Herbalife Ltd. (HLF) Earnings Call Transcript & Summary

Thank you. All right, all set? Omega? Sure. Good morning, everyone, and thank you for joining us today, whether in person or via webcast. I'm Samantha Hallway, Head of Investor Relations at Herbalife, and I'm joined by John DeSimone, our Chief Financial Officer and incoming Interim CEO. Scott Schaefer, our Senior Vice President of Finance and Transformation and incoming CFO. Before we begin, I would like to direct the cautionary statement regarding forward-looking statements that is available under the Investor Relations section of our Herbalife website. This fireside chat will 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 presentation will be governed by this language. In addition, during today's presentation, we may discuss certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or non-recurring items that management believes impact the comparability of the periods referenced. Please refer to our Investor Relations website for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. And with that, I'll hand it back over to Hale.

Thanks, Sam. So John, the company comes into the conference with four quarters of top-line growth, a stated path to bring leverage into the 1x range by '28. The debt deal that you announced yesterday, and the early stages of a push into personalized, data-enabled nutrition. You've also had some recent management changes, so maybe walk us through what the CEO transition announcement and what interim means in your title.

Yes, sure. So for those who are unfamiliar with what's happened in the last few years, about three years ago, we had one of our top distributors, our second most successful distributor in the 46-year history of the company, join as an employee. We were going through some post-pandemic challenges, as was our industry. And he was bringing a distributor perspective in. He came in as Chief Strategy Officer, then President, then CEO. And he brought that unique angle that helped us create a vision and a strategy for the longer term. And we've announced that he's going back to running his distributorship at the end of October. I'm incredibly grateful for the insight he brought in, for the new vision and strategy, our company is in a much better place today than it was coming out of the pandemic. Nine of our last 11 quarters, we've had local currency net sales growth. The last four quarters, we have reported net sales growth. We've had volume growth in the last four quarters. Our balance sheet has been strengthened. You know, three years ago our leverage ratio was 3.9, gross leverage ratio, now it's 2.7 or 2.8 in that range. We've got a new debt deal, saving a lot of money of interest. We're in a much better spot right now for Stefan now to return. Stefan is the person we're talking about who's our current CEO to return back to his distributorship. At the same time, just prior to this, we announced a CFO transition. When I came back to the CFO, so from my background, I was CFO from 2010 to the middle of 2018, had a couple other roles with the company. After that, semi-retired, came back in early 2024. And one of my objectives when I came back, in addition to strengthening the balance sheet, was to hire a successor. And about 1 year ago, Scott came in, and we're very comfortable that he is the right person. So we announced my retirement at the end of the year, and Scott was going to jump in on January 1. Those two transitions were actually disconnected, but I think it was fortuitous because with Stefan going back to his distributorship, I've already had a replacement. For me, I'm stepping in as an Interim CEO. I've been at the company for 18 years. I know the company very well. I'm no longer retiring on December 31, so I will be interim for as long as it takes to find the right candidate. And I think that's an important takeaway for the audience. I understand the business. We've got an incredibly strong executive team. I will be here for as long as it takes, and I will be here for whatever transition a new CEO has, whatever help they need. But we're doing this in a position of financial strength, right? This is not a traditional CEO transition. In fact, we're not even losing Stefan, who is our current CEO. He is our #2 distributor. In his organization, he has about a $500 million in revenue. He has not been able to run that distributorship as CEO. It has to go in a trust. Now he gets to go back and run that distributorship, and that's one of the reasons for such a quick transition. So, that's just some context around the situation and both Stefan's situation, my situation, and Scott's situation. So Stefan's transition, does that change the personalized nutrition push that the company's? No, again, for some context, our core business is doing very well. Like I said, last four quarters, we've had volume growth, strong net sales growth. But there is a vision, and kind of the foundation of that vision is we've got 6 million members. Members are somebody who's a distributor or a preferred customer that can buy directly from us. In addition, we have millions of additional customers. When we talk about nutrition clubs, which we'll talk about at some point today, these are consumers coming into a fixed location to buy basically a single serve of our product. In the U.S. alone, we have 4 million customers that are not distributors, in just the U.S. alone. So we have reach into millions, tens of millions of customers, to extrapolate out to the U.S. customer base. We believe the next wave in health and wellness nutrition personalization. Personalization, Herbalife's been grounded in personalization since it started. Our distributors ultimately create a personalized program for their customers to be successful. But it's more of a curated program. The vision going forward is more of a formulated, personalized product. So taking the data, like what the data consumers have available to them today is exponentially greater than the data they've had available before, just a decade or two decades ago. It used to be just a scale, or you measure how many bench presses you could do. There was measurements, but it was minimal. The amount of data our consumer has today with their ability to get blood work, I mean, blood work is a commodity. Anybody can go get their own biomarkers. What do you do with that data? We want to own the space where we can take that data, whether it's biomarker data or just survey data where you answer a series of questions, and we can create a product specifically for your needs. That is an important part of our strategy, and that's not going to change. It's a spectrum. We're personalized today on a curated standpoint. We want to go to a personally formulated. We think we have the foundation for it because we've got the millions of customers. We will have the ability to get the data. There's going to be a journey to get there on that spectrum, but that's an important part of our future. Whoop, or a ring. I mean, the amount of data is a bit, like what do you do with the data? That's the confusing part for consumers. We want to be the experts to say, take that data, is what you do to improve it.

