康寶萊 (HLF) 2013 Q2 法說會逐字稿

Good morning and thank you for joining the second-quarter 2013 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 Brett Chapman, the Company's Chief Legal Officer.

I would now like to turn the call over to Brett Chapman, 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 yesterday's earnings release, and our SEC filings for a complete discussion of risks associated with these forward-looking statements, and our business. In addition, during this call certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements. Prepared in accordance with US generally accepted accounting principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures.

We believe these non-GAAP financial measures assist management and investors in evaluating and comparing period-to-period results of operations, in a more meaningful and consistent manner. Please refer to the investor relation's section of our website, Herbalife.com to find our press release for this quarter, which contains a reconciliation of these measures. Additionally, when management makes reference to volume during this conference call, they are referring to volume points.

I will now turn the call over to Michael.

Thank you, Brett.

Good morning and welcome to our second-quarter 2013 earnings call. Let me start by saying that Herbalife's businesses is stronger than it's ever been and the operating results announced yesterday are the best in the Company's history. It was a record performance from both top and bottom line perspective. Second-quarter net sales of $1.2 billion is 18% above last year's second quarter. Our adjusted EPS of $1.41 increased 29% compared to the prior-year period, and we generated $183 million in free cash flow. The strong performance in the second quarter was an acceleration over the record results achieved in the first quarter.

Volume points grew 14% year-over-year, with growth in each of our six regions. South and Central America grew 33%, Asia-Pacific grew 1%. China grew 49%. EMEA grew 16%, and Mexico grew 8%. North America's growth rate was 11% in the quarter, compared to 2012 and more importantly, its growth rate increased sequentially from the 4% in the first quarter. Sales of our top-selling meal replacement product Formula One increased 16%, reflecting the ongoing expansion of daily consumption sales methods by our distributors, which are making our products more accessible and affordable. Formula One and our other nutritional products provide a meaningful solution to millions of consumers, who seek to improve their health and to manage their weight. Obesity, while it continues to be a global epidemic that poses serious health concerns, as well as a tremendous financial burden on public health systems around the world.

Herbalife today has a mission for nutrition, that is based on our belief that our independent sales force is helping mitigate the global obesity epidemic by offering high-quality products, personalized coaching, and a social environment that inspires customers to eat better, engage with each other, maintain a healthy weight, and pursue a healthy, active lifestyle. We have never been more confident about our business, and as a result, included in our earnings announcement yesterday, we raised our guidance for the third time this year. The new guidance range points to 2013 being another record year with double-digit top and bottom line growth. Over the past seven months, there's been a whole lot of misinformation spread about Herbalife. As a result, we believe that Herbalife has become one of the most researched companies on Wall Street.

We also believe that through the in-depth research conducted by so many firms, the investment community as a whole, has come to the same conclusion that we already knew. Herbalife is a sustainable, financially strong Company, with a robust consumer base loyal to our high quality nutritional products. We have demonstrated the scale of our consumer base through studies performed by two highly respected research companies, the latest announced June 11 performed by the Nielsen Company, a leading global information and measurement company found that 3.3% of the US adult population, or 7.9 million people, have purchased an Herbalife product within the three-month period prior to the study. Of which 87% reported themselves to be non-distributors. This study, along with previous independent studies, have shown a large number of end-users for our products, with a vast majority being outside our network. We also believe our sales channel direct sales is ideally suited to marketing nutrition products.

Our distribution approach has evolved over the last three decades. Our focus will continue to be on supporting our distributors. Their focus is on increasing customer contact, through a wide variety of social models, which work together to drive better product results. The ongoing personal contact, coaching, and education between distributors and their consumers, strengthen the sales of weight management, daily nutrition, and our personal care products. This frequent personal contact enhances the consumer's experience by improving their nutrition and health education, as well as motivating them to begin and maintain wellness and weight management programs. All of which means greater success in achieving their goals. Herbalife 24 is emerging as a product and a brand for endurance athletes and those looking for great sports nutrition.

