Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

Good day, everyone. I'm Steph Wissink, Senior Research Analyst and Managing Director on the consumer team at Jefferies. Thank you for joining us for a Virtual Nantucket Conference session with the team from Herbalife. On your screen, you should see Alex Amezquita, the company's CFO; Bill Ferrante, the SVP of Strategy, Finance and Investor Relations; and then Eric Monroe, the Head of Investor Relations for Herbalife Nutrition. We're going to turn the time over to Alex, Eric and Bill to just go through a really quick slide deck with some of the company highlights. And then we'll come back towards the end with a few prepared questions. Alex and Eric, over to you.

Thanks, Steph. Certainly, miss being in Nantucket, I'm looking at your background with envy. So hopefully, we're there next June. But great to be here with everyone. If we could go to the opening slides. So I'm going to provide a brief, brief introduction and just sort of the salient attributes of Herbalife Nutrition. Herbalife Nutrition, we were founded in 1980, 41 years old. We're in 95 markets around the world, pretty broadly diversified. We have approximately 10,000 employees and 120 products. All those products generated about $5.5 billion of net sales in 2020 for an adjusted EBITDA of $848 million. Part of our share repurchase activity over the past 10 years, we have returned $5.7 billion of capital, which is a testament to the excess cash flow generation of the financial model of the company, underlying the strong fundamentals of the top line of the company. So why Herbalife Nutrition? Why invest in Herbalife Nutrition? And what is -- why is it a great value proposition? One, we are a growth company aligned with global trends. So whether those global trends are in weight management, as evidenced by obesity around the world, not innate to the U.S. or any particular market, but really an epidemic that is around the world or it is in the millennial and younger demographics. They move to a healthy active lifestyle as part of their DNA. We are aligned with all of those global trends that give a significant tailwind to the top line of our business. There's an enormous market opportunity. We've only begun in many of our markets, even in the U.S. market, which is our oldest market. There's still significant opportunity for us to tap into that addressable market. Our channel, we are a direct selling company. We use a multilevel marketing compensation plan to compensate our channel for their sales activity. We see that as a competitive advantage. We have tens of thousands of businesses around the world, connect with their customers in the way that their customers want to be connected with hyper-localization. So while there is Herbalife Nutrition, a global brand, that brand takes on the personification of each one of those people in their local community. And we think that, that connectivity, that personalization provides a significant competitive advantage as it relates to retail, as it relates to online, where there's more of an anonymous, less personalized, less consultive, we provide that opposite. It's more than simply a product. It is a product and somebody comes with that product. Our product portfolio addressing global consumer trends. So the lion's share of our products are food -- functional food in nature. So having the appropriate amount of protein, carbohydrates and fat supplemented with micronutrients, personalized for that individual and giving that individual choice, whether that's a clean label choice, whether that is non-GMO choice, whether that's been a -- the type of protein that you're having, whether that's plant protein or otherwise. So providing consumers with choice addressing the global consumer trends that we're all hearing about in our -- in the headlines today. I mentioned it earlier, we're in 95 markets. We are a geographically diverse company. No one particular region is more than 25% of the business equally distributed among North America, Europe, Latin America, China and the rest of Asia Pacific. And lastly, I commented on the cash flow, on the share repurchase activity of $5.7 billion, our strong cash flow generation of the business. There's not a ton of CapEx in this business. Obviously, we have manufacturing facilities and we have to invest there. But relative to our revenue, working capital tends to be neutral for