Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us for our Nantucket Consumer Conference. My name is Steph Wissink. I'm a senior research analyst and managing director on the consumer team. And joining me on screen today is the senior team from Herbalife. On your screen, you should see Alex Amezquita, the company's CFO; and Eric Monroe, the company's Head of Investor Relations. Thank you for joining me, guys.

Thank you so much. Thanks, Steph. I wish we were in Nantucket in hindsight, but I guess you will have to do it one more time.

Yes, it's hard to be in Southern California, but Nantucket might have it in the summer.

Well, let's start first. I know there's a lot of companies that have been reporting and a lot of headlines out there. So I just want to bring everybody back to a centering point and, Alex, have you just take us through current state of the business, just based on what you've shared with the market and level set us, then we'll jump into some of the key questions.

Sure. Sure. And just to confirm, given the timing of when we're actually having this, this is -- my comments will be as of -- consistent with the last quarter when we gave our last earnings call. So the state of the business is really, ending March, going into April, we saw a pretty dramatic change in our sales channel and our distributors out there in the field. Our first quarter, by all stretch, is -- wasn't largely achieved, our guidance range. We overachieved on EBITDA and EPS. And our volume or the equivalent of our unit sales wasn't too far off from the midpoint of our guidance. Net sales was a little bit down more as a result of mix than anything fundamental in the quarter. However, we revised guidance pretty meaningful. So the disconnect, or if you look at the quarter results and then try to understand the delta in the guidance for the rest of the year, that was really reflected in the trends that we saw dramatically shifting at the end of the quarter, to some extent, but even more so in April. Obviously, first month in the second quarter. So we changed our guidance approach to some extent, and we've been talking about this. Normally, what we would guide this early in the year and what was reflective of our February guidance, we have a normal seasonality to the business, where our second quarter is significantly larger than our first quarter. Third quarter is comparable to that second quarter. And then fourth quarter, a little bit lower than the third quarter and maybe more commensurate with the first quarter. However, we've taken that historical seasonality out of our guidance. What we did was -- there's a lot going on in the world right now, right? In addition to the macroeconomic backdrop that's all top of minds, I think, for all of us, trying to understand where is it going. There are certainly, for us, specifically, as most companies, we saw input costs dramatically increasing. We know that we're going to have to do some unusual pricing actions to kind of keep pace. CPI isn't really keeping pace with what we're seeing on the input cost side. So we know that we're going to have to do some pretty significant price increases. We know that coming out of the pandemic, there are some behavioral changes going on in our channel, which we don't have enough data yet to trend out quite yet. And so we need some months, at least, to kind of see how that's trending. And then obviously, what's going on in Eastern Europe and the knock-on effects from the Russian-Ukraine war and how it affects really just sentiment globally there is that impact. So there's all these pretty dramatic influences in what this year is going to shake out. So the guidance approach we took was, okay, we're not going to make any assumptions about what may or what come in terms of normal seasonality or improvement in KPIs or any of the strategic initiatives we are doing to address these issues. What we decided to do was simply take wherever our run rate was in the KPIs that we were experiencing, let's just model those out for the rest of the year and just be transparent about it. Be transparent to our investors or potential new investors to say, if you have a view on some of these issues in terms of how it might affect demand elasticity, how effectively the cohort that's been underperforming, and I know we'll talk about this in a moment, but how that might -- how we might replenish that volume that's sort of coming out of those folks, go for it. We're going to just give you a guidance package based on what we're seeing today, and we'll update you and be transparent as the months and quarters go on here. So that's sort of the state of the business.

Let's jump into that cohort analysis because this is really interesting to me to think back chronologically through what you experienced during COVID. You had a pretty [ fast ] acceleration in engagement across both of your distributors and your customer base. So take us back and walk us through 2020-2021 and then give us some sense of how big that cohort is as a percentage of the base and as you're talking about kind of -- for the productivity of that cohort. How we should think about that?

