康寶萊 (HLF) 2014 Q2 法說會逐字稿

Good morning, and thank you for joining the second-quarter 2014 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 Amy Greene, the Company's Senior Vice President -- Government, Corporate, and Investor Relations. I would now like to turn the call over to Amy Greene to read the Company's Safe Harbor language.

Good morning. Before we begin, as a reminder, during this conference call, comments may be made that include some forward-looking statements. These statements involve risks and uncertainties, 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 will now turn the call over to Michael.

Thank you, Amy. Good morning, and welcome to our second-quarter 2014 earnings call. We have just concluded the highest overall sales quarter in Herbalife's history.

Our results announced yesterday demonstrate the fundamental strength of our mission to provide high-quality nutrition products through a networks of engaged members in a community-based approach, of health and wellness benefiting people around the world. This has been a cornerstone of our success since 1980, and we're just getting started.

Let's review some of the highlights from the second quarter. Net sales of $1.3 billion increased 7% in the quarter, and volume growth of 5% compared to the prior-year period. Our adjusted second-quarter EPS of $1.55 increased 10% compared to the prior year. Underlying sales growth was an 9% increase average active sales leaders, and a 5% increase in new members.

We generated $156.9 million in cash flow from operations, and invested nearly $40 million in capital expenditures to support the growth in our business, and expand our B2B program, the highlight of which is our Herbalife innovation and manufacturing facility in Winston-Salem, North Carolina, where we've already hired approximately 290 employees. And we plan to higher more than 200 more people at this facility as it ramps up production.

Also last week, our Board of Directors approved a new manufacturing facility in Nanjing, China. This new facility will support the growth in the greater China region.

We have raised our adjusted 2014 EPS guidance to a range of $6.17 to $6.32, reflecting our expectation of continued strong sales growth, and profitability throughout the remainder of 2014. We repurchased more than $580 million or 9.8 million shares during the quarter under our share repurchase program, to further our goal to accelerate returns to shareholders. We've had 19 straight quarters of record top and bottom line performance, and we believe the opportunity for Herbalife has never been greater than it is today.

Let me discuss four of the core reasons we believe our future is so bright. One, our products address the real consumer needs. Over 60% of our product sales are in weight management. They are designed to provide solutions to help mitigate and curb the obesity epidemic, and the adverse impact it has on rising healthcare costs.

Two, the community based approach offered by our direct selling model is effective in supporting sustainable behavioral change for weight management and promoting a healthy active lifestyle. Three, our continued record performance in the face of an unprecedented $50 million short seller campaign speaks to the effectiveness and the resilience of our model. And four, our financial strength and capital structure enables us to continue to create value for our shareholders.

Let me dig deeper into each one of these four points. First, the Harvard School of Public Health estimates that the worldwide rate of obesity has nearly doubled since 1980, with over 200 million adult men and just under 300 million adult woman being obese. When you look at the rate in children, it's even more worrisome. In 2010, 43 million preschool children were overweight or obese, and that is a 60% increase since 1990.

In the United States, obesity is second only to tobacco in the number of deaths it causes each year for adults under the age of 70. The World Health Organization was recently cited that the number of obese people in the world has doubled since 1980. The WHO in 2012 acknowledged that while obesity was historically identified as an issue for high-income countries, overweight and obesity are now on the rise in low and middle-income countries, particularly in urban neighborhoods.

The scientific substantiation of our meal replacement products is supported by scientists around the world. And in fact, in 2010, the European Food Safety Authority approved meal replacements for use in weight loss and weight management, based on 47 scientific studies. A Cornell University study estimates that obesity now accounts for almost 21% of US healthcare costs Additionally, a team of Stanford University School of Medicine researchers just published a study that cited high correlation between inactivity or lack of exercise rather than simply higher caloric intake, as a driver for a dramatic increase in obesity.

The research pointed to the percentage of women who reported no physical activity having increase from 19% to 52% between 1988 and 2010. And the percentage of inactive men rose from 11% to 43% over the same period. Not surprisingly, obesity also increased from 25% to 35% in women, and from 20% to 35% of men. However, the number of calories consumed per day has not changed materially.

Given these facts, it's not surprising that sales methods used by our members around the world have expanded to incorporate fitness and support activities into their training and club offerings, to complement the use of our weight management products in communities around the world. To expand on my second point, the strength of community-based approaches offered by our direct sales model is more effective in creating sustainable behavior changes from weight management and promoting a healthy active lifestyle.

The reality is that people are more likely to lose weight in a group setting or an environment than going at it alone. This has been researched and cited by many sources, including the researchers at the University of Pennsylvania, who recruited 166 people to participate in a weight loss program either alone or with three friends or family members. Among those who embarked among the program with friends, 95% completed the program compared to only 76% of those who dieted solo.

After 10 months, 66% of the group dieters maintained their weight loss compared to only 24% of those who were on their own. This example supports a simple message, that virtually any aspect of an individual's life, where behavioral change is desired, can benefit by inclusion in a social network or support group. It's no wonder that the global rollout of Nutrition Clubs, fit camps, one-on-one support and even weight loss challenges conducted by our members provide very effective sales methods to increase the likelihood that consumers can achieve their weight loss goals, while combining low-calorie meal replacements in a group setting.

