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Herbalife Ltd. (NYSE:HLF)

Q3 2011 Earnings Call

November 1, 2011 11:00 am ET

Executives

Brett Chapman - General Counsel

Michael Johnson - Chairman & CEO

Des Walsh - President

John DeSimone - CFO

Analysts

Per Ostlund - Jefferies & Company

John San Marco - Janney Capital Markets

Mike Schwartz - SunTrust

Linda Bolton Weiser - Caris

Timothy Ramey - D.A. Davidson

Scott Van Winkle - Canaccord Adams

Anand Vankawala - Avondale Partners

Chris Ferrara - Bank of America-Merrill Lynch

Operator

Good morning, and thank you for joining the third quarter 2011 earnings 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 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 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 they 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 third quarter earnings call. Today we are very pleased with the record results that we reported yesterday, specifically the sixth consecutive quarter of double digit top line growth. We would like to take this moment to congratulate our distributors who are once again leading the way through increased engagements and improved activity and of course our employees who remain keenly focused on the servicing and the needs of our distributors.

For the first time in our history the company exceeded 1 billion volume points in a single quarter. We continue to believe that our top line growth is a result of strategically pursuing three large global mega trends, first the global obesity epidemic which shows no sign of letting up. In fact last month the Red Cross reported that more people died in the past year from complications associated with obesity than those that died as a result of being malnourished.

Secondly anti-aging. People today are living longer and desire to take more control of their personal health regimens. And lastly earning extra income, whether it is here in the US or developed markets where underemployment is as big an issue as unemployment or in emerging markets where people want to improve their social economic stature, the pursuit for supplemental income, that’s seemingly universal.

Herbalife is uniquely positioned to capitalize on these three mega trends through our products and our business opportunity. We believe it’s the confluence of these mega trends along with our products and our distribution and compensation plan that continue to positively differentiate our company. On the product front, we continue to build our leading position in the global weight management category, to provide solutions for healthy weight management.

As a result, the company’s global market share in the meal replacement and slimming category, increased from 29% in 2009 to 33% last year and we expect with double-digit growth in our weight management product category that our market share could easily increase for 2011. We’re building off this leadership position in the weight management category by introducing products that’s centered around our core competencies such seasonal flavors of our Formula 1 Shakes. Our new Prolessa Shake boost to help with both satiety and fat burning as well as our new line of Herbalife24 products. While it is very early, we continue to be very excited about the Herbalife24 line which we officially launched at the recent US and EMEA extravaganza.

The Herbalife24 product line is a sports performance line that will likely appeal to an expanded customer base, adding to that of the traditional Herbalife products. Our strategy behind the introduction of Herbalife24 includes the potential to attract a new category or demographic of distributor to drive brand awareness and distributor confidence to continue to leverage our team athletic and events sponsorship.

One of the first things you learn at Herbalife is use, wear, talk. And that message is stressed in everything we do, you use the product, you wear the brand and you talk to people. It’s no different with me, or any distributor in our company. Our business is based on product results and personal testimonials.

Ever since joining Herbalife, I’ve had my own personal testimonial by our Formula 1 Shake and other products, and in this quarter I added another personal testimonial for our new, Herbalife24 line.

Recently I competed in the Leadville 100. It’s a 100-mile mountain bike race in the Colorado Mountains. Herbalife had a team of 30 riders competing, and this year, with the help of our Herbalife24 line, I was able to beat my 2010 time by almost 69 minutes. Now I have my own testimonial.

Turning to our business opportunity. Herbalife continues to provide a meaningful compensation opportunity for people in developed and emerging markets. We offer individuals the opportunity to generate either, supplemental or full-time income.

Our income opportunity has proven itself successful for emerging markets such as Mexico, Brazil, Russia and India as well as in established markets, like right here in United States and in Korea. The business opportunity continues to be enhanced by the globalization of daily consumption, distributor methods of operations, as evidenced by our broad-based growth and volume, increased level of distributor activity and record retention rate.

During the third quarter, average active sales leaders were up 24% versus last year, and for the second consecutive quarter this year it increased in all six regions. More people than ever before are attracted to our business opportunity as they witness Herbalife distributors successfully growing their businesses.

Lets take a minute for an update on one of our key strategic initiatives designed to enhance and support the business opportunity of our distributors, iChange. The iChange website that we introduced to distributors at the beginning of 2011 is beginning to gain traction. The site is another tool that allows distributors to maintain a consistent and frequent dialog with their customers, a crucial foundation in our direct sales model. The [Herbalization] of iChange website was completed late this quarter and the distributors who are using iChange beta version are beginning to see meaningful improvements in their business. We are expected to release iChange to all distributors in our regional eight beta markets and throughout the EMEA region this quarter.

Another key strategic area of investment for us has been the area of brand and image. As many of you have seen recently, Herbalife was the title sponsor of the World Football Challenge, who is featured on ESPN, Univision and other networks around the world. Additionally, the strengthening of our brand will come through giving back to our communities and to the world at large, both at the corporate level and through activities of our distributors.

