FINAL TRANSCRIPT
Thomson StreetEvents
HLF – Herbalife Ltd at Wedbush California Dreamin’ Consumer MAC:
Management Access Conference
Event Date/Time:De.06.2011/10:45PM GMT
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FINAL TRANSCRIPT
Dec. 6,2011/10:45PM/HLF-Herbalife Ltd at Wedbush California Dreamin’ Consumer MAC: Management Access Conference.
CORPORATE PARTICIPANTS
Amy Greene
Herbalife Ltd.. – VP, IR
CONFERENCE CALL PARTICIPANTS
Rommell Dionisio
Wedbush Securities Inc. – Analyst
PRESENTATION
Rommel Dionisio – Wedbush Securities Inc. – Analyst
All right, everyone. I guess we’ll get started on the next presentation. The Company has, obviously, been a loyal presenter here for a number of years and one of our favorite names, continues to be, and certainly one of our outperformers, Herbalife. And representing the Company is the Head of Investor Relations, Amy Greene. Amy?
Amy Greene – Herbalife Ltd. –VP, IR
Thanks, Rommel. So, I’m going to spend some time today giving you a quick overview of Herbalife, what we do and, I think importantly, why we’re growing and what we’re expecting as far as forward growth.
Safe Harbor agreement – I’ll point you to that. It’s also on the website and in every other publication.
Okay, so the story – Herbalife’s story is kind of predicated on a few key things. The Company’s products have to be relevant. We address three key global megatrends and we’ll talk about what they are in a few minutes. You’ve got weight management, anti-aging and the need for supplemental income or underemployment.
Our growth over the past few years has been predicated by the distributors changing the way that they take the products to market. So, there’s been a – the distribution model has morphed and has found an exponentially larger audience and that has been driving or growth.
We take the cash that we generation and one of the ways that we use it is to grow our brand and we do it through kind of confidence marketing or building of brand equity. You’ll see us sponsoring teams, whether it’s the LA Galaxy wearing Herbalife jerseys or Leo Messi or F C Barcelona. Different things like that where we can communicate the – something behind the healthy, active lifestyle and create some brand equity.
We’ve had very strong financial performance over the past couple of quarters. We generate a lot of cash and we return that to shareholders through a dividend and through our share repurchase authorization.
As I mentioned, the global megatrends are – we look, whether it’s the business model or the product portfolio, we look for them to fit somewhere in the sweet spot between these three things — obesity, the global obesity epidemic, and aging population; or underemployment. And the intersection of those three things creates a spot for our distributors to grow their businesses.
When we look at our business –what our product portfolio is, 60% of our sales are in what’s categorized as functional foods. The meal replacement shake – we call it Formula 1 – that is 30% of our sales last quarter. It’s imported into most markets as a food item.
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FINAL TRANSCRIPT
Dec. 6,2011/10:45PM/HLF-Herbalife Ltd at Wedbush California Dreamin’ Consumer MAC: Management Access Conference
So, people, I think historically, think of the Company as a supplements company. Surprisingly, in reality it’s less that half of our targeted nutrition category. The rest of the sales are of things that are an aloe drink, an herbal tea or that meal replacement shake. So, much more food based than supplement-based.
And the real replacement shake that I mentioned, Formula 1, we’re the largest player in this market globally. Based on Euromonitor data, last year we had 33% market share. Number two is this little company called Unilever, with this little tiny product called Slim Fast. After that, you’ve got Amway and after that it breaks down to a full list of providers with nobody having material market share. So, I think it’s meaningful. It’s a $5.2 billion category and we definitely kind of own it, for lack of a better term.
One of the points that we made when we look at the summary slide is the change in the distribution model. We are a direct selling company. Everything we sell goes through an Herbalife distributor. Traditionally, the way that Herbalife distributors sold their product was to sell you a canister or a bottle of product.
We had a distributor in Mexico that came to us one day and said, I love the product. There’s a huge need for it in Mexico, but the addressable audience is people that can afford to buy a month’s 30-day supply of that shake is small. Can you package it in daily sachets so that I can sell it on a per-day basis, which is how they can afford it? We couldn’t.
