Q2 2022 Herbalife Nutrition Ltd Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good afternoon, and thank you for joining the second quarter 2022 earnings conference call for Herbalife Nutrition Ltd.
On the call today and stopped the jaw Aqua <unk>, the company's chairman and CEO .
John Desimone, the company's president.
Alex and mosquito, the company's Chief Financial Officer, and Eric Monroe, The company's senior director Investor Relations.
I would now like to turn the call over to Eric Monroe to read the company's Safe Harbor language.
Good afternoon on today's call, we will be making some forward looking statements and while we are making those statements in good faith, we do not have any guarantee about the results. We will achieve descriptions of our risk factors are included in the documents we filed with the SEC.
We will also be discussing some non-GAAP financial measures. These non-GAAP and adjusted numbers refer to measures that exclude items management believes impact the comparability for the period referenced.
Please see the earnings release for additional information on our comparability items.
These GAAP to non-GAAP reconciliations can be found in the earnings press release and the slides we will be reviewing on today's call both of which can be found in the investor Relations section of our website.
I'll now turn the call over to chairman and CEO John <unk>.
Thanks, Eric and good afternoon, everyone.
Thank you for joining our second quarter 2022 earnings call.
You might have noticed that we've enhanced the format of our call by adding a slide presentation to accompany our verbal remarks.
We hope the enhancement not only makes it easier to absorb our quarterly update but also provides for a richer understanding of our business performance.
I'll start with the highlights of what we'd like you to take away from our call today.
First I'm pleased to announce our second quarter financial performance exceeded the top end of our guidance range for net sales volume adjusted EBITDA and adjusted EPS as you might recall last quarter, we saw a slowing of business trends and certain underlying kpis.
At the end of the first quarter, which continued in April .
With that backdrop. We're also pleased to update you that compared to April our business trends and metrics appear to have stabilized in the months of May and June .
That said, we acknowledge that there's still a significant amount of work to accomplish particularly around improving our new distributor a new preferred customer metrics.
I'll go deeper into our Kpis trends in a moment.
To address the macroeconomic landscape that many companies are facing we implemented meaningful price increases in mid June to partially offset the dramatic inflationary increases that we're seeing in our input costs.
As a reminder, our raw material manufacturing overhead and freight costs are increasing ahead of local consumer price indices.
We believe the timing of these pricing actions largely drove the top line out performance that we achieved in the second quarter specifically.
Specifically pre buying ahead of the price increase resulted in sales activity being pulled forward from July into June .
Our guidance for the third quarter includes the impact of this pull forward.
It should be noted that even without the pull forward. Our Q2 top line performance was in line with our guidance.
Such we are reaffirming our full year 2022 guidance for net sales and volume.
We're also reaffirming our adjusted EBIT guidance for the full year 2022.
We anticipate the execution of expense management initiatives that helped drive our adjusted EBITDA performance in the second quarter will continue throughout the year and will help absorb the significant incremental FX headwind on EBITDA.
However, in addition to the FX headwind and increase to our full year tax rate as well as the incremental cost of our variable rate debt. As a result of fed tightening are primary drivers of a 25 cent reduction to our adjusted EPS guidance range.
<unk>.
Looking to the future after significant analysis on our digital strategy, we are lunching herbalife one.
This will be the cornerstone of our front end distributor facing technology platform.
More on this investment in our future in just a moment, but let's get into the details of the second quarter.
Reported net sales for the second quarter declined 10, 3% compared to the prior year, which exceeded the high end of our guidance range. As a reminder, our second quarter of 2021 was the largest quarter in the company's history, which benefited from.
<unk> demand related to the pandemic.
With this backdrop, despite the year over year decline when compared to the last pre pandemic second quarter of 2019 net sales grew meaningfully by 12, 3%.
Reported net income of $87 million resulted in adjusted EBITDA of $195 million, which is also above our guidance range.
EBITDA margin in the quarter was 14%, which was a sequential improvement compared to our Q1 margin.
Reported earnings per share of 88 cents resulted in adjusted earnings per diluted share of 96 cents, beating the top of our adjusted EPS guidance range.
