康寶萊 (HLF) 2005 Q2 法說會逐字稿

Good morning, and thank you for joining the second quarter 2005 conference call for Herbalife Limited. As a reminder, this conference is being recorded. On the call today is Michael O. Johnson, the Company's CEO, Greg Probert, the Company's President and COO, and Rich Goudis, the CFO. I'm now going to read the Company's forward-looking statement before management prepared remarks.

Except for historical information contained herein, the matters set forth on this earnings call are forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements for purposes of federal and state securities laws, including any projections of earnings, revenue, or other financial items. Any statements of the plans and strategies, and objectives of management for future operations, any statements concerning proposed new services or developments, any statements regarding future economic conditions or performance, any statements of belief and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words may, will, estimate, intend, continue, believe, expect, or anticipate and any other similar words. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.

Our future financial condition and results of operations, as well as any of the forward- looking statements, are subject to change and to inherent risks and uncertainties such as those disclosed on this earnings call. Important factors that could cause our actual results, performance and achievements or industrial results to differ materially from estimates or projections contained in the forward-looking statements include, among others, the following--our relationships with and our ability to influence the actions of our distributors, adverse publicity associated with our products or network marketing organizations, changing consumer preferences or demands, the competitive nature of our business, regulatory matters governing our products including potential governmental or regulatory actions concerning the safety or efficacy of our products and network marketing programs, risks associated with operating internationally including foreign exchange risks, our dependence on increased penetration of existing markets, contractual limitations on our ability to expand our business, our reliance on our information technology infrastructure and outside manufacturers, the sufficiency of trademarks and other intellectual property rights, product concentration, our reliance on our management team, product liability claims, uncertainties related to the application of transfer pricing and similar tax regulations and taxation relating to our distributors.

I will now turn the call over to the Company's CEO, Michael Johnson.

Good morning, everyone. Thank you very much for joining this call. I will begin the call today by discussing the highlights of the second quarter. Greg will update you on our five key strategies in our key markets, and Rich will run through our financial performance.

As you know, this is our third earnings call as a public company. Prior to the IPO, we formulated the strategic plan for our company, and included in that plan was a plan to turn around our underperforming markets. Since then, our distributors and our employees have been working diligently to execute this plan. I'm really excited today. I am excited about the financial performance of our company and how much we have achieved so far. And I'm even more excited to think about the prospects for our future.

In fourth quarter 2004, we reported double-digit sales growth to 13.8%. In the first quarter of '05, we reported double-digit growth of 14.8%, and I'm pleased to report today that the second quarter of 2005 is no exception. We reported strong double-digit net sales growth of 18.7%.

As you know, we kicked off the second quarter with our company's 25th anniversary extravaganza in Atlanta, where we set multiple records, including the largest event in the company's history with more than 35,000 distributors in attendance from all over the world. The momentum from Atlanta has continued throughout the quarter. In Atlanta, we launched our new skin-care line, NouriFusion. We launched it in 23 markets, our largest launch in the Company's history. We launched LIFTOFF in the US, our entry into the high-growth energy drink category.

We generated 385 million in net sales for the second quarter, the highest quarterly net sales in the Company's history. The US posted year-over-year sales growth for the second consecutive quarter with sales in the second quarter reaching its highest level in over three years-- Korea. Korea reported net sales growth for the third consecutive quarter, reflecting the results of a turnaround plan started over a year ago. In Japan, the rate of net sales decline continues to decelerate for the third consecutive quarter. This is in line with our expectations and reflecting the impact of numerous initiatives in that market.

We increased our number of supervisors 18.3%, which is 2.5 percentage points higher than the growth rate in the second quarter of 2004. We have added 20 President's Team Members in the second quarter, increasing our total to almost 800 -- 797. We launched Team Herbalife globally to associate our brands with health, fitness and community service activities.

In the US, we became the presenting sponsor of the AVP Pro Volleyball Tour. This fits perfectly with our three R's, our supporting recruiting, retailing and retention. Recently, we entered into a partnership with Anschutz Entertainment Group, AEG. Anschutz Entertainment Group is that one of the largest sports entertainment presenters in the world. AEG owns sports venues and teams such as the Home Depot Center in Loss Angeles, the LA Galaxy, the JP Morgan Chase Open, now presented by Herbalife, and the bicycle tour starting this February called the Tour de California.

We are excited about this partnership, as it provides our company with a worldwide venue opportunity to host our extravaganzas and it will showcase the Herbalife brand and products at events attended by hundreds of thousands of spectators. We expanded our scientific and medical advisory board members during the quarter. We expanded it in the US, Brazil, Germany, and Japan. This is to support our product development in our distributor training. We now have more than 20 medical and scientific advisory board members globally, providing us with enhanced visibility and credibility in the medical, scientific, and regulatory communities around the world.

This morning, we announced that Dr. Steve Henig, who I'm proud to say is with us today, has joined us Herbalife as our Chief Scientific Officer. Having a world-class chief scientific officer supports our continuing commitment to offer the best nutrition and weight-management products in the world. Steve is a product innovator with more than two decades of experience in the development and marketing of nutrition products. We're extremely excited about Steve joining team Herbalife.

Steve is taking over from our vice chairman, Henry Burdick, who has directed products and research and development since 2003. Henry will continue in an executive role throughout the end of the year and to ensure a smooth transition, he will continue to advise our company as a consultant. As you know, Henry is a leader in our industry and we're fortunate to retain his services into the future.

Continuing our international management upgrade, we hired new country managers in Germany, Russia, and Turkey. These are highly skilled sales, marketing, and operations executives. We have located our Japan headquarters to Roppongi Hills, an upscale section in Tokyo. We elevated the image and awareness of our brand in our company in the Tokyo andJapan marketplace. In conjunction with that relocation, we opened the nutrition center to service customers and support our distributors.

We opened our China office in Shanghai, which strengthened our management team. We have applied for product licenses and increased the utilization of our China manufacturing facility in anticipation of the Chinese government issuing direct selling regulations this year. We've opened in Hungary, now our 60th market. Our distributors, working with management, continue to globalize great ideas such as Nutrition Clubs and the Total Plan.

