Good afternoon, and thank you for joining the Second Quarter 2016 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 for a complete discussion of risks associated with these forward-looking statements in our business. We do not undertake any obligation to update or release any revisions to any forward-looking statements or to report any future events or circumstances or to reflect the occurrence of unanticipated events except as required by law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, prepared in accordance with U.S. Generally Accepted Accounting Principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures assist management and investors in evaluating our performance and preparing period-to-period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release. Please refer to the Investor Relations section of our website, herbalife.com, to find our press release for this quarter, which contains a reconciliation of these measures. Additionally, when management makes reference to volumes during this conference call, they are referring to volume points. I'll now turn the call over to our Chairman and CEO, Michael Johnson.

Thank you, Alan, and thanks, everyone, for joining today. This quarter we sold more products than any quarter in Herbalife history. Worldwide volume points grew 9% compared to the second quarter last year with approximately 80% of our markets reporting an increase in volume points. And four of our six regions: EMEA, United States, Mexico, and China achieved record-high volume points. This is a fantastic performance by our members and employees, and it continues the great momentum we saw coming into 2016. As I'm sure you all remember, almost two years ago, we said that the marketing plan changes we committed to carry out would lead us to record volume and that's exactly what we are now experiencing. We are immensely proud of our members around the world who helped us deliver through their hard work and dedication to their customers. Today, our members are bringing a range of nutrition products to more customers than ever before. As a result of this performance, our reported net sales for the second quarter grew 3.4% to $1.2 billion compared to the same quarter last year. This is year-over-year net sales growth for a second consecutive quarter despite ongoing currency headwinds. Our focus on managing expenses allowed us to absorb the negative effect from currency swings and continue supporting volume growth, all the while keeping our gross margin essentially flat. We also recently announced our settlement with the U.S. Federal Trade Commission and the Illinois Attorney General, which included a payment of $203 million. As a result of these regulatory settlements on a reported basis, we reported second quarter net loss of $22.9 million or $0.28 per diluted share. This compares to a net income of $82.8 million or $0.97 per diluted share for the comparable quarter last year. However, our adjusted earnings…

Thank you, Michael. I will start today by reviewing the company's second quarter 2016 reported and adjusted results, including key market highlights. I will then discuss our third quarter and full-year 2016 guidance. Lastly, I will close with detailed comments regarding our recent settlement with the FTC. For the second quarter, worldwide volume points increased 9% compared to the second quarter 2015. Second quarter 2016 volume points of $1,484.3 million represents the highest quarterly results in the company's history, doubling the high end of our guidance range of 4.5% growth. Four of our six regions set quarterly volume record and approximately 80% of our markets experienced volume point growth in the quarter. Second quarter reported worldwide net sales of $1.2 billion increased 3.4% while local currency net sales grew 10% both compared to the prior year period. Reported EPS for the second quarter of a loss of $0.28 per diluted share includes the impact of the $203 million expense related to the recent regulatory settlement, and compares to the $0.97 earnings per diluted shares for the second quarter of 2015. Adjusted earnings per adjusted diluted share of $1.29 increased 4% compared to the $1.24 per diluted share reported for the second quarter of 2015 despite a negative impact of $0.31 from exchange rate headwinds. The adjusted EPS of $1.29 per share also exceeded the high end of our guidance of $1.20 per share. Moving on to our regional and market highlights, for the U.S., volume points of $338.5 million set a new record and increased 13.8% compared to the prior year quarter. The momentum in the U.S. continued from the first quarter as our members remained focused on building long-term sustainable businesses based on customer demand and daily product consumption. So at the end of my comments, I will discuss…

Thanks, John. So once again, as you all heard, this is a fantastic and historic quarter for Herbalife. Our momentum and performance reflects the strength of our distributors' businesses. And with the regulatory settlement behind us, we've never ever been more focused. So let's go now to Q&A.

Our first question is from the line of Mike Swartz with SunTrust.

Just I guess trying to get a sense in some of these changes to the business plan coming from the FTC settlement, and they were all just trying to boil it down and figure out what exactly this means, and I think John, in your remarks, you had said we could see a period similar to the one you rolled out to 12 months qualification or the first order limitation, or maybe we get a slight plateauing or a temporary plateauing in the business. So I guess just based on what you see today, I mean, is there any time horizon that we should be thinking of as to when we could see that?

