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Herbalife Ltd. (NYSE:HLF)

Q4 2011 Earnings Call

February 22, 2012 11:00 am ET

Executives

Brett R. Chapman – Secretary and General Counsel

Michael O. Johnson – Chairman and Chief Executive Officer

Des Walsh – President

John DeSimone – Chief Financial Officer

Analysts

John P. San Marco – Janney Montgomery Scott LLC

Timothy Ramey – D. A. Davidson & Co.

Mike Schwartz – SunTrust Robinson Humphrey

Linda Bolton-Weiser – Caris & Company

Gary Albanese – Auriga

Anand Vankawala – Avondale Partners

Operator

Good morning, and thank you for joining the Fourth Quarter and Full Year 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 R. 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 O. Johnson

Thanks, Brett and good morning everyone, and welcome to our fourth quarter and full year 2011 earnings call. As you read in our press release yesterday, we’ve just had a very strong fourth quarter and the best year in the company’s history. Fourth quarter sales were up 20% and EPS grew 25%. And for the year, sales grew 26% and EPS increased 37%. We now had seven consecutive quarters of double-digit growth in Volume Points and distributor engagements as well as two consecutive years of record sales leader retention.

In 2011, we achieved a mile. So it’s very important to all of us, and team Herbalife. early in Herbalife’s history, Herbalife’s founder, Mark Hughes set an aspirational goal of $5 billion in retail sales and this has been an inspiration and motivation for everyone. In 2011, we’ve reached that goal and we exceeded it.

So let me take a moment to congratulate everybody on team Herbalife, our distributors whose tireless efforts and commitment are making it easier than ever for consumers to access Herbalife’s nutrition product. And to our employees who understand the priority of supporting our distributors and building a world-class infrastructure. while you can see the strength of our business in the financials we reported yesterday record sales, volume and cash flow, the underlying fundamentals in our business are equally exciting and support our confidence and our belief in the future. These fundamentals are broad based volume point growth.

For the quarter, we saw double-digit growth in all six regions and for the full year, five of our six regions, volume grew in excess of 10%. Our average active sales leaders increased 22% in 2011, an indication of a strong distributor engagement.

Record sales leader retention, in 2011 we have retention levels in excess of 50%, the highest retention rate in company’s history. To summarize these fundamental simply, more people are using our nutrition products everyday. More people are coming into the business, staying in the business and moving up the marketing plans.

The interdependency of these three metrics volume growth, engagement and retention metrics that we share publicly, gives us confidence that the best is yet to come and strengthen our belief that we can achieve our aspirational goal of 10 billion Volume Points by 2020. This is also the reason, we raised our 2012 guidance and we are now projecting double-digit volume point growth for the year.

As we have said for the past several years, we offer solutions for three global macro trends, an ever-increasing obesity issue and aging population, and in these times of record unemployment and opportunity for people to earn full-time or supplemental part-time income. Herbalife is truly at the intersection of health and wealth.

In 2011, we continued to benefit from our infrastructure and our seed-to-feed initiatives. We now manufacture more than 25% of our global volume in our own manufacturing facilities. And the product front in 2011, our major product launches included the introduction of Prolessa Duo, a unique (inaudible) and fat reduction product that works with our Formula 1 meal-replacement shake.

Several seasonal Formula 1 flavors and in the U.S. and Europe, we launched our Herbalife24 sports performance product, which applies to an extended customer base that includes premier athletes we sponsor. And now we are seeing a new generation of Herbalife distributors, building their business methods directed at athletic and active consumers.

In 2011, we continued our strategic investment in building our brand. One of our main focus points is soccer, which is a sport well aligned with Herbalife in terms of geography, social economic, distributor activation opportunities and our belief in a healthy active lifestyle. 2011 highlights included our title sponsorship of the World Football Challenge with 13 of the world’s top professional soccer teams competing and it was broadcasted on ESPN, Univision and many networks around the world.

And in November, we celebrated the very exceeding MLS Cup win by the Herbalife sponsored LA Galaxy. Along with our distributors, we continue to leverage more than 150 sponsorship to the athletes’ teams’ event, including our top sponsored athlete Leo Messi, who won the FIFA Ballon d' Or for an amazing third time.

At Herbalife, our tradition of giving back comes from the heart it strengthens our brand and image. When we live our values and make our communities better places to live and work. In 2011, our Herbalife family foundation opened up nine new Casa Herbalife programs that we are now helping to bring better nutrition of more than 20,000 children every single day that 72 Casa Herbalife programs around the world.

In 2011, we also partnered with GAIN, the global alliance for improved nutrition and DSM one of our nutrient suppliers. And we’ll distribute 20 million micronutrient sachets to help with malnutrition and starvation in Ethiopia and in Kenya. Working collectively with DSM and our distributors it is our intend to develop a sustainable distributor driven business model and solution for providing nutrition in markets such as these.