My third point is our record performance continued in the second quarter in the face of a baseless campaign and difficult comps over last year's results. Last year was the largest volume quarter in US history, and despite this, we saw the highest net sales in the Company history and the third highest in terms of volume in the history of the company during this past quarter. Second-quarter sales leader activity was at an all-time high, at 77% of the US, compared to 69% last year.

Also, during the quarter, 44% of new sales leaders that qualified, did so through the more gradual 5K method, compared to 38% last year. This is a great leading indicator for improving retention rates, as well. Our year-to-date buyback rates in the US are the lowest in history, going back as far as our records are available. At our general market extravaganza in early July, attendance was up 24% over last year's event.

We are pleased with the progress we see around the world, the focus our members bring to the expansion of their own independent businesses, as they spread the mission of a healthy active lifestyle across the globe, has never been stronger. We're continuing to see double-digit growth in both EMEA and China, where new sales methods are making engagement and a fitness regime possible for more and more customers. We just finished a six-city tour in China focused on integrating more elements of our healthy active lifestyle program into Nutrition Clubs there.

The fourth point, our continued financial strength and capital structure, offer attractive opportunities to create continued value for you, our shareholders. We have had 19 successive quarters of record top and bottom line performance. Our net debt, excluding cash in Venezuela, is approximately $1.2 billion.

Our company is conservatively levered. As most investors are aware, Herbalife has historically generated a significant amount of free cash flow, and has used the majority of that to repurchase shares. We expect to continue our buyback program, which John will discuss a more detail, in just a few minutes.

Beyond the ongoing success of our financial results are a reflection of what we have always known to be true: the deep and intrinsic value that Herbalife's products and business opportunities bring to our customers, members, and communities around the world. And it is creating a growing business and a strong free cash flow. As a company, we pride ourselves on the fact that we provide our members and customers with great high-quality products that meet real consumer needs.

Based on research, nearly three-quarters of our members joined primarily to use our products for their own consumption, which is a testament to its quality and effectiveness. Herbalife has great products, along with the culture and a distribution network that is helping improve public health globally. We are proud that people choose Herbalife so that they can connect with a community of like-minded people to achieve their goals of becoming healthier, and living a more active lifestyle. Whether it is simply working with one of our members or attending a nutrition club, weight loss challenge, or fit camp, Herbalife members provide a support network, person-to-person, to bring people together who have similar health and fitness goals.

Our nutrition clubs, along with other interactive social based sales methods, provide the support of a structured environment, and are an important way we advanced our mission to bring good nutrition, activity, and economic opportunities to communities around the world. Additionally, nutrition clubs provide a fantastic setting for our members and consumers to connect face-to-face and support each other on the road to a healthier, more active, lifestyle. We're proud that these nutrition clubs are an internal components of many neighborhoods, where too often there are few options for access to social support, information, and nutritious choices for food.

Additionally the nutrition clubs that originated in Mexico, created by a member over 10 years ago, continue to evolve. Over the past several years, numerous studies have been published creating consumer awareness, that in order to lose weight, you need to burn more calories than you consume. This awareness has treated new consumer demands for activities, and satisfying this demand has been a key driver behind our increased focus for our members and customers having a healthy active lifestyle. This is a primary reason for the success of fit camps, and is now giving a rise to new sales method that incorporate exercise and activity.

We remain successful because we're a Company that provides an invaluable and unique opportunity for those members who choose to pursue an opportunity for supplemental or full-time income. This paired approach, entrepreneurship and value creation, that defines Herbalife is exemplified by the individual efforts of our members and sales leaders. As the impact our members have on their own communities grow, so does their enthusiasm for Herbalife.

As I mentioned earlier, we differentiate ourselves in the community-based approach, to help people lead healthier more active lives. This organic growth approach, family by family, neighborhood by neighborhood, and city by city, is the essence of Herbalife, and one that will provide a growth catalyst for years to come. Our confidence in the success of our products and sales methods is a catalyst for member engagement and activity, and our strong financial performance.

As you know, our Company is a subject of an FTC inquiry. We are confident that there will be a successful conclusion that will keep Herbalife on the path to success for years to come. Two particular updates reinforce the confidence.

First, we recently retained an independent firm and former FTC economist to assess our business. The conclusions released publicly last week were clear and definitive. It confirmed what we already knew: Herbalife is a legitimate, socially beneficial business model.

The research was conducted by Dr. Walter Vandaele, a respected economist and former economic adviser to the Director of Bureau Competition and Assistant Director for the Regulatory Evaluation Bureau of Consumer Protection at the FTC. Dr. Vandaele has completed an extensive and thorough analysis of Herbalife. Dr, Vandaele found that approximately 97% of Herbalife's US products are purchased by consumers for end-use consumption.

In addition, he found that the vast majority of Herbalife's product line, 80%, is consumed by members who join Herbalife to receive product discounts for themselves and their families, or is consumed by individuals outside of our members. Doctor Vandaele's conclusion confirms what we have already known, that there's real demand by real people for our products.

