康寶萊 (HLF) 2015 Q3 法說會逐字稿

Good afternoon and thank you for joining the third-quarter 2015's 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 CFO; and Alan Quan, the Company's Vice President, Investor Relations. I would now like to turn the call over to Alan Quan 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 risks and uncertainty, and, as you know, actual results may differ materially from those discussed or anticipated. We encourage you to refer to today's earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements 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 that 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 our Chairman and CEO, Michael Johnson.

Thank you, Alan, and good afternoon and good evening, everyone. Last year, we implemented a series of strategic changes to our business and told you that they would result in improvements to our business. Well, a year later, I am pleased to report that our members around the world continue to embrace these changes and as a result we are reporting another quarter of improved volume trends and positive member metrics.

Our third-quarter adjusted EPS was $1.28 per diluted share. Which exceeded the high end of our guidance range of $1.00 to $1.10. Local currency net sales grew 5% when compared to the prior-year period. This is a sequential improvement from the 1% local currency sales growth experienced in quarter two. Our reported net sales this quarter were impacted by a 17% currency headwind.

Resulting in a 12% decline compared to the third quarter 2014. Worldwide volume points were down 3% in the quarter. But, the year-over-year trend improved sequentially compared to the second quarter, which saw a decline of 5%. Cash flow from operations is up 32% for the third quarter compared to the same period last year and remains strong at $134.5 million.

Importantly, many of our key member metrics are up and we believe they will continue to improve as we move further from the initial implementation of the business model changes we made late last year and this year. So, for the third quarter in a row, we are raising our full-year 2015 guidance. John will address the specifics later. And, enter -- and, in addition, he will provide details of our full-year 2016 guidance. Which will reflect our confidence in the future in spite of the ongoing challenge of currency headwinds.

Improving trends we are seeing in our key metrics are consistent with our expectations and are built on the foundation of our strong sustainable business model. Our healthy business trends continue. As we are seeing a significantly greater percentage of sales leaders qualifying through the 4K cumulative method. And, greater numbers of members ordering product quarter over quarter. Bottom line is that we have a much stronger, more engaged, and more active member base as a result of the changes we implemented and this has been done with the overwhelming support of our senior members around the world.

We are also seeing growth in the number of new members placing orders in all six regions. For example, this quarter the number of active new members in our North American region was up 33% compared to a decline of 16% in the second quarter. These are both compared to the prior-year period. This is good news. As it represents the first time in North America since quarter one 2014 that new members with volume has grown versus the prior-year period.

On a worldwide basis, excluding China, the total number of new active members was up 21% compared to the prior-year period. This is more good news. As it compares to just a 1% increase between quarter two 2014 and the second quarter of this year. This group is important because history tells us that new members, who are immediately active and engaged, are more likely to achieve their goals and remain with Herbalife in the long run. Improving trends in both our financials and member metrics reflect the attitude and effort of our senior sales leaders and the increased focus of our members on creating personalized experiences for new customers and new members alike.

It was a busy third quarter in terms of interaction with our members. In September and October we hosted seven major events in Mexico, Spain, Russia, Belarus, and Brazil. As well as an APAC regional event in Indonesia. Altogether, more than 50,000 confident and energized members came together to share ideas, learn from each other and the Company, and to be recognized for their success.

When we attend these events, we take time to meet with members who are at different stages of their Herbalife journey. We learn how the Company can better serve them and their market. And, we hear stories on the positive impact they are having on people in their communities. What is clear is that there is an increased sense of pride that has taken hold among our members based on enhanced customer service and member support.

They talk about the care and value they bring to their customers to help them achieve their goals. They dedicate significant time to training and mentoring those new members looking to build a business. Which in turn leads to a greater productivity and retention. They are adopting and fostering more sustainable business methods. Such as nutrition clubs, fit camps, weight loss challenges and shake parties.

There's a real understanding among our members of the direct correlation between a positive experience with the people and products that represent our brand and retention. And, between retention and long-term sustainable growth. We are implementing more local promotions designed to drive customer-centric behavior. Encouraging and rewarding members to build their organizations around this philosophy of consumption, retention, and sustainability. And, importantly, as metrics show, there is a higher level of engagement and activity as a result.

In addition to these events, we recently had our 10th anniversary celebration in China. More than 100,000 members and their customers across China came together for outdoor activities. 5K runs and community workouts in nearly 100 cities to celebrate this important milestone. These events, and many others like them throughout the year, help to further raise awareness of the Herbalife nutrition brand and our message around a healthy active life.

In the past year-and-a-half, more than 1 million members, customers, friends, and families have attended thousands of member-organized sporting events across China with the goal of improving their health through good nutrition and by becoming more physically active. Sadly, China has one of the fastest growing obesity rates in the world. But, if there's good news, it is that Herbalife is uniquely positioned in this market to provide a solution through a combination of our nutrition product, our community of nutrition clubs, our focus on a healthy active lifestyle, and the support and mentoring provided by our members.

