Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

Welcome back. It's my pleasure to welcome Herbalife Nutrition back to CAGNY. On paper, Herbalife Nutrition is a fast-growing, globally diverse company that sells weight management, health and wellness and sports nutrition products exclusively through the direct selling channel in over 90 countries around the world. But the story is far richer than that. So joining us today to bring this story to life, we have incoming Chief Executive Officer Dr. John Agwunobi; President John DeSimone; and Senior Vice President, Finance and Strategic Planning Alex Amezquita. Before passing it over to Dr. A, please join me in thanking Herbalife Nutrition for the generous support of CAGNY in sponsoring lunch earlier today as well as the high-protein iced coffee and shake bars throughout the day. And with that, I'll turn it over to John.

Tim, you know what? Right here works. Welcome back. I know this is the -- actually, it's the second post-lunch session. It's not the first post-lunch session. So this is our second appearance at CAGNY. Herbalife Nutrition was here last year. And I appreciate you having us back because this is one of our annual events. This is important to us as a company. This week, we reported on earnings, and we've had a great year since you last saw us. I can say that with some confidence. And I know that my colleagues a little later, John DeSimone and Alex will touch on the details behind our earnings and our year and our future, which is even more important. My hope before we're done today, in the next 30 minutes or so, is that we might spark a thought in your mind and perhaps you'll consider learning a little bit more about us. We're a hidden gem, I would say. I know most of you or many of you are CPG-oriented, and we're a little more than that in that service is a big part of what we do. So let's get into it. Forward-looking statement, disclaimer, you can't read it. Neither can I because I don't have my glasses on, but it's on our website if you want to see the detail. Let's move on. I'll start, if it's okay with you, by giving you just a brief overview of who we are. Then I'll kind of go a little deeper into why I think you need to do a little research on us, if you're inclined. My colleagues will go into the details. I'll just give you the overview. So we're actually -- many people don't realize this, we're actually a very global company. We're in 94 different countries around the world. We operate in every region of the world. In fact, the U.S. is only 20% of our business. We're very proud of the work that we do here. That's where we started, right here in the U.S., but we've gone around the world plus some. We were founded in 1980, so this is our 40th year anniversary. We're tenured. We're tried. We're tested. And I hope you'll begin to recognize, we're true. We have about 9,500 employees. They work in many different places around the world. And they work in manufacturing plants. They work in offices, supporting our independent distributors. And when all is said and done, we're proud of each and every one of them. We have 120 different product types, and we'll go into that in a little bit more. 5,000 SKUs, S-K-Us, so it's not about a hero product. We're very proud of the fact that we introduced new products on a regular basis around the world, typically at the regional level. Most of our products are developed in conjunction with our distributors in their local markets for their local customers. My colleagues will take you down a trip that kind of shows you that it's not just about our products. That's important, but even more exciting is what our distributors do with those products. We're in the business of selling results. And the results come about when you take the products that we have, combine them in innovative ways the way the distributors do and offer value-added services on top: coaching, education, training. And that's what helps deliver the results for our customers. That's why they keep coming back. We manufacture almost 65% of our own products. That's important because it speaks to how important quality is. We manufacture around the world in a number of different locations, but we hold ourselves to a single standard, a standard of quality that we've learned and acquired over the last 40 years. From your perspective, I hope to leave you with some thoughts on our financials. My colleagues go deeper. $4.9 billion in net sales in F '19 and EBITDA of $681 million. But when you take a look since 2007, which is when we started our buyback -- share buyback programs, we have given back $5.1 billion to our shareholders, we've returned to our shareholders since 2007. All right. Let's go into a little more detail. By the way, on just about everything that I've just described, we're only just getting started. This is the tag from our 40-year celebration. We're having a big celebration around the world, a big event to celebrate in 6 weeks in Los Angeles. We call it our Honors event. And this is the theme of the entire business as we start the next decade, the fifth decade of our company's work. So why should you care? Let's talk a little bit about this. Well, first, and I say this without hesitation, we are a growth company. And my colleagues and I had a long discussion about why should I say that and what's important to you. Well, first, our products -- and we'll talk about this in some detail in just a minute. Our products and our product categories are absolutely in the center of the bull's eye when it comes to trends, consumer trends. Our product categories, our product sits squarely in the middle of major consumer trends. Second, we've had mid -- we're going to have mid-digit growth over the next 5 years. By the way, historically, we've outperformed, and that's important. But on a go-forward basis, you're going to see mid-single-digit growth as you look out into the next 5 years. We'll talk about the markets. I'll end my part of this conversation speaking about markets in just a minute. But what's most important to us, and we'll spend a lot of time on this, is the unique competitive advantage that our distribution channel gives us. It's -- we were talking earlier with Tim about this. If you look at the industry in which we work, there are many different types of direct sellers. We've evolved over the next -- over the last 40 years in such a way that we've fine-tuned who we are and how we go to market. We've actually been designed by our distributors. They've given us ideas that no other direct seller has, Nutrition Clubs, for example. We'll get into that in just a minute. But I would urge you, if you do decide to research us a little more, to recognize that we're not typical. Yes, we've been around for 40 years. Yes, we're one of the biggest, one of the most stable, one of the most likely to deliver growth in the future, but we are far from typical. We are unique. Our product portfolio, as I've indicated, is it's just -- it couldn't have been built better over the last 40 years to address the trends for the next decade. We'll talk about that in a second. Geographic diversity. I know my colleague is going to touch on this. 94 countries, only 20% of our revenues come from the United States. Ours is a portfolio that delivers when one market is up and when one market is down. It's one of our strengths. And then if you look back at our history, we've delivered strong cash flow, and we will continue to do so. I'll let Alex -- he's going to talk a little bit more about that as we go forward. Just quickly, describing the spaces that we work in. So we work -- our legacy kind of position was in weight management. We've begun increasingly to focus on sports nutrition. And health and wellness, which is a broad category, from vitamins to aloe to fish oils, it's a category -- a catch-all category of health and wellness, all 3 spaces are trending very significantly in the marketplace. Our product portfolios match up with these need states: obesity and overweight, fit and active lifestyles and living healthier, a propensity that goes not just for the young folks but also for older individuals, healthy aging. In the end, our global network provides customers with personalized nutrition solutions for need states that are trending big right now across the world. As I end my portion of this, I just want to focus on where the markets are and where we sit within each of those markets. Weight management, as I've indicated, our legacy business, started 40 years ago. Today, it's a $17.6 billion marketplace. We sit at about 19.2% of it. But what's important is it continues to grow at a CAGR of 5.2%. Sports nutrition, which for us has been one of our fastest-growing businesses in recent years, is a $21.7 billion marketplace. We're only a tiny sliver of it. We've just started that journey. And then, of course, this broader space of health and wellness, $109 billion. And we're only 1.4% of it. One of the reasons we know that we've only -- we're only just getting started is because there is so much runway for us. And these are growth spaces, the CAGRs prove that, 8% in sports nutrition, 4.9% in health and wellness. So with that, let me hand off to John DeSimone, our company's President.

