Alan Quan - Vice-President Investor Relations Michael O. Johnson - Chairman and Chief Executive Officer John G. DeSimone - Chief Financial Officer Desmond J. Walsh - President.

Meredith Adler - Barclays Capital, Inc. Michael A. Swartz - SunTrust Robinson Humphrey Timothy S. Ramey - Pivotal Research Group LLC Scott Van Winkle - Canaccord Genuity, Inc..

Good afternoon, and thank you for joining the First Quarter 2015 Earnings Conference Call for Herbalife Ltd. On the call today is Michael Johnson, the company's Chairman and CEO; the company's President, Des Walsh; John DeSimone, the company's CFO; and 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 risk 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 U.S. 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..

members, who are dedicated to and focused on customers, customer acquisition, customer retention, customer service, and customer loyalty. To conclude, this has been an encouraging quarter in a number of areas, and one that has seen us continue our progress.

Importantly, we are seeing a positive impact with the marketing plan changes and the trends in key metrics that give us confidence that this momentum will continue to build throughout 2015.

Our members are energized and fully behind the changes we made because they see first-hand the way these changes enhance the experience of both their customers and the new members.

We believe we are on track to cycle through the impact from these changes this year and create a stronger platform for sustainable growth that we believe will deliver long-term value for our shareholders. John will now take you through a more detailed look at the financials..

Thank you, Michael. First I will review the company's first quarter reported and adjusted results; then I will discuss the second quarter and our remaining 2015 guidance; lastly, I will discuss the recently announced amendment to our bank deal.

For the first quarter, local currency net sales grew 3.9%, while reported net sales of $1.1 billion decreased by 12.5% compared to the first quarter of 2014. Excluding Venezuela, local currency net sales were essentially flat compared to prior year. Currency translation continues to have a significant impact on our reported results.

As Michael mentioned, approximately 80% of our business is generated overseas, so this translates into significant ongoing FX headwinds faced by all U.S. companies with a large international presence. Q1 Venezuela sales were reflected at the SICAD II rate until mid-February when we moved to the SIMADI rate.

During the first quarter, Venezuela accounted for 0.6% of our worldwide net sales. Volume points for the first quarter were down 4%, which was better than the high end of our guidance range. The beat was widespread with the only notable exception being Mexico, which slightly underperformed to our expectations.

Compared to guidance, our reported net sales were equal to the high-end of the range and would have been above the high end of the range excluding the impact of currency changes compared to those assumed in guidance.

Moving on to EPS, Q1 adjusted EPS was $1.29, which was above our guidance range of $1 to $1.10, but down 14% compared to the same period in 2014, due primarily to lower volume and strong currency headwinds, partially offset by a lower diluted share count.

First quarter adjusted diluted EPS was negatively impacted by a $0.44 currency headwind compared to Q1 2014, of which $0.18 was due to Venezuela. On a reported basis, Q1 EPS increased 24% to $0.92 per diluted share in the quarter compared to $0.74 per diluted share in the first quarter of 2014.

Our first quarter reported EPS includes additional items considered outside of normal company operations, which we believe will be useful to investors when analyzing period-over-period comparisons of our results.

These items include $0.12 of non-cash interest expense related to our outstanding convertible note, $0.03 related to expenses incurred responding to attacks on the company's business model, and $0.02 for expenses related to the FTC inquiry.

Adjusted results also exclude a $0.12 favorable impact related to unrealized FX gains generated by movement in the euro and its impact on intercompany balances which we chose to leave unhedged in the quarter for cash management reasons.

Lastly, adjusted results exclude $0.30 resulting from the remeasurement and impairment losses relating to the previously-mentioned move to the SIMADI rate in Venezuela. At the end of the first quarter, we have only approximately $12 million remaining in bolivar-denominated cash.

Compared to our first quarter guidance range of $1.00 to $1.10, the increase in our adjusted EPS was primarily due to higher-than-expected volume, which was above the high end of our guidance and lower expenses due to the ongoing expense controls put in place, and a $0.04 favorable impact due to delayed expenses that would be spent later this year.

