Herbalife Nutrition Ltd. (NYSE:HLF) Q3 2023 Earnings Call Transcript

Herbalife Nutrition Ltd. (NYSE:HLF) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good afternoon, and thank you for joining the Third Quarter 2023 Earnings Conference Call for Herbalife Limited. During the company’s opening remarks, all participants will be in a listen-only mode. Following the opening remarks, we will conduct a question-and-answer session. As a reminder today's conference call is being recorded. I would now like to turn the call over to Erin Banyas, Vice President and Head of Investor Relations, to begin today's call.

Erin Banyas: Thank you, Sherry, and good afternoon, good evening, everyone. Joining us today are Michael Johnson, our Chairman and Chief Executive Officer; Stephan Gratziani, our Chief Strategy Officer; and Alex Amezquita, our Chief Financial Officer. Before we begin today's call, I would like to direct you to the cautionary statement regarding forward-looking statements on page two of our presentation and in our earnings release issued earlier today, which are both available under the Investor Relations section of our website. The presentation and earnings release include a discussion of some of the more important factors that could cause results to differ from those expressed in any forward-looking statement within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended.

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As is customary, the content of today's call and presentation will be governed by this language. In addition, during today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or non-recurring items that management believes impact comparability of the periods referenced. Please refer to our earnings release and presentation materials for additional information regarding these GAAP measures and the reconciliations to the most directly comparable GAAP measure. And with that, I will now turn the call over to Chairman and CEO, Michael Johnson.

Michael O. Johnson: Thank you, Erin, and good afternoon, and good evening, everyone. You know, it's been a year since I returned to Herbalife a company I believe in, and I am passionate about. Since my return, we've accomplished a lot. We modernized our brand, cast of vision for Herbalife 2.0 met with nearly 125,000 distributors at nine extravaganzas. We reached a key milestone launching our all new herbalife.com website, launched innovative products and our trends, they are improving. We are in a transformational process that touches all parts of our business and we're seeing progress. Rebuilding sales growth is obviously a key priority. Our net sales for the quarter were $1.3 billion, and this is the third quarter in a row that our year-over-year net sales trends have improved.

India continues to outperform and EMEA has posted two consecutive quarters of year-over-year growth. Our return to growth in the U.S. and China is our primary focus. In addition, we took proactive steps during the quarter to further secure our balance sheet and the number of our average active sales leaders along with our active preferred customers and non-sales leaders are also trending up. Alex, will present the numbers for the quarter, and we can confidently say we are seeing momentum building. Another key priority with my return was ensuring proper succession management. We've announced some key leadership changes over the last six months that are already beginning to move the needle and support our growth strategy and overall success. We have a strong management team in-place and we are continuing to build on that strength with the addition of key executives, including the recent appointments of former Amway executive Claire Groen is our Chief Human Resources Officer, and Susan Brown is our Head of Global Corporate Communications.

Both Claire and Susan bring a wealth of experience to the company. And as previously announced, Stephan Gratziani joined in August as our new Chief Strategy Officer, bringing more than 32 years of experience as a top independent distributor to the company. With Stephan’s unique perspective energy and understanding what drives topline growth and has helped us improve our understanding and efforts with the B2C portion of our business. So let me explain. Since the company was founded in 1980, we've operated a B2B2C selling model with the company selling distributors and those distributors selling to consumers. Over the past 43 years, our core investment strategies and tools have been focused primarily on supporting the B2B component of the business, while distributors focus primarily on developing their own tools and strategies for selling to the consumer, as well as recruiting and building their own organizations.

Our strategies and priorities are evolving, and we are developing tools and platforms to help distributors better manage their customers. Stephan is uniquely positioned to lead this charge with our distributor leaders and empower the entrepreneurial spirit that is so critical to our sustainable growth. Stephan hit the ground running in his new corporate role and joins us today to share his areas of focus in his first few months. We continued our world tour this quarter which included four extravaganzas in September alone. These events provide our distributors with a vision for the future recognition for important achievements and the sharing of best practices that motivate and energize our distributor base. We believe these events set in motion new recruiting and retailing activity.