Yes. I mean, quite simply, it's sort of understandable, particularly if you take a step back and just think, what has Herbalife Nutrition been through? So through the pandemic, if you go from 2019 to where 2021 ended, we grew almost 20%, almost 20%. And so a lot of that demand that came in during that time, a lot of it was situational. A lot of the distributors and customers that came in were unique to pandemic conditions, meaning a captive seller or maybe not a lot of options with their time. So Herbalife Nutrition as supplementary or part-time income was a very attractive choice because what else are you going to do? Technology was being adopted by consumers and by sellers in a way that made it very easy to do the business and find customers during the pandemic. We're not completely out of the pandemic. Obviously, parts of -- particularly if you think of what's going on in Shanghai right now and some markets in Asia Pacific, there's still some pretty significant pandemic influences still going. But by and large, we're sort of coming out of the pandemic. The world is opening up. The conversation now is return to office. And so in that environment, all of the people coming in during the pandemic that had a way of doing the business then, they have to go back to sort of more of the prepandemic times and how to sell. And what I would say is a little bit more -- selling is not easy. And so learning those prepandemic tools now, for some, that might pass the threshold of perhaps, you know what, I kind of came in with this set of assumptions, calling someone up in person, that's not really for me as the world opens up. And so we saw a reduction in activity rate in that new cohort. And by activity rate, what I mean is the number of folks that qualify to be a sales leader, or just to make this -- if someone's not too familiar with Herbalife Nutrition, just think of them as storefronts. As we have someone come in and qualify as a sales leader, you could effectively think of them as a selling or a retail storefront. That would be the retail equivalent. But we had -- so we had a lot of these retail storefronts come in and the number of them selling in a given month. So the number of them selling in March and the number of them selling in April, as a percentage of that population in the cohort, was significantly lower than what would be normal, right? For those that were selling, they were selling, I would say not too unusual than prepandemic or KPIs that we're used to. But as a population, the number of those folks selling were significantly lower. So what does that mean? It seems like as we move forward, there's sort of 2 paths to fill in the volume that was lost from that group of people, that I mentioned, almost 20% of the company growth. There was a lot of folks that came in that in Q1 and really more so in April that weren't as active. So maybe they turned out, hard to know right now, but there's 2 paths to recover for that. One is to reengage them. So effort to reengage them and get them as a population more active; or two, is really focus on recruiting and finding new sales leaders, finding new storefronts, finding new customers to replace those folks that are being less active. And right now, it's unclear because we really have -- and again, I'm going to be speaking as of our last earnings call, we really only have the 1 month of data to really -- 1 month of data doesn't create a trend yet. So we don't really know how that's going to trend out and what that trajectory looks like and how that's going to be fulfilled. Recruiting is a normal thing. Reengagement is a normal thing. Both of these are, in any other market, they go through cycles where these are the types of things that are normally addressed with strategic initiatives. What's unique here is that we had many markets experience that at the same time. So they're going through this cycle at the same time to figure out how do we go do that. So you started a question with tell me about what's going on with the cohort. So hopefully, I gave a little bit of context to say we see a change in behavior of the cohorts. We know what that problem is. It's actually a known issue that we address in our 42-year history, thousands of times as each market goes through a cycle. And so now what we need is we're just looking for that data, and we're looking for the strategic initiatives that each market is employing to figure out, is it a better use of time to reengage? Or is it a better use of time to recruit new? Clearly, it's not binary. I'm sure it's a mixture of those 2 things, and we're just trying to figure out how that trends out.

Hey, Alex, can you talk a little bit about how you think about your distributor force. So why do you think that still presents the best option for your go-to-market model? I know some of your peers have been talking about they're making changes to their engagement model. And you do have a big preferred customer business. So also maybe help listeners understand how big the distributor piece is versus how big the preferred customer is. and I know China is a little separate, but just kind of to step back and help people compartmentalize the size and then just give us your philosophy around still using a distributor-based model.

Yes. So I think you have to go back to the fundamental, what does Herbalife Nutrition or what is anyone in nutrition trying to solve? We're trying to solve getting healthier, more nutritious calories to consumers. So what is the value proposition of Herbalife Nutrition? There still is a fundamental lack of good nutrition globally. You can see it as evidenced by obesity trends, by spend on health care from just not eating properly. There's many metrics that you could see that the world needs better calories, right? And so they need nutrient-dense calories rather than quick-serve fast food or nonnutrient-dense calories. So if you think about that value proposition, we believe that a direct-selling model is really well poised to capture on that opportunity because nutrition, particularly nutrition in a direct-selling model, there's a personal connection. Everybody has different nutritional needs. It's personalized, whether you're male/female, whether you're a new mom or pursuing a 10K or an Ironman. Whatever your nutritional goals, whatever your fitness goals, whatever your lifestyle, they're all unique and different. And so what our channel does is even if you are a preferred customer, there's still a distributor that is making sure that your journey or that customer's journey is unique, there's accountability, there's -- and why I mean accountability? We all know, really hard to get up at 6 a.m. to go to the gym. But if you have a friend to go do it, you're more inclined to do it and you're more inclined to create sustainable habits. It's not a 30-day program. We're trying to create lifestyle changes. All of that -- all of those elements, and I can go on and on, but hopefully, you get a feel for what those elements are, we feel like our direct-selling channel is really well positioned. I really can't think of a better model well positioned to try and effect change, sustainable change in the nutrition category.

