Herbalife LTD. (HLF)

HLF 
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Herbalife Ltd. (HLF)

Q2 2008 Earnings Call Transcript

August 6, 2008 11:00 am ET

Executives

Brett Chapman – General Counsel and Secretary

Michael Johnson – Chairman and CEO

Des Walsh – EVP

Rich Goudis – CFO

Analysts

Timothy Ramey – D.A. Davidson

Scott VanWinkle – Canaccord Adams

Karen Howland – Lehman Brothers

Simeon Gutman – Goldman Sachs

Doug Lane – Jefferies & Co

Smith Alson [ph] – A&A International [ph]

Chris Ferrara – Merrill Lynch

Presentation

Operator

Good morning and thank you for joining the second quarter 2008 earnings conference call for Herbalife Ltd. On the call today is Michael Johnson, the company’s Chairman and CEO, Rich Goudis, the company’s CFO, Des Walsh, Executive Vice President, 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

Thank you, Kevin. Before we begin and as a reminder, during this conference call, comments maybe made that include some forward-looking statements. These statements involve risks and uncertainties, 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 to our SEC filings for a complete discussion of risks associated with forward-looking statements in our business.

In addition during this call, certain financial performance measures maybe discussed that differ from comparable measures contained in our financial statements prepared in accordance with US Generally Accepted Accounting Principles, referred to by the SEC as non-GAAP financial measures. We believe these non-GAAP financial measures 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 Web site, herbalife.com to find our second quarter press release containing a reconciliation of these measures.

I would now turn the call over to Michael.

Michael Johnson

Thanks, Brett. Good morning, everyone, and welcome to our second quarter 2008 earnings call. As you all saw, this is another solid quarter for Herbalife. Our 18th consecutive quarter record revenue, and one in which we generated almost $60 million in cash flow from our operations. In addition, our independent distributor organization grew 12% to 1,847,000, and our distributor leadership team, president’s team, also grew – our president’s team also grew by 12%. And in July, we received five additional direct selling licenses in China. By any measure, this has been an extremely successful period for our company.

We are executing ahead of expectations in tough market conditions. Our business continues to grow with an accelerated pace, and the second quarter is no exception. Our bottom line results were strong, and distributor confidence is unwavered. This earnings call should send a clear signal about our ability to execute despite economic issues and attacks from outside forces on our business. We expect that you have the same trust in our distributors, our products, our business opportunity, and employees that we do. Our fantastic performance gives us the ability to raise our 2008 guidance, which we communicated to you in our press release last night.

Let me update you on two issues that seem to be on every investor’s mind. We want you to have the facts about the Spanish Ministry of Health Alert, and scare tactics around the California Prop 65 labeling requirement. We are in an ongoing dialogue and continue to cooperate with Spanish authorities to help them more fully understand the science and safety of our products. We don’t know how long this is going to take, but we are confident that we are taking the right actions to correct this misperception. I want to stress that no ingredients or products have ever been cited in the Spanish Ministry of Health Alert, and we don’t anticipate that any of our products will be pulled from that market. Des will provide more additional details about Spain later in our call.

As we stated in our June 8th press release on the subject of Prop 65, we have confidence in our ongoing internal testing program, and it validated our results to two highly regarded independent laboratories. Here are the facts. We don’t have a Prop 65 labeling issue. It’s important for everyone to understand that California’s Prop 65 labeling regulation never had anything to do with the safety of our products. We have been asked why we have not released our Prop 65 testing result. And the answer is simple, for competitive reasons. Our product formulas are proprietary, and it’s essentially impossible to conduct a proper Prop 65 test on our products without our formulas.

We operate at the highest level of integrity, and our actions reinforce this point. We have mechanisms in place to continuously look to improve our products, operations, and distribution practices, but we will also defend our company vigorously against malicious manipulation of information and profit-seeking critics. We will continue to build credibility by achieving the business objectives we’ve stated. Our commitment to integrity in our results speak for themselves.

To that end, we posted record net sales of $640 million, an increase of 21% over second quarter of last year. As I’ve said earlier, this makes 18 consecutive quarters of double-digit sales growth. Net income for the quarter was also a record $67 million, an increase of 39% compared to the year-ago period.

We reported earnings per share of $1.01, reflecting earnings growth of 56%. In addition, over the past 12 months, we have returned over $525 million to investors in the form of share repurchases and dividends.

As we announced two weeks ago, the China Ministry of Congress granted us five additional direct-selling licenses. All licenses are effective immediately, except Beijing, which will be activated after the company opens service outlets in the coming months.

Our international diversification has been a strong catalyst for growth, both in new and emerging markets. Our top ten markets, which represent 71% of our business, grew 25% year-over-year, while emerging markets of China, Venezuela, and Peru delivered triple-digit growth rates.

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