FINAL TRANSCRIPT
Thomson StreetEvents
HLF-Q1 2010 Herbalife Ltd. Earnings Conference Call
Event Date/Time: May. 04. 2010/ 3:00PM GMT
COPORATE PARTICIPANTS
Brett Chapman
Herbalife Ltd. – General Counsel
Michael Johnson
Herbalife Ltd. – Chairman, CEO
Des Walsh
Herbalife Ltd. – President
John DeSimone
Herbalife, Ltd. –CFO
CONFERENCE CALL PARTICIPANTS
Doug Lane
Jeffries & Company, Inc. – Analyst
Brett Jordan
Avondale Partners – Analyst
Tim Ramey
D.A. Davidson & Co. – Analyst
Scott VanWinkle
Canaccord – Analyst
Chris Ferrera
Merrill Lynch- Analyst
PRESENTATION
Operator
Good morning and thank you for joining the first quarter 2010 earnings conference call for Herbalife Ltd. On the call today is Michael Johnson, the Company’s Chairman and CEO, the Company’s President, Des Walsh, John DeSimone, the Company’s CFO and Brett Chapman, the Company’s General Counsel. I would now like to turn the call over to Brett Chapman to read the Company’s General Counsel. I would now like to turn the call over to Brett Chapman to read the Company’s Safe Harbor language.
Brett Chapman – Herbalife Ltd. – General Counsel
Before we begin, as a reminder, during this conference call, comments may be made that include some forward-looking statements. These statements involve risk and uncertainty and as you know, actual results may differ materially from those discussed or anticipated. We encourage you to refer to yesterday’s earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements and our business.
In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, which are prepared in accordance with the US Generally Accepted Accounting Principals, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measures assist management and investors in evaluating and comparing period to period results of operations in a more meaningful and consistent manner. Please refer to the Investor Relations section of our Web site, herbalife.com, to find our first quarter 2010 press release containing our reconciliation of these measures. Additionally, when management makes reference to volume during this conference call, they are referring to volume points. I’ll now turn the call over to Michael.
Michael Johnson – Herbalife Ltd. – Chairman, CEO
Thanks, Brett, and good morning everyone and welcome to our first quarter 2010 earnings call. We kicked off our 30th anniversary with a record first quarter. We experienced stronger volume in margins exceeding the guidance that we provided to you in February. 2010 is a year of opportunity as our business continues to gain momentum, led by engage distributors who are driving daily use of Herbalife products to more consumers and expanding deeper into markets throughout the world.
Herbalife is in a unique competitive position with the direct selling industry. Our distributors have developed an economically attractive business method which comes in the form of nutrition clubs or weight loss challenges that emphasize daily consumption of our products. We believe these business methods, which provide a daily price point to consumers is transforming our business. Millions of people can now access Herbalife products and the business opportunities, especially in emerging markets, where they have the ability to pay a daily fee to our distributors for access to our great products. Yesterday we reported adjusted EPS OF $0.98, which was $0.30 above our first quarter 2009 results. The improvement in earnings was driven primarily by revenue growth. Our reported net sales in the quarter increased 19% compared to the same period in 2009, again reflecting the strong growth in local currency sales, coupled with an FX tail wind of 530 basis points.
In terms of local currency, we experienced sales growth of 13% versus the same period in 2009 led by a 21% increase in the US Latino market and a 14% increase in the US general market. Growth in the general market is most encouraging and as we believe, unique in our industry. Des will provide you with additional detail regarding the general market in just a few moments. In total, our top five markets, which comprise almost 55% of our revenue, were up 155 in local currency sales in the first quarter. This growth was led by a 12% increase in new distributors, primarily reflecting recent changes we made in our marketing plan. Additionally, we experienced an increase in average active sales leaders of 11% compared to the same period in 2009, reflecting their focus on daily consumption business methods.
