Good afternoon and thank you for joining the Second Quarter 2020 Earnings Conference Call for Herbalife Nutrition Ltd. On the call today is Dr. John Agwunobi, the company’s Chairman and CEO; John DeSimone, the company’s President; Alex Amezquita, the company’s Senior Vice President of Finance, Strategy and Investor Relations; 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, we may make forward-looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements in our business, we encourage you to refer to today’s earnings release and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Our forward-looking statements are based upon information currently available to us. We do not undertake any obligation to update or release any revision to any forward-looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events. In addition, during this call, certain financial performance measures maybe 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. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC. These reconciliations together with additional supplemental information are available at the Investor Relations section of our website, herbalife.com. 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 Chairman and CEO, John Agwunobi.

Good afternoon, everyone. I hope that you and your family are staying safe and healthy. With today’s release, we announced record-breaking quarterly net sales results for the company. We reported net sales of $1.3 billion, which grew 8.6%. Reported earnings per share grew 52% and adjusted earnings per share grew 36% compared to the second quarter of 2019. As part of our pre-release a month ago, we announced that the second quarter of 2020 was also the largest quarter in our 40-year history in terms of volume points with record results in both our North America and our EMEA regions. Q2 also saw a record number of new members and preferred members joining the business. As a sign of the confidence that we have in our business and our long-term growth prospects, we announced last month that we made an offer to purchase $750 million of our common shares. Alex will provide more details on this transaction later in the call. As the numbers and facts demonstrates Herbalife Nutrition is performing at an exceptional level and we believe our distributors’ entrepreneurial spirit, combined with our quality line of nutrition products, will lead to continued growth. From a demand perspective, our business is backed by favorable consumer trends in an environment that has never been more responsive to what we bring to the table. According to a recent study from William & Hood, health is beneath top global consumer priority. We believe that individuals around the world have a heightened focus on consuming healthy, nutrient dense foods and supplements. Additionally, individuals who are seeking an economic opportunity are finding our business model to be attractive. Our distributors are embracing technology to service their customers, which is helping them meet the increase in demand. We are assisting our distributors as they rapidly…

Thank you, John. Second quarter net sales of $1.3 billion represented an increase of 8.6% on a reported basis compared to the second quarter in 2019. This was a record for the company despite the 550 basis point currency headwind driven by the significant strengthening of the U.S. dollar at the end of Q1. Adjusting for the change in foreign exchange rates, net sales for the quarter increased 14.1% year-over-year, excluding the impact from Venezuela. We reported net income of approximately $115.1 million or $0.82 per diluted share. Adjusted earnings per diluted share were $0.95, an increase of 36% compared to adjusted earnings per adjusted diluted share of $0.70 for the second quarter last year. The impact of currency fluctuations represented a year-over-year headwind of approximately $0.08 on results for the second quarter. Note that our reported and adjusted results this quarter include expenses related to the China growth program of approximately $2.3 million or $0.01 per share. Reported gross margin for the second quarter of 79.7% decreased by approximately 65 basis points compared to the prior year period. The decrease was primarily driven by increased freight costs related to orders being shifted to home delivery versus member pickup as a result of COVID-19. Second quarter 2020 reported SG&A, as a percentage of net sales, was 35.7% and adjusted SG&A as a percentage of net sales was 35.4%. Adjusted SG&A excluding China member payments was 26.3%, approximately 200 basis points lower than the second quarter in 2019. The reduction in expense was largely driven by a decrease in member promotion and event costs as a result of delays, cancellations and reformatting our promotional events due to the COVID-19 pandemic. However, we expect a significant portion of these reduced expenses to be spent in the third and fourth quarter. Our second…

Thank you. [Operator Instructions] Our first question will come from Wendy Nicholson with Citi. Please go ahead.

