HERBALIFE Earningcall Transcript Of Q2 of 2024
our chairman and chief executive officer; Stephan Gratziani, our president; and John DeSimone, our chief financial officer. Before we begin today's call, I would like to direct you to the cautionary statement regarding forward-looking statements on Page 2 of our presentation and in our earnings release issued earlier today, which are both available under the investor relations section of our website. The presentation and earnings release include a discussion of some of the more important factors that could cause results to differ from those expressed in any forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. As is customary, the content of today's call and presentation will be governed by this language. In addition, during today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or nonrecurring items that management believes impact the comparability of the periods referenced. Please refer to our earnings release and presentation materials for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. And with that, I will now turn the call over to chairman and CEO, Michael Johnson. Michael Johnson -- Chairman and Chief Executive Officer Good afternoon, and good evening, everyone, and thank you for joining us. Our financial foundation is strong and continues to improve. In the second quarter, we exceeded our adjusted EBITDA expectations. And while we missed our top-line guidance, which was impacted by a higher-than-anticipated FX headwind, we are continuing to execute on our initiatives to drive top-line growth. Let's take a look at our financial performance. Net sales were $1.3 billion, up slightly versus Quarter 2 of 2023 on a constant-currency basis, while down 2.5% on a reported basis due to 270 basis points of FX headwinds. Our adjusted EBITDA of $180 million exceeded our guidance, and we are raising our full year expectations. Adjusted EBITDA margin was 14.1%, up 120 basis points year over year. Quarter 2 marks our highest adjusted EBITDA and adjusted EBITDA margin in seven quarters. We further reduced our total leverage ratio to 3.5 times at the end of June and remain committed to reducing our total leverage ratio to three by the end of 2025. John DeSimone will do a deeper dive into the numbers later on the call, but let me highlight some of what we accomplished in Quarter 2. We have substantially completed our reorganization. We have the right people in the right roles and our leaders and employees are incredibly engaged and committed to our vision of becoming the world's premier health and wellness company community and platform. We'll continue to focus on refining our business to drive even more efficiencies and cost savings. We welcome the e-commerce and media technology executive, Perkins Miller to our board of directors. Perkins has a proven expertise in leading large-scale digital transformations, and he's done it for some of the biggest brand names, NBC Sports and the NFL. Perkins' experience is invaluable to us, especially as we continue our digital transformation. Our focus on distributor recruiting through programs like Herbalife Premier League are working. We've advanced and evolved our training programs as part of our strategic alliance with Eric Worre to excite, motivate and provide high-level training and resources to our distributors. As I said, these are the highlights. Now I want to talk a little bit more in detail about the heart of the company, our distributors and what we're doing to excite, engage and empower them to grow their businesses. Under the leadership of our President, Stephan Gratziani, we're implementing new and innovative initiatives for our distributors, and we're seeing some very positive trends. Importantly, in Quarter 2, our worldwide distributor recruiting was up year over year, reversing 12 consecutive quarters of decline, thanks to programs like the Herbalife Premier League, which launched earlier this year as part of our new approach to training and supporting our distributors. In August, we will launch our new mentorship leadership development and accountability program for our top leaders in North America which is unlike any program we've ever had at Herbalife or in the industry for that matter. This training will be focused on, among other things, supporting the implementation of successful go-to-market strategies and providing one-on-one support to distributors by sharing business metrics and creating an accountability structure with their peers distributor leadership and the company. This is the next phase in continuing to upskill our distributors and better support them through a key account management program. Stephan has engineered this and is leading our Mastermind program, and we'll provide more details on this later in the call. As you know, we have a long-term relationship with Eric Worre, one of the most trusted and influential thought leaders in network marketing. Eric has been working with us for a little over four months and has already made a positive impact. He's provided hours and hours of training and events