Mike, this is Des. So the analogy here, Mike, is that just as you saw it with the enhancements to the marketing plans, whenever there's change of this nature, our members take the time to train, to adopt, to assimilate, to incorporate these changes into their business. So we started that whole process early. Obviously, as you would have heard Michael referenced, we began literally just a few days after the announcement with the beginning of training in Atlanta. So I think we're going to see that adoption, assimilation take place through the remainder of this year and obviously into early next year. But most important thing is that we don't see any long-term impacts in our business, because we engage with our distributor dealers, and we only move forward with the settlement once we had their input that we could not only do well but, in fact, thrive under the terms of this settlement.

And just a follow-up. In terms of the distributor base, I think you said you had some record attendance with some of your U.S. Extravaganzas. But you guys have typically had pretty good visibility into distributor engagement in volume trends. So I know this is only three weeks or a couple of weeks since the settlement. But is there anything you can point to within the U.S. business from an engagement or volume level standpoint to give us a little more comfort that this has been accepted, and we're starting to turn the page here?

Yeah. So, Mike, I think that's very evident already. We saw it in terms of our numbers that for the Atlanta Extravaganzas, we obviously had a very strong showing at Long Beach before the settlement, but we actually had an even stronger attendance than in Atlanta. Similarly, I think if you've been there, you would have seen the attitude of our distributor leaders is tremendous. They actually view many elements of this settlement being positive for the business. Some of them we've spoken about for some time, the segmentation between preferred members and actual business builders are what we're now going to be resuming calling distributors. They see the ability to actually have receipting tools, which will give them greater insights into customers, give some greater information regarding segmenting their customers, incremental sales opportunities. All these things are seen as positive. And so, obviously, as with any change with a period of adoption but overall, certainly the attitude of our members and their engagement has never been stronger (39:01).

Yeah. And Mike, if I can just add and you started off by saying recognizing, it's early, it's only been a few weeks. But there's been no change in the trends of starter kits that we've sold, so as an indication of engagement levels. So, again, early, but no signs of concern at this point.

Okay. And then one follow up, just in terms of the kind of self-consumption discussion that you had. I think you said there's some sort of threshold to whereby if a distributor goes over that they are or not compensated based on that volume. Can you give us a little more detail on what maybe that threshold is?

Yeah, sure. Mike, this is John. I'll do that. There's two types of threshold. So one is an individual distributor threshold where their purchases up to an allowable limit and for the first year, it's $200 can be rewarded. That's at the micro level. At the macro level, the earnings that they receive no more than one-third of it can come from that limit, purchases within that limit. So, the two concepts are one individual who is a business participant can buy and use as much product as they want, but only up to $200 is going to be rewardable and anybody who has a downline has to focus the appropriate amount of time on selling to customers as they do selling to internal consumption of the business participant.

Okay. Great. And then one more question if I may, just in terms of the – you outlined some of the costs associated with the program that you're rolling out. But I think you said $5 million to $10 million of that is ongoing costs. Is that capitalized or will that be expensed?

No, that will be expensed going forward.

That's all expensed. Okay. That's it for me. Thank you.

And let me also add by the way and this is not unimportant that – while internal consumption above the allowable limit isn't directly rewardable, the FTC and Herbalife recognizes that not all of our sales are going to fall within the limit, and not all of our sales are going to get receipted, and that's why there is the 80% rule. So, there is no allowable if you want to call it breakage within the order. So that, in effect, the upline rewards can still be paid out based on purchases.

Okay. Thank you.

Our next question is from the line of Tim Ramey with Pivotal Research Group.

Hi, Tim.

Good afternoon. Thanks and congratulations. So I've got several questions. I didn't note anything in the Q on any changes or processes underway on the credit agreement. Is there anything to say there, John, or is that just on the to-do list?

Well, if it's a process, I think it's important to note that big picture, capital structure, as you know and investors know, and cash management strategies are important part of our company's vision. The management team, along with the board, have been and will continue to develop and evaluate all possible options. And we'll make those decisions that we think is in the best interest of our shareholders long-term. And when and if there's something to announce, that'll be determined by management and board, and at the time, like our history in the past rolling out something.