Hi. Just two questions, if I can. First just on the tender offer given that the stock is above the offer range, what’s your plan? Is there an expectation that you will bump up that tender range or if you could comment on that, would that be first? And then just secondly, thinking of the business when the momentum is fantastic on – and I think you have done a great job explaining how important things like the Tencent partnership have been for you. But I guess my question is we have sort of seen now a couple of other direct sellers also report strong numbers and it does feel like at least in the U.S. market, there has been just momentum in the industry and maybe people are at home and feeling entrepreneurial and looking for extra income. So I guess just my question is, do you think there is something to that from sort of a high level industry perspective or do you really think this is all very much Herbalife specific and a result of the initiatives that you have undertaken to grow your business? Sorry for the long question, but that’s what I am interested in. Thank you.

Yes, thank you, Wendy and thanks for the good questions. I will start – this is Alex, I will start with the tender offer first. So obviously, the tender offer does not expire until next week, August 11. And so we don’t have a crystal ball in terms of what that stock price might be at the end of this tender. So, at this point, there is really not much more I can comment on what we might do until we see where we are. The offer that is out there is the offer that is out there and we will see how the net – the coming days play out.

Yes, this is John. I will take the next – the second question. So, I can speak specifically to Herbalife. I mean, I read the releases of other companies. But at Herbalife and I will start with numbers, we announced at the beginning of May that April was down 1% in volume and we finished the quarter up over 12%, which means incredibly strong May and June. And as Alex said in his remarks with – Dr. A said in his remarks sequentially, May was better than April, but June was even better than May and that continued into July. So, there was a lot of momentum. And I think when you kind of run the numbers, it might even be stronger than what we are seeing in the industry. So, I think there is some truth that globally, the industry is doing well for whatever reasons you want to ascribe to it’s really hard to know right. But I think we are actually exceeding those industry statistics. And we are doing it pretty much globally. I know there were 3 of 6 regions did not increase in the quarter, but that really was mostly a weak beginning of the quarter. At the end of the quarter, we saw a lot of strength. And matter of fact, every region in the month of June, new members are up double-digits and Mexico was 30% in June for new members. So, that really is – I think sets us up at least for the near-term sets us up well, I mean obviously long-term, the type of growth we are seeing now, it’s got to flatten a little bit, but I think it does give us a new foundation.

John, this is John Agwunobi. And I would just add to that answer or rather I would just urge everyone to kind of look back at our Q4 2019 and our Q1 2020 results and you will see I believe that ours is a company that the strategy is working in. It’s been working since even before the more recent kind of external issues that have hit the entire marketplace. We are confident in our strategy and we think that it underlies all of the numbers that you are seeing in Q2 and beyond.

And just a second follow-up on that, I think – and maybe this is a point of clarification, the $2.3 million that you called out on I think as incremental investment in China. Is that sort of an update and a sort of constant on whatever fine-tuning of your investment spending in that market. And I guess the question is to keep the momentum going, how much more spending do you think you are going to need to do to continue to bolster those digital tools and keep them offering something new and compelling to the distributors?

Right. So, Wendy, just as a reminder that $2.3 million that you have highlighted is investment that comes out of our China Growth and Impact Investment Program, that is money that we receive from the Chinese government effectively, that we commit to reinvest back into China in some way, shape or form. Last year, we spent a lot of that money into our branding some of it went into our technology. So it’s just some form of investment that we make into China. I want to call that out. I would say that that’s sort of a separate path of investment that we make when we think about technology and overall infrastructure. So like the $0.10 investments, that part of what I would call part more part of our run rate investments that we are making into China, so kind of two separate we have sort of run rate investments. Those are things like our $0.10 cents on the partnership. And then now our investments we have $105 million remaining in the China Growth Fund, or for other sorts of one time investments that we make, as we receive monies for the China government, we will then invest those monies back into China.

Perfect. That’s very helpful. Thank you so much. I really appreciate it.

Terrific.

Thank you. Our next question will come from Hale Holden with Barclays. Please go ahead.

