Q3 2022 Herbalife Nutrition Ltd Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Good afternoon, and thank you for joining the third quarter 2022 earnings conference call for Herbalife Nutrition Ltd.
On the call today is Michael Johnson, the company's chairman and interim CEO .
Alex Emmis Quito the cause.
MS 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.
We are making these statements in good faith, we do not have any guarantee about the results we will achieve.
Descriptions of 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 impacts the comparability for the period referenced please.
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 that we will be reviewing on today's call.
Of which can be found on the Investor Relations section of our website.
I will now turn the call over to chairman and interim CEO Michael Johnson.
Thanks, Eric and good afternoon, everyone and thank you for joining us on the call today, it's great to be back on this call with you and to be stepping back into my former role as chairman and interim CEO and I'm honored to be in this role again for this great company.
So passionate about it.
As interim CEO my focus will be in two key areas first to rebuild sales momentum at Herbalife nutrition and second succession management.
We'll be working closely with the board to help select and mentor the future leader of the company, who will propel us toward.
Sure.
Since I left the CEO role in 2020, the progress we have made broadening our product portfolio investing in our technology platform and embarking on a transformation of our operational capability is truly remarkable at the same time, we've had to navigate an unprecedented time in the world as global economies are impacted by the onset.
Onset persistence and aftermath of a global pandemic.
But like nutrition has not been immune to the dramatic ups and downs that companies and society as a face during these times. However over Herbalife nutrition is 42 year history in my nearly 20 years as a company we have overcome many similar challenges liquidity risk.
Periods of economic uncertainty this company's resilience.
Not only founded in the global Megatrends that demand better nutrition around the world, but also in the economic opportunities it affords individuals' potential to supplement our income.
We have seen how the entrepreneurial spirit of our distributors have developed new successful sales strategies in both good times and in tough times.
Individuals look to the herbalife nutrition business opportunity for supplemental or even full time income.
As you know I am extremely familiar and respectful of our incredibly capable leadership team that we have overseeing our strategies.
We're not going to Miss a beat I had been working closely for over a decade with our CFO Alexander Mosquito <unk>.
<unk> operating officer, Mark Sizzler and of course, my good friend and the Executive Vice Chairman John Desimone, among others in this great management team.
I'm incredibly proud of this team and their hard work and commitment to our goal of being the world's Premier Nutrition Company, Let me turn the call over to Alex who will give you details of our quarter.
Thank you, Michael and I'm incredibly thrilled to be working with you once again.
Now to the six key points that we would like attendees to take away from our call today first third quarter volume points of $1 6 billion were down 10, 7% compared to the prior year.
Which was above just the midpoint of our Q3 guidance range.
However, the significant strengthening of the US dollar during the quarter as well as with geographic mix of revenue resulted in net sales down nine 5%, which was below our expectations.
Note that FX headwinds from the stronger U S. Dollar has had a significant impact on Q3 results and consistent with the headlines you've likely seen in the financial press.
Second despite the net sales shortfall focused expense management efforts in the quarter contributed to adjusted EBITDA above our Q3 guidance range and adjusted EPS near the high end of our range.
Third we experienced a softening of sales.
Through a result of the current economic backdrop as well as the significant off cycle pricing actions that took place in June for many markets around the world we.
We anticipate these trends could continue into the fourth quarter.
Fourth <unk>.
Significant strength in India, Buoyed, a global softening of key metrics for active sales leaders and new member counts.
We are keenly focused on improving our distributor metrics with Q4 promotions specifically designed on addressing new member counts.
Fifth while we focus on protecting the bottom line in the near term, we continue to invest for our future growth, including our Herbalife one platform, we referenced last quarter.
And.
While we anticipate trends that emerged in the third quarter to persist into the fourth quarter, we are not able to forecast in an environment with such rapidly shifting consumer behaviors and volatility in the world at large as such the company is withdrawing fiscal year 'twenty two guidance, we will revisit our ability to provide 2023.