In addition to the top line beats the team took decisive actions to execute on expense management initiatives that contributed to the bottom line beat.
This is in addition to our transformation program that we discussed last quarter.
We completed approximately $30 million of share repurchases in the second quarter, bringing our year to date total to approximately $132 million.
This buyback was consistent with our methodology of returning our excess cash flow to shareholders through share repurchases.
Our underlying business trends and Kpis stabilized during the remainder of the second quarter compared to April levels.
One of our Kpis average active sales leaders showed monthly improvement in the months of May and June .
For the quarter.
Average active sales leaders of approximately 482000 was just 3% under last year, but were significantly higher than pre pandemic levels, which were in the low to mid 400 thousands.
New distributors and preferred customers joining the business have also stabilized off April trends, showing a slight improvement in the months of May and June .
While still above pre pandemic levels are recruiting trends remained meaningfully below 2020 in 2021.
We view this as an opportunity to drive growth and we are working closely with our distributor leadership on ways to increase the number of new members entering the business.
During our first quarter call, we stressed the importance of returning to in person events as a potential catalyst to return to growth. As a reminder, we believe that the interactive discussions face to face team building and social elements that are characteristic of our in person events.
Are all an important source of ideation motivation and inspiration for our distributors.
Based on a sample we analyzed from a series of U S events in April .
We measured both increased activity rates and productivity from distributors that chose to attend in person event versus non attendees.
During the two months following the events May and June we observed an improvement of eight percentage points in activity rates and a 10% improvement in productivity from those that attended the event in person versus non attendees.
Again, we believe in person events are one of the best opportunities to educate train and motivate our distributors, particularly those that are new to the business.
Turning to our regional results, where I will highlight activities from our two largest regions.
The Asia Pacific region had another quarter of growth up 15% compared to the prior year and set a quarterly sales record for the company.
The region was led by continued strength in India, which grew 30%, India supported by strong underlying metrics, including 25% year over year growth in new distributors and preferred customers and 37% growth in active sales leaders.
The preferred customer program in India has been a significant driver of growth in the market as both a means to engage new product consumers as well as to introduce consumers to the potential business opportunity.
Over 40% of our total sales leaders in India converted from the preferred customer program to become distributors and go onto eventually qualify as sales leaders.
Looking at North America, we saw a decline in net sales of 16% in the quarter.
This decline is against a challenging prior year comparison period from the largest quarter in the region's history. However, compared to Q2 2019 prior to the pandemic the business increased by approximately 23%.
Distributor recruiting remains a focal point for the region just a few weeks ago. We hosted our first in person Regionwide extravaganza for Nam since 2019 with attendance of over 20000.
As a result of the stabilization of business trends observed during the second quarter. Despite a significantly stronger U S. Dollar we are reaffirming our volume point net sales and EBIT guidance for the year.
Our guidance continues to imply year over year net sales will show growth for the fourth quarter.
For the full year, our updated adjusted earnings per share guidance includes a projected year over year currency headwind of approximately 55 cents per diluted share.
An incremental 32 cents headwind from prior guidance.
Alex will provide more details on our guidance in just a moment.
Moving on to the launch of Herbalife won.
The future of Herbalife nutrition digital technology.
Designed to supercharge distributor growth and elevate customer experiences around the globe Herbalife, one will be our first ever unified data and AI powered global digital platform, enabling growth by delivering a best in class digital experience around the world.
Uh huh.
From re imagining sign ups E Commerce down line management to providing seamless payment options and other innovative capabilities to drive ongoing engagement satisfaction and loyalty Herbalife, one will help differentiate and strengthen our leadership in the market.
We will build herbalife won on a brand new architecture that will allow for scalability flexibility performance and speed to market of future capabilities laying the foundation for our future success.
We are projected to invest approximately $400 million in this program with net incremental expenditures of 200 million to $250 million over the next three years.
Herbalife one represents the single most significant investment.
In the company's history, and it demonstrates our confidence in the potential of our business.
I'm also proud to announce that we're making some executive leadership promotions to ensure we are better supporting our independent distributors and unleashing the potential and power of our regional teams.
John Desimone will become executive Vice chair of the company.
