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CNBC Exclusive: CNBC Transcript: Herbalife Chairman & CEO Michael Johnson Sits Down with Kate Kelly Today on CNBC

Thursday, 10 Jan 2013 | 2:13 PM ET

When: Today, Thursday, Jan. 10, 2013

Where: CNBC's "Squawk on the Street"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Herbalife Chairman & CEO Michael Johnson today on CNBC's "Squawk on the Street" (M-F, 9AM-12PM ET). Here is a link to the embeddable video on CNBC.com: http://video.cnbc.com/gallery/?video=3000140236.

All references must be sourced to CNBC.

KATE KELLY: THANK YOU SO MUCH, MICHAEL JOHNSON, FOR JOINING US. I KNOW YOUR TIME IS LIMITED. WE REALLY APPRECIATE THIS. GOING INTO TODAY YOU WANTED TO YOU SAID SHRED BILL ACKMAN THE HEDGE FUND MANAGER THAT CAME OUT WITH A FOUR-HOUR PRESENTATION ATTACKING YOUR BUSINESS MODEL AND YOUR ETHICS THERE ABOUT THREE WEEKS AGO. DID YOU SHRED HIM? HOW DID YOU DO TODAY?

MICHAEL JOHNSON: WELL I NEVER SAID I WANTED TO SHRED BILL ACKMAN. SO THOSE ARE YOUR WORDS, NOT MINE. WE JUST WANTED TO TAKE CARE OF SOME THINGS THAT WERE SAID THAT WERE JUST FRANKLY WRONG ABOUT OUR COMPANY AND I THINK WE DID THAT.

KELLY: YOU TALKED QUITE A BIT ABOUT YOUR PRODUCT, WHY THEY'RE POPULAR, WHAT THE SCIENCE IS BEHIND THEM. IT FELT TO ME IN SOME WAYS LIKE A RECRUITMENT TOOL IN AND OF ITSELF A WAY TO APPEAL TO POTENTIAL NEW DISTRIBUTORS OR CUSTOMERS. MAYBE EVEN MORE SO THEN TALKING TO INSTITUTIONAL INVESTORS WHO WERE IN THE AUDIENCE. WAS THAT YOUR INTENTION?

JOHNSON: THERE WERE A LOT OF PEOPLE IN THE ROOM. NEW DISTRIBUTOR POSSIBILITIES. NO, I'M JUST KIDDING. PRODUCT IS THE BASE OF ANY GOOD COMPANY. AND AT THE BASE OF OUR COMPANY IS A GREAT PRODUCT. PEOPLE, PROCESS, PRODUCT, SEED TO FEED. WE ARE BUILDING A BETTER PRODUCT EVERY SINGLE DAY AND WE ARE VERY PROUD OF IT.

KELLY: LET'S TALK A LITTLE BIT MORE ABOUT THAT CUSTOMER BASE. YOU SAID THE LAST TIME I SPOKE TO YOU, WHICH WAS LIVE A COUPLE OF WEEKS AGO, THAT 90% OF YOUR PRODUCT IS SOLD OUTSIDE OF THE NETWORK, MEANING NOT IN A NUTRITION CLUB, FOR EXAMPLE. TELL US MORE ABOUT THAT STATISTIC. BECAUSE YOU ALSO SAID HISTORICALLY YOU DON'T TRACK THE NUMBERS. YOU DON'T KNOW EXACTLY WHERE THE SALES ARE. SO WHERE DOES THAT 90% COME FROM?

JOHNSON: IT WAS A MISSTATEMENT. 90% OF OUR DISTRIBUTORS OK, WHO ARE BUYING OUR PRODUCT, AND LET ME JUST TRY TO CLARIFY THIS, BUY IT FOR ONE REASON AND THEY BUY IT FOR SELF-CONSUMPTION. THAT WAS A MISSTATEMENT ON THAT DAY. I WAS KIND OF HYPED UP THAT DAY, WASN'T I?

KELLY: IT WAS A TOUGH DAY. ACKMAN CAME OUT SWINGING AND YOU WERE REACTING TO IT IN THE MOMENT.

