Q4 2020 Herbalife Nutrition Ltd Earnings Call
Well, ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good afternoon, and thank you for joining our fourth quarter and full year 2020 earnings conference call for Herbalife Nutrition Ltd. On the call today is Dr. John <unk>, the company's chairman and CEO, John Desimone, the company's President Alex Amezquita, the company's chief financial.
<unk> officer, and Eric Monroe, The company's senior director of Investor Relations I would now like to turn the call over to Eric Monroe to read the company's Safe Harbor language.
Before we begin 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 those discussed oriented supported for.
For a complete discussion of risks associated with these forward looking statements in our business. We encourage you to refer to today's earnings release, and our SEC filings, including our most recent annual report on form 10-K R.
Our forward looking statements are based upon information currently available to us.
We do not undertake any obligation to update or release any revisions to any forward looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events. In addition, during this call certain financial performance measures may be you discussed that differ 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 assist management and investors in 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 reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the S. E. C. These reconciliations together with additional supplemental information are available at the investor relation.
<unk> section of our website Herbalife dot com. Additionally, when management makes reference to volumes. During this conference call. They are referring to volume points I will now turn the call over to our chairman and CEO John <unk> Good afternoon, everyone.
You for joining us on the call today.
2020 was a record year for Herbalife nutrition.
The demand for our nutrition products combined with the tenacity and entrepreneurialism spurred on by distributors resulted in net sales of $5.5 billion.
Which is a record for the company and an increase of 14% compared to the prior year.
Three of our regions Asia Pacific EMEA, and North America set annual net sales records.
Fourth quarter net sales of $1.4 billion increased 16% and represented the largest fourth quarter in company history.
In fact, each quarter in 2020 set a net sales record for the respective quarter.
It was not just on the topline that we delivered notable results.
2020, net income of $372.6 million increased 20% versus the prior year.
Reported earnings of $2.77 per diluted share and adjusted earnings per share of $3 on 71 cents each grew by approximately 25% year over year.
Our business continues to generate significant cash flow with 'twenty 'twenty cash flow from operations of $629 million, an increase of approximately 37% versus the prior year.
Today, We also announced sales leader retention results for the last 12 months, we qualification period ending in January of 2021.
The re qualification rate was 67.9%, which increased from the prior year rate of 66.5%.
There were approximately 330000 sales leaders retained.
The highest in our history.
We believe this result reflects the ongoing sustainability of our business and the opportunity we offer to our distributors.
Simply put 20 'twenty was an amazing year, the best year ever for Herbalife nutrition, and a testament to the strength of the company and the resilience of our distribution channel.
Although 2020 was a record setting performance year I believe the best is still to come.
In 2021, we are projecting to build off the double digit net sales growth of 2020 and have raised our net sales guidance to be in the range of 6% to 14%.
And the board of directors approved a new three year $1.5 billion share repurchase authorization.
Yet I also know that for too many 'twenty 'twenty was a year filled with loss and unimaginable challenges on my thoughts are with everyone impacted by the pandemic, we almost do our part to ensure that everyone remains safe nothing.
Nothing is more important.
As our distributors navigated the challenges of 2020, many were able to give back to their communities donating products and other supplies to those who needed. It the most for this I am grateful.
Let's dig a little deeper into our regional results for the fourth quarter, starting with the U S where net sales grew 32% compared to the fourth quarter of 2019.
During the quarter, we continued to see strength and the underlying metrics with new distributors, increasing 17% and new preferred members increasing 44%.
At the end of the year, we had over 9000 nutrition clubs in the U S compared to approximately 7700 clubs at the end of the prior year.
The growth in nutrition clubs came from more rural parts of the country, such as Alabama, Tennessee, and Louisiana, where nutrition clubs have become embedded in small town communities.
In China net sales declined 8% compared to the fourth quarter of 2019.
Along with a decline in the number of new independent service providers.
In addition to some macroeconomic challenges in China, We believe one factor contributing to these declines is a recent enhancement made to the requirements for our sales representatives to be eligible to apply to become independent service providers.
