康寶萊 (HLF) 2013 Q4 法說會逐字稿

Good morning, and thank you for joining the fourth-quarter and full-year 2013 earnings conference call for Herbalife Ltd. 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 Brad 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 preparing period-to-period results of operations in a more meaningful and consistent manner.

Please refer to the Investor Relations section of our website, Herbalife.com, to find our press release for this quarter, which contains a reconciliation of these measures. Additionally, when Management makes reference to volume during this conference call, they are referring to volume points.

I'll now turn the call over to Michael.

Thank you. Brett. Good morning, everyone, and welcome to our fourth-quarter and FY13 earnings call.

As we pre-released a few weeks ago and announced yesterday, the financial strength of our business has never been stronger and was the best in our Company's 34 year history. These results led to another record performance in terms of both top and bottom line.

Fiscal 2013 net sales of $4.8 billion were 18% above last year's results. Fourth-quarter net sales of $1.3 billion were 20% above last year's fourth quarter. Our adjusted fourth-quarter EPS of $1.28 increased 28% compared to the prior-year period. Our adjusted full-year 2013 EPS of $5.37 is an increase of 36% compared to the prior year.

Our fourth-quarter results reflect a 13% increase in the average active sales leaders, and an increase of 15% in the number of new members. In 2014, we retained a record number of sales leaders and our overall retention rate was constant with the prior year of 51.8%.

Our updated 2014 guidance reflects our expectation that we will carry this positive top-line momentum in 2013 right on into 2014. It also includes increased FX headwinds, as many of you have modeled, along with the very positive $0.39 impact on EPS from our recent financial transactions.

You know, at Herbalife trading shareholder value is primary. It's a primary objective for a management team and our Board of Directors, and as such, we are always evaluating the proper capital structure to best maximize shareholder value above and beyond the favorable contributions from our strong financial performance. As many of you know, when our stock was in the mid-30s last year, we began a process to re-capitalize the Company, take advantage of our strong cash flow to buy back stock.

As luck would have it -- or I probably should say as bad luck would have it, in April our auditors resigned due to a non-ethical and illegal behavior by the senior auditor partner on our account, and thus we were left with three years of un-audited financial statements. In May, the Company engaged Price Waterhouse Cooper as our new auditor, and a successful re-audit was completed in mid-December, despite significant interference from Bill Ackman.

The audit was complete, and therefore we went back to the market to pursue a recapitalization and maximize shareholder value. The $1.15 billion financial transaction that we completed two weeks ago will be very accretive to the Company, resulting in approximately $0.56 of accretion on an annualized cash basis. John will provide a more in-depth summary of this transaction and explain the benefits to shareholders later in our call.

You know, for 34 years Herbalife members have been offering a safe, simple and effective weight-management program that encompasses personal nutrition, education and product training, which go hand-in-hand with our flagship and industry-leading meal replacement shakes. Herbalife members create a social community and a support network that research has shown improves the likelihood of participants to be successful in achieving their weight-management goal.

The global obesity epidemic continues to be a catalyst for Herbalife around the world, as it is the largest macro trend that positively affects the sales growth of our Company. In the US, for example, the CDC's most recent statistics indicate that 34.9% of the adult population is obese, and that number increases to 42.5% for Hispanic adults and 47.8% for African-Americans here the US.

Countries and their governments around the world are becoming more aware of the eventual toll that this epidemic can have on their citizens and on their economies and are now looking for solutions. In the New York Times last week it was estimated that obesity and its related diseases, including type-two diabetes now cost the health care system more than $1 billion per day. Herbalife nutrition products and our members are well-positioned to help be part of the solution to this ongoing epidemic.

Another macro trend that can positively affect Herbalife is the high un- and underemployment figure. The direct-selling business model is designed to provide economic empowerment to people wanting to earn supplemental income and, for a small few, build a full-time business.

We engage independent and reputable survey research firms to take a close look at our business: specifically, Nielson and Lieberman Research Worldwide. Their research has proven that the majority of our members joined Herbalife with the primary purpose of buying our products at a discount. There's another segment of our members who are interested in earning part-time or supplemental income. Our research indicates that approximately 4% of our members join Herbalife for the opportunity to earn a full-time income.

These two large mega-trends, along with others such as anti-aging and public health, continue to give us a favorable platform in which our members and products drive throughout the 91 countries in which we operate. This intersection of mega-trends with our products and our actively-engaged sales leaders has resulted in a record after record of financial performance on both the top and bottom line.

Now let's take a closer look at this past year. The fact that Herbalife was able to produce another record performance of double-digit growth while under the constant and unrelenting attack by short-seller Bill Ackman is further testament to the integrity of our business model and the value of our product. As many of you know, Ackerman, a Wall Street gambler who placed a reckless $1 billion short bet against our Company and stands to gain financially if Herbalife loses, has managed an expensive publicity campaign full of false and misleading information about Herbalife.

Most unfortunately, we have seen Ackman's false and misleading statements being repeated by others. The saying goes, you can be disappointed, but don't be surprised. Let me focus on two facts -- proven facts, supported by independent research that undermine Ackman's baseless and reckless argument.

First, we have millions of customers. Three separate research studies performed by to separate leading research companies confirmed that there are millions of Herbalife customers and that the overwhelming majority are outside the network. This information is indisputable and directly disproves Ackman's false and misleading statements about our Company's distribution model.