Most importantly, our distributors' confidence continues to grow, creating momentum which ultimately result in financial performance that creates value to our shareholders. We continue to invest in our business and execute our five key strategies to make Herbalife stronger for the future. We will continue to implement broad reaching growth initiatives, intending to increase recruiting, retailing and retention opportunities for our distributors. We will continue to build our brand recognition and our corporate reputation through activities aligned with our mission and values.

In just a moment, Greg will provide you with a key update on our key strategic initiatives for 2005. But first, I am incredibly pleased to announce that my good friend, my associate for many years-as many of you know, Greg was with me at Disney for over a decade, and I have a great fortune to bringing him to Herbalife, where he was formerly a CEO of DMX Music. And today, I'm very proud to announce that Greg has been promoted to President as well as Chief Operating Officer of Herbalife. Greg and I worked have together and we will continue this association strongly into the future. G. Prob?

Thank you, Michael. I'm going to begin with an update of our five key strategies, followed by an update of our focus markets. Since we have many new investors on the call today, I want to remind everyone of our five key strategies that we consider vital to long-term growth prospects of the Company. One, our distributor strategy, two, our customer strategy, three, our product strategy, four, our China strategy and finally fifth, our infrastructure strategy.

Our distributor strategy continues to be the single biggest catalyst for our top and bottom-line growth over the next several years. Distributors are our number one priority. Our management team remains distributor focused and we prioritize our investment to substantially enhance the ability of distributors to improve the recruiting efforts, increase their ability to retail our products and extend the life cycle of distributors through retention initiatives.

Two distributors programs, the Nutrition Clubs and the Total Plan, are catalysts for expanding and strengthening our business on a global basis. In the second quarter, Mexico doubled its net sales compared to the second quarter of 2004. We believe the largest contributing factor is the rapid expansion of the Nutrition Clubs party planning program. We continue to export and nurture the Nutrition Club's concept from Mexico to other markets like the US, Indonesia, Jamaica, South Africa, Brazil, Venezuela, Colombia, the Philippines, and finally, Bolivia. The clubs the distributors have started in countries outside of Mexico are showing signs they're taking roots and their sale volumes are steadily increasing. We are supporting the global expansion of the clubs by investing in staff members in each region to work with local distributor leaders to provide consistency and standard operating processes. They will also provide training, mentoring, and coaching to distributors.

The club supports the retailing of science-based products, while providing recruiting opportunities in a venue filled with customer sharing their positive experiences from using the products. Many of these customers decide to become distributors and open their own clubs. The Total Plan method of operation is centered around in-home presentations of our personal care products on a person-to-person basis. During the presentations, the customer and distributors discuss inner and outer nutrition, along with the business opportunity, hence the name the Total Plan. Although the primary goal is to demonstrate the effectiveness of our personal care line, get referrals for future presentations, and sell both inner and outer nutrition programs to the customer, the Total Plan is also effective as the recruiting method.

As a recipient of an inform presentation, the customer gets to experience what it's like to be a Herbalife distributor using the Total Plan method of operation. The simplicity of this low-key introduction to the Herbalife business opportunity has proven effective in converting customers into distributors. The launch of NouriFusion provides a fully upgraded product line, which added excitement to the presentations or provides a reason to contact customers that haven't received a presentation in a while. Distributors can build a stable customer base, attract new distributors and effectively train new distributors in a very specific, simplified manner with the Total Plan. We're supporting the worldwide rollout with Total Plan with standardized training, CDs and literature.

In addition to globalizing best practice such as Nutrition Clubs and Total Plan, we're enhancing and developing business communication tools for our distributors. We have substantially upgraded myherbalife.com website in the US during the second quarter by incorporating themes that include the three R's to all levels of the distributor organization. On the side, distributor can find a recruiting and retailing tips, event locators, and training seminars schedules. It also provides a forum to exchange the best practices with each other. The early feedback received from our distributors has been positive. As a result, vis-à-vis US online ordering rate increased from 26% of total orders in April to 30% of total orders in June.

Distributors are also taking advantage of our new online features like basic training of the use-where-talk philosophy, creating their own success stories about part results and financial achievements. Our company has been built on stories and sharing those stories became easier in April. In addition, myherbalife.com has supported the successful launch of Liftoff by offering sampling tips, interactive contests, and customized business cards and even a community event finder. I will expand on Liftoff launch in a moment. The new myherbalife.com site will roll out to other key markets throughout 2006 in a customized version meeting the needs of the US Spanish-speaking market in the expected launch in the third quarter of this year.

Furthermore, this summer, we're introducing a new distributor business called BizWorks. It has been designed to the bidders with real-time down line reporting capabilities, so that they can improve training and mentoring initiatives with other distributors. BizWorks also simplifies the method of communication for distributors with automated e-cards and messages geared towards keeping distributors in the business longer, ultimately increasing retentionaries. In addition to business management tools, BizWorks also provides our distributors with four personalized websites. These professional sites feature common branding themes designed to enhance the productivity of our distributors.

BizWorks real-time reporting tools are being made available this month globally. The BizWorks websites will be available in US this month and will rollout in other markets in 2006. We remain committed to helping our distributors build their business more effectively and providing enhanced services to their customers. We continue investing in branding initiatives during the quarter, which is critical to ongoing success in retailing our products, facilitating the recruiting of new distributors, and more importantly in the long term, supporting our direct to consumer initiative which I'll discuss in a minute.

In March, we entered into an agreement with the AVP Pro Beach Volleyball Tour, where Liftoff was named the official energy drink of the tour. This sponsorship is critical in creating awareness and demand for Liftoff, helping our distributors with the recruiting and retailing initiatives, and introducing our innovative products to new market segments. In June, we extended our agreement to 2007 and sponsored three athletes from the tour-- 2004 Olympic bronze medallist Elaine Youngs, 2004 Olympian Stein Metzger, and rising star Jason Ring.

In April, we introduced Team Herbalife, an activewear of clothing for distributors to proudly display the Herbalife brand name and logo. In June, we announced our sponsorship of the Nautica Malibu Triathlon taking place in September. In July, we announced the sponsorship of Olly Freeman the current World Junior Triathlon silver medallist and the London Junior Triathlon Champion. He will be competing again at this year's Michelob Ultra London Triathlon, at which Herbalife is also official Nutrition Sponsor.

