Good afternoon, and thank you for joining the First Quarter 2020 Earnings Conference Call with Herbalife Nutrition Limited. On the call today is Doctor. John Agwunobi, the company's CEO John DeSimone, the company's President Alex Amezquita, the Company's Senior Vice President of Finance, Strategy and Investor Relations and Eric Monroe, the Company's Director, Investor Relations. I'd now like to turn the call over to Eric Monroe to read the Company's Safe Harbor language.
Before we begin, as a reminder, during this conference call, we may make forward looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward looking statements in our business, we encourage you to refer to today's earnings release and our SEC filings, including our most recent Annual Report on Form 10 ks and Quarterly Report on Form 10 Q. Our forward looking statements are based upon information currently available to us. We do not undertake any obligation to update or release any revision to any forward looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events.
In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U. S. Generally Accepted Accounting principles referred to by the Securities and Exchange Commission as non GAAP financial measures. We believe that these non GAAP financial measures assist management and investors in evaluating our performance and preparing period to period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release. A reconciliation of these non GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC.
These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website, herbalife.com. Additionally, when management makes reference to volumes during this conference call, they are referring to volume points. I will now turn the call over to our Chairman and CEO, John Agwunobi. Good afternoon, everyone.
1st and foremost, I hope you and your families are all safe and healthy. This is an extremely challenging time for us all and our thoughts are with those most affected by this global pandemic, especially those on the front lines of the crisis. As you saw from our press release, the Q1 was an all time high in terms of volume points. We and our distributors are working hard to overcome the various challenges we've encountered to ensure our nutrition products are accessible to customers. Our factories as well as our 3rd party manufacturing facilities are operating at close to normal capacity.
As many of you know, the majority of our products are foods, yet there have been last mile delivery disruptions and Nutrition Club restrictions in various markets. We believe the strength of our direct selling model and our culture of collaboration with our distributors have helped us minimize the impact of those disruptions to date by sharing best practices and developing localized solutions. Our distributors have been utilizing consumer facing technology to interact with their customers, particularly in cases where face to face interactions are unable to take place. Attendance at virtual product training and business opportunity meetings has been extraordinarily strong. For example, a recent virtual meeting in North America had over 40,000 participants.
Additionally, we've been utilizing our training teams in new and exciting ways. For example, our doctors have offered virtual trainings on our products and on how to stay safe and healthy. And our sponsored athletes and fitness experts are leading at home virtual workouts around the world. The learnings and enhancements that we have had from this time will only benefit us in the future. While we focus on the immediate priorities related to the pandemic, we continue our work to successfully deliver against our strategic initiatives.
Our strategy is working, yet we're constantly learning new ways to build it better and to innovate, so that we come through each challenge stronger than before. We will continue to evolve our strategy to best support our distributors as they grow their businesses and drive the company forward. Turning now to updates on our top 4 markets. Let's start with China, where volume points grew 29% compared to the Q1 of 2019. While this growth was extraordinary and due to the team's ability to quickly adjust to changing
Ladies and gentlemen, we do apologize. We're experiencing a minor technical difficulty. Please remain on the line.
Okay. Listen, let me start by apologizing to everybody for the technical issues. What we're going to do now is we're just going to keep going. I'm going to finish out my statement here and then we'll hand it off to Alex. So we're talking about China, where the volume points grew 29% compared to the Q1 of 2019.
And I was saying that although this growth was extraordinary and it was due to the team's ability to quickly adjust to the changing marketplace dynamics, I want everyone to remember that last year's performance was impacted by the Chinese government's 100 day review of the health products industry. We learned from last year's review that we needed to be less reliant on large in person meetings. And therefore, we created a very robust e commerce platform, and we moved many of our sales meetings online. These moves have proven to be extremely helpful during the pandemic. As the economy in China reopens, so have approximately 90% of our nutrition clubs with social distancing measures in place.
Now in the U. S, the Q1 and the month of March were all time record highs. We did see an initial decline in sales in mid March, especially in Nutrition Clubs, as states and localities placed restrictions on commerce. However, this decline has been partially offset by the ingenuity and the creativity of our distributors, who pivoted and focused their energies on increasing home deliveries and carryout services. India volume increased by 15% during the quarter, but the pandemic had an adverse impact on sales late in the quarter and on into April.
