康寶萊 (HLF) 2011 Q3 法說會逐字稿

Good morning and thank you for joining the third quarter 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.

Before we begin, as a reminder, during this conference call comments may be made that include some forward-looking statements. The statements involve risks and uncertainties 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 US generally accepted accounting principals 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.

Thanks Brett. Good morning everyone and welcome to our third-quarter earnings call. Today we are very pleased with the record results that were reported yesterday. Specifically, the sixth consecutive quarter of double-digit top line growth. We would like to take this moment to congratulate our distributors who are once again leading the way through increased engagement and approved activity. And of course, our employees who remain keenly focused on the servicing and the needs of our distributors. For the first time in our history, the Company exceeded 1 billion volume points in a single quarter.

We continue to believe that our top line growth is a result of strategically pursuing three large global mega-trends. First, the global obesity epidemic which shows no sign of letting up. In fact, last month the Red Cross reported that more people died in the past year from complications of associated with obesity than those that died as a result of being malnourished. Secondly, anti-aging, people today are living longer and desire to take more control of their personal health regimen. And lastly, earning extra income. Whether it is here in the US or other developed markets were underemployment is as big an issue as unemployment, or in emerging markets where people want to improve their socioeconomic stature, the pursuit for supplemental income is seemingly universal.

Herbalife is uniquely positioned to capitalize on these three mega-trends through our products and our business opportunity. We believe it is the confluence of these mega-trends along with our products and our distribution and compensation plan that continue to positively differentiate our Company. On a product front we continue to build our leading position in the global weight management category to provide solutions for healthy weight management. As a result, the Company's global market share in the meal replacement and slimming category increased from 29% in 2009 to 33% last year. And we expect with double-digit growth in our weight management product category that our market share could easily increase for 2011.

We are building off this leadership position in the weight management category by introducing products that center around our core competencies such as a seasonal flavors of our Formula One shakes, our new Prolessa shake boost to help with both satiety and fat burning. As well as our new line of Herbalife 24 products. While it is very early, we continue to be very excited about the Herbalife 24 line. Which we officially launched at the recent US and EMEA Extravaganzas.

The Herbalife 24 product line is a sports performance line that will likely appeal to an expanded customer base adding to that of the traditional Herbalife products. Our strategy behind the introduction of Herbalife 24 includes the potential to attract a new category or demographic of distributor. To drive brand awareness and distributor confidence, to continue to leverage our team athletic and events sponsorship. One of the first things you learn at Herbalife is use, where, talk. That message is stressed in everything we do. You use the product, you were the brand and you talk to people. It is no different with me, or any distributor in our Company. Our business is based on product results and personal testimonials.

Ever since joining Herbalife I've had my own personal testimonial about our Formula One shake and other products. And in this quarter, I added another personal testimony for our new Herbalife 24 line. Recently I competed in the Leadville 100, a 100 hundred mile mountain bike race in the Colorado mountains. Herbalife had a team of 30 riders competing and this year with the help of our Herbalife 24 line, I was able to beat my 2010 time by almost 69 minutes. Now I have my own testimonial.

Turning to our business opportunity, Herbalife continues to provide a meaningful compensation opportunity for people in developed and emerging markets. We offer individuals the opportunity to generate either supplemental or full-time income. Our income opportunity has proven itself successful for emerging markets such as Mexico, Brazil, Russia and India as well as in established markets like right here in the United States and in Korea. The business opportunity continues to be enhanced by the globalization of daily consumption. Distributor methods of operation, as evidenced by our broad-based growth and volume, increased level of distributor activity, and record retention rates.

During the third-quarter Average Active Sales Leaders were up 24% versus last year and for the second consecutive quarter this year it increased in all six regions. More people than ever before are attracted to our business opportunity as they witness Herbalife distributors successfully growing their businesses. Let's take a minute for an update on one of our key strategic initiatives designed to enhance and support the business opportunity of our distributors, iChange. The iChange website that we introduced to distributors at the beginning of 2011 is beginning to gain traction. The site is another tool that allows distributors to maintain a consistent and frequent dialogue with their customers. A crucial foundation in our direct sales model. The herbalization of iChange website was completed late this quarter and the distributors who are using iChange beta version are beginning to see meaningful improvements in their business. We are expected to release iChange to all distributors in our original eight beta markets and throughout the EMEA Region this quarter.

Another key strategic area of investment for us has been the area of brand and image. As many of you have seen recently, Herbalife was the title sponsor of the World Football Challenge, it was featured on ESPN, Univision and other networks around the world. Additionally, the strengthening of our brand will come through giving back to our communities and to the world at large both at the corporate level and through activities of our distributors.