In Asia, we sponsored the team that competed in dragon boat races and our team finished among the top 10. And finally, our partnership with AG, announced yesterday, will showcase our brand to more people than ever before in the Company's history. As Michael mentioned earlier, these initiatives associate our brand with nutrition, health, fitness, and sports, and community service activities.

Another initiative within the distributor strategy is the market segmentation. The most developed segmentation initiative is our focus on Generation-H. This under 30 age group is vital to long-term success by continuously recruiting younger distributors. They're young, motivated, internet savvy, and share great ideas with ease. We've created a Gen H leadership group composed of under 30 supervisors who are building solid businesses. We facilitate monthly training calls hosted by Gen H leaders. These calls are open to all Gen H distributors. We have redesigned recruiting materials and tools in MTV style to help create excitement and acceptance.

In addition to Gen H, we will target other segments of the population. For example, we believe stay-at home moms in the Latino population represent opportunities for us. Therefore, we will evaluate, customize recruiting and training tools designed to run around the interest and cultural aspects of these demographic segments. By standardizing and globalizing best practices, like Nutrition Clubs and the Total Plan, we can penetrate more deeply into existing markets. By continuously improving and upgrading our distributor's tools, such as our myherbalife.com and BizWorks, we can simplify the manner in which our distributors conduct their business. And by customizing our marketing materials, we can extend our reach to broader segments of the population in our existing markets. As we said in the past, the best and most innovative ideas come from distributors. When we align great ideas with simplified tools, the result is top and bottom line growth.

Our customer strategy is a longer-term initiative to accelerate revenue and profit. Creating a larger sustainable and predictable customer base is important to building a stronger core business for our distributors and the Company. During the second quarter, we made progress toward defining our business needs, selecting a service provider, and developing a rollout plan for integrated direct to consumer business platform that will allow consumers to order directly from the Company, while preserving the business relationships with our distributors. Our distributors are very excited about the initiative. We will be testing our e-commerce capabilities by launching a Liftoff direct-to-consumer mini site in the fourth quarter of 2005. We plan on expanding the test in the first quarter of 2006 with a fully functional direct-to-consumer site in the Canadian market.

Testing the concept in the Canadian market will provide useful data and feedback to ensure a successful rollout in the US market, which is expected in mid 2006. This initiative is designed to improve the ability of our distributors to retail our products while increasing their productivity as they leverage this technology and infrastructure of our company.

Now, let me turn to profit. Our new product strategy is important to support both our distributor and customer strategies. As Michael mentioned earlier, we have two significant product launches at our 25th anniversary extravaganza, LIFTOFF and NouriFusion.

LIFTOFF is a portable, great-tasting, sugar-free energy drink that promotes mental acuity and battles fatigue. It comes in a unique effervescent tablet delivery form. It was launched in the US in April and rollout traditional markets in 2006. We are supporting the marketing of this product with AVP Pro Beach Volleyball Tour sponsorship. We expect this product to support recruiting activities and more importantly, help our distributors to better penetrate the Gen-H distributor segment of the market. During the second quarter, we sold over 600,000 units of LIFTOFF, generating over 10 million volume points.

Our NouriFusion line is a vitamin-based skincare line supported by scientific research. Along with vitamins A, C, and E, these products incorporate natural ingredients and new technology providing environmental and stress protection. During the second quarter, we sold over 225,000 units generating approximately 5.8 million volume points. The launch of NouriFusion is expected to stimulate growth in our outer nutrition category, which grew 55% versus the second quarter of last year. We launched NouriFusion in 23 markets and scheduled to rollout the line in other markets throughout 2005 and 2006.

Later this year, we plan to launch a cardio health hearty line in the United States. This line will include our popular Niteworks product, bundled in a program with several new products that benefit the heart circulation and overall antioxidant nutrition. Our new products group has been working very closely with Dr David Heber, Dr. Lou Ignarro and our scientific staff, now headed by Dr Steve Henning, on new products for 2006 and the years following.

Last year, we began to regionalize the product development process in effort to better link local distributor consumer needs with our product development priorities. In addition to expanding our regional SAB and MAB members, we are beginning to respond to local request for regional products. For example, in many parts of Asia, certain cultures require very specific products that relates to facial and personal care items. So we are looking into meeting those local needs by expanding NouriFusion line to include skin whitening agents and foundations that are popular in this region.

To support distributors who are leading with a personal care line, we have also launched a personal care International Business Pack. There are several other regional product suggestions currently under review.

Now, let me turn to China. We continue building our presence in China. We are working with the US and central Chinese government agencies to keep abreast with the latest development associated with the final regulations for operating a direct selling business model in the region. Currently, China represents less than 1% of our company sales. However, we believe this market still remains optimistic to us in 2006 and beyond. The delay time in the regulations has not impacted our strategy, which is to be one of the first companies to attain a direct selling license. As a result of the delay, we decided to execute those aspects of our plan that are not contingent upon the release of the regulations. As such, we are investing in key elements necessary to execute our strategy.

We expect to begin expanding our retail presence in this market in the fourth quarter. We will continue to enhance the manufacturing capabilities of our plant in Suzhou. We are continuing to invest in hiring key positions in the areas of government relations, sales, and marking, and finance. We are executing a communication strategy with our local Chinese distributors to prepare them for conversion to the new model. We have more than doubled our licensed products in the past year. We expect to have over 25 products ready for our fourth quarter launch. The product set in this region will vary slightly to support the local needs.

And finally, we have identified our resource sites and we are finalizing design plans for these retail locations. We remain confident that we'll be a better position to capitalize in this market opportunity. We are active participants in all meetings held by the US and Chinese governments. We continue to maintain strong government relations and will continue to invest and to manage an approximate 10 to 12 million operating loss this year.

As I said earlier, 2005 is the year of building our presence in China. For 2006 and beyond, we anticipate being well positioned in China to be a larger contributor to our topline growth.

And finally, let me turn to our fifth strategy, infrastructure. We continue to invest in technology infrastructure, as well. The rollout of Oracle globally is proceeding as planned. Our supply chain management and our distributor management modules are live and our order management modules are in the process of going live in several large countries. We expect the complete rollout Oracle will take us into 2007, as we believe having all of our information in one system is required to better manage the global complexity of operating in 60 countries around the world.

