Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us today. My name is Erin Banyas, and I am Herbalife's Head of Investor Relations. Joining us today are John DeSimone, Herbalife's Chief Financial Officer; and Hale Holden, Barclays Managing Director and Head of U.S. High Yield Credit Research. Before we begin today's fireside chat, I would like to direct you to our cautionary statements regarding forward-looking statements, included in our most recent 10-Q filing and earnings release which include a discussion of some of the more important factors that could cause results to differ from those expressed in any forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. As is customary, the content of today's fireside chat will be governed by this language. In addition, during today's fireside chat, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or nonrecurring items that management believes impact comparability of the periods referenced. Please refer to our historical earnings releases and presentation materials available under the Investor Relations section of Herbalife's website for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. And with that, I will now turn it over to Hale Holden of Barclays.

Thanks, Erin. So I realize we're competing with launch, John. maybe we should have had change of rooms but...

It's okay.

Yes. So you were previously CFO, you were President, you left the company, you came back as CFO. I don't know if we want to call this Herbalife 3.0 or what version we're on, but maybe you could talk about some of the changes in the last 6 months and where you see this going.

Yes, sure. Maybe I'll even go back a little further and talk about the changes the prior 6 months that I think led to me coming back, if that's okay. I was CFO from 2010 until mid-2018, President for a little while after that, left during COVID, kind of left, was still like part time but just more of a consultant. Coming out of COVID, the company's had some struggles. In reaction to those struggles, they brought back Michael Johnson, who was the CEO for much of my tenure at the company. He came back and he did a couple of things that I think painted a really good future for the company. He brought on a President who was our #2 distributor, and I could sense the energy of our distributor base changing and the activity is changing. And the person he brought on, his name is Stephan, Stephan is a very strategic thinker as well as a very tactical executor. So he's very good at driving sales, it's what he's done his whole life. At the same time, while I could sense the energy of a distributor force changing, our profit was well below where I thought it should be given where our sales are and where our cost structure was the last time our sales were at this level. And so I thought there was a lot of cost savings opportunity. So I came back specifically because, a, I love the company but also I just see it as a huge financial opportunity to drive shareholder value. And I'll add, if we're talking about alignment with shareholders, my entire compensation package is nothing but stock appreciation rights, so that's how much I believe in the stock. So now what's happened since I came back or maybe since 6 months before I came back until now, which is the last 12 months in total, stable -- sales have stabilized somewhat, right? We've had 1% growth in Q4 last year, 1% in Q1, we were down a couple -- 2.5% in Q2, a lot of that driven by currency but we've got kind of a baseline we feel good about. And our projection is kind of in the low single-digit decline in Q3 but getting better in Q4. So I think sales are on the right trend. Second, we've taken a lot of cost out. We did a major restructuring with the organization where we delayered and took $80 million of cost out of the business. 90-plus percent of that has already been done. So it's in now the future run rate. We did that both in a very strategic way but also a very financial way, which is we delayered the business, our business during -- especially during COVID when we had this huge wave of growth. And we really problem solved by hiring people. We added a lot of layers. We had 13 layers of people from the CEO to the lowest level in the organization. We reduced that to 9 levels in 1 organization, 8 in the rest of the company. So we really delayered. It makes us more flexible. I think it makes us more efficient. It makes us a little more entrepreneurial, which is the nature of our business. So I think that helped and so that's been done. And you saw our margins grow in Q2. So I think our margins are on the right track also. And there's a lot more opportunity to reduce costs. We have a couple of more cost savings projects going on. We've committed to Wall Street that our intention is to increase our EBITDA margins by 100 basis points next year over what we had guided at the end of Q1, we're still on track for that. That's our commitment to Wall Street. If we get a little bit of sales growth next year, which I think we will, that's our expectations, then a margin enhancement, pay down the debt, I think there's a huge opportunity for this -- for the growth in the stock.

So I think there was some confusion after the last call on the -- it isn't really price reductions that you want to take in Latin America, but the lower-priced SKUs or commission reductions if you want to view it that way, how that may or may not be a detractor to the margin goal that you just outlined.

