Good afternoon, and thank you for joining the Third 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 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 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 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. Thank you for joining our call today. I believe there's never been a better time to be part of Herbalife Nutrition. Our company's leadership, distributors and employees are all working together to execute against our core growth strategies, and as a result, as you read in our press releases today, our strong, positive momentum continued in the third quarter. We're looking forward to our Investor Day tomorrow where we will share with you some of our key growth strategies that we believe will continue to create shareholder value. But for now, let's get right into our third quarter results. This quarter, in terms of volume points, it was our largest third quarter in the company's history, with 15% year-over-year growth, and the second largest quarter overall following the record that was set in the second quarter this year. This is evidence that our strategies for growth, cultivating an innovation culture, accelerating product launches, leveraging technology and strengthening our distributor difference, are delivering results. In addition to our strong operating results in the quarter, we also continue to focus on our capital structure as a means to increase value to shareholders. For example, in August, we closed two debt deals, totaling $1.65 billion consisting of a $1.25 billion credit facility and a $400 million senior note. And today, we announced a new $1.5 billion buyback authorization to be completed over the next five years, providing us the opportunity to continue our buyback program which has so far resulted in over $4.5 billion of capital being returned to shareholders since 2007. John will review financials in more detail along with our updated guidance which now includes the full year 2019 in just a few minutes. At Investor Day tomorrow, we'll share several of our growth strategies with you. One…

Thank you, Rich. Let me start by discussing the company's third quarter 2018 reported and adjusted results, which will also include key market highlights. I will then review our fourth quarter and full year 2018 guidance, as well as our initial full year 2019 guidance and conclude by providing a brief update on our capital structure and the recently approved buyback authorization. Third quarter reported net sales of $1.2 billion represented an increase of 15% compared to the prior year. Q3 volume points of 1.5 billion grew 15% and benefited by approximately 70 basis points from a number of tests we've been implementing this year related to product volume point values. The net growth in volume points in Q3 was the largest in a single quarter since 2012 and the second highest volume point quarter in total in the company's history. The volume point growth was again very broad-based including double-digit growth in four of our top five markets for the second quarter in a row. We reported net income of $71.2 million or $0.49 per diluted share for the third quarter of 2018 compared to a reported net income of $54.5 million or $0.33 per diluted share for the third quarter 2017. Adjusted earnings per adjusted diluted share were $0.74 compared to $0.41 per share for the third quarter last year. Note that our results include expenses related to the China Growth and Impact Investment Program of $4.4 million or $0.02 per share. These expenses were not included in our guidance for the quarter and are not included in our future guidance. However, we will continue to identify them so that you can model them appropriately. As a reminder, these costs are being funded by our China Growth and Impact Investment Program, which was built by grants from the…

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

Hi. Thank you, everybody.

Hi, Doug.

Good evening. Starting with the fourth quarter outlook – or the full year outlook, the increase in volume points, is that just basically flowing through the third quarter upside and your fourth quarter outlook of 8% to 12% is largely unchanged?

That's slightly up from what was implied in the prior quarter guidance. And so if you do the math, I don't know if we have time yet, but you'll see it's up a little bit.

Okay. Good. And then the EPS number, I've done some quick math as obviously there's a lot of numbers here, but it looks like the $0.50 to $0.60 adjusted EPS isn't too far off from what was implied before, is that about right, even with... (00:21:03)

Yes, that's correct. So we've got – we have slightly higher volume, has rolled in, but we also have more currency headwind than what was expected the last time we spoke. Obviously, the dollar has strengthened. We have – we talked a lot historically about our – the impact the dollar can have on our results both from a translation and transaction standpoint. So we have a headwind from currency and slight headwind from tax rate.

Right, right. I was going to ask about that because your tax rate went up a little bit from the previous outlook, what changed there?

Just country mix.

Okay. One thing that stuck out in the numbers was the gross margins. You mentioned they were up 82.5%, that's really looking at the last few years, the biggest quarter that I can see from a gross margin standpoint. And again, China gross margins continue to be improving and the highest that I've seen there for a while. Is this a new sustainable level or is there just something going on near term that has had them pop and we should really look for them to go back to kind of an 80% range going forward?

Well, there's an opportunity above 80%, but I do think there are some unusual things this quarter. This quarter is unusually high and we talked a little bit about this on the last quarter's earnings call that the gross margin is a timing difference between currency. When currency strengthens, the net sales gets translated at the current month's exchange rate which we know is worse than the exchange rate six months ago. But inventory gets translated at the rate the month the inventory was made. And think of five months ago maybe is when the inventory was translated. So you get actually a benefit sequentially from – in the short term from a strengthening dollar.

