Herbalife Nutrition Ltd.
Q2 2016 Earnings Call Transcript

Published: 4 Aug 2016

[Operator:]

Good afternoon, and thank you for joining the Second Quarter 2016 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 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.

[Alan Quan:]

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 in our business. We do not undertake any obligation to update or release any revisions to any forward-looking statements 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, 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'll now turn the call over to our Chairman and CEO, Michael Johnson.

[Michael O. Johnson:]

Thank you, Alan, and thanks, everyone, for joining today. This quarter we sold more products than any quarter in Herbalife history. Worldwide volume points grew 9% compared to the second quarter last year with approximately 80% of our markets reporting an increase in volume points. And four of our six regions

[John G. DeSimone:]

Thank you, Michael. I will start today by reviewing the company's second quarter 2016 reported and adjusted results, including key market highlights. I will then discuss our third quarter and full-year 2016 guidance. Lastly, I will close with detailed comments regarding our recent settlement with the FTC. For the second quarter, worldwide volume points increased 9% compared to the second quarter 2015. Second quarter 2016 volume points of $1,484.3 million represents the highest quarterly results in the company's history, doubling the high end of our guidance range of 4.5% growth. Four of our six regions set quarterly volume record and approximately 80% of our markets experienced volume point growth in the quarter. Second quarter reported worldwide net sales of $1.2 billion increased 3.4% while local currency net sales grew 10% both compared to the prior year period. Reported EPS for the second quarter of a loss of $0.28 per diluted share includes the impact of the $203 million expense related to the recent regulatory settlement, and compares to the $0.97 earnings per diluted shares for the second quarter of 2015. Adjusted earnings per adjusted diluted share of $1.29 increased 4% compared to the $1.24 per diluted share reported for the second quarter of 2015 despite a negative impact of $0.31 from exchange rate headwinds. The adjusted EPS of $1.29 per share also exceeded the high end of our guidance of $1.20 per share. Moving on to our regional and market highlights, for the U.S., volume points of $338.5 million set a new record and increased 13.8% compared to the prior year quarter. The momentum in the U.S. continued from the first quarter as our members remained focused on building long-term sustainable businesses based on customer demand and daily product consumption. So at the end of my comments, I will discuss the recent FTC settlement and its potential impact on the U.S. business going forward. Volume points in China increased 9.6%, compared to the second quarter of 2015, a new record high for that country. This growth comes in the face of a difficult second quarter comp in a market we'll continue to face challenging growth rate comparisons for the remainder of the year. In the second quarter, Mexico posted 10.3% volume growth compared to the prior year quarter, and also set a new quarterly volume point record. Turning to EMEA, approximately 80% of the markets in the region showed volume point growth in the quarter, resulting in a regional increase of 21.3% compared to the prior year period. Volume points for Russia were up 22.2% in the quarter due to an easier comp driven by a price increase impacting in the second quarter of 2015. Volume in the South and Central American region decreased 7.4% compared to the prior year period. However, excluding Brazil, volume points in the region increased 1.9% for the second quarter. The macroeconomic environment continues to be a challenge in Brazil as volume points declined 20.4% in the second quarter 2016, similar to the decline we saw in the first quarter. We continue to expect volume points in Brazil to be impacted by the macroeconomic conditions and this is reflected in our guidance. Asia Pacific volume points increased 2.4% compared to the prior year period. Volume points for Asia Pacific, excluding South Korea, increased 19.1% compared to the prior year period. Moving on to our financial highlights for the second quarter. As previously mentioned, the second quarter represented a new worldwide volume point record, with an increase of 9% compared to the prior year period. Worldwide reported net sales of $1.2 billion increased 3.4% and 10% on a constant currency basis compared to the second quarter of 2015. On a reported basis, the second quarter net loss of $22.9 million or $0.28 per diluted share compares to net income of $82.8 million or $0.97 per diluted share in the second quarter of 2015. Our reported EPS continues to include items we consider to be outside of normal company operations or we believe it will be useful to investors when analyzing period-over-period comparisons of our results. These adjustments are detailed in today's earnings press release. There were two new items included in the adjustments this quarter. One is the regulatory settlement, and the second item is a $28.1 million or $0.23 per share income item, which resulted from government grants received in China related to the regional headquarters and regional distribution centers established in certain locations in China. The purpose of these China government grant programs is to encourage local investment in operations. However, there