Q1 2020 Earnings Call
[music].
I wouldn't limited on the call today, it's Dr., John I wouldn't be.
<unk> CEO, John D. Simonetti companies, President, Alex I Mosquito, the company's senior Vice President Finance strategy, and Investor Relations and Ericsson wrote the company's director Investor Relations I'd now like turn call over to urban wrote to read the company's Safe Harbor language.
Before we began as a reminder, during this conference call. We may make forward looking statements within the meaning of the federal Securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from Doe discussed or anticipated.
For a complete discussion of risks associated with these forward looking statements in our business. We encourage you to refer to todays earnings release, and our FCC filings, including our most recent annual report on form 10-K, and quarterly report on form 10-Q.
Our forward looking statements are based upon information currently available to us.
We do not undertake any obligation to update or really any revisions to any forward looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events.
Question during this call certain financial performance measures, maybe discuss the different from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures as just managed.
And investors and evaluating our performance and preparing period to period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release a.
A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the FCC. These reconciliations together with additional supplemental information are available at the Investor Relations section of our web site Herbalife Dotcom. Additionally, when management makes right.
For instance volumes during this conference call they are referring to volume point I.
Well now turn the call over to our chairman and CEO, John I wouldn't Ob good afternoon, everyone first and foremost.
I Hope you and your families are all safe and healthy. This is an extremely challenging time for us all.
So I was those most affected by this global pandemic, especially those on the front lines of the crisis.
As you saw from our press release, the first quarter was an all time high in terms of volume points.
We and our distributors are working hard to overcome the various challenges we've encountered to ensure our nutrition products are accessible to customers.
Our factories as well as our third party manufacturing facilities are operating at close to normal capacity.
Many of you know the majority of our products are foods.
Yeah, there have been last mile delivery disruptions and nutrition club restrictions in various markets.
We believe the strength of our direct selling model and our culture of collaboration with our distributors have helped us to minimize the impact of those disruptions to date by sharing best practices and developing localized solutions.
Our distributors have been utilizing consumer facing technology to interact with their customers, particularly in cases, where face to face interactions are unable to take place.
Attendance virtual product training and business opportunity meetings have been extraordinarily strong for example, a recent virtual meeting in North America had over 40000 participants.
Additionally, we've been utilizing our training teams in new and exciting ways.
For example, our doctors have offered virtual trainings on our products and on how to stay safe and healthy.
And our sponsored athletes and fitness experts are leading at home virtual workouts around the world.
The learnings and enhancements that we have had from this time.
Well only benefit us in the future.
Well, we focus on the immediate priorities related to the pandemic. We continue our work to successfully deliver against our strategic initiatives.
Our strategy is working yet we're constantly learning new ways to build it better and to innovate so that we come through each challenge stronger than before.
We will continue to evolve our strategy to better support our distributors as they grow their businesses and drive the company forward.
Turning now to updates on our top four mark.
Let's start with China.
Well volume points grew 29% compared to the first quarter of 29 team.
Well this growth was extraordinary and due to the team's ability to quickly adjust to changing.
Ladies and gentlemen, we do apologize we're experiencing a minor technical difficulty please remain on the line.
Okay.
Listen, let me start by apologizing to everybody.
For the technical issues, what we're gonna do not always we're just going to keep going I'm going to.
Finish out my statement here and I will hand, it off two out of it. So we're talking about China, where the boy imports grew 29% compared to the first quarter of 29 team and I was saying that although this growth was extraordinary and it was due to the team's ability to quickly a job.
To the changing marketplace dynamics I want everyone to remember that last year's performance was impacted by the Chinese government 100 day review of the health products industry.
We learned from last year's review that we needed to be less reliant on large in person meeting.
Therefore, we created a very robust ecommerce platform and we moved many of our sales meetings online.
These moves have proven to be extremely helpful. During the pandemic.
The economy in China, we opened so have approximately 90% of our nutrition clubs with social dusting thing that was measures in place.
No in the U.S.
The first quarter and the month of March well, all time record highs.
We did see an initial decline in sales in mid March, especially in nutrition clubs.
Great and localities placed restrictions on commerce. However, this decline has been partially offset by the ingenuity and the creativity of our distributors, who pivoted and focus their energies on increasing home deliveries and Carryout services.
India volume increased by 15% during the quarter.
But the pandemic had an adverse impact on sales later in the quarter and on into April.
Finally in Mexico volume points were down 7% in the quarter.
We're seeing some softening of still attributable to the pandemic. In addition to the already difficult economic conditions in that market.