Right. But in your prepared remarks, I think you cited retail price increases and the benefit of self-manufacturing and that there's actually a slight negative impact from currency. So, I'm just wondering that with currency again moving against you and with the anniversarying of the retail price increase coming up, is that going to drive any kind of meaningful change in gross margins back the other way?

I said there'll be a little bit the other way, so the comment on the call was ex Venezuela. Okay.

All right. Okay. Okay.

So from currency standpoint. So – but, like I said, I think there's some opportunity above the historical rate of 80%. One of the things, if you go back over time, we have had meaningful strengthening of the dollar. And I'm not just talking in six months, (00:23:36) go back six years.

Right.

And during that timeframe, we did not take as much price increase to compensate for the lost value to the company from the currency because we take price increases with inflation. But over time, inflation in local markets many times lags the local currency relationship to the dollar. It's not one-to-one, but that will allow future price increases and a catch-up in margins. So, we do anticipate higher than 80%, given country mix issues, there's always risk, but higher than 80% margins going forward. (00:24:11) below the 82.5% we had this quarter.

Right. Your point being you still have room for additional price increases to catch up with?

Correct.

Okay. I got it. And last, I don't want to overlook the fact that the top line numbers were very impressive and I'm sure you'll talk about that a lot and we'll talk about that a lot – your business a lot tomorrow. So, the only other thing I saw that I had a question about was in your adjusted EPS numbers, you included the anti-dilution from the capped calls, and I just wanted to know what the rationale was there because obviously that's going to increase the comparison for next year, if that's the new way you're going to look at adjusted EPS.

So, when you're saying we include – so from a reported standpoint, we are forced to include the anti-dilution from the converts, okay. So, what we do is give you an adjusted number that's also has an adjusted share base. So you can assume what happens next year when those capped calls actually deliver the shares to us.

Got it.

So, you got to use the adjusted number because I think it's like 3.5 million shares.

3.4 million.

3.4 million shares have built into the share base that you need to exclude for adjusted purposes because they actually will be dilutive to it (00:25:23) next year. But the accounting actually looks at them as two different transactions, there's the dilutive and the anti-dilutive. The dilutive, we have to include, the anti-dilutive we can't. So, we give it to you on an adjusted basis.

Okay. Thanks for clarifying that. And I'll go ahead and pass it on. Thanks, guys.

Thanks, Doug.

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

Good evening. Thank you so much. Couple of clarifications, please. There were some – I think you mentioned something like 70 basis points of volume growth coming from test markets and you've kind of went through that quickly. I wasn't sure that I really understood what that related to.

Yeah. Sure, Tim. I think we've talked in the past about the relationship of volume point to net sales. And in certain markets, we are testing changing the volume point value for different reasons. At the end of the day, we use volume points for qualification levels. And in different markets for different products, we want to test the ability to change those qualification levels to ultimately make it easier for certain distributors to qualify to kind of match the socio-economic climate in various markets. Or in the U.S., for example, we launched a new bar. And in relationship in that new bar, volume point to net sales, it was different than the older bar, so we adjusted the older bar. So, the key point is there is no relationship – there's no financial – direct financial relationship for volume points, but because we report volume points, whenever we make a test change, we will be transparent with you so that you can understand what it is and normalize for it, but we are running different tests in different markets globally.

Got it. I'm sorry, I was thinking test products and this is your different approach to volume points, I understand.

Yeah, yeah. These are not test products, right. These are testing different – some changes with volume point values. (00:27:24)

Understood. In the future star program in China, can you talk at all about what that looks like on the ground, how – I mean, obviously, the growth is terrific in China, but what are the things we should be looking for there?

Well, I mean, the future star promotion is intended to give some economics to newer distributors in China. I think it's something that the model was likely missing earlier. We hope that it can be permanent. We don't know, there's always unintended consequences. So we are testing on a promotional basis does the future star promotion drive engagement and not just engagement in the markets we're in, but other Tier 2 and Tier 3 markets where we're not that strong today. And so we're looking at it, we'll follow it. Hopefully, at some point in time, we make the future stars promotion either permanent or some version of it permanent.

And relative to CapEx, I know your cash flow and EBITDA margins were incredible this quarter. It looks like you're pushing some CapEx out, lower this year, higher next year. Is there anything in particular you would point to in terms of why the changing in timing?

Just one of the key areas of investments for us in the capital side is a front-end distributor-oriented technology. And it wasn't a plan timing difference, it just turned out to be a resource timing difference, not capital resource, but human resource. And so, some of that got moved into next year. And we'll talk a little bit about what that technology is. Actually, we'll talk in-depth about what that technology is tomorrow.

