Herbalife Nutrition : Earnings Transcript FY 2022

Herbalife Nutrition Ltd (Q4 & Full-Year 2022 Earnings)

February 14, 2023

Corporate Speakers:

• Eric Monroe; Herbalife Nutrition Ltd.; Senior Director of IR
• Michael Johnson; Herbalife Nutrition Ltd.; Chairman and CEO
• Alexander Amezquita; Herbalife Nutrition Ltd.; CFO
• John DeSimone; Herbalife Nutrition Ltd.; Vice Chairman and Chief Strategic Officer

Participants:

• Chasen Bender; Citigroup Inc.; Research Division, Assistant VP
• Jeffrey Wallin Van Sinderen; B. Riley Securities, Inc.; Research Division, Senior Analyst
• Karru Martinson; Jefferies LLC; Research Division, Analyst
• Hale Holden; Barclays Bank PLC; Research Division, MD
• Anna Jeanne Lizzul; BofA Securities, Research Division; Research Analyst
• William Michael Reuter; BofA Securities, Research Division; MD & Research Analyst

PRESENTATION

Operator^ Good afternoon and thank you for joining the Fourth Quarter and Full Year 2022 Earnings Conference Call for Herbalife Nutrition Limited. On the call today is Michael O. Johnson, the company's Chairman and CEO; Alex Amezquita, the company's Chief Financial Officer; John DeSimone, the company's Chief Strategic Officer; Mark Schissel, the company's Chief Operating 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. You may begin.

Eric Monroe^ 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 on the Investor Relations section of our website.

I'll now turn the call over to Chairman and CEO, Michael Johnson.

Michael Johnson^ Thanks, Eric, and welcome, everyone. And I find it a little bit ironic that I'm talking to you on Valentine's Day, my first day back with Herbalife after 2.5 years, was on Halloween. So, I'm coming to you on 2 American holidays, and now I'm going to give you a report in my first 100 days.

I started on October 31 and immediately jumped on a plane to Cairo, Egypt in November and we met with our distributor leaders, our Chairman's Club and Founder's Circle. We did a follow-up meeting with them in Los Angeles in the first part of December to take action in the lift sales and to formulate a strategic plan for growth. We listened, we learned, we made decisions. We put a plan in place to modernize and relaunch Herbalife.

We presented it to our up-and-coming distributor leaders in Lisbon, Portugal and in Dallas, Texas, to inspire, to listen to them, to energize and to present the foundation of our relaunch of Herbalife, which we call Herbalife 2.0. This is -- was and is to our next level leaders. We have launched new promotions.

Our in-person events in 2023 alone have totaled 170. We've reached 175,000 distributors face- to-face. That's a big change from our pandemic times. We set up a digital task force made up of select distributors in our internal team to speed the time to market for Herbalife ONE, our digital transformation. We have set up 2 internal committees, a volume committee to drive growth and a margin committee to manage cost.

With all that said, there's no way to get around that we are disappointed in our performance for fiscal 2022 and our last quarter. Our fourth quarter net sales of $1.2 billion were down 10% from the prior year. On a constant currency basis, sales were down 4%. Our full year net sales of $5.2 billion were also down 10%, but on a constant currency basis, down 5%. The strength of the dollar has obviously impacted our EPS as well. Our full year adjusted EPS of $3.40 was impacted by a $0.60 currency headwind. We generated significant cash flow in 2022. Our FY operating cash flow was over $350 million. Through our cost management efforts in the fourth quarter, we maintained adjusted EBITDA flat to the fourth quarter in 2021.

Now on to the future. And here's my promise. Our sales will grow, and our results will improve. I'm fully aligned with our Board, our investors, our distributors, and our employees to usher in a new era of growth for Herbalife. Here's our vision on how we're going to deliver.

Our business is built on 2 major platforms: our content and our distribution. Our content is our product. We are going to grow our product portfolio to position Herbalife as the premier public health and wellness company.

We started in 1980 as a weight loss company. We evolved in the 2002, a nutrition company. Today, we are launching ourselves into the future to be a public health and wellness company. New products, new services, coaching, wellness evaluations available through our distributor platform for our customers, we shall see this company grow. We have enormous opportunity to grow our company through enhancing our daily nutrition products with expanded lines such as vegan and choices and proteins. We are expanding Herbalife24 to include new product enhancing our current ingredient profile.

We've actually brought back the founder, the creator of Herbalife24, a product that expanded our distributor base to our consumers and to our distributors. We are exploring opportunities for sleep products and coaching. We will continue to build upon our weight management platform.

We have other categories we're exploring regionally. In India, which is a growth market for us, our product line is unique to that market. We are unleashing products regionally in Europe and Asia and China, and we'll look forward to synergies and opportunities to globalize some of our regional product offerings.

Our plan is to reach more consumers with more offerings through our distributors than ever before.

Our next platform is distribution. And it's our distributors that give a voice and a passion, if you will, to our product. Our distributor base, it's global, 95 markets. Our entrepreneurial distributors have a unique relationship with their consumers. Today, we're modernizing our compensation structure, including new promotions to energize and incentivize our distributors to make it easier to earn early in their journey.

Through our digital platform, we will accelerate the transference of data to better understand our consumers and our preferred customers to work alongside our distributors to enhance their sales, which brings me to our digital platform, Herbalife ONE.

This is our largest investment ever. Our digital platform, Herbalife ONE is transformational. It will accelerate data actions. Herbalife ONE will be our first-ever unified data-powered global digital platform that will enable growth by delivering best-in-class digital experience for distributors and consumers around the globe. From simplifying sign-ups to providing a best-in- class e-commerce experience with enhanced data analytics to suggested and targeted selling features, Herbalife ONE will modernize, differentiate and strengthen our leadership in the marketplace.

