Good afternoon, and thank you for joining the Second Quarter 2015 Earnings Conference Call for Herbalife Limited. 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 Alan Quan, the company's Vice President Investor Relations. I would now like to turn the call over to Alan Quan 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 today's earnings release and our SEC filings including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for a complete discussion of risks associated with these forward-looking statements in 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 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 and preparing period-to-period results of operations in a more meaningful and consistent manner. These non-GAAP financial should be considered in addition to, and not as a substitute for or superior to the financial measures prepared in accordance with GAAP. Please refer to the Investor Relations section of our website, 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'll now turn the call over to our Chairman and CEO, Michael Johnson.

Thank you, Alan and good afternoon and good evening everyone. The important trends we saw at the beginning of the year continued into the second quarter of 2015 and I'm pleased to say that we exceeded expectations. Importantly, three out of four key markets most impacted by our marketing plan changes, the U.S., Mexico and Brazil have continued to show expected improvement in sales performance and in key member metrics such as activity levels of sales leaders and the percentage of new sales leaders qualifying through the more deliberate, more sustainable and ultimately more productive 4K cumulative method. For the quarter, we reported net sales of $1.2 billion, while this represented a decline of 11% from the prior year period, largely due to the unfavorable impact of currency fluctuations, we achieved net sales growth of 1% on a local currency basis, which is close to the high end of our guidance range. It is important to note that April and May of 2014 represented the highest volume point months in the company's 35 year history and therefore created our most difficult comparisons of the year. In terms of profitability, second quarter adjusted EPS was $1.24 per diluted share, which exceeded the high end of our guidance of $1.15, primarily as a result of our ongoing focus on making prudent investments to drive growth while controlling discretionary spending. Most importantly, the financial results from the first two quarters combined with our expectations for the remainder of the year allowed us to raise our adjusted diluted EPS guidance for the year to the range of $4.50 to $4.70 from the previous range of $4.30 to $4.60. Our new guidance reflects our outlook for the near term performance of the business related to the strategic decisions we have made to improve the business…

Thank you, Michael. First, I will review the company's second quarter 2015 reported and adjusted results, including a few market highlights. I will then give an update on guidance for the remainder of the year. For the second quarter, we reported worldwide net sales of $1.2 billion, down 11% from the prior year period, while up 1% on a local currency basis, as currency headwinds represented a decline of 12%. Worldwide volume points were $1.4 billion, a 4.8% decrease compared to last year, just slightly below the high end of our guidance by 30 basis points. It's worth repeating that April and May of 2014 represented the highest volume point months in our history, making Q2 our toughest comparison of the year. Adjusted EPS of $1.24 per diluted share was above the high end of our guidance of $1.15 and we are raising our adjusted EPS guidance for the full year to a range of $4.50 to $4.70 from the previous range of $4.30 to $4.60. In the second quarter, we saw volume point trends improve in three of the four key markets most impacted by our marketing plan changes, the U.S., Mexico and Brazil. We are seeing sequential improvements in key metrics in these markets and are encouraged by the positive trends. In the U.S. during the second quarter, volume points declined 9% versus the prior year period, compared to a decrease of 12% in the first quarter. We believe the improving trends reflect an accelerated adoption of the 4K cumulative method for new sales leader qualification, which is continuing to cycle through. During the second quarter, 80% of sales leaders came from the 4K cumulative method, which is nearly double the percentage of sales leaders that qualified in this way during the same period last year. Other trends…

Thanks, John. This has been a solid quarter that is built on the positive trends we saw at the start of the year. We are seeing an improvement in key markets that have been most impacted by the changes we implemented with the support of our Member leaders. Our Member base around the world is engaged and enthusiastic about the future, as we are. Furthermore, we have a relentless focus on our consumers and remain committed to ensuring that our Members and their customers, all the new, are getting the products they want, in the way they want them. And our brand, it just keeps getting stronger every single day. Each month, our confidence in the future increases, we feel good about where we are and where we are heading, and look forward to a strong second half of the year. So operator, now, we're ready to take any questions.

And our first question is from the line of Meredith Adler from Barclays.