I assume this is the HN-connect program?

Yeah. HN-connect is a big component of it, which we will demo tomorrow so you can see how it works. But it's not the only part of our distributor-facing technology investment. But it is (00:29:37).

Okay.

Yeah.

Thanks, John.

It's a POS 2. And we're also investing in the POS 2 for Nutrition Clubs. We had version 1 launch in the U.S. and now we're going to upgrade to a version 2, and so that's part of the technology investment. And again, you'll hear more about that tomorrow.

Perfect. Thanks.

Thanks, Tim.

Our next question comes from the line of Akshay Jagdale with Jefferies.

Hey, thanks for taking the question. Congrats on a strong quarter. I wanted to ask about China first – China and India actually. So those are two geographies where you have some really solid growth right now. But the economies there are sputtering in many different ways. So, can you talk about the momentum there and so why you think they're sustainable even in light of all the economic sort of headlines that we hear from there?

Sure. So, let me address the sustainability part first. So growth in our industry could be spiky bin (00:30:45) especially in some of the emerging markets. And so India had growth of 42% this quarter, that's not the sustainable rate. We think there's lots of opportunity in India. This quarter, we launched some new local flavors, we launched a bunch of new access points that helped drive engagement that really spiked things up this quarter. So I don't want you think third quarter is the sustainable rate, but we think there's tons of opportunity in India. And then with China, we've got lots of momentum and good engagement in China. I think future stars is one of the reasons for it. I don't expect that 20% is also sustainable, but I think long term there's big opportunities in China, again, just to base the way (00:31:31) direct selling works, and if you follow direct selling (00:31:33) that it has some peaks and valleys and spikes in this (00:31:36), but the trend over the long term we expect to be really positive in both of those big emerging markets for us.

Got it. And then just one housekeeping item on interest expense. What are you assuming specifically in your guidance for interest expense next year? I'm trying to get a sense for what kind of EBIT you're expecting in your guidance next year? So just wondering what the interest expense number is.

Yes. So let me just kind of give you some of the core assumptions for debt next year. So, we have $675 million convert that's due in August. Our forecast – our guidance, I should say, assumes that we just paid that off. Now, at the same time, we – our board authorized a $1.5 billion buyback. If we decide to buy back stock and refinance the $675 million, that should be upside, assuming that we buy back stock and it's accretive. But right now, you can just take the $675 million and assume it gets paid out in August and that interest will go away in August. And that's the way the model works, and so there'll be a little less interest next year than this year I think is the way it's been profiled out at this point.

Got it. And then just related to that somewhat, so the FX impact obviously is pretty significant next year. I'm just trying to get a sense for, one, the visibility that you have into that number and, two, if any offsets that you have modeled in that regard, right. So, I mean, are you assuming some tight (00:33:20) actions or are there any other cost savings actions that you're taking that might offset that that are already included in your guidance on FX? Or are you just simply flowing it through right now and you're going to work to offset some of it, and if you do, there'll be upside?

So, just by way history for your benefit, the way that we forecast FX is we use the average rate for the two weeks post quarter-end, so that'd be the first two weeks of September and we – excuse me, (00:33:56) mid-October, and we roll that into on our system for next year. So, we – from a visibility standpoint, we're not making any prediction on currency, right. We're using the average rate for the two weeks after the quarter ended. If those two – if those rates are accurate, we got great visibility, right, the system calculates it pretty accurately. And so that $0.25 impact year-over-year is real based on the rates as of a couple of weeks ago. As far as anything that we do to offset it, we have not implemented any particular strategy. We have not changed our pricing approach to next year. Also by way of history, we don't price based off currency. We price based off inflation and what the consumer is seeing locally on similar products. So I think pricing off of currency is a long-term mistake and creates a lot of volatility with our consumer.

Got it. And just one last one maybe, don't want to steal any thunder from tomorrow. But you've been – I think you're one of the few consumer companies that actually has access to direct consumer level data and a significant amount of it. What are some of the higher level learnings? I mean, when I thought about it, I felt like the biggest impact on your model would be sort of efficiency for sales leader, right. So, the number of, I guess, volume points that go through a particular sales leader over time is where I think you could leverage technology the best, right? But is that a good way to think about it longer term or, I mean, what are some of the high-level learnings from the technology and the data that you're gathering?

