HLF-2012-Barclays Cap Retail Conference

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EDITED TRANSCRIPT
HLF – HERBALIFE LTD at Barclays Capital Retail and Restaurants
Conference

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EVENT DATE/TIME: APRIL 24, 2012 / 2:30PM GMT

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April 24, 2012/2:30PM,HLF – HERBALIFE LTD at Barclays Capital Retail and Restaurants Conference
CORPORATE PARTICIPANTS
Ibi Fleming Herbalife Ltd.-SVP and Managing Director, North America
Amy Greene Herbalife Ltd. –VP,IR
CONFERENCE CALL PARTICIPANTS
Brian Wang Barclays Capital Inc. – Analyst

PRESENTATION

Brian Wang-Barclays Capital Inc.-Analyst

All right, great. I think we’re going to get started now. So,for those of you who don’t know, my name is Brian Wang, I work at Barclays, I work with Meredith Adler as well, covering the food and drug retail as we just recently launched on healthy living as well, and we’re very honored to welcome Herbalife here today. They’ve experienced tremendous growth over the past several years, partly attributable to the Company’s switch over to daily consumption form previously selling bulk orders
less regularly. It’s a truly global Company, operating in over 80 countries, with only about 20% of sales actually coming from the US. We recently initiated coverage, like I said, with a one overweight rating on Herbalife, and—but we do think that is still definitely in the early stages of a multi-year growth story.

So, with us today, we have Senior Vice President of North America, Ibi Feming, {I’ve shown that}; and VP of Investor Relations, Amy Greene, who many of you I’m sure are quite familiar with. So, well, we’ll be doing the fireside chat format, so I’ll ask a few questions and then we’ll open it up and hopefully a lot of people have questions.

So, I guess, just to start with just big picture king of global macro. Your Company has obviously performed very, very well over the last several years. Do you believe that the global economic downturn benefits, hurts or how that impacts Herbalife multilevel marketers in general? And if it started to improve or if we start to see signs of improvement globally, how do you think that impacts the business?
Amy Greene-Herbalife Ltd.-VP, IR

I’ll take it from a global standpoint and then Ibi can talk about it for North America. But I think, for us, particularly with daily consumption, the economic downturn has not been—has not necessarily been a driver, I think, I—or an impediment. I think that there’s enough perhaps (technical difficulty) to think that industry to be more counter-cyclical than it may necessarily be, because in order for (technical difficulty) put a need for supplemental income, people may sign up to be a distributor.

They’re only going to be a successful distributor, if they’re able to sell through to a consumer. So you need both, you need the business opportunity and you need the product driver. And so, for us, we look at more the macros from the standpoints that weight management is—there’s a growing need around the world for weight management. There’s also a need for supplemental income due to underemployment.

So it’s just both sides of the coin that are helpful. If the economies around the world were to improve, one of the beauties of it is that you’d probably have hired a sizable income, which creates more the ability for distributors to sell from the catalog to a larger extent than just within the daily membership fees within the club. So that can always be a positive. What about—what do you think about (technical difficulty)?
Ibi Fleming – Herbalife Ltd.- SVP and Managing Director, North America
(technical difficulty) So when economy is great, it’s great because (technical difficulty) money they spend and buy the products, become a (technical difficulty)opportunity for those folks who are looking for the best opportunity. So(technical difficulty).
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April 24, 2012/2:30PM,HLF – HERBALIFE LTD at Barclays Capital Retail and Restaurants Conference

Brian Wang – Barclays Capital Inc. – Analyst

{It’s like} a win-win. So I guess just on the Nutrition Clubs and the daily consumption, I guess, if you could just talk a little bit about what—there are other forms of daily consumption beyond the Nutrition Club that you could just touch briefly on what those entail, what those are?
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Amy Greene-Herbalife Ltd.-VP, IR

So within the Nutrition Club model, inside the Nutrition Club activities, I think, (technical difficulty) other daily consumption models, other weight-loss challenges, we have headcount (technical difficulty). And so the way I think about the Nutrition Clubs, for those of you that haven’t done, is they are—it’s a fixed location that the distributor rents to facilitate those Nutrition Clubs. So they multipurpose the space and one way to do that other than just operating a Nutrition Club that we’ve seen very successful in a lot of markets is a weight-loss challenge, which is very similar to that plays off the TV shows biggest loser kind of thing. So there is a curriculum and {there is still} that some people come in and they’re tricked or taught about nutrition and healthy active lifestyles, and they (technical difficulty) curriculum for each week. This all kind of revolves around consuming the product.