Second, most people join Herbalife for a discount on products. The vast majority of members do not join Herbalife for the business opportunity. Rather, they join to take advantage of the discount offered on Herbalife's market-leading weight-management, sport nutrition and our other high-quality products.

This information is validated through not only third-party research but also by our internal database of member performance, in which 71% of US members have never sponsored another member. These two points, that we have millions of customers and the majority of our members join for product discounts and not the business opportunity, disprove Ackman's thesis.

Our transparency, with figures like these, the fact that they are true while what Ackman says is false and misleading has forced him to move away from an easily-dispelled pyramiding argument and instead pursue an anecdotal victim campaign. For more then a year, Ackman and his paid consultants in Washington, DC, have combed the country to find voices of a very small minority of current and former distributers and a past disgruntled employer, too, who will paint the Company's practices as bad so that people will think the bad behavior and the practices of the few are somehow representative of the whole.

Of course any company as large as Herbalife, and with as many members, may have a few bad actors. From my point of view, even one bad actor or disgruntled employee is one too many, and that is why we have put in place our gold-standard consumer protection policy. I would find it surprising that anyone believes that Wall Street financier Ackman is really looking out for these people. If he were, he would not be trying to bring down a company that employed 7,400 hard-working people and is improving the lives of millions of satisfied members and customers who value the products, and in some cases, the additional income.

We at Herbalife, on the other hand, are thinking about these people. We allow members an easy entry and an easy exit. For example, in the US new member kits of various sizes, each costing less than $90 and contain sample products that have a retail value that exceeds the cost of the kits, have a generous refund policy. We provide a new members 100% refund on start-up kits within 90 days of purchase and we do not require the individual to even return the kit.

We have an industry-leading inventory return policy. Upon resigning, the member is entitled to 100% refund on all products returned that are unopened and that have been purchased in the prior 12 months. We even pay for the cost of shipping on these return products.

Equally important, these gold-standard policies are not only in the member rule book as they have always been for many years, but now all new members are required to acknowledge that they are aware of these consumer protections before they even join us. Additionally, a brochure containing our gold-standard protections, as well as a hot-line for reporting issues, is now included in every order, beginning this week.

We have begun moving to mandatory compliance training for members joining up for our business opportunity. All new sales leaders are required to complete a formal company training program prior to becoming eligible for royalty compensation. This training includes the key dos and don'ts of direct selling.

All members who want to open a nutrition club are required to complete a formal Company training program. This is in addition to the 90-day waiting period previously implemented. Beginning later this year, we will require annual recertification training as part of the requalification of sales leaders.

Let me recap the changes we have made to set the industry standard for consumer protection. First, we believe we have the best refund policies in direct selling that allows members an entry and exit that is virtually risk free.

Second, we want our members' expectation with regard to the product or the business opportunity to be realized. We believe the best way to ensure that everyone receives the proper information is to over communicate at the very beginning of our relationship. Not only are these changes making us a better company, but also will allow us to be the industry leader in consumer protection practices, and they'll help eliminate the misperceptions and misrepresentations that have been made about our Company over the past year or so.

While we always want to do better, I note that prior to these changes we have been able to demonstrate that the vast majority of members had a good experience, as indicated in the following survey information. According to research done last year, 87% of former Herbalife members would recommend Herbalife products. 87% is a remarkably high level of support coming from former members whose evaluation of Herbalife products is entirely independent from any continuing relationship with the company. This research is consistent with individuals having a good experience with Herbalife.

We believe Herbalife's retention rate is the best in the direct-selling industry. Our retention rate of sales leaders whose behavior suggests they want to build a business is 51.8%. No other direct seller the US discloses such data. Further, the disclosures in the 10Ks of other leading direct-selling companies, such as Tupperware and Avon among others, note the high turnover characteristic of direct selling without mentioning the specific statistics.

Disclosure from other diet companies also note a high turnover rate. We are not abnormal. In fact, we believe that our retention of members is likely higher than any other direct-selling company.

Herbalife -- know we are proud of our diversity of our independent members. Self-identified Spanish-speaking members represent approximately 60% of members in the United States and are responsible for purchasing approximately the equal amount of products (inaudible). Herbalife is incredibly proud of the diversity of our membership.

We want to empower all of our members to live a healthier, active lifestyle and, if they so choose, to take advantage of the business opportunities that a multilevel marketing business model like an Amway, and Avon, or a Tupperware can offer. We believe that Herbalife's model rewards and entrepreneurial spirit and supports the development of successful members, all while providing low risk and easy entry into, and exit out of, the Herbalife business.

In addition to strengthening our business with many build it better initiatives and improving our capital structure with the recent financial transaction, we've also strengthened our Board of Directors. In the fourth quarter, we had the privilege of announcing two additions to our Board of Directors -- Dr. Richard Carmona, the 17th Surgeon General of the United States, and Maria Otero, the former US Undersecretary of State.

Ms. Otero came with her family to the US when she was 12 years old and has spent her career in positions where she could have an active role in helping better the lives of others. Both Dr. Carmona and Ms. Otero were impressed by the passion of Herbalife members and the impact of socialization in nutrition clubs and fit clubs can have on the well-being of consumers around the world. All of us at Herbalife are extremely grateful to all of our board members for the talents and perspective that they contribute to us on an ongoing basis.

