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Article by DailyStocks_admin    (01-26-09 05:27 AM)

The Daily Magic Formula Stock for 01/26/2009 is Herbalife Ltd. According to the Magic Formula Investing Web Site, the ebit yield is 23% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

GENERAL

We are a global network marketing company that sells weight management, nutritional supplement, energy & fitness products and personal care products. We pursue our mission of “changing people’s lives” by providing a financially rewarding business opportunity to distributors and quality products to distributors and customers who seek a healthy lifestyle. We are one of the largest network marketing companies in the world with net sales of approximately $2.1 billion for the fiscal year ended December 31, 2007. We sell our products in 65 countries through a network of over 1.7 million independent distributors. In China, in order to comply with local laws and regulations, we sell our products through retail stores and an employed sales force. 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 28-year operating history.

We offer science based products in four principal categories: weight management, targeted nutrition, energy & fitness and Outer Nutrition. The weight management product portfolio includes meal replacement shakes, weight-loss enhancers, appetite suppressors and a variety of healthy snacks. Our collection of targeted nutrition products includes dietary supplements which contain quality herbs, vitamins, minerals and natural ingredients that support total well-being and long-term good health. The energy & fitness category includes energy and isotonic drinks to support a healthy active lifestyle. Our Outer Nutrition products include skin cleansers, moisturizers and lotions with antioxidants, as well as anti-aging products. Weight management, targeted nutrition, energy & fitness and Outer Nutrition accounted for 63.4%, 20.2%, 4.2% and 6.7% of our net sales in fiscal year 2007, respectively.

We believe that the direct-selling channel is ideally suited to marketing our products, because sales of weight management, nutrition and personal care products are strengthened by ongoing personal contact between retail consumers and distributors. This personal contact may enhance consumers’ nutritional and health education as well as motivate consumers to begin and maintain wellness and weight management programs. In addition, many of our distributors use our products themselves, and can therefore provide first-hand testimonials of product effectiveness to consumers, which often serve as a powerful sales tool.

We are focused on building and maintaining our distributor network by offering financially rewarding and flexible career opportunities through sales of quality, innovative and efficacious products to health conscious consumers. We believe the income opportunity provided by our network marketing program appeals to a broad cross-section of people throughout the world, particularly those seeking to supplement family income, start a home business or pursue entrepreneurial, full and part-time, employment opportunities. Our distributors, who are independent contractors, can profit from selling our products and can also earn royalties and bonuses on sales made by the other distributors whom they recruit to join their sales organizations.

We enable distributors to maximize their potential by providing a broad array of motivational, educational and support services. We motivate our distributors through our performance-based compensation plan, individual recognition, reward programs and promotions, and participation in local, national and international Company-sponsored sales events such as Extravaganzas. We are committed to providing professionally designed educational training materials that our distributors can use to enhance recruitment and maximize their sales. We and our distributor leadership conduct thousands of training sessions each year throughout the world to educate and motivate our distributors. These training events teach our distributors not only how to develop invaluable business-building and leadership skills, but also how to differentiate our products to consumers. Our corporate-sponsored training events provide a forum for distributors, who otherwise operate independently, to share ideas with us and each other. In addition, we operate an internet-based Herbalife Broadcasting Network, which delivers worldwide, educational, motivational and inspirational content, including addresses from our Chief Executive Officer, to our distributors. Our efficient and effective distribution, logistics and customer care support system assists our distributors by providing same day, or next-day sales capabilities and support services. We further aid our distributors by generating additional demand for our products through traditional marketing and public relations activities, such as television ads, sporting event sponsorships and endorsements.

Our Competitive Strengths

We believe that our success stems from our ability to motivate our distributor network with a range of quality, innovative and efficacious products that appeal to consumer preferences for healthy living. We have been able to achieve sustained and profitable growth by capitalizing on the following competitive strengths:

Distributor Base

As of December 2007, we had over 1.7 million distributors, which includes approximately 129,000 China sales representatives and employees. Collectively we refer to this group as “distributors.” Approximately 473,000 of our 1.7 million distributors have become sales leaders, which are comprised of approximately 451,000 supervisors in the 64 countries where we use our traditional marketing plan and 22,000 China sales employees operating under our China marketing plan. Collectively we refer to this group as “sales leaders.” We believe that the distributors who have not attained supervisor level can be segmented into three general categories based on their product order patterns: discount buyers, small retailers and potential supervisors. We define discount buyers as customers who have signed up as distributors to enjoy a discount on their purchases; small retailers as product users and sales people who generate modest sales to friends and family; and potential supervisors as distributors who are proactively developing a business with the intention of qualifying to become a supervisor. In 2007, excluding China, distributor orders for these three general categories were approximately 52%, 26% and 22%, respectively. For the approximately 451,000 supervisors in our organization, the marketing plan encourages active participation in the business including building down-line sales organizations of their own, which can serve to increase their income and increase our product sales. Sales leaders contribute significantly to our sales.

Product Portfolio

We are committed to building distributor, customer and brand loyalty by providing a diverse portfolio of health-oriented and wellness products. The breadth of our product offerings enables our distributors to sell a comprehensive package of products designed to simplify weight management and nutrition. Many of our product formulations have been in existence for years; however, we continually review, and if necessary, improve our product formulations, based upon developments in nutrition science. We believe that the longevity and variety in our product portfolio significantly enhance our distributors’ abilities to build their businesses.

Nutrition Science-Based Product Development

We continue to emphasize and make investments in science-based product development in the fields of weight management, nutrition and personal care. We have a growing internal team of scientists dedicated to continually evaluating opportunities to enhance our existing products and to develop new science-based products. These product development efforts are reviewed by prominent doctors and world-renowned scientists who constitute our Scientific Advisory Board and Nutrition Advisory Board. In addition, we have provided donations to assist in the establishment of the Mark Hughes Cellular and Molecular Lab at UCLA, or the UCLA Lab, and we continue to rely on their expertise. We believe that the UCLA Lab provides opportunities for Herbalife to access cutting-edge science in herbal research and nutrition. In 2007, Herbalife awarded a research grant to the National Center for Natural Products Research at the University of Mississippi School of Pharmacy, or NCNPR. The grant will allow NCNPR scientists to identify and study the biologically active chemicals found in botanicals, which may be used in the development of future dietary supplements and skin care products for Herbalife.

Scalable Business Model

Our business model enables us to grow our business with only moderate investment in our infrastructure and other fixed costs. With the exception of our China business, we require no Company-employed sales force to market and sell our products. We incur no direct incremental cost to add a new distributor in our existing markets, and our distributor compensation varies directly with sales. In addition, our distributors bear the majority of our consumer marketing expenses, and supervisors sponsor and coordinate a large share of distributor recruiting and training initiatives. Furthermore, we can readily increase production and distribution of our products as a result of our numerous third party manufacturing relationships as well as our global footprint of in-house distribution centers.

Geographic Diversification

We have a proven ability to establish our network marketing organization in new markets. Since our founding 28 years ago, we have expanded our presence into 65 countries. While sales within our local markets may fluctuate due to economic, market and regulatory conditions, competitive pressures, political and social instability or for Company-specific reasons, we believe that our geographic diversity mitigates our financial exposure to any particular market.

Experienced Management Team

Our management team is led by Michael O. Johnson who became our Chief Executive Officer after spending 17 years with The Walt Disney Company, where he most recently served as President of Walt Disney International. In 2007, he was named Chairman. Since joining our Company, Mr. Johnson has assembled a team of experienced executives, including Gregory Probert, President and Chief Operating Officer and formerly Chief Executive Officer of DMX Music and Chief Operating Officer of The Walt Disney Company’s Buena Vista Home Entertainment division; Richard Goudis, Chief Financial Officer and formerly Chief Operating Officer of Rexall Sundown; Brett R. Chapman, General Counsel and formerly Senior Vice President and Deputy General Counsel of The Walt Disney Company; and Steve Henig, Ph.D., Chief Scientific Officer with responsibility for our product research and development, and formerly Senior Vice President of Ocean Spray Cranberries, Inc.

