Eric Monroe - Herbalife Ltd. Richard P. Goudis - Herbalife Ltd. John G. DeSimone - Herbalife Ltd. Desmond J. Walsh - Herbalife Ltd..

Douglas Calder Lane - Douglas Lane & Associates LLC Timothy S. Ramey - Pivotal Research Group LLC Michael A. Swartz - SunTrust Robinson Humphrey, Inc. Beth N. Kite - Citigroup Global Markets, Inc..

Good afternoon, and thank you for joining the Fourth Quarter and Full Year 2017 Earnings Conference Call for Herbalife Limited. On the call today is Richard Goudis, the company's CEO; Des Walsh, the company's President; John DeSimone, the company's CFO; and Eric Monroe, the company's Director, Investor Relations.

I would now like to turn the call over to Eric Monroe to read the company's Safe Harbor language..

Before we begin, as a reminder, during this conference call, comments may be made that includes 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 in our business.

We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events except as required by law.

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 our performance and preparing period-to-period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release.

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

I will now turn the call over to our CEO, Rich Goudis..

Good afternoon, everyone. Thank you for joining our call today.

2017 was a year of transition for our company as we implemented the FTC order and as you can see from our steadily improving performance in the third and fourth quarters, we believe we turned the corner in the second half of the year and our return to net sales growth in the fourth quarter was validation.

Let me take a moment to share some key statistics that highlight the recovery in our largest market. The U.S. business was down 19% in the second quarter, the quarter when we implemented the final changes required by the FTC order. The U.S. business was down 17% in the third quarter and down just 8% in the fourth quarter and now even less in January.

This is what happens when you have a business based on consumer demand and daily consumption and strong leaders who innovate and inspire their teams to persevere through transitions in their businesses.

I want to take a moment to recognize and thank our amazing distributors and our employees who supported them for all their hard work and dedication to making sure Herbalife Nutrition is a recognized leader in the industry. And with this transition behind us, we're all really excited to move forward and return to volume point growth in the U.S.

in 2018. John will review the financial results for 2017 in just a few moments, but for me and for our distributors, employees around the world, we are already out of the gate building a bigger and stronger company in 2018. So, let me share with you some of our key initiatives for 2018.

I believe we are entering a period of transformation for our company. A period where we incrementally invest to leverage our robust technology platform over the next few years.

We are fortunate to have a single instance ERP platform that was upgraded to Oracle R12 in 2017 and a platform that has new capabilities such as a segmented ordering for preferred customers and distributors, a point-to-sale software to track sales and help manage inventory and nutrition club check-in tools to improve the customer experience.

All of which were deployed in the U.S., just last year. Now, with over a million customer seats being collected in the U.S. each month, we've started to invest in leveraging the smart data. And we will use it to help grow our business and create a more satisfying customer and distributor experience.

Our commitment to this digital transformation is best highlighted by the multi-year agreement we signed with Salesforce 3 weeks ago that expands upon our initial agreement entered into last year. We believe this platform will bring amazing CRM capabilities to our distributors and their customers.

We are currently in the early phase of what we expect will be a much larger rollout in the U.S. this year with some international expansion toward the end of 2014. We believe this technology investment has the ability to improve distributor productivity, efficiency and profitability and in so doing to transform the company.

Additionally, as I said on our last earnings call, we will invest more to usher in an innovation culture. In addition to new innovative products, we will also have keen focus on innovation that will affect every area of our business.

We just completed our first global innovation challenge using crowdsource technology and it had more than 3900 employees from 62 countries engaging and collaborating on ideas. We're excited that our employees are taking ownership in driving the company's future with participation rates that are 2 to 3 times higher than industry norms.

The top ideas are wide ranging and include suggestions like pop-up nutrition clubs, protein shakes for diabetics, improved events registration systems for our large events, and an international exchange program for our employees.

And next month, we'll use the same approach to engage our entrepreneurial distributor leadership to crowdsource their ideas around innovation. As for innovative products, let me briefly update you on recent introductions and some plans for 2018.

Throughout the fourth quarter, we launched more than 70 products globally with some exciting launches in our top markets. For example, in Russia and the Russian speaking markets, we launched our gender segmented multi-vitamin products, which are now available in 35 markets throughout EMEA.

