Herbalife Nutrition : Q3 2020 Herbalife Ltd. Earnings Transcript

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EDITED TRANSCRIPT

Q3 2020 Herbalife Nutrition Ltd Earnings Call

EVENT DATE/TIME: NOVEMBER 05, 2020 / 10:30PM GMT

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NOVEMBER 05, 2020 / 10:30PM GMT, Q3 2020 Herbalife Nutrition Ltd Earnings Call

CORPORATE PARTICIPANTS

Alexander R. Amezquita Herbalife Nutrition Ltd. - SVP of Finance, Strategic & IR

Eric Monroe Herbalife Nutrition Ltd. - Director of IR

John G. DeSimone Herbalife Nutrition Ltd. - President

John O. Agwunobi Herbalife Nutrition Ltd. - Chairman & CEO

CONFERENCE CALL PARTICIPANTS

Douglas Matthai Lane Lane Research - Principal & Director of Research

Hale Holden Barclays Bank PLC, Research Division - MD

Ivan Philip Feinseth Tigress Financial Partners LLC, Research Division - Director of Research

Karru Martinson Jefferies LLC, Research Division - Analyst

Sebastian Barbero Jefferies LLC, Research Division - Equity Associate

PRESENTATION

Operator

Good afternoon, and thank you for joining the Third Quarter 2020 Earnings Conference Call for Herbalife Nutrition Ltd.

On the call today is Dr. John Agwunobi, the company's Chairman and CEO; John DeSimone, the company's President; Alex Amezquita, the company's Senior Vice President of Finance, Strategy and Investor Relations; 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.

Eric Monroe Herbalife Nutrition Ltd. - Director of IR

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 or anticipated. 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 and quarterly report on Form 10-Q.

Our forward-looking statements are based upon information currently available to us. We do not undertake any obligation to update or release any revision 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 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 SEC. These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website, herbalife.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 Agwunobi.

John O. Agwunobi Herbalife Nutrition Ltd. - Chairman & CEO

Good afternoon, everyone. Thank you for joining us on the call today. During the third quarter, we achieved another worldwide sales record, with reported net sales exceeding $1.5 billion and growth of 22.3% compared to the prior year. 3 of our 6 regions, North America, Asia Pacific and EMEA, along with 24 countries, set new quarterly net sales records.

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NOVEMBER 05, 2020 / 10:30PM GMT, Q3 2020 Herbalife Nutrition Ltd Earnings Call

Volume points grew for the tenth consecutive quarter. And for the third quarter in a row, we set a new record high. The success was broad-based as we had volume growth in all 6 of our regions for the first time since 2013. We have also seen growth in our sales force, which is now the largest it has ever been.

In the third quarter, new distributors and preferred members grew 57%, with increases in every region. Approximately 65% of these new distributors and preferred members are millennials or Gen Z, part of an increasingly health-conscious and younger demographic. We believe that an increased interest in health and wellness is continuing to drive demand for our nutrition products. Our products and our innovative direct sales channel allow us to help consumers reach their nutrition goals through education and community, healthier eating and a more active lifestyle.

Technology has been key during these times. We have seen our distributors turn to social media in higher numbers to reach new customers and to stay connected. We are empowering our distributors with enhanced technology tools for ordering, analyzing business performance and customer retailing. The combination of our traditional business methods and a more advanced digital infrastructure creates a more resilient sales force and channel.

Additionally, our training activities have shifted to a virtual online format, which has extended our reach to an even larger audience. At some of our larger events, attendance has been well above prior year levels. We expect to utilize an efficient hybrid event model in the coming years.

I now want to pivot to our outlook for the future. For the fourth quarter, we expect the momentum to continue, with net sales growth in the range of 10% to 20%. Looking ahead to 2021, we expect to build off this year's 13% year-to-date net sales growth and project full year 2021 net sales to increase between 3% and 11%. Alex will provide more details on our guidance.

We also announced today a distribution of warrants to our shareholders in an effort to provide the potential for enhanced value to all of our shareholders. Alex will also provide additional information on these warrants, and you can also find a Q&A document available now on our Investor Relations website.

Let's dig a little deeper into our regional results. Starting with the U.S., where volume points were at an all-time high and grew 50% for the quarter. We continue to see strength across all our channels in the U.S. led by customer direct shipping, which increased approximately 90% compared to the prior year. Sales coming from Nutrition Clubs also increased for the third quarter, including more home deliveries from Nutrition Clubs to their customers, an approach that has seen increased use as a response to the pandemic.