John's vast experience at unmatched knowledge of our company will enable him to work on transformative growth initiatives that are central to the company's future.
Additionally, we are looking to move more responsibility to the regions and we're creating three regional presidents.
Steven Kanchi will be the regional president of APAC and China.
Eddie Heinrich will be the regional president of EMEA and India.
And Frac Lombardy will be regional president of the Americas.
These individuals have proven to be effective leaders and their new titles reflect the importance of their rules.
These three people will also report directly to me and I look forward to their continued contributions.
Before I turn it over to Alex I'd like to say that we have unwavering confidence in the resilience and strength of our distributors. We continue to innovate with local product development, which resulted in approximately 60, new SKU launches during the second quarter and over 20, new launches so far.
In Q3.
We believe our ongoing investments in our business and products will drive performance and ultimately create meaningful shareholder value.
I will now turn the call over to Alex Thank.
Thank you John I'll start by reviewing our financial performance for the second quarter, followed by guidance and close with comments related to our capital structure cash and share repurchase activity.
Second quarter net sales of 1.4 billion represents a decline of 10, 3% on a reported basis compared to the second quarter in 2021.
As John mentioned net sales were materially above our guidance range largely due to increased activity in the month of June as a result of pre buying ahead of the pricing actions, we executed mid month.
Normalizing for the pre buying that took place in June we estimate net sales for the quarter would have been in the upper half of our guidance range.
The U S dollar strengthened significantly against most major currencies during the second quarter and had a significant impact on our Q2 results as well as full year forecast.
FX was a 440 basis points headwind to net sales, which was 170 basis points on favorable compared to the Q2 guidance.
We benefited from 510 basis points of pricing, which was largely from the price increases taken prior to the start of the second quarter, we will not see the majority of the benefit of the pricing actions taken mid June until the third quarter.
Moving to margins, where adjusted EBITDA of $195 million resulted in an EBITA margin of 14.0%, which outperformed our margin expectations for the quarter.
Although gross profit of 77, 3% in the quarter was a sequential improvement.
It drove an EBITA margin headwind versus prior year of approximately 200 basis points, primarily driven by increased input costs in our supply chain related to raw materials and manufacturing overhead as well as shipping costs.
Within SG&A, we experienced an approximate 110 basis point headwind related to distributor promotional spend.
This headwind was largely from the timing of a major distributor event that took place in the second quarter of 2022, but took place in the first quarter of 2021.
Recall in 2021 our distributor promotions were significantly disrupted because of the pandemic.
And we are now returning to more normalized levels of promotional spend.
In the second quarter, we saw an increase in professional fee spending versus prior year, primarily related to the digital initiative Herbalife, one noted earlier, which accounted for approximately 40 basis points of EBITDA margin pressure.
We are beginning to see the positive impacts of cost savings in labor and benefits during the second quarter. We benefited by approximately 70 basis points of EBITDA margin expansion due to efficiencies and targeted strategic improvements as well as lower employee bonus accrual leading to favorable margin impact even after absorbing the.
The impact of annual Merit increases.
There was an approximate 40 basis point net benefit from the impact of price increases mix and other items.
As mentioned earlier currency had a significant impact and led to an additional 70 basis point headwind on EBITDA margins.
Adjusted EPS for the second quarter was <unk> 96.
Above our guidance range of 60 to 80.
FX was a headwind in the quarter of approximately 13.
Which was six cents unfavorable from what was assumed in guidance.
Our higher tax rate, primarily driven by Geo mix of income was an approximate nine cent headwind in the quarter compared to our guidance assumption.
Moving to guidance for the full year.
Where we are reaffirming our net sales estimates to be in a range of down 10% to down 4% on a reported basis.
We are absorbing an incremental headwind of approximately 210 basis points compared to our prior guidance due to the ongoing strengthening of the dollar.
The full year currency headwind is now 440 basis points, which is reflective of the average U S dollar to foreign currency exchange rates for the first two weeks of July .
I want to highlight that the midpoint of our fiscal year guidance for 2022 of down 7% as coming off the accelerated growth, we experienced in 2020 and 2021.
The $5 8 billion of net sales we achieved in 2021 was just under 20% growth from 2019.