Guidance at our next earnings call in February .
Now focusing on Q3 results.
Reported net sales for the third quarter declined nine 5% compared to the prior year, despite hitting our volume projections the strengthening of the U S. Dollar during the quarter drove a 600 basis points currency headwind to net sales compared to prior year.
Ported net income of 82 million resulted in adjusted EBITDA of approximately $183 million, which was above the high end of our guidance range adjusted EBITDA margin in the quarter was 14, one 1% exceeding expectations.
Reported EPS of <unk> 83.
This resulted in adjusted earnings per diluted share of <unk> 91.
Which was near the high end of our EPS guidance range reported and adjusted EPS were both negatively impacted by a year over year currency headwind of approximately <unk> 18.
During the third quarter as previously communicated the company strategically reduced $50 million of our outstanding debt. We ended the quarter at three five times gross debt to EBITDA, which was above our target leverage ratio of 3.0 times ill.
I'll discuss capital allocation going forward in a moment.
Drilling into net sales.
Where we benefited from 10 three percentage points of pricing from the combination of our CPI linked price increases we implemented primarily in the first quarter as well as the 10% of global price increase most markets implemented in June .
Favorable country mix, primarily driven by significant outperformance in India resulted in a net sales headwind of approximately 310 basis points.
The U S dollar strengthened significantly against most major currencies during the third quarter and had an impact on our Q3 results FX was a 600 basis points headwind to net sales.
Moving to margins, where adjusted EBITDA of $183 million, resulting in an adjusted EBITDA margin of 14, 1%, which outperformed our margin expectations for the quarter.
EBITDA benefited 270 basis points from the significant price increases we've taken this year, while geographic mix of revenue and other was a headwind of 50 basis points largely due.
Due to the continued strength in India.
Although gross profit of 78.0% 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 and our supply chain.
Within SG&A, we experienced an approximate 120 basis point headwind related to promotional spend.
This headwind was largely due to the return of in person events in most regions as well as the return of more normalized promotional spend.
Recall in 2021, our distributor promotions were significantly disrupted because of the pandemic.
We continue to see the positive impact of cost savings in labor and benefits during the third quarter. We benefited by approximately 40 basis points of EBITDA margin expansion due to the efficiencies and targeted strategic improvements leading to favorable margin impact even after absorbing the impact of annual Merit increase.
<unk>.
As mentioned earlier currency had a significant impact and led to an additional 80 basis points of headwind on EBITDA margins.
Yeah.
For the quarter average active sales leaders of approximately 482000 was 5% under last year and slightly improved from Q to.
Q through.
Q3 performance was supported by the continued outperformance of India, Excluding India active sales leaders declined 2% versus the second quarter.
Similar trends were seen in our new distributor and preferred customer metric, while the Q3 metrics slightly improved as a whole compared to the second quarter trends, excluding India, new distributor and preferred customers joining the business declined single digits sequentially compared to the second quarter of 2002.
The sequential declines we experienced in our new distributor and preferred customer metric is a key focus area for management. We are market specific actions in place for improving this metric with several near term strategies already underway for.
For example, in both Mexico and Korea.
We have implemented promotions around new distributor sign up kits and while early we have observed positive results.
And observed a month to date sequential increase in October over September of 91%, and 21% and Mexico and Korea, respectively.
Turning to our regional results I'd like to call out that our operational segments have been reduced from six to five as our previously previous segments of Mexico, and South and Central America are now combined into the Latin American segment.
Also a few highlights from APAC and the EMEA.
The Asia Pacific region had another quarter of growth up approximately 10% compared to the prior year. The region was led by continued strength in India, which grew 37% and Vietnam, which was up 30%.
Certain markets in the region were adversely impacted in the third quarter by accelerated purchases in the second quarter ahead of that are significant and price price increases effective during June .
As one of our more price sensitive regions. We will continue to monitor the impact that price increases have had on APAC volume from an elasticity perspective.
