Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to our 38th Strategic Decisions Conference. Welcome. Just before we get started, a little housekeeping item. I'm sure you've all got the drill by now, but please use the QR codes for the pigeonhole link. So if you have questions, I can make sure that I incorporate those into our discussion this afternoon. So it's my great pleasure. I'm Alexia Howard. I've been with Bernstein since 2005, covering the U.S. packaged food space. It's my great pleasure to welcome Herbalife management team to the podium today. We have John Agwunobi, who's been the CEO since March of 2020, which was a very interesting month to be stepping into that role, been with the company since 2016 and prior to that was an SVP and President of Health & Wellness for Walmart, which is a pretty interesting background and very appropriate here. We also have Alex Amezquita, the CFO, who joined the company in 2017. And we also have Eric Monroe from Investor Relations as well.

So as we get started here, maybe we can just start with a very broad question. Since this is the Herbalife Nutrition's first year at this conference and here in person at last, it may be helpful to give a quick 60-second, couple of minute overview of the company for those that have never heard the pitch [indiscernible].

I'll take that one right away. First of all, it's so good to be in person, right? I mean two years we've been apart -- so anyway. So Herbalife Nutrition, we are a company that sells food, functional food for the most part. Protein, vitamins, tea, aloe drinks and fish oil for one. I'm obviously simplifying a little bit, but those are the core ingredients, the core products. We've been in business now for 42 years, having been founded in 1980, and we sell into 95 different markets around the world, so we're truly a global company. Our core categories are weight management, which is our kind of anchor category. That's where we started our business 40 years ago, and it still remains the biggest part of our business. Meal replacements being the core subcategory within that space for us as a business. In fact, Euromonitor recently said that we are the #1 global brand in weight management. We also, second category, are in sports nutrition and energy. That's how we define the category. And once again, it's anchored with protein, different kinds of protein, plant-based protein, milk-based protein, fish protein -- different proteins. We run the gamut. And then, of course, the third category, just going back to sports nutrition, it's the fast -- and energy as a category is the fastest-growing category in our business. And then, of course, we're in another category that we call targeted nutrition. It's a catch-all for a number of kind of nutrients, and it's where our vitamins sit. It's where aloe sits and a number of our other products. So those are the 3 broad areas that we work in. We go to market through our independent distributors around the world. We think it's a core competitive advantage of ours. They are essentially coaches, and each can or each product that you purchase comes with a distributor who can tell you how to use it, can help you with your own personal health and wellness goals and can maintain a relationship with you personally, but also is charged with building you into our community. We'll talk about communities in just a second. We have kind of a number of different ways that our distributors sell to their consumers. Direct selling, where they knock on doors or they visit with families, make calls and so forth, a very traditional sales approach. They also have what's called nutrition clubs is another way, where these are bricks and mortar locations around the world. We have 12,000 of them here in the United States, 72,000 nutrition clubs around the world. These bricks and mortar locations are where the customers are invited every day to not only consume the product, but to participate in healthy living and weight management communities. As I was mentioning earlier, the distributors tends to coach and manage these communities. And then the third, which is emerging, and it's increasingly important to us, is the online digital social space, which has increasingly become a big part, especially with the pandemic, become a big part of the way that we sell our products to our customers. Now speaking of the pandemic, and I'll end on this commentary. During the first quarter, going into the second quarter of 2020, when I was made CEO, as a result of the pandemic, very clearly, we saw an explosion in sales. All of our metrics were off the charts positive, whether it was the number of new distributors joining the business or the number of new customers joining the business or just sales, off the charts as a result of increased demand for healthy nutrition. As a result, in many cases, of demand for the business opportunity that the distributors have, being able to work from home behind a computer during a lockdown had some attraction to it for many. And this growth continued all the way through 2020 and into 2021. And by the time we got to the middle of 2021, it suddenly started to slow, unpredicted. It suddenly started to slow. The magnitude of that slowdown, the acuteness of that slowdown, we didn't anticipate. And that slowdown, the give-back of that -- some of that growth through the -- since then has continued until our last -- I'm speaking as of last earnings, Q1. My colleague, the CFO, would remind me that we didn't get it all back, and I'll let him comment on that, if you want to.

