Pershing Square Holdings, Ltd. Public Class USD Accum.Shs · LSE:PSH
Pershing Square Holdings, Ltd. Public Class USD Accum.Shs — Pershing Square Capital Management — Q2 2016 Earnings Presentation
49 slides from Pershing Square Holdings, Ltd. Public Class USD Accum.Shs's earnings presentation, Jul 20, 2016
Slide 1: Q2 Conference Call
Pershing Square Capital Management, L.P. Q2 Conference Call July 20, 2016
Slide 2: No Longer "Business" as Usual
No Longer “Business” as Usual An Overview of the FTC’s Complaint and Injunctive Relief July 20, 2016 Pershing Square Capital Management, L.P.
Slide 3: Disclaimer
Disclaimer Pershing Square is an investment adviser to funds that are in the business of actively buying and selling securities and other financial instruments. Pershing Square currently maintains a substantial short position in various securities related to Herbalife Ltd. (“Herbalife”). For example
Slide 4: Agenda
Agenda ► Introduction Pershing Square’s Thesis on Herbalife ► Overview of the FTC Complaint ► Injunctive Relief ► The HLF Spin Machine ► Conclusion 3
Slide 5: Pershing Square on Herbalife
Pershing Square on Herbalife ► December 2012 – Who Wants to be a Millionaire? ► March 2013 – Herbalife and Fortune Hi-Tech: Side-by-Side ► March 2014 – Herbalife in China ► July 2014 – The Big Lie (Nutrition Club Presentation) ► January 2015 – Stealing the American Dream (LULAC Presentation) ► Septe
Slide 6: What We Said Then…
What We Said Then… ► “Herbalife distributors earn almost no retail profit” (1) ► “Herbalife’s compensation plan incentivizes orders without regard to retail demand” (2) ► “The real purpose of Nutrition Clubs is recruitment” (3) ► “Participants in the Herbalife scheme, the distributors, ‘obtain their
Slide 7: Pershing Square's Thesis
Pershing Square’s Thesis ► Pershing Square has long held that Herbalife is a fraud – a Pyramid Scheme that victimizes millions of people around the world ► Our investment thesis has been that the FTC would take one of two actions: Litigate to halt Herbalife’s operations and provide restitution for
Slide 8: FTC Summary
FTC Summary ► On July 15th, 2016 the FTC filed a Complaint for Permanent Injunction and Other Equitable Relief (the “Complaint”)(1) against Herbalife.(2) Specifically, the FTC announced that Herbalife operates illegally and alleged violations of Section 5(a) of the FTC Act, including: Unfair Pract
Slide 9: FTC Summary (cont'd)
FTC Summary (cont’d) ► On July 15th, 2016 Herbalife filed an 8-K, which included a Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment (the “Settlement Agreement”) (1) ► The Settlement represents Herbalife’s agreement to engage in a “top to bottom”(2) restructuring of its bu
Slide 10: Herbalife: July 15, 2016 Share Price Performance
Herbalife: July 15, 2016 Share Price Performance Herbalife Share Price – 7/15/2016 $73 10:00AM: FTC News Conference Begins $72 ~10:25AM: “They were not determined not to be a pyramid. That would be $71 inaccurate… I do not endorse [Icahn’s] statement.” – Chairwoman Ramirez $70 10:44AM: HLF 8-K / FTC
Slide 11: Herbalife's Spin Machine
Herbalife’s Spin Machine Herbalife’s Reaction to the Settlement “The FTC settlement is an acknowledgment that our business model is sound…” “The terms of the settlement in no way change our business model as a direct selling company but simply build upon current procedures.” ________________________
Slide 12: Herbalife's Spin Machine
Herbalife’s Spin Machine Icahn’s Reaction to the Settlement “The FTC settlement announced today, coming after a two-year investigation also concluded that Herbalife is not a pyramid scheme – a conclusion that obviously vindicates our research and conviction.” ________________________________________
Slide 13: Video Clip
Video Clip 12
Slide 14: The FTC Complaint
The FTC Complaint
Slide 15: Herbalife Does Not Offer a Viable Retail-Based Business Opportunity
Herbalife Does Not Offer Distributors a Viable Retail-Based Business Opportunity There is minimal retail demand for Herbalife’s products “[M]any of the Distributors whom Defendants would expressly or impliedly characterize as solely ‘discount buyers’ are, in fact, pursuing the business opportunity
Slide 16: Herbalife Does Not Offer a Viable Retail-Based Business Opportunity
Herbalife Does Not Offer Distributors a Viable Retail-Based Business Opportunity A significant percentage of total volume is merely qualification buying “Higher-level Distributors who are eligible to receive reward payments frequently buy Herbalife products in order to meet the thresholds for obta
Slide 17: Herbalife Does Not Offer a Viable Retail-Based Business Opportunity
Herbalife Does Not Offer Distributors a Viable Retail-Based Business Opportunity What little retail exists is not profitable “The retail sale of Herbalife product is not profitable or is so insufficiently profitable that any retail sales tend only to mitigate the costs to participate in the Herbal
Slide 18: Nutrition Clubs are Nothing More than a Recruiting Scheme