There are now fit club business models based on Herbalife 24, that are creating opportunities for a whole new generation of Herbalife customers and distributors. We know a large percentage of our distributors or participants are simply discount customers, who use our weight management, nutrition, sports and personal care products primarily for their own use. Knowing that most of our participants are discount buyers, we have decided to change in simplify the terminology we use for participants in our network. Beginning this quarter, the term we will use for participants will change from distributor to member. This change will require modifications to all participant agreements, rules, and training materials, and will take several quarters to implement across all platforms around the world. In the US, however, the implementation will begin immediately, and should be completed within a few months.

We believe this change will be beneficial to our business as it will help simplify the understanding of our participant base. This is another example of our build-it-better program, which has yielded numerous opportunities for our business and for our distributors, as we focus on initiatives that make our Company stronger, our products better, our customers better served, our direct selling model and business opportunity more successfully and easier to understand, and our brand even stronger. We believe the changes we are making will better serve our customers, and help you as investors better understand and simplify our business. These changes will help clarify misinformation introduced into the market, and spread to several special interest groups here in America, who have been badly deceived about how our business really works. From an investment perspective, we continue to invest in our products and our brand.

Our extraction facility in Changsha, China is ramping up its production, an increased the amount of the botanical ingredients in our products including teas that we manufacture in that facility. We will have invested $130 million in our Winston-Salem, North Carolina, manufacturing facility, which is expected to begin operations next summer as planned. And this quarter we announced a new sports sponsorship with one of the worlds top athletes, Cristiano Ronaldo. Cristiano is an athlete who understands how vital good nutrition is when striving for world-class performance. We are excited to have Cristiano as a member of team Herbalife, and we look forward to working with him to improve his performance on and off the field.

I want to thank all the members of our Herbalife family, our members and sales leaders, there are millions of customers around the world who use our products to improve their nutrition and health and who are ultimately responsible for our exceptional global growth, and of course, our employees. Despite the public market distractions, our focus remains on supporting our members, while implementing the numerous growth and infrastructure strategies we believe will help us deliver ongoing strong financial performance. We are experiencing tremendous growth around the world, driven by an increased consumption of our products as a result of the global obesity epidemic, and an aging population. Our members and sales leaders remain highly engaged, sharing great ideas to drive global growth, while working closely with our management team to introduce new ideas and initiatives worldwide. All of us at team Herbalife are working harder, smarter, every single day, to build it better.

Now over to Des for a more detailed update on our performance in our key regions.

Thank you Michael.

As you've just heard, we had another record quarter. Our 15th consecutive quarter of double-digit top line growth, and our 8th consecutive quarter of more than 1 billion volume points. As Michael mentioned, we will soon begin implementing the nomenclature change, with new participants being turned members, as opposed to distributors. So, as we go through the discussion of the regional results, we will use the new terminology.

June was the strongest volume month ever in Herbalife's history. Such performance is reflective of our ongoing momentum, and the breadth of growth that we see across our markets. Not only did four of our six regions post strong double-digit volume point growth, but every region saw increases in average active sales leaders. Our members and sales leaders around the world actively continue their mission for nutrition, helping to provide great tasting low-calorie nutrition in communities amidst an increasing obesity epidemic. They consistently execute daily consumption methods to build stable, growing, businesses.

Now let me provide some highlights and data on our regions. The North American region had another record quarter. It posted 10% net sales growth, and 11% growth in volume points, each compared to the prior year. Average active sales leaders with volume points, increased 10% and new members increased 4% compared to last year's second-quarter results. The per capita volume point penetration for the region in the last 12 months was 3.4. This compares to 7.4 in Mexico, and 9.2 in Korea, and supports our belief that there is tremendous opportunity for future growth in this, our oldest and largest region. ¶

Within the North American region, the continued strength of the US market can be seen in a net sales growth of 11%, and a volume point growth of 12%, each versus the same quarter last year. Compared to the prior-year period, average sales leaders with volume points increased 10%, and new members in the US increased 4%. The growth in the US market is broad-based. As you know, we experienced the departure of a top US sales leader from Herbalife in January, and another in June, related to the introduction of rules last September restricting the sale and use of paid advertising leads. As we stated at the time, and as is evident in the strength of the second quarter, the loss of these sales leaders has not had a material effect on our US business.

