康寶萊 (HLF) 2011 Q1 法說會逐字稿

Good morning and thank you for joining the first quarter 2011 earnings conference call for Herbalife Ltd. On the call today is Michael Johnson, the Company's Chairman and CEO; the Company's President, Des Walsh; John DeSimone, the Company's CFO; and Brett Chapman, the Company's General Counsel. I would now like to turn the call over to Brett Chapman 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 and as you know, actual results may differ materially from those discussed or anticipated.

We encourage you to refer to yesterday's earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements and our business. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, prepared in accordance with US Generally Accepted Accounting

Principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measures assist management and investors in evaluating and comparing period to period results of operations in a more meaningful and consistent manner.

Please refer to the Investor Relations section of our site, Herbalife.com, to find our press release for this quarter which contains a reconciliation of these measures. Additionally, when management makes reference to volume during this conference call, they are referring to volume points. I will now turn the call over to Michael .

Thanks, Brett Good morning, everyone, and welcome to our first quarter earnings call. This has been a tremendous quarter. We achieved the 3 highest volume months in the Company history. And as you read in yesterday's press release, we had a strong quarter across every geographic region of our business. Let me start this call by recapping some of our key performance statistics included in our release.

Record volume points of 902.2 million up almost 22% over 2010 . Record net sales of $795 million, a 29% increase over the prior year. Record earnings per share of $1.41 on a reported basis and adjusted earnings of $1.43.

Double-digit, year-over-year increases in volume points in all 6 of our regions, a 21% increase in active average sales leaders over the prior year. Free cash flow after dividends and capital expenditures was approximately $64 million for the quarter.

Our shareholders approved a 2-for-1 stock split and our Board declared a post-split of $0.20 per share quarterly dividend. We are also pleased to announce that Carole Black and Michael Levitt joined our Board of Directors. Carol is the former President and Chief Executive Officer of Lifetime Entertainment Services, a multi-media brand for women, which includes many Lifetime networks. She has served as Director of Time Warner Cable, Inc., since July 2006.

Michael is the Chairman and Chief Executive Officer of Stone Tower Capital, LLC, which he founded in 2001, as an alternative investment management firm. Carole's and Michael's experiences as Chief Executive Officer adds depth of knowledge to our Board.

The reason for our success in this quarter and every quarter is very clear. It's our products and our distributors. Our distributors are highly engaging and confident in the Company. They are building sustainable businesses with long-term customers using the products everyday.

They are holding more meetings than ever before, bringing more new people into the business and retaining them at a higher rate than ever. Let me remind you of our 2010 retention rate of 48.9%, which is up from 27% in 2002, and which we believe is the highest in our industry.

In March, 1500 highly engaged and confident distributors, our most active leaders from around the world, attended our 2011 Herbalife Honors and Mark Hughes Bonus Awards event here in Los Angeles.

In addition to participating in training and leadership meetings, they experienced the inaugural tours of the new Herbalife Innovation and Manufacturing facility, the very exciting introduction of our new sports line Herbalife24, presentations from our Herbalife Nutrition Institute top doctors and scientists, our taste of the future preview of the latest in product and technology including our social media site Herbalife iChange.

Our Herbalife Family Foundation Gala raised nearly $1 million for our worldwide to Casa Herbalife Program. And on the Mark Hughes Bonus Award evening, we awarded $41.3 million in bonuses and recognized the recipient of this year's Herbalife Family Foundation Humanitarian of the Year Award.

Now let me give you more details on a few of the key initiatives and projects we previewed with our top distributors at Honors. First let's talk about the product. During Honors the tours of our Lake Forest Manufacturing Facility were a resounding success.

We've raised the bar in the supplement industry by demonstrating it so clearly in our HIM tours, we are giving our distributors tremendous confidence and pride in our scientific substantiation, ingredients, and manufacturing processes. The tours were such a hit that in addition to holding a regular schedule of tours in Lake Forest, we are modifying our manufacturing facility in Xuzhou, China, in order to hold tours there. And we are also creating virtual tours online.

At Honors our distributors were also very excited about the upcoming launch of our revolutionary new sports product line Herbalife24. Herbalife24 is designed to be meet the high end nutritional needs for the 24-hour athlete, such as those on our Herbalife-sponsored teams around the world. 100% of the product lots will be tested by an independent lab, and every canister will carry the BSCG symbol so professional athletes can be confident there no banned substances.

