HLF-2012-Barclays Back-to-School Consumer Conference

FINAL TRANSCRIPT

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HLF – Herbalife Ltd at Barlcays Capital back to School Consumer Conference
Event Date/Time: Sep.07.2011/5:30PM GMT

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FINAL TRANSCRIPT
Thomson StreetEvents
HLF – Herbalife Ltd at Barlcays Capital back to School Consumer Conference
Event Date/Time: Sep.07.2011/5:30PM GMT

CORPORATE PARTICIPANTS
John DeSimone
Herbalife Ltd.-CFO

CONFERENCE CALL PARTICIPANTS
Brian Wang
Barclays Capital – Analyst

PRESENTATION

Brian Wang – Barclays Capital – Analyst

I think we’re going to try to get started now. If you could please find your seats. So for those of who you don’t know, I am Brian Wang, I work on Meredith Adler’s team on the food and drug retail. We don’t officially cover Herbalife yet, but we’re very delighted to have them joining us for the first time at the back-to-school conference. Herbalife has had a tremendous success in the last couple of years as they transition to distributors from selling bulk order infrequently to selling smaller orders much more frequently over what the Company describes as daily consumption, but I will let John and the Company describe that little bit better. Here to discuss the story today is the Company’s CFO, John DeSimone. John, with that I will give it to you.
John DeSimone – Herbalife Ltd. – CFO

Thank you. Good afternoon. Let me set up the presentation after the Safe Harbor Statement that’s up here which is also available on the website. I am going to walk first through the strategy behind the Company, what we’re doing, what’s working, how it is working, why it is working, and then we’ll get into the financials. For those of you who don’t know, we have had a couple of great years. We think there is a lot of runway left. I think the best way to understand this business is to understand the strategy first. Start with five key takeaways for investors.

First is, and most importantly, the products are relevant. We don’t generally talk about that enough. Excuse me.

Unidentified Audience Member

(inaudible – unmiked individual).

John DeSimone. – CFO

Okay. So we’ll see if we can keep track of this. Products are relevant. It is a nutrition based product. You will find throughout this presentation we will talk a little about what types of products we have, but they are mostly functional food products which is different than traditional supplement products that many investors think of. The awareness of the need for good nutrition has never been greater than it is today. That awareness is at the consumer level, the press level, the governmental level, and that speaks well about the opportunity that we think is in front of us.

Second, in addition to the products being relevant, there is a new distribution model, and I say new. It is mostly new. The model has transitioned from a very infrequent medium to high priced purchase done now much more frequently, and that has increased the consumer access to the product and dramatically increased the addressable audience, meaning the number of people who can afford to participate in the product. That’s been the driver of our growth over the last seven years, and we think it will be the driver for the next seven for sure, and we’ll discuss in more detail what that means in a few slides.

FINAL TRANSCRIPT
HLF – Herbalife Ltd at Barlcays Capital back to School Consumer Conference
Event Date/Time: Sep.07.2011/5:30PM GMT

Third, if I get back to the slide, this is not me pushing the button by the way. Apparently there is a little bit of a problem with the electronics. The brand, I think we have a strong brand. It think it is strengthening. It wasn’t always that way. But in the direct seller, in all direct sellers, branding is to build an identity and create confidence for distributors and for consumers, but it is not a [pull] business. So as a direct seller if you want longevity and sustainability, brand is critically important. We invest a lot behind the brand and you will see we brand a lot through sports, through creating a healthy active lifestyle image for the Company.

Fourth bullet point, strong financial performance, we have been a growth company for a number of years. Our compounded annual growth rate for the last eight years is just under 10%. For the last two years it is much higher than that. This model has a very low fixed cost base, very high variable cost base, and throws off a lot of cash.

That will lead me to the fifth bullet point which is we use that cash to accelerate returns to shareholders through both the dividend and the buy back, and you will see in one of the slides near the end of the presentation that free cash in this business approximates net income, and that also approximates how much we return to shareholders through dividend and buy back so it is a great financial model. See if it moves. Here we go. No controversy here. Supports the fact that our products are relevant. They address three mega trends, first and foremost obesity. Obesity is a worldwide epidemic. It is not a western culture epidemic any longer. In China the obesity rate is second fastest in the entire world.

There is only 5% of the adult population in China is overweight, but 20% – plus of the adult population—excuse me 5% is obese, but over 20% is overweight. As western diets move east, this problem is also moving east. So the products address that, they address aging population, and from a business opportunity standpoint, the under or unemployment, but under employment probably being more critical helps the business opportunity.

New clicker? Thanks. Sometimes it is moving on its own. Okay. A little bit about our product break down. 62.8% of our sales come from weight management, about half of that comes from the meal replacement shake, so most of that category is functional ford base. It is not take a pill and don’t eat for 30 days. That’s the controversial product that we don’t participate in and won’t participate in, so I think, when you think of Herbalife, you should think more food based, less supplement based. On the targeted nutrition side, that is the more supplement oriented business and that is 22% of our business. Sports and energy is under 5%, outer nutrition which is skin care is a very small piece of our business at 4%.

