Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

All right. Morning, everyone. For those of you who don't know me, I am James Kayler from the High Yield Research Group at Bank of America. I am standing in for Bill Reuter, who could not be here, doing him a favor. So very happy to be hosting Herbalife and the CFO, Alex Amezquita. Alex, thank you for coming today for our first -- the first live event I've been at in a couple of years. So thank you for being here.

Thanks, James.

Very good. So I'm going to turn it over to you for a few minutes just to give an intro and maybe talk a little bit about the fourth quarter, and then we'll go through some questions and leave time for Q&A at the end.

Sure. Sounds great. So I'll just jump in with Herbalife Nutrition. Herbalife Nutrition, first of all, for those who are not familiar with, our equity story. We are a global nutrition company. We're in 95 markets around the world. We did about $5.8 billion of sales in 2021, generated about $873 million of EBITDA. And we go to market with our core competitive advantage. We use a direct selling model, which allows folks from all around the world to sell our nutrition products, particularly in the category of nutrition in the language that their customers want to be spoken to, in the way that they want to be spoken to, in a very localized, personalized way. So that's our go-to market, and that's our general strategy. In the fourth quarter, our fourth quarter, we sometimes refer to volume. It's the equivalent of units, was down 6%. And again, where Herbalife Nutrition currently is in 2020 upon the onset of the pandemic. We received a surge in demand. It was -- some of it was situational, some of it was simply the awareness of folks making a connection between the health of their body and what they were eating. And also a lot of folks being displaced in their current working situation looking for extra income. And then also the third leg of that stool being not a lot of social engagement since everybody was locked up at home. It had a lot of time for our channel to really just focus on the business, focus on their customers as they went in the world. As a result of that, in the second and third quarter and then sort of easing off into the fourth quarter of 2020, a significant amount of surge demand. So as we think of 2021, particularly Q3 and Q4, we're coming off of those -- that exceptional demand. The business is still strong. The business is still healthy. If you look at our Q3 and our Q4 results, you're looking at sequential improvement in the top line as our -- the decline over that prior year that surge demand continues to contract. And we'll talk about 2022 in a moment, but that trend should continue into 2022. That's what's embedded into our guidance, returning to the growth in the back half of 2022.

Great. That's a great transition to the first kind of the set of questions here. But so you have given an outlook for the full year and first quarter. And as you sort of alluded to, the first quarter guidance is for down sort of mid-single digits but then growing for the full year. So if you could just kind of maybe expand a little bit on sort of how you're thinking about that cadence and then what the historical drivers there?

Sure thing. So what I would say is we're entering a more normalized level of activity now. So all of those new folks that came into the business in 2020 and the first half of 2021, they're now sort of grounded into the base level of the business. So as you think of the trajectory of 2022, that's looking like a more normalized year that we traditionally have. So when you're looking at year-over-year comp numbers, what you're going to see is a decline still in Q1, improving in Q2 and returning to growth in the back half of 2022. Again, that's much less about this year in terms of those growth rates and more about what it's comping against in terms of that profiling. If you look at the trajectory, if you look at -- there's a certain seasonality in our Herbalife Nutrition business. The second and third quarters tend to be at higher levels of net sales and activity than our first and second quarter. That pattern of seasonality is going to return to a more normal level and the growth we'll see in the back half of 2020.

Very good. I know the company is truly global. And I'm curious if the outlook for different geographic regions is different the pace this year, how you guys are thinking about what geographies might be areas of outperformance and underperformance?

Yes. I think our main regions that set records in 2021 will continue to do so. The Americas, North America, Europe and APAC more broadly, particularly being led by India, which is -- had a tremendous amount of growth over the past couple of years, fueled with incredible sustainability metrics. So really healthy growth as well. We see those 3 regions really being the drivers of growth as we go into 2022, which accounts probably for round numbers, 60% of our portfolio, maybe a little larger.

Very good. So it's interesting, you said through the pandemic sort of some of the impacts on the business and sort of your differentiated business model. So I know like personal relationships and context are sort of key to the business. Do you have any view on if that is changing at all one way or the other, sort of like in this new -- I guess, the new normal that we're now entering?