Our Business Strategy

We believe that our network marketing model is the most effective way to sell our products. Our objective is to increase the recruitment, retention, retailing and productivity of our distributor base by pursuing the following strategic initiatives:

Major Market Strategy

We look to optimize country operating models, further aligning resources to fuel growth in high potential markets, develop lower-cost models where appropriate and centralize key regional functions. Expanding in China represents a significant growth opportunity for us as we believe that China could become one of the largest direct-selling markets in the world over the next several years. To address this opportunity, we have assembled a management team with direct selling experience, secured a headquarters location in Shanghai, expanded our manufacturing capacity in our Suzhou, China factory and in July 2007, received a direct-selling license for the Jiangsu province. We are in the process of opening retail locations and pursuing direct-selling licenses in additional provinces. Through December 2007, we have opened 90 retail stores in 29 provinces. Other critical major market strategies include developing an Eastern European strategy, nurturing Brazil’s transition to a better balance of retailing, retention and recruiting, and identifying new untapped markets.

Product Strategy

We are committed to providing our distributors with unique, innovative products to help them increase sales and recruit new distributors. Product development is focused on obesity, anti-aging, fitness, children’s health, and immunity enhancers. On an ongoing basis we will augment our product portfolio with additional science-based products and, as appropriate, will bundle products addressing similar health concerns into packages and programs. We are establishing a core set of products that will be available in all markets around the world. We are also empowering regional and country managers to develop unique products that are specific to their markets to ensure that local consumer needs can be met. Additionally, each year we plan to have “mega launches” of products and/or programs to generate continual excitement among our distributors, to add to our core set of products and to support our distributor DMOs. These “mega launches” will generally target specific market segments deemed strategic to us, such as the 2007 introduction of a children’s line to target stay-at-home moms and a sports and fitness line to target consumers with active lifestyles.

Distributor Strategy

We continue to increase our investment in events and promotions as a catalyst to help our distributors improve the effectiveness and productivity of their businesses. We will attempt to globalize best-practice business methods to enable our distributors to improve their penetration in existing markets. We refer to these business methods as DMOs and they include Nutrition Clubs, the Total Plan, Wellness Coach and Internet/Sampling. We also introduced BizWorks, a business system which assists our distributors in building their businesses more efficiently while better servicing their existing customers. And finally, to increase brand awareness among potential customers and distributors, we have entered into marketing alliances, created “Team Herbalife” and rolled-out a style guide and brand asset library so that our distributors have access to the Herbalife brand logo for use in their marketing efforts.

Infrastructure Strategy

In 2003, we embarked upon a strategic initiative to significantly upgrade our technology infrastructure throughout the world. We are implementing an Oracle enterprise-wide technology solution, with a scalable and stable open architecture platform, to enhance our efficiency and productivity as well as that of our distributors. In addition, we are upgrading our internet-based marketing and distributor services platform with tools such as BizWorks and MyHerbalife.com and we have invested in business intelligence tools to enable better analysis of our business. In 2008, we expect to execute the next stage of stabilization upgrades for the software application tier of the Oracle platform with implementation thereof across multiple regions in 2008 and 2009. Additionally, we continue to invest in our employees through a comprehensive and global organizational development program.

Product Overview

For 28 years, our products have been designed to help distributors and customers from around the world lose weight, improve their health and experience life-changing results. We have built our heritage on developing formulas that blend the best of nature with innovative techniques from nutrition science, appealing to the growing base of consumers seeking differentiated products and desiring a healthier lifestyle.

As of December 31, 2007, we marketed and sold 131 products encompassing over 3,500 SKUs through our distributors and had approximately 1,803 trademarks worldwide. We group our products into four primary categories: weight management, targeted nutrition, energy & fitness and Outer Nutrition. Our products are often sold in programs, which are comprised of a series of related products designed to simplify weight management and nutrition for our consumers and maximize our distributors’ cross-selling opportunities. These programs target specific consumer market segments, such as women, men or children, as well as weight-management customers and individuals looking to enhance their overall well-being.

Weight Management

Weight Management is our largest product category representing 63.4% of our net sales for the year 2007. Formula 1, our best-selling product, is a healthy meal with soy protein, essential vitamins, minerals and nutrients that is available in seven delicious flavors and can help support weight management. It has been part of our basic weight management program for 28 years and generated approximately 30% of our retail sales for the year 2007. Personalized Protein Powder is a soy and whey protein product developed to be added to Formula 1 to boost protein intake and decrease hunger. Weight-loss enhancers, including Total Control ® , address specific challenges associated with dieting, such as lack of energy, hunger and food craving, fluid retention, decreased metabolism and digestive challenges, by building energy, boosting metabolism, curbing appetite and helping to promote weight loss. Healthy snacks are formulated to provide between-meal nutrition and satisfaction.

Targeted Nutrition

We market numerous dietary and nutritional supplements designed to meet our customers’ specific nutritional needs. Each of these supplements contains quality herbs, vitamins, minerals and other natural ingredients and focuses on specific lifestages of our customers, including women, men, children and those with health concerns, including heart health, healthy aging, digestive health, or immune solutions. Niteworks ® is a product developed in conjunction with Nobel Laureate in Medicine, Dr. Louis Ignarro, that supports energy, circulatory and vascular health and enhances blood flow to the heart, brain and other vital organs. Garden 7 ® is designed to provide the phytonutrient benefits of seven servings of fruits and vegetables and has anti-oxidant and health-boosting properties. Best Defense ® is an effervescent drink that boosts immunity. In 2007, we introduced a new Kids Line including shakes and improved multivitamins which provide essential nutrition including protein, fiber and 100% of key nutrients to meet growing kids’ daily needs.

Energy and Fitness

We have entered into the high growth energy drink category with the introduction of Liftoff ® , an innovative, effervescent energy product with B-vitamins, ginseng, ginger and caffeine to increase energy and improve mental clarity for better performance throughout the day. In 2007, we launched H 3 OTM Fitness Drink to provide rapid hydration, sustained energy plus antioxidant protection for people living a healthy, active lifestyle.

Outer Nutrition

Our Outer Nutrition products complement our weight-management and targeted nutrition products and aim to improve the appearance of the body, skin and hair. These products include skin cleansers, toners, moisturizers and facial masks, shampoos and conditioners, body-wash items and a selection of fragrances for men and women. NouriFusion ® is a personal care product line that utilizes vitamin A, C and E to provide benefits to the skin. In 2006, we launched an extension of our successful Skin Activator ® product, an advanced cream based glucosamine complex to reduce the appearance of fine lines and wrinkles, into a full line of anti-aging products.

Literature, Promotional and Other Products

We also sell literature and promotional materials, including sales aids, informational audiotapes, videotapes, CDs and DVDs designed to support our distributors’ marketing efforts, as well as start-up kits called “International Business Packs” for new distributors. In 2006, we introduced BizWorks, a customizable retail website for our distributors to enhance the on-line experience and improve their productivity.

Product Development

We are committed to providing our distributors with unique, innovative science-based products to help them increase recruitment, retention and retailing. We believe this can be best accomplished in part by introducing new products and by upgrading, reformulating and repackaging existing product lines. Our internal team of scientists and product developers collaborate with the Company’s Nutrition Advisory Board and Scientific Advisory Board to formulate, review and evaluate new product ideas. Once a particular market opportunity has been identified, our scientists along with our marketing and sales teams work closely with distributors to effect a successful development and launch of the product.