us. And the combination of those facts with our operating margins provide strong cash flow generation to the business. There's not a lot of M&A. There's not a ton of capital expenditure requirements. So that strong cash flow results in a significant amount of excess cash flow and, prudently, we return that cash flow to shareholders in the form of share repurchase. The market size and the opportunity. Generally speaking, we think of our product portfolio in these 3 broad-brush strokes. There's the weight management part of the business, which is really the legacy and the core of Herbalife Nutrition over its 41 years. We represent 19.4% of that $17 billion opportunity. I'd also like to point out that in each of these categories, if you look at the 5-year forward CAGR, again, as identified by third parties, you'll see they are all at very attractive growth rates above approximately 5% and upwards. Weight management, our flagship product portfolio. We've also more recently, over the past 5, 8, 10 years, entered and continue to make advancements and continue to grow into sports nutrition. Again, this is a highly discerning customer with very specific array of products, whether that's protein supplementation, BCAAs, et cetera, really designed for the highest level performance athletes, and we have our athletes -- there are professional athletes around the world taking this product and instrumental to their regimen. So if it's good enough for a professional athlete, it's -- the everyday person who trains like a professional athlete, we're making sure that they have the same ability to achieve those personal goals. And lastly, the health & wellness category, a very large category. Think of this category more of targeted nutrition type value propositions. For example, heart health, brain health, those types of things, among many others. There is a large, large opportunity in this very broad category. We currently have product portfolio that's -- as it relates to Herbalife Nutrition, is a meaningful part of our revenue mix. But as it relates to the addressable market, we still have a lot of opportunity in that $115 billion market opportunity. Recent financial performance. 2020, obviously, we all had our challenges. Fortunately, the consumer trends resulting from the global pandemic really resulted in consumers really seeking out better nutrition alternatives. And as a result of that, our top line grew 13.6% for the year, EBITDA of $848 million or 12.4%. And as we look into that momentum building into this year, our first quarter, 18.9% growth and a record quarter for EBITDA, the $254 million of EBITDA we achieved in the first quarter is a quarterly record for the company and 20.7% growth. Broad-based growth, 5 of the 6 regions reporting year-over-year net sales growth. Again, a testament to that diversity of the company, but also the consumer trends and the value proposition not really unique to any one particular region. It really is a global macro trends fueling the top line growth of this company and the EBITDA growth. Historically, where we've been, obviously, we had significant growth in 2020. Growth is not new to us since 2017. We've had a growth pattern of 7.8% CAGR. And that growth momentum continues into 2021, where for the year, we anticipate being somewhere between 9% and 15% sales growth. I mentioned this a few times to global diversity. Here it is, I won't belabor the point. But as you can see, we really have a meaningful stake across the world [Technical Difficulty] from the global macro trends that we've discussed. And here is just a little bit kind of going one layer deeper and towards the powerful cash flow generation. Over the past 10 years, we've generated, no matter where we were in the cycle, no matter what was going on in the world, no matter what was affecting the company, we've generated consistently strong cash flow, generally between $550 million and $650 million. On average, $600 million a year. Last year, we had about $629 million of operating cash flow. Here, it's adjusted to $733 million. As compared to our operating cash flow of $629 million, we anticipate 2021, again, to propose similar performance where we would anticipate operating cash flow for this year 2021 to be north of where we were in 2020. And those are -- that's the end of our prepared remarks, Steph. Happy to go deeper into any specific areas that you might want to venture.