The product packaging will also have QR Codes, Quick Response Codes, which when scanned by an enabled phone or device will link to a video explanation of the product's science and benefits. While all of our products excite us, this new line of 7 products is truly revolutionary, and we believe Herbalife24 will redefine sports nutrition.

Athletes are athletes, 24/7, and while you will be hearing much more about Herbalife24 in the months to come, we already have more than 300 athletes ranging from weekend warriors to elite professional athletes who have been beta testing the products. The response from them as well as from our sponsored team has been tremendous.

We are introducing Herbalife24 in the US starting later this month and will feature in sample Herbalife24 at US-based events including this month's Tour of California and the Indianapolis 500. And stay tuned for more announcements coming real soon.

In the area of product development and scientific leadership, we are very pleased to announce, yesterday, the addition of a very talented and experienced individual to lead our Outer Nutrition product area, Dr. Paolo Giacomoni who has joined us as Vice President of our worldwide Outer Nutrition.

Dr. Giacomoni spent 13 years with Estee Lauder, where he most recently served as Executive Director of Research, overseeing scientific research and communications for the Clinique line, and playing a leading role in the development of multiple products, including new technologies to the marketplace and spear-heading concept formulations.

Prior to Estee Lauder, Dr. Giacomoni was with L'Oreal for 13 years, first in basic research and then in product development. He has a PhD in biochemistry, a master's degree in physics, holds several patents and has over 100 scientific studies published in the areas of biochemistry, cellular biology, photo biology, and skin aging.

Continuous improvement is the name of the game for us in every area. And as we mentioned earlier, at Honors we had training from our leaders on the business methods creating success. Des is going to be telling you a lot more about that. We also acquired a social media site called iChange, that will support business building online.

The iChange system makes it easy for our distributors to offer nutrition information to a large number of customers both within the new Herbalife iChange site and across other forms of social media such as Facebook and Twitter. Customers get access to free coaching from distributors and access to nutritional tracking tools to help them achieve their goals, available at anytime and anywhere, through their mobile device or computer.

It's a powerful set of tools to help our distributors develop these types of relationships online and leverage their own social online networks. And Herbalife and iChange are a perfect strategic fit. Herbalife is the original social network. Our distributors have been helping people personalize their nutrition programs since 1980.

Starting next week we will have about 500 early adopter distributors in 9 countries beginning to work with our customers on Herbalife iChange. We plan to open up access to all distributors in the early adopter markets and begin the first group of non-English pilots in July. We are also constantly working to expand the brand and image of Herbalife around the world often through the sponsorship of athletic events, teams or athletes.

Together with our distributors we sponsor more than 200 teams, athletes, and events worldwide. Our distributors are taking an increasingly active role in their local market sponsorships and community service activities. Our products are more relevant for today's consumers than at any time in our 31 year history. And the unique design of our distributor compensation system provides a financial remuneration that rewards hard work and success.

Our distributors continue the globalization of daily consumption business methods that are enabling more distributors to be successful with Herbalife than ever before in our history. Our retention levels have never been higher and more distributors are achieving new levels within our marketing plan than ever before. Our brand and image are gaining strength and the strategic initiatives being launched lead us to believe that the momentum in our business will continue.

We are just getting started. In fact, several of us are heading to Bangkok tomorrow to present at our Asia-Pacific extravaganza, where we expect more than 25,000 people, our largest regional event ever. Let me turn it over to Des for some the specific market updates.

Thank you, Michael. The momentum we are seeing in our business is driven by 2 key forces, our distributors' commitment to expanding daily consumption business methods around the world, which helps create a long-term stable customer base, and the continuing commitment of our distributors to Herbalife's Mission for Nutrition.

We continue to see the expansion in daily consumption business methods as a primary driver of our distributors' businesses and Herbalife's growth. We believe the momentum behind this evolution will continue to accelerate as more distributors in more markets have success at culturating daily consumption business methods to their markets.

As we entered 2011, we began to discuss for distributor leadership the idea of what we call TLC, and how working to implement this concept throughout the organizations can help drive sustained growth and success. Let me give you a brief overview of the TLC concept. T is for trainings, constantly reinforcing the systematic and continuous training as the means of helping every distributor further their understanding of the basic tenets of the Herbalife business opportunity and products.

L is for locations. Wherever the distributors are conducting their businesses, whether nutrition clubs, offices, lifestyle centers, or on the Internet, we are seeing that there is a special dynamic were distributors create a sense of community and where product and business opportunity, training, and testimonials can be shared.