The personal relationships that is so key to our business. That's our differentiator. That's why our direct selling model works so well. Now what those personal relationships look like are so dynamic. So I think in the onset of the pandemic, there was a sentiment that, oh, Herbalife Nutrition is going to struggle through the pandemic because it's in-person personal relationship that really drives that business. And with the lack thereof net sales is really going to fall off. Well, exactly the opposite happened. We actually saw a tremendous amount of growth because our channel -- hundreds of thousands of entrepreneurs all around the world figured out how to do the business differently at an incredibly fast rate. They learned how to use virtual. They learned how to use technology tools. They learned how to change their models to find the demand that customers were wanting, consumers wanted to put something healthier in the body. And our channel figured out ways to use technology in virtual ways to still maintain that personal relationship. And so whether that be through a Zoom or a virtual Nutrition Club or otherwise. So we saw a dynamic shift in the way that our channel went to market. But the bread and butter of our business, legacy has been the in-person aspect of it from a motivational standpoint, from a training standpoint, et cetera. So what we get really excited about in terms of 2022, is if we can return to some of that bread and butter. If we get back to how this company really in the 42 years -- well, I guess, 40 years prior to the last 2 years, really grew for all those years. It's the in-person element of it. And getting back to that we could see as a continuing growth driver of all of those folks that came into our business over the past 2 years that really haven't had that opportunity. We have a tremendous motivational educational driver of our sales force. We have in-person events, where training is done. Education about the products is done. Education about how to manage your business is done. Those types of things. And they service both a motivational aspect and a functional aspect. There are -- for the past 18 months, we've had about 3 million folks come into the business over that past month that have not been to a live event. And so for us to get back to those types of activities in 2022 is really encouraging for us to see that base business really increasing their productivity, increasing their success as we go forward. So the in-person is really important. We've been really dynamic on the front end to shift from historical ways of doing the business to new ways. But now we're looking world to try to -- I know it's hard to say for the world to get back to normal right now under all the circumstances that are going on but trying to get back to that in person in a more normalized world.

I think we all want to get back to something more normal, right. You mentioned how your sales partners have to sort of embrace technology and sort of adjusted. What have you guys done on the technology front to improve the business and, I guess, to reach consumers better sort of -- and presumably, that accelerated somewhat in the last couple of years.

Yes. So technology is a huge strategic focus for us as a company. We are investing a lot of time, effort, energy, dollars into improving technology. We just about completed what was a global initiative in rolling out something called segmentation. It's a lot of technology and infrastructure that basically says, when somebody new comes to Herbalife Nutrition, they can identify as either solely a customer. And all they want to do is consume product. They have no interest in reselling products, and those are called preferred members or preferred customers. And distributors who have -- who would like the option to resell product. Rolling that technology out globally was a huge effort. But now knowing our population who specifically want to be customers and who specifically is interested in the business opportunity. It allows more targeted marketing and allows our distributors to be more efficient in training them and talking to them and communicating them and understanding what needs that might be relevant to that particular constituency. So building that base level of infrastructure was critical to it now is the next stage where we can build productivity tools on top of that, we can build -- again, this is all done in the hands of our distributors. We build the tools for them to use out in the field. And now that we have segmentation in most markets around the world, leveraging productivity-type enhancements. These are things like CRM tools, business analytics tools, just making it easier for customers to interact with the product portfolio with the distributors themselves in ordering, all of those types of things is the next phase of that once -- this infrastructure is now built around the world.

Very good. Changing gears. So I -- again, I'm relatively new to the story, but I know there have been challenges in China from an operational perspective. And I'm curious sort of like where that stands? And if you expect any improvement in 2022, I guess, and maybe sort of even at a broader level, what the long-term outlook for the China market is?

Yes. No. So China actually continues to struggle from a top line perspective. And probably, we'll continue to do so in the near term. The interesting thing about China is the market opportunity still has never -- has -- is as good as it ever has been. China continues to go through a transformation, particularly in terms of how that market -- how the channel goes to market in China. What we're learning from other places in the world, in Nutrition Clubs, there are models that create daily behaviors, that create stickier customers that create less churn. All of the things as you can imagine in a -- if you had a customer that you would want, customer lifetime value, all the things that ladder up to customer lifetime value. We've seen what works in some other markets. In China, that's been a challenge historically. In China, it's been more of a customer acquisition model. You go get a customer, but the retention of that customer, the methods and how you go to market, it hasn't really lent itself to really retain those customers. It's been a large or a near-term sale and then that customer goes away, and then you have to go and acquire another one. What's really encouraging about China is the distributor leadership where the channel leadership in that market is all in on transforming the legacy way of doing that business to a more sustainable way of doing the business in terms of laddering up these customer lifetime values, how do we go to market. Now to do that, you actually have to change the way you actually do the business. And so we're having near-term dislocation. 2021 has been evidence of that. And we'll continue to go through that transformation through 2022. And what I'm confident is if we make the transformation, we get to the other side. What you -- one of the issues China has had historically, there's been some government issues, but -- the business itself, there's been a lot of volatility in the business. And that is the ebbs and flows of customer acquisition. If you take a break, then you don't get that sustainability piece of it, and you have a drop off. So you really have the ebbs and flows of human behavior. If we make this transition, the volatility that we've historically seen in China reduces. The success of the distributors in China increases. All really good things. So I know the China team is working really hard with the distributor leadership, with the channel leadership in that market to make this transition. Again, the most encouraging thing. And I think the hardest thing that you can typically have in this situation is the distributors, the folks out in the field want to make this change. The leaders want to make this change, and they're going through the hard work of going through it. So probably a little bit more headwinds to come, but I'm really optimistic and I'm really confident in the long-term value of where that market is heading.