A new product development process was implemented globally to accelerate the introduction of new products and to improve the launch of products. Cross-functional teams from Product Marketing, Product Development, Sciences, Licensing, Manufacturing and Finance were formed and assigned to major product initiatives.

The product development process is a stage-gate process based on “best in class” practices in our industry. The process consists of five stages: identification, feasibility assessment, development, launch and learn. The project teams obtain approvals from a corporate steering team comprised of key executives in the Company. The process defines each department’s roles and responsibilities and sets clear deliverables for each stage. It creates a succinct process from the beginning of the development cycle to the end.

New product ideas are generated and narrowed down to high potential ideas that fill our business needs and conform to our overall strategy. We test the most promising ideas with distributors and customers using a variety of qualitative and quantitative tools. This testing is followed by a feasibility assessment which includes a review of product and package prototypes, product positioning and messaging, process design, analysis of manufacturing issues and providing preliminary financial projections of product sales. The next stage is the development phase in which we finalize the formula, process, manufacturing strategy, product positioning, pricing, labeling and other related matters. The fourth stage is the launch phase in which we prepare promotional and sales materials, complete the supply chain plan, create product and financial forecasts, and complete other final preparations for launch. After the product is launched, we closely track sales performance and the lessons learned so we can update and improve the product development process. In addition, during the past three years, we have significantly increased our investment in clinical studies and in our science program to substantiate claims and efficacy of our products.

We reorganized our technical team in 2007 for greater efficiency in product development as well as to carry out related product development strategies both globally and regionally. During 2007, we also added new talents to our technical and scientific teams and additional resources to the Company’s Nutrition and Scientific Advisory Boards.

The Nutrition Advisory Board is headed by David Heber, M.D., Ph.D., Professor of Medicine and Public Health at the UCLA School of Medicine, Director of the UCLA Center for Human Nutrition and Director of the UCLA Center for Dietary Supplement Research in Botanicals. The Nutrition Advisory Board has 20 members from 17 countries. It is comprised of leading scientists and medical doctors who provide training on product usage and give health-news updates through Herbalife literature, the Internet and training events around the world. Our Scientific Advisory Board is chaired by Dr. Heber and has 12 members from six countries. Louis Ignarro, Ph.D., Distinguished Professor of Pharmacology at the UCLA School of Medicine and Nobel Laureate in Medicine is also a member of the Scientific Advisory Board.

We believe that it is important to maintain our relationships with members of our Nutrition Advisory Board and Scientific Advisory Board to recognize the time and effort that they expend on our behalf. Each member of our Nutrition Advisory Board other than Dr. Heber receives a monthly retainer of up to $5,000, plus up to $3,000 for every day that they appear at a non-southern California distributor event and up to $2,000 for every day that they need to travel to such events. Members of our Scientific Advisory Board are compensated for their time and efforts in the following manner: (1) ten members are paid an annual retainer of $5,000 plus travel expenses, (2) Dr. Ignarro receives no direct compensation from us although we do pay a consulting firm, with which Dr. Ignarro is affiliated, a royalty on sales of Niteworks ® , certain “healthy heart” products, and other products that we may mutually designate in the future that are, in each case, sold with the aid of Dr. Ignarro’s consulting, promotional or endorsement services, with such amounts totaling $1.4 million, $1.0 million and $1.9 million in 2005, 2006 and 2007, respectively and (3) Dr. Heber generally, other than a one time option grant in 2005, receives no direct compensation from us although we do reimburse him for travel expenses and we do pay to a consulting firm, with which Dr. Heber is affiliated, a quarterly consulting fee of $75,000.

In 2007, we completed construction and moved into modern, state-of-the-art product development laboratories in Torrance, California, as well as quality control laboratories in Carson, California. This investment will enable our developers, scientists and quality control staff to accelerate product development, launch products faster and provide a more robust quality control program.

CEO BACKGROUND

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” MESSRS. MICHAEL O. JOHNSON AND JOHN TARTOL.

NOMINEES


Director

Name and Experience
Class Since

Michael O. Johnson , age 53, is Chairman and Chief Executive Officer of the Company. Mr. Johnson joined the Company in April 2003 after 17 years with The Walt Disney Company, where he most recently served as President of Walt Disney International, and also served as President of Asia Pacific for The Walt Disney Company and President of Buena Vista Home Entertainment. Mr. Johnson has also previously served as a publisher of Audio Times magazine, and has directed the regional sales efforts of Warner Amex Satellite Entertainment Company for three of its television channels, including MTV, Nickelodeon and The Movie Channel. Mr. Johnson served as a director of Univision Communications, Inc., a television company serving Spanish-speaking Americans until March 29, 2007 and serves on the board of Loyola High School of Los Angeles. Mr. Johnson received his Bachelor of Arts in Political Science from Western State College.
I 2003
John Tartol , age 56, has been an independent Herbalife distributor for 25 years and a member of the Chairman’s Club since 2000. He is active in training other Herbalife distributors all over the world and has served on various strategy and planning groups for Herbalife. He is also active on behalf of various charities in his community and worldwide on behalf of the Herbalife Family Foundation. He has a bachelor’s degree in finance from the University of Illinois.I 2005

MANAGEMENT DISCUSSION FROM LATEST 10K

You should read the following discussion and analysis in conjunction with Item 6 — Selected Financial Data and our consolidated financial statements and related notes, each included elsewhere in this Annual Report on Form 10-K.

Overview

We are a global network marketing company that sells weight management, nutritional supplement, energy & fitness products and personal care products. 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 are one of the largest network marketing companies in the world with net sales of approximately $2.1 billion for the year ended December 31, 2007. We sell our products in 65 countries through a network of over 1.7 million independent distributors except in China, where we sell our products through retail stores and an employed sales force. 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 28-year operating history.

During the quarter ended June 30, 2007, we reorganized our product categories to better reflect how our distributors sell products and programs. Our products are grouped in four principal categories: weight management, targeted nutrition, energy & fitness products and Outer Nutrition. Our products are often sold in programs that are comprised of a series of related products 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 increasing prevalence of obesity and the aging of the worldwide population, which are driving demand for nutrition and wellness-related products and the recruitment and retention of distributors.

The opportunities and challenges upon which we are most focused are: retailing of our products, recruitment and retention of distributors, improving distributor productivity, new markets, further penetrating existing markets including China, globalizing successful distributor methods of operation such as Nutrition Clubs, introducing new products, developing niche market segments and further investing in our infrastructure.

In late 2007, we changed our geographic regions from seven to five regions as part of our on-going Realignment for Growth plan. This updated regional structure allows us to better support the distributor leadership and enhance synergies within the regions. Under the new geographic regions, we report revenue from:


• North America, which consists of the U.S., Canada and Jamaica;

• Mexico and Central America, which consists of Mexico, Costa Rica, El Salvador, Panama and Dominican Republic;

• South America, including Brazil;

• EMEA, which consists of Europe, the Middle East and Africa; and

• Asia Pacific, including countries in the former Greater China, North Asia and South East Asia regions.

Historical information presented in this Annual Report on Form 10-K relating to our geographic regions has been reclassified to conform with our current geographic presentation.

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 unit measure of product sales volume. It is a useful measure for us, as it excludes the impact of foreign currency fluctuations and ignores the differences generated by varying retail pricing across geographic markets. In general, an increase in Volume Points in a particular geographic region or country indicates an increase in local currency net sales.