Last month, as part of our commitment to improving nutrition around the world, we announced at the Clinton Global Initiative, in partnership with GAIN, that global alliance will improve nutrition and DSM one of our key nutrient suppliers. With this agreement, we agreed to distribute 20 million micronutrient sachets to those in need throughout the Horn of Africa. Working collectively with DSM and with our distributors, it is our intent to develop a sustainable solution for providing nutrition into these key future markets.

Before passing the call over to Des, let me conclude my prepared remarks by providing you with a snapshot of our recent distributor events. As of those of you who visited our Atlanta extravaganza are aware, our extravaganzas are a great place for us to experience the engagement and passion of our distributors first hand.

This past weekend in Las Vegas, we wrapped up our annual extravaganza season. From July through September, we’ve seen more than 80,000 distributors at events in Minsk, Mexico City, Barcelona, Seoul, Istanbul, and in October, in Atlanta, Rio de Janeiro and Las Vegas. The enthusiasm of our distributors and their excitement at the growth that they are experiencing in their businesses is tremendous. It is creating new success stories that we are sharing around the world. You've heard me say this before and it deserves repeating. We’re just getting started. Our aspirational goal is to achieve $10 billion volume points by 2020.

Our products and our business opportunity are more relevant for the global marketplace than any time in our 31-year history as is the way we go to market, person-to-person direct sales. We are the original social network with a highly entrepreneurial distribution base, who are passionate about the result that they have achieved with our products and the business opportunity. The globalization of daily consumption business methods is enabling more distributors to be successful than ever before in our history.

Our brand and image continue to gain recognition and strength worldwide and we are just getting started. And lastly, our strategic initiatives and investments continue to target top line growth opportunity.

We are building a strong global management team and a robust infrastructure that are capable of maintaining the positive momentum we are experiencing in all of our regions around the world. We believe these investments, coupled with a strong engagement of our distributors, should continue to allow us to report strong financial performance.

Now, let me turn it over to Des for specific market updates.

Des Walsh

Thank you, Michael. The momentum we’re seeing in our business is driven by two key forces; our distributors’ commitment to expanding daily consumption business methods around the world and the continuing commitment of our distributors to Herbalife’s Mission for Nutrition.

The third quarter was tremendous. As Michael mentioned, this is the first time that the company has ever exceeded 1 billion volume points in a quarter and frankly, we believe that we are just getting started.

It was our founder Mark Hughes’ aspirational goal that Herbalife would one day achieve $5 billion in retail sales and that at the pace we’re going, that milestone may be just around the corner. When we look at the key metrics that we report to investors, such as volume points, local currency net sales, new distributors and average active sales leaders, every region posted increases in every metric.

We have often mentioned the transformation that is occurring in our business due to the expansion of daily consumption business methods and this quarter is a stellar example of the positive changes that we are seeing throughout the markets in which we operates.

We believe the momentum behind this evolution will continue to accelerate as more distributors in more markets have success acculturating daily consumption business methods to their markets.

Daily consumption business methods not only drive increased distributor engagement, they also drive increases in consumer engagement. One key characteristic of daily consumption business methods whether nutrition clubs, weight-loss challenges or distributor led fitness boot camps is that the distributor and their consumers have much more frequent contact then is normal for traditional direct sellers.

Based on the consumer research that we have conducted in the U.S., Mexico and Korea, nutrition club customers in each market indicate that approximately 80% of them visited the club more than three times a week. In the U.S. and Mexico more than 50% of club members stated that they visited the club every day that the club was open and between 30% and 40% of those people have been attending the club for more than one year.

As daily consumption takes route in various markets around the world, we see fascinating at our patients of the model through both the acculturation and refinement of the concept that are driving growth. When we see successful and sustainable business methods, we work with distributors to help globalize these concepts.

Right now, we are excited about systemized training methods that we are seeing driving growth in duplication in Mexico and new club membership methods that are beginning to see success in the U.S., particularly among the general market and the generation age groups.

Over the past year, in each of our regions, we have been regionalizing our sales support staff so that they can be closer to the distributors in their markets. This strategy is enabling the sales teams to provide more timely information and assistance to distributors in their markets. It is also vital as we strive to take our business down to a more localized level using a city-by-city approach.

Having sales staff on the ground, responsible for finite geographical territories in constant dialog with local distributor leadership is proving to be a highly appreciated initiative for sales growth and distributor communication.

In the third quarter of 2011, we were very pleased to see that the increased engagement we have been discussing for the past several quarters has continued to translate into growth and volume point. The growth was fairly evenly split between emerging and established markets.

The established markets category which includes several of our oldest markets, for example, the U.S. and most of Western Europe accounted for 46% of our volume points and increased 20% compared to the prior year quarter.

The emerging markets category accounted for 54% of our volume points and grew 27% for the quarter over the third quarter of 2010. We remain very pleased with the relative balance of our business between these two groups and are excited by the scale of the opportunities that we see to grow both wider and deeper simultaneously.

Now let me provide regional highlights and color on some key regions. The North America region had another strong quarter posting 16% net sales in local currency net sales growth and 12% growth in volume points each as compared to the prior year period.

New distributors increased 6% in the quarter and average active sales leaders, one of our key distributor engagement metrics increased 15% in the North America region each is compared to last year’s third quarter results.

For the quarter, U.S. net sales increased 16% and volume points increased 12% versus the same quarter last year. Compared to the prior year period, new distributors in the U.S. increased 5% and average active sales leaders increased 15%.

