Herbalife LTD. (HLF)

HLF 
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Herbalife Ltd.(HLF)

14th Annual ICR XChange Conference Call

January 11, 2012 02:10 pm ET

Executives

Amy Greene - VP, IR

Analysts

Scott Van Winkle - Canaccord Genuity

Presentation

Scott Van Winkle - Canaccord Genuity

Good afternoon everyone. I am Scott Van Winkle with Canaccord Genuity. Thanks very much for being here for the Herbalife presentation. From the company we have Amy Greene, Vice President of Investor Relations. Herbalife has had just a remarkable run in the last couple of years and the fundamentals, basically 20% volume growth on top of 20% volume growth and I am sure Amy will give you more specific numbers on that and I think we are going to see a continuous, very favorable outlook in the stock, a reasonable valuation and certainly the fastest growing direct seller among the major players. Amy?

Amy Greene

Thanks Scott. So thanks for coming guys. I have seen a lot of you break out, so this is going to be more kind of a high level run through, but hopefully I will finish in time and you guys can ask some questions. Safe Harbor statement we all know and love it and then you know let's go through the kind of the key bullet points quickly.

So Herbalife, the growth that we've seen over the last couple of years is dependent on the fact that our products kind of fit three global megatrends. That's going to be underemployment, obesity and anti-ageing. The distributors over the past several years have radically changed the way that they sell the product. The product themselves haven't necessarily changed. We introduced new products here and there and everything but really it’s a matter of how the distributors are taking it to market. We call it daily consumption nutrition clubs and it radically improves or increases the addressable audience and the consumer access.

So we will talk about that. Over the past couple of years we've done a lot of work in strengthening the brand through athletic sponsorships and really a focus on the healthy active lifestyle. So well I will show you some pictures. As Scott alluded to we had very strong financial performance. We generate a lot of cash and we return that cash to shareholders through a dividend and a large share repurchase authorization. We will look at some of those numbers.

The three key megatrends that we always point to; obesity, anti-aging, underemployment and I choose underemployment instead of unemployment because typically it’s the need for supplemental income that will drive someone to a direct selling model rather than the need for total employment. And that seems to be something we see across the board in all 80 countries that we operate in.

Obesity, it’s a growing, not, pardon the pun. It’s a growing megatrend around the world. When you look at the top five markets, four of the top five markets as far as increases in adult onset diabetes and obesity rates. You are looking at India, China, Egypt, Mexico, they are not the countries that most people would immediately associate with obesity, but it’s a huge and growing problem.

China alone, just to give you order of magnitude, only 5% of the Chinese population is obese. But 22% of the Chinese population, adult population is now overweight. So the Chinese government is becoming very aware that they are staring down the barrel of a very big and looming issue on the horizon.

In the third quarter, I put the slide on here because I think it’s important. People think of us, tend to think of us as a nutritional supplement company and I think that’s a misperception because 60% of our sales are functional foods and by that I mean 30% of the sales are of Formula 1 meal replacement shake, 15% of our sales are from the herbal teas and another 10% are of the aloe concentrate or the aloe drink. So those three products which are the ones that are principally served in a nutrition club now account for slightly more than 60% of the sales and are imported in the countries around the world as food items.

Targeted nutrition, absent the aloe, so on the right hand side of that pie chart, that’s the rest of what people would think of supplements or tablets. In the meal replacement business, over the last several years, we’ve seen a drastic increase in our global market share. Euromonitor says it’s a $5.2 billion category globally. We have 33% market share in 2010, up from the 22.6%. Number two in the space would be Unilever with Slim Fast and number three would be Amway. After that, all of the players break down and they become very de minimis very quickly. So, it’s a big category, it’s growing and we’re taking share at the same time.

Now, the thing that’s been driving all of our growth is the way that the distributors have transformed the way they sell the product. Traditionally, direct selling is categorized by medium-to-high price purchases done infrequently. The distributor does not necessarily have a lot of contact with their customer base. They may call them, in some cases, there is a two-week catalog cycle in some companies. Some distributors may call someone to try and get them to plan a party. But it’s not a regular interaction.

What our distributors started doing, we still sell products in that way but the distributors also recognize that there was a growing need for the ability for people to buy it on a per day basis. And we call that daily consumption. So we had a college professor who is a distributor in Mexico, (inaudible) Mexico actually and he came to us and he said there is a huge need for the product in Mexico. We love it. The problem is there is about this many people in Mexico that can afford to buy a month’s supply.

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