Good afternoon and thank you for joining the First Quarter 2018 Earnings Conference Call for Herbalife Nutrition Limited. On the call today is Rich Gutis, the company's CEO Des Walsh, the company's Executive Vice Chairman John Theissimone, the Company's Co President and Chief Strategic Officer Doctor. John Agwunobi, the Company's Co President and Chief Health Nutrition Officer and Eric Monroe, the Company's Director, Investor Relations. I would now like to turn the call over to Eric Monroe to read the Company's Safe Harbor language.
Before we begin, as a reminder, during this conference call, comments may be made that include some forward looking statements. These statements involve risks and uncertainty, and as you know, actual results may differ materially from those discussed or anticipated. We encourage you to refer to today's earnings release and our SEC filings for a complete discussion of risks associated with these forward looking statements in our business. We do not undertake any obligation to update or release any revisions to any forward looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events except as required by law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.
S. Generally Accepted Accounting Principles referred to by the Securities and Exchange Commission as non GAAP financial measures. We believe that these non GAAP financial measures assist management and investors in evaluating our performance and preparing period to period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release. Please refer to the Investor Relations section of our website, herbalife.com, for additional supplemental information and to find our press release for this quarter, which contains a reconciliation of these measures. Additionally, when management makes reference to volumes during this conference call, they are referring to volume points.
I will now turn the call over to our CEO, Rich Gutas.
Good afternoon, everyone. Thank you for joining our first call as Herbalife Nutrition Limited. We are excited about the name change, which was approved by shareholders at our April General Meeting, because we believe this new name is more reflective of our purpose to make the world healthier and happier and it better communicates our strategies and investments to position us as a leader in the nutrition industry. In the Q1, we exceeded expectations as we returned to growth in the U. S.
Ahead of schedule and as such, we've raised our financial outlook for the year. This is an exciting time for the company. In the area of products, we're introducing more products than ever before. The speed of introductions has increased and the degree of collaboration on innovation with our distributor leadership has never been stronger. In the area of technology, our acute focus to develop tools that improve the efficiency and productivity of our distributors is accelerating with the continued beta test of HN Connect, what we formally called salesforce.comproject.
In the area of education and training, we continue to increase our focus and investments to enhance our distributor difference, so our distributors in turn can help their customers achieve better results. And with our success in the U. S, where our Q1 of 2018 was greater than the highest quarter in 2017, we are clearly leading the industry. For the quarter, volume, net sales and EPS all exceeded our guidance. This is a testament to the hard work of our entrepreneurial distributors and the teamwork across our company.
And on the topic of teamwork, I'm thrilled to announce that once again we are included in the Forbes list America's Best Midsize Employer for the 3rd consecutive year. We also had very encouraging distributor metrics in the quarter. Let me share a few highlights with you. Worldwide average active sales leaders increased 3% year over year following 3 quarters of decline. And in the U.
S, we welcomed over 67,000 new preferred members to our community of like minded people, the highest number since we began segmenting the sign up applications in the Q1 of 2017. In addition to our positive financial performance, we continue to execute initiatives designed to accelerate shareholder value. A few recent key initiatives were the completion of the refinancing for a portion of our convertible notes and the commencement of our modified Dutch auction tender offer to buy back up to $600,000,000 of our common shares. As you can see from our reported numbers and as you'll hear on this call, we are confident about our future and as a result, we have raised our guidance for the full year. John will give you the details of our financial performance and guidance in just a few minutes.
Our success continues to be attributable to the dedication of our entrepreneurial distributors and the difference they play to help ensure their customers receive the proper nutrition education, coaching and support, and of course, consume our great nutrition products to achieve their nutrition goals. Distributors are our unique point of difference. They play an important role in their customers' lives, providing them with much needed nutrition education, support and encouragement, and they create communities of like minded people, whether nutrition clubs and fit camps or through weight loss challenges and other methods of operation. This one on one high touch customer experience that our distributors create is critically needed in our industry because of the complexity of nutrition and the individual needs and personal differences among consumers. The distributor difference is especially important in weight management due to the behavior and lifestyle change consumers need in order to adopt a more healthy and active lifestyle.