Thanks for taking my call. I guess some of the volume numbers that you posted were just extraordinary. And I was wondering if you could just give us some context on, maybe just specific regions in the Americas and in the UK number you gave, what you think is adding to that benefit? And then Dr. A, I heard your comment that it’s going to flatten out a new baseline but assuming that the current environment stays how it continues where it is?

Yes, lets so by the way, when we are talking about flattening out what we’re seeing is some of these growth rates, I mean, but like, in direct selling in general growth can be spiking, okay, any kind of stair step its way up. And this is a stair we think. And so we don’t know when it will come to a more normalized growth rate, but it inevitably will. And I think that was the point. As far as what’s driving the growth, it’s it definitely distributor activity, that activity is being driven by engagement. Now, it’s hard to quantify specifically, if that’s because people are home more or if just people are looking for good nutrition, which is something that’s really important these days. There is really a lot there is not one thing, and it’s just building on itself. And so that’s what we are saying I can’t even be honestly be more specific than that because it’s not one thing

I would just add there are two Johns in the room, there is John A and there is John D and I think your comments related to flattening in the future came from John D.

Sorry. I guess if I put it in another way. Presumably the higher volume points your distributors are doing better financially, and they are more engaged on a go forward basis. So how do you guys ensure that this momentum continues when we move to a more normalized state of affairs?

Yes. So, this is John A, I would note that a couple of things. First of all, I do think that on the consumer side that people’s behaviours have changed acutely in response to the pandemic. But I would wager to that these many of those behaviour changes will have some persistence to them right that there are going to be Consumers out there that commit themselves to living healthier, more healthy, active, balanced lifestyles in the future. All right, so that’s number one on the distributor behaviour side. Yes, I think our distributors are working extraordinarily hard over the course of this quarter. And yes, as a result, I think they are seeing their feet out in the in their rewards ours is a business that is built on momentum and what we call the marketing plan the ability to achieve to set goals and to achieve those goals and to be they are incremental growth, build up build on themselves, as they hit a certain level in the marketing plan. They then kind of subscribe and aspire to hitting the next level. So we do expect that the momentum the energy that is being generated within our distributor base will continue on into the future. To my colleague John D’s comment, this is a business that kind of has stair steps as it grows. I mean, traditionally, as we have looked to the past, that’s kind of the pattern that we have seen. There is accelerated, spurts in growth followed by more moderated growth, followed by an acceleration again then in the future, so that’s kind of the way it works or at least it has around the world in the past. And I think we should expect to see the same as we go forward.

Thank you very much.

Thank you. Our next question will come from Steph Wissink with Jefferies. Please go ahead.

Thank you. Good evening, everyone. I just got a couple of housekeeping questions and then I would like to unpack the category performance. But the first question, Alex, is for you, you mentioned kind of the savings and that you would respend those in the back half of the year, I am wondering if you can just help us think through the SG&A rates in the back half as you recover some of those savings? And then secondly, I think John DeSimone, you had mentioned that the July month was another month – a month over month momentum, should we anticipate it is better than June or it has maintained June’s run-rate exit?

Hi, Steph. Thanks for the questions. I will actually take – I will take both of those questions. So, the first on the expense, so in my remarks, I mentioned that our adjusted SG&A, excluding member payments, improved by about 200 basis points over last quarter 2019 – Q2 2019. The expenses that we anticipate being delayed to the back half of the year, if those expenses occurred this quarter, that would be about 100 basis points of that 200 basis points. So hopefully that gives you some idea of magnitude. Related to the second question with respect to July, yes, in fact, that is what we are saying. We are seeing the growth rate that we saw in July is in excess of the growth rate that we had in June.

Excellent. Thank you. And then I want to unpack your category performance. It looks like your sports fitness business and even your Targeted Nutrition business were both extremely strong both up in the mid-teens. Can you talk a little bit about what you are seeing within those businesses? Are you gaining new customers – customers entering the brand in those two areas and then traveling across the category portfolio? Maybe give us some perspective on what you are seeing kind of within your category performance?