The sequential growth from 3.8% in the first quarter, to 11.9% in the second quarter was very strong, and is a testament to the leadership, resilience, and focus of our US members and sales leaders. In addition to this volume point growth, we are very pleased with the underlying trends that we are seeing in the US. Approximately 80,000 new US members joined in Q2, the largest increase ever for a market in Herbalife history. The percentage of new sales leaders qualifying under the 5K method has continued to grow and expanded more than 30% in the quarter. Historically, sales leaders that qualify under the 5K method are more productive and more likely to have built businesses ground in daily consumption, and steady long-term customers. 22 of the top 25 metro US markets posted growth in the second quarter, over the same period last year. Moving on to Mexico, local currency net sales for the quarter increased 12%, and volume points increased 8%, each as compared to the prior-year period. For the second quarter, average sales leaders with volume increased 13% while new members decreased 1% both compared to the prior year.

The per capita volume point penetration in Mexico for the last 12 months was approximately 7.4. As you know, training and educating our members and their customers is a fundamental part of the Herbalife business. In 2012, we launched a wellness tour covering 65 cities in the region, with doctors from Herbalife's nutrition advisory board. This year, the wellness tour in Mexico held 150 events in 100 cities, seeing over 117,000 attendees. These events drive ongoing attention and education about healthy lifestyles, building on the 2012 introduction of the Herbalife 24 product line to Mexico.

Now let's turn to China where local currency net sales increased 49% and volume points grew 49% in the second quarter, compared to the prior year period. Average active sales leaders increased 18% over the same period last year. China's volume point per capita penetration for the last 12 months was about 0.2. We are delighted to see growth and improved metrics in this region, driven by the introduction of daily consumption methods into the market. Earlier this year we implement first order limits in China. We continue to see more nutrition clubs open, and while we are pleased with the progress of the China market, we remain cautious about expecting too much, too soon. In the Asia-Pacific region in the second quarter, local currency net sales increased 1% and volume points increased 1%, each as compared to the prior-year period. Average active sales leaders with volume grew by 15%, and new members grew by 3% over the same quarter last year. The volume point per capita penetration in this region for the last 12 months was 0.6.

In the past two years in Asia-Pacific, we have seen cumulative volume point growth of 38%, and about an additional 169,000 members qualify as sales leaders. We are working with leadership within the Asia-Pacific region, to focus on implementing best practices, to help drive higher retention and sales leader activity rates. These include an increased emphasis on the 5K sales leader qualification, which increased from 22.5% of qualifying sales leaders in Q1, to 26.5% in Q2. The combination of these factors, coupled with a difficult comp against Q2 2012, resulted in a very modest increase in volume points in Q2 2013. However, we believe the core business in Asia is very strong, as evidenced by the growth of average active sales leaders in the quarter, by an impressive 15%.

Within the Asia-Pacific region, Indonesia continued its strong performance, with a 47% increase in local currency sales, and a 69% increase in average active sales leaders, as compared to the same quarter prior year. Korea is one of our most established Asia-Pacific markets, with per capita volume point penetration of 9.2. Lapping difficult comparisons from prior periods, local currency net sales decreased 3%, as compared to second quarter of 2012. During the second quarter, we saw more than 17,000 members and sales leaders at the Korean extravaganza, which illustrates the unified leadership and strong engagement by both members and sales leaders. In India, local currency net sales grew 4%, and average active sales leaders grew 26% over the same quarter prior year. Increased product access through past operational initiatives, and the successful adoption of the daily consumption business methods, drove much of this growth.

With less than one volume point per capita penetration in India, we see significant growth potential in this market. And through the introduction of first order limits, and increased focus on the 5K sales leader qualification, we are working with our leadership to create long-term sustainable businesses there. Local currency net sales in the South and Central American region increased 50%, and volume points in the region were up 33%, each as compared to the second quarter of 2012. Average sales leaders with volume points in the region increased 30%, and new members also increased 30% over last year's second quarter. The per capita volume point penetration in this region for the last 12 months was 1.9. The region is supported by a strong and engaged leadership base, which we know to be an integral part of driving growth.