Alex, I'd like to just double-click on 2 things from the presentation, and then we can kind of break into some of the more thematic questions. But the first is the acceleration you saw in the first quarter was incredibly powerful. And what happened to relative to '20 is that your sales growth and your EBITDA relationship inverted. So your EBITDA growing faster than your sales growth, everything accelerating. But I'm curious if you can talk just a little bit about that as an observation on how you're thinking about the full year guide, so 9% to 15% in sales, should we expect EBITDA to grow faster than sales? Is there something within the model that's starting to show some leverage this year?

Yes. So when you go on a quarter-by-quarter basis, you're going to see a little bit more volatility in both the margins and in -- and then the corresponding growth rates, particularly as it relates to net sales growth. So typically, in the beginning of the year, we tend to have -- the first quarter tends to be a higher-margin quarter in that particular quarter. For seasonality purposes, for the events, the promotions that we put on, just the various operations of the business tends to have an operating margin that's a bit higher and all else being equal, all a bit higher in the beginning of the year versus the fourth quarter of that year. That cycle, if you kind of look at our historical pattern, that will continue and continue. What I will say is, overall, if we just blend the quarter and we just look at the annuals kind of sort of just isolate out that quarterly volatility. What we're seeing is 2021 margins, and I'm going to compare them to 2019. Because 2019 is a little bit better of a reflective margin profile than 2020. 2020 had a lot of puts and takes. Generally, that enures to the benefit of an expanded margin in 2020 for -- because of events that we couldn't put on, some of the promotions that we couldn't necessarily do, T&E being suspended, obviously. So 2019 being a bit more of a normal year. And obviously, we -- for the first 6 months, not a lot of T&E still, but we're back to spending what I would say is more normal levels in how we motivate the channel, which is primarily through events where you have training, education, product rollouts, really education, and getting the channel to be more capable sales professionals. Those events are back on. That spend is back on. Obviously, T&E isn't quite there. So -- but overall, a margin profile. Now currency, obviously, also has a pretty significant impact on our margin profile. So if I just normalize again also for currency, you're going to have a 2021 that is probably slightly higher from a margin percentage perspective than it was from 2019. So there is -- to your point, there is some operating leverage showing its way through our EBITDA margins and our operating income margin, but there's also a lot of other factors that are moving that up and down, currency being one of those, that kind of mask what's happening on the business.

Got it. That's really helpful. And then I hate to be the parent that focuses on the A minus on the report card versus the A. But you had one market that didn't participate in the growth last year, so I'm wondering if we can just look at that market a bit more diagnostically. What's happening in that market that might be different than the rest of the world, how you go to market in that market versus the rest of the world? And then as you look at various scenarios from a financial planning perspective, internally, maybe Bill, you want to jump in here, how you're thinking about the various vectors of recovery in that market? And what that might imply in that 9% to 15% range, is the low end status quo and the 15% back to '19 levels? Or give us some sense of the variability in the high and the low in that full year sales forecast?

Yes. Being that -- I reviewed all my children -- all my kids' report cards, I get it, I get it. I'll focus on the [ AMI. ] I'll focus on China for a moment. So China is going through transition. This transition has been happening. It really started in earnest in the fourth quarter of last year and continued through this year and sort of as we've been communicating. We do anticipate this being a multiple quarter turnaround in that market. China has always been a market with a lot of volatility. If we look at the past 10 -- 20 quarters, we went back and look at the past 20 quarters, we had 10 quarters up and 10 quarters down, and 9 of them switching between up and down. Now some of that is factors out of our control. We had the 100-day campaign, there was the pandemic and the way that, that market responded to it, et cetera. But what we're trying to do, in this transition period now, we're trying to use some of the lessons learned that we've seen in other markets around the world and encourage behavior changes in China to mitigate at least what we can do, from a business perspective, mitigate some of that volatility in the way that China goes to market. And so in the process to make, there is going to be a few eggs broken here to make this omelet. And I think it's going to take a few quarters for us to get through that. This transition period that I'm speaking to, you mentioned the 9% to 15% range, that's baked in. Obviously, we have a view on how long it's going to take. We have a view on the trajectory, and that's baked into that 9% to 15% net sales growth. And so we've seen it. We saw it in the first quarter. China down significantly on net sales, yet the company is still posting 18.9% net sales growth, the same true for the fourth quarter. And the same true for 2020, when you look at the whole year in terms of China's influence on the overall net sales portfolio. So while 100% agree, that's a huge focus for us too, as an executive team, as a management team to make sure we get China going in the right direction. Generally speaking, across the entire global portfolio, we feel really good about the trajectory of the company.

That's really helpful. So I mean the company can actually grow double digits even with the negative drag from China, as it has?

That's right. That's right. And by the way, that's always going to be the case with us, I think. I think there's always going to be a market -- if we go and dissect market by market, there's always going to be unique facts and circumstances of that market, which is going to be driving that market up, down or sideways. But generally speaking, if we go back, and that's why I think the global macro trends, what category we play in, how we go to market is so important because I think unequivocally, the value that we provide solves a real issue in the world. I mean, there is a real value proposition. And so if you believe in that same value proposition, which is effectively providing customers with a nutrient-dense better calorie than the calories that they're currently consuming, then we're going to win. And market might be up, market might be down, but overall, as a company with this geographic diversity, where overall, we're going to win.