And then, the fit camp that Ibi mentioned (technical difficulty) are really taking hold in a lot of the general market communities and (technical difficulty) with that gen age group that we would like to highlight recently that’s kind of 35 and under that are not—they’re focused on weight management, it’s not just they’re focused on healthy active lifestyle. So within their Nutrition Club on a given morning or afternoon they will host what’s essentially a boot camp. And it’s a free exercise, workout regiment that’s led by one of the distributors that—and sort of creates a funnel. So we have a club in Los Angeles that—so really kind of kicked these things off and they’ll have 100 to150 people on any given morning as a fit camp, there is a free boot camp and then after that, they invite them back to the Nutrition Club for their (inaudible), because one of the tenets of working out is that you want to have pricing within 30 minutes of finishing your workout.

So it’s a natural progression and buy them back to the club for a {protein shake}. And these are people who aren’t necessarily—who are more interested in healthy active lifestyle than just a weight-loss element. And so it creates a very good customer draw and it’s a very low threat {being that’s } inviting them under a nutrition club, so it’s more of the activity that takes place in the nutrition club, at least for daily consumption, because they’re even moving away from (inaudible) boot camp because it’s not just going to the beach in Santa Monica, for example, and exercising . If they have (inaudible), so the moms that bring in (technical difficulty) their kids and they go strolling somewhere, yoga classes. So it’s all about having some kind of activity that then they come back to this nutrition club where they have their (inaudible) shake.

Brian Wang – Barclays Capital Inc – Analyst

And just for the audience, I can speak first-hand on – they had an Investor Day about a month ago out in LA and Amy had us all up at 6 AM, doing a good workout and having our nutrition shakes after. So {is a—definitely—}

Amy Greene- Herbalife Ltd. – VP, IR

If you’re going to come to LA, you might well (inaudible).
Brian Wang – Barclays Capital Inc. – Analyst

Forget about jet lag but you’ve got a topic of Gen H and sort of the targeting a younger consumer now, 35-year-old and younger.Is it the Company’s intention to sort of target like that younger demographic or a different income demographic like with the Herbalife24 sports nutrition line or how do you guys fell about that?

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April 24, 2012/2:30PM,HLF – HERBALIFE LTD at Barclays Capital Retail and Restaurants Conference

Amy Greene- Herbalife Ltd.-VP,IR

So I mean (technical difficulty) asked the question is it the Company’s intention, basically it’s the distributors’, right? I mean the distributors are out there working, and they don’t see—they just see a face and they’re not {mocking}, and okay, I’m going to talk to the person because they’re young or I’m going to talk to this person, because they’re(inaudible)person, because they’re African-American. They talk to everybody about the business opportunity and the products. For the Company though, we do see, right. So we dos see the segments that can provide Herbalife a broader base.

So, for example, the African-American initiative that we’re doing, it started about three years ago}. We see distributors moving up the marketing plan with that. So we invite them on the stage. So it’s like with {light}, right, I mean, it’s like if I’m going somewhere and I want to be able to relate to whatever it is being presented, I wanted to be someone that I can relate to. So that’s what we try and do a Herbalife in terms of the corporate side.

With the Gen H’ers, which is distributors that are 35 and younger, for example, last year, on the general market side we had 11 new {presidency} members. Out of the 11 new presidency members, eight were considered Gen H. So, because we have now that new distributor that is young, so we do. We bring them up on stage. We talk about how they do the business. Is it a little different than distributors been around for 30 years and that’s how we basically help distributors see the opportunity. And because distributors recruit-drug selling as a general rule is typically very friends and family oriented.

So I’m by nature going to talk about the business and/or sell product and recruit people that I come and contact with. And so as a segment begins to grow, it would take on a natural momentum, it tends to take on a {logic} event.