Number of Supervisors and Retention Rates by Geographic Region as of Requalification Period

Our compensation system requires each supervisor to re-qualify for such status each year, prior to February, in order to maintain their 50% discount on product and be eligible to receive royalty payments. In February of each year, we demote from the rank of supervisor those distributors who did not satisfy the supervisor re-qualification requirements during the preceding twelve months. The re-qualification requirement does not apply to new supervisors (i.e. those who became supervisors subsequent to the January re-qualification of the prior year).

The number of supervisors by geographic region as of the quarterly reporting dates will normally be higher than the number of supervisors by geographic region as of the requalification period because supervisors who do not re-qualify during the relevant twelve-month period will be dropped from the rank of supervisor the following February. Since supervisors purchase most of our products for resale to other distributors and consumers, comparisons of supervisor totals on a year-to-year, same period basis are good 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. Consequently, increases in our sales are driven primarily by our retention of supervisors and by our recruitment and retention of distributors, rather than through increases in the productivity of our overall supervisor base.

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 growing 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 distribution allowances and handling and freight income, 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 Generally Accepted Accounting Principles in the U.S., or GAAP. You should not consider retail sales in isolation from, nor as a substitute for, net sales and other consolidated income or cash flow statement data prepared in accordance with 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.

Our “gross profit” consists of net sales less “cost of sales,” which represents the prices we pay to our raw material suppliers and manufacturers of our products as well as 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 & 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 & Fitness and Outer Nutrition; and

• other discretionary incentive cash bonuses to qualifying distributors.

Royalty overrides are generally earned based on retail sales and approximate in the aggregate about 22% of retail sales or approximately 36% of our net sales. Royalty overrides together with distributor allowances represent the potential earnings to distributors of up to approximately 73% of retail sales. The compensation to distributors is generally for the development, retention and improved productivity of their distributor sales organizations and is paid to several levels of distributors on each sale. Due to restrictions on direct selling in China, our full-time employed sales representatives in China are compensated with wages, bonuses and benefits instead of the distributors earnings, distributor allowances and royalty overrides. Because of local country regulatory constraints, we may be required to modify our typical distributor incentive plans as described above. Consequently, the total distributor discount percentage may vary over time. We also offer reduced distributor allowances and pay reduced royalty overrides with respect to certain products worldwide.

Our “operating 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 operating 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 contracts and option contracts to mitigate our foreign currency exchange risk as discussed in further detail in Item 7A — Quantitative and Qualitative Disclosures about Market Risk.

Summary Financial Results

Net sales for the year ended December 31, 2007 increased 13.8% to $2,145.8 million from $1,885.5 million in 2006. The increase was primarily due to growth in several of the Company’s top countries including, the U.S., China, Venezuela and Taiwan with increases of 23.9%, 136.9%, 317.3% and 27.7%, respectively, as compared to 2006. The increase in these markets reflects strong supervisor growth, the continued success of our distributors with various operating methods like the Nutrition Club DMO and Lead Generation/Sampling DMO, and an increase in the number of stores in China. The opening of Peru in December 2006 as a new market also contributed to the sales growth. Overall, the appreciation of foreign currencies had a $73.0 million favorable impact on net sales in 2007, representing about 3.9% of the total sales increase.

Net income for the year ended December 31, 2007 increased 33.8% to $191.5 million, or $2.63 per diluted share, compared to $143.1 million, or $1.92 per diluted share, for 2006. The increase was driven by revenue growth in many of our markets, expansion in operating profit margins and reduction in interest expense following a debt refinancing in July 2006, partially offset by higher labor costs, depreciation expense and foreign exchange losses.

Net income for 2007 included an unfavorable after tax impact of $3.8 million from the completion of the first phase and start of the second phase of our Realignment for Growth plan, an increase in tax reserves of $3.6 million and a $2.1 million net tax benefit resulting from various international tax settlements. Net income for 2006 included $14.3 million additional interest expense related to our refinancing arrangements in July 2006, a $3.7 million tax benefit resulting from an international tax settlement, a $2.7 million additional tax benefit from refinancing transactions, a $2.2 million favorable impact of the adjustment to income tax accrual and a $4.9 million unfavorable after tax impact in connection with the Realignment for Growth plan in the fourth quarter of 2006. The amounts for 2006 were partially offset by a $7.0 million expense in connection with the adoption of the new accounting rules for stock based compensation and a $12.4 million charge for the continued build-out of infrastructure in China.

Results of Operations

Our results of operations for the periods described below are not necessarily indicative of results of operations for 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.

Changes in net sales are directly associated with the recruiting and retention of our distributor force, retailing of our products, the quality and completeness of the product offerings that the distributor force has to sell and the number of countries in which we operate. Management’s role, both in-country and at the corporate level is to provide distributors with a competitive and broad product line, encourage strong teamwork and leadership among the Chairman’s Club and President’s Team distributors and offer leading edge business tools to make doing business with Herbalife simple. Management uses the distributor marketing program coupled with educational and motivational tools and promotions to incentivize distributors to increase recruiting, retention and retailing, which in turn affect net sales. Such tools include Company sponsored sales events such as Extravaganzas and World Team Schools where large groups of distributors gather, thus allowing them to network with other distributors, learn recruiting, retention and retailing techniques from our leading distributors and become more familiar with how to market and sell our products and business opportunities. Accordingly, management believes that these development and motivation programs can increase the productivity of the supervisor network. The expenses for such programs are included in selling, general and administrative expenses. Sales are driven by several factors, including the number and productivity of distributors and supervisors who continually build, educate and motivate their respective distribution and sales organizations. We also use event and non-event product promotions to motivate distributors to increase recruiting, retention and retailing activities. These promotions have prizes ranging from qualifying for events to product prizes and vacations. The costs of these promotions are included in selling, general and administrative expenses.

The factors described above have helped distributors increase their business, which in turn has driven growth in our business. The discussion below of net sales by geographic region further details some of the above factors and describes unique growth factors specific to certain major countries. We believe that the correct business foundation, coupled with ongoing training and promotional initiatives, is required to increase recruiting and retention of distributors and retailing our products. The correct business foundation includes strong country management that works closely with the distributor leadership, unified distributor leadership, a broad product line that appeals to local consumer needs, a favorable regulatory environment, a scalable and stable technology platform and an attractive distributor marketing plan. Initiatives, such as Success Training Seminars, World Team Schools, Promotional Events and regional Extravaganzas, are integral components of developing a highly motivated and educated distributor sales organization that will work toward increasing the recruitment and retention of distributors.

Our strategy will continue to include creating and maintaining growth within existing markets, while expanding into new markets. We expect to increase our spending in selling, general and administrative expenses to maintain or stimulate sales growth, while making strategic investments in new initiatives and in new markets. In addition, new ideas and DMOs are being generated in our regional markets and globalized where applicable, either by distributors, country management or corporate management. Examples of DMOs include the Nutrition Clubs in Mexico, the Total Plan in Brazil, the Wellness Coach in France and the Lead Generation/Sampling in the U.S. Management’s strategy is to review the applicability of expanding successful country initiatives throughout a region, and where appropriate, financially support the globalization of these initiatives.

North America

The North America region reported net sales of $438.7 million for the year ended December 31, 2007. Net sales increased $81.1 million, or 22.7%, for the year ended December 31, 2007, as compared to 2006. In local currency, net sales increased by 22.5% for the year ended December 31, 2007, as compared to 2006. The fluctuation of foreign currency rates had a positive impact of $0.8 million on net sales for the year ended December 31, 2007. The overall increase was a result of net sales growth in the U.S. of $80.8 million, or 23.9%, for the year ended December 31, 2007.

