Herbalife Ltd HLF
Q4 2011 Earnings Call Transcript
Transcript Call Date 02/22/2012

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 - General Counsel: Before we begin, as a reminder, during this conference call, comments may be 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 may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with 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 - Chairman and CEO: 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 a best year in the Company's history. Fourth quarter sales were up 20% and EPS grew 25%. 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 engagement, as well as two consecutive years of record sales leader retention. In 2011, we achieved a milestone that's very important to all of us on team Herbalife.

Early in Herbalife's history, Herbalife Founder Mark Hughes had an aspirational goal of $5 billion in retail sales and this has been an inspiration and motivation for everyone. In 2011, we 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 products and to our employees who understand the priority of supporting our distributors in 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 history. To summarize these fundamentals simply more people are using our nutrition products every day, more people are coming into the business staying into business and moving up the marketing plan.

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 issues and aging population into these times of record unemployment, an 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 initiative. We now manufacture more than 25% of our global volume in our own manufacturing facilities. On the product front in 2011 our major product launches included the introduction of Prolessa Duo the unique satiety 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 appeals to an expanded customer base that includes premier athletes we sponsor. 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 point was soccer which is a sport well aligned with Herbalife in terms of geography, social economics, distributor activation opportunities and our belief in healthy active lifestyles. 2011 highlights included a title sponsorship of the World Football Challenge, where 13 of the world's top professional soccer teams competing and it was broadcasted on ESPN, Univision and many networks around the world.

In November, we celebrated the very exciting MLS Cup win by the Herbalife sponsored LA Galaxy. Along with our distributors we continue to leverage more than 150 sponsorships with athletes, teams, events including out top sponsored athlete Lionel 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 and we are now helping to bring better nutrition to more than 20,000 children every single day at 72 Casa Herbalife programs around the world. In 2011 we also partnered with GAINs, the Global Alliance for Improved Nutrition and DSM one of our nutrient suppliers and will distribute 20 million micronutrient sachets to help with the malnutrition and starvation in Ethiopia and Kenya.

Working collectively with DSM and our distributors it is our intent 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 have 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 volume 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 in our annual leadership event. We expect more than 4,000 of our top distributors from around the world 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. At 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 us 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 have more distributors entering the business, more distributor activity and 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 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 in our products and our business opportunity, and our brand and our image continue to gain recognition and strength worldwide truly, we're just getting started. We'll 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 - President: Thank you, Michael. The fourth quarter was our second consecutive quarter of more than 1 billion volume points, a 23% increase over last year's fourth quarter results and is the highest volume quarter in Herbalife's history. 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 method 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 method, whether Nutrition Clubs, Weight Loss Challenges or distributor-led fitness boot camps is that the distributor and their consumers have much more frequent contacts than 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 in volume points.

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. New distributors increased 5% in the quarter and 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 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 H distributor group, our name for those distributors under 35 years old. We are seeing very exciting adaptations of the Nutrition Clubs spring up through this group and a higher utilization of the Herbalife24 products in addition to stronger use of social networking. North America has taken a running start to 2012 with a huge increase in attendance at our 2012 kick-off meetings around the country.

The General Market saw a 65% increase in attendees and two new cities added this year. At the Latino Future Presidents 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 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 11% compared to the prior year. We are very pleased to see average active sales leaders increase 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 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 introduce an element of discipline that is proving to be beneficial in helping distributors grow their Nutrition Club business.

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 as compared to the prior year period. For the fourth quarter, 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% on 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 any 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 as 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 our Welcome to Herbalife promotion, in which the IBP that a new distributor purchases when they sign up had a lower price point than is 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 studying 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 market and is now driving sales throughout numerous countries in the region. As Michael mentioned, it is an indicator of the broad based strength 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, as 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 to 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 are 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 2010 this quarter's volume points were up approximately 38% with a 32% increase in new distributors and retention improved approximately 7 percentage points to almost 77%. This retention rate is a stellar example of the benefits created by building a business on a strong stable foundation grounded in daily consumption coupled with systemized training and 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 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 fine tune the nuances of the daily consumption model that will work best in this market.