Thank you, John. So these are big categories, right? We're a big player in weight management. That's our legacy position. Sports nutrition is the fastest growing of the 3 categories. And you're going to see that -- not only do we see that as a big opportunity, we're going to tell you why we think it's a big opportunity for us. And then health and wellness, as a $110 billion category, is the biggest category. And we're a small player but with a big opportunity. And that's what this next slide is meant to show you is why we think we can gain market share in those categories. So to start, this is a look -- let me just set up this slide. This is a look at the profile, self-identified profile of consumers within those 3 categories, regardless of the brand they use. So about 28% self-identifies sports consumer, about 51% is wellness and about 21% is weight management. Now when you match that up against Herbalife Nutrition's consumers, it matches up pretty well, which means we've got consumers in our franchise, we have credibility with those consumers and it crosses those 3 categories. But when you match it up against our sales, we're still skewed toward weight management. Okay? Some of that is because that's our legacy and where our strength was. Some of it is we're just launching products now in these other categories to match the consumer need. So it's a big opportunity. We'll talk about how we get it, but this is a big opportunity. Now I'm going to jump to what I consider the engine of Herbalife. And if you take nothing away from today's presentation, just pay attention to the next couple of slides. You'll learn more about this company and maybe get a little more interested. The product's the fuel but the distributors are the engine. And I made it [ orderable ]. And I'm going to ask some people to come up on stage that I'll introduce. Come on up. These are people who helped serve the Herbalife shakes and products during lunch. Okay? Chris, Tamar, Jose, Danny, Jose, Danny and Suni. These are not hired help. These are local distributors who took time away from their business to service you today so you could experience Herbalife. And I want -- yes, thank them, right? They -- absolutely. And what I want you to walk away with was an image of we have distributors like this in 95 countries and in almost every city within those 95 countries and in almost every community within those cities. Right? So it's an impression that I want you to kind of keep in mind as I go through the next few slides. So thank you very much for coming up. So what makes -- I'm trying to change -- I don't know what you think about direct selling and how it works. Whatever it is, throw it out, okay? Try to start from scratch, okay? Because traditional direct selling, going back decades, is characterized by very infrequent interaction between a distributor and a rep or their customer, okay? Very infrequent, meaning they might have a party every 2 weeks or once a month. And during that interaction, they try to get a meaningful amount of sales. And what you'll learn about Herbalife and Herbalife's new models that have been introduced over the last couple of decades is that equation has flipped upside down. Our distributors get very frequent interaction with their customer. And during that frequent interaction, ask for a very small sale, but get it very often, okay? The goal of that interaction is to help customers achieve results. This is not just a transaction. You're buying plastic -- if you're buying toilet paper, it's a transaction. When you're trying to get healthy, whatever your goal is, whether it's wellness, whether it's fitness, whether it's weight loss, you can achieve it better with a support community. At the end of the day, you're not trying to buy a product, you're trying to get somewhere. And the products, combined with the engine of the products, the distributors, help customers get there. Those -- that frequent interaction which drives results creates a personal connection with the consumer. That's a personal connection lots of companies wish they had, and we have it. Another strength of our model, call it hyper-localization. And what we mean by that is there's a foundation that Herbalife builds. But within that foundation, each distributor gets to determine how to best generate customers and service their customers. Of the 7 distributors that were up here, they run different models. We don't tell them how to operate their business. They actually tell us how they need to operate their business. And so I used to think a distributor in Bogota needed to be different than one in Barcelona or one in Bangkok. But the reality is, even within a city like L.A., the models are different from community to community. And so the distributors get to determine how to best service the customers. And the strength of that is as those models change over the next decade, we don't have to come up with those ideas. The distributors come up with those ideas because they are the ones closest to the consumer. So it's a very localized model. And lastly and probably the most unique element compared to what you might think of direct selling is a lot of the business is done through brick-and-mortar locations. We call them Nutrition Clubs. They come in a lot of different names. Think of a club as it's owned and operated by a distributor or a group of distributors. And within that location, consumers come in. And instead of buying a canister of product, they buy generally an individual shake or a series of products, but it's usually 1-day serving or they join as a member and get that as a benefit. So it operates more like a daily purchase. That's the concept, right? That's the frequent interaction, okay? And that helps drive compliance on the product, meaning consumers take the product and if they take the product, they have result. So if you take nothing else here -- I'm going to play a video on clubs, so you can see what they look like. But if you're interested in learning more, the best thing you can do is contact us, and we'll give you some addresses. I guarantee you there are clubs in your local area, and you can go visit and see those clubs. But if we could queue up the video, please? [Presentation]

