THOMSON REUTERS STREET EVENTS
EDITED TRANSCRIPT
HLF- Q1 2012 HERBALIFE LTD Earnings Conference Call
EVENT DATE/TIME: MAY 01, 2012/ 3:00PM GMT
OVERVIEW:
HLF reported 1Q12 net sales of $964.2m and diluted EPS of $0.88. Expects full-year 2012 fully diluted EPS to be $3.5803.74 and 2Q12 fully diluted EPS to be $0.91-0.95.
CORPORATE PARTICIPANTS
Brett Chapman Herbalife Ltd – General Counsel
Michael Johnson Herbalife Ltd- Chairman, CEO
Des Walsh Herbalife Ltd – President
John DeSimone Herbalife Ltd – CEO
CONFERENCE CALL PARTICIPANTS
Mike Swartz SunTrust Robinson Humphrey- Analyst
David Einhorn Greenlight Capital – Analyst
Tim Ramey D.A. Davidson & Co. – Analyst
Bill Leach TIAA-CREF- Analyst
Linda Bolton Weiser Caris & Company- Analyst
John San Marco Janney Montgomery Scott- Analyst
Anand Vankawala Avondale Partners-Analyst
PRESENTATION
Operator
Good morning and thank you for calling –joining the first quarter 2012 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, 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 prepared in accordance with US generally accepted accounting principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measure 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, www.herbalife.com to find our press release for this quarter which contains a reconciliation of these measures. Additionally, when Management makes reference to volume during this conference call, they are referring to volume points. I will now turn the call over to Michael.
Michael Johnson – Herbalife Ltd – Chairman, CEO
Thanks, Brett. Good morning everyone and welcome to our first quarter 2012 earnings conference call. Our financial and business trends continue to be strong. Yesterday we announced a 24% increase in EPS, driven by a 24% volume point growth. Each of our six regions experienced strong volume point growth in the quarter.
Five of the six regions had double-digit volume increases. Four of our regions – Asia, North America, China, South and Central America –exceeded 20% growth. Mexico had a 16% increase in volume points and EMEA was up 6%. Before I elaborate on the quarter, let me say thank you to our distributors, employees and vendors around the world. The consistency of our growth and financial results is due to your dedication and hard work.
My ninth anniversary with the Company was in April, and as I approach my first decade at Herbalife, I’ve been reflecting on how much our Company and business have changed over the past decade, primarily because more people than ever are using our products every day. We call that daily consumption.
We have worked very hard to position Herbalife as a global nutrition company that uses network multilevel marketing as its channel of distribution, which we believe by the nature of our human network is a competitive advantage for selling nutrition products in both developed and emerging markets. Our independent distributors are leading this transformation by focusing on creating loyal customers. Their efforts include employing business methods that offer the opportunity for frequent interaction between the distributor and her or his customer. This interaction fosters proper use of our products, while providing the person to person support that leads to a successful product result.
Whether the individual’s goal is weight loss or weight gain, weight maintenance, improved health, improved athletic performance, more energy, healthy skin nutrition, or outstanding daily nutrition, our product results drive our customer loyalty and our customer retention. We use the name daily consumption to refer to any distributor business method that allows for frequent customer interaction and focuses on creating long life consumers. Our independent distributors are reinventing the Herbalife direct selling model with daily consumption. It is one of the key drivers of our growth. Today we estimate that more than a third of our volume is being transacted through daily consumption.
These business methods and our journey is just beginning. We have enough data and history to support our belief that daily consumption business methods create more long-term customers and therefore more long-term success for our distributors. While our distributors are independent business operators and choose the method that works best for them in their respective markets, we work with distributors on identifying and training best practices from markets around the world, many of which are grounded in daily consumption. These best practices are high customer touch, and are sustainable, and have high retention. At Herbalife, we have a culture of constant improvement with a goal of moving Herbalife from a good to a great Company.
One of the areas of focus has been able to make modifications in our marketing plan to help our distributors widen their businesses. We made a change in 2009 to our marketing plan that allows distributors to become sales leaders over a longer period of time, building their business in a less aggressive, more sustainable manner. This change better reflected important business tenets of the daily consumption business methods having so much success around the world, slower, methodical and sustainable growth through the establishment of a solid customer base.
Later this year, we will begin testing a maximum volume point limit for first time orders. The test will place a cap of 1,500 volume points on first orders from new distributors. We believe limiting first orders will help the new distributor develop a solid foundation for success, taking the extra time to understand the Company, our products and the business before making a larger financial commitment. It may sound odd, but essentially we are speeding up by slowing down.