Due to the uncertainties surrounding Cobiz 19 evolving impact on our business and on the global economy. We are unable to provide guidance at this time. However for transparency. We are providing you with April volume performance.
Given the magnitude of the restrictions put in place by local government in response to the pandemic.
We are encouraged that volume points for the month of April were down by only one per cent compared to April 29 team again, we believe this strong performance speaks to the strength of our direct selling model and our distributor culture.
We are confident our business can continue to manage through this pandemic and that we will come out stronger at the end.
Here are a few reasons why.
Well first this is a global event, but it's very local in the way that it impacts each country each city and each community.
We have an innovative infrastructure and our distributors know how to operate effectively in their local communities.
Oh, I thought block by block level.
We're encouraged by the way our distributors are connecting with and servicing their customers in this environment.
Second.
Good nutrition and healthy active lifestyles, how long was being important and people are realizing that that is true now more than ever before.
And finally, the need for supplemental income has always existed.
Our business model May help provide an opportunity for some at this time.
It's remarkable how our distributors and our employees have stepped up together to keep our business is moving forward.
And I couldn't be more proud to be part of this company at this time.
So at this point, let me hand, this over to Alex to review the financials.
Thank you John.
A record setting volume in the quarter converted to first quarter net sales of 1.3 billion, representing an increase of 7.7% on a reported basis compared to the first quarter in 2019 and included double digit net sales growth in six of our top 10 countries adjusting for the headwind and foreign exchange rates net sales for the quarter increased 10.4 per.
<unk> year over year.
We reported net income of approximately 45.6 million for 32 cents per diluted share, which includes an additional legal accrual 83 million related to the FCC Indio, Jay investigations Ami FCP matter in China.
Adjusted earnings per diluted share were 83 cents, an increase of 27% compared to adjusted earnings per adjusted diluted share of 66 cents for the first quarter last year.
Note that our reported an adjusted results. This quarter included expenses related to the China growth program of approximately 2.2 million.
Additionally, our adjusted EPS figures continue to exclude items, we consider to be outside of normal company operations. We win where we believe will be useful to investors when analyzing period over period comparisons of our result.
We have excluded net expenses related to the response to covert 19.
5.8 million during the first quarter.
The impact of currency fluctuations represented a year over year had one of only approximately two cents on results for the first quarter. Despite the approximate 270 basis points and went to that Phil. This is due to headwinds in other short term offset within the quarter.
Golden 19th sentiment drove a significant strengthening of the U.S. dollar in late March and is expected to having more material impact on EPS result for the remainder of the year should currency rates stay at current levels.
Reported gross margin for the first quarter of 8.5% increased by approximately 115 basis points compared to the prior year period.
The increase was primarily driven by the impact of retail price increases and lower inventory write downs as long as the roll off of the massacre Mexican retaliatory tells us that impacted the first quarter 2019.
First quarter 2020 reported yesterday as a percentage of net sales of 43.5% was primarily driven by the previously mentioned legal accrual 83 million adjusted EPS DNA as a percentage in that field was 36.4%.
April volume point results.
Appropriate luminary volume point results provide some insight as to the severity different markets have been impacted by coven 19 restrictions as well as the phase of the impact for example, China and the U.S. or up 20, and 14%, respectively, well, India in Brazil, or down 30, and 31%, respectively. We will <unk>, we will periodically reassess or ability.
Set 2020, guys as and when we can reasonably estimate the impact of coping 19.
Related to the balance sheet. We currently have 944 million of cash on hand, and 1.4 1.5 billion in our share repurchase program [noise], our financial profile remained strong with ample liquidity in a favorable debt maturity schedule.
During mid March we announced that amendments where existing credit facility that modestly increase borrowing capacity extends into maturity and reduce the interest rate applicable to the term loan aid facility and revolver by 50 basis points.
Being able to execute this amendment during these uncertain macro economic times demonstrates the confidence in support or lenders have an herbalife nutrition [noise].
Just concludes our prepared remarks, operator, please open up a last question.
Yeah.
Ladies and gentlemen, as or a minor in order to ask an audio question. Please press start followed by the number one on your telephone keypad again that a star one in order to ask an audio question. Our first question is from line of Wendy Nicholson Winter Citigroup, Wendy or a line is open.
Hi, a couple of questions for you if I can't it's first one the major distributor event I know on that had been obviously something you're looking forward to think D.L.. That's how I understand why they recalled to paint cost savings, but what you are thinking on in terms of rescheduling that and and and I'm wondering for two reasons number one the impact of the P. and.