The growth in the U.S. continues to be driven by expansion of daily consumption business methods particularly in the general market segment of the business. As Michael mentioned, we have just wrapped up the last of our three U.S. extravaganzas and saw tremendous enthusiasm at all events. During the third quarter, we saw growth throughout the U.S. market in both the Latino and general markets.

In the U.S. there were two segments where we are seeing strong business trends about which we are becoming increasingly excited; Generation H, our name for those distributors on the 35 years old and our African-American business. We are seeing very exciting adaptations of the nutrition clubs spring up through the Gen H group and we are beginning to see daily consumption begin to drive sales and engagement in the African-American distributor community.

Moving on to Mexico; local currency net sales for the quarter increased 30% and volume points increased 23% each as compared to the prior year period. For the third quarter, new distributors increased 14% compared to the prior year. We are very pleased to see average active sales leaders increase 26% for the quarter compared to third quarter 2010.

This is the third consecutive quarter that the region has posted a greater than 20% increase in average active sales leaders over the comparable period of the prior year. In Mexico, the more structured training methods that many distributors are integrating into their businesses is driving solid volume growth, duplication of clubs and development of strong distributor leaders throughout the market.

The regionalization of the sales staff in Mexico is helping to facilitate another growth driver for Mexico which is the focus on going deeper into the market, posting more meetings and generally engaging in more activity in less populated states. The Asia-Pacific region continues to be a growth driver for the company.

During the third quarter local currency net sales increased 31% and volume points grew 36% each as compared to the prior-year period. For the third quarter, new distributors increased 47% versus the prior year.

We believe the growth within the region continues to be driven by the expansion of daily consumption business methods and the high degree of distributor engagement. Average active sales leaders increased 39% in the quarter over the same quarter in 2010. The drivers in the region continue to be Korea and India.

Compared to the prior-year period volume points in Korea and India increased 62% and 112% respectively.

Both countries are benefitting from the expansion of nutrition clubs and the regionalization of their sales support staff. We believe that Korea which is being showing strong growth for several years still has room for additional expansion in their business as they focus on the smaller less penetrated cities.

Local currency net sales in the South and Central American region increased 44% and volume points in the region were up 40% each as compared to the third quarter of 2010. Average active sales leaders in the quarter increased 22% over last year’s third quarter. New distributors increased 51% for the quarter. As we mentioned on last quarter’s call, we are beginning to see the benefit of the daily consumption moving out of the early adopter markets in the region and the business method is now driving sales throughout numerous countries in the region.

As an indicator of the broad-based strength in the region compared to last year, we saw volume point growth in every country throughout the region. Within the South and Central America region, we need to mention the strength we are continuing to see in Brazil.

Brazil experienced volume point growth of approximately 31% in the third quarter over the third quarter of 2010 as both nutrition clubs and traditional business methods experienced growth. We are very excited about the opportunity we believe that exists in Brazil and our distributors in this market are just beginning to scratch the surface of the real market opportunity.

Turning to EMEA, during the third quarter local currency net sales increased 14% and volume points in the region grew 16% compared to the same period in the prior year. New distributors for the third quarter increased 9% over the prior-year period, average active sales leaders in the region improved over the course of the year and were up 17% in the quarter. We are encouraged by the continued success of weight loss challenges throughout countries in Western Europe and the growth of nutrition clubs in more southern markets.

Within EMEA, Russia had another amazing quarter. While we do not usually talk about country-specific results, Russia again deserves to be highlighted. Compared to the third quarter of 2010, this quarter’s volume points were up approximately 60% with a 36% increase in new distributors and a greater than 45% increase in average active sale leaders. This city-by-city view of the business opportunity has been a huge driver in Russia coupled with the nutrition clubs and the recent enhancements to the marketing plan which were first tested in this market.

Now, let’s turn to China where our local currency net sales increased 1% and volume points increased 2% in the third quarter compared to the prior-year period. We believe our sales leaders in China continue to make progress acculturating the concept of daily consumption. We are seeing clubs open in locations more like those that have been successful and duplicable in other markets.

While, we are very pleased with the progress of the business in China, we remain cautious about expecting too much too soon from this market. We’re focused thereon building a sustainable business on a solid foundation of long-term customers. Before, I turn the call over to John, let me take a minute to applaud our distributors for the fabulous quarter and also remind everyone on the call that we believe the momentum we’ve seen in our business due to the transformation to a more daily consumption-based model remains in the early stages and that there is still a long runway of opportunity ahead of us.

Now, let me pass the call over to John to review the financials.

John DeSimone

Thank you, Des. I’ll first go the third quarter’s results and then I’ll discuss the guidance provided in yesterday’s earnings release and specifically the topical issue of foreign currency and it’s potential impact on our expected performance. Let’s start at the top with volume.

As both Michael and Des mentioned, the third quarter was the first in the company’s history in which we achieved in excess of 1 billion volume points in a quarter. This record performance was geographically broad based with all six regions and 80% of our 78 countries, experiencing increases in the quarter.