While we believe this change was a contributing factor to the decline in the fourth quarter. We believe this enhancement will ultimately strengthen our business by improving the quality of our independent service providers.
The EMEA region continues its strong trajectory with net sales growth of 31%.
36 countries in EMEA experienced double digit net sales growth in the quarter highlighted by markets, such as Italy, which grew 34%, Spain, which was up 54%, France, which increased 57% and the U K, which grew 129%.
The accelerated growth in new members that we had in the second and third quarters is having a positive impact on our sales leader metrics as average sales leaders with volume points increased 18% in the fourth quarter versus the prior year.
Additionally, we have launched our segmentation initiatives in nine markets in EMEA.
We are encouraged by the initial adoption of the program and the distributor engagement it is driving.
We are continuing to implement segmentation around the world with 21 markets scheduled throughout 'twenty 'twenty one.
Moving to India.
While we saw continued success with net sales surpassing $100 million in the quarter for the first time in the history of the country, representing an increase of 21% compared to the prior year.
Strong underlying metrics support the growth with more than 120000, new preferred customers joining the business during the fourth quarter.
The growth in India contributed to our record net sales quarter for the Asia Pacific region, which increased 14% versus the prior year.
We believe we have the right strategy in place to continue delivering results.
On Friday, we will provide an update on our growth strategies at our annual presentation at the virtual Cagny conference.
The presentation will be available on our IR website.
I am proud of our distributors and our employees.
For all they have accomplished in 2020.
Their contributions to expanding access to nutrition and economic opportunities are significant and I expect they will only continue to grow in 2021 congratulations.
Nations to the entire Herbalife nutrition team.
I will now turn the call over to Alex to review the financials.
Thank you John fourth quarter net sales of 1.4 billion represents an increase of 16% on a reported basis compared to the fourth quarter and 2019.
Our net sales performance for the fourth quarter. Once again showed the strength of our geographic diversity and our five largest markets. The U S, India, and Vietnam, and net sales up double digits, while China, and Mexico were down yet as a company net sales were up 16% for.
For the fourth quarter, we reported net income of approximately $73 8 million or 59 cents per diluted share and adjusted earnings per share of 71 cents.
Currency continued to be a headwind and had an unfavorable impact of seven cents.
Note that our adjusted earnings now includes the impact of China Grant income for the fourth quarter. Adjusted earnings includes China Grant income of $1.5 million as well as expenses related to the China growth program of approximately 6 million.
Adjusted results from all prior year periods have been updated to include China Grant income.
Reported gross margin for the fourth quarter of 78.1% decreased by approximately 300 basis points compared to the prior year period.
The decrease was largely driven by the unfavorable impact of foreign currency increased inventory write downs and the increase in freight costs related to orders being shifted to home delivery versus member pickup as a result of COVID-19, consistent with the second and third quarters of 2020.
The negative impact to cost of sales from home delivery is expected to continue in 'twenty and 'twenty one.
Fourth quarter, 2020 reported and adjusted SG&A as a percentage of net sales were 36.5% and 36.4% respectively. Excluding China member payments adjusted SG&A as a percentage of net sales was 29.2% approximately 130 basis.
Points favorable to the fourth quarter, 2019, which was largely due to a decrease in member promotion and event costs. As a result of delays cancellations and reformatting of promotions and events due to the COVID-19 pandemic.
Our fourth quarter reported effective tax rate was approximately 34.8% and our adjusted effective tax rate was 28.8%, which was higher than our year to date tax rate due to unfavorable changes in our country mix for the fourth quarter and was within our expectations.
Turning to the full year.
Reported net sales of 5.5 billion increased 14% on a reported basis adjusting for foreign exchange impact in Venezuela net sales for the year increased 17%.
'twenty 'twenty reported net income was 372.6 million or $2.77 per diluted share compared to reported net income of $311 million or $2.20 per diluted share for the full year 2019.
2020, adjusted diluted EPS was $3.71 and includes China Grant income of $14 5 million in expenses of approximately 13.7 million related to the China growth program.
The full year was negatively impacted by approximately 28 cents per share from foreign currency fluctuation on a constant currency basis adjusted earnings per share grew approximately 34% compared to 2019.