Last month as part of our commitment to improving nutrition around the world, we announced at the Clinton Global Initiative a partnership with GAIN, the Global Alliance for Improved Nutrition and DSM, one of our key nutrient suppliers. With this agreement, we agreed to distribute 20 million micro nutrient sachets to those in need throughout the Horn of Africa. Working collectively with the DSM and with our distributors it is our intent to develop a sustainable solution for providing nutrition into these key future markets. Before passing the call over to Des, let me conclude my prepared remarks by providing you with a snapshot of our recent distributor events. As those of you who visited our Atlanta Extravaganza are aware, our extravaganzas are a great place for us to experience the engagement, and passion of our distributors firsthand. This past weekend in Las Vegas we wrapped up our annual extravaganza season. From July through September we have seen more than 80,000 distributors at events in Minsk, Mexico City, Barcelona, Seoul, Istanbul and in October in Atlanta, Rio de Janeiro, and Las Vegas. The enthusiasm of our distributors and their excitement at the growth that they are experiencing in their businesses is tremendous. It is creating new success stories that we are sharing around the world.

You've heard me say this before and it deserves repeating, we are just getting started. Our aspirational goal is to achieve 10 billion volume points by 2020. Our products and our business opportunity are more relevant for the global marketplace than at any time in our 31-year history. As is, the way we go to market, person-to-person, direct sales. We are the original social network with a highly entrepreneurial distribution base who are passionate about the results that they have achieved with our products and the business opportunity. The globalization of daily consumption business methods is enabling more distributors to be successful than ever before in our history. Our brand and image continue to gain recognition and strength worldwide and we're just getting started. And lastly, our strategic initiative and investments continue to target top line growth opportunities.

We're building a strong Global management team and a robust infrastructure that are capable of maintaining the positive momentum we are experiencing in all of our regions around the world. We believe these investments, coupled with the strong engagement of our distributors should continue to allow us to report strong financial performance. Now let me turn it over to Des for specific market updates.

Thank you Michael. The momentum we are seeing in our business is driven by two key forces, our distributors' commitment to expanding daily consumption business methods around the world and the continuing commitment of our distributors to Herbalife's mission for nutrition. The third quarter was tremendous. As Michael mentioned, this the first time that the Company has ever exceeded 1 billion volume points in a quarter and frankly, we believe that we are just getting started. It was our founder Mark Hughes' aspirational goal that Herbalife would one day achieve $5 billion in retail sales and at the pace we are going that milestone may be just around the corner. When we look at the key metrics that we report to investors such as volume points, local currency net sales, new distributors and Average Active Sales Leaders, every region posted increases in every metric.

We have often mentioned the transformation that is occurring in our business due to the expansion of daily consumption business methods and this quarter is a stellar example of the positive changes that we are seeing throughout the markets in which we operate. We believe the momentum behind this evolution will continue to accelerate as more distributors in more markets have success acculturating daily consumption business methods to their markets. Daily consumption business methods not only drive increased distributor engagement, they also drive increases in consumer engagement. One key characteristic of daily consumption business methods, whether nutrition Clubs, weight loss challenges or distributor led fitness boot camps, is that the distributor and their consumers have much more frequent contact than is normal for traditional direct sellers. Based on the consumer research that we have conducted in the US, Mexico and Korea, Nutrition Club customers in each market indicate that approximately 80% of them visited the Club more than three times a week. In the US and Mexico, more than 50% of Club members stated that they visited the Club every day that the Club was open and between 30% and 40% of those people had been attending the Club for more than one year.

As daily consumption takes root in various markets around the world, we see fascinating adaptations of the model through both the acculturation and refinement of the concepts that are driving growth. When we see successful and sustainable business methods we work with the distributors to help globalize these concepts. Right now, we are excited about systemized training methods that we are seeing driving growth and duplication and Mexico and new Club membership methods that are beginning to see success in the US, particularly among the general market and the Generation H groups.

Over the past year in each of our regions we have been regionalizing our sales support staff so that they can be closer to the distributors in their markets. This strategy is enabling the sales teams to provide more timely information and assistance to the distributors in their markets. It is also vital as we strive to take our business down to a more localized level using a city by city approach. Having sales staff on the ground responsible for finite geographical territories in constant dialogue with local distributor leadership is proving to be a highly accretive initiative for sales growth and distributor communication.

In the third quarter of 2011 we were very pleased to see that the increased engagement we have been discussing for the past several quarters has continued to translate into growth and volume points. The growth was fairly evenly split between emerging and established markets. The established markets category, which includes several of our oldest markets, for example, the US and most of Western Europe, accounted for 46% of our volume points and increased 20% compared to the prior year quarter. The emerging markets category accounted for 54% of our volume points and grew 27% for the quarter over the third quarter of 2010. We remain very pleased with the relative balance of our business between these two groups and are excited by the scale of the opportunities that we see to grow both wider and deeper simultaneously.