So in 2021, we posted $5.8 billion of sales, which is about an incremental $1 billion of sales or 19%, a little over 19% from where we were full year 2019. In our guidance for fiscal 2022, the midpoint of our net sales guidance is down 7%. So if you think of the almost 20% growth over 2019 with the 7% growth, you could see and with the expectation that we anticipate net sales growth coming out of this year, so in Q4, that is the base that we continue to believe that we will grow on. So effectively, call it, 12% or 13% growth through the pandemic until we start to hit growth going into what we'll see happens in 2023.

Thank you very much for that introduction. And we've certainly seen those dynamics play out. Can you talk specifically about is this dynamic broad-based across all geographies, the story about the recruitment and in-person sales? Are you seeing this concentrated in any particular market? I guess put another way, was the recent reduction in sales guidance across all geographies or was it coming from specific markets?

Yes. So I'll start on this one as well. I will say that, speaking about the pandemic, first of all, let me, just for the record and just for emphasis, state that we look at the pandemic as being an event. There's our base business, our core business, which was doing extraordinarily well coming into the pandemic. And we are confident that looking beyond the pandemic and out into the future, that core business remains what it is. And so we're very pleased with that. The interesting thing about the pandemic, and I'm sure others would -- from other companies, other industries would agree with this, it had this unique thing to it, which is it, for the first time in our history, synchronized what had been a portfolio effect across our business. We are in 95 different markets. On any given day, some are up, some are down, and you get the benefits of being a portfolio in that regard. With the pandemic, all of a sudden, all of the markets were spiking. And on the back end, all of the markets have seen a similar kind of falloff. So that synchronicity that is kind of injected in, that's new for us. So to answer your question, a lot of what we've predicted -- what we've been talking about relative to the pandemic is across all markets.

I mean some of the impacts are more so than less in some of the recent behaviors that we saw that we talked about in our last earnings call in terms of the pandemic cohort and how their productivity metrics. You're going to see that a little bit more impactful in the U.S. versus Europe versus Asia Pacific in terms of more impactful to less impactful, but they all exhibit -- are exhibiting that similar behavior, just a different magnitude.

There are a few outliers obviously. I think India would be a great example of a market that has just continues to surge forward with its growth even though other markets are beginning to see the follow-up post pandemic. But to Alex's point, I think they've all been impacted to some degree or the other. The magnitude of the impact has been a little different market to market.

Makes sense. Do you have any metrics you can share about the size of the pandemic era cohort and the magnitude of the activity reduction?

Yes. So as we think about, as John A. just mentioned, there's sort of a pre-pandemic cohort and then the pandemic cohort, which is really 2 years of new people coming into the business. That 2-year group represents about 40% of the unit sales that we do today or 40% of the volume. That pre-pandemic cohort represents about 50%, and then we have this 10% off to the side, which is in our global number, which is our preferred customer program. That is unit sales for people that sign up with Herbalife Nutrition specifically for the product opportunity, not to resell product. So if you break it back down, it's 40% of our volume represents the pandemic cohort right now.

And are you able to talk about within each group, how much things have dropped off for?

Well, if you think about our over -- if you think about the overall company in terms of what guidance we have reduced from where we were in February to where we're going forward, so that 40%, there's about 1.5 points of growth that's attributed to the situation in Russia and Ukraine, but the lion's share, almost double digits of the rest of that, would be attributed to that 40% group.

That makes sense. Okay. So at this point in time, are you more focused on improving the activity of the current distributors? Or is there more of a focus on bringing in new sellers into the network?

No, I think our focus is on actually both. I think it's an important part of our -- it always has been an important part of our journey, but is especially true given where we are today. One, I think we need to do everything we can. First of all, I think you should go into what might be impacting that core. What might be the issue there? I think it's clear that when you have a massive surge of people coming on into a system all at once, it's -- ours is an apprenticeship type of business. More experienced distributors teach less experienced distributors how to run their businesses, how to grow their businesses. And when you have this surge that suddenly comes on, during a time of lockdown, where they don't have the in-person relationships or in-person meetings to go to and wish to learn the fundamentals of the business and there's less apprenticing going on from up above because there's just so much coming at -- there are so many people coming on at the same time, they fall behind in terms of their development as distributors. And so I do think there's an opportunity as things begin to reopen, as the surge has slowed now, there's an opportunity for us to revisit with many of those individuals and offer them the sponsorship, the support, the apprenticing that the system is designed to deliver. I think it's also real that many of them, we've lost them to our system. Many of them came on during a time where it was exciting, and everybody wanted to do this. They were locked down at home, and they come back out into the real world and realized, "You know what, I don't want to do this anymore." And so those individuals have to be replaced. And so recruiting new individuals into the sales force, I think, is going to be an important part of the strategy going forward. And our distributors around the world are tuned in on that. They have plans in every market and are driving towards that as we speak.