The focus on customers is greater than it's ever been in China. As our products and the nutrition club experience become embedded into the daily routines of our Chinese consumers. The growing number of nutrition clubs provide a unique community environment that encourages customer engagement and interaction and delivers results. China experienced volume point growth of 24% in the quarter and we are confident that our model is the right one for long-term success in this market.

And, it's not just China. Around the world, our members are increasingly focused on expanding their retail customer base and providing customers with the best experience possible. This means that the breadth, depth, and the taste of our products becomes ever more important. Therefore, we will continue to strengthen and drive innovation in our product portfolio to ensure that it meets the demands of today's consumers. Our research shows we are a part of a nutrition sector that is increasingly moving towards personalized solutions and away from a one-size-fits-all approach.

While we are embracing this shift and see it as a great opportunity for which we are ideally positioned, our market is becoming increasingly segmented by demographic and personal preference. And, each of our user and potential user groups have specific demands. Understanding and addressing the needs of our different consumers requires thoughtful segmentation. And, this will increasingly guide our product development, member and consumer education, and marketing efforts.

Offering our consumers greater choices has always been important to Herbalife. But, we know it will be even more so in the coming years. While we are already well-positioned for the future in key nutrition categories, such as meal replacement, heart health, adjustive health, sports and energy, we continue to look to expand our choice with each of our product categories.

Additionally, we will continue to research and work with our members, science team, doctors, and key suppliers to identify new trends and growth segments to ensure our members have the best products and an easy-to-understand education to serve their customers. We are working with, and challenging, our global ingredient partners to ensure we are engaged in the latest advancements in science and consumer preferences.

In addition, we have a number of new product ideas that we are developing in-house to take us into completely new customer segments. We are excited about what the future holds for our product offerings. We are also creating new categories of products that increase the number of occasions when Herbalife can be consumed. For example, we just launched a new Formula 1 chicken and vegetables soup in Brazil. This is the first ever high protein meal replacement soup. And, it opens up a completely new consumption occasion for our members and their customers.

It also opens up interesting opportunities for nutrition club owners to get greater use out of their existing facilities. Having a new meal option gives them a reason to expand their operating hours. We are already seeing clubs in China and Korea open in the evening for nutrition education and social activities. And, giving members new meal options will only add to their success. In addition, we continue to expand our flavors for our core products to appeal to specific markets and generate real excitement among our members and their customers. We currently have 24 Formula 1 flavors and our newest flavor is mochaccino, which just launched in Brazil.

We are also creating additional products that further support the daily consumption business models of our members. A key strategy for us is to allow our nutrition club owners to personalize their customer shakes by offering targeted nutrition boosters. This past quarter, we introduced an extra kale powder booster in Mexico. Which allows customers to increase their calcium intake while visiting their club.

Extra kale was a top-selling tablet in Mexico and we believe this new delivery form will be a catalyst for growth in this key dietary supplement. We recently introduced a Mandarin flavored Aloe Concentrate in Mexico providing further choice and variety and it has been enthusiastically received by customers and members in their nutrition clubs.

Our focus on creating new products, extending existing product lines, and creating additional consumption occasions has been a significant focus of our this year. It is an additional advantage for us to create more powder and liquid products allowing us to further leverage our vertical manufacturing infrastructure. Which is great for our members, consumers, and shareholders. In the past quarter, we self-manufactured nearly 60% of all of our nutrition products. Which, along with our unwavering commitment to product quality, creates a competitive advantage for us in terms of bringing innovative products to the market.

And, let me conclude the update on products with a category close to my heart, sports nutrition. This quarter, we unveiled, in addition to our Herbalife24 line, CR7Drive. Our exciting new sports hydration drink developed by our science teams in collaboration with global soccer superstar Cristiano Ronaldo. Thus, CR7. We believe this product addresses a number of key customer growth segments. While demonstrating our leadership and innovation in the sports nutrition sector.

Since its creation in 2011, our Herbalife24 sports line has attracted a new, younger, millennial demographic to Herbalife as both members and customers. And, CR7Drive is a marquee addition to the Herbalife24 portfolio. Following its official launch at our EMEA extravaganza in September, the excitement level among our members has been incredible. With sales already exceeding our initial forecast. CR7Drive is now available here, in North America, and we have begun to roll it out globally.

We believe that combining the brand power of Cristiano Ronaldo with such an innovative product creates a unique competitive advantage for our Company. We believe it will attract new members and have a positive impact on the engagement of our existing members. It will open up new sales opportunities for our members to expand and grow their retail customer base. And, it will further elevate our brand globally.