This is our competitive advantage over traditional and online retailing of nutrition products and one that we intend to continue to strengthen. Our extensive product lineup is also important in helping the customers of our distributors achieve their desired results. Our Seed to Feed program, where we have invested over $300,000,000 since 2010 ensures we have traceability and control over key ingredients. And today, we self manufacture approximately 65% of our nutrition products in our state of the art facilities, including our top products to offer consumers more choice than ever before and provide us with the necessary flexibility and capacity to support future growth. Additionally, we are expanding our portfolio of products to help our distributors attract new consumers and retain their existing customers longer.
In the Q1, new products and line extensions contributed to our growth as we launched more than 65 products globally. Let me mention just a few to highlight our underlying strategies. In EMEA, Pro20 Select is off to a great start, launching in 12 markets in the region and ranking among the top 3 selling SKUs in some markets. As a reminder, this product expands consumer choice in our protein shake portfolio, leveraging trends in the natural food and beverage market by offering a convenient water mixable shake with more protein per serving, lower sugar and no artificial colors or sweeteners. We will look to build on this product success and introduce similar products in other key markets in the next 12 to 18 months.
Following our launch of the first new flavor of our top selling product NRGT in Brazil last quarter, we introduced a second flavor, green apple in Mexico in January. It has proven to be a popular product so far, ranking 1 of the top 10 SKUs in the country. Based on this success, we are exploring similar opportunities in key markets to create and satisfy consumer demand and drive increased consumption of our top selling products. Early in the Q1, we introduced our 1st Formula 1 shake made specifically for Nutrition Clubs and it's currently among the top 10 SKUs sold in Brazil. The product comes in an 80 serving size pouch, delivering improved economics for our distributors.
With the success of this product, we are evaluating and prioritizing additional markets to introduce a similar large format offering to help improve distributor economics for Nutrition Club operators around the world. In February, for the Chinese Lunar New Year, we launched a limited edition Formula 1 red bean and koi seed flavor. This flavor was developed locally and is in line with our strategy to develop flavors that resonate specifically with consumers in each market. This product had tremendous sales performance selling out in only 2 months, further validating the success of this strategy and our ability to develop and manufacture local flavors of our top selling products. In India, following the same strategy, we launched Formula 1 Strawberry in January.
It has exceeded our initial sales forecast and is the 2nd most popular SKU in that country. We also launched a complementary product, Formula 1 Dino Shake Strawberry for kids. And for the first time in India, we introduced our global top selling herbal aloe concentrate to expand our digestive health offering. To wrap up the discussion on new products, let me give you one example of what we're doing and how we're working with our distributor leaders to accelerate new product introductions. In March, we hosted 2,500 of our top leaders from around the world here in Los Angeles.
An exciting highlight for me was having our distributors experience our concept cafe, where our marketing and R and D teams shared samples of new products and innovative product concepts. The reception to these new concepts was amazing and we are now working with our regional distributor product committees to prioritize many of the new products they sample. We anticipate that you will see significant activity in the area of new products over the next 12 to 18 months, products that will expand our offering into new daypart segments, along with products in new categories that will enable our distributors to attract new customers and extend the lifecycle of their existing customers. Increasing our investments in education and training is another key strategy for our company. Working with our top distributor leaders, we've created a new, more personal and intimate educational experience.
It was introduced at our premier leadership event in Los Angeles last month, delivered via master classes and breakout sessions that enable distributors to personalize their educational journey. We believe the more educated and better trained our distributors are, the more confidence they will have and the more value they will bring to their organizations and their customers. We've also been on a journey to educate key thought leaders and influencers about the value of what we bring to communities around the globe. This strategy is playing out in key markets where we do business and is extensive and ongoing. On our last call, we talked about our participation in South by Southwest here in the U.
S. So on this call, let me share an example of what we're doing in China. Our local team in China is continuing their outreach to thought leaders and later this month, we will partner with the Chinese Nutrition Society on National Nutrition Week, the largest official nutrition event in the country. CNS is a non profit organization dedicated to bringing together academics, research institutions and industries to advance the research and application of nutrition science for health, well-being and disease prevention. This year's event will be titled Healthy Weight, Eat Smart and Exercise Smart.
