Add
HLF to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| HLF > SEC Filings for HLF > Form 10-Q on 30-Apr-2012 | All Recent SEC Filings |
30-Apr-2012
Quarterly Report
Overview
We are a leading global nutrition company that sells weight management, nutritional supplements, energy, sports & fitness products and personal care products utilizing network marketing distribution. As of March 31, 2012, we sold our products through a network of 2.8 million independent distributors. In China, we currently sell our products through retail stores, sales representatives, sales officers and independent service providers. We pursue our mission of "changing people's lives" by providing a financially rewarding business opportunity to distributors and quality products to distributors and their customers who seek a healthy lifestyle. We believe the quality of our products and the effectiveness of our distribution network, coupled with geographic expansion, have been the primary reasons for our success throughout our 32-year operating history. As of March 31, 2012, we sold our products in 81 countries.
Our products are grouped in four principal categories: weight management, targeted nutrition, energy, sports & fitness and Outer Nutrition, along with literature and promotional items. Our products are often sold through a series of related products and literature designed to simplify weight management and nutrition for consumers and maximize our distributors' cross-selling opportunities.
Industry-wide factors that affect us and our competitors include the global obesity epidemic and the aging of the worldwide population, which are driving demand for nutrition and wellness-related products along with the global increase in under employment and unemployment which can affect the recruitment and retention of distributors seeking part time or full time income opportunities.
While we continue to monitor the current global financial crisis, we remain focused on the opportunities and challenges in retailing of our products, recruiting and retaining distributors, improving distributor productivity, opening new markets, further penetrating existing markets, globalizing successful Distributor Methods of Operation, or DMO, such as Nutrition Clubs and Weight Loss Challenges, introducing new products and globalizing existing products, developing niche market segments and further investing in our infrastructure. Management also continues to monitor the Venezuelan market and especially the limited ability to repatriate cash.
We report revenue from our six regions:
• North America;
• Mexico;
• South and Central America;
• EMEA, which consists of Europe, the Middle East and Africa;
• Asia Pacific (excluding China); and
• China.
Volume Points by Geographic Region
A key non-financial measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted average measure of product sales volume. Volume Points, which are unaffected by exchange rates or price increases, are used by management as a proxy for sales trends because in general, an increase in Volume Points in a particular geographic region or country indicates an increase in our local currency net sales while a decrease in Volume Points in a particular geographic region or country indicates a decrease in our local currency net sales.
We assign a Volume Point value to a product when it is first introduced into the market. The specific number of Volume Points assigned to a product is based on a Volume Point to U.S. dollar ratio that we use for the vast majority of new products. If a product is available in different quantities then the various sizes will have different Volume Point values. If a new product is not introduced in or otherwise expected to be sold in the U.S., we will determine the Volume Point value for that product based on a review of various factors in the regions and countries in which we will market the product, including the Volume Point to local currency ratio of existing products in the relevant countries. In general, once assigned, a Volume Point value is consistent in each region and country and does not change from year to year. The reason volume points are used in the manner described above is that we use volume points for distributor qualification and recognition purposes and therefore attempts to keep volume points for a similar or like product consistent on a global basis. However, because Volume Points are a function of value rather than product type or size, they are not a reliable measure for product mix. As an example, an increase in Volume Points in a specific country or region could mean a significant increase in sales of less expensive product or a marginal increase in sales of an expensive product.
--------------------------------------------------------------------------------
Three Months Ended March 31,
2012 2011 % Change
(Volume points in millions)
North America 298.4 243.0 22.8 %
Mexico 191.4 164.5 16.4 %
South & Central America 164.7 125.1 31.7 %
EMEA 145.9 138.0 5.7 %
Asia Pacific (excluding China) 273.8 198.7 37.8 %
China 40.9 32.8 24.7 %
Worldwide 1,115.1 902.1 23.6 %
|
Average Active Sales Leaders by Geographic Region
With the continued expansion of daily consumption DMOs in our different markets, we believe the Average Active Sales Leader metric, which represents the monthly average number of sales leaders that place an order from us in a given quarter, is a useful metric. We rely on this metric as an indication of the engagement level of sales leaders in a given region. Changes in the Average Active Sales Leader metric may be indicative of the current momentum in a region as well as the potential for higher annual retention levels and future sales growth through utilization of daily consumption DMOs.