Additionally, see the expanded use of the 5K qualification method in South and Central American markets, which gives us confidence in the long-term growth and stability, as members and sales leaders continue to build their business sustainably over time. Venezuela continued to grow with a 51% increase in new members, and 58% increase in average active sales leaders, both as compared to second quarter 2012. We believe the daily consumption, coupled with an increased utilization of the 5K qualification method, are making a significant difference in the growth of this market. Within the South and Central American region, we continue to see strength in Brazil. Volume points grew 30%, and average active sales leaders grew 26% in the second quarter, over the same period prior year.

The ongoing adoption of nutrition clubs, as well as traditional business methods, contributed to this growth. Turning to EMEA, during the second quarter, local currency net sales increased approximately 15%, and volume points in the region grew 16%, compared to the same period in the prior year. Average sales leaders with volume points in the region, was up 12% and new members was up 13% over the prior year period. In EMEA, per capital volume point penetration in the last 12 months was about 0.7, which we believe speaks to the scale of the opportunity that remains in this region. Effective implementation of daily consumption business methods through nutrition clubs, fit camps, and weight-loss challenges drove performance across the region. We continue to see the development of a younger, more athletic member base in Western Europe, that has embraced the Herbalife 24 product line and an active lifestyle, and enthusiastically introduced them to their customers.

Within EMEA, Russia had a robust second quarter, compared to the second period prior year, volume points increased 20%. Our Russian leadership has helped to develop a disciplined, city by city focus that includes systemized training, applied daily consumption methods, and utilization of the 5K qualification method. The UK, our oldest market in EMEA, continues its impressive performance. This quarter we experienced 92% growth in volume, and a 56% increase in average active sales leaders. The early stage success of weight-loss challenges, office clubs, and fit camps in the market, ignited the member base and drove engagement with a larger group of consumers. We are seeing other markets in the region begin to implement elements of the business methods that have been so successful in the UK. Encouragingly, we are beginning to see signs of growth emerge in other markets in Western Europe, which have been flat for several years, and which contributed to the record 16% volume point growth in EMEA this quarter, as compared to the same quarter of last year.

Now, in passing the call over to John to review our financials, let me take the opportunity to pay tribute to our members and sales leaders, for another very strong quarter. Their resilience, steadfast engagement, and dedication to their customers are evident in the record-breaking second-quarter results. We are proud of their accomplishments, and continue to support their endeavors in creating and mentoring new customers, and in showing the value of Herbalife's products around the world.

Thank you, Des.

As Michael said earlier in the call, we had a great quarter. But before reviewing our second-quarter financial performance, and the full-year guidance provided in yesterday's announcement, let me provide an update on the re-audits. Similar to last quarter, we filed our second-quarter 10-Q without the SAAS 100 review, and therefore without the required SOX 906 certifications. The 10-Q is complete in all other respects, including SOX 302, CEO, CFO certifications, as to the accuracy of financial information. When completed the 10-Q will be amended with the 906 certifications, to reflect that a SAAS 100 review has been completed by PWC, as part of their re-audits of the prior three years.

Management and the audit committee, believes that the financial statements, covering the referenced periods fairly present in all material respects, the financial condition and results of operations of the Company as of the end of and for the reference periods. And they continue to be relied upon, and that the Company's internal controls over financial reporting, was effective during these periods. With respect to progress of the re-audits of 2010 through 2012, and the SAAS 100 reviews for each of the first two quarters of 2013, we expect to be completed and up to date no later than the end of this calendar year.

Let me now review our financial results, comparing them both to the second quarter of last year, and to the guidance for this quarter, that was provided to you in April, and then I will comment on the updated guidance we provided yesterday. With respect to our financial results, yesterday we reported second-quarter net sales of $1.2 billion, an increase of 18.2% compared to the second quarter 2012. Local currency net sales for the period increased 17.4%, with a favorable FX impact of 0.8%, as compared to the prior period. Since Des has already reviewed in detail the volume in net sales results by region and key country, I will now discuss our margins. Our gross profit margin for the second quarter decreased approximately 53 basis points, as compared to the second quarter of 2012. The net decrease to gross margin was primarily due to the unfavorable impact of currency, with higher costs and price increases offsetting each other.