As a major sponsor since 2015, our experts will be featured alongside CNS officials giving keynote presentations and conducting media interviews. This partnership in China is a key strategy to further strengthen our position as a premier nutrition company in this important market and we believe our participation will help ensure we continue to be part of the conversation about the future of nutrition through our positive solutions to global megatrends such as obesity. As I look to the future, I'm excited about the possibilities we have as we invest in our high touch, high-tech approach to nutrition and continually strengthen our distributor difference. Since 2010, we've invested over $300,000,000 in technology, creating an enviable and leverageable global Oracle based platform. A key element of our strategy to leverage our technology investments is the launch of HN Connect using salesforce.com.
Our beta test went live in the U. S. In January with a small group of distributors who are testing several journeys that have been developed with their help. These journeys include email campaigns that personalize the customer experience and automate tasks for our distributors based on the specific needs of their customers. Automating marketing tasks and personalizing the customer experience through artificial intelligence, including suggestive selling, gives our distributors the freedom they need to focus on the true difference they make in people's lives through personal support, coaching, other 1 on 1 relationship activities and creating communities of like minded people in person and online.
HN Connect was first showcased at our kickoff leadership event in Orlando earlier this year and again in March at our event for global leaders in Los Angeles, where some of our investors also had a chance to experience these new tools. Early feedback from our distributors has been positive. As we move through the summer months, we will continue to build functionality working with our distributor leaders in preparation for a broad launch of Phase 1 later this year. Additionally, we are evaluating future market introductions after the U. S.
Rollout is complete. Before we move on to John and the financial update, I would be remiss if I did not publicly thank Des Walsh for his leadership as our President since 2010. On May 1, Des moved into his new role as Executive Vice Chairman. His dedication, passion and strong distributor relationships have contributed greatly to our success and more importantly his development of our future leaders has set us up for an amazing future. Let me also congratulate again John DeSimone and Doctor.
John Agwunobi on their promotions to Co President this week. In addition to our solid growth strategies, our quality products and our amazing distributors and employees, it's our incredible bench strength of talented executives that makes us also optimistic about our future. Additionally, the quality of leaders who are willing to serve on our Board of Directors also makes us confident about the future. Last month, we welcomed 4 new Board members whose expertise will help our company deliver on our purpose of making the world healthier and happier. They are Nick Graziano, Portfolio Manager for Icahn Enterprises Al Lefever, former Chief Financial Officer at Jardin Corporation, a leading provider of consumer products Juan Miguel Mendoza, independent Herbalife Nutrition distributor for 25 years and a member of our prestigious Chairman's Club since 2013 and Margarita Paula Hernandez, Founder and CEO of Hernandez Ventures, a private firm engaged in the acquisition and management of a variety of business interests.
And finally, I'd like to extend a heartfelt thanks and gratitude to those who just stepped off the Board. Dick Birmingham, who is a Board member since our IPO Pedro Cardoso, an independent distributor who served for 8 years and Keith Cozza, CEO of Icahn Enterprises, whose exemplary service and leadership helped see us through a critical time in our company's history. Now I'll turn it over to John for the financial details.
Thank you, Rich. Today, I will start by discussing the company's Q1 2018 reported and adjusted results, which will include key market highlights. I will then review the Q2 and full year 2018 guidance and conclude by providing a brief update on our share repurchase program. 1st quarter reported net sales of $1,200,000,000 represented an increase of 6 point 8% compared to the prior year. Volume points for the Q1 were $1,400,000,000 And despite a very challenging comparison, it nearly matched the prior year's Q1, led by the U.
S. Return to growth ahead of plan. This is also the 3rd quarter in a row where 5 of our 6 regions showed sequential improvements in volume point trends. We reported net income of $82,100,000 or $1.08 per diluted share for the Q1 of 2018 compared to reported net income of $85,200,000 or $0.98 per diluted share for the Q1 of 2017. Adjusted earnings per diluted share were 1 point $4.0 compared to $1.24 per share for the Q1 of 2017.