Before passing the call over to Des, let me conclude my prepared remarks by providing you with a snapshot of our recent distributor events. We’ve just returned from two Extravaganzas in Central and South America; the first in Panama City, Panama followed by San Diego, Chile.

Our fourth quarter 2011 was the third consecutive quarter that every country in our South American region posted value point growth. And at the two Extravaganzas we saw 18,000 very excited and extremely confident distributors ready to take it to the next level in 2012.

In March, many of you will be joining us for our Investors Day here at Los Angeles, which will be held during our annual leadership event. We expect more than 4,000 of our top distributors from around the word to be here at our summit meeting, which culminates in our annual Mark Hughes Bonus Award evening. This year will be an amazing bonus award event with more than $50 million awarded to the qualifiers, that’s my first bonus award event as CEO, it was an amazing experience to be handing out checks totaling almost $18 million, so awarding bonus checks totaling more than $50 million is simply going to be incredible, you’ve heard it say this many times, we are just getting started.

Our strategic initiatives and investments continue to target top line growth opportunities. We continue to enhance our global management team and the infrastructure that will support our top line growth well into the future. We get more distributors entering the business, more distributor activity in engagement and our sales leaders are having more success, sustainable success than ever before, this is evidenced by our retention rate of over 50%.

Our products and our business opportunity are more relevant for the global marketplace at any time in our 32-year history, as this is the way we go to market, person-to-person direct sales. We’re the original social network with highly entrepreneurial distributors who are passionate about the results, they have achieved with our products and our business opportunity in our brand, in our image continued to gain recognition and strength worldwide truly. We’re just getting started.

Let’s share much more detail with you when you join us for our Investor Day next month. So at this point, let me turn the call over to Des and John for our business and financial highlights.

Des Walsh

Thank you Michael. The fourth quarter was our second consecutive quarter of more than $1 billion volume point, a 23% increase over last year’s fourth quarter results and it’s the highest volume quarter in Herbalife’s history. And as Michael said, we are very pleased with the momentum we see in the underlying trends in our business as all six regions finished the quarter with double-digit Volume Point gain. The main driver of our growth continues to be the adoption and the expansion of daily consumption business method.

Additionally, this initiative has been augmented with the expanded use of systemized training methods that enhance training for our distributors and sales leaders and our city-by-city approach continues to localize the Herbalife opportunity and distributor support. Daily consumption business methods not only drive increased distributor engagement, they also drive increased consumer engagement. One key characteristic of daily consumption business methods whether nutrition clubs, weight-loss challenges or distributor led fitness boot camp is that the distributor and their consumers have much more frequent contact than it is normal for traditional direct sellers.

Throughout 2011, we were very pleased to see that the increased engagement we have been discussing for the past several quarters continue to translate into growth and Volume Point.

Now let me provide regional highlights and color on some key regions. The North American region had another strong quarter, posting almost 18% net sales and local currency net sales growth and 16% growth in Volume Points, each compared to the prior year period. the new distributors increased 5% in the quarter and the average active sales leaders one of our key distributor engagement metrics increased 17% in the North American region compared to last year’s third quarter results.

For the quarter, U.S. net sales grew 17% and Volume Points increased 16% 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 17%. The growth in the U.S. continues to be driven by the expansion of daily consumption, business methods particularly in the general market segment of the business building on the successes of our Latino business.

For the year, North America’s net sales grew almost 14% and Volume Points increased to 11% versus 2010. New distributors increased 5% and average active sales leaders grew 15% for the year compared to 2010. Sales leader retention in the region improved 2.5 percentage points to approximately 51% for the year.

In the U.S., we are seeing continued momentum in business growth in the generation age distributor group, our name for those distributors under 35 years old. We are seeing very exciting adaptations of Nutrition Clubs bring up through this group and the higher utilization of the Herbalife24 products in addition to stronger use of social networking.

And North America has taken their running start 2012 with a huge increase in attendance at our 2012 pick up meetings around the country. The general markets saw 65% increase in attendee and two new cities added this year. And (inaudible) Future President’s Team Retreat we had a 28% increase in the number who qualified to attend. We view these as significant indicators of increased distributor engagement.

Moving on to Mexico, local currency’s net sales for the quarter increased 20% and Volume Points increased 20% each as compared to the prior-year period. For the fourth quarter, new distributors increased to 11% compared to the prior year. We are very pleased to see average active sales leaders increased 26% for the quarter. This is the fourth consecutive quarter that the region has posted an increase in average active sales leaders greater than 20% over the comparable period of the prior year.

For the entire year, local currency net sales in Mexico increased almost 29% and Volume Points increased 25% compared to 2010 results. New distributors increased 22% and average active sales leaders grew 25% for the year compared to 2010.