Nothing emphasizes this last point more than the impact of our social media campaign. In just the first week, the hashtag, #CR7Drive, achieved more than 78 million impressions. More than 12.5 million users were reached on Facebook and Twitter and the launch video alone had more than 2 million views. We're working hard to build out our product portfolio by segment and to refine our marketing and messaging so that we can communicate more effectively with our members and their customers. We are confident that this will lead to increased sales and even higher levels of customer and member satisfaction.

Globally, we remain focused on building a brand that's synonymous with good nutrition and a healthy active life. In September, that message was heard loud and clear through our very visible presence in America at triathlon events in Los Angeles, Washington, D.C., Malibu, and Chicago. In October, Herbalife was also the prominent title sponsor of the Bali International Triathlon.

Our sponsorship of these events, as well as many others throughout the year, reflects our ongoing global commitment to events and activities that support our message of a healthy active life. In Asia Pacific, we just held our fourth annual wellness tour. Throughout the month of October, our nutrition experts spoke with scientific and health professionals in academics and governments. As well as Herbalife members and consumers across 14 markets in 21 cities. To increase the understanding of what can be done to improve one's wellbeing.

We also continue to forge relationships with organizations and groups that are aligned with our commitment to improving our communities through good nutrition. Our previously announced partnership with the American Red Cross, through which we provide protein snack bars to blood donors around the US, continues to introduce our brand and products to hundreds of thousands of consumers who might not otherwise be aware of the benefit of Herbalife products.

The launch this month of the co-branded protein bar will have a further positive impact on the awareness and perception of our brand and provide a great opportunity for our members as they speak with existing and potential customers.

This quarter was one of further steady improvement and continuing progress along the path we set out. It was a positive EPS performance against a backdrop of global macro challenges. Most notably, significant currency headwinds. We have more new members with volume. More sales leader with volume. And, a record number of members purchasing directly from the Company.

In other words, we have more people buying Herbalife products than ever before. Importantly, the improving volume trends, the underlying member metrics that we are seeing, are consistent with what we expected when we rolled out the changes to our business over a year ago. We believe these are reliable indicators of continuing positive future performance and this confidence is reflected in our 2016 guidance.

Our members are as engaged and confident as ever about the future. As evidenced by the record numbers of them attending our events around the world. I want to recognize and congratulate them for the way they have embraced our transition so successfully.

Their resilience, hard work, and energy is remarkable and is rewarded every day when they see the positive impact that they are having on their friends, families, and communities. They're helping customers improve their nutrition habits. They are empowering members with new skills and they are creating opportunity. Their ongoing focus on setting and meeting expectations of those who come to Herbalife is building our brand and making our business stronger every single day.

And finally, we've just completed our five-year planning process. Where we laid out a strategy for continuing growth for the years ahead. And, we have never been more excited about where we are going as a Company or more confident about the future. Herbalife will continue to place the customer at the center of all we do.

With nutrition products that meet their daily needs. And, the unique social network that provides community, support, education, and most importantly, results. We will continue to make a positive impact in communities around the world by bringing good nutrition and an opportunity for people to earn supplemental income or build a full-time business. And, we will continue to build Herbalife on a sustainable growth platform to deliver long-term value for you, our shareholders. John will now take you through a more detailed look at the financials and market highlights.

Thank you, Michael. To start, I will review the Company's third-quarter reported and adjusted results. Which will include key market highlights. I will then provide an update on guidance for the fourth quarter and initial full-year guidance for 2016.

For the third quarter, worldwide net sales of $1.1 billion grew 5% in constant currency terms. While reported net sales declined 12%, compared to the same period last year. With currency headwinds in the quarter resulting in a decline of 17%. The 5% growth in local currency is a sequential improvement over the 1% growth in local currency experienced in Q2.

Adjusted EPS of $1.28 per diluted share was significantly above the high end of our guidance range of $1.00 to $1.10. Reported EPS was $1.09 per diluted share. Compared to $0.13 per diluted share for the third quarter 2014. Currency had a negative impact on the third-quarter EPS of $0.42. Compared to the prior-year period. And, $0.03 compared to the guidance provided last quarter.

For the full-year 2015, we are raising adjusted diluted EPS guidance to a range of $4.65 to $4.75. Versus the previous range of $4.50 to $4.70. Exchange rate movements, since the guidance provided a quarter ago, have negatively impacted our 2015 EPS expectations by $0.14. $0.03 of which was realized in Q3 and $0.11 impacting Q4 guidance. I will provide further detail on guidance later in the call.

For the quarter, we continued to see improvement in member trends across key markets. The worldwide sales leader activity rate, excluding China, was 62% in the third quarter. Compared to 59% last year. And, as Michael previously mentioned, we are excited by the trend of new active members which continued to strengthen. Showing broad-based geographic improvement in the third quarter.

Worldwide new members with activity, excluding China, grew 21% in the third quarter. Compared to the prior-year period. And, improved sequentially against an increase of only 1% in the second quarter of 2015. This shift is showing us, that despite total number of new members being slightly down, those new members coming into the business are more engaged, active, and productive.