And second, a recent landmark court case regarding a multi level marketing company further confirms what we've known all along, that our business model is lawful and beneficial. The recent decision in the FTC versus BurnLounge by the US Court of Appeals for the Ninth Circuit validated that consumption of products by participants can be a legitimate measure of sales for multi-level marketing companies, provided that the sales are motivated by genuine demand, as is the case for Herbalife. Once again, undeniable facts are on our side, and the truth will continue to prevail.

Two weeks ago, nearly 13,000 people came together in Chicago to celebrate the value Herbalife brings to their lives Over three days of training, education, and recognition, attendees shared in the Company's mission, vision, and value, as well as the integrity behind our products. Any way you cut it our performance and strong support for our company has been and continues to be solid and strong.

As a reflection of our confidence in the strength of our business and the future position of our Company, we have recently completed the successful repurchase of $581 million in our common shares during the second quarter. Since 2007 we've returned approximately $3.1 billion to our shareholders in total share repurchases, and we will continue to strive to use our capital effectively to create value for all our stakeholders.

We're incredibly proud of the hard work of our 7,600 employees, who support almost most 4 million dedicated members, and our outstanding products and services that positively impact the lives and health of millions of consumers. We are expired each and every day by the passion of our members and employees, in their tireless efforts to build it better.

Now let's turn it over to Des for a more detailed update on performance in our key regions.

Thank you, Michael. By all measures, we have demonstrated solid performance in the second quarter of 2014.

Four of our six regions posted volume point growth and local net sales growth, while average active sales leaders volumes points increased in every region over last year's second quarter. This exceptional growth exemplifies the resilience and dedication of our sales leaders to provide their customers with the advice, support, and nutrition products they need, to achieve their health and wellness goals.

At Herbalife there is one constant: change, or perhaps more aptly put, progression. Our members and those of us that support them are always looking at ways to advance business methods, or DMOs that help extend Herbalife's ability to reach more consumers in our 90-plus markets. The entrepreneurial nature of our members is a driving force in the creation and implementation of ways to adapt business methods to service the needs of customers in different communities around the world.

For several years we have been talking about the benefits and expanded utilization of data consumption business methods, as well as have they have been acculturated throughout our markets. One adaptation that we're very excited about is the inclusion of various active lifestyle components into daily consumption DMOs, such as fit camps, 5K runs or even something as simple as neighborhood walks. Our members understand and are increasingly coaching their customers that when the usage of Herbalife products is coupled with exercise, the result is a truly healthy active lifestyle.

Now let me provide some regional highlights and color our key regions. Although the North American region, and specifically the US market came in below expectations in terms of volume points, partially due to the very difficult comparison from the prior-year period, the region and the US achieved their highest net sales results in their history. And, as is evident in multiple indicators, the fundamentals of the US remain strong. Average active sales leaders increased 5%.

New members during the quarter of 76,000 was the fourth highest in history, although a 4% decline compared to the same quarter of last year. 47% of this year's new sales leaders qualified through the 5K method, compared to 38% last year. And just two weeks ago, we saw almost 13,000 members at the extravaganza in Chicago, a 24% increase over the prior year.

While we are extremely proud of our business in the US, we believe the opportunity for continued growth has never been better. We expect to see the region exit Q3 strongly, and the business to accelerate again in Q4. In recent years, US sales leaders introduced interactive fitness or exercise elements into the model, in order to attract and retain new members.

Sales leaders from different countries have been visiting members in the US to learn more about how they are successfully integrating fit camps into their business. An interesting element of the expansion of fit camps in the US is that it has driven significant growth in younger members, focused more on healthy, active lifestyles. As Michael mentioned, the social network enabled by our business model, coupled with our members educating and coaching customers about living a healthy, active lifestyle has the ability to impact millions of people.

At Herbalife, meetings are designed to be both motivational and educational. Our meeting calendars are designed to reach various members, wherever they may be in their Herbalife tenure. Some of them, like Herbalife opportunity meetings are designed to introduce people new to Herbalife to our products, and the basics of our business model.

For those members that choose to build a business, we have training meetings that focus on increasing their knowledge on how to retail the products and grow their business. Our larger regional events, extravaganzas, are open to all members, and just two weeks ago, we saw almost 30,000 members at the extravaganza in Chicago, as I said before, a 24% increase over the prior year. We were honored to have Doctor Richard Carmona, one of our board members and also the 17th Surgeon General of the United States, speak to those in attendance about the positive impact of Herbalife members in nutrition clubs in driving sustainable behavioral change through access to good nutrition, coupled with the message of a healthy, active lifestyle.

Events are an important opportunity to share with our members information about business improvements, such as the Gold Standard, and the new Practical Claims Guide. And in the Expo area of the extravaganza, we had stations dedicated to different educational elements of our business, including new products, technologies available to increase member efficiency, as well as a large area dedicated to training and educating members on our rules and appropriate business practices.