L.C.D. sent their costs that we should build and maybe in the back has some time, but also in terms of keeping the momentum a life you think that's necessary for the momentum and the good well among the distributors.
[noise] yeah his job I'll take that so the event was done virtually.
They will not be a live honors this year I I can tell you I think it was done in a way in in collaboration with distributors that it was actually motivating. It does keep the momentum going as term and in terms of savings what we spend a a certain amount of our present a sales on deceiver events in promotions and.
To get back to that same level by the end of the year it may be redirected into something else.
But I think it'll be somewhere included in the model.
Got it and then my second question is with regard to China can give us a sense on the the the volume probably set up 29 per cent in the corner are stunning that's fantastic I know it was an incredibly easy com <unk> anyway, you can break that down kind of you know January February March on it so that we can get.
And for how much cobin impacting you maybe in February or March versus how much groceries on January I don't I don't even if that would be helpful or meaningful, but just curious to try to get offensive, whether cobin wasn't attach a big deal or not in China in the first quarter. Thanks.
Yeah. So it's it's I'll give you some numbers, but let me first qualified it it's it's difficult to look out because of the timing of Chinese new year. This year versus last year plus the impact of the hundred day campaign last year. When I can tell you is growth rate of China in March.
What about equal to what it was in Q1, it was 29% growth rate in March It was 29 point for for the quarter, but the spreadsheet January if ever gets really if I gave you numbers it'd be really hard for you to do it to embrace it know exactly what it means because of the time of Chinese new year. This year and started in January last.
So there's a big mix issue, resulting from that.
Got it okay. That's helpful. Thank you.
<unk>, obviously means January and February combine was around 29% growth.
Yep Yep that makes sense terrific.
And next we have a question from the line of <unk> with Jeffrey <unk>. Your line is open.
Good afternoon.
Look at the regional volume points and in April Yeah, I had to when I looked through the list. It's North America in China, you know, it's where I think you may progress with your E. Commerce platform you know how much how was that improvement in those markets driven by the having the E. commerce and does that change your thinking about how.
You would roll that out to the rest of the the <unk>.
Yeah, I think it's more than just E. commerce.
So first I think big picture in in countries and regions that have sophisticated infrastructures the ability for distributors define alternative methods to do the business.
We're enhance those with maybe some weaker infrastructure swim with difficult also you know trying to hand, the U.S. have prefer members and that helps him for for a members you know in April actually in the U.S. was was a record number of new prefer members. So I think there are some.
Some benefits that we can learn from from China as performance in from U.S. performance that will in a enhanced other other regions over time as we accelerate the role of some of these tools of course when you start looking at you know India in Brazil, <unk> <unk> <unk> <unk>, the Lockdowns me a little more.
Challenging in general anywhere in the U.S., so that had their own go and and their ongoing and so some of that plays a role into also.
Okay, and then when we look at the nutrition clubs you know certainly encouraging did hear them, you know pivoting and doing more carry out and delivery, but you know how are they performing are they getting rent relief for you know the times that they're required to be close you know, what's the health of your distributors here in the U.S. particular.
Yeah, well, so obviously nutrition called volume is down, but the U.S. and having record performance a lot of the nutrition cooperates do more than just operate nutrition clubs. They have preferred members. They have the ability to so what we call customer direct shipments <unk>.
Customer direct shipments in in the first quarter up or April you use up 40 per cent and so I think they just finding alternative methods as far as rent abatement and things like that I don't know, it's gonna be very specific to each.
Individual distributors, so I'm not aware of it but it but April was the largest month in the history of the U.S. So over all the schematism performing very well on the U.S.
In terms of the the states that are reopening you know where where do nutrition clubs you know when dawn. The all the you know state by state guidelines of what needs to be met you know how quickly can distributors open up that channel for you.
Well, it's a very localized question. So I don't know the specifics right, but when you think of clubs for so they're selling food.
Even doing curbside and deliveries in many states.
Asking is when things open up where they can go back to normal how quickly will they will they come back.
You know I guess, it's gonna be of course, I'm not prepared the answer but like I said that the U.S. is just set or.
The the highest.
Volume month in U.S. history history was March and they beat it in April so.
Yeah.
Thank you very much guys appreciate it.
[laughter] and our next question Exploitive Hail Holden with Barclays Hail Your line is open.
<unk>.
Two questions. The first one is yeah I heard your comments on Latin America in Brazil.
She was it just really locked down and the economy, there or is there something else going on market because it is an outsize decline for volume points versus or other trends.