Before moving onto operating margin, please note that our reported second-quarter results included some unusual items that we consider to be outside the range of normal operations. We have therefore excluded these expenses from our adjusted second-quarter results, they are as follows -- $8.1 million of pretax expenses, or $0.07 earnings per share related to expenses incurred, responding to attacks on the Company's business model; $3.5 million of pretax expenses or $0.02 earnings per share, of one-time costs incurred during the quarter, associated with our re-audits. These costs may ultimately be recovered, but until a definitive agreement is in place, the costs will be expensed as incurred, as will any recovery. We expect to continue to call out this item in the future. The third unusual item in the quarter was a tax benefit of $0.02, related to the first-quarter devaluation of the Venezuelan Bolivares. The following comments regarding the Company's second-quarter operating margin, the effective tax rate, and EPS all exclude these three items just discussed.

Second-quarter adjusted operating margin of 16.7%, which excludes the items just mentioned, decreased by approximately 137 basis points, compared to the prior year. A little more than 100 basis points of this decrease, is a result of higher SG&A expenses which exclude China service provider expenses. SG&A was negatively impacted primarily by two items. Higher recorded currency losses as this year's quarter included $7.9 million in recognized FX losses, compared to only $800,000 recognized in last year's P&L, resulting in a net unfavorable impact of approximate $7.1 million. This change accounts for approximately half the adverse basis point change. The second item impacting SG&A as a percentage of sales is sales events which increased by approximately $6.5 million, versus the second quarter of last year.

Now let's move on to our effective tax rate. Our second-quarter adjusted effective tax rate was approximately 410 basis points lower than our effective tax rate for Q2 2012. The variance is primarily due to shifts in our geographic mix, as well as some benefits from discrete items. Second-quarter adjusted earnings per share of $1.41 was $0.32, or 29% higher than our earnings per share for the second quarter of 2012. As previously noted, the improvement was primarily driven by growth in sales and a decrease in our effective tax rate, along with the lower share base due to ongoing buyback activity. Comparing second-quarter EPS to the previous guidance provided in April, adjusted EPS of $1.41 was $0.23 per share higher than the high end of our guidance range. This beat was primarily driven by top line performance, but also benefited by $0.04 of timing of expenses which had been re-phased into the balance of the year, and $0.06 due to favorable effective tax rate.

Before moving onto the new guidance provided for 2013, I want to note a couple of items. With respect to Venezuela, our guidance continues to assume a rate of 10 Bolivares to a dollar for the balance of the year, and does not include any further charges or write-downs associated with our Venezuelan operation, or Bolivares denominated cash. Our guidance also excludes any ongoing expenses incurred responding to attacks on the Company's business model in the re-audit related expenses or any recoveries of such costs. In the second quarter, these pretax costs were approximately $8.1 million and $3.5 million respectively. For all currency assumptions, we use the average closing exchange rates during the first two weeks of July, with the exception of Venezuela, as previously disclosed. The currency rates assumed in our guidance reflect the movements that are meaningfully worse than the rates utilized a quarter ago.

As such, there is an $0.18 per share negative impact to the back half of the year, due to the strengthening dollar compared with the guidance provided in April. If not for this currency impact, both the third-quarter and implied fourth-quarter guidance provided yesterday would have each been $0.09 per share higher. From a volume point perspective, we are raising our full-year 2013 volume growth expectations by 250 basis points, compared to the previous guidance. And now expect volume growth in the range of 11.5% to 13.5%. As Michael mentioned, for the third time this year, we are raising our adjusted EPS guidance for 2013. We are taking the low-end of the range up $0.23 per share, and the high-end of the previous range up by $0.15 per share.

We now expect adjusted EPS to be in the range of $4.83 to $4.95. The full-year adjusted EPS guidance includes a year-over-year currency headwind of approximately $0.30 per share. For the third quarter, we are providing initial guidance for volume point growth of 11.5% to 13.5%, which is on top of the strong 17% and 23% volume growth we experienced in Q3, of both 2012 and 2011 respectively. Adjusted EPS in the third quarter is expected to be between $1.09 and $1.13. This adjusted EPS range for the third quarter includes a negative headwind of approximately $0.13 per share versus the prior year. And $0.09 per share adverse impact compared to the rates we utilized in the guidance we provided a quarter ago.