Now, let's turn to Mexico, where local currency net sales for the quarter increased 7%, and volume points increased 5%, each as compared to the prior-year period. For the second quarter, average sales leaders with volume increased 3% compared to the prior year. As we have discussed in the past, Mexico's business fundamentals have continued to strengthen, as members have been transitioning their daily consumption business practices to commercial clubs.

To support the growth, we have been working to continue the expansion in the number of products access points, and recently, we added another group of stores where Herbalife members can pick up their orders, bringing our total of pick up points in Mexico to over 850. By making access geographically closer to the members, we have seen the average order size in Mexico decrease 60%, while the number of orders has increased more than 250% since 2009. The ability to have closer to real-time ordering has proven to be very beneficial in Mexico, and will continue to be a focus of Management both in Mexico, and around the world.

Let's move on now to China, where local currency net sales increased 46% and volume points grew 38% in the second quarter, each as compared to the prior-year period. Average active sales leaders increased 33% over the same period last year. The progressive adoption and acculturation of daily consumption business methods, as well as the implementation of the first-order thresholds and 5K sales leader qualifications, have been meaningful drivers of the sustainable growth in this market.

Recently, China's members have increased their focus on integrating exercise, our healthy active lifestyle components, into their clubs. Since the beginning of 2014, we hosted over 57,000 people at 775 healthy active lifestyle events in 64 cities throughout the market. And to help support the adoption of this business method, we just completed a six-city tour where we saw over 17,500 members and hosted three 5K races.

As we have always stated, the rules related to the direct selling industry are unique in China. We continue to be transparent with our operations, and remain comfortable with our structure and business model in the market.

Next, the Asia-Pacific region. Which, after successive declines of 4% and 6% in prior quarters returned to growth in the second quarter, with local currency net sales increasing 3% and volume points increasing 1%, each as compared to the prior-year period. Throughout the region, we continue to focus on driving sales leader retention, and are pleased to see average active sales leaders with volume increase 6% compared to the prior year.

Also, new members grew 5% over the same quarter last year. We have now implemented first order limits in six of the 15 Asia-Pacific countries, and after experiencing a momentary slowdown, we have seen the country, particularly India, return to a stronger base of members, who came into the business more gradually.

Korea, a market that accounts for approximately for one-third of Asia-Pacific's volumes, experienced a 3.5% decline in local currency net sales for the quarter, as compared to the prior-year period. Leadership continues to engage and educate new members and customers, as well as guide the market through a healthy transition to daily consumption DMO practices. We believe increased focus on sales leader activity and retention, together with education on the benefits of daily consumption, will result in further improvement to net sales and volume point growth.

In India, local currency net sales increased 33%, and average active sales leaders with volume increased 16% over the same quarter of prior year. Sales leader activity continued to grow, due to improved product access, and the ongoing successful localization of nutrition clubs. Furthermore, the first order threshold that was introduced in March and was subsequently extended from a 10-day period to a 30-day period has been readily accepted by the country's leadership, and is having a positive impact on the foundation of the business. We will continue to implement first-order thresholds in several other Asia-Pacific countries over the course of 2014.

Turning now to the South and Central American region, local currency net sales in the second quarter increased 8%, and volume points in the region were down 7%, each as compared to the prior-year quarter. Active sales leaders with volume points in the region increased 14%, and new members increased 13% over last year's second quarter. Venezuela was the biggest driver of the decrease, with volume points down 40%, and average active sales leaders down 11%, each as compared to the second quarter of the previous year. As we noted last quarter, the strict currency restrictions in Venezuela continue to make currency repatriation very difficult, and impacted product supply in the market.

Herbalife Venezuela has begun to develop relationships with local manufacturers, and in doing so, we will be able to 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. Excluding the impact from Venezuela, the region's volume would have increased by 1%.

In Brazil, local currency net sales decreased approximately 1%, volume points decreased 8%, and average active sales leaders grew 11% in the second quarter, each as compared to the same a period last year. We believe that the softness in the quarter was due in part to an economic slowdown as a result of the Brazil hosting the World Cup, and the impact that had on Nutrition Club attendance, coupled with the fact that Brazil that only one extravaganza this year compared to three last year, which can have a short-term impact on member engagement.

Moving on to EMEA, local currency net sales increased 21% and volume points grew 22%, each as compared to the second quarter of 2013. Average sales leader with volume points in the region was up 18%, and new members improved 28% over the prior-year period. Members in this region continue to develop and utilize versions of the business methods previously mentioned, such as fit clubs, weight loss challenges, and nutrition clubs. We were encouraged by the consistent execution and successful localization of daily consumption business methods exhibited in both Western and Eastern Europe throughout the quarter.

In Russia, local currency net sales grew 43%, and average active sales leaders increased 24%, each over the second quarter of 2013. We believe that city-by-city initiatives, ongoing adoption of the commercial nutrition club and strong branding efforts by the company and members, including our sponsorship of FC Spartak Moscow, continue to have a positive impact on the market recognition and consumer confidence. New members increased 64% over the second quarter in 2013.