Okay. So in South and Central America, with the exception of Brazil and Mexico, we changed our business model with how we compensate our distributors just a little bit so that we can lower our price to the consumer. It was actually their request for us to do that. So this is something where we're not dictating it, but we're responding to a situation that they see in the marketplace. And what they see is that our price point in some of the poorer socioeconomic countries really just hit the surface level of consumers who could afford to buy the product. So in order to go deeper into those markets, we needed to lower our price. In order to lower our price, we needed to reduce the commission structure we pay our distributors. We think, as do our distributors that by doing that, they will sell more product, which will more than make up for the percentage decrease in the margins, and they'll make more money, and we'll make more money. The reason why that's important is because if we can prove to our distributors that such a change will make them more money that opens the door to us launching a lot more products globally by having a different margin structure for different products with our distributors, provided they're successful with it. So I actually think it's a huge inflection point that if we look 5 years from now and when we look back at and what's one of the more important initiatives we've done as a company, it's this test in South and Central America.

So what would you say to the folks that closely monitor your volume points every quarter? Because if you do this, it changes -- it may change the way the volume points sort of accounted for or not?

Well, we normalize it for investors. So when we give you volume point comparisons, it's normalized.

Okay. So no change in volume points.

Well, there was also a change in volume points, but we normalize it for investors. For those who are unfamiliar, distributors get credit for volume as the way -- and the more volume they do, the more they can earn. One of the challenges in South and Central America is the average purchase by a customer is lower than it is in the U.S. and a lot of other countries. So they have to find more customers to get the volume. So we have now given them more volume for sales, so they don't need to find more customers so that they can earn and be successful. When we share our volume point comparisons, we normalize for that. So you're getting apples-to-apples as an investor.

Let's talk about distributor trends. So that's been the big surprise really since March to the Premier League and some of the other programs that you come up. And simplistically, I look at direct distributor model as the more distributors you have, the more sales you have over time, sort of you're shrinking distributors and obviously it's not good for your forward sales.

Distributors are like store fronts, right? So the more you have, the more customers you reach that's the nature of our business model is this individual distributors have a limited reach, we want some of their customers then to become distributors and get more reach and so you want more distributors. It's not the only way you grow, but it's the easiest way to grow, right? The other way to grow is to get more customers from your current distributors or get more purchases from those customers, which we're also working on. But we needed to get more new distributors because the distributor size has shrunk since COVID ended. I can talk about why...

Let's talk about why.

Okay. I'm going to give you the big reason why it's because Stephan came on board as President, right, because there's a lot -- what motivates somebody to join ultimately is, do they believe they have a business opportunity driven by a purpose and that had been lost coming out of COVID. Stephan, our new President, who was the distributor has brought that back. He's brought back the confidence, the inspiration, the motivation. But more importantly, the strategies to make that work, both by creating the right promotions to drive the right behavior. Look, we're in the people business, right? We sell nutrition products. But we are motivating a sales force. How do you motivate a sales force, lots of different ways. It can be promotions, it can be recognitions, it can be earnings. Stephan has been a master of doing that for 32 years as a distributor. He has brought that insight into the company. And now he is -- we have this external sales force that he is now trying to manage with internal sales force like tools, to hold out sales force accountable to delivering certain results and that's what we're seeing work.

So maybe you could talk about the Premier League and how that grew distributors and how sticky you think the new adds will be?

Well, again, there's different ways to motivate, right, earnings is one, recognition is another. With the Premier League, it's a lot of recognition and recognizing our distributors for recruiting in new distributors that also then sell, right? So it's not just about bringing new distributors and it's about helping them be successful as a salesperson. That's what the Premier League does. It's a 12-month -- we can call it promotion because it's a promotion, but it might become part of the permanent cycle of our business. But right now, it's a promotion and it's trying to drive proper behavior to grow sales. One of the ways to do that is to drive recruiting but it's to drive recruiting that's been activated by those recruits selling. So it's not just signing somebody up, it's signing somebody up but then following through and helping them sell product because they have to sell in order for you to get credit for that recruit.

And that credit gives you more access to folks like Eric or ...

Gets you access to Eric or you get to invited to different training events at extravaganzas, it gets you different recognition. It's not economically costly for the company. It's much more of a recognition and training program.

So out of these new distributors, the volume points were still down in the second quarter. Maybe talk about how long you think it takes for them to ramp or when we would see stabilization in volume point.