Volume growth in the quarter was also strong in both established and emerging markets, with established growing 19.5% during the quarter and emerging increasing 26.9%. Our overall volume performance in the quarter was also very broad based from a timing standpoint. While we wouldn’t normally comment on monthly results, it is worthy to note that our distributors’ businesses remained strong despite the volatility in the financial markets over the past two months, with September volume points being the largest in the company’s history.

Since Des has already provided significant detail on volume points by region, I’ll move to net sales, which grew approximately 30% compared to the third quarter last year. This increase was comprised of 24.1% local currency sales growth plus an approximate 600 basis point benefit from foreign currency exchange rates.

Turning to the third quarter margins, gross margin was slightly lower on a year-over-year and sequential basis. The differences are due to changes in country mix, slight increases in our inventory reserves offset by net sourcing savings which includes the benefit from our seed-to-feed strategy.

In the third quarter, the H.I.M. manufacturing facility continued to produce approximately 23% of all worldwide inner-nutrition production volume, very similar to last quarter and in line with our expectations.

Moving on to SG&A as a percentage of sales, in total, it improved by approximately 241 basis points versus last year. 65 basis point of that change was a result of China sales employee expense while the remaining 176 basis point improvement was leveraged against our cost structure.

Compared to the prior year, SG&A increased 22% while sales grew 30%. It is worthy to know that this year’s SG&A included a $2.3 million benefit from lower foreign currency losses versus prior year results.

The third quarter operating margin of 16.9% was approximately 220 basis points ahead of last year. As we’ve mentioned before, the operating margin expansion was driven by leverage in the business model.

The effective tax rate for the quarter of 28.5% was slightly better than the guidance provided, and was approximately 500 basis points higher than our adjusted effective tax rate from third quarter last year. This large year-over-year change in the third quarter’s effective tax rate was a result of last year’s third quarter rate being unusually low due to the implementation of certain tax strategies that led to a year-to-date catch-up being booked in September last year.

On a year-to-date basis, the year-over-year effective tax rate change is only 89 basis points, which was slightly better than our expectations.

Turning to earnings per share, the company reported EPS of $0.87, $0.27 higher than the prior year adjusted EPS results and $0.11 better than the high-end of guidance range that we provided in August.

As we’ve seen in prior quarters, the upside compared to guidance was due to higher sales of approximately $50 million versus the high-end of our previous guidance range.

During the quarter, the company generated cash flow from operations over $143 million, an increase of 42.3% versus the comparable quarter in 2010.

Free cash generated during the quarter of $126 million represents a 117% of net income. On a year-to-date basis, free cash also exceeded net income by 8%. During the quarter, we repurchased 2.8 million shares for a total cost of $150 million. This amount was a $100 million higher than what was included in our guidance.

As it relates to our philosophy and the company's $1 billion share repurchase program, we have consistently communicated to investors that there will be a routine component and a more opportunistic component, where we would potentially accelerate our activity in the marketplace if the stock over reacted for any particular reason.

This past quarter was an example of a situation, we believe, our stock over reacted to non-Herbalife world and financial news, and we do not believe it was reflective of the trends we were seeing in our business. Currently, we have $528 million remaining on our $1 billion share repurchase program.

Now, let me discuss our guidance for the remainder of 2011 and our initial 2012 guidance. I will start with currency as I believe it’s important for investors to understand the assumptions that we used in developing our guidance. Historically, we have used the exchange rates as of the last day of the reported quarter in determining guidance, which was essentially the same rate at which we hedged the subsequent quarter. However, we changed that approach this quarter due to the extreme volatility in exchange rates since late September.

We made a decision to averaging our hedge rates for the quarter. Accordingly, the hedged exchange rates for our key currencies in the fourth quarter are very close to the average exchange rates for the first four weeks of October. We have utilized these hedge rates in calculations of both the fourth quarter guidance and full-year 2012 guidance. As we mentioned in yesterday’s press release, had currencies remained constant with June 30, 2011 rates or 2011 fourth quarter, and our 2012 guidance would have been $0.10 to $0.12 better per quarter than what we have provided.

As a sensitivity for modeling purposes, a simple word I think about the impact of currency is that a 1% move in our entire basket of currencies would have an approximate $0.05 impact to our 2012 full-year EPS guidance. Of course, not all currencies are equal.

During times of FX volatility, those countries that have local product manufacturing have less of an impact, while those countries with most or all of their products produced in the U.S. will have more of an impact on EPS.

Moving on to the specifics of guidance, we are increasing our Q4 volume point guidance significantly from what was assumed in our previous guidance, given the positive business trends Des described. The EPS benefit from this increase more than offsets the negative effect of currency.

We now expect EPS to be between $0.68 and $.072 per share in the fourth quarter on volume point growth of 17% to 19%, with the net sales expecting to increase 13% to 15%.

As we look to close our record performance in 2011, our guidance for the full-year is 19.7% to 20.2% volume point growth and 24.5% to 25% net sales growth.

Turning to 2012, we expect to continue to post strong growth on growth comparisons in both, volume and net sales. We expect volume points to grow in the high single to low double-digit range.

Accordingly, we are initiating fiscal 2012 guidance with volume point growth of 8% to 10% over 2011.

Net sales are also expected to grow 8% to 10%. This range includes a 600 basis point drag from the change in currency rates previously mentioned. We expect full-year EPS to be in the range of $3.25 to $3.45 per share.