Again in the second quarter, the UK market consistently executed its key DMO strategies, and as a result, continued to experience meaningful growth. Local currency net sales and volume points in the UK increased 21%, each compared to the second quarter of 2013. The success of the weight loss challenge DMO over the past couple of years has led members to begin to implement fitness elements into the business, resulting in a DMO called Level 10, where members participate in 90 day fitness challenges. It a recent fitness challenge in the UK, we had over 2,200 participants in three regional challenges.

Over the last few quarters, nearby markets have observed the UK's growth and have strategized to adopt similar business practices. Markets such as Germany, France, and Spain have found success localizing in implementing their daily consumption business methods, and consequently experienced 12%, 15%, and 35% volume point growth in Q2 respectively, over the prior year.

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

Thank you, Des. First, I'll review the Company's second quarter 2014 reported and adjusted results. Then I'll provide updated information on third-quarter and full-year 2014 guidance.

Adjusted EPS for the quarter of $1.55 was at the high-end of our guidance, and $0.14 or 10% higher than the adjusted second-quarter results of last year. The comparison to last year was negatively impacted by $0.28 from the combined impact of foreign currency, and a higher effective tax rate. The $0.28 is comprised of a negative $0.17 impacting currency and a negative $0.11 impact on the tax rate.

On a reported basis, EPS of $1.31 includes the following four items that we consider to be outside the normal operations of the Company, or we believe to be useful to investors when analyzing period-to-period comparisons of our results. First $0.11 impact from $10.1 million of non-cash interest costs associated with the outstanding convertible bond offering.

Second, $0.06 and $0.03 respectively for expenses incurred in response to attacks on the Company's business model, and expenses incurred related to the FTC inquiry. And lastly, our adjusted results exclude a $0.03 impact from taxes relating to the first quarter of Venezuelan devaluation. As noted during last quarter's conference call, while the devaluation occurred in the first quarter, the tax impact gets spread throughout the year.

For the second quarter, the Company reported net sales of $1.3 billion, representing an increase of 7.1% compared to the second quarter 2013. Local currency net sales for the period increased 10.8%, with an unfavorable FX impact of 3.7%, as compared to the same period last year.

Since Des has already provided significant regional detail around our volume point and net sales results, I'll now turn to margins. Our gross profit margins for the second quarter improved approximately 60 basis points, versus the second quarter of 2013, primarily a result of price increases, favorable impact of country mix, and lower inventory write-downs, partially offset by the unfavorable impact of foreign currency fluctuations and other costs.

On a sequential basis, gross profit margins improved by approximately 20 basis points, primarily the result of lower inventory write-downs, partially offset by unfavorable impact of foreign currency. Operating margins declined on a reported and adjusted basis by approximately 80 basis points and 60 basis points respectively. But both were negatively impacted from currency fluctuations by approximately 105 basis points. If not for the impact of currency, adjusted operating margins would have increased by approximately 45 basis points.

SG&A, excluding the non-GAAP items previously noted and China service provider costs, increased approximately 60 basis points as a percentage of sales, compared with the second quarter of a year ago, primarily due to the unfavorable impact of foreign currency fluctuations. Interest cost increased by $15.8 million versus the second quarter of last year, due to the convertible bond deal executed earlier this year, $10.1 million of the $15.8 million is non-cash.

Moving on to our effective tax rate, our second quarter adjusted effective tax rate was approximately 485 basis points higher than our effective tax rate for Q2 2013, but in line with the expectations provided in our previous guidance. The increase versus prior year was due to the inability to fully realize a tax benefit related to the increased cash interest expense, also the impact of changes in geography mix of the Company's income, and a decrease in the net benefits from discrete events, principally related to a favorable tax audit settlement in the comparable 2013 period.

As previously noted, second-quarter adjusted earnings per share of $1.55 was $0.14 or 10% higher than our earnings per share for the same period of 2013. Comparing second-quarter adjusted EPS to the previous guidance provided in April, adjusted EPS of $1.55 is equal to the high-end of our guidance range. EPS compared to guidance was negatively impacted by sales that were slightly below our estimates, but this impact was offset due to lower than expected expenses.

Before moving on to the new guidance for the third quarter and full year 2014 provided in yesterday's release, I want to note a couple of items. With respect to Venezuela, our guidance assumes a GAAP rate of VEF10.6 to $1 for the balance of the year, and excludes the potential impact of any future devaluation of the Venezuelan bolivar, or any future repatriation of existing cash balances in that country.

Our guidance also excludes any ongoing expenses incurred responding to attacks on the Company's business model, and the FTC inquiry, as well as the impact of non-cash interest costs associated with the Company's convertible notes. For all currency assumptions, we have used the average closing exchange rates during the first two weeks of July, with the exception of Venezuela, and this is consistent with our historical practice.

I would now like to turn to our third-quarter and full-year 2014 guidance expectations. From a volume point perspective, we expect volume growth of 5.5% to 7.5% in the third quarter. We are initiating our adjusted EPS guidance for the third quarter to be in the range of $1.49 to $1.53 per share, representing an improvement over 2013 adjusted EPS of between 5.7% and 8.5%. This guidance range includes an unfavorable currency impact of approximately $0.08 per share.

Our EPS estimate for the third quarter 2014 includes approximately $10 million of event expenses that occurred in Q4 last year. This is only timing, as the negative impact to Q3 will equally benefit Q4 this year.