The EMEA region saw a 9% decline in local currency net sales which was materially.
Amplified by 14 points of currency pressure in the quarter, resulting in reported net sales are down 23%.
Okay.
Turning to capital allocation and our cash position.
Our long term use of cash prioritization as a company remains unchanged.
As always our number one priority is to service our debt and as I mentioned earlier during the third quarter, we strategically reduced our debt by approximately $50 million as we remain prudent with cash given the difficult macro economic backdrop.
Given the persistence of this difficult macro economic landscape the company plans to reduce debt by an additional $50 million in the fourth quarter.
Reallocating funds that were previously earmarked for share buybacks to reduce our debt.
Turning to cash our cash generation ability remains strong year to date for 2022, we have generated approximately $299 million of operating cash flow.
We currently have $532 million of cash on hand.
As Michael started out on the call by saying over our 42 year history, we have overcome numerous macroeconomic challenges and while we are not satisfied with this quarter's results. We do remain confident that the resilience of our business and the strategic actions. We are taking will help us significantly emerge from the current macro economic environment.
This concludes our prepared remarks, operator, please open up the line for questions.
Thank you.
Ladies and gentlemen to ask a question you will need to press star one one on your telephone.
Again, Thats star one one to ask a question.
Please standby, while we compile the Q&A roster.
Yes.
Okay.
Our first question comes from the line of Jason Bender with Citi. Your line is open.
Great. Thanks for Slotting me and good afternoon, everyone.
Where I'd like to start is just on the leadership change obviously anytime there is change the topic can be a little bit disruptive to culture and I just wanted to give you an opportunity to expand on the change and maybe offer.
Why now was the right time.
John will be leaving the company.
So.
This is Michael Incidentally I'd welcome we haven't had a chance to meet yet.
Okay.
Most management changes are highly disruptive.
Unusual part of this one is this is a three peat.
I am returning back to accompany our love from the board of Directors, we decided to make the change in order.
To provide a spark we have spent all morning on the phone with our leadership in the field our management team our employees and.
Now I've got to be careful talking about my own receptivity I'm here, because it sounds a little egocentric, but the reception has been extremely warm.
Maintain relationships with our leadership.
For the time I've been away from the company because they've got a lot of France.
And that team are maintained the relationship with management here because we are friends to after 20 years working intercompany you don't just build professional relationship to build personal relationships, bringing my professional relationship back inside this time allows me to expand on the personal relationships and.
And create hopefully in energy and motivation that will lift the topline sales to this company to where we want them to serve our.
All of our stakeholders, our customers, our employees and especially our shareholders. So they can benefit from the hard work of the team in the field. So while it's usually is disruptive but I think this has actually a little different pace toward a little different feel I don't think it's a disruption I think continues.
Continuation of the momentum that we created with these team almost 20 years ago, and we're looking forward to build much stronger in the future.
Got it perfect. Thank you for thank you for that color and then Alex maybe one for you can you maybe just expand on the rationale for why you're withdrawing guidance.
The macro is tough there is still market, China conflict in Ukraine, and placing pressures you name it but these aren't new issues per se and with just two months left in the year I'm guess I'm wondering why pull guidance now and what does this really mean in terms of your ability to forecast the business.
Yes, that's a good question so while a lot of the headlines arent necessarily new we've been dealing with the pandemic the fallout of the pandemic.
Issues around the supply chain all of those are largely new what we have seen through the third quarter is a pretty dynamic shift in.
Consumer behavior and purchasing behavior.
As you know largely we've been focused on active sales leaders and the introduction of new distributors and preferred customers as key kpis throughout the year, but what we saw in the third quarter was a reduction in productivity as.
As well and so.
What it appears and again this is just herbalife nutrition data I'm not suggesting this is broadly but perhaps.
Is that.
These macroeconomic conditions or I should say the change.
Is.
Is impacting consumer behavior beyond ability for us to forecast, where again, we're seeing productivity down which suggest the reduction in buying behavior, whether that's a swapping out for other goods, whether thats, just simply supply saving dollars for energy purchases and other critical.