Turning now to market and regional highlights. Worldwide, volume points declined 3%. An improvement for the 5% decline in the second quarter. Approximately 60% of our markets experienced volume point growth during the quarter. In the third quarter, volume points in the US declined 6% versus the prior-year period. An improvement, compared to a decrease of 9% in the second quarter.

Importantly, as Michael already mentioned, for the first time since the first quarter of 2014, active new members in the US grew versus the prior-year period. Active new members were up 33% compared to the same quarter last year. And, this compares to a decline of 16% in Q2 and a decline of 28% in Q1. We continue to be encouraged by this trend. Similar to the second quarter, volume points of Brazil declined 1% in the third quarter compared to the prior year. And, new members with activity grew 65% compared to last year.

Moving on to Mexico. This market displayed tremendous resiliency during the quarter. As noted last quarter, the Company implemented a 16% VAT during the third quarter on many of its products. Despite this significant cost increase to customers, volume points in Mexico was down only 5% compared to prior year. Similar to what we reported in the second quarter. We expect a 16% VAT increase will continue to impact volume on year-over-year comparisons. Until it is annualized next year. And, we have included the expected impact in our guidance.

Member trends in Mexico during the quarter continued to improve. And, in the third quarter, 83% of sales leaders qualified through the 4K cumulative method. Compared to 20% during the same period last year and 75% in the second quarter of 2015. In addition, the percentage of volume from one- and two-month qualifiers has decreased from 16% in 2014 to 2% in the third quarter this year. Showing a continued acceptance of the changes implemented last year and earlier this year. The percentage of new members with activity in Mexico increased by 29% compared to the prior year. Up from 14% growth in Q2.

Volumes in Korea declined 45% compared to last year. In addition to the impact from the global marketing plan changes implemented over the past year, this quarter presented a difficult comparison for Korea. As it also implemented local marketing plan changes last August that had a similar effect to a price increase and resulted in increase in volume to Q3 last year. While, this year we announced a price increase in Q2, that we believe resulted in forward purchasing in Q2 and negatively impacted this year's Q3 volume.

Moving on to China. The focus on customers and daily consumption has resonated throughout our business in China. And, it continues to shows strength despite ongoing macroeconomic challenges. For the quarter, China's volume points grew 24% compared to last year. During the quarter, we also saw a record high number of average active sales leaders. Which were up 31% compared to last year. For the quarter, volume points in EMEA grew 10% compared to last year. And, new members with activity increased 34% compared to the prior year.

Russia, the region's largest market, returned to volume point growth in the third quarter. It reported a volume increase of 4% compared to the prior year and local currency growth of 19%. Despite the ongoing difficult economic circumstances in the market, we believe that the market has adjusted to the 14% price increase implemented earlier this year.

Moving on to our financial highlights for the third quarter. As previously stated, third quarter adjusted EPS was $1.28 which was above our guidance range of $1.00 to $1.10 and compared to $1.45 per diluted share in the third quarter of 2014. Third quarter EPS was negatively impacted versus the prior-year period by $0.42 of currency movement. Reported net income for the quarter was $93.6 million. Or, $1.09 per diluted share. Versus $11.2 million, or, $0.13 per diluted share last year.

On our third-quarter reported EPS includes additional items we consider outside of the normal Company operations are items that we believe will be useful to investors when analyzing period-over-period comparisons of our results. These items include $0.03 related to expenses incurred responding to attacks on our Company's business model. $0.05 for expenses relating to regulatory inquiries. $0.13 related to non-cash interest expense and the amortization of non-cash issuance costs. And, two other offsetting items relating to Venezuela.

Adjusted results also exclude a $0.02 favorable impact related to the recovery of payments against defective manufacturing equipment at our Winston-Salem facility. Which were previously impaired and called out. And, also, a $0.01 favorable impact resulting from a foreign exchange gain from the euro/USD exposure on intercompany balances.

Our reported gross margins for the quarter increased by 150 basis points compared to the prior-year period. And, excluding additional items we consider outside of normal Company operations, gross profit increased by approximately 90 basis points. On an adjusted basis, gross margins benefited 145 basis points from price increases and country mix. Which were partially offset by the unfavorable impact of foreign currency of approximately 80 basis points.

SG&A, excluding non-GAAP items, was 38.2% of net sales. This represents an increase of 180 basis points compared to the third quarter of 2014. Which is in large part due to the continued growth in China and the resulting increase in China member payments.

Excluding China member payments, and other non-GAAP items, SG&A as a percentage of net sales was 28.6%. A decrease of 90 basis points compared to the prior-year period. Reflecting the timing of sales events and the continued focus on cost management. Regarding sales events, there are approximately $6 million in events. That, during last year, were in Q3 but will be in Q4 this year.

