Q2 2019 Earnings Call
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Good afternoon, and thank you for joining to second quarter 2019 earnings conference call for Herbalife Nutrition limited.
On the call today is Michael Johnson, the company's chairman and CEO , John do you see most of the company's co President and Chief Strategic Officer, Dr., John I'll go and I'll be the Companys co President and Chief Health and Nutrition Officer.
Alex I Mosquitos, the company's senior Vice President of Finance strategy, and Investor Relations and Aircom and wrote the company's director Investor Relations.
I would now like turn the call over to Erik front row 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 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-K , 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 revisions to any forward looking statement were 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.
<unk> 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 FCC. These reconciliations together with additional supplemental information are also available at the Investor Relations section of our website Herbalife Dot 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 Michael Johnson. Good afternoon, everyone. Thank you for joining us for our second quarter 2019 conference call.
I'd like to start by stating the obvious but the fundamentals of our business are strong and we are confident in the direction of Herbalife nutrition.
Our performance demonstrates the strength of our geographic diversity as we reported the second highest world wide quarterly volume points in company history.
And this is in light of our challenges in China, Our second quarter results were within our guidance range on both the top and bottom line.
We delivered year over year net sales growth in four of our six regions, we reported year over year net sales growth in eight of our top 10 countries three of our regions Nam EMEA and Asia Pac set all time quarterly volume point Records. However, we recognize China is an issue.
And we have a plan in place that is working let's look what we are doing to stimulate the Chinese market first we expanded our e-commerce platform late in the second quarter to give our China retail customers the ability to purchase products directly from the company. This is the first stage of a larger project, where we are working in partnership with Tencent, who as you May know is a leading e-commerce and social media platform to establish a social E Commerce channel in conjunction with our established business model.
The full platform is expected to launch in the fourth quarter of this year.
Second we have improved the economics for our service providers with a focus on enhancing the profitability in activities of nutrition clubs.
And third we are executing on our China growth, an impact investment program with exciting branding opportunities, including our official nutrition sponsorship of the International Champions Cup.
The ITC is the worlds Premier annual Summer Soccer tournament, featuring 12 of the top clubs in the world, including New Ventas in Manchester United.
They're playing matches across North America, Europe , and Asia. The tournament is televised globally, including CCTV in China, our products will be available to the players and visible on the sidelines during the broadcast.
As you can see we're focused both at corporate and with our team on the ground in China to improve our position in this important market. We started to see improvement towards the end of the quarter and expect to see continuing improvement in the back half of the year.
While we are focused on the business in China. We're also doing some exciting things in other markets to drive results, including North America.
Just this week, we launched the nutrition club out to all of US club operators at our annual extravaganza, which was attended by more than 26000 distributors.
This suite of tools called H, and my club makes it easier to own and operate a nutrition club by helping operator set up manage and grow their nutrition club businesses.
We announced the development of a customer facing nutrition club App, where customers will be able to stay connected with their nutrition club in their distributor browse the club menu preorder in paid from their mobile device. This customer out called engage was released to a beta group this week.
With a full launch expected in the fourth quarter. These apps will make consuming an herbalife shake Ti lower coffee in one of our nutrition clubs.
A more enjoyable experience.
John de Simone, we'll tell you about some of the global successes, we're having in other key geographies such as Asia Pacific and EMEA were also working on other exciting branding and promotional initiatives. The doctor hardware Nobody will share with you later in the call in closing I want to reiterate what I said at the beginning of the call. The fundamentals of our business are strong and we are confident in a positive direction of herbalife.
Now, let me hand, this over to Alex John and John who will talk in more detail about our results.
Thank you Michael volume points for the second quarter were approximately one and a half billion and represents the largest quarter in terms of absolute volume points in the company's history note that adjusting for changes in volume point values that we discussed on prior earnings calls this was the company's second largest quarter in history.
We experienced net sales growth in four of our six regions and eight of our top 10 countries.
As expected foreign currency exchange rates continued to be a headwind second quarter net sales of 1.2 billion declined 3.5% on a reported basis compared to the second quarter in 2018.
Adjusting for foreign exchange impact and excluding Venezuela net sales for the second quarter increased 70 basis points over the same period 2018.