Yes, I mean, obviously sports nutrition and Targeted Nutrition are on a relative basis to our weight management part of the portfolio, smaller piece of the portfolio. So, when you see up overall our company growing at the growth rates that you are seeing when you have that amount of growth on the smaller base. It’s just – I think, if you look at our sports nutrition category, generally quarter-over-quarter, you are seeing that double-digit growth even when we are experiencing more moderate levels of growth. So, I just think this is an attractive categories. Obviously, sports nutrition is a big opportunity. We talked about sports nutrition and Targeted Nutrition as being the big opportunities for us to penetrate with us having market leading position in the weight management side. And so, this is just very much on trend with the strategy. It’s the second pillar of our strategy, technology being the other.

Alright. Thank you very much.

Thank you. Our next question will come from Doug Lane with Lane Research. Please go ahead.

Yes. Hi, good afternoon, everybody. Just to start Alex when you call out the $6.1 million of COVID expenses, what exactly are those kind of expenses?

Yes. So those are expenses that we have to do that we have to perform today above and beyond what normal operations are. So, for example, sanitation, for example, compensation for employees going above and beyond what they would have to do in a non-pandemic situation. Expenses like you might have just seen our recent press release where we had to cancel the LA Triathlon, the Herbalife Nutrition LA Triathlon and we had some costs that were sunk into that, that now there is no return on that investment. So we had to – so those are just sunk expenses. So it’s those types of things that we are experiencing as it directly relates to COVID-19 impact.

Okay, got it. Thank you. And then just a follow-up on the product question, I think in the last call, you were talking about some of your immunity products being particularly strong, immunity essentials things like that. Is that still the case or is the strong volume really broad-based at this point?

Yes, I would say the strong volume is broad-based. Again, it’s a little bit of the answer that I just gave to staff clearly Targeted Nutrition is growing at a double-digit rate. And so part of that portfolio does include our immunity products, so we are encouraged by it to see that growth in those areas, those new market areas for us, but the growth, if you look across the portfolio, I would say is broad-based.

Okay, fair enough. And then lastly, Dr. A, I appreciate your comments on the momentum of the business, which seems to be pretty common across direct selling where you see momentum build and then it eases a little bit in particular regions and that I totally get. So the question I have is with your Asia-Pacific region, which has been growing double-digits for the last 2 years plus and all of a sudden it went negative this quarter. And I know you talked about India being down 15%, but there has got to be something more than just India there?

India is – by the way, just to be very clear, when you look at our global business and the impact that the pandemic has had on it. By any accounts, APAC has been under that umbrella longer than any other region in our business. It started there and places like Korea, India, Indonesia and a few other locations have been particularly impacted by their government’s responses to the pandemic, India, especially, I think. So let me hand this off to John D and he will jump in with a little more detail, but I would just kind of point to the fact that it is principally COVID related and with India in the forefront.

Yes. And just kind of to profile it out a little bit, as we said in the May call that Asia was hit specifically hard because of some of the infrastructure challenges in many of those countries, not just India, but Indonesia, Korea. And so in June, the end of the month, Asia actually had growth again. And so it was really much of a – much more of a – you can see that in April when we released, volume was down almost 14% in Asia and we finished only down 5% in Q2. So it definitely had some momentum that builds during the quarter or momentum might be the wrong word. It’s probably more – it was a solution oriented set of programs that were put together in Asia to overcome some of the challenges. And so I think that was very successful and India itself was actually flattish in exiting quarter.

That’s good color. Thanks, John.

Thank you. Our next question will come from Ivan Feinseth with Tigress Financial. Please go ahead.

Hi, thank you for taking my call and congratulations on another great quarter.

Thank you, Ivan.

Thank you.