That ends our prepared comments. We will now open up the call for your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Per Ostlund with Jefferies & Company.

Per Ostlund - Jefferies & Company

Thanks. Good morning everybody. Congratulations. I want to start, I’ll get your thoughts on the EMEA region. Obviously, you know, there are other region growing faster but I guess, I like to see the acceleration that you’ve got there in EMEA and both the volume points, an average active sales leaders in the quarter. Are you seeing anything yet that, sort of, resemble and inflection point on the daily consumption front, given that sort of the strength in the U.S., India and Brazil among other region that might be expected to kind of have some cultural over lap there?

Des Walsh

Hi, Per, this is Des. So the answer is yes and essentially, if you look at EMEA, lets divide it into two areas. First of all, you got what’s happening in Russia where we’ve obviously had already seen that inflection point. We’ve seen this tremendous growth there combined with tremendous levels of activities, distributor engagement and the impact of the 5-K marketing change that we’ve first tested there a couple of years ago, and then in Western Europe as well. We actually now have in emergence, a range of daily consumption activities driven initially by weight-loss challenges, than expanding into lifestyle ventures and now we’re actually seeing a growing number of successful clubs and duplication of clubs. So I would say, absolutely we’re seeing that inflection point still in the early stages, but certainly we’re very excited by the seeds that are begin planted, that are being sold by our distributor leadership there.

Per Ostlund - Jefferies & Company

Great. Des, following just on that point you commented in the preamble about it being early days for daily consumption, I think that certainly seems to have been through. You talked in the past about sort of a lifecycle I guess for daily consumption, be it inception that’s expansion enhancement. As you’re kind of looking at your markets now versus may be where you are at the end of the last year when you had your Analyst Day, have any of the markets kind of moved up the maturity curve or is it still really early for frankly the vast majority of the market share?

Des Walsh

It’s still early Per, I mean obviously we recognize that it takes about two or three years for the acculturation process and I would say that pretty much happy that its still in the same buckets as they were a year ago are just growing in terms of maturity. The other thing that we’re seeing is that some of the systemized training message that we’re seeing adopted in Mexico now spreading elsewhere we believe are actually going to contribute both to the mature markets in terms of enhancing their growth, but also possibly accelerating the growth of others in the other stages.

Per Ostlund - Jefferies & Company

Excellent, I appreciate that color. John, one for you quick here or may be two; not to dwell on the FX thing, given all positives here but, you mentioned the 600 basis point impact on the top-line, is that actually 600 basis points discreet to 2012 or is that a swing factor versus where it would have been in June?

John DeSimone

That is a swing factor to what it would have been in June rates; about 400 basis points is the discreet factor.

Per Ostlund - Jefferies & Company

Okay. So using the rule of thumb then something on the order of $0.20 in terms of just sort of an adverse currency in the vacuum for 2012 is probably reasonable?

John DeSimone

I think $0.20 is may be a little light below. Yeah, I think so it’s 200 basis points on the base of 600 basis points is a third, so if you apply that same ratio to EPS which I think is appropriate, and we’re talking $0.10 to $0.12 a quarter so may be $0.03 to $0.04 a quarter is, even a soothing equation so you are 70% less then you’ve got – probably I would say about $0.25, may be $0.28 somewhere in that range.

Per Ostlund - Jefferies & Company

And then so just real quickly, the FX impact to EPS in the quarter was $0.12 was a little bit more than sort of the first couple of quarters of the year; was that basically the lower FX losses in the quarter in the SG&A line jump?

John DeSimone

It was lower FX losses, but it was also overall for the Q3 sounds when you say this today, but it was a better FX rate than it was a year ago.

Operator

Your next question comes from John San Marco with Janney Capital Markets.

John San Marco - Janney Capital Markets

Can you update your estimate of how many nutrition clubs you think you have globally?

Michael Johnson

Well let me put out the standard qualifier, when we talk about the numbers of nutrition clubs it is an estimate; it’s a statistical estimate, and a survey estimate. In some countries we have actually pretty good data, pretty good registration data and in other countries it’s a little softer number. I am looking at the sheet here we’re probably get around 70,000 clubs around the world. We are going to work on giving the investors a better number; we’re going to kind of break it into home clubs and commercial clubs sometime next year hopefully early next year.

John San Marco - Janney Capital Markets

And then Des, I think you said that you have seen some shifts in how daily consumption manifest in Europe; do you have a guess of what the nutrition club count looks like in the EMEA business and may be how that compares versus year ago? And then I guess secondarily if, is it the distributors are shifting from weight loss challenges etcetera to nutrition clubs or has it been largely incremental?

Des Walsh

So I guess John what's happening is if you think of the nutrition clubs in Europe lets say began initially with a conflict of lifestyle centers which essentially are branded Herbalife

offices. For our distributors, they have meetings, they invite customers there to participate in weight loss challenges and so they are really sort of brand centers rather than traditional nutrition clubs.

Now obviously they take part in other activities there, but you won't have customers coming on a daily basis to actually start the day with a healthy shake. So that's the model that we saw initially emerge in Western Europe, primarily as a factor of the local regulation and other factors.

So what's happening now is that from that base, we are actually seeing an expansion into more traditional nutrition clubs, but primarily in commercial locations and primarily with the number of distributors operating together, so this is an evolution that we are seeing taking place.