Very good. Maybe switching gears a little bit to the product side. I know there's been a lot of effort and resources put into the introduction of new energy, sports and fitness products, and we're a big growth driver in '21. How does the new product lineup look as we go forward, the same amount of innovation that's been happening?

Yes, absolutely. I mean when we think of our product portfolio, we generally think of 3 broad buckets of products. We have our traditional bread and butter weight management products. We have a category of targeted nutrition, which is anything from a supplement for heart health or brain health or something very specific in nature. And then we have our third bucket, which is our sports and fitness bucket, which is the one that you just referred to as well. Those have been our 3 areas in our product portfolio. We have a lot of market share. We're the leading market share in weight management. But in targeted nutrition and sports and fitness, there's a lot of opportunity for us to grow. Sports and fitness has been a great driver of not only trying to increase dollar from that pie. But what it does, it's been bringing in a younger demographic to our company, which is really rising all boats across all of the product categories. So that sports and fitness line, those energy products are really being identified with millennial and Gen-Z demographic. Right now, 2/3 of new folks coming into the business are in that demographic. So as we -- I think we launched 100 SKUs in 2021 in that line, and we'll continue to do it. We'll continue. It's been a growth driver. It's been a double-digit growth driver now for us for quite a while, probably a couple of years now, and we continue to do so. But again, it's also bringing in that younger demographic, which is the future leaders of the channel for tomorrow.

You mentioned going through the 3 product categories because it's very helpful. The core sort of weight management product, can you talk about -- does that product have annual innovation and to introduce new flavors and change things there? How do you keep that sort of fresh to the market?

Yes. No, absolutely. There has to be some level of innovation because consumer trends and preferences are always sort of migrating. Our product strategy is -- tends to be science-based or is science-based. So clinical studies, the things that we know to work, the things that we know to be effective generally surrounding around your macro nutrition, your protein fat and carbohydrates. So we're formulating around those 3 things constantly. Now there's -- when I talk about consumer preferences and how you get those macro nutrition, you can get it vegan format, in a clean format. And if you're a sports athlete, you may need different amounts or different types. So the formulations are really innovating to keep up with those consumer trends. But the real secret, again, is my nutrition is probably different and your nutrition is probably different than my wife's nutrition and certainly different than my kids' nutrition. And so it's how you apply these building blocks of nutrition that are in our portfolio to what is needed to attain the goals of the customer and of itself, right? My nutritional needs and the new moms nutritional needs are very different. And so we could both be taking the same product, but it's quantity. It's what else are we taking with it and having that level of education and having that level of guidance coming from the channel itself. That's the real differentiator, particularly when you're talking about that piece of the portfolio.

As a follow-on to that, I haven't really thought about this until out for this session. But I guess as a global company, there's different taste all your customers. And so how do you sort of -- how do you manage through that -- manage that those differences and from a product perspective?

So I guess, the best way to answer that is really to think about how do we manage the company side of things and to support our distributors. We're regionally managed. In fact, part of the transformation program that we talked about more in the last quarter's earnings call. On the front end of the business, we pushed more of those resources out to the local regions and markets. So the local regions and markets have the ability. So for example, in India, they are going to have flavors of our flagship product, Formula 1, that are local to that market, flavors that may not necessarily be our bread and butter, but is exactly the taste profile and the flavor profiles that work for that market. Same for China, same for any other -- you pick a market, there's flavors. And that's coming from the product innovation teams in each of those local markets and regions that are really connecting with the customers and the distributors in that channel to understand what might work best from a product standpoint, what flavor might work best? What are those? I mentioned those consumer needs and trends a moment ago. What is going on in that particular market that customers are really asking for? So again, I guess the answer to that question really is the distributed way in which we have product innovation teams and local teams working with those regions and markets to develop that product pipeline.

Very good. Maybe moving to sort of operations and execution. Obviously, inflation is hugely topical in any industry you participate in or follow. I'm curious if you could talk through sort of what the inflationary landscape is for your business and sort of how you're managing that and what maybe the major areas of concern and/or things that potentially are getting better in 2022?