Now let me provide regional highlights and color on some key regions. The North America region had another strong quarter posting 16% net sales and local currency net sales growth and 12% growth and volume points. Each as compared to the prior year period. New distributors increased 6% in the quarter and Average Active Sales Leaders, one of our key distributor engagement metrics, increased 15% in the North America region, each as compared to last year's third quarter results. For the quarter, US net sales increased 16% and volume points increased 12% versus the same quarter last year. Compared to the prior year period new distributors in the US increased 5% and Average Active Sales Leaders increased 15%. The growth in the US continues to be driven by the expansion of daily consumption business methods particularly the in general market segment of the business.

As Michael mentioned, we have just wrapped up the last of our three US Extravaganzas and saw tremendous enthusiasm at all events. During the third quarter, we saw growth throughout the US market in both the Latino and general markets. In the US there are two segments where we are seeing strong business trends about which we are becoming increasingly excited. Generation H, our name for those distributors under 35-years-old, and our African-American business. We are seeing very exciting adaptations of the Nutrition Clubs spring up through the Gen H group and we're beginning to see daily consumption begin to drive sales and engagement in the African-American distributor community.

Moving on to Mexico. Local currency net sales for the quarter increased 30% and volume points increased 23% each as compared to the prior year period. For the third quarter, new distributors increased 14% compared to the prior year. We are very pleased to see Average Active Sales Leaders increase 26% for the quarter compared to third quarter 2010. This is the third consecutive quarter that the region has posted a greater than 20% increase in Average Active Sales Leaders over the comparable period of the prior year. In Mexico, the more structured training methods that many distributors are integrating into their businesses is driving solid volume growth, duplication of Clubs and development of strong distributor leaders throughout the market. The regionalization of the sales staff in Mexico is helping to facilitate another growth driver for Mexico which is the focus on going deeper into the market, hosting more meetings, and generally engaging in more activity in less populated states.

The Asia-Pacific Region continues to be a growth driver for the company. During the third quarter, local currency net sales increased 31% and volume points grew 36%, each as compared to the prior year period. For the third quarter, new distributors increased 47% versus the prior year. We believe 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. The drivers in the region continue to be Korea and India. Compared to the prior year period, volume points in Korea and India increased 62% and 112% respectively. Both countries are benefiting from the expansion of Nutrition Clubs and the regionalization of their sales support staff. We believe that Korea, which has been showing strong growth for several years, still has room for additional expansion in their business as they focus on the smaller, less penetrated cities.

Local currency net sales in the South and Central American region increased 44% and volume points in the region were up 40% each as compared to the third quarter of 2010. Average Active Sales Leaders in the quarter increased 22% over last year's third quarter. New distributors increased 51% for the quarter. As we mentioned on last quarter's call, we are beginning to see the benefit of daily consumption moving out of the early adopter markets in the region and the business method is now driving sales throughout numerous countries in the region. As an indicator of the broad-based strength in the region compared to last year, we saw volume point growth in every country throughout the region. Within the South and Central America region, we need to mention the strength we are continuing to see in Brazil. Brazil experienced volume point growth of approximately 31% in the third quarter over the third quarter of 2010 as both Nutrition Clubs and traditional business methods experienced growth. We are very excited about the opportunity we believe that exists in Brazil and our distributors in this market are just beginning to scratch the surface of the real market opportunity.

Turning to EMEA. During the third quarter, local currency net sales increased 14% and volume points in the region grew 16% compared to the same period in the prior year. New distributors for the third quarter increased 9% over the prior-year period, Average Active Sales Leaders in the region improved over the course of the year and were up 17% in the quarter. 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.

Within EMEA, Russia had another amazing quarter. While we do not usually talk about country specific results, Russia again deserves to be highlighted. Compared to the third quarter of 2010, this quarter's volume points were up approximately 60% with a 36% increase in new distributors and a greater than 45% increase in Average Active Sales Leaders. The city-by-city view of the business opportunity has been a huge driver in Russia coupled with the Nutrition Clubs and the recent enhancements to the marketing plan which were first tested in this market.

Now let's turn to China where local currency net sales increased 1% and volume points increased 2% in the third quarter compared to the prior year period. We believe our sales leaders in China continue to make progress acculturating the concept of daily consumption. We are seeing Clubs open in locations more like those that have been successful and duplicable in other markets. 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 quarter and also remind everyone on the call that we believe 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.

Thank you, Des. I will first go through the third quarter results and then I will discuss the guidance provided in yesterday's earnings release and specifically, the topical issue of foreign currency and it's potential impact on our expected performance. Let's start at the top with volume. As both Michael and Des mentioned, the third quarter was the first the Company's history in which it achieved in excess of 1 billion volume points in a quarter. This record performance was geographically broad-based with all six regions and 80% of our 78 countries experiencing increases in the quarter.

Volume growth in the quarter was also strong in both established and emerging markets. With established growing 19.5% during the quarter and emerging increasing 26.9%. Our overall volume performance in the quarter was also very broad-based from a timing standpoint. While we wouldn't normally comment on monthly results, it is worthy to note that our distributors' businesses remained strong despite the volatility in the financial markets over the past two months. With September volume points being the largest in the Company's history.

