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Herbalife Ltd. (NYSE:HLF)

Q4 2007 Earnings Call

February 27, 2008 11:00 am ET

Executives

Michael Johnson - Chairman and CEO

Greg Probert - President and COO

Rich Goudis - CFO

Brett Chapman - General Counsel

Analysts

Simeon Gutman - Goldman Sachs

Olivia Tong - Merrill Lynch

Karen Howland - Lehman Brothers

Operator

Good morning and thank you for joining the fourth quarter 2007 Earnings Call for Herbalife Ltd. On the call today is Michael O. Johnson the company's Chairman and CEO, Greg Probert, the company's President and COO and Rich Goudis, the CFO. I would now like to turn the call over to Brett Chapman, the company’s General Counsel, to read the company's Safe Harbor language.

Brett Chapman

Thank you. Before we begin and as a reminder, during this conference call, comments maybe made that include some forward-looking statements. These statements involve risks and uncertainties and as you know, actual results may differ materially from those discussed or anticipated. We encourage to you refer to yesterday's earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements in our business.

In addition during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, prepared in accordance with US Generally Accepted Accounting Principles, referred to by the SEC 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 web site, herbalife.com to find our fourth quarter press release, containing a reconciliation of these measures.

I would like now to turn the call over to Michael Johnson.

Michael Johnson

Good morning, everyone. Welcome, again to our fourth quarter and 2007 conference call. Let me start out with a few comments regarding our full year performance, followed by key highlights of our most recent quarter and lastly, touch upon some recent trends.

Investors often ask me why our business is doing so well, especially during economically challenging times. And my response has always been, in the combination of our product, our highly entrepreneurial distributors and our management team, we are providing healthy solutions to global health issues, like obesity and providing a great business opportunity to people in search of supplemental or full time income. This works well in these times.

Over the past three years, our distributors and management team have been leading a transformation in our company. With the emergence of the customer club model and its various cultural adaptations, distributors are now reaching more consumers than ever before. They are increasing access to our products. They are promoting daily consumption and this has been the significant catalyst for growth in many of our markets.

2007, as you know, is another record year for Herbalife. We experienced double digit topline growth, 13.8%. Our operating margins expanded 71 basis points and our EPS increased 31%.

Throughout the year, we experienced broad strength and balance in our topline growth. Our top ten markets comprised 685 of our net sales and collectively they grew 17%. Our number one market, the United States grew 24%, and over 80% of our sales came from outside the US.

Both our operating profit margins and EPS increased to record levels, reflecting the strength of our business model and our focus on increasing returns to you, our shareholders.

We tapped into our balance sheet in 2007 to take advantage of what we believe was an inexpensive stock. Since the inception of our buyback last May, we have repurchased 9.5 million shares, 13% of our common stock. And our balance sheet remains conservatively levered at approximately one time's EBITDA.

We have been public now for three years. In both our financial fundamentals and our outlook for future success, well frankly, they have never been stronger. In non-financial terms, we evaluate the strength of our business against the performance of three Rs, retailing, recruiting and retention.

Our net sales growth demonstrates a success we are having in retailing. Our strength in retailing has come, as our distributors are making our products more accessible than ever before.

Our mission for nutrition is based on daily consumption and the most successful and sustainable business models we have are those that are based on daily consumption. Over the past few years, we increased support of daily consumption by product development, packaging and training.

We've also had success with recruiting, as evidenced by the record number of distributors in our business, over 1.7 million, which reflects an annual increase of 8.6%. Over 210,000 new sales leaders joined Herbalife in 2007, an increase of 6.6%. More distributors attained the highest recognition levels in the company than ever before, including 113 new Presidents Team Members, an increase of almost 12% and two new Chairman's Club Members.

On the third R, retention, we were stable at 40% excluding Mexico. As you may recall the growth and trading issues we experienced in Mexico in late 2006, coupled with our enhanced enforcement efforts in that country have led to fewer supervisors who re-qualify.

On a positive note, we're experiencing increasing retention rates in key market such as the US which is up 30 basis points, Taiwan, up 510 basis points, Japan up 410, and Brazil up 80 basis points.

Now let us take a look at our fourth quarter.

Our financial performance was frankly outstanding, led by top line growth of 18.6%, our strongest quarter of the year in both growth rate and absolute dollars. Once again, we benefited by the fact that 82% of our business is international, where currency 620 basis point contribution to our top-line growth rate.

