Good afternoon, and thank you for joining the first quarter 2018 earnings conference call for Herbalife Nutrition Ltd. On the call today is Rich Goudis, the company's CEO, Des Walsh, the company's Executive Vice Chairman, John DeSimone, the company's Co-President and Chief Strategic Officer, Dr. John Agwunobi, the company's Co-President and Chief Health 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 risk and uncertainty. As you know, actual results may differ materially from those discussed or anticipated. We encourage you to refer to today's earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements in our business. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any future events or circumstances, or to reflect the occurrence of unanticipated events except as required by law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures.
We believe that these non-GAAP financial measures assist management and investors in evaluating our performance and preparing period-to-period results of operations in a more meaningful and consistent manner, as discussed in greater detail in the supplemental schedules to our earnings release. Please refer to the investor relations section of our website, herbalife.com, for additional supplemental information and to find our press release for this quarter, which contains a reconciliation of these measures. Additionally, when management makes reference to volumes during this conference call, they are referring to Volume Points. I will now turn the call over to our CEO, Rich Goudis.
Good afternoon, everyone. Thank you for joining our first call as Herbalife Nutrition Ltd. We're 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. It better communicates our strategies and investments to position us as a leader in the nutrition industry. In the first quarter, we exceeded expectations as we return to growth in the U.S. ahead of schedule. 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 HNconnect, what we formerly called salesforce.com project. 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. With our success in the U.S., where our first quarter 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.
On the topic of teamwork, I'm thrilled to announce that once again, we're included in the Forbes list America's Best Midsize Employers for the third 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 three quarters of decline. 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 first quarter 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 million 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 in 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 million since 2010, ensures we have traceability and control over key ingredients.
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 first quarter, 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, PRO 20 Select is off to a great start, launching in 12 markets in the region and ranking among the top three 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's success and introduce similar products in other key markets in the next 12-18 months. Following our launch of the first new flavor of our top-selling product, N-R-G Tea, 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 among 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 first quarter, we introduced our first 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 Coix 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 two 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 second most popular SKU in that country. We also launched a complimentary product, Formula 1 Dinoshake Strawberry for kids. 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&D teams shared samples of new products and innovative product concepts.
The reception to these new concepts was amazing. We're now working with our regional distributor product committees to prioritize many of the new products they sampled. We anticipate that you'll see significant activity in the area of new products over the next 12-18 months, products that will expand our offering into new day-part segments, along with products in new categories that will enable our distributors to attract new customers and extend the life cycle 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. In 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. 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 nonprofit organization dedicated to bringing together academics, research institutions, and industries to advance the research and application of nutrition science for health, wellbeing, 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. 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 mega trends 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 million 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 HNconnect using salesforce.com. Our beta tests 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 one-on-one relationship activities, and creating communities of like-minded people, in person and online.
HNconnect 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 one later this year. Additionally, we're evaluating future market introductions after the U.S. rollout is complete. Before we move on to John on 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 1st, Des moved into his new role as Executive Vice Chairman.
His dedication, passion, and strong distributor relationships have contributed greatly to our success. More importantly, his development of our future leaders has set us up for an amazing future. Let me also congratulate again John DeSimone and Dr. 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. 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 four 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 LeFevre, former Chief Financial Officer at Jarden 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 Palau-Hernandez, Founder and CEO of Hernández Ventures, a private firm engaged in the acquisition and management of a variety of business interests. Finally, I'd like to extend a heartfelt thanks and gratitude to those who just stepped off the board, Dick Bermingham, who was a board member since our IPO, Pedro Cardoso, an independent distributor who served for eight years, and Keith Cozza, CEO of Icahn Enterprises, whose exemplary service and leadership helped see us through a critical time in our company's history. I'll turn it over to John for the financial details.