How do you think of the current tight labor market and escalation of wages is impacting the recruitment of new distributor sales? I'm assuming that's more here than in the developed markets.

Yes -- no, it's interesting. This is one of those extraordinarily strange environments in that you have a really tight labor market. Anyone who wants a job theoretically can get a job these days, right? And salaries are going up. So for the -- I was reading an article the other day where a former employer of mine, Walmart, was offering, I think, $110,000 or $120,000 a year for truck drivers. So it's clearly one of the tightest labor markets that we've seen in recent years. But on the other side, you have an entire group of individuals that have spent the last 2 years working from home, and they are pushing that on the notion of coming back into an office and working 9 to 5 again and getting back into that old grind. I was reading an article about Elon Musk the other day where he's pushing back on some of that. The bottom line is there are 2 sentiments out there. And there -- ultimately, what that impact ends up being on recruiting is going to be hard for us to tell prospectively. We're going to have to -- we'll know after the fact. We're watching both very closely. Will the fact that many people don't want to go back to work result in a surge in gig economy type jobs like ours where people are looking for a part-time job or a job that they can do from home? We'll see. Will the tight economy make it harder to recruit as we go forward? We'll have to wait and see on that as well.

Do you know what proportion of your sellers are doing it part-time versus...

I don't have the number offhand.

We don't have the specific analysis. That's not a way that we characterize.

Fair enough. Just curious. And do you have any new strategies for recruiting and retaining your distributors in the current environment?

So the interesting thing about the recruiting and sort of the situation, so yes, we are coming off of the pandemic, but a lot of the strategies, techniques, what our distributors use to go to market, what we would set up as promotions to help incentivize those types of behaviors, that's not necessarily a new thing. We've been in business 42 years. Each market goes through its cycle where you have a consumer cycle, then you go into a recruiting cycle and then you go -- so you have these ebbs and flows and you have these techniques. Now those techniques tend to be very local in nature, very market-by-market in nature. There isn't one size fits all that works for all of our 95 markets. But those types of things, it's not necessarily a new concept. We're applying tried-and-true concepts in a new world, and we'll have to see how that works. But the markets generally have a good sense of how to work with the distributors and local leaders of that market to affect that behavior.

Makes sense. Okay. So what gives you the confidence that in-person events will change the dynamics? And what's the status of in-person versus virtual events in your different geographies?

Yes. So around the world, we have these kind of 2 levels of events. We have kind of -- in every market, they have a big annual event. And so there are big events happening once a year in almost every one of our big markets around the world. But more importantly, I think for the purposes of the discussion that we're on today, we have events happening every day, smaller events, 30 people, 50 people, 100, sometimes 500 people. And these are typically put on by distributors, not just for the purposes of recruiting, but also for the purposes of inviting their customers to come and try our nutrition products and so forth. And we're just really excited to know that those events are starting up again in person. We are a relationship business when all is said and done. Our coaches are a value-added proposition. There are 3 things that generate value for our customers. The first is the coach. The individual who can help you identify what you need in order to achieve your nutrition goals, your health and wellness-related goals, and the distributors serve that function in every market around the world. The second is we provide community, a place where you can come and visit with other customers and distributors, but where you can set goals, be celebrated when you achieve those goals. You can -- there's a social aspect to our business. It's why our Nutrition Clubs have done so well over the years in almost every market where they are. And then the third is, by some accounts, the most important, the product. I mean let's be very clear. As much as we focus on earnings, on the data and the data showed a weakness in a certain cohort of distributors, the demand for healthy nutrition, good, high-quality, science-based healthy nutrition, that demand is a long-term trend today and out into the future, a very positive one. Whether it's weight management or sports nutrition or just general health and wellness, the world is -- and by current accounts, the pandemic helped this -- the world recognizes the importance of good, healthy nutrition. And we have thousands of SKUs around the world, mostly, as I said, in protein, vitamins, tea and aloe, but many different products and a brand that people recognize represents high-quality science-based nutrition. So you put those 3 together, and they come together in a very tangible way in these events that you request. So we're excited by the fact the events are coming back on. We think it's going to make a big difference. And for the -- specifically for the distributors who are new or those that might have been recruited during the pandemic, my sense is once they are introduced to not only how to sell, but to what we sell in a very real and present way, that their performance will improve.