Over the course of two and a half weeks, we met with nearly 33,000 distributors in events in Kazakhstan, Poland, Mexico, and Brazil. In addition to the main event, we hosted mega workout sessions at both Krakow and Mexico City to kick off our new year long global, I'm With You Campaign. And Krakow, more than 4,000 distributors and their guests gathered together for an outdoor mega workout, truly putting our healthy active lifestyle focus in motion. We continue to deliver our commitment to develop new and innovative products. When we met in August for the Q2 earnings call, we had launched HERBALIFE V, our first ever vegan product line for the U.S. market. The plant based product line was met with resounding enthusiasm and opened the door to a new group of customers and distributors.

Sales have eclipsed our expectations, and by the end of September, we were sold out four of the five products. Our distributors and our customers love this product. In September, we continued the momentum and launched three new products, we launched Night Mode, which is scientifically shown to improve sleep quality in just seven days and is available in select markets in Europe. In Brazil, we rolled out our all new OnActive Drink, a powdered product developed specifically for adults over 40, to support vision, muscle, bone, and immune health. And in Mexico, we introduced for the first time into the market five beverage enhancers, which are powdered drink mixes for use in Nutrition Clubs, Mexico's largest DMO or daily method of operation. In October, we launched a turmeric based drink that supports muscle recovery and joint health called Golden Beverage for our Latin American market, with the product now available in Bolivia, Ecuador, and Columbia.

All of these great products are backed by science, quality tested and easy to incorporate into a customer's daily routine. These product launches are a testament to our commitment to quality and innovation. Another area we're gaining momentum and delivering on our commitments is with Herbalife One. We hit a key milestone in August with the launch of our all new herbalife.com website in Singapore. The new website has been well received by distributors and customers and learnings from the launch are being used for continuous improvement to further evolve and optimize the content. We remain on-track to complete the broader rollout of the new website to 40 additional markets that represent approximately 80% of our sales by the end of this year.

This milestone is a critical step in helping us transform our business and propel us toward our next chapter of growth. I want to say thanks to the entire team who've worked endlessly to bring this to fruition. We've also been focused on the involving GLP-1 trend, which we are monitoring very, very closely. There continues to be a lot of conversations regarding the drugs and their potential impact on many industries. We are actively engaged in discussions both internally and externally and evaluating the options that are best suited for Herbalife and our distributors, regardless of the path we choose, we have an incredible opportunity to help people considering currently using or maybe coming off GLP1s. Core strength of our distributors is helping individuals in their overall health and wellness journeys, whether it's losing weight, building muscle, developing better nutritional and healthy active lifestyle habits and or supplementing their nutrition to our products and our community.

This is core to our brand and positions us as a healthy companion or an alternative to the medical approach. Another area we are showing our commitment to health and well-being is with respect to diabetes prevention. According to the CDC, approximately 96 million Americans are pre-diabetic. This inspired us to develop a program that targets those at risk for developing type 2 diabetes. We're excited to announce that we have recently been approved as a provider of the CDC's diabetes prevention program. We are going through the necessary steps to certify our internal health experts as master trainers, which will give us the ability to train our distributors to become certified lifestyle coaches to administer the diabetes prevention program. As announced in mid September, we're happy to welcome Herbalife independent distributor and chairman's club member, Rodica Macadrai.

As a new member of the Herbalife Board of Directors, Rodica is filling the seat made vacant when Stephan resigned from the Board to become the company's CSO. With Eastern European roots and a strong knowledge of our business, Rodica brings a wealth of diverse experience to the Board. She has nearly 30 years with her organization and a global business that expands across markets in Europe, Asia Pacific, North America, and Latin America. We look forward to Rodica's keen insights and contributions. I know she is going to be a valuable addition to our Board. We've seen a lot of change over the past few years. These positive changes have us confident about Herbalife, more today than ever before. We have a strong leadership team and a strategic succession plan in place.

Our future is bright, we're on a direct clear path to success. We told you last quarter that our trends indicated we would see year-over-year net sales growth in the fourth quarter, and based on our line-of-sight today, our key indicators show this will indeed be the case. And with that, I'll turn it over to Stephan followed by Alex and then we'll come back for closing remarks following the Q&A. Stephan?

Stephan Gratziani: Thank you, Michael. I'm excited to be joining you and Alex today on my first earnings call. It's hard to believe I'm nearly three months into my new role. After working in the field as an independent distributor for over 30 years, it's been an exciting career move to have joined the executive team. I chose to make this transition because I believe we are in a unique position and time in our company's history. As the third largest direct sales company in the world, we have proven that the combination of our products and the business opportunity are incredibly valuable for our customers and distributors globally. As Michael mentioned, we are moving into a new era as a company. One, where our focus will be more on the B2C portion of our business and supporting our distributors to be more effective and successful in the fast moving world that we live in today.