We are still netting approximately 11% growth filling from the pre pandemic era to the midpoint of our 2022 guidance.
As John stated our guidance assumes a return to year over year net sales growth in the fourth quarter.
We are reaffirming our adjusted EBITDA to be in a range of $680 million to $740 million.
We are reducing full year 2022 guidance for adjusted diluted EPS to a range of $3 25 to $3.75.
This 25 cent reduction to the range of our prior adjusted EPS guidance is primarily driven by unfavorable FX headwinds as well as a higher tax rate and interest expense FX.
FX now represents a year over year headwind of approximately 55 for 2020 to.
32 unfavorable from the 23 full year headwind assumed a quarter ago.
Turning to our cash position and our share repurchase activity, our cash generation ability remains strong and during the first half of 2022, we generated approximately 229 million of operating cash flow.
We expect that the cash generation in the back half of 2022 to track ahead of the back half of 2021.
We currently have approximately $580 million of cash on hand.
During the second quarter, we completed approximately $30 million in share repurchases, which we executed while remaining prudent with the cash given the difficult macroeconomic backdrop.
While we continue to be opportunistic with future share repurchases, we are modifying the buyback assumption used in guidance.
During the third quarter the company plans to reallocate the $50 million previously designated for share buybacks to strategically reduce outstanding debt we.
We are currently tracking above our target leverage ratio of three times gross debt to EBITDA and this debt payment will help bring us closer in line.
Share repurchases may still be executed opportunistically during the third quarter, but are not assumed in guidance. Our guidance does assume that $50 million of share repurchases are resumed in the fourth quarter to maintain the patter of consistency we began in the beginning of 2021.
We continue to believe the repurchase of common shares is consistent with the company's long term goal of maximizing shareholder value.
This concludes our prepared remarks, operator, please open up the line for questions.
Thank you.
As a reminder, ladies and gentlemen to ask a question.
You need to press star one on your telephone.
Thats Star one wants to ask the question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Chris <unk> with Jefferies. Your line is open.
Hey, Thanks, and congrats on a nice quarter.
My first question is just around the demand following the pricing action in June so it sounds like you're keeping a watchful eye on trends and I know youre sitting here today with only a month and a half of data.
Based on what Youre seeing through July could you tell us what youre seeing relative to trends in demand.
Yes, I'll take that one thanks for that question, obviously that is something that we're watching closely it's a little different to comment.
Comment yet on what we're seeing in July we really need to see August to make those comparisons to really kind of isolate what is really demand elasticity versus all the other factors that are that are going around the world at the macro backdrop that we're experiencing so well.
We will need a couple of months.
August and September , especially to really.
Having a comparison, where we can isolate what is demand elasticity versus other factors.
Okay. That's fair and then maybe if I if I could ask about the sales guidance and nice to see the reiteration today, but I'm curious if the outlook is still based on April trends run rating through the rest of the year right.
Maybe can you walk us through your thought process and leaving that unchanged. Despite what kind of sounds like the initial rebuild that momentum.
Sure. So really you have a number of competing factors throughout the P&L. So I'll take it line item by line item.
From a April run rate trends and so we're talking about the underlying kpis and the volume that is.
Being achieved in each of our each of our regions.
Effectively netting out to be in the same places.
Back in April So the guide in April versus the guide now effectively have very similar performance of the business.
For the remainder of the year. When you then take that business performance and go down the net sales line you effectively have all the pricing actions that we took in June being counter counteracted by the FX headwind that we're seeing the strengthening of the U S. Dollar in most major currencies, so effectively all of that pricing that we are.
That we're getting.
As effectively netting out from FX as you go down to EPS.
Some of that.
Spence management that we saw in Q2 is going to make up for the mission of that same FX impact that I mentioned on our net sales line, but how that impacts EPS.
Tax rate, increasing and we also have interest rates.
Increasing on our variable rate debt the combination of those three things were going to offset the lion's share of it we are going to offset.
In our EBITDA, but there is a remaining 25 lowering our EPS range. So.
So again, a lot of a lot of different factors impacting each line of the P&L, but fundamentally the underlying business and how we saw it sort of playing out for the full year, yes, there's a little timing.