He said fine. He opened the front door of his house. He invited friends and family in to what her called his nutrition club and he charged them a daily membership fee for the advice and coaching and his expertise and while they were there, he served them a serving of an aloe drink, a tea and the meal replacement shake.
So, he effectively created a daily price point out of something we could not. That took off in Mexico. Net thing you know, there were almost 20,000 nutrition clubs in Mexico. The US Latino market saw the growth that was happening in Mexico and thought, we can do that, too.
So, basically what you say when your look at direct selling is traditionally direct selling is done with medium and high-priced products that’s done—sold infrequently, whether it’s a catalog party or a spa party or I call you once a month and remind you to order products, whatever it is, high customer acquisition cost and it’s pretty inefficient for distributors because the onus is on me, as the distributor, to call you to remind you to order the product or to try to sell you product.
With daily consumption, what you got was a business model that has incredibly frequent interaction between the consumer and the distributor. The consumer is coming to the distributor in a physical location called a nutrition club. They are coming in and they’re paying a daily price. They’re being served the product. So, you’ve got small purchases made really frequently, which radically increases the addressable audience that can afford to consume the product. And lastly, it’s a more efficient model for the distributor, because the consumer is coming to them.
These are kind of the benefits that we have seen and continue to see from it. The frequent interaction and the consumption of product, now I know when the consumer is coming into a nutrition club as a distributor, I see them consuming the product. I’m serving it to them. In the old days, I’m—you’re buying a canister. You’re taking it home and I hoping that you actually are using it every day, but I don’t know.
Now, if you’re coming in and I see you, I have a dialogue with you. I know what you’re eating. I know who your kids are. I know what’s going on in your life, which creates very long-term customers, which keeps them sticky, i.e., the frequent interaction and we call it—that’s kind of our virtuous cycle.
Now, what has daily consumption done to our business? The gray bar looks at what per capita consumption is in these—was in these markets in 2003. The green bar is exactly the same measurement only 2010. And chronologically, these are the markets that began using daily consumption the earliest.
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FINAL TRANSCRIPT
Dec. 6,2011/10:45PM/HLF-Herbalife Ltd at Wedbush California Dreamin’ Consumer MAC: Management Access Conference
So, as I told you, Mexico is where—was the birthplace of nutrition clubs. Per capita consumption was 1.2 volume points per person in Mexico in ’03. Last year it was 5. US Latino market, you see a similar 5X growth. That started in ’06. Taiwan was next to adopt nutrition clubs in 2007. You see 4X growth, Korea the next year, Brazil and now that we’re in 2011, what we’ve seen is that the success that all of these distributors have had with daily consumption has motivated more distributors in more countries to try this business method and that you get the beauty of kind of a snowballing effect.
So, the growth that we’ve been seeing in our top line and our volume over the last year has been this expansion going into more countries.
I get a—as we’ve talked with investors more about nutrition clubs and taken more of them to see them, it has a very bricks and mortar element to it, even though it’s distributor funded. It looks like something that investors are accustomed to, so they begin asking for demographic information. And as a company, I don’t transact any—we don’t transact with the end customer, so we do—we hired third-party survey companies to go into nutrition clubs and find out, what does the nutrition club consumer look like.
And in the US, we discovered that under—that 50% of the nutrition club members are under 35, 60% are female and 60% of them have some form of employment, with 40% of them employed full time. Interestingly, the gender mix is much more evenly split than most people presume direct selling companies to be. People think of direct selling and they think it’s a women’s business, but, surprisingly, 40% of our customer base is male.
And this is what their purchase—what they do in clubs looks like. So, from a frequency standpoint, more that 50% of the nutrition club consumers in the US say that they attend their nutrition club every day. There’s an incremental 25% that say that they attend three-us days a week. So, we’ve got 75% of US nutrition club members that are coming better than—more than half the week. So, frequency and product compliance is good.
More than 50% of those consumers say that they’re spending an incremental $75 for product to consume away from the club. So, whether that’s buying multi-vitamin, or whether it’s buying a heart healthy product or whatever, it speaks to what the disposable income ore what the purchasing power is of the customers at nutrition clubs.