We also introduced an immune booster in individual stick packs fortified with EpiCor, a clinically proven naturally active ingredient to support immune health. This new product which was successfully launched in Mexico is now in two regions and will be rolling out in the broader EMEA region and in North America in the future.

There were also introductions of 11 exciting new products in our top 10 markets including India, where we launched our popular heart health product Niteworks. And in China where we launched our first ever snack product, a Deluxe Protein Bar Vanilla Almond flavor. In Brazil, we launched a new flavor of our popular NRGT in a tropical flavor.

This new product is another example of our successful strategy of offering more flavors of our best selling products to drive additional consumption. In fact, we rolled out new flavors of our most popular meal replacement shakes in three of our top 10 markets and they all rank among the top products sold.

They include banana caramel in Mexico, mint chocolate in Indonesia and my favorite dulce de leche in Russia. Trends in the food and nutrition industry are playing right into our sweet spot including nutrient dense plant nutrition with a keen focus on ingredient traceability and consumer personalization.

This definitely gives us a competitive advantage as we execute our new product strategy in 2018 and beyond.

I'll provide details throughout the year as we announce new launches, but the products we've planned for 2018 represent exciting and unique flavors as some of our most popular products as well as innovative new product sizes to help drive trial and increased distributor profitability.

We'll also introduce new formats and boosters that meet the needs of different life stages and day parts to further personalized nutrition and expand usage occasions of our top selling products.

And we plan to offer more products geared towards attracting and retaining wellbeing lifestyle consumers, who are looking for clean labeled products with fewer ingredients and less sugar. Like the PRO 20 Select water-mixable shake, we recently launched in EMEA, which does not contain GMOs or artificial ingredients.

Our internal data shows these consumers are more active, productive and stay with us longer. As you know, over the last 7 years, we've also invested more than $300 million in formulation and quality labs, an extraction facility and two manufacturing plants here in the U.S.

to increase ingredient traceability, improve control over quality throughout the entire supply chain and accommodate growth through flexible capacity. And we've invested in people with more than 300 scientists and a new faster systemic approach to commercialization of our product ideas.

These investments in operations and exciting new products combined with the knowledge, encouragement, supportive community, care and commitment of our incredible distributors is our biggest competitive advantage. We call it the distributor difference, because it allows our distributors to sell results and not just products.

We're also transforming the training and education experience to ensure we have the most knowledgeable and effective distributors, who are all well-equipped to support the various needs of their customers. Our increased investment led by Dr.

John Agwunobi will include in-person and online nutrition and fitness master classes, as well as the development of several dedicated fitness and nutrition portals with engaging and informational videos featuring numerous experts.

We're also launching a university-style education program at our major events throughout the year, where distributors can customize their experience by selecting from among a variety of classes offered focused on product education, business acumen and personal development that best fits their personal needs for growing their businesses.

Looking ahead, we are creating an enhanced personalized education program that will feature even more relevant content to drive our CRM initiatives building an ecosystem of in-person and e-learning opportunities across all digital platforms.

The training will include a customized course curriculum based on level, tenure, and experience and will feature training credits recognition, even gamification and social elements including a constant feedback loop with course ratings and comments. With the assistance of Dr. Agwunobi, a recognized and respected former public health official and Dr.

Richard Carmona the 17th Surgeon General of the U.S. and a member of our board, were also seeking to educate key thought leaders and influencers about the value of what we bring to the world, ensuring we are a key part of the conversation about the future of nutrition.

As part of this effort, we will have a significant presence at the world renowned South by Southwest Event next month in Austin, Texas, which will be attended by some 350,000 people and feature an extensive line-up of panel discussions, thought leadership keynote presentations, and brand experiences.

In addition to creating a premier Herbalife Nutrition experience, we were excited to learn that a panel discussion proposed by us has been accepted as part of this prestigious program.

This panel, featuring Herbalife Nutrition experts will focus on global food security strategies, including the production of nutrient dense foods, sustainable food supply chains, and the necessary collaboration among government, corporations and local communities to ensure the world's growing population has access to good nutrition.