Three Months Ended March 31,
2012 2011 % Change
North America 62,532 52,549 19.0 %
Mexico 52,674 42,480 24.0 %
South & Central America 40,614 30,970 31.1 %
EMEA 41,332 35,960 14.9 %
Asia Pacific (excluding China) 55,706 40,510 37.5 %
China 9,531 7,272 31.1 %
Worldwide(1) 252,321 205,036 23.1 %
|
(1) Worldwide Average Active Sales Leaders may not equal the sum of the Average Active Sales Leaders in each region due to the calculation being an average of Sales Leaders active in a period, not a summation, and the fact that some sales leaders are active in more than one region but are counted only once in the worldwide amount.
Number of Sales Leaders and Retention Rates by Geographic Region as of Re-qualification Period
Our compensation system requires each sales leader to re-qualify for such status each year, prior to February, in order to maintain their 50% discount on products and be eligible to receive royalty payments. In February of each year, we demote from the rank of sales leader those distributors who did not satisfy the re-qualification requirements during the preceding twelve months. The re-qualification requirement does not apply to new sales leaders (i.e., those who became sales leaders subsequent to the January re-qualification of the prior year).
Sales Leaders Statistics (Excluding China) 2012 2011
(In thousands)
January 1 total sales leaders 501.3 434.2
January & February new sales leaders 34.8 28.9
Demoted sales leaders (did not re-qualify) (151.3 ) (144.8 )
Other sales leaders (resigned, etc) (0.8 ) (0.8 )
End of February total sales leaders 384.0 317.5
|
Sales Leaders Retention (Excluding China) 2012 2011
(In thousands)
Sales leaders needed to re-qualify 314.9 283.2
Demoted sales leaders (did not re-qualify) (151.3 ) (144.8 )
Total re-qualified 163.6 138.4
Retention rate 52.0 % 48.9 %
|
The table below reflects the number of sales leaders as of February of the year indicated (subsequent to the annual re-qualification date) and sales leader retention rate by year and by region.
Number of Sales Leaders Sales Leaders Retention Rate
2012 2011 2012 2011
North America 79,150 72,152 51.1 % 48.6 %
Mexico 67,959 54,526 59.2 % 57.9 %
South & Central America 65,653 50,288 55.7 % 47.3 %
EMEA 55,121 49,696 61.5 % 58.6 %
Asia Pacific (excluding China) 116,158 90,822 40.2 % 38.4 %
Total Sales Leaders 384,041 317,484 52.0 % 48.9 %
China 26,262 30,543
Worldwide Total Sales Leaders 410,303 348,027
|
The number of sales leaders by geographic region as of the quarterly reporting dates will normally be higher than the number of sales leaders by geographic region as of the re-qualification period because sales leaders who do not re-qualify during the relevant twelve-month period will be removed from the rank of sales leader the following February. Since sales leaders purchase most of our products for resale to other distributors and consumers, comparisons of sales leader totals on a year-to-year basis are indicators of our recruitment and retention efforts in different geographic regions.
The value of the average monthly purchase of Herbalife products by our sales leaders has remained relatively constant over time by market. Consequently, increases in our sales are driven primarily by our retention of sales leaders, our recruitment and retention of distributors and by our distributors' increased adoption of daily consumption DMOs.