So what I hope you take away from that video is that the interaction that takes place. The clubs are individual servings, but it's more than just the product. There's community activities that brings the consumers together. By way of background, in the U.S., we estimate we have around 7,700 clubs. And we have a lot of good data in the U.S. Globally, we estimate that number to be over 70,000 of these types of locations owned and operated by a distributor or a group of distributors servicing their customers. So it's coming out of a fixed location. There's some -- there's 8 different countries -- 8 different cities representing 8 different countries on this slide, showing you the number of clubs in those respective cities. I'm not going to read them off. It's in your deck. Just know that globally, we have quite a few of these and a lot of businesses operated this way. This is a simple slide. By way of setup, the first 2 bars is the success the consumer has on a diet product alone versus in a group setting. So in a group setting with the social support network, 95% of the people can achieve a goal on their own, it's 76%. I prefer the graph on the right, which is after you've achieved your goal, what is the likelihood that you've kept the weight off, okay, which is even harder than achieving a goal because one's short term, one's long term. And 66% of the people have a likelihood of keeping the weight off if they have a social support group, where only 24% do if they have to do it on their own. Think -- I think of it like going to a gym, okay? If you have a personal trainer or if you have 3 friends you're meeting at the gym, you're more likely to go, right? You're accountable to more than just yourself. It's not just self-discipline. And that's the way our distributors interact with their customers, okay? Now the customers are accountable to more than just themselves. And in weight losses even -- it spreads even more quickly because when somebody loses weight, it's an objective result. And their friends want to lose weight. And you go to a lot of clubs, and you'll see people know each other and their friends and family. So not controversial at all, I think it's just good to see on paper. And then this looks at our distributor base. This looks like the number of new distributors in the last 12 months that have joined Herbalife, distributors and preferred members. The only 2 things that matter on here are the 2 most green parts of the pie chart, which is 10% Gen Z and 49% Millennials, which means 59% of our distributors that have joined are within those 2 generations, which means our distributor base is getting younger, not older like is common within direct sellers. And I think the visual kind of play to that, right? You just saw how young, fit these local distributors are that we brought on stage, and we have those globally. Now how are we going to grow? I think of 2 key strategies. There are more than 2, but these are the 2 key: product expansion and technology. On the product side -- look, the legacy of the company is in weight loss and it's in protein, okay? But the reality is now, as you can see by these distributors, there's a lot more demand around fitness products, around choice. When we talk about choice, things like clean label, non-GMO, maybe vegan. When we go to sports nutrition within the sports category, there are people playing sports on the weekend that want to lose weight and we have products for them, but there are also a lot of people trying to build muscle mass. And within distributors that came up here, if you read -- I read their stories this morning, some joined and lost weight. Others joined specifically for the goal of putting on muscle mass, and they've achieved that. So we have options, depending on whatever the consumers' goals are, within the 3 categories that Dr. Agwunobi talked about earlier, whether it's weight loss, general health and wellness or fitness. The third column is localization, one of the movements we've made strategically. We're very centralized in our product development and launching, and we decided that we needed to be more localized. We're in 95 countries. What is needed in India could be very different than what's needed in the U.K. And so we had to get the resources out there, and that provides a lot of options. Just -- sometimes just on flavors. One of the benefits of our product, hopefully, you've tasted it, is it needs to taste good. We want you taking a shake a day for the rest of your life, right? It's not a 30-day program. And so if I calculate, I'm going to take about 13,000 more shakes the rest of my life, it needs to taste good. And so taste matters, and taste is a very local commodity. And then expanding dayparts, fill gaps, that's kind of basic. Other than when you have a fixed location, if you can get consumers into the evening, instead of just in the morning or for lunch, you can increase sales out of that same fixed asset you have. And so when you look on a chart, you'll see some soups and evening shakes and things like that or high-protein coffee, which was something that was served outside. And so these are opportunities within the product category. So ultimately, what we're trying to do is extend the customer life cycle on behalf of distributors. Sports. Over the last 2 years combined, around 36% growth within the sports category. It's a big category for us now, and it's getting bigger. And we think it's a big part of our future. And then I'm going to play a sports video for you. That will be about a minute. We can queue up the next video. [Presentation]