...my question. I guess my first question would be, maybe you could talk a little bit about Internet sales in the U.S. I mean, clearly, the loyalty program in China is doing really well and being able to buy directly from the company is doing well in China. Are you seeing something similar in the U.S. and how do you think that that sort of develops as we look at globally?

Yeah. So, Meredith, this is Des. So, Meredith, we see that Internet represents an element of choice for consumers. And certainly, we seem to be successful in China. But frankly in the U.S. and elsewhere, I'm not sure that it's ever going to be a huge incremental factor in our business. It's a way for customers to be serviced on a 24/7 basis. And certainly, our Members are using it for that purpose. But for the most part, we're a face-to-face business. It's that interaction between our customers and our distributors that really is the magic behind Herbalife. So, I think we see it as being an added benefit. But as a separate sales strategy or driver, I'm not sure that we're going to see it represent a key factor of growth in the future.

Thank you. That's helpful. And then I guess I had a question about, sort of what you're hearing in the U.S., there's clearly still some overhang from the investigation. What do you hear from Members or from potential Members? Is that just being sort of brushed off at this point? Clearly, you had a huge number of people go to St. Louis, but just wondering how sort of that's developing.

Yeah. So as it happens, Meredith, I actually just came back from the North American retreat where we had our presidents, team Members altogether, and overall, the atmosphere there was just tremendously positive. Obviously, St. Louis was a turning point for our U.S. business. We had our Latino Members and our general market Members altogether, tremendous excitement, record attendance. And so overall, the sense is that things are returning to growth, that a lot of the noise has subsided, our Member leaders had never been more confident about the future. They have acclimatized to the marketing plan changes, they have successfully implemented new trainings in their organizations in relation to income and product claims. So overall, there's very much a sense that the tide is turning and that good things lie ahead.

Great. And then I'll just ask one more question, which I know nobody will answer. But is there anything that can be updated about the investigation or we're still in no new information mode?

This is John, and I would say your assumption is correct, that there's nothing to update other than what's in our Q, which is not an update at this point. So when we do have an update, we will do it in a broad sense, but nothing to update at this point.

Okay. Great. Thank you very much.

And our next question is from the line of Mike Swartz with SunTrust.

Just wanted to touch on, John, I think you made a comment about Mexican VAT increase that's going through in the back half of the year. Could you maybe give us a little more granularity on that, what the impact is, maybe the volume points or what the net impact is to guidance?

Yeah. Sure. Just by way of background, it was – recently there was a decree by the government that confirmed VAT on supplements. And in order to adhere to that, we actually had to make a formulation change so that we could import the products under a VATable customs code. That reformulation – most of it has happened, it has created some out-of-stock issues while we go through that reformulation. So, that's one short-term issue. But in addition, the VAT is a 16% VAT, it'll be – impact around 47% of our products based on the current product mix. And we estimate that that will have about a $30 million volume point impact in the back half of the year, that's our estimate and that's enrolled into our guidance.

And will you guys be taking pricing to offset that volume hit, that incremental tax or I mean is this...

No, no. I mean it's a tax that gets passed through, it's a VAT, it's a sales tax...

Okay.

...think of it from a sales tax perspective. So it's a pass through.

Okay. Okay. And then I think you also made a comment on just some of the drivers to gross margin in the quarter, you had mentioned about a 90 basis points-94 basis points impact from, I guess what was it inventory, write down. Just for perspective, what is that typically in a quarter or on an annual basis?

Well, that's a year-over-year comparison, the 94 basis points, right. So, we wrote off more inventory than we normally do. Now, a lot of that, about $5 million of that, was Mexico inventory under the old formulas that we can no longer import given the new decree. So, it was a little abnormally high this quarter. So, again, that 94 basis points is just a year-over-year comparison.

Okay. Okay, great. Thank you.

We do have a question from the line of Tim Ramey from Pivotal Research Group.

John, your new forecasting algorithm has proved to be pretty good, the fact that you didn't make any real changes in sales. The second half was heartening given the increase in currency. But if we kind of looked at where the variations from what your model told you, would it be fair to say that Brazil was better, EMEA was worse, China was better. Is that kind of how you'd read it?

