Good afternoon, and thank you for joining the Second Quarter 2018 Earnings Conference Call for Herbalife Nutrition Limited. On the call today is Rich Goudis, the company's CEO; John DeSimone, the company's Co-President and Chief Strategic Officer; Dr. John Agwunobi, the company's Co-President and Chief Health and Nutrition Officer; and Eric Monroe, the company's Director, Investor Relations. I would now like to turn the call over to Eric Monroe to read the company's Safe Harbor language.

Before we begin, as a reminder, during this conference call, comments may be made that includes 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 statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events except as required by law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, prepared in accordance with U.S. Generally Accepted Accounting Principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures assist management and investors in evaluating our performance and preparing period-to-period results of operations in a more meaningful and consistent manner as discussed in a greater detail in the supplemental schedules to our earnings release. Please refer to the Investor Relations section of our website, herbalife.com, for additional supplemental information and to find our press release for this quarter, which contains a reconciliation of these measures. Additionally, when management makes reference to volumes during this conference call, they are referring to volume points. I will now turn the call over to our CEO, Rich Goudis.

Good afternoon, everyone, and thank you for joining our call today. We have an amazing company. I've been part of team Herbalife for 14 years. Yet every day I'm reminded how special our company is. And for those investors who have been with us for a while and know us well, you also understand what a truly exceptional place this is. We are a company whose shared purpose of making the world healthier and happier inspires us, leads us, drives us and is embraced in advance by our community of like-minded people. Our commitment to product quality and consumer protection is leading our respective industries and raising the standards of companies in the nutrition and direct sales fields. And most importantly, we're having a real impact on the lives of those we touch. People are becoming healthier. They are becoming more active. They are losing weight and they're improving their lives because of the results we sell and the business opportunity we provide. Yes, it's indisputable that we have built a purpose and performance-driven company that is deeply grounded in our principles and one that has a strong foundation from which to grow. We had a strong second quarter and I could not be more proud of our distributor leaders and our employees who worked together to make this happen. As you've seen by now, our top line growth rates accelerated in Q2, reflecting the strong momentum in our business. John will talk about our financials in greater detail later on the call, but let me share with you some very positive, high-level financial steps. All six of our regions reported local currency net sales growth and five of our six regions experienced year-over-year volume point growth. And on the subject of volume points, Q2 was a record quarter for…

Thank you, Rich. Let me start by discussing the company's second quarter 2018 reported and adjusted results, which will also include key market highlights. I will then review our third quarter and full-year 2018 guidance and conclude by providing a brief update on our capital structure. Second quarter reported net sales of $1.3 billion represented an increase of 12% compared to the prior year. Volume point growth was very broad-based in the second quarter, including double-digit growth in four of our top five markets. As Rich mentioned, Q2 volume points of 1.5 billion was the highest volume point total in any quarter in the 38-year history of the company. We reported net income of $94.4 million or $0.62 per diluted share for the second quarter of 2018 compared to a reported net income of $137.6 million or $0.81 per diluted share for the second quarter 2017. Adjusted earnings per adjusted diluted share were $0.80 compared to $0.76 per share for the second quarter 2017. Note that all EPS values have been adjusted to reflect the stock split, which was affected in May of this year. The adjusted diluted EPS figures continue to exclude items we consider to be outside of normal company operations or we believe will be useful to investors when analyzing period-over-period comparisons of our results. Please refer to our second quarter 2018 earnings press release for additional details on these adjustments. Our Q2 adjusted diluted EPS of $0.80 was above the high end of our guidance range of $0.58 to $0.68. This EPS beat was primarily driven by higher-than-expected sales in the quarter. Reported gross margin for the second quarter of 81.7% increased approximately 80 basis points compared to the prior-year period. The increase was primarily driven by favorable impact of retail price increases and lower inventory…

Your first question comes from the line of Doug Lane with Lane Research.