is no insurance that the company will continue to receive these grants in future periods. Second quarter 2016 adjusted earnings per adjusted diluted share increased 4% to $1.29 per diluted share compared to $1.24 per diluted share in the second quarter of 2015, which exceeded the high end of our guidance at $1.20 per diluted share. Compared to our second quarter guidance, the increase in our adjusted EPS was primarily due to higher-than-expected volume in net sales. Second quarter 2016 reported net income and EPS were negatively impacted by $27.7 million or $0.32 per share from negative currency fluctuations. And adjusted diluted net income and EPS were negatively impacted by $26.6 million or $0.31 per share from negative currency fluctuations. Gross margin for the second quarter was approximately flat versus the prior year period. Gross margins included the favorable impact of cost savings through strategic sourcing and self-manufacturing of 88 basis points, lower inventory write-downs of 81 basis points, and retail price increases of 37 basis points, which were partially offset by the unfavorable impact of foreign currency fluctuations of 165 basis points. For the second quarter, reported SG&A as a percentage of net sales were 56.3%, a significant increase compared to the prior year period, primarily driven by the $203 million expense related to regulatory settlement. Excluding the impact of the SG&A related items we backed out for adjusted net income and diluted EPS purposes, which is discussed in today's press release, SG&A was 38.7% of net sales, a decrease of 18 basis points compared to the prior-year period. Excluding China member payments and the items I just listed, SG&A as a percentage of net sales was 29%, which is essentially flat with the prior year period. Our second quarter reported effective tax rate was 46.7%, while our adjusted effective tax rate was 26.8%. Cash flows from operations for the second quarter was $226.9 million, which represents a 15% increase in the prior year period. At the end of the second quarter, we had $937 million in cash of which over 50% was held in the U.S. The company has since made payments of $203 million in regulatory settlements from this balance. Moving onto third quarter guidance and the remainder of our full year 2016 guidance. Worldwide volume point guidance for 2016 has been updated to a range of 4.5% to 7.5% growth. This reflects full year increase of approximately $130 million volume points, partially due to the beat in the second quarter. Volume point guidance for the third quarter is estimated to be in the range of 5% to 8% growth. In addition to providing guidance for adjusted EPS, we are also providing guidance for reported or GAAP EPS for the full year 2016 of $2.30 to $2.60. Adjusted diluted EPS guidance for the full year has been raised to a range of $4.50 to $4.80. We have adjusted full year EPS guidance to reflect the better-than-expected results from the second quarter of 2016 and the update to our full year volume point guidance, partially offset by unfavorable currency movements. Full year currency headwinds are now estimated to be approximately $0.90 per diluted share, which is $0.20 higher than the guidance provided a quarter ago. Third quarter GAAP diluted EPS guidance is estimated in the range of $0.74 to $0.84 and adjusted diluted EPS guidance is estimated in the range of $0.98 to $1.08, which includes an unfavorable currency headwind of approximately $0.14 per diluted share, compared to the same quarter 2015. Net sales guidance for the full-year 2016 remains at 1.5% to 4.5%. On a constant currency basis, full-year adjusted net sales guidance is now within a range of 7% to 10% growth, up from the previous range of 6% to 9%, reflecting the increase in our full-year volume guidance, partially offset by a negative impact from country mix. Worldwide net sales guidance for the third quarter was estimated within a range of 2% to 5% growth. Our capital expenditure for the third quarter are expected to be within a range of $35 million to $45 million, and for the full year, we are now projecting a range of $160 million to $180 million, up from the previous guidance of $145 million to $175 million. Lastly, our effective tax rate guidance has been updated to a range of 27.5% to 29.5% for the full-year 2016. Our effective tax rate guidance for the third quarter is 28% to 30%. I will now discuss in more details items related to the FTC settlement. After more than six months of negotiations, our desire was to reach an agreement that would not only be in the best interest of our members and our company, but would also allow us to focus on growing our business without the distraction of a protracted litigation. We believe the settlement achieved that goal and, further, we believe these changes will create a greater understanding of our business model by customers, investors and regulators, which will only strengthen our business and the industry over the long-term. For more than a decade, we have focused on growth while simultaneously leading a process of continuous business improvements and making significant infrastructure investments that have helped us become a leader in the nutrition industry. We believe that the changes we agreed to with this settlement will make our business even stronger. Much has been written about the terms of the settlement and what it means for our U.S. members and their customers, as well as our business performance, so let me start with the basics. First, as Michael mentioned, we will segment our members base into two categories