Yeah. So so lockdowns more impactful are there for a number of reason. So for example in Brazil clubs just on open not even not doing delivery, they're not open.
We have a lot a third party logistics providers in in these countries. Some of those of shut down so the access like call. It the last mile. The consumer has a access to the product has been restrict getting a lot of the same south and Central America market is much more than the rest of the world.
Okay, [laughter] and then.
Let me just add I I want to add this because I feel like.
South and Central American Clooney, Brazil.
<unk>.
Seven per cent growth in the month of February I combined girls in January and February It was March that bright damn came into the negative. So that we were seeing good trends in south and Central America prior to.
In fact of covert in March.
Oh that's helpful. Thank you.
And then I was wondering if you if you're wraps that's sort of shifted.
There are marketing or their value approach.
To adjust for.
Lock down restrictions, whether it was you know focusing something some more on on the vitamins that you guys have been highlighting or if it was meal replacements to keep you healthy what you're not leaving your house keep laid off and just some of those ships that they've been doing dynamically.
Yeah, I don't necessarily know if the distributors <unk> are shifting whether it's more response to the demand that they're seeing for them to customers. So for example in a lot of the countries. We've seen an increase in the immunity portion of our portfolio for those particular products as people start thinking about you know staying healthy to avoid.
Would any any any any potential just making sure they stay strong and healthy. So we have seen commands shift to different parts of our portfolio I I wouldn't say that it changes the equation for distributors in terms of their business model and any material way, but we have seen we have seen tomato shifts in in purchasing behavior.
Okay. Thank you very much appreciated.
Mm.
Yeah.
Once again, ladies and gentlemen that star one on your telephone keypad in order to ask 90. A question. Our next question is <unk> definitely isn't it with Jeffrey's Stephanie your lines open.
Thank you good afternoon, everyone. Just a few questions for us to first of all we wanted to unpack a little bit more on the digital sales can you just remind us what percentage of the businesses Dot com.
And just to share a little bit more on some of the tools that you might have put into the market. During this period to help your distributor.
Well some of the sales opportunity.
Yeah. So <unk> I think the most dramatic market, where we seen the change in digital behavior was China. Obviously in 2019 as we responded to the hundred day campaign.
There the reliance on meetings, we talked about putting in second and third legs to the school. So that distributors would have alternative means to do the business. We've seen that really come to fruition as we've gone through the coven 19 situation about 30%.
Of transactions in China, or now coming through that digital platform right. So that's effectively going from zero to 30, which is a pretty significant impact.
So that's the market, where you've seen the digital platform really come to bear in the U.S.. There's been an increase I don't have the exact statistics has gone up.
Yeah, and Guy got them I mean, so if you think of a customer direct which is going on the go or like site it's around [noise].
A little over.
20% or 22 2021, 22% of our business goes through that platform or didn't April. Okay. So this is you were talking kind of post the impact of of covert.
But in the U.S., there's a lot of digital platforms, you know for members or to directly from the company and we have nutrition club using different digital tools on I'm really speaking specifically to the dot com site.
Okay. That's great and then I'd want to ask you know just <unk> extrapolate a little bit on the disclosure around Ah the F.T.P.A.
Both on the call and your filing today I think that that language. You you think you've reached in understanding in principle, you'll enter into administrative resolution you just talk a little bit about that where where are you are that process and then what that may permit you to do with respect to some of the cash in the buyback.
Yeah, so but it was 70. Thank you for your for your participation your questions.
I hope you're staying safe by the way.
Yeah. So.
As you can as you saw from the update.
The disclosure no 10, q. regarding the S.C.C.N.D.O.J. investigation.
Is is is all the detail that we can share with you is in the queue and I would refer you to the to to for further details on that.
Having having said that.
We do believe that it has freed us of any material non public information that would have affected our ability to repurchases shows. So having said that we also mindful of the fact that we have to stay Putin and you know use good <unk> good judgment in the face of Kobe's 19, and the the inevitable in.
<unk> on the economy that we all are well aware of.
So we're having to navigate kind of see what's happening beyond.
The O.J.S.C.C. and now co bid on the economy that we're trying to balance everything as we look to the future.
Okay. That's very helpful last one for US it's just your enthusiasm around the U.S. on meeting the highest number in in April. It certainly palatable can you talk a little bit about new customers.
Do you think about retaining those customers life cycle value in some of those new customer that you're bringing and thank you.
Yeah, I mean so.
The lights, new customers in the life cycle with customers the too obvious.
