Herbalife Nutrition Ltd. (HLF) Management on Jefferies 2019 Global Consumer Conference (Transcript)

Jun. 19, 2019 4:05 PM ETHerbalife Nutrition Ltd. (HLF)9 Comments
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Herbalife Nutrition Ltd. (NYSE:HLF) Jefferies 2019 Global Consumer Conference Call June 19, 2019 10:30 AM ET

Company Participants

John DeSimone - Co-President & Chief Strategic Officer

Bosco Chiu - Executive Vice President & Chief Financial Officer

Alex Amezquita - Senior Vice President, Finance & Strategic Planning and Investor Relations

Conference Call Participants

Unidentified Analyst

Good morning everyone. I think we'll get started with the next presentation. Sitting alongside me is the senior team from Herbalife. And I think I'm going to just let each of you introduce yourselves to begin, so we know whose is at the table and then I've got few questions to kick us off. But please if you’ve got questions from the audience, raise your hand, and we'll flow it into the conversation.

So, Alex -- or do you want to -- please.

John DeSimone

John DeSimone, I've been at Herbalife for close to 12 years, eight of which I was a CFO, I'm currently the Co-President.

Bosco Chiu

I am Bosco Chiu; I'm currently the CFO with the company for 25 years.

Alex Amezquita

Alex Amezquita, SVP in Finance and Strategy.

Question-and-Answer Session

Q - Unidentified Analyst

Just to help familiarize the room with the business, maybe talk a little bit about first and foremost the size, I think that's one thing that always surprises new folks as they look at the business, and then maybe help us appreciate if you were to pie chart your business kind of the key pieces?

John DeSimone

Yes, happy to do it. So, first and foremost, we are a nutrition company. I think, sometimes, we started this conversation with our method of distribution as a direct selling company, but we are primarily -- or first and foremost, a health and nutrition company.

We use direct selling as our method for distribution, and there's a whole host of reasons why that is the case. But we are about $4.9 billion of sales in 2018. And if you think of our company, these are going to be rough numbers, but just to think about the global diversity, about 20% of our business is in the U.S., North America, about 25% -- 20% of our business in China, 25% -- 20% of our business in the rest of Asia-Pac, 20% in Europe, and 10% between Mexico and the rest of the LatAm.

Unidentified Analyst

How about on the product side, maybe just give us some scope on?

John DeSimone

Yes, and on the product side, so we are -- our core product is a meal replacement shake, and that shake has many different flavors, many different formulations, but first and foremost about meal replacement shake. We also have -- our portfolio extends into the broader health and wellness space with supplements and also in sports nutrition with products to help with athletes of all levels in their athletic pursuits and performance pursuits, so they pursue a healthy active lifestyle.

Unidentified Analyst

So, we got the financial experts at the -- on the panel here, so one of the things that I think is super helpful is if you just articulate how the financial engine is built. So, this idea of a direct selling model, how you compensate, how you recruit, retain, activate without getting into some of my own experience, yes, I will come back to that. But I'd be curious to just talk about how do you think about the financial rubric for the business model?

John DeSimone

Sure. So again, we are a direct seller. Our customer acquisition vehicle are our distributors, we don't advertise and create pull. Our first sale is almost always a push; it's the repeat that's the pull. The economics built around that is each product has a fixed amount of economics we're willing to pay our distributors for their effort, it's -- we are indifferent as to which distributor buys the product, our economics are the same regardless of which distributor buys the products, but a particular distributor's performance allows them to get the maximum amount of those economics that we make available to the entire distributor force.

So, we are MLM, which means you can both earn money from your own sales and from the sales of your team members. And the greater you perform, the greater piece of the pie you can get.

Unidentified Analyst

Can you talk a little bit about the payout ratio on the P&L, just to help scale it up relative to other MLM models?

John DeSimone

Yes. The net sales for us, it's between 30%, 35% of our net sales goes to our distributors. Forget about how they look at it, which is, they look at it as a percent of retail, we look at it as a percentage of net. The difference really is just primarily our country mix. So the payout ratio is different in China, it's different in Korea, in most of the rest of the world it is the same with some exceptions for certain products.