The second quarter performance reflects the strength of our geographic diversity as China works through its recovery from the impact of the 100 day review, excluding China net sales increased 5.4% compared to the prior year period, and excluding China, and Venezuela constant currency net sales increased 9.6% year over year, we reported net income of approximately $76.5 million or 54 cents per diluted share and adjusted earnings per adjusted diluted share were 70 cents.
Which includes expenses related to the China growth program of approximately 4 million or two cents per share.
As a reminder, we will continue to make you aware of the amount of expenses related to the China growth program that is included in our reported and adjusted earnings as this expense is excluded from our guidance.
The impact of currency fluctuations.
Represented a year over year headwind of approximately nine cents on results for the second quarter.
Reported gross margin for the second quarter of 80.4% decreased by approximately a 130 basis points compared to the prior year period.
The decrease was primarily driven by the unfavorable impact of foreign currency fluctuations and country mix, partially offset by the favorable impact of price increases.
Second quarter 2019 reported an adjusted SGN, a as a percentage of net sales were 38.5% and 37.0% respectively.
Excluding China member payments adjusted SGN, a as a percentage of net sales was 28.3% approximately 60 basis points higher than the second quarter 2018, which continues to be impacted by investments in technology, and particularly a shift to cloud based infrastructure.
Our second quarter reported effective tax rate was approximately 37.7% and our adjusted effective tax rate was 33.0%, which was higher than our expectations, primarily due to the impact of country mix and unfavorable discrete events.
Now, let me share the updated guidance.
Worldwide volume point guidance for 2019 has been updated to a range of <unk>, 0.5% to 5% growth net sales guidance for the full year has also been updated and we are now expecting a range of down 1.7% to up 2.8%.
This range is reflective of the volume point adjustments and country mix as well as a 240 basis point impact from foreign currency fluctuation.
Full year reported diluted EPS is now estimated to be in a range of $2, an 11 cents to $2.51 and adjusted diluted EPS guidance is expected to be in a range of $2.40 to $2.80.
Full year reported and adjusted diluted EPS includes a currency headwind of approximately 27 cents, excluding the impact of Venezuela.
Our effective tax rate guidance increased 200 basis points to 31% to 35% on a reported basis and increased 100 basis points to 28% to 32% on an adjusted basis.
For the third quarter 2019, we estimate volume points to be in a range of down 1.5% to up 4.5%.
Net sales are expected to be in the range of down 2% to growth of 4%, which includes an approximate 60 basis points currency headwind versus the prior year.
Third quarter reported diluted EPS is estimated to be in a range of 44 cents to 64 cents.
And adjusted diluted EPS to be in a range of 50 cents to 70 cents.
Reported and adjusted diluted EPS includes a projected currency headwind of six cents compared to the third quarter of 2018.
Excluding the impact of Venezuela.
Our effective tax rate guidance for the third quarter is 32% to 36% and our adjusted effective tax rate is expected to be in a range of 28.5% to 32.5%.
We currently have 1.3 billion of cash on hand, and approximately 675 million of debt from our convertible notes.
Is due on August 15th it is our intention at this time to pay off the $675 million due of the convertible notes with cash on hand, I will now turn the call over to John de Simone.
Thank you Alex.
Before speaking about specific regional performance.
Let me repeat something Michael said earlier.
One of the key assets of Herbalife is our geographical diversity.
And this is evidenced by our performance in Q2 in which we achieved near record results. Despite the volume of China being down 37%.
In fact, excluding China volume points grew 5.6% in the quarter.
Net sales grew 5.4%.
In constant currency net sales grew nearly 10%.
We will continue to benefit from our geographic diversity, while we are acutely focused on improving China.
We have seen moderate improvements in June volume performance compared to our overall Q2, China performance and believe Q3 will show an improving trend.
It's obviously, taking time has a number of the approved meetings and attendees continue to expand.
But we are still below the levels seen prior to the 100 day review.
These meetings a critical in the short term to rebuild new cohorts of members to offset the impact of the hundred day review.
However, while we continue to rebuild the traditional meeting based business.
Michael spoke about a few of the changes we made in China that we believe will be good for the business in the medium to long term.
Like improved economics for the service providers.
