Herbalife's (HLF) CEO Michael Johnson on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Herbalife Ltd. (HLF)

Herbalife Limited (NYSE:HLF)

Q2 2014 Earnings Conference Call

July 29, 2014 11:00 AM ET

Executives

Michael Johnson - Chairman and CEO

Des Walsh - President

John DeSimone - CFO

Amy Greene - SVP, Government, Corporate and IR

Analysts

Meredith Adler - Barclays Capital

Mike Swartz - SunTrust Robinson Humphrey

Scott Van Winkle - Canaccord Genuity

Rommel Dionisio - Wedbush Securities

Operator

Good morning and thank you for joining the Second Quarter 2014 Earnings Conference Call for Herbalife Limited. On the call today is Michael Johnson, the Company's Chairman and CEO; the Company's President, Des Walsh; John DeSimone, the Company's CFO; and 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.

Amy Greene

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 risk and uncertainty and, as you know actual results may differ materially from those discussed or anticipated. We encourage you to refer to yesterday's earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements and our business.

In addition, during this call certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, prepared in accordance with U.S. 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 Web site, 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 Mike.

Mike Johnson

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 and provide high quality nutritional products through a network 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 a 9% increase average active sales leaders and 5% increase in the new members. We generated $156.9 million in cash from operations and invested nearly $40 million in capital expenditures to support the growth in our business and expand our Seed to Feed 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 hire more 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 growth in the greater China region. We have raised our adjusted 2014 EPS guidance to the 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 have had 19 straight quarters of record top and bottom-line performance and we believe the opportunity for Herbalife has never been greater that it is today.

Let me discuss four of the core reasons we believe our future is so bright. One, our products address real consumer needs, over 60% of our product sales from 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 and cash flow structure enables us to continue create value for our shareholders.

Let me dig deeper in 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 women 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 17.

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 first 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. Cornell University study estimates that obesity now accounts for almost 21% of U.S. 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 in a dramatic increase. The research pointed to the percentage of women who reported no physical activity having increased to 19% to 53% between 1988 and 2010. And the percentage of inactive men rose from 11% to 43% in the same period. Not surprisingly obesity also increased from 25% to 35% in women and from 20% to 35% in men. However the number of calories consumed per day has not changed materially. Given these facts, not surprising, the 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 approach is offered by our direct sales model is more effective in creating sustainable behavior changes from weight management in promoting a healthy active lifestyle. The reality is that people are more likely to lose weight in a group setting or an environment that 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 on the program with friends, 95% completed the program compared to only 76% of those who dieted solo.

At 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 of consumers and achieve the weight loss goals while combining low-calorie meal replacements in a group setting.

My third point is our record performance continuing 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 the U.S. history and despite this we saw the highest net sales in the company’s 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 in an all time high at 77% of the U.S. compared to 69% last year.

Also during the quarter, 44% of new sales leaders that qualified did go 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 buy back rates in the U.S. are the lowest in history, going back as far as our records are available. And our general market extravaganza in early July attendance was up 24% over the last year’s event.

We are pleased with the progress we see around the world. The focus our members bring though the expansion of their own independent businesses, as they spread the mission of a healthy active lifestyle across the globe has never been stronger. They are continuing to see double-digit growth in both EMEA and in China. Our new sales methods are making engagements and the 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 in the 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 a majority of that to repurchase shares. We expect to continue our buyback program which John will discuss in more detail in just a few minutes.

The ongoing success of our financial results are a reflection of what we have always known to be true, the deep and intrinsic value the Herbalife's products and business opportunities brings 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 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 product, along with a 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 likeminded people to achieve their goals, to becoming healthier, and living a more active lifestyle whether it is simply working with one of our members or attending the 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 opportunity to communities around the world.

Additionally, nutrition clubs provide a fantastic and affective 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 to see nutrition clubs are an internal component 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. In order to lose weight you need to burn more calories than you consume, this awareness has created new consumer demands for activity 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 rise to a new sales method that incorporates exercise and activity. We remain successful because we’re a company that provides a valuable and unique opportunity for those members who chose 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.