That's a feel for -- I wanted to introduce you to some of our sports distributors -- sports-oriented distributors and get a feel for that business. I'm going to move now to technology, which is the other big element of growth. If you could walk away with one thing, as you meet our distributors, I believe -- I don't want to speak for them, but I believe their most constraining asset is their time. They're all individuals. And when they're doing one thing, it's hard for them to do another. So how can we use technology to help them service their customers better? Through both data utilization, artificial intelligence, and it comes in many forms, and I've listed 3 up here. So Herbalife HN MyClub is if you saw in the Nutrition Club video, there's iPads that really is a POS system that allows our distributors to capture their customer information. It's a lot of data, by the way. And that data is going to be an asset for us. We don't yet know how to use it properly in order to generate more sales, but that's definitely coming in the future. Engage. We just launched Engage as a customer app in the U.S. It allows the customer to interact with their distributors and club. For example, a customer heading to a club can preorder their shake, okay? So it's a big advantage for the customer in terms of customer experience. And then lastly, this is very specific to China, because this was an initiative we launched last year with WeChat, which is the e-personal store for our distributors in China because there's been some restrictions on meetings in China. And so there needs to be an alternative way to do business in China that's less relying on meetings, yet that's still very personal. And so through WeChat, each of our distributors can create their own personal e-store and service their customers and communicate their customers through this online platform. And this is just some of many platforms that we're working on globally in order to make the experience easier, make the distributor activity more efficient and ultimately capture data that we can then use, push back to our distributors to help them grow their business and make more money. So with that, I'm going to now pass it on to Alex, who will talk about the financials.