I wanted to also go back to just more linguistics, but a lot of your peers in legacy direct selling models are really pushing aggressively to transition to more social selling models. And you, at the onset, talked about embracing the fact that you're a digital marketing company and a digital selling company -- excuse me, a direct selling company with a multilevel architecture. So talk a little bit about the attributes of that model that you can embrace and that are really core to the ethos of your brand? And then -- and you mentioned kind of hyper-local. I think that's one attribute. But then also when you're selling a system of nutrition versus just an item, there's also an element of accountability in communities. So maybe talk a little bit about both of those attributes and how being a direct seller with that multilevel nature is something that you're embracing versus discount moving away from.

Yes. No, absolutely, 100%. So we actually -- we're embracive -- we embrace social media as well as part of a tool for our distributors to use. I think fundamentally, there's a distinction, though, in terms of how social selling and how that channel is used. So it's great to create a wider net. There's obviously efficiencies. There's obviously a different way. Customers live in social media. So you have to go to where your customers live as well. So all of the -- for all of those reasons, we're very supportive of the channel leveraging social media. However, the difference being is, you need to ensure still what is that core competitive advantage that I meant that personalization. The social channel can't turn into an anonymous transaction. If it turns into that anonymous transaction, then we've lost that stickiness. We've lost the personalization. We've lost the whole, what I would call, the special sauce that really had us grow through the pandemic by having that stickier customer and beyond and before for that matter. So I kind of see social media, particularly commerce on social media, it can go a different -- a couple of different ways. It can go in the way of our traditional direct selling, where is that -- there is that personal connection that results from finding that customer. And it can go in the direction of maybe more of an Amazon model where it's just strictly transactional. What we're working with our channel is making sure that it does go in that more traditional way, maintain the personal contact. That's where our core competitive advantages and dissuade practices that move towards that transactional nature.

That's really helpful. And given the changes you've had in your infrastructure around customer data, something that came out of the settlement several years ago. But talk a little bit about what you're learning about your end customer? If there's any cohort information you can share? How that might factor into some of the strategies around digital? You brought in a Chief Digital Officer recently. So just trying to connect this notion of member, consumer, data and analytics and digital strategy.

Yes. Yes. I mean that's -- that is a mouthful, right? That is -- and by the way, we have tons of strategy, and there's all different lanes of sort of what you just mentioned there. I'm going to try and parse a couple of those out. So the digital strategy really is to make sure we are optimizing our channels' time in the field. There's a suite of tools. It can be -- there can be a CRM component. There can be an ordering component where it's making it easier for a distributor in the field to get product to their customer. There is inventory management for a Nutrition Club. There's a point-of-sale component of it, so that when somebody walks up to a Nutrition Club, they might have their just simply -- their shake waiting for them, so that the distributor running that Nutrition Club can focus more on the value-add part of the conversation than the logistical part of the conversation of what you want to have today, right? So there's all sorts of elements. There's all sorts of tools. There's business analytics tools in that digital package, so that a distributor can know what am I selling, where am I selling? Hey, it's been 20 days. I haven't made a sale to this preferred customer and what happens to them? All sorts of business analytics for their benefits so that they can help manage their organization. So when we talk about the digital suite, it's all of these productivity tools and making sure that they're empowered to be more efficient so that they can spend their time doing what they do best, which is making that personal connection with more and more customers. So I kind of put that in the digital -- that's sort of the digital bucket. It's a strategy or the effectiveness or the objective of that strategy is a little bit different than the objective of the data, although they're highly -- there's a lot of overlap, right? Obviously, there's a lot of data that comes with some of those digital tools, right? Hey, somebody spent a lot of time on this page. Somebody spent a lot of time here. Oh, why is that abandoned basket? Is that -- that's -- there's sort of those learnings that can help with the commercial -- with the other elements of it. But I think the lion's share, we're trying to enhance productivity with distributors in the field with the digital tools. On the other side, the data tools, we're still in the early innings of that. The first sort of real, I would say, outcome of this data. Now we've had it for a few years, and I think we're finding our way with how can we really use it for -- to kind of move the business forward as a concept in customer retention. And so we were -- we have been through a journey in distributor retention. So in other words, making sure -- and I'm going to just use very generic words, right, for those distributors in field, make sure your same stores are growing. They're still open next year, right? That's the equivalent, right? So make sure they continue to be productive. But now the -- and that has been highly successful. So if you look at our rate of distributor retention, highly correlated to the top line of the business. Now it's sort of shifting that focus to customer retention, right? And by customer retention, what are you trying to do? You're trying to enhance customer lifetime value of that customer, making sure they repeat buy, et cetera. So we now have -- since we have that end user data, we can get very specific and we can get very analytical about figuring out what is helping drive customer retention. And I think that's where that data, I think that's going to be the first really useful way for us to drive top line in the business through a strategic way to use that data.