Non discretionary purchases is unclear at this moment as we're looking through the data, but clearly there has been a shift through the quarter and our inability to really forecast. These shifts just leads to.
Our inability to forecast.
Herbalife nutrition is going to behave in that environment.
Got you Okay, great and then sorry, if I can just sneaking one more just in terms of the campaign to bring in new distributors. I was wondering if you could just maybe offer some specifics there in terms of what that entails and then maybe specifically how is it different.
What youre doing now versus what you've done historically to really drive.
New recruitment.
Sure so.
Clearly with inflation.
And just how the world has been reacting to really an unprecedented levels of our pricing even in mature economies like the U S.
In Europe , where we're seeing high single digits.
You are having actually real inflationary costs that may be double digits.
That price sensitivity, we are taking into account into how we.
Structure promotional activities. So for example, figuring out ways for new member kits to be either a three for two.
Not passing along price increases on a very select part of the portfolio to encourage demand and a part of the market where.
Where we want to encourage growth. So I would say, it's really related around demand impacts around pricing and around the ability for for new members to come in without necessarily that hurdle or at least keeping pace with the significant price increases that we're seeing around.
Around the world.
Great. Thanks, so much that ill pass it on.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Jeff Van <unk> with B Riley Your line is open.
Hi, everyone and welcome back Michael.
In light of the leadership change can you just speak to what the board is looking for in a permanent CEO and the process around that.
And then Michael how long you plan to stay there to help us with succession. Once a candidate is chosen.
Sorry.
I guess permanent dessert.
Is it open ended word anymore, but I'm the permanent chairman.
Of the company.
Voted by the board to take the role of Chairman. So we as a board are looking for someone who has got Hart.
And once a brain connected to it in order to drive.
This opportunity both fundamentally with the numbers have a keen sense of margin in their perspective, but also someone whose volume aware who knows how to.
Harness and frankly, let loose I guess hardest is the wrong word let loose distributor innovation distributor entrepreneurial isn't in the field cut through some of the red tape that companies gather over the years someone who has a passion for nutrition somebody who has a passion for product somebody who has a passion for August .
<unk> and help them build their businesses every day and someone who wants to build an employee environment that is spectacular.
Life employees tend to work very very hard their work life balance is one that is a bit challenged at times and bringing that passion and making people feel very good about working in a place that brings a special opportunity to people in terms of an economic opportunity as well as the nutritional opportunity is someone that is.
<unk> going to be unique so it may take us a little time, hopefully, we'll be able to harvest that very quickly and bring bringing something into the front I don't want to give you a timeframe on me or an exact date, because it's going to take a process and that process is going to be completed as we see fit when we find the right person he or she who <unk>.
Into this role will find themselves at the helm of a spectacular company and a huge opportunity and we want them to understand that and when we find that person away. We go.
Okay, Great and then just wanted to kind of and I realize I know youre with your guidance and I know this is a tough question.
But overall just.
Interested to hear you.
Thank you.
Maybe you have to put some pieces in place for this to happen, but do you think you can grow the business in the face of recession.
Or do you think that's more likely a return to growth.
Year over year growth.
Exiting a recession.
Hi, Geoff this is Alex I'll take that one could talking with you. So we do believe that we have the ability to grow during a recession now obviously, we have to get the right strategic initiatives in place.
But we have the history of being able to do something to grow during recessionary periods.
We've referenced a lot on this call about the macroeconomic challenges and I want to make a distinction between your question and sort of what we're facing so currently this current macroeconomic challenges are still faced with things like a tight labor market are still faced with a pricing transition that's a.
<unk> consumer sentiment those are all significant headwinds obviously to almost any business to the extent that you have some stabilization there to the extent, even if you have some weakening of.
The labor market those sorts of activities could play to our favor historically our distributors have had.