[Michael O. Johnson:]

Thanks, John. So once again, as you all heard, this is a fantastic and historic quarter for Herbalife. Our momentum and performance reflects the strength of our distributors' businesses. And with the regulatory settlement behind us, we've never ever been more focused. So let's go now to Q&A.

[Operator:]

Our first question is from the line of Mike Swartz with SunTrust.

[Michael A. Swartz:]

Just I guess trying to get a sense in some of these changes to the business plan coming from the FTC settlement, and they were all just trying to boil it down and figure out what exactly this means, and I think John, in your remarks, you had said we could see a period similar to the one you rolled out to 12 months qualification or the first order limitation, or maybe we get a slight plateauing or a temporary plateauing in the business. So I guess just based on what you see today, I mean, is there any time horizon that we should be thinking of as to when we could see that?

[Desmond J. Walsh:]

Mike, this is Des. So the analogy here, Mike, is that just as you saw it with the enhancements to the marketing plans, whenever there's change of this nature, our members take the time to train, to adopt, to assimilate, to incorporate these changes into their business. So we started that whole process early. Obviously, as you would have heard Michael referenced, we began literally just a few days after the announcement with the beginning of training in Atlanta. So I think we're going to see that adoption, assimilation take place through the remainder of this year and obviously into early next year. But most important thing is that we don't see any long-term impacts in our business, because we engage with our distributor dealers, and we only move forward with the settlement once we had their input that we could not only do well but, in fact, thrive under the terms of this settlement.

[Michael A. Swartz:]

And just a follow-up. In terms of the distributor base, I think you said you had some record attendance with some of your U.S. Extravaganzas. But you guys have typically had pretty good visibility into distributor engagement in volume trends. So I know this is only three weeks or a couple of weeks since the settlement. But is there anything you can point to within the U.S. business from an engagement or volume level standpoint to give us a little more comfort that this has been accepted, and we're starting to turn the page here?

[Desmond J. Walsh:]

Yeah. So, Mike, I think that's very evident already. We saw it in terms of our numbers that for the Atlanta Extravaganzas, we obviously had a very strong showing at Long Beach before the settlement, but we actually had an even stronger attendance than in Atlanta. Similarly, I think if you've been there, you would have seen the attitude of our distributor leaders is tremendous. They actually view many elements of this settlement being positive for the business. Some of them we've spoken about for some time, the segmentation between preferred members and actual business builders are what we're now going to be resuming calling distributors. They see the ability to actually have receipting tools, which will give them greater insights into customers, give some greater information regarding segmenting their customers, incremental sales opportunities. All these things are seen as positive. And so, obviously, as with any change with a period of adoption but overall, certainly the attitude of our members and their engagement has never been stronger (39

[Michael O. Johnson:]

Yeah. And Mike, if I can just add and you started off by saying recognizing, it's early, it's only been a few weeks. But there's been no change in the trends of starter kits that we've sold, so as an indication of engagement levels. So, again, early, but no signs of concern at this point.

