FINAL TRANSCRIPT
Thomson Street Events
HLF- Q4 2009 Herbalife Ltd. Earnings Conference Call
Event Date/Time: Feb. 24. 2010/ 4:00PM GMT
CORPORATE PARTICIPANTS
Brett Chapman
Herbalife Ltd. – General Counsel
Michael Johnson
Herbalife Ltd. – Chairman & CEO
Desmond Walsch
Herbalife Ltd. – President
John DeSimone
Herbalife Ltd. – CFO
CONFERENCE CALL PARTICIPANTS
Doug Lane
Jeffries & Company – Analyst
Chris Ferrara
BofA Merrill Lynch – Analyst
Bret Jordan
Avondale Partners – Analyst
Tim Ramey
D.A. Davidson & Co. – Analyst
PRESENTATION
Operator
Good morning, and thank you for joining the fourth quarter and full-year 2009 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 Safe Harbor language.
Brett Chapman – Herbalife Ltd. – General Counsel
Before we begin, and as a reminder, during this conference call comments may be made that include some forward-looking statements. These statements involve risks 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 with 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 were prepared in accordance with US Generally Accepted Accounting Principles, referred to by the Securities & 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 website, Herbalife.com, to find our fourth quarter 2009 press release containing a reconciliation of these measures. Additionally, when management makes reference to volume during this conference call, they are referring to volume points.
I’ll now turn the call over to Michael.
Michael Johnson – Herbalife Ltd. –Chairman and CEO
Good morning, and welcome to our fourth quarter earnings call.
We had another strong quarter and year. 2009 was full of unique challenges, and we sit here today stronger from the lessons we learned, and proud that around the world Team Herbalife rose to the test. We had a record-setting volume in 2009, culminating in our strongest fourth quarter revenue and EPS in the Company’s history. Our results can be summed up simply. Our business continues to gain momentum, led by engaged distributors driving daily use of Herbalife products to more consumers in deeper end markets around the world. Yesterday, we reported an adjusted EPS of $0.98, which beat the high end of the guidance by $0.07, and was $0.28 above 2008 results.
The stronger than expected fourth quarter performance was led by local currency sales growth of 15.8% versus 2008. The ongoing growth of local currency sales provides further validation to us that daily consumption methods are taking hold in many markets, and that they are an effective way for our distributors to build their businesses. In the fourth quarter, our distributors’ use of daily consumption methods, coupled with new marketing-planned enhancements implemented during the quarter, helped drive a 15% increase in new distributors, a slight increase in new sales leaders, and a 7% increase in the number of average active sales leaders.
To further illustrate the strength we are seeing in our business, the 2009 requalification of sales leaders reached a 43%, up from 40% last year, and we believe it to be one of the highest in our industry. The broad strength of the quarter in terms of local currency sales growth is best represented by the fact that five of our six regions, and nine of our top ten markets, experienced growth during the quarter.
Our reported net sales in the quarter increased 23% compared to 2008; again, reflecting the strong growth in local currency, coupled with an FX tailwind of 720 base points. Once again, the broad strength of our business was reflected in the fact that nine of our top ten markets reported year-over-year net sales growth, and collectively our top ten markets reported a growth of 11.9%, excluding benefit from currency fluctuations. Inclusive of currency benefit, those top ten markets grew 28.8%.
As investors have come to appreciate, Herbalife’s business model generates a large amount of free cash flow. In 2009, we generated a record $285 million in cash flow from operations, which was an increase of 4.4% compared to 2008. Since the end of 2008, we have lowered our net debt by $101 million to $99.5 million, while returning $123 million in cash to shareholders throughout both our dividend and share repurchase programs. We are in an enviable position, with a conservatively-levered balance sheet.
2009 was a challenging year for most companies around the world. In November, we told you that throughout the organization at every level, we were committed to driving volume growth in 2009. We are proud to have generated record volume points, despite the economic turbulence felt around the world. Our distributors have accomplished something few others can claim; they were able to drive record volume in 2009. We ended the year on a high note, posting record fourth quarter revenues and EPS results. It is this excitement that we will carry with us this year, as we celebrate our 30th anniversary.
Recently, we welcomed our fourth member to our prestigious Founder Circle, Enrique Varela and Graciela Mier from Zacatecas, Mexico, who are founders of our nutrition club DMO. We also welcomed new Chairman’s Club distributors from Korea, Mrs. Park and Mr. Kang, along with 20 new members to our President’s Team from around the world. There is one new President’s Team member in particular that I would like to mention. This is our first President’s Team member from Lesotho, Africa. Critics believe that direct selling is characterized by infrequent large-sized purchases. They would never believe that our business could be successful on a large scale throughout South Africa; but daily consumption, driven by small purchases made frequently, has proven to be an outstanding model, and one which is opening our eyes to what could be possible in this incredibly large and untapped Continent.