And a consumer ordering platform as well as other initiatives previously mentioned, we believe these changes presenting meaningful opportunity for volume growth in the future.
Moving to other key markets. The U.S. business had a strong quarter recording the largest quarter in its history in both terms of net sales and volume points.
With that sales volume points, both increasing 6% compared to the second quarter of 2018.
Volume point trends continue to accelerate on a two year stack basis.
The volume point value test, we began last year on a few products benefited the comparison in the quarter by approximately 150 basis points.
Turning to Mexico, despite volume being down in the quarter.
The region increased in both reported net sales of 2.5% in constant currency net sales of 1.3%.
As we stated last quarter, there were temporary terrorists placed on our products going into Mexico for which we instituted a 2% surcharge in order to cover this cost.
Fortunately since last quarter, the tariffs on our products have been eliminated.
Accordingly.
We eliminated the surcharge by converting it into a price increase for which our distributors can now earn however, there is a near term negative impact to the company of approximately $5 million.
As the inventory for which we are paid tariffs turn through the system, while we no longer collect the surcharge this should almost entirely run through our inventory system during the third quarter.
The Asia Pacific region reported a 23% year over year increase in volume points in constant currency net sales.
This is the sixth quarter in a row, which this region has set a new all time record high in volume points.
Growth in the region continued to be broad based led by India, Indonesia, Vietnam, Malaysia, and South Korea.
India volume increased 36% during the quarter as we continued to add access points and expand our product offering.
Indonesia volume was up 28%.
Vietnam increased 40%, Malaysia, 32% and Korea was up double digits, 10%.
Of note.
The comps for APAC get much more difficult.
During the back half of the year as we annualize some very strong growth rates last year that also included a couple of onetime events.
Looking at South and Central America in which volume points declined 10.3%.
Which was driven by a 20% decline of Brazil during the quarter, we did launch segmentation in Brazil, and we are cautiously optimistic that the trends will improve later in the year most likely Q4.
Turning to EMEA. The region continues its strong growth pattern with volume points, increasing 5% in the quarter in constant currency net sales increasing 9.1%.
Volume point increases for the quarter were broad based and led by South Africa span in Russia.
Now let me end my prepared remarks with an incredible statistic. This is now the 37th consecutive quarter of volume growth in EMEA Congratulations EMEA.
I will now turn the call over to Dr. Hogland Ob to provide an update on some of our growth initiatives.
Thank you John as we highlighted at our last Investor Day event.
And as we have said on prior earnings calls we have a multi pronged strategy that we believe will help drive future growth in our business.
I'm, particularly passionate about our product strategy.
Providing our distributors with more product choices on leveraging trends in food and nutrition to help them sell more products to existing customers to help them appeal to new customers and attract new distributors within this strategy one of our categories that we've been acutely focused on is sports nutrition.
According to Euromonitor data. This 15.7 billion dollar category is projected to grow at a five year compounded annual growth rate of about 10.6%.
And we are aiming to gain market share in this rapidly growing category.
In the U.S., we launched a new product Herbalife 24 branch chain amino acids or BC AIDS.
We launched it this past weekend at our extravaganza.
This product extends our sports nutrition line, creating a more comprehensive portfolio for our competitive fitness enthusiasts and novices.
Our BC a product delivers five grams of branch chain amino acids, including three grams of loosing, which is more than the 2.5 grams required to stimulate protein synthesis. It helps build and retain lean muscle and supports quicker recovery after exercise.
It does not contain caffeine artificial flavors or sweeteners.
It is gluten free and is made with non GM all ingredients.
We've also added a new enhanced protein powder to our Herbalife 24 line.
Featuring a blend of five types of protein along with key amino acids and vitamins. This high protein Lo carb powder makes it easy to fit into any nutritional regiment.
Featuring 24 grams of protein and only one gram of sugar. This product supports lean muscle growth and helps reduce soreness, while improving muscle recovery and repair.
Like all our Herbalife 24 products. This protein powder is an S F certified for sport.
Additionally, we have added two new flavors of our popular herbalife 24 rebuild strengths muscle recovery product to our portfolio.
Vanilla ice cream and Strawberry shortcake.