The adjusted diluted 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. Please refer to our Q1 2018 earnings press release issued today for additional details on these adjustments. Our Q1 adjusted diluted EPS exceeded the high end of our guidance range of $0.90 to $1.10 This EPS beat was driven by the higher than expected sales as well as excess tax benefits from the exercise of equity grants, partially offset by lower gross margins. Reported gross margin for the Q1 of 79.6% decreased by approximately 180 basis points compared to the prior year period. This decrease was driven primarily by foreign currency fluctuations and increased self manufacturing costs from a plant inventory reduction, both of which were discussed on last quarter's conference call.
Additionally, we experienced higher inventory write offs in the quarter, partially offset by the favorable impact of retail price increases. Q1 2018 reported an adjusted SG and A as a percentage of net sales of 39.1% 38.5%, respectively. Excluding China member payments, adjusted SG and A as a percentage of net sales was 29.1%, approximately 50 basis points higher than the Q1 of 2017. The increase was primarily driven by a change in revenue recognition accounting rules implemented in 2018 that increased both net sales and SG and A by approximately $6,000,000 This accounting rule relates to the accounting of sales to importers, a model we use for approximately 3% of our net sales. This change in accounting rules had no impact to net income.
Our Q1 reported and adjusted effective tax rate were 10.2% and 10.6%, respectively. This was significantly lower than our expectations primarily due to excess tax benefits from the exercise of equity grants generated during the quarter, along with other discrete benefits. Excluding the impact of equity grant exercises, our adjusted effective tax rate would have been approximately 1600 basis points higher. Shifting now to our regional and market highlights. In the U.
S, the momentum we previously observed continued as we returned to growth a quarter earlier than expected. We look to build off the strength in the Q1 and expect to see trends continue to improve during the Q2. In China, Q1 2018 volume points decreased 22%. As a reminder, this decline in China was expected because volume points in Q1 of last year was higher than it otherwise would have been due to a price increase implemented at the beginning of April 2017, which resulted in our distributors and customers buying extra product in March 2017 in front of this price increase. Normalizing Q1 2017 for the impact of the price increase, China would have been relatively flat compared to the Q1 of last year.
Turning to Mexico, we saw a meaningful improvement in trends in the quarter with volume points down just 2% coming off declines of 9% 8% in Qs 3 and 4 respectively. During the Q1 of 2018, we tested a small volume point value change on a few products in Mexico that benefited the comparison in the quarter by approximately 170 basis points. The Asia Pacific region showed 10% year over year growth with notable performances from India, Indonesia and Malaysia, while EMEA grew 7%, its 32nd consecutive quarter of growth. Moving ahead to guidance. Worldwide volume point guidance for 2018 has been updated to a range of 3% to 7% growth.
This reflects the beat of volume points in the Q1, along with slightly higher expectations for the U. S. For the remainder of the year. Our combined volume point projections for the remaining markets are primarily unchanged from the guidance provided a quarter ago. For the Q2 2018, we estimate volume points to grow in a range of 4% to 8%.
With respect to full year net sales guidance, we are raising previous estimates of 5.5% to 9.5% growth by 3.50 basis points to a range of 9% to 13% growth. This reflects the better than expected results in the Q1 and a favorable movement in currency since last quarter. Currency is expected to have an approximate 330 basis point tailwind to full year net sales, which is 150 basis points higher than our previous guidance. For the Q2 of 2018, we estimate net sales to be within a range of 8.5% to 12.5% growth, which includes an approximate 370 basis point currency benefit versus prior year. Our currency impact for the full year and second quarter both exclude Venezuela due to the hyperinflationary impact of currency, rate exchanges and associated price increases in that market.