Any issue of some of the pull forward.
That we saw in Q2 coming out of Q3, but effectively the strength of our business in business coming off of our April levels.
Yeah.
Great.
Super Helpful. And then maybe just last one for me.
If you were to recast the sales guidance, maybe using the old approach that embeds all of the various kpis that you've historically looked at how would that shake out versus what you've reiterated today and then maybe separately. If we were to compare those kpis to how they looked at Q1. When you last reported is it safe to say, there's been a broad based improvement.
<unk>.
I missed a little bit of your beginning question I think are you, saying is our kpis.
I'm going to answer. This question is if you ask our kpis today, where they were in April does that is that the question.
That's essentially the question and then if you were to use kind of the historical approach of guidance setting where would that lands relative to what you've reiterated today.
Yes.
First of all our guidance setting we're using the same approach in which we used last quarter, which is effectively.
Where we run rating today.
We're we're run rating today is effectively where we were run rating in April so our kpis hasn't meaningfully changed now the one caveat to that is we had April and it's not a lot of months of data right. We had April we saw may stabilize off of April and then we have June which was impacted by pricing.
If you normalize for some of that price increase activity. We take reasonable estimate you would have a June that looks stable off of may.
And so that is effectively a stabilization of the kpis that John mentioned at the beginning of this call.
We're carrying forward into the guide for the rest of this year.
Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jeff Van <unk> with B Riley Your line is open.
Hi, everyone.
I know you mentioned product mix may be shifting a little bit.
Any trends you can touch on there maybe also speak to kind of what youre seeing in the weight control segment of the business.
The performance segment.
And then also if you could just speak to the news that rescue product tighter rolling that out.
How thats being received so far.
Yes. This is John I'll take that so we see the same trends in the product categories that we have seen.
Really now for a couple of years, which is.
Outperformance.
From a weighted standpoint in sports nutrition.
And then.
Healthy active lifestyle.
Uh huh.
Healthy weight is <unk>.
It's dropping a little.
It's just where our new product launches are that's where our new consumers are coming in.
We see improved customer.
Lifetime value for people, who buy sports nutrition, or health and wellness products versus weight management, which is.
Not uncommon we use weight management certainly is a.
A change in lifestyle, but some people that is very goal oriented. So we continue to see that shift.
Small because obviously weight management is the biggest part of our portfolio because we are seeing a shift and we are seeing a shift in our distributor base to if you come to our events and we just had a big one in Detroit Youll see.
A lot of fit.
Healthy people.
Two are coming from more than just weight management.
So we do see that trend and we will continue to see that trend and of course, we're launching more sports nutrition products and we're expanding it around the globe and Youll continue to see that.
Yes, I would just add this is John I would just add that I think across.
The broader news.
<unk> and fitness space, we're seeing this as a long term trend we're seeing people.
Splits nutrition for their weight management goals in other words people who've typically would've gone after a weight what we traditionally call a weight management product a high protein low calorie products. For example are increasingly going to sports nutrition solutions.
Whether it's a part of their fitness environment or their lifestyle, they're looking for products that are designated a sports nutrition product. The line is blurring between the two categories now the good thing as it relates to US is we play strong in both spaces. So no.
Where the customer goes whether it be the traditional weight management category that we offer formula one being the anchor product in that range or over on our Herbalife 24 sports nutrition category.
We find that the customer moves really back and forth between the two seeking high protein.
Supplementation and low calorie nutrition, and we offer both in both categories.
We're seeing growth as was mentioned.
A significant and impressive growth I think in our nutrition sports nutrition category and growing at a lower pace on overall on our weight management side.
Okay. So sorry, just to clarify you're saying weight management is still grow.
Yes.
Let me see if I can pull up the exact number of the categories. The category. So the category.
To be clear Geoff this is Alex speaking our year over year.
The growth rates I mean.
Net sales were down 10% year over year right right.
So we've had but at the same trends of sports and fitness outpacing our weight management cat.
Category is still consistent so if you look if you look in the queue.
Weight management is down double digits, and we have our energy and sports and fitness effectively flat. So you still have that significant outperformance but.