Our full year adjusted tax rate of 22.7%, which improved approximately 280 basis points from our 2019 adjusted tax rate of 25.5%.
We are issuing guidance for the first quarter 'twenty 'twenty, one as well as updating our full year 'twenty 'twenty one guidance.
For the first quarter, we estimate net sales to be in the range of eight 5% to 16, 5% growth, which includes an approximate 200 basis points currency tailwind versus the prior year.
First quarter reported diluted EPS is estimated to be in a range of 95 cents to $1 10, and adjusted diluted EPS to be in a range of a dollar to $1 15.
Reported and adjusted diluted EPS include a projected currency benefit of six cents compared to the first quarter of 'twenty 'twenty for.
For the full year, we are increasing our net sales estimates to be in a range of 6% to 14% growth on a reported basis, which includes an approximate 340 basis point tailwind due to currency constant currency net sales are slightly increase to a range of 2.6% to 10.6% growth from the.
Previous range of 2.2% to 10.2%.
We are raising full year 'twenty 'twenty, one guidance for reported diluted EPS to a range of $4.05 to $4.55 along with adjusted diluted EPS to a range of $4.25 to $4.75. The 60 range versus prior adjusted EPS guidance is primarily driven.
By favorable currency movement, along with the impact of share repurchases, including the 600 million share repurchase we completed in early January.
EPS guidance excludes the impact of any future, China Grant income and expenses related to the China growth program future share repurchases and excess tax benefits from equity exercises.
Turning to cash flow capital structure, and our share repurchase activity.
Our business continues to generate substantial cash flow operating cash flow of 629 million grew 37 per cent compared to 2019. This contributed to a little over 1 billion of cash on hand.
At the end of 'twenty 'twenty.
Adjusting for share repurchase completed in January and the drawdown on our revolver. We currently have approximately $600 million in cash.
As John mentioned, the board approved a new three year 1.5 billion share repurchase authorization.
Related to the balance sheet earlier this month, we announced an amendment to our existing 733 million term loan b credit facility that reduces the interest rate by 25 basis points, excluding the cost of the transaction and future principal payments the lower interest rate will save the company approximately 8 million in interest costs through maturity continuing to.
Prove our capital structure remains a key focus as part of our overall strategy to deliver value to our shareholders.
This concludes our prepared remarks, operator, please open the line for questions.
Of course as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Oh.
Our first question will come from Doug Lane with Lane Research. Please go ahead.
Yes, hi, good afternoon, everybody I'm.
Staying on the China growth program, and just could you give us your thoughts on them on why they changed are in the.
The adjusted EPS for that mine.
Sure. So it's a change from our adjusted EPS effectively as we've been dealing with the China growth program now for a number of years.
We had a contract renegotiation this year and as we reevaluated the treatment of that income.
It was determined now that we're a few years into this that it is.
Recurring in nature, we can't simply say that is non recurring we have an expectation that.
On that we may receive these funds in the future. So it's simply on.
Treatment a few years of more knowledge renegotiation of a contract in the expectation.
That's that China Grant income would be we can no longer say it's nonrecurring.
Okay. I mean, that's for now if you do spend that money and that's the spending of that money was included in your results previously correct correct. So it feels like we're now matching the income with the expenses now, albeit the China Grant income is unpredictable.
Don't know when we will exactly get it and we have more control on how we can spend it. So we may have some volatility them too and matching the income with the expense with that said over a long period of time, you would see matching up of the expenses with the income.
Okay fair enough.
Shifting gears, Alex I think on the third quarter call. You mentioned, there would be more advertising and promotion spending in the fourth quarter. Because you acknowledged didn't understand there obviously with COVID-19 earlier in the year and it doesn't sound like that happens. So can you just update us on where you think advertising and promotion.
Why it didnt really expand in the fourth quarter, what we should look for that going into 'twenty and 'twenty one.
Well actually Doug.
We did spend more this fourth quarter than we did in the fourth quarter of 2019.
I think that you did still have some of that spend that we thought would have in Q2 and Q3 did hit in Q4 it was still a.
We understand relative to our expectation.