Brian Wang – Barclays Capital Inc. – Analyst

And then just sort of continuing on with that topic, when you – and Herbalife does create new products, because it is a network marketing model, which is –obviously is different than just general retail, can you talk a out a little bit, I guess, when you launch a new product line, for example, Herbalife24, do you look to –like it’s a plan to target new distributors or kind of have the existing distributors add on to their purchases or do they target new customers or maybe sort of –?

Amy Greene-Herbalife Ltd.-VP,IR

{Sort of}, right, and we’ve launched new products, we want to target the existing distributors and then obviously the distributors target potential new customers. So the Herbalife24 has opened up the door for that different customer. But basically, new products for us just—they bring excitement and engagement to the distributors. I mean our core products are still the top five and that’s really – the number one product has been around for over 30 years. But it’s definitely important for the market because it does bring in excitement and engagement to the distributors.

Brian Wang – Barclays Capital Inc. – Analyst

And then, one of the sales initiatives that you guys sort of talked about a little bit at the Investor Day, or I guess, a little bit more in detail is a city-by-city approach, where you’re kind of sharing – having your top distributors in each kind of large city, kind of take responsibility for other distributors and for the brand and everything. If you could just talk a little bit more detail about that and do you believe it’s more sort of {easy}, I guess? Do you believe it’s more applicable in the US or in less developed markets, I guess?
Amy Greene- Herbalife Ltd. – VP, IR

Yes. No, actually, that city-by-city approach is taking hold everywhere and all the regions, and so for example, for North America, we’ve taken the concept that Mexico did, so Mexico about two years ago launched a {pre-immunization} program. So basically, before our sales folks were in the

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April 24, 2012/2:30PM,HLF – HERBALIFE LTD at Barclays Capital Retail and Restaurants Conference

office, so what Mexico did, they, started putting salespeople in the different regions So this way, when a person wakes up, they’re basically living with a distributor, not really technically again with a distributor. But—

Ibi Fleming – Herbalife Ltd. – SVP and Managing Director, North America

For a reason by the way, Mexico carved itself up into X number of geographical entities with Mexico. So whether it’s population dense or the ability to traverse the area, so it’s broken something to X number of regions and yes, for us we did it we took a look at our top 10 {MSCA} areas.

So, for example, North America did I think 980 million volume points last year. The US was 960 million. The top 10 MCSA areas for us represented 43% of that. So then, we’ve really taken in North America, we have five regional tasks that re in different areas of Chicago, so in California, Houston, New York, New Hersey area, we have one in Canada and those staff, they’re working with the distributors every day, they’re having meetings with them, they’re training on biz works, how to look at their business, how to see within the organization who is moving up the marketing plan.

So it’s really in fact day-to-day and that’s phase-to-phase that that’s happening out there is city-by-city approach. So then, you were showing them numbers about their area, for example. We give them stats. This is how many, how – if you’re only working with Latino market, this is how many we have in population in this area of Latinos. If you work in both markets, if you happened to be Latin, you’re bilingual, you can recruit both sides. So it really engages a distributor.

Brian Wand – Barclays Capital Inc. – Analyst

Okay. And then, just talking – staying on that topic of sort of sales initiatives, can you just talk a little bit about, I guess it was a couple of years ago, I think that you changed the sales leader qualification status, where I guess it kind of coincides with the growth of the daily consumption, but if you could just talk briefly about – about that?

Ibi Fleming – Herbalife Ltd. – SVP and Managing Director, North America

Yes, so for us, here in the US, so in about 2005 is when we started seeing deduction of the Nutrition Clubs from Mexico to the US and it came first on the Latin side. So in 2005, the Latin business represented roughly 30% to 35% of the total US business. And then, when they adopted the Nutrition Club model, today, the Latino Business represents roughly 60% to 65% for the total US. And – but basically, for the Latino market, it was a gradual – it was their already because jus the way they operate it, they weren’t purchasing large amounts of volume.