My son's playing football, and he sent me his Whoop score last night and then told me I needed to get off my butt and...

Reach your goals. A little bit.

Apparently make fun of your father who's not playing high school. So any changes to the capital allocation policy that you guys have outlined or the way you think?

For those who are unfamiliar, again, I feel like I want to give background for those who are unfamiliar with Herbalife. We generate a lot of cash. Perspective, over the last four quarters, our free cash flow yield is 23%. We've always generated cash. The reason we have debt is because we've done a lot of buybacks over the years. We bought back $6.5 billion of stock since I joined the company. A lot of that was strategic. Some of it was we had a board member who was a big investor and ultimately bought that position out. That was not strategic, but the rest of it was strategic. Coming out of the pandemic, when business changed, our balance sheet didn't look so strong anymore, and so we focused that cash on paying down debt, which we've done a lot of in the last three years, over $800 million, I believe, in the last three years. Our goal is to pay another $600 million down by the end of 2028. But where our stock is right now, and our multiple is incredibly low, incredibly undervalued for a company that's growing, that generates cash. We announced yesterday a $250 million 3-year buyback program. So we're going to work in the buyback along with paying down debt. That does mean maybe the 2028 goal of paying down another $600 million might get pushed out a little to 2029, which is fine because the maturity of the debt deals we just did doesn't happen until the early 2030s. So we'll still hit that goal. So yeah, I think our priorities have changed. And so you'll start seeing a buyback program that gets implemented. We announced it in advance of this conference so we could talk about it in our meetings with our investors. It's not likely to be implemented till next quarter because of blackout period. By policy starts tomorrow. And so there really isn't enough time to execute something in Q3, but at least we can talk about it, and investors know it's coming and we can start executing it beginning with our earnings announcement that'll be early November. So at the risk of making this a little weird for Scott, one of the things that got a lot better when you came back to the company, John, was the ability to hit guidance, project, have some financial rigor and hold yourself accountable for the goals that you had out there. Maybe talk about your confidence and how that's institutionalized in the way you do things now, so that when you depart at some point in the future, it can carry that forward. Yes, look, there was a time when I was not in the company, where we, again, it was challenging times coming out of the pandemic, and we pulled guidance. Couple things, we will always guide. That's my commitment. That Scott agrees with that. We guide with the best information we have possible, but there is a lot of rigor and a lot of different models we use to guide, hundreds of models, ultimately, that we use to find what we think is the best model to use for guidance. And over the last 2 years, I think in the last 3 years, since I came back, we've missed net sales once. But I haven't missed EBITDA. We've exceeded guidance. So I do think it's been institutionalized. Knock on wood, every time you guide some, at some point you're going to miss. We all have to deal with that. But I think we have a lot of rigor in the process. Scott, who's the next CFO, his background. He was with Zappos for 16 years. From when it was its standalone company to when it was the division of Amazon, he rose up to not just the CFO position, but the CEO position for 3 years. Working for Amazon, I think financial discipline, operating rigor and accountability is core to that environment, so I think it's in Scott's DNA, too.