Yeah. Hi. Good afternoon, everybody. I'd like to start, you talk about the strength in the volume points in the quarter, which is really impressive. I think the number that stood out for me was China, it looks like a record quarter for China as well. Yeah, it was up a lot and you have funny comparisons. But the absolute number in China was bigger than the first quarter of 2017 when you pulled volume ahead. So I think I'd love to hear more about what's going on with China and how it got back to such strong growth.

Yeah, Doug, it was in fact an all-time record in China. I think the growth rates are a little distorted because of the events of last year, right? So when we had the price increase in April of last year, it pulled a lot of volume into March, which really impacted both first and second quarter last year and the comparisons this year, right? So the growth rates are – obviously you've got to neutralize that a little bit. But the volume is still strong. I think there are a couple of broad-based initiatives that we've implemented. One is the future stars promotion that was our goal of trying to offer bedrock and economic opportunity for some of the newer service providers, that was one. Two is we launched the growth and investment program; program that was funded by the grants that came from the government. We received $105 million in grants over the last few years. We are now reinvesting that in different growth initiatives. Now we didn't invest a lot in the second quarter, a little over $3 million, I think, in the second quarter, but there's a lot more on the way. But I think it just creates some excitement in the fact that we have that in the works for us to trying to get in some deal flow. Who knows we'll get a deal done, but we're trying to provide some products in (00:29:31) small company, and it took us a little while to get into some deal flow. Hopefully, something will materialize over time there. But I think overall just the confidence is high from our distributors there. They went through quite a bit of a change last year when management changed out and whatnot. So I think it's just more stable.

And what about social selling there? I think there was some Internet or social selling that was going on that really didn't get a lot of traction and then you did other management changes, and I think a change in how you educated people in social selling. But where does that stand in China? Are you investing in apps and handheld applications and integrating the social media like you are in the U.S.?

Yeah. We're actually investing in, I think, it's called WeChatify, which incorporates all the different social media aspects from just a business simplification standpoint both from an ordering standpoint, from management into the customers and whatnot. And so that is something we hope to have done launch sometime this year. I don't want to say done, because those things are never done, but at least launched.

Okay. Thank you.

Your next question comes from the line of Tim Ramey with Pivotal Research Group.

Thanks so much and congratulations on an amazing quarter. John, I was somewhat confused about what you said on the $3.3 million spent in the 2Q relative to the China grants. Did you not match that by taking it out because you said that it would have had a $0.02 positive impact on EPS, which I assume was adjusted EPS.

Yeah. I'm sorry. It was adjusted EPS. So given that we're going to be spending this money over a period of time, it's going to be a frequent spend every quarter under the new guidelines on non-GAAP adjustments, we're not allowed (00:31:46) advice we're getting from our accounting experts to actually include it in our non-GAAP results. Yet, this is spending that we believe will not be part of our run rate. When the grants came in, it was income from which we excluded from performance. And when we spend that money, we should exclude it from performance. But we can't always do it on a non-GAAP adjustment on the press release. So sometimes we'll be able to; sometimes it'll be capital; sometimes it could be an acquisition. But to the extent that we spend money that's included in our operating results that you need to know is not going to recur, we're going to let you know in the way I just let you know now. We may even put it in the press release in the future, because you're going to need to know the number. And it's going to fall into different buckets.

Right. Okay. So if it's operating, it won't be excluded from adjusted, but it will be called out?

It will be called out so you can model appropriately, correct.

Perfect, perfect. Okay. I was intrigued by the disclosure in the press release that you're evaluating changing volume point metrics and how you're doing that. Is there anything you can say relative to that now or what would the goal be? What are you trying to solve for?

