Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us today for our third appearance and presentation at CAGNY. Since we spoke with you a year ago, it's been a record year for Herbalife Nutrition. We just reported our full year 2020 results earlier this week, and I'll highlight a few of the records we set in just a moment. Before I jump into the presentation, I'd like to ask you to please take a moment to review our forward-looking statements, which will also be available on our Investor Relations website. Today, I will be sharing with you what makes Herbalife Nutrition such an attractive opportunity as well as what gives me confidence in our future. You'll also hear from our President, John DeSimone, who will highlight our key growth strategies before turning it over to our CFO, Alex Amezquita, to get into the financials. For those of you who are newer to our story, let's start with a brief overview of Herbalife Nutrition and who we are. Take a look. [Presentation]

We will spend most of today talking about our bright future, but I want to quickly celebrate some of the success that we had this past year. 2020 was a record sales year for Herbalife Nutrition with net sales of $5.5 billion, an increase of 14% compared to the prior year. We had record net sales performance in 3 of our 6 regions and 39 markets set new sales records. It was not just on the top line that we delivered results. Our 2020 net income of $373 million was up 20% compared to prior year. Our business continues to generate significant cash flow. 2020 cash flow from operations of $629 million grew 37% compared to the prior year. Our performance in 2020 was a testament to the strength of the company and the resiliency of our distribution channel. The demand for our nutrition products, combined with the tenacity and the entrepreneurial spirit of our distributors, drove the strong performance in the business. While the 14% net sales growth we experienced in 2020 was remarkable, we've been on a healthy growth trajectory for years. Over the past 10 years, our net sales have grown at a compound annual growth rate of over 7%. And on a constant currency basis, our 10-year net sales CAGR is approximately 11%. Although 2020 was a record-setting performance year, I believe the best is still to come. In 2021, we are projecting to build off the double-digit net sales growth of 2020 and have raised our net sales guidance to be in the range of 6% to 14%. For the first time ever, today, we are providing a long-term growth algorithm that confirms the confidence we have in the ongoing trajectory of the business. Alex will take you through our long-term outlook later in the presentation. Let's get into some of the basics of the business and why we believe Herbalife Nutrition is a very attractive opportunity for long-term investors. First of all, we are a growth company. Our business is aligned with major global trends that are tailwinds in our business. There's an unequivocal demand for better nutrition in the world, and no company better positioned to deliver on this demand than Herbalife Nutrition. Secondly, we have been in the business for over 40 years, but we're just getting started. We are in attractive and growing nutrition categories and have an enormous total addressable market. Third, we are a global network that provides customers with personalized nutrition solutions, and our distribution model is our core competitive advantage. We are a global consumer goods company with an unparalleled distribution channel in markets all around the world. We have access to valuable customer data, which proves the strength of our business model. We have the opportunity to leverage this customer data in order to enhance future performance. Our entrepreneurial business model thrives on social connection, both in person and virtual. And our distributors excel in building communities and networks to support nutrition goals. Fourth, our high-quality nutrient-dense products are right in line with global trends. We have more than 300 scientists and 50 PhDs on staff who help us harness cutting-edge technology, scientific research and consumer data to develop our science-based products. We operate in 95 markets and have tremendous geographic diversity. This geographic diversity is an asset which Alex will review in more detail a little later on in this presentation. And lastly, we have reliable cash flow generation, which, over the past 10 years, has resulted in over $6 billion of adjusted operating cash flow. At the end of the day, we return our excess cash to shareholders. In fact, over the past 10 years, we've returned approximately $5.6 billion in value to our shareholders, primarily through our share repurchase program, including $600 million already completed so far in 2021. We confirmed our ongoing commitment to returning value to our shareholders with our recent announcement of a new $1.5 billion buyback authorization. Let's take a look at what we sell: products that address global trends such as the overweight and obesity epidemic, a desire to live a more fit and active lifestyle and ultimately to live healthier. Health and better nutrition have become a top global consumer priority. Herbalife Nutrition is the solution. Our product categories represent an enormous market opportunity of over $150 billion across 3 categories that address significant global trends. Our weight management products address the global overweight