We provide distributors with products, support materials, training, special events and a competitive compensation program. If a distributor wants to pursue the Herbalife business opportunity, the distributor is responsible for choosing the DMO or business methods that they intend to utilize to grow his or her business and personally pays for the sales activities related to attracting new customers and recruiting distributors by hosting events such as Herbalife Opportunity Meetings or Success Training Seminars; by advertising Herbalife's products; by purchasing and using promotional materials such as t-shirts, buttons and caps; by utilizing and paying for direct mail and print material such as brochures, flyers, catalogs, business cards, posters and banners and telephone book listings; by purchasing inventory for sale or use as samples; and by training, mentoring and following up (in person or via the phone or internet) with customers and recruits on how to use Herbalife products and/or pursue the Herbalife business opportunity.
Presentation
"Retail sales" represent the gross sales amounts on our invoices to distributors before distributor allowances, as defined below, and "net sales," which reflect distributor allowances and shipping and handling revenues, represent what we collect and recognize as net sales in our financial statements. We discuss retail sales because of its fundamental role in our compensation systems, internal controls and operations, including its role as the basis upon which distributor discounts, royalties and bonuses are awarded. In addition, it is used as the basis for certain information included in daily and monthly reports reviewed by our management. However, such a measure is not in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Retail sales should not be considered in isolation from, nor as a substitute for, net sales and other consolidated income or cash flow statement data prepared in accordance with U.S. GAAP, or as a measure of profitability or liquidity. A reconciliation of net sales to retail sales is presented below under "Results of Operations." "Product sales" represent the actual product purchase price paid to us by our distributors, after giving effect to distributor discounts referred to as "distributor allowances," which approximate 50% of retail sales prices. Distributor allowances as a percentage of retail sales may vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide.
Our "gross profit" consists of net sales less "cost of sales," which represents our manufacturing costs, the price we pay to our raw material suppliers and manufacturers of our products as well as shipping and handling costs related to product shipments, duties and tariffs, freight expenses relating to shipment of products to distributors and importers and similar expenses.
"Royalty overrides" are our most significant expense and consist of:
• royalty overrides and production bonuses which total approximately 15% and 7%, respectively, of the retail sales of weight management, targeted nutrition, energy, sports & fitness, Outer Nutrition and promotional products;
• the Mark Hughes bonus payable to some of our most senior distributors in the aggregate amount of up to 1% of retail sales of weight management, targeted nutrition, energy, sports & fitness, Outer Nutrition products and promotional products; and
• other discretionary incentive cash bonuses to qualifying distributors.
Royalty overrides are generally earned based on retail sales and provide potential earnings to distributors of up to 23% of retail sales or approximately 33% of our net sales. Royalty overrides are generally compensation to distributors for their services in managing the development, retention and improved productivity of their sales organizations and are paid to several levels of distributors on each sale. Due to restrictions on direct selling in China, our sales employees in China, prior to the transfer into independent service providers, were compensated with wages, bonuses and benefits and our independent service providers in China are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program. Compensation to China sales employees, sales officers and independent service providers are included in selling, general and administrative expenses. Because of local country regulatory constraints, we may be required to modify our typical distributor incentive plans as described above. We also pay reduced royalty overrides with respect to certain products worldwide. Consequently, the total royalty override percentage may vary over time.
Royalty overrides together with distributor allowances of up to 50% of retail sales prices represent the potential earnings to distributors of up to approximately 73% of retail sales.
Our "contribution margins" consist of net sales less cost of sales and royalty overrides.
"Selling, general and administrative expenses" represent our operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, distributor marketing, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses and other miscellaneous operating expenses.
Most of our sales to distributors outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate transaction losses on intercompany transactions. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. From time to time, we enter into foreign exchange forward and option contracts to partially mitigate our foreign currency exchange risk as discussed in further detail in Part I, Item 3 - Quantitative and Qualitative Disclosures about Market Risk.
Net sales for the three months ended March 31, 2012 increased 21.3% to $964.2 million as compared to $795.1 million for the same period in 2011. In local currency, net sales for the three months ended March 31, 2012 increased 24.3% as compared to the same period in 2011. The increase in net sales was primarily due to the continued successful adoption and operation of daily consumption DMOs; increased distributor engagement as reflected by record 2012 sales leader retention and an increase in average active sales leaders; branding activities and increased distributor recruiting.