Speaking of collaboration with governments, we previously received approximately $90 million in grants over the past few years by governments in China as part of an economic development package for our proven contribution and commitment to the continuing growth and success of the Chinese economy We recently announced our commitment to use these funds for our first China Growth and Impact Investment Fund to invest in the continued long-term development of our business and help address challenging public policy issues such as the increasing rates of obesity in that country.

This China Growth and Impact Investment Fund will focus on 5 key areas, new acquisitions in health and wellness products in companies, expansion of nutrition clubs, increasing and improving technology, providing additional research, learning and training in the areas of nutrition, and public private partnerships focused on eradicating obesity.

We're all excited about this opportunity in China.

Our strategy is to leverage technology, building a culture of innovation including accelerating the launch of new products along with strengthening our distributor difference through education and training are all coming together in new and exciting ways to drive our transformation in 2018 and beyond.

Combined with industry trends and global megatrends, these will be some of the key catalysts for our future growth.

Looking forward to our future growth and with the year of transition now behind us, Des Walsh, our President recently approached me about his desire to slow down a bit and spend more time with his family, yet still be involved with our strategic planning and play an influential role with our distributor leaders around the world.

It's with this goal in mind that earlier today we announced that Des will assume a new position of Executive Vice Chairman in May, focusing his time and talent to ensure our distributor voice is intimately represented in our growth plans. In conjunction with this move, Dr.

John Agwunobi will be promoted to Co-President and Chief Health and Nutrition Officer, focusing on education and training content as well as corporate sales, marketing and events.

And John DeSimone will be promoted to Co-President and Chief Strategic Officer, retaining responsibility for strategic planning and investor relations, while assuming reporting responsibilities for the regional managing directors. His keen focus will be overseeing growth strategies and investments and driving performance across all of our regions.

And lastly, it's my pleasure to announce that our current Chief Accounting Officer, Bosco Chiu, a 25-year-old Herbalife Nutrition employee will be promoted to CFO, where he will assume the additional responsibilities for tax and treasury.

With all of these exciting plans underway, I believe there's never been a better time to join Herbalife Nutrition and the opportunity for our distributors has never been greater. I'll now turn the call over to John to discuss our fourth quarter financial performance..

Thank you, Rich. Today I'll start by discussing the company's fourth quarter and full year 2017 reported and adjusted results, which will include key market highlights. I will then review our first quarter and full year 2018 guidance and then conclude providing a brief update on our share repurchase program.

Net sales of $1.1 billion represented an increase of 4.6% on a reported basis and an increase of 3.4% on a constant currency basis compared to the fourth quarter of 2016. Full year 2017 worldwide net sales of $4.4 billion represented the decline of 1.4% and 1.1% on a reported and constant currency basis respectively.

Volume points for the fourth quarter 2017 were $1.3 billion, which represented a decrease of 1.8% compared to the fourth quarter of 2016 and was in line with our expectations. The 1.8% decline in volume points is a sequential improvement over the 5.6% decline last quarter and the 8.1% decline experienced in Q2.

For the full year, worldwide volume points declined 3.6% to $5.4 billion compared to 2016. Both the EMEA and China regions experienced record volume point performances for the full year 2017. With respect to earnings, as a result of the Tax Cuts and Jobs Act or the U.S.

Tax Act that was signed into law in December 22, 2017, the company recorded a provisional one-time non-cash charge of $153.3 million during the fourth quarter of 2017. This charge predominantly consists of foreign tax credits that the company will likely not be able to be realized under the new tax laws.

Due to this non-cash charge during the fourth quarter, we reported a net loss of $63.4 million or $0.87 per diluted share compared to a reported net income of $99.4 million or $1.16 per diluted share for the fourth quarter 2016.

However, for the fourth quarter, adjusted earnings per adjusted diluted share were $1.29, compared to $1 per share for the fourth quarter of 2016. Our Q4 adjusted EPS meaningfully exceeded the high end of our guidance of $0.84 to $1.04.

With volume in line with expectations, the EPS beat was driven primarily by expense management and underspend plus a lower adjusted effective tax rate. The lower rate was primarily a result of discrete items in the quarter as well as excess tax benefits from the exercise of equity grants.