There were two things I'd say that really drove the worse, the downsides. So, we were off a little bit on Russia, but I think Russia is starting to recover, we see that in July. And we were off in a big way in Venezuela, which we don't even use that method to forecast. It's not a big market for us. But I think I gave you the stats, it was like 28 million volume points in the second quarter last year for Venezuela, it was only 5 million this year. And, that's a result of some really massive price increases that were a direct impact of continued devaluation. So, other than that, we were pretty close and, a little under in China.

Okay. And would you repeat what you said about China in July as it related to – cancelling meetings last August?

Yes, yes. I think this was misunderstood last year. So, we have, unlike – China is a different business and unlike the rest of the world, we have a customer loyalty program, sometimes referred to as preferred customer, but it's a customer loyalty program. Think of a points program similar to an airline, and consumers can sign up for that program. They are not sales reps. They are outside the network where they can just buy a product either in the field as a way to track consumption in the field or directly from the company, we can see the transactions directly from the company. And as I said, 25% of our business in the second quarter came through that method of direct purchases in the companies from consumers and a way to further promote that customer loyalty program. We are not allowing people to sign up as sales reps in July, that's behind us by the way. It's in front of the second quarter, but behind at this point in time as that happened in July. We did the same thing in August. So really shouldn't impact the comparisons over sales leader numbers or Member numbers, but it's just the way to promote customer loyalty program.

Okay. And given that those two things sort of offset year-over-year, I mean, do you continue to see strong double-digit out of China? Do you think we'll see a continuation of the trends there?

Yeah, I think that's independent of what we're doing in July about not allowing sales reps to sign up. But I think we had a good first quarter in China. We had a good second quarter and we expect China to be a good market for us.

Great. And just one other quick one, your return rate, normally just discussed on an annual basis. I think you now have the ability to measure it on a quarterly basis. Do you have that number for the 2Q? Did it decline as you'd expect it would with the new compensation plan changes?

So, it was under 0.2% of sales, 0.2%, I think it was identical to where it was in Q1. I don't have Q2 of last year to know how it was year-over-year.

Okay. Thanks so much.

We do have a question from Scott Van Winkle with Canaccord.

Hi, everyone. Sorry, I dialed in a little bit late, so I apologize if I'm asking a question that's already been answered. But I was just looking at the average active sales leaders and the new distributors. And they kind of went different directions, new distributor growth really improved. Average actives, the growth was a little bit softer in Q2 than Q1. Again, I apologize if you talked about it, but can we kind of split the difference between the two?

Yeah. Hi, Scott. This is Des, and the good news, Scott, is nobody has asked the question, so no worries. So Scott, a couple of things, so first of all, obviously the average active sales leaders number is impacted partially by Venezuela. We show overall a 5% improvement. If you back out Venezuela from that number, the number would have been closer to 6.5%. And I think you heard John's comment in relation to Venezuela, significant decline in business there driven by very significant consecutive price increases arising from devaluation. So, if you look back at the 6.3%, 6.5% number, that's not materially different from what we've had in the past. And, again, it shows that as the fundamentals of our business continue to improve, the percentage of average active sales leaders increases. In terms of new member activity, I think two things to bear in mind. We've actually now had three consecutive quarters of increase in terms of the number of new members coming to Herbalife. Obviously, comparing Q2 2015 to Q2 2014, we have a decline. But as you know, Q2 2014 was our record quarter with both April and May being the two highest volume and, therefore, activity months of the year. So, we continue to see a strong improvement in new Members. And, most significantly, Scott, what we see is an improvement in terms of the percentage of new Members ordering because as you know, for us, that's really a key metric. It's not just about numbers, just as with sales leaders, just as with new Members, what we're really focused on is engagement. And so, to see the number of ordering new Members increase, we see that as a very significant trend and metric in our business today.

Yeah, let me put a number on that too. So, for new Members that ordered product in the quarter was up 5% over where it was a year ago, in absolute numbers.

I'm sorry, John, 5% growth of the number of new Members who had an order in the quarter versus a year ago?

Yes.

Great. And is that trend – I guess we exclude Venezuela from the calculation, is a trend of having a build in new distributors at a time maybe where the average active number is a little bit softer, is that a function of the new qualification expectations, the 12-month qualification program?