With respect to gross margin, our reported gross margin for the first quarter was 80.5%, which was approximately 40 basis points higher than the first quarter of 2014. The increase in the margin included a favorable impact of price increases, lower inventory write-downs and country mix and the unfavorable impact of foreign currency fluctuations.

SG&A, excluding non-GAAP items, increased as a percent of net sales by approximately 400 basis points compared to Q1 2014. More than half of that increase, or approximately 225 basis points, was due to an increase in China member payments due to the continued strong growth in that market.

Of the remaining increase, the majority was due to the unfavorable impact of currency of approximately 130 basis points. Moving on to effective tax rate, our first quarter adjusted effective tax rate was approximately 120 basis points higher than Q1 2014 and approximately 20 basis points higher than the high end of our guidance.

The increase was primarily due to a higher full-year effective tax rate as a result of changes in country mix of earnings, partially offset by a decrease in net expenses from discrete events. Now turning to guidance.

Although we are pleased with our better-than-expected first quarter results, we continue to feel the impact of the marketing plan enhancements as they cycle through the business.

As Michael stated, we have updated our full-year 2015 guidance to reflect Q1 results, but have kept our previously guided volume outlook for the remainder of the year essentially unchanged. For volume expectations, the second quarter faces a difficult comparison, as Q2 2014 was the highest volume quarter in the company's history.

May of last year was the largest single month in the history of the company and April was the second largest. We maintain our view that we expect to return to growth sometime during the second half of the year. Net sales in our guidance continue to reflect the impact from currency.

Currency headwinds will have a negative impact of approximately 1,000 basis points on net sales growth rates in Q2 and 900 basis points for the full-year 2015, both adjusted for price increases in Venezuela tied to FX rate movement.

Excluding Venezuela, the balance of the year will be negatively impacted by approximately 600 basis points due to currency. For all guidance currency assumptions except Venezuela, we have used the average closing exchange rate during the first two weeks of the quarter.

For Venezuela, our guidance reflects the previously mentioned SIMADI rate of approximately 190:1 and it's important to know that the impact of this rate change on the balance from 2015 was mitigated by price increases instituted in Venezuela in both March and April that were tied to the FX rate movement.

Guidance for the second quarter adjusted diluted EPS is in the range of $1.05 to $1.15, which includes an unfavorable currency impact of approximately $0.40 per diluted share, inclusive of approximately $0.14 resulting from Venezuela.

Adjusted EPS guidance for the full year is now in the range of $4.30 to $4.60, which includes the currency headwind of approximately $1.26 per diluted share, inclusive of $0.45 for Venezuela. The new guidance range represents an increase from previous guidance of $0.20 to the low end and $0.10 to the high end.

This increase reflects the beat in Q1, partially offset by $0.04 for a slightly higher tax rate than assumed the quarter ago, $0.04 from the timing of expenses previously noted, and $0.03 of additional negative currency impact compared to assumptions used last quarter.

Our free cash flow guidance for the year, defined as cash from operations less capital expenditures, has increased to a range of $440 million to $470 million, reflective of our first quarter results in which we generated approximately $145 million. Our capital expenditure guidance remains unchanged from that previously provided.

Yesterday the company amended its credit facility to extend the maturity data of its revolving credit facility to March 9, 2017. The term loan will still mature on March 9, 2016.

Pursuant to this amendment and upon execution, the company will make payments of approximately $20.3 million and $50.9 million on the term loan and revolving credit facility, respectively. We will bring the total expected available borrowing capacity on our revolving credit facility to $425 million as of September 30, 2015.

The interest cost on the amended deal effectively remains the same through the original maturity date of March next year. For the subsequent year, March 2016 through March 2017, the interest costs will be 200 basis points higher than the existing deal.

This new amendment does allow the company the ability to pay dividends or repurchase its common shares to a maximum of $233 million, which is the amount currently authorized by the board. However, no buyback is included in our current guidance. I will now turn the call back over to Michael before taking questions..

improving the lives of people around the world through the efforts of our members and employees. With that, we would now be happy to take your questions.