Our adjusted effective tax rate for the quarter was 30.5%. Which was at the high end of our guidance range. And, 60 basis points above our tax rate from the same period last year. Primarily, due to a decrease in net benefits from discrete events. Which was partially offset by a change in the country mix of earnings.

Cash flow from operations for the third quarter was $134.5 million. Up 32% compared to the prior-year period. At the close of the third quarter, we had approximately $813.2 million in cash. Of which, $479.7 million, or, 59% was held in the US. At the end of the third quarter, the current portion of our long-term debt is $254.7 million.

Moving on to guidance. Starting with the fourth quarter, we expect volume point trends to sequentially improve in the fourth quarter. And, estimate a range between a decline of 1.5% to growth of 1.5%. Net sales will continue to be negatively impacted by currency exchange rates For the fourth quarter, we estimate a decline of 5.5 % to 8.5% in net sales. Or, an increase of 1.6% to 4.6%, excluding currency.

Adjusted diluted EPS guidance for the fourth quarter is estimated in a range of $0.85 to $0.95 per share. Currency has negatively impacted the fourth-quarter EPS guidance by $0.11 since rates assumed a quarter ago. And, $0.27 versus the prior-year period. Full-year adjusted diluted EPS guidance is in the range of $4.65 to $4.75. Which includes a $1.54 full-year unfavorable impact from currency. Our capital expenditures for the fourth quarter are estimated in a range of $30 million to $40 million. And, our effective tax rate guidance is 27.5% to 29.5% for the fourth quarter. And, 29% to 30% for the full year.

With respect to cash flow, we are raising our free cash flow guidance for the year, defined as cash from operations less capital expenditures, by $20 million to both the low and high end of previous guidance. And, now estimate full-year free cash flow to be in a range of $490 million to $510 million.

Looking further ahead to full year 2016. Our initial guidance for net sales growth is within a range of 4.5% and 7.5% on volume point growth of 2.5% and 5.5%. Our adjusted diluted EPS guidance range is $4.35 to $4.75. We continued to face negative currency movements against the US dollar. And, as a result, have estimated an unfavorable impact of $0.50 from currency movements versus 2015.

On a constant currency basis, guidance for adjusted EPS, would be in a range of $4.85 to $5.25 per share. Our effective tax rate guidance for the year is 28% to 30%. Capital expenditure for 2016 is estimated within a range of $115 million to $145 million. Of which, $20 million is dedicated for the upgrade to our Oracle system. And, $22 million for the build out of our third manufacturing plant in China which is planned to start production in the second half of 2016.

This ends my prepared remarks and we will now be happy to take your questions. Operator.

(Operator Instructions)

We'll take a moment to compile the Q&A roster. Meredith Adler, Barclays.

Hi, Meredith. Meredith? Operator, we must have lost her. Let's go to the next question and then we will come back to Meredith when she dials back in.

Okay. Tim Ramey, Pivotal Research.

Just wanted to get a little more color on the conservative guidance for adjusted diluted EPS for 2016. Basically, looking at a flattish, or perhaps even, down year. I know you mentioned the $0.50 of currency. But, the top line numbers are certainly favorable. So, anything else you can throw at that that would help us understand?

Oh well, I mean, I think you nailed it. So, I think our -- from a volume standpoint, where we're looking at low- to mid-single digits for the year. But, that accelerates throughout the year with each sequential quarter being better than the last. The challenge is the currency headwinds. And, it is a $0.50 headwind. Most of that, actually, occurred in dollar movement since the last quarter. As you know, in our call script, we have an $0.11 impact to Q4 of this year versus the guidance we gave just 90 days ago. From the movement in currency.

And, just for a little, maybe, for your modeling purposes, that $0.11, I'll give you some key movers. The Brazil currency was $0.03. The Mexican Peso was $0.02. China was another $0.01. That's $0.06 of the $0.11. And then, it was spread out between a penny here for Korea, a penny for Russia and movement like that. So, it's -- it really is broad-based with an -- a little bit of an overweight toward Korea and Mexico. And, that's really what are the key drivers for the currency headwinds next year also.

Okay. And, John, also on the CapEx forecast. I think at the second quarter you'd called it out as 110 to 130. And now, you're calling for the full year to be $80 million to $90 million. Can you give us some color on what's happened there? Did some projects slip into next year? Or?

Yes. Some projects slipped into next year. We pushed -- so, the China factory. A lot of that spending is in next year. Well, some of it's still in this year. And, it's needed.

We actually just took -- we had to take a high-speed line out of Winston-Salem and ship it over to China to handle the needs there. So, that's one of the projects that a little bit pushed. But, is still needed for next year. And then, the Oracle upgrade. We're doing an Oracle upgrade. Systemwide upgrade. Global upgrade. That was going to start in Q4, but, it starts next year.

Great. Okay. Thanks.

Scott Van Winkle, Canaccord.