Full year reported diluted EPS is estimated to be in a range of $3.95 to $4.35 and adjusted diluted EPS guidance is expected to be in a range of $5.05 to $5.45 up from the previous ranges of $3.82 to $4.22 $4.60 to $5 respectively. Full year reported and adjusted diluted EPS include a currency benefit of $0.26 an increase from $0.13 included in our previous guidance. 2nd quarter reported diluted EPS is estimated to be in a range of $0.90 to $1.10 and adjusted diluted EPS to be in a range of $1.15 to $1.35 Second quarter reported and adjusted diluted EPS include a projected currency tailwind of $0.07 compared to the Q2 of 2017. These estimates are all on a pre stock split basis. As a reminder, our shareholders approved a stock split effective May 7 with the stock split distribution date of May 14.
We are also slightly lowering our capital expenditure expectations for the year to a range of $110,000,000 to $140,000,000 Additionally, 2nd quarter capital expenditures are expected to be within a range of $25,000,000 to $35,000,000 Full year effective tax rate guidance remains unchanged at 30% to 35% on a reported basis and reduced to 23% to 28% on an adjusted basis, primarily reflecting the excess tax benefits recognized in the Q1. 2nd quarter effective tax rate guidance is 36% to 41%, while the adjusted effective tax rate is expected to be in a range of 29% to 34%. Lastly, I'd like to make a few comments in regard to cash, debt and our share repurchase activity. Since we spoke last quarter, we announced multiple strategic initiatives designed to enhance shareholder value. As part of this plan, in March, we completed a new convertible debt offering of $550,000,000 that effectively resulted in a refinancing of approximately $475,000,000 of our outstanding convertible notes that mature in 2019.
Additionally, we announced a self tender offer seeking to repurchase up to $600,000,000 of common shares, which we expect to close on May 24. We believe the completion of the refinancing allows greater flexibility in our use of capital, while the tender offer is consistent with our long term goal of returning value to shareholders. Our guidance assumes the entire $600,000,000 tender is completed later this month. At the end of the quarter, we had $1,300,000,000 in cash, dollars 2,200,000,000 in total debt and approximately $900,000,000 in net debt, all prior to the execution of the tender. Thank you.
And this concludes our prepared remarks. Operator, please open the line for questions.
Our first question comes from the line of Doug Lane with Lane Research.
Hi, Doug.
John, just staying on the buyback here. You mentioned you now have a full $600,000,000 baked into your outlook this year. Before, I think you had $200,000,000 Can you give us an idea for what that differential what the impact to EPS is from the additional 400,000,000
dollars Yes, it's around $0.08 $0.08 Okay. For the rest of the year, right? That's not an annualized number. That's just the impact on the change in guidance
for the For this year. Right, right. I get that. And now stepping back, one number that really stuck out, and I know that China is a little bit has tough comparisons from last year, but the average service providers with volume points was a big jump year over year and sequentially. Can you give us a feel for what's going on there and what the implication is?
Is that going to translate directly to volume points as soon as this quarter? Or how should we think about that?
Yes. China's kind of been a little volatile in the last 6 to 8 quarters as you follow the track. I think one of the things that we talked about last quarter on the earnings call were 2 things we were doing in China. One was the $90,000,000 investment program that's now going to be $105,000,000 because as you noticed in our earnings release, we received another $15,000,000 ish in grants. And so we're going to add that to this program, this investment program.
Another thing we did is we augmented the marketing plan in China with eligibility to train based on allowing people to earn money a little earlier in their journey than they may have in the past. As a reminder, in China, things work a little differently in that people's eligibility to earn if you are a service provider is not materially different in the amounts than the rest of the world, but how you access that is through hours work based on your eligibility. We've created a supplement to that that allows people to get eligible to earn paid training a little sooner and we think that's helped with engagement. So whether that translates to improved long term trends or not is something we're following on right now. The change that we made is a test and we'll see how it works out.
Okay. Okay, that's helpful. Then just one last thing. The North America number was certainly a lot better than what I was modeling and the volume points back to flat already. And it sounds like from your previous commentary, that is a trend line thing.
There wasn't anything unusual in the quarter that we have to give back anywhere. It's just that the business has ramped a little bit ahead of schedule. Is that the way to look at it? And maybe give us some sort of drivers there? And if you could comment also on the project with Salesforce and how that's panning out and where you start to see some benefit from that investment?