Since Des has already provided significant detail on volume points by region, I will move to net sales which grew approximately 30% compared to the third quarter last year. This increase was comprised of 24.1% local currency sales growth plus an approximate 600 basis point benefit from foreign currency exchange rates. Turning to the third quarter margins, gross margin was slightly lower on a year-over-year and sequential basis. The differences are due to changes in country mix, slight increases in our inventory reserves, offset by net sourcing savings. Which includes the benefit from our feed to feed strategy.

In the third quarter, the H.I.M. Manufacturing facility continued to produce approximately 23% of all worldwide and nutrition production volume. Very similar to last quarter and in line with our expectations. Moving onto SG&A as a percentage of sales, in total, it improved by approximately 241 basis points versus last year. 65 basis points of that change was a result of China sales employee expense while the remaining 176 basis point improvement was leveraged against our cost structure. Compared to the prior year, SG&A increased 22% while sales grew 30%. It is worthy to note that this year's SG&A included a $2.3 million benefit from lower foreign currency losses versus prior-year results. The third quarter operating margin of 16.9% was approximately 220 basis points ahead of last year. As we've mentioned before, the operating margin expansion was driven by leverage in the business model.

The effective tax rate for the quarter of 28.5% was slightly better than the guidance provided and was approximately 500 basis points higher than our adjusted effective tax rate from third quarter last year. This large year-over-year change in the third quarter's effective tax rate was a result of last year's third quarter rate being unusually low due to the implementation of certain tax strategies that lead to a year-to-date catch up being booked in September last year. On a year-to-date basis, the year-over-year effective tax rate change is only 89 basis points. Which was slightly better than our expectations.

Turning to earnings per share, the Company reported EPS of $0.87, $0.27 higher than the prior year adjusted EPS results and $0.11 better than the high end of guidance range that we provided in August. As we've seen in prior quarters, the upside compared to guidance was due to higher sales of approximately $50 million versus the high end of our previous guidance range. During the quarter the Company generated cash flow from operations of $143 million, an increase of 42.3% versus the comparable quarter in 2010. Free cash generated during the quarter of $126 million represents 117% of net income. On a year-to-date basis, free cash also exceeded net income by 8%. During the quarter, we repurchased 2.8 million shares for a total cost of $150 million. This amount was $100 million higher than what was included in our guidance.

As it relates to our philosophy on the Company's $1 billion share repurchase program, we have consistently communicated to investors that there will be a routine component and a more opportunistic component where we would potentially accelerate our activity in the marketplace if the stock over reacted for any particular reason. This past quarter was an example of a situation we believe our stock over reacted to non-Herbalife world and financial news and we do not believe it was reflective of the trends we were seeing in our business. Currently, we have $528 million remaining on our $1 billion share repurchase program.

Now let me discuss our guidance for the remainder of 2011 and our initial 2012 guidance. I will start with currency as I believe it is important for investors to understand the assumptions that were used in developing our guidance. Historically, we've used the exchange rates as of the last day of the reported quarter in determining guidance which was the essentially the same rate at which we hedged the subsequent quarter. However, we changed that approach this quarter due to the extreme volatility in exchange rates since late September. We made a decision to average in our hedge rates for the quarter. Accordingly, the hedged exchange rates for our key currencies in the fourth quarter are very close to the average exchange rates for the first four weeks of October. We have utilized these hedged rates in calculations of both the fourth quarter guidance and full-year 2012 guidance. As we mentioned in yesterday's press release, had currencies remained constant with June 30, 2011 rates, our 2011 fourth quarter and our 2012 guidance would have been $0.10 to $0.12 better per quarter than what we have provided.

As a sensitivity for modeling purposes, a simple way to think about the impact of currency is that a 1% move in our entire basket of currencies would have an approximate $0.05 impact to our 2012 full year EPS guidance. Of course not all currencies are equal. During times of FX volatility, those countries that have local product manufacturing have less of an impact while those countries with most or all of their products produced in the US will have more of an impact on EPS.

Moving on to the specifics of guidance, we are increasing our Q4 volume point guidance significantly from what was assumed in our previous guidance given the positive business trends Des described. The EPS benefit from this increase more than offsets the negative effect of currency. We now expect EPS to be between $0.68 and $0.72 per share in the fourth quarter on volume point growth of 17% to 19%. With net sales expecting to increase 13% to 15%. As we look to close out a record performance in 2011, our guidance for the full year is 19.7% to 20.2% volume point growth and 24.5% to 25% net sales growth.

Turning to 2012, we expect to continue to post strong growth-on-growth comparisons in both volume and net sales. We expect volume points to grow in the high single to low double-digit range. Accordingly, we are initiating fiscal 2012 guidance with volume point growth of 8% to 10% over 2011. Net sales are also expected to grow 8% to 10%. This range includes a 600 basis point drag from the change in currency rates previously mentioned. We expect full-year EPS to be in the range of $3.25 to $3.45 per share. That ends our prepared comments, we will now open up the call for your questions. Thank you.

