scott Van Winkle - Canaccord Genuity

Great. Thank you very much.


There are no further questions. I would now turn the call back to the company for closing comments.

Michael Johnson

We want to thank everybody for the ongoing support. We are extremely proud at Herbalife, who we are and what we do to create opportunity in the lives of our customers, our member and of course, we are part of our employees what they are doing every day. We promote a healthy active lifestyle. Our members help their customers find healthy solutions in a social support system that creates incredibly strong bond to our product and to our people. With the incredible amount of money and energy being thrown against the (inaudible) trying to store who we really are, we are always and we always have been confident in the integrity of our longstanding business and the company's compliance with applicable laws and regulation.

So this has lead to another record quarter. We look forward to seeing you again next quarter and to repeat what we have repeated today. So I thank you all very much for being with us.


That concludes today's conference. Thank you for your participation. You may not disconnect.

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