Operator, would you please open the lines?.

Our first question is from the line of Meredith Adler with Barclays..

Hi, Meredith..

Hey, guys. Good to see that all your marketing changes are being accepted so well by the distribution base. I was wondering if we could go back and talk about some of the other kinds of initiatives that had been worked on in the past. I'm interested to know whether you're still seeing daily consumption grow.

And the combination of fitness and healthy eating; how is that going? Or maybe everybody has been distracted by these other changes, but I was wondering if that's still helping to drive the business?.

Yeah. Hi, Meredith. This is Des. So, look, we see enhancement in every area. So obviously we see continued adoption of FitClub model. We see continued expansion of daily consumption through the clubs.

I would say literally firing on all cylinders, that all of the initiatives we put in place in recent years are all contributing to the enhanced performance that we're seeing in our metrics today..

Okay. That's great.

And then maybe a question for John; was there something in particular that made you decide to refinance the bank's debt? Were you just uncomfortable that it was all going to come due next year? Or what drove it?.

It's not just one thing. But I think the biggest pieces are – start with flexibility. We would've had $825 million due within the next 12 months. That's down to $420 million. So that's the current piece. We have $425 million in cash already in the U.S., so we already have enough cash to cover the current piece.

So I think from just a flexibility of utilization of cash, it's beneficial. I also think that if you want to buy back stock, there are some covenants around buying back stock, basically you got to pay the term note down by $1, if you buy $1 back in stock and the revolver down. So if we want to pay more down in debt, we can use some to buy back stock.

But we're not anticipating doing that in the near term. But at least we have some flexibility there. And lastly, the piece that we did roll was the revolver and that really is an option. If nothing else, if we want to pay the revolver down because we have no better use of cash, then we have the flexibility to do that..

Great. That's very helpful. Thank you..

Thank you..

Our next question is from Michael Swartz with SunTrust..

Hi, Michael..

Hey. I think, Michael and John, you both mentioned some cost reduction programs.

Can you kind of give us a sense of scale and scope of those? What you're actually doing? And then maybe where we're seeing more of those savings? Is it coming from cost of goods? Is it coming from SG&A? Maybe you could provide a little color on that?.

Yeah, most of it's in SG&A. I define it more as cost control. We're going through a transition on how members come into the business and that has a short-term impact, we believe, on volume. And during that time we want to be prudent on expenses. We haven't done any kind of big reduction in staff. We don't plan to do it.

It's really all about just being wise with what we're spending money on, doing a little less travel. Nothing I would say that's facing distributors, or distributor facing, so nothing that impacts what distributors see and feel and touch, but all of the other types of expenses that are administrative and overhead based..

Okay. Great. And maybe you can give us a little more sense of the momentum exiting the quarter. It sounds like the cumulative qualification process is really picking up.

Are there any metrics you can give us in terms of what you're seeing from a volume point or average active standpoint as we moved from January to February to March?.

Well, I will say one of the things, shifts that we're seeing, is more activity from new members that come in. So new members when they join, some buy directly from the company and some do not, and we're seeing more of them buy directly from the company.

So I think that's devaluing the new member stat a little and maybe valuing more new member activity which is something we'll evaluate releasing in the near future. As far as how things spread out during the quarter, we generally don't discuss how things profiled.

Just I can tell you that we didn't change significantly any of our volume expectations for Q2 or Q3 or Q4, so there's nothing that we're seeing in the trends that would make us believe that those quarters are more at risk, so we kept our guidance the same..

Okay. Great. Thanks for the color..

And our next question is from the line of Tim Ramey with Pivotal Research Group..

Hey, Tim..

Hi, there. Thanks. One clarification; I think at the fourth quarter call, you said that you thought that currency would be $1.19 headwind, and now you're saying $1.26 and there's got to be something missing between that $0.07 increment. What am I missing there? I have to believe currency certainly got worse than $0.07..