Hello, thanks. John, I want to explore that last question from Tim a little more on the guidance for next year. What kind of shocks me was the higher revenue dollar guidance than volume guidance. Unless I'm reading that incorrectly. I would've thought the other way, obviously, with currency. Is there a lot of price that's flowing through next year?

Well, yes, there is significant amount of price. Some of it, actually, has flown -- flew through, came through the third quarter already. And, some more in the fourth quarter. And then, of course, we'll have some next year to compensate for some of the currency movements. Now, again, we don't adjust price base on currency. We adjust price based off of inflation.

But, as currency moves in some of these countries, it has an impact on inflation. So then, we take a price increase. It's always a lag to inflation. It's always only a fraction of the currency movement. But, that's part of what's happening between the volume points and net sales. And then, the other element is country mix. Is favorable next year.

All right. I know you called out what your price increase in Russia. Are there specific markets where we should think about more impact from pricing?

So, Russia was one we did in March. We did a US one in May of 2%. That's -- so that had a part -- about half a year this year. It'll have a full year next year. And then, throughout the world, we've done a number of price increases tied to inflation. I don't have all the numbers, the increases, off the top of my head. But, I'm happy to give them to you after the call.

Okay. And then, last point on that. So, if we're thinking about mid-single digit revenue growth and, kind of, flat earnings year over year. Where's the loss in the P&L from currency?

Yes, well, I -- actually, I think, on a constant currency basis its growth in EPS. So, this year high end guidance is $4.75 on a constant currency basis. We'd be somewhere around $5.25, $5.35 next year at the high end of the guidance on a constant currency basis. So, it is, in fact, currency.

One of the elements that impacts margins next year, is, in fact, country mix. So, some of the more complex regions that are more expensive to run is where some of the growth is. Now, one of the things I will point out on the mid-single digit volume growth next year. Again, it is an acceleration throughout the year. We end the year more to a high-single digit buying growth.

Got you. Okay. And then, a few others, if I could. Another financial one for you, John. The gross margin, you didn't call out self manufacturing and that improvement year over year. It seems like every time you -- we hear a number about what percentage of sales is self-manufactured, it's going up. Was that an impact?

It was a small impact that, actually -- so, Winston-Salem was profitable this quarter. And, it's expected to be profitable in Q4, but, you don't see the impact of that until next year. It rolls out with an inventory turn. So, it's not hitting the P&L yet. It's still a slight impact, the gross profit. But, it'll accelerate a little bit more next year.

Okay. Great. And then, on the VAT in Mexico. I remember talking about a last quarter, but, I don't remember, when was it put into place as far as during the quarter? And, I'm wondering if the impact is more significant in Q4 and going forward than we saw in Q3?

It was impact -- it was implemented during the quarter, all right? So, it didn't start -- this quarter did not start out with the complete implementation of the VAT. And, by September, and in the month of September, about 76% of our products sold in Mexico had VAT. So, that's closer to the 80 that will have VAT when it's fully implemented. And, September was not any meaningfully different from a growth rate standpoint than August or July.

Okay. And then, can we talk a little bit more about Korea? You talked about the comparisons, obviously, with, kind of, pull forward in sales last year during the quarter. And then, maybe, a little pull out this time around. But, it seems to be the market that has had the most impact overcoming the marketing plan changes. Is that right? I mean, what's different?

I mean, you talk -- you called out four markets where we're going to see a big impact in Korea. Is this the one that's having the most, do I have that right? And then, second, what's different? And, does it, kind of, turn later or sooner? Or, anything you've got to, kind of, expand on that?

Yes, Scott, this is Des. Let me take that one. So, what we have in Korea is a situation, where, effectively, we had two marketing plan changes, Scott. As you know, Korea, because of local regulatory environment, has a slightly different marketing plan than the rest of the world. So, we had the same worldwide changes. In terms of the first-order program. In terms of the transition of 5K to 4K.

And then, we had local marketing plan change that was intended to add an additional discount level below the level of supervisor. So, it was really the accumulation of those changes, plus the addition of a surcharge in the middle of this year. And, so, that's why you've got this cumulative effect. Frankly our members are responding well to this. And, we certainly are seeing high levels of engagement. But, the reality is because of accumulation, Korea's return is going to be, really, a 2016 story.

Great. Thank you, Des.

Sure.

April Scee, CRT.

Yes, hi, thanks. Just a question or two on the organic. And, just, first for the guidance for the fourth quarter. I just want to make sure I understand it. When you're looking at the range of 1.6 to 4.6. How do I think about that when you're faced with an easier comp in the fourth quarter?

And then, also on a 12-month basis. When we're, sort of, plugging in the math. I have trouble getting to your numbers. And, conversely, on the FY16 guidance. The 7% to 10% sounds like a pretty good acceleration.

I know you've talked about a lot of the things moving in the right direction. But, what's driving in your confidence in the 7% to 10%? What would be the big risks there? Or, the potential upsides that we might be looking at from a moving pieces perspective?