Thanks, John. Great. So I'm going to give a financial update. We just released earnings on Tuesday, so we're not going to go through a play-by-play on the quarter and the year. Really, this section is just going to be going through the financial information one layer deeper and the concepts that John and John just took. And if -- should you have any questions about the quarter or year, we can obviously do that in the Q&A.. Really focusing on historical performance, particularly the growth story, cash flow, returning cash to shareholders and our capital allocation strategy. So over the past couple of years, our volume -- and the way to think about volume is the equivalent of units in any other CPG company. Volume is our way to talk about units. It stays constant year-to-year. It's not affected by price. It's not affected by currency. We've grown volume or we've grown units about 6.3% over the last 2 years annually. 2019 was a record year on top of a record year in 2018, 6.1 billion volume points. This is on the heels of all of the trials and tribulations that we had gone through, which I'm sure some people might still have in the back of your mind. And coming out of that, being on our toes now, still being able to grow this company at a pretty significant rate. When you look on the net sales side of the equation, 5.5% CAGR. As you saw or as you heard, 20% of our sales are in North America or in the U.S. So like many companies that have many of their sales internationally, whenever you have a stronger dollar environment or a strengthening dollar environment, that translation hits us. It hits us in the net sales. In 2019, it hit us by a little over 3%. So 3% of that growth was given up on the stronger dollar. And going from 2018 to '17, 5.5%. So on a constant currency basis, that 5.5% would be something in the significantly high single digits. And should the dollar stabilize, that's sort of the growth algorithm that you can think about Herbalife Nutrition, a mid-single-digit volume or unit growth company with a little bit of pricing power. We still have pricing power. In 2019, we had about 3% of pricing in our net sales. So that pricing power still exists. So you would anticipate, as a baseline, a high single-digit net sales growth type of company. Geographic diversity. So you heard about the 94 countries. You heard about 20% in the U.S., which is predominantly the North America region, really levered to emerging markets. So if you look at the portfolio overall, it's really a balance of being levered to emerging markets with stability in our developed markets: U.S., EMEA. Our European market grew this quarter for the 39th consecutive quarter in a row. So you have to go back almost 10 years before you've seen a decline in that market. So a real underlying base of stability with real growth coming from markets like Indonesia, Vietnam, India, et cetera, and really hitting the global mix. Just to give you some sort of perspective, in 2018, China represented 21% of our net sales. And as you may or may not know, last year, the government instituted something called a 100-day campaign. That basically affected the general health industry and specifically hurt us for 100 days where we couldn't really operate the business regularly, and there was a bit of a hangover to that. So it's an episode. We'll recover. Obviously, there's a caveat of coronavirus, but we'll recover from the 100-day campaign. But through 2019, China declined 25%. Yet, we still grew the overall portfolio by 3.5% net sales constant currency. So it really just shows you the strength of this model. Growth is coming from all regions and really levered towards growth. Cash flow generation. This is just doing a 10-year look-back. We generated over $6.3 billion of operating cash flow, fairly consistent, fairly stable. The ups and downs that you'll see here are really primarily just in working capital accounts. They're really timing issues. And even if you look at 2019 over '18, that difference, that's about $120 million working capital swing going in the unfavorable direction from '18 to '19. That's just a timing issue. We would totally expect that to reverse out. So in 2020, if I were to put a number there, I would anticipate working capital then go and help balance that out. So really consistent stability. And what we do with that cash flow is primarily return it to our shareholders. So if you look at that same period over the past 10 years and you think about our capital allocation policy, obviously, first, you pay your debt. You make your internal investments. You make your external investments. And you return to -- cash to shareholders. We don't do a lot of M&A. We don't have large amounts of capital. The capital that we have spent in the past 10 years is on IT infrastructure, is on manufacturing facilities, both of which, on an internal standpoint, can fuel the growth for the next 5, 10 years. So the 20% of capital expense -- expenditures every year that we go forward now, I would anticipate that becoming a smaller piece of this pie. And then what you're left with is 80% of that cash going back to shareholders. And lastly, just a comment on our capital structure. So our target for our capital structure is about 3x gross leverage. For us, that is a leverage level that gets us on our journey where we can continue to improve our credit ratings, continue to create more cost-effective use of capital. So for example, on this journey in the fourth quarter, we repriced our Term Loan B and saved 50 basis points of rate. We'll continue to look for these opportunities as we improve our credit rating, which just means more cash that we can return to shareholders or put to good use. We're currently at 2.1x, which means that there's room to the upside. So I would anticipate in the near future, we can take advantage of the capital markets in that way. And then if you look in the near term horizon, there's really not a lot of maturities coming until 2023, 2024 and modest at that. So there's a lot of runway in front of us with our capital structure, and we'll continue to deploy that cash efficiently for shareholders.