The reason that we believe that we may have reached an inflection point is that we’re now seeing distributors move up the marketing plan as a result of duplication of the club, so there has always been several hundred clubs operating in recent years in Western Europe, but we haven't necessarily seen that duplication, that's what we’re now beginning to see. We’re beginning to see the movement of the marketing plan and for us that's really the first indication that you’ve got that duplication that drives further adoption.

John San Marco - Janney Capital Markets

Okay. And then on the 8% to 10% volume guidance which is the same guidance you originally gave for 2011, I guess a couple of observations, of course you have a little better year-to-date sales force growth this year than you had a year ago today. And also yet again on below the long-term volume guidance of 11% are there any discreet headwinds reflected in that volume assumption, just any comments you care to make on the 8% to 10% versus recent growth rates?

John DeSimone

Well, it’s a coincidence that it was 8% to 10% this year and last year, they are not related to each other but with a little bit – if we’re lucky, we will beat them by the same amount but I wouldn’t make that assumption. The 8% to 10% is based off the best information available; it is based off what our really strong year-over-year, over year comps like we’ve had two incredible growth years that we now have to compound. And 8% to 10% is not materially different than the long-term growth rate of 11%, it’s pretty close to that number. So it’s nothing discreet, it’s just may be a little bit of conservatism given the strong two years that we’ve had.

John San Marco - Janney Capital Markets

Got it; same guidance practice as historically. And then my last one, can you quantify, you mentioned iChange and it sounded like you are having some at least the level of success you expected with. Is there anything you can quantify in terms of the performance of distributors who have been using iChange versus control group or anything like that?

Des Walsh

Yes, so John this is Des. So yes, we’re very excited about what we’re seeing iChange; still in the early stages, but what we are seeing is the distributors who are using iChange have significantly better performance in terms of customer engagement, customer retention. So we’re working closely with the pilot group of distributors in terms of continuing to modify to add additional functionality and we believe that as part of our sort of social network strategy, this is going to be an important part and exciting tool for our distributors.

Operator

Your next question comes from Mike Schwartz with SunTrust.

Mike Schwartz - SunTrust

I guess I was most impressed in the quarter with the established market growth of about 20%. Could you just give us more color on that where you are seeing particular pockets of strength, is that mostly Europe or is that US general or any thoughts on that would be helpful?

Des Walsh

So I would say, it’s a number of factors. Obviously the US general market, very excited about this. This is the oldest market in Herbalife, 31 years and what we’re seeing there is obviously a significant adoption of daily consumption, our US leaders have monitored what’s happening in our Latino group of markets for several years. They really have adopted the clubs and to a significant to create they have merged it with weight loss challenges with traditional HOMs, with the traditional Tuesday, Thursday, Saturday business model.

And effectively the nutrition clubs in the general market is being used almost like traditional offices where you’ve got a lot of distributor activity taking place, then you merge that with some of these new wonderful ideas like the fitness boot camp that we’re seeing is a tremendous of way of bringing new customers and that’s really what’s driving the growth you know in the US general market.

Same thing I would say for Korea. Obviously a number of years ago, our Korean leaders, they went to Mexico, they went to Taiwan. They came back and you know they introduced a systemized training approach that works very well with the Korean culture and so you have this tremendous training and duplication, time that into a HOM model and so on.

So really what I would say is that in the established markets, it’s really this daily consumption driving long-term customers which in turn drives distributor retention, distributor sponsorship and so on. So that’s the whole and that’s the circle of success that you’ve heard us talk about at various meetings.

Mike Schwartz - SunTrust

I know you don’t break this out anymore, but is that kind of US general market still running at about at 20% plus growth rate?

Des Walsh

The US general was in excess of 20% and the Latinos also had growth in the quarter.

Mike Schwartz - SunTrust

Okay, great and then next question is just on the Spencers’ trial in India, could you give us an update on that, how that’s performing and then are you looking at replicating that in other areas in the country in the next several quarters?

Des Walsh

Yes, so it’s still very early days on that Mike, but we believe that it will be positive. The thing to remember about Spencers though is that unlike Waldo’s in Mexico, for Waldo’s had over 300 locations, Spencers is approximately a 100 and they’re predominantly regional.

So what we’re actually doing Mike, is that we obviously believe that improved access points is a significant factor for our distributors, particularly those engaged in daily consumption methods. So to supplement what’s happening with Spencers, we’re looking at a number of other possibilities, not just for India, but elsewhere and I think in future calls, you can expect to hear more about that.

Operator

Your next question comes from Linda Bolton Weiser with Caris.

Linda Bolton Weiser - Caris

Hi. So in terms of, you made some comment about your cash flow and your opportunistic share repurchase in the quarter, I mean your cash flow performance is really, really great and it looks to me like you’re going to be able to generate free cash like $400 million or so next year in which case that way exceeds doing $200 million of share repurchase. So can you give us thoughts on, you know if that all come true like what you would do with the cash.

Michael Johnson

Well our first priority for cash is always to invest in our core business and for any opportunity we have that can drive an appropriate ROI above our cost to capital or risk-adjusted cost of capital, we would do that first. When you get beyond that there are little tuck-in acquisitions that maybe an opportunity and we look at things like manufacturing or iChange, beyond that, it’s really returning money to shareholders through a dividend and a buyback.