From a growth or contraction standpoint, I, just want to be clear, there's still contraction, but energy and sports and fitness is outpacing our weight management again, thats just reflective of our overall company performance.
Right, but it sounds like we've seen some stabilization here in the last couple of months and I believe you're guiding to Q4, reflecting to up year over year.
So it seems like youre going to have broken up somewhere.
From what you're saying it sounds like sports nutrition is really going to continue to be the fastest growing segment.
Correct me, if I'm wrong on that.
So just to make sure I mean, you heard from a lot of people on answering this question. So let me see if I can recap it.
Sports.
Nutrition, we expect to outpace.
<unk> of the other categories and Herbalife nutrition.
And that is from just a percentage of the pie right. So let's look I mean, we have other performance criteria, what we're measuring and other.
<unk> measurements.
Within the pie of what we sell we expect faster growth in sports nutrition and weight management.
Opportunity all of the categories that we sell we expect to return to growth for and growth next year, but the opportunities within the three big categories, We have which is weight management health and wellness products and sports nutrition, we expect the fastest growth coming sports nutrition.
Great well I mean, given kind of what you are seeing the shift to people I guess, maybe using sports nutrition more for <unk>, all that seems to be a real positive I would think.
One other thing I wanted to ask you about and then I'll, let someone else jump in and just wanted to ask you. If there is anything more you can offer.
And giving us color on the Herbalife one.
Products.
What that will consist of obviously, it's a large investment.
It seems like it's extremely well thought out and.
I would think going to be a phenomenal product, but that level of investment, but maybe you could just talk about some of the benefits for distributors consumers and then also the data from that system that youll collect big data that you can analyze and apply to improve your business.
Yes, let me start there.
So thanks.
Thanks for the question because it does allow us to kind of I think emphasize how important this feels to us internally.
Our distributors have for many years spoken to the need for us to use front and our consumer facing and our distributor facing technology as a competitive tool as a way to differentiate us from the competition.
As you can imagine our online interaction with new distributors and new customers. It's the first interface that people typically have it helps define the brand and so a big part of Herbalife and one is about making sure that the experience online whether that be through social media interactions with.
Accompany our traditional online interactions, making sure that that experience reflects the modern youll forgive the face sexiness of our business in other words, we want to make it a tool that helps attract people into the lifestyle into the community that is herbalife nutrition. The technology itself. Our hope is that it will.
Make signing up new distributors faster and more efficient our hope is that it makes transactions whether that be distributors to accompany our distributor to customer transactions faster and quicker and more efficient it is.
Also away as you pointed out for us to gather data and to use that data not only to do the traditional kind of E. Commerce type type type work that no. One else is doing and it's time for us to now do the same but we also think that there is knowledge. There that we can use to better kind of decided what products, we should get into next in <unk>.
Each of our regions.
What how to package and promote.
Bundles at individual products to our customers. The bottom line is our hope is that this new tool helps us sell more faster.
Now it also has been to provide our individual distributors and their own independent businesses with data that they can use to better target customers to better target, where they are going in terms of growing their businesses to better track and monitor their businesses.
The bottom line is this and we've used this youll forgive me for using an anecdote that we've used internally.
The way we see it as this is a wholesale teardown of the old house and build a new.
But we want to it's not just about fixing stuff that isn't working it's about trying to leapfrog to the next generation of technology.
We are better able to kind of.
Okay.
Get ahead of the competitive curve when it comes to technology.
In the end.
We think it's going to help our distributors who've actually been working with us for months.
To help design. This in other words, it's not something that we're building in the center and then handing off to the distributors. The distributors that we are sitting with us for a number of months.
Kind of help us identify where the pain points are where the opportunities are to compete in the marketplace, where we're falling behind the competition on and Theyre, helping US design. This solution herbalife, one so that we can put it in place over the next three years.
Great to hear it sounds like it's going to be phenomenal. Thanks for taking my questions and best of luck.
Thanks, Jeff.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of <unk> with Bank of America. Your line is open.
Hi, Thanks for taking the question.
You mentioned that pricing increased 5% on a year over year basis during the second quarter, but that didn't include much benefit of the June price increase how large was the June price increase such to think about how much the year over year increase should be in the third quarter.