The adjusted EPS figures continue to exclude items we consider to be outside of normal company operations or we believe will be useful to investors when analyzing period-over-period comparisons of our results. Please refer to our fourth quarter 2017 earnings press release for additional details on these adjustments.

I'll now describe the performance in the quarter in a little more detail. Currency had a slight benefit on our results in the fourth quarter, but represented a modest headwind on a full-year basis.

Fourth quarter 2017 reported and adjusted net income and EPS benefited by $2.3 million or $0.03 per diluted share due to the impact of currency fluctuations. Reported gross margins for the fourth quarter of 80.8%, decreased by approximately 40 basis points compared to the prior-year period.

This decrease was driven primarily by the negative impact of foreign currency fluctuations, partially offset by favorable impact of pricing changes. Fourth quarter 2017 reported and adjusted SG&A as a percentage of net sale was 39.5% and 39% respectively.

Excluding China member payments, adjusted SG&A as a percentage of net sales was 29.6%, approximately 150 basis points lower than the fourth quarter of 2016, primarily driven by the timing of promotion and events costs and other cost controls.

As a reminder, we previously communicated that a major distributor event occurred in the third quarter this year as opposed to the fourth quarter in 2016. Our fourth quarter reported effective tax rate was 157.9% primarily driven by the tax credits we will likely not be able to utilize as a result of the U.S. Tax Act.

Our adjusted effective tax rate was 17.5% which was lower than our expectations, primarily due to the impact of discrete benefits and excess tax benefits from the exercise of equity grants generated during the quarter. Excluding the impact of these equity grant exercises, our adjusted tax rate would have been approximately 400 basis points higher.

Turning to the full year 2017 reported net income was $213.9 million or $2.58 per diluted share compared to a reported net income of $260 million or $3.02 per diluted share for the full year 2016. 2017 adjusted diluted EPS was $4.86 per diluted share and was a slight increase compared to the $4.85 per diluted share for full year 2016.

Full year 2017 reported and adjusted net income, were each negatively impacted by $18.7 million from currency fluctuation and reported and adjusted diluted EPS were each negatively impacted by $0.23 due to the impact of foreign currency fluctuations. Shifting now to our regional market highlights.

This is the second quarter in a row where trends in the year-over-year comparison improved in 5 of 6 regions. In the U.S., our volume points were in line with our expectations and we continue to see the market pivot as we have previously discussed.

The volume decline of 8% in the fourth quarter reflects a dramatic improvement compared to the Q3 decline of 17% and we expect to see significant trend improvement once we annualize the implementation of the changes made in May of 2017.

Turning to Mexico, as discussed during our last earnings call, the September earthquake in Mexico had a meaningful impact to results in October which were down 13% compared to the prior October. However, we experienced a good recovery in November and December, which resulted in volume points being down only 8% in the fourth quarter versus 9% in Q3.

In China, Q4 volume points increased 10%, a return to growth following two quarters of volume point decline. Let me also spend a minute on the recently announced $90 million China Growth and Impact Investment Fund.

This fund represents incremental investments for the China business and is equal in size to the China grant monies; the company has already received and called out in our prior earnings calls and public filings.

Going forward, we will try and identify this spending for investors, so that they could track it and carve it out as necessary similar to how the offsetting grant amount has been carved out in the past.

For the latest 12-month requalification period, ending January 2018, our worldwide sales leader retention was 59.7% on an apples-to-apples basis with last year. This was slightly lower than our retention rate of 60.9% last year, but a strong result nonetheless, given the transition that took place in 2017.

Additionally, the latest retention results represents the largest, absolute number of sales leaders that re-qualified in the company's history. Let me also add that we are testing some lower retention qualification levels in certain markets. The retention due to lower qualification tests are excluded from the above results.

If we included the test results the retention is 63.6%. Moving ahead to guidance for the full year 2018 much of our guidance remains unchanged from the guidance provided last quarter. However, we have increased our effective tax rate slightly due to the new U.S. Tax Act and we have included an additional $200 million in share buyback.