Okay. That's still the nominal dollar amount in Q4 2020 was significantly higher than Q4 of 2019.
And that should continue right. So I mean, we share your view 'twenty 'twenty, one is as having a higher SG&A as a percent of sales in 2020 correct.
That's right. So as we go into 2021 the biggest the biggest issue with 2020 was in reacting to the COVID-19 situation, we couldn't mobile as fast enough. We did get some promotion and we did do some virtual events, but there wasn't enough time to reappropriate all of the farms that we normally would for.
For all ROI positive chatter.
Promotions and events.
Now that we have the benefit of more time now that we have the benefit of stabilization in this COVID-19 world, we do anticipate being able to fully spend the advertising and promotion event type spend that we would normally do we feel like we have the necessary lead time to make sure that we can put those monies to work.
Okay, good and just lastly.
Looking at the numbers in the second and third quarter.
There was a huge spike in new members that you know I don't remember those kind of numbers in the recent past anyway. So could you update us on you know now that we're a couple of quarters into it how is the behavior of the new members from last summer is for.
For US you know advancing the leader share productivity, all those kind of things and trying to think about how how your sales leaders numbers will evolve this year.
Yeah, Yeah, it's John I'll take this one.
So the performance of the new members coming in in Q3, and Q4 were not materially different than the new members coming in in Q3, and Q4 of 2019 or really the recent history of any new members in any quarter, which we viewed as a good sign I think it's an opportunity for us as we focus on better improving customer retention, which is one of our long term objectives, there's lots of opportunity.
But if you're looking for the quality of the new members coming in now versus what we had seen kind of pre COVID-19 there were about the same.
Okay.
Alright, thanks, guys.
Thanks, Doug.
Thank you. Our next question will come from Hale Holden with Barclays. Please go ahead.
Good afternoon, and thanks for taking the question I had two.
I was wondering in the market segmentation rollout unless you're doing in EMEA and you've done a couple of other markets. If there was a way to kind of tease out the benefit you've seen there from the overall benefit the company is having on Covid or post post COVID-19.
Your year to date.
Yeah. This is John I'll take that although it isn't going to be much of a tease because it's pretty earlier than most of most of the European markets that that launch segmentation ditch on December of 2020, we had a few in Russia and the Russian speaking markets that Didnt noticed so it's early but what we've seen from the markets that have launched it prior.
Prior to 2020 of course, it's a big advantage and I think it's created a lot of demand from our distributors to launching a lot of other countries. So we're in 13 countries right now we're going to do another 21 in this year in 2021.
Ironically, and so that'll give us.
<unk> 30 for market out of our 95, but it will.
Give us coverage or a little over 80% of our sales and so the benefit ultimately is is direct interaction between the customer and the company had transaction, which the system can that help leverage for improved productivity on behalf of the distributor to be clear range still distributors customers. So.
We've seen a lot of good utility from the program, so far and we're expecting a lot from it in future.
Great and then my second question is if you could give us a little bit of color on the change in.
Requirements for China in the fourth quarter for your.
Youre on a set of distributors there.
That result from the orbit churned down I guess from a number yeah look it's not the only thing let me just be clear right I mean, China's got.
On a handful of initiatives now that we're launching this year in 2020 or just launched that are in the really early phases to overcome a really a changing landscape in China that changing landscape is really the reduction in meetings that we thought were much more temporary than it turned out to be and we need it.
Yeah on some strategies in technology and product and nutrition clubs and I'll go through each of those if you'd like but specifically to the ability of the distributor to qualify to become a service provider.
Washington of their sales a portion, but a little less for 40% of their sales has to come with customer transactions through the company's system for the customer visibility.
So think of it as just a almost a promotion of the segmentation that's going on everywhere else that we get something.
A little deeper but similar in the U S. A few years back when we implemented the segmentation that was required as part of on settlement.
When you when you implement it shift with a distributor base is this just time it takes to overcome an implant in the U S. It was six to eight months I don't know what channel.
I think in that same timeframe.
But that's not the only thing that was just one of a handful of things I think from a technology standpoint.
We launched the personal store.
Last year, and that's more of an online transaction system.