[Michael A. Swartz:]

Okay. And then one follow up, just in terms of the kind of self-consumption discussion that you had. I think you said there's some sort of threshold to whereby if a distributor goes over that they are or not compensated based on that volume. Can you give us a little more detail on what maybe that threshold is?

[John G. DeSimone:]

Yeah, sure. Mike, this is John. I'll do that. There's two types of threshold. So one is an individual distributor threshold where their purchases up to an allowable limit and for the first year, it's $200 can be rewarded. That's at the micro level. At the macro level, the earnings that they receive no more than one-third of it can come from that limit, purchases within that limit. So, the two concepts are one individual who is a business participant can buy and use as much product as they want, but only up to $200 is going to be rewardable and anybody who has a downline has to focus the appropriate amount of time on selling to customers as they do selling to internal consumption of the business participant.

[Michael A. Swartz:]

Okay. Great. And then one more question if I may, just in terms of the – you outlined some of the costs associated with the program that you're rolling out. But I think you said $5 million to $10 million of that is ongoing costs. Is that capitalized or will that be expensed?

[John G. DeSimone:]

No, that will be expensed going forward.

[Michael A. Swartz:]

That's all expensed. Okay. That's it for me. Thank you.

[Michael O. Johnson:]

And let me also add by the way and this is not unimportant that – while internal consumption above the allowable limit isn't directly rewardable, the FTC and Herbalife recognizes that not all of our sales are going to fall within the limit, and not all of our sales are going to get receipted, and that's why there is the 80% rule. So, there is no allowable if you want to call it breakage within the order. So that, in effect, the upline rewards can still be paid out based on purchases.

[Michael A. Swartz:]

Okay. Thank you.

[Operator:]

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

[Michael O. Johnson:]

Hi, Tim.

[Timothy S. Ramey:]

Good afternoon. Thanks and congratulations. So I've got several questions. I didn't note anything in the Q on any changes or processes underway on the credit agreement. Is there anything to say there, John, or is that just on the to-do list?

[John G. DeSimone:]

Well, if it's a process, I think it's important to note that big picture, capital structure, as you know and investors know, and cash management strategies are important part of our company's vision. The management team, along with the board, have been and will continue to develop and evaluate all possible options. And we'll make those decisions that we think is in the best interest of our shareholders long-term. And when and if there's something to announce, that'll be determined by management and board, and at the time, like our history in the past rolling out something.

[Timothy S. Ramey:]

Would you care to kind of restate what your goals would be for the capital structure, assuming that you have the covenants that would allow it? Mr. Icahn's statement was fairly aggressive in terms of leveraging the company it seems, doing acquisitions, perhaps. What's your comfort level now assuming that you have the credit agreement in place?

[John G. DeSimone:]

Yeah. It's a question I'm not sure this is the right time to answer. I think historically we have said we were willing to lever up to coverage ratio that's consistent with investment grade. That can mean different things for different companies; it doesn't mean we will be investment grade. That certainly hasn't changed...

[Timothy S. Ramey:]

And that's sort of 2 to 3 times, is that?

[John G. DeSimone:]

Yeah. It's 2.5 times to 3 times is kind of where the management team historically have said they were comfortable. There is a Board of Directors that's involved in this decision and whatever ultimately is decided will be in the best interest of our shareholders long-term. And if there's something to announce, we'll announce. So right now, I'm just giving you my opinion that's consistent with the historical opinion we've had.

[Timothy S. Ramey:]

And quick scan of your 100-plus page Q, it looks like you changed the language relative to any SEC investigation. I think it's sort of in the past tense now. Is there a comment specific to that?

[John G. DeSimone:]

No, I don't think we changed much in that language, Tim. I think what we removed or changed language relative to the FTC and the Illinois AG and that's really it; no other changes were made. We're a big company. We get questions and inquiries from time-to-time like all big companies do, and if there's anything material to disclose, we'll disclose it.

[Timothy S. Ramey:]

Okay. And Des, I wonder if you've given thought to what the preferred customer cost of entry will be? I assume that it would be in the company's best interest to make that a very low bar for someone to become a preferred customer de novo. Is there anything you can shed light on there?