C is for consistency of meetings. Meetings are one of the driving forces behind our growth and are part of the core philosophy of Herbalife. Community or the social element of our business is critical to maintaining engaged, knowledgeable distributors. Our metrics have long illustrated to us that distributors engaged in consistent meetings, city by city, are much more likely to be retained and growth profitable businesses.

In the first quarter of 2011, we were very pleased to see that the engagement that we have been discussing for the past several quarters has continued to translate into growth in local currency net sales, which were fairly evenly split between established and emerging markets. The established markets category, which includes several of our oldest markets, for example the US and most of Western Europe, accounted for 49% of our local net sales and increased 17% for the year.

Volume in the established markets increased 14% for the year, as compared to the prior-year period. The emerging markets accounted for the remaining 51% of our local currency sales and grew 33% for the year.

Volume in the emerging markets increased 29% for the year compared to the prior-year period. We remain very pleased with how balanced our growth is between the two groups, and are excited about the scale of the opportunities that we see to grow both wider and deeper, simultaneously.

Now let me provide regional highlights and color on some key regions. The North American region had another strong quarter, posting 10% growth compared to the prior-year period in both local currency net sales and volume points. New distributors increased 5% in the quarter. One of the measurements that we use to gauge distributor engagement , average active sales leaders, increased 15% in the North American region compared to last year's first-quarter results.

For the quarter, US net sales grew 11% and volume points increased 11% versus the same quarter last year. Compared to the prior-year period, new distributors in the US increased 5% and average active sales leaders increased 15%.

The growth in the US continues to be driven by the expansion of daily consumption business methods. The engagement level of our US leadership remains very high, with record attendance at meetings in cities around the country.

Moving on to Mexico. Local currency net sales for the quarter increased 37%, and volume points increased 32% compared to the prior-year period. For the first quarter, new distributors increased 38% compared to the prior-year. We are very pleased to see average active sales leaders increase 23% for the quarter compared to first quarter 2010.

We believe that Mexico is back to 2006 levels, and we believe that the distributor leadership, together with improved product access, are key factors in this success. The Asia-Pacific region continues to be a growth driver for the Company. During the first quarter, local currency net sales increased 36%, and volume points grew 31% compared to the prior-year period.

For the quarter, new distributors increased 36% versus the prior year. We believe the growth within the region continues to be driven by the expansion of daily consumption business methods and the high degree of distributor engagement. Average active sales leaders increased 27% in the quarter.

For the past several quarters, we've been discussing our excitement about the growth we are beginning to see in India. Well, India was again a highlight in the first quarter, posting volume point growth of approximately 154% compared to the prior year. The Herbalife business is taking root in multiple states throughout India, and we are working diligently to ensure that our infrastructure continues to be capable of supporting this level of growth.

Local currency net sales in the South and Central America region increased 28% and volume points in the region were up 24% in the quarter. Average active sales leaders in the region increased 14% over last year's first quarter. New distributors increased 10% for the quarter, compared to the prior-year period. Regionally, we believe that our distributor leadership continues to see the benefits that daily consumption business methods can bring to their markets.

Within the South and Central American region, we need to mention the strength we are seeing in Brazil. Brazil experienced volume point growth of approximately 28% in the first quarter, as nutrition clubs, as well as our traditional business methods, experienced growth.

In Brazil, we are regionalizing our sales support team so they can be closer to their distributors and provide improved aid to distributors in their markets around the country . We are taking our business down to a more localized level, using a city by city approach. We are very excited about the opportunity we believe that exists in Brazil, and our distributors in this market are just beginning to scratch the surface of the real market opportunity.

Turning to EMEA, this is a region we are seeing the growth of daily consumption business models with distributors focused on the creation of long-term customers. During the first quarter, local currency net sales increased 18% and volume points in the region grew 15% compared to the prior year. New distributors for the first quarter increased 19% over the prior-year period. Average active sales leaders in the region improved over the course of the year and were 12% up in the quarter as compared to the first quarter 2010.

We are pleased to see the UK continue to gain traction with the weight loss challenge concept, and the Nordic countries are seeing growth with distributor offices which they call Lifestyle Centers.

Within EMEA, Russia continues to raise the bar on performance and is now a top-10 country for us. While we do not usually talk about country-specific result, Russia deserves to be highlighted.