We are in the implementation phase of our business intelligence software. This software will provide insight and statistical data related to the distributor, products, and other operational metrics that will better help us manage resources, target promotions, and understand our distributors' patterns more effectively. This data will be standardized and pushed out to the regions, so that all global staff members are using common metrics with standard definitions. As I stated earlier, we will continue to invest in our web presence, our business tools for distributors, and direct-to-consumer platform, and our expansion of our business in China.

In addition to systems, we are also investing in our people. This quarter, we announced the appointment of Michele Crocker as Vice President of Organizational Development. The Organizational Development plan will focus on improving company performance by developing effective leaders, creating a leadership pipeline, standardizing best practices related to company-wide operational processes and fostering a learning culture to ensure employees have the required tools and skills to successfully execute the five-year plan. Supporting the infrastructure strategy, we expect to invest 35 to $40 million in capital in 2005 and approximately 30 to $35 million in 2006.

Now, let me give you an update on our key markets. Core markets-- our core markets comprise 40 countries and are defined as countries that are open for at least 5 years. In the second quarter, this group of countries comprised 44% of our net sales and increased 5.1% versus the same period of 2004. One of Herbalife's competitive advantages is that we are geographically diversified. For example, in the second quarter, Europe contributed 37% of sales, the Americas contributed 43% of sales, and Asia, including Japan, contributed 20% of sales. This geographic balance minimizes the impact of volatility from any one country or region. We believe this is an important investment criteria.

Periodically, countries in this group will grow or decline, but the balancing of geographies allows our management to focus on countries that are materially impacting the business. So let me turn to those countries, which we call "focus markets."

Our focus markets fall in two categories. Turn-around countries, such as the US, Japan and Korea, and those referred to as "high flyers," which are Brazil, Mexico and Taiwan. These markets will be evaluated annually and classifications will be changed according to current trends. After the third quarter, we will evaluate our markets and communicate which countries will rotate on and off the list. In Mexico, our number two market based on volume points, volume was up 113% in the second quarter versus the same period of 2004. We attribute this growth to the expansion of our party-planning concept Nutrition Clubs along with strong country management and distributor leadership that is highly engaged.

In Brazil, our number three market, volume increased by over 38% in the second quarter versus the same period of 2004. We attribute this strong growth to expansion in the Total Plan, strong country distributor leadership, a highly effective country management team and a solid product portfolio.

In Taiwan, our number four market, volume increased 5% in the second quarter of 2005 versus the same period of 2004. The second quarter represents a lower growth rate than we have been experiencing, but we expect the growth rate to return to double digits in the third quarter. While we enjoy strong growth in these three markets, we remain very focused and committed to turning them around and improving performance in the US, Japan and Korea.

Korea posted its third consecutive quarter of improving results. In this most recent quarter, volume was up 21% versus 2004. The trends in Korea continue to show improvement, reflecting the implementation of a turnaround plan that began in the fourth quarter of 2003. We are pleased with the progress today and expect Korea will continue to post year-over-year improvement for the balance of 2005. Later this year, Korea is likely to be removed from the turnaround list of markets once it demonstrates four sequential quarters of year-over-year growth.

In the US, our number one market, volume points in the second quarter increased 22.2% versus same period of 2004. Excluding international, distributor volume at the Atlanta extravaganza, the US was up 18.7% in the quarter versus 2004. We believe the US is a viable direct selling market, and therefore, we will continue to make the necessary investments to sustain these positive results. After two quarters of positive year-over-year growth, we are not ready to declare a turnaround. We are encouraged by the recent performance.

Total supervisors in the US were up 2% year-over-year in the second quarter. This is the first time we are reporting positive year-over-year growth in total supervisors for the US since the fourth quarter of 2003. In addition, the rate of new supervisors in the US continues to accelerate, up 22% in the second quarter. The growth initiatives being deployed in the US are gaining traction, and our distributors are focused on executing initiatives to sustain this momentum.

We will continue to nurture the Total Plan and Nutrition Club programs, we'll continue enhancing myherbalife.com, we will launch BizWorks tools for distributors this week, we will continue to target segments of the population such as Generation H, we'll continue to increase brand awareness and improved corporate image through marking alliances like the AEG and AVP Volleyball Tour sponsorships, the launch of Team Herbalife Sportswear and the Nautica Malibu Triathlon. All these initiatives are geared towards sustaining and simply improving growth in the US market.

Now let me turn to Japan. Japan was down 4% in the second quarter compared to the same period of 2004. Including Atlanta sales, Japan was down just 1.9%. On a year-over-year basis, Japan was down 30% in the fourth quarter of 2004, 16% in the first quarter of 2005. This deceleration of decline rate is in line with our expectations as we're starting to see the impact of our initiatives in that market. Similar to the US, we believe that the Japanese market continues to be a viable direct selling market, and we'll make the necessary investments that we believe will turnaround our business in Japan.

Let's recap the initiatives of 2005 that contributed to these encouraging trends. First, Bill Ron and his team have reengaged the top-level distributors. Over 1800 Japanese distributors attended the extravaganza in Atlanta. Now we are improving our brand name through initiatives such as sponsoring Toray Tennis Tournament. We relocated our Japanese office to a prestigious location in Tokyo to improve our image and attract distributors to the business.

We have opened Herbalife Nutrition Center in this facility to attract customers and potential distributors. We extended our call center hours to better support the business needs of our distributors. We added new medical and scientific advisory board members in Japan to strengthen our relationship in the scientific, medical and regulatory communities in this market. We are launching personal care IBP's to support the Total Plan in Japan with products that meet local needs. Based on current monthly run rates, we would experience -- we could experience positive year-over-year volume growth before year.

Now, let me turn it over to Rich for a review of our financial performance.

Thanks, Greg. Let me walk you through the financial statements that were contained in our press release yesterday, and also provide financial guidance for our third quarter and full-year 2005 period. During this section, all references to sales are in fact net sales and volume is volume points. Net sales of 384.7 million in the second quarter were up 18.7% versus 2004, reflecting year-over-year growth in all regions except Japan. Approximately 2.7 million of event sales from our Atlanta extravaganza are included in these numbers. Excluding the impact of FX, the company's sales increased 12.8% in the quarter.