Another aspect of our constant improvement culture is in the science and manufacturing infrastructure of our products, which we call our Seed To Feed strategy. Self manufacturing is and will continue, in the future, to be an important focus for several reasons. First, to ensure that we continue to deliver the highest quality products to our distributors. Second, to support the growth of an increased demand for product around the world. Third, to drive distributor engagement through the confidence they feel regarding the quality of the product. And last, but certainly not lease, we believe that to be a leader in the nutrition and supplement industry with regulators around the world, it is important that we be in more control of the manufacturing process for a greater percentage of our products.
We also strive to be a positive influence in the nutritional supplement industry, urging and supporting requirements for adverse event reporting. We believe it was this type of leadership that allowed us to attract people of high caliber like Dr. Bill Frankos, the former head of the Dietary Supplement Division of the FDA, who joined Herbalife to leave our science and safety efforts.
Herbalife is self manufacturing more products than we ever have in the past. We are currently manufacturing approximately 30% of our global volume. Our goal is to self manufacture as much as two-thirds of our inner nutrition products, including the extraction of the raw botanical ingredients use in many of our products today. With respect to science, we often use the terms R&D or Research and Development interchangeable with science. To be clear, we have 180 employees with scientific degrees across a number of disciplines who are employed in ensuring that our products are safe and efficacious. A portion of what our scientists work on is considered by accounting rules to be R&D.
In addition, we dedicate a majority of our spending in the areas of product reformulation and improvement, method development, stability testing, quality testing and international registrations, all of which play a vital role in providing the highest quality product to our distributors and their customers around the world. With respect to new products, they are an important element of driving distributor excitement and engagement. But unlike traditional CPG companies, new products in our distribution channel take time to be integrated into distributor business methods. They first need to have products results. And then they need to understand how to sell the new products, which in turn can generate meaningful future business for them.
For example, our two significant product launches during the past 18 months, Prolessa and our Herbalife24 sports line, represented approximately 1.5% of worldwide volume and 5% of North American volume in the first quarter. But notable the Herbalife24 line is attracting the creation of new business methods and new distributors who have an athletic and performance focus for their Herbalife distributorship. Another area of evolution and transformation of Herbalife in this decade has been the emphasis on building a brand that focuses on using our products to support a healthy, active life.
For many years, the Herbalife message was –Lose Weight Now, Ask Me How. Today we’ve added to that theme –Hey, I’m An Herbalife independent distributor. Let me give you a shake that’s going to be the most nutritious meal you’ll have today. Let me help you reach your healthy weight and maintain it through outstanding daily nutrition. Now that’s no slogan so today, we are – Have you had your shake today? That’s the Herbalife of today.
The first place we focus on in building our brand is with our distributors and our employees. Our brand is built through each and every experience we have with customers and our communities. Our distributors know that the expectations and claims that they present for our products and our business opportunity will come under more scrutiny than ever before with the increased use of social media and the watchful eye of regulators. We welcome this increased awareness.
Along with our distributor leaders, we are consistent in teaching the importance of integrity and ethics in everything we say and do. When the facts have proven otherwise, we will work with all team Herbalife members, whether the individual is an Herbalife independent distributor, an employee, or even a vendor, to make sure they understand the uncompromising stance we have on taking the high road.
We also promote community service. The more we are all involved in our vision of making our communities better places to live and work the stronger we will be and our brand will be. We also promote our brand through the association of our products with healthy active lifestyle of sports. We continue and currently sponsor some of the top teams and athletes around the world. And this is a huge source of pride for our distributors. We are a global nutrition Company and athletes and their trainers are influencers in this important area and our distributors help create more access to our products than ever before.
Building a recognized and respected brand and image is a process in which our distributors, and employee, and vendors all participate. We are on a mission to build our Company to be the best at everything we do. As we discussed a few weeks earlier at our Analyst Day, our theme for 2012 is Build a Better. That’s truly been our approach for the past nine years and it is a rewarding journey that will continue long into the future.
Investors often ask me, what gives me so much confidence about our future. First of all, I have tremendous respect for our distributor leadership, the women and the men in the field every day working to provide the best daily nutrition to customers around the world and an opportunity for part time or full time income. Our employee team at Herbalife is committed to a collective vision that supports our distributors and their businesses. And we are constantly looking into the future, building and doing it better every single day. We are all incredibly proud to be associated with Herbalife of today and excited about the Herbalife of tomorrow.
Secondly, and you’ll hear more from Des about his, our city by city initiative. When you see a city like Zacatecas, Mexico or Reykjavik, Iceland where our penetration and retention rates are very high, you also see a shining Herbalife brand. Our product results are on display because so many people are using our products every day. Our distributors are engaged in building and protecting the brand because these are their communities, this is where they live. They are not some far away brand. They are local and active in the lives of those around them. As we continue to foster the transformation in our business, our distributors will lead the way through daily consumption, deeper city penetration, increased engagement and they will be wearing and living the brand in cities all over the world. To me, that says go confidently into the future.
Thank you for your continued support along our wonderful journey. Now let me turn it over to Des.