Our revenue growth is well balanced, our top 10 markets which represent 67% of our business, grew 20%. All other markets were up 16%. In the US, our largest and our oldest market, net sales were up 22% for the quarter, which marks the sixth consecutive quarter of 20% plus growth for that market.

Globally, we saw strength in several markets. Taiwan sales were up 19% as our distributors continue their implementation of the methods that support daily consumption. China sales were up 146%, becoming now our number five market this quarter. With 90 retail locations in 29 provinces and five potential licenses currently under review, we remained optimistic for continue success in this market.

Our Spanish speaking South American markets are growing at double and triple-digit pace. Venezuela was up 349% that’s hard to say, 349%, Bolivia was up 147% and Argentina was up 38%. Peru which has been open for only 13 months has been a strong success story becoming a top 20 market in the past quarter.

Attendance at our major events is a great indicator for momentum in a marketplace. In the past month, we hosted over 20,000 distributors at major events in Argentina and Venezuela. These attendance figures are tremendous, when you consider that just two years ago, our Spanish speaking South American markets have one Extravaganza attended by 2500 distributors.

In Europe, we experienced sales increases, in Italy of 22%, and Spain of 26%, in France of 34% and in Russia of 15%. Throughout the year, we worked diligently alongside our distributors to stabilize our business in Mexico. Sales were slightly below our expectations, down 1%. The Mexico and Central America region, as a whole, finished up the year 2%, helped by a momentum in Panama and the opening of El Salvador.

Reflecting the leverage in our business, coupled with our focus on high ROI spending, our operating margins expanded by nearly 60 basis points to 15.1% of sales and our EPS was up 33%.

I am confident that we are heading into 2008 with positive momentum. As you may know, the new sales leader metric is a key leading indicator of future growth of our business. In the fourth quarter, new sales leaders increased 10%, the largest quarterly increase throughout the year, and as a preview in to our first quarter, Herbalife had its highest sales month ever in January 2008. Our net sales were up over 20% when compared to January 2007.

In the first few weeks of 2008, we have now the addition of three new chairman's club members. This is an important indication to our distributors that the doors are still wide open at the top. In January, we introduced two new chairman's club member, Guillermo and Carola Luna and Shawn and Nicole Dahl. Guillermo and Carola's distributorship is from our growing South American region and their organization spans across 16 countries. Shawn and Nicole are from the North American region and are now second generation distributors.

And in February, we introduced our 35th chairman's club member, Eduardo Cuellar and Sylvia Anzola. Eduardo, a psychologist and a doctor. Excuse me, Eduardo was a doctor and his wife Sylvia is a psychologist. They are located in Bogota, Columbia. Eduardo and Sylvia are examples of the type of individuals attracted to the Herbalife business and health opportunity.

And the addition of three new chairman's club demonstrate, as I said before, the momentum that our distributors are carrying in to 2008 and it demonstrates that the door is open and there is room at the top for all of our distributors.

We continue to support our brand with sponsorship programs. The goal of these programs is to drive brand awareness, create distributor activation opportunities and associate our brand with a healthy active lifestyle. Our goal is to create opportunities for our distributors to activate the brand within their communities. Our latest sponsorship was developed with that objective in mind. In January, we introduced a unique partnership with AYSO, the American Youth Soccer Organization. This agreement makes Herbalife the official nutrition advisor and official health and wellness provider of the United States leading Youth Soccer Organization.

Over 1 million children play AYSO Soccer with 80,000 teams throughout the US. The sponsorship includes putting the herbal-like logo on AYSO jerseys. Potentially up to 1 million children will wear Herbalife on their jersey just like the Los Angeles Galaxy.

Also included in this sponsorship is a sampling of our kid-shakes, our H30 Hydration Drink and our Deluxe Protein Bar at matches in events, also combined with field signage and a website presence. And our distributors can build on this sponsorship with the AYSO Organization in their communities by doing local sponsorships.

This sponsorship supports retailing, with sampling and activation opportunities for our distributors and it will help in recruiting a key target segment of the US population, the stay-at-home mom. These women want to give their kids great nutrition and they might be searching for supplemental income through our wonderful business opportunity.

To further support our distributors in the marketing efforts, we recently introduced brand style guides in the brand asset library for our distributors. This will help them activate the brand, once again in their local marketplaces.

Now on to products. We've been very active in product development in the fourth quarter in 2007. We launched Café Latté Flavored Formula 1 to expand the flavors available in our number one selling product line. This has been received very well especially by the nutrition club operators.