Yes, that's a great question, right? So we're seeing the activity levels increase, but we see a decline in new recruits for 12 straight quarters before growth last quarter, right? So we're -- there's this air pocket. We had this big bubble come in during COVID, a lot of people joined, not just us, within the industry, a lot of people joined, worked from home. Those people weren't sticky. They didn't have the training, the connection, the events to go to become sticky. So when COVID restrictions lifted, they left, it created an air pocket, which just kept getting bigger and bigger as our new recruits kept shrinking. That trend is now changing. So when does it translate to sales growth? We're pretty close. Like I said, we had 1% growth in Q4, 1% growth in Q1, we were down 2.5% in Q2 with some reasons behind it, kind of in that same path for Q3, but potentially growth in Q4, but maybe if you looked at the implied guidance for Q4, slight decline, slight increase, somewhere in that range. So we're kind of hovering in at that point. At some point in the near future, which I think will be sometime next year, you'll start to see growth from the new distributors.

are you seeing these new distributors ramp the same way that distributors did, I guess, any year pre-COVID or are they sort of in line with historical average?

So I'll put it into 2 -- I'll break that into 2 buckets. So there's activity and productivity. We're seeing the activity levels consistent with historical levels, meaning they come in, how many are active in Month 2, Month 3, Month 4, same percentages. Productivity is around 10% below what we've seen historically, which could be a good thing. We actually lowered the qualification for these distributors to earn more money. So we've driven some of that behavior, which we think will be more sticky.

Do you think some of it has to do with the price point of the product being higher than it was pre-COVID?

Well, I mean, our price points are higher. We've taken price increases like every other consumer products company. I think we've taken it in line with what's going on in CPI, in local marketplaces. So I have no evidence that that's what the driver is.

Okay. So let's talk -- you mentioned the restructuring program. Maybe talk about some of the specifics on it. $80 million in annual savings starting in 2025, $50 million savings in '24, I think are the numbers. You reduced levels, you've taken a building out of play or sold a building recently. What other components, is it just headcount? Or are there other components to it?

So that particular program is just a delayering. It was manager and above. We took out $80 million in cost on an annual basis. We executed most of that in the month of May. So we're going to get around $50 million of savings in 2024, $80 million in 2025. That was all delayering. That was management -- manager and above that were just positions that were eliminated. The building, which really wasn't tied to the program. It's just -- we have a lot of real estate in Southern California. We don't need it all with both the reduction in force and 2 days a week people work from home. So we just didn't need the space. It was a building that had an alternative purpose. It was an administrative building that could also be a warehouse. A company -- there was a couple of companies that wanted it and then tear it down, build a warehouse. We took advantage of that, and we sold the building. They were unrelated. But there are other costs -- so that's one program. There's another program -- there's actually 2 other programs we're looking for cost reductions. In the technology area, which you now spending -- our technology spend has gone way up, we're going to look to reduce our technology cost. You'll see that to start to roll into next year's EBITDA and all other indirect spend, indirect spend anything we spend outside the walls of Herbalife unrelated to the manufacturing of product. That's another area we're looking to save money.

Are there other buildings that you might consider selling?

No. We don't own a lot of our buildings. We own one of them in Southern California and the rest of them are manufacturing building, so we have no intention to sell.

One of the other questions that I've gotten pretty frequently is, and you helpfully put it on the chart every quarter, which highlights that prices have gone up, but volume continues to go down. So how sustainable is that do you think over time? Or when do you think we would see sort of those lines start to normalize? Because it doesn't look like something that you can do forever, right?

Well, we take price based on what's going on in the [indiscernible] marketplace with one exception a couple of years ago when it was massive inflation and our costs have gone up, we took an out-of-cycle price increase. In general, we try to take small price increases a couple of times a year in different marketplaces based on what the consumer is seeing on similar product. If it is what they're seeing on similar product, we expect to continue to do that. I think what you're seeing in price outweighing volume right now is a catch-up from a lot of what's happened with currency over time. So we're very dollar-denominated in our cost structure, right? A lot of our overheads in the U.S., but a lot of our product is made in the U.S. And so when currency devalues, we've gotten hurt, our EBITDA has gotten hurt. But that has a lag effect on inflation in the local marketplace. It allows us to take price over time. We expect to continue to do that, to continue to take price based on what the consumer is seeing on similar products going forward. With the exception of what we're learning from the South America, Central America test, where we can actually lower price, lower commissions and if it can drive more volume and more profit, then we'll also have to implement that elsewhere. And we have some of our other countries like Indonesia, for example, who wants that program. Our distributors are asking for that program. They want a lower price, and they're willing to make less in order to get that lower price because they think they can make it up with volume.