We continue to increase our investments in sports and branding, primarily through sponsorship. We understand our brand strength is in the experience and the emotional connection that is created through the success with our Herbalife products and through the success of Herbalife members.

Now, let me take just a moment to congratulate Christiano Ronaldo, an outstanding Herbalife athlete and a product user on his second FIFA Ballon d'Or. Christiano believes in the power that nutrition plays in his athletic career and we are honored that our products or part of his nutrition regimen.

We continue to make investments in manufacturing technology and distribution, creating more access points to help support our daily consumption-driven business, which together which will allow us to stay ahead of our growth expectations while creating a competitive advantage with our Seed to Feed program. Our $130 million investment in Winston-Salem, North Carolina, is on target to begin production of our top products in 2014, bringing over 500 manufacturing jobs to this factory, which will export nutrition products to over 50 countries. When this facility is up and running, we will have a capacity to manufacture 60% to 65% of our inter-nutrition products.

We are experiencing tremendous growth around the world, driven by increasing daily consumption of our nutrition 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 management to introduce new ideas and initiatives worldwide. All of us on team Herbalife are working harder, smarter and every single day to build it better and create enhanced value for you, our shareholders.

Now let me proudly hand the call over to Des for a more detailed update on performance in our key regions.

Thank you, Michael. As you've just heard, we've continued our solid performance throughout the fourth quarter of 2013, marking our 17th consecutive quarter of double-digit top-line growth with 13% growth over the same period in 2012. We are pleased with our business momentum throughout the year, marked by our members' tremendous engagement with their customers and their ongoing dedication to Herbalife's Mission for Nutrition.

Five of our six regions posted volume point growth and local net sales growth, while average active sales leaders with volume points increased in every region over last year's fourth quarter. For the full year, all six regions experienced increases in volume points, net sales and average active sales leaders over the prior year. The results are complemented by the record number of 216,459 sales leaders retained in 2013 as compared to 196,732 in 2012, representing an increase of 10% over the previous period. With the total number of sales leaders needing to re-qualify increasing notably in 2013, our overall retention rate remained at 51.8%, consistent with prior year.

Regionalization and city-by-city initiatives over the last two years have built a firm foundation for united leadership, systemized training and the sharing of daily consumption best-business practices among members. Together, those elements prompted the successful implementation of daily consumption business methods around the world, and we continue to view this focus as the key propeller of growth in our business.

The results over the last several years, and in 2013, which I will share with you today, prove the sustainable nature of the strategy and thereby the significant associated potential ahead. Our 2013 volume point per capita penetration for the company worldwide is at 1.0, a 12% increase over 2012, which included markets with significant populations such as India and China. Daily consumption will continue to move this metric upward as we've seen happen in markets with solid nutrition-club activity such as Korea and Mexico, which have achieved volume point per capita of 8.7 and 7.4, respectively.

2013 highlighted the incredible resolve of Herbalife's members to bring about delicious, low-calorie, accessible and effective nutrition to consumers daily to offset the ongoing obesity epidemic that affects communities throughout the world. At the end of the year, members operated over 78,000 nutrition clubs worldwide and many continue to explore and incorporate additional daily consumption business methods, such as Fit Club, to their core service offering.

Our members' growing interest, dedication and excitement are also seen in their attendance of 2013 events, where over 200,000 members participated in regional extravaganzas, summits, honors and anniversary events. Their success is embodied in the financial results you'll hear about today.

Now let me provide some regional highlights and color on our key regions. The North American region had another impressive quarter. It posted 7% in both net sales growth and volume point growth, each compared to the same period prior year. Average active sales leaders with volume points increased 8%, and new members increased 2%, compared to fourth quarter of last year.

In October, the region held two extravaganzas in Las Vegas and Los Angeles, each with more than 10,000 members in attendance. During the events, we introduced our new skin care line with 10 new paraben-free products, designed for customers who wish to experience results-oriented quality products and to extend their wellness goals to outer nutrition. This line has been well received by members and customers and complements our portfolio products designed to improve health and well-being.

For the year North America's net sales grew 8% and volume points increased 8%, each versus 2012. Average sales leaders with volume points increased 9% and new members increased 3% over last year. In the last 12 months, the per-capita volume point penetration was 3.5, marking a growth of 7% over the metric in 2012.

Within the North American region, the strength of the US market is demonstrated in net sales growth of 4% and volume point growth of 8%, each versus the same quarter last year. Compared to the prior-year quarter, average active sales leaders with volume points grew 8% and new members increased 1%. The volume point per capita penetration for the US is 3.9.

We are pleased with the following developments in the US market over the year. 2013 marked the largest collective entrance of new members in Herbalife's US history, with approximately 280,000 new members, or an average of approximately 23,000 new members per month over the 12-year period.

This demonstrates the strong public confidence and interest in our Company, products and business model after our great performance in the first half of the year. Furthermore, 22 of the top 25 metro US markets posted growth in 2013, another indication of the continued strength in our most established markets.

Now let's turn to Mexico, where local currency net sales for the quarter increased 9% and volume points increased 5%, each as compared to the prior-year period. For the fourth quarter, average sales leaders of volume increased 8% compared to the prior year. For the year, local currency net sales increased 10% and volume points increased 6% over 2012. Average active sales leaders with volume points grew 10% over last year. The per-capita volume point penetration in Mexico for the last 12 months was 7.4.