With our Tri core blend of protein and high quality carbohydrates, It's a quick and effective way to meet the immediate and long term needs of both professional athletes and weekend warriors.
Rebuilds strength also includes a blend of free amino acids, along with select vitamins and minerals.
And for the first time, we introduced our sports nutrition line in one of our fastest growing markets India.
Well, we launched Herbalife 24 hydrate in the second quarter.
We are working to further expand our herbalife 24 product line in India later this year.
In the second quarter, we produced and hosted the first ever Herbalife 24 triathlon.
Bringing the event to our hometown of Los Angeles, where our company was founded almost 40 years ago.
We welcome to more than 2000 participants, including 900 try athletes from the U.S. Asia and South America.
The Herbalife 24 triathlon, Los Angeles was featured in Tri athlete magazine.
As one of America's best New triathlon loans.
And we've committed to hosting this event for the next three years.
We are thrilled to offer this event to the Los Angeles community, bringing a healthy active lifestyle to outlay and beyond.
And returning to what Michael spoke about earlier Herbalife nutrition was named the official sports nutrition partner of the International Champions Cup.
Well Herbalife nutrition partnership with this year's tournament brought matches to China were also sponsoring the women's International Champions Cup, which kicks off in North Carolina on August 15th featuring our Companys sponsor team analytical de Madrid.
Before the Q and eight I'd like to highlight some of the incredible distributor engagement that we have seen at some of our recent sales events around the globe.
As we referenced a few times on this call. This past weekend was our North America Extravaganza, which took place in New Orleans. This event was attended by a record 26000 distributors the largest regional event in Herbalife nutrition history.
This quarter, we also hosted events for our Russian speaking markets as well as two events in Hong Kong during the second quarter, one for our China service providers and another for all of our APAC region.
Both events in Hong Kong set attendance records for their respective regions.
I personally attended these events and the engagement passion and enthusiasm of our distributors that I witnessed firsthand continued to give me confidence in our Companys amazing future.
So that concludes our comments operator, please open the line for questions.
Ladies and gentlemen at this time, if you'd like to ask an audio question you may do so by pressing star followed by the number one on your telephone keypad again Thats star one to ask one audio question.
Our first question line of Tim rainy from pivotal research.
Tim.
Good afternoon. Thanks.
I noticed in the Q that.
You further refined your disclosure.
On the China marketing plan reserve to 20 million from I think it was eight last quarter.
Where anything you can say on that other than.
Just as Triangulating and on.
On.
As a result.
And I assume there was no particular progress on the F. SCPA matter.
Hey, Sam Thanks, Thanks for the question, obviously, I can't say too much more than what is in the disclosure you are correct that the 20 million accrual is up from 8 million in the last quarter.
And.
As you can imagine in these types of of matters, there's really not a whole lot more we can say.
I'd say one other update that you know as you.
The deeper with the finer tooth comb on the on the SCPA matter is that there is some some.
Small, but important adjustments on that language.
You will notice that.
Last quarter, we are in the process of conducting our own internal review we have now conducted we completed that review internally obviously.
Those.
Those discussions we can't get into the details of it but just given let you know that we conducted our own internal.
Okay. Thanks, so much and then.
Relative to China it's.
It's not clear if there are any.
Meaningful levers that are being brought to bear that will impact you know threeq, you and maybe for Q.
You know it sounds like the.
Ecommerce platform.
Really won't be a thing until maybe the fourth quarter given the end of the fourth quarter.
What what should we be thinking about in terms of real levers that are being pulled to help that.
Reach and get back on track.
Yes, Dan its John .
Let me put it into different buckets stock with the kind of traditional business that.
Im very meeting based.
As you know from following the industry, leading level and the attendant level.
Are not back to where they were pre hundred day campaign.
But they are progressing we're probably from an total attendance level.
At the end of Q2 at about two thirds of what we were 300 day.
Review in terms of attendees right, which is more important than number for me I'm going to just focus on.
And that's progressing.
The reason why that's not.
An immediate action is there are basically two cohorts that have to be rebuilt the cohort that never existed because.
But it's also the cohort that came in prices 100 day review that couldn't do the business and therefore dropped out and so as you build up that will continue to build and we do expect.
Through the end of the you see progression in the base business.