Sales leader retention in Mexico, already an impressive 58% increased again in 2011 to 59%. Mexico, our oldest Nutrition Club market continues to experience growth as the three strategies that I’ve mentioned earlier are helping to drive continued increases in penetration.

First, we are seeing more distributors in Mexico adopting non-residential Nutrition Club model, which is helping to expand consumer access to clubs and Herbalife product. Secondly, many distributors in the region have been integrating more structured training methods into their businesses that introduced an element of discipline that is proving to be beneficial in helping distributors grow their Nutrition Club business.

And thirdly as part of our city-by-city focus in the fourth quarter, Mexico hosted its multi-city Nutrition Club tour, where distributors around the country shared best practices on growing and operating their Nutrition Clubs and we saw over 90,000 distributors this past year compared to 70,000 in April of 2011 and 55,000 in November of 2010.

And while we do not usually comment about current business trends, two of Mexico’s leadership training events in the first quarter sold out at least a month in advance. The excitement and engagement level of our Mexican distributors is very high.

The Asia-Pacific region continues to grow. During the fourth quarter, local currency net sales increased 34% and Volume Points grew 37%, each is compared to the prior year period.

for the fourth quarter, the new distributors increased 49% versus the prior year. 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.

While we continue to see strong growth out of both Korea and India, we are very pleased with the growth of the other markets within the region particularly Indonesia and Malaysia. In India, we are working to ensure that our infrastructure and distributor training keep pace with the very strong growth. For the year, local currency net sales in the Asia-Pacific region increased 32% and Volume Point growth of 33%.

New distributors increased 44% and average active sales leaders grew 34%. Sales leader retention in the region improved almost 2 percentage points to approximately 40% for the year. Congratulations also to our Korean distributors and employees as Herbalife Korea recently received the 2012 Most Trusted Brand Award in the health functional food category sponsored by Chosun Ilbo and the Korea Branding Association and conducted by an affiliate of Korea’s biggest daily newspaper the Chosun Ilbo. They surveyed 2,800 consumers over the age of 20 who chose the best brand according to brand remembrance, brand purchase, brand awareness and preference.

Local currency net sales in the South and Central American region increased 33% and Volume Points in the region were up 35%, each is compared to the fourth quarter of 2010. average active sales leaders in the region increased 27% over last year’s fourth quarter. New distributors increased 89% for the quarter compared to the prior year period. As we mentioned on last quarter’s call, during the back half of 2010, we ran a Welcome to Herbalife promotion, which is the IVPs that a new distributor purchases when they sign up, had a lower price points and it's typical in the market.

While we are very pleased with the number of new distributors that the promotion brought into the business, we will be setting the engagement of these distributors over the next few months to see whether this promotion is one which merits repeating. One of the things that we continue to be pleased within the South American region is that daily consumption is moving out of the early adopter markets and is now driving sales throughout numerous countries in the region. and as Michael mentioned, it is an indicator of the broad based trend that this is the third consecutive quarter where we experienced Volume Point growth in every country throughout the region.

Within the South and Central American region, we need to mention the strength we are continuing to see in Brazil. Brazil experienced Volume Point growth of approximately 21% in the fourth quarter over the fourth quarter of 2010 at both nutrition clubs and traditional business methods experienced growth. Our distributors in this market are just beginning to scratch the surface of the real market opportunity.

For the year, local currency net sales growth in the South American region increased almost 37% driven by Volume Point growth of 33%. New distributors increased 44% for the year and Average Active Sales Leaders increased 21%. sales leader retention in the South American region improved more than 8 percentage points to almost 56% for the year. This is a remarkable achievement and is another testament to the increased penetration of daily consumption.

Turning to EMEA, during the fourth quarter local currency net sales increased 11% and volume points in the region grew 10% compared to the same period in the prior year. New distributors for the fourth quarter increased 18% over the prior-year period, and average active sales leaders in the region were up 17% in the quarter each as compared to the fourth quarter 2010. 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. And like the U.S., we launched the Herbalife24 products in the fall, and we believe that we’re seeing a younger athletic distributor group in Western Europe really embrace this product.

Within EMEA, Russia had another impressive quarter. Compared to the fourth quarter of 2010, this quarter’s volume points were up approximately 38% with a 32% increase in new distributors and retention improved approximately seven percentage points to almost 77%. This retention rate is a staler example of the benefits created by building a business on a stabler foundation grounded in daily consumption coupled with systemized training a local focus city-by-city.

In the EMEA region, annual local currency net sales and volume points increased 12% compared to 2010; both new distributors and average active sales leaders increased 15% compared to the prior year. Sales leader retention in this region improved more than four percentage points to more than 61% for the year.

Now, let’s turn to China where our local currency net sales increased 14% and volume points grew 13% in the fourth quarter compared to the prior-year period. While we continue to believe that our sales leaders in China are making progress acculturating the concept of daily consumption, we believe that we are still working to find (inaudible) in the nuances of the daily consumption model that will work best in this market.