Finally, in Mexico, volume points were down 7% in the quarter. We are seeing some softening of sales attributable to the pandemic in addition to the already difficult economic conditions in that market. Due to the uncertainty surrounding COVID-nineteen's evolving impact on our business and on the global economy, we are unable to provide guidance at this time. However, for transparency, we are providing you with April volume performance. Given the magnitude of the restrictions put in place by local governments in response to the pandemic, we are encouraged that volume points for the month of April were down by only 1% compared to April 2019.
Again, we believe this strong performance speaks to the strength of our direct selling model and our distributor culture. We are confident our business can continue to manage through this pandemic and that we will come out stronger at the end. Here are a few reasons why. Well, first, this is a global event, but it's very local in the way that it impacts each country, each city and each community. We have an innovative infrastructure and our distributors know how to operate effectively in their local communities, almost at the block by block level.
We're encouraged by the way our distributors are connecting with and servicing their customers in this environment. 2nd, good nutrition and healthy active lifestyles have always been important, and people are realizing that that is true now more than ever before. And finally, the need for supplemental income has always existed, and our business model may help provide an opportunity for some at this time. It's remarkable how our distributors and our employees have stepped up together to keep our businesses moving forward. And I couldn't be more proud to be part of this company at this time.
So at this point, let me hand this over to Alex to review the financials.
Thank you, John. Our record setting volume in the quarter converted to 1st quarter net sales of $1,300,000,000 representing an increase of 7.7% on a reported basis compared to the Q1 in 2019 and included double digit net sales growth in 6 of our top 10 countries. Adjusting for the headwind in foreign exchange rates, net sales for the quarter increased 10.4% year over year. We reported net income of approximately $45,600,000 or $0.32 per diluted share, which includes an additional legal accrual of $83,000,000 related to the SEC and DOJ investigations on the FCPA matter in China. Adjusted earnings per diluted share were $0.83 an increase of 27% compared to adjusted earnings per adjusted diluted share of $0.66 for the Q1 last year.
Note that our reported and adjusted results this quarter included expenses related to the China growth program of approximately $2,200,000 Additionally, our adjusted EPS figures continue to exclude items we consider to be outside of normal company operations or we believe will be useful to investors when analyzing period over period comparisons of our results. As such, we have excluded net expenses related to the response to COVID-nineteen of $5,800,000 during the Q1. The impact of currency fluctuations represented a year over year headwind of only approximately the approximately 2 70 basis points headwind to net sales. This is due to headwinds and other short term offsets within the quarter. COVID-nineteen sentiment drove a significant strengthening of the U.
S. Dollar in late March and is expected to have a more material impact on EPS results for the remainder of the year should currency rates stay at current levels. Reported gross margin for the Q1 of 80.5% increased by approximately 100 and 15 basis points compared to the prior year period. The increase was primarily driven by the impact of retail price increases and lower inventory write downs as well as the roll off of the Mexican retaliatory tariffs that impacted the Q1 of 2019. Q1 2020 reported SG and A as a percentage of net sales of 43.5 percent was primarily driven by the previously mentioned legal accrual of 83,000,000 dollars Adjusted SG and A as a percentage of net sales was 36.4%.
And adjusted SG and A excluding China member payments was 28%, approximately 140 basis points lower than the Q1 2019, primarily driven by the cancellation of a major distributor event and the cancellation or delay of a number of other events and activities, all due to the impact of COVID-nineteen. As John mentioned, given COVID-nineteen's impact on our ability to provide guidance, we are disclosing preliminary April volume point results. April preliminary volume point results provide some insight as to the severity different markets have been impacted by COVID-nineteen restrictions as well as the phase of the impact. For example, China and the US are up 20% 14%, respectively, while India and Brazil are down 30% 31%, respectively. We will periodically reassess our ability to set 2020 guidance as and when we can reasonably estimate the impact of COVID-nineteen.
Related to the balance sheet, we currently have $944,000,000 of cash on hand and $1,500,000,000 in our share repurchase program. Our financial profile remains strong with ample liquidity and a favorable debt maturity schedule. During mid March, we announced an amendment to our existing credit facility that increased borrowing capacity, extended the maturity and reduced the interest rate applicable to the Term Loan A facility and revolver by 50 basis points. Being able to execute this amendment during these uncertain macroeconomic times demonstrates the confidence and support our lenders have in Herbalife Nutrition. This concludes our prepared remarks.