We also introduced Skin Activator packets to support the sampling DMO. Our new Soft Green line in Brazil has been well received by distributors and their customers. It is manufactured locally, with attractive price points and we extended that line to include additional SKUs in December.

We continue to expand our core product portfolio globally including heart health products in South America and our other nutrition products in additional Asia Pacific countries.

We are also working with officials in Capitol Hill to make our products more assessable to consumers. As you may know, consumers can use pretax contribution in their HSA or FSA account, to reimburse over-the-counter products. Herbalife has been working in support of Bill number 1107, which would allow consumers to use HSA or FSA contribution towards a narrow set of nutritional products, whose efficacy is supported with health claims. We feel this is an important role that Herbalife can play to help the US evolve from a sick care system to the one that a provides incentives for people to live healthier lifestyles by making nutrition more affordable.

Events and meetings are important to our business to introduce our products. We share best practices made at these meetings among the attendees as well as educate, train and inspire our independent distributors. In the first quarter of 2008, we had several important events take place. The North America region, hosted the January kick-up meetings in 10 cities in United States, Canada and Jamaica, as well as two day Latino meetings in six different US cities. As part of the bifurcation of the US business into the Latin and non Latin business units, the market is proactively developing event calendars customized to the needs of these two different distributor communities.

In Mexico, we hosted 7,000 distributors at a leadership development weekend at Hermosillo and Veracruz.

In the Asia Pacific region, Herbalife will be sponsoring the Los Angeles Galaxy's exhibition game in Asia, in March, with matches in Hong Kong, Seoul, South Korea and Shanghai, China. Over a 150,000 people are expected to attend these three matches. In fact, I am excited to tell you, I will be at the Shanghai game along with 5,000 distributors and 60,000 spectators in one week. As I just mentioned, we have had over 20,000 distributors attend two events in South America during the past month.

And best of all, our annual Herbalife honors event will take place in two weeks in Singapore. We will award our best distributors with a record $34 million. At this event, our President’s team and Chairman club will share big ideas, driving their businesses, with each other and with their downlines.

It was in this forum in 2004 that we started sharing the nutrition club concept from Mexico with the world. Today, we have approximately 40,000 nutrition clubs in 40 countries. Those are good numbers. It has been a great quarter.

So let's turn it over to Greg to give you an update on our key business trends. Greg?

Greg Probert

Thank you, Michael. Before I get started, I would to like to take a moment to say thank you to our distributors and our employees around the world and congratulate them on another record year. It is through their incredible efforts that we are able to achieve such impressive results in 2007.

As you saw in our earnings release yesterday, at the end of 2007, we modified the regional structure from 7 regions to 5 regions. We did this for two reasons.

First, to better align our resources to improve the support for our distributor leadership. For example, Peru opened in December 2006 and several of our distributor leaders from Brazil shifted their focus and time to develop Peru. The incremental $27 million in annual sales in Peru more than offset the $5 million decline in Brazil and these market expansion efforts extended our distributors downline organizations throughout the region.

By incorporating Brazil in to the rest of the South American market, we can now better serve the breadth of our distributors downline organizations.

Secondly, we saw this is an opportunity to enhance synergies within the region particularly in the area of sales and marketing. For example, the success of commercial clubs in Taiwan has led to adoption of clubs in Japan and Korea. So with a unified Asia Pacific structure, we can now integrate best practices more quickly across these neighboring countries.

With regards to the specific changes, the regions of EMEA, North America, and Mexico, and Central America remain the same. The South America region now includes Brazil and is headed by Rob Levy. Asia Pacific includes Southeast Asia, North Asia, and the greater China countries and is now headed by Paul Noack. Until recently, Paul served as our Chief Strategic Officer and in that role was a key architect of our China strategy. Bill Rahn continues to run the North Asia market, which includes Japan and Korea, and he will also now assume responsibility for all marketing activities throughout the region.

Similarly, Edi Hienrich, continues to ride in the Southeast Asia market and will have responsibility for all sales activities across the Asia Pacific region. China continues to be won by Jerry Li and will report directly to Paul Noack along with our Taiwan and Hong Kong markets.

Now, I would like to take a few minutes to highlight business trends and some of our key markets, which investors have focused on recently, the US, Mexico, Brazil and China. The US had stronger momentum year despite softness in the US economy reflecting what we believe is an economically resilient business model, coupled with the transformation to business to a more daily consumption model. We have had six straight quarters with 20 plus percent sequential growth in the US.