On the product front, during the fourth quarter we introduced six new and improved products in the US, and continued the globalization of key products. We strive to continually improve our products, and as such, we are in the process of upgrading and improving key products in our weight management and targeted nutrition lines for release in 2010. Another key element of our product strategy is the globalization of our portfolio. By the end of 2009, we had introduced more than 60 new or reformulated products across 72 countries.
We continue to be very confident about future of Herbalife. It is that confidence in the momentum of our business that allows us to increase our full-year 2009 guidance, and guide to 15% to 17% EPS growth for the first quarter.
There appears to be some confusion about the first quarter guidance. We want to take the opportunity to address this issue. We are guiding to between 3% and 4% volume growth for the quarter, and 5% to 6% for the year. The first quarter volume guidance includes the impact of lapping the Taiwanese government coupon program, which benefited our first quarter 2008 results by between 12 million and 15 million volume points. Were it not for that event, our volume guidance would have been 5% to 6% for the quarter and for the year. And despite the strengthening of the dollar since we last discussed guidance in late December, given the strong performance of our key markets coupled with the current positive business trends, we are raising our full-year 2010 EPS guidance by $0.05, to $3.58 to $3.70.
In three weeks, our top distributors from around the world will gather in Orlando, Florida for our annual leadership summit, where we will begin to celebrate Herbalife’s three decades of success, and introduce our roadmap for growth during the next decade; the one we will call the Herbalife Decade.
With that brief overview, let me turn it over to Des for specific market updates. Des is joining us from Lisbon, where he is taking part in a strategy session with our Europe, Middle East and Africa’s local management and distributor leadership. [Engia], Des.
Desmond Walsh – Herbalife Ltd. –President
Thank you, Michael.
I have just completed two days of meetings here, and am excited about the initiatives being implemented to continue the positive momentum we are experiencing in many parts of EMEA. Around the world, we were pleased to see the momentum that our business gained as we closed out 2009, and as we have begun 2010. During the fourth quarter, we saw local currency net sales growth in all of our regions except for China, which, as we have mentioned in the past, is in the early phases of the transition to a model based on daily use of our products.
Before I begin our regional overview, let me take a moment to mention a new business metric that we have begun to share with the investment community, average active sales leaders. As we have discussed before, the evolution of the distributors’ business methods to more of a daily model is driving a shift in the metrics we disclose. We believe average active sales leaders is a better measurement of engagement levels, and we have made available historical data for this metric on our website.
Now let me provide highlights from our top markets. Our number one market, the United States, accounted for 19.5% of the Company’s reported net sales, and grew 17% versus the same quarter last year, well ahead of our expectations. We are proud of the fact that unlike many companies, we were able to grow our US business in 2009. In the fourth quarter, the United States Latin market represented 67% of the country’s net sales, and was up 22.1% versus the prior year. We were pleased to see that new distributors, new sales leaders, and average active sales leaders, all increased in the quarter. New distributors were up 3.4%, while new sales leaders increased 1.3%. Average active sales leaders increased 21.7%.
Our US Latin business remains a vital and growing area, with what we believe to be years of additional growth opportunities ahead. For example, per capita consumption among the Latin population of Chicago metro market is now over $19, while our national average is approximately $9.
New sales in the general segment of the US market were basically flat versus the fourth quarter in 2008. New distributors increased 6% in the quarter, both new sales leaders and active sales leaders decline in the quarter, down 14.5 and 3.4% respectively. However, we believe that general market leadership is becoming more active, hosting more meeting in cities around the country. We are optimistic that this increased activity will lead to new sales growth in the general market later this year.
Moving on to Mexico, our second-largest market. The fourth quarter is the first full quarter where we have anniversaried the implementation of the 15% VAT that negatively impacted our net sales beginning in August 2008. Local currency net sales for the quarter increased 8.2%. New sales leaders increased 18.7% year-over-year in the quarter. We are excited to see average active sales leaders increase by 2.4%, compared to the prior-year period. Early in the fourth quarter, Mexico launched a successful recruiting and brand-building initiative that resulted in strong new distributor growth of 21.4% in the quarter.
Mexico is the birthplace of Herbalife’s nutrition clubs. The stability of the Mexican business further validates to us one of the key benefits of the daily consumption model; consistency despite adversity. As further evidence of this, Enrique and Chela Varela, from Mexico, who created the nutrition club model, have recently become only our fourth distributor to achieve the highest level in our marketing plan, that of Founder Circle, thanks to the daily consumption model.
One of our largest logistical issues in Mexico has been access to Herbalife product. We expanded our Herbalife distribution centers from two in 2006 to 21 in 2009. In the fourth quarter, we have completed a test of distributor pick-up locations within a chain of retail stores throughout Mexico. We were very pleased with the results of the test, and have begun to roll the program out throughout much of the country. By the end of the first quarter, distributors will be able to place their order with Herbalife, and then pick up the product in any of approximately 300 retail locations.