I'll discuss the buyback and more details in a few moments. Our guidance does not include any excess tax benefit from equity exercises, which contributed approximately $0.37 to adjusted EPS in 2017.

For the first quarter 2018, we estimate net sales to be within a range of down 1% to up 3% which includes approximately 350 basis points of currency benefit. Net sales growth is reflective of an expected volume point change in a range of down 7% to down 3%.

The first quarter results are hampered by a difficult comparison period that includes the North American business operating at a higher rate prior to the implementation of business changes in May of last year, as well as a timing benefit of volume in China, which was pulled forward from Q2 to Q1 in 2017, due to a price increase implemented at the beginning of April 2017.

First quarter reported diluted EPS is estimated to be in a range of $0.70 to $0.90 and adjusted diluted EPS guidance to be in a range of $0.90 to $1.10. Capital expenditures for the first quarter are expected to be within a range of $30 million to $40 million.

And first quarter effective tax rate guidance is 30% to 35% on a reported basis and 27% to 32% on an adjusted basis. This includes the estimated impact of the U.S. Tax Act on our 2018 rate. Lastly, I'd like to make a few comments in regards to cash, debt and our share repurchase activity.

Since the inception of the company's share buyback program 10-plus years ago, the company has repurchased approximately $4 billion in stock, buying over 91 million shares adjusted for splits. We believe the buyback program has been utilized effectively in creating value for our long-term shareholders.

During 2017, through our last earnings call on November 2, the company had repurchased $757 million in stock, some discretionarily in the open market, some through 10b5 programs and some through a tender offer that was completed in October.

As of the last earnings call, the company had $743 million remaining on its current share authorization program. Following that last earnings call, the company put in place a 10b5 plan that was designed to buy back stock from late December through the end of the third week of February.

However, stock price ran-up above the parameters of our 10b5 plan and we didn't buy back as much stock as we had previously expected. Fortunately, today we have approximately $1.3 billion in cash and slightly more than $700 million remaining in our current authorization program.

And as our actions have shown in the past, the management and the board view share repurchase as an effective means of creating incremental long-term shareholder value and we expect to continue to repurchase our stock. As I stated a few moments ago, we have assumed $200 million in repurchases in our guidance.

A practice we routinely did for guidance a few years ago. We certainly may choose to buy back more than this during the year, but we added the $200 million to guidance to demonstrate our continued commitment to the program. With respect to debt, we have $2.3 billion in total debt and $1 billion in net debt.

While no guarantee on execution, we expect to work on restructuring our debt this year for more effective terms and an enhanced maturity profile. Thank you. And this concludes our prepared remarks. Operator, please open the line for questions..

Our first question is from the line of Doug Lane from Lane Research..

Yes. Hi, everybody..

Hey, Doug..

Excuse me.

John, just following up on your stock repurchase comments, was there a reason why you weren't more aggressive in buying between third quarter earnings call and the end of the year?.

Well, as a portion of time in there, where there is a waiting period after you put a 10b-5 in. So, our primary objective was to be in the market consistently through the closed period because this was an extra-long close window right, the year-end window was closed almost twice as long as the normal window.

And to do that, we thought the best way was to do a 10b-5. Again in hindsight, you could say that because the stock ran out, we didn't execute as much as we wanted and we should have taken a different approach.

But the objective was to spread it out during a closed window and it just didn't work out as planned, and so we've rolled our commitment into our forecast, so that people are still confident that we intend to buy back stock and we expect the $200 million to be our minimum..

Great.

And you still have what $700 million remaining, right?.

We have $700 million remaining, we've got $1.3 billion in cash. We do have debt due beginning next August 2019, so a-year-and-a-half away. And so, we're going to work on – everything kind of works in conjunction. We generate a lot of cash, we've got some debt that we would like to refinance for both better terms and different maturity profile.

Right now our maturity profile is tied to two key dates, it's next August and then the majority and the Term Loan B, so we'll have to stagger that a little that a little, so we will be working on that simultaneously while we consider different options to buy back stock..

Okay, fair enough. Now moving on, I know you didn't put a currency comment in your 2018 outlook. I think last time in the third quarter, you were looking for a positive 1.2% of sales and a positive $0.10 to EPS. Just directionally, is that about where we are today or is it a little bit more favorable than that.