Net sales in the Americas were 166.8 million, an increase of 43.7 versus the second quarter of 2004. Without the positive impact of FX, sales would have been up 37.7%. Net sales in the US were up 12.8%, ahead of our expectations. Adjusting for the extravaganza sales, the US would have increased 10% for the quarter. Additionally, net sales in Mexico were up 127% and Brazil was up 72%. These two countries continued to expand rapidly due to the success of the Nutrition Clubs in Mexico and the Total Plan in Brazil, coupled with strong country management and unified distributor leadership.

On a year-to-date basis, net sales for the Americas were 307.4 million, an increase of 35.2% versus the same period of 2004, primarily driven by strong growth in Mexico, up 99.6%; Brazil, up 62.1%; and the higher than expected sales reported in the United States, up 8.8% versus the same six-month period of 2004. Again, adjusting for the international sales that transacted at the Atlanta extravaganza, the US would have increased 7.3% year-to-date. Excluding currency fluctuation, year-to-date net sales would have increased 31.6%.

European net sales of 141.8 million in the quarter increased 3.3% from 137.4 million in the second quarter of 2004 as expected. Without the impact of FX, sales would have decreased 3%. As we called in the second quarter of last year, we had a very successful European Billion Dollar Challenge Promotion that led up to our Barcelona extravaganza. European sales last year, year-over-year in the second quarter, increased 17% versus 2003 and as a result, that promotion created very difficult comp for us during the first six months of 2005.

It's important to note that the sales performance varies throughout our European portfolio. For example, within our top six countries, two were down double-digits, three were up double-digits, and one was up single digits, all versus 2004. Similar to what Greg's team achieved in Korea, in the US and Japan, they are focusing their resources on improving German and the Netherlands to return these two countries to year-over-year growth rates. On a year-to-date basis, net sales in Europe increased 4.5% versus the first six months of '04 to $286.4 million. Excluding currency fluctuations, as expected, year-to-date sales would have increased 3.9%.

Net sales in Asia-Pacific were 55.8 million, an increase of 13.6% versus 2004. Taiwan was up 11.7%, and South Korea was up 33.6%. Excluding the positive impact of FX, sales would have increased 6.9% for the region versus the same period in '04. As Greg mentioned, we are very pleased with the improvements in Korea. On a year-to-date basis, net sales in the region were 115.8 million, an increase of 21.5%. Excluding the impact of foreign exchange, the region was up 15.1% versus the first six months of '04.

Sales in Japan were 20.2 million, down 6.3% from the 21.6 million in 2004. This represents a third consecutive quarter that the rate of decline has slowed. Excluding the impact of FX, sales in Japan would have declined 8.1% compared to 2004. These trends are in line with our expectations, and they continue moving toward year-over-year sales growth in the fourth quarter. On a year-to-date basis, net sales in Japan were 47.1 million, down 8.5%. Excluding the positive impact of currency fluctuations, Japan was down 10.6%. Gross profit in the second quarter was 307.3 million or 79.9% of sales. The year-over-year improvement of 32 basis points primarily reflects the year impact of the-- the introduction last year of our ShapeScan distributed tool. On a year-to-date growth profit was 603.6 million, or 79.8% of sales, which is relatively inline with last year's, year-to-date percentage of 80%.

Royalty expense in the second quarter was 137.1 million, or 35.6% of sales, and was up 30 basis points compared to the 35.3% of sales in 2004, primarily due to country mix and to the lesser extent, product mix.

On a year-to-date basis, royalty expense was 272.3 million, or 36%, up from 35.5% reported for the first six months of 2004, reflecting the US royalty bonus from the first quarter of 2005 and to the lesser extent, country mix.

SG&A of 117.8 million was up 12.6 million, or 12%, and in line with expectations when compared to 105.2 million reported in the second quarter of last year. The absolute dollar spending increase reflects 9.3 million of increase labor and benefits associated with normal merit increases, additional new hires, and increased bonus expense due to the Company's improving financial performance this year, 4.6 million increase in sales and promotion expenses primarily associated with the Atlanta extravaganza, a1.6 million increase in professional fees offset by lower amortization of 1.4 million and a $1.7 million benefit to the elimination of pre IPO's sponsor related fees.

As a percent of sales, SG&A improved 182 basis point to 30.6% of sales, due to stronger than expected sales in the quarter. On the year-to-date basis, SG&A expenses were 227.8 million or 30.1% of net sales versus 213 million reported in the first six months of '04, an improvement of 276 basis points.

Interest expense for the second quarter was 7.4 million, a decrease of 6.8 million compared to the 14.3 million reported in the second quarter of last year, reflecting the benefits of the IPO recapitalization. On a year-to-date basis, interest expense was 29.6 million down 12 million versus the 41.6 million reported the same six months in '04.

Excluding the recapitalization expenses of 14.2 million in the first quarter of '05 and 15.4 million in the first quarter of '04, interest expense was 15.4 million, a decrease of 10.8 million compared to the 26.2 million in 2004. Again, reflecting the benefits from our IPO recapitalization.

During the quarter, we prepaid 35 million of our $200 million term loan. Our outstanding debt is now 329 million, comprised of $165 million of which is the 9.5% notes through June 2011, and the remainder is a term loan tied to LIBOR plus 1.75 basis points. Our term loan is hedged with an interest-rate swap minimizing the exposure to increasing rates. Our effective tax rate, excluding the $5.5 million non-cash tax charge associated with moving our China's sub within our global organization was 37.1%.

Net income on a reported basis was 22.8 million in the quarter, and earnings per share were $0.32, compared to net income of 12.1 million in the second quarter of 2004. Excluding the non-cash tax charge for China of 5.5 million in the second quarter of 2005, net income was 28.3 million or $0.39 per share compared to earnings per share $0.22 in the second quarter of 2004.

For the six-month period, reported net income was 36.1 million and earnings per share was $0.50. This compares favorably to the earnings per share of $0.21 reported for the same six-month period in '04. Excluding the recap charges in the first quarter of 2004 and 2005, and a non-cash tax charge for China in the second quarter this year, our earnings per share was $0.78 for this first six months of 2005 versus $0.49 for the same period in 2004.