For the full year, we are raising our adjusted EPS guidance by $0.07 on the low end and $0.02 per share on the high end, despite lowering the full year 2014 volume growth expectations by 200 basis points, compared to previous guidance. Full-year volume points are expected to growth between 6% and 8% for the year. We now expect adjusted EPS to be in the range of $6.17 to $6.32 per share, representing an improvement over 2013 adjusted EPS of between 14.9% and 17.7%.

From a capital structure perspective, the Company repurchased a total of $581 million of its outstanding common stock during the second quarter of 2014, as part of its previously announced $1.5 billion share repurchase program. The $581 million was comprised of approximately $315 million purchased in April, as part of a 10b5-1 trading plan. Plus $266 million related to an agreement with Merrill Lynch to repurchase shares by June 30, 2014. A total of 9.8 million shares were repurchased during the quarter, at an average price of $59.41 per share.

In total, we have repurchased $1.6 billion of stock during the past 18 months, and $3.1 billion since 2007. However we still remain conservatively capitalized, with gross debt of $1.8 billion, and cash of $621 million, excluding Venezuelan cash. And thereby have a net debt position of approximately $1.2 billion. With our adjusted trailing 12 months EBITDA of approximately $900 million, our leverage ratio is just over 2 times on a gross basis and 1.2 times on a net debt basis.

We generate a considerable amount of cash, and like the past seven years, we believe we will likely continue to repurchase shares as an attractive method to return capital and create continued value for shareholders. And while our projections are seeing $50 million per quarter of additional buyback, given our conservative balance sheet and substantial cash flow, we will continue to explore options to opportunistically accelerate the returns.

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

(Operator Instructions)

Meredith Adler, Barclays

Thanks for taking my question. I have a couple of questions. You spent a lot of time talking about the focus on fitness, and how that is spreading in certain markets.

Is there the potential for it to move into markets that one might consider more mature? Mexico is still growing, but certainly nutrition clubs have been there a long time. South Korea, can this bring new life to places that one would describe as mature?

So Meredith, this is Des. The answer is absolutely yes.

The history, Meredith, of course, is that it started in our most mature market of all, the United States. And what we see in the United States is that it has been hugely beneficial in attracting a younger demographic. People very much focused on healthy active lifestyle and in fact we've had distributor groups come from all over the world, including Asia-Pacific, including Korea, to actually look at the fit clubs here in the US. So this is something we see really spreading all around the world.

And would you say that in the US the younger group that's being attracted is not necessarily Latino? Is this broadening considerably into the non-Latino market?

Yes, it's actually been effective in every demographic. And we're very excited to see it, because obviously we see the opportunity ahead. These are young people, they're bringing with them a sensibility and how to communicate with other younger people. We're seeing growth in relation to social media and their use of total media.

You seen that also transform the UK. Here's a market 30 years old experiencing this tremendous growth, partially based on the fitness concept, healthy, active lifestyle. So universal appeal regardless of ethnic group.

Thank you, and John, I have just a quick question for you. Obviously the tax rate was a headwind this quarter and because of the Venezuela situation will probably be a headwind, or will have an impact in the next couple of quarters. But when you look out further, is there any reason to believe that you're going to continue to have this elevated tax rate?

Meredith, I think last year the tax rate was low in both Q2 and Q3. So it was a headwind this quarter that we just reported, and it will be a headwind next quarter by about the same amount of basis points, 400-plus basis points. But historically, if you look at 2012 the tax rate for the year was 28.7%, that's pretty much what we're expecting this year, and I think that's a good assumption to use out in future periods.

And then I just wanted -- you mentioned buybacks, and that you have the ability to do more. The stock for whatever reason is down a lot today. Are you willing, even this quickly after finishing so much in buybacks, are you willing to be opportunistic?

We are certainly willing to be opportunistic, I think the point that was made earlier in the call was that we have a good amount of cash. We're still conservatively levered, our EBITDA in the quarter, unadjusted was $220 million, adjusted was $235 million. That annualizes to around $900 million of EBITDA, which is about where our 12 month was.

And on a gross basis, we have $1.8 billion in debt, so that's a two times leverage ratio which is significantly lower than the covenant that we have an on net debt ratio, which was 1.2 times. So we do think that this is an opportunity, and without getting into specifics on how we take advantage of it, we will look to take advantage of opportunities in our buyback program.

Great. Thank you very much.

Mike Swartz, SunTrust.

Just wanted to touch on the US business. I think that was the biggest, at least in my mind, negative in the quarter. Could you maybe just what through maybe what you saw there?

I understand the comps were pretty tough, but I think you made some commentary about getting back to growth in the fourth quarter, and what goes into that thought process? Is it more that the comps get easier, or is it something you're seeing in terms of activity levels right now?

Yes Mike, so a couple things. So first of all, Mike what you see this in the context that this is something that you see happening regularly in our business, so we saw it in Asia-Pacific region last year. Fourth-quarter down 4%, first quarter down 6%, then return to growth in the second quarter of this year. You have seen it happen in Brazil, you've seen it happen in Mexico.