The increase in net sales in North America was led by distributor momentum behind the Nutrition Club DMO among our Latino distributors as well as the Lead Generation/Sampling DMO among our non-Latino distributors in the United States. In October 2007, the region hosted over 7,000 distributors in Long Beach, California for the annual Herbalife University and Latino Development Weekend event.

New supervisors in the region increased 19.6% for the year ending December 31, 2007, as compared to the same period in 2006. This was led by new supervisor growth in the United States of 20.8%. Total supervisor growth in the region increased 19.9%.

We believe the fiscal year 2008 net sales in North America should continue to show year over year positive growth primarily as a result of continued momentum in the United States behind expansion of the club concept and Lead Generation/Sampling DMOs.

Mexico and Central America

The Mexico and Central America region reported net sales of $384.6 million for the year ended December 31, 2007. Net sales for the year ended December 31, 2007 increased $7.7 million, or 2.0%, as compared to 2006. In local currency, net sales for the year ended December 31, 2007 increased by 2.2%, as compared to 2006. The fluctuation of foreign currency rates had an unfavorable impact of $0.6 million on net sales for the year ended December 31, 2007. Net sales in Mexico had a decline of $2.3 million, or 0.6% for the year ended December 31, 2007, as compared to 2006.

New supervisors in the region decreased 19.3% for the year ending December 31, 2007, as compared to the same period in 2006. Driving this decline was Mexico, whose number of supervisors decreased by 21.2% for 2007. Total supervisor growth in the region increased 22.1%.

After experiencing explosive sales growth in 2004 through 2006, 2007 was a re-building year for Mexico as the management team, in conjunction with the distributor leadership, addressed issues of infrastructure needs as well as distributor training. Infrastructure enhancements included introduction of sales centers and expansion of current distribution facilities, the addition of a toll-free phone line, and enhanced Ethical Business Practices or EBP resources. There are now 20 locations throughout Mexico, an increase of 6 locations and expansion of 3 sales centers. These additions were designed to provide additional distributor access points and support the expansion of our business. In addition, the distributor leadership has invested significant time training other distributors on Nutrition Club operations and the marketing plan in Mexico.

In Central America, we opened El Salvador, our 64th country, in February 2007. For the year 2007, net sales in El Salvador were $4.9 million, making it the region’s second largest market.

We believe the fiscal year 2008 net sales in Mexico and Central America should show year over year positive growth as a result of infrastructure enhancements, and better trained distributors driving penetration across Mexico, and focusing on retailing and recruiting.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Herbalife is a global network marketing company that sells weight management products, nutritional supplements, energy & fitness products and personal care products. 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 are one of the largest network marketing companies in the world with net sales of approximately $2.1 billion for the year ended December 31, 2007. As of September 30, 2008, we sold our products in 66 countries through a network of over 1.9 million independent distributors except in China, where we sell our products through retail stores and an employed sales force. 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 28-year operating history. Unless otherwise noted, the terms “we,” “our,” “us,” “Company” and “Herbalife” refer to Herbalife Ltd. and its subsidiaries.

Our products are grouped in four principal categories: weight management, targeted nutrition, energy & fitness and Outer Nutrition. Our products are often sold in programs that are comprised of a series of related products 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 increasing prevalence of obesity and the aging of the worldwide population, which are driving demand for nutrition and wellness-related products and the recruitment and retention of distributors.

The opportunities and challenges upon which we are most focused are retailing of our products, recruitment and retention of distributors, improving distributor productivity, entering new markets, further penetrating existing markets including China, globalizing successful distributor methods of operation such as Nutrition Clubs, introducing new products, developing niche market segments and further investing in our infrastructure.

In late 2007, we changed our geographic regions. This updated regional structure allows us to better support the distributor leadership and enhance synergies within the regions. Under the new geographic regions, we report revenue from:


• North America, which consists of the U.S., Canada and Jamaica;

• Mexico and Central America, which consists of Mexico, Costa Rica, El Salvador, Panama and Dominican Republic;

• South America, which includes Brazil;

• EMEA, which consists of Europe, the Middle East and Africa; and

• Asia Pacific, which consists of Asia, New Zealand and Australia.

Historical information presented in this Quarterly Report on Form 10-Q relating to our geographic regions has been reclassified to conform with our current geographic presentation.

A key non-financial measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted unit measure of product sales volume. It is a useful measure for us, as it excludes the impact of foreign currency fluctuations and ignores the differences generated by varying retail pricing across geographic markets. In general, an increase in Volume Points in a particular geographic region or country indicates an increase in local currency net sales.

Number of Supervisors and Retention Rates by Geographic Region as of Re-qualification Period

Our compensation system requires each supervisor to re-qualify for such status each year, prior to February, in order to maintain their 50% discount on product and be eligible to receive royalty payments. In February of each year, we demote from the rank of supervisor those distributors who did not satisfy the supervisor re-qualification requirements during the preceding twelve months. The re-qualification requirement does not apply to new supervisors (i.e. those who became supervisors subsequent to the January re-qualification of the prior year).

2008. In October 2008, the region hosted an Extravaganza in Los Angeles that was attended by over 13,000 distributors, an increase compared to a similar event in 2007.

New supervisors in the region increased 9.3% and 6.8% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. New supervisor growth in the United States was 9.6% and 7.6% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007.

We believe the fiscal year 2008 net sales in North America should continue to show year over year positive growth primarily as a result of continued momentum in the United States resulting from the transformation of our distributor business focus to a daily consumption model.

Mexico and Central America

The Mexico and Central America region reported net sales of $100.2 million and $305.2 million for the three and nine months ended September 30, 2008, respectively. Net sales increased $7.2 million, or 7.7%, and $18.4 million, or 6.4%, for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. In local currency, net sales increased by 1.4% and 2.1% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. The fluctuation of foreign currency rates had a favorable impact of $6.0 million and $12.5 million on net sales for the three and nine months ended September 30, 2008, respectively. Net sales in Mexico increased $2.5 million, or 2.8%, and $10.2 million, or 3.7%, for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007.

During the third quarter we began collecting a Value Added Tax, or VAT, from our distributors that has been levied by the Mexican government on the import and resale of certain products. Distributors previously paid 0% VAT on purchases of most of our products. This VAT increase impacted approximately 60% of our volume in the Mexican market and the fact that the predominant DMO in Mexico is retail price-sensitive caused volumes to decline sequentially from the second quarter. We are in the process of challenging this assessment on several fronts, however in the near-term while the products continue to be subject to VAT, we expect volume growth to be constrained.

The region hosted an extravaganza in Mexico City in July 2008 that was attended by over 15,000 distributors, a decrease compared to a similar event in 2007.

New supervisors in the region decreased 21.3% and 9.6% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. Mexico’s new supervisors decreased by 23.5% and 11.1% for the three and nine months ended September 30, 2008, respectively.

We believe the fiscal year 2008 net sales in Mexico and Central America should show a slight year over year decrease reflecting lower volumes due to the recent VAT charge coupled with assumed unfavorable currency fluctuations in the fourth quarter 2008.

South America

The South America region reported net sales of $85.8 million and $281.8 million for the three and nine months ended September 30, 2008, respectively. Net sales increased $9.9 million, or 13.0%, and $80.9 million, or 40.3%, for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. In local currency, net sales increased 4.2% and 28.8% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. The fluctuation of foreign currency rates had a $6.8 million and $23.2 million favorable impact on net sales for the three and nine months ended September 30, 2008, respectively. The increase in net sales for the region was primarily attributable to net sales increases in Brazil, Venezuela, Peru and Bolivia.