I've witnessed our markets evolve and change for over three decades. Most of the changes were driven by the evolution of technology and the accessibility to it. These changes created many opportunities for our distributors and for our company, although some were also disruptive in nature. Herbalife distributor leaders are focused and committed entrepreneurs who are on the ground experiencing in real time the changes in the markets and adapting their DMOs and business flows to be as effective as possible. As we focus our efforts, on further supporting the distributors with the tools, training and platforms necessary to build bigger customer bases and attract more business leaders, we see the potential for unprecedented growth in the years to come.

During my first 90 days, a lot of folks has been on North America, China, and Mexico. We've gone deeper than ever before in analyzing the business in these three markets and coming up with strategies to support our distributors on the road back to growth and momentum. North America is not only our most important market, but also the most developed and diverse. We have multiple generations of distributors, working with different demographics and in various business models. We've been working closely with groups of distributors who operate different models, such as Nutrition Clubs and developing bespoke solutions to better support their businesses. We believe the more we partner and support our distributors in the B2C part of our business, the more effective their efforts become, and the better the results will be.

Although, we've only recently started to focus on this in North America, we're beginning to see the impact. China has also been a major focus. We spent more time with our Chinese service provider leaders in the last few months, than we have in the last few years. The pandemic created a difficult environment for an extended period of time for our business in China. It also created a forced separation and isolation, which made it challenging to support the business from a distance. We're making up for lost time, and China will be one of our main focuses for the rest of the year in 2024 and beyond. Mexico remains one of our most stable and important markets despite economic headwinds. With the highest percentage of Nutrition Clubs globally, we are focused on raising the product productivity per club by providing distributors with innovative products and tools needed for continued growth.

The newly launched Beverage Enhancers are a clear example of this. One of the trends we find the most exciting for our company is the return of the healthy active lifestyle movement that was interrupted during the pandemic. Month-to-month, our distributors are leading more group workouts, building bigger communities, and helping more people get in the best shape of their lives. Distributors have used weight loss marathons and different challenges over the last few years to attract customers and help them get results. These are primarily been online programs, but we are now seeing new innovative challenges gain momentum and start to make an impact not only online, but also in-person in local communities throughout North, Central and South America.

The last thing I'd like to touch upon is Herbalife One. As Michael mentioned, we reached an important milestone with the launch of our new brand site in Singapore. We're excited to see the other 40 markets come online this year with the distributor e-commerce solution to follow suit. Our focus will now turn to building a customer platform and community that will allow us to empower our distributors businesses by increasing the value proposition of becoming an Herbalife customer. Our distributors do an incredible job of adding value to our products through the services and the distributor difference they provide to customers. The more value we can add as a company to our distributors' customers and businesses, the more attractive their offers become in the marketplace.

The more value we provide, the easier it is for distributors to make a sale, create customer loyalty and generate referrals thus creating a virtuous circle. And at the same time, the easier it is for distributors to get and keep customers, the more attractive the business opportunity becomes, which enlarges the virtuous circle. It's been a busy first 90 days, and I'm excited more than ever to be a part of Herbalife as we modernize and usher in this new era of Herbalife 2.0. Alex, over to you.

Alex Amezquita: Thank you, Stephan, and welcome, we are thrilled to have you on Board. I'll begin my section with the key financial highlights for the quarter. First, as Michael noted, our trends are continuing to improve and the third quarter marks our third consecutive quarter of improved year-over-year reported net sales trends. For the quarter, net sales were $1.3 billion, down 1.1% compared to the same quarter last year. Second, third quarter gross profit margin was 76.3%, and while the pricing actions we have taken over the past year have led to an approximately 160 basis point benefit to gross profit margin compared to Q3 of last year, we continue to be negatively impacted by the impacts of input cost inflation, which drove a 290 basis point headwind.

As well as unfavorable sales mix and FX, each of which contribute to an additional 30 basis points of headwind year-over-year. Third, Q3 adjusted EBITDA was $163 million, with margin at 12.7%, which was a 20 basis point decline from Q2 of 2023, primarily driven by the unfavorable input costs and sales mix impact on gross profit margin, partially offset by our continued cost saving initiatives. Fourth, adjusted diluted EPS of $0.65 was negatively impacted by a $0.07 nine month true-up for an upward revision of our full-year 2023 tax rate, which was primarily due to shift in country mix from our previous expectations. We now anticipate a full-year 2023 adjusted effective tax rate of 25%. Fifth, we continue to take strategic actions related to our previously announced transformation program.