So we shouldn't look at this is something that's terribly unusual. Clearly, we want to see every number positive, but obviously net sales up in the US. And that's why, when we look at our historical situation of the markets, we look at what's happening in the US, that's why we're confident that we will have a good Q3 and emerge in Q4.

A couple of key factors behind that, obviously, we've shared those with you. 76,000 new members in the second quarter, the highest number in Herbalife history.

A key indicator for us was the average active sales leaders increasing, because a key metric for engagement and success. And then obviously the extravaganza that we just were at, where, again a 24% increase in attendance from a year ago. All of those things combine to show us the fundamentals in the US were strong, and that's what gives us the confidence about a return to growth later in the year.

Okay, thanks Des. And switching over to Venezuela, another publicly traded direct marketer talking about some pushback from a regulatory standpoint on pricing in Venezuela over the past month or two. Have you seen anything in terms of that?

There is a price control in place in Venezuela, where they look to limit the amount of profit a company can make. We have taken price increases over the last 12 months, but generally, going forward, price increases need to be effectively approved, or at least not disapproved by the Venezuelan government. So we're seeing some of that same activity.

But you're not seeing them coming in telling you to roll back prices?

They did in January, but we have not since.

Okay. Thanks John.

Scott Van Winkle, Canaccord.

John, just to make sure I get this right, so the buyback that was delivered in June, is that completed now? The pre-purchased arranged buyback?

That was completed, that was $266 million delivered by the end of June, yes.

Then did that have much of an impact on the average share count in Q2, or that's mostly a Q3 impact?

So we -- I will give you the total of buyback in Q2 and how it factored into the share base. So we bought 9.8 million shares in total during the quarter. Some of that was done in April, and some of it was done through the contract with Merrill Lynch in May and June. That 9.8 million shares of buyback had about a 5.8 million reduction in the quarter, which means $4 million did not get reflected in the quarter, based on the average of the share base, so you can expect Q3 to have around 4 million less shares than Q2.

Excellent. Great. And then on Brazil, the comment one of the drivers you talked about was the World Cup. I'm assuming that you call that out because since the World Cup you've seen a pickup in business in Brazil?

We called it out Scott, because effectively the World Cup reduced the amount of working days in Brazil by about 10 during the course of the World Cup. And we saw that having an impact not just in Brazil, but particularly other markets that share the same time zone.

The other key factor in Brazil was, we shifted from three extravaganzas to one extravaganza, and although the total attendance was up, what we saw shift was the geographic mix of those attending. With lesser attending from the farther-out areas of Brazil, where we've had significant growth in recent quarters.

So that's really the combination of both of those two factors really was the key driver for that reduction. Looking forward, the fact that we didn't have better attendance from certain segments of Brazil may affect -- may have an impact in terms of third quarter, but we expect to get back to growth next year.

Okay and then on the Venezuela, you obviously talked about the cumulative price increase over the last year being over 100%. What's the sensitivity to price in that market, and obviously there's lots of challenges in Venezuela. I'm wondering maybe specifically on the price increases what it does to volume?

Well, it's a hyper-inflationary market by the way, so what you see happening to Herbalife's prices is not inconsistent with what's happening on the ground with all consumer product companies. And there's an element of price control that's now put in place. But overall, it's been a big decrease in volume in Venezuela, it's down 40%.

That's not different what we expected coming into the year. Some of that is because of the economics that have taken place on the ground. And some of it is because of supply chain, issues with getting product imported into Venezuela, from currency controls and importation control. So it's a little bit of a combination, which is why you see the decline in Venezuela.

Okay. And then Des, in China, if you look at the metrics, revenue growth, volume growth, activity on the service provider side. But the sales number, which is I guess is equivalent to the members or salesperson number which is equivalent to members elsewhere, that number has been down the last six or seven quarters. Is this because there's a transfer to the service provider model? I'm just trying to put the numbers between those metrics.

So I think it's a number of factors, Scott, and that's one of them. Another factor is the fact we launched the preferred customer program in China, which has been very successful. And I think it's also a reflection of our service provider model, focusing more on sustainability and long-term potential.

So a number of factors, all of which we see as being very positive for the future. One thing, a reflection of our confidence and commitment to the stable growth in the future, is that we're just about to move forward with a new manufacturing facility in Nanjing. And we believe this is critical in order to sustain the growth in the China market in the years ahead.

Okay. And then a couple questions, additional questions, if I could. What percentage of your markets, maybe in terms of percentage of sales, now have a first-order limitation in place?

So speaking from memory, it's probably about a dozen today. And if what we're doing now is of course based on the success of that, Scott, we're looking to expand that into significant markets. Actually, I'm being corrected, we're actually up to 18 now Scott. Which is an indication of the success of that.

What we see is that it helps people along that road to sales leader. And similar to the 5K, what it does is it ensures that when people achieve that level of sales leader, that they have a stronger more stable business, which contributes to long-term retention. So a lot of positives from that side, and we actually see ourselves rolling this out more and more later on, during the course of this year.