Well, I think I'll take it from end to beginning and take your last question first. So, for next year, we are seeing a dramatic improvement in engagement levels with our member base. Which we plug into our models to use to project the next couple of years of volume by country. And, it's based on active members. And, active members are dramatically improved in the third quarter from where they were in the second quarter and the first quarter. And, I give you some big picture numbers.

First, I'll deal with the whole Company, ex-China. And then, up to some particular countries. But, active new members in Q1 of this year was down 4%. In Q2 it was up 1%. In Q3 it was up 21%. So, dramatic increase.

In the US, in Q1 it was down 28. In Q2 down 17. In Q3 up 33. So, now, when new members come in are engaged, there's a cycle in the model, that pushes them out for at least a couple years and you get the benefit for a couple years. So, this goes into next year's model.

Now, some of next year is dealing with last year's new members, right? Which is why next year, at the beginning of the year, you get a balancing effect and you get more of an acceleration towards the back half of next year. Is that?

Yes, that's very helpful. And then, just, on the guidance for the fourth quarter and the full year. There is the comment about the Venezuelan price increases being excluded. And, just, sort of, how do we think about that in relation to the fourth-quarter guidance? And then, just, mathematically, how are we getting to the 1 to 1.7 for the full year?

Yes, so, the difference for the math is that on the forward-looking periods we do not include the benefit from price increases in Venezuela in our constant currency guidance. All right?

Okay.

Because, you can get these price increases because of the change in the exchange rate, all right? And so, without the exchange rate, you wouldn't have the price increase. So, that's why, when you look at your projections in Q4, you can't do the math. But, we provide that information in our website looking backwards.

Okay.

In our investor relations portion of our website. Now, going -- now, remember, so, Q1 of this year had some decent volume from Venezuela. But, then it was a big drop off in Q2, 3, and 4. So, it's really, Venezuela's only going to impact it, the guidance, for one more quarter. And the, the numbers are so small that it really doesn't matter after the Q1 of next year.

Okay. That's really helpful. And then, just on some of the new initiative. You talked about a lot of them this quarter. But, just thinking about the savory and the hot and the sports nutrition and the chicken soup stuff that you mentioned on this call. When would you expect to have enough critical mass that they really start to matter to the representatives, or, the numbers? And, how do you incentivize the reps to get involved within to drive these new businesses?

So, April, this is Des. So, we're already seeing the impact, April. In terms of new member engagement. In terms of the profile of new members coming into the business. We're seeing a younger demographic attracted by the sports line. We're seeing the excitement it creates having Cristiano Ronaldo and his activity on social media has been a tremendous boost in terms of confidence and engagement.

So, I think we're already seeing that impact. And, you see it in terms of the sequential improvement in various metrics. In terms of new member electivity. Not just in the US, but, in other regions of the world.

Okay. Thank you. That's really helpful.

Sure. Thanks, April.

Mike Swartz, SunTrust.

Hello, good evening, everyone.

Hi Mike.

John, just a -- I have a question about the third quarter. The volume in the quarter came in relatively in line with your expectations that you gave a couple months ago. And, EPS came in well above the range that you had outlined for everyone. Can you, just, maybe, help us bridge the gap of, I guess, what came in better than expected?

So, it's on the expense side and it falls -- the expense side falls into two buckets. So, there's a timing bucket of about $0.05 that got moved into the fourth quarter. So, we still expect to spend the money. We just profiled it differently than we did a quarter ago. And then, it's lower expenses. We are managing expenses. I think we've talked about that now for a few quarters and we'll continue to do that.

Okay. And then, I apologize if I missed this. But, just, in terms of the 2016 guidance. It looks like you're looking for about 7% to 10% top-line growth, ex-currency. But then, EPS, ex-currency, you're looking for 4% to 10% growth. So, maybe, I guess, why aren't you seeing leverage there, excluding any -- excluding the negative of currency?

Yes, now, that's a great question, I -- so, there's two reasons. One is country mix which I tried to describe earlier. So, some of the countries where the SG&A is higher and some of the regions where it's higher is where the growth is coming from. Or, at least, where the -- where growth is outweighing some other countries. So, we've got a country mix challenge. That's about $15 million impact to the bottom line. And, that makes up the majority of the difference.

And, the other side is, of course, we've been controlling expenses very significantly this year. And, as growth starts to reappear during next year, and exceeds that low- to mid-single digit range, we're going to add some of those costs back that are needed to support that growth.

And, did you say that the country mix port -- or, aspect of that was 50, five zero, or 15?

I'm glad you asked. Clarification, one five.

One five, okay. (laughter)

It's my accent.

(laughter) Thank you.

Yes.

Meredith Adler, Barclays

Hello, guys.

Yes, welcome back, Meredith.

(laughter) Yes, I'm not great with technology. So, I'd -- a lot of my questions have been asked. I guess I would like to go back to talk about Korea just a little bit. It is your most established market. And, obviously, it's a unique market. There have been a lot of changes.