Turning to the balance sheet. The Company ended the quarter with 100.7 million in cash, which reflects the strong financial performance less the pre-payment of debt during the quarter and the payout associated with the Mark Hughes bonus awarded at the Atlanta extravaganza. Inventory of 77.6 million increased 6.5 million from the end of 2004, associated with the need to support our double-digit sales growth and to support multiple product rollouts globally.

From an efficiency standpoint, inventory turns was 4.2 turns versus 3.9 turns at the end of the second quarter in 2004 and 4.4 turns at the end of the first quarter of '05. CapEx of 8.4 million in the quarter reflects our ongoing investment in infrastructure that Greg just mentioned.

We invested approximate 5.2 million in information technology, including Oracle, our Internet initiatives, and our IT infrastructure. We also invested in facilities, primarily reflecting leasehold improvements associated with our new China headquarters and the relocation of our Japan headquarters in Tokyo. On a year-to-date basis, we have invested 12.8 million in CapEx. Capital expenditures are expected to accelerate in the third quarter due to the ongoing implementation of Oracle, the deployment of BizWorks, the testing of our direct-to-consumer platform, and lastly, the expansion within China.

Let me now turn to our 2005 guidance. I will take the next few minutes and provide detailed guidance for both the third quarter and full-year. Our EPS guidance for the full-year excludes the IPO claw-back expense in the first quarter of 14.2 million, and the second quarter of $5.5 million non-cash tax charge associated with our China sub.

As a result of stronger then expected earnings per share performance in the second quarter and anticipated double-digit sales growth for the second half of the year, we are raising our full-year earnings per share guidance to $1.45 to $1.50 per share. As we increase our comfort level with the predictability of our sales trends, we're providing the following guidance.

Net sales growth versus 2004, 14 to 16% in the third quarter, 14 to 16% for the full-year. Gross profit as a percent of sales, 79.5 to 79.7% for the third quarter, 79.5 to 80% for the full-year. Royalty expense as percent of sales, 35.6% to 35.8% for the third quarter, 35.6 to 35.9% for the full-year. SG&A percent as percent of sales, 31.4 to 32.8% for the third quarter, 30.4 to 31.2% for the full-year. Operating income as a percent of sales, 10.9 to 12.7% for the third quarter, 12.4 to 14% for the full-year.

Interest expense in millions of dollars, 6.7 to 7.0 for the third quarter, 28.0 to 29.0 for the full year. Our effective tax rate, 36.0 to 37.0 for the third quarter, and 36.0 to 37.0% for the full year. And please note that the tax rate and interest expense for the full-year period excludes the IPO recap expenses of 14 2 million incurred in the first quarter of '05. The effective tax rate also excludes the impact of the $5.5 million non-cash charge associative restructuring the Company's ownership of the company's China sub within the global organization that was reflected in our second quarter earnings.

EPS $0.31 to $0.33 for the third quarter, $1.45 to $1.50 for the full-year. And lastly CapEx, $15 million to $20 million in the third quarter and $35 million to $40 million for the full-year.

That includes the financial recap for the second quarter and guidance for the third quarter and full year. At this time, we would like to turn the call over to your questions.

(Operator Instructions)

The first question is from Joe Norton from Banc of America Securities.

Yes. Thanks. Good morning.

Hi, Joe.

Congratulations, Greg.

Thank you, Joe.

I have a couple of questions. The first question I have, just trying to drill down a little bit more into the US sales and volume. Could you tell us anything about the mix? I think you said on a like for like volume, it was up 18.7%. Was that right?

That's correct.

Can you tell us how the mix on that is skewing or just if you're seeing any mix shift in the US business?

Are you talking about product mix?

Yes.

Yes. What we're seeing with the launch of NouriFusion, we're seeing some pretty good growth in our outer nutrition categories and obviously LIFTOFF is a new category, the energy category for us, which is about $2 billion category in the US. So we're now into that category, with LIFTOFF and very happy with the launch of that in the quarter. And I think other than that, all the other products are improving, too. I think those are probably two highlights.

Okay. And then, just along those same lines. I am just curious, if with the number of new reps, which sounds very strong, is there any way you can track or, if you can -- can you tell us anything about what those people are ordering? Are you seeing anything different? And I guess what I'm driving at is, can you tell us anything more about what's driving that net or not the net but just the new reps in the US?

I would not say that the reps are particularly drawn to one particular product or another. I think you are seeing across the board increases. But obviously, we believe something like a LIFTOFF will open up new segments, especially the Generation H. It's a great fit with that segmentation that we have been talking about for the past three or four quarters. Hence, I think that we really haven't drilled down and looked at those number of supervisors and they ordering anything differently. We are seeing basically our volume across the board is going up.

Thanks. And then I just wanted to ask a little bit more on the -- on sort of the hyper-growth markets. I am just wondering, one of the things we are -- I mean those are very impressive growth rates. But I am just kind of wondering, how do you -- you guys feel like you have a better sense of predictability down there, or I can see from your increases in your top line forecast that you must have some greater sense of confidence. But I'm just curious, do you feel like you can predict when a country is growing at 100%, do you feel like you can predict how that growth rate is going to shake out for the next quarter or two and what's driving it?

Joe, I think we are improving our ability to predict, as we have talked over the last couple of quarters, we -- and originally being a new public company, we wanted to hedge a little bit and have some conservatism in our numbers to make sure that we did not disappoint our new investors, that's number one.

Number two, here we are a month into our third quarter, so I think our guidance reflects our comfort level as we take the snap shot having just concluded July. So we are improving our ability to predict in the near term our results. I think we are moving the street up little bit more cautiously to our internal projections are. But as we mentioned a long-term, we have a lot of initiatives underway to improve our visibility over the longer term, looking at the different metrics that have been looked at many years in the MLM industry, and kind of narrowing those down to what are the right metrics to look at to help us measure and monitor this business, and make better decisions for long-term.

So, I think what you're really seeing is our move to double-digit guidance and net sales growth rate is our comforts that that's sustainable, at least through the end of the year. And again, we are -- we have moved to the street up and taken a little bit of a caution that we had the over last couple of quarters out of our guidance.