And you talked earlier about getting back to flattish sales year-on-year in the back half of the year and specifically to be getting back to growth year-on-year in Q4. What is it going to take to achieve that? And what gives you confidence you can get there?

Engagement. So the engagement. The engagement is going to take a variety of ways, but it's our distributor network engaging, whether that be the catalyst of in-person events, whether that be simply we are managing the price increases, as many are, the interesting thing about Herbalife Nutrition, price increases isn't simply a consumer side. There's actually a business opportunity side. As we increase prices, that means more economics for someone to make that sale. So you mentioned the tight labor market earlier. A price increase actually creates a benefit for the business opportunity side if you were to be a Herbalife Nutrition distributor. So that engagement across these multiple facets, the complexities that we need to just work through in this new environment, work through the macro issues, work through the consumer sentiment issues, work through the in-person issues, engagement issues, that's what we see as we go forward. Now I should also note that the guidance package that we put forth in terms of that back half flat growth with the Q4 -- Q4 potential net sales growth, it really is based on trends that we saw at the end of Q1 going into April, more so in April. So in a normal year, there's seasonality to our years. This is a very dynamic world. There is a lot of puts and takes. There is price increases. There's labor markets. There's macro. There's the Russia-Ukraine war. There's a knock-on effect. There's a lot of dynamics that are happening that could push our business up or push our business down. We're not making any guesses on which way it's going to go. Our guidance for 2022 simply represents what we were seeing in April and March, and we're just carrying that forward in this year. So that back half growth really represents or, I should say, Q4 growth just represents the comparison of keeping things as is versus where we were in the fourth quarter of 2021.

And are there specific metrics on engagement that you can sort of track to say, "Hey, that would suggest that we are heading towards something that's going to be more positive."?

Yes, sure. So something that we do and we do publish in our supplementaries are our active sales leaders. So effectively, how many distributors in the market are actively ordering and selling in that given month. And so as the year progresses, we'll see how those numbers trend. Those numbers have been exploded through the pandemic going into the back half of '20 and to much of 2021. A little bit of relaxation recently, and that's what we were seeing recently, which affected some of the -- impacted some of the revision to guidance. But as we see this progress in the year, that's going to be a key KPI that we're looking towards, the activity and how many new customers, how many new distributors are coming into the business, both metrics that we provide in our supplementaries.

Great. Can you talk about 2 markets that seem to be moving in different directions? So how large are India and China for you? And why are the regions performing so differently?

Yes, sure. So a lot of -- at times, our business tends to be a momentum business, right? Success breeds success, and so that's what you see in India. India has an incredibly strong consumption model. The sustainability metrics that underlie it are incredibly strong. And you just see the momentum that they've had now for a period of time now. By the way, the growth rate that, that market has seen will slow down at some point. It has been growing significant double digits now for a very long period of time, so that will slow down at some period. But the underlying sustainability metrics, the underlying consumption behavior that, that market is seeing has been incredible. And so we see that momentum continuing.

A little bit tactically there, India has a really strong Nutrition Club model at play. But they've also taken advantage of a recent strategic shift where we moved product development or at least product ideation out into the regions. And they started to launch a unique set of products in India that are very specific to them, Ayurvedic products specifically that have helped, I think, fuel some of their growth or their momentum.

Now on the other side is China. And China is going through a transformation. It has been going through a transformation now for a period of time. It was coming off of a model that had a go-to-market behavior that caused a pretty significant churn rate in the customers. And that for sustainability, for a business opportunity, for a distributor to be successful in China, that's just extra work. It's a lot of hard work. So that leadership is going through a transition where they're transitioning from sort of an older way of doing the business, which had a higher customer churn rate into a more sustainable model that we've seen around the world, a model that is more representative in what's in most markets around the world. Now to get from there, old to new has been a very difficult transition and continues to be a difficult transition. Obviously, we all know about the zero tolerance policy that's happening in China and Shanghai, et cetera. So it's making that transition even a little bit more challenging. But they're going through that transition, and it will take some time for us to get to that other side. But when we made these transitions, you do see the business come out the other side. The U.S. is actually a very good example of what we saw in 2017 when it went through the segmentation process. And the growth that we saw in the back half from a stronger business model has been incredible. We expect something of China's transition to produce the long-term value of that market that we still see. Our brand is incredibly strong in China. The assets and investment we have made in the manufacturing facilities, extraction facilities there are incredibly valuable.