Alright. So were there any specific standout products in the quarter? And also any products that surprised you as far as the demand or lack of demand and were there any products that you ran low on or ran out of and had shortages that if you had more, you would have done better?

Well, so look, there was no major surprises. We had some product launches. They did pretty much as expected. But I will say there were some product shortages, because demand was higher than expected from the lead time that we need to build product, especially for some of the products that are not made by us. And some of those manufacturers have their own issues, because of closures and things like that. So, towards the end of the quarter, we definitely had some out of stocks, I think we recovered it pretty quickly. Whether that ended up being lost sales or not, I’d rather not say, I think whether that was redirected to other products temporarily or it was caught up later in the quarter, I am not sure, but there was definitely some out of stock issues, which is not unexpected when you have such a dramatic shift in trends.

Any products that you thought were going to sell well, but didn’t?

No, no, no surprises, no surprises, not that I am aware of.

And to your point, your – the other question about whether or not there is one that did more better than expected, yes, across the board, we have seen growth across all categories, if that’s a surprise, that’s the fact though across all our categories have seen really good growth.

Then as far as, let’s say tools that your agents are using since more – most everybody has had to go to more online rather than in-person meetings, what kind of process have you learned from that and thoughts of putting new platforms in place to support sellers going forward?

Yes, this is John D. Let me hit what I think is one of the more important takeaways from the movement toward more technology. That was really forced upon everybody. Certainly, there is – it’s a virtual world now and our distributors have embraced that. But I think the bigger takeaway is that out of the need for more technology, there was a – I think there was more demand for segmentation. As you know, we segment our business in a small number of markets. And now we have plans that by the end of next year, volume – or 80% of the volume, maybe even up to 90% of our volume will come from markets that have segmented. And so that’s a big advantage that’s coming out of what I think is just the increased use of technology. There is lots of different kinds of technology. As market segment, they will have access to the different technologies that are out there.

When you say more segmented markets, you mean as far as product lines that sell well or?

No, it’s a preferred number, I am sorry. So there is a little history here. Some terms that are maybe it’s outdated, but there was a point in time where everybody who signed up was a distributor and then we segment that they have just customers able to sign up was just customers and not do the business and that was…

No, no. I am familiar with that.

Yes, yes. So that having the option to sign-up is just a customer is something that will be in markets that represent 80% to 90% of their volume by the end of next year, a lot of technology that goes into programming getting it executed, that’s why it takes till the end of next year, but that’s a big step forward.

As far as increases in new distributors, what areas have you seen driving that and what products did new distributors tend to lead off with or focus on?

Yes. I think the most important part of the new distributor equation that we are seeing is our distributors are getting younger. We are getting a lot more millennials and Gen Zers than we have had in the past. And then we already saw that movement starting, but it’s even bigger now. Even in Mexico now the majority of new members joining on millennials are younger and that was a market that was not quite there a year ago. So that’s a big advantage. And so that’s the demographics we see coming in. I am not familiar with – off the top of my head whether their product portfolio purchases is different than the average. Certainly, nothing stands out in my mind, but I am just not that familiar with it, I am tracking it that way. But that’s really the single biggest advantage of what I would say is the demographics coming into the business right now.

And what do you think is driving that?

Well, I mean, again, it kind of goes back to the question I was asked earlier, which is what’s driving the business and there is no one thing, I think there is lot of momentum. I think the awareness of the importance of good nutrition has never been better. And so I think our product line more than anything is probably what’s driving it, at least what’s helping distributors get confident and drive the businesses as people – we have solutions to real issues around obesity and around healthy active lifestyle and basic nutrition. So I think that’s probably the most important thing.

Do you think those younger people are coming on as distributors or younger people are coming on as customers? And the younger people if they are coming on as distributors are coming because they are more entrepreneurial and looking for the business opportunity?