Is this a lower price primarily on the Formula 1 tubs that we're talking.

No, it was everything.

Everything?

Yes.

Yes. Okay. North America has been a pain point for a couple of quarters, maybe longer. How do we get back to flattish sales in North America? Because one of the bear cases is, hey, you're just trading off high margin sales in North America and replacing them with lower-margin EM sales.

Yes. U.S. has been a drag, it's been a drag on our consolidated results. It's our biggest market from a sales standpoint. And if we can get North America to get to flat, just flat and stop being a drag, it changes the whole headline of how our business is performing. And the U.S. has an overweighted focus from investors, both debt and equity investors because it's very U.S. centric.

Because we sit here.

We sit here, right. And so we -- our focus is on the U.S. I think. So we've had new distributor growth in the U.S. for the first time in 3 years, so that's a good sign. We just finished a mastermind training event for some of our top distributors in Las Vegas where this is part of the program to treat our external sales force as though they had internal discipline -- internal sales force discipline. So this program was both not only training them what to do but giving them key account managers. so the way it would work is, we've got regional salespeople that work for the company in different states. These distributors as part of this program will get every month from their salesperson all their metrics. They will make a commitment as to what they will do next month, how many new customers they will get, how many new distributors they will get, what sales will be. They'll get reported on that by their key account manager, and they've been grouped in peers of 10 of the distributors who all now will share their results with each other. So they become accountable to more than just themselves. They become accountable to delivering the metrics they committed to the company through their key account manager and through their peers and so that creates an incentive for people to have the discipline to execute, but also allows them to share best practices.

And this wasn't previously being done?

It's never been done, it's not even done in the industry. These are independent salespeople who have, in the past, have been left through their upline to train. Well, now everybody is uplined, if you can follow the logic is Stephan's downline because Stephan is now the President. And Stephan from 2010 to 2023 when he was a distributor grew his business 10x greater than what Herbalife is growing its business. So Stephan is a very successful distributor. He's taking the discipline he used to use at his organization, and he's now training all the distributors.

I like the competitive aspect of that.

Of course, yes, so do I, right? I like -- our distributors are entrepreneurs. They work for themselves. Sometimes, some mornings, it's probably tough to have that discipline. You need to do the things you need to do when you're an entrepreneur, not everybody. Some people have that natural discipline. Other people have that discipline when they're accountable to somebody else, whether it's a competitor by having 10 in a group where you're trying to be the best of your 10 or to the company because you now have a key account rep who's giving your data every month who's going to sit down with you and say you said you were going to have 15 new customers, you only gained 13, what happened? Why? Because Joe over here actually gained 18, it is what he did. And so sharing that best practice will help spread the training that's necessary for people to execute on the strategy.

And Stephan's also talked about taking the Nutrition Clubs, which is a big part of the U.S. model and moving them, I guess, for a lack of better words, more from a one-to-one sales to a more distributor-like model.

Yes. So Nutrition Clubs are an important part of our business. For those who are unfamiliar with the Nutrition Club, it is a fixed location owned and operated by a distributor. And I'm going to use Starbucks as an example, okay? What the distributor does in that club is generally sell individual servings of products made with Herbalife's ingredients. It could be a shake, no difference, Starbucks sells a cup of coffee. The reason why those model -- that model is successful is it's an individual serving, it's do it for me, so you walk in, you get a shake, it feels very accessible because you're paying for just 1 serving at a time instead of a 30-day supply, which is kind of like if I were to use Starbucks as an example, you could buy a pound of coffee for, I don't know, $10.

Also lets you change the flavor, which is the killer for me for the....

Well, that's right. Well, there's a lot of -- so our distributors come up with their own flavor, too, they have a whole flavor system that they add to the shakes. So we have, I don't know, something like 20-something flavors. You can go into a club and there could be 75 flavors because they have system they had. So it's do it for me, it's single serving. It also creates discipline for a distributor who now has to get up and put a key in a door because they have a customer coming every day. So it creates discipline. It's very sticky. But it's only -- if you're a distributor running a club, that customer flow in the club is only one way to make money. You also can sell take-home product. You can sign them up as a preferred customer so they can buy directly from Herbalife other products that you don't sell in the club. Well, during COVID, we had an explosion in Nutrition Clubs because rent was free. In a lot of cases, it was -- I mean it was cheap; in a lot of cases, it was free because we were an essential business because we were serving food, so we were allowed to stay open. Our distributors were allowed to stay open or open clubs, we have this huge inflow of clubs during COVID. And then when COVID -- when the world opened up, those operators didn't know any other business other than that individual serving. They never turned their customers into preferred customers, they never did the take home sales. They did -- they became very transactional and not community-based, which the clubs prior to COVID were very community-based. You go in, you could still get a shake, but you might have your weight on the wall. And as you lose 10 pounds, you move along the wall and you -- they'd celebrate you.

