Herbalife LTD. (HLF)

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Herbalife Ltd. (HLF)

Q3 2008 Earnings Call

November 4, 2008 11:00 am ET


Brett Chapman – General Counsel and Secretary

Michael Johnson – Chairman and Chief Executive Officer

Des Walsh – Executive Vice President

Dr. Steve Henig – Chief Scientific Officer

Rich Goudis – Chief Financial Officer


Simeon Gutman - Goldman Sachs

Chris Ferrara – Merrill Lynch

Karen Howland – Barclays Capital

Doug Lane – Jefferies & Co

Scott VanWinkle – Canaccord Adams



Good morning and thank you for joining the third quarter 2008 earnings conference call for herbal life. On the call today is Michael Johnson, the company’s chairman and CEO. Des Walsh, Executive Vice President, Rich Goudis, the company 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. You may precede, sir.

Brett Chapman

Good morning. 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 in 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 U.S. generally accepted accounting principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures.

We believe that 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, herballife.com, to find our third quarter press release containing a reconciliation with these measures. I'll now turn it over to Michael.

Michael Johnson

Thanks, Brett. Good morning everyone on Election Day in the United States and to our friends worldwide. Welcome to our Third Quarter 2008 Earnings Call. You know these are interesting times. Our credit markets are in turmoil, our financial failures are abounding, and the U.S. unemployment is projected at the highest levels since the 1980’s. As we consider the big picture in the economic challenges here and around the world, it has been and will likely continue to be for some time a punishing operating environment for many companies in many industries.

Herbalife will not be immune, but let me address why we believe our business offers compelling advantages in this environment. At Herbalife we offer product solutions, which address the global obesity epidemic and we provide a business opportunity that enables people the opportunity to earn part time and full-time income in one of the most uncertain economic times in history.

We offer a healthy meal for around $2, a much healthier and lower cost alternative than most fast food options. In addition, our business is globally diversified operating in 69 markets. We have significant revenue and growth opportunities throughout Asia, Latin America, Eastern Europe, and here in the U.S. as our distributors dive deeper into penetration into their markets, and they focus on business methods that create daily consumption of our products.

During the quarter our top ten markets grew 21% year-over-year, and four of our top 10 markets grew at an accelerated pace. We believe the reasons we are successful in these chaotic times is the focus on daily consumption methods that provide a sticky customer, resulting in higher retail and retention figures. We continue to see markets that are evolving to a better balance of recruiting, retailing, and retention by focusing on daily consumption models.

Markets such as the USA, Brazil, Taiwan, and now Korea have all benefited from this ongoing conversion to daily consumption. Moreover, our products low price point on a per-serving basis helps our distributors attract new customers who are looking for weight management and good nutrition at an attractive price, and in this weak economic climate many consumers are looking for ways they can trade down on their purchases.

We have revenue of $602 million, which reflects our 19th consecutive quarter of double digit revenue growth, and one which we generated almost $80 million in cash flow from operations, an increase of 19% year-over-year. We did not repurchase shares during the quarter considering the market volatility, and a desire to pay down debt remained conservatively capitalized during this period of uncertainty in the credit markets.

We have an under leveraged balance sheet, little or no reliance on the capital markets, and we are self-funded from strong free cash flow generation. In a normalized market we would be buyers at these levels during the quarter. We look to make opportunistic purchases of our stock with market volatility wanes, and we believe the valuation is dislocated from the fundamentals.

Net income for the quarter was $58 million, an increase of 20% compared to a year ago. We reported diluted earnings per share of $0.89 reflecting an earnings growth of 33%. While earnings per share was ahead of expectations in the third quarter, we were increasingly impacted by the unprecedented fluctuations in foreign exchange rates, as well as a slow down in volume point growth in a few of our top markets.

Foreign currency headwinds are a consequence of the global economic crisis; however, our volumes slowdown reflects issues that are unique to Herbalife. Going forward, to assist investors, we will provide volume point growth guidance as well as foreign exchange assumptions for the key currencies which could affect our financial results.

Despite solid positioning throughout many of our markets, we are actively refining our growth and profitability plans to address the global market changes. We anticipate that current spot rates currency headwinds are going to have a negative impact on revenue and earnings per share in the fourth quarter of 2008 and potentially throughout 2009.

Additionally, we may experience inconsistent volume growth in certain markets primarily reflecting the transition within these markets to the daily consumption model. In the face of these unprecedented times in the economy, the opportunity for ongoing top line success speaks volumes to the dedication of our distributors. Many of our distributors started, or increased, their business in tough economic times, and we believe their unwavering commitment will allow them to continue to grow their business.

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