Just I guess – just it's not giving exact numbers, I don't know?.

Well, so the guidance ranges don't change much and long as we added constant currency when there was huge volatility and we'll add it again should it be relevant, it's actually $0.13 of benefit next year, so not materially different than it was in the previous guidance.

So, that – there – it's been for simplification reasons, removed, but we will still give it on the call..

Well, no – and that's a good thing, not to have to talk about it every quarter. I understand that. And then, can you talk – I mean, based on my original forecast, I think the biggest upside was in China.

Could you just drill down a little bit more on how China is progressing? What did you see – was it the upside to your expectations as well, and what were the key drivers behind the good performance out of China?.

Yeah, China is a good market for us, obviously it was an interesting year, we had a lot of management changes. There was some governmental noise around the industry that ended during the fourth quarter, and we've also implemented some changes.

And so, you'll see total number of new service providers that significantly increased, so I'll kind of put into buckets, I think this might be the best way to look at China. So, we launched the growth fund.

That growth fund is tied – you know money is fungible, but it's tied to the grants we got from the government part of the agreement with the government is that that gets invested in China and it's created a challenge I think for us to be able to provide investors with enough information to match the two so this is the best way to match the two and also give our distributors in China the confidence on where this money is going to be spent.

So, that's one bucket. Another bucket, as you know in China, we've got direct sellers and we also have non-direct sellers, right. Service provides are outside of direct selling, and we also have directs on the product, and non-directs on a product.

So, one of the changes we made in December was we offered a pathway for direct sellers to move into service providers more easily and that gives them better access to the non-direct selling product, which the direct sellers don't have as much access to. So, that help people become a service provider more quickly.

And then recently, we just announced a promotion, it will be a 5-month test promotion to try and drive more economic opportunity to newer SPs. SPs make money through the economic models, building on hours. We try to equate those hours to approximately what somebody would make if they were in another country.

What we've added in conjunction which is strategy around training and education is we had a promotion to allow SPs to become eligible for paid training as a way to earn more a little earlier in the journey in conjunction with the strategy to have more educated and trained distributors everywhere.

And so, it's a great – very exciting time in China for that reason. Always a lot of local competition in China. So, I think it's great that we continue to strengthen our business, but we're excited about it. Again, Q1 is going to be a tough comp, so let's keep our expectations in line.

Q1 last year had the price increase that we announced in the second week of March that was effective April 1, so we had 40 to 45 million volume points go forward into the first quarter that will not get repeated this year. So, it's really a second quarter story going forward is China..

Okay that's helpful. Thanks, John..

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

Thanks so much. Couple of questions on the tax rate, I think I'm understanding that you've essentially got a situation where you need to shift costs perhaps to non-U.S. markets, particularly China to get more benefit from the new tax rate. First, would you kind of consume that or confirm that that that's a strategy and something you'll be working on.

And any thoughts on how that might look as the year plays out?.

So, you're right, and part of your answer is right, I think thematically it's correct and that we have a structure designed for one tax code and now the tax code changed, we're not getting the foreign tax credit or at least the benefit of the foreign tax credits that we would have had under the old law.

What I would disagree with you is when you say, China I think overall holistically we have to use some tax planning, there's a lot of work to be done on that side. I think there's opportunity.

The opportunity is really going to be a 2019-plus event, because it's going to take time to execute whatever strategy we need to execute in order to maximize the opportunity for us. But, for the most part, thematically you're right..

Okay. And as we think about volume points going forward, the big picture is pretty positive; first quarter slow start. Can you put any more geographic color around it? Do you expect Mexico will have an easy second half comp? I presume that will be a source of strength.

Any other things you would call out that look interesting from a company mix perspective?.

Interesting that we're seeing pretty broad positive trends. I think maybe the biggest challenge might be South America, but even those trends are starting to improve. So, it's – I wouldn't call out anything specific.

I think we're looking for sequential improvements back half of the year versus the front half the year in 2018 in virtually every region..

Okay. Thanks so much..

Thanks, Tim..

And our next question is from the line of Michael Swartz from SunTrust..