Scott, I was hoping for better shoes from you, to be honest. Oh. I don't know. I, I, um, I do wonder how you got from Zappos to Herbalife because presumably you spent a lot of time at Zappos, and Herbalife may not have been on your operating radar. So maybe talk about what attracted you to the company or how you ended up there. Yes, so after exiting Zappos, I decided I wanted to take a year off. And halfway through that window, I started.

To search for what's next. And I was actually about to join another firm with a contract opportunity back in the shoe game as a CFO, COO. And right before I signed the contract, one of the recruiters I was working with reached out and services opportunity with Herbalife, and I've always been into health and wellness journey over time, and, you know, I familiar with the company but wasn't deeply familiar, and so I was like, yeah, this seems like a really interesting opportunity, that the profile looked great, and met with John first, and then I met with the CEO, Stefan. And what was striking that made me really pause and really become extremely interested was how it presented both purpose and opportunity. Zappos was a company that was purpose first, values first. And then when you're creating value for people, profit follows, and cash follows. And we lived our values every single day. Culture and the company and really the purpose of helping small, you know, business owners, you know, create something unique for themselves. I just did, struck me, and so I thought it was something that I did want to pursue a little bit further. And then on the opportunity side, the company had come through a kind of corrective period coming out of COVID and was on stable footing. I learned a lot from John in terms of like the margin expansion and the goal that we have set forward on debt pay down, and it seemed like it was just a really great time for us to, for me to jump, and kind of the rest is history. I've been with the company now about 10 months and extremely grateful to be part of it. It feels very much like home.

So what are two or three metrics that you're going to focus on as CFO that you want to hold the company accountable for, or your team accountable for?

Yes, so when you think about first the financial and then kind of the operational, I think on the financial side, clearly free cash flow. This is a great cash generating business. And as we focus on margin expansion being #2, our ability to drive top-line growth, margin expansion's only going to yield stronger free cash flow. This is not a capital-intensive business, so there's a lot of operating cash and free cash that we generate. Those are a couple where we're going to set long-term targets for ourselves, and I think we can continue to do really well. The operational one, you know, because we are, the way we go to market is through our distribution, and they're kind of our first line of customers, then of course they have their customers that they work with. Experience metrics matter. They are effectively operational metrics. And so the couple that I really want to hold ourselves accountable is how can we create a great experience for our distributors? So this is everything from inventory efficiency, making sure that we have product in stocks that they can meet consumer demands, to things like click to deliver rates, right? Making sure that we can get a product to our customers in an appropriate time, to our distributors and our customers in an appropriate time, to help them service their small business needs. So just a couple of those operational metrics, because those have a significant impact on the experience that they can create for their customers.

John, you've got a clock on your tenure here, maybe now we're in extended time, but...

What do you want to finish before you leave? I'll speak to it as a CFO position, not as the Interim CEO, because there's things I want to do on both. And, you know, our historical margin rate was north, EBITDA margin was north of 15, right around 15, between 15 and 16 for a long time. We went down really low to 11.3% coming out of COVID in 2023. We worked our way up to just over 13%. Last year, we want to see if we get back to 15. I think there's a little bit of aspirational goals there because of some, if the more familiar you get with us, the more you'll understand this next comment. There's an India GST tax issue that's great for sales but hurts margins a little. So it's hurt, it's creating a, it's a mixed issue, still hugely beneficial to us as a company, but it puts pressure on the margin number, but adds a lot of profit. We're working on a path, a roadmap to get our margins back up. Whether we get to 15 or maybe we get to 15 less the impact of GST, we want to have that clear roadmap out over the multiple years we need to get there. And Scott's a big part of that, and I'd like to have that done.