Joe, its Mike. I'm just going to add one thing to that. While it's not a predictable or a predictability metric measurement, we have done a study recently that looks at our market share size in some of these marketplaces. And when you look at Brazil, we are a single-digit market share, under 5%, and some of our competitors are in the 20s and 30s. So there is a lot of expansion opportunity, particularly in Brazil.

Okay. Thank you very much.

Your next question is from Javier Escalante from Morgan Stanley.

Hey, good afternoon everyone. Also following up on the predictability. first I -- if you can go over again on the impact of this extravaganza in Atlanta in the second quarter sales, both in the US and in Mexico. And again, what kind of initiatives do you have for the third and fourth quarter to extend this momentum in the balance of the year or is it something that is basically you just picked up in Atlanta and you feel that that momentum is going to continue? And I have a couple of other questions after that.

Sure. First, let me just say from a volume points standpoint, we did a little over 5.5 million volume points in total at Atlanta. And of that, about 3.4 was done by our 60 different countries. So it was really not skewed to any one particular country that was due to buy -- and you were there, Javier -- you saw the people actually buying. So that is kind of broad based.

I think, overall, what we are saying is and when we sat at this call at the end of the first quarter, we had a very strong April. But we weren't sure how much of that strong April might have pulled in some from May. So we were very cautious with our guidance. We sat on the call three months ago, guiding for the second quarter. We wanted to get through May. And more importantly, we wanted to see what June might rebound too.

As we went through the quarter, we saw -- we didn't see the drop-off that we had expected, especially in the US after the extravaganza. And we saw a very strong June that followed. So that gave us a lot of confidence that Greg mentioned earlier, that all of these initiatives that you have heard us talking about since we first met last September, that have been put in place really starting in this late spring of last year and into this summer are taking hold. And it's not just one initiative, that's what gives us the confidence that it is not just one catalyst driving the US market. Its numerous initiatives. And more importantly, as Mike said, it's the excitement not only here at the headquarters, but really felt throughout the distributor leadership. That's really carrying up the momentum.

And in the same token, you guys looking at the US, for instance, as an example, in the fourth quarter, sales were down 17. Now they are up 13%. Do you think that this kind of sales volatility quarter-over-quarter is intrinsic to the multilevel marketing? Number one, is there something that you can implement to smooth over these swings a little bit? And then, why -- what give you confidence that given these swings, you're not going to experience the other end of it in the next couple of quarters?

That is a great question. I think, overall, we're trying to do is minimize the volatility of these different markets through a lot of the initiatives, the tools, the technology, the management changes that we've been doing; I think that's first and foremost. And then, second is to be a lot more predictable over a longer horizon and give you visibility into what we see occur in those marketplaces. So, I think last year's performance was more reflective of truly a lot of change in the business in the -- really over the last five years.

And really, I think, we thought last year was the year of the distributor. We left the year very positive as far as the camaraderie, the trust and the teamwork amongst the senior leadership of the distributors, among themselves and with company management. And we left after our university that I think Bill attended in Anaheim, very positive about the US. Now I'll turn over to Greg from here.

Yes. I would just add to that that we are doing some things to try and make sure that we have strong growth in every quarter. One thing that comes to mind is our product release schedule that we want to-- just taking sort of a tent pole strategy, to use some vernacular from my prior life in the movie business. But we -- if you remember, Liftoff, NouriFusion in Q2, cardio line, re-promote Garden 7.

So again, what we want to do is make sure our distributors have -- constantly either launching new products or refreshing the existing lines. So that's one thing that we want to make sure that we arm our distributors with that momentum on a quarterly basis. The other thing is our distributor initiatives, whether it's Nutrition Clubs, Total Plans, Generation H, we are making sure that we launch those quarter-by-quarter so that, again, there is something new and exciting in the market. So, I think some of that over time will help with the volatility of the quarters.

And Greg, you basically said that the old Herbalife was focused too much on recruiting and not on retail and retention. What kind of measures are you taking on -- what kind of metrics are you're starting to track to make sure that this momentum that you guys are now experiencing is balanced in terms of retailing and not just recruiting? Because the one thing that I would like to ask you is do you guys have any sense of consumer throughput from all of these purchases that the distributors are placing in the last three or four months?

Right. First of all, I'm not sure I ever said that that we're only doing recruiting. I think what we need -- what we said was to expand this market you always have to recruit. I mean that's what drives multilevel marketing. What we want to do is become equally good at retention and retail...

Exactly.

...and without losing that momentum on the recruiting. So a lot of initiatives that we put are on recruiting and retailing, whether its product initiatives or the Nutrition Clubs or the Total Plan. Specifically, our promotions, our marketing alliances, again, they're all meant to do that. We do -- we track the 3Rs, we look at retention numbers on a quarterly basis and retailing numbers and recruiting numbers.

So basically we look at that by market and keep-- Mike and I and everyone in the management team keeps a very close eye on that. So we know that we look at a relationship between volume points and new supervisors with the difference being what is really we consider the throughput through the channel that's not being absorbed by new supervisors, really being moved through our customers and we keep a very close eye on that. That's one of our key indicators that the product is moving through the channel.

And how those look like now, given what you guys have been doing for the last six to nine months in terms of how the retailing activity -- are you seeing a pick-up, let say, in productivity by the distributors that are coming in, the retention of the new distributors is any different from it was before or is it too early to tell?

I would say it's a little early to tell, but its trending in the right direction, Javier. What I'm very happy about is that we've been able to increase the recruiting activity in the US, as our new supervisor numbers show. We're also increasing overall volume points, and retention was very good this year of supervisors. And so, again, we're looking at all three of those metrics, and I think what we're seeing is we're moving towards a more balanced approach to the business, which is one of our key initiatives that we outlined for you guys over the past couple of quarters.

Thank you guys, and congratulations on the quarter.

Thank you, Javier.

(Operator Instructions)

The next question is from Lauren Lieberman from Credit Suisse First Boston.

Thanks. Good morning. First question is on gross margin expansion. I wanted to know how much of the higher estimate for gross margins through the rest of the year is attributable to NouriFusion?

Primarily all of that, Lauren. As we mentioned, we want to have a little bit more balanced offering within our three product categories between weight management, inner nutrition and outer nutrition. And with the expansive launch in 23 markets, we have expected to see gross margin enhancement, not only that replaces the product that it was intended to replace. But also, more importantly, we get a bigger growth rate. And we saw that during this quarter that our outer care line was growing at a faster rate than our overall company sales.