Mexico's business fundamentals continue to strengthen as members transitioned their daily consumption business practices from operating residential nutrition clubs to commercial clubs. Commercial clubs are typically held in larger venues and operate longer hours, which allow more customers partake in the social activities, classes and services offered by members. By the end of 2013, approximately 79% of the country's 37,000 registered nutrition clubs were non-residential or commercial, an impressive transition for the market that created and developed the nutrition club concept over 10 years ago.

The region also remains committed to bringing products closer to members to better support daily consumption businesses through improved product access. The partnership with Waldo's has enable members to improve customer service through timely replenishment of product and will continue to evaluate promising new product access points in 2014.

Let's move on now to China, where our local currency net sales increased 116% and volume points grew 103% in the fourth quarter, each as compared to the prior-year period. Average active sales leaders increased 39% over the same period last year. For the year, local currency net sales increased 65% and volume points grew 62%, both as compared to 2012.

Average active sales leaders increased 27% over last year and China's volume point per capita for the last four months was 0.3. The meaningful metric growth over the last few quarters is attributed to the progressive adoption and acculturation of daily consumption business methods, as well as the implementation of the first order limits and 5K qualification.

Our focus and China has been, and will continue to be, building a sustainable business foundation for long-term customers, and we remain committed to moving slowly and thoughtfully when necessary to achieve the desired results. In 2013, China also piloted a preferred customer program that identified and provided further benefits to repeat customers. We currently have approximately 150,000 preferred customers in China and we look forward to expanding this concept to other markets in the future.

Next, the Asia-Pacific region. In the fourth quarter, local currency net sales decreased 2% and volume points decreased 4%, each as with compared to the prior-year period. Average active sales leaders with volume grew 6% and new members grew 2% over the same quarter last year.

For the year, local currency net sales increased 5% and volume points grew 2%, both as compared to 2012. Average active sales leaders increased 13% and new members grew 6% over last year. The volume point per-capita penetration in this region for the last 12 months was 0.6.

Korea, Asia-Pacific's largest market, had volume point per capita penetration of 8.7. Local currency net sales for the year remained unchanged as compared to 2012. Leadership continued to engage and educate new members and customers, as well as guide the market through a healthy transition in daily consumption DMO practices.

In India, local currency net sales grew 9% and average active sales leaders with volume increased 14% over the same quarter prior year. It's volume points per capita were 0.16. Factors that promoted sales leader activity included improved access to products in-country and the successful localization and implementation of nutrition clubs. Furthermore, the first-order limit introduced earlier in the year also favorably contributed to the market's development. Having seen its efficacy, the first-order limit will be implemented in several other Asia-Pacific countries later this year.

In Indonesia, local currency sales increased 28% over 2012 fourth quarter. The adaptation of daily consumption DMOs, particularly nutrition clubs, expand the market in 2013 and continues to propel future growth.

Turning now to the South and Central American region, local currency net sales in the fourth quarter increased 51% and volume points in the region were up 25%, each as compared to the quarter prior year. Average sales leaders with volume points in the region increased 29% and new members increased 34% over last year's fourth quarter.

For the year, local currency net sales increased 49% and volume points increased 31% over 2012. Average active sales leaders with volume points grew 29% and new members increased 31% over last year. The per-capita volume point penetration in the region was 2.1.

In Venezuela, volume points increased 15% and average active sales leaders increased 37%, each as compared to fourth quarter of the previous year. Growing member engagement and collaboration have driven daily consumption deeper into the market and contributed to higher sales. The strict currency restrictions in Venezuela, however, have made repatriation very difficult. To reduce our economic exposure to such restrictions, the Company intends to limit the amount of products imported into the market.

Herbalife Venezuela will also begin to develop a self-manufacturing capability over the next two years, and in doing so will better serve local members. We believe that this process will fortify the country's long-term strategy of protecting profit and sustainability as well as promoting market self-sufficiency.

In Brazil, local currency net sales grew 31% and average active sales leaders grew 25% in the fourth quarter, each as compared to the same period last year. The expansion of traditional and daily consumption business methods, as well as popular product launches during the year, have supported market momentum.

Moving on to AMEA, local currency net sales increased 19% and volume points grew 17%, each as compared to the fourth quarter in 2012. Average sales leaders with volume points in the region was up 14% and new members improved 43% over the prior-year period.

For the year, local currency net sales increased 16% and volume points increased also 16% over 2012. Average active sales leaders with volume points grew 13% and new members increased 22% over last year. The per-capita volume point penetration in the region was about 0.7. Members in this region continue to develop and utilize the complimentary business methods of weight loss challenges, fit clubs and nutrition clubs, which supported new customer outreach and improved service customization based on client need.

We are encouraged by the consistent execution and success localization of daily consumption business methods exhibited in both Western and Eastern Europe throughout the year. In Russia, local currency net sales grew 25% and average active sales leaders increased 22%, each over the fourth quarter in 2012. We believe that city-by-city initiatives, ongoing adoption of the commercial and nutrition clubs and strong banding efforts by the company and members, including our sponsorship of FC Spartak Moscow, have increased market recognition and consumer confidence and [track record].

Throughout the year, the UK market consistently executed it's key DMO strategies, and as a result experienced notable growth. Local currency net sales in the UK increased 72% and volume points grew 69%, each as compared to the fourth quarter of 2012. The numerous weight loss challenges held during the year, paired with the consistent client support exhibited in nutrition clubs, enabled customers to experience the efficacy of our nutritious products and the dedicated service of Herbalife members.