Thank you, Rich. Today, I will start by discussing the company's first quarter 2018 reported and adjusted results, which will include key market highlights. I will then review the second quarter and full year 2018 guidance and conclude by providing a brief update on our share repurchase program. First quarter reported net sales of $1.2 billion represented an increase of 6.8% compared to the prior year. Volume Points for the first quarter were 1.4 billion, and despite a very challenging comparison, it nearly matched the prior year's first quarter, led by the U.S. return to growth ahead of plan. This is also the third quarter in a row where five of our six regions showed sequential improvements in Volume Point trends.
We reported net income of $82.1 million, or $1.08 per diluted share for the first quarter of 2018, compared to a reported net income of $85.2 million, or $0.98 per diluted share for the first quarter of 2017. Adjusted earnings per diluted share were $1.40, compared to $1.24 per share for the first quarter of 2017. The adjusted diluted EPS figures continue to exclude items we consider to be outside of normal company operations or we believe will be useful to investors when analyzing period-over-period comparisons of our results. Please refer to our first quarter 2018 earnings press release issued today for additional details on these adjustments. Our first quarter adjusted diluted EPS exceeded the high end of our guidance range of $0.90 to $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 first quarter of 79.6% decreased by approximately 180 basis points compared to the prior year period. This decrease was driven primarily by foreign currency fluctuations and increased self-manufacturing costs from a planned inventory reduction, both of which were discussed on last quarter's conference call. Additionally, we experienced higher inventory write-offs in the quarter, partially offset by the favorable impact of retail price increases. First quarter 2018 reported and adjusted SG&A as a percentage of net sales of 39.1% and 38.5%, respectively. Excluding China member payments, adjusted SG&A as a percentage of net sales was 29.1%, approximately 50 basis points higher than the first quarter of 2017.
The increase was primarily driven by a change in revenue recognition accounting rules implemented in 2018 that increased both net sales and SG&A by approximately $6 million. This accounting rule relates to the accounting of sales to importers, a model we use for approximately 3% of our net sales. This change in accounting rules had no impact to net income. Our first quarter reported and adjusted effective tax rate were 10.2% and 10.6% respectively. This was significantly lower than our expectations, primarily due to excess tax benefits from the exercise of equity grants generated during the quarter, along with other discrete benefits. Excluding the impact of equity grant exercises, our adjusted effective tax rate would have been approximately 1,600 basis points higher. Shifting now to our regional 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 first quarter and expect to see trends continue to improve during the second quarter. In China, Q1 2018 Volume Points decreased 22%. As a reminder, this decline in China was expected because Volume Points in Q1 of last year was higher than it otherwise would have been due to a price increase implemented at the beginning of April 2017, which resulted in our distributors and customers buying extra product in March 2017 in front of this price increase. Normalizing Q1 2017 for the impact of the price increase, China would have been relatively flat compared to the first quarter of last year. Turning to Mexico, we saw a meaningful improvement in trends in the quarter, with Volume Points down just 2%, coming off declines of 9% and 8% in Q3 and Q4 respectively.
During the first quarter of 2018, we tested a small Volume Point value change on a few products in Mexico that benefited the comparison in the quarter by approximately 170 basis points. The Asia Pacific region showed 10% year-over-year growth, with notable performances from India, Indonesia, and Malaysia. While EMEA grew 7%, its 32nd consecutive quarter of growth. Moving ahead to guidance. Worldwide Volume Point guidance for 2018 has been updated to a range of 3%-7% growth. This reflects the beat of Volume Points in the first quarter, along with slightly higher expectations for the U.S. for the remainder of the year. Our combined Volume Point projections for the remaining markets are primarily unchanged from the guidance provided a quarter ago. For the second quarter 2018, we estimate Volume Points to grow in a range of 4%-8%.