Is there any reason to believe that what you're seeing there is tied to the maturity of the market? It's, I think, at one time, anyway, volume plans for capital were pretty high there. Is there any reason to see that as a problem now? And, is this any -- if it's true, should we be thinking about that for other markets?

No, Meredith, we've no reason to believe that. Because, as you know, we have other markets in the world with compered volume points per person. So, what we see there is really a reflection of the cumulative marketing plan changes. And, anytime you've got that level of change in a certain -- and, a volume amount of period, you've, obviously have got a distraction issue. So, we're very focused on that.

We've got a very strong consumption-based business with the clubs. But, what we have seen is a significant reduction in terms of new sales leaders. And, that's really, sort of, the key factor. But, again, nothing that would give us any pause for concern regarding the long-term health of the market. Simply, a longer transition and adoption of the marketing plan changes and moving beyond those.

And, I know, Meredith, Des said this already. But, it's worth repeating. Korea has a different marketing plan than the rest of the world and the changes made to that marketing plan was different than the rest of the world.

All right. Okay. And then, I have a question about, you had a skincare line. And, I was wondering how that's done? And, or, yes, I guess the skincare line, and, how that's done? And, where you think that relates at all to any, say, distinct product? How quickly it will get accepted? And, maybe, even having to educate your members about it?

Yes, so the skincare line has performed moderately well. I think, from our perspective, the primary reason for the updating of the skincare line was part of our initiative constantly to be updating based on latest science. We took out phosphates. We took out sulfates. So, the line is a better line from that perspective and we're proud of that.

In terms of our core business. Skincare is not really our core business. And so, that's why I think from our members' perspective, really, they're focused on our nutrition or inner nutrition products, rather than outer nutrition. So, I think it will always remain an important part of our business. But, certainly, not one that we're highly focused on.

Okay. And then, I guess, just, really quick, had a simple question. But, you did say you have to take a line out of Winston-Salem to send to China. Which, I mean, assuming that China's volume was outstripping that availability of capacity. Would -- did that have any impact on any other markets, having to take that out? Or, was that just underutilized capacity at Winston-Salem?

No, it was underutilized capacity. So, we have 11 lines -- or, we had 11 lines in Winston-Salem. So, we're down to 10. Nine of which are running. The 10th one will come up next month.

And, we're running between 35% and 40%. Maybe, 35% to 45% of capacity is based off of that equipment. So, there was plenty of room. And, that's why we chose to reduce lead time by just moving equipment we already had as opposed to ordering new equipment for China. Now, we will order the equipment for Winston-Salem to replace that line. And then, there's actually five clean rooms already built for five additional lines should we need it in Winston-Salem.

Got it. And then, actually my final question would be about your material costs. Are you seeing any changes in that?

So, we're seeing -- so, it differs by commodity. So, in certain commodities we've seen a little bit of a reduction. But, nothing meaningful.

But, nothing going up?

Not on a global basis when we look at overall material costs, it's a net alight decrease going into next year, we believe.

Thanks. Okay. Thank you very much for answering my questions.

Thanks, Meredith.

I want to thank everybody for being on the call today. And, it's obvious that we have got some currency headwinds heading into next year and you're all focused on guidance as you should be. But, let me just point out some things that are -- I think, are important to our Company. Is that members are assimilating to these marketing plan changes as we speak. They're improving volume. The local currency sales trends are great.

Quarter three improved over quarter two. We expect sequential improvements in quarter four and throughout next year. Engagement levels are incredibly high. Average active sales leaders are up versus prior year. New members with activity are up in every region. Both compared to prior year and sequentially. More people are ordering from the company than ever before. And, finally, just as a -- you know me, those of you who know me, I'm very passionate about our Company.

And, we got to start the day with two pretty amazing calls. One, to congratulate a 35-year employee of Herbalife. And, that is just amazing to know that the legacy of this Company continues to be incredibly strong. This employee started in a little tiny office on 251 Robertson Boulevard here in Los Angeles. And, today, we're in 91 markets. Almost $5 billion in sales strong. And, the growth that he has seen and the growth that we have seen in the Company continue to give us incredible confidence about the future.

And, the second call was something very special. It was a call to recognize and congratulate a member in Scotland for his achievements in a rise to president's team. This -- his story is really one of engagement and activity in helping customers in his community improve their health through nutrition and healthy activity. This formal royal marine commando, which is another wonderful story, has changed his life and the lives of the community through Herbalife. His story is inspiring and motivating to every single one of us.

It just leads me to say, and I'll just say this all the time, Herbalife is a special company. We've made up of thousands of members and employees like the gentleman that we started our day with today. They work hard. They're resilient. They believe strongly in our mission. And, I just want to thank all of you for your support. We look forward to reporting our fourth quarter and full year to you on our next call. Thank you very much.

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