(Operator instructions) We will pause for just a moment to compile the Q&A roster. Pierre Ostlund, Jefferies & Company.

Thanks, good morning everybody, congratulations. Want to start out and get your thoughts on the EMEA region. Obviously, there are other regions growing faster, but I guess I'd like to see the acceleration that you got there in EMEA in both the volume points and Average Active Sales Leaders in the quarter. Are you seeing anything yet that sort of resembles an inflection point on the daily consumption front given sort of the strength in US, India and Brazil, among other regions that might be expected to kind of have some cultural overlap there?

Hi, Pierre. This is Des. So, the answer is yes, essentially if you look at EMEA, let's divide it into areas, first of all, you've got what's happening in Russia where we've obviously already seen that reflection point. We've seen this tremendous growth there combined with tremendous levels of activity, distributor engagement and the impact of the 5K marketing change that we first tested there a couple of years ago. Then in Western Europe as well we actually now have emergence of our range of daily consumption activities driven initially by weight loss challenges then expanding into lifestyle centers and now we are actually seeing a growing number of successful Clubs and the duplication of Clubs. So I would say absolutely we are seeing that reflection point still in the early stages, but certainly we're very excited by the seeds that are being planted and being sown by our distributor leadership there.

Great. Des, following just on that point you commented in the preamble about it being early days for daily consumption and I think that that certainly seems to ring true. You talked in the past about sort of a lifecycle I guess for daily consumption, be it inception, expansion, enhancement, as you are kind of looking at your markets now versus maybe where you were at the end of last year when you had your analyst day, have any of the markets kind of moved up the maturity curve or is it still really early for, frankly, the vast majority of the markets here?

It is still early, Pierre, obviously we recognize that it takes about two or three years for the acculturation process and I would say that pretty much everybody is still in the same buckets as they were a year ago, just growing in terms of maturity. The other thing that we're seeing is that some of the systemized training methods that we are seeing adopted in Mexico and now spreading elsewhere we believe are actually going to contribute both to the mature markets in terms of enhancing their growth but also possibly accelerating the growth of others in the other stages.

Excellent, I appreciate that color. John, one for you quick here, or maybe two, not to dwell on the FX thing given all the positives here, but you mentioned a 600 basis point impact on the top line, is that actually 600 basis points discrete to 2012 or is that a swing factor versus where it would've been in June?

That is a swing factor to what it would've been in June rates. About 400 basis points is the discrete factors.

Okay. So using the rule of thumb then something on the order of $0.20 in terms of just sort of an adverse currency in a vacuum for 2012 is probably reasonable?

I think $0.20 is maybe a little light.

A little low?

Yes, I think so. So 200 basis points on a base of 600 basis points is a third, so if you apply that same ratio to EPS, which I think is appropriate, and we're talking $0.10 to $0.12 a quarter, so maybe $0.03 to $0.04 a quarter is, you can exclude from the equation, so you got 70% less than -- I'd say about $0.25, maybe $0.28, somewhere in that range.

All right, very good. Sorry real quickly, on the FX impact to EPS in the quarter was $0.12, it was a little bit more than sort of the first couple quarters of the year. Was that basically the lower FX losses in the quarter? In the SG&A line, John?

It was lower FX losses. But it was also an overall for the Q3 -- it sounds funny to say this today, but it was a better FX rate than it was year ago.

Okay, very good. Thanks everybody.

John San Marco, Janney Capital Markets.

Thanks, good morning, everyone. Can you update your estimate of how many Nutrition Clubs you think you have globally?

Let me put out the standard qualifier when we talk about the number of Nutrition Clubs, which is an estimate, it's a statistical estimate and a survey estimate> In some countries we have actually pretty good data, pretty good registration data and in other countries it is a little softer number. I'm looking at the sheet here, we've probably got around 70,000 Clubs around the world. We are going to work on giving the investors a better number. We're going to kind of break it into home clubs and commercial clubs sometime next year, hopefully early next year.

Okay. And then, Des, I think you said that you've seen some shifts in how daily consumption manifests in Europe. You have a guess what the Nutrition Club count looks like in the EMEA business and maybe how that compares versus year ago? And then I guess I secondarily, is it the distributors are shifting from weight loss challenges, et cetera to Nutrition Clubs or has it been largely incremental?

So I guess, John, what's happening is if you think of Nutrition Clubs in Europe obviously begin initially with the concept of lifestyle centers, which essentially are banded Herbalife offices. Where distributors have meetings, they invite customers there to participate in weight loss challenges and so they are really sort of brand centered rather than traditional Nutrition Clubs. Now, obviously there will shake parties and there will be other activities there, but you won't have customers coming on a daily basis to actually start their day with a healthy shape. So that's the model that we saw initially emerge in Western Europe primarily as a factor of the local regulation and other factors, so what's happening now is that from that base we're actually seeing an expansion into more traditional Nutrition Clubs but primarily in commercial locations. And primarily with a number of distributors operating together, so this is an evolution that we are seeing taking place. The reason that we believe that we may have reached an inflection point is that we're now seeing distributors move up the marketing plan as a result of duplication of the Clubs. So there has always been several hundred Clubs operating in recent years in Western Europe, but we haven't necessarily seen that duplication, that's what we are now beginning to see. We're beginning to see the movement up the marketing plan, and for us, that's really the first indication that you've got that duplication that drives further adoption.

