FINAL TRANSCRIPT
Thomson Street Events
HLF- Herbalife Ltd. at Canaccord Adams Global Growth Conference
Event Date/Time: Aug. 11. 2010/ 12:00PM GMT
CORPORATE PARTICIPANTS
John DeSimone
Herbalife Ltd. – CFO
Amy Greene
Herbalife Ltd. – VP, IR
CONFERENCE CALL PARTICIPANTS
Operator
Scott Van Winkle
Canaccord Adams- Analyst
PRESENTATION
Scott Van Winkle- Canaccord Adams – Analyst
Good morning, everyone. I’m Scott Van Winkle with Canaccord Genuity. Thank you for being here for the Herbalife presentation. Please look at your seminar materials for any appropriate disclosures. But Herbalife, well, I don’t know what you can say, I’ve never seen a company put up a quarter like it was put up a couple of weeks ago, and I’m sure John will be happy to talk about it.
But I’ll introduce Chief Financial Officer, John DeSimone and he’ll probably introduce the rest of the team. John?
John DeSimone – Herbalife Ltd. – CFO
Thank you, Scott. With me today are Amy Greene, Vice President of Investor Relations and Ibi Fleming, she runs our US Latino business, which represent s about 16% of the Company. It’s the single biggest segment we have. And under her leadership over the last six years, it’s grown by a factor of five. So, a good person to come and speak to you in the breakout session if you’re interested.
I need the – is there a clicker, or I just hit the screen? Let me start with the Safe Harbor statement. This is available for those listening on the web. It’s available on our website. I see some new faces, I also see some faces who sat through the presentation before. We’ve flip-flopped the order of the slides. We’re starting with the results.
As Scott said, we had a tremendous second quarter. It’s three strong quarters in a row, but second quarter has outperformed the other two. And it starts with volume, and it’s – what you’ll see here is volume broken into the regions as we report them. Volume points is a unique term for Herbalife. It represents effectively the retail sales in US dollars of products, okay? And it’s the same – every product has the same volume point value around the world. So basically it’s a good proxy for unit volume.
Q2, we had 837.1 million volume points, and that’s up 19.9% versus the prior year. And the growth was very broad based, and very spread out throughout the quarter. April, May and June are now each in the top-three months in the Company’s history. So it was a very evenly spread quarter, and these results as you see, as I go through the regions, were pretty broad based.
North America – now we break out North America and Mexico separately, because Mexico was a genesis of daily consumption club model, which I’ll talk about in a few slides. So North America, in this case, 95% of the volume is the US, and the US was up 21.1%. That’s unique in our industry of any direct seller of size. And I’ll get to the details later behind it, but it’s really because we’re addressing a segment of the population that couldn’t participate in the product offering a few years ago under the traditional direct selling model.
Mexico, Mexico was up 11%. It’s been interesting ride. We learned a lot with Mexico. Mexico was the genesis of the new daily consumption model. We had a little learning curve along the way. We’ve had some ups and downs, but it’s now double-digit growth again and it’s –the double-digit growth after five years of daily consumption speaks to the strength of the model.
South America was the only region where we had a slight decrease, almost flat. Two key markets, Venezuela, which has a lot of noise, a lot of political noise, lot of currency noise, importation controls that make the business a little challenging. I mean that was one of the key drivers for volume being down in South/Central America.
EMEA, which is Europe, Middle East and Africa, 8.6% volume growth. That’s coming off of a number of quarters in a row of essentially flat sales, and that is also a result of the new daily consumption model starting to spread in Europe, and Eastern Europe starting to leverage the new marketing plan that was put in place a couple of years ago, as Russia was up 36% in the quarter.
China, which is a relatively new market for us, so you can see the volume points aren’t that high, but we’ve had 25.7% volume growth in the second quarter after 22% plus growth in the first quarter.
And then Asia Pacific, 50% plus growth in Asia. It is now, from a net sales standpoint, our single biggest region. It surpassed North America the first time and that represents 25% of our net sales. So, the volume points is on the screen, but if you look at concentration of sales around the world, we’re pretty diverse. Asia is 25% of our net sales, North America is 24%, EMEA is 20%, Mexico, and Central and South America combined to about 25% of net sales, and 7% in China. So we’re diverse geographically.
In terms of net sales, what we reported this quarter was net sales of $688.8 million in the quarter. That’s 20.5% growth on – what you saw on the prior page was 19.9% volume growth. So moth of this is – most of our sales growth is coming from volume. There’s a little bit of FX benefit.
Operating margin went from 12.7% to 16.9%, a 420 based point improvement, all driven by volume and volume gains. The contribution margin of incremental sales in our business – on our business model in the short term is 35% to 40%. n the longer term, it’s I mean 20%, maybe 25% depending on the market. So we get a big bang in the short term when our volume exceeds our expectations.