So all the investments that we continue to make in the technology systems, we're actually really confident about. Where that's going to end up. Timing is a little harder to tell with COVID and the lockdowns, but the outcome, we know how this movie plays out.

And just as a follow-up, how big are China and India as a proportion of sales, for example?

So China -- India would be just under 10% of sales and China in a very similar position.

Great. Perfect. Actually, switching gears here, we've got a question that's come in from the audience. The FDA in the U.S. appears to be increasingly active in the vitamin supplement space in terms of regulation. Do you perceive the regulatory landscape changing at all for the business?

Not in the short one. Obviously, they're well established -- the construct -- the regulatory construct in the United States, especially around vitamins, has been in place for a number of years. We welcome the fact that the FDA is looking at it and that there might be opportunities to make it tighter and better in the future. But for those of us that are in the business, the science-based, high-quality nutrition, it actually might end up being more an opportunity than it is negative. There are some players out there that don't play by the rules, perhaps because they don't think there are any rules. So we see the work of the FDA as a positive over the long run. I just don't expect their work to result in anything tangible in the short term.

Makes sense. Can you talk about how the current global supply chain disruption and input cost pressures are affecting the business? Clearly, they're very widespread for everybody. Last fall, it seems as though you were seeing relatively little disruption versus other players in the packaged food industry generally, but this seems to have changed as pressures have intensified. Where are you seeing the biggest input costs and supply chain pressures? And is there any light at the end of the tunnel?

Yes, absolutely. So we were starting to see things change in the Q4 of last year. It was a little difficult to know is this here to stay or are things going to -- and it's really across 3 categories. It's off of manufacturing wages up significantly, input costs on our commodities up significantly, fuel and energy cost for transport, ocean transport, container shortages, all of the different ways of getting raw materials or finished products from point A to point B up significantly. And even the products that we generally lock in forward. So for example, one of our biggest ingredients, soy protein isolate, which we lock in forward for the following year, we're seeing that as we are now starting to try and figure out what that next -- what do we lock in for 2023. We're just seeing the delta in that for continuing pressure input cost. So you really, across your 3 main sources of manufacturing costs, transport, wages and raw material ingredients, all 3 of those, up significant double digits, far outpacing whatever we're seeing. You pick the market, whether it's U.S. CPI, U.K. at 9%, Mexico at 8%, general Eurozone at 7% to 8%, we're seeing our input cost multiples of that. So as a result, we're having to do outsized pricing actions, and we have been in communication with our distributor channel over the past few weeks to exercise what is pricing actions in and above what we normally do, which is price with local inflation. What we're seeing on the input side is just so dramatic that we have to take some unusual actions.

Yes. That certainly makes sense. Are there hedges in place for your key ingredients and these other costs that are going up? And if so, do you generally hold a rolling set of hedges and over what time frame? Are you bumping up against any physical shortages of raw materials? And if so, how are you addressing this?

No physical shortages, fortunately. We -- for the ingredients that -- really, the only shortage has been the ingredients and the ingredients that we tend to purchase. We tend to be the 800-pound gorilla for those ingredients, so we do have some purchasing power in those types of ingredients. So the team has done incredibly well to make sure that even if we're single source, we're finding double source on all of that. So generally speaking, no shortage of supply. Now cost, on the other hand, that's a different story. And really, there's only a handful of products that we -- I heard hedge, but really, it's we lock in a forward rate. And so for the most part, our 2022, it's for the most part locked in, for the most part, I'd say. For those -- for the ingredients that we have those types of contracts for, we're starting to look into 2023. And as I mentioned, for those types of products, we're seeing pretty significant increases from where we are in 2022.

So in the face of these input cost pressures and supply chain disruptions, what are your plans regarding price? Historically, the company has chosen to raise prices only in line with general levels of CPI inflation, as you mentioned. Do you think that this pricing strategy needs to change? It sounds though you are taking more.