We continue to see more nutrition clubs opened, and while we are very pleased with the progress with the business in China, we remain cautious about expecting too much too soon from this market. We are 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 year and also to remind everyone on the call that we believe that the momentum we have 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 review the company’s fourth quarter results as compared to the year ago quarter, and then compare to guidance we provided in late October, after which I’ll discuss our guidance for Q1 and full year 2012.

For the fourth quarter, we reported net sales of $884.6 million, an increase of 20% compared to the fourth quarter of 2010. For the period, foreign currency had a 310 basis point drag on net sales, and local currency net sales increased by 23%.

Since Des has already walked through the details of our volume and net sales results by region, I’ll move on to gross margin, which improved by approximately 80 basis points compared to the fourth quarter of last year. There were two items to bring to your attention with respect to gross margin comparisons.

First, our seed-to-feed strategy including H.I.M. manufacturing and our strategic softening efforts, benefited gross profit by slightly less than half the total variants. And secondly, foreign currency benefited gross margin compared to the fourth quarter of last year.

I’ll go more into how foreign currency can impact our results during Investor Day next month. Let me add one comment now, for country that purchase most of their products in the U.S. such as Mexico as opposed to those purchasing most of their products locally such as Italy. The impact on cost of goods sold that you would expect to see some changes in foreign currency is essentially lagged by approximately one inventory return. Accordingly the impact from the strengthening dollar during the latter part of 2011 is reflected in our Q1 and full year 2012 guidance.

Now let me turn to SG&A; SG&A as a percentage of sales was essentially flat for the quarter compared to a year ago. Excluding compensation to China, sales employees and independent service providers as well as recorded foreign currency exchange gains and losses, SG&A in the quarter improved by approximately 30 basis points versus last year’s fourth quarter. Specific to recorded foreign currency gains and losses, this year’s fourth quarter included $2.3 million in losses compared to a net gain of $700,000 recorded in the prior year period. The Q4 effective tax rate was significantly higher than a year ago. As you know the fourth quarter’s effective tax rate includes a true-up to the full year rates of previous three quarters.

Accordingly, let me discuss the tax rate in the context of the full year. The adjusted full year 2011 effective tax rate of 26.3%, with approximately 190 basis points higher than last year’s full year rate. Much of these changes relates to a one-time benefit recorded a year ago that was noted in last year’s fourth quarter conference call. However higher than last year’s rate, 2011 effective tax rate came in approximately 150 basis points better than the mid point of guidance we provided. And we have also lowered our expected 2012 effective tax rate by 50 basis points, and both below and high end of our guidance range. This change is reflected in the guidance provided yesterday.

Fourth quarter earnings per share of $0.86 was $0.14 better than the high end of guidance provided in October. This was primarily driven by both higher volumes and a lowered and projected effective tax rate. With respect to cash flow for the full year, the company generated cash flow from operations of approximately $510 million, an increase of 31% compared to 2010. Free cash flow for the year, net of approximately $91 million of CapEx was $419 million, which slightly exceeded reported net income of approximately $413 million.

Also during the fourth quarter, we repurchased $50 million in common stock and for the full year 2011 we repurchased just under $300 million in common stock, which leaves us with approximately $475 million remaining on our $1 billion repurchase authorization.

Now let’s discuss guidance for 2012, both for the first quarter and full year. First address currency, as I believe it’s important for investors to understand the assumptions we used in developing our guidance. We used average rates as opposed to specific spot rates similar to the method we employed last quarter. In this case we used an average of the daily closing rates during the month of January, while these rates are slightly worse than those utilized for our previous 2012 guidance. The spot rates as of the end of January, and those as of the end of the day Friday, where meaningfully better than those assumed in our current guidance.

To provide investors with a sensitivity for modeling purposes if either January 31 spot rates or last Friday’s spot rates were used to determine our guidance, the full-year 2012 EPS guidance range would have increased by $0.10 to $0.15.

However, there would essentially be no EPS impact to Q1 guidance as quarter is substantially hedged. Venezuela, which represented less than 2% of total company Volume Point in net sales in 2011, is included in the forecast having exchange rate of 5.3 Bolivars to a dollar.

Let me move on to our assumptions for Volume Point growth, which as Michael mentioned earlier, reflects I belief in the continued strength and momentum of business as we build on the 21% volume growth experienced in 2011.

From a Volume Point perspective, we are providing initial guidance for the first quarter of 2012 of 14.5% to 16.5% growth. And we are increasing our Volume Point guidance for the full-year by 200 basis points to both the high and low end of what was previously provided. We are now expecting Volume Point growth of 10% to 12% for the year. Fully diluted EPS in the first quarter is expected to be between $0.76 and $0.80.