Based on the actions we have implemented through September 30th, we now expect to deliver an incremental [$15 million] (ph) cost savings in 2023, bringing our expected program savings for this year to at least $60 million, of which $20 million was realized in Q3. We continue to expect to deliver total program run rate savings of at least $90 million in 2024 and beyond. Despite challenges that we continue to experience from an input cost and gross profit perspective, we are highly focused on our overall margin profile through productivity initiatives and SG&A. While our transformation program has been our flagship program to address productivity initiatives, we will continue to press on opportunities to be more organizationally effective. During the third quarter, we recognized an incremental $5 million of pretax expenses in SG&A related to the program, primarily related to employee retention, and separation costs, bring our total program to date costs to $67 million.

These expenses are excluded from our adjusted results. We continue to expect to incur total program pretax expenses of at least $75 million. Sixth, during the quarter, we also took actions to further secure our balance sheet and repurchased approximately $66 million of our 2024 convertible notes at a discount. And seventh, as reflected in our results, the strengthening of the U.S. dollar versus foreign currencies continues to have a negative impact on our profitability. When we met during the Q2 earnings call, we had expected to see an FX tailwind in the fourth quarter of 2023. However, due to the strengthening of the U.S. dollar since then, we are now expecting an FX headwind in the fourth quarter. Moving to slide eight. Reported net sales for the third quarter declined approximately $14 million or 1.1% versus the same period last year.

Favorable FX movements, primarily for the Mexican peso, resulted in an approximately 40 basis point currency tailwind year-over-year. We continue to deliver on our commitment to return to growth. This is the third consecutive quarter that we have improved our year-over-year reported net sales trends. Based on this trend and others, internal indicators continue to point to our return to topline growth in the fourth quarter of this year. Adjusted EBITDA for the third quarter was $163 million with 12.7% margin and was impacted by higher input costs an unfavorable sales mix on gross margin, partially offset by higher pricing and continued cost saving initiatives. Third quarter diluted earnings per share was $0.43 with adjusted diluted EPS of $0.65, which was negatively impacted by a $0.07 nine month true up for an upward revision of our full-year 2023 tax rate.

As a reminder, the true up represents our current full-year expectations against the amounts previously reported in the first half of 2023. Operating cash flows for the third quarter were approximately $80 million, driven by approximately $69 million of net income adjusted for non-cash items in the period, along with our continued commitment to optimize our working capital, which contributed approximately $11 million of favorable impact in the quarter. Cash on hand was down $31 million from June 30, to $496 million at September 30th, primarily reflecting the early $66 million repurchase of a portion of our 2024 convertible notes. Turning to slide nine. We see the drivers of our year-over-year change in net sales. Pricing provided and approximately 630 basis point benefit in the period as a result of price increases implemented over the past 12 months in certain markets to address market specific conditions, and were generally in-line with local CPI increases.

The pricing benefit was partially offset by approximately 220 basis points of unfavorable country mix due to increased sales in India and lower sales in the U.S. and China, relative to our overall net sales portfolio. Moving to the Adjusted EBITDA margin bridge on slide 10, Adjusted EBITDA of a $163 million resulted in a margin of 12.7%, a 140 basis points below the third quarter of last year. Adjusted EBITDA margin benefited by approximately 190 basis points from the pricing increases we have implemented over the past year. However, higher raw material costs and manufacturing overhead costs continue to impact our results, which drove an approximate 290 basis point margin headwind versus Q3 of '22. Within SG&A, we benefited from an approximately 50 basis point improvement in promotional spend, primarily due to the timing of spend and cost efficiency actions.

Also within SG&A, salaries and bonus contributed an approximate 10 basis point headwind, the benefits we are realizing from the cost savings related to our transformation program were offset by increased wages and bonus accruals in the current period versus Q3 of last year. Currency was an approximate $2 million headwind on adjusted EBITDA during the quarter, resulting in an approximate 30 basis point negative impact on adjusted EBITDA margin. Turning to slide 11, we are encouraged that our average active sales leaders are trending up. As a reminder, this metric shows the monthly average number of sales leaders that have had activity from either their own purchases or those of their preferred customers or non-sales leaders down line. For the third quarter we had approximately 467,000 average active sales leaders, which was up 2% from the second quarter of ‘23 and 8% over the third quarter of 2019.