The impact our members have on their own communities grow so does their enthusiasm for Herbalife. As I mentioned earlier we differentiate ourselves in community based approach to help people live 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 publically was clear and definitive, it confirmed what we already knew. Herbalife is 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 pro-analysis of Herbalife.

Dr. Vandaele found that approximately 97% of Herbalife’s U.S. products are purchased by consumers with end used consumption. In addition he found that the vast majority of Herbalife’s product farm 80% is consumed by members who joined Herbalife to receive product discounts for themselves and their families or is consumed by individuals outside of our members. Dr. Vandaele’s conclusion confirms that we already know that there is real demand by real people for our products. And second, the 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 U.S. Court of Appeals for the ninth circuit validated that the consumption of products that 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 and the strength of our business and the future position of our Company, we’ve recently configured 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 try 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 4 million dedicated members and our outstanding product and services have positively impact the life and health of millions of consumers. We’re inspired each and every day by the passion of our members and employees in their tireless efforts to build it better.

Now I would like to turn it over to Des for a more detailed update on performance in our key regions.

Des Walsh

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 with volume 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 these advice support and nutrition products they need to achieve their health and wellness goal. At Herbalife there is one constant change or perhaps more aptly put progression. Our members and those of us to 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 market.

The entrepreneurial nature of our members is a driving force in the creation and implementation of ways to adopt business methods to service the needs of customers in different communities around 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 introduction of various active lifestyle components into daily consumption DMOs, such as fit camps, 5K run, or even something as simple as neighborhood walk. Our members understand and are increasingly coaching their customers from the usage of Herbalife products that’s coupled with exercise the result is a truly healthy and active lifestyle.

Now, let me provide some regional highlights and color on our key region. Although the North American region and specifically the U.S. market came in below expectation in terms of volume point partially due to the very difficult comparison from prior year period. The region and the U.S. achieve their highest net sales results in their history, and as is evident in multiple indicators the fundamentals of the U.S. remains strong.

Average active sales leaders increased 5%, new members during the quarter of 76,000 which is 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 qualify 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 hit 24% increase over the prior year. While we are extremely proud of our business in the U.S., 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, U.S. sales leaders introduce interactive fitness or exercise elements into the model in order to attract and retain the members. Sales leaders from different countries has been visiting members in the U.S. 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 U.S. is that it has driven significant growth in younger members, focused more on healthy and active lifestyle. As Michael mentioned, the social network enabled by our business model, coupled with our members education 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 product in the basics of our business model. For those members that chose to build a business, we have training meetings that focus on increasing their knowledge on how to retail products and grow their business.

Our larger regional events extravaganzas are open to all members. And just two weeks ago, we saw almost 13,000 members of 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 of Surgeon General of the United States, speak to those in attendance about the positive impact of Herbalife members and nutrition club 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 the information about business improvements, such as the goal standards 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 roles 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 side.

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 pickup points in Mexico to over 850. By making access geographically closer to the members, we have seen the average order size in Mexico decreased 60% while the number of order have increased more than 250% in 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 progress of adoption and the acculturation of daily consumption business method 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 or healthy active lifestyle components into their clubs. Since the beginning of 2014 we hosted over 57,000 people at 757 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 new markets.

Next the Asia Pacific region which after successive declines of 4% and 6% in prior quarters retuned 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 volumes 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 one-third of Asia Pacific’s volume 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 to a healthy transition to daily consumption DMO practices. We believe in increased focus on sales leader activity and retention together with education on the benefits of daily consumption will result in further improvements to net sales and volume point growth.