For the full year, we are raising our fully diluted EPS guidance range adding $0.15 to both the low and high-end of that previously provided, resulting in a new 2012 guidance range of $3.40 to $3.60. The increase in our fully diluted EPS guidance is largely due to the confidence we have in our Volume Point growth. And just to repeat, our EPS guidance does not reflect the softening of the dollar over the last month.

Before ending the prepared remarks, I’ll comment briefly on the dividend increase. As announced yesterday, the Board of Directors approved a $0.30 per share dividend, a $0.10 increase from the previous quarterly dividend. This decision is reflective with our strong 2011 performance and demonstrates management’s confidence in the company’s future growth and our commitment to maintaining a suitable dividend return to shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question will come from John San Marco with Janney Montgomery.

John P. San Marco – Janney Montgomery Scott LLC

Thanks. Good morning, everyone. Congratulations.

John DeSimone

Thank you, John.

John P. San Marco – Janney Montgomery Scott LLC

Can we talk a little bit more about this phenomenon of commercial club formation that you’re seeing in Mexico, presumably it cannibalizing some of the previously – what were previously home clubs. So, it would be helpful, if you could quantify maybe what percent of Mexican volumes come from daily consumption and how that compares to the prior year? Any other way you have to look at it to sort of confirm that daily consumption still has momentum in Mexico?

Des Walsh

Yeah, John. Hi, this is, Des. Let me take that one. So John, we believe that daily consumption business methods continue to contribute approximately 70% of our volume in Mexico. We believe the transition from home clubs to commercial clubs is a very healthy development that it results in greater facility for training new distributors. We have greater visibility to commercial clubs through our field service program. So frankly in every respect we think this is a very positive development and is certainly contributing to the growth we’re seeing in Mexico today.

John P. San Marco – Janney Montgomery Scott LLC

Okay. So I guess in your view when two home clubs become one commercial club and in your observation if one plus one equals something greater than two?

Des Walsh

Yeah, absolutely, John and we’re seeing this, because obviously one of the things our distributors are really focused on now is the number of consumptions, the focus on creating duplication, a focus on making it easier for customers to transition the distributors, and then open their own clubs and frankly, this home commercial model, the systemized training that we’re now seeing introduced by many distributor leaders in Mexico, support that obviously by the company with nutrition club towards and so on. I think all of this is contributing to a combination, so that you’ve got this, as you say there's incremental effect to out rather in cannibalistic effect.

John P. San Marco – Janney Montgomery Scott LLC

Okay. That's certainly showing up in the financial result. so, I guess second question how much – what was the percentage discount on the IBP in that end.

John DeSimone

Yeah. This is, John. it was different by market. What we tried to do is develop an equivalent IBP price in each marketplace compared to the U.S. based on GDP for capital of the addressable audience. so it's different marketplace.

John P. San Marco – Janney Montgomery Scott LLC

Okay. And do you have an estimate of what effect that had on your sales or on your pricing?

John DeSimone

Well, didn't have much on our sales, they don't believe. I think it was a two months – maybe two and a half months test, a little too early to determine how successful it was. I mean, we’re excited about it early. but really, the objective of the test was not just to bring people in, but to bring people in at a high activity rate and we don’t know if that happened yet, that’s something we wanted to wait six months after promotion, look back at their activity levels and see if it was a successful promotion or not. so it's a little too early to tell.

John P. San Marco – Janney Montgomery Scott LLC

Okay. And just last question, I was hoping you could talk about Taiwan and when we will anniversary those club closures there and then maybe what your outlook is once we get those anniversaries?

John DeSimone

Yeah. So John, we're pretty close to that. but obviously, we think mid-year we're going to see that. but frankly, we should loose sight of the fact, that our business in Taiwan is very strong that we have there one of the highest penetrations of many commercial markets in the world. so obviously, it's down a little from those busy (inaudible) a year or so ago, and as you know, (inaudible) because of the company’s efforts, because I think a number of our clubs there had tended, had there too far into perception that they were becoming retail outlets and as you know, we’re absolutely committed to our direct selling model. and so as you know, we pulled back and closed a significant number of clubs, but the business that’s there is stable and we're very happy with that.

John P. San Marco – Janney Montgomery Scott LLC

Okay. Thank you for taking the questions.

John DeSimone

Sure, thanks.

Des Walsh

Thank you, John.

Operator

The next question will come from Tim Ramey with D. A. Davidson.

Timothy Ramey – D. A. Davidson & Co.

Good morning, congratulations, we're not worthy still.

Michael O. Johnson

Good morning, Tim.

Timothy Ramey – D. A. Davidson & Co.

Good morning. I think you highlighted Korea and India as two of the top performers and I continue to be entreated by the performance in India, I wonder if you dive in a little further there in terms of how that markets developing, and what kind of milestones are ahead on that. I think you would indicate it was above to or had dropped into your top 10 markets.