Compared to the first quarter 2010, this quarter's volume points were up approximately 75%, with an almost 50% increase in new distributors. New sales leaders in the market increased more than 100% with a greater than 40% increase in average active sales leaders.

As we have told you on previous calls, Russia is the market where we initially tested the marketing plan changes that we rolled out globally in October 2009. Russia is the market with the 12-month sales leader qualification in place the longest, and we continue to be very pleased with the changes we are seeing in the business as a result. We continue to believe that Russia has the potential to be a significant market for us.

The longer qualification process has been a game changer in Russia, and we believe that the success we see in this market could be a leading indicator as to what we may experience in other markets as the 12-month qualification takes root around the world. Given the degree of sales growth, coupled with the logistical challenges of accessing product in a country as vast as Russia, we are expanding our number of sales centers throughout Russia this year and adding the necessary infrastructure to support the anticipated growth.

Now let's turn to China where local currency net sales increased 36% and volume points increased 28% in the first quarter compared to the prior-year period. We believe our sales leaders in China are making progress at culturating the concept of daily consumption. We are seeing clubs open in locations more like those that have been successful and duplicable in other markets.

While we are very pleased with the progress of the business in China, we remain cautious about expecting too much too soon from this market. We are focused there on building a sustainable business on a solid foundation of long-term customers.

As we have been discussing with you for the past several quarters, we believe there is an ongoing transformation within our business. The daily consumption model that has taken hold in some of our largest markets and continues to expand into more of our existing markets every day, a fascinating aspect of the growth in daily consumption is the various forms it is taking on around the world.

Nutrition clubs are just one iteration of daily consumption business methods that Herbalife distributors are successfully leveraging around the world. While we talk about the localization of daily consumption across the globe, it is important to understand that we believe we are in the early stages of its growth in most of our markets.

In closing, let me take this opportunity to thank our distributor leadership for a great start to what we believe is going to be an excellent year. Now let me pass the call over to John to review the financials.

Thank you, Des. Our financial results for the first quarter are reflective of the Board's strength in the business as discussed by Des and Michael. Yesterday we reported net sales of $795.1 million, an increase of 28.5% compared to $618.6 million reported in the first quarter of 2010. This reported growth of 28.5% was comprised of local currency net sales increase of 24.7%, plus a 380 basis point benefit from foreign currency.

Since Des has already discussed our local currency net sales and volume growth in great detail, I will move onto margins. For the quarter, on a reported basis, gross margin was 220 basis points better than Q1 of last year. However last year's results were significantly impacted by the implementation of hyper inflationary accounting in Venezuela. On a normalized basis, excluding this 1-time, prior-year item, gross margin was comparable to Q1 2010, improving by 18 basis points.

On a side note, the Company's new manufacturing facility in Lake Forest, California, was a little behind schedule in ramping up production in Q1 and was very slightly dilutive in the quarter. However, in April, volume more than doubled and represented approximately 20% of worldwide inner nutrition production for the month.

Moving onto SG&A, as a percentage of sales on a reported basis, SG&A improved by 269 basis points, of which approximately two-thirds of the improvement resulted from last year's one-time charge relating to Venezuela. On a normalized basis, SG&A improved by 85 basis points.

This variance was primarily a result of operating leverage from sales growth. There was no material impact from foreign currency transactions and hedge gains and losses, as there was approximately $2 million of losses recorded this quarter compared to $1 million in losses compared to the same quarter last year.

Operating margin on a normalized basis improved by approximately 130 basis points. This improvement was primarily a result of the previously discussed changes in gross profit and SG&A. Additionally, currency had a positive 20 basis point benefit to operating profit.

Turning to earnings per share. The Company reported EPS of $1.41 for the quarter, and adjusted EPS of $1.43. The difference between the 2 items relate to a 1-time write-off of unamortized debt financing cost resulting from the Company's prior credit facility that was replaced in Q1 of this year. The adjusted earnings of $1.43 was $0.45 higher than adjusted 2010 Q1 and $0.22 better than the high end of our guidance range provided in February.

The majority upside from both comparisons was a result of stronger than expected sales growth in many markets. Additionally, a slightly better effective tax rate benefited the quarter by $0.02 in comparison to both the prior year and to the guidance previously provided.

With respect to cash flow, during the quarter the Company generated cash flow from operations of $107.5 million, an increase of 23% versus the comparable quarter in 2010. We paid $14.8 million in dividends and invested $28.3 million in capital expenditures.

