|David Einhorn: I got a couple of questions for you, first is how much of the sales that you make in terms of final sales are sold outside the network and how much are consumed within the distributor base? |
Des Walsh: David, we have a 70 percent customer rule which effectively says that 70 percent of all products are sold to consumers or actually consumed by distributors for their own personal use. So, obviously what we've seen with Nutrition Clubs is that we now have visibility for the first time to our customers. You know that we reported on this call for the first time the number of commercial clubs around the world which is in excess of 30,000. So that has given us visibility to the tremendous amount of products that are being sold directly through to consumers and we see that as a growing trend in our business.
David Einhorn: What is the percentage that is actually sold to consumers that are not distributors?
Des Walsh: We don't have exact percentage, David, because we don't have visibility to that level of detail.
David Einhorn: Do you have an approximation?
Des Walsh: So again, going back to our 70 percent rule, we believe that it's at 70 percent or potentially in excess of that.
David Einhorn: Okay. What is the incentive for a supervisor to sign somebody up to become a distributor as opposed to – if they are going to consume for themselves, as opposed to just selling them the product for the mark-up? How does the supervisor come out better?
Des Walsh: I think there's two reasons for that. So, we know from our business today that many of our future supervisors and business builders come in as customers and then they become distributors, so the benefit from a supervisor is the ability for greater retention of that customer/distributor, because they are now earning a 25 percent discount. The second issue is that it preserves lineage. So obviously, if I sign you up, David, as a distributor, my hope and my expectation is that based on the tremendous product results that you are going HERBALIFE INTERNATIONAL OF MERICA, INC Moderator: Brett Chapman 05-01-12/11:00 a.m. ET Confirmation # 66116502 Page 18
to achieve, that you will have friends and families go to you and say – Gosh, David, you look great, what are you on? You are going to respond and say I'm on Herbalife and that will encourage you to say, wow, maybe this is a business opportunity I can be interested in. So the benefit for me as your supervisor is one, the discount that you would get and therefore my greater likelihood of retaining you as a permanent customer and secondly the hope that at some stage, you will decide to do the business and therefore that you are already in my lineage and part of my group.
David Einhorn: Just so I understand this clearly, if I sell to a customer, I bought – I'm a supervisor, I buy at a 50 percent discount, I sell to a customer, I make 50 points, if he pays the full price. If he signs up as a distributor and buys it himself, I get– he gets a 25 percent discount and I get 7 points as a royalty? Is that how it works?
Des Walsh: Herbalife No, you would get the other 25 percent.
David Einhorn: I would get 25 percent plus the 7 percent?
Des Walsh: So unless you are in royalties you would simply earn the difference. So you would earn a 50 percent discount, you're selling at 25 percent discount and so the difference between the two is your profit on that sale.
David Einhorn: Right, so if he signs up as a distributor and buys it for himself from Herbalife I still get the 25 percent?
Des Walsh: That is correct.
David Einhorn: Okay, good. One last question, when you had your previous 10-K, you disclosed three groups of distributors at the low end – you called 29 percent self consumers, 57 percent small retailers, and 14 percent potential sales leaders. Then that disclosure did not repeat in the subsequent 10-K, so I have two questions. First of all, how do you track that and how do you characterize and know which ones are which? And second, why did you stop disclosing that in the last 10-K? Is that something that you've stopped tracking or just stopped disclosing? HERBALIFE INTERNATIONAL OF MERICA, INC Moderator: Brett Chapman 05-01-12/11:00 a.m. ET Confirmation # 66116502 Page 19
John DeSimone: David, hi, this is John. The criteria for grouping distributors into different classes was based off of their volume purchases. We're making assumptions that people below a certain volume weren't doing the business, they were buying self consumption. And I don't remember the exact amounts, but I can get it to you after the call. It's how we delineated between the three classes. The reason we took it out of 10-K is a change in CFO, from Rich to me. I didn't view it as valuable information to the business or to the investors. However we can easily provide the exact same breakout going forward, if you'd like. I could email it to you and to our investors. Again, I don't remember the exact delineation between the three classes but I can certainly get it to you. Our objective is to be completely transparent.
David Einhorn: Thanks, I'd appreciate that sort of follow up, that would be helpful. Thanks so much, guys.
...and i just knocked off 30% of your companies valuation by these few questions.