Before I leave. We talked about this a little bit yesterday, but you have these new products that are coming that are different than the core. You have a distributor base that is a unique attribute of the company, and in the sense that they're not directly employees. And most of your cash is coming from the core nutrition products at the moment. So how do you make sure that the distributors don't get distracted with the shiny new toys or that things get levered in the right way and that, you know, growth is, move it up and to the right the way you wanted it to? Yeah, first of all, I think...

I'm going to reframe it because I think I'm not worried about distributors getting distracted from the next bright, shiny object. Okay. Right. Because they're going to do whatever makes them the most money. They're all independent entrepreneurs. They know what works. They have their business flows. They don't change easily. The real question is how do we as a company, the company not get distracted with the bright, shiny object. So we're not working on things that don't add value. Our job is to is to help add value to the distributor. If we launch something, they're not going to be distracted. If it doesn't work for them, they just won't use it. And so our job is to add value. And so that's what we believe we're doing with our initiatives. And we do that multiple ways, but one of the ways is a lot of interaction with our distributors. For example, with our new technology platform, Protocol, it's an app. We call them labs. Our distributors have different business flows. We, those business flows have names. Nutrition clubs is one of the names, but there's a lot of them. We bring in the top distributors that have those business flows in these labs to help us launch a product that they believe will help them. So I'm not worried about distraction. It's more the other way around is making sure we put the energy and effort into things that actually add value. Otherwise, they won't use it. Right.

The flip side of that is how do you move the needle on the distributor economic model so that they do adopt these.

And it becomes profitable for them. There's two things that have to marry up. It has to be value for the consumer, and it has to help a distributor make money. Those are the two things the initiatives need to do, in fact, for it to be successful. So, again, I'm not at all worried about that. I think what we're launching with their interaction will help drive value.

And Scott, you came in after Herbalife 1 was kind of cleaned up by John, which is probably, but maybe if you guys could both talk about where you are in the digital transformation, what you have left to do, you know.

Is that an ongoing sort of cost drag as you go forward? So I, and we use the phrase Herbalife One, it was a large internal technology investment to kind of clean up a lot of middleware and connect a lot of our systems together to be more efficient both internally and for kind of distributor-facing, significant investment over a number of years, and that project concluded about 1 year or so ago. So our digital transformation, it's not going to stop. What we're doing, for the most part, is not heavy and capital intensive. Our typical CapEx rate runs between 1% to 2% of sales. So the couple of things that we have going right now, which I think no matter what, we're going to continue to invest in a good digital experience that is obviously competitive. Internal for efficiency and external for helping drive growth for our distributors and for ourselves. The, where we are in the journey right now is, if you look at the consumer-facing side of it, right, our Protocol investment, so how can we better connect in customers and their data with distributors to help them create a creative value, and then also, again, create better business opportunity for themselves. That we're going to continue to be on, and that development cycle will continue. I'd say we're still early in that development cycle. That's not the only consumer-facing or distributor-facing technology that we have. I think there's still a lot more that we can continue to do to improve those experiences and possibly combine some of the applications and reduce some of the overall tech overhead. So I think that's going to be part of that journey. The other side of it is we have some other internal projects that we're doing. Our Oracle ERP is an on-prem system right now. We have a large project that's through '28 and goes into '29 and some of the later boundary systems to move to a cloud infrastructure. That project, again, this is the biggest year for the capital intensive portion of it. We're going to get a lot of gains out of it for internal efficiencies because we can't take advantage of a lot of things like the AI native aspects of what cloud has to offer because we're on-prem server. So with that, we are expecting actually some labor efficiencies down the road where we can apply AI automation for things like translation services for our contact center that can help us do some consolidation efforts. So we are again, we're always going to be on a journey of creating a great infrastructure that can help with efficiency internally and externally. It's never going to be done the same way. I shouldn't say never, but we don't anticipate it being done in the same way as with Herbalife One and the level of investment, but sticking within that 1% to 2% range and trying to create incremental efficiencies for ourselves and growth opportunities for our distributors will always be our journey.

I, I completely agree. So I'd say we're still early in our journey.