[Desmond J. Walsh:]

Yeah. So, Tim, as you can imagine, it's certainly a subject of active discussion at the moment. But at this stage, we've no final determinations.

[Timothy S. Ramey:]

Okay. And, John, as you went through those four buckets of sales, I'm assuming that nutrition clubs basically fall into bucket four. What percentage of sales, if you can say, in the U.S. now run through nutrition clubs?

[John G. DeSimone:]

So, first, you are correct that nutrition club transactions in the field will be part of that fourth bucket. We are creating a tool for which nutrition club operators can track their members' entry into the club and consumption based on what they sell to those members. That tool, which we've used in different respects in China, so it's got some testing already behind it, actually automatically integrates into our system. And so there's really no submission needed as long as the tool is used; it'll be automatically integrated. As far as what percent of our sales are from those member fees is I think is what you're talking about, it's more than just take-home sales out of the nutrition clubs. And just to be clear, the study that was done – and it's a couple of years old now, that was done by a third party that we engaged suggested I think it was 16% of our sales were done through that mechanism.

[Timothy S. Ramey:]

Got it. Okay. And on the cost to implement, I think you said $20 million to $30 million of operating cost. Is that sort of one-timey or – I missed part of what you said.

[John G. DeSimone:]

Yes. That's what I said. There were one-time costs to get this up, and then there's ongoing operational costs. And what you noted were the one-time costs, the operational costs to keep this functioning year-to-year is $5 million to $10 million. And let me go back – I think maybe there's an important additional point to your last question, which is how much sales go through clubs? I think one of the benefits of what we're going to implement is a lot more visibility into the transactions that take place in the field that'll give us the actual retail profit, how much of our sales go through various mechanisms, various channels, a lot more data for us to be more effective with consumers and for our distributors to be more effective with consumers.

[Timothy S. Ramey:]

And it would be great to have that as investors as well, if we could?

[John G. DeSimone:]

And investors, and anybody else who wants to know more about our company.

[Timothy S. Ramey:]

Great. Hey, thanks so much.

[Operator:]

Our next question is from the line of Phil Terpolilli with Wedbush.

[Phil Terpolilli:]

Thanks for taking the questions.

[Michael O. Johnson:]

You're welcome.

[Phil Terpolilli:]

Just a couple of things, sort of from a timing perspective, can you just walk us through some of those incremental changes? You mentioned a few things earlier, but I think a couple of times, I heard 4Q and then early 2017 for some others, so just walk through sort of what we should see from the FTC changes and kind of when with the cadence?

[John G. DeSimone:]

Yeah. So the objective that we have is to make sure the segmentation is in place in the fourth quarter and that the receipting tool is in place in the fourth quarter, so we can start getting results in parallel, the compensation system for a few months, because the compensation programming is what takes the most time. And that gives us some runway to see how people in the field behave to know where there needs to be more assimilation or how the tools are being adapted or how we can make the tools more effective before this goes live in May.

[Phil Terpolilli:]

All right. Okay. That's helpful. And I guess sort of from a bigger picture perspective, what kind of gives you confidence that you can implement these changes within the timeframe allotted? And I guess how smooth do you sort of expect this to be based on some things you've done in the past?

[Desmond J. Walsh:]

Yeah, Phil. This is Des. So we're very confident about this, Phil, for a number of reasons. First of all, as you know, we consulted with some of our top leaders before we moved forward, and we moved forward having had their input regarding the likely business impact. And so we were absolutely confident therefore that we could thrive under the proposed settlement terms . I guess the second thing is that after years of studies, and our own extensive data analysis, we'll have to be confident that our business is probably based on a foundation of daily consumption and that we've had millions of satisfied customers out there. And I think the third element is, it's just the advancement in terms of mobile technology and the proliferation of smartphones among our distributor base. And what that means is that, it is not practical for us to provide receiving tools to enable our distributors to effectively track retail sales and upload that data seamlessly to it. So really, when you combine the consultation with our distributor dealers, our consumer base business, access to technology, and frankly, our internal resource of over 1,000 technology employees that we have in shared services centers around the world. The combination of all those factors just give us complete confidence in our ability to successfully implement the agreement.