We continue to see more Nutrition Clubs open and while we are very pleased with the progress of the business in China, we remain cautious about expecting too much too soon from this market. We are focused there on 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 - CFO: 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 increased by 23%.

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 are two items to bring to your attention with respect to gross margin comparison.

First, our Seed to Feed strategy including H.I.M. manufacturing and our strategic sourcing efforts, benefited gross profit by slightly less than half the total variance. 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 the Investor Day next month, but let me add one comment now.

For countries that purchase most of their products in the U.S. such as Mexico as oppose to those purchasing most of the products locally such as Italy, the impact on cost of goods sold, that you would expect to see from changes in foreign currency is essentially lagged by approximately one inventory turn. Accordingly the impact from the strengthening dollar during the latter part 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 rate of the preview 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% was 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, while higher than last year's rate, 2011 effective tax rate came in approximately 150 basis points better than the midpoint of guidance we provided and we have also lowered our expected 2012 effective tax rate by 50 basis points on both the low and high-end of our guidance range. This change is reflective 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 volume and a lower than 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, I'll discuss guidance for 2012, both for the first quarter and full year. I'll 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 rate are slightly worst 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 were meaningfully better than those assumed in our current guidance.

To provide investors with sensitivity for modeling purposes if either January 31st spot rates or last Friday spot rates we 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 points in net sales in 2011 is included in the forecast at an exchange rate of 5.3 bolivars to $1.

Let me move on to our assumptions for volume point growth which as Michael mentioned earlier reflects our belief in the continued strength and momentum of the 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 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 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 of out 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.

Transcript Call Date 02/22/2012

Operator: John San Marco, Janney Montgomery.

John San Marco - Janney Montgomery: Can we talk a little bit more about this phenomenon of commercial club formation that you're seeing in Mexico, presumably its cannibalizing some of the previously, what were previously home clubs. So it'd be helpful if you could quantify maybe what percent of Mexican volumes come from daily consumption and how that compares to the prior year or any other way you have to look at it to sort of confirm that daily consumption still has momentum in Mexico?

Des Walsh - President: Yes, John, this is Des, let me take that one. So, John we believe that daily consumption business that continues to contribute approximately 70% of volume in Mexico. We believe the transition from home clubs to commercial clubs is a very healthy development. 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 it's certainly contributing to the growth we're seeing in Mexico today.

John San Marco - Janney Montgomery: I guess in your view, when two home clubs become one commercial club, in your observation one plus one equals something greater than two?

Des Walsh - President: Absolutely, John and we're seeing this because obviously one of the things our distributors are really focused on now is the number of consumption, the focus on creating duplication, focused on making it easier for customers to transition to distributors and then open their own clubs and frankly, their total commercial model, the method of systemized training that we're now seeing introduced by many distributor leaders in Mexico, supported obviously by the company with Nutrition Club Tours and so on, I think all of this is contributing to a combination so that you've got this, as you say this incremental effect rather than cannibalistic effect.

John San Marco - Janney Montgomery: That's certainly showing up in the financial results. So, I guess second question, how much – what was the percentage discount on the IBP in LatAm?

John DeSimone - CFO: This is John. It was different by market. What we try to do is develop an equivalent IBP price in each market place compared to the U.S. based on GDP for capital of the addressable audience. So it was different by marketplace.

John San Marco - Janney Montgomery: Do you have a estimate of what effect that had on your sales or on your pricing?

John DeSimone - CFO: Well, it didn't have much on our sales, we don't believe. I think it was a two months, maybe 2.5 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 happens yet, that's something we want to wait six months after promotion, look back at the activity levels and see if it was a successful promotion or not, so it's a little too early to tell.

John San Marco - Janney Montgomery: 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 anniversaried?

Des Walsh - President: So, John, we're pretty close to that, but obviously, we think midyear we're going to see that, but frankly we (certainly besides) 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 dizzying heights a year or so ago, and as you know partially that was because of the company's efforts, because I think a number of our clubs there had tended, had veered too far into a perception that they were becoming retail outlet and as you know we are limited 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.

Operator: Tim Ramey, D.A. Davidson & Co.