And maybe just to add some color around the size of that preferred member, preferred customer cohorts. At a global level, it represents around 10% of total company sales. But if you look and isolate the U.S., and that's the market where the preferred member program has been around for the longest, since it's most mature really since the 2018 time frame, it varies between 25% to 30% of the total U.S. business. It is represented by that preferred member cohort. So that just puts some context around the size that we're talking. The preferred member program is now live in markets that represent north of 80% of total company sales. So it is available in the majority, in all of our major markets.

Yes. And just to reemphasize, it's a preferred member program or preferred customer program depending on the market. It is where someone does sign up with the company with strictly the intention to consume products, with no intention to resell products. However, there's still a relationship between our preferred member and a distributor. I just want to reemphasize that point. That connection, that -- everything that I just spoke about a moment ago, still persists in our preferred member program. As it does as a retail customer, a preferred member program is just someone to receive a little bit of a discount on top of what they would normally purchase.

Yes, that's helpful. I want to just jump ahead, and this is going to be a little bit of popcorn all over the place, because I want to cover way if we can. So the first is, you mentioned some cost of goods inflation. Any quantification of what you're seeing in your cost of goods and any sense of how much you may need to price to kind of catch CPI up to KPI?

Well, let me start with the second half first. So we are going to take pricing action. In fact, we're taking pricing action in a couple of days here, which more or less is going to be a 10% price increase around the world. That's for most markets. We have a few markets for regulatory reasons that may lag that. But generally speaking, a 10% price increase will be going into effect around the world. That 10% price increase will not fully recover what we're seeing on the input cost side. So there's still much to go. If all holds, in other words, if all else is equal, that price increase should out about a point of gross margin in the back half. So if you just take the back half P&L and you compare that versus the gross margin that we ended Q1 with, we anticipate that being about 1 point of gross margin expansion. Again, we're not at our gross margin run rate. There's still more to go. Our input costs are significantly above that. But we're trying to balance a lot of things here. We're trying to balance that demand elasticity, we're trying to recover some of that input cost inflation. We're trying to make sure -- particularly, with price increases in our model, it's not just a consumer equation, but it is the selling equation. So distributors have to feel like that is a business opportunity that they can be still successful at. So we have to make sure that, that is also in balance. So this is a pretty dramatic 10% price increase for some markets, that's on top of the price increases they've already had this year. So let's take the U.S., for example, they did a 6.8% in March. So effectively, in a span of 3 months, that's 17% price increase. You would see similar orders of magnitude for Mexico, which had a price increase in February and then with this. And wherever you are in the world, if it hasn't been in place yet, if it was planned to be put in place, that 10% is on top of that. So these are pretty dramatic price increases. And so we're really going to have to just see how this plays out.

And Alex, is that price increase contemplated in your revenue outlook as well that was already all factored into what you gave us?

It was. It was. Yes. In the guide, it does have some concept of price increases to be put in effect around this time frame.

One of the questions we're getting a lot for a lot of brands is how does the brand typically perform in a recession. Then you actually have a history to go back and look, because you've been around for a couple of recessions, actually. So talk a little bit about what you noticed about your business, whether it's elasticity to price increases or short-term, long-term nature of impacts?

Right. So empirically, it's a little bit difficult to say in this type of recession, it will create x -- but I think the concept is quite simple in the concept of -- and particularly, it hasn't happened yet, you would presume that you would get labor market softening at the same time that you would have a recessionary trend. I would say, okay, there has been some signs of labor market softening, but it's still running very strong at the moment. So really, because what the opportunity is, it's almost the obvious opportunity. I need to make supplemental income. There's time if there is pressure from other types of employment or the lack thereof, we become an attractive opportunity to make supplemental income. So that whole concept should be fairly easy to consume. But the magnitude of that sometimes is very difficult to quantify.

All right. That's helpful. Last one is on the balance sheet, and then we'll jump into more of a thematic question, but talk a little bit about your decision to kind of meter out your buybacks versus being a little bit more opportunistic. Any change in posture that is notable?