The breadth of our strong performance in the first quarter results can be seen in the fact that all six of our regions posted net sales growth. Turning to free cash flow, Herbalife’s business model generates a large amount of free cash. We generated $87.4 million in cash flow from operations in the quarter. And compared to last year’s first quarter, we lowered our net debt by $17.4 million to $82.1 million while we repurchased $28 million in stock and paid out $12.1 million in dividends during that quarter. We remain in an enviable position with a conservatively levered balance sheet. Yesterday our Board of Directors approved an expansion and extension of our current share repurchase authorization, reflecting our belief that we will continue to generate significant cash in excess of our needs. This expansion represents a $700 million increase to the prior $300 million program, bringing the total authorization to $1 billion.
This authorization runs thought December 31st, 2014. As of March 31st, 2010, we have already used slightly more than $100 million of the previous $300 million buyback authorization, leaving approximately $900 million. This expanded repurchase authorization is on top of the $760 million we have returned to investors since the inception of our buyback and dividend program three years ago.
On a product front, we continue to target the global obesity epidemic around the world. As many of you have read in this weekend’s “Wall Street Journal,” more than a third of the adult population of America is, sadly, obese, a significant increase from even a decade ago. The annual health costs of obesity in America have risen from $74 billion in 1998 to $147 billion in 2008, and this is no longer an epidemic unique to the US we have tremendous head room to grow our weight management category. This past quarter our weight management business increased 18% and comprised 63% of our business.
We introduced two new and improved products in the US and continue the globalization of key products this quarter. Throughout 2010, we are upgrading key products for release in both our weight management and targeted nutrition lines and as we enter our Herbalife decade, we are highly focused on innovation, recruiting new, outstanding talent in product research and development for sports nutrition, skin care, anti-aging and brain health. We also continue to increase our commitment to vertical integration and best manufacturing practices. Our expectation for Herbalife is to be recognized as the premiere nutrition company in the industry for product innovation, quality, efficacy and safety.
In quality assurance and safety new talent such as former FDA director Bill Frankos, who joined us recently as our Senior Vice President of Product Compliance and Safety, will also contribute credibility to our efforts to educate regulatory and government bodies around the world. As will activities such as the Global Nutrition Transition Conference for physicians that we held in Orlando, prior to the leadership summit in March. The world in still upside down about nutrition. Our shake, with the best protein, healthy carbohydrates, balanced vitamins, minerals and antioxidants is called a meal replacement, while a burger, fries and soda is called a meal. Hard for me to figure out, maybe you can. As more people become educated about healthy nutrition, we are here, ready to support them in their pursuit of healthy, active lifestyles.
Our continued confidence in the future of Herbalife is reflected in our 2010 guidance. We are raising our full-year 2010 EPS estimates to a range of $3.80 to $3.90, a 16% to 19% increase over our 2009 results. Our financial performance is directly attributable to the ongoing success and increased engagement of our independent distributor. Since January we’ve hosted distributor events in Ecuador, Brazil and China and celebrated our 30th anniversary at our leadership summit in Orlando, Florida. Some of our sales side analysts and top investors were in Orlando and experienced firsthand our distributors’ passion for Herbalife. Their engagement with the business is higher than at any other point we can recall and there are more Herbalife meeting of every size, from Herbalife opportunity meetings, to success training seminars to leadership development weekends, taking place around the world than anytime before.
In two weeks we’ll be in Singapore with our distributors from Asia-Pacific for the annual Extravaganza. We’ve sold nearly 15,000 tickets, putting this event on track to be the largest Herbalife event ever hosted in Asia. Our distributors will be exchanging ideas, learning from our most successful distributors and leaving with a new energy and a call to action that they will take back to their respective markets to continue to drive our wonderful momentum. Before I turn over to Des, let me repeat, we are confident 2010 is a year of opportunity for Herbalife and while we celebrate our 30th year in business, we truly believe that we’re just getting started. Now let me turn it over to Des for specific