I'm not sure I like that.

But it works, right? Because I was disciplined for a consumer, right? And so Stephan's point is, we have to take the clubs that opened during COVID and teach them to be more than just transactional, teach them to have a community, teach them the other revenue streams they can generate from a customer flow coming through the door every day. That's the benefit. We have 65,000 clubs globally. It's a big number of fixed locations with a lot of customer flow coming in. One of the strategies of the company is how do we get more out of that customer flow, how do we help our distributors get more out of that customer flow.

Has that started now? Is that more towards the end of this year when that goes live?

That's starting now -- actually, that was part of the Mastermind program also, a lot of club operators is, okay, how do you get new customers, how do you convert these customers to preferred customers so they can buy take-home product from the company but you get the economic benefit.

So you put out some balance sheet targets out there. Big one last quarter where you said paying down $1 billion of debt over the next 4 to 5 years and then have leverage probably creep below 3 but maybe talk through some of the logic on that.

Well, sure. I mean we've had a previously stated goal when [indiscernible] first in a CFO, never being above 3x leverage, and we're at 3.5x now. So the first thing when I first came back and said, we're going to get to 3x and we're going to get to 3x by the end of next year, end of 2025. But then the longer I stayed, the more I realized we need to continue to pay down debt. Investors were unaware of what we were going to do with our cash because we generate more cash than we can invest in the business. So there's excess cash. What are we going to do with it? We've made the decision that we're going to continue to pay down debt. That's going to -- we're going to pay $1 billion of debt that will take 4 or 5 years to do. Our market cap today is under $1 billion, right? If our enterprise value doesn't change, then we can transfer $1 billion of value from debt holders to equity holders that more than doubles the stock in 4 to 5 years. That's if nothing else changes, right? I actually think we're going to generate sales growth. We've already made a commitment to increasing margins next year. You layer on that with paying down debt, I think there's a lot of upside in the stock.

So let's talk about China. China was a massive part of the company when I first started covering it, now it's much smaller. Obviously, COVID -- zero COVID policy's hurt you pretty badly in China. But you've also made some changes there. Where do you see China going? And is that potentially another growth vector?

Yes, China is very small right now. So China offers us very little risk, but a lot of opportunity. So how do we tap into that opportunity. Once it was the other way around, right? It had a lot of risk, not as much opportunity because it was a much bigger part of our business. During COVID, when China shuts down, they shut down. And we had just opened up a lot of clubs in China, and those clubs can no longer operate. And so we're kind of trying to build back from a very low base now in China. The change you're referring to is we've launched a program in China that reward our distributors for signing up 10 of their customers as preferred customers. Preferred customers means those customers can buy directly from the company and the economic credit goes to that sales rep. The benefit of that is now the transactions with the customers aren't in the field, they're with the company. So we've now got the data. We know what they bought, when they bought it, how much they paid and we can use technology to try to both upsell and increase the life cycle of those consumers. It's an important part of our long-term strategy. There's been resistance in the past from distributors wanting to give their customer information to the company with the fear that we would go around the distributor to the company -- I mean to the customer, they're now very confident we won't do that because one of the top distributors is now the President of the company. There's a whole new level of trust between the distributors and the company that didn't exist and so the suspicion has gone. And so China now has a program where they're recruiting preferred customers, turning those customers over to the company, letting the company market and sell to the customer but the distributors getting the credit. So I think that can be an inflection point to growth in China. We're not seeing the volume yet either, but we're seeing a lot more transactions, a lot more people buying directly from the company, which will lead to volume growth over time.

Okay. One of the other debates out there is what does Herbalife look like in a mild recession? Is it good or is it bad? Or does it have no effect?