Yeah. Currency got a little worse than $0.07. Some of that was hedged though. We had about $0.12 hedged. So actually, just to be clear, currency for Q2, Q3 and Q4 is about $0.03 worse than we assumed. Right? So we also had a little bit of a hit in Q1, and that's the differential. But if not for a hedge, we would have been about $0.12 lower..

Great. All right, and then the Mexico field sales, there was concern about how that would flow through the system with inventory again in the Mexican distributor warehouses.

What can you report on how that seems to have played out?.

Tim, this is Des. So certainly I think we're very pleased with what we're seeing in Mexico. As you know, the primary driver between the two things that took place in February were intended to continue this journey that we've been on, really since 2009, in terms of the switch to the cumulative 3-month to 12-month sales leader qualification.

So looking at the numbers in Mexico, you saw that obviously tremendous progress going from 39% accumulated in overall Q1 to 75% in March. So certainly, those final two pieces kicked in, in February, that we are very pleased to see our Mexican member leadership has assimilated the new marketing plan changes.

And we're seeing solid fundamentals as we go through into the remainder of the year. So leadership (31:55) is in place and now we just want to cycle through those changes..

Yeah. And if I could add, Tim – this is John. As I said in my script, we missed our (32:11) in Mexico, but only slightly. There was nothing materially different than we had expected..

Yeah. I was going to ask, John, you talked about a new actuarial model for modeling, essentially retention and volume.

Based on the fact that you're not changing volume assumptions in the guidance, I assume you're validating that model to a degree?.

Yeah, so just as a reminder for those who are unfamiliar or don't remember what we talked about last call, was we changed our models based on shifts we're seeing in the business from the modifications to the marketing plan.

And post-February, which is when the last two changes went into place, we saw some changes from what we had modeled, but nothing material, and usually it was a shift from new people buying more and people who maybe have been a little more senior buying less, and that's pretty indicative of what you'd expect with the elimination of field sales.

So nothing we're seeing – we constantly validate the model every month and we'll continue to do that. And as we get more information the model will get better, but there's nothing at this point that we see that would change our expectations, and hence, we didn't change our expectation..

Okay. And just one more to circle back on the credit agreement. My printer ran out of paper as I was printing the 500-and-something-page Q, so I haven't reviewed it yet.

But I think you said you can buy back stock up to, what was it, $230 million authorized by the board?.

Yeah. So we have $233 million authorized and outstanding, and that's what the limit is on the credit facility. In addition, no covenant change on leverage ratio or interest coverage ratios, no cost change until next year. So through the old maturity period, the interest costs are the same.

Post-March of next year, for the subsequent year the interest cost will be 200 basis points higher than the current deal..

Okay.

And you have to have the term loan or the revolver completely paid down to buy back stock? Is that what I heard you say?.

No, no, no. You have to pay down $1 in revolver and $1 on the term loan to buy back $1 in stock. So basically, the banks are saying, if you're going to buy back stock, that's fine, but they want a piece too, so..

Those bastards at BofA. Well anyway, okay..

No, no, no, no. First of all, it was the entire bank group, right? This went through a lot of banks and this was, I think, a good vote of support. We are outstanding $500 million on our credit facility and $425 million of it got extended for a year, without any incremental interest cost for the original term.

To me, this is a very positive step, and a vote of confidence from the banks. But one of the things, banks generally don't like you – and with our overhang is that we go spend the money and buy back stock, so there were some restrictions on it. But at least we have some flexibility to buy back the stock up to the current authorized amount, so..

Okay, thanks. I'll let it move on. Thanks..

We do have a question from the line of Scott Van Winkle with Canaccord Genuity..

Hi, Scott..

So when you gave the March figures for the percentage of supervisors qualifying under the 3-month to 12-month model, so I think I wrote down 87% in the U.S. Is the other 13% just someone who does it less than three months? Obviously there's a first order limitation and they're just faster than the 3-month to 12-month model.