Operator, please open up the line for questions.
Our first question is from the line of Wendy Nicholson with Citigroup. Wendy, your line is open.
Hi. A couple of questions for you, if I can. The first one, the major distributor event, I know that had been obviously something you were looking forward to. It was a big deal. And so I understand why there were such big cost savings.
But what's your thinking on in terms of rescheduling that? And I'm wondering for two reasons. Number 1, the impact of the P and L to the extent there are costs that we should build in maybe in the back half sometime. But also in terms of keeping the momentum alive, do you think that's necessary for the momentum and the goodwill among the distributors?
Yes, this is John. I'll take that.
So the event was done virtually. There will not be a live honors this year. I can tell you I think it was done in a way and in collaboration with distributors that it was actually motivating and does keep the momentum going. In terms of savings, look, we spend a certain amount of our percent of sales on distributor events and promotions, and we hope to get back to that same level by the end of the year. It may be redirected into something else, but I think it will be somewhere included in the model.
Got it. And then my second question is with regard to China, can you give us a sense the volume points of up 29% in the quarter are stunning, that's fantastic. And I know it was an incredibly easy comp, but is there any way you can break that down kind of January, February, March, so that we can get a sense for how much COVID impacted you maybe in February or March, versus how much growth you saw in January. I don't even know if that would be helpful or meaningful, But just curious to try to get a sense of whether COVID was in fact a big deal or not in China in the Q1. Thanks.
Yes. So I'll give you some numbers, but let me first qualify it. It's difficult to look at because of the timing of Chinese New Year this year versus last year, plus the impact of the 100 day campaign last year. What I can tell you is the growth rate of China in March was about equal to what it was in Q1. It was 29% growth rate in March.
It was 29.4 percent for the quarter. The spread between January February, it's really if I gave you numbers, it'd be really hard for you to embrace it and know exactly what it means because of timing of Chinese New Year. This year it started in January of last year, it was in February. So there's a big mix issue resulting from that.
Got it. Okay, that's helpful. Thank you
very much. Obviously, it means January February combined was around 29% growth.
Yes, that makes sense. Terrific.
And next, we have a question from the line of Karru Martinson with Jefferies. Karru, your line is open.
Good afternoon. When we look at the regional volume points in April, I have to when I look through that list, it's North America and China, where I think you made progress with your e commerce platform. How much was that improvement in those markets driven by having e commerce? And does that change your thinking about how you would roll that out to the rest of the globe?
Yes, I think it's more than just e commerce. So first, I think big picture. In countries and regions that have sophisticated infrastructures, the ability for distributors to find alternative methods to do the business or enhanced. Those with maybe some weaker infrastructure is a little more difficult. Also, China and the U.
S. Have preferred members and that helps in preferred members. In April, actually in the U. S. Was a record number of new preferred members.
So I think there are some benefits that we can learn from China's performance that will enhance other regions over time as we accelerate the rollout of some of these tools. Of course, when you start looking at India and Brazil and South America, the lockdowns were a little more challenging in general than they were in the U. S. U. S.
And they're ongoing. And they're ongoing. And so some of that plays a role into it also.
Okay.
And then when we look at the Nutrition Clubs, certainly encouraging to hear them pivoting and doing more carryout and delivery. But how are they performing? Are they getting rent relief for the times that they're required to be closed? What's the health of your distributors here in the U. S.
In particular?
Yes, well, so obviously Nutrition Club volume is down, but the U. S. Is having record performance. A lot of the Nutrition Club operators do more than just operate Nutrition Clubs. They have preferred members.
They have the ability to sell what we call customer direct shipments. Customer direct shipments in the Q1 or in April, excuse me, was up 40%. And so I think they're just finding alternative methods. As far as rent abatement and things like that, I don't know if it's going to be very specific to each individual distributor. So I'm not aware of it.
But look, April was the largest month in the history of the U. S. So overall, distributors are performing very well in the U. S.
And in terms of the states that are reopening, where do Nutrition Clubs land on the all of the state by state guidelines of what needs to be met? How quickly can distributors open up that channel for you?
That's a very localized question. So I don't know the specifics, right? But when you think of clubs, first of all, they're selling food. They've been doing curbside and deliveries in many states. I think what you're asking is when things open up or they can go back to normal, how quickly will they come back?
That's going to be a question I'm not yet prepared to answer. But like I said, the U. S. Is just set up. The highest volume month in U.