Well. So historically, both Herbalife and this industry does well in a recession. We do well when people are looking for extra money, right? Not necessarily full-time money. Sometimes it leads into full-time money, but the direct selling in Herbalife in its past has grown well when distributors need to find a little extra money. So during a recession, that could work to our benefit. It has in the past.

It makes it easier to find new distributors or new customers?

Easier to recruit new distributors, correct.

Maybe a quick rundown of the '24 guidance changes you made at 2Q and specifically in the third quarter.

Yes. I mean we took EBITDA guidance up slightly for the year, but we took revenue slightly down. We had a weaker Q2 than we thought. We're down 2.5%. And we took what we learned in Q2 and kind of rolled a little bit of that miss into Qs 3 and 4. So we lowered sales a little bit in the full year guidance, but we increased EBITDA.

Okay. You guys have talked about GLP-1s on your calls, a little bit more last year than this year. My general view is that your customer base isn't really set up for insurance coverage on GLP-1s, but they're obviously compounded ones that are now cheaper. You could use the shake as a complement, you could also view it as a weight loss threat. So I don't know if you've seen any evidence either way on that.

So we haven't had any direct loud voices from our distributors based on their feel that they're not getting customers because of GLP-1s. So I don't think it's going against our consumer base right now. But I do think it's an opportunity. The 2 biggest weaknesses of GLP-1 are muscle mass loss because you're not getting the proteins and nutrients your body needs. Our shake is a low delivery -- low-calorie delivery form of protein. We're a protein company, right? That's the core of our ingredients. Proteins is our #1 ingredient. So we can be a low-calorie, easy to digest form of protein if you're on GLP-1. So we're -- we could be a complement to that, people who are on that program. Secondarily, another challenge with GLP-1 is it's a life -- it doesn't change behavior. It tricks your body. So when you get off of it, you gain the weight back. And so you haven't learned to change your behavior. We are a behavioral changing company. That's what our distributors do for their customers. So we've launched campaign in fact to say if you're on GLP-1, here's a set of products. We're not going to -- we're not going to look to compete against GLP-1s, we're going to look to complement GLP-1s.

Does that require additional distributor education on how to sell that?

A little bit. But again, we get the training program now. So I think -- I don't think it's a big challenge for us. If there's 1 thing our distributors know is how to sell weight loss, right? So a slight shift to say, okay, a complement to GLP-1 instead of a direct weight loss program, I don't think it's going to be that much of a challenge.

All right. I'm going to give you a softball.

Okay.

There's a whole portion of the world that thinks that MLMs or distributor-based businesses are not good businesses. So maybe talk about why you think they are good businesses and why it's the right business for Herbalife. You only got 4 minutes.

okay. So a couple of things. One, weight loss is best done through a community program, okay? That's been proven through a lot of studies about people lose weight better when there's a support group. But more importantly, after they lost weight, they maintain it better in the support group. So by having it be through Nutrition Clubs, I know everybody focuses on MLMs but we have 65,000 fixed locations, very different MLMs. We're an MLM where our distributors have 65,000 brick-and-mortar locations for which customers come to them. We actually flipped MLM upside down. MLM in the past has been characterized by distributors having very infrequent interaction with their customers, think of Tupperware party or whatever company you want to think of, very infrequent interaction and asking for a large purchase. We flip it upside down. We say the customer now comes to the distributor, the distributor sees him frequently and they ask for a very small purchase. It's a completely upside down model from what people think of when they think of MLM. So I understand the concern with MLM, we run it differently. We run it through a lot of fixed locations -- it's not the only way we do business, but it's the #1 method of which or the way Herbalife does business is through these 65,000 fixed locations. And so that changes the model a lot. That also gives the distributor the discipline they need to be successful because they have a fixed location for which they have to get up and operate every day. So it's a complete -- I know the compensation system says it's MLM, but the way we go to market is completely different than the rest of direct sellers. Additionally, in the U.S. we don't pay any of that compensation out to any distributor until the distributor sells the product to the customer, and we have visibility into that. So if you own one of those thousands of locations in the U.S., when you sell a product, it goes into a POS system, that's our POS system, and that's when you get paid, not when you buy the product. So it's also we flip upside down that equation, too.

Right. You do a sale to an actual customer?

To an actual customer for which we have to have visibility into for you to get paid?

all right. We're going to end it there. John is going to be [indiscernible] there for breakouts if you guys have any questions. Thank you.

Thank you.