Yes. I think the inflationary environment, the most challenging element of this and we used the inflationary environment as this broad umbrella of actually a couple of really important moving pieces. First of all, all these pieces are moving incredibly dynamically fast, right? So this isn't -- this wasn't -- in Q4, when you have the PPI, CPI mismatch to the amount that it currently is in, it's never been as dramatic. You have the input cost of all of our goods significantly ahead of where baskets of goods are being priced, right? So when I think about the general inflationary concept, right now, I think we're caught in a transition where that has to settle out. It has to -- by definition, it has to settle up. We, as an economy, are to have to price to match our input costs. But right now, CPI isn't doing that right at this very moment. So we have significant input costs, wages, raw materials. Those types of things, things that we've seen in all of our headlines that we're managing through. Our traditional pricing strategy, as you mentioned, is the price with CPI. That while it's offsetting some of that input cost, it's not fully offsetting the input cost. So we're going to have to think about how can we be more creative in this transition period. I think part of the element is trying to figure out just that balance between as you increase retail price, you're affecting demand. And so what's the right balance to recover the input cost, how sustained it is versus how aggressive do you want to be on pricing and potentially affect the demand side of the equation. And that delicate balance is sort of what most companies right now are wrestling with.

Sure. Are there particular inputs that are -- what are the top few inputs that really are the focus? And are there ways to mitigate some of those cost increases?

Yes, it depends on the products -- or it depends on the ingredient. So probably our largest ingredient that we're a purchaser of soy protein isolate. And we have all of our 2022 supply locked in at a sort of mid-single-digit cost increase over 2021. That's actually -- that's -- I wish that, that was across all of our inputs because across dairy, resin, all of those are up significant double digits, sometimes even up 30%, 40% cost increase over 2022. Unfortunately, most of those types ingredients are spot market, can't forward purchase a lot of those tremendously. So we're subject to that. And then obviously, on the freight side of things, freight in, freight out, has been significant. Again, we've heard about all the supply chain issues from a distribution standpoint. And so we're seeing that in terms of rates for freight in and freight out as well. So right now, as a company, our -- we recognize margins in 2022, significantly below where margins have been historically. That's our current guidance right now is reflective of that. But on all of these matters, one thing that I want to be sure. I'm not sure if it came out across as clear is as overtly on our last earnings call as we are working as a management team to find ways to recover this margin. It's not in our guidance yet. Some of the things that we're working on. What we're working on basically is the world as we see it today, or I should say, at the world as we see it as of the last earnings call. But we, as a managed team, are actively figuring out ways to be creative. There is a sense of urgency to figure out how do we get margin recovery in this world. Again, we need to balance the demand side of things as well. We don't want to necessarily do anything that can negatively affect the top line for a sustained period of time as well. So we're trying to balance those competing objectives.

Interesting. And from -- when you think about the sort of broader wage inflation in the economy and obviously, your distributors are a huge -- important part of the business. How does that -- do rising wages and this an incredibly robust job market that we seem to have, is that impacting your ability to sign up new distributors?

I'm going to have to speak as of the end of the quarter because I don't want to say anything about Q1 as of yet. But as of that date, we have not seen that impact. You would probably see that impact in the number of new distributors in the business. And the trends that we saw in Q4 were very consistent with the trends that really began, I would say, in the middle of Q3 when we sort of hit a more normalized rate of new distributors coming into the company that hasn't really deviated much. So I get the concept of the theory and perhaps. But I'm not seeing any way through the end of '21, there's nothing in the numbers that indicate that that's the case.

Very Good.

Meaning seeing those -- all of those higher-cost wages really attracting folks out the business opportunity.

Yes. you're still seeing the same levels...

We're still seeing that same interest coming. Yes.

You mentioned soy, and it sounds like that's really one of the only -- the few areas that you can actually hedge. So other stuff. Are there other -- I assume there is like sourcing and other things that you guys are working at constantly to try to...

Constantly. I mean, hats off to our supply chain team. What they've had to endure through the pandemic has been just absolutely exceptional. It's a new fire drill every day for them. And whether it's finding different suppliers or finding a different way to get point A to point B, we had a lot of markets, right? We had the pandemic hit, and different governments reacted differently to how the supply chain is going to work in that particular market, whether we were using third-party suppliers or wholly owned. They've just had to go through so many hoops and barrels. So hats off to them. But by and large, they've kept product getting to our customers. They kept product getting to the distributors. We've largely had -- we've largely been in stock with historical levels.

You haven't really had any stock issues?