Meal replacement category, it’s a nearly $5 billion category in 2003. We owned 12% of that category. In 2009 it was 23%. The 2010 data, I just got yesterday, this all comes from Euromonitor, so I haven’t had a chance to update this presentation, but we’re up over 30% now market share. So we are a leading market shareholder in meal replacement shakes around the world. This is a worldwide statistic. That’s the back on our product.

On the business model, this heading is a new heading. We’re starting to think that this new model is redefining direct sales. Traditional direct sales is characterized by medium to high priced purchases done infrequently, and the infrequent is the key characteristic. Most direct sellers, the rep or the distributor, meets very infrequently with their customer, once a month, once every two weeks, has to schedule a party, make a phone call, not a very efficient model.

You will find that over the next couple slides when we talk about daily consumption we’re talking about business models where the distributor has frequent interaction with the consumer. In some cases daily interaction. That daily interaction creates both the opportunity for the consumer to purchase product at a lower price point, same cost per serving, but just what they need for that day, which makes it more accessible, and it is a very efficient model for distributors because customers are now coming to distributors instead of distributors going to customers.

It allows the distributor to have more customers than the traditional model. This is the cycle if you can envision this. The frequent interaction between a distributor and a customer is creating what we call product compliance, product useage, meaning that meal replacement shake, making sure the consumer is taking it every day. If a consumer takes a meal replacement shake every day instead of one of their meals, they will in fact lose weight and that leads to the third circle which is the product result.

FINAL TRANSCRIPT
HLF – Herbalife Ltd at Barlcays Capital back to School Consumer Conference
Event Date/Time: Sep.07.2011/5:30PM GMT

If a consumer loses weight which is an objective result, not a subjective result, that builds credibility, that builds the brand, and that create s a long-term customer which then comes back to the distributor often because they’re getting a product result. The model change of that frequent interaction is creating more consumers who are having more success on the product.

What are some of the models? I circled one here which is club. Clubs is the dominant form of daily consumption within Herbalife right now. How many people have visited nutrition clubs? They’re all around the country. If you are interested in the story, you should take the time to see a club. It will highlight the opportunity, it will become more tangible for you.

A club basically operates where a distributor opens a fixed location, started in people’s home. But in a lot of cases it is a commercial location, maybe shared by a number of distributors if you can think of a [Healthalon] where there is different stations for each distributor. And a consumer can come in and buy Herbalife life product one meal at a time jut for what they need that day effectively. That’s the way it works.

Instead of having to buy a 30 day supply of meal replacement shake and stick in the cabinet in the kitchen and hope that the consumer uses it every day, the consumer comes to the fixed location and gets three products, and aloe drink, a cup of tea for caffeine and an Herbalife shake. It is sold as a meal and sold just for that day’s supply meaning a $100 monthly supply will cost you about $3 per day. That daily price point makes the product much more accessible for the consumer.

We equate it and analogize it to coffee. Coffee at $2 a day at Starbucks is very accessible for many people, but if people had to go in at the first of each month and buy a $60 prepaid card, some people would for sure, but far fewer people could afford that $60 coming out of their pocket once a month, they can afford the $2 once a day.

That’s what changed in our model. Consumers can buy Herbalife product one meal at a time. That really offers five benefits. One is that daily price point is more accessible.

Two, and this is an important benefit, is the product is sold as a meal. As a meal, the spend becomes a replacement spend, not a discretionary spend. Supplements are generally considered a discretionary spend. So in difficult economic times, discretionary spend can be a challenge, but a replacement spend actually creates a value proposition for us. We look at the competition as being fast food. Try to get a consumer to move away from McDonald’s and into Herbalife. It costs less money and you get a better meal. That value proposition creates stickiness in the model.

Third the product created an objective result. Fourth, because of that objective result when you go to a club, you will find that there is a number of club members who know each other. Why? When a person loses weight, generally the friends and family, their circle of influence wants to know why they lost weight, how they lost weight, and it is pretty simple for that person to get other members of their circle of influence to come to the club.

When you walk in a club, there is a social fabric because of that; that ties clubs together and keeps it sticky. When somebody goes to a club at eight in the morning, they usually go in and meet a number of people. That creates that discipline to show up everyday.

Then lastly on the distributor side, for anybody else that follow the direct seller, a distributor or rep, generally is motivated to sign up for a company for some reason the day they sign up. But a couple days later they don’t have the discipline to be successful. They don’t have the discipline because they don’t have a boss. They have to wake up every morning and know what to do, and be motivated and disciplined to do it.

When you have a club, that club creates a forced discipline because you have to physically get out of your house and go to another location and put a key in the door because you have customers coming and it helps the distributor be more successful than they might ordinarily be under the traditional model. That was pretty wordy, but that hopefully described clubs.

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