Moving to slide 12. We can see the trend in the number of unique preferred customers and non-sales leaders that have purchased product during the each of the respective quarters. We are also encouraged to see the continued upward trend on our active preferred customers and non-sales leaders, which are up 10% from the fourth quarter of '22 and have been steadily increasing in 2023, whereas in 2022, our actives declined throughout the year. We continue to believe this is evidence that the new innovative, DMOs that are being introduced by our distributors are taking root, and our distributors are re-engaging with their organizations and customers. The financial trends as well as our underlying business trends are what gives us the confidence that we will return to net sales growth in the fourth quarter.

Moving to slide 13. We highlight the age demographics of our average active sales leaders, along with active preferred customers and non-sales leaders. Our distributors and customers span across five generations, with approximately 50% of our active sales leaders and nearly 60% of our active preferred customers and non-sales leaders represented by millennials and GenZ. We believe this is evidence that our products and business opportunity resonate with the younger generation. We are highly focused on continuing to recruit and retain millennials and GenZ. The new and innovative DMOs being introduced by our distributors, particularly those centered on healthy active lifestyle, are also helping us to connect and engage with this age demographic.

Moving to our regional results for the third quarter. As we have said, or trends are improving. Three of our regions had year-over-year growth in the third quarter both on a reported and a on a local currency basis. EMEA was up 5% year-over-year on a reported basis up 3% on a local currency basis and this is a third consecutive quarter that EMEA has reported improved year-over-year net sales trends. In Latin America, reported net sales were favorably impacted by FX, primarily by the Mexican peso. Mexico's reported net sales were up 20% compared to the prior year, while up 1% in local currency. Year-over-year volume declines in Mexico were more than offset but a two price increases implemented in the market this year, 5% in January and 2% in June.

In mid September, we began experiencing importation delays in Mexico as a result of the government delaying timely approval of importation permits, which may impact our future inventory supply and future sales in our Mexican market. We continue to work closely with the Mexican government to try and obtain the necessary timely importation approvals and minimize the risk of disruption in our Mexico market. In the Asia Pacific region, net sales on a local currency basis were up 5% year-over-year, while reported net sales were up 2% due to unfavorable fluctuations in FX. India continues to be the growth driver in the region which was up 12% on a reported basis and 16% in local currency. In North America the decline in reported net sales was primarily driven by the US markets 13% year-over-year decline.

The US market continues to be a primary focus for us. The regional team is highly engaged in taking numerous actions to launch new initiatives to drive recruitment, stimulate engagement, improve productivity and support the return to growth. We are beginning to see positive signs in some of our key states as a result of these initiatives. We have also have distributor working groups in place to accelerate the sharing of best practices. While our turnaround efforts are beginning to gain traction, it will take time to see meaningful results. In China, reported net sales improved for the second consecutive quarter this year. Year-over-year reported net sales were down 19%, which is primarily due to tough comps versus the prior year due to the 5% price increase implemented in August of 2022.

Net sales in local currency were down 14%. China is another key market we are laser focused on. Since joining us in August, Stephan has been working very closely with the regional team and distributors to develop a strategy to identify key growth opportunities to get that market back on track. Turning to our capital structure and cash position. During the quarter and inline with our objective to reduce our nominal debt levels, we repurchased approximately $66 million of our 2024 convertible notes at a discount. The remaining $197 million principal balance comes due in March of 2024, and we plan to continue to park cash with the free cash flow we generate between now and then and use the revolver to cover any difference. Our $330 million revolving credit facility remains fully undrawn.

We ended the quarter with a 3.8 times gross leverage ratio and we were fully compliant with all of our debt covenants. CapEx for the nine months ended September 30th was approximately $100 million including our investments in Herbalife One. We now expect total CapEx for the year to come in around $120 million to $160 million inclusive of Herbalife One, moderately below our previous estimate. Our capital allocation and long term use of cash priorities remains unchanged, Our number one priority is to service our debt as we work towards investment grade metrics and a targeted gross debt leverage ratio of 3.0 times, and we will continue to seek opportunities to reduce our nominal debt levels as we approach that target. This concludes our prepared remarks.

Operator, please open the lines for questions.

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