I carefully listened to the last Investor Conference Call by Herbalife Ltd; I was not disappointed. Currently, Herbalife is growing at 16%. And it is fair to say more success is expected. The Vision of Herbalife is to be the premiere nutrition company in the world. The products are distributed using network marketing, which is viewed negatively by many persons. However, Michael O. Johnson demonstated that direct selling is a good business; graphs were displayed with other mega-competitors in the industry. Moreover, he noted that across the world obesity rates (BMI > 30) are expected to double in thirty years and that the global population is aging. As such, the business model of a nutrition company in the direct sales industry is sustainable for the future.
The award-winning CEO spoke about how the company had lost confidence in 2003 - because of the death of the founder in 2000 and a rapid changeover of top leadership. On a company-wide level, he introduced strategic planning for retailing, retention and recruiting to replace the ninety (90) day plans that were used in the past. In recent times, Herbalife has improved its management team, expanded its geographic reach as well as sharing best practices among distributors in training. This has resulted in distributor momentum and top line revenue. According to the Chairman, his job is as follows: to promote confidence in the products, the business opportunity, the brand and the image of Herbalife.
He noted the improvement in Herbalife performance over the years:
16 years - 1 billion retail sales
8 years - 2 billion retail sales
2 years - 3 billion retail sales
Michael O. explained the compensation structure of the marketing plan, which allocates 73% of profits to distributors. There is 50% retail discount (100% markup on cost, excluding shipping and taxes), 15% royalty override, 7% production bonus, and 1% annual bonus. The compensation for supervisors in 2006 was displayed on the screen. [See Herbalife.com or the sheet enclosed in the International Business Pack kit.] I transcribed the actual numbers at each level of the Marketing plan; there are 418,735 supervisors, 66,675 World Team, 12,403 Global Expansion Team, 2,899 Millionaire Team, 1066 President Team, and 31 Chairman Club members. [This includes 1 President Team member, Dr. Vendryes, and at least two Millionaire team distributorships resident in my island home, Jamaica.]
He remarked that Herbalife was first with a Nitric Oxide product; as a result, the company was an object of ridicule, but then they were copied by others. He also noted that David Beckham has been a big hit. (David Beckman is a soccer star that recently moved to LA Galaxy, sponsored by Herbalife. Their playing jerseys displays a Herbalife logo on its front.)
He spoke about integrity at length; there is an investment in staff to strengthen internal controls, policies and procedures. There is a distributor whistle blower hot line and internal audits. The rules for supervisors include 10 customers/70% rule; each supervisor is required to submit proof of ten customers and that seventy percent of their products are sold to customers.
Actually, I had only intended to listen to a part of the call; yet, I was so intrigued by the presentation that I continued to attend the audio stream for all four presentations: 1) Michael O. Johnson, Chairman and CEO; 2) Scientific overview by four physicians, 3) Greg Probert, President and COO; 4) CFO. The podcast ended with a Question and Answer session.
You can read verbatim information from a previous conference call to discuss the 3rd quarter information:
Herbalife Limited (HLF)
Q3 2007 Earnings Call
November 7, 2007, 11:00 AM ET
http://seekingalpha.com/article/53338-herbalife-limited-q3-2007-earnings-call-transcript
Michael O. Johnson - Chairman and Chief Executive Officer
Thanks Brett. Good morning everybody. I am fired up on Liftoff this morning and I have got to lot to say. So buckle your -- fasten your seat belts as they say. It's a great morning; it's great morning to be part of Herbalife. Welcome to our third quarter earnings call.
Before we update you on the third quarter, let me comment on the events that adversely affected our stock in the last few days. On Monday, an individual who claims to be a fraud investigator issued report that put in question our integrity, our marketing plan and our ethical fiber as such. This rattled your confidence; it rattled the investor confidence in our business model, our management team and our company. I am here to fix that right now. When concerning how we best respond to this report, we debated getting into the sand box and trading tit for tat or taking the high road, I have every intention of taking the high road.
Herbalife is a great company, a company of which I am personally very proud. When I left Disney four and a half years ago to join Herbalife I found the company that needed improvement and it lost its founder in 2000 and had several CEOs and senior management changes in three years. The company had new owners; who were looking for new leadership. It was a company, which was very tactical which lacks strategic direction. We had a senior management team that was not united in purpose and our distributor employee confidence in the long-term future of the company was frankly in doubt.