Finally, I will address our share buyback program. Over the last couple of years, our guidance normally included $50 million of share repurchase per quarter. This indicated our intention to at least execute a portion of our buyback program on a routine basis, even though in many quarters, we significantly exceeded that amount. Last quarter we did not include any repurchase in our guidance for Q2, as a result of KPMG's forced resignation. We wanted to wait until we had new auditors on board, which would provide us better visibility into the timing of securing re-audited statements.

With PWC on board, and our confidence in having re-audited statement by year end, our guidance provided yesterday includes the assumption that the Company will resume its buyback program. We have included $50 million per quarter in our forecast, but we believe that our balance sheet is under levered and we have available cash, and therefore we may decide, based on the discretion provided to us by our board, to repurchase more than the amount included in the guidance. ¶

Thank you. This ends our prepared comments. We will now open up the call for your questions.

(Operator Instructions)

Tim Ramey, DA Davidson.

John, I took note of the fact that there were fully restated balance sheets for '10, '11, and 12 in the 10Q filed last night. And you can't do a balance sheet without an income statement. So you must be pretty close on the relook at the financials. Why do we think that it's as far out as the end of the calendar year?

I think my words Tim, were no later than the end of the calendar year.

But it could be quite --?

It's going to be when it's going to be, and as soon as it's ready, we're going to release it. I think the outside timeline is the end of this year, it is possible that it's done earlier. But it's a complex, time-consuming process. And I want to make sure we set expectations that we can achieve.

Sounds good, and then obviously, one of the reasons why you weren't able to repurchase stock at lower levels was the KPMG resignation. I know that you certainly have a very good cause of action against KPMG. Where are you at on both recovery of excess audit fees as well as other damage that may have been caused by their malfeasance of their senior audit partner?

Tim, we can't comment on potential proceedings. Sorry.

Okay. Thanks.

John San Marco, Janney Capital Markets.

I have a follow-up on your scripted comment John about capital allocation. Has the amount of cash that you need to keep on hand to run the business, has that changed at all from two years ago when you just held about 250 or so?

No, it hasn't changed. I think what we spoke about on the last earnings call was just the need to get the new auditor on board and have some clarity as to what the reorg timeline was. I think, we made it clear that prior to KPMG's resignation, we were looking to enter into a debt deal. That deal fell apart. We now know we are under levered. No commitment on anything specific that we will do, but we will always look to create value for our shareholders, and that includes looking at our capital structure.

Okay, thanks. On Latin America, I was wondering if you could just sort of talk about in a bigger picture sense. It was maybe the last segment you had accelerate out of '08 slowdown, and now it's been the biggest driver of growth. I guess what do you do there differently today that's been impactful, and what's the opportunity to take that to other regions?

John this is Des. I think a couple of things. A significant factor in South and Central America is obviously Brazil, a number of years ago we sat down with our distributor leadership. We really worked with them to improve business practices and retention rates and activity rates in Brazil. Since then, we've actually seen significantly stronger performance and consistent performance in Brazil, most recently in second quarter, 30% growth. But of course, John, it's not just about the growth in volume points. Because not only did we have 30% growth in volume points in Brazil, but we had a 26% increase in average active sales leaders.

So it's about productivity, it's about engagement. In the Spanish speaking markets in Latin America, it has been obviously, again, tremendous leadership, by our distributors there, but it has been a focus on daily consumption, focus on more and more training, more institutionalized support and frankly, better product access throughout the region. So a whole combination of distributor leadership, engaged leadership. The factors and the Company's approach in terms of regionalization city by city, and essentially the same strategy that has driven our growth in South and Central America is the same thing that's our strategy around the world. It's daily consumption, systemized training locations, and a city by city approach.

Okay, thanks. And then the -- I was wondering if you could address the decline in total number of distributors during the quarter? Was that turn driven or you just maybe if you could, what you could detail on that number?

So our focus today overall John is on productivity and engagement, and not pure numbers. Obviously, we are thrilled to see the significant number of new distributors joining us in the United States. As I said in the prepared comments the numbers of new distributors, new members in the second quarter 80,000 new distributors came to Herbalife in the second quarter, a record number. So we are very pleased to see that. But overall, our focus is on activity and engagement and helping members on the path to sales leaders.