Okay. And then on the 8% to 10% volume guidance which is the same guidance you originally gave for 2011, I guess a couple observations, of course you have a little bit year-to-date sales force growth this year than you had a year ago today. And also you had again a below the long-term guidance of -- volume guidance of 11%, are there any discrete headwinds reflected in that volume assumption? Any comments you care to make on the 8% to 10% versus recent growth rates?

Well, it is a coincidence that was 8% to 10% this year and last year. They're not related to each other but with a little bit, if are lucky we will beat it by the same amount, but I wouldn't make that assumption. The 8% to 10% is based off the best information available. It is based off of what are really strong year over year over year comps. We've had two incredible growth years that we now have to compound and 8% to 10% is not materially different than the long-term growth rate of 11%. It is pretty close to that number, so it is nothing discreet, it's just maybe a little bit of conservatism given the strong two years that we've had.

Got it. Same guidance practice as historically? And then my last one can you quantify, you mentioned iChange and it sounded like you were having some, at least a level of success you expected with it, is there anything you can quantify in terms of the performance of distributors who have been using iChange versus a control group or anything like that?

Yes, so John, this is Des. So, yes, we are very excited about what we are seeing with iChange, still in the early stages. But we are seeing is the distributors who are using iChange have significantly better performance in terms of customer engagement, customer retention. So we are working closely with a pilot group of distributors in terms of continuing to modify to add additional functionality and we believe that as part of our sort of social network strategy this is going to be an important part and exciting tool for our distributors.

Okay. Thank you very much for taking the questions.

Thanks John.

Mike Schwartz, SunTrust.

Good morning, everyone.

Good morning, Mike.

I guess I was most impressed in the quarter with the established market growth of about 20%. Can you just give us more color on that where you are seeing particular pockets of strength, is that mostly Europe or is it US general? Any thought on that would be helpful.

Mike, this is Des. I would say it is a number of factors, obviously the US general market, very excited about it. This is the oldest market in Herbalife's 31 years. And what we are seeing there is obviously significant adoption of daily consumption. Our US leaders have monitored what's happening in our Latino market for several years. They really have adopted the Clubs and the significant -- to a significant degree, they've merged with weight loss challenges, with HOMs, with a traditional Tuesday, Thursday, Saturday business model. And effectively the Nutrition Clubs in the general market are being used almost like traditional offices where you've got a lot of distributor activity taking place. Then you merge that with some of these new wonderful ideas like the fitness boot camp that we are seeing as a tremendous way of bringing new customers and that's really what's driving the growth in the US general market.

Same thing I would say for Korea. Obviously a number of years go our Korean leaders they went to Mexico, they went to Taiwan, they came back and they introduced a systemized training approach that works very well with the Korean culture. So you have this tremendous training and duplication time that into an HOM model and so on. So really, what I would say is that in the established markets it is really this daily consumption driving long-term customers, which in turn drives distributor retention, distributor sponsorship and so on. So that's the whole and that's the circle of success that you've heard us talk about at various meetings.

Great and I know you don't break this out anymore, but is that kind of US general market still running at about a 20% plus growth rate?

US general was in excess of 20% and the Latinos also had growth in the quarter.

Okay, great. And then next question is just on the Spencers Trial in India, could you give us an update on that, how that's performing and then you are looking at replicating that in other areas in the country in the next several quarters?

Yes, so is still very early days on that, Mike, but we believe that it will be positive. The thing to remember about Spencers though is that unlike Waldo's in Mexico, where Waldo's had over 300 locations, Spencers is approximately 100 and they are predominantly regional. So what we are actually doing, Mike, is that we obviously believe that improved access points is a significant factor for our distributors particularly those engaged in daily consumption methods. So to supplement what's happening with Spencers, we are looking at a number of other possibilities, not just for India, but elsewhere and I think in future calls you can expect to hear more about that.

Okay, great, thank you.

Sure.

Linda Bolton-Weiser, Caris.

Hi Linda.

Hi. So in terms of, you made some comment about your cash flow and your opportunistic share repurchase in the quarter. Your cash flow performance is really, really great and it looks to me like you're going to be able to generate free cash like $400 million or so next year in which case that way exceeds doing $200 million of share repurchase. Can you give us some thoughts on if that all comes true what you would do with the cash?