Over the last few quarters, nearby markets have observed the UK's growth and have strategized to adopt similar business practices. Markets such as France and Spain have found success localizing and implementing their daily consumption business practices and consequently experienced 14% and 38% volume point growth in Q4, respectively, over the prior year.

Before turn it over to John, I want to highlight a new initiative being pledged our Company, which is referred to as the Herbalife gold standard. As a leader in our industry, we promise to provide and uphold the highest standards of quality and protection for the Herbalife consumer.

The gold standard embodies our build it better initiatives and therefore guarantee clear and consistent communication of potential income before becoming an Herbalife number, low startup costs for those interested in membership, a full refund of the entry kit within 90 days of enrollment if a members resigns for any reason, and a 100% money-back promise for unsold product purchased within 12 months of membership termination. Furthermore, the gold standard highlights our members' pledge to abide by strict product-claim guidelines and avoid misrepresenting Herbalife products as medical, therapeutic or curative.

Since all members must acknowledge the gold standard in writing before becoming a member, we eliminate any doubt that new members are in any way unaware of the promised consumer protection practices or the facts surrounding Herbalife's business opportunity. In addition, we will promote the gold standard in new members materials and training materials for all levels. We are proud to offer this industry-leading standard in consumer protection and believe that this is another important milestone in our build it better initiative.

In closing, let me thank all our members and sales leaders for another great year. We are inspired by their passion, their dedication and their entrepreneurial spirit. Our collaboration improves public health around the world. By providing support, education, and access to affordable excellent nutrition, our members continue to empower consumers on a daily basis so they can truly achieve a healthy, active lifestyle.

Thank you, Des.

First, I'll review the Company's fourth-quarter and full-year 2013 audited results. Then I'll provide information on 2014 guidance, before discussing our new convertible debt deal and our share repurchase strategy.

The fourth-quarter and full-year results reported yesterday were in line with the pre-release issued on February 3 in conjunction with our $1.15 billion convertible debt deal. For the fourth quarter, the company reported record net sales of $1.3 billion, representing an increase of 19.8% compared to the fourth quarter 2012.

Local currency net sales for the period increased 22%, with an unfavorable FX impact of 2.2% as compared to the same period last year. For the full year, we reported net sales of $4.8 billion, an increase of 18.5% over 2012.

Since Des has already provided significant regional data around our volume points and net sales results, I'll now turn to margins. Our gross profit margins for the fourth quarter and full year were essentially flat compared to the respective prior-year periods. Before moving to SG&A and operating margin, note that our reported fourth-quarter and full-year 2013 results include some unusual items that we consider to be outside the range of normal operations.

We have therefore excluded these expenses from our adjusted fourth-quarter and full-year financial results. They are as follows: one-time costs associated with our re-audit; for the quarter, these costs consisted of $10.8 million in pretax expenses, or an $0.08 impact on EPS. For the full year, costs were $20.4 million on a pretax basis, or a $0.14 impact EPS. These costs may ultimately be recovered, but until a definitive agreement is in place, the cost of the expense is incurred, as will any recovery.

Our adjusted results also exclude expenses incurred in response to a tax on the Company's business model. For the fourth quarter, these costs were $5.3 million on a pretax basis, a $0.04 impact on EPS. For the full year they amounted to $29.1 million pretax expenses, or $0.23 per share. And finally, our adjusted results also exclude expenses related to the impact of the Venezuelan bolivar devaluation, which in the fourth quarter represented no pretax impact, but a $0.01 impact on EPS, and for the year, these costs represented $15.1 million of pretax expenses, or a $0.09 impact on EPS.

The following comments regarding Company's fourth-quarter and full-year operating margin, effective tax rate and EPS all exclude these re-adjusted items. Fourth-quarter adjusted operating margin of 15.6% increased approximately 52 basis points compared to the prior year. For the full year, operating margin of 16.6% improved by 34 basis points over 2012.

Fourth-quarter SG&A as percentage of sales, excluding China sales, representatives and service provider expenses, increased by approximately 45 basis points. This movement is primarily due to the timing of sales events, as certain events held in the third quarter of 2012 took place in the fourth quarter of 2013. On a full-year basis, SG&A as a percentage of sales, excluding China sales, representatives and service provider expenses, were essentially flat with 2012. 2013 full-year SG&A included net foreign currency losses of $22.8 million, as compared to $16.7 million for 2012.

Moving onto our effective tax rate, our fourth-quarter adjusted tax rate was approximately 97 basis points higher than our effective rate of Q4 2012, but in line with the guidance we provided in October. The full-year 2013 adjusted effective tax rate of 26.1% was approximately 261 basis points lower than 2012 rates, primarily due to an increase in net benefits from discrete events that were partially offset by country mix.

Fourth-quarter adjusted earnings per share of $1.28 was $0.28, or 28%, higher than earnings per share for the same period in 2012. For the year, adjusted earnings per share of $5.37 was 36% higher than the prior year. Both reported and adjusted EPS numbers were in line with our pre-release earlier this month. The improvement over the prior year were primarily driven by growth in the top line and a lower share base due to our share buyback activity. These items were partially offset by our higher effective tax rate, and approximately $0.08 for the quarter and $0.11 for the full year of unfavorable impact in foreign currency.