Well, I think across the board, we are getting younger both on the customer side and the distributor side. I don’t want to impute what that – what their goal is. I mean, lot of them come in as customers first and then move over to the distributor side. I do think the business opportunity is attractive. I think there is a lot of momentum and excitement. And so that’s part of it. But there is a whole host of reasons that people join. But again, products, the service might be the engine of the company, but the products are the fuel.

Yes. Alright, thank you very much and congratulations again.

Thank you, Ivan.

Thank you. Our next question will come from Karru Martinson with Jefferies. Please go ahead.

Good evening. Just in terms of the unique customer increase that you had in North America, the 25%, we have touched on the technology, but could you talk to us, how are the distributors reaching that connectivity so that they can actually retain these customers who perhaps have tried your products here in the pandemic for the first time? How do you keep that customer in-house going forward?

Well, that technology segment, I mean – I will give you multilayer answer. So first is segmentation, which allows customers to sign up, which gives informational access to distributors to be able to stay in contact with them, then it’s the tools built around segmentation to help automate some of the opportunities to keep engagement high. And then of course there is the receding tools that are made available certainly in the U.S. but they are outside the U.S. now. And they are going to be in a lot more markets, where there’s a lot more transaction field level transactions that are captured in a database that can be used to keep that interaction more frequent. It’s, more about community connectivity, and it’ll be a little bit more information will be more available with these tools.

Okay. And when you talked about the SG&A rate in the second half, we have 100 basis point shifts, being higher is that kind of a return to some of your in-person sessions or how do we think about what the pandemic lockdown is going to do on that side of the equation or is that something that we should look at for next year?

Yes, it’s not necessarily returned to in person, I think primarily that is just the shift from what was going to be in person in Q1 and Q2 moving to virtual events or virtual different types of promotions that are just largely hitting in Q3 and Q4, what needs to happen effectively if there needs to be an absorption by the distributor based in a particular market okay, if we can’t go with Plan A, we want to go with Plan B, and C. And so it just takes some time to develop what those new promotions and what those new events might be. And so what was going to happen in the second quarter is now just happening later in the year as those plans are being developed.

Okay. And then lastly the higher freight costs you referenced as you shipped to more residences? Is that something that over time you can negotiate those costs down or is that just a new part of the business that we just have to absorb?

It’s not necessarily a new part in itself. I mean, what we are seeing and this is a little bit in John A’s comments. So for example, in the U.S. where you had nutrition club distributors or distributors that own a nutrition club, they effectively represented about the same amount of volume in the quarter, but they shifted the way that they received product and got product to their customers from in person or from, to more of a direct shift to home. So you are using home delivery in that vehicle to get products from effectively our warehouse to the customers. So, what is what we don’t know yet is as things evolve, as these conditions evolve how are we going to offset, how are we going to think about is this the new way, is it the new shift in shipping or do we return back to effectively how our supply chain was designed to be optimal? So we are going to have to just, this is something that we are going to have to see how that develops and, react accordingly.

Thank you very much, guys. Appreciate it.

Ladies and gentlemen, thank you for participating in today’s question-and-answer session. I would now like to turn the call back over to Dr. John Agwunobi for any closing remarks.

Thank you. I will keep this short. First, thank you all for the work that you do following us and for your questions today. I will just kind of point out the obvious here for a quick moment and that is on to the company that’s been – this had a strategy that’s been in place for quite a few years now at least over the last 24 months, I would ask you to take a look at the trajectory of our business, you will begin to note that the business and the strategy were working even before the pandemic, it’s true. And I think appropriate to state that during the pandemic that strategy’s impact would appear to have accelerated. That strategy continues to work. We continue to drive it. And even after the pandemic, we feel really confident that our strategy is going to deliver on our goals. With that, I would just point out one last thing, which is there are a number of – I think it’s worth noting that our distributors around the world have worked extraordinarily hard over the last quarter, over the last two quarters, actually over the last four quarters and their work is directly related to the results that we are talking about today. So with that, I will just say thank you. Stay safe and see you soon.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.