Herbalife Earnings Call Nuggets: Product Mix and 2013 Guidance

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On Tuesday, Herbalife, Ltd. (NYSE:HLF) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Product Mix

John San Marco – Janney Montgomery: Did you say, just double checking you said there were 43,000 clubs at quarter end in total and does that calculated the same way as the 36,000 number you gave us last quarter?

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Michael O. Johnson – Chairman and CEO: It’s calculated the same way and yes, it’s just under 43,000.

John San Marco – Janney Montgomery: In that context I was hoping you could address product mix, the weight management product line growing a little slower than targeted nutrition just surprising given all the data we have to get in daily consumption. Can you help us what’s driving the product mix shift for me?

Des Walsh – President: Yeah, hi, John this is Des. So, I think what you’re seeing John is that through the Herbalife Fit Club concept we obviously have increased adoption of other products beyond the core Nutrition Club product range. It also speaks to the fact that our Nutrition Club customers are obviously are coming every day to enjoy a shake, tea, aloe, but in addition that they are purchasing other product. So, I think what you see is that it’s just a broader reflection of more consumer activity but across the broader product range.

John San Marco – Janney Montgomery: So it’s different products going through the same clubs or are these new clubs that are opening out that are just focused on products outside of theā€¦?

Des Walsh – President: So, it’s probably both John. What we have obviously is that we’ve got a whole group of new distributors who are combining the Herbalife Fit Club concept with Nutrition Club concept and so in those clubs you actually have a broader range, but also I think you have the maturing of existing clubs with greater focus now on consumption of other products outside the clubs.

John DeSimone – CFO: John this is John. Let me add that 51.4% of our volume this quarter came from Nutrition Club skews which compares to 51.1% last year. So it is slightly up.

John San Marco – Janney Montgomery: So if you want to point for that it’s (ELO) Formula 1?

John DeSimone – CFO: Correct.

John San Marco – Janney Montgomery: Last question was just hoping you could address Western Europe it seems that of this new soft spot you have globally they tend to be in these markets where the economies are the weakest. Does this make you rethink the economic sensitivity of the business model or is there something you’ve need about 2012 or do I have it all wrong and you don’t view your business as economically insensitive?

Des Walsh – President: No, John. What we see is, there’s obviously, Western Europe continues to be a focus for us but here’s what we’re really excited about in Western Europe. Our distributors are entrepreneurs and so they follow success. If you look at Western Europe and you look at what’s happening in the U.K., what you see is that our distributor leadership there, two or three years ago began to focus significantly on daily consumption business methods and specifically the Weight Loss Challenge concept and that concept obviously combined with clubs, combined now with Herbalife Fit Club, has really resulted in tremendous growth in the U.K., you see that 56% increase in volume points in the third quarter, 70% increase in new distributors. So, because of that, that concept is obviously now being looked at and adopted by leadership throughout Western Europe. So, we believe that what’s happening in the U.K. is a leading indicator of what can happen in the other countries in Western Europe and so, that’s why we’re confident that the model is just as productive as ever and that we’re on the right strategy as far as all of Western Europe is concerned.

2013 Guidance

Mike Swartz – SunTrust Robinson Humphrey: This question is directed to John, with regards to the 2013 guidance. If I kind of do the math, it looks like you’re guiding for some margin pressure year-over-year, could you maybe give us some more color on the moving parts there? Are there any one time costs from the new manufacturing facility, et cetera?

John DeSimone – CFO: The major impact to margins next year is FX and the major FX contributor is Venezuela and the assumptions we’re making with respect to that market, which is a 10 to 1 exchange rate. Once you get beyond FX, we have pretty close to margin neutral expectations for next year. I think you had a second question which was some cost that may be in the model next year for the new manufacturing operation. There are some it’s not very material. So, I wouldn’t be too concerned about that.

Mike Swartz – SunTrust Robinson Humphrey: Then kind of longer term, I guess with the whole Seed to Feed initiative and then this new facility that you are bringing online by 2014, is that facility included or the potential savings from that facility included in that kind of 100 to 200 basis points outlook, you gave, I think in 2010 regarding Seed to Feed or is this incremental?

John DeSimone – CFO: No, it’s included. That basis point benefit expectation included an entire Seed to Feed strategy that was multiple years. At that point in time we knew we needed additional facilities, we didn’t know where. We have evolved that strategy to a one large facility on the East Coast. The primary objective of that facility is to stand stock on high-quality products. We feel that the capacity is necessary given our growth profile. So, that is still the primary objective of that facility. The secondary objective is the financial opportunity.

Mike Swartz – SunTrust Robinson Humphrey: Assuming that facility starts sometime in mid-year 2014 when would you expect any kind of cost savings from vendor consolidation to show up?

John DeSimone – CFO: Vendor consolidation is partially a result of manufacturing, self-manufacturing, but it was part of an overall consolidation that took place regardless and independent of self-manufacturing. But to answer your first question, we’re not going to see a benefit from that factor until 2015, because it’s going to come up in mid ’14 and then you’ve got to ramp up and then have one inventory turn before we see the benefit.

A Closer Look: Herbalife Earnings Cheat Sheet>>

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