and obesity epidemic. We are the global market leader in the $17.3 billion weight management category, with just under 20% market share. And we are the #1 meal replacement product in the world. According to Euromonitor, this category is projected to grow at a 5-year CAGR of approximately 5%. We believe we can expand our market leadership in this category. We have a tremendous opportunity in the fast-growing category of sports nutrition. Our Herbalife24 sport nutrition line is used by professional athletes all over the world, including the LA Galaxy, Mexican soccer star Chicharito and our longtime partner, Cristiano Ronaldo. In fact, our sports hydration drink CR7 Drive was codeveloped with Cristiano. On top of our soccer partnerships, we have global relationships with 4 National Olympic Committees and an esports team in China and some of the top women athletes and teams in the world. According to Euromonitor, this category is projected to grow at a CAGR of approximately 7% for the next 5 years. We are early in our journey in sports nutrition with less than 1% market share, but I believe this will be a big part of our future. Health and wellness is a large, broad category of over $115 billion. It includes fish oils, fiber as well as vitamins and supplements, and is projected to grow at a CAGR over 5% for the next 5 years. We see an opportunity to launch new products in this space and to grow our market share. With that, I would like to turn it over to our President, John DeSimone, to provide more insights on our distribution channel, our strategies that set us up to deliver on the global demand for nutrition.

Thank you, John. I believe one of the core strengths of Herbalife Nutrition is our distribution model. Not only do our distributors generate virtually all of the new customers for the company, they truly excel at creating a community which motivates, inspires and educates them on proper use of the products, and more importantly, on achieving results. Our distributors create a sense of belonging for their customers by recognizing and celebrating all of their successes on their journey into better nutrition. We understand that implementing a new nutrition lifestyle can be challenging and complex for many, not to mention the daily motivation it takes in staying committed in order to achieve their goals. The support our distributors provide to their customers is invaluable in this area. We call it the Distributor Difference, and it is what truly sets us apart. Now you may have a perception of traditional direct selling, which is often characterized by customers having infrequent interactions with their distributor, accompanied with a relatively high purchase amount. But at Herbalife Nutrition, we do it a bit differently. What you will learn about Herbalife Nutrition's direct selling strategy is that our distributors often have frequent interactions with their customers, and with that, a very small but frequent and even sometimes daily sale. This frequent interaction is an essential part of the community our distributors build, and has been a major part of our business model for more than 10 years. This approach creates a personal connection between distributor and customer, helping drive results for the clientele. This direct connection is a significant competitive advantage. Another strength of the distribution model is its hyper localization ability, meaning each distributor determines the best possible way to acquire and service their customers based on their local needs. Across communities and across countries, each distributor connects with each customer personally, and therefore results in the continued development and evolution of methods of operation. One of management's key roles is identifying successful models distributors have developed, and then sharing their methods with other distributors. One example of an extremely successful method of operation, which has been shared around the world, is our Nutrition Clubs. Nutrition Clubs are brick-and-mortar locations, owned and operated by distributors and embedded in local communities. Instead of simply selling products for in-home use, they provide individual single serving consumptions prepared by the club operator. Through their customers' visits and activities at the club, our distributors create a healthy community-oriented gathering place. Additionally, the daily price point, often considered a membership, can be a replacement spend for the consumer. In other words, we are providing a healthier option for the client who may otherwise buy a less nutritious fast food meal at a similar cost. The localized nature of our model really shines through in Nutrition Clubs. Clubs tailor their services to what their customer communities desire, whether that be by offering weight loss challenges, neighborhood walks for new moms or a concept called Fit Clubs, which integrate nutrition with a workout. Many of these clubs are in rural areas that otherwise lack access to healthy food options. In total, our distributors have approximately 75,000 clubs worldwide. At the end of 2020, our distributors operated over 9,000 Nutrition Clubs in the United States compared to approximately 7,700 clubs at the end of the prior year. And much of this recent growth in Nutrition Clubs have come from more rural parts of the country, where our Nutrition Clubs have become embedded in small town communities. We always encourage our investors to visit Nutrition Clubs, but since we can't take you to one today, we have created this video for you to take a look inside one of our Fit Clubs. [Presentation]

