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Thomson StreetEvents

HLF- Herbalife Ltd. at Janney Montgomery Scott ‘Investing In The New Normal’ Conference

Event Date/Time: May.26.2010/ 7:30PM GMT


John DeSimone

Herbalife Ltd. – CFO

Amy Greene

Herbalife Ltd. – IR


John San Marco

Janney Montgomery Scott – Analyst


John San Marco – Janney Montgomery Scott- Analyst

Good afternoon everyone.  I’m John San Marco, the Household & Personal Car analyst at Janney.  I’m very pleased to introduce our next presenters, Herbalife.  Herbalife is one of the world’s largest direct selling companies.  They’ve got a huge nutrition portfolio as well as some other consumer products they’ll tell us about.  And they’re certainly one of the fastest-growing companies in both spaces.  With us from Herbalife are Chief Financial Officer, John DeSimone, and the head of Investor Relations, Amy Greene.

There are a number of exciting things going on at the Company including modifications to the way its distributors are incented and the way the Company teaches its distributors to sell its product.  With that, John and Amy have kindly offered to stick strictly to a fireside chat format.  So we’ll just jump straight into Q&A.  I’ve got a number of questions, unless someone wants to beat me to it.

Maybe you guys could just start off talking out with what I sort of view as the biggest part of the story today and that’s why you’ve made this decision to switch to the – what a nutrition club format is, for those who may not know it?  Why you made the decision to start pushing that model?  And what the big benefits and challenges are?  Okay.



John DeSimone – Herbalife Ltd. – CFO


Does everybody have a presentation, so I can reference pages on the presentation?  Clubs are – it’s really a distributors’ method of operating.  It’s how our distributors go to market.  And about a third of our business, a little less than a third, about 30% of our business right now we estimate being done through the club model.  But the club model is what’s driving a majority of our growth.


And there’s a few benefits to clubs.  But the first benefit and the key benefit is it offers consumers the ability to buy product on a daily basis, at a daily price point.


All right, and I’m going to jump around based on the question.  So I’m going to turn to page – if you can turn to page 7, I like this slide.  It gives you – doesn’t tell you how clubs operate but it gives you a key benefit of clubs, which is – and coffee is the example on this slide.  Coffee at $2.00 a day is a pretty expensive proposition.  And if it was at – if you had to buy that product at the beginning of each month and prepay for 60 cups –I mean for 30 cups pay $60, far fewer people could afford to do it.  Same thing for Herbalife product and any other direct seller.  They’re always – we’re always selling a monthly supply of product where consumers had to pay $100 for a program or $50 for a month’s worth of meal replacement shakes, whatever it may be.  The new model offers consumers the ability just to come in and pay $3 for what they need that day.  So, just like a cup of coffee, a distributor would come to a club.  For $3 they would get a meal replacement shake.  They would – their cup of tea, which is a caffeine drink and they would get an aloe drink, which is digestive.  So the benefit of that daily price point is it reaches far more consumers.  It’s – the addressable population is exponentially increased from having a daily – offering a daily price point than just that monthly price point, which the traditional model has offered.


There’s other benefits to clubs too, but that is the key benefit, which is far more people can afford to buy the product now.  And it’s – additionally it’s sold as a meal replacement shake.  So we look at the club’s competitors as fast food.  The objective of a club is to steal one meal a day from fast food.  The benefit of that is where the clubs are looking for consumers to trade down economically to just trade off dollars that they were spending somewhere else for food and buy a Herbalife meal basically as opposed to traditional supplements which are a little more dependent on disposable income.  So it’s a tradeoff.  So we’re seeing that benefit too.


We’re also seeing a forced – call it a forced discipline of the benefit of clubs, our distributors basically have a job that helps them be successful.  So in traditional direct selling, a new distributor could be very motivated the day they sign up.  But what do they do 30 days later?  They have to be just as self-motivated, get up, call ten friends, whatever it may be.  In the club model, they have an operation they have to go manage and people come into that operation.  They have to service those customers.  So that’s a forced discipline.  It helps make them successful and customers come to the clubs instead of distributor going to customers.  So again, traditional direct selling, distributors have to call up their customers once a month, schedule a party or however they go to market, it’ generally the distributor contacting the customer.  In this case, once you make contact and the customer knows where the club is, the customers now come to the distributors.


The benefits of the model are it’s more sticky, penetrates far deeper into the marketplace, and we have seen in markets that have adopted clubs 3X to 5X growth rate just because it goes deeper in the marketplace where traditional direct selling skims the surface of the market.  So, I don’t’ know—


I’m going to start with slide 8 and then go to slide 9.  So slide 8, there are 3 core products for clubs.  Okay, they are – let’s say the meal replacement shake, the aloe drink and the teas.  They come in a lot of flavors.  But those 3 products, you can see in that first box in 2003 represented 37% of the Company’s volume.  In 2009, it represented 51% of the volume.  So it’s grown – those 3 core products have grown 152% while the Company’s grown 84% just purely on a volume basis.  And that shows you where the – that the growth is being driven from going deeper into the markets we’re in.