In the fourth quarter sales in the top 25 metro areas increased 30% year-over-year. Nine of our top 10 metro areas posted double-digit sales growth year-over-year. 62% of the US business came from our Latino distributors, which grew 38% reflecting strong and motivated distributor leadership. 38% of the business came from our non Latino distributors, which grew 1%. During the quarter over 7000 distributors attended Herbalife University and Latino development weekend in October 2007.

For the US market, our 2008 expectations are for continued growth driven by the expansion of customer clubs, internet business systems, distributor sampling, which has catalyst from AYSO agreement and emerging DMO, such as a weight loss challenge.

In addition, we will be opening several sales centers in key cities such as New York, Chicago and Fresno. These sales centers are run by a third party, are self funded and are proving to be a good resource for Latino market with a large portion of cash and carry distributors. If these centers prove to be successful, we could add additional centers to additional markets with no capital cost to Herbalife.

Mexico finished the year nearly flat versus 2006, which is what we have projected back in January of 2007. Fourth quarter results were down 1.4% versus prior year, the trend is up 4.5% sequentially from Q3 '07 and volume point growth was positive year-over-year for both November and December. New supervisors were up 2% sequentially from third quarter led by December, which had over 3000 new supervisors.

The 2007 infrastructure and training investments have been completed and are now showing positive initial signs. The states with new distribution centers grew 40%, helping our distributors expand their reach in the new towns and cities, while also helping to alleviate the congestion at our older facilities.

And lastly, we have worked closely with our distributors leadership to develop promotions and incentives to provide the catalyst for sustainable growth. One such promotion has the objective to double the number of nutrition clubs, which has been named club of club challenges. The way it works is that each club operator who opens a nutrition club will earn a cash bonus.

In addition, we will recognize the distributor who opens the highest number of clubs as the number one nutrition club builder and recognize the distributor who has the highest number of nutrition clubs in his organization, as the number one nutrition club multiplier. This promotion will begin in the second quarter of 2008.

We expect Mexico to return to growth in late 2008, led by the rebuilding efforts in 2007, including additional infrastructure and new local management team, increased distributor training and promotions like the club of club challenges that I just explained. All these are built on a strong foundation of the nutrition club DMO.

Now lets turn to Brazil. Brazil continues its transition to a better balancing of the three R's, retailing, retention and recruiting. For those distributors who have been using the nutrition club DMO for more than a year, sales were up 8% for the year. This growth is very encouraging, it lead us to believe that the concept has been acculturative and distributors have figured out how to replicate the model.

For those still transitioning from the traditional business to the nutrition clubs, sales were down 14% for the quarter. We remain very encouraged that our distributors are having success with the nutrition clubs and we are optimistic that in the second half of 2008, distributors who have transitioned their business to nutrition clubs over the past year will be posting positive growth.

The recently launched Soft Green line has been a success in Brazil with sales of over 2 million volume points, which account for more than 13% of our Outer Nutrition business. Moreover, this new line is helping to grow the other nutrition business. Average Outer Nutrition sales have grown 40% since the launch of the Soft Green line, going from 1.1 million volume points a month to the Soft Green launch to 1.5 million volume points a month. Based upon this early success, we will be looking to extend this line in 2008.

In terms of events, we hosted over 6,000 distributors at the Brazil South East Extravaganza in December 2007.

In Brazil, we hope to see positive revenue account as early as the second of 2008. For the region, we expect a continued strong growth in the Spanish speaking markets of South America to more than offset any softness in Brazil during the first half of 2008.

China continues to grow, in line with our expectations. In 2007, we ended the year with approximately $75 million in net sales. Annualizing our fourth quarter revenue suggest, we could do $100 million in 2008, a 33% increase. As Michael mentioned earlier, why we did not yet have an update on the direct selling licenses under review with MOFCOM remained optimistic on their approval in the near future, which should provided an ongoing catalyst for growth in this key market.

We operate 90 retail locations across 29 provinces and we are currently revitalizing our real estate strategy to maximize the impact of our current stores, as well as optimize new store openings. We expect to end 2008 with over 100 stores across more than 30 provinces. We also plan to apply for additional provincial licenses just later in the year, which will help carry positive momentum into 2009.