What I hope you take away from that video is that Nutrition Clubs are about delivering consumers a healthy product experience and building a relationship and community that bring consumers and distributors together. As I said earlier, a supportive community can be critically important in nutrition and weight loss, and Nutrition Clubs is one of the ways our distributors create a great environment for this. However, it's not the only way. As we've experienced in 2020, this sense of community can happen virtually as well. As the world becomes more digital in nature, we have seen our distributors rapidly embrace this digital transformation by integrating social media and other digital tools into their daily activities. Our distributors use social media platforms to attract and convert customers by creating content and engaging with people. Our distributors are part of our brand, not paid influencers, so the posts they create are authentic. Distributors post content that depicts a healthy and active lifestyle, including workouts as well as product demos, recipes and testimonials in order to authentically appeal to and connect with potential customers. Distributors also use digital platforms to stay connected with their customers and organizations for support, motivation, inspiration, training and more. These tools help distributors provide the best, most efficient form of service and allow them to still provide one-on-one coaching, as well as create online groups and communities without being physically together. The increased usage of digital tools dovetails well when you consider our distributor demographics. For the full year 2020, approximately 65% of our new distributors and preferred members are Gen Z or millennials. When you compare this to 59% in 2019, you can see that our business is getting younger. Our brand resonates with this younger demographic, and I'll share with you how elements of our growth strategy are structured around appealing to them. Two key elements of our growth strategy include product expansion and distributor-enabling technology. While our brand was founded in weight management, our product portfolio crosses different categories. The new science-based products we launched fits well with both global consumer trends and local preferences. It is important to us that no matter what your needs are as a consumer, we offer you choice. For example, different markets have a combination of our basic line, our clean label line or our non-GMO options. Sports nutrition is a category where we have built a strong brand, but also have an opportunity to gain share by expanding both our product portfolio and geographic reach. We also have our focus on localized product offerings which meet the taste and unique ingredient desires from around the world. This is a key strategy, as we operate in so many countries with so many unique flavor profiles and ingredient preferences, depending where in the world you are. We also look to expand dayparts and to fill gaps in our product portfolio by entering new categories. All of the products you saw on the screen are recently launched products that are already available. If you recall from the demographic data we shared earlier, the Gen Z demographic is an important part of our business and a focus of our product strategy. As we evaluate future product launches, we have Gen Z and their consumer preferences in mind. Concepts such as vegan products, gummies and functional beverages, along with the acceleration of our Herbalife24 sports nutrition line and the expansion of our recent launch of our Enrichual hemp cannabinoid offerings will continue to position Herbalife Nutrition as an attractive option for our younger distributors and their customers. A second leg of our growth strategy is investing in distributor-enabling technology. Our investments in technology have been and continue to be in areas designed to help our distributors become more efficient and productive. One of the strategies to help accomplish this has been to capture as many transactions as practical so the data can be leveraged to enhance our distributors' performance. For example, the expansion of our Preferred Member program will result in more than 80% of our sales coming from countries that will have this program implemented by the end of 2021. Additionally, we have made significant investments in tools to help capture and leverage transaction data. Those investments range from partnerships with companies such as Tencent and Salesforce to internally develop tools and programs, such as our proprietary POS tool, distributor business tracking software and our customer loyalty program. Let's see a brief video on how our distributors utilize this new technology in their businesses. [Presentation]

We are still early in our journey to improve our distributors' performance through the use of data and technology, but we are currently collecting robust data in the U.S. and are working to expand this capability to other markets. We believe that we can utilize the data, powering it with AI and enabling our distributors with actionable information, leading to improved customer retention and productivity. I'd like to now introduce our CFO, Alex Amezquita, to walk through our financial model and performance.