And our earnings per share was up 70% from $0.78 last year in the second quarter to $1.32 this year, mostly driven by volume. And then guidance, this is the guidance we provided a couple of weeks ago when we did our earnings release. You can see on the volume point and net sales, which is the first box, you can see the third-quarter guidance. Volume point and net sales growth is expected to be 13% to 15%, and EPS growth is expected to be 16% to 21% in the third quarter. And then for the full year, we’re looking for an EPS growth of 31% to 34% on volume growth of 12% to 14%.
Now why is Herbalife growing? So there’s a couple of key reasons. This first one, we don’t speak enough about, right? It’s – our products are relevant. They solve a need, okay? That need is the need for good nutrition, weight loss and then just as importantly, weight management; maintaining your weight once you’ve hit your goals.
It was considered though – obesity was considered a Western problem. It’s really a global problem. The World Health Organization estimates that in five years from now, there’ll be 2.3 billion overweight adults in the world and that’s 40% higher than it was five years ago. And China, for example, people – a lot of investors don’t think China has a weight problem, but 24% of the adult population in China was overweight. That means there’s more than 200 million people in China that’s overweight. That’s more people overweight in China than in the Us, even though the US has 64% of its population overweight. So it’s a big population and it’s expanding. As fast foods, Western diets expand globally, obesity expands. And we bring a solution, so our products are very relevant.
Second and equally as important is, a new model has increased consumer access to the product. Traditional direct selling and Herbalife direct selling was always selling a monthly price point, monthly quantity of products. So you’d spend $30, $50, $100 at one time and by that month supply a product depending on nutritional needs. And that worked very well for a certain segment of the population and still works well today for that segment. But this is another segment that couldn’t afford to participate in that monthly price point, it didn’t have $100 at a time to buy products.
Our distributors a few years ago in one market specifically identified that problem, all right, that there’s a consumer segment that couldn’t afford to participate in that monthly price point and many of those consumers needed our products more than most. So they developed what’s called a club model, and a club effectively allows a consumer to buy an Herbalife meal one serving at a time. So it takes the monthly price point and breaks it down to a daily price point, and that daily price point increases the affordability of the product. And I’ll come to that in a little more detail in a few slides.
And then branding; we spent quite a bit of money on building a strong brand to benefit our distributors. We do that through sports, soccer specifically. We do a lot of sports. Soccer fits well as a global sport, we’re a global company. We sponsor over 150 teams and athletes around the world; FC Barcelona, Lio Messi, LA Galaxy. There were – if you had listened to our conference call, you’d have heard that there were nine players on the winning Spanish soccer team, World Cup team that are – play on teams that we sponsor.
Little bit—just to look at our product portfolio. We are 62.5% Weight Management, so almost two-thirds of our product come from Weight Management. But non-traditional weight management, as you might think if you’re new to the story. We don’t chase fads. We’re not coming out with a new hot product that stops people from eating to 30 days. We’re a lifestyle company. We’re much more a functional food company, and you’ll see some of that on the next slide. Half of that 62.5% comes from Formula 1, which is the meal replacement shake and it’s been around for 30 years.
Moving over to Targeted Nutrition, Targeted Nutrition are products that address a condition-specific problem, could be cholesterol, brain health, whatever it may be. And then we have two smaller categories that offer opportunity in the long term, Energy and Sports, which represents less than 5% of our sales and Personal Care, which represents less than 5% of our sales.
These are our top five products on the bottom, and that represent 61% of our sales. So you can – almost all of them are what I’d consider functional food, not traditional, contentious, fat-oriented supplements.
Formula 1 shakes represent, it’s a third of our business, it’s our number one product. Our second product are Herbal Teas, energy teas. Aloe Concentrate is our third-largest product. Protein Powder is our fourth. And then fifth is Niteworks. Niteworks is a product designed by the only scientist ever to win a Nobel Prize for work in nutrition. He won it based on developing a molecule that’s the basis for Niteworks and it’s exclusive to Herbalife.
Now I’m going to speak a little bit to the transition from the traditional model to the new model, and I’ve said some of this already. But the traditional model, again, is that medium to high price-point purchase done infrequently. It’s done once a month. It’s a month supply. And it’s pretty much the same way for all direct sellers. That model skims the surface of the consumers that can participate in that offering. So it’s a very low penetrating model. The turnover at the customer level is pretty high, and the acquisition cost of the consumer is high.
If we transition over to daily consumption – and the traditional model hasn’t gone away. It works still for a segment of the consumers. But on the daily consumption side, it’s going after small purchases. It’s done frequently, regularly. It penetrates much deeper into the marketplace, because many more consumers can afford to participate. And there’s a slide I like on the next page that maybe will help everybody visualize what that means. It has a much lower consumer turnover rate, higher retention and it’s more efficient because it’s a club model, so it’s a club setting where consumers come to distributors instead of distributors going to consumers. So it allows distributors to service more consumers than they can traditionally. And you can see, that model started in 2003. It started in Mexico. It’s spread pretty slowly, although it’s gained a lot of traction over the last 12 to 18 months. But from 2003 to 2009, Company nearly doubled its sales and more than doubled its profits.