But that's one of for step digital transformation process, what we didn't launch or just now launched a beta of the distributor hub, which is the distributors business tools.
That will things like live streaming for example, distributors can have live streaming events, except we have a very limited number of Sps that can use that tool because our system can handle the number of transactions that come in with people turn to byproduct during those live streaming event. So we have work to do there.
We also have signed a deal with Alibaba to provide the middleware. So the middleware will sit underneath this customer excuse me the per.
Personal store for our distributors that we interact with all of our systems that will give us credit abilities do.
Promotions and loyalty programs and things like that and that should launch in may.
And then lastly of course is the data infrastructure piece that is out for bid right now that will turn all of these systems into.
AI capable by the end of this year cycle. So there's a lot of technology based initiatives in China.
You know China is a really high end technology tool.
Consumers are used to high end tools and and.
That's where we're putting on collateral money this year theres a handful of other strategies that I could talk about.
But that's that's the key point.
Great. Thank you so much I appreciate it.
Thank you. Our next question will come from Sebastian Barbero with Jefferies. Please go ahead.
Hi team Thanks for taking my question.
I was wondering if you can give us a little more detail on your digital initiatives for 2021 outside of China.
Yes. This is John I'll take that too so the digital transformation of this company falls into a couple of <unk>.
So one is we've got some some.
Very easy to use high end tools and a handful of markets and we're rolling them out and by the end of this year most of our markets will have those high end tools.
That's step one so that's more just creating a level playing field with the <unk>.
Top of the line tools that we have today, we're also building a.
More of a middleware program now that will allow us similar to what I just explained in China, we're doing that globally to that allow us to create even state of the art tools going forward. So those are two of the key areas that we're going to invest in technology in 2021.
Okay.
Gross margin in Q4 was a bit more pressure than than we anticipated wondering if you could perhaps talk about where your E. Comm penetration is today versus where it was.
On a year ago.
And also talk about lease penetration rates in some of your larger markets.
Especially make sure I heard the question right are you talking about our E commerce penetration rates.
Yes and to himself.
Shifting to home delivery versus member pickup.
Sure sure well why don't I talk about home delivery. So yes, so margins continue to be pressured by home delivery again.
Given that we have a distribution network in terms of getting our product into the hands of customers and distributors that were really geared for a lot of access points that require in person.
In person delivery.
That flipped on its head this year right because of the lack of in person in person because of Covid in lockdown. So home delivery has become we've had to layer on in home delivery on top of our infrastructure and those margins you've seen it on our gross margin continued to pressure pressure.
Pressure gross margin, we're still in a COVID-19 situations. So it's still too early for us to react in any meaningful way to be able to re optimize our distribution network to know is our current home delivery right here to stay or would we revert back to what were optimized for <unk>.
More of an in person delivery once once COVID-19 settled so youre going to see in 2021. This continued probably at the same rate that we've seen in Q4 see that.
That margin pressure from that aspect in 2021, it's probably somewhere around a point of margin I would say as we think of as we think of 2021 with that said.
Overall gross margins should be about the same maybe even slightly improved as we think of other types of benefits that we can get out of our cost of goods sale all lines. So.
A point of pressure from from.
From home delivery, but hopefully we can offset that with other with other benefits.
Got it okay.
I want to shift cash a little bit and talk about the performance of the product portfolio I think <unk> got push the strongest for the year on your sports nutrition and wondering that has to do.
With a young day.
Member base.
And also you're talking about that how do you think about the growth by category in 'twenty 'twenty, one and then.
What should we expect.
From the.
Portfolio extension I think I'll go over the next 12 months.
Yeah, Hi, this is John I'll take the beginning of that question, which is the performance of the different categories and really has three core so this weight management and targeted nutrition and sports and.
And just by way of for everybody else on the call weight management grew in 2020 I'm talking volume here.
Bye Bye I mean shooting net sales by 10% targeted nutrition by 'twenty sports nutrition by 'twenty five.
And if you've seen on or any of our prior investor presentations. There was a focus on expanding into targeted nutrition and the sports category and that's what's driving it.