From that.
Just from that now let me work on a couple of other pieces to layer on so the ecommerce.
Think of the ecommerce more in in in three phases. So we actually launch.
Ecommerce.
Platform whatnot with Tencent that was based on our internal.
System.
June 20, Threerd or something close to June 20 Threerd.
And.
That's the slogan that is having the ability for customers to go through this platform an order from us is a little clunky.
A quick way to go to market.
While we develop a phase one kind of version one with 10 sandwich is going to be much more robust where it's almost a separate e-commerce platform each of our sales reps and service providers.
Then it will be around two weekends.
Right well with Tencent with thinking October . It later this year, but that layer on to the fact that the meetings are coming.
Summing it.
So that so first traditional business, meaning the second is is this ecommerce site third is the profitability for Sps that operate well, it's not just nutrition close but it's it is a focus of nutrition clubs, which is increasing the economics.
To those distributors because the economics have been different in China.
That we believe will help the club model.
In multiple ways, but one of the ways of trying to help pull model in China is to get it out of the big cities into the smaller footprint.
Tier two tier three cities or at least in the suburbs the bigger cities and that's starting to gain.
Some traction so those are the big things.
We're layering on and its continuing ideas flowing through and actually.
A handful of supplying to turn a Sunday night to meet with.
Both management and distributors and Tencent the seawell things we can do.
So it sounds like it's progressing it sounds like.
There might not be.
Year over year.
Growth in the four core first quarter is Hugh.
You know sort of previously guided to is that is that a fair statement do you think it's now.
Pushed out and to enter 2020 to see year over year I would say.
China.
In Q2 was a little bit below our expectations not me.
But a little bit lower expectation, so that could change if you're a little it doesn't mean necessarily wont grow in Q4.
But it might be Q1, but.
Nothing's changed fundamentally in our long term outlook in China.
Okay. Thank you.
Yes.
And our next question is one of Steph Wissink from Jefferies Sir.
Thank you good afternoon, everyone.
My question relates to the guidance for the year I mean, you talked about an incremental FX headwinds and a slightly higher tax rate.
I'm wondering if were accounting for the majority of that in the new guidance are there incremental fundamental changes to the underlying guidance that you want us to be aware of.
Yes, so we lowered the midpoint of our guidance by about 10 cents in that if I just sort of partition out that 10 cents about half of it is what you indicated tax effects.
The other half goes to primarily our revised expectations around China that John just talked about so.
While clearly within the range of where we thought we were going to be three months ago is now that we have three months more month knowledge that kind of refining where we think the end of the year is going to line up and how that kind of roll through our rvps.
Okay. That's great and then gross margin could you just share a little bit more around the effects of country mix. So the decline in China is that.
Cancel drag to the gross margin how should we think about gross margin recovery as China comes back online.
Right. So China is going to hit on the gross profit line, China will have a material impact on pushing that up or pushing that down.
As China as a percentage of our net sales.
Is reduced which is what happened in Q1.
That's going to materially pushed down our gross profit as a percentage as a percentage in Q2, you seen sequential growth and that's what that's attributed to as net sales as a percentage of our overnight sales continue to increase you'll see that get pushed up.
Now my view that's just.
There is a lot of other factors that goes into that into that percentage number FX pricing et cetera, but generally if you just isolate for the impact of China on gross profit that that's how little move that line.
Okay, Great and the last one is on the new Nutrition club App.
I'm curious if you can talk a little bit more about the east to setting up a center using the app the efficiency that it offers your ear center operator, it almost sounds a bit franchise is I'm wondering if you can give us a bit of a peek into.
What you expect to see in terms of number of centers the pace of those coming online and the use of the app.
Particularly you know in the U.S. and then also if you think about it internationally.
Yes.
Yes, John .
Let me start with the U.S. and go through a little bit of the migration to get to where we are and what we expect so.
We launched this tool in beta format.
In April .
And we had a slow build the purpose that we'll build it was designed to be a slow build so these workout blogs.
But more importantly get our more senior distributors trained on it so as other people decide donlin has the tool is a lot more knowledge base in the fields to help people.
It started.
And then we made it available to everybody about two weeks before the extravaganza in lots of different stations since that point. The download has been tremendous our goal is to.