They were already purchasing small amounts of volume points. What we’re seeing is, is the shift now with the general market. They’ve definitely adopted now the Nutrition Club model as well. We’re seeing the general market group over 20% last year and it’s all from the daily consumption model, the nutrition club model. And—but it’s really run the journey, right. I mean, North America, as I always keep saying, it’s the oldest region, over 30 years old and that just started two years ago. So it’s a gradual shift that we are seeing.

Amy Greene-Herbalife Ltd. –VP, IR

And to those that aren’t necessarily really familiar, so when you sign up at (inaudible) you would sign it to be a distributor that would give you an initial discount on your product purchases. But as you – to qualify as a sales leader, you have to – under the traditional methods, you have to purchase X amount of volume in one month or in two consecutive months.

And so what we tested and then more it’s grown with at the end of 2009 was the ability to become a sales leader by buying 5,000 volumes point every 12 consecutive months, because what we saw was daily consumption and particularly with nutrition club was distributors ordering the – just the amount of product they need to service and to work within their nutrition clubs and one of them to be able to stay in the business and grow their business with incremental purchase instead of feeling the need to buy a lot at any one period of time.

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April 24, 2012/2:30PM,HLF – HERBALIFE LTD at Barclays Capital Retail and Restaurants Conference

And when you look at some economically less-developed markets, the idea of buying 4,000 or 5,000 volume points work of product in one or two consecutive months seems like an instrumentable amount of money in some places. And giving them the ability to accumulate those purchases over 12 months has really changed their thought process about how – what it takes to become a sales leader for the distributor.

Ibi Fleming – Herbalife Ltd. – SVP and Managing Director, North America

And it provides an opportunity for better training. So if I recruit Amy, for example, I’m taking the time to really train her on the business, how to work the business, how to run up a nutrition club versus signing someone up, putting in 4,000 volume points now, figure out how am I going to retail this product. So it’s also built a solid foundation and people stay. So they’re sticky business.

Brian Wang – Barclays Capital Inc. – Analyst

And just on the topic of training, I think that’s sort of the answer to this question, but I guess on the last call, it sounded like you guys were moving more, I guess, away from the home-based nutrition clubs and more towards the commercial space nutrition clubs?

Ibi Fleming – Herbalife Ltd. – SVP and Managing Director, North America

Well, really so when Mexico started nutrition clubs in 2003, I believe, they were initially founded in distributor term. And they – but as they began to be adopted, then the Latinos in the US began opening nutrition clubs in 2005, what they saw
Working were home-based clubs, so they started I think in Manhattan.

But then, when the Koreans and Taiwanese wanted to do nutrition clubs and they came over, when they went back to Korea and Taiwan, it’s not culturally acceptable to have a bunch of branded people in your horse, that’s in your apartment every day that drink shake. So they’re like to how are we going to make this concept work, oh! we’re going to rent a larger space. They’re going to – and they would open a nutrition club in a commercial location.

So as we began to see the success of that, other distributors were like, (inaudible). I want to leave my house, go somewhere, put a key in the door and actually have this freestanding thing and so we began seeing in the US well , a Latin’s nutrition clubs that may have originally been {intense} more for the commercial.

So in reality, in 2011-2012, Mexico is really still the only country that has a meaningful number of home-based clubs that was the kind of (inaudible). Latino market in the US may have some, but it’s not a huge piece. One of the things that I would have to say that robust that we like to talk about Herbalife and we’re very good at. It’s a propagation of good ideas from distributors and helping them to see best practices from other areas or countries or regions around the world.

Also, the Mexicans saw everywhere else in the word these commercial clubs working and there are benefits to nutrition. There’s benefits to being in your house, there’s benefits to not being in your house. But they begin to see productivity benefits by being in commercial locations. Your hours are longer, you can share the workload across the multiple distributors. There are definitely, but you can invite more people that you would necessarily feel comfortable inviting to your house some random person you et at the market or is it the commercial location, you invite anybody you come across.

So they began transitioning – a lot of distributors they began transitioning from home-based clubs to commercial. So it’s not the companies looking alike which is saying you should do this versus the others, it depends on the distributor’s, individual situation. But it is the reality that we’re seeing is that we are seeing more and more commercial clubs in existence. Yes, with a handful Mexicans, so they have a lot of home-based clubs, so they’re definitely transitioning it.

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