Timothy Ramey - D.A. Davidson: I think you highlighted Korea and India as two of the top performers and I continue to be intrigued by the performance in India. I wonder if you'd delve in a little further there in terms of how that market is developing and what kind of milestones are ahead on that. I think you had indicated it was about to or had dropped into your top 10 markets?

Des Walsh - President: Tim, we are obviously quite 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 are excited by the growth that we see. At the same time, we are 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 distributor ethics perspective with that growth. So, obviously, we are very happy about what we are seeing in India, at the same time we've got a note of caution there as we ensure 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 are looking very much long-term situation in India rather than short-term one.

Timothy Ramey - D.A. Davidson: If I could just follow up John's comment yesterday on you know the CapEx just sort of being pegged 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 your thoughts are on kind of just budgeting at 3%?

Des Walsh - President: We model at 3%, we don't budget at 3% we actually have sort of very detailed CapEx budget. The CapEx budget falls into three categories there is a maintenance portion which is $30 million, $35 million a year. There is a system 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 to increase the 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 projects. So it's limited on what you can invest at any one point in time and except 3% seems to be about all we can execute for more of a human capital than a financial capital standpoint. So I think if 3% is more of a full out it's now a starting point we don't budget 3% at a high level we have to do it at a detail level and what we're finding is 3% is about all we can execute.

Operator: (Mike Schwartz, SunTrust).

Michael Schwartz - SunTrust: Just wanted to take a look at China and I know you're trying to kind of rein in any kind of positive commentary going on there and you don't want to really get ahead of yourself, but was there anything you saw going from 3Q to 4Q 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 are you seeing greater productivity what's going on there?

Des Walsh - President: So here's what we're seeing Mike so what we're seeing in China with the clubs is that as always we go through this acculturation process and that process normally takes two to three years, and China first of all is taking a little 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 is partly due to the fact that we now see clubs emerging in lower income areas, as they work to find and create a model which works better in that environment, and obviously that's very positive and very healthy because although there is a substantial – a higher income level in China today, the vast percentage of the population is not in that income bracket. 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 want to remain cautious. It's very early days, yet we remain positive about the future, but we don't want to get too bullish and get ahead of ourselves.

Michael Schwartz - SunTrust: 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 - President: We believe that it is possible, and we're working very hard to replicate the conditions that exists in Russia and many other 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, where we talked 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 in excess of 70%.

Operator: Linda Bolton-Weiser, Caris & Company.

Linda Bolton-Weiser - Caris & Company: In chatting with various distributors and asking things about the Herbalife24 sports 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 potentially different training for the distributors. Can you give a little more detail on what you are thinking long-term with regard to how you're going to better sell that line?

Michael O. Johnson - Chairman and CEO: 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 using distributors, not the company, to start these. We unleash their entrepreneurial ambitions with a product like this and then you'll see things like fit clubs coming forth. 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 are bringing them not only to Herbalife24, but to our standard products too. So, it really is an eye-opener for us. It was something that we had in mind to lift our brand, to lift the opportunity to work with our sports teams more closely, who are sponsoring around the world, and have new business methods evolve from it. The creation of 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 transfer globally as quickly as possible.

Linda Bolton-Weiser - Caris & Company: Then can I also ask about just kind of shifting to the balance sheet and cash flow, I mean, your performance was great, and your dividend increase is certainly impressive. But one could argue your balance sheet is actually under leveraged given the consistency of your performance and growth, et cetera. Would 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 - CFO: It's John, I'll take this question. So, it is an option, we have a credit line that has quite a bit of capacity available right now, and circumstantially we may consider it at some point in time. It would be used more if there is an overreaction in the stock for something that's going on in the marketplace that doesn't really impact Herbalife, when the stock overreacts. But other than that, we're going to keep returning our cash flow to investors through dividend and buyback, and if we decide to lever it up it will be for special circumstances.

Linda Bolton-Weiser - Caris & Company: Can I just sneak in one more, I guess, year end inventory was up 36% year-over-year, of course, you have really high sales growth, but is the inventory really high because of your infrastructure build or what's going on there?