And it’s – you’ll see on the next slide if you can turn to the next slide, to put a little bit of metrics behind what the opportunity is, this slide – it’s got a lot of numbers on the slide, but the blue bars are the penetration rates.  And think of penetration rates—we call them volume points here, but basically US dollars worth of retail sales per consumer in the market for a population.  So in Mexico, for example, in 2003, Mexico is where clubs started.  The penetration rate was 1.2 million – 1.2 volume points per capita.  In 2009, that was up to 4.4.  in 2006, you can see on the bottom of that chart, there’s an inflection point where clubs really started to take hold in the market.  It started in Mexico.  It grew to the Latino community in the US because there’s close ties to Mexico.  And the consumption—volume points per capita consumption rate went from 2.3 volume points to 10.8.  Okay and that’s while the non-Latino US market is still at 1 and it’s just starting clubs; Taiwan, large clubs.


And clubs evolve in each market.  Okay, clubs were a home club.  This was done out of people’s homes in Mexico.  It’s now mostly done around the world in small commercial locations that are shared by a number of distributors that do the club together.  And Taiwan started that.  So Taiwan has gone almost 3X growth.  Korea, which started a year later with clubs, has had 2.5X growth and still tremendous growth in the current quarters, last couple quarters.  Brazil started even later.  It’s had 2X growth and still growing.  And then India, which is isn’t on the chart, India –there’s a lot of people.  So the per capita consumption doesn’t break the axis but we’ve been in India for ten years.  Outside of the first two years, it’s been flat.  And then for the last 5 quarters, we’ve had between 80% and 110% growth year over year, driven by the fact that consumers can now buy the product at a daily price point, all right, which is very much how in Asia people are accustomed – in a lot of Asian markets, are accustomed to buying product.  I mean in some markets they buy single-serving cigarettes.  And so the population in India that can afford to participate in the product offering a daily price point is significantly higher than those consumers who can afford to participate in the product offering at a monthly price point.


So this gives you some perspective as to what clubs have done for certain markets in the last six years.  And when you see the total company penetration rate, in 2009, we were – it says 0.6. It’s 0.56.  It rounds to 0.6.  So there’s still a big opportunity by spreading this model around the world.


Amy Greene – Herbalife Ltd. – IR


[Aspirationally], our goal as we’ve said before is to triple the size of the Company over the next ten years.  And the principal means of doing that will be to have – will be to continue to see clubs grow deeper the markets they’re in and in additional markets around the world.



Unidentified Audience Member


(inaudible-microphone inaccessible)


John DeSimone – Herbalife Ltd. – CFO


So it’s early.  So we’re seeing signs of growth in the fourth quarter in the general market from clubs.  And we were cautiously optimistic on our fourth quarter conference call saying we think the US is – general market is ready for growth.  And then we had great growth in the first quarter.  So, I think sustained growth, which we believe it will be sustained growth, will help other markets realize that clubs can work in their markets.  So there are some markets that are just resistant to this model, because it’s a change.  And distributors, in general, this is their livelihood.  This is their business.  They don’t change easily.  And in certain markets, the markets that we’ve been in for a long time, where the distributors are very comfortable with a different method, which is more finding that monthly consumer, finding a few people buy a lot instead of a lot of people buy a little.  Those distributors haven’t yet adopted clubs.


But the US general market, which is the oldest market in the company, it’s 30 years old, if that market starts to have success then distributors in other markets lose that excuse that clubs can’t work for them.  And the thought is hopefully, it’ll help engage those other markets to start clubs.  Now if it doesn’t spread that way, we think it’ll spread, for example, in Western Europe through the immigrant population.  So there’s a huge Indian population in the UK, in France.  And we’re having great success in India.  So somehow there will be a connection that way in those immigrant populations, there’ll be clubs.  And that’ll help spread.  But it’s – Europe is a little further away.  They have yet to start clubs.  Whereas, about 73 markets, 40 or so have started clubs.


More questions, anybody–?


Unidentified Audience Member


(inaudible-microphone inaccessible)



John DeSimone – Herbalife Ltd. – CFO


So you can see – there’s a slide that’s page 3 that looks at volume by region.  North America is essentially the US.  Okay, there is Canada, which is a small business for us and a little bit in the Caribbean, which is a small business for us.  So the US represents a little under 25% of our sales.  Cause Canada may be 3% of that.  So, US is around 22% of our sales.  US is still having great growth.  But there’s great opportunities elsewhere.  In Asia Pacific, we’re very excited about this new club model works really well in countries where there’s huge populations, but most of the people in those populations can’t afford to buy at the monthly price point.  So I suspect that Asia will outpace growth in some of the other markets.  We think there’s a big opportunity in the US, in Brazil.  Eastern Europe, there’s opportunity and Asia Pacific.  And then some countries that we’re not in, there’s still opportunities to open new countries.  The countries we’re in represent 75% of the world’s population.  There’s still a chunk of the population we don’t reach that actually could be good markets for us, Egypt, Middle East.  We might have to tweak the model a little to get it to work in those regions.  But there is opportunity to spread geographically beyond where – what our footprint is today.



Amy Greene – Herbalife Ltd. – IR


And one of the interesting things I think about the US is when we talk about the US, we tend to bifurcate the market to talk to Spanish-speaking and all other, essentially, because the Spanish-speaking portion of the US market first adopted clubs as they came out after seeing the Mexican model.  And so the growth characteristics were very different between the two markets.


Five years ago, the market was predominantly non-Spanish speaking.  It was 70/30.  And now has almost inverted because of what the growth that daily consumption has provided behind the Spanish-speaking market.  So there’s a lot of opportunity in the non-Spanish speaking side.  It’s just that the Spanish-speaking has so outpaced it over the last four to five years.