More than 40% say that they’ve attended a nutrition club for more than one year. So, it’s a very sticky customer. One thing you’ll notice if you come to a nutrition club with, which I would encourage all of you to do and I’m happy to – I travel all over the country, taking people to clubs, so let me know if you want to see one. Distributors are loathe to talk of a diet. What they talk about is a healthy, active lifestyle. Formula 1 is a well-balanced meal. It happens to be a well-balanced meal that has 200 calories.
So, if you were consuming a 600-calorie meal and you’re now consuming a well-balance 200-calorie meal, just from caloric substitution, the benefit is that you may, if it was your goal, lose weight. You may gain weight having a well-balanced meal. It just depends on what your goal was.
The beauty of not talking about a diet is it doesn’t have a finite end. If I was to say the goal is to lose 10 pounds what does the distributor do on the next day? It’s—so they talk, instead, healthy, active lifestyle.
And the benefit of frequency of visits, the benefit of monthly spend and that the customer stays and it’s sticky is that you have very successful operators. In the US, more than 50% of the nutrition club operators said that they’ve been operating their club for more than a year. This was done last summer and one year was the highest increment that we gave them at the time. So, it’s all depending on how long the club is in operation.
One of the questions we get often is, okay, so you’re in 79 countries and if daily consumption is driving your business, how many countries and what part of—what does the life span of a nutrition club look like? So, let me spend a minute talking to you about this.
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FINAL TRANSCRIPT
Dec. 6,2011/10:45PM/HLF-Herbalife Ltd at Wedbush California Dreamin’ Consumer MAC: Management Access Conference
From a – what we look at, starting on the left, is inception, going to expansion, going to enhancement. So inception is kind of the acculturation period. So, when a group of distributors decide to do nutrition clubs in a given market, it’s going to take a little while for them to figure out what’s going to make a club work in their culture, in their country, in their neighborhood. It just depends. So, we tend to look at that as about a two-year window where they’re playing with what business method, what do the clubs look—what do they look like, where do I open them, that type of thing.
Once they identify a model that works for them, you tend to see this period of expansion and that’s that rapid duplication of clubs that you get, which drives a lot of volume growth and a lot of distributor engagement. After that, you have this enhancement period where you don’t see as rapid a growth in the number of clubs, but you see an increased efficiency and productivity in the clubs. It might be higher ticket – they’re selling more incremental product in there, they have more members, things like that.
When we look at our countries, there’s only five of them that are in the enhancement stage and they’re kind of the five that I showed you only the earlier graph that looked at where they started and where they are. So, you’re looking at Mexico, the US Latino market, Korea and Taiwan. Those are really the only ones that I would say are in enhancement.
Expansion you’ve got the US general market where we’re seeing very strong growth. You’ve got Brazil, Russia and India. The other markets are pretty much in inception, because you’ve got a lot of markets and a lot of distributors that are working on clubs and you’re seeing the benefit of the volume growth, but we’re not necessarily seeing that rapid duplication yet. But we fell pretty comfortable, based on the data we have, that over the – over time, you have more countries that move from inception to expansion to enhancement and that’s where we see—that’s kind of the lifecycle we’ve seen.
I mentioned the things that we do to drive our brand – Leo Messi, Indy race car. We sponsored the World Football Challenge this year on ESPN and Univision and everything. Anything that has that connotation of healthy, active lifestyle and, frankly, soccer works well for us because it’s a global sport and it matters everywhere but here.
Now, from a financial standpoint, in the third quarter we saw volume growth in all our regions, 23% globally. China, which is the smallest of our regions grew 2%, but everybody was up.
Engaged distributors – this is a graph of average active sales leaders, which looks at the average number of sales leaders that ordered in the quarter compared to the average number that ordered in the prior year quarter. So, it’s just an engagement metric, but we’re – we are thrilled with the fact that engagement amongst distributors has continued to row over the last – last year plus.
A lot of people presume that our growth is predicated on our expansion or growth in emerging markets. It’s not. We’re pretty well balanced between emerging and established markets. This is based on World Bank definition. Established markets were up 20% in the quarter. Emerging were up 27% and it’s 53.5% versus 46.5% of sales.