S. History was March, and they beat it in April. A lot
of that.
And our next question is from the line of Hale Holden with Barclays. Hale, your line
is open. Two questions. The first one is, I heard your comments on Latin America and Brazil. Is it just really the lockdown and the economy there? Or is there something else going in that market?
Because it is an outsized decline for volume points versus your other trends.
Yes. So lockdown is more impactful there for a number of reasons. So for example, in Brazil, clubs just aren't open, not even not doing delivery, they're not open. We have a lot of 3rd party logistics providers in these countries. Some of those have shut down.
So the access, like call it the last mile that the consumer has access to the product has been restricted in a lot of the South and Central America market, much more than the rest of the world.
Okay. And then, I think that was on
Let me just add, I want to add this because I feel like South and Central America, including Brazil, had 7% growth in the month of February, had combined growth in January February. It was March that brought TAMKAN into the negative. So that we were seeing good trends in South and Central America prior to the impact of COVID in March.
That's helpful. Thank you. And then I was wondering if your reps had sort of shifted their marketing or their value approach to adjust for lockdown restrictions, whether it was focusing something some more on the vitamins that you guys have been highlighting or if it was meal replacements to keep you healthy while you're not leaving your house to keep weight off and just some of the shifts that they've been doing dynamically?
Yes, I don't necessarily know if the distributors are shifting, whether it's more response to the demand that they're seeing for their customers. So for example, in a lot of countries, we've seen an increase in the immunity portion of our portfolio for those particular products as people start thinking about staying healthy to avoid any potential, just making sure they stay strong and healthy. So we have seen demand shift to different parts of our portfolio. I wouldn't say that it changes the equation for distributors in terms of their business model in any material way, but we have seen some modest shifts in purchasing behavior.
Okay. Thank you very much. I appreciate
it.
Our next question is from the line of Stephanie Wissink with Jefferies. Stephanie, your line is open.
Thank you. Good afternoon, everyone. Just a few questions for us. The first one we wanted to unpack a little bit more on the digital sales. Can you just remind us what percentage of the business is .com?
And just to share a little bit more on some of the tools that you might have put into the market during this period to help your distributors bolster some of the sales opportunity?
Yes. So, I think the most dramatic market where we've seen the change in digital behavior was China. Obviously, in 2019, as we responded to the 100 day campaign, the reliance on meetings we talked about putting in 2nd and third legs to the stool so that distributors would have alternative means to do the business. We've seen that really come to fruition as we've gone through the COVID-nineteen situation. Around 30% of transactions in China are now coming through that digital platform, right.
So that's effectively going from 0 to 30, which is a pretty significant impact. So that's a market where you've seen the digital platform really come to bear. In the U. S, there's been an increase. I don't have the exact statistics, but it has gone up.
Yes, I got them. I mean, so if you think of customer direct, which is going on the GoHerbalife site, it's around a little over 20% of our 22%, 21%, 22% of our business goes through that platform or it did in April, okay? So this is we're talking kind of post the impact of COVID. But in the U. S, there's a lot of digital platforms.
Preferred members order directly from the company. We have Nutrition Club using the different digital tools. I'm really speaking specifically to the .com site.
Okay, that's great. And then I just ask you to just extrapolate a little bit on the disclosure around the SPPA, both on the call and in your filing today. I think that the language you use is you've reached an understanding in principle and you'll enter into administrative resolution. Can you just talk a little bit about that, where you are in that process and then what that may permit you to do with respect to some of the cash and the buyback?
Yes. So, the way, Stephanie, thank you for your participation and your questions. I hope you're staying safe, by the way. Yes, so as you saw from the update, the disclosure in our 10 Q regarding the SEC and DOJ investigation is all the detail that we can share with you is in the Q, and I would refer you to the Q for further details on that. Having said that, we do believe that it has freed us of any material non public information that would have affected our ability to repurchase shares.
Now having said that, we're also mindful of the fact that we have to stay prudent and use good judgment in the face of COVID-nineteen and the inevitable impact on the economy that we all are aware of. So we're having to navigate, kind of see what's happening beyond DOJ SEC and now COVID and the economy that we're trying to balance everything as we look to the future.
Okay, that's very helpful. Last one for us is just your enthusiasm around the U. S. On reaching the highest number in April, it's certainly palatable. Can you talk a little bit about new customers, how you think about retaining those customers, just life cycle value of some of those new customers that you're bringing in?