Additionally, as announced a March 9, we replaced our prior credit facility with a new one that provides 75% more capacity. This new facility wasn't announced until the end of the open trading window, and as a result of this material information not being public, we were prevented from repurchasing shares during the first quarter.

I'd now like to discuss our guidance for 2011 both Q2 and full year. Our guidance figures are based on exchange rates as of the end of Q1, consistent with prior practice. Since the end of the quarter, the dollar has weakened a bit, but keep in mind that 62% of this year's euro exposure is hedged at $1.35, so we don't get the full benefit of the strength of the euro this year.

For the second quarter, which is our most difficult comp for the year, we expect volume point growth of 10% - 12% and net sales to increase by 19% - 21% compared to the strong results reported in last year's second quarter. EPS on a pre-split basis is expected to be between $1.42 - $1.48. And on a post-split basis, EPS is expected to be between $0.71 - $0.74.

For the full year, we are increasing our expectations across the board. We expect volume growth of 12% - 14% compared to our previous guidance of 8% - 10%, and net sales are expected to grow 18% - 20% compared to the previous guidance of 13% - 15%.

In terms of EPS, we are raising the high end of our guidance on a pre-split basis by $0.38. We now expect full year pre-split EPS to be in the range of $5.54 - $5.78. On a post-split basis, our full year guidance range is $2.77 - $2.89 per share.

Before ending our prepared remarks, I will comment briefly on the pending stock split. As announced yesterday, the shareholders approved a 2-for-1 stock split. This decision demonstrates our confidence in the Company's future. It also improves the liquidity of the stock, and makes the stock more accessible for distributors and consumers.

The record date of the split will be May 10, and the Company's Board of Directors also approved a post-stock split quarterly dividend of $0.20 a share to be paid on June 7. That ends the prepared remarks. We will now open up the call for your questions.

(Operator Instructions) Our first question comes from the line of John San Marco with Janney Montgomery Scott.

Thanks, good morning and congratulations. Couple quick housekeeping questions to start off with. What repurchasing expectations are currently in your EPS guidance for the year?

We are expecting -- when we announced the share buyback a year ago, we contemplated $200 million a year; and we have that $200 million in our guidance for the rest of this year.

Okay, thanks. And then for SG&A, 30.8% was obviously down a great deal despite the absolute dollar growth. Is there something structural that requires you to keep the growth in that spend level in line with your revenue growth? Or might you be able to sustain some leverage benefit given the current top line growth rates?

So, there is leverage in our business, but we do have to spend both in front and behind growth. And our expectations, I think we said this before, is to have, long term, a 20% contribution margin on incremental sales growth and that's what we are managing to.

Okay. How do we think about inflation and the relative value that your meal replacement shake has for consumers versus a more standard meal in emerging markets? And maybe as part of that, have you taken your prices up on Formula 1, and do you have a sense what's happening to the average club price point of a meal replacement?

Hi, John, this is Des. Let me answer that. Philosophically what we always want to do is ensure that our pricing remains consistent or a little bit less than inflation, and that way we're always in a position to ensure that our products are competitive in the marketplace.

In relation to the clubs, obviously what the clubs have done is given us the ability to reach a much broader segment of the population to whom purchasing products on a monthly basis might not have been affordable in the past. And where we have modest price increases, those are passed on in the clubs for the most part, but again the philosophy is always to keep price increases generally at or slightly below inflation. That means we believe we will always continue to be price competitive in the marketplace.

Got it. And Des, if I see 3%-ish pricing coming through your income statement, is that a decent proxy to think about maybe what the Indian consumer who is visiting his local nutrition club is facing in terms of Herbalife specific price increases?

John, this is John. I will take that one. Our price increases are market specific. It's not a worldwide price increase when we take it. It's based on inflation in a given marketplace. If you see a piece of it in coming through the P&L, it may be relating to 1 country or may be relating to 10 countries.

Sure. Same question but worldwide, maybe take away the Indian comment I threw in there. Worldwide, is the 35% or so of your volume going through clubs, is that, do you think, 2% - 3% more expensive than it was a year ago today?

It's difficult to say, John, because what will happen is that individual distributors in individual countries will make a decision whether to pass on that price increase. It's difficult to say across-the-board. In general terms, I would say it broadly follows, but it isn't necessarily automatic or immediate.

That's fair enough, thank you. One last one and I'll stop monopolizing. If you could just comment, it seems like your body posture around seeking a distribution partner in India maybe stalled from three months ago, last you spoke publicly. I was wondering if there is any updates towards trying to emulate the Waldos' success you have had in Mexico.