The growth being outweighed in those two categories a lot of that is coming from the expansion of certain skus. We have in the U S into other markets unit case sports nutrition weighted to China and India.
I expect that.
Sports will outgrow the other two categories. Both in 2021 in the next few years and I also expect that targeted nutrition walk for weight management.
For that same time period.
And to add onto that.
Bastian. So if you look at we talked about the growth rates, we talked about the growth rates of sports nutrition and targeted nutrition being Phoenix.
Free and accelerated from from our weight management and if you look at our overall product mix, particularly as you compare it from 2018 to 2019 for 2020, you continue to see the diversification of our product portfolio weight management in 2018 represented just over 63% of our product sales, it's now under 60%.
And that that has been taken targeted nutrition now represents an incremental interest over 2% and sports and fitness represents another incremental appointment have so.
It's little bites each year as those.
Areas of focus that we've highlighted in our in our investor presentations et cetera continue to outpace the rest of the portfolio, where we're hoping to continue to take advantage of taking share in making share in those categories.
Got it thank you.
Thank you. Our next question will come from William Reuter with Bank of America. Please go ahead.
Hi in 2020, I think that your SG&A was down base.
Based upon lower event costs less promotional activity et cetera. So I guess the outlook for 2021 do you expect that those expenses are going to come back or given continued high cases et cetera are you still going to be hosting less of those events in person.
Good good question. So I think the large buckets of expense will be coming back so our advertising promotion sales events those types of spend.
Our consistent.
Historically, if you go back to 2019 and before.
As a percentage of our net sales will will be returning so there will be some margin pressure as compared to 2020 actually I would say, it's the other way around 2020 was a bit of an anomaly because we didn't have that spend.
With that said.
Some spend like <unk>, we don't anticipate that coming back.
Right away, but I don't think that's not as big of a needle mover.
Advertising and promotion spend et cetera, so on.
On a margin basis, I think the way that I would look at it Williams is looking at 2019 as the reference here and.
Approaching margin levels that are more consistent with 2019 on a constant currency basis.
Okay.
And then just my other one in terms of how you know.
You were going to continue you should continue to produce a lot of free cash flow. This year, how you're thinking about uses of that free cash flow. If you think you are going to pay some sort of a large dividend I guess what are your thoughts there.
Yes, I don't think any dividend strategy is something that the board has been contemplating I think it's still the same story that we've been espousing in that our excess cash flow will return to shareholders in the most efficient way to do that is through share repurchases. So as we sort of move into 2021.
Consistent cash flow generation will return that consistent cash flow.
Through share repurchases.
As we generate the excess cash flow so.
I guess I'll leave it at that it's on a consistent strategy that we've had.
And we will continue to do so.
Cool alright. Thank you that's all from me.
Sure.
Thank you. Our next question will come from Ivan <unk> with Tigress financial. Please go ahead.
Thank you for taking my question congratulations on another great quarter, and a great year.
What were some of the leading products in the quarter and the year that drove a lot of the sales growth and also if were you did you experience any shortages in products because of the pandemic and issues with supply chain that if you had more of you would've sold more.
Yes.
Two unique question. So first of all I'll take the I'll take this.
This is John.
We launched a lot of new products this year.
I think for.
The ones that are.
Outpaced the normal performance of the company, where sports nutrition and targeting.
Nutrition as we've already said that growth rates.
In sports nutrition, we're on it and 40% high end growth in weight management and on target nutrition. It was.
100% higher so that's where our focus is.
It is and has been there is no one product launch that makes up a material part of our growth.
Product launches generally on I know I know a lot of direct sellers do it differently. Some people have big pipeline fills up we don't we are slow builds and you do not see material growth coming from a product launch on it and we expect that that's the way the model will continue to work. So I can't point you to any one product just like the new products are important to drive.
Growth long term to drive distributor engagement, alright gets something to for distributors to call customers about.
And that's important.
With respect to out of stock.
But we had a a.
On a number of out of stocks earlier first.
First half of the year second quarter Q3, a little bit I think we're pretty much caught up at this point.
Q3, there had the most impact.
And that was for a couple of reasons of course, when sales growth dramatically exceeds expectations.