Thank you.
Yes. I mean, so, new customers and the life cycle of customers are the 2 obvious metrics that are really important to us. I'm not going to give you the number of new customers that came in over the last couple I can tell you that the average order size in the U. S. Has gone down.
So the growth in the U. S. Has come from more people ordering. We will measure the lifetime value of those customers and reorder rates as we go forward. But it's encouraging that the growth is coming from more people ordering.
That's great. Thank you very much.
And our next question is from the line of Ivan Feinthev with Tiger I'm sorry Tigris Financial. Ivan?
Thank you for taking my questions and congratulations on the record results, especially in a difficult time. So driving these record results, what do you think were some of the factors, the key products, what most surprised you and what do you think the opportunities here are going forward? And a lot of people addressing the fact that one of the ways, the best ways to stay healthy is to be healthy. So I think there is a huge amount of opportunity for a company like
yours. Yes, thank you, Ivan. So first of all, let's be very clear. No one wishes these kinds of situations on anyone. This is a crisis by any definition and there are many families, our customers, perhaps even some of our employees and distributors out there who have either lost loved ones or had to suffer through the illness themselves.
So that's the first thing I think is critically important. Having said that, at times like this, people do tend to reevaluate their own personal situations. They look at their health, they look at their income streams, they look at the security of their families, and they make assessments as to how do they improve things for themselves and their families in the future. It's also, I think, critically important that we went into this crisis really connected to our communities through our distributors. They're really embedded at the very local level in communities.
The whole business model is built around what we call the circle of influence, our ability to kind of connect through families and friends into the community. And it's proven true. It's proven to be very useful in this situation where people are locked down. They're able to kind of distributors and their customers are able to stay connected and it's been a very effective business model. The proof of concept has been, I think, quite clear.
I'll also say this that when all is said and done, healthy nutrition and a balanced healthy lifestyle are the ways to stay healthy. And with that, people the demand for our products and for our services has gone up around the world. And I'm just glad and grateful to the whole team that we've been able to meet that increased demand. Now as we look to the future, and that was the latter part of your question, it's an important part because it's a big part of our it was always a big part of our strategy and this helps us accelerate the notion. Connecting to technology bringing technology into our front office, so to speak, and into the transactional aspects of our distributors' work was always on our strategic plan.
It's become even more important as a part of this, whether it's Zoom or social media or the many other technology based platforms that are a part of our business, e retail and so forth. They've all become even more important and will accelerate our kind of rollout of those strategies around the world, I think, as a result of what we're learning today.
Any specific products that you saw surge in demand, for example, like the immunity products or even the stress management products that surprised you?
I'll turn it over to Alex in a second to give you the details if you require. But I will say this, all of our product categories have seen increased sales. It's true that those products that are most associated with immune support perhaps more than others. But Alex, do you want to add any detail to that?
Yes. You know, Ivan, there has been broad based growth across the portfolio, as John just mentioned. I did mention immunity in my response earlier, because we have seen that a little bit more disproportionately grow than other elements of our portfolio. But really, if you look at Targeted Nutrition, our sports line is up double digits, Targeted Nutrition is up double digits, outer nutrition is up double digits. It's really across the whole portfolio.
So we're just grateful for that.
And at this moment, I'm showing that we have no further questions over the phone lines. I'd like to turn it back to our presenters for any closing remarks.
Yes. So, this is John Agwendobi here. And I want to start by obviously saying how fortunate we all are in Herbalife Nutrition for our distributors and their innovation, their resilience and their work in the face of this crisis. Their customers, their preferred members, their relationships in the community have made a big difference in their independent businesses and in the company overall. As we look to the future, clearly, our focus is, 1, let's kind of get through this and continue our growth into the future, focus on our strategy and our long term view.
But I do think it's important that we stop for a moment and just kind of make sure that each of you, you're our partners as well, that you stay as safe as you possibly can. We will get through this. Talking about the pandemic. And the business will continue to thrive and grow into the future as we've indicated, at least that's what we believe. And we think our model is the right model and that it's proving itself to be a great model in this time.
And so with that, I say thank you, stay safe, and we'll see you next quarter.
Ladies and gentlemen, we thank you for joining us for the Q1 2020 earnings call for Herbalife Nutrition Limited. You may now disconnect.