This is a routine piece to the buyback which is included in our guidance is buying back $200 million in stock, which does leave excess cash beyond that which may get utilized for an investment opportunity or may get utilized for buy back more stock if the opportunity rises. So again the hierarchy is invested in our core business, find third-party investments that can drive to Herbalife and then just return the money to shareholders.

Linda Bolton Weiser - Caris

I found it very interesting, hearing some of the stories that the convention about the Herbalife24 and the boot camp concepts that are cropping up in Los Angeles and how that is seemingly attracting a non-Latino customer, can you comment on just Herbalife24 and idea that may be it’s not going to be as cannibalizing and that it actually may help you expand and reach a different kind of customer and distributor.

John DeSimone

So Linda we believe that Herbalife24 contributes a number of things. First of all, it obviously gives us tremendous creditability within a high level sporting community and that really has a halo effect which applies that to all our products. The second thing is that it absolutely enables us to reach out to a new audience and the fitness boot camps that you referenced you know are a great example of that where it just gives us tremendous authenticity within the weekend warrior sporting community.

And it’s also helping us to attract a new group of distributors who are focused on the business opportunity based around health and fitness. So I think, you know, Linda, there's tens of thousands of personal trainers in the U.S. and now with Herbalife24, they can see that we've got both, a tremendous business opportunity but also a product line that is directly related to what they do everyday. So I think we are seeing this having an impact in a number of areas for us and that would just be a summary of all of that.

Linda Bolton Weiser - Caris

And for your guidance for next year, it seems like embedded in that guidance is a little bit more price mix than maybe what we've seen in 2011, can you give any color on that?

John DeSimone

I might give you a little bit of color. Like I said, 200 basis point of the 600 basis point impact from currency was really just using June rates and not average year-to-date rates. These average year-to-date rates, it’s really a 400 basis point impact. There's a couple of components ahead and there is a little bit of timing. There's a little bit of market conversions where we have some third party countries that we sell to a third party, that next year will be taking operation over to where we just really accounting has changes the gross to net. Then there's about little under 200 basis points in mixed price combined.

Operator

Your next question comes from Tim Ramey with DA Davidson.

Timothy Ramey - D.A. Davidson

You know that you’ve talked a lot about distributor engagement and the increase in the average active associates that are leaders. Do you have a sense of what's that doing to incomes across the range of your distributors, is part of this -- I assume its kind of obvious, but part of the distributor engagement is people are making a lot more money?

Des Walsh

So, Tim, I don’t know that we’ve got an exact number on that, but there certainly is a correlation because obviously what we see when you got an increased number of sales leaders is that translates -- that’s driven by the fact of having a stronger customer base ordering more regularly. And so effectively, you know, it’s an indication that we have got people who’re building a long-term sustainable income, and of course the critical part of that, Tim, is that that resulted in increased movement of the marketing plan. And so I think you’ve got a combination of factors, more activity, more customers, moving up to marketing plan and that combination then converts into higher income.

Timothy Ramey - D.A. Davidson

And does some of these really stratospheric growth rates that we saw in Russia and elsewhere, and which -- that just seem hard to execute, can you talk about, some of, I guess, you mentioned or John did last night, that there were some supply chain inefficiencies that resulted from a strong volume growth. Is some of this volume growth coming at a higher cost to deliver, given that the rates are just so stunning?

John DeSimone

This is John, Tim. There is not a fundamental change in the model but the reality is when you are growing at 20-plus percent and even higher in certain markets. Efficiency isn’t the most critical issue. It’s really supplying our distributors with products. So you need to take the order shift, you have the product, shift the product path to our distributors. Those are the three most critical components we have and we will do whatever it takes to support that right because when the distributor is ordering product is because they have a customer in there selling that product and we want to make sure we support it. And in the short-term, when we have high growth rates, mainly our freight product, we may add inventory to our marketplace, but it is not a fundamental shift in the cost structure. It is more of a short-term inefficiencies to support them. They are in, -- growth we’re seeing in certain markets.

Timothy Ramey - D.A. Davidson

Great. And probably, I think it’s worth mentioning. I haven’t had too many 10 wagers in my career but when we get to 65 and not if then when we get to $65, it’s just nice to point out that this is a 10 wager of the March ‘09 number, congratulations on that?

Operator

Your next question comes from Scott Van Winkle with Canaccord Adams.

Scott Van Winkle - Canaccord Adams

Thanks. Most of my questions had been asked. I have a question about new products in kind of carrying on the conversation about 24 and how it, you know, attracts the new distributor group and a new selling model. Is that important with new products and my question is as nutrition clubs grow as a percentage of your total sales, and the focus is on the core three products. Does new product innovation have any less of an impact in driving in a momentum arc of our sales?

Michael Johnson

Hi, Scott, It’s Michael. 24, let me start there. 24, we believe, and I am going to repeat basically what Des says, it has a chance to open up some new doors without a doubt. We’re seeing a younger distributor come to this company for many reasons. Obviously, there is an economy opportunity, but it’s the product opportunity that appeals to them all. So they can talk. The people in the younger segment may not always be interested in weight-loss or weight management, you know, they haven’t had that unfortunate moment yet in life where their waist has expanded to the point where they’re just out of control with it.