JOHNSON: YEAH, I WAS A LITTLE UPSET THAT DAY BUT WHAT WE HAVE IN OUR COMPANY TODAY IS WE HAVE A TREMENDOUS AMOUNT OF CUSTOMERS. LIEBERMAN'S PROVED THAT. THEY HAVE SHOWN OUR CUSTOMER ENVIRONMENT IS MUCH LARGER THAN ANYONE OUT IN THE WORLD THINKS THAT WE HAVE, ESPECIALLY ONE MAN WHO IS TRYING TO PUT A POSITION FORWARD THAT WE HAVE NO CUSTOMERS, WHICH IS REALLY A STRANGE POSITION IN A COMPANY LIKE OURS, AND WE HAVE THOUSANDS OF PEOPLE WALKING INTO NUTRITION CLUBS AS YOU AND I SPEAK.

KELLY: TO THE BEST OF YOUR KNOWLEDGE, THOUGH, MICHAEL, WHAT PERCENTAGE OF YOUR PRODUCTS ARE SOLD OUTSIDE THE NETWORK? WHAT PERCENTAGE WITHIN THE NETWORK?

JOHNSON: I DON'T HAVE A NUMBER FOR YOU.

KELLY: YOU DON'T HAVE A BALLPARK ESTIMATE.

JOHNSON: YOU KNOW I GOT IN TROUBLE DOING THAT LAST TIME. SO LET'S GO BACK, CHECK THE FACTS. GET LIEBERMAN TO LOOK AT ALL OF THE NUMBERS WITH US. WE KNOW WHO WE SELL TO. WE DO NOT KNOW WHO THEY SELL TO. AND THERE'S NOTHING WRONG WITH THE WAY WE DO OUR BUSINESS. THERE IS ABSOLUTELY NOTHING WRONG WITH IT.

KELLY: OK, LET'S TALK A LITTLE BIT MORE ABOUT THE CUSTOMER BASE AND OPPORTUNITIES FOR UPWARD MOBILITY. WHICH ARE A KEY SELLING POINT FOR HERBALIFE. WHAT PERCENTAGE OR EVEN IF BALLPARK ESTIMATES, HOW MANY OF YOUR DISTRIBUTORS ACTUALLY CLEAR ROUGHLY THE $100,000 MARK PER YEAR? DO YOU HAVE A SENSE OF THAT?

JOHNSON: OH, YEAH, WE KNOW THAT. 100,000 IN WHAT SALES?

KELLY: NO, IN ACTUAL EARNINGS. BECAUSE BILL ACKMAN SAYS THAT ONLY 1% OF YOUR DISTRIBUTORS ACTUALLY MAKE THE VERY TOP LEVEL. DES SAID EARLIER THAT SOMETHING LIKE 80% OF FOLKS MAKE MORE THAN THEIR SPONSORS OVER TIME. THOSE ARE OBVIOUSLY APPLES AND ORANGES. BUT CAN YOU KIND OF RECTIFY THOSE TWO DATA POINT. IS THE 1% TRUE?

JOHNSON: WELL YOU'VE GOT TO—HERE'S WHAT YOU'VE GOT TO LOOK AT, OUR DISTRIBUTORS MAKE MONEY TWO WAYS, THEY MAKE IT OFF RETAIL MARGIN BY BUYING THE PROJECT AND RESELLING IT AND GETTING THE MARGIN. SOME WORK AT 15% MARGIN, SOME WORK AT 40%, SOME WORK AT 50%-- IT DEPENDS ON THE MARGIN THEY WORK AT SO WE CAN'T EXACTLY TRACK THAT. I DON'T KNOW IF YOU'RE A DISTRIBUTOR OF MINE, I DON'T KNOW WHAT YOU SELL THE PRODUCT FOR. IF YOU OPERATE IN A DAILY CONSUMPTION METHOD, IT'S USUALLY A 100% MARGIN ON THAT BUSINESS BECAUSE YOU'RE PROVIDING AN INCREDIBLE SERVICE. IF YOU SELL OVER THE INTERNET, YOU'RE PROBABLY SELLING AT A LOWER MARGIN. SO I CAN'T GIVE YOU THE EXACT NUMBER TO SAY HERE IS DISTRIBUTOR X AND SHE MADE Y INSIDE THE COMPANY.