around the world, including Extravaganzas in APAC, Latin America and North America, just to name a few. And speaking of Extravaganzas, over the last three months, we've hosted events in Thailand, Colombia, India and the U.S. We had record attendance numbers in APAC, where approximately 24,000 people convened in Bangkok, and in India, where events in Bangalore and Delhi drew nearly 36,000 people on a combined basis to their first-ever multi-city extravaganza events. These events were the perfect time to get our distributors excited about the broad and diverse range of products we continue to roll out globally, from nutrition and performance products like Herbalife24 creatine and Herbalife Protein Chips in North America to beauty products like Herbalife skin care line in India. As I mentioned, Stephan is going to talk more about the positive distributor trends and some exciting new ways we're upscaling distributors, supporting distributor leaders and creating more productive, relevant DMO business flows, including enhanced support for Nutrition Clubs are key differentiator for Herbalife. This is an exciting time at Herbalife, and exciting time in the world of sports. Herbalife is the ultimate nutrition support behind some of the most legendary champions and teams in the world. These athletes dedicate their lives to their chosen sports and we dedicate ourselves to fueling their pursuit of greatness by providing the best nutrition products. We are incredibly proud of all our sponsored athletes, which is why we just launched our Fueling The Best Campaign, highlighting their accomplishments. You'll even see some of them competing this summer in the Olympic and Paralympic games where we are fueling 33 athletes and seven teams. These athletes are important brand ambassadors and a testament to the advanced nutrition delivered by our science-backed products. We believe in them, and we're hoping to bring home some gold to Herbalife. We also believe in our employees, our distributors, our business model and our products. We believe we can and continue to change and empower people's lives. Most of all, we believe the transformative journey we are on. And we believe in our vision of becoming the world's premier health and wellness company community and platform. It's going to take a little time, but we're well on our way. Now I'm going to turn it over to Stephan, who will give more details on why we believe so strongly in Herbalife and in our future. Stephan, over to you, my friend. Stephan Gratziani -- President Thank you, Michael. On our last earnings call, we shared some early recruiting numbers after the launch of the Herbalife Premier League at Summit in mid-March. Now I'd like to share some details on how the quarter developed. As Michael mentioned in his opening comments, new distributor numbers were up in Q2, following 12 consecutive quarters of year-over-year declines. This is an early positive sign as new distributor recruiting, especially on a consistent and prolonged basis, is a driver for future growth. Let's have a look at the numbers. As you can see on the left side of Slide 8, Q2 had significant sequential improvements over Q1 across all regions, up 26% worldwide. More importantly, Q2 year-over-year recruiting was up in every region, with the exception of China, which I'll talk about in a minute. North America recruiting was up 15% over Q1 and 23% over Q2 of last year. Latin America was up 30% over Q1 and 34% over 2023. EMEA was up 15% over Q1 and 9% over the same quarter last year. Asia Pacific was up 40% over Q1 and 11% over Q2 last year. And China was up 10% over Q1 and down 3% over the same quarter last year. Those are significant improvements across the board. And now, let's talk about China. When the Premier League program was launched in China, we chose to focus on the acquisition of preferred customers instead of sales representatives. This was due to the timing of the launch of a new preferred customer loyalty program. Unlike the rest of the world, where the Premier League qualification includes recruiting 10 first-line distributors, in China, the program launched with the qualification based on adding 20 first-line preferred customers. This led to significant focus on preferred customers, which impacted the level of recruitment of new sales representatives in the quarter. During Q2, we believe we accomplished what we set out to do which was to create enough inertia to reverse the previous 12 quarters of year-over-year declines. By creating a long-term strategic alliance with Eric Worre making his training and expertise available to our distributors, in combination with the launch of the Herbalife Premier League, we have successfully refocused and reinvigorated our distributor leaders. This is illustrated not only by the growth and recruiting that we see overall, but by the level of those in the marketing plan who are doing the recruiting. If we look at the right side of the slide, you'll see the recruiting growth by the different levels of distributors within Herbalife. Note, China has been excluded due to its different