[Phil Terpolilli:]

Got it. And then, just last thing for me. When you look back kind of pre-FTC, you guys had a dividend. Any sort of discussion with the board you had about bringing that back or potentially re-implementing the dividend policy? Thanks.

[John G. DeSimone:]

Yes. It's John, I'll take that. I'll just – it kind of dovetails into Tim's question about capital structure and cash management. We're just not ready to make a comment yet. I do want to point out that everything is on the table. And like I said, when the board feels the timing is right, we'll – I'm sure, make exposure.

[Operator:]

Your next question is from the line of Ethan Devine with Indus Capital.

[Ethan Seath Devine:]

Follow-up on that line of questioning, but maybe more just philosophically and ongoing as opposed to talking about restructuring of balance sheet. So, let's say, the company is going to do something in the neighborhood of $500 million of free cash this year. Historically, the company has returned 100% of free cash to shareholders since IPO. Is there any reason for us to think, going forward, that would be different? And then, philosophically, how do you think about buybacks versus dividend?

[John G. DeSimone:]

Yeah. Great question. So, I think you're right on historical practice. Just some data points that I think put it in proper context. But since we instituted the buyback and the dividend in 2007, we've repurchased $3.1 billion in stock and a dividend at about $600 million to our shareholders. So, it's heavily weighted towards buybacks. Our approach had always been as a growth company that buying back stock below the intrinsic value of the company was the best way to return value to those shareholders that stayed with us. We still continue to think we're a growth company. We've got some things to work out. We have a bank deal that's due in March. That bank deal is not friendly to buyback. So we're not ready to discuss what our future options are. Once we clear up some of the restrictions in the current debt deal, we'll discuss (53

[Ethan Seath Devine:]

And do you have a framework for intrinsic value?

[John G. DeSimone:]

So I have a framework for intrinsic value. I have a few frameworks we use to kind of triangulate it. We do a five-year plan every year. Over that five-year plan, we come up – we try to be conservative. We come up with what we think the future value of the company is. We discount it. We compare that to where the stock is trading at, and that is one way to compare what we think is an undervalued stock. In other ways, as we look at multiples versus the group, multiple versus – and when I say the group, the groups are consumer products groups, direct sellers, but again, full of other different metrics we look at to determine if we believe our stock is undervalued. And so, those are the things that are part of the consideration. Cash management is also part of it, right. When you get to do, we have a bank deal currently that's due next March. We have a bond deal due in 2019. So there is other considerations too. But relative to intrinsic value, it's probably not much different than the text book look at intrinsic value.

[Ethan Seath Devine:]

Understood. Okay. Thanks very much.

[Operator:]

Our next question is from the line of Mark Fleischhauer with Owl Creek Asset Management.

[Mark Fleischhauer:]

Hi, guys. Congrats on the quarter. Most of my questions have been taken, but maybe just given the strength that we saw in volume points this quarter and what's guided through the back half of the this year, could you just give a little bit more color, Des, as to what's driving this? Are we just seeing the anniversary of some of the business model changes? Are we seeing improved daily consumption? I mean, just any color as to what's driving this reacceleration of growth and how we can we think about sustainable organic growth on a volume basis going forward?