Data visibility is improving in Herbalife, but we want to do it better. We need better data utilization, and we know it. Where else? Our brand, we are refreshing our brand. We're relaunching it, which allows us to operate in a variety of verticals. We will roll it out at our leadership event in 1 month from today.

Our vision? It's both short term and long term. Our plan to return to growth in the near term is made up of a well-defined plan. It's growth for the short term. Let's recruit and retain customers and distributors, pretty simple; expand Nutrition Clubs, high opportunity by analyzing metrics and giving more information and data to distributors entering this highly profitable area.

Growth Preferred Customer Programs. We are enhancing data analytics to take action on the data we are collecting in order to drive growth. And we need to better maximize the usage of our data for visibility and opportunity. Distributor contribution or compensation enhancement, as I mentioned before, we are creating economic incentives and promotions to motivate, drive and reward distributor activity.

I said it before, I'll say it again, we need to improve visibility, improve our data and analytics, high-tech, high touch in this company. Herbalife ONE will be the underpinning of our operations going forward. Today, we are saying we have no guidance in our forecasting because we just launched new initiatives and need time to analyze and digest before we can accurately forecast into the future.

On margin enhancement, we have $70 million of ongoing efficiencies identified through our Transformation Program. We are making difficult and, frankly, unpopular decisions, 7% reduction in our global workforce, price increases in 2023, zero-based budgeting, every expense to be analyzed, including our professional fees, but we are still investing for growth as you've seen in Herbalife ONE.

Personally, I'm focused on getting Herbalife (inaudible) again. It's the only Herbalife, I know, how to grow volume, build content, enhance our distribution, and create better margin opportunities. We have a shared vision with our distributors and management for building customers and building distributors' businesses stronger. This is our Herbalife of today. It's our Herbalife of tomorrow, and it's our promise to you.

So, let's take it over, Alex, and show them what we got.

Alexander R. Amezquita^ Thank you, Michael. Michael left you with a vision of where we are headed and the plan that will return Herbalife to growth. I'll begin my section with the key takeaways for today's call.

First, fourth quarter net sales of $1.2 billion were down 10.4% compared to the prior year. Although currency pressure eased towards the end of the quarter, the U.S. dollar remained significantly elevated over the prior year, driving a 620-basis point currency headwind to net sales.

Second, despite the net sales decline, focused cost management efforts during the fourth quarter contributed to adjusted EBITDA that was approximately flat with the prior year.

Third, over the past 90 days through Michael's leadership, we are aligned in a well-defined plan that will focus the company's efforts to improve distributor metrics and ultimately return Herbalife to growth.

Fourth, while we are optimistic about revitalizing the top line, we are actively controlling expenses to manage margins and maximize profitability. We've expanded and accelerated our previously announced Transformation Program, which is now expected to deliver annual savings of at least $70 million, with approximately half of these savings being realized in 2023 and the remainder being realized in 2024 and thereafter.

Fifth, during the fourth quarter, we took steps to secure our balance sheet. In December, we issued a new convertible note due in 2028 using all proceeds of the transaction to repurchase a portion of convertible notes due in 2024. In addition to the refinancing, the company

strategically paid down its revolver and with scheduled amortization payments, we reduced our nominal debt by approximately $60 million.

And sixth, we will not be providing guidance for 2023 on today's call. While we anticipate the trends, we observed in the third and fourth quarter to continue into the first quarter, there are also growth initiatives being put into place and will need to observe traction before incorporating into our forecast. Further, the macroeconomic conditions continue to create a backdrop of consumer behavior that is challenging to predict.

Reported net sales for the fourth quarter declined 10.4% compared to the prior year and down 4.2% on a constant currency basis. Reported net income of approximately $54 million resulted in adjusted EBITDA of approximately $131 million, which was in line with the prior year.

Adjusted EBITDA margin in the quarter was 11.1%, an improvement of 110 basis points compared to the fourth quarter of 2021.

Reported EPS of $0.55 resulted in adjusted earnings per diluted share of $0.53. Adjusted EPS was negatively impacted by year-over-year currency headwind of approximately $0.25.

During the fourth quarter, as previously communicated, the company strategically reduced approximately $60 million of our outstanding debt. We ended the quarter at 3.47x gross debt to adjusted EBITDA, which is above our target leverage ratio of 3.0x. The company plans to use free cash flow generation in 2023 to reduce our overall debt as we continue to work towards our long-term target leverage.

For the full year, net sales declined 10.3% compared to the prior year. We experienced a year- over-year net sales headwind in all 4 quarters this year with a full year impact of 490 basis points. Local currency net sales declined 5.4% in 2022.

Reported net income of approximately $321 million resulted in full year adjusted EBITDA of approximately $694 million. Adjusted EBITDA margin for the year was 13.3%.

Reported EPS of $3.23 resulted in adjusted earnings per diluted share of $3.40. Adjusted EPS was negatively impacted by year-over-year currency headwind of approximately $0.60.

The company generated over $350 million of operating cash flow in 2022. The impact of our working capital accounts improved in 2022 over 2021 and we will continue to focus on working capital initiatives to improve cash flow generation as we move into 2023.

Drilling into fourth quarter net sales, where we benefited from 12.7 percentage points of pricing from price increases influenced throughout the year. Unfavorable country mix, primarily driven by significant outperformance in India resulted in a net sales headwind of approximately 270 basis points. Local currency net sales for the fourth quarter was down 4.2% compared to the prior year. U.S. dollar weakened towards the end of the quarter against most major currencies but were still materially elevated compared to the fourth quarter of 2021.