In Brazil, the region’s largest market, net sales increased $14.0 million, or 47.3%, and $22.6 million, or 23.7%, for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. The increase in net sales was a result of successfully transforming this market into a more balanced mix of recruiting, retailing and retention via the Nutrition Club DMO. In addition, the timing of this year’s Extravaganza, which was held in July 2008 versus December 2007 a year ago, created positive distributor momentum. Favorable foreign currency fluctuations also contributed to the increase in net sales for the three and nine months ended September 30, 2008.

Venezuela, the region’s second largest market, experienced net sales increase of $1.3 million or 8.9%, and $35.2 million or 115.5%, for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007, reflecting slowing third quarter volumes as a result of price increases of 20% and 25% in January and May 2008, respectively.

New supervisors in the region decreased 10.8% and increased 11.6% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. For the three months ended September 30, 2008, the decrease was driven by declines in Argentina, Venezuela and Columbia of 62.1%, 50.2% and 23.1%, respectively, as compared to the same period in 2007. These declines were offset by increases in new supervisor growth in Bolivia and Brazil which increased 57.0% and 24.0%, respectively, for the three months ended September 30, 2008 as compared to the same period in 2007. For the nine months ended September 30, 2008, the increase was driven by increases in Bolivia, Peru and Venezuela of 119.8%, 63.3% and 52.0%, respectively, as compared to the same period in 2007. These increases were offset by declines in Argentina, Brazil and Columbia of 30.5%, 9.9% and 17.0%, respectively, for the nine months ended September 30, 2008 as compared to the same period in 2007.

We believe the fiscal year 2008 net sales in South America should show positive year over year growth reflecting the many successful DMO’s and price increases partially offset by slowing volumes in Venezuela and Argentina and assumed unfavorable currency fluctuations during the fourth quarter 2008.

EMEA

The EMEA region reported net sales of $135.4 million and $453.3 million for the three and nine months ended September 30, 2008, respectively. Net sales increased $1.6 million, or 1.2%, and $30.3 million, or 7.2%, for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. In local currency, net sales decreased 5.7% and 3.5% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. The fluctuation of foreign currency rates had a favorable impact on net sales of $9.3 million and $45.1 million for the three and nine months ended September 30, 2008, respectively.

Among the largest markets in the region, Italy and France reported net sales increases of 27.1% and 17.6%, respectively, while Spain reported a net sales decrease of 27.6% for the three months ended September 30, 2008, as compared to the same period in 2007. For the nine months ended September 30, 2008, Italy and France, reported net sales increases of 27.6% and 25.8%, respectively, while Spain reported a net sales decrease of 1.9% for the nine months ended September 30, 2008, as compared to the same period in 2007. The increase in net sales for Italy and France was driven by growth in Total Plan, Wellness Evaluations and Healthy Breakfast DMOs. The decrease in net sales for Spain reflects the impact of negative media reports in April 2008 relating to the Spanish Ministry of Health issuing a press release regarding their on-going inquiry into the products that we sell in Spain. Net sales in the Netherlands increased 6.0% and 4.9% for the three months and nine months ended September 30, 2008, respectively, as compared to the same period in 2007 and reflect a re-activated distributor base that is utilizing the Wellness Evaluation and Healthy Breakfast DMOs. In addition, Eastern European countries have shown signs of potential long-term growth as net sales increased in Russia by 37.8% and 47.4% and Poland by 55.9% and 57.9% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. The increases in Russia and Poland were primarily driven by adoption of the Nutrition Club concept in the form of a Breakfast Club DMO. These increases were offset by declines in Germany and Portugal. Germany net sales declined 27.3% and 18.8% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007, as it transitions to daily consumption models including Nutrition Clubs and Wellness Evaluations. Portugal net sales declined 50.9% and 41.3% for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007, due to weaker recruiting efforts as this market, similar to Brazil in 2006, transitions toward daily consumption methods.

For the three and nine months ended September 30, 2008, new supervisors for the region decreased 18.1% and 12.5%, respectively, with declines in Portugal, Spain and Germany of 77.6%, 56.9% and 50.7%, respectively, for the three months ended September 30, 2008 and declines of 65.7%, 21.0% and 47.8%, respectively, for the nine months ended September 30, 2008. These declines were offset by increases in Russia, France and Italy, which were up 37.9%, 24.5% and 18.0%, respectively, for the three months ended September 30, 2008 and 50.2%, 21.3% and 19.8%, respectively, for the nine months ended September 30, 2008.

We believe fiscal year 2008 net sales in EMEA to show a slight increase on the strength of year to date favorable currency fluctuations partially offset by assumed unfavorable currency fluctuations during the fourth quarter 2008.

CONF CALL

Brett Chapman

Good morning. Before we begin as a reminder during this conference call comments may be made that include some forward-looking statements. These statements involve risk and uncertainty and as you know actual results may differ materially from those discussed or anticipated.

We encourage you to refer to yesterday’s earnings release in our SEC filings for a complete discussion of risks associated with these forward-looking statements and our business. In addition, during this call certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures.

We believe that 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 Web site, herballife.com, to find our third quarter press release containing a reconciliation with these measures. I'll now turn it over to Michael.

Michael Johnson

Thanks, Brett. Good morning everyone on Election Day in the United States and to our friends worldwide. Welcome to our Third Quarter 2008 Earnings Call. You know these are interesting times. Our credit markets are in turmoil, our financial failures are abounding, and the U.S. unemployment is projected at the highest levels since the 1980’s. As we consider the big picture in the economic challenges here and around the world, it has been and will likely continue to be for some time a punishing operating environment for many companies in many industries.

Herbalife will not be immune, but let me address why we believe our business offers compelling advantages in this environment. At Herbalife we offer product solutions, which address the global obesity epidemic and we provide a business opportunity that enables people the opportunity to earn part time and full-time income in one of the most uncertain economic times in history.

We offer a healthy meal for around $2, a much healthier and lower cost alternative than most fast food options. In addition, our business is globally diversified operating in 69 markets. We have significant revenue and growth opportunities throughout Asia, Latin America, Eastern Europe, and here in the U.S. as our distributors dive deeper into penetration into their markets, and they focus on business methods that create daily consumption of our products.

During the quarter our top ten markets grew 21% year-over-year, and four of our top 10 markets grew at an accelerated pace. We believe the reasons we are successful in these chaotic times is the focus on daily consumption methods that provide a sticky customer, resulting in higher retail and retention figures. We continue to see markets that are evolving to a better balance of recruiting, retailing, and retention by focusing on daily consumption models.

Markets such as the USA, Brazil, Taiwan, and now Korea have all benefited from this ongoing conversion to daily consumption. Moreover, our products low price point on a per-serving basis helps our distributors attract new customers who are looking for weight management and good nutrition at an attractive price, and in this weak economic climate many consumers are looking for ways they can trade down on their purchases.

We have revenue of $602 million, which reflects our 19th consecutive quarter of double digit revenue growth, and one which we generated almost $80 million in cash flow from operations, an increase of 19% year-over-year. We did not repurchase shares during the quarter considering the market volatility, and a desire to pay down debt remained conservatively capitalized during this period of uncertainty in the credit markets.

We have an under leveraged balance sheet, little or no reliance on the capital markets, and we are self-funded from strong free cash flow generation. In a normalized market we would be buyers at these levels during the quarter. We look to make opportunistic purchases of our stock with market volatility wanes, and we believe the valuation is dislocated from the fundamentals.

Net income for the quarter was $58 million, an increase of 20% compared to a year ago. We reported diluted earnings per share of $0.89 reflecting an earnings growth of 33%. While earnings per share was ahead of expectations in the third quarter, we were increasingly impacted by the unprecedented fluctuations in foreign exchange rates, as well as a slow down in volume point growth in a few of our top markets.