In 2013, our [book] generated cash flow from operations of $773 million, an increase of 36% compared to 2012. Net of approximately $147 million in capital expenditures for 12-month period, the Company's free cash flow for the full year was approximately $626 million.

Before I discuss 2014 guidance, I would like to note a couple of assumptions. With respect to Venezuela, our guidance assumes the GAAP rate of 6.3 to 1 for January results, and 10 to 1 for the balance of the year, and excludes the potential impact of any future devaluation of the Venezuelan bolivar and any future repatriation of existing cash balances in the country. Our guidance also excludes any ongoing expenses incurred responding to the attack on the Company's business model and the impact of non-cash interest costs associated with the Company's convertible notes.

For all currency assumptions, we move the average closing rate during the first two weeks of January, with the exception of Venezuela, as previously noted. This is consistent with our historical practice. Additionally, the currency rates assumes an our recent guidance reflect movements that are $0.10 unfavorable to rates used a quarter ago.

From a volume point perspective, we are reaffirming our full-year 2014 volumes growth expectation that was first introduced last October and again in the February 3 re-release. We expect the full-year and first-quarter 2014 volume growth to be in the range of 6.5% to 8.5%. Of special note, as mentioned in October, Venezuela's volume is expected to be reduced by approximately 100 million volume points in the year in reaction to the economic and currency situation in the country. This decrease is incorporated into our guidance.

With respect to EPS, our guidance expects adjusted EPS which, as previously mentioned, appropriately excludes the impact of non-cash interest costs associated with the Company's recently issued convertible notes, as well as the other items previously mentioned. For the full-year 2014, we are taking both the low and high end of the range up by $0.40 per share to $5.85 to $6.05. This is increases a result of the cash accretion of the recent debt deal.

First-quarter 2014 diluted EPS on an adjusted basis is expected to be between $1.25 and $1.29. This includes a $0.20 currency headwind versus the prior-year period. The cash accretion from the new debt deal only benefits the first quarter by $0.01 per share.

Let me now cover the new convertible debt deal. Since the KPMG issues of last April, we have consistently maintained that when the re-orders were complete, we would be looking to take on some additional leverage to fund the buyback, and any new debt structure that we enter into would be based on economics.

There were some rumors recently that we executed this particular structure because it was all that was available to us. This is simply not true. We had other options available, but chose this structure because it provides the best economics for the Company and its shareholders.

Let me provide some details on the specifics. First, the coupon on this debt is only 2%, not much different than our dividend, and since we are using the net proceeds to buy back stock we are saving on the dividend. For example, a 2% coupon on a $1.15 billion debt deal is $23 million annually in costs. With the repurchases expected from the net proceeds of this deal, we will save approximately $17 million annually in dividends. So on a net cash basis ,it is costing the company approximately $6 million annually to borrow $1.15 billion, an economically strong deal for the company and its shareholders.

Second, the Company effectively repurchased 9.9 million shares through the prepaid forward as part of the debt transaction. The economics of this deal passed through to the Company immediately, even though the shares will not be delivered until the end of the contract.

To be clear, for accounting purposes and for dividend purposes, these shares are out of our share base as of February 7. The additional approximately $300 million in net proceeds is expected to be used to buy back stock over the next three months. Depending on the share price, we expect to repurchase a total of 14 million to 14.5 million shares through the prepaid forward in our out-right buyback as a result of this transaction.

Third, the deal is very accretive from a cash perspective. The accounting for a convertible includes non-cash interest that is commonly excluded for performance purposes, and we have excluded it from our guidance and we will exclude it from our adjusted results. From a cash basis, the accretion for 2014 is expected to be approximately $0.40 per share, with an annualized accretion of approximately $0.56 per share. The profile of this benefit for this year is $0.01 benefit in Q1, a $0.10 benefit in Q2, and the remaining benefit split equally in quarters three and four.

Fourth, while holders of our debt begin to receive equity benefits at a stock price of $86.75, the Company's capped call option effectively increases the conversion price to $120.79 per share. This element works very much like a stock appreciation writing. The stock price hits $130.79, then the Company will issue equity for the $10 difference.

In more practical terms, if the stock achieve $150 stock price, the Company will issue approximately 2.6 million shares from the 14-plus million shares we repurchased as part of this deal. The net retirement of shares, at $150 per share, will be in excess of 11 million shares. While this deal may sound complex, the economics are simple and very compelling.

Moving on to share repurchase, the company plans to repurchase stock over the next few months with the $300 million remaining from the net proceeds on the convertible deal. Additionally, we expect to continue to repurchase stock on a routine basis. Our guidance includes $50 million in repurchases each of the next three quarters in addition to the $300 million from the debt deal.

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

(Operator Instructions)

Your first question comes from the line of Rommel Dionisio with Wedbush Securities.

Thank you. Hi, good morning. I wonder if you could just update us on some of the direct access initiatives outside of Mexico. You guys referenced the Waldo's arrangement. It's going very well. But also if you could just give us an update on how Russia, India and perhaps some other markets are going with some of those initiatives. Thanks.

Hi, Rommel. This is Des. We have a number of different programs going in different markets. We are obviously looking to replicate this Waldo situation. We are also testing automated sales centers in EMEA -- if you think of a large capacity vending machine, but behind locked doors with access only to it by members. Frankly, we see this as very promising.