KELLY: THIS PYRAMID SCHEME ACCUSATION HAS DOGGED YOU OVER TIME. THE COUNTRY OF BELGIUM PUT IN LITIGATION, IT'S COME UP IN OTHER PRIVATE LITIGATION. OBVIOUSLY BILL ACKMAN IS CONTENDING YOU ARE A PYRAMID SCHEME. YOU TALKED TODAY ABOUT REASONS WHY YOU ARE NOT. AND THERE WAS SOME COMPELLING EVIDENCE FROM LIEBERMAN ASSOCIATES ABOUT FORMER DISTRIBUTORS AND THEIR FEELINGS ABOUT THE PRODUCTS IN THE COMPANY. ALSO YOU HAD ANNE COUGHLAN FROM NORTHWESTERN UNIVERSITY EXPLAINING POINT BY POINT WHY YOU DIDN'T CONSIDER YOURSELF TO BE A PYRAMID SCHEME. VERY INTERESTING DATA, COMPELLING STORY BUT BOTH OF THOSE ENTITIES WERE HIRED BY HERBALIFE TO MAKE THESE ASSESSMENTS. HOW MUCH TRUST CAN AN INVESTOR PUT IN AN ASSESSMENT THAT YOU FUNDED?

JOHNSON: I DON'T THINK YOU CAN BUY ANN COUGHLAN. WE BROUGHT HER IN, WE SAID NO HOLDS BARRED WE WANT YOU TO LOOK AT US. AND SHE'S OBVIOUSLY GOING TO BE PAID FOR HER SERVICES. WHETHER WE ARE PAYING HER OR NOT SHE IS NOT GOING TO INDICT HER WHOLE CAREER, HER REPUTATION ON GIVING US A PIECE OF PABULUM THAT IS GOING TO ENHANCE WHAT WE WANT IT TO SAY. WE PUT HER UP THERE SHE SPEAKS AS A PROFESSOR AT THE UNIVERSITY OF NORTHWESTERN, KELLOGG SCHOOL OF MANAGEMENT, PROBABLY ONE OF THE MOST PRESTIGIOUS SCHOOLS IN THE COUNTRY. ANNE IS NOT GOING TO COME IN HERE AND BE PERSUADED BY A FEW BUCKS THAT ANYBODY IS GOING TO PAY HER. AS FAR AS OTHER VOICES THAT ARE COMING UP, LIEBERMAN RESEARCH ABSOLUTELY PAID THEM BUT ARE THEY GOING TO MORTGAGE THEIR WHOLE COMPANY ON GIVING ONE COMPANY A FALSIFIED RESEARCH OF SOME SORT? SO I THINK CAN YOU PUT HIGH WHAT SHOULD I SAY HIGH CREDIBILITY IN BOTH OF THOSE PEOPLE.

KELLY: WHEN THE ACKMAN SHORT WAS FIRST REVEALED BY US ON DECEMBER 19th AND THEN YOU CAME ON OUR AIR, AT THE TIME YOU CONSIDERED IT TO BE PART OF A SHORT SELLER CONSPIRACY, IF YOU WILL, TO DRIVE DOWN THE PRICE OF HERBALIFE SHARES, POSSIBLY BECAUSE OF AN OPTIONS EVENT THAT WAS OCCURRING A COUPLE OF DAYS LATER AFTER THE ACKMAN PRESENTATION. ACKMAN DENIED THAT. TODAY I HEARD SOME LANGUAGE FROM YOU AND FROM DES YOUR PRESIDENT ABOUT THE IDEA THAT HE'S MOTIVATED BY PROFIT AND GREED. AND TO BE SURE ANY HEDGE FUND IS LOOKING TO MAKE PROFITS AND PERSHING SQUARE IS NO DIFFERENT. BUT IN THIS CASE HE SAID HE'S GOING TO DONATE ANY PROFITS TO CHARITY. WHAT DO YOU THINK MOTIVATES HIM?