Net income for the three months ended March 31, 2012 increased 22.9% to $108.2 million, or $0.88 per diluted share, as compared to $88.0 million, or $0.70 per diluted share, for the same period in 2011. The increase for the three months ended March 31, 2012 was primarily due to higher contribution margin driven by net sales growth discussed above, partially offset by higher selling, general and administrative expenses to support the growth of our business and higher income taxes.
Net income for the three months ended March 31, 2011 included a $0.9 million pre-tax ($0.7 million post-tax) additional interest expense from the write-off of unamortized deferred financing costs resulting from the debt refinancing arrangement in March 2011. See Note 4, Long Term Debt, to the Notes to Condensed Consolidated Financial Statements for further information on our debt refinancing.
Results of Operations
Our results of operations for the periods below are not necessarily indicative of results of operations for the full year or future periods, which depend upon numerous factors, including our ability to recruit new distributors and retain existing distributors, open new markets, further penetrate existing markets, introduce new products and programs that will help our distributors increase their retail efforts and develop niche market segments.
The following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated:
Three Months Ended
March 31, March 31,
2012 2011
Operations:
Net sales 100.0 % 100.0 %
Cost of sales 20.3 20.5
Gross profit 79.7 79.5
Royalty overrides(1) 32.9 33.2
Selling, general and administrative expenses(1) 30.8 30.8
Operating income 16.0 15.5
Interest expense, net 0.2 0.3
Income before income taxes 15.8 15.2
Income taxes 4.6 4.1
Net income 11.2 % 11.1 %
|
(1) Compensation to our China sales employees and service fees to our independent service providers in China are included in selling, general and administrative expenses while distributor compensation for all other countries is included in royalty overrides.
Net Sales
The following chart reconciles retail sales to net sales:
Sales by Geographic Region
Three Months Ended March 31,
2012 2011
Shipping & Shipping &
Retail Distributor Product Handling Net Retail Distributor Product Handling Net Change in
Sales Allowance Sales Revenues Sales Sales Allowance Sales Revenues Sales Net Sales
(Dollars in millions)
North America $ 333.3 $ (158.2 ) $ 175.1 $ 35.6 $ 210.7 $ 265.8 $ (127.0 ) $ 138.8 $ 28.2 $ 167.0 26.2 %
Mexico 189.3 (92.4 ) 96.9 20.2 117.1 168.0 (82.0 ) 86.0 17.9 103.9 12.7 %
South & Central America 272.3 (130.1 ) 142.2 23.3 165.5 205.6 (98.2 ) 107.4 17.9 125.3 32.1 %
EMEA 248.8 (120.0 ) 128.8 25.2 154.0 248.3 (119.4 ) 128.9 25.0 153.9 0.1 %
Asia Pacific 406.1 (184.3 ) 221.8 38.2 260.0 314.3 (144.3 ) 170.0 29.3 199.3 30.5 %
China 67.3 (10.4 ) 56.9 - 56.9 50.8 (5.1 ) 45.7 - 45.7 24.5 %
Worldwide $ 1,517.1 $ (695.4 ) $ 821.7 $ 142.5 $ 964.2 $ 1,252.8 $ (576.0 ) $ 676.8 $ 118.3 $ 795.1 21.3 %
|
The factors described above have helped distributors increase their business, which in turn helps drive Volume Point growth in our business, and thus, net sales growth. The discussion below of net sales by geographic region further details some of the specific drivers of growth of our business and causes of sales fluctuations during the three months ended March 31, 2012 as compared to the same period in 2011, as well as the unique growth or contraction factors specific to certain geographic regions or significant countries within a region. We believe that the correct business foundation, coupled with ongoing training and promotional initiatives, is required to increase recruiting and retention of . . .
|
|