Well, our first priority for cash is always to invest in our core business. For any opportunity we have that can drive an appropriate ROI above our cost of capital, or risk adjusted cost of capital, we would do that first. When you get beyond that, there are little pocket acquisitions that may be an opportunity and we look at things like manufacturing or iChange. Beyond that, it's really returning the money to shareholders through a dividend and a buyback. There's a routine piece to the buyback. What's included in our guidance is buying back $200 million in stock which does leave excess cash beyond that which may get utilized for an investment opportunity or may get utilized to buy back more stock if the opportunity arises. Again, the hierarchy is invest in our core business, find third-party investments that can drive value to Herbalife, and then it is return the money to shareholders.

Great and then I found it very interesting hearing some of the stories at the convention about the Herbalife 24 and these boot camp concepts that are cropping up in Los Angeles and how that is seemingly attracting a non-Latino customer. Can you comment on just Herbalife 24 and the idea that maybe it is not going to be as cannibalizing and that it actually may expand, help you expand and reach a different kind of customer and distributor?

Sure, so Linda, we believe that Herbalife 24 contributes a number of things. First of all, it obviously gives us tremendous credibility within a high-level sporting community. That really has a halo effect which applies then to all our products. The second thing is that it absolutely enables us to reach out to a new audience and the fitness boot camps that you referenced are a great example of that. Where it just gives us tremendous authenticity within the weekend warrior sporting community. It is also helping us to attract a new group of distributors who are focused on the business opportunity based around health and fitness. So I think you know Linda, there is tens of thousands of personal trainers in the US and now with Herbalife 24, they can see that we've got both a tremendous business opportunity but also a product line that is directly related to what they do everyday. So I think we are seeing this having an impact in a number of areas for us and that would just be a summary of all of them.

Great, and then for your guidance for next year it seems like embedded in that guidance is a little bit more price mix than maybe what we've seen in 2011. Can you give any color on that?

I will give you little bit of color, like I said 200 basis points of the 600 basis point impact from currency was really just using June rates and not average year-to-date rates, if you use average year-to-date rates it is really a 400 basis point impact. There's a couple components in there, there's a little bit of timing. There's a little bit of market conversions where we have some third-party countries that we sell to a third-party that next year will be taking that operation over, so that will be just really accountingism, changes to gross to net. Then there's about a little under 300 basis points in mix price combined.

Okay. Thanks.

Sure.

Tim Ramey, D.A. Davidson.

Good morning and congratulations as well.

Thank you Tim.

You have talked a lot about distributor engagement and the increase in the active -- average active associates that our leaders. Do you have a sense of what that's doing to incomes across the range of your distributors? Is part of this, I assume it is kind of obvious, but part of the distributor engagement is people are making a lot more money.

So Tim, I don't know that we've got an exact number on that, but there certainly is a correlation because obviously what we see when you've got an increased number of sales leaders is that's driven by the fact of having a stronger customer base ordering more regularly. And so effectively it is an indication that we've got people building a long-term sustainable income and of course, the critical part of that, Tim, is that that results in increased movement up the marketing plan. So I think you've got a combination of factors, more activity, more customers moving up the marketing plan and that combination then converts into a higher income.

And does some of these really stratospheric growth rates that we saw in Russia and elsewhere, they just seemed hard to execute, can you talk about some of -- you mentioned or John did last night that there was some supply chain inefficiencies that resulted from the strong volume growth, is some of this volume growth coming at a higher cost to deliver given that the rates are just so stunning?

Will, this is John, Tim. There's not a fundamental change in the model, but the reality is when you're growing at 20% plus and even higher in certain markets, efficiencies isn't the most critical issue, it is really supplying our distributors with products. You need to take the order, ship -- be able to have product, to ship the product to pay our distributors, those are the three most critical components we have. And we will do whatever it takes to support that because when a distributor is ordering a product it's because they have a customer in there selling that product and we want to make sure we support it, and in the short-term, when we have high growth rates we may air freight product out, we may add inventory to a marketplace. But it is not a fundamental shift in the cost structure, it is more of a short-term inefficiencies to support the incredible growth we are seeing in certain markets.

Great. And probably I think just worth mentioning, I haven't had too many 10 baggers in my career, but when we get to $65, not if, but when we get to $65 just nice to point out that that is a 10 bagger off the March '09 number. Congratulations on that.

Thank you.

Scott Van Winkle, Canaccord Adams.

Thanks. Most of my questions have been asked, I have a questions about new products and carrying on the conversation about 24 and how it attracts the new distributor group and a new selling model. Is that important with new products? And my question is, as Nutrition Clubs grow as a percentage of your total sales and the focus is on the core three products, does new product innovation have any less of an impact on driving momentum or incremental sales?

Hi Scott, it's Michael. 24, let me start there, 24 we believe, and I'm going to repeat basically what Des said, has a chance to open up some new doors without a doubt. We are seeing a younger distributor come to this Company for many reasons, obviously there's an economic opportunity. But there's a product opportunity that appeals to them also. They can talk to people in the younger segment who may not always be interested in weight loss or weight management, they haven't had that unfortunate moment yet in life where their waist has expanded to the point where they are just out of control with it. But it offers an opportunity for them to get excited about this Company, engaged in this Company with a product that is very useful for the target market they are after. That's why you are seeing these boot camps and these type of business opportunity offerings work so well for us. We're kind of on the cusp of understanding the cannibalization of Herbalife 24. But I'm not sure we're going to see it in the way we had early expected it.