business model. At the top of the chart, you will see our President team members, who have typically built the largest organizations in the company. All the way through the distributor, which is the entry level of the marketing plan. As you can see, our President team recruited 66% more distributors in Q2 over Q1 of 2024. And 72% more over Q2 of last year. Our next level of leadership, our mill team had the second highest percentage increase of recruiting, up 62% over Q1 and 54% over last year. Followed by the TAB team, which was up 48% over Q1 and 40% over Q2 of last year. This is good for the business. As these three groups of leaders, which we refer to as TAB team members, typically have the longest tenure in the company, lead the largest sales organizations and know how to support new distributors with the best go-to-market strategies. We consider this a positive sign that our top distributors are engaged in leading the way in new distributor growth. And we are about to launch a program for this group that we believe will help drive new customer and distributor growth helping them achieve even more success within their organizations. A final comment on the recruiting metrics before we move on. One quarter of new distributor growth following 12 consecutive quarters of year-over-year declines, is only the beginning of our journey of our return to volume growth. We are going to build on this trend step by step, quarter by quarter. Now I'd like to talk about the program I referred to for the TAB team that Michael also mentioned. We are about to launch in all new mentoring, leadership development and accountability program that we believe will be a game changer. This program, which we refer to as the Mastermind program is like nothing we have ever done before and is geared toward creating sustainable growth and increased productivity. It will address two important areas that make the biggest difference in helping distributors succeed long term. The first is supporting them and leveling up their skills and further developing their leadership. And the second is ensuring that their go-to-market strategies or DMOs are always evolving and staying effective and relevant in the current marketplace. In late August, we will launch the Mastermind program to our top distributor leaders in North America and we will later expand it into other markets. Eric Worre and I, alongside a team of some of the most successful Herbalife distributors have designed the program, which will deliver monthly actionable comment in coaching. Participating leaders will be part of a peer accountability group and will have a personal key account manager to support them with metrics and data to help them increase sales, further drive recruiting growth and expand their businesses. We're excited about this program, which could potentially reach thousands of our TAB team members in North America. We're encouraged by this first quarter of new distributor growth and we see a lot of potential in this new Mastermind program launching in North America in August. We also have a lot of exciting things happening in other markets. This year in Mexico, we've had two new Chairman's Club and 11 new president team members qualify. It's been a year since we've seen these types of numbers in Mexico. In Europe, we continue with the DMO master classes and the models are gaining traction in multiple countries. In Latin America, we launched a pilot program aimed at stimulating growth and the markets have responded positively, which John will discuss briefly, and India continues to outperform. With that, I'll turn it over to you, John. John G. DeSimone -- Chief Financial Officer Thank you, Stephan. I'll begin with our key financial highlights on Slide 10 before getting into more details. Net sales for the second quarter were $1.3 billion. The decline versus last year is driven by 270 basis points of FX headwinds. On a constant-currency basis, net sales were up slightly. And as Michael stated, our top line was more significantly impacted by FX headwinds than we had anticipated coming into the quarter. Our Q2 adjusted EBITDA was $180 million and exceeded our guidance range of $140 million to $160 million. Adjusted EBITDA margin was 14.1%, a 120-basis-point improvement versus the second quarter of 2023. The Q2 reflects the significant progress we have made in our initiatives to improve profitability. Capex for the second quarter was $36 million, essentially the midpoint of our guidance range. In addition, we incurred approximately $5 million of capitalized SaaS implementation costs in the quarter. Q2 gross profit margin was 77.9%, up 90 basis points compared to the second quarter of last year. The improvement in gross profit margin was primarily driven by pricing actions we have taken over the past year which provided approximately 160 basis points of benefit, partially offset by the impact of increased input costs of approximately 60 basis points, mainly relating to increased raw material costs. Second quarter EPS was $0.05 and included approximately $49 million of pre-tax costs related