In India local currency net sales increased 33% and average active sales leaders the 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 regions. 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 repatriations 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 health efficiency. 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 period last year. We believe that the softness in the quarter was due in part to an economic slowdown as a result of Brazil hosting the World Cup and the impact that had on nutrition club attendance coupled with the fact that Brazil had 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’re 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 effort by the company and members including our sponsorship of FC Spartak Moscow, continue to have a positive impact on the market recognition and consumer context. 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 it continued to experience meaningful growth. Local currency net sales and volume points in the UK increased 21% each as 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 call level 10, where members participate in 90 days fitness challenge. In a recent fitness challenge in the UK we had over 2200 participants in three regional challenges.

Over the last few quarters, nearby markets have observed the UK’s growth and has strategized to adopt similar business practices. Markets such as Germany, France and Spain have found success localizing and 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 who had 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.

John DeSimone

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

Adjusted EPS for the quarter of $1.55 was at the high-end of our guidance, $0.14 or 10% higher in the adjusted second quarter results of last year. The comparison for last year was negatively impacted by $0.28 from the combined impact of foreign currency and a higher effective tax rate. The $0.28 has comprised of a negative $ 0.17 impact from currency and $0.11 impact by the tax rate. On a reported basis EPS was $1.31, includes the following four items that we consider to be outside the normal operations of the company or we believe it to be useful to investors when analyzed in period-to-period comparisons of our results.

First $0.11 impact from $10.1 million of non-cash interest cost associated with the outstanding convertible bond offering. Second, $0.06 and $0.03 respectively towards expenses incurred in response to a tax on the company’s business model, and expenses incurred related to the FTC inquiry. And lastly, our adjusted results exclude a $0.03 impact in taxes relating to the first quarter Venezuelan devaluation. As noted during the last quarter’s conference call, while the devaluation occurred in the first quarter, the tax impact is spread throughout the year.

For the second quarter, the company reported net sales of $1.3 billion representing an increase of 7.1% against the second quarter of 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 margin for the second quarter improved approximately 60 basis points versus the first quarter of 2013 primarily a result of price increases, favorable impact of currency 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 result of lower inventory write-downs, partially offset by unfavorable impact of foreign currency.

Operating margins declined on a reported an adjusted basis by approximately 80 basis points and 60 basis points respectively, but both were negatively impact 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 non-GAAP items previously noted, and China service provider cost 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 non-cash.

Moving onto effective tax rate our second quarter adjusted effective tax rate was approximately 485 basis points higher than our effective tax rate of Q2 2013 but in line with expectations provided in our previous guidance. The increase versus the prior year was due to the inability of fully realizing tax benefits related to the increased cash interest expense, and 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 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 and our earnings per share for the same period 2013 comparing second quarter adjusted EPS to the previous guidance provided in April adjusted EPS of $1.55 was 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 to the relevant capacity expenses.

Before moving on to the new guidance for the third quarter and full year 2014 provided in the press 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 Venezuelan Bolivar or any future repatriation or 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 cost 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% and 7.5% in the third quarter. We’re initiating our adjusted EPS guidance for the third quarter to be in the range of $1.49 to a $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 estimates for the third quarter 2014 includes approximately $10 million of event expenses that occurred in Q4 last year which is the only timing of the negative impact to Q3 would equally benefit Q4 this year.

For the full year we’re raising our adjusted EPS guidance by $0.07 on the low end and $0.02 per share on a high end. Despite the full year 2014 volume growth expectations by 200 basis points compared to previous guidance. Full year volume points are expected to grow between 6% and 8% for the year, we now expect adjusted EPS to be in the range $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 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 the 10b5-1 trading plan, plus $266 million relating 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 Venezuela cash, and thereby had 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 two times at gross basis and 1.2 times on a net debt basis.

We generated 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 per shareholders. While our projections assume $50 million per quarter of additional buy backs 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 questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Meredith Adler with Barclays.

Meredith Adler - Barclays Capital

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?

Des Walsh

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 United States that it has been hugely beneficial in attracting a younger demographic people very much focused on a healthy active lifestyle. And in fact we have had distributor groups come from all over the world including Asia pacific including Korea to actually look at the fit camps and fit clubs here in the U.S. So this is something that we see really spreading all around the world.