Hey. Good evening, guys. I guess John, just wanted to dig into the updated guidance. You didn't change anything really with regards to the full year and I'm just wondering some of the moving parts within there. Looks like tax rate is a little worse, obviously you're embedding some share buybacks a little bit of currency.

So, the way that I am looking at it looks like about $0.10, $0.20 maybe delta versus prior guidance, just operationally.

Can you kind of walk through what that is? Were there some costs that slipped out of the fourth quarter into 2018?.

Let me just, the hidden syrup, (35:33) it's almost exclusively tax rate offset by the buyback. So, operationally the numbers don't change hardly at all, right. Yeah. Okay. So, I think currency went from a $0.10 benefit to a $0.13 benefit which is immaterial.

Other than that, we hit our Q4 volume guidance almost in the middle of guidance, we haven't changed anything for 2018 although we're excited about the trends and therefore that doesn't change the profile of the P&L at all other than the implementation of the U.S. Tax Act that rolled into the model..

Okay. And then just on the IT systems investments you're making, you called out Salesforce, Oracle.

Could you talk about, I guess that process and I think before you said that was about $10 million or so incremental spend in 2018, is that still the plan?.

Yes. Numbers haven't changed, correct..

Okay. That's it from me, for now. Thanks..

Thanks, Michael..

Our next question is from the line of Beth Kite from Citi..

Terrific. Hello, everyone.

I was just wondering if we could actually go back to the South America and Central America region, the 17% local currency sales growth in the fourth quarter was just so strong, can you help us understand which countries drove that?.

Yeah. Look, it's – I think with South America you maybe focus on volume points because you've got a Venezuelan situation even though we don't do a lot of volume in Venezuela. The currencies move so much that it really skews the constant currency number in that region.

I don't even know what it's up to now, might be up to 25,000 to 100,000, started the year at 2,000 or something. So, it's not a perfect look because along with the devaluation, we have price increases, and so the price increases wouldn't happen without the devaluation.

So, if you take Venezuela out of the situation, the 17% drops to 1.5%, which is much more in line with probably what you're expecting..

Got it. Got it. And then that syncs a little bit more too with the average sales leader numbers. Okay, great, great. Okay.

And then for the U.S., just in light of three quarters now effectively with the new terms of the consent order, can you dig in a little bit more for us in terms of both personal consumption as that I think had been a pressure point early on, and how are you tracking towards getting up to that $200 monthly spend sort of personal consumption? And then also because preferred members are such an important component, can you help us understand sort of how the purchase habits have been because I think that kind of might tie just a recalibration you have coming up in May for personal consumption?.

Well, on the internal personal consumption of distributors, we're still on the education path even as recently as January, there was a misunderstanding as to how it actually works. So, I think, there's lots of – that's probably one area where there is opportunity and it's I think, it's going to get better.

But, we didn't see much movement in it during the back half of last year like we had hoped. So, to me that is for me anyway is upside because I do think there is opportunity on there, mostly from education and probably doesn't require a lot of anything else.

As far as purchasing habits of preferred members, Rich talked about some of the things that we're seeing on types of products people buy how that turns into retention and productivity and what we're seeing is the wellness consumer sticks with this longer, buys more, more active, because they buy more frequently.

They buy in larger amounts and they stick with us longer and so we're in the infant stage of learning how to use that data and that's the goal of sales force is to bring in some intelligence – automated intelligence to help us do that, so we didn't have to recreate it, but we are starting to learn a lot about our consumers through that process..

Got it. And then, can you remind me, and I apologize if I should know this, but the – you had a big number of new preferred members, for instance that came in the first quarter of 2017, the 63,000.

Do those folks – do they re-up now here in first quarter of 2018, and kind of does that happen in each quarter of the year on a year-ago basis for the new preferred members that come in or can you just remind me of that process?.

Yeah. So, Beth, this is Des. So, for the group that actually transitioned over, so as you know we bifurcated our distributor base and we gave people the option to elect to become preferred members.

So, for those people who are elected to transfer over who were formerly distributors, effectively we grandfathered those on an ongoing status assuming that they actually make a certain minimum number of purchases during the year.