[Desmond J. Walsh:]

Sure, Mark. So, look, essentially, the picture that we painted for you two years ago has come to fruition, right. So what we said, well, if we were going to go through a period of transition, as the members adopted and incorporated the new marketing plan and enhancements into their organizations, and that once we came through that, that we'd actually see a return to stable, combined with improved metrics. So that's sort of one key factor. The second thing is that obviously what you is a reflection of growing consumer demand for our products. Herbalife, as you know, is number one in terms of meal replacement category, and that's reflected in terms of the sales that you see today. I think the third factor would be distributor engagements, right. We have – following the successful adoption of the marketing plan changes, our distributors are feeling the confidence that comes with that. That translates to increased engagement, to increased activity, and you can see that reflected in terms of number of new numbers coming to the business, attendance to events, and so on. And I think the last thing I would say is that, as always, our members are hugely entrepreneurial at embracing new ways of bringing our products to market. So we have different programs that are in effect out there, that are driving increased level of customer-focused activity, an ambassador programming you've heard of, which is focused on creating more stable customers and introducing them to the business. And then, combined with that, we have an active member program that has been very successful in terms of encouraging new members to focus on creating a solid, stable base of customers. And then, you couple all of those with this sort of overall megatrends in the world, obesity growing and aging population, rising healthcare costs, rising demand for entrepreneurship. So you put all that together and that's what's reflected in these record second quarter numbers.

[Mark Fleischhauer:]

Great. Yeah and I echo the previous thought. So, we look forward to you guys getting back in the market and buying your own stock again, because I think it's your reaction post all of this news flow has been fairly muted. So, thanks. Good work.

[Desmond J. Walsh:]

Thanks, Mike.

[Operator:]

And we do have a follow-up question from the line of Tim Ramey with Pivotal Research Group.

[Timothy S. Ramey:]

Follow-on on Ethan's question. Do you believe your stock is undervalued right now, John?

[John G. DeSimone:]

So unbiased, but yes, I do.

[Timothy S. Ramey:]

Okay.

[Michael A. Swartz:]

What a surprise question.

[John G. DeSimone:]

Look, maybe I shouldn't answered it off (58

[Timothy S. Ramey:]

We'll work on it. And just another one on China. You mentioned the tough comp and that's true. But as I look back on the sequence from 2Q to 3Q last year, volume points took more of a sequential decline than sales did. And I don't remember what that was about at that time. Your guidance for the 3Q is what I would term muted. What are you thinking about China on a sequential basis, 3Q versus 2Q this year?

[John G. DeSimone:]

Sequential base, so on top of my head, if I think of comparisons to last year which is more than what comes to mind in sequential comparison.

[Timothy S. Ramey:]

Okay. That's fine.

[John G. DeSimone:]

China has some seasonality. Look, I think China is getting into – is getting to be more mature. The numbers are good and the growth rates are going to be more in line with growth rates you're seeing in other markets and not the kind of growth rates we've seen over the last couple of years. And it's just – it's narrower than that (59

[Timothy S. Ramey:]

Yeah. Okay. And then, Russia was remarkably strong. But I assume you've had a lot of drag from FX on the ruble there. Is that a fair statement?

[John G. DeSimone:]

Well, that is a fair statement, but it's not the driver. So, what happened in Russia is, we had a price increase of March of 2015, so last year, and that pulled volume into Q1 last year from Russia. So, Q2 suffered from that last year and made the comparison easier this year in Russia.

[Timothy S. Ramey:]

Got it. Okay. Thank you.

[Operator:]

And that's all the questions we have in the queue at this time.

[Michael O. Johnson:]

Well, this is Mike and I just want to thank you all very much for being on the call today, and we are obviously very optimistic about the future, and some of the good points that have come out of all this journey, and it's been a journey through the last few years here in dealing with our government, in dealing with all the issues that are – that they have raised and that we have accomplished and working together very, very closely with our distributor leadership. And that's, I think, the key to our future here is that we've got a huge customer base. We have a very inspired, motivated distributor base. We have an energized management team and employee base in the company, and the need for our products has never been greater. Last year, we sold the equivalent canisters of about 300 million shakes in the United States. While that number sounds big, 300 million shakes, we think we should be doing way more than that. Way, way, way more than that. And so, all of our content, people are behind enhancing that shake line, all of our distribution team are behind, building a better opportunity for not only the business opportunity members, but for customer members and preferred members of Herbalife. So, we're looking forward to a great future .Thanks for being with us, and we'll report back next quarter. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.