Would you care to kind of restate what your goals would be for the capital structure, assuming that you have the covenants that would allow it? Mr. Icahn's statement was fairly aggressive in terms of leveraging the company it seems, doing acquisitions, perhaps. What's your comfort level now assuming that you have the credit agreement in place?

Yeah. It's a question I'm not sure this is the right time to answer. I think historically we have said we were willing to lever up to coverage ratio that's consistent with investment grade. That can mean different things for different companies; it doesn't mean we will be investment grade. That certainly hasn't changed...

And that's sort of 2 to 3 times, is that?

Yeah. It's 2.5 times to 3 times is kind of where the management team historically have said they were comfortable. There is a Board of Directors that's involved in this decision and whatever ultimately is decided will be in the best interest of our shareholders long-term. And if there's something to announce, we'll announce. So right now, I'm just giving you my opinion that's consistent with the historical opinion we've had.

And quick scan of your 100-plus page Q, it looks like you changed the language relative to any SEC investigation. I think it's sort of in the past tense now. Is there a comment specific to that?

No, I don't think we changed much in that language, Tim. I think what we removed or changed language relative to the FTC and the Illinois AG and that's really it; no other changes were made. We're a big company. We get questions and inquiries from time-to-time like all big companies do, and if there's anything material to disclose, we'll disclose it.

Okay. And Des, I wonder if you've given thought to what the preferred customer cost of entry will be? I assume that it would be in the company's best interest to make that a very low bar for someone to become a preferred customer de novo. Is there anything you can shed light on there?

Yeah. So, Tim, as you can imagine, it's certainly a subject of active discussion at the moment. But at this stage, we've no final determinations.

Okay. And, John, as you went through those four buckets of sales, I'm assuming that nutrition clubs basically fall into bucket four. What percentage of sales, if you can say, in the U.S. now run through nutrition clubs?

So, first, you are correct that nutrition club transactions in the field will be part of that fourth bucket. We are creating a tool for which nutrition club operators can track their members' entry into the club and consumption based on what they sell to those members. That tool, which we've used in different respects in China, so it's got some testing already behind it, actually automatically integrates into our system. And so there's really no submission needed as long as the tool is used; it'll be automatically integrated. As far as what percent of our sales are from those member fees is I think is what you're talking about, it's more than just take-home sales out of the nutrition clubs. And just to be clear, the study that was done – and it's a couple of years old now, that was done by a third party that we engaged suggested I think it was 16% of our sales were done through that mechanism.

Got it. Okay. And on the cost to implement, I think you said $20 million to $30 million of operating cost. Is that sort of one-timey or – I missed part of what you said.

Yes. That's what I said. There were one-time costs to get this up, and then there's ongoing operational costs. And what you noted were the one-time costs, the operational costs to keep this functioning year-to-year is $5 million to $10 million. And let me go back – I think maybe there's an important additional point to your last question, which is how much sales go through clubs? I think one of the benefits of what we're going to implement is a lot more visibility into the transactions that take place in the field that'll give us the actual retail profit, how much of our sales go through various mechanisms, various channels, a lot more data for us to be more effective with consumers and for our distributors to be more effective with consumers.

And it would be great to have that as investors as well, if we could?

And investors, and anybody else who wants to know more about our company.

Great. Hey, thanks so much.

Our next question is from the line of Phil Terpolilli with Wedbush.

Thanks for taking the questions.

You're welcome.

Just a couple of things, sort of from a timing perspective, can you just walk us through some of those incremental changes? You mentioned a few things earlier, but I think a couple of times, I heard 4Q and then early 2017 for some others, so just walk through sort of what we should see from the FTC changes and kind of when with the cadence?

Yeah. So the objective that we have is to make sure the segmentation is in place in the fourth quarter and that the receipting tool is in place in the fourth quarter, so we can start getting results in parallel, the compensation system for a few months, because the compensation programming is what takes the most time. And that gives us some runway to see how people in the field behave to know where there needs to be more assimilation or how the tools are being adapted or how we can make the tools more effective before this goes live in May.