So, a little bit. Certainly, the number of new Members that order directly from the company is a direct result of the marketing plan changes because people are not allowed to buy in the field when they try to qualify to become a sales leader. So that does create more transactions directly with the company and that is an outcome. The other thing is with sales leaders. April and May were really difficult comps and the average active sales leader number improved a lot in June versus where it was in April and May.

Got you. And it looks like, I mean this is playing out pretty much as you thought. You put a lot of effort into the guidance, end of last year, beginning of this year with all the changes. Is that fair to say, John? And is there a certain metric that kind of gives you the most confidence and then the forecast you built up six months ago?

So you're right in that we rebuilt the models and we had to rebuild the models to incorporate changes in behavior from the new marketing plan changes. I think, really looking at new Member activity and new Member productivity and taking it down below the sales leader level was one of the key changes we made, we don't do it for every market, but we do it for the ones that are important to the overall guidance and that's been very helpful.

Great. Thank you.

And we do have a follow-up question from the line of Meredith Adler with Barclays.

The first is maybe I just missed this, but you said that you saw really good progress in three of the four key markets. What was the fourth market that you didn't see progress in?

So, the fourth market, Meredith, was Korea. And we did see some improvement, but not to the levels we saw in the U.S., Mexico and Brazil. And really one key reason for that is that as you know, in Korea, we actually have a slightly different marketing plan, and not only in Korea did we make the same changes as we made in the worldwide marketing plan, but in addition, we effectively introduced a new level in the Korea marketing plan, and again with the same goal, the goal of creating long-term growth and stability. So, the combination of those means greater impact in terms of assimilation. And anytime you got a high level of assimilation, then you actually have distraction in the market and time to adjust it. The good news by the way is that we're seeing the impact of that. I think you heard us reference this, but the percentage of cumulative sales leaders increased to 68% in Q2 2015, which was almost double that of what it was the prior year, and similarly, activity rates of new sales leaders, significant improvement. So positive trend in Korea, but the reality is, it's going to take longer than in the other markets and I think we're really going to see – the return to the growth that we've seen in the past in Korea will be a 2016 story rather than really 2015.

And then I have a sort of more theoretical question about when you see economic slowdown. I think you've talked about this before, but I'm wondering if you still feel the same way that we clearly are seeing an economic slowdown in many places. Do you continue to believe that that's going to boost your business? I've specifically gotten questions about China, but clearly Brazil has slowed. There's a lot of places that have slowed.

Yeah, Meredith, to be honest, we do not see a direct correlation. I know there's a prevailing view in the industry that a slower economy means an increase in sales. We've seen that go in both directions. So I have to say there's not a direct correlation.

Great.

It's market to market...

Varies from market to market, you mean?

Yeah.

Yes.

Okay. Thank you. Those are my questions.

Sure. You're welcome, Meredith.

And we do have a follow-up question from the line of Mike Swartz with SunTrust.

Hey, maybe John or Des can answer this. Just I was running between calls, but can you maybe give us a little more granularity around some of the cost efficiency measures that you – I think, you alluded to earlier and then how those should play out through the rest of the year?

Yes, John, I'll take that one. I think we have been pretty transparent that we've been on a – I'll call it, cost control, it's not so much cost cutting. It's just why we transition through these marketing plan changes. We want to look at discretionary spending and keep it as low as possible, but in areas that do not affect our Member base, things that they don't see or touch. So it's consultant, its professional fees, it's travel, it's really just being prudent in areas that are not critical right now, and we'll put them off until we get through this transition. So we'll continue to have that focus throughout the rest of the year.

Okay. Thank you.

And we have no further questions in queue. Michael, do you have any closing remarks.

Yes, John.

Yeah, let me just clarify one thing before I think, when we talk about China and the change in July of just bringing in loyal consumers, it doesn't – we don't expect that to impact the volume from that marketplace. So, I just wanted to clarify that before I pass this back to Michael.

You want to clarify anything else.

No. Thank you.

Just checking. So, I just want to – before we close the call here, while we close the call, say thank you for all of you for being on this afternoon with us. Obviously our shareholders are important to us. Our stakeholders, our shareholders and employees, of course our Members, our customers and all the folks who are aligned and associated with us through our brand, we're very proud of Herbalife. And as you can see we're on the move, we're confident, focused, invigorated. And, we're looking forward to reporting back to you on our next call our results for the third quarter. Thank you very much.