Okay. And then lastly the new hire on the government affairs side, should we expect any change in strategy or real obvious impact, or I'm wondering what to expect from that hire?

Scott, it's Michael. Alan Hoffman is a great talent and a great fit, and Barb Henderson, as you know, has been just a tremendous executive for us for over a decade. And Barb came to me at the beginning of the year and said I want to work a seamless transition, and we looked at this opportunity to say, you know something? Eventually we're going to be a Fortune 100 company.

We have to look at the future of this company and how we position ourselves in government affairs, in public affairs, in press and communications, and we wanted to go out and find the best person we possibly could. Barb worked with me very closely with me on this, worked with our headhunters, and worked with the opportunity to combine these two areas and find a significant person to fit this.

Alan Hoffman is a terrific fit for us. We've all interviewed him, spent a lot of time with him, we were very thorough in bringing this gentleman aboard Herbalife, and we're excited and proud. It won't change anything in a strategic sense, but it will coordinate all of our external factors together in terms of communications, public relations, and government affairs, which we think is part of the way more modern companies are setting up their global infrastructure to deal with all the elements that are external to us.

In terms of getting our story out, both to government officials and making them understand who we are, as well as under press, and making the consumers and the larger marketplace understanding who Herbalife is, what we do to impact people's lives on a positive level. And making sure people understand that we're one of the top global nutrition companies on the face of the earth. Sorry for the long answer there, Scott, but this is an important hire for us, and we're very sad to see Barb go, and we're excited to welcome Alan.

Great. Thank you very much.

(Operator Instructions)

Rommel Dionisio, Wedbush Securities.

Thanks, good morning. I continue to notice the strong growth you're posting in Russia and India, and those are two, coincidentally, markets where addressing direct access initiatives to get product to some of the more far-flung markets. I'm wondering if you can give us an update on that, and potentially other countries where it might be relevant in the future?

So I guess the importance of direct access is very significant. You've seen us talk about this now in Mexico for many years, you saw us on this report make reference to another store chain that has recently joined our family there. And so clearly this is an issue for us on a worldwide basis.

It is been a factor in Russia, and it is, we believe, a huge potential in India also. Where it's a clear goal to increase access point. What it does, obviously creates better fulfillment, lower economic access for distributors.

We are working with different partners. We have a couple of tests currently in progress, probably too early as yet to really talk in great detail, other than to say the results are very promising. And I think in future calls we'll give you more detailed updates as we see it progress.

Okay. Thanks very much.

Meredith Adler, Barclays.

I would just like to clarify a little bit about the guidance. The volume points, the reduction in the midpoint of the volume point growth, is most of that tied to the US, and is a lot of that a result of what you saw in the second quarter?

I think you're saying the third quarter is still going to be a bit soft. But is there anything else, how do you explain that change?

Meredith we just want to be conservative right? So we have this quarter, where obviously we believe it is a great quarter. We understand there is some concern about the apparent weakness in the US, but we want to be conservative. In the US, we have planned an 18 city tour with our top distributor leaders, and so we've got a whole bunch of different initiatives, but as we look forward, we always want to be as conservative and guide appropriately.

Is it realistic to describe the business as becoming more mature? Are you at a new stage of maturity?

I don't believe so, Meredith, because when you look at the macro trends, the opportunity for Herbalife has never been greater, so we continue to see higher levels of obesity. We see trends that frankly are very negative from a health and wellness perspective. But at the same time that represents opportunity for Herbalife, and for our message of good nutrition in a healthy, active lifestyle.

Also, when you look at our most recent extravaganza in Chicago, a 24% increase in terms of the attendees. And so all the things that we look at see not a maturing market, but actually an expanding market. And with huge runway for growth ahead.

Do you think there is some variation of opinion on the topic within the Company?

Not informed opinion, and certainly not inside the Company.

And again, Meredith, look to the UK. Here's a market we been in 30 years, a market that was flat for many years, and along come initially the weight loss challenges, then the fit clubs, driven partially by Herbalife 24. So whether it's the US, we're 34 years old, whether you look at the UK, 30 years old, what you see is a level of energy and confidence and excitement.

And the other thing I think to put in context, Meredith is that obviously I know people are focused on the US business, but you look at Q2 2012, our numbers this quarter, volume points up 10% from where we were in Q2 2012. So I think you should put that into the equation, and factor that in, because I think that's a true reflection of the growth that we're having in our business today.

All right. Thank you. Very helpful.

There are no further questions, I will turn the call back over to Michael Johnson.

Thank you very much, and thanks everyone for being on the phone, we know there's been some interesting reaction to these numbers. But I think we should put this quarter in context. We had record top and bottom line in Herbalife. We may have conditioned the market for big beats, but we met the high end of our EPS guidance, and our EPS is 40% higher this quarter than it was before all this other stuff started, the short seller noise started.

We are incredibly confident that the megatrends of obesity, coupled with the success of our products, and now the opportunity to build our businesses with a younger Herbalife distributor coming in to a healthy, active lifestyle program, will continue to drive record growth for 2014. We're looking forward to build it better every single day, to return to shareholders value in this company, and we're excited to talk you again in three months. Thank you very much.

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