John DeSimone

Yeah. So Tim, we're obviously probably pleased to see what’s happening in Korea and in India, obviously two very different markets in terms of their stage, in terms of the acculturation of daily consumption. In India, obviously we’re excited by the growth that we see. at the same time, we’re somewhat cautious, Tim, because what’s very important to us is that our distributors’ ability to train and to mentor the number of new distributors coming into the business is very important. similarly, we are working hard to keep pace from an infrastructure perspective, from a theoretic perspective with that growth, so obviously we’re very happy about what we’re seeing in India, at the same time we got a note of caution there as we ensured that that growth is based on a strong foundation of daily consumption, but India for us is like a cricket match. Right it’s a three day event, it’s not a three hour event and so we’re looking very much a long term situation in Korea, in India rather than short term one.

Timothy Ramey – D. A. Davidson & Co.

Right. If I can just follow-up John’s comment yesterday on the CapEx just sort of being tend to sort of 3% of sales, that begins to sound like there is a significant infrastructure build out that it isn’t just one project, it’s less project oriented and more systems oriented. Can you talk a little bit about kind of the uses of CapEx and what’s your thoughts are on kind of just budgeting at 3%?

John DeSimone

So we model at 3%, we don’t budget at 3%, we actually have a very detailed CapEx budget, CapEx budget falls into three categories; maintenance portion which is $30 million, $35 million a year. There is a systems strategy that actually is a good portion of our strategic initiative budget within CapEx. And then there was manufacturing, and those are really the three buckets. Most of our IT investments at this point in time is distributor facing, trying to improve the service of our distributors increased access and it’s along those lines, but because it’s really just three buckets, you got the maintenance bucket that doesn’t change much.

On the IT side, we’re on one instance of Oracle and everything is just a prerequisite of the next project. It’s limited on what you can invest at any one point in time and that 3% seems to be about all we can execute from more of a human capital and a financial capital standpoint. So I think 3% is more of a fallout, it’s not a starting point. We don’t budget 3% as a high level we actually do it at a detailed level and what we’re finding is 3% is a bottle we can execute.

Timothy Ramey – D. A. Davidson & Co.

Perfect, thanks.

Operator

The next question will come from Mike Schwartz with SunTrust.

Mike Schwartz – SunTrust Robinson Humphrey

Hi, good morning everyone.

Michael O. Johnson

Hi, Mike.

Mike Schwartz – SunTrust Robinson Humphrey

Hey, just wanted to take a look at China. And I know you’re trying to kind of rain in any kind of positive commentary going on there, and you don’t want really get ahead of yourself, but was there anything you saw going from 3Q to 4Q and that gives you any kind of thoughts of how daily consumption is playing out? Are you seeing clubs start to touch a broader audience or you’re seeing greater productivity, what’s going on there?

Des Walsh

So here is seeing, Mike, we’re seeing in China with the clubs is that as always we go through this cultivation process and that process normally takes two to three years. In China, first of all, its taking a bit longer because as you know China is a closed market, so we don’t have the benefit of having our international leaders there.

The second thing in terms of the acceleration of growth, I think it’s partially due to the fact that we now see clubs emerging in lower income area as they work to find to create a model, which works better in that environment. And obviously that’s very positive and very healthy because our (inaudible) substantial, a higher income level in China today.

The vast percentage of the population is not in that income bracket. And so, our sales leaders there are very correctly seeing how can they adopt the model, so that it can reach to a broader audience. But again Mike, as you highlighted, we remain cautious about China. It’s a very evolving marketplace, very unique market situation and that’s why we just not remain cautious. It’s very early days yet, we remain positive throughout the future, but we don’t want to get too bullish and get ahead of ourselves.

Mike Schwartz – SunTrust Robinson Humphrey

Okay, great. Thanks for the color. And then the follow-up question just on the retention rate up to 52% in 2011. I know in some countries and you pointed out, Russia that stands in the 60%, 70% range. Is there any reason to think that the company wide number can’t get to a 60% to 70% number in the future?

Des Walsh

We believe that it is possible and we’re working very hard to replicate the conditions that exist in Russia and many others markets where we have in excess of 60%. And essentially that’s why Mike you continue to hear us talk about the three elements that you heard at [Honors] last year. You’ll hear them again at the investor conference; you’ll hear them at the summit this year. We talk about systemized training about locations and about a city-by-city focus, because it’s really that city-by-city focus that is being led by our distributor leaders in Russia and around the world that is really contributing significantly to that. So, again, no reason at all, we believe that retention rates in excess of 60% are achievable and in fact, as part of our Herbalife Decade plan, we would like to see us get to an excess of 70%.

Mike Schwartz – SunTrust Robinson Humphrey

Okay, wonderful. Thank you.

Operator

The next question will come from Anand Vankawala with Avondale Partners.