Foreign currency headwinds are a consequence of the global economic crisis; however, our volumes slowdown reflects issues that are unique to Herbalife. Going forward, to assist investors, we will provide volume point growth guidance as well as foreign exchange assumptions for the key currencies which could affect our financial results.

Despite solid positioning throughout many of our markets, we are actively refining our growth and profitability plans to address the global market changes. We anticipate that current spot rates currency headwinds are going to have a negative impact on revenue and earnings per share in the fourth quarter of 2008 and potentially throughout 2009.

Additionally, we may experience inconsistent volume growth in certain markets primarily reflecting the transition within these markets to the daily consumption model. In the face of these unprecedented times in the economy, the opportunity for ongoing top line success speaks volumes to the dedication of our distributors. Many of our distributors started, or increased, their business in tough economic times, and we believe their unwavering commitment will allow them to continue to grow their business.

During these times of unprecedented foreign exchange volatility and slower volume in a few key markets, we considered not providing guidance at this time, but we thought that given the stability of our business model and positive trends in several of our top markets, coupled with the development of our profit improvement plan, we wanted to provide a floor for the 2009 earnings. Therefore, our initial earnings per share guidance for 2009 is $3 to $3.20, reflecting our current volume point trends along with current spot foreign exchange rates.


While we are not sure where this foreign exchange volatility will settle out, it is our goal to be more profitable and generate higher cash flow from operations in 2009 compared with 2008. We are currently developing a profit improvement action plan, which will include appropriate reduction of expenses, organization changes, and savings within our supply chain to help us achieve this goal and mitigate further foreign exchange erosions.

Our cost structure is highly variable, which we believe will help us weather slower top line growth periods and still allow us to produce significant levels of cash flow. Initially, our focus on continuous improvement allows us to reduce discretionary spending while refocusing and prioritizing investment behind distributor initiatives. We anticipate concluding these plans in early December, reviewing them with the Board, and sharing them with our investors that are investor date December 16th in New York.

Herbalife is a fantastic business. For the past 28 years our distributor leaders have successfully weathered economic downturns. We believe our business is well positioned to take advantage of this uncertainty by providing a healthy meal at an attractive price, as well as a means of addressing the obesity epidemic which plagues the world, but success will not come from sitting back and waiting. It will come from taking positive and proactive steps. We will continue to work closely with our distribution team to help them even be more successful in 2009.

Now let me turn it over to Des who will discuss volume and provide in-depth update in key markets.

Des Walsh

Thank you, Michael. Before I begin my prepared remarks I'd like to take the opportunity to thank our distributors and employees for their dedication and hard work during the third quarter. Without their positive attitude and resilience in the face of these turbulent economic times we would have been unable to lay the foundation for success in coming quarters, and they will play an integral role with the continued transformation of our business to one that provides greater consumer access to daily consumption of our products and a healthy meal at an attractive price point.

Let me now share some insights on key business trends in key business markets, including the U.S., Mexico, China, South America, Taiwan, and Korea. Our results in the U.S. market were above expectations in the quarter and bucked the negative consumer market cycle, validating how well are business can perform in challenging economic times. The U.S. market remains our largest market, and net sales increased 23% year-over-year, reflecting in acceleration of 3% sequentially from the second quarter growth rate.


During the third quarter 66% of the U.S. volume came from our Latino distributors, which grew 27% year-over-year, reflecting the ongoing momentum we have experienced by Latino distributor leadership since the introduction and evolution of nutrition clubs in late 2004. Our general market business comprised 34% of the U.S. business in the quarter, and grew 3% year-over-year, which also experienced a slight increase sequentially from the second quarter of 2008.

We are also seeing the emergence of nutrition clubs in the general market, indicating the commitment of both our general market and Latino distributors to provide improved consumer access to a healthy meal at an attractive price in communities throughout the U.S. Volume points for the top 25 metro areas in the U.S. were up 23% year-over-year, growing at a faster rate than the total U.S. market that grew at 18%.

The top 25 metro markets for the Latino market experienced volume point growth of 27% versus a year ago, while the general market top 25 metro markets experienced a year-over-year volume point growth of 11%. While each segment grew at a faster rate than the overall Latino and general markets, we’ve seen three consecutive quarters of our non-top 25 metro markets showing sequential volume growth. We believe this trend is due to initiatives we’ve put in place, such as our relationship with the AYSO, which helps us more deeply penetrate the U.S. market.

We expect this trend to continue in to 2009. Now on to Mexico. Mexico, our number two market, reported third quarter net sales growth of 3%. Excluding the favorable impact from currency, sales declined 3%. We believe the decline in local currency sales in Mexico is primarily attributable to a 15% vat that had been newly levied by the Mexican government on the import and resale of certain products.

This newly leveled vat impacts approximately 60% of our volume in the Mexican market, and follows a 2.5% price increase in May, which together had a meaningful impact on demand since the company began passing on the vat in August. For the four months prior to implementing the vat, volume in Mexico increased 1% over the prior year; however, August and September were 8% and 17% below the prior respectfully.

We believe that most of our products should not be subject to that, and we along with other industry participants are in the process of challenging the Mexican government’s vat change. However, given the affective price increase created by the vat we don’t anticipate volume point growth in Mexico until the back half of 2009 unless the vat in issue gets resolved sooner than we anticipate. We continue to work closely with our Mexican distributor leadership to help support our combined initiative to more deeply penetrate this market.

Now onto China, our number four market in terms of net sales. During the quarter China reported third quarter net sales growth of 87%, up 6% sequentially. In local currency growth, net sales were up 70%. During the quarter results were negatively impacted by the Olympics, as the Chinese government did not allow us to host meetings at our retail stores during the period leading up to and during the event. During the quarter we received five additional direct selling licenses from the Chinese government.

While it's difficult to quantify the impact of these licenses in the near term, we believe these expanded licenses provide enhanced sales, employee confidence, increases our competitiveness in the market, and provides credibility with both consumers and with Chinese government relations. Additional provincial licenses, coupled with increases in our store base and improved store productivity, along with the potential introduction of the nutrition club concept and our preferred retail program should act as continued catalysts for growth as we head into 2009.

However, we continue to pursue a better balance of recruiting, retailing, and retention. During this transition period we therefore anticipate continued sequential net sales growth rates to slow. South America is comprised of seven markets, and as a whole this region's sales growth slowed, primarily reflecting a slowdown in Venezuela and Argentina, offset by accelerated growth in Brazil.

First the positive story. In Brazil we are pleased to deliver on our expectation of positive local currency sales growth that increased 28% year-over-year for the quarter. Including the benefit from currency, Brazil reported third quarter net sales growth of 47%. Brazil is a good example of a successful market shift from a recruiting-base model to a consumption-base model. Among those distributors who have been using the nutrition club DMO for more than a year, volume points were up 46% during the quarter, and 32% year-to-date.

In addition, we remain encouraged with the growth of and refinement to the nutrition club DMO. Our traditional business within Brazil also remains strong, so the nutrition club growth is now incremental growth for Brazil. In Venezuela we face a unique situation arising from the country's currency restrictions and high inflationary rates. To address this issue we raised prices approximately 50% during the year in order to keep up with rising costs.

Additionally, the volatility of the parallel exchange rate, as compared to the official rate, coupled with our inability to get cash out of Venezuela on a timely basis has created a difficult business environment for the distributors residing outside Venezuela but having sales within the country. These factors have resulted in a 35% decline in volume points. We continue to work with local distributor leadership to identify investments and sales initiatives which will help increase recruiting.

Argentina had negative local currency net sales, volume point declines, and decreases in new supervisors during the quarter. This country has seen social economic disruptions, and we believe is transitioning to a better balance of recruiting, retailing, and retention much like Brazil did in late 2006. We believe this transition will take some time, but in the long run will produce a more stable market.