Yes, for sure. For sure, it has to change. And even what we're doing this quarter doesn't really get us -- it doesn't make us whole on what we're seeing on the input cost side. But obviously, we're trying to thread the needle between demand elasticity, impacting the distributor channel, trying to manage gross profit margins and trying to navigate this in a macro backdrop, which we still don't really see how this is going to play out. We certainly can see -- I think anybody that's looking at this can say that the current macro environment is not sustainable. You can't -- you sort of can't have a PPI allocation or CPI by the magnitude that it does today. And so if -- unless you fundamentally believe that corporate -- the global corporate margin structure has changed indefinitely, something is going to have to regulate. So we don't know exactly what the next actions are going to be, but we're taking these pricing actions now to at least make a step forward to help our gross profit margins. But we're also -- the way out of this is top line growth. So we're really just trying to balance those 2 dynamics. And so this is going to be something we're going to have to monitor every month and as the year plays out.

And how do you think about your pricing power and elasticity relative to other companies that are selling through regular retail channels?

Well, our products are nutrition products. And generally, if you think of them as functional food, which most of our portfolio is, it is still an economic better calorie than what you might get in fast food or otherwise -- that you might otherwise. So the value proposition of our portfolio still is fully intact. When our distributors go out to market and are talking to their customers, they could still make the point that, even with the price increases that we're making -- and by the way, I'm not sure if our price increases are disproportionately higher than anyone else. I mean it may be just in line. I don't think CPI is really representative of what's happening out there in the world right now. But even if we are outpacing, and I'm not saying that we are, but even if we are, it's still more economic than what alternatives might be.

Makes sense. Okay. Now what's the outlook for input cost inflation and margins beyond 2022? We don't want formal guidance, but is it going to be just as bad in terms of the step-up as we look out into 2023?

Well, I mean, obviously, that's going to depend a lot on what's coming on. The issue right now is the gross profit issue. And so it really is this balance between -- it is the balance between what's happening in the macro world, how fast or how -- if we're going to keep pace with input costs with the supply chain, with fertilizer cost, with ocean transport cost, if we're going to keep pace with that, then we have to do it on pricing. But that also means CPI is going -- I mean it won't be unique to us. That's for sure, right? So we're just going to have to monitor how that plays out. Now there's other things that we're doing on the rest of the SG&A side to help out with some additional productivity to help out margins. We have a transformation program in place, which is really helping with some of our back-office productivity in our global shared services capability, which we have a Phase 2 that we're going to start implementing at the end of this year which, putting the 2 programs together, could yield up to $30 million of SG&A savings. So we're doing some productivity stuff on our side of the house. But again, the big lever is really going to be on the gross profit side, and we're just going to have to manage that.

And just coming back to the question about what do we see in terms of the pressures coming in next year. It's so hard to predict. There's so many what-ifs, right? The conflict in Eastern Europe. The pandemic, is it truly done with us? And then how do these -- how do the different PPI-related input s cycle over time? You and I, we were talking a little earlier about fertilizer input. Does fertilizer impact 2023 and then beyond? You see, the supply/demand economics kick in at some point, and it's really hard to -- we're literally, as a team, kind of watching everything on a daily basis. We're making a lot of reactionary moves. At some point, if this begins to extend and look like it's a multiyear phenomenon, we'll have to start making more kind of structural and strategic kind of moves. Manufacturing, for example. Do you manufacture in the U.S. exclusively? Or do you move manufacturing plants around the world? Those are longer-term conversations, and it really depends on how we see this view, not just for 2023, but for the next decade. What do things look like out for the next decade?

Well, that's actually a good segue to the next question here. So let's talk about your strategy and what are the biggest longer-term growth opportunities going forward. Where do you see the biggest strategic priorities and growth opportunities, say, for the next 3 to 5 years or so?

Well, I'm very clear in my mind that a big part of our future has to be about leveraging digital technology in a way that allows our distributors to become more efficient, more productive and to have greater reach. We've already seen many of them individually using social media and other technology tools to kind of further their businesses. What we haven't done is taken a corporate approach where we provide all and any distributors access to those digital tools, where we teach and train and provide the backbone for a digital transformation. We're committed to it. We've signaled in our guidance that we're going to invest against it even in the face of all of the unknowns and the financial pressures are out there. We are absolutely going to build out our digital transformation in a way that furthers growth for the company. Beyond that, obviously, I think we do need to start thinking about whether or not we have the right deployment of our manufacturing assets. For those who don't know, we manufacture about 65% of our own products. We have obviously a backup channel and contract manufacturers for the rest, but we -- I think from the long run, we need to think about how we redeploy or realign our manufacturing so that it benefit, not just with PPI-related pressures, but also FX. We're trying to figure this out for the right path. So digital would be the big growth proposition that we have out there today. I mean, very clearly, product is always going to be one of the main drivers of our growth, new product introductions in new markets. And we have a strategy today. I kind of alluded to it a little earlier, where we are pushing a lot of our product innovation and development and launches into the regions. We used to do it all very centrally. It would start here in the U.S., and then we would gradually kind of filter out the products to other markets. But we realize now that with big discrete markets evolving and emerging and gaining strength, that it's actually faster and more impactful to have each region have a product strategy that better reflects their customers' needs. And so we've unlocked that. It's beginning to kick in already, as I mentioned, with India. We're hoping to see more of that around the world. Brazil has launched a few very unique products, Acai bowls and things like that, that are sourced locally. And my hope is that we'll ultimately help their growth. We're going to start to see more of this all around the world.