to the implementation of our restructuring program and $10.5 million of pre-tax costs relating to the extinguishment of our debt that was refinanced during the second quarter. Both of these items are excluded from our adjusted results. Our adjusted EPS for the second quarter was $0.54, which included a $0.07 FX headwind versus the second quarter of 2023. Our second quarter adjusted effective tax rate was 32.3%, up from 27.5% for the second quarter of 2023, which drove an approximately $0.04 unfavorable impact to adjusted diluted EPS. The higher effective tax rate in 2024 was primarily due to changes in geographic mix of income, elevated interest expense following our recent debt refinancing, and an increase in tax expense from discrete events in the period. We continue to expect our full year 2024 adjusted effective tax rate to be approximately 30% based on our forecasted geographic mix of income and the impact of higher interest expense. Operating cash flows for the quarter were strong at $103 million and included approximately $31 million of cash payments related to the restructuring program. Credit agreement EBITDA for the second quarter was $208 million, leading to a further reduction in our overall leverage ratio to 3.5 times as of the end of June. Please refer to the schedule in the back of our presentation and earnings press release for a reconciliation between adjusted EBITDA and credit agreement EBITDA. Turning to Slide 11. We see the drivers of our year-over-year net sales performance. On a reported basis, net sales were down 2.5% year over year, with an overall volume decline of 6%, which drove a nearly $80 million headwind. This was more than offset by approximately $86 million of pricing benefit as we continue to implement pricing increases to address regent or market-specific conditions, which are generally in line with local CPI increases. Unfavorable country mix of approximately $7 million was primarily driven by increased sales in Mexico and India, as well as lower sales in the U.S. relative to our overall net sales portfolio. FX, as I said earlier, was at 270-basis-point headwind year over year or about $36 million. Moving to Slide 12. We have the regional net sales results for the second quarter. On a local-currency basis, three of our five regions reported net sales growth in the quarter, with FX negatively impacting each of these regions on a reported basis. In Latin America, net sales were up 2% on a reported basis and up 5% on a local-currency basis. During the second quarter of this year, in most markets in the region, excluding Mexico, we implemented a pilot program that reduced pricing and modified certain distributor compensation and qualification variables. This pilot is designed to localize and optimize the business opportunity based on certain socioeconomic conditions in the country. We believe these initiatives positively impacted many of the markets in Latin America and could possibly be expanded into other markets. EMEA net sales were down 1% year over year with local currency net sales up 4%. Favorable year-over-year pricing impacts more than offset volume declines. However, unfavorable FX headwinds more than offset the net benefit. The year-over-year results were generally mixed across the markets in the region. Asia Pacific net sales were down 2% year over year on a reported basis, while up 2% on a local-currency basis. India continues to outperform in the region, with net sales up 8% on a reported basis and 10% in local currency. China reported net sales decline of 7% year over year and were down 4% on a local-currency basis. China faced a difficult comp in Q2 this year as a result of a sales surge last year in Q2. The two-year stack for Q2 in China is an improvement versus the Q1 two-year stack. Last month, we launched a new customer loyalty program in China, which encourages a more customer-centric approach aimed at driving customer recruitment, activation and continuous repurchase with improved customer benefits. Our business is continuing to evolve in China, and we are encouraged by the positive trends we are seeing with respect to new customers joining. In North America, our net sales trend improved from the first quarter of 2024. The 7% year-over-year decline in reported net sales in the second quarter was primarily driven by the U.S. market. As Stephan noted earlier in his opening remarks, new distributor recruiting is up year over year in the region and several initiatives have been launched over the past few months to encourage recruiting and activity from new distributors. While the recovery in North America has taken longer than we would have liked, we are seeing green shoots and are encouraged by the gradual improvement. Moving to Slide 13. We see drivers over $10 million or 6% year-over-year increase in adjusted EBITDA. Q2 adjusted EBITDA came in strong at $180 million with margin of 14.1%. We have not seen results like this in seven quarters, which is a testament to the work the team has done to rightsize and pull costs out of the business. Looking at the bridge, the impact