Were also looking at a FedEx relationship in the Philippines and other market that would provide similarly -- similar access to local product pickup. So we certainly have seen the impact of this in Mexico, Rommel, and we look forward to reporting results in other markets in quarters ahead. It's certainly a priority for us and you're going to hear a lot more about this in the future.

Okay. Is a possible to quantify at this point to see how much the business is expanding outside of the traditional urban centers, or are we a little early for that?

You know, the focus of the initiative is really due to two things. One is within urban centers is to provide 24/7 access, because obviously in highly populated urban centers what we see is that it's challenging sometimes for distributors to make their way across cities. It's not just a rural initiative; it's also for urban centers. Difficult to quantify exactly, but it's something that we're looking at closely and I think when we provide further information, Rommel, we'll try and do that for you also.

Okay. Thank you, Des, and congratulations on the quarter.

Sure. Thank you.

Our next question comes from the line of Sandy Chin with Visium Asset Management.

Morning, guys. I had a little trouble hearing some of the call because I'm down at CAGNY, but can you just clarify, what is the currency headwind for the full year?

It is $0.65 for the full year. It's $0.20 in the first -- these are approximate numbers -- it's around $0.20 in the first quarter and $0.65 for the full year 2014, versus what the rates were on average for 2013.

And how much of that is Venezuela?

Around half of that is Venezuela. And then it's Brazil. Indonesia, Mexico, India, Argentina are all contributing.

So absent this FX impact, guidance would have been $0.65 higher, or not necessarily?

Well, absent FX, it would have been $0.65 higher. I think I just caution you on the Venezuela one because 6.5, which is what Venezuela was accounted for last year, is certainly likely to change and probably not reflective of the economics in that market last year.

And once you implement that self-manufacturing facility in Venezuela next couple of years, will that mitigate some of the impact from FX from Venezuela at least?

Just to be clear, we're looking to produce locally in Venezuela. Not necessarily self-manufacture. And the reason is, companies that are manufacturing in Venezuela have had greater ability to access dollars for the ingredients they need to come into keep the factory running. So we think it's an effective way to pay for supply.

So it's a process because our products have to get licensed and that's time consuming in Venezuela, even though it's a local manufacturer, but we think it's a way to lower the -- I wouldn't say FX risk. More the currency control risk associated with importing product in Venezuela.

Okay that's fair. And my second question is disparate from currency. Can you guys give an update on the Senator Markey letters and inform us as to what's going on.

Sure. This is John. I'll take that question. We have been in frequent communication with Senator Markey's office. On January 31, I, along with other members our executive team met with Senator Markey's staff in person, and we appreciated the opportunity to do so. I thought the meeting went well. I thought we were completely responsive to their questions. And subsequent to that meeting, we have sent a letter to his office.

The letter responding to his inquiries? Or just as a summary of your meeting?

Yes, both.

Got it. And is there a next step we need to be aware of, or --

Not that I am aware of.

Okay. Did you feel like it's been resolved? (multiple speakers) That you guys have addressed all the questions he had?

I think we were completely responsive in the meeting and I think we did a good summary in the letter, and beyond that I think it's in the hands of the staff of Senator Markey's office and they're reviewing the letter.

Okay, thanks.

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

This is Mitch in for Mike. Congratulations on a great quarter.

Thank you, Mitch.

First, with regards to Korea, and I'm sorry if I missed this earlier, but how are the training initiatives in the clubs you recently spoke to progressing?

I think they are progressing well. Mitch, obviously our business in Korea is exceptionally strong. We've got one of the highest volume point penetrations of any major market in the world there. We've got a very mature leadership. So we're -- obviously, we're focused on improving some of our metrics there and working with our leadership to accomplish that, and this training in the clubs is a key part of that.

So we believe it's progressing well. You may be aware, we've received a number of consumer awards and media awards in Korea in the past 12 months, which certainly is reflective of our business model there and our acceptance as a nutrition company. We see good things ahead for Korea, based partially on the training and other initiatives.

Okay. And then second, looking to the Asia Pac region as a whole, and given where the business in Korea stands now, is it possible for the region's retention rate to converge to a level around the company average over time?

Absolutely, Mitch. In fact, we see this as one of our great opportunities in the Asia-Pacific region. As you know, we had a tremendous period of growth there. And as normally follows in our business, we then have a period of consolidation where we focus on improving the metrics, improve training, providing better support to those who joined the business. So that process is all taking place. Obviously, we've got a huge population in Asia-Pacific. We are increasing the addressable audience with daily consumption, with enhanced product access and with more products. So huge opportunity ahead and that improvement in the metrics is the key part of that.

Okay. Thank you, Des. Good luck, guys.

(Operator Instructions)

You next question comes from Mark Sigal with Canaccord Genuity.

Hi guys. It's Mark on for Scott. The growth in China was once again very strong. I was wondering if you can just provide a little more color, perhaps on club growth versus club productivity and overall productivity there. Thanks.

Yes. So Mark, we are very pleased to what we see in China. What we see, obviously, is continued adoption of the club model, continued acculturation of that. We are also excited, frankly, by this preferred customer program. As we announced, we've got about 150,000 members of this preferred customer program. Under this program, a customer will pay an amount of about RMB15, about $2 or $3, and in return for that they receive -- they have the option of buying directly from the company, in which case we track loyalty points. And then at the club level, those preferred customers would be able to redeem those points for little items, what we call promotion items, and so on.