Yes. So I think to answer your first part of your question, there was nothing unusual from a timing perspective in the U. S. So it wasn't that Q1 pulls away from future quarters. In fact, when you look at our increased guidance for Q2s through Q4 on a volume standpoint, it's almost exclusively coming from the U.
S. Right. With that, we did implement a new promotion that we may make permanent, which is through documented sales, through receiving to non distributors, people can qualify to become a sales leader at a lower volume in 1 or 2 months than they've done in the past. And that's really a benefit of having documented sales because everything's going to the end user. So that's something we did exclusively for the U.
S. And we're monitoring it and it's going really well and I think it creates a lot of confidence in activation. Not to mention this just the adjustment period for the implementation of the changes we made 3 quarters ago is kind of worked mostly through the system. So all that is kind of combined to generate a lot of confidence excitement in the U. S.
And on sales force?
No. On sales force, it's early. On sales force, we launched with a beta group in January. It's a small group. It's not going to get to be a bigger group until I think in summer once it's designed in a way that we think distributors will like it when it's launched.
I think the worst thing we could do is drive trials with bad products. So we have to make sure it's those point where it's effective and that's as planned, that's part of the process. And so I think it will be a bigger group in the summer. I think by the end of the year you'll start seeing some impact to it. And it's really much more of a driver for 2019.
But it is, as you heard from Rich's script, a priority for the company.
Okay. Thank you.
Our next question is from the line of Mike Swartz with SunTrust.
Hey, good afternoon everyone. Hi,
Mike. Hey, John, maybe can we take a step back on guidance and maybe you can just help us understand, I guess, the bridge between prior guidance and current guidance? It looks like you're picking up some in obviously this the with the tender a little bit with currency and then I would assume there's a flow through of that tax benefit in the Q1 that benefits the full year as well. So maybe you can help us understand that better.
Yes. I think maybe the simplest way to understand it is, is focus on the high end of guidance. Previously for the Q1, which was $1.10 we came in at $1.40 on an adjusted basis, that's a beat of $0.30 dollars We raised the range for the full year up $0.45 so it's a $0.15 incremental range to the positive side. The 2 key drivers on the positive side were FX and other $0.09 and the share base from the buyback is in the $0.08 And then we had kind of an offset of $0.05 from the new debt deal, which has slightly higher interest in the convertible that we replaced. And then just some other ins and outs, some minor stuff, but that gets you right around $0.45 incremental change in guidance.
Okay. That's helpful. Thanks for that. And then just Rich in your prepared commentary and I noticed this going back a couple of quarters, there's been more and more talk about product development and expanding the so called arsenal at Herbalife. I would assume that comes with a stepped up cost in terms of product development, R and D.
Maybe
can you give us
a sense of how much incrementally you might be spending longer term around product development?
Well, that's a great question. I think what you're hearing right now is really just reflection of the investments we've made, the tools and the technology we put in place, the prioritization efforts that we've been working on both internally and with our distributor leaders. So and also focus, right? We're more on the offense today than ever before. Our distributor leaders see the opportunity for us to get into new product categories and we're just the acceleration is just happening.
So let me pass it back to John on that.
Yes. One of the things that I think it's a great question because certainly the priorities for the company have matured over the last 4, 5 years from changes that we had to make and put a lot of resources on to something a little more proactive in driving growth. And so one of the initiatives with the company this year heading into next year, it may not be exclusive around the world, but certainly within certain regions and corporate is a 0 based budgeting approach, so that we can figure out if and how we fund some of these new initiatives through defunding some of the other things that may not be as important going forward as they have been in the past. So that's something we're working on this year.
Okay, that's helpful. And then, John, just on Mexico, I think you said you were running a test benefit sorry, a test program there in the quarter. Could you just provide a little more color on what exactly you were doing and then maybe quantify the benefit that you had in volume points from that?
Yes, I think it was 170 ish basis points to the volume point change in Mexico.
It might be off by 10
to 20, but I think it was 170. And that's from a change in volume point guidance. We've done 2 we did 2 tests in the Q1. 1 was March and had almost no impact and that was in Brazil. We did another one in Mexico.