JOHNSON: COME ON, KATE. LET'S BE HONEST WITH EACH OTHER HERE, THAT HE'S GOING TO DONATE ALL OF HIS PROFITS? HE'S GOT PARTICIPANTS IN THAT FUND, HE HAS GOT ALL SORTS OF DIFFERENT PEOPLE WHO ARE MAKING MONEY OUT OF THAT FUND. WHO KNOWS WHERE IT'S REALLY GOING. THOSE CHARITABLE COSTS FOR HIM OF FUNGIBLE. I DON'T WANT TO GET INTO HIM AND WHAT HE'S DOING AND HOW HE'S DOING. THAT SOUNDS GOOD BUT IS HE GOING TO TAKE 100% OF THE PROFIT THAT HE'S MADE ON SHORTING HERBALIFE, 100% OF IT, SO NO PARTICIPANT IN HIS FUND IS GOING TO GET A SINGLE PENNY, 100 INTO...? I'LL BELIEVE THAT WHEN I SEE IT.

KELLY: THE S.E.C., THERE ARE INDICATIONS REPORTEDLY THAT THEY'VE OPENED AN INVESTIGATION INTO HERBAL LIFE. WE DON'T KNOW THE DETAILS BUT A SENIOR OFFICIAL THERE TOLD CNBC YESTERDAY THAT MULTI-LEVEL MARKETING IN GENERAL HAS BEEN A SUBJECT OF ONGOING INTEREST TO THEM. WHAT CAN YOU TELL US ABOUT THE S.E.C. INVESTIGATION?

JOHNSON: WE ANSWERED THAT THIS MORNING I HAVE NOTHING TO SAY BEYOND THAT.

KELLY: WHAT ABOUT PRIVATE LITIGATION? WHAT ABOUT THE REPORTS THAT IT IS POSSIBLE YOU'LL ACTUALLY SUE BILL ACKMAN FOR WHAT HE'S DONE?

JOHNSON: NO COMMENT.

KELLY: CAN'T GIVE US ANY UPDATE ON THAT?

JOHNSON: NO.

KELLY: HERE IS THE FINAL QUESTION FOR YOU, MICHAEL. WHAT IS THE HEART OF THE BUSINESS, IS IT SALES OR IS IT DISTRIBUTION?

JOHNSON: THE HEART OF THE BUSINESS IS PRODUCT AND PRODUCT RESULTS THAT PEOPLE GET EVERY SINGLE DAY FROM TAKING AN HERBALIFE SHAKE, FROM OUR ENERGY PRODUCTS, FROM OUR GREAT NUTRITION PRODUCTS FOR SPORTS, FOR OUR SKIN CARE PRODUCT, THAT'S THE HEART OF HERBALIFE, IT'S THE PRODUCT.

KELLY: BUT BETWEEN THOSE TWO THINGS—

JOHNSON: YOU SAID LAST QUESTION.

KELLY: A FOLLOW-UP TO MY LAST QUESTION. BETWEEN THOSE TWO THINGS OBVIOUSLY THE PRODUCT IS AT THE HEART OF IT BUT WHEN IT COMES TO THESE ACCUSATIONS ABOUT THE PYRAMID SCHEME, THE PROPORTION OF EACH IS VERY IMPORTANT. AS YOU KNOW. IF YOU HAD TO PICK ONE OR THE OTHER, WHAT DO YOU THINK IS THE CORE CENTER FOR YOU GUYS?

JOHNSON: ONE OR THE OTHER OF WHAT?

KELLY: SALES OR RECRUITMENT.

JOHNSON: OH, SALES. YOU ONLY GET PAID ON SALES IN OUR COMPANY.

KELLY: OK, MICHAEL JOHNSON--

JOHNSON: KATE, I'M SORRY, I GOT TO GO TO L.A. AND SEE DISTRIBUTORS TONIGHT.

KELLY: YOU'VE GOT TO CATCH A PLANE. THANK YOU FOR SPEAKING WITH US. WE APPRECIATE IT.


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