This is been hugely successful. It's helping us build a stronger, stabler business. It's giving direct visibility to customer orders. So for a lot of reasons, we see good things in China. As always, we are cautious, because it is China, but certainly we're planning additional investments to support our future growth there.

Great. And then, Des, earlier in the year you talked about some significant weather disruption in Mexico. It seems like those issues have abated. Can you talk about how things have trended coming out of those major storms you faced?

Yes. So those were the hurricanes that we referred to towards the end of last year and it certainly did have an impact, but as you can see from the full quarter results, volume points up 5%, we are back on a stable growth curve again. So, very pleased to see that.

Okay. And then lastly, with the new manufacturing facility expected to come online in the not-too-distant future, can you guys talk a little bit about some margin capture opportunities there, and just how you are thinking about that as the plant ramps?

Yes. So let me start by saying the ramp-up of the plant, the construction site is on time and on budget. We expect to start beginning production and it's the early ramp up in June, July time frame. I think the ramp up is going to be about a 15-month ramp-up phase, and I think that in 2014 it's actually slightly dilutive as the costs get run through the P&L, with not a lot of production -- about $0.03 dilutive, this year. Then we start to see accretion by the end of 2015 and when we get closer to that point will give you some more specifics for modeling purposes.

Okay, fair enough. Thanks a lot.

Our next question comes from Meredith Adler with Barclays Capital.

Hey, thanks for taking my question. I have actually two questions. I want to go back to China for a moment and just can you -- is there anything for you to say about increased government involvement or scrutiny on your business, or whether the scrutiny they have on other MLM businesses is having impact on you, or you think it will?

Meredith, I'll take the question. This is John. I'll start by saying I'm certainly not a authority on Nu Skin's model there, although I think we are fundamentally different on go to market there. But there is some good news. I think the indications are -- and I'm not authority on this either, but the indications are that Nu Skin will navigate through this areas or events and there may be, from some stories we heard, same ones you have, that there may be some more clarity coming on out of regulations work in China and that's good for the industry.

China is an ever-changing, evolving marketplace. I think we are comfortable that we are in compliance with today's regulations and we're also comfortable that if regulations mature that we can be in compliance with wherever they go. The thing to remember is, our business is based on people taking our product every day and that model will work and we can certainly adjust it accordingly as needed in the marketplace.

And your growth doesn't scare you. It seemed like one of Nu Skin's problems was that they grew very, very quickly. You feel like you're in control despite the rapid growth?

Again, I'll preface my comments by saying I'm not an expert on Nu Skin's model. I don't know that growth is the problem. I think it's the foundation of the growth. As long as it's coming from people taking the product every day, backed by genuine demand, there's not going to be an issue.

And then a totally different subject -- most of the buyback that you are going to be doing this year will come from the convert offering. But you generate quite a bit of cash every year -- sitting on a lot of cash. Obviously, some of it's in Venezuela. Can you just talk a little bit about any thoughts on what to do with that cash? I think you have got revolver borrowings. Is it time to pay those down? Can you give us some color on it?

Great question. I will start by saying we did the $1.15 billion convertible debt deal. The net proceeds of that will all be used to buy back stock. A lot of that has happened already. The rest will happen over the next few months. And then what we've included in guidance is $50 million a quarter, starting in Q2, Q3 and Q4 in addition to this debt deal, which is very consistent with how we have guided in the past. And the purpose of that guidance is to indicate to our investors that we intend to continue to buy back stock and that will be, at least as we expect today, that will be our continued use of cash which will be to buy back stock.

Were not M&A oriented. We don't have a lot of capital needs, so with the cash we generate there are really two options -- you can pay down debt or return the money to shareholders. Our choice would be return money to shareholders as long as we have a conservative capital structure, and we think the current structure we have is still conservative, and no need to pay it down.

But you are generating a lot more than even $200 million of free cash flow every year, which would be if you did five -- or four quarters of $50 million, that is what you would use. It just seems like maybe you are going to start building your cash balances again. Have you thought at all maybe longer-term about how you address that?

So we have -- and I think, again consistent with our historical approach, is we forecast $50 million of buyback per quarter and keep the rest in reserve to buy back opportunistically and that is our intention at this point in time. Our intention is still to use it as a buyback. It's just there is a portion of it -- a large portion of it not included in guidance.

So 3.25 % -- 0.75% drop in the stock might be a buying opportunity? That's today's drop.

It might be.

Okay. Thank you very much.

Thank you.

There are no further questions at this time.

Hi, this is Michael. So let me take a minute to close here real quick. Guys, this company -- we've got a great team. We had another record-setting quarter and a full year that was driven by fantastic business metrics. I think it's really important for us to focus on who we really are. We are a solid company.

We're always looking to improve and we are uniquely positioned to help in the fight of global obesity, anti-aging and help improve community health. We've had a wonderful run of products. Our products are better today than ever before. There's [still true] and innovative daily consumption sales method of clubs, fit camps, weight loss challenges and really, most importantly, we have a growing sales leader group who are highly engaged and active, spending time to educate and inspire their customers on the benefits of good health, nutrition and a healthy, active lifestyle.

And as John pointed out, and our guidance suggests, we continue to expect strong growth for our company in 2014. We really look forward to bringing you our first-quarter results later this year in April. So thank you for your continued support. Have a wonderful day and let's go Herbalife. Thanks.

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