Yeah. So, I think you're pretty close to on track as to what the goal is. It's productivity. It's productivity and scalability and a lot of other different elements that we'll talk about tomorrow at Investor Day. But that productivity ends up being productivity per customer, that's the real way to look at it. Now, we don't have visibility in the customers globally. We've got much more visibility into the U.S. And we're working on the technology to improve that productivity. It's something – we call it HN-connect, you know it is Salesforce. (00:36:08) It's in its beta form. I think I want to say probably 7,000 users. We haven't launched it formally to everybody in the U.S., but it's been scaling up with the objective of, when we launch it to everybody, we know it works well, right. We don't want to – I think the worst thing we can do with this new tool is drive trial to that tool until we know it functions the way it needs to function. So we're scaling up, we started with 200 distributors, then we went up to I think 1,000 or 2,000, and now we're at 7,000. And then early next year or late this year, we'll go to the whole market, and that will give us a lot more information. But that is a huge opportunity for the future for which we will discuss tomorrow.

And one last one. As it relates to FX, more strategically, given the volatility and sort of the strengthening of the dollar over a longer period of time that we've seen, have you thought about changing the way you think about pricing? Is that something that you might change going forward, where you'll be pricing more in line with FX moves as opposed to waiting for sort of the inflation to catch up?

So I think that would be a big mistake for a lot reasons, okay. First of all, currency can be volatile, all right. So the last thing we want to do is have pricing tat's volatile and have currency move meaningfully in one way, take a price increase and then move meaningfully on (00:37:33). Second is what we don't want is for the consumer to see something happening different with the Herbalife product pricing than what it's seen in its local marketplace. I think that's just going to drive that behavior and be really volatile for the consumer, and that's not something we want to do. So, we're going to drive – our strategy has been and right now will continue to be based on inflation. And the only way to handle currency is either moving costs around to create some more natural hedges, and we have some opportunity there, we've created some shared service centers in some of the markets where we have high sales to create some natural hedges. Manufacturing is mostly in the U.S. There's limited opportunity to move that. So – and we create some hedges to kind of smooth that out over time.

Perfect. Thank you. I'll pass it on.

Thank you.

Our next question comes from the line of Mike Swartz with SunTrust.

Hi, Mike.

Hey. Good evening. How are you?

I'm good. Thank you.

Hey, John, just wanted to touch on Asia Pacific in the quarter, that was the one region that really stood out from a volume perspective. And I think in your prepared remarks, you mentioned, obviously, India had nice growth this quarter, but I think you also as an aside mentioned I think it was Thailand and Malaysia where you had some maybe near-term items that were impacting that. Could you just go through what exactly that was and maybe how much of an impact that had?

Yeah. I can tell you what the issues are, how much of an impact, I don't know off the top of my ahead, but I was talking about Vietnam and Malaysia. So, Vietnam has a new set of regulations going in that – for direct sellers that require – I want to say it's like a whole day of in-person training for people who sign off, and that goes into effect I think early next year. And so in advance of that, a lot of people are signing up now, so they're signing up in advance of that change. So that's an industry change in Vietnam. And then in Malaysia, it's a tax change, and so basically it's economics that are driving some advanced purchasing in Malaysia.

Okay. And then also on the – I think you mentioned a shift in timing of a distributor event from the third quarter to the fourth quarter. I guess, one, was that embedded when you gave third quarter guidance in July? And then, two, how much of a shift was that?

That was embedded in guidance, that (00:39:59) shift is a shift comparing 2017 to 2018. So, we have a very large event that last year was in August. This year it's in – it's actually next week, and so it's into Q4 and it's a meaningful number. I don't know the exact number, but it's in the millions.

Okay, okay. Thank you. And then, just finally on the input cost raw material front, anything to think about there? I know there's been some talk that soybean prices are going higher and you obviously have exposure to that. I mean, any way to look at what that could mean as we think about 2019 and beyond?

No, we haven't seen that, at least with the soys (00:40:48) that we buy, we have not seen any meaningful movement in price.

Okay. Thanks. That's all for me.

Thanks, Mike.

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

Wonderful. Hello. If I may, I'm just going to stick on Asia Pacific just with one more quick question, and it's around Indonesia, which also is another country that had great performance in the quarter. Given some of the weather events of sort of the end of the third quarter and start of the fourth, what kind of level of growth are you looking for? Are you concerned about that country kind of like Mexico a year ago when it sustained earthquakes?

Yes, so we – so definitely looking for less growth in Indonesia this quarter than last quarter. So, yeah, it'll have an impact. It's not uncommon when a major natural disaster happens in a country that can impact us in the short term. I think it doesn't change our long-term perspective on the business, but certainly, it will have an impact in Q4.