Let me add, this is John, let me add one other thing too that's unique in the quarter. So, in the first quarter when our sales leaders were -- the ones that were not retained, they were demoted to senior consultant for 90 days and actually dropped out of the system in the second quarter. So, you actually see that movement in this reported period.

And do you think that had an incremental impact versus the historical 2Qs? And was that a bigger number this year that --?

No, this was part of a win-back campaign that was something we were testing as part of the business that we didn't do last year.

Oh okay. Alright. Well, I'll jump back into the queue. Thank you.

(Operator Instructions)

Scott Van Winkle, Canaccord Genuity.

Des, I was wondering if you could talk a little bit more about Asia-Pacific and kind of some up. You talked about markets, puts and takes here and there. I am kind of wondering overall you mentioned some good metrics and average active supervisors. I wonder what the expectations are in volume and revenue in that region, and then I would love to hear a little more commentary on the disparity between the revenue of this last quarter and the average actives if you could.

Yes Scott, so Asia-Pacific, really two key messages there. The first, obviously, in Korea, Korea represents about a third of our total business in the Asia-Pacific region. Korea, as you know, has achieved this tremendous volume points per capita, just over 9, a significant number. So in Korea I think we have reached just a natural plateau in the business, while our distributors, while the Company regroups. That is something that traditionally happens in many markets, and we believe that there is still growth ahead in Korea. But we are working with our Korean leadership now to focus on retention. Because retention has been one of our challenges there, and so that's really our key focus on training, on retention.

And then frankly, just overall more increase product access, more training regarding clubs, and so on. In the other markets in the Asia-Pacific region, again a focus on the 5K qualification. You know that we've introduced the first order limitation in India, and we've seen the combination of 5K, the first order limitation. Again our focus is on building a stronger foundation for growth ahead. Volume point penetration in the entire Asia-Pacific region is 0.6. And as you compare that to the advanced markets like Korea, you'll see there is huge opportunity for growth ahead. So in the third quarter, we predict slightly increased growth and then fourth quarter acceleration growth. So overall we are going to have a growth story in the Asia-Pacific, what you're seeing in Asia-Pacific today is something that you saw in Brazil a few years ago, and in China more recently where we worked with distributor leadership to put in a stronger foundation for future growth.

Great, and then, I appreciate the commentary in China, are there any other metrics? Des, I think for three or four years you have ended your China commentary with that cautionary statement at the end. Are there any other metrics we should watch or think of when we look at China kind of taking off this quarter?

So, you know Scott China, we will always be cautious about China. Because the reality is that we operate there in a market, that is obviously subject to change at any time. We know we do -- we have a tremendous relationship, and we do a lot of focus in terms of government relations, government activity so the government is totally aware that we are a good corporate citizen. But at the end of the day, it's China. So we are very pleased with what we see in China.

We see an accelerating business. We see tremendous strength in our fundamentals. That's shown in the numbers in terms of percentage active sales leaders. All the key metrics are very positive in China. But frankly, whether it's now or 1 year or 5 years or 10 years, I think you're always going to hear us be saying the same conservative thing regarding China.

Are there any parallels you can make between China and maybe another market, a little more mature market, where you saw the same type of trajectory, or is China just a different environment because of the different operating model?

So it's a different environment because of the same operating model, but some fundamentals apply. And that is that our business is focused on daily consumption. It's about people consuming our products every single day and that's the commonality, whether it's China or whether it's any other market in the world.

Great. Thank you.

Sandy Chen, Visteon Asset Management.

You noted, John, that you guys thought you were under levered and that seems to be quite the understatement to say the least. You have about $850 million in cash and $950 million in debt, so you're at about 0.1 debt to EBITDA. Can you just talk about what you think would be a normal leveraged amount, the group average for consumers is about 1.5 times? So you could take on another $1 billion in debt when your audit's done and if you used that for share repurchases are dividends you could shrink your float by 15%. Is this the right way to think about what you guys -- how you would use your cash? Could you just rank order just cash use and then talk about the -- walk through the mechanics of, either doing a tender offer if you were to do $1 billion to $2 billion in a share [or a massive] share repurchase program?