Yes. I'd say there's 2 halves of that question. So first, if we go years back, one thing in our share repurchase program, we are committed then as much as we are today to the share repurchase program, but it was very, for lots of reasons, it was choppy. It was larger buybacks and then no buybacks and then a larger buyback. And we're trying to be consistent to help -- consistency, we believe, will help multiple over time. Will help with investors just -- it's almost like having a dividend-like approach with our share repurchase program to give some consistency to an investment thesis that an investor may have. So consistency is one thing that is important to us. Since the beginning of last year, we've been pretty consistent every quarter in that $100 million zone, plus or minus some quarters above that, some quarters maybe below that. But generally, about $100 million a quarter now. So that's where the consistency desire comes from. With that said, particularly at these share prices, we're not reserving opportunistic cash in the interest of consistency. We would use excess cash to be as opportunistic as possible. The challenge now is we also have to manage this business and be prudent. And so if my comments on the last earnings call was there's still $50 million of share repurchase in the guide, but we want to exercise prudence in terms of getting through this year with all of the variables that we've talked about, we just want to be cash prudent. So cash prudence doesn't necessarily mean we spend that cash on something else, particularly at these share price levels. Share repurchasing is the most attractive way to return cash to shareholders, we believe, at this point. And so we would use excess cash to do that. We may be in a position where we might park some of that cash, and it would just be a timing issue until we sort of have a little bit better clear line of sight to how to get through this current environment.

I mean Alex, talk really quickly also about fixed costs. And any sense around tightening just given the top line trend and some of the uncertainty that you're referencing?

Yes. I mean, I think the great thing about the Herbalife Nutrition business model, the financial model is much of our costs are variable. I'd say the one just sort of situational caveat I would put that, our input costs are not acting as variable as they normally do with all the input cost side. It's not behaving that way with the dramatic escalation in it. It's more of the escalation than the variable nature. But generally speaking, we have a cost structure that's highly variable with our top line. And so there's still the ability to generate cash even if we have a net sales reduction in the guide.

You mentioned earlier technology, and this is one of my passion points, as you know. I tend to dig into this continuously with you. But I wanted to just step back and think about the evolution of your business and the construct of tech. There's digital, there's your tech stack, there's organizing all your customer data. Some of that has been regulated into your business, but otherwise, it's been more strategically overlaid on the business. But help us think through the digital opportunity for Herbalife Nutrition on a global basis. When do you expect to see some of the benefits of some of the work that you've been doing kind of inside the motor of the machine? When do you expect to see your distributors benefiting from that as well?

Sure. I mean digital technology, particularly on the front end, helping our distributors be more productive in the field, that's been a strategic theme of ours now for a number of years. There has been -- technology has advanced at the same time that we were trying to make a step change in that area as well. I think you might recall when we partnered with Salesforce at a point, there were some ideas there. So it's always been a strategic theme because the fundamental premise is that a distributor in the channel talking to a customer, that's their most valuable asset. The most valuable thing that they can do is make that connection with the customer. We want to do everything that we can to supply a suite of tools. And when we talk about digital technology, it is a suite of tools. It's business analytics, it's e-commerce, it is the ability to manage inventory. Just everything that you would think of a small business owner being able to do, that's what they're doing out there in the field. And so we want to provide those tools to help with productivity. Where we are now is I think we are getting to the point where a lot of the tools that we have built historically have been custom in nature. They've been Herbalife Nutrition design for the uniqueness of the way that we go to market. And I think we're sort of waking up and saying, well, why does it need to be unique so far? So why does it still need to be unique? Can we rearchitect this digital technology platform to leverage some of the third-party tools that are out there and just incorporate them? So for example, something as simple as a shopping cart, we shouldn't be designing our own shopping part. Let's go use someone's shopping cart where they are the ones that are keeping up to date with all of the payment programs and all the features like abandoned cart technology, all of that technology that then just becomes part of the package, let's go leverage somebody else that's putting all their resources to make a shopping cart, I'm using this as an example or a metaphor. They're putting all their resources to make sure that's always up to date and we don't have to do that. So we're thinking about how do we rearchitect this to kind of keep pace with technology solutions that both business owners and consumers expect in this world today. So that's a bit in our CapEx guide, which is a little bit elevated from our normal run rate. Some of those dollars are really thinking about this effort, and then we'll have more to come as the quarters unfold in terms of what's our trajectory on that.

I just want to close with asking Eric, are we missing anything big and important that we didn't touch on?

So I think we hit all the main themes today, right? We are talking about the top line, we're talking about the cost side and we're talking about capital allocation. And those have been the top three most important topics for our investors over the past few months. So I do believe that we covered all our bases here.

It's such a dynamic time to be having these conversations because if we would have had this conversation 2 weeks ago, it might have been different; 2 weeks before that would have been different. So I can just sense that in the business operations for all of these firesides that we've been hosting, just really extreme dynamicism out there. It's not an easy environment to forecast business. No doubt.

That's for sure. That's for sure.

Well, I really want to appreciate -- or extend my appreciation to both of you for joining me and for everyone else for listening in on the line. If you have any follow-up questions for Herbalife, just feel free to reach out to any of us at Jefferies, we'll get you in touch. Eric and his team do a great job of organizing investor events and we're happy to organize that for you as well. So thank you again for joining us today. Have a wonderful afternoon.

Thanks, everybody. Thank you, Steph.