In January 2008, we hosted kick-off meetings in six cities which featured Dr. David Heber in a Chinese language version of his book, What Color Is Your Diet?, in support of our rollout of Garden 7 in China. Michael mentioned the Los Angeles Galaxy tour of Asia in March and this is a great example of our brand enhancing activities. Beyond 150,000 attendees in the stands, we anticipate there are hundreds of millions of Asian consumers who watch these games.

Each impression ties the Herbalife brand, to help the active lifestyle as personified by the sport as well as the Galaxy players like David Beckham. This is an exciting sponsorship for this very important region. We expect China to be a key contributor to our revenue growth in 2008 and beyond and we will continue to work closely with the Chinese government to obtain additional provincial licenses which will allows us to operate direct selling business nationwide.

Thank you now, I'll turn it over to Rich for our financial updates.

Richard Goudis

Thanks Greg. Let me briefly walk you through the fourth quarter financial results that were contained in yesterdays press release and provide financial guidance for the first quarter of 2008 and revise guidance for the full year 2008. Then we will open it up for your questions.

Net sales was $578 million in the quarter, up 18.6% versus the fourth quarter of 2006, driven by strong volume across many of our markets reflecting the highest quarterly growth rate in terms of new sales leaders for 2007. FX had 620 basis favorable impact during the quarter, the largest contribution for the year. The favorable FX contribution reflects the fact that 82% of our business is derived outside of the US. On a full year basis, net sales increased 13.8% to $2.1 billion and FX had 390 basis points favorable impact.

On a reported basis, gross profit in the fourth quarter was $464.2 million or 80.3% of sales. However, excluding the one-time benefit resulting from an international tax settlement, gross margin was 79.9%, an increase of 23 basis points compared to the fourth quarter of 2006. The difference was primarily due to the sales increases in China, which has a favorable cost of goods structure reflected in our local manufacturing coupled with our pricing and commissioning structure.

Royalty expense for the fourth quarter was $204.8 million or 35.4% of sales, reflecting an improvement of 30 basis points compared to last year. The difference is attributable to sales increases in China as commissions and bonuses are paid to our Chinese sales employees are recorded in SG&A. This was partially offset by year-to-date correction in one of our international markets.

Including the China sales employee expenses in royalty, royalties as a percent of sales increased 59 basis points to 37% compared to 2006. Again, primarily reflecting the correction date in the fourth quarter. Without the adjustments in the fourth quarter, we were essentially with 2006.

On a reported basis, fourth quarter SG&A was $173.7 million or 30.1% of sales. Excluding expense associated with the China sales employees just mentioned SG&A expense was a $162.2 million or 28.1% of sales, an improvement of 236 basis points versus 2006. And when you normalize the SG&A for the realignment expenses that we incurred in both 2006 and 2007, our SG&A, as a percent of sales improved a 150 basis points to 27.4% compared to 2006.

Fourth quarter operating income was $85.7 million or 14.8% of sales on a reported basis. However, excluding the onetime tax benefit, reflecting gross profit and the realignment expenses reflected in he SG&A, operating income as a percent of sales improved 57 basis points to 15.1% of sales. This improvement reflects the leverage we have in this business coupled with our prioritization of investments to maximize our returns.

Fourth quarter interest expense was $3.4 million versus the $2.7 million 2006, an increase of $700,000 primarily reflects the higher net debt balance as we utilized our revolver to repurchase stock. On a reported basis, our fourth quarter effective tax rate was 34.6%, however adjusting for our non recurring items that are described in our press release yesterday, the fourth quarter effective tax rate was 34.3% or 60 basis points below the normalized fourth quarter 2006 rate. Our effective tax rate has steadily declined over the past three years and we anticipate further improvement in 2008.

Net income on a reported basis was $53.8 million in the quarter compared to the $41.7 million in the fourth quarter of 2006. On a normalized basis, net income was $55.1 million reflecting an increase of 24% compared to the normalized net income in 2006.

And fourth quarter reported diluted EPS was $0.77 as compared to $0.56 in the fourth quarter of 2006. On an normalized basis, fourth quarter diluted earnings per share increased 33.2% to $0.79.

Now let's turn to the balance sheet. We ended 2007 with $187.4 million in cash and $357.4 million in outstanding debt. We were successful in reducing inventory $17 million throughout the year and it terms of efficiency, our days on hand improved 21 days to 113 days. And more importantly, our inventory turnover improved 50 basis points to 3.22 compared to the fourth quarter of 2006.