So can we dig into the digital side of it? You mentioned a little bit more. What are you and your distributors and end customers able to do today that wasn't available until recently? And what new capabilities are going to come out over the next few years?

Maybe I'll take a stab. It isn't necessarily to what -- there's a lot of different functions. If you think about a distributor out there, they're a small business, right? And so they need tools, they need a CRM tool, they need a business analytics tool, what's going on in their organization, where are their sales coming from, how do I evaluate where my next best effort might be, so business analytics. There's logistics, just simply ordering product and getting it to their distributors and their customers. There's signing people up. There's logistics around. So there's...

And then e-retail. Their ability to sell on -- through online platforms.

Right. Education, training, all of these different tools, right? If they want to learn about a product, where do they go learn about the product so that they can then talk about it intelligently to their customers. There's a suite of things that a distributor does out in the field from a business side. We have a lot of those tools, but they're in silos. They've been developed sort of in their own lanes. They're not necessarily accessing a database where it would make logical sense that, if it's over here, then it could be over here to give you value-added features per se. And it's also the way, the speed of how technology is moving. What do you get used to in a shopping cart when you go to Amazon, it's hard to keep up pace with that if you're developing all of that internally. So it isn't necessarily all of the different what, it's the hows and how that all integrates and how that all looks and feels and how the sort of brand impression you get when you use our tools and how you sell that to the next person and say, "This is a good place for you to use your time. You can go and be infective at doing your business with Herbalife Nutrition in this category that you're passionate about. And by the way, look at this suite of tools to help you be successful." Right? So it's keeping up with the pace of what business owners, what consumers, what brand expectations. In our younger demographics, there is a expectation to be immersed with the brand that you not only buy from, but certainly if you're going to spend your life with in any sort of economic way. So we really have to make sure that distributors are feeling that they can be immersive in our brand across all of the ways that they interact with us. And so it's really making that leap forward, and we're just not there today with our current digital technology offering. And this is really the vision for our future.

Makes sense. Okay. You mentioned an investment in your e-commerce platform, and that can obviously mean different things for different companies. Do you view that as a channel that could impinge on sales through your distributors? Or is it very different?

It's very different. So e-commerce has, I think, a connotation that when you use a Herbalife Nutrition, it isn't the e-commerce that I think is traditionally thought of. E-commerce at Herbalife Nutrition, there are tools, there's an expectation of using a technology interface in a certain way, and that's what we refer to it. What it does not mean is that, that is a transactional non-personalized sale between the company and a customer. Our e-commerce solutions still involve the distributor. The sale of the customer still needs to involve the distributor. That relationship between a distributor and a customer, we have to maintain that relationship, the stickiness, the personalization, all of the benefits that John mentioned earlier about what is our core competitive advantage in direct sales in this category of nutrition, that still needs to be intact. Now we can use technology to further that, but we don't want to use technology to replace that.

Yes. So when we think about -- when we talk about e-retail within the company, e-commerce within the company, we're not talking about the company e-retailing and e-commerce saying to customers, we're talking about giving our distributors, each and every one of them as a small business, the ability to own and operate their own e-commerce shop powered by us, but largely delivered by them.

That makes sense. That's really super helpful in terms of understanding it. I do have -- no, it's disappeared. Okay. Are you looking to expand into new nutrition categories to accomplish your goals? I'll come back to...