Michael O. Johnson

Hello, Anand?

Operator

He has withdrawn his question. The next question will come from Linda Bolton-Weiser with Caris.

Des Walsh

Hi, Linda.

Linda Bolton-Weiser – Caris & Company

Hi, in sharing with various distributors and asking things about the Herbalife24 product line, it seems that there is great optimism about the eventual potential of this product line, but that it really requires a slightly different sales method and presently different training for the distributors. Can you give a little more detail on what you’re thinking long-term with regard to how you’re going to better sell that line?

Michael O. Johnson

Hi, Linda, it’s, Michael. I think, Des mentioned it pretty well in his comments today that different business methods are going to spring with products like Herbalife24. We’ve got a new methodology starting and it’s usually distributors not the company, who to start this (inaudible) we unleash their entrepreneurial ambitions with a product like this. And then you’ll see things like fit clubs coming forth, you’re going to – as Des mentioned in his notes, we have a group here in West Los Angeles, that’s developed a whole new method of bringing people to the company and they’re bringing them not only the Herbalife24, but to our standard products to serve with that.

It really is an eye-opener for us. It was something that we had in mind to list our brand, to list the opportunity to work with our sports teams more closely who response in and around the world, and have new business methods evolve from it. The creation in these business methods frankly has moved a little quicker than we had anticipated. And it’s a fabulous thing to see a younger more fit group coming in, not just concerned with weight loss, but concerned with total nutrition and fitness nutrition. So these will become organic just like so many things have in our company, we will then take it upon ourselves to make sure that these good ideas spreads for globally as quickly as possible.

Linda Bolton-Weiser – Caris & Company

Great. And then, can I also ask about just kind of shifting to the balance sheet and cash flow, I mean your performances is great and your dividend increase is certainly impressive. But one can argue your balance sheet is actually under leverage given the consistency of your performance and growth et cetera. Would you consider sort of levering up a little bit more and being more aggressive on some sort of a share repurchase or something along those lines?

John DeSimone

Linda, it’s, John, I’ll take this question. So it is an option. We have a credit line that has quite bit of capacity available right now. And so substantially we may consider it at some point in time. It would be used more if it is an overreaction in the stock or something that’s going on in the marketplace that doesn’t really impact Herbalife’s when the stock overreacts. But other than that, we’re going to keep returning our cash flow to invest as to dividend and buyback and if we decide to lever it up, it will be for a special circumstances.

Linda Bolton-Weiser – Caris & Company

Great, and can I just make a one more.

John DeSimone

Yeah.

Linda Bolton-Weiser – Caris & Company

I mean, I guess you’re on inventory was up 36% year-over-year of course, you have really high sales growth, but is the inventory real high because of your infrastructure build or what’s going on there?

John DeSimone

There is couple of things. So, first and foremost of course it is to support sales and 70% of the increase in the inventory is just tied to increase in sales. We have a couple of other things going on. One is, we stopped manufacturing that, right. So there are raw materials and [whip] that are now part of our inventory that we’re sitting at a vendor in prior periods, all right. So that’s about $7 million, which is not a big number, but that is a piece of it. And then we have some coursing strategies that as we take in more products into our facilities we are building buffer inventory from the current vendor to soften the transition.

Linda Bolton-Weiser – Caris & Company

Great, thank you very much.

Operator

(Operator Instructions) And the next question will come from Gary Albanese with Auriga.

Gary Albanese – Auriga

Hi, good morning everybody. I was wondering if you could address the boot camps in terms of the scale, how big is that effort right now? Is it regional wise, and then really what are the opportunities that you see in terms of coordinating that with the rest of business with the nutrition clubs and driving sales in the future?

Des Walsh

Hi, Gary, this is, Des. So, Gary it’s in its very initial stages. and in fact, really the concept of a fit camp to boot camp is really tied into this whole question of healthy active lifestyle and another way of bringing customers to the company to be associated around that campfire. And – but initially, it’s in its very early stages. so we have a group here that’s created this in Southern California, it has been very successful, we are following as Michael mentioned, in relation to Herbalife24, our standard process where once we see an idea that our distributors have embraced, once we see it spreading across organizations, once we see distributors moving up the marketing plan, then our distributors follow success. and so what we do is that, we simply provide a platform to get that word out. and so again, Gary it's a testament to the power of our distributors, their entrepreneurial spirit, their ability to create and implement great ideas. But this is one in the very early stages, what will happen is that at our coming summit, this concept will be spoken out and then it will be taken around the world by distributors as they see that if something they can incorporate into their business.

So, early stage is yes. but again, by the way, what's really interesting to us is that although it’s developed around the concept of fit camps on a beach, what we’re now seeing is some distributors adopt that to their local environment. So they’re having fit camps in parks, we’re going to see fit camps in malls, we’re going to see it a whole variety of different methods of implementing it in whatever local environment exists. So that's one of the exciting things about obviously, all that we’re seeing at Herbalife.