Thank you, John. As you saw in our recent earnings release, our financial performance in 2020 was strong. Building on 2020, I would like to give you some perspective on Herbalife Nutrition's financial profile as we look to 2021 and beyond. First, as you heard from John and John, we are well positioned to drive top line growth. We are a growth company. Second, our geographic diversity provides a portfolio effect and limits geographic concentration risk from any one market. Third, we have strong cash flow generation with a demonstrated track record of consistency over the long term. Fourth, we have a capital structure in which our excess cash can be readily returned to shareholders. These key points set up our long-term growth algorithm, which consists of organic net sales growth in the mid- to high single digits, the benefits of our global scale driving operating income in the high single digits, and double-digit EPS growth. From a historical perspective, over the past 3 years, our business has grown net sales at a compound annual growth rate of 7.8%. Given the majority of our net sales are generated outside of the U.S., the strengthening of the dollar has been a headwind. On a constant currency basis, the past 3 years, our business has grown at an approximate 10% CAGR. Our geographic diversity is a strength. With a basket of 95 markets around the world, our diversity limits our geographic concentration risk. Our largest market is North America at 25% of net sales, followed by APAC at 24% and EMEA at 22%. China makes up 14%, and the remaining 15% consists of Mexico and SAMCAM. This balanced growth is what gives us the confidence to have consistency in our top line. Our goal is to grow EPS double digits over time by maximizing 3 value drivers: organic sales growth, operating income leverage and efficient return of capital. As you have heard throughout the presentation, we believe we are well positioned to grow organic sales mid- to high single digits. With operating leverage and SG&A as well as pricing power, we are positioned to grow operating income in the high single digits. Note, this assumes a currency-neutral environment. We have been committed to use share repurchases as the most efficient way to return excess cash to shareholders. We have a demonstrated track record of returning cash to shareholders, and we'll continue to do so as evidenced by our new $1.5 billion authorization. The result of this is double-digit EPS growth. From a cash flow perspective, over the past 10 years we have had healthy cash flow generation. Over that 10-year period, we have generated approximately $6.1 billion in adjusted operating cash flow, including over $700 million in 2020. What we have done with this cash over the past 10 years is primarily return it to shareholders. 83% of our uses of cash or approximately $5.6 billion have been given back. Returning cash via share repurchases provides leverage on our operating income growth and enables us to achieve that double-digit EPS growth. The other 17% of our uses of cash has been on capital expenditures, which has been in investments such as our manufacturing facilities and technology to support our top line. Historically, we have not been that acquisitive. However, we continue to look for attractive opportunities, which could help build out our product portfolio and complement the value our distributors bring to their customers every day. For our capital structure, our target is to be around 3x gross leverage. For us, that is a level that gets us on a journey to improve our credit ratings and access more cost-effective capital. We are currently at 2.7x leverage, with no major maturities on the horizon until 2024. This provides ample runway for the company to return excess cash to shareholders and flexibility to be opportunistic and continuing to optimize our capital structure as market conditions evolve. Thank you. Now back to John.

Thank you for taking the time today to hear about the opportunity we see ahead for our business. At Herbalife Nutrition, we are committed to finding innovative solutions to help people thrive, ensuring that they can have access to nutrient-rich foods and a support system to help them live their best lives. We believe we have a long-term growth opportunity of mid- to high single-digit net sales, which will translate to double-digit EPS growth. Our model generates reliable cash flow and is supported with geographic diversity. Our distribution channel is our unique competitive advantage. There's a growing demand for better nutrition in the world, and our investments in product expansion and distributor-enabling technology position us to deliver on this demand. In closing, I hope you leave today with the understanding that we are well positioned in the global trends of nutrition and health and wellness, and we are just getting started.