By the end of October this half half clubs in the U.S.
Beyond this tool and I think it's a very achievable goal.
And so we're excited about I think you were at the event and I don't know if you were there on Sunday. When this is Lawrence on stage with all the tools that I see launched in my time here. This is the one that I had the.
The greatest positive reception from the most people.
Most distributors and so we're excited.
About a feature and it was designed not franchisees by the way okay.
What it what it is.
It is designed to help.
Small business people, which is what our.
Hey, good properties are operate in an efficient effective way there.
You know I want to say 1920 different nutrition club model, even within the U.S. and is designed to handle all.
So.
I think thats one of the big advantage.
Of this tool.
It was created with the with the design in mind that we're not going to force. It on people that we won design a tool that people want to use that we've got we've kind of the underlying premise the foundational perimeter. This tool and I think thats been successful and I think when we meet.
In discussing our next call you'll see that there was a ton of pull from it that way and that means to me that other if it's a tool that was created affecting that people want to use in other regions and money.
John if I could just add this is I'll say, it's also a very customized liberal tool in other words, each nutrition club operator can put in their own particular menus their own particular shakes.
It doesn't try to standardize everybody all the time, it's not a franchise.
That's great. Thank you very much.
And our next question is one of Dougs Lane from Lane Research Doug.
Yes, hi, good afternoon, everybody I'm very interested in this ecommerce that you're developing for China.
And just to get some more color on that is ecommerce going to be at this great channel for you in China or is it really just a tool for your existing channels in China.
So it's a tool for our existing channel in China, except.
It's a tool, which our sales reps and service providers customers can order directly from the company.
Which is not so we had ecommerce in China, which is the only people that orders were our own sales reps and service lines. So this is an opportunity for customers to order directly from us which allows for greater product access.
And a lot more efficiency that channel.
And it's something that's pretty you know its China China's.
Consume is incredibly.
Technologically savvy.
Quite frankly this was something that was was missing from Oman.
With 100 day review, it's offered us an opportunity to.
Got it makes sense, but I mean, it's sort of a customer orders you'll ship directly to the customer now we book full retail price in your sales line or will still be a wholesale price and then we're going to be a markup going to up a distributor somewhere.
So so we want our distributors so that the economics.
It won't change the accounting for us so for us if you're trying to do a model. The I believe the accounting the debits and credits all go to the same line, regardless of whether the consumer buys directly from us or distributor sales with Pfizer.
Okay got it and.
Just lastly, North America continues to be.
Upside at least versus my model. So I think this is the fifth quarter of pretty good numbers. There can you elaborate a little bit on what's driving the growth in North America and is some of that what you're doing in North America translatable to other geographies.
So let me answer the first question, which is yes of course, what we do in Europe could be trans formed to other.
Yes, I think one of the so if I were to tell the story from scratch on North America North America went through a lot went to a lot of change as you know.
Our distributors.
Use those changes to build a better business with.
Preferred members and segmentation in the two k. being the primary drivers.
That change.
I say that because.
I don't think its dissimilar from what we're doing in China, right now, which is an event we use the event.
Make the business stronger.
And I think we have a history of being able to prove that we can come on our side stronger.
So in addition to the segmentation to preferred members into today.
You know its interesting clubs, we had our latest chairman club come from a small group of.
But nutrition clubs in Rural America, and so I think the nutrition called model is really strong in the U.S. and Thats something thats already obviously migrated out a lot of other countries.
And so I think you start layering and hopefully the expansion the Pos to an expansion our segmentation.
You know these things will that have an impact on rent.
It's not an overnight process it to bill.
Okay. Thank you.
Ladies and gentlemen, as a reminder, once again if youd like to ask an audio question you may do so by pressing star followed by the number one on your telephone keypad.
Our next question from the line of Beth Kite from Citi.
Hi, everyone.
I'd like to ask one more question on China, If I may it sounds like from the discussion today.
Did it in is it accurate to say that it's not a fundamental issue in terms of the real change to the appetite or the Chinese consumer for.
Weight management weight loss nutrition products and more a timing till you get medians back online to get.
The pipeline of distributors that might have lost kind of again back into the system. Because I think there is a little bit of a concern the investor side that.