So, for that group, there isn't a requalification, they will remain as preferred members simply based on a – on an annual purchase. For our new preferred members, people who joined after January under the new program, they have the same annual renewal requirement as anyone else.

And so, that's something that will happen each year and we'll continue to monitor them each year thereafter..

Okay. Perfect. Thank you, thank you.

And one more kind of country-based question for China, I know you spoke to it a bit with Doug's question, but did you say how the nutrition club count is tracking, where you – are you at a point now where you're growing nutrition clubs again in the country?.

I believe it's about flat. It's been flat now for a couple of quarters, which is an improvement of the trend we saw for the prior quarters. I do think that our growth fund will help with that. So, we'll see the tracker for the next couple of quarters and hopefully we'll see some improvement..

Okay, perfect. And I have just two last questions, if I may quickly.

One for the guidance, is there any embedded expectation for price increases kind of anything major like you did in China last April that's currently in the guidance that we have for this year?.

So we have pricing – see, major – first of all, generally when we take a price increase we don't get the material impact that we had in China and we do price increases frequently in different markets. So, we'll get some flow forward but not the extent of virtually a whole month's worth of pull-forward that we had in China.

But yeah, we have price increases embedded in different markets at different rates. But, do I think any of them are material? I don't think there are anything material..

Okay. And then John, could you help us I know last time you talked about gross margin kind of a little bit visible into 2018, but especially helping us to understand it was probably going to have some pressure here in the first quarter just because of some FX, the lack of FX benefits, if for nothing else.

Can you just kind of talk us a little bit through again the gross margin progression that you're expecting in 2018?.

Yeah. Well, actually the biggest impact early in the year is lower production. So, we had an inventory reduction program that we put in place. And to give you some numbers around that, it could take about 5 to 6 months lag on inventory production variances hitting the P&L.

So, you really got to look at the last 6 months of 2016, to understand what happened in the beginning of 2017 and then you look at the last 6 months of 2017 to see what happens in 2018. And so, if you can follow me if you look at our statement of cash flow through the back half of the year of 2016.

We built – and I take statement of cash flows because it takes out currency, we built around $70 million of inventory in the balk-half of 2016, which whenever sales starts to miss your forecasts, which is when that – that's when we started to miss, you overbill.

In the back half of this fiscal 2017, we actually reduced inventory by $30 million, that's $100 million of lower production. And you take the labor and overhead of that, that goes on the balance sheet and rolls on out in the subsequent 5 months to 6 months.

So, that lower it – from a comparison standpoint, that lower production in the back half of 2017 compared to the back half of 2016 will impact Q1 by $0.10 and it's also – it's gross margin line. It will continue into Q2 and then you'll see improvement in margins in the third and fourth quarter from production.

So, that's what I tried to talk about last time, I didn't have the full production numbers because we hadn't been through the full – the year yet, but now that we have gone through the year, I have those numbers. So what you'll see is higher cost sales or lower gross margin to begin in the year improving as you go up through the year..

Got it. Just what I needed. Thank you so much. Appreciate your time..

And I think....

I think, there aren't any anymore questions, so I'm going to pass it over to Rich for closing remarks..

Okay. Great. Thanks, John. And thanks everybody for listening in. I just have had five key points I guess to close. Number one, I think you can see in our performance and our guidance that we turned the corner in 2017.

Number two, hopefully you can hear in our commentary today, in our – in the Q&A, we have tremendous pride and confidence in our business and our growth strategies.

Point number three, hopefully you understand as well, we have amazing distributor engagement and that's highlighted by I think some of the feeling that we have now coming out of some really key leadership meetings early in the year and we pre-announced our volume to help engage with our distributor leaders and really hit the ground, running really hard in 2018.

Point number 4, I think from a performance and fundamental perspective, this is the year that investors really get rewarded for being long-term investors in Herbalife.

And then lastly number 5, hope that you can tell by the tone here; we're just really excited about this transformation that we see underway this digital transformation is just really exciting and we look forward to speaking to you in May. Have a great day, everybody..

Ladies and gentlemen, this does conclude the conference call. Thank you greatly for your participation. You may now disconnect..