That's great. All right. We didn't leave a ton of time for this next section, but I wanted to kind of go through this pretty quickly, kind of 60-second responses. The first is on operating margins. The big question we get from investors is, you've had this kind of long-standing target to expand your operating margins, but they've been pretty flat for a number of years. So just give us the 1 or 2 big triggers that you think could be net beneficial to operating margins here in the next 12, 24, 36 months?

Stabilization of currency. Since 2011, currency has been a huge headwind. If currency -- if we were at a constant currency from 2011, we would have margin expansion. So it's -- currency explains 90% of it.

Okay. That's helpful. And then I want to get to capital allocation because you have refinanced a portion of your debt. You still have another $600-million-or-so outstanding, I think, coming due. It's not due for 3 or 4 years -- 2025 actually 4 years. Are you considering refinancing that tranche of debt, any need to do that in the near term. It's at a relatively high interest rates, so just curious about your refinancing.

Yes. No, obviously, we're still in the non-call period on that. Even though we were on the non-call period and the other that we call, the make whole on that, just -- it was still a great economic decision. So 100%. I mean, we'll make good economic decisions. If there becomes a situation where it makes sense to call those, we will.

Great. And then last question is, my favorite topic is cash, maybe your favorite topic, too. So you talked a lot about free cash flow generation. I mean, this model is incredibly rich in terms of cash conversion. So outside of share buyback, any other agenda areas that you would use that excess cash flow over the course of the next several years?

Well, if we call it excess, then by definition, it's after our internal investments, it's after the CapEx that we're putting towards the digital strategy that we mentioned in some of the manufacturing CapEx that we need to invest into kind of support the top line growth that we've seen. We're not a big M&A house. It's not something -- I mean, we are looking to expand the product portfolios, but those are really tuck-in acquisition type uses of capital, not something that rises to the level of really materially changing sort of what we've talked about in terms of the excess cash flow. So not really, no. And if that question is pointing to a dividend or some other use, we really think the most effective use are particularly at these share price levels is to repurchase our own shares.

And I want to just give you a final thought here Alex because Eric and I have had a number of conversations offline about this, which is that it feels like for the first time in many, many years, there's not this -- some sort of extemporaneous factor laying over the stock in terms of fundamental performance. Cleaned up a lot of the elements of the past years. The business is really starting to catch momentum. The ownership structure is settled out a bit now. So it feels like you can run this business, run the business for the business opportunity. So maybe give us a sense of just 2 or 3 things that we should be watching for from you over the next 2 to 3 years that are really emphasizing the value inherent in the business?

Yes. I think it's our consistency in our performance and the more and more we distance ourselves. I think it's just got to get on the radars of the finance community that this is an incredible business, well positioned in a category that's incredibly attractive. And from our perspective, we're just focused on executing. We have all the confidence in the world now. A lot of the distractions in the past are beyond us. And we're just really excited to just dive into the business 100% and execute.

Great. Final thought. Okay, we're going to leave it there. I'm sorry, Eric and Bill, we didn't get to you any of those questions, but we'll definitely circle back. And if anybody has -- would like to connect with the Herbalife management team, just reach out to your Jefferies' representative, and we'll make sure we get you connected with Eric and he can hook up Bill and Alex. Thank you, everybody, for joining, and thank you to the audience for joining in as well. Have a great afternoon.

Thanks, Steph.

Thank you.