All right. Okay. That's helpful. And I guess sort of from a bigger picture perspective, what kind of gives you confidence that you can implement these changes within the timeframe allotted? And I guess how smooth do you sort of expect this to be based on some things you've done in the past?

Yeah, Phil. This is Des. So we're very confident about this, Phil, for a number of reasons. First of all, as you know, we consulted with some of our top leaders before we moved forward, and we moved forward having had their input regarding the likely business impact. And so we were absolutely confident therefore that we could thrive under the proposed settlement terms . I guess the second thing is that after years of studies, and our own extensive data analysis, we'll have to be confident that our business is probably based on a foundation of daily consumption and that we've had millions of satisfied customers out there. And I think the third element is, it's just the advancement in terms of mobile technology and the proliferation of smartphones among our distributor base. And what that means is that, it is not practical for us to provide receiving tools to enable our distributors to effectively track retail sales and upload that data seamlessly to it. So really, when you combine the consultation with our distributor dealers, our consumer base business, access to technology, and frankly, our internal resource of over 1,000 technology employees that we have in shared services centers around the world. The combination of all those factors just give us complete confidence in our ability to successfully implement the agreement.

Got it. And then, just last thing for me. When you look back kind of pre-FTC, you guys had a dividend. Any sort of discussion with the board you had about bringing that back or potentially re-implementing the dividend policy? Thanks.

Yes. It's John, I'll take that. I'll just – it kind of dovetails into Tim's question about capital structure and cash management. We're just not ready to make a comment yet. I do want to point out that everything is on the table. And like I said, when the board feels the timing is right, we'll – I'm sure, make exposure.

Your next question is from the line of Ethan Devine with Indus Capital.

Follow-up on that line of questioning, but maybe more just philosophically and ongoing as opposed to talking about restructuring of balance sheet. So, let's say, the company is going to do something in the neighborhood of $500 million of free cash this year. Historically, the company has returned 100% of free cash to shareholders since IPO. Is there any reason for us to think, going forward, that would be different? And then, philosophically, how do you think about buybacks versus dividend?

Yeah. Great question. So, I think you're right on historical practice. Just some data points that I think put it in proper context. But since we instituted the buyback and the dividend in 2007, we've repurchased $3.1 billion in stock and a dividend at about $600 million to our shareholders. So, it's heavily weighted towards buybacks. Our approach had always been as a growth company that buying back stock below the intrinsic value of the company was the best way to return value to those shareholders that stayed with us. We still continue to think we're a growth company. We've got some things to work out. We have a bank deal that's due in March. That bank deal is not friendly to buyback. So we're not ready to discuss what our future options are. Once we clear up some of the restrictions in the current debt deal, we'll discuss (53:21) when we're ready, we'll discuss it. But in the meantime, I think it's safe to say that as long as we're a growth company, we will, in all likelihood, overweigh the returns to buyback versus dividends.

And do you have a framework for intrinsic value?

So I have a framework for intrinsic value. I have a few frameworks we use to kind of triangulate it. We do a five-year plan every year. Over that five-year plan, we come up – we try to be conservative. We come up with what we think the future value of the company is. We discount it. We compare that to where the stock is trading at, and that is one way to compare what we think is an undervalued stock. In other ways, as we look at multiples versus the group, multiple versus – and when I say the group, the groups are consumer products groups, direct sellers, but again, full of other different metrics we look at to determine if we believe our stock is undervalued. And so, those are the things that are part of the consideration. Cash management is also part of it, right. When you get to do, we have a bank deal currently that's due next March. We have a bond deal due in 2019. So there is other considerations too. But relative to intrinsic value, it's probably not much different than the text book look at intrinsic value.

Understood. Okay. Thanks very much.

Our next question is from the line of Mark Fleischhauer with Owl Creek Asset Management.

Hi, guys. Congrats on the quarter. Most of my questions have been taken, but maybe just given the strength that we saw in volume points this quarter and what's guided through the back half of the this year, could you just give a little bit more color, Des, as to what's driving this? Are we just seeing the anniversary of some of the business model changes? Are we seeing improved daily consumption? I mean, just any color as to what's driving this reacceleration of growth and how we can we think about sustainable organic growth on a volume basis going forward?