On the other side as far as expanding the basic three offerings, you are going to see more and more about Formula One as we go down the road. You're going to see boosters to it, you're going to see opportunities for distributors to sell products inside and have people walk away with product from their Clubs. And that's an opportunity for us to build and expand on this, Des, you want to add anything on that?

I think absolutely, at the end of the day new products drive excitement and this is a business that gives another reason for our distributors to talk to people whether in the Clubs, whether at Clubs, so keeping the products on the cutting edge, our reformulations so we're always, the best signs, that's always going to be part. And then the last thing I would mention is seasonal flavors, Scott, so we've had tremendous success with seasonal flavors for those of you who tried the pumpkin spice or the orange creamsicle, you will know what I'm talking about. But again, a significant factor in excitement and driving reasons for conversations.

And then quickly on iChange which I think is just an awesome tool. Are there any challenges like testimonials or regulatory or anything like that you have to be careful with with setting up a network like that?

So there's always occasional challenges because obviously our customers are leaving comments and obviously our customers get excited about products results. But obviously, it's something that we closely monitor, Scott, and if we see anything that's inappropriate then we respond very quickly.

Great, thank you.

And then the other thing, Scott, as well, is that of course we train our distributors so there's constantly on this message of no medical claims, so that they also are acting as observers out there and if they see anything inappropriate many of them will also -- will response to us and let us know.

Thank you.

Anand Vankawala, Avondale Partners.

Hi, thanks and just want to add my congratulations. Just one quick follow-up as far as share repurchase goes. Is the $200 million you mentioned built into the fiscal '12 guidance?

Yes, it's built in as an average spread over the year.

All right, perfect, thanks.

Chris Ferrara, Bank of America.

Hey, guys, sorry if you guys said this already, but just in Central and South America, I guess five out of the last six quarters, your ads have been, I guess in the range of 60,000 to 75,000, this quarter it is 107,000, and I know you talked about how strong the market's been, but what drove that immediate -- that big jump up this quarter? Was there anything specific to think of?

Yes, so Chris, one of the -- two factors obviously, one is increased distributor engagement, the second factor is that we did begin a test in all countries in South and Central America, other than Brazil, where we tested a lower cost IBP which is directionally related to income levels in different countries. And so we are monitoring that closely because for us, the issue really isn't whether we bring in more distributors, or we sell more IBPs because we assume that was a given, the real issue for us is to monitor what happens with those distributors when they come into the business and see what the engagement level is. So I think that's one of the things that drove the new distributors but again for us, it is an interesting experiment, we're certainly impressed with the initial results, but the real issue is what happens now in the next six months with those new distributors and the systemized training and the impact of that and so on.

Okay, that's helpful. And I guess, John, real quick, the relationship you gave between 1% FX hit on top line is $0.05 a share, it sounds like that relationship deviates in the 2012 guidance where I think you are saying maybe 4 point of FX hit, but it is more like $0.25, $0.28 of EPS. Is there a particular reason why it would be different in this 2012 guidance or am I misunderstanding?

I think it is different context. So versus the guidance, a 1% change in all of our currencies that are in our basket would drive a $0.05 change to the guidance we provided. What I was trying -- I hope I answered Pierre's question right when he asked this, the $0.25 impact is the year over year impact from currency change and the reason why it is a lower number is Q4 this year is also impacted by currency, so you don't really have a full-year impact next year versus 2011. So there was slightly different context.

Okay. Thanks.

I think that's the last question.

At this time, there are no further questions. Gentlemen, are there any closing remarks?

Just a few real quick here, thank you, everyone for tuning in this morning. It is always interesting to wake up every morning and get online and see what's impacted the world in the last eight hours and this has obviously been a world of great impacts lately. And the way I put it quite simply is bad news on the outside of Herbalife and damn good news on the inside in our world. We focus internally on Team Herbalife, which is employees and distributors dedicated to our mission for nutrition. Tomorrow most of us in our management team will fly to Singapore for meetings with their Global Management Team to focus on continuing our momentum by transferring best practices market to market. After three days with our management teams we will welcome our top 50 distributors from around the world for two days of further discussion on how we reach our near-term goals, our five-year plan and our 10-year aspirational opportunity. We work closely with our independent Herbalife distributor leadership on almost every aspect of how we go to market. Our business is better and our future brighter because of both the global mega-trends and our incredible Team Herbalife, which is once again repeating myself, our employees and our distributors who work together taking our business to new heights. Thanks again for your support. We look forward to seeing you at the end of next quarter.

This concludes today's conference, you may now disconnect.