But it offers an opportunity for them to get excited about this company, engage in this company with a product that is very useful for the target market area. So, that’s why you are seeing these boot camps, and these type of business opportunity offerings work so well force. So I don’t -- we’re kind of on the cusp of understanding the cannibalization of Herbalife24, but I am not sure we’re going see it in the way we had kind of early expected it.

On the other side as far as expanding the basic three offerings, you’re going to see more and more about Formula 1 as we go down the road. You’re going to see boost restored, you’re going to see opportunities for distributor to sell product inside and have people walk away with products from their clubs and that’s an opportunity for us to build and expand on this bit. Des, you want to add anything on that?

Des Walsh

I think absolutely, I mean at the end of the day, new products drive excitement and this is the business that it gives another reason for our distributors thought to be, whether in the clubs, whether outside the clubs. So we’re keeping the products on the cutting edge, our reformulations, so we’re always, always the best signs that always going to be part. And then the last thing I would mention is seasonal flavors Scott, so we’ve had tremendous success with seasonal flavors for those of you who tried the Pumpkin Spice or the Orange Creamsicle, you will know what I am talking about. But you know again a significant factor and excitement and the driving reasons for conversations.

Scott Van Winkle - Canaccord Adams

And then quickly on iChange which I think is just an awesome tool. Are there any challenges like testimonials or regulatory or anything like that you have to be careful with setting up a network like that?

Des Walsh

So there has always occasional challenges because obviously our customers are leaving comments and obviously our customers get excited about product’s results but obviously it’s something that we closely monitor Scott, and if we see anything that’s inappropriate then we respond very quickly. And then the other thing Scott, as well as of course, we train our distributors so that constantly on this message of no medical claims you know so that they also are acting as observers out there and if they see anything inappropriate many of them will respond to us and let us know.

Operator

Your next question comes from Anand Vankawala with Avondale partners.

Anand Vankawala - Avondale Partners

Just one quick follow-up, as far as share repurchase goes, it’s the $200 million you mentioned built into the fiscal ’12 guidance?

John DeSimone

Yeah, it’s built in as an average spread over the year.

Operator

Your next question comes from Chris Ferrara with Bank of America

Chris Ferrara - Bank of America-Merrill Lynch

But just in Central and South America right I guess in last five or over the last six quarters your edge have been I guess in the range of 60,000 to 75,000. This quarter it’s like 107,000 and I know you talked about how strong the markets have been, but what drove that immediate that big jump up this quarter was there anything specific to think of?

John DeSimone

Yeah so Chris, there are two factors, obviously one is increased distributor engagement and the second factor is that we did begin a test in all countries in South and Central America other than Brazil where we tested a lower cost IBP which is directionally related to income levels in different countries. And so we’re monitoring that closely because for us the issue really isn’t whether we bring in more distributors or we sell more IBP’s because we assume that was a given.

So really for us as to monitor what happens with those distributors when they come in to the business and see what the engagement level is. So I think that’s one of the things that drove the new distributors, but again for us its an interesting experiment, we’re certainly with initial results but the real issue is what happens now and over the next six months with those distributors and the systemized training and the impact of that and so on.

Chris Ferrara - Bank of America-Merrill Lynch

And then I guess John real quick, the relationship you gave between I guess 1% FX hit on top-line at $0.05 a share, it sounds like that relationship deviates in the 2012 guidance so I think you were saying may be four points of FX hit, but its more like $0.25 to $0.28 of EPS, is there a particular reason why it would be different in this 2012 guidance or I misunderstand it?

John DeSimone

I think it’s a different context. So versus the guidance a 1% change in all of our currencies that are in our basket will drive a $0.05 change to the guidance we provided. What I was trying and I hope I answered to Pierre’s question right when he asked this, the $0.25 impact is the year-over-year impact from currency change and the reason why it’s a lower number is, Q4 this year is also impacted by currency. They don't really have a full year impact next year versus 2011, so it was a slightly different context.

Operator

At this time, there are no further questions. Gentlemen, are there any closing remarks?

Michael Johnson

Just a few real quick, thank you everyone for tuning in this morning. It’s always good to seeing wake up every morning, get online and see what's impacted the world in the last eight hours and this has obviously been a world of great impacts lately. And the way I put it, its quite simply is bad news on the outside of Herbalife and damn good news on the inside in our world. We focus internally on team Herbalife which is employees and distributors dedicated to our mission for nutrition.

Tomorrow, most of us and our management team will fly to Singapore for meetings with our global management team to focus on continuing our momentum by transferring best practices market-to-market. After three days with our management teams will welcome our top 50 distributors from around the world for two days of further discussion on how we reach our near-term goals, our five year plan and our 10 year aspirational opportunity.

We work closely with our independent Herbalife distributor leadership on almost every aspect of how we go to market, our business is better and our future brighter because of both the global megatrends and our incredible team Herbalife which is once, again repeating myself, our employees and our distributors who work together taking our business to new heights.

Thanks again for your support. We look forward to seeing you at the end of next quarter.

Operator

This concludes today’s conference. You may now disconnect.

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