So in some of emerging markets where you're trying to reach different consumers and you want to have a different price point for your product, you want to make sure that the distributors don't have to find that many more consumers in order to qualify for the marketing plan so there could be an adjustment to volume points. And it's a test, it's not – there's nothing material at this point. We tested something in Brazil and we tested something in Mexico. I think those are the two markets. We called out the Mexico piece, which I think represented like a 160-basis-point impact to the Mexico volume point. But the concept is to match the economic opportunity with the amount of sales the distributor has to do in some marketplaces, and maybe break away a little bit from having it be globalized. So I actually think it's an opportunity for us. But it's a five-year journey and it's going to be test, test, test, test, test. And when we know more about the results of those tests, we'll certainly inform you. And we're doing it in conjunction with our (00:33:58) leaders in those markets by the way. This is a coordinated plan with our distributors.

Okay. And then, relative to the lower qualification standard in the U.S. that you adopted in the first quarter, are you able to disaggregate that or do any analytics on what impact that had on the really amazing result in the U.S.?

Look, I think there are a lot of things in the U.S. that help momentum. I think one of them was this new 2K qualification method. I don't have any direct analytics to say what it would have been without the 2K because you don't know what behavior would have been without the 2K. So I think we all believe that it was an idea that came from a meeting working with our distributors together. We know it resulted in tremendous moving up the marketing plan. We've had, I think, 44 new price team in the U.S. – this year we have more price team in the U.S. in the second quarter than we had in the last six quarters combined. So the results were great. I think it drove activity. And so it's really tough to just separate.

Terrific. Thank you.

Thanks, Tim.

Your next question comes from the line of Beth Kite with Citi.

Excellent. Hello, everyone. I was wondering, I guess, it's a little bit of an extension of Tim's question at the end about the U.S. market. If you could just help us to better understand the preferred members that look so strong in the quarter of north of 75,000 incremental preferred members. So just a whole set of questions around that. One, even going back to 2Q 2017, the retention rate on the folks that came in last year, are you projecting a level like this incrementally the next couple of quarters? So what kind of growth rate is embedded in the guidance we have for total company to think about the U.S. in that regard? And also is the company leading the effort of bringing the preferred members in? Or is this really just all distributor-driven? And then, I guess, my last question around that is, if you think about taking that to other markets, I would think because it's so strong right now in the U.S. that would be beneficial. So how do you think about taking that to other markets, what might still be kind of whole kit and caboodle on preferred members if you could?

Yeah. So, Beth, this is John. There were quite a bit of questions mixed in there, so I'll see if I can get them all. Let me start by saying obviously preferred member growth was strong. Number of new preferred members in the quarter was up, I think, 37% over the second quarter last year. That's not us. We're not out there, trying to find preferred members. That's distributors signing up preferred members. I think it's tied to our engagement level, which is really high. I think it's tied to them understanding the elements of the changes that we made now, right? So it just takes time to implement and understand all the different elements of the changes that took place a year ago. So that's increase, right? Last year – you're comparing to a quarter that was one month pre-implementation; two months, post-implementation. So I'm not sure it's a clean comparison like it will be next quarter. So that's one. It was strong, it's driven by our distributors. You asked about what it means for the future, our models and our forecast definitely put some emphasis on recent results, but we try not to overweight it. We want to make sure that the trends are there for the long term and so we feel good about the trends. That's another question that was one about, I think, expanding the program globally and preferred members, we're calling that segmentation. And we're actually active in working with our distributors to create segmentations globally, we've had a number of meetings including an all-day offsite with a number of top leaders just a month or six weeks ago. We're working with a number of leaders in different markets whether it'd be India or Brazil, some APAC markets, some EMEA markets to launch segmentation. I think it's going to be a journey. We want to make sure we do it right. We were forced into doing it in the U.S. and we had to do it quickly. I think we've learned from that. It might not be done identically. It might be unique elements locally for different discount structures and things like that. So there is still a long way to go, but I think there's a lot of demand for segmentations from our distributors. And we are trying to react to that demand.

Perfect. (00:38:49)

I think, look, we didn't talk about HN-connect, which is Salesforce, and obviously, that's something that is a long-term strategic opportunity for us, for which we've launched the beta in the U.S., we've got great reception from it at the (00:39:04) last week. We had over 5,000 people visit the breakouts. We're up to 6,500 people in our beta. And that's something that the rest of the world is going to look to take advantage of, and segmentation is important part of maximizing that tool. And I think it will be a competitive advantage for us over the long term.