Let me see if I can hit all of those. First, we have a tremendous history of share repurchase, having repurchased $1.7 billion since 2007 so you know we're huge fans of it. And you know us well. Regarding appropriate debt levels, that is a decision for our board, as you can imagine. I think we have communicated that investment grade debt levels, not necessarily investment grade debt, but the types of multiples that you would see in an investment-grade Company is something we would be comfortable with. That's something that has consistently been communicated. As far as the buyback goes and the execution of a buyback, I think that would be based on circumstances at the time we decide to do a buyback. Yes, we do buybacks.

And that timing is all predicated on when your audited financials are complete?

No, I think what I said in my comments, is we're back and we expect to be back in the market now that we have PWC on board, and that we have visibility to the completion of the re-audits.

That's just normal open market share repurchase program?

Yes. That's what's included in our guidance.

And what do you have left in your share repurchase program? $750 million?

A little more, almost $800 million, $787 million.

And could you go back to the board as soon as that would be complete, to ask for more if necessary?

I guess we will deal with that when it's time. That will be a board decision. Again, we have a strong history, Sandy, you know us very well, we generate a lot of cash. We are not M&A oriented. That cash first and foremost goes into investing in our future, in our growth. And then it goes back to our investors. And with a heavy overweight toward share repurchase. And that has been a consistent theme for Herbalife now for six years.

Okay. I guess just, you have $850 million in cash on hand, and your repurchase program is $780 million. So you could fund all of that with what you have currently without having to go to the debt market.

Look, we have a lot of cash, as I said in my opening remarks, and we are under levered, and we will do what we think is best for the long-term interest of our shareholders.

Okay, thanks.

Tim Ramey, DA Davidson.

Des, maybe you could shed a little bit more light on the new classification, which is a great initiative. Are you actively going to renegotiate or redraw agreements with existing distributors or do you just plan to have this kind of cycle through the normal re- up period? And is there any change to member economics, i.e, the cost to become a new member versus the cost to become a distributor previously?

So, Tim no cost, no change. This is literally a nomenclature issue to bring greater clarity when people look at our business model. So essentially what is about to happen is that we are introducing a new member application and so effectively, there really is no change. It will cycle through over a period of time, but very shortly we'll have a new member application in the United States, somebody coming to Herbalife will complete that, they will be termed a member. And then when they qualify as a sales leader, they will become known as a sales lear.

So essentially it's really it's just a substitution of the term distributor for the term member, recognizing that the overwhelming majority of people who historically completed a distributor application, are joining for the purpose of a wholesale discount. They had no intention of doing the business, as you know, over 70% of people did not and never recruited anybody. Over 70% of people based on the consumer research signed up to become a wholesale member. So this change is simply reflective of the reality of our business and intended just to bring clarity to an existing situation.

Des, some of your peers have used an auto ship agreement as a sort of an inducement to sign up as a -- what their nomenclature is, a preferred member or a preferred distributor or preferred customer. Wouldn't that have been an opportunity for you to set up something like that?

Tim, we don't favor auto ship significantly for this reason. In our business it is all about the personal interaction between the distributor and their customers. And so from that perspective the idea of simply product shipping automatically just doesn't automatically gel with that. We want to encourage regular contact. If you think about it, that's one of the magic of a nutrition club. The fact that you have regular contact three, four, five times a week between a distributor and their customers. So frankly, auto ship programs where people are just receiving products automatically certainly if a customer wishes to have something like that, we'd certainly explore it. But frankly as a matter of policy, it is not something that we really support and it's one of the points of difference between Herbalife and our competitors.

Sounds good. Thanks.

At this time there are no further questions. Presenters, do you have any closing remarks?

This is Michael. I just want to thank everybody for their questions and for participating today. We are obviously extremely proud of the quarter, proud of our distributors, our team members, everybody involved with Herbalife. Our vendors, all of the product excellence that's taking place in the Company. As we said in today's call, our business has never been stronger and our guidance reflects our confidence that our business will continue to strengthen as we close out 2013.

We have a goal here at Herbalife, and it's build it better. And every day we believe this philosophy will continue to make our Company extremely valuable to you, our investors. So we look forward to seeing you all and being with you all on our call next October or this October. So thank you very much. Onward and upward.

This concludes today's conference call. You may now disconnect.