<unk> mantra had the motivation to get out there and help people find an extra income opportunity at times when they are looking for it so the motivation our model being a push model where distributors get out there and.
And have certain motivations at time to create that extra sale recessionary times people looking for extra income those types of that type of environment actually should.
Could benefit us and so.
Obviously, we'd have to see how things play out there is a lot transitioning in the moment and it's hard to that's why we drew a graph guidance, it's a little hard to forecast when that might be but I just want you to simply takeaway recessionary times.
Do not necessarily mean that there isn't an opportunity for us to grow we could we could potentially grow in those environments provided we get the right strategies and we get the right motivations out there in the field.
Okay. Good to hear and then I just wanted to circle back to India for a moment if we could.
Youre continuing to see really strong growth there.
And I guess my question is are there elements of what is working to drive growth in India that you could potentially apply to other regions and I guess, if so how do you do that or what are those elements.
Yes, certainly so one of the great things about what we do as a company when we find things that are working in one place, we really do a deep deep dive to understand those things and try and get that best practice or whatever that activity might be going on in other regions. Now. So we've studied some of the things that are going on specifically in India.
See how they might apply to other places that particularly there are some strategy around the preferred customer model, which are fairly uniquely.
One of the many things that are going right in India now.
While we are doing those things it is probably important to note.
India more or less is a self contained economy and while.
We can look at those best practices and try and replicate those in other places. It really is a combination of things that are happening in India. The momentum that's been going on over the years. It's the specific things that we just referenced and it's also the fact that right now that economy more or less being closed.
<unk> has a lot of the.
The backdrop for continued success that is pretty unique and not really being experienced anywhere else in the world right. Now. So again, while we definitely are going to look towards those specific strategies. It really is a combination of things happening in India that is really promoting the continued outperformance there.
Got it thanks for taking my questions and best of luck in the remainder of Q4.
Thanks, Ken.
Thank you.
Please standby for our next question.
Our next question comes from the line of Karan remarks, Wilson with Jefferson with Jefferies. Your line is open.
Good afternoon.
Last quarter and the quarters before we talked about there was the pandemic cohort who was not engaging your longer term distributors will still still putting up good metrics.
Is this kind of pulling of guidance now, saying that those two groups of kind of merge together or is there still a difference between the two groups.
Hi, Chris Great question.
Our Q3 results have shown exactly that that those two groups of effectively merged we're not seeing a material difference from them.
At this point.
And the productivity comments that we've made and just generally the trends of pre pandemic.
Pandemic and I'm not quite sure if you say post pandemic quite yet, but really all cohorts are trending.
In line.
And then wondering if we'd look at the kind of the macro.
Macro headwinds that youre talking about the tight labor market the pricing transition and those are certainly things that are going to be with us.
Probably in a non transition.
Way for the next couple of quarters at least.
What are the programs in place that you have to kind of.
Function, even with those headwinds.
Yes, so so clearly some of the promotional activity that we were talking about on new member growth is going to be a big focus for us the strategies that go beyond those key metrics, we're actually meeting with key leadership next week to continue to drive and understand what.
The company can do with distributor leadership around the world in and specific strategies to address that I think we're all focused on really understanding the.
Sort of the landscape that we're in and we're really going to think about what are the strategies, we could do to help.
Herbalife nutrition to be successful in that.
And just lastly in terms of the $50 million debt repayment here in the fourth quarter coming up.
That'd be ABL again, and just how do you guys look at your converts here and.
Would you call March of 'twenty four.
Yes, so so yes, so likely it'll be same thing what we did in the third quarter paying down the revolver with that $50 million. We will start looking at the converts as we get into 2023. The maturity is into 2024, so we have plenty of opportunities to do.
Various various alternatives with that piece of the capital structure.
To answer your question, the $50 million will likely be against the revolver this quarter.
You very much guys I appreciate it.
Thank you.
Please standby for our next question.
Our next question comes from the line of Marianne Neely with Barclays. Your line is open.
Hale Holden from Barclays, Michael I know you've been.