Now, I want to close with a few comments on Taiwan and Korea. In previous calls we eluded to the growth in Taiwan being driven by the addition of nutrition clubs. In the quarter our distributors opened the 1,000th nutrition club in Taiwan, and the clubs have contributed greatly to the growth and stability in the market. While this market has one of the highest volume points per capita ratios for the company at just over 6% verses an average of 1.14 for the entire company, Taiwan produced 6% year-over-year volume point growth in the quarter.

The question for many of you has been whether distributors in other Asian countries could be successful in acculturating these clubs to their own countries. We are delighted to report that in Korea, in just the last year, over 500 nutrition clubs have opened. We believe that these clubs are a significant factor in Korea’s 44% year-over-year volume point growth in the quarter.

Based on these successes, other distributors throughout Asia are now embracing the nutrition club model that we believe will help accelerate the adoption of this daily consumption business method company wide. Now I’ll turn it over to Rich for an update on the financials.

Rich Goudis

Let me briefly walk you through the third quarter financial results, provide you with financial guidance for the fourth quarter and for the year 2008. Along with our initial guidance for the full year 2009 and explain key assumptions underlying the guidance. Then we’ll open up the call to your questions. Net sales of $602.2 million in the third quarter were up 13.7% versus the third quarter of '07. FX had 187 basis point favorable impact during the quarter reflecting the fact that 80% of our sales are derived outside the U.S.

Last quarter we started providing investors with a listing of our top ten markets in terms of net sales by quarter for the past three years. This quarter we’ve expanded our disclosure to include local currency net sales as well. You can find this information on our web site at www.herblife.com under the investor relations tab. On a reported basis, gross profit in the third quarter was $485.6 million or 80.6% of net sales. This is an increase of 63 basis points compared to the third quarter of 2007.

Improved margin was a result of Country Mix approximately 13 basis points and foreign currency fluctuations approximately 50 basis points. Royalty expense in the third quarter was $200.3 million or 33.3% of sales reflecting improvement of 195 basis points compared to last year. Normalizing for the China sales employee expense which, as you know, is recorded in SG&A, the royalty rate would have improved 59 basis points primarily reflecting a timing of certain distributor promotions.

SG&A was $196.8 million or 32.6% of sales. Again, normalizing for the China sales expense, SG&A expense was $176 million or 29.2% of sales, an increase of 90 basis points versus last year. The increase primarily reflects higher salary expense primarily due to merit increases and compensation associated with full-time employees in China, additionally higher advertising and promotion expenses, higher sales event expenses primarily reflecting the timing of events, higher net foreign exchange cost and higher depreciation and amortization which relates mostly to the development to our technology infrastructure and expansion and relocation to new facilities all contribute to the increase in year-over-year SG&A.

Third quarter operating income was $88.5 million or 14.7% of net sales reflecting a decrease of 9 basis points compared to last year. Third quarter interest expense was $3.4 million versus $2.7 million in the third quarter of last year. The increase primarily reflects a higher average net debt balance as we use our excess cash and our revolver to repurchase stock over the past year and was partially offset by lower interest rates.

The weighted average interest rate on our debt was 5.08% in the quarter versus 6.54% in the third quarter of 2007. I want to remind investors that we do not need our credit facility to finance our day-to-day business and that our facility doesn’t expire until 2012. Our third quarter effective tax rate decreased to 31.7% compared to 36% a year ago primarily due to the decrease in the operating effective tax rate reflecting Country Mix, the tax holiday in China, the lack of stock option exercises and the favorable impact of our global entity structuring and planning.

Net income was $58.1 million in the quarter an increase of 20.2% compared to the year ago. Third quarter diluted earnings per share was $0.89 compared to $0.67 in the third quarter reflecting an increase of 33%. Now let’s turn to the balance sheet. We ended the third quarter with $149.4 million in cash and $326.2 million in outstanding debt. Our inventory increased $7.9 million from December 2007 primarily to support sales growth.

And in terms of efficiency our inventory days on hand increased two days year-over-year while inventory turnover decreased to 2.94 times versus 2.97 times a year ago. In the quarter we invested $32.6 million in capital primarily in technology investments such as Oracle and BizWorks to support improvement and distributor services. Over the past four months we successfully upgraded our existing Oracle applications and went live with Oracle in Mexico, Central America and South America.

And just this past weekend we went live in Brazil. We now have nearly 60% of our revenue transaction entirely on the Oracle platform. We anticipate going live with Oracle in Asia Pacific, excluding China, in January 2009 and will finish with AMEA in April of 2009.

Now let’s move onto guidance, which we expanded a bit to give you better insight into the potential impact from foreign currency volatility and volume trends. For the fourth quarter we expect diluted earnings per share to be between $0.65 and $0.70 on volume points flat to down 3%, and net sales decline to 6% to 8% compared to the same period in '07 respectively, reflecting late October FX rates, and an affective tax rate of 28% to 28.5 %.

Based on our fourth quarter guidance we are lowering our full year of 2008 diluted earnings per share guidance to the range of $3.50 to $3.55 on volume point growth of 4% to 5%, and revenue growth of 10% to 11%, coupled with an affective tax rate of 28% to 28.5%. Our fourth quarter 2008 and full year 2008 tax rate exclude a potential $6.5 million non-cash charge for the write up of certain deferred tax assets in connection with the company's ongoing legal entity capital structuring.

For the full year 2008 capital expenditures are expected to be in the range of $100 million to $105 million, again primarily reflecting the investments in Oracle. The company’s initial diluted earnings per share guidance for 2009, as Michael said, is a floor of $3 to $3.20 on volume point growth of 4% to 5%, and net sales flat up 1% compared to 2008 respectively, reflecting late October FX rates, coupled with an affective tax rate of 27.5% to 28.5%.

Additionally, full year 2009 capital expenditures are expected to be in the range of $55 million to $60 million, reflecting the conclusion of our initial rollout of Oracle. During the past several months we’ve been asked repeatedly how the recent strengthening of the US dollar impacts our bottom line, so I want to give some additional information which factors into our guiding. While we have operations in 69 different countries, our FX exposure as it relates to profitability is weighted towards two currencies, the Mexican peso, approximately 32%, and the Euro about 27%.

Since the quarter ended, we’ve seen significant US dollar strengthening, up 19% and 12% respectively. As we look at our 2009 guidance there are two components we want to provide additional guidance – FX and volume. When we first rolled up our 2009 budget, our earnings per share expectations were north of $4 per share using early July FX rates. Our initial 2009 guidance reflects current volume point trends coupled with late October spot FX rates. Specifically it assumes a spot Euro price of $1.33, and a spot Mexican price of $12.83.

Additionally, we've performed sensitivity analyses in the event currency exchange differs from these spot rates. If all rates in our basket of countries were to move plus our minus 10%, our current earnings per share range would increase 21% and decrease 21% respectively. In addition, our guidance does not include any accretion resulting from any future share repurchases.

As Michael stated earlier, it’s our goal to be more profitable and generate increased cash flow from operations in 2009 compared to 2008. Our initial guidance does not reflect this goal; rather it represents what we believe is a floor in earnings given the positive volume trend in the sale of our top markets, which Des reviewed with you, and the stability of our business model to generate free cash flow and earnings.

We are in the process of evaluating how we can remove excess costs from our infrastructure; reduce discretionary spending, while investing appropriately against numerous sales growth initiatives. We need another four to six weeks to complete this plan, and will update you at our Investor's Day in December, in New York. This concludes our prepared remarks and now we’ll open up the call for your questions.



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