Over the past 2 quarters, we have seen a material acceleration in new distributors in the U.S. with year-over-year growth of 75% in Q2 and 85% in Q3. Our analysis into the behavior and ordering patterns of this new distributor cohort shows similar trends to distributors that entered the business prior to the pandemic. The activity rates and productivity of these new distributors gives us confidence in the future retention rates of the U.S. business.

In China, volume points grew 1% compared to the third quarter of 2019. Although meeting attendance is not back to historical levels, we are encouraged that certain cities in China are beginning to allow larger in-person group meetings to take place. These types of large gatherings have not taken place in China since last year's 100-day review, and we expect to utilize a combination of in-person and virtual meetings going forward in China.

India returned to growth in the quarter, increasing by 16% compared to the prior year. Restrictions imposed in the market due to the lockdown continue to ease. By the end of the quarter, our company locations were open to take orders, receive payments and to pick up product. However, we continued to see our members favor home delivery, where volumes still exceed pre-pandemic levels. The growth in India contributed to a record quarter for the Asia Pacific region, which increased 10% versus the third quarter of 2019.

In Mexico, volume points were up 7% in the quarter, following 5 quarters of single-digit declines. New members in Mexico grew 26% during the quarter, with 58% of new members coming from the millennial and Gen Z demographics compared to only 51% at the end of

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NOVEMBER 05, 2020 / 10:30PM GMT, Q3 2020 Herbalife Nutrition Ltd Earnings Call

last year.

The EMEA region set another volume point record and grew 34% in the quarter, the 42nd consecutive quarter of growth dating back to 2010. The growth came from countries such as Spain, which was up 43%; Turkey, up [6 -- 37%], increased 82%. And the united members are turning to social media to connect with their customers and are using technology to carry out their sales and training activities.

Finally, South and Central America returned to growth and were up 16% in the quarter. This was led by double-digit increases in Colombia, Chile and Peru, while Brazil was down just 1% in the quarter. Sales have rebounded as product access challenges from the pandemic have eased, and we're seeing distributors utilize virtual events, similar to what we've seen in other regions to improve the reach of their training.

Additionally, we have 2 leadership changes to share. Effective November 9, Bosco Chiu, who has been with Herbalife Nutrition for 27 years, has assumed the new role of Chief Risk Officer, where he will work across all business units to lead our enterprise risk management, internal controls, ethics and compliance strategy.

In conjunction with this move, Alex Amezquita, who celebrated his 3-year anniversary with the company this week, will become our company's new Chief Financial Officer. He will now be responsible for all corporate financial functions at the highest level.

Both will report to me. And with these executive leadership transitions, we strengthen an already strong and high-performing senior management team. I look forward to working closely with Bosco and Alex as they assume their new responsibilities.

So what you've heard today is that in the third quarter of 2020, Herbalife Nutrition continues to set records. I am confident in the resilience and in the innovation of our distributors, the future of our business and our continued growth potential.

I now turn the call over to Alex to review the financials.

Alexander R. Amezquita Herbalife Nutrition Ltd. - SVP of Finance, Strategic & IR

Thank you, John. Third quarter net sales of $1.5 billion represented an increase of 22.3% on a reported basis compared to the third quarter in 2019. Currency normalized during the third quarter, but still drove a headwind of approximately 280 basis points. Adjusting for the change in foreign exchange rates, net sales for the quarter increased 25.1%.

We reported net income of approximately $138.1 million or $1.04 per diluted share. Adjusted earnings per diluted share were $1.15, an increase of approximately 60% compared to adjusted EPS of $0.72 for the third quarter last year. The impact of currency fluctuations represented a year-over-year headwind of approximately $0.12 on results for the third quarter. Note that our reported and adjusted results this quarter include expenses related to the China Growth and Impact Investment Program of approximately $3.2 million.

Reported gross margin for the third quarter of 78.8% decreased by approximately 165 basis points compared to the prior year period. The decrease was primarily driven by the unfavorable impact of foreign currency fluctuations and increased freight costs related to orders being shifted to home delivery versus member pickup as a result of COVID-19 that we called out a quarter ago.

Third quarter 2020 reported SG&A as a percentage of net sales was 34.8%, and adjusted SG&A as a percentage of net sales was 34.6%. Adjusted SG&A, excluding China member payments, was 26.5%, approximately 240 basis points lower than the third quarter 2019. This was largely driven by 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. A significant amount of the underspend on these items from the first 3 quarters of the year is projected to be spent in the fourth quarter.

Our third quarter reported effective tax rate was approximately 19.5%, and our adjusted effective tax rate was 16.3%, which was lower than the prior year, primarily due to favorable changes in the company's geographic mix of income and a reduction in the income tax rate of certain foreign jurisdictions.

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