from favorable gross profit margins, I mentioned earlier, can be seen in the benefits of price increases, partially offset by higher input costs. And as I stated last quarter, our employee bonus accrual is a headwind in Q2, and we expect the headwind to continue in the back half of 2024. Technology costs were up approximately $6 million year over year, primarily due to increased SaaS hosting fees. Unfavorable year-over-year currency movements, primarily related to the Argentinian peso and Turkish lira drove an approximate $11 million year-over-year reduction in adjusted EBITDA. Turning to Slide 14. I'll provide an update on our capital structure. Since our last earnings call, we have paid down our revolver by $90 million. As a reminder of what we previously reported in April, we completed a $1.6 billion senior secured refinancing and repaid all amounts outstanding on our 2018 credit facility, as well as more than half of the amount outstanding on the 2025 notes. The net result of this transaction or these transactions is that we pushed the vast majority of our debt maturities out to 2029. With the only sizable maturity we faced prior to 2028, being the $262 million outstanding on the 2025 notes, which we remain on track to repay. And as I noted earlier, we further reduced our total leverage ratio to 3.5 times as of June 30th, with the goal to achieve our target of three times by the end of 2025, following the repayment of the 2025 bonds. Moving to Slide 15. We will review our outlook for the third quarter and full year. For the third quarter, we expect net sales to be in the range of down 4.5% to flat year over year. This is primarily driven by approximately 300 basis points of unfavorable FX headwinds year over year. We expect adjusted EBITDA to be in the range of $125 million to $155 million. For comparison purposes, we have a large distributor event that will take place in the third quarter of this year, which was held in the fourth quarter of last year. The year-over-year comparison is also expected to be negatively impacted by currency partially offset by the favorable impact of the restructuring program. This program was substantially complete as of June 30th. Approximately $66 million of implementation costs of this program were accrued in the first half of the year with only a small amount remaining. From a cash standpoint, about $33 million has been paid so far, with about $35 million remaining to be paid in the back half of the year. Our planned capital expenditures for the third quarter are in a range of $35 million to $45 million. Based on our results for the first half of the year and the outlook for the remainder of the year, we have updated our guidance for full year 2024 net sales to be down 3.5% to up 1.5% versus last year. And we are raising our expectations for full year adjusted EBITDA to a range of $560 million to $600 million as we are reaffirming our capex expenditures of $120 million to $150 million. The increase in adjusted EBITDA expectations reflect our outperformance in Q2, partially offset by lower volume expectations and unfavorable currency movements from our initial expectations in May. As we look to the back half of the year, we expect capitalized SaaS implementation costs to be in a range of $10 million to $15 million, which is incremental to our planned capex. A couple of last comments before we open up the call for questions. First, while sales were a bit lower than we had expected and currency is more of a headwind than we expected, there's a lot of good things happening at Herbalife that are creating a strong foundation for growth. New distributor recruiting continues to grow versus prior year, reversing 12 consecutive quarters of decline, and that growth is coming from experienced distributors that know how to build businesses. Herbalife Premier League is taking off. And the Mastermind training program is coming in August, which is unlike anything ever done in the industry. We are taking training and accountability to a higher level than ever before. We're continuing to launch innovative products that resonate in local markets and align with consumer trends. We have positive results from the pricing and compensation changes we are piloting in most Latin American markets. Our sponsored athletes are important brand ambassadors and a testament to our Advanced Nutrition delivered by our products. Our profit is strong. Our restructuring program is substantially complete, and we are continuing to look at ways to further reduce costs and expand margins. Our leverage ratio is 3.5 times, and our goal remains to get to three times at the end of next year, following the payoff of the bonds. And while our goal is three times by the end of 2025, we don't plan to stop there. We want to pay off $1 billion in debt over the next four to five years and transfer that value to equity holders, and that will be our primary use of our free cash. This concludes our opening remarks. Operator, please open the call for questions. Operator Questions & Answers: |
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