John DeSimone - CFO: There is couple of things, so first and foremost of course it is to support sales and 70% of the increase in inventory is just tied to the increase in sales. We have a couple other things going on, one is we self manufacture now, right, so there are raw materials and WIP that are now part of our inventory that were sitting at a vendor in prior periods, right, so that’s ( about $7 million), it's not a big number, but that is piece of it. Then we have some sourcing strategies that as we take in more product into our facilities, we are building buffer inventory from the current vendor to soften the transition.

Operator: Gary Albanese, Auriga.

Gary Albanese - Auriga USA, LLC: I was wondering if you could address the boot camps in terms of the scale like how big is that effort right now, is it regional wise, and really what are the opportunities that you see in terms of coordinating that with the rest of the business with the Nutrition Clubs and driving sales in the future?

Des Walsh - President: Hi, Gary, this is Des. So, Gary, it's in its very initial stages, and in fact, really the concept of a fit camps or boot camps 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. So, what we do is that we simply provide a platform to get that word out. 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 upcoming summit this concept will be spoken off and then it will be taken around the world by distributors as they see that it's something they can incorporate into their business. So early stages yet, but again, by the way what's really interesting to us is that although this developed around the concept of fit camps on a beach, what we're now seeing is some distributors adapt that to their local environment. So they are having fit camps in parks, we're going to see fit camps in malls. We're going to see 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 USA, LLC: I think that the whole concept works very well with your model. Changing subjects, with 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 - CFO: This is John. Our Seed to Feed 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, whereas we move of our foreign production into our current H.I.M. facility. We haven't got any more detail in providing some visibility than what I've just given you right now.

Gary Albanese - Auriga USA, LLC: Just lastly, do you have any estimates for what in terms of percentage of revenue the daily consumption model is right now?

John DeSimone - CFO: We've actually dug pretty deep into different types of analysis, to come up with a good estimate and it really ranges depending on how specific we get by market. So we believe it's between 34% and 41% and probably about two-thirds of our growth is coming from daily consumption right now.

Operator: Anand Vankawala, Avondale Partners.

Anand Vankawala - Avondale Partners: Most of my questions have been answered. 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?

Michael O. Johnson - Chairman and CEO: Yes. Now, we actually have changed our philosophy on this, because initially when it home clubs we used to really try and keep a track of this and then we started back when we (went) into commercial clubs. What we're seeing in commercial clubs, of course, is that we have in many instance we've got groups of distributors working together and that's why we believe that individual locations is no longer the best measurement to see growth in the clubs because individual clubs can frankly hide the true level of activity and engagement around the clubs and that's why we are transitioning more to say, what is this percentage of daily consumption. Obviously, by the way, daily consumptions 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 are going to start to see us more reporting this percentage of our volume-based on daily consumption rather than individual club numbers.

Anand Vankawala - Avondale Partners: I guess, just lastly with regard to Herbalife24, any commentary as far as whether you're targeting specific demographics. I know that you're saying that with the generation age, you're getting more traction with the Herbalife24, but are you basically trying to attract a younger demographic and is that pretty much the focus going forward or do you think you can get through the remainder of the distributor base as well?

Michael O. Johnson - Chairman and CEO: So, Herbalife24 is for people who have active lifestyles, whether they go to a gym, whether they are participating on a team, whatever they are doing; it is an endurance product or a rebuild product or a restore product in there. We are very confident about the science behind these products and 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 am drinking every single day that everybody is drinking around here. It's a broad range of consumers, it is 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 life style. So, while we're seeing younger distributors come to it, I think that some of the branding done by it, some of the funds 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 gym's, go to clubs to work out 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: Can you share any metrics as far as what percentage of distributor base in areas where Herbalife24 has been available for more than a quarter. What percent have actually ordered 24 product?

John DeSimone - CFO: This is John. It's little too early for us to start giving out stats. 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 probably about six months away before we feel comfortable giving out statics.

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

Michael O. Johnson - Chairman and CEO: 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 (start), our 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 I believe 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 out at our Investor Day. So please join us. It's going to be an exciting time, while you 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.