Meredith Adler - Barclays Capital

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

Des Walsh

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 are bringing with them the sensibility and reaching to have communication with other younger people. We're seeing growth in relation to social media and they are using social media. You’ve seen that also transform the UK. Here's a market 30 years old experiencing this tremendous growth partially based on the fitness concept of healthy active lifestyle. So a universal appeal regardless of ethnic group.

Meredith Adler - Barclays Capital

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?

John DeSimone

Meredith, I think last year the tax rate was low in both Q2 and Q3. So it’s a headwind this quarter that we just reported and 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.

Meredith Adler - Barclays Capital

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?

John DeSimone

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 are still conservatively levered. Our EBITDA in the quarter, un-adjustable was 20 million, adjustable was 235. That annualizes to around 900 million of EBITDA which is about where our 12 month was. And on a gross debt basis we have 1.8 billion in debt, so it’s a two times levered ratio which is significantly lower than the covenant that we are having on a net debt ratio, it’s 1.2 times. We do think that this is an opportunity and without getting into specifics how we take advantage of that. But we will have to take advantage of opportunities in our buyback program.

Operator

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

Mike Swartz - SunTrust Robinson Humphrey

I just wanted to touch on the U.S. 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 then just 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?

Des Walsh

Yes, Mike, a couple of things. So first of all Mike, we should see this in the context. This is something that you see happening regularly in our business. So we saw it in a specific region last year, fourth quarter down 4% first quarter down 6% and then it returns to growth in the second quarter this year. You’ve seen this happen in Brazil. You’ve seen that happen in Mexico. So we shouldn’t look at this as something that is terribly unusual. Clearly we want to see every number positive. But obviously net sales, up in the U.S., and that’s like when we look at our historical situation of the markets. We look at what’s happening in the U.S. That’s why we’re confident that we are going to have a good Q3 and emerge up in Q4.

A couple of key factors behind that obviously. We shared those with you, 76,000 new members in the second quarter, the highest number in Herbalife’s history. Key indicator for us was the average active sales leaders increasing, because that’s the key metric reflecting 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 U.S. are strong. And that’s what gives us the confidence about our return to growth later in the year.

Mike Swartz - SunTrust Robinson Humphrey

Okay, thanks Des. And switching over to Venezuela, another publicly traded direct marketer was 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?

Des Walsh

Sure. There is a price control in place, in Venezuela. We 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 increase need to be effectively improved, or at least not disapproved by Venezuelan government, so that we're seeing some of that same activity.

Mike Swartz - SunTrust Robinson Humphrey

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

Des Walsh

Yes, they did in January, but we had not since.

Operator

Your next question comes from the line of Scott Van Winkle with Canaccord.

Scott Van Winkle - Canaccord Genuity

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?

John DeSimone

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

Scott Van Winkle - Canaccord Genuity

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

John DeSimone

So bought in -- I will give you the total of buyback in Q2 and how it factored into the share base. 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 Jun that 9.8 million shares of buyback had about a 5.8 million reduction in the quarter which means 4 million and not get reflected in the quarter based on the averaging of the share base. So you can expect Q3 to have around 4 million less shares than Q2.

Scott Van Winkle - Canaccord Genuity

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?

Michael Johnson

We called it out Scott, because effectively the World Cup reduced the amount of sort 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 in some other markets that share the same time zone. So the other key factor in Brazil was we shifted from three extravaganzas to one extravaganza. And although the total attendance was up, we saw shipped with the geographic mix of those attending with lesser attending from the farther areas of Brazil where we had significant growth in recent quarters. So that’s really the combination of both of these two factors really were the key driver for that reduction.

Looking forward the fact that we didn’t have that attendance from certain segments of Brazil may affect the -- may have an impact in terms of third quarter but we expect to get back to growth next year.

Scott Van Winkle - Canaccord Genuity

And then on the Venezuela, 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 is lots of challenges in Venezuela. I'm wondering maybe specifically on the price increases what it does to volume?