And this was increasing the volume point value on certain nutrition club SKUs in Mexico. It was our Formula 1, which is obviously our number one product, had a different volume point to retail ratio than some of the other products in the market. So we were testing to see if an increase in volume point value in some of the nutrition club markets would make it easier for some of the Nutrition Clubs in Mexico to qualify. And in Brazil, along those same lines, in Brazil, we launched a Nutrition Club unique SKU that was 80 servings. It's going to have a higher volume point value per serving than the traditional Formula 1.
And the reason is we want clubs to get more into the C and D markets in Brazil. And so you want the price point to be lower, but you don't want to have to get that many more customers to qualify. So it's a balancing approach. And it's just it's a test. We'll see how it goes.
And over time, if it's of
value to our distributors, then we may do more.
Okay. That's it for me. Thank you.
Question is from the line of Tim Ramey with Pivotal Research.
Thanks so much. I think this was the first time we've seen the revaluation on the CVR. And that might have been just because the only I don't know, Q4, maybe it hadn't moved enough. How often are you going to have to reevaluate? Is it a continuous thing or once a year kind of thing?
Yes, Tim, it's A, it's every quarter. B, it's kind of a Monte Carlo revaluation approach to a 3rd party who values it, right? So the reason why it appears to have more value is because the stock price went up, right? That doesn't change the probability of an event happening. So the reality is we carve it out because the reality is at some point in time, if we don't go private between now and the end of the CVR, all that balance sheet debits I mean, credit is going to come through the to debit and balance sheet will come through as credit and the P and L and the income.
We don't want to recognize that income just like we're not recognizing the expense. It's all just kind of of just non cash valuations, just going to have its ins and outs. And so it has nothing else to it. I don't want you to think that it's more valuable because there's some talks going on or anything like that. That's not the case.
It is strictly just a third party valuation Monte Carlo analysis.
Understood. And then on the China income, I assume that this just meant you had expenses related to
start spending against the program, but we received another $15,000,000 or so of grant money from Chinese government in the Q1.
Okay, All right. What will you net expenses into that single line when that happens?
Well, if we can, we will. If we can, we'll just identify it so you can get your models appropriate.
Okay. And I guess that China investment thing was announced pretty late in the Q1, but I'm surprised there wasn't some investment. Well,
execute against it. Again, we're calling it a program instead of a fund, so people aren't confused as to exactly what it is, but because the words investment fund together can mean different things to different people. This is an investment program
right,
that we have identified. Okay. So that's starting in Q2, you'll see some expenditures against that. There were 3 different programs that we're expecting to start in Q2. And so on the next call, you'll hear some dollars and a little more specifics on the initiatives that are being launched in that program.
And let's assume perhaps not even too aggressively that the stock trades above 108 tomorrow morning. Now what do we do? Do we I mean, I'm hoping we don't go It's not a topic
It's not a topic I think we can comment on this call.
Okay. Thanks a lot.
Thank you, Tim.
Our final question comes from the line of Beth Kite with Citi.
Terrific. Hello, good afternoon. If we could just first start on the U. S. Preferred numbers and that strong growth of new joiners you saw in the Q1 of 2018.
Were there any specific initiatives or sort of anything you attribute to that growth of preferred numbers? And then also, how was the renewal rate from the 1st 63,000 of last year's Q1?
Yes. So I think the first part of your question ties very much into what I answered earlier on in the call, which is what changed in the U. S. And there's a couple of things that changed. Some of it is just the time since the structural changes we made where people have adapted from a transaction standpoint, but also emotionally around that.
But further, we changed the qualification in the U. S. That provided you submit documentation on your sales to 3rd parties and not to distributors, you can actually qualify at with less volume than you could have in the past. And I think that's just all helped to reignite the market in the U. S.
And that's tied to preferred members. And then on your second part, I don't have the status as to what the renewal rates are. I don't have that in front of me for the new preferred numbers in the U. S. I'm sorry.
Okay. Very well. I can follow-up with Eric on that maybe. The gross margin discussion that you had in sort of the puts and takes to the Q1 were really helpful. How much of that in terms of sort of the drags do you expect might persist here in the Q2?