No, John, it continues exactly on track. It's a test in progress. It begins this month. And, then, just as we did in Mexico, what will happen is we are testing it in a limited number of their locations, initially, assessing the impact, and then we will make a decision then to expand it.

Great, thank you so much for your time, and congratulations on a great quarter.

Next question comes from the line of Doug Lane with Jefferies & Co.

Good morning, everybody. Can you talk about, now that May is here, this is the launch for Herbalife24, so can you give us an update on what the strategy is for Herbalife24 and how you're going to integrate the distributor force into that strategy?

Hi, Doug. You got me off my feet. It's Michael. You figured out how to get me on this call. Herbalife24 is going through a soft launch until October. We are launching 5 products through the summer, and will be launching all 7 products starting October 1.

We're doing it around a couple of events that we're pretty excited about, which is the Tour of California. We'll be doing a lot of sampling with distributors on the course. We will also do it to the Indianapolis 500 where we have basically a vendor sponsored event taking place there with a lot of distributors coming. We have a wonderful spokesperson for us named Townsend Bell.

We are going to make a pretty good-sized announcement here in probably the next 3 or 4 weeks about an event in the middle of the summer, and we will be featuring possibly a few television ads this summer, but we will see if we sign that event for sure, which will take place, as I said, in July and August.

The other thing is, we have a lot of distributors, about 300 distributors and athletes who are on a beta test program for us right now; and we are going to continue to monitor them. We are working with our young Dr. John Heiss and Dr. Luigi Gratton on monitoring and working with these athletes.

We've gotten resounding, positive input and testimonials from them so far. We've got a couple real wonderful products in this line that we are really excited about.

And then we have a worldwide rollout that will take place throughout the world over the next year. We will be launching it in Europe in October also -- no, when do we launch in Europe, Des?

At the event in September.

At the event in September, excuse me, in Barcelona. We are also putting this in all of our teams throughout the world. We've worked with the nutritionists and the doctors in every team that we sponsor, and we've got a resounding positive from all of them, and so we're bring that product to their training tables and their training rooms right now. So we are very, very, very excited about this product.

And where do you envision it, Michael, in 2 or 3 years down the road here in integrating it into your existing infrastructure?

In manufacturing infrastructure?

And distributor network.

It will be completely in our distributor network over the next year.

Oh, okay. As a separate line?

It's called Herbalife24, and it's for the 24-hour athlete. You heard some of the verbiage from me just a little while ago. Basically it's a line that is built for high-end athletes, but there's going to be 4 or 5 products in that line that are going to have incredible off take, we believe, in everyday use. We are already hearing people incorporating it into their daily lives.

We think this is a new opportunity for distributors and distributor recruiting. We think there is a lot of opportunity in building into the personal trainer environment as well as the high school athletes to build into a tremendous opportunity for coaches and teams there, parents of players.

We're just real, real excited about what we see coming down the road here. We're also manufacturing, one of the products right now, we are running it in our facility down here in Lake Forest.

Okay, thanks.

Our next question comes from line of Chris Ferrara with Bank of America.

Thanks, guys. Looking at the incremental guidance change for Q2 through Q4, the implied after you strip out the Q1 beat of your own expectations. It looks like the incremental margin you are assuming on the incremental sales is a little lower than what we typically expect on a run rate. I think you guys normally talk about a contribution margin of 20%. Is the math right? Is it right and are there incremental investments you guys are contemplating as part of this guidance as you move through the rest of this year?

Chris, this is John. The 20% contribution is the longer-term contribution and we exceeded that in the first quarter, and we actually exceeded that last year also. There is a little bit of incremental investment expected in the back half of this year to compensate for these 2 waves of growth we have seen, the second quarter last year and of course the first quarter this year. So, when you look at the 2-year contribution of incremental sales, from '09 - '10, and then from '10 - '11, we are going to exceed that 20%.

Got it, thanks. And then I guess on a totally separate, if you look at your average active leaders' stride and even new distributors -- I guess it's particularly in Latin America but across the Company -- this quarter you saw somewhat of an inflexion up, even in Europe.

I know the story has been for a while that retention is good, moving to a daily consumption model, we are not so worried about new distributors or recruitment or active leaders -- not that you're not worried about it, but it's not the best indicator. Right now we seem to have an inflexion in active leaders and distributors. Can you talk a little bit about that? Is there something specific going on or am I just off base on this?