CapEx was 17 million in the fourth quarter which reflects our ongoing investments in our infrastructure.

Now let's turn to guidance. We're providing first quarter guidance for the first time and we're raising our full year 2008 net sales growth and EPS guidance. We expect topline growth in the first quarter to be in a range of 12% to 14%, and diluted EPS to be in the range of $0.77 to $0.79, reflecting an increase of 26% to 30% over 2007.

And based on current business trends as Michael and Greg mentioned earlier on the call, we are raising our outlook for 2008. We now expect topline growth to be in a range of 9% to 11% and full year diluted EPS to be in a range of $3.25 to $3.30, reflecting an increase of 20% to 22% over 2007.

Please note that these estimates exclude our cost expected to be incurred, related to our realignment for growth initiative and accretion resulting from any further share repurchases.

While Michael and Greg described the positive business trends with you today, we remain hesitant to provide higher 2008 guidance, this early in the year, as we still remember the punishment we took in a market when we had to re-guide our sales growth estimates in Mexico in January 2007.

As in the past, we remained cautious in our expectations for our 2008 guidance. And as we have done in the past, we will revisit our guidance each quarter based on the most recent business trends.

That concludes our prepared remarks, now we'll open up the call for your questions.

Question-and-Answer Session

(Operator Instructions) Our first question comes from Simeon Gutman.

Simeon Gutman - Goldman Sachs

Hi guys. Just want to walk through the chronology, what happened in Mexico, because I know when you reported the third quarter in early November, you were thinking something in low single-digit range and if October was the slower building month. I guess the assumption was November and December were going to be better and it sounds like they were, but not as strong. I want to make sure I have that down correct and if they weren’t as strong, what were -- anything specific you can point to, anything geographic or its just a simple business, just taking a little longer to get going?

Rich Goudis

I think its more just a lag Simeon, October we comp negative, but both November and December we comp positive. So just like we talked on the last earnings call, where we fell a little bit short in September, we also fell short in October, but we saw very positive momentum building in November and December. And as Greg mentioned, I think we were up sequentially 4.2% from Q3 to Q4, while previous year, I think we were down sequentially Q3 to Q4.

As Michael mentioned, we built a strong foundation. We had some really significant promotions that are kicking in the second quarter. So, we think we built the strong foundation, we've cleaned up the ethical issues from a year ago and strengthened our training programs and now with this incentive program that will kick off in the second quarter that really creates stimulus for people to start recruiting and building more clubs and therefore building revenue.

Simeon Gutman - Goldman Sachs

And the club of clubs promotion, it definitely sounds like a terrific recruiting tool, and I know the nutrition club, hits on all the three Rs. But it sounds like doubling the number the number of nutrition clubs, how does that play into the retention part and then are you also measuring some type of productivity from the clubs as opposed to just the pure sake of opening them?

Greg Probert

All right. This Greg Simeon. I think those are great questions. We are looking not only opening clubs, but making sure that as the clubs open they are solid and based on a strong foundation. If you remember, working on one of the reasons that our retention is down in Mexico is that we are cleaning out some of the clubs that were noncompliant. And we did that though our audits and through our EBP. And we think now that those clubs are gone, there is a very stable base upon which to grow and we want to make sure that we incentivize our distributors who open clubs and I think we a key learning of both management and our distributor leadership was that, those clubs have to be opened the right way, in the right locations and we now have the infrastructure to support that.

As I said in my prepared comments, in areas where we have opened the new distribution centers, our sales are increasing. They are decreasing in Mexico City where most of the noncompliant clubs were. So we are seeing -- I think we have done all the right things and I think this promotion will be the stimulus to get our distributors back to opening new clubs.

Simeon Gutman - Goldman Sachs

Okay. And then on the branding side of things, in '07, I had argued that you had only started to lay the groundwork for some of the higher profile things and then in early '08 here with AYSO and then last year with Galaxy. Is there anything at high level that you have seen. Anything shifting, any key distributors really taking to some of the sponsorships and exploiting it. Anything in activation, is there anything momentum-wise, in that region that you are already benefiting from it?

Michael Johnson

Well, it's Michael, Simeon. Yes. We have had distributors, actually the AYSO program that we did, it is something that we have had on our mind for a while. But our distributor actually beat us to the punch on this with -- in Florida we had a distributor down there who sponsored the local AYSO program and he sponsored it in a large way and we watched and saw what he did down there and if he can become the blueprint for distributors throughout the United States and throughout the world to get involved with other teams, not only soccer but other sports teams and get them to sponsor with Herbalife and get it on the jerseys, it's a relatively small investment. They can buy the uniforms; they can take the product, we'll give you tents to set up. We're working with local management; everywhere we've got tents, banners, sampling size.