Metrics that are really important to us.
I'm not going to give you the number of new customers that came in Alaska month, I can tell you that the average order size in the U.S.
Going down so the growth in the U.S. has come from what people ordering.
We will measure like time values of those customers and <unk> as we go forward, but it's encouraging that it's that the growth is coming from more people water.
That's great. Thank you very much.
And our next question, it's mine Oh, Ivan <unk> with Tiger I'm, Sorry Tigers financial Ivan.
Thank you for taking my questions and congratulations on the record results, especially in a difficult time. So thriving these record results what do you think where some of the the.
Factors the key products, what most surprised you and.
What do you think the opportunities here are going forward, you know and a lotta people addressing the fact that one of the ways. The best ways to stay healthy is to be healthy. So I think there was a huge amount of opportunity for a company like yours.
Yeah. Thank you Ivan.
So so first of all you know, let let's be very clear no. One wishes. These kinds of situations on anyone's. This is a crisis by any by any definition and there are many families our customers, perhaps even some of our employees and distributors out there who have either lost loved ones will have to suffer through the the illness themselves. So.
That's the first thing I think it's critically important having said that at times like this people do tend to re evaluate their own personal situations. They look at their health. They look at their their their income streams that look at the security of their families and and they make assessments those too as to how do they improve things.
Themselves and their families in the future.
It's also I think critically important that we went into this crisis really connected to work communities through our distributors, they're really embedded at the very local level in communities. The whole business model is built around what we call the circle of influence our our ability to.
Our ability to kind of connect through families and friends into the community and it's it's proven true it's proven to be very useful in this situation where people are locked down they're able to kind of distributors and their customers are able to stay connected and it's been it's been a very effective business model, but proof of concept has been.
I think quite clear.
I'll also say this that when all is said and done healthy and nutrition and a balanced healthy lifestyle are the other ways to stay healthy and and with that.
People the demand for for our products than for our services as has gone up around the world.
And I'm, just glad and grateful to the whole team that we've been able to meet that increased demand now as we look to the future and that was the latter part of your question. It's an important part because it's a big part of our it was always a big part of our strategy and this helps us to celebrate the notion connecting to technology based technologies into our front office so to speak in into the.
Into the the transactional aspects of our distributors were was always on our strategic plan, it's become even more important as a part of this you know whether it's zoom more social media or the many other technologies you based platforms that a a part of our business he retail and so forth.
They become even more important and then will accelerate are kind of rule out of those of those strategies around the world I think as a result of what we're learning today.
Mm.
<unk> <unk> specific products that you saw search and demand for example, like the community products or you buy all the rest management products that are so I'll I'll turn it over to us and just decided to get into details. If if you require but I will say, there's all of our product categories have seen increased sales.
It's it's true that those products that are most associated with the immune support perhaps more than others, but Alex to you want to add any detail for that yeah, you know I've been.
There had been broad based group <unk> across the portfolio as as John just mentioned I didn't mention immunity in my in my response earlier because.
We we have seen that a little bit more disproportionately grow than other elements of bar of our portfolio, but really if you look at target of nutrition or sports line is up double digits targeting nutrition is up double digits outer nutrition is up double digits.
It's really across across the whole portfolio. So.
So yeah.
We're we're just grateful for that yeah.
That's great to hear him congratulations again, thank you. Thank god. Thank you.
Once again as a reminder, that star one on your telephone keypad.
And at this moment I'm showing that we have no further questions over the phone lines all my turn it back.
To our presenters for any closing remarks.
Yeah. So this is John I went over here and I, just I want to start by.
Obviously, saying Hello.
Fortunate we all are in our in in normalized nutrition for our distributors and there are innovation their resilience and their their work in the face of this crisis.
Customers their preferred members their relationships in in the in the community I made a big difference in their independent businesses and in the company overall.
As we look to the future clearly our focus is one that's kind of get through this and continue our growth into the future focus on our strategy and our long term view.
But I do think it's important that we stopped for a moment and just kind of make sure that each of you you're off partners as well that you stay as safe as you, possibly can we will get through this I'm talking about the pandemic.
The business will continue to thrive and grow into the future as we've indicated at least that's what we believe we think on model is the right model and that it's proving itself to be a great model in this time.
So with that I say, thank you stay safe and we'll see you next quarter.
<unk>.
Ladies and gentlemen, and we thank you for joining us for the first quarter to doesn't 20 earnings conference call <unk> Nutrition Limited you may now disconnect.
[laughter].
[laughter].