Unidentified Analyst

Talk about product innovations. It’s one thing that struck me when I was with you recently at your headquarters, this idea of product pipeline, development of innovation, expanding your addressable market potentially through innovation. Can you talk a little bit about how you think about new products?

Bosco Chiu

Yes. So, when we think about product, it's important first to go back to the comment that John made. So that first sale is a push sale, right, if our distributor is connecting with their community, and again, benefit of the model is this community aspect. So this is in -- when you think about Herbalife Nutrition and you think about the direct selling model, why is it uniquely different or what is our core competitive advantage, that relationship that that distributor builds with its customer, it creates the repeat business, it creates the accountability, it creates the community, it creates the opportunity for that customer to achieve results that they would not otherwise be able to receive.

So maybe, somebody in the audience here has been on a weight loss program. After a week, you might give up, but if there's somebody there with you on that journey, you might be more accountable, you might actually stay in the program longer, you might be there long enough to develop a healthy active lifestyle habit. So the first thing to understand, that push sale needs to be something that really pulls that customer into say, hey, I want to subscribe to this. It isn't just a transaction when you get on the retail shelf or an Amazon order.

So when we think about product innovation, we have to think about products that support that, right. And so, how we do product innovation is very collaborative with our distributors. We have -- around the world, we have something called product committees, and in these product committees, we work with our distributors, they bring ideas, we bring ideas, and we really collaborate around with what helps you today create either an incremental sale, to create pulling in a customer today that they would not normally be able to attract.

So weight loss and weight management has been our bread-and-butter for almost 40 years. And now, what we're seeing is, we're getting into different areas. So we're building out our sports nutrition category. To build that -- now this isn’t a person that is necessarily looking to lose 10 pounds, look good in there, the key perhaps, but it's really -- hey, there's a performance goal that I might be achieving.

I'm entering a competition; I am trying out for the high school sports team. I'm trying out for college team. All those types of customers that we may not have had access to is providing that opportunity. So there's a lot of innovation right now around extension of who we can address.

Unidentified Analyst

So community is a big common threat. And I experienced this firsthand. So I went out and spent a day with the team, and we visited a couple of nutrition centers. So, my vision to what a nutrition center was and what I saw was so starkly different and it just underscores this idea of community connection.

And so, as you think about the nutrition center model, the experience that I had, one, being a young Hispanic woman, third-generation, I believe, seller, she operates a morning regimen business and between 6:30 and 9:30 that day, the door was revolving constantly. So she was essentially retail selling almost like you would buy coffee.

So maybe talk about that as a proxy for that community that's really focused on weight, weight management. And then the other, to your point on sports nutrition, we saw one of your top sellers in the world, we saw distributors with a full team running a fitness center essentially and building in this idea of healthy meal replacements and other augmented products to help that lifestyle? So this in contrast that what I saw was so starkly different than what I viewed back there?

John DeSimone

So I think that -- one of the core strength of our company is the entrepreneurialism that we allow our distributors to develop. We don't have to figure out from L.A. what's going to work in Bangkok or what's going to work in South Central L.A., or what's going to work in Copenhagen, right? We set a foundation which allows the distributors to determine what's going to work locally in their community for people that they know and they need to serve.

There are some threads that are common across them. And those threads on the nutrition centers are generally your -- you can get a single serving of the products that you need as opposed to buying a canister that’s going to last 30 days in your cabinet at home and hope that you have the discipline to take it every day.

You come to the center and they’ll make you the shake, that meal replacement shake or the sports shake or whatever it may be, well they’ll sell you a herbal tea for caffeine and an Aloe drink or maybe something else.

And so, it almost has a Starbucks feel, and I knew Starbucks as an example as to how the model works economically to the benefit of distributors because it creates a more accessible price point. It's not cheaper, but it's more accessible.

And what I mean by that is, a pound of coffee you can buy for $10 it will last you 2 months and you can make it everyday at home. You got many of us in this room who will go to coffee shop and spend that $2, and now it's $3 in Starbucks and buy that coffee, because it's convenient, it's do it for me instead you do it yourself. And that's what our distributors create around our products, is a more accessible, one single price point, and at that price