Sure, Mark. So, look, essentially, the picture that we painted for you two years ago has come to fruition, right. So what we said, well, if we were going to go through a period of transition, as the members adopted and incorporated the new marketing plan and enhancements into their organizations, and that once we came through that, that we'd actually see a return to stable, combined with improved metrics. So that's sort of one key factor. The second thing is that obviously what you is a reflection of growing consumer demand for our products. Herbalife, as you know, is number one in terms of meal replacement category, and that's reflected in terms of the sales that you see today. I think the third factor would be distributor engagements, right. We have – following the successful adoption of the marketing plan changes, our distributors are feeling the confidence that comes with that. That translates to increased engagement, to increased activity, and you can see that reflected in terms of number of new numbers coming to the business, attendance to events, and so on. And I think the last thing I would say is that, as always, our members are hugely entrepreneurial at embracing new ways of bringing our products to market. So we have different programs that are in effect out there, that are driving increased level of customer-focused activity, an ambassador programming you've heard of, which is focused on creating more stable customers and introducing them to the business. And then, combined with that, we have an active member program that has been very successful in terms of encouraging new members to focus on creating a solid, stable base of customers. And then, you couple all of those with this sort of overall megatrends in the world, obesity growing and aging population, rising healthcare costs, rising demand for entrepreneurship. So you put all that together and that's what's reflected in these record second quarter numbers.

Great. Yeah and I echo the previous thought. So, we look forward to you guys getting back in the market and buying your own stock again, because I think it's your reaction post all of this news flow has been fairly muted. So, thanks. Good work.

Thanks, Mike.

And we do have a follow-up question from the line of Tim Ramey with Pivotal Research Group.

Follow-on on Ethan's question. Do you believe your stock is undervalued right now, John?

So unbiased, but yes, I do.

Okay.

What a surprise question.

Look, maybe I shouldn't answered it off (58:05). I think you guys are experts at this, you in the Wall Street and it's better off if you determine that, but ....

We'll work on it. And just another one on China. You mentioned the tough comp and that's true. But as I look back on the sequence from 2Q to 3Q last year, volume points took more of a sequential decline than sales did. And I don't remember what that was about at that time. Your guidance for the 3Q is what I would term muted. What are you thinking about China on a sequential basis, 3Q versus 2Q this year?

Sequential base, so on top of my head, if I think of comparisons to last year which is more than what comes to mind in sequential comparison.

Okay. That's fine.

China has some seasonality. Look, I think China is getting into – is getting to be more mature. The numbers are good and the growth rates are going to be more in line with growth rates you're seeing in other markets and not the kind of growth rates we've seen over the last couple of years. And it's just – it's narrower than that (59:25) as the numbers get big.

Yeah. Okay. And then, Russia was remarkably strong. But I assume you've had a lot of drag from FX on the ruble there. Is that a fair statement?

Well, that is a fair statement, but it's not the driver. So, what happened in Russia is, we had a price increase of March of 2015, so last year, and that pulled volume into Q1 last year from Russia. So, Q2 suffered from that last year and made the comparison easier this year in Russia.

Got it. Okay. Thank you.

And that's all the questions we have in the queue at this time.

Well, this is Mike and I just want to thank you all very much for being on the call today, and we are obviously very optimistic about the future, and some of the good points that have come out of all this journey, and it's been a journey through the last few years here in dealing with our government, in dealing with all the issues that are – that they have raised and that we have accomplished and working together very, very closely with our distributor leadership. And that's, I think, the key to our future here is that we've got a huge customer base. We have a very inspired, motivated distributor base. We have an energized management team and employee base in the company, and the need for our products has never been greater. Last year, we sold the equivalent canisters of about 300 million shakes in the United States. While that number sounds big, 300 million shakes, we think we should be doing way more than that. Way, way, way more than that. And so, all of our content, people are behind enhancing that shake line, all of our distribution team are behind, building a better opportunity for not only the business opportunity members, but for customer members and preferred members of Herbalife. So, we're looking forward to a great future .Thanks for being with us, and we'll report back next quarter. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.