I have often told investors when I joined Herbalife I've viewed this company as a company of yesterday, today and tomorrow. Only one can change history, my focus was firmly on the future of our company. I immediately set out to build a strong leadership team, develop the growth strategy. We established distributor confidence and add to the integrity of our products, our business opportunity, our brand and our company image.
Let me take a moment to summarize what we collectively with our distributors, employees, our nutrition advisory board and our Board of Directors have accomplished in the past four and a half years. We've restored growth at Herbalife, double-digit top line growth in the past 36 months. Through specific strategic initiatives leading this year's growth was the U.S. so how old this market? Its 27 years old. It grew 20% in the last quarter.
Let me share with you some global comparisons to 2003. Today we have current... we currently have 1.7 million distributors, that's an increase of 58%. We have more distributors moving up the marketing plan than ever before. This is one of the many ways we define success. Our supervisor growth is up 52%, our GET team growth up 51%, our MILL team growth it's up 51% also. Our PRES team growth is up 40%, we have added eight new Chairman's Club, an increase of 33% and we now have two members of our founder circle. We developed strategies to strengthen retailing, retention and recruiting which you have heard us call the 3Rs. We modified the marketing plan to improve, supervise and retention. And the result has been an improvement in the retention from 28% in 2003 to 42.5% in 2007.
We initiated a sharing of best distributor practices worldwide. The company invested in those practices which we call DMOs [Daily Methods of Operations] to focus on retailing and retention. Most popular of these DMOs are Nutrition Clubs, which many investors on this call have visited over the past several months or even years. We are more balanced today among the 3Rs than at anytime in the company's history. And that is thanks to our leadership of our distributors who have globalized the successful DMOs.
And for distributors who decide to leave our company we have an industry leading policy to accept product returns for up to one year. Our buyback rates are approximately 1% of net sales. We have invested in staff to strengthen our internal controls policies and procedures. In today's world operating with integrity is not nice to have, but it's required.
We have been SOX compliant each year that we have been public. We have a distributor whistle blower hotline which handles complaints, I and against our distributors. We have minimal activity on this line, but each complaint is investigated and we review the results quarterly with our audit committee. We have a worldwide ethical business practice group that monitors distributor activity and proactively responds to questionable business practices. We have a worldwide internal audit staff that reports directly to the audit committee of the Board.
We have improved enough grade of the science behind our products along with its standard product training and coaching with the assistance of highly regarded professionals. Our Nutrition Advisory Board, we have built a global network of scientists and doctors, one of them who is a Nobel Laureate with impeccable credentials that assist our R&D team in reviewing and developing new products along with teaching our distributors about the science behind our products. At UCLA, we have a strong affiliation where we have established the Mark Hughes Cellular and Molecular Nutrition Laboratory at the Center for Human Nutrition.
At the University of Mississippi, we have a partnership, who will assist us in the development of future botanical and herbal products. And we currently have six clinical trials underway at various universities throughout the world. We have introduced new products with great science. They compete well in the marketplace. Let me name a few. Niteworks, it's a core heart health and a core heart helpline developed by a Nobel Laureate. Liftoff, an excellent energy drink that's been consumed this moment by people around this table and around this world and it competes head-to-head at retail with many of the best energy products, best effects which helps boost immunity. H3O, a fabulous hydration product, a new kid's line for kid's nutrition; skin activator and a complete new NouriFusion line, that's a line of personal care products fortified with vitamins.
We have built a tremendously talented management team which I am very proud of. It's comprised of Executives from some of the largest paying companies in the world. This is a team of high moral fiber, strong business ethics. And lastly, we created a company vision, mission and value statement that provides all of our employees and distributors with a fixed moral compass.
Now let me address some of the more specific points in this report. The report specifically states that our company is operating improperly in the Peoples Republic of China. And that our global marketing plan and distributive practice are designed for failure. Let me reiterate the facts as we've previously disclosed. We have strong confidence in our direct selling business model on a global basis. We operate in compliance with all applicable laws in 65 markets throughout the world and our business model has stood the test of time for 27 years....
For more of transcript from the call, click http://seekingalpha.com/article/53338-herbalife-limited-q3-2007-earnings-call-transcript
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