Okay. Very good. And then switching over to the segments, I noticed that the – separate from the geographic, but the energy sports and fitness had pretty strong year-over-year growth stronger than the company. So, I was wondering if there was particular innovation, was it the Achieve bar we saw in the U.S., for instance, that launched here in the third quarter? Were there just sort of organic underlying drivers from existing product? And/or was it the bar issue that you talked about in your prepared remarks? Not just you, but I think you said something about like a shift in the way the bars were calculated?

Well, the bars that were calculated were not sports bars that were calculated. It was sports bars launched and that relationship between volume points and net sales, therefore, we changed for the non-sports bars also to match that relationship. So, it wasn't sports. But we did launch some bars and that helped. But I think most importantly is the sports nutrition category offers us a lot of opportunity. I think it's something where our brand plays where, we build a lot of credibility, and there's a portfolio gap for which we can expand, and we're going to talk about that tomorrow.

Okay. Perfect. We'll wait for tomorrow. My next one might be one for tomorrow as well. I was wondering if you could give us any more context around the Iced Coffee launch in the U.S. just in terms of how it – I know it's just one month in and not even a full month probably in certain markets here in the U.S., but how did it perform versus expectations? Are you marketing that product differently than other launches? Are you spending different investment dollars to support that launch?

So, we're not spending anything incremental above any other launch that we do. We're launching it the same way. I do think it's outperforming our expectations, but it's early. Look, I don't want to set expectations based on how things sell in week one or month one. Anytime you launch a new product, especially something like coffee, that's a new category, it's easy to drive trial. I think what's important is the repeat business. So, I don't want to – by the way, we're super confident in the product, I'm not trying to set low expectations, I'm just saying it's too early for us to judge, it's too early certainly for you to judge on what that can drive.

Okay. Got it. Fair enough. And then lastly on the preferred member concept, that having been deployed here in the U.S. now over a year ago, are you at this point able to share any other markets from the fourth quarter or in 2019? I think when I was with you in Paris, you spoke about Italy adopting preferred members. Can you just talk to us about if at that market, if any other markets, in the kind of six to next 12-month timeframe, are going to adopt preferred members?

Yeah, sure. So, Brazil – and based on – it's based on demand from our distributors in Brazil, they want to launch it. So, we're doing the program now, it (00:44:53) will be early next year. And as you know, Brazil has been one of the weaker points for us as a company, and I think it could be a catalyst. I think it – and most importantly, it came in as a request from our distributors to launch this. So I think we're excited about it. I don't know exactly, it might be March or April next year (00:45:14) beyond, but we're excited about it.

All right. That's it for me. We'll see you tomorrow.

Thanks, Beth. (00:45:20)

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

Hey, Tim.

Hey. Thanks. Just wanted to go a little bit deeper on the Formula 1 Select. I think I heard you say that was just launched in Australia, is that right? And if so, how quickly can that roll to rest of the world? Do you have a capability to manufacture it here in the U.S.? I assume it's not particularly a limiting factor, but love to hear a little more.

Yeah. Tim, this is Rich. So, actually, the Select line is our premium line really going after the wellness consumer, a more discerning consumer as we talked about in the prepared remarks. We started with the launch actually early this year with a version of the Select line, it was called PRO 20 that launched in EMEA and has been received really well. The markets that just launched recently was both Australia and New Zealand that launched this quarter. And again, it's allowing our distributors to talk to a broader range of customers. Our plans are to bring it to other markets next year. I think North America is scheduled to bring out a version maybe even in the first or second quarter next year. We'll talk more about it tomorrow and give you a little bit more visibility. But clearly, we believe that there's consumer demand for these kind of products and our research suggests that these people in this category, because they're living the lifestyle, they stay with us longer and they spend more money. So it's very attractive opportunity.

Exciting. See you tomorrow.

Yeah. Thanks, Tim. See you too.

There are no more questions. We will go back to Rich Goudis for closing remarks.

Okay. Thank you. Listen, we're really thrilled to report the third quarter results with you today. But we're really excited to host you tomorrow at our Investor Day, our first in over five years. In addition to a lot of prepared comments that we have, what's most exciting is that you're going to have the opportunity to interact with almost 20 different executives and distributors on panel discussions that are interactive with Q&A, giving you the opportunity to get a little bit deeper into some of our strategies, but more importantly, to actually hear firsthand from our distributors and some of our regional executives, how they do what they do and how we make this world healthier and happier. So, we look forward to seeing you all tomorrow. Have a good evening.

This concludes today's conference call. You may now disconnect. Thank you for your participation.