Thank you, Alex. Okay. Sorry, I lost my jacket. It was getting hot. So that's who we are. Now before we close, obviously, if all you know about us is what you've read in the newspapers over the last 20 years, you've probably missed something about who we've become. If you haven't been someone that follows us closely, you've probably missed the fact that we truly are an organization on the march. We're doing well, and we're doing it the right way. We're a growth company. We have significant growth ahead of us. I would urge you to consider studying us a little more. In the end, we're a growth company, well positioned in a global trend of nutrition that the world hasn't seen before. Health and wellness is here, and there's a lot more to come. We are doing it from the grassroots up. Our distributors live in every community. It's not just virtual. We have online retail in some countries, online platforms in some countries. It's, in many cases, bricks-and-mortar. In every case, there's a passionate distributor surrounded by very loyal customers, providing them with service and with some of the world's finest nutritional products. So with that, I think we should close and see if we have some questions.

Question here.

My name is Diana Rosero from Bloomberg Intelligence. In addition to a potential decline in volumes in China, can you talk about how the supply chain may be affected by the coronavirus? And any potential challenges to that -- to bring your supply chain back to regular operations?

Okay. Well, I guess I'll do it. So we do not export hardly anything out of China. We do some botanical extractions at our own facility, and that seems -- that's up and running right now. So we do not expect a material supply chain impact from the coronavirus.

Yes. I'll just add to that. So just kind of round that out. We manufacture in China, obviously, for our Chinese marketplace, for the most part. And an actual fact, although there was an extended closure of those factories associated with an extension of the China -- Chinese New Year holidays, now that the holidays are over, those factories are back up and running again, full shifts. I think we saw a tiny bit of absenteeism this last week when they first came back. But we fully expect production for the Chinese market out of our Chinese manufacturing facilities to be where it's supposed to be in the short -- near-term weeks.