It puts pressure on supply and then with.
Work force being a little bit Ltd. During some of the Covid.
Eight of Covid.
Production was challenging more with third parties and with Herbalife nutrition itself.
But there was definitely some impact of sales from.
Auto stocks, but much more for Q3 than Q4 issue.
Ivan This is John <unk> here.
Thank you for your question just a reminder that.
At the category level as was mentioned earlier by Alex.
We continue to see significant growth in sports nutrition in general we're very pleased to see that and then targeted nutrition as well.
So the strategy for our product portfolio at a category level continues to deliver the way we hoped it would and we expect to see more of that in the future. The other part that I think is notable but to John's point no. One item would be called out is the fact that we are increasingly moving to new flavors and new products at the <unk>.
Regional level as designed by product development teams in each region, so flavors in India.
In particular categories of products like Ayurvedic products in India are launching we're seeing flavors in China on a new products in South America that are unique to those regions as well overall I think at the category level, we're seeing significant growth.
Very good alright, as far as support Tech investments. So what kind of demands are your distributors or looking for like what would they say in.
What kind of investments are you going to be making in support tech.
What type of initiatives.
Again, so I'll break it into.
I'll break it into China on everything else, although they are related income and a different platform. So like I said in China. This these high end tools started with the personal store, but to get better functionality out of the personal style, we need that set.
Net of business tools, and the middleware that ties it all together the middleware. So it looks like I think of the old days of a receiver we had all these things plug into your received on your receiver plugged into the <unk>.
Right well, we don't have that so every time you have got a personal story, you're going to plug into all of our different databases and you can't run promotions that way and you can't run for customer loyalty programs. So there's a lot of functionality that will get enhanced with this middleware that goes in in May but that is the that is the next step to a bigger strategy, which is.
AI how to use artificial intelligence to make on distributors more effective.
And more productive because a distributors single most constraining asset as the time it almost all single person entities and so what youll see thats, the China comment but that.
It's also a global comment is how do we make our distributors more effective and more productive with technology and that falls into two buckets. One is ease of use okay. So there's a whole focus on rolling out our best tools to every market ease of use second is then scale.
Is creating the technology to help our distributors service multiple customers at the same time with the distributors at a training event.
They also recruiting customers and service for customers as the servicing one customer how can they also service and other customer and so how can we give on distributors the information they need to be more effective and efficient and therefore retained net customers longer.
Through artificial intelligence that happens automatically that's the way that's coming in technology.
Well, how would you incorporate artificial intelligence trying to match up like additional products that somebody would use when they favor certain products or how would you.
Yes.
Lots of ways, but what youre talking about is kind of the maybe the easiest way to visualize it right. So it's almost people.
I as a consumer byproduct day.
And then the system says people, who byproduct day also light product B and C. Do you want to add it to your basket right.
It's a lot more complex than that because we are also in the business of helping distributors generate more from their whole organization and that could also be tied to AI. So there's lots of opportunities for AI, but what you. Just mentioned is one that a lot of people can understand it is part of what we're trying to accomplish.
What about let's say population demographics of your customer base.
To target either product launches or potential.
Interest well yeah of course.
We're getting we're getting younger right as an organization, which is rare for direct seller right. When you look at.
Almost 60% of our new members are millennials or Gen Z and we're trying to now incorporate their views into our strategies.
On X strategy and technology strategy. So of course that will be an important component.
The fact that your client base is getting younger as that's that's why it's skewing toward the growth of sports nutrition, because younger people would just generally be more be more active.
Yeah look, it's chicken and egg alright, so, but yes that might be also why the sports nutrition line like that.
Tracking yogurt right so.
Goes hand in hand.
And as we come out of the pandemic, what what type of opportunities do you see with people, we engaging in the economy with.
What type of consumer demand for products and what type of new products do you envision coming out from 2021 and beyond.
Yes, let me jump in with a few thoughts here so I think.
Clearly, it's hard to predict on a country by country basis.
What the longer term impacts of COVID-19 might be on the economy on People's behaviors, They're awesome I think obvious patterns that will carry forward I think Alex mentioned one of them.