With respect to full-year net sales guidance, we are raising previous estimates of 5.5%-9.5% growth by 350 basis points to a range of 9%-13% growth. This reflects the better-than-expected results in the first quarter and a favorable movement in currency since last quarter. Currency is expected to have an approximate 330 basis point tailwind to full-year net sales, which is 150 basis points higher than our previous guidance. For the second quarter 2018, we estimate net sales to be within a range of 8.5%-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-$4.35, and adjusted diluted EPS guidance is expected to be in a range of $5.05-$5.45, up from the previous ranges of $3.82-$4.22 and $4.60-$5.00 respectively. Full-year reported and adjusted diluted EPS include a currency benefit of $0.26, an increase from $0.13 included in our previous guidance. Second quarter reported diluted EPS is estimated to be in a range of $0.90-$1.10, and adjusted diluted EPS to be in a range of $1.15-$1.35. Second quarter reported and adjusted diluted EPS include a projected currency tailwind of $0.07 compared to the second quarter of 2017. These estimates are all on a pre-stock split basis. As a reminder, our shareholders approved a stock split effective May 7th, with the stock split distribution date of May 14th.
We are also slightly lowering our capital expenditure expectations for the year to a range of $110 million-$140 million. Additionally, second quarter capital expenditures are expected to be within a range of $25 million-$35 million. Full-year effective tax rate guidance remains unchanged at 30%-35% on a reported basis and reduced to 23%-28% on an adjusted basis, primarily reflecting the excess tax benefits recognized in the first quarter. Second quarter effective tax rate guidance is 36%-41%, while the adjusted effective tax rate is expected to be in a range of 29%-34%. Lastly, I'd like to make a few comments in regard to cash, debt, and our share repurchase activity. Since we spoke last quarter, we announced multiple strategic initiatives designed to enhance shareholder value.
As part of this plan, in March, we completed a new convertible debt offering of $550 million that effectively resulted in a refinancing of approximately $475 million of our outstanding convertible notes that mature in 2019. Additionally, we announced a self-tender offer seeking to repurchase up to $600 million of common shares, which we expect to close on May 24th. We believe the completion of the refinancing allows greater flexibility in our use of capital, while the tender offer is consistent with our long-term goal of returning value to shareholders. Our guidance assumes the entire $600 million tender is completed later this month. At the end of the quarter, we had $1.3 billion in cash, $2.2 billion in total debt, and approximately $900 million in net debt, all prior to the execution of the tender. Thank you, and this concludes our prepared remarks. Operator, please open the line for questions.
At this time, if you would like to ask a question, press star, then the number 1 on your telephone keypad. Again, that's star 1. 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 million baked into your outlook this year. Before, I think you had $200 million. Can you give us an idea for what that differential, what the impact to EPS is from the additional $400 million?
Yeah. 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 this year.
For this year. Right. I get that. Stepping back, one number that really stuck out, and I know that China's a little bit has the 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?
Yeah. Look, China's kind of been a little volatile in the last six to eight quarters as you follow the track. I think one of the things that we talked about last quarter on the earnings call were two things we were doing in China. One was the $90 million investment program that's now going to be $105 million because, as you noticed in our earnings release, we received another $15 million-ish in grants. We're going to add that to 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, how you access that is through hours worked based on your eligibility. We've created a supplement to that which allows people to get eligible to earn paid training a little sooner. We think that's helped with engagement. Whether that translates to improved long-term trends or not is something we're following. Right now, the change that we made is a test. We'll see how it works out.
Okay. That's helpful. Just one last thing. The North America number was certainly a lot better than what I was modeling, the Volume Points back to flat already. 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? Maybe give us some sort of drivers there, 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.
Yeah. I think to answer the first part of your question, there was nothing unusual from a timing perspective in the U.S. It wasn't that Q1 pulled away from future quarters. In fact, when you look at our increased guidance for Q2s through four on a volume standpoint, it's almost exclusively coming from the U.S.
Right.