The product in May and it's just not there for a while now into the future given the investigation and the past. So if you could speak to that and and my perception of the discussion so far in this conversation.
Sure.
That's a good question.
We do our analysis suggests that it's very meeting based.
A number of attendees in meetings with Alibaba thing while volume.
So I don't think fundamentally anything is changed.
Certainly the need for a product hasn't changed there is a consumer sentiment as you know we believe its short term and some of the things that we're doing on the E Commerce site nutrition club overcome that.
The only thing I would add to what use you suggested is.
I don't know, if we will ever get back to it.
What was I right, we can assume that well and we believe it will but there's no guarantee it will right now right about two thirds of level. There are certain big cities right. Now we're with them are proving meetings, we assume that that over time will change.
But certainly from what were seeing based on.
Our member activity.
We believe that consumer demand, but again, it's definitely they are long term in their products.
Some real real issue in China has got this healthy China 2030 initiatives they recognize.
That preventative.
Measures for good nutrition and activity is really.
I wasn't real economic crisis on health hearing so I do think that this is an important initiative I think we can be part of that for Walker.
Perfect. Thanks, so much now actually does not have you or maybe this is for Alex.
If we could talk about the sort of decision that came through today in the Q and in your prepared comments that the convertible that is going to be paid off and it doesn't sound like.
Refinancing of that is.
On the horizon in the next 15 days. So can you share with US how you think about the second half I assume there is no buyback activity and second half guidance might you be opportunistic might actually be a 2020 of that and tied to that are you able to share and operating cash flow forecast for 2018.
Sure so.
Let's take the easiest one first so in our guidance. We don't we don't have any buybacks projected in our guidance that we issued guidance just on the pure fundamentals of the business.
Secondly post the convert.
Could we be in the market in a meaningful way, we could one item that we're going to have to be mindful of in this kind of goes to Tim's question is the.
Updated disclosures around the investigation, that's something that we'll have to be mindful of.
As we go forward it doesn't mean that we won't be in the market, but there may be some challenges for us to be in the market. We're just going to have to monitor that this situation closely as it unfolds.
As that situation unfolds.
Are there then becomes an economic decision in win and timing about a potential refinery.
So as you know and we've stated we feel very comfortable at our current leverage leverage levels.
We're at about 2.9 times on a gross leverage level anywhere in the three times ZIP code is the place that we feel good about.
Post.
The maturity of the converts.
We'll be down to about 2.2 times, so obviously, there will be room and upside to refine but.
Refinancing and carrying the cost of debt on our balance sheet. When we may be in a position.
We can't put that cash to work effectively right that goes into an economic decision. So we'll have to just take all of that together and as the as the quarter and the month fall here just make the right economics.
Great. Thank you lots of further.
Good context, there are you able to give a number for the operating cash flow for the year.
I don't have that at my fingertips here. So let me maybe we can follow up on that offline.
Wonderful Okay, perfect and then if I may I, just like to close with two questions around especially cost strategy. We won in the energy sports and fitness segment, just thinking about the.
24 line and its you know recent.
I think it's a single product at this point, but I fall start into India in the second half of this year and into next year, we're where and when might you be continuing to expand.
The magnitude of expansion of the Herbalife 24 into other markets and then also I think that we're at now five markets with preferred members are there any ONTAP additional too.
Those five thank you so much.
Yes. Thanks for the question, let me start quickly on the H 24 line of products, it's multiple skews with multiple purposes and use cases, and then I'll hand off for the for the for the PM question to John My colleague. So on on Urbanize 24, as you know it's a it's a sports performance line. It has multiple skews in the U.S. It has a number of very successful skews, including rebuilds strength, which is a high protein.
Product for use principally right. After exercise it has a hydration product, which actually is the product is 24 hydrate that we launched in India. Most recently this quarter. This last quarter, we launched.
H 24, BC a branch chain amino acids that was launched at the extravaganza.
This I, we also launched an enhanced protein products under the same age 24, Brent. So the answer to your question is we're going to continue to innovate and add new products to the H. Ttwenty four line overall expanding it so that it is better satisfies the needs of individuals who exercise individuals who want to gain muscle mass and individuals who are into sports. However were also going to take that line, even as we add to it and continue to then extend take that line to other countries around the world as Weve done most recently in India will continue to take it to other countries as demanded.