<unk> home delivery could become a bigger portion of the way that we fulfill our product deliveries on a go forward basis. It's also quite likely to expect that there'll be more for.
Physical activity fitness sports as people come out of their homes, and we engage them in the environment around them and the need for sports nutrition.
Hopefully, we will follow that as well I do think that there's a general awareness of health that.
In our surveys and our interaction with distributors on with customers. It would appear that that that awareness is going to stick with a large portion of the population as they come out of their Covid lockdowns.
It's hard to be precise obviously, because we were kind of looking at human behavior here.
I do think that technology is an important and powerful change that is not going to reverse people have learned the importance of digital technology. Many of our distributors who were not online have now moved online I think it's unlikely that they will reverse that that behavior pattern and our customers there.
The whole technology Revolution was accelerated.
And continues to be accelerated by Covid.
I hope that answers your question, there's a lot coming thank you Ivan.
Thank you and congratulations and wish you a great 2021.
Thank you.
Thank you and our next question will come from Karin carry Martinsen with Jefferies. Please go ahead.
Good afternoon.
The changes to the China distribution model with the segmentation should that'd be a headwind recognizing that there are other factors there I play with how should that headwind kind of play out through the next couple of quarters until we anniversary that in the next fourth quarter.
What would be the drag from that yes.
Yes sure.
It's a it's a change in how sp's get qualified.
Just to be clear and it is a headwind it's not the only headwind by the way right. So we have a headwind in the next few months.
In China, but that is one of the headwinds which is a change in qualification takes time too.
Implement and distributors take time to acclimate, such change and we've seen that in the past so yes.
Yes, I think youre looking at some headwinds for a little while.
Okay, and then just when you referenced the kind of a point of margin gross margin pressure with the <unk>.
Shipping on home delivery and freight.
What is the ability to push through prices.
On a lot of food companies.
They're starting to talk about.
Rising inflation for input materials, and also the freight and taking pricing where appropriate is that something that is available to you at this point in time on the year.
Yes, absolutely let me clarify because maybe maybe the context was was it was it was taken out of context for I wasn't clear enough. So.
I'm not saying that there is a point in the final number.
Gross margin or even operating margin what I'm, saying is the home delivery impact is about a point of margin. We have other levers that we're going to use pricing being one of those to counteract the impact of home delivery such that we can deliver on operating margin that is consistent with.
2019 operating margin on a constant currency basis, and referring specifically to gross margin our gross margin consistent with what we delivered in 2020, so the home delivery is.
Isn't it.
I guess, an impact, but I didn't mean that to represent that is going to be the final answer does that makes sense. Yes. Thank you very much for the clarification and speak and speaking of pricing. It is something worth, noting because we are able to take pricing.
We generally have a philosophy of pricing with local inflation.
In the markets around the world.
And if you look at our pricing. We're generally I think for 2020, it's been pretty consistent on a quarterly basis, but we're getting about two and a half to three points of pricing on average. So we are taking price, where it's responsible and whereas consistent with the inflation in that market.
Thank you very much appreciate it.
Thank you ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back over to Dr. John <unk> for any closing remarks.
Thank you I'll keep this quick keep it brief first of all.
2020, a record net sales year for us as a company.
Looking back on it I think all of US are very proud of the work that our distributors and our employees put into delivering that result, but I would note that we have seen volume growth now in 2020 and 2019 the year before that in 2018, so theres a theres a run here that we're pleased to see as well our.
<unk> is working its still a very simple and focused strategy.
Thank God, we sometimes move the.
The items around in terms of how we rank them I think this year as we look to the future technology is going to be a big focus for us as a company.
But looking back on 2020, I think product came through for us in a big way.
As Ben described and particularly I think it's important that we note. This that it was delivered during what I think society will recognize historically was a particularly tough year with COVID-19.
Do want to just point out in closing here that many of our distributors lost lost loved ones. This year number of on employees have been impacted.
Sadly by.
By Covid.
On and around the world and that particular issue Covid is still here. So we're adapting on the fly and I think it's important that I just end by saying, how very proud I am of the entire team for delivering an amazing year during tough circumstances on with that outlook.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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