Gary Albanese – Auriga

Yeah. I think the whole concept works very well with your model. Changing [stuff] could be the seed-to-feed program, what's the percentage or how do you see that growing into 2012. I mean, is that going to encompass more and more of your production or your inventory or your revenue?

John DeSimone

All right, this is, John. our C2B strategy is a multi-year strategy, and it will ramp up in kind of a wavy fashion over the next three or four years, and you'll see some ramp up throughout 2012 where as we move some of our foreign production and see our current H.I.M. facility. We haven't gotten any more detailed in providing some visibility then, than what I’ve just given you right now.

Gary Albanese – Auriga

Okay, okay. And just lastly, do you have any estimates for what in terms of percentage of revenue the daily consumption model is right now?

John DeSimone

Yes. We've actually dug pretty deep into different types of analyses to come up with a good estimate, and it really ranges depending on how specifically get by market. and so we believe it’s between 34% and 41%. and probably about two thirds of our growth is coming from daily consumption right now.

Gary Albanese – Auriga

Okay, great. Thank you very much.

Operator

The next question will come from Anand Vankawala with Avondale Partners.

Anand Vankawala – Avondale Partners

Hi guys, thanks for taking my question. Most of my questions have been answered and so the only follow-up I have is do you have an estimate of how many daily consumption clubs or nutrition clubs there are right now worldwide?

John DeSimone

Yes. So, now we actually have changed our philosophy on this, because initially when it was home clubs, we was really trying to keep a track of this, and then we [stopped] with that when we had been to commercial clubs. What we’re seeing in commercial clubs of course is that, we have many instances, we’ve got groups of distributors working together, and that's why we believe that individual location is no longer the best measurement to see growth in the clubs, because individual clubs can frankly high the true level of activity and engagement around the clubs, and that's why we're transitioning more to say what is this percentage of daily consumption. And obviously, by the way, daily consumption doesn’t just mean clubs; it means any method focused on creating permanent customers and building a business around them with increased access to them and so on. But directionally, that's why you’re going to start see us more reporting this percentage of volume based on daily consumption rather than individual club numbers.

Anand Vankawala – Avondale Partners

Okay, great. Thank you. And then I guess just lastly with regard to Herbalife24, any commentary as far as whether you’re targeting specific in regards, I know that you’re saying that with the Generation H, you’re getting more traction with the Herbalife24, but I mean are you basically trying to attract the younger demographic and is that pretty much the focus going forward, or do you think you can get us through the remainder of the distributor base as well?

Des Walsh

Well, Herballife24 is for people who have active lifestyles whether they go to a gym, whether they are participating on a team, whatever they’re doing there is an endurance product, or rebuilt products, or restore products in there we are very confident about the science behind these products in the formulation. So we think that the general public has a reception for either one or all of the products that are in line, there is a hydration product that I’m drinking every single day, that everybody is drinking around here. It's a broad range of consumers, it's a broad range of products that are in there. it's definitely for somebody who is interested in having a very healthy supplement in their active lifestyle. So while we’re seeing younger distributors come to it, I think that some of the branding done by it, some of the fund that’s around it, some of the interesting business models that are coming because of it is attracting a younger distributor to us who isn’t necessarily a weight loss distributor, but certainly is going to attract people to their club. Most people go to gyms, go to clubs to workout, because of weight management, that’s their big goal in life. So, it's going to have a intersection between the two, but it definitely has an opportunity to build new distributors for us, younger distributors for us, but it will work across all of our distribution base.

Anand Vankawala – Avondale Partners

Okay. Do you have – can you share any metrics as far as what kind of distributor base in areas where Herbalife24 had been available for more than a quarter. What percent have actually ordered 24 product?

John DeSimone

This is, John. It's a little too early for us to start giving outstats. I mean, the product really got launched in – the full set of products in late Q3, early Q4 and Europe was on the same timeframe. So it’s probably about six months away before we feel comfortable giving out statistics.

Anand Vankawala – Avondale Partners

Okay. Thank you.

Operator

At this time, there are no further questions. I would like to turn the conference back over to management for any closing remarks.

Michael O. Johnson

I just wanted to thank everybody for being on the call today. I think you’ve heard some themes about sustainability, about just getting started, about strong [starts], strong fundamentals; the confidence that we have in Herbalife today is greater than ever before. We look into the future with a bold promise for our distributors, for our consumers, for our shareholders and (inaudible) system that this company is poised for its greatest time ever. we look forward to sharing more of those, of that information with you, what we're going to do and how we're going to do it out on our Investor Day. So please join us. it’s going to be an exciting time while you're here, and we'll show you the best of Herbalife and the best is yet to come.

Operator

Ladies and gentlemen, thank you for participating in today’s conference call. You may now disconnect.

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