Pershing Square conference call slides for the second quarter ended June 30, 2016.

Pershing Square Q2 2016 Conference Call Presentation

Herbalife – No Longer “Business” As Usual – An Overview of the FTC’s Complaint and Injunctive Relief

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)
  • September 2015 – Herbalife and Vemma: Side-by-Side
  • February 2016 – The American Dream Denied (Victim Video Series)

What We Said Then…

  • “Herbalife distributors earn almost no retail profit”
  • Herbalife’s compensation plan incentivizes orders without regard to retail demand”
  • The real purpose of Nutrition Clubs is recruitment”
  • “Participants in the Herbalife scheme, the distributors, ‘obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers.’”
  • “Recruiting Rewards earned by distributors are substantially greater than the Retail Profit they generate”
  • Herbalife mischaracterizes distributors attempting to build a business as retail customers

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 victims, or
    • Demand material injunctive relief – effectively dismantling the pyramidal nature of Herbalife’s business – and otherwise prevent further victimization of consumers
  • We believe the FTC’s recently announced Settlement Agreement represents the fulfillment of the second of the above two scenarios

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 Practices: Engaging in “unfair acts or practices” which are “likely to cause substantial injury to consumers” (3)
    • Income Misrepresentations: Engaging in “deceptive acts or practices” including making false representations that Herbalife distributors are “likely to earn substantial income” (4)
    • False or Unsubstantiated Claims of Income from Retail Sales: Falsely representing that “Herbalife Distributors are likely to earn significant full-time or part-time income from selling Herbalife products at retail”
  • The FTC findings confirm our long-held allegation that Herbalife operates as a pyramid scheme
  • 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”)
  • The Settlement represents Herbalife’s agreement to engage in a “top to bottom”(2) restructuring of its business model in the United States. Key elements include:
    • Compensation limited to verifiable, “Profitable Retail Sales”
    • Present compensation levels remain only if 80% or more of U.S. sales are verifiable, “Profitable Retail Sales”
    • Qualification purchases are prohibited
    • Misleading income claims prohibited
    • An Independent Compliance Auditor to oversee compensation plan changes for a period of seven years
  • Prohibition on misleading income claims is immediate. Mandated changes to the compensation plan are effective beginning May 2017
  • We believe the implementation of the Settlement Agreement will cause the pyramid to collapse

Herbalife: July 15, 2016 Share Price Performance

Pershing Square, Herbalife

See full PDF below.