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Herbalife: It’s important that we take more control of the manufacturing process

By Elaine Watson , 03-May-2012
Last updated on 03-May-2012 at 14:51 GMT2012-05-03T14:51:49Z

Direct selling supplements giant Herbalife now manufactures almost a third of its products in-house and will significantly increase this percentage in the coming years.

In a conference call with analysts this week, chief executive Michael Johnson said: “We are currently manufacturing approximately 30% of our global volume in our own manufacturing facilities

Our goal is to self-manufacture as much as two thirds of our inner nutrition products including the extraction of the raw botanical ingredients used in our products today.”

He added: “We believe that to be a leader in the nutrition and supplement industry with regulators around the world it is important that we be in more control of the manufacturing process for a greater percentage of our products.”

The share price drop: Hedge fund manager questions raise no new issues, insist bosses

The firm, which posted impressive double-digit hikes in sales and profits in the first quarter, has spent much of the week explaining its reporting protocols after questions on the earnings call from high-profile hedge fund manager David Einhorn prompted a dramatic slide in its shares.  

However bosses hit back yesterday with a press release re-iterating that Herbalife's Q1 results were its best in 32 years and describing Einhorn as “a recognized short seller” who raised “no new subjects or concerns”.

This morning, they announced a $427.9m share repurchase on the grounds that Herbalife stock is "undervalued".

Einhorn wanted to know how many sales made to Herbalife’s distribution network are then sold to other consumers (as opposed to being consumed directly by the distributors - who get a discount).

Herbalife said that in 2011, 27% of its distributors were discount buyers that get a 25% discount on products; 61% are small retailers that earn a 35% discount; and the remaining 12% are “potential supervisors” who get a 42% discount.

It added: “The percentage of product of any multi-level marketing company consumed by its distributors is substantial. This is not surprising since consumers who are enthusiastic about the products become distributors in order to purchase at a discount and possibly to share and sell the products to others.”

Generation H and Herbalife 24's 'halo effect'

Herbalife was particularly encouraged by its growth in developed as well as emerging markets, with net sales in North America up almost 26%, volume points up 23% and new distributor numbers in the region up 17% in the quarter.

Meanwhile the Herbalife 24 sports nutrition range was continuing to attract a new breed of distributors under the age of 35, dubbed ‘Generation H’, said president Des Walsh.

“We see Herbalife 24 as having a greater impact than purely the product sales itself [analysts' estimates that it generated $15m in sales in Q1 were 'directionally right', he said].

"It's about continuing to make Herbalife a hip cool company and attract a younger generation of distributors. The halo effect of Herbalife24 goes way beyond the sales of the product itself...

"We are seeing very exciting adaptations of Nutrition Clubs… and higher utilization of Herbalife 24 products in addition to stronger use of social networking."

As for weight management, Herbalife’s focus was also evolving, he said.

“For many years, the Herbalife message was lose weight now, ask me how”, he said. Today the focus is on helping customers achieve healthy active lifestyles, he said.

Q1, 2012 results breakdown

In the three months to March 31, 2012, net income rose 22% to $108.2m, while group net sales increased 21% to $964.2m and volume growth topped 24%.

For the full year 2011, Herbalife reported net sales of $3.5bn, up 26% on 2010.  Adjusted net income surged 35% to $413.3m.

Johnson added: “Each of our six regions experienced strong volume growth in the quarter and five of the six had double digit volume increases.”

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