Having said that, we did implement a new promotion that we may make permanent, which is through documented sales, through receipting to non-distributors, people can qualify to become a sales leader at a lower volume in one to two months than they've done in the past. That's really a benefit of having documented sales because you know everything's going to the end user. 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 created a lot of confidence and activation. Not to mention, just the adjustment period for the implementation of the changes we made three quarters ago has kind of worked mostly through the system. All that has kind of combined to generate a lot of confidence and excitement in the U.S.
On Salesforce?
On Salesforce, it's early. On Salesforce, 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 trial to a bad product. We have to make sure it's at a point where it's effective, and as planned, that's part of the process. I think it'll 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. 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 Michael Swartz with SunTrust.
Hey, good afternoon, everyone.
Hi, Mike.
Hey, John, maybe could 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, with the tender, a little bit with currency, and then I would assume there's a flow-through of that tax benefit in the first quarter that benefits the full year as well. Maybe you can help us understand that better.
I think maybe the simplest way to understand it is focus on the high end of guidance. Previously, for the first quarter, which was $1.10, we came in at $1.40 on an adjusted basis. That's a beat of $0.30. We raised the range for the full year up $0.45, so that's a $0.15 incremental change to the positive side. The two key drivers on the positive side were FX, another $0.09, and the share base from the buyback, which is another $0.08. We had kind of an offset of $0.05 from the new debt deal, which has slightly higher interest than the convertible that we replaced. Just some other ins and outs, some minor stuff, but that gets you right around the $0.45 incremental change in guidance.
Okay. That's helpful. Thanks for that. Just, Rich, in your prepared commentary, and notice 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 stepped-up costs in terms of product development, R&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 a reflection of the investments we've made, the tools and the technology we've put in place, the prioritization efforts that we've been working on, both internally and with our distributor leaders. 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. The acceleration is just happening. Let me pass it back to John on that.
Yeah, one of the things that I think it's a great question because certainly the priorities for the company have matured over the last four or five years from changes that we had to make and put a lot of resources on to something a little more proactive and driving growth. 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 zero-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. That's something we're working on this year.
Then, John, just on Mexico, I think you said you were running 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?
I think it was 170 basis points to the Volume Point change in Mexico. I might be off by 10 or 20, but I think it was 170. That's from a change in Volume Point guidance. We did two tests in the first quarter. One was March, and it 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 1 product, had a different volume point to retail ratio than some of the other products in the market. 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.
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. The reason is we want clubs to get more into the C and D markets in Brazil. You want the price point to be lower, but you don't want to have to get that many more customers to qualify. It's a balancing approach. It's a test. We'll see how it goes. Over time, if it's of value to our distributors, then we may do more.
Okay, that's it for me. Thank you.
Thanks, Mike.
Our next question is from the line of Tim Ramey with Pivotal Research.
Thanks so much. I think this was the first time we'd seen the revaluation on the CVR. That might have been just because the only, I don't know, fourth quarter, maybe it hadn't moved enough. How often are you going to have to revalue it? Is it a continuous thing or once a year kind of thing?
Yeah, Tim, A, it's every quarter. B, it's kind of a Monte Carlo revaluation approach to a third party who values it, right? The reason why it appears to have more value is because the stock price went up, right?
Sure.
That doesn't change the probability of an event happening. 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, debit on the balance sheet will come through as a credit in the P&L, and be income. We don't want to recognize that income, just like we're not recognizing the expense. It's all just kind of non-cash valuation. It's just going to have its ins and outs.
Sure
It has nothing else to it. I don't want you to think that it's more valuable because there's some FX going on or anything like that. That's not the case. It is strictly just a third-party valuation Monte Carlo analysis.
Understood. Then on the China income, I assume that this just meant you had expenses related to the China investment thing, but no income this particular quarter, or did I misunderstand?
No, it's the other way around. We didn't start spending against the program, but we received another $15 million or so of grant money from Chinese government in the first quarter.
Okay. All right. Will you net expenses into that single line when that happens?