Or sort of, I guess, said a different way, how do you think sort of 2Q, 3Q and 4Q will shake out from sort of an expansion or contraction mode for gross margin?
Well, we certainly expect an expansion of gross margin in Q2, not all the way to what we would consider normal under the current FX rates because again we talked about inventory reduction last year in Qs 34 and that's basically a 5 to 6 month rollout before it hits the P and L, which is one of the reasons why FX can have a benefit to sales in 1 quarter and the detriment to gross profit because the cost of sales are always lagging 5 or 6 months. And so by the time you get into May, you're almost at normal. So maybe half the quarter will be at a more normalized gross margin rate. So I think you're going to see meaningful gross margin rate. So I think you're going to see meaningful growth in gross margin sequentially, still might be a little bit below last year.
And then I think in Q3 and Q4, but the other way, you'll see growth versus last year.
Perfect. Thank you. And then 2 countries that maybe, Dolke talked about as much being India and Indonesia. You had really great growth in India, I see in the Q of 26%. And even Indonesia, on a really tough comp, I would say the 9% looks good.
Are there any particular initiatives going on different in those countries? I don't think I recall hearing them getting new products per se in the Q1, but anything specific you could talk to for growth in those markets?
Yes. So India is actually the more complex answer because there's been 2 consecutive Q1s, so the last 2 years, each a very unique things going on in India. So if you go back to 2016, we had a really big price change in Q4 2015, which pulled a lot of volume out of Q1. And then last year in Q1, we were implementing bifurcation, which was a new regulation in India. The last 2 first quarters, as complicated as that sounds, were artificially low.
So this growth rate appears higher than it really is. So I hate to say you got to look at 3 year growth rates, but if you did, you see India's 30% to 40% combined equal last 4 quarters over 3 years. So you got to take that into it. It's doing great. India is doing well.
It's strong, but it's not 25% growth rate kind of strong and that's not something you should model in. It's going to be a little more normal after Q1, maybe it'll send a little into Q2. But other than that, nothing else unusual in India. And Indonesia, I think Indonesia actually was I mean, it's come off top comp, but it's just normal single digits. It's a good market with lot of opportunity for us.
I think it's our 7th largest market. Its growth rate is a little actually lower than it was in Q4 sequentially. One of the things that I thought was interesting this quarter, I didn't mention so far is of our number of markets we're in, 70% of them actually had sequential improvement in their volume point trends versus Q4, right? So and that 70% actually represents 75% of our volume globally. And one of the markets that didn't was China with a lot of things going on there, especially with the price increase last year.
If you exclude that, actually 83% of our volume was coming from markets that had sequential improvement over Q4 in trends. I don't mean actual volume point values, but if you look at growth rates or decline rates in Q4 versus Q1, it was just sequential improvement.
Wonderful. And if I could squeeze just one more in, just going back to Tim's discussion with you on China, the grant money. So it's great to hear that some of that will likely start to be deployed in the Q2. I know it's gone now from 90 to 105 or 106 in terms of total grant. Do you expect to largely deploy most of that here in 2018?
Or is that sort of a couple year endeavor at this point to spend that in to the country? And also, sorry, and also are you still is a part of that still largely focused on Nutrition Club development in the country? Thanks so much. I'm all done then. Thank you.
So it's certainly going to be multi year, but I'd like to or we'd like to front load it as much as we can, but the most important thing is to do effectively and in conjunction with our distributor leaders in China, so that they can activate around it. Some of the programs that we're doing is already launching I think in the month of May, but I think it will be a slow build and really maybe Q3 to Q4 you'll start seeing more meaningful investments, but it will certainly carry into next year. And it won't be just Nutrition Clubs. I think that was just one of a whole list of investment opportunities that we talked about when we did the release last quarter.
Perfect. Thank you so much.
And there are no more questions at this time. I would like to turn the call back over to Mr. Rich Gudis for closing remarks.
Thank you. Listen, this is clearly an exciting time for our company and we look forward to updating you again on our business in August. Thank you.
And ladies and gentlemen, this does conclude today's conference call. You may now disconnect.