Michael Johnson

Well it’s a highly inflationary market by the way. So what you see happening to urbanized prices is not in consistent with what’s happening on the ground with all consumer products, companies and -- there is an element of price control that’s not put in place. But overall many big decrease in volume in Venezuela is down 40%, that’s not different than what we expected coming into the year. Some of that is because of the economics that are taking 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 controls. So it’s a little bit of combination which is why you see the decline in Venezuela.

Scott Van Winkle - Canaccord Genuity

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 I guess is equivalent to the members or salesperson number which I guess is equivalent to members elsewhere, that number has been down like 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.

Des Walsh

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

One thing, as reflection of our confidence and commitment to 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 that we see in the China market in the years ahead.

Scott Van Winkle - Canaccord Genuity

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?

Des Walsh

So speaking from memory it’s probably about a dozen today. And 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 am being corrected 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 different people achieve that level of sales leader that they have a stronger more stable business which contributes to long-term retentions.

So a lot of positives and that’s why we actually see ourselves rolling this out more and more later on during the course of this year.

Scott Van Winkle - Canaccord Genuity

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

Michael Johnson

It’s Michael, Alan Hoffman is a great talent and great fit, 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 seamless transition and we looked at this opportunity to say, you know something eventually we’re going to be a Fortune 100 Company and we have to look at the future of this Company and how we position ourselves in government affairs, in public affairs and press and communications. And we want to go out and find the best person we possibly could. Barb worked with me very closely 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’re very thrilled 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 in government affairs which we think is part of the way more modern companies are setting up their global infrastructure to deal with all of the elements that our external to us in terms of getting our story out both to government officials and making them understand who we are as well as press and making the consumers in 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 down the face of the earth. So, sorry for that long answer there Scott, but and just this is an important hire for us, and we are very sad to see Barb go, and we're excited to welcome Alan.

Operator

(Operator Instructions) Your next question is from the line of Rommel Dionisio with Wedbush Securities.

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 you’re addressing and all you have those 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.

Des Walsh

Yes. Rommel, I guess the importance to address that is it is very significant. You’ve seen us talk about this now in Mexico for many years, you saw as on this report make reference to another store chain that has recently joined our family there, and so clearly this is an initiative for us a worldwide basis. It had been a factor in Russia and we believe there huge potential in India also where if they clear goal to increase access points, but it does obviously creates better fulfillment to lower economic access for distributors. We are working with different partners. We have a couple of task currently in progress, probably too early, yes, to really talk in great detail other than to say the results of very promising, and I think in future calls we will give you more detailed update as we see it progress.

Operator

Your next question comes from the line of Meredith Adler with Barclays.

Meredith Adler - Barclays Capital

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 U.S., 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?

Des Walsh

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

Meredith Adler - Barclays Capital

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

Des Walsh

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 represent opportunity for Herbalife and for our message of good nutrition and 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 of the things that we look at, see not a maturing market, but actually and expanding market, and with huge runway for growth ahead.

Meredith Adler - Barclays Capital

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

Des Walsh

Not informed opinion, certainly not inside the company. And again Meredith, look at the UK, here is a market been in 30 years and 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 U.S. of 34 years old or you look at the UK 30 years old. You know what you see is the level of energy and confidence and excitement. And the other thing I think to put in context, Meredith, this is it. Obviously I know people are focused on the U.S. business, but if you look at Q2 2012, our numbers this quarter volume points are 10% from where we were in Q2 2012. So I think you should sort of put that into the equation and factor that in because I think that’s the true reflection of the growth that we’re having in our business today.

Operator

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

Michael Johnson

Thank you very much and thanks everyone for being on the phone. We know there has 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 condition to market to big Bs but we met our 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 business with a younger Herbalife distributor communion to a healthy active lifestyle program will continue to drive record growth for 2014. We are looking forward to build it better every single day to return the shareholders value in this Company and we’re excited to talk to you again in three months. Thank you very much.

Operator

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

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