If we can, we will. If we can't, we'll just identify it so you can get your models appropriate.
Okay. I guess that China investment thing was announced pretty late in the first quarter, but I'm surprised there wasn't some investment.
Well, it was announced in, I want to say, in the middle of February, there wasn't enough time to actually execute against it.
Right.
Again, we're calling it a program instead of a fund, so people aren't confused as to exactly what it is because the words investment fund together can mean different things to different people. This is an investment program-
Right
That we have identified. Right. Okay. That's starting in Q2, you'll see some expenditures against that. There were three different programs that we're expecting to start in Q2. On the next call, you'll hear some dollars and a little more specifics on the initiatives that are being launched against that program.
Let's assume, perhaps not even too aggressively, that the stock trades above 108 tomorrow morning. Now what do we do? I'm hoping we don't go right down to the wire on the 24th before we say, "Well, let's take another 10 days to adjust the range." Have we made a plan?
Tim, 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.
Hi, Beth.
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 first quarter of 2018, were there any specific initiatives or sort of anything you attribute to that growth of preferred members? How was the renewal rate from the first 63,000 of last year's first quarter?
Yeah. 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 things that changed. Some of it is just the time since the structural changes were made, where people have adapted, both from a transaction standpoint, but also emotionally around that. Further, we changed the qualification in the U.S. that provided you submit documentation on your sales to third parties and not to distributors, you can actually qualify with less volume than you could have in the past. I think that's just all helped to reignite the market in the U.S., and that ties to preferred members. On your second part, I don't have the stats as to what the renewal rates are.
I don't have that in front of me for the new preferred members in the U.S. I'm sorry. I can get that to you.
Okay, very well. I can follow up with Eric on that, maybe.
Thank you.
The gross margin discussion that you had and sort of the puts and takes to the first quarter were really helpful. How much of that, in terms of sort of the drags, do you expect might persist here in the second quarter? 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 Q3 and 4 and how that's basically a five- to six-month rollout before it hits the P&L, which is one of the reasons why FX can have a benefit to sales in one quarter and a detriment to gross profit because the cost of sales are always lagging five or six months. By the time you get into May, you're almost at normal. Maybe half the quarter will be at a more normalized gross margin rate. 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 4, it'll go the other way, and you'll see growth versus last year.
Perfect. Thank you. Two countries that maybe don't get talked about as much being India and Indonesia. You had really great growth in India, I see in the Q1 of 26%, 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 first quarter, anything specific you could talk to for growth in those markets?
India is actually the more complex answer because it's been 2 consecutive Q1s, the last 2 years, each have very unique things going on in India. If you go back to 2016, we had a really big price change in Q4 of 2015, which pulled a lot of volume out of Q1. 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. This growth rate appears higher than it really is. I hate to say you got to look at 3-year growth rates, if you did, you'd see India is 30%-40% combined equal last 4 quarters over 3 years. You got to take that into account. 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. Other than that, nothing else unusual in India. Indonesia, I think Indonesia actually was. We've come off tough comp, it's just normal. It's single digits. It's a good market with a lot of opportunity for us. I think it's our seventh largest market. Its growth rate's 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? That 70% actually represents 75% of our volume globally.
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, you'd see 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, you look at growth rates or decline rates in Q4 versus Q1, it was just sequential improvement.
If I could squeeze just one more in. Just going back to Tim Ramey's discussion with you on China, the grant money. It's great to hear that some of that will likely start to be deployed in the second quarter. 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 into the country? 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.
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. The most important thing is to do it 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 are already launching, I think, in the month of May. I think it'll be a slow build and really maybe Q3 to Q4, you'll start seeing more meaningful investments. It'll certainly carry into next year. 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.
There are no more questions at this time. I would like to turn the call back over to Mr. Rich Goudis for closing remarks.
Okay. Thank you. Listen, this is clearly an exciting time for our company. We look forward to updating you again on our business in August. Thank you.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.