In Philippines, the Subic Bay triathlon was sponsored by a distributor down there. We have distributors going here, which is a huge deal, so you've got a ton of leads down there. We just came of the promotions of the tour of California where distributors managed all of the goods there, the distributors who were at the closing event in Pasadena in pouring rain, on Sunday walked away with somewhere around 1500 leads out of that event, that is a significant day for them for two to three hours worth of work to have 1500 leads and generate customers, retail customers, potential new distributors.

So these are the kind of things that are taking place. We have -- there are too many to mention here. There was a bicycle racing team meet sponsored by one our distributors there. There are local sports teams, throughout Europe, we have triathletes who were sponsored not only by the company but by individuals. We have a gentleman who is going to climb Mount Kilimanjaro, who has got cerebral palsy, who is being sponsored by a distributor and taking our products and will be climbing Kilimanjaro at the end of the summer. These are branding, creating great awareness, working with distributors on a local basis and having distributors actually activated. And as soon as the stories get out, of why these meetings as so good and I am sorry to be so long winded here, but these meetings are so good. As distributors come they are proud of this, they share their photographs, they share their results and that entices and enlightens another distributors mind to say, hey I can do this too. So that’s where the success starts to build.

Greg Probert

And let me just a little color to the AYSO. As Michael said, something we’ve eyeing now for over a year and find that we're able to conclude the deal. But if you remember one thing is we talked about over the past year was really going after the stay-at-home moms, we launched the children's line, which is a great product line to go after that segment. And now, we have access to -- our distributors have access to well over million soccer moms and soccer dads. And it really a great example of grass root distributor activation. So again, I think in terms of access to our brand and access to our product it’s a wonder setting agreement in terms of the US. And this is great to have the children line to go with that.

Simeon Gutman - Goldman Sachs

Okay. And just have two more, I’ll ask them together. The first maybe for Greg, on Eastern European, on the European markets what is the strategy and how is that evolving? And then second for Rich, is there any free cash flow usage assumed in your '08 guidance?

Greg Probert

I will do the Eastern Europe, I think the results as we reported, in Russia were up 15% which was I think encouraging. We've always felt there is a untapped potential in that market. As we announced last quarter, we just hired a new Vice President to run Central and Eastern Europe for us, who came from one of our major competitors in that region. And so, I am going to do a tour of that region with Wynne Roberts, who runs EMEA for us. In April to really go and visit Poland and Russia and a few other countries to really formulate, I think a more aggressive plan for getting deeper penetration in those markets. A lot of our competitors have tremendous double-digit growth throughout Central, Eastern Europe, Russia, CIS and so I think its certainly on our radar and like I said I will be going there in a couple of weeks to work with our European management team on a more aggressive plan to penetrate those markets.

Rich Goudis

And then, Simeon, obviously, we remain conservative in our guidance to what our expectations are - there are no further share repurchases. We will use our excess free cash to pay down the debt. So again if we were to potentially go back in the market that would only provide more accretion above our current guidance.

Simeon Gutman - Goldman Sachs

Right. But it still doesn’t mean, even assume you complete the authorization in that number. Correct?

Rich Goudis

That’s correct, I think we have about 65 million outstanding and again our guidance is typically very conservative and the conservative thing to do is pay down debt.

Simeon Gutman - Goldman Sachs

Okay. Thanks.

Rich Goudis

Okay.

Operator

Our next question comes from Olivia Tong.

Olivia Tong - Merrill Lynch

Hi. Good morning. I just want a one quick one first. Can you explain what the correction was in the royalty override?

Rich Goudis

Yeah, the year-to-date catch up in Mexico.

Olivia Tong - Merrill Lynch

Can you provide any further detail? Why the need for a catch up?

Rich Goudis

I don’t know the specific reason other than I think it was just a calculation error that was made throughout the year. So it was just cumulative catch up.

Olivia Tong - Merrill Lynch

Okay. As sales grew beyond expectations, relative to your expectations. Are there particular regions where you saw much more sales at upside than others?

Rich Goudis

Can you just repeat the question, please?