So, the fact is growing – grew last quarter double digits and Korea is a very strong growth market for us definitely helps bolster the established market category, while the daily price point is incredibly meaningful in growing the emerging markets. So, we have the benefit of both.
Net sales grew 30% in the quarter. EPS grew 45% and this is the guidance that we provided when we reported. We guided for 17% to 19% volume growth, 19.7% to 20.2% for the year and next year for volume to grow 8% to 10%.
The beauty of our business model is that we generate a lot of cash. Net income is a fabulous proxy for free cash and what do we do with the free cash? We return it back to shareholders. Since 2007, which is when we instituted the dividend and the repurchase authorizations, we’ve returned 97% of our reported net income back to shareholders through one of those two methods.
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FINAL TRANSCRIPT
Dec. 6,2011/10:45PM/HLF-Herbalife Ltd at Wedbush California Dreamin’ Consumer MAC: Management Access Conference
And, since 2004 we’ve had a compound annual growth rate of 10.8% and the 2011 and 2012 bars look – hit the mid-point of the range for guidance that we’ve provided to give you an idea.
And then I’ll get back to where I started. So, it’s a pretty simple presentation, but it – there tends to be lots of questions about it, so I’ll go ahead and go to Q&A and see if anybody has any today.
QUESTIONS AND ANSWERS
Amy Greene – Herbalife Ltd. – VP, IR
Okay, yes?
Unidentified Audience Member
(inaudible question – microphone inaccessible)
Amy Greene – Herbalife Ltd. – VP, IR
Raw materials and pricing. We have 80% gross margins and so – and we have two meaningful inputs, soy and resins or packaging kind of thing. We have seen a little bit of commodity cost increase, nothing that we can’t handle.
We tend to think of pricing based on local inflationary – whatever’s going on in a local market. In highly inflationary markets, where necessary, we’ll take price, but we weight it against what the general economic conditions of that country are, so there may be a place where it would make sense to take it, based on what inflation’s going on, but if the general economic climate is such that the distributors think it would be unwise to take price, we listen.
And so, if you look over the last couple of years, we tend to average, on a global basis, about 2% to 4% price, but there can be some countries that don’s have price increases for a year or two and there are others that – where you have to do it ob a regular basis. It just depends.
Unidentified Audience Member
(inaudible question – microphone inaccessible)
Amy Greene – Herbalife Ltd. – VP, IR
Sure. Vertical integration. In – toward the end of 2009, we bought a manufacturing facility in Orange County and we, as a large player in meal replacement and the supplement industry, we thought it was prudent to begin to manufacture for ourselves. It’s a protectionist strategy. We like controlling as much of the supply chain and the manufacturing as possible
So, we bought a facility here. We spent $1 million on the facility. We put $20 million in CapEx, for $30 million, the facility can do approximately 35% of our global production. We have a manufacturing facility in China that manufactures for China.
Last quarter, we manufactured about 30% of our overall global volume. The target – the goal is to get to closer to 60%. We will do that through some regional manufacturing. We need to be less dollar-cost denominated, if possible. Brazil manufactures some for Brazil. India manufactures in India, but there are other places we would like to put some facilities and it’s very much driven by where we’re seeing growth and regional trade blocs.
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FINAL TRANSCRIPT
Dec. 6,2011/10:45PM/HLF-Herbalife Ltd at Wedbush California Dreamin’ Consumer MAC: Management Access Conference
So, we’ll work toward it, over time, but the capital needs necessitated by going more vertical are built into the cap ex guidance that we give. It’s a very low capital business, as a general rule, as you can imagine if it costs $30 million to do a facility of the size here in Orange County, it is probably less capital – intensive in other places.
And, let’s see, while I’m on cap ex, I might as well give it to you. It’s typically about 3% of net sales and ex-maintenance – ex-maintenance CapEx, the other two buckets are manufacturing and technologies or IT.
Any other questions? You guys are way too easy today. Is that it? Okay. Well, thank you and I’m upstairs in 7 if you need me.
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