Sure, Chris, we've got a number of things going up. First of all, it's all tied back to the gradual transition to daily consumption, the focus of creating long-term customers, and then also what you're seeing is the impact of the new supervisor qualification. So, anytime you've got a situation now whereby every distributor is a potential future supervisor, that actually changes the dynamic a little.

So, we've got more engagement. We've got more distributors who are on that path to become a supervisor, and we think those are very healthy trends. You saw the beginning of that program in Russia a number of years ago; and now what we're seeing is the gradual enhanced adoption of it in other regions. I think that's 1 of the things that is driving what you're seeing in South and Central America, coupled with, obviously, the increasing adoption of daily consumption.

Got it, thanks. And I guess 2 other quick ones. One of them is what are your share-creep expectations? Obviously you're buying back some stock, but what are your thoughts as far as how much a share count is going to go up just as far as equity issuance goes with respect to management compensation, stuff like that?

The 2 are disconnected, right? Our buyback is independent of the equity compensation. Some companies have a strategy where they want to buy back enough stock to compensate for equity grants. Since 2007, our buyback has exceeded our equity grants by more than 5 times. I suspect that will continue. It will be a little less than that, because as the stock goes up, some of the grants become in the money and it helps share base creep up a little.

But you'll still see a net reduction this year for the rest of this year. I don't want to give out any specifics, because it all depends on the time of year when you buy back stock, because it's an averaging method, right? So, you're only going to get -- whatever we buy back for the rest of this year, we are only going to get half the benefit for this year. But you'll still see a net reduction for the rest of this year.

Right, that make sense. And I'm sorry if you said this, have you guys taken incremental pricing this year? Are you guys planning to, and what have you taken are ready that would still need to anniversary; is it anything meaningful?

It's not meaningful. We've taken just a really small number of countries that we've taken small price increases, and only a small number of countries where they're planned. So, with the exception of Venezuela where it is hyper inflationary, where you might have some meaningful price increases, it's very de minimis.

Got it, thanks a lot, guys.

Our next question comes from the line of Scott Van Winkle with Canaccord Genuity.

Thank you. I want to follow-up on the active sales leader question. Should we think about the new compensation plan and the 12-month program for becoming a supervisor, did that have a timing impact where in this first quarter, normally requalification period, we see a big step up in the growth rate of average active sales leaders? Or is independent of some timing issue, when you launched that program?

Scott, I don't think there is any connection between the 2. Scott, what we have is we have just a gradual adoption, the 5K program around the world. Obviously Russia is the most advanced. We have other markets that adopted very early, primarily, say, Italy, but I don't think there's any timing between a quarter issue or anything like that.

It's simply, basically, many of our leaders, as you know, they will take a cautious approach. They will watch how others adopt something, and then when they believe that it's beneficial for their team, then they will embrace it also. That's what we are gradually seeing happen now around the world.

Des, a couple years ago, you sat an analyst down and you talked about how we are going to see a deceleration in new sales leaders as you roll out nutrition clubs across all your markets. I think that was about 2 years ago.

Are we seeing the reverse of that here, where we are seeing that traction, or is it a 2-year lag? Is there anything else I can correlate -- this is a fairly significant acceleration across most of your markets this quarter.

I think 2 things you're driving at, Scott. First of all, anytime when you transition to daily consumption, you obviously have a shift in focus of the business. The focus now is in creating long-term customers.

Obviously as you will note from sitting through various presentations, the whole basis of the circle of success is that those long-term customers drive customer retention that drives distributor retention, which then in turn drives distributor recruiting. And so, in some markets you are seeing that circle of success come to fruition, and more supervisors result from that.

The other thing, obviously, with the 5K is that there is a lag there, because now you've got distributors accomplishing the level of the supervisor over a period between 3 and 12 months. And then the third thing that's happening in some markets, Scott, is the fact that the business is generating such tremendous results for our distributors, creates a sense of momentum in that marketplace, and that's actually attracting people because of the tremendous stories of success. That's partially what's behind the growth that we are seeing in India and so on.

So really, you have got those 3 factors in place that are driving. But for us, the key factor is still average active sales leaders, because that's the measure of how engaged our sales leaders are, and we believe obviously that's a very important driver as we look to the future.

Great, thanks. So I can hear Michael talk again, on the sports nutrition line, it sounds like you're talking about a whole new wave of distributors. Do you see it more as a new opportunity for a new class of distributor? A new age group, a new focus?