Do you have any sense for how many of the distributors or just how broad on the acceptance is so far of NouriFusion?

I think it's very broad. I think the distributor responses are very good across the board. If you look at the sales of our outer care, it's really spiked up. And I think part of that is the product itself. And I think, also, aligning the product launch with the Total Plan, so that we give not only great products, but also a distribution vehicle to improve the business. I think tying those two things together has been very strong. And as I mentioned earlier, we're doing also things like IBP's, our international business packs, we're tailoring those to the NouriFusion product, which is a first for us.

We basically have one pack now. We're creating different packs for different types of distributors. Again, this has been a request of our distributors for several years, and we are implementing those types of things currently. So, I think all of those things are showing strong acceptance of the line.

Thank you.

And your -- its Michael. It wouldn't be me if I didn't give a product pitch on this call somewhere. We've given our distributors a very unique selling premise with this product, vitamin A, C, and E. There is -- there are many products in the marketplace that have some vitamin in them, but nobody has A, C, and E like we do. And it's a well differentiation, it's a pitch, it's an ability for them to get out and immediately supplying the product and the product really works. So it's a wonderful opportunity for distributors who may not have been a skin care distributor in the past, now step over the line and add this to their product sales portfolio and their recruiting opportunities.

Let me add one thing to that, Michael. It's not only that, but also we think we're seeing is a lot of new distributors coming in, being recruited by this line to come in as outer care distributors and make this one of their primary line. Again, with the Total Plan, because it is such an easy plan to implement, it's not frightening. It is very easy to learn, it is very easy to duplicate. And I think what we're going to see is that this will not only drive sales, but also help us in recruiting. We don't have our hand in that metric yet, but we have good directional data that shows that's happening.

Okay. But so far do you the think that the majority of your distributors that will already skin care distributors have made the switch?

Yes. In the Michael's point, I think you are also seeing some of our distributors are more focused on our traditional weight-management, and supplement lines also moving over to expand our portfolio with that product.

Okay. So we'd see -- sequentially it's-- the rate of increase in outer nutrition should moderate. But year-over-year it would still be pretty significant?

Exactly.

Okay.

And Lauren, let me just be clear, we actually replaced our old line with the new line.

Okay.

So there was an immediate conversion. It's not like people can choose both products.

Okay.

There is an upgrade in the line.

Okay. Great. Next question is just Germany and then Netherlands; I know that the declines there are consistent with the last quarter or two. But I wondered if we could get some more detail on some of the plans for a turnaround there, things that are already in place or you're hoping to put in place in the next quarter?

Okay. We're doing a lot of things. I guess the overarching comment that I would say is many things that we put into Korea, Japan and US they're being very successful in turning around those markets. That we've proven, that works in those three markets, and very different markets, very similar initiatives we're moving over to Germany and the Netherlands.

One of the reasons, I think that because we are anniversaring very tough quarters in Europe because of the euro challenge. I think that the declines are little bit exasperated by that. I think we'll see those level out to this type of initiatives where we talked about before-- strong management, so we replaced country manager in Germany. We've added country manager in Netherlands. We never had a country manager there before was managed out of the UK. So we want to be more focused. I think distributor leadership is getting much more united.

We're focused on the three arts, not just on recruiting. The Netherlands was really a retailing market, and Germany was recruiting. We want to get the other two r's in both of those markets. Specifically, Total Plan, Generation H, we are launching in Germany. Niteworks launched throughout Europe, summer spectaculars. So again, a lot of the stuff that you have heard about in the US with strong country management, united leadership, giving distributors the tools whether it is a Total Plan, giving them good products. There is a lot of excitement about Niteworks launches somewhere around the summer spectaculars. We had a Generation H meeting in Frankfurt and have just great enthusiasm. So, I think a lot of the same initiatives. And we've expect-- but to be truthful folks, it took us a while to turn Korea around, it took us a while turn Japan and it took us a while turn US. So, we expect to see that turnaround over the next 12 months.

Okay. What would -- I guess, should I be looking for positive volume growth ex currency in Europe by the end of this year?

Yes. Absolutely.

Okay. In second quarter or is that too soon? It was down 3 - what up, 0.5%, first quarter down 3 this quarter?

Right. I think somewhere in between the third and fourth quarter you'll see that flip.

Okay. And then just a final question. I think this is probably best answered by Michael, and it's about a secondary offering. As I understand that there is still no publicly shared plans. Have you had any additional discussions with the private equity sponsors?

We've had discussions on, but at this point there is no additional information.

Okay. And any thoughts in one thing that I -- just to put in my two cents. I think additional liquidity at this point would be a very good thing for your stock. With the kind of results that you guys are putting up, there are lot of people, I think that they want to get involved and are having trouble doing it.

I'm sure our equity holders are listening.

Okay. Good.

Thank you, Lauren.

Thank you.

I'm showing no further questions at this time.

This is Michael again, and I just want to tell you all it's a pleasure to talk to you. In reports of second quarter performance, obviously, when we have good news like this, these are good calls.

And the thing I want to just caution everyone on and what we've done with our Company internally is, if I can use a baseball metaphor, we went from the minor leagues to the major leagues when we went public, and we are literally in the top of the first inning in the first game of the season here. We believe that our company has a long way to go. We think the opportunities are there and we're building energy and excitement in our distributors. And they are building energy and excitement in all of our employees around the world. So we're just getting started.

We are very excited about these growth initiatives that are taking place and particularly in Japan where we are seeing a nice turnaround. We continue to strengthen this management team, obviously, with the addition of Steve Henig that's a wonderful addition to us, the continuation efforts by Henry Burdick, who has been a great contributor to our company, our distributor support, our products they're all picking up and gaining momentum. As I said before, our distributors are engaged, they are motivated, and they're excited. They continue to strengthen their teamwork and expand their businesses globally, while they offer people all over the world and opportunity to prove themselves. And they're financially well being. We said in our mission statement that we are committed to changing people's lives.

We look forward to see many of you tomorrow in New York on Thursday in Boston. I hope to see all of you soon. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.