And then I'll take on the segment, taking place and so I think from a segmentation standpoint.
There's a lot of.
Additional demand.
From various countries various distributors in various countries to implement segmentation.
In their respective markets.
We won't announce which markets until we announce it to that particular market pricing over each of the next few quarters, you're going to hear more and more names outlook. So we do expect.
The number of markets using segmentation to grow significantly over the next few years.
It's a pull model and quite frankly, each marketing programming so.
It's not it's not a switch you can turn on and turn on the whole region market by market and there is a pipeline.
For which we are we'll be walking segmentation, but.
In addition to the five that you already know about.
We're not yet to announce on this call which is.
Those are for reasons I hope you understand right those mark our.
Pretty much 100% perfect. Thank you very much.
And our next question is one of Hale Holden from Barclays.
Thanks, I had two quick ones just a clarification on.
The restrictions on share buybacks.
Related to the disclosure is that it's not a blackout restrictions while you're in negotiations you wouldn't want to buy shares back or is there something else I'm missing there, yes, yes, he'll just just to be clear.
I don't think we're saying that we are have a restriction and I think we're just trying to signal.
You know, we don't know where these discussions are going to go there is a possibility that we could be impacted and we're just trying to signal that we have just something that we need to be aware of and when we're sitting here in three months from now.
It just gives you an idea.
What might transpire over the quarter.
Understood.
And then my second question is on the.
I saw the rollout press release.
Last week on the on these 24.
And I was just wondering from a distribution standpoint.
If you thought your current distributors were in a good spot to be able to expand.
To more of a performance athlete into that into that market or was it kind of take a sort of different training mechanism to get people up to speed on it.
Yes, it's a good question our model is as you know is that we we launch.
Largely in response to demand for products from our distributors. They are in touch with their customers everyday they understand what the needs in the market place are they have a process. What we are they have product committees, where they discuss debate and prioritize what what needs. We should help them fill first and so these launches are typically in demand in response to demand from our distributors and so.
So the answer to your question is yes, we believe our distribution network. Our distributors are ready hundreds of them by the way if not thousands have increasingly over time built fitness sports into their models and so it's us keeping with their with their growth and their demand.
And then I just assume it's.
Higher basket for the distributor and result in higher distributor and so I caught all in it kind of has a flywheel effect of it expands.
I think that's a fair statement, yes, and actually a a bit more sustainable than some weight loss customers can be right. This one one cat in some respects we lost customers some of them have a finite goal where.
Sourced nutrition customers, our lifestyle, yes, Virginia without a doubt.
Sounds good I appreciate it thank you.
And ladies and gentlemen, I would now like turn the call back over to Michael Johnson for closing remarks, so thanks, everybody for being on the call.
I listen to this great team of executives and think about a great deal of distributors the basket of markets we have.
And then of course, we talk about China, and this is where I want to get to the conclusion in one of these quarters are saying Besides China. We are doing great. We're going to pick up with tried and we got a great.
Situation there in terms of business models, we've got an incredible opportunity with our methods in the marketplace and nutrition physical believe it's not it's not isolated to one market you heard John Dr., John just talked about before and the sustainability of that product and John D. Small drop it in say Hey look.
This type of customer is somebody who wants to build muscle they want lean muscle mass in their body. We have a basket of markets. We have a basket business methods. We have a basket of products that are going to satisfy consumers for a long time, the passion of our distributors in a way. They go to market was evidenced to all of us in the last month in five gigantic meetings to the Russian speaking markets too in Hong Kong, one for our Chinese.
Service Representatives and for our Asia Pac distributors and that 26000 distributors energetic and many of you participated in that's all that energy in the Superdome in New Orleans. This company is a special place. This is a special time, we've got a bit of a problem in China will get over it we've seen these problems before we conquered him we beat them, we're going to do it again, we built this company strong and we're going to build an even stronger so thanks for being with US. We appreciate your energy your support let's go get them Herbalife.
Ladies and gentlemen, this does conclude today's conference. We thank you greatly for your participation you may now disconnect.