Or is it just as much incremental to existing distributors, and then I'd love to hear you talk about skincare . Obviously something is coming down the road, I would think, in the next year with the recent hire and the opportunity there. And does that play out the same way?

You're going to get me to talk twice in one call? The thing you mentioned on Herbalife24, Scott -- and good morning, Scott, it's good to hear your voice -- it's holistic. We see current distributors obviously who are testing this product in their organizations who are attracting new customers -- not attracting customers yet, but attracting potential new customers and thinking about building out their business to attract trainers, to attract people in the athletic field, to work with young athletes as well as old athletes, like me.

And we think that there is frankly a lift that's going to come, but I don't expect it right away, because, as Des says, it always takes time for people to blend in a new product to their business. And as this happens, we have a lot of young distributors coming to us. We see this in different parts of the US right now and all across the world, but especially in the US where we are rolling out Herbalife24 to these 300 beta testing distributors.

They are attracting a group, a younger group, who are not only looking for an economic opportunity, but are looking for a product that suits their age group and looks at their specific needs in the marketplace. A lot of trainers out there. There was a big article a couple days ago about personal trainers and how it's a rapid growth industry in the US.

These folks are limited by the number of hours in the day that they can do business. They can only train 8, 9 people a day, and that's a very busy, hefty day for them, but to add a nutrition aspect to that business is a big, big deal, and we think there is a real opportunity for them to do it.

We're going to see a lot of hybrids. We're going to see people attracting and adopting this product to their business. On the skincare line, we are very excited about Dr. Paolo Giacomoni joining us. He brings a wealth of knowledge and experience to the Company. We frankly have just relaunched and are just in the process of relaunching some haircare lines that we have right now, paraben-free lines. We are going and juicing up the aloe side of our product. We are very excited about that.

We are also repackaging some of our line, but I think you could look at 2012, as being a year for us that's going to have a lot of focus on skincare, skin nutrition, inner nutrition and Outer Nutrition, blending for the proper skin balance, targeted areas that we are going to focus on. And I don't want to mention those are now, but there's a big, big market in many targeted areas in skincare and it's not color.

It will be more local focus, products that will be targeted into that marketplace. Dr. Giacomoni brings a global expertise to us. He's not only multilingual; he is Italian born and educated. He's worked in the US for many years, operated in Europe, Asia. We are very, very excited about this hire, and who he is and what he brings to the table.

Thank you, and then, Des, your comments about caution not to expect too much out of China. There's been some recent strong trends among direct sellers in China, and if I just look at things like your average active sales leaders and your revenue growth, I get pretty optimistic. Is there something else I should think about?

No, Scott, just that we have been consistently cautious about China since we opened five years ago. We continue to be cautious today. It's driven by a number of factors, first obviously China is a challenging environment. You know that we have a marketing plan that is vastly different there from the rest of the world. We don't have the ability to have our international leaders engaged in China, so all of these factors are factors which incline us to have us be consistently cautious about China.

We are pleased to see the transition to daily consumption. We believe that's very positive and healthy for the market. But again, it's a market about which you will continue to hear us be cautious in the future also.

Thank you much.

(Operator Instructions) Our next question comes from the line of Bret Jordan with Avondale Partners.

This is Aunon in for Bret. Just a quick question, turning back to the Lake Forest facility, what are your expectations for margin benefits as you ramp up production this year?

We haven't specifically said what our expectations are for this year. We do expect it to be accretive the rest of this year. We have given a long-term -- what we think are long-term opportunities for margin reduction but that's a 3 to 5-year goal. Right now, it's a little dilutive in Q1, but not materially dilutive, but a little dilutive and we expect that to turn around and be a little positive for the rest of the year.

All right, perfect. Thanks.

If there are no further questions, this is Michael again for the fourth time on the call today. I just want to say thank you. Thank you not only to our investors who are enjoying the benefits and the fruits of the hard work of the distributors and the employees of this Company who have come together to really take Herbalife to a new place, but as I constantly say to the distributors and to our team here, while the news is good and heady, we are just getting started. We see a lot of ramp way in front of us. We think the momentum is really just beginning. We are very, very proud of Herbalife where it is today, our science, our product, our brand, our image, all are taking us to a new level. We're scratching the surface here and we're looking forward to talking to you again next quarter. Thanks a lot, you guys.

Ladies and gentlemen, this does conclude today's conference call.