Olivia Tong - Merrill Lynch

Sure. Sales obviously beat your own internal expectations, so I am just wondering what particular, were there any particular regions where you saw results that were well above expectations? Or was it more, just a little bit more in each region?

Rich Goudis

No. I think net-net the only market in local currency terms where we thought we saw a shortage was Mexico as Mike and Greg mentioned. And then where the upside really came currency. Currency was 620 basis points of benefit in the quarter. It was our largest contribution. Then we had some upside in the South America region and a little bit in China, it was a little bit stronger but net-net I think it was really competitive, it saw us come through.

Olivia Tong - Merrill Lynch

Okay Thanks a lot.

Operator

Our next question comes from Karen Howland.

Karen Howland - Lehman Brothers

Thanks. I'm curious about your sales forecast. I know you'd indicated that it was up about 20% in January. I recognized the desire to be conservative but that 12% to 14% for the first quarter seems particularly low, if January was 20% last score something. Are you seeing something in the February month that would believe you to think that it is going to decrease that much?

Rich Goudis

No, there is nothing that we're seeing that's negative, I think it's just, you're seeing this management team being cautious, number one, again in January we saw tremendous currency benefit. Our guidance for you is more cautious now, I mean the dollar fell again to, I think the Euro was $1.50 today, that's clearly what -- that's clearly a little bit different than what is contained in our guidance.

Karen Howland - Lehman Brothers

Okay, and how much for currency in January of that 20%?

Rich Goudis

We didn't disclose that.

Karen Howland - Lehman Brothers

Okay. And then I was wondering, I know you've been working to decrease the overall tax rate. I was wondering if you have any assumptions, anything for that for 2008?

Rich Goudis

I think the last year we're kind of suggested that would be in the low 30s. So I think most analysts have got about 32% Karen and I would say that anything below 32%, you'll probably see potentially further increase in our guidance.

Karen Howland - Lehman Brothers

Okay, great. Thanks very much.

Rich Goudis

You're welcome.

Operator

(Operator Instructions).

Michael Johnson

Okay. It looks like, we've reached the point, where the questions have been answered. And the quarter is done and its time to get back to work here. So, I am going to conclude it with a few comments.

First of all I want to thank everybody for being on call and thank you for you support of our company. We are very proud of Herbalife. We know we head into 2008 with tremendous momentum, which we've have already seen. Challenges and opportunities in our health and nutrition in this opportunity platform, puts us in a very unique place. We have an opportunity for people to add real income to their life, either supplemental or fulltime.

We are taking the global health issue head on, which is [B3 and have heart health], two areas that we think are very, very important. As I watch and listen to all the candidates who are running for office, I hear about all the different healthcare platforms, but I don’t hear enough about health. I hear a lot about disease and I am very proud of Herbalife. And in fact, if we are taking on issues straight on.

Strong top-line growth, enhanced profitability, accelerating new sales leaders trend, getting Mexico turned around, built basically on the strong foundation. Our Spanish speaking South American has incredible momentum. Brazil gaining traction behind its transition to be more balanced mix of the three Rs. Our US marketplace which many people told us when we went public, was going to be just kind of a forgotten market, [200 of millions] and its growing and despite of economic softness.

We are seeing turnarounds in parts of Europe and we’ve got a tremendous eye on Eastern Europe for expansion. Greg, will be going on a trip there very soon. We are building our IT platform and which will offer geographic expansion and acceleration in 2009. And that’s a big, big deal for us. And our strength in Asia, which I will be visiting, I will be doing five cities in the next two weeks in Asia, is beyond and behind the growth is Taiwan and China.

Herbalife as you know is a momentum driven business in some distributor financial statistics for you to consider as you think about us and it took us 25 years to get to 25 chairman club members and in the past three years we have added 10 additional members for a total of 35.

It took us 21 years to get to a $1 billion in sales, in the past six year we doubled to over $2 billion in net sales.

We have got a geographically balanced business which is experiencing strong growth and we have a business model that enables operating margin expansion when investments are made into high ROI projects and it’s a business that generates tremendous free cash.

For the past three years we have experienced EPS growth in excess of 20% per year. We continue to manage our capital structure to provide increased returns to shareholders.

So as I said at the beginning, I want to thank you for your support. We are excited about the Herbalife for 2008 and as we are saying here, it’s the year to dare to be great, Thank, you.

Operator

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect.

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Source: Herbalife Ltd. Q4 2007 Earnings Call Transcript
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