Nutrition Clubs are Nothing More than a Recruiting Scheme Nutrition Clubs lose money and are simply a recruiting vehicle “[M]any Distributors find it all but impossible to make enough money from retail sales of product to cover the overhead of the club and also generate income for the owner.” (1)
Slide 19: Herbalife's Business Opportunity is Based Entirely on Recruitment
Herbalife’s Business Opportunity is Based Entirely on Recruitment Absent a viable retail-based business opportunity distributors focus their efforts on recruiting “Notwithstanding Defendants’ express and implied representations that Herbalife offers a retail- based business opportunity, in truth t
Slide 20: The Overwhelming Majority of Distributors Do Not Make Any Money
The Overwhelming Majority of Herbalife Distributors Do Not Make Any Money The vast majority of distributors lose money “The overwhelming majority of Herbalife Distributors who pursue the business opportunity make little or no money, and a substantial percentage lose money.” (1) The small minority
Slide 21: Herbalife – A False Business Opportunity
Herbalife – A False Business Opportunity Herbalife and its distributors systematically engage in deceptive representations to recruit prospective distributors “In numerous instances in connection with the advertising, marketing, promotion, offering for sale, or sale of the right to participate in
Slide 22: FTC Definition of a Pyramid Scheme
FTC Definition of a Pyramid Scheme: “Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not
Slide 23: Herbalife: FTC's Findings Nearly Identical to Vemma
Herbalife: FTC’s Findings Nearly Identical to Vemma Conclusion: (1) Conclusion: (2) “In sum, Defendants’ compensation structure incentivizes “In sum, unlike legitimate multilevel marketing businesses, Distributors to purchase thousands of dollars of product to Defendants reward Affiliates for recrui
Slide 24: Herbalife is a pyramid scheme
While Herbalife likely negotiated to prevent a “pyramid scheme” label as a condition of its Settlement Agreement with the FTC, the FTC findings make clear: Herbalife is a pyramid scheme 23
Slide 25: Injunctive Relief
Injunctive Relief
Slide 26: The Heart of the Settlement - Injunctive Relief
The Heart of the Settlement - Injunctive Relief The impact on HLF’s business will be dictated by the injunctive relief The “key goal is to dismantle the alleged deception and unfairness built into how Herbalife does business. As the company rewrites its advertising claims and restructures its compen
Slide 27: The Settlement Limits Compensation to Verifiable, "Profitable Retail Sales"
The Settlement Limits Compensation to Verifiable, “Profitable Retail Sales” Herbalife currently Now, Herbalife can only compensates distributors pay distributor based on their wholesale compensation based on purchases of products verifiable sales of and purchases of their products to real downline c
Slide 28: Limiting compensation to Profitable Retail Sales is a problem for Herbalife
Limiting compensation to verifiable, “Profitable Retail Sales” is a problem for Herbalife because: “Defendants’ program does not offer participants a viable retail-based business opportunity.” (1) ________________________________________________ (1) FTC v. Herbalife International of America, Inc., e
Slide 29: Obligation to Collect and Maintain Documentation
Obligation to Collect and Maintain Documentation Herbalife is now required to collect and maintain Retail Sales Information and “take all reasonable steps” to ensure the accuracy of the information Method of payment Herbalife has previously said collecting such information in an Products and qua
Slide 30: Qualification Purchases Are Prohibited
Qualification Purchases Are Prohibited Herbalife currently requires distributors to make large product purchases in order Qualifying purchases by to qualify for compensation distributors are and to advance in the prohibited Marketing Plan Any volume thresholds/requirements for compensation, discount
Slide 31: New Training Requirements and Restrictions on Misleading Income Claims
New Training Requirements for Distributors and Restrictions on Misleading Income Claims The “training” currently offered Now, the company by Herbalife and its distributors focuses on recruiting others into cannot pay any the business opportunity with compensation to false and misleading income distr
Slide 32: New Training Requirements and Restrictions on Misleading Income Claims (cont'd)
New Training Requirements for Distributors and Restrictions on Misleading Income Claims (cont’d) How will this change the pitch to prospective distributors? “How many of you would like to make at least a million dollars a year in income?” BEFORE “Be your own boss.” “The opportunity to earn more than
Slide 33: Herbalife Distributors are Already Violating the FTC Settlement Agreement
Herbalife Distributors are Already Violating the FTC Settlement Agreement ► Meanwhile, HLF senior distributors continue to peddle false and misleading income representations in violation of the FTC Settlement Agreement ________________________________________________ (1) Source: Facebook. 32