Yes. So we've -- over the years, we've stated and it's an ongoing part of our strategy that we -- many of our products today, just for context, that are focused on specific times of use, whether it be breakfast, nutrition, protein for breakfast in the form of shakes or especially in our weight management business or nutrition that is applied in the pursuit of specific set goals. We are currently looking at and innovating in product lines that would allow us to be a part of the 3 meals of the day, not just breakfast, we call them meal parts, the different -- and the snacks in between. We've recently gotten -- as we look at our Nutrition Cub success, we've recently been looking at different ways to enhance the experience with products in our Nutrition Clubs. For example, we recently launched protein coffee, high-protein coffee for use in settings, not just at home, but also in places like Nutrition Clubs. We'll continue to expand down those paths. We're also kind of increasingly looking at other areas of nutrition. Staples, for example, how do we help take staples and make them healthier? There'll be kind of an opportunity there as we go forward to kind of play around with -- especially protein. I mean it's one of the most important nutrients you can have and finding ways to make every meal of every day and every part of those meals healthier is one of the things we're working on.

So I've got another question from the audience. Given that it's an asset-light business, you have some manufacturing in-house, but generally asset-light, why take on so much financial debt? Do you expect to use the cash and debt to buy back shares? And maybe some commentary on the uses of cash.

So our capital structure has been pretty consistent now for a number of years. We don't have any intention to take on any more debt than where we are. We have a 3x gross debt lever that -- hold on. 3x gross debt level that we've been pretty consistent on for a period of time, and I don't envision that changing. Now obviously, we're going through a little bit of a trough here. So the denominator is going to have us be a little bit above that for a period of time, but we'll get through that. There's no reason to really fundamentally change that. We manage our debt capital structure, from a financial metric standpoint, to be investment grade. We don't have that rating from the credit rating agencies today. But if you look on the financial metrics, our leverage levels, interest coverage, all of the things that matter, they are representative of investment-grade companies. And we're going to continue to pursue that. So I don't envision us to be very aggressive with our debt capital structure in the interest of what you just mentioned.

We've kind of described ourselves as being conservative in this space over time because we don't change it a lot. We were -- to the point, the 3x has stayed fairly stable, as long as I've been in the company, that's where we sat, and we have no plans to change that. So yes.

Great. Can you talk about the capacity expansion plans as sales grow over time?

And when you say capacity, so if you could [indiscernible].

Manufacturing capacity.

We -- the part of the CapEx spend that has been present in the past couple of years actually is expanding some of that capacity. So for the, I would say, for the near future, 3 to 5 years, we have plenty of capacity to handle what we need to handle. And we'll look to add capacity maybe in local markets, maybe India. To the extent that, that market has become large enough, that maybe it is time for us to consider having our own facility in a market of that size. But at present, we have plenty of capacity to handle our, I would say, the next 3 to 5 years' growth.

Great. We're coming into the final couple of minutes, so I really just have one more at the moment. What don't investors typically understand about the Herbalife story? And why do you think you're trading at your current valuation?

Yes. Maybe...

I'm jumping in after.

So listen, it's a little hard to speculate on what Wall Street -- obviously, they're underwriting something that I don't think anybody on the management team would think is the right answer. What I can say is the question that we normally get because we're a multilevel marketing company, because we're a direct-selling company, where you have downward momentum, so that must imply you must be a runoff business then at this point. So I do think that there tends to be a disconnect. We are a direct selling company, true. We're a multilevel marketing company, true. But we also are in nutrition. We also go to market differently. I think the fundamental resiliency of our business, the fundamental long-term value proposition that we provide in health and wellness, which is a trend that needs to be placated globally, it is a fundamental need that the world needs. It needs a better nutrition. There needs to be better calories around the world. You can measure it by obesity. You can measure it -- there's a number of ways you can see the need for global nutrition. We provide fundamental global functional food, and we do it in a way in direct sales where it creates a personal connection with that consumer, which I think is a core competitive advantage in how you deliver and how you fulfill that need. So if I think of, fundamentally, what does the world need, we're still ideally positioned. And so when I think of -- if we're getting a runoff multiple, that's a disconnect from, I think, the value proposition that we actually provide.

Yes. And I'll just add in the few seconds that we have that -- it's not add, its emphasize. I think for some reason, people don't see the fact that we've been in business for 42 years. We have 72,000 bricks and mortar independent distributor Nutrition Clubs around the world. We manufacture 65% of our products in our own manufacturing facilities around the world. I think sometimes people don't realize that we are here to stay and that this is a business that has a core kind of foundation to it that isn't going away. The events come and go on top, but the core business is strong and will continue to grow.

Wonderful. Thank you so much for your time this afternoon. I really appreciate you drawing the story and all of those very hopeful comments to bring the story to life. Thanks for your time.

Thank you so much.

Thanks.