Herbalife LTD. (HLF)

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Herbalife Ltd. (HLF)

Q2 2011 Earnings Call

August 2, 2011 11:00 a.m. ET

Executives

Michael O. Johnson – Chairman & CEO

John DeSimone – CFO

Desmond Walsh – President

Brett Chapman – General Counsel

Analysts

Mike Schwartz – SunTrust

John San Marco – Janney Montgomery Scott LLC

Pierre Ostlund – Jefferies & Company

Tim Ramey with DA Davidson.

Scott Vanwinkle – Canaccord Genuity

Christopher Ferrara – Bank of America, Merrill Lynch

Anand Vankawala – Avondale Partners

Presentation

Operator

Good morning, and thank you for joining the Second Quarter 2011 Earning Conference Call for Herbalife Ltd. On the call today is Michael Johnson, the company's Chairman and CEO; the company's President, Des Walsh; John DeSimone, the company's 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.

Brett Chapman

Before we begin, as a reminder, during this conference call, comments maybe 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 and our SEC filings for a complete discussion of the risks associated with these forward-looking statements and our business. In addition, during this call certain financial performance measures maybe discussed that differ from comparable measures contained in our financial statements that prepared in accordance with the U.S. Generally Accepted Accounting Principles, referred to by the Securities and Exchange Commission 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 website, herbalife.com to find our press release for this quarter which contains a reconciliation of these measures. Additionally when management makes reference to volume during this conference call we are referring to volume points.

I'll now turn the call over to Michael.

Michael Johnson

Thanks Brett. Good morning everyone and welcome to our second quarter earnings call. This has been a very strong quarter. The strong top and bottom line results that we reported yesterday are the results of the hard work of 2.3 million distributors and all of team Herbalife. We'd like to start off by saying thank you to everyone for their commitment to our vision and our mission for nutrition.

While we are beginning to see the hard work bear fruit, we believe there is still so much more opportunity ahead of us. Frankly, we're just getting started. Let me start this call by recapping some of the financial results included in our earnings release.

Record volume points of 980 million, up 17% over 2010. Record net sales of almost 880 million, a 28% increase over the very strong results of the prior year. Record earnings per share of $0.88, a 35% increase over our earnings of the prior year. Notable, in our record performance is 21% increase in average active sales leaders over the prior year. And finally, our cash from operations was $143 million, an increase of 74% compared to the prior year and a record for us.

The drivers of our growth continue to be distributor engagement and expansion of daily consumption. Through daily consumption, more distributors are interacting with more consumers on a regular basis and these consumers are experiencing product results. This creates a sticky customer. In response to a survey of U.S. Nutrition Club members, nearly 60% said they attended a nutrition club everyday, almost 80% attended more than 3 days a week, and more than 40% have been attending the club for longer than one year.

In a similar survey, Mexico, more than 50% of members responded that they attend everyday. And 90% attending at least three times a week. Korean clubs have reported similar statistics with 35% attending everyday and more than 80% visiting at least 3 days a week.

The organic nature of distributor growth coming from with interim member base is as exciting as it speaks to our longer term growth opportunity. The exciting thing we're seeing is that the newest distributors are coming from our constantly growing base of Nutrition Club members.

We're seeing the development and training the new distributors from the member base of Nutrition Clubs or lifestyle centers. The successful implementation of daily consumption continues to drive both distributor engagement and retention. For the second quarter, average active sales leaders increased 21% over the prior year and new distributors increased 20%, both increased in all six of our regions.

You may remember from last quarter, our 2010 sales leader retention rate was 48.9%, which we believe is an industry-leading number. These metrics of activity and retention tells a story of the strength we're seeing underlying our growth story.

Our distributors are also inspired by the seed to feed strategy, represented by our state-of-the-art manufacturing facility in Lake Forest, California. We believe we're continuing to raise the bar in the supplements industry. We have toured thousands of distributors through the facility and their confidence was echoed by Wall Street analysts in a recent report, “Herbalife's innovation and manufacturing facility is essentially a branding and packaging facility, but undoubtedly one of the most impressive nutritional supplement facilities we have ever toured. And we have toured dozens of facilities over the last 15 years”.

If the facility is impressive to a seasoned analyst, imagine the impact on an Herbalife distributor of a tour through their very own manufacturing facility and then returning home to tell their customers in down line how proud they are to be associated with Herbalife and that confidence they have in the products that they are selling.

Read the rest of this transcript for free on seekingalpha.com