Or what's the delta there between 87% and essentially all of them?.

Yeah. So a lot more people expert at math on the call than I am but yeah, when you subtract 100% from 87% and that's what you get left with. And that is the number who are achieving the level of supervisor in a one-month or two-month qualification as opposed to a 3-month to 12 month qualification..

Yeah. So, Scott, but the marketing plan changes don't demand or require three months. What they do is drive people through a slower build sales leader and that's what we're seeing. It doesn't mean somebody can't do it in two months..

Oh, got you, got you. Okay. I got you. And then one of your direct selling peers today reported and they made a comment about strong China sales and they talked about a more favorable operating environment in China in general.

Is there anything that's changed in that market, regulatory, environment wise that might be more favorable than say a year ago? Obviously there was a competitor over there that had a struggle a year ago.

Has that market changed at all?.

Not that we see. I mean, obviously we always believed that the Chinese government has looked very favorably upon our business there. We've seen consistent support for that. We're very pleased with our business and the outlook, but certainly nothing that has changed materially in terms of a regulatory outlook..

Okay.

And then last, as we think about the vast majority of distributors taking a more gradual approach to qualifying as supervisor, does that have any implications on what percentage are using nutrition clubs or a daily selling method? Or is it that's insignificant, it's just the process by which they go to qualify?.

It really doesn't, Scott. What it does reflect is our leaders' confidence in that, this measure is going to have a long-term beneficial effect. So as you know we began this whole concept back 2008-2009 with the introduction of the cumulative qualification.

Over the years we've seen enhanced adoption and then last summer as you know we took a worldwide vote on it. 80% of those eligible to vote voted, and 80% of those voted in favor of it.

So this reflects the fact that in EMEA and in China where there has been a significant deduction of the accumulated qualification that our leaders saw this as beneficial for them, and hence the adoption on a worldwide basis.

So no change in terms of how people are doing the business, just increased confidence that with these changes comes growth and sustainability in the future..

And let me add, Scott, that with specific respect to nutrition clubs, a member is required to be in the business at least three months before they open up a club anyway. So the marketing plan changes no impact on clubs..

Thank you..

And we have no further questions in queue..

Okay. So this is Michael. Let me just make a few observations. Thank you all for being with us, number one, and obviously no more questions, just a little bit about what's been taking place actually very recently here. Last week, Herbalife was a sponsor of the Milken Institute Global Conference. And many of us attended several of the sessions.

And I participated in one of the panels. It was actually called the Business of Health, but it was really – it was about obesity. And some of the themes that came through just once again gave me great confidence in Herbalife and what we're doing.

And one that came through loud and clear to me in these sessions is our society is facing a tremendous public health issue because of poor nutrition. One of the panelists called it a trillion-dollar issue here in the United States alone.

And the lack of education about healthy choices, the lack of access to healthy choices, the lack of affordable healthy choices, these are really the underlying causes that everyone agreed that have to be tackled if we are to help individuals and communities turn the tide on this tremendous public health issue.

I came out of this with a strong feeling. Never have I felt more strongly about the contribution of Herbalife's members and its products that we do and what we make to address this global challenge.

Our healthy shakes, supplements, fitness products, combined with a personal community-based approach, are making a difference in cities and towns all across this globe. It's really fascinating to see the way we go to market and how we impact people's lives.

We have an incredibly strong team of people dedicated to this mission and committed to making a difference. And we have never been more confident in the future of our company. Our members and employees, they live this company. You saw that in our results with our Guinness World Book of Records.

The participation we have in triathlons and events around the world through our Herbalife brand. It's really amazing. It's the positive impact of Herbalife that we get to see every day.

Our focus, as it's always been, as Des has said and as our team has always reiterated, our focus is to build Herbalife better every day for our customers, our members, and you, our shareholders. So thank you for your support. We will be with you again at the end of the next quarter. Thanks a lot..

And ladies and gentlemen, this does conclude the first quarter 2015 earnings conference call for Herbalife Limited. You may now disconnect..