There's been times of temporary disruption, but the workarounds have been there. And we're largely where we've been at historical levels, again, had a lot of brain damage on our team to kind of figure out how to do that, but they've been able to keep pace.

Very good. And so I guess, I want to hit on the pricing side a little bit. I guess, historically, it sounds like you've really taken like an annual price increase. Given the volatility, is that something that you've either -- you've changed and/or you're considering changing sort of a more frequent or like I don't know, a more dynamic pricing.

So it depends on the market, right? I think this concept, particularly in the U.S., is hitting us a little U.S.-centric because we're used to 1%, 2%. And now all of a sudden, we're at 7 -- I think what was at 7.5%, right? So I think for a lot of folks in the U.S., that is a new concept. In other markets around the world, we do have multiple price increases a year. So Mexico is a prime example, our closest neighbor. We'll do 3 price increases a year. They've had inflation in the mid- to high single digits now for a period of time. So again, we'll do 3 there. In the U.S., we're still contemplating one. But again, this is a pretty rapidly evolving situation. So again, it just depends on the market. There are different practices in different markets that are more attuned to what historical inflation has been. We have markets that have had that high single digit, sometimes even. And I'm not even talking about hyperinflationary markets now like you could argue Argentina is a hyperinflationary environment. I'm talking about just even significant inflation. We have different pricing strategies in those markets. The question is whether or not we bring that to the U.S. now? And how does that affect the demand? And how sustained is this right now? And you hear the Fed's actions, and it does give you the indication that, I guess, maybe this is going to be a lot longer than we all would have hoped for. But then I go back to the PPI, CPI a mismatch, with PPI outpacing CPI, it feels like we're in a sustained. So we're going to have to think about how to be creative with our pricing, with all of those data points.

And you hit on earlier, obviously balancing sort of price and demand elasticity. Have you done work? And do you have a framework to think about what that demand elasticity looks like? Because, I mean, particularly in the U.S., right, it's been a pretty benign environment over the last -- for a long period here. So is that something that you guys have a view on or something you're developing or you're experimenting with or...

Well, unfortunately, we don't have a model for it. Yes, we don't have a model with historical data where we can say there's a lot of other models. I think there's some CPG models where you can really, market-by-market, start to test some of these input -- stimulus input what do you get on the other side, right? We don't have sophisticated models like that. Because for us, there is a lot of complexity, right? We're the whole chain. We're to the distributor, to the customer, all at once. It's not like just to the wholesaler, and it's not like just at retail, right? So I think it's a little bit more challenging for us to understand and attribute exactly how much demand changes are due to price versus many other things that may be going on in that market at any given time. So when we think about demand, it's a little bit more from a business instinct. It's a little bit more from a feel of what that local team is feeling in that particular market. Obviously, we've had enough tests to have ranges and some informed, but it's not -- I just don't want to give the impression that it's the sophisticated model that we have a ton of historical data from that we can just say, "Oh, well, 1% is going to cause a 1%. That's a little bit hard for us to have in this model to understand. But clearly, there's still a demand elasticity curve in the market, right? So understanding how to play on that is a challenge.

Sure. Well, with the last few minutes left, as a credit guy, we can't get away out talking about the balance sheet. Maybe you can just remind me sort of what the leverage target is and sort of like what the financial policy is. I know that there's been a fair amount of share repurchase activity in the past. I'm curious sort of what -- how to think about the outlook.

So balance sheet is strong. Our leverage target on a gross debt basis is about 3x, which we're right in that ZIP code right now. We have been using our excess cash to repurchase shares, particularly at these share price levels. Repurchasing shares is the most attractive way we think that we can use cash to deliver long-term value. We've been pretty consistent in 2021. And we're repurchasing shares. We did about $100 million of share repurchase in Q2, about $160 million in Q3 and about $100 million in Q4. I would anticipate that pattern of using our excess cash in a consistent manner to repeat in 2022. And to the extent that we have opportunistic cash, again, particularly at these share price levels, we would be using that excess cash in a share repurchase capacity. So that's sort of the highlights.

Yes. So it sounds like capital allocation perspective repurchasing the shares is kind of a top priority. Is M&A something that you look at either within your core or adjacent products?

It's something that we look at. If you just look at the history of us as a company, it's not something that we've done a lot of. Usually, it's small dollars. And it's usually around formulations and not necessarily products that you see out on retail, not necessarily. So it's just been smaller. So M&A is something that we look at, but I would say it's just -- I wouldn't calculate M&A into a sort of a capital allocation forecast.

Very good. All right. Well, with that, I think we have hit the time there. Thank you, Alex, very much for coming and putting up with me, learning about the business on the fly. Thanks very much.

Yes. Sure. Thanks, James.

All right.