Got it, got it. One more on the U.S. if I may, how is the pressure point, if you will, of personal consumption? If you'd even coin at that (00:39:34) trending at this point with the higher level of money we spend now coming out, I think, as of June 1, $235 a month, did you see across the quarter your distributors generally spending a higher amount towards that maximum? Is there still opportunity there? Where are we in the evolution of the personal consumption issue?

Yeah. Well, I'm not sure I'd take it as an issue. I think it was an opportunity, it's the way I may describe it which is something as people learn more about the operating parameters in the U.S., there's an opportunity. I don't know where we are right now. I think we opted a month-and-a-half ago or something, I don't remember exactly. And I just haven't followed it. It's not really that much on my radar screen right now, but I'll follow up with you.

Okay. Great. And then finally, it was super helpful when you talked about the gross margin expansion and the drivers of that. I guess, is there anything specific to think about in the second half associated to either gross margin expansion or contraction that you'd like us to think about in modeling? And then, also, in terms of how you think ex-China member payments, the cost came down year-over-year to the $27.7 million, (00:40:51) in the back half of the year, what are you – do you expect to have any incremental different cost and even incur in the first half of the year in any particular markets that are meaningful. Or I guess, just any drivers that might after the gross margin line be something to think about for operating margin in the second half?

Yeah. I think, first on gross margin, there are really two things. We talked about in the past how we have negative manufacturing variances hitting in Q1 and part of Q2 on what we did. We also actually had an FX benefit relative to margins in Q2, because the FX in cost to sales lags net sales. But net sales gets booked every month at whatever the currency is for that monthly average currency, where cost sales is basically getting booked at what the currency rates were five months ago. So there was a benefit there. So I don't expect a material movement in gross margins the rest of the year. I don't know all the details, but those things pretty close to offset each other. I expect it to hover here; maybe it'll drop a little bit, but nothing meaningful. With respect to SG&A, there is some timing of events. Events will be much higher in Q4 than they were last year because our largest event, which is our top distributor vacation in a meeting that we do before the vacation was in August last year, it's in November this year. So that's a swing. And it's usually, Q2 is not a big spend for events like Q3 and Q4. Obviously, we'll see some swings there. Those are things that come to mind.

Okay. Perfect. That's it from me then. Thanks very much.

Thanks, Beth.

We have a follow-up question from Tim Ramey with Pivotal Research Group.

I guess, I can't let you go without chatting about share repurchase. I assume it doesn't look like you bought any stock other than the Dutch auction in the quarter. And I assume you're somewhat shutdown due to the debt deal in the market right now. Is it a fair statement that you don't have anything active there, but could pending the debt deal?

Yeah. Those are all accurate statements. We don't have anything pending. I think we've been consistent that our next priority was to refinance the agreement, credit facility that we entered into last year, which had some restrictions coming in in August. And so we've been working on that. We launched. We've already had a couple of bank meetings. We hope to close that deal this month. As a reminder, until August 15, there was call protection on the first deal. So there is a big penalty for closing before then. So we're timing it to happen after that date, but hopefully this month. Again, no assurances, but that's our goal. And then, really, the decision at that point is what do we do with the convert that's due next year, do we plan to pay it off, do we refinance it and how does that play into a buyback program and it's something that we'll work on.

Okay. Thanks.

There are no further questions at this time. I'll now turn the call back over to Rich Goudis for closing remarks.

Thank you very much. Listen, the numbers speak for themselves. The pace of change in innovation is accelerating. I think you can hear that. And our team work in alignment with our distributors has never been stronger. We have a special company with a simple but bold purpose to make this world healthier and happier. We look forward to seeing all of you as many as possible at our Investor Day on October 31 in New York. Thank you.

This concludes today's second quarter 2018 earnings conference call for Herbalife Nutrition Limited. Thank you for your participation. You may now disconnect.