Slide 34: Distributors Already Violating the Settlement (cont'd)
Herbalife Distributors are Already Violating the FTC Settlement Agreement (cont’d) ► Meanwhile, HLF senior distributors continue to peddle false and misleading income representations in violation of the FTC Settlement Agreement ________________________________________________ (1) Source: Facebook. 3
Slide 35: Distributors Already Violating the Settlement (cont'd)
Herbalife Distributors are Already Violating the FTC Settlement Agreement (cont’d) ► Meanwhile, HLF senior distributors continue to peddle false and misleading income representations in violation of the FTC Settlement Agreement ________________________________________________ (1) Source: Facebook. 3
Slide 36: Meaningful Restrictions on Nutrition Clubs
Meaningful Restrictions on Nutrition Clubs The FTC has concluded that nutrition clubs operate primarily as a tool for recruiting new members and that their expenses of operation often surpass any income earned In order to protect consumers, Distributors cannot lease a physical location or portion th
Slide 37: Restrictions to Follow High Level Distributors Even If They Leave
Restrictions to Follow High Level Distributors Even If They Leave Herbalife ► For ten years, Herbalife must deliver the Settlement Agreement to and obtain signed acknowledgements of the agreement from: Officers, directors, LLC members Employees and agents Founder’s Circle & Chairman’s Club mem
Slide 38: The HLF Spin Machine
The HLF Spin Machine
Slide 39: Herbalife Began Deceptive Characterizations of the FTC Settlement
Even before the FTC Settlement was announced, Herbalife began to engage in deceptive characterizations of the FTC settlement and its impact on its own business in an effort to prevent distributor flight. 38
Slide 40: Herbalife's Spin Machine
Herbalife’s Spin Machine ► Herbalife’s deceptive characterization of the settlement has been accepted by the media and is being promoted by senior HLF distributors in an attempt to stop distributor flight ________________________________________________ (1) Source: Facebook. 39
Slide 41: Herbalife's Spin Machine (cont'd)
Herbalife’s Spin Machine (cont’d) ► A post from Herbalife Board Member and Chairman’s Club member John Tartol’s nephew undermining the FTC Settlement Agreement: ________________________________________________ (1) Source: Facebook. 40
Slide 42: Bullish Assertions About the Settlement Are Dishonest
Bullish Assertions About the Settlement Are Dishonest ► Below is some of the spin we’ve heard from the Herbalife camp regarding the FTC settlement: HLF CEO Michael Johnson: “The FTC settlement is an acknowledgment that our business model is sound” (1) The FTC settlement requires a “top to bottom”(2)
Slide 43: Bullish Assertions About the Settlement Are Dishonest (cont'd)
Bullish Assertions About the Settlement Are Dishonest (cont’d) Herbalife would not have agreed to these terms if it couldn’t live with them Response: The alternative would have been protracted litigation with the FTC where Herbalife would have been labeled a pyramid scheme. Response: “In our view it
Slide 44: "It's Only 22% of the Business"
“It’s Only 22% of the Business” ► While it is true the U.S. accounted for 22% of net sales in Q1’2016, the impact to profitability will be significantly larger: Herbalife’s LTM reported Net Sales in the United States are $879 million(1) At a ~43% contribution margin(2) this represents $375 milli
Slide 45: HLF's Normalized Earnings Power
HLF’s Normalized Earnings Power ► Pro forma for the expected decline in the U.S. business, normalized EPS is significantly below consensus estimates Herbalife adds-back multiple items we believe are true ongoing costs to the business PRO FORMA EARNINGS POWER 2016 Pro Forma FY'2015 Low High Notes G
Slide 46: Conclusion
Conclusion
Slide 47: Next Steps
Next Steps The FTC complaint and settlement provide a roadmap for regulators in 90 other countries around the world to enforce similar requirements. China Very strict guidelines for direct selling ► In 2015, China represented 85% of organic growth(1) ► 19% of revenue(1) Mexico 37,000 Nutrition C
Slide 48: Next Steps (cont'd)
Next Steps (cont’d) The SEC has been investigating Herbalife for more than three years. Based on the FTC’s findings the SEC now has evidence that Herbalife has made numerous materially false and misleading statements to the investing public: “We have millions of customers. Three separate research st
Slide 49: Conclusion
Conclusion ► The findings of the FTC are those of the principal consumer protection agency in the United States, not those of a short seller. ► The FTC – with access to Herbalife’s internal information and data – has independently confirmed all of the allegations of our investment thesis. ► We are s
Pershing Square Capital Management — Q2 2016 Earnings Presentation on 6ix