So the glue.
Global price increase was 10% which went into effect in mid June .
There were some markets that were not part of that global price increase including China, India.
Vietnam, and Malaysia for regulatory reasons.
And otherwise so those will be going into place.
In Asia Pacific in Vietnam, and Malaysia that was earlier this month in July .
We're slated to have that price increase in India in September and I think also in Q3 for China. So other than that the world received a 10% price increase in mid June .
That's very helpful.
I can understand that with the shift in sales from July into June .
Very difficult to get any sources of data that indicate how consumers are responding to higher prices is there anything you've heard from your representatives are that you've been able to see which can kind of give you a sense for how underlying demand may have changed or price elasticity.
Obviously, we have ears to the ground on all of this in all of our markets and really trying to understand that I think it would be too early for me to really.
So any of those anecdotes at this point because they would just be that so let us collect the data will come back to you in a quarter and what kind of I won't give you sort of what we're seeing with a little bit of substance behind those.
Perfect. That's I can appreciate that and then.
It sounded like the $50 million that had been.
We expect it to be used for share repurchase that will be operate opportunistic debt repayment during the third quarter.
I heard you say that you were going to return to.
Share repurchases in the fourth quarter with that $50 million does that mean that you would not continue to opportunistically repurchase debt in the fourth quarter or.
It just didn't address that in at all.
Yes, so we just didnt address it explicitly at all what happens in the fourth quarter. If you look at the midpoint of our guidance the fourth quarter of our 2021 falls off so you will see our target leverage.
Rich.
Average ratio start to improve in the fourth quarter once the fourth quarter of 2021 rolls off so really.
Is to manage our gross debt, let's get a little closer to target now.
And.
The P&L.
Take care of itself to some degree fourth quarter, obviously, if there is anything.
Where we need to be.
<unk> be a bit more prudent on our on our how much debt. We're carrying we'll certainly do that as we as we are now but.
But that's not in our expectations. So if we if we hit our guide our expectation is we will have sufficient sufficiently move towards our target leverage and we can reuse that excess cash back into our share repurchase program.
Great. Thanks, so much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Hale Holden with Barclays. Your line is open.
Thanks for taking the call.
I had two quick ones for you.
Net investment in the Herbalife, one IP infrastructure build of $200 million to $250 million over the next three years.
I was wondering if a total investment of 400 is that just longer dated or is there a cost saves that offsets that to make that that number lower.
And how those numbers Josh.
The net.
Net investment is reflective of we are currently investing in a number of our legacy technologies thing technology tools that are out in the market today.
So what we're talking about when we refer to our net investment it's the reallocation of that expected expected spend into herbalife one.
Does that makes sense.
Yes. It does thank you.
Yeah.
And then the.
The $50 million.
Participants that pay down in the third quarter.
I was wondering if we should think about that going towards your variable debt or if you might go after deeper discount or discount that.
It'll likely we have $150 million drawn on the revolver right now so we will likely will likely take the revolver down by the $50 million.
Great. Thank you so much.
Thank you.
At this time I would like to turn the call back over to Dr. John <unk> for closing remarks.
Thank you very much.
Thank you all by the way for participating in the calls and for your questions.
I just want to close with a few thoughts here first.
It is something we're actually.
Internally pleased to see that our numbers are beginning to stabilize off of the April number as was reported as was mentioned by both myself and Alex.
That was important.
But the real work is ahead of us.
I want to leave both our investors and our community those that follow us with that.
The clearer picture, we're going to fight for more.
We're not satisfied with where we are we think it's good to see that things are stabilizing but it gives us an opportunity now to focus on building into the future.
We continue to project growth in Q4 as was mentioned.
To get there we're going to do some hard work internally and the teams are excited and motivated both SaaS and our distributor partners out in the field. There is a sense of excitement there is a sense of.
Purpose that is tangible when you go through events when you visit with distributors when you talk with them one on one.
And so as we look to the next phase of our journey. Our focus is really on making sure that we build off of this foundation.
We generate growth and ultimately shareholder value.
I look forward to talking with you again next quarter.
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Yes.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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