Sort of starts and stops with this company over time and I was wondering.
As you look at the landscape now how long do you think it will take you from your starting point today to sort of restart distributor engagement and then gap Cathay excitement going to where you can bill growth off a base.
That's a great question tomorrow or get on a plane with all the executives here.
How do you hear Cairo, Egypt, our Founder's Circle and Chairman's Club 60, 70 Distributorships Alex Company are we know we've grown so nicely.
We'll be there. These are the leaders who have the organizations that impact every local market in the world.
We were honored zoom call with them already today their enthusiasm is pretty hot.
Very welcoming.
As I said earlier in the call. It created a lot of friendships and that group and I am not going to fair trade on the friendships.
On a trade on other business certain states and I think we can get growth back hopefully sometime next year that would be a goal of mine I don't want to promise that Eric rigs all those wonderful statements in the beginning about no promises.
In here, but the expectation with me is let's get rolling and we have done well in many types of environments economic environments. We've ever had a pandemic environment. This is new to all of us, but I think this company has a great opportunity there is no bad.
Time for good health ever and.
This is.
An economic opportunity that gives people a lot of dignity and I'm going to play on that like we've played on it for 20 years, because it's real and you see it impacting change People's lives so to get growth back Thats My number one goal.
Third if we don't get the growth back you won't see me in this on this call.
The purpose of me being here, it's the purpose of the opportunity that our distributors know and love and embrace and sometimes you just need a little shy of energy to get the to get the game going again, and I think we've got it and I feel it from the distributors are feeling from the team.
And we are highly highly motivated to move forward, so no timing, but a heck of a lot of energy and a heck of a lot of desire and a great team to pull it off.
Thank you and my second question was.
I mean, if I'm, if I was just sort of listening between the lines here.
It sounds like some of the pricing that you took over the summer.
Combined with the macro environment has sort of driven productivity to clients.
Worst month to month to month for the third quarter.
And I was wondering if you if you thought my comment around the pricing was correct.
Or if it was just something else.
So we saw the reduction in demand.
That's clear and evident in the data we have our data scientists that run through the that run through the performance on a month to month basis, and we can see the reduction in demand now what's what's challenging us.
Those.
Those results, whether it's due to the pricing increase whether it's due to the macroeconomic conditions. The results are the same. So you can't it's hard to give attribution to one of those two things in any sort of with any sort of specificity. Further I think as you go region by region and market and market that's going to vary whats working.
<unk> in the U S is probably different in Europe is probably different in Asia Pacific So on and so forth.
No.
I think your comment is generally right. It has had pricing has had some impact.
But to sort of quantify the specific amount of demand elasticity that we've seen in the third quarter.
We don't have the data to really suggest.
With any with any precision.
Okay that makes sense. Thank you safe travels tomorrow.
Thanks Al.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Michael Johnson for closing remarks.
Thanks, everyone. Thanks for being on this call. It is really a tremendous honor and responsibility that I embraced to be back in the seat.
I'm really proud of what this company does our mission and our vision and our values. They are spectacular it's really something that we show up every day, helping people get healthier and provide the opportunity to earn a little more money I never forget day, one when I joined here My brothers sent me.
A little faint there was it a framed.
In a frame and it said the first one.
Help us help in this company creates that opportunity today, we have opportunities and the challenges that are never like never before but this is an incredibly resilient business and we're working closely and will continue to work closely as we mentioned in Cairo with our distributors to make sure that we improve our trends and deliver a better return.
We've got a great team of executives here, we've got distributors, who are incredibly dedicated I will be focused to ensure their passions result in better sales in each of our markets.
No one I believe our opportunity far outweighs our challenges we have a bright bright future ahead of US we've got a great company here and a world class leverage volt distribution channels supported by global Megatrends that will provide a catalyst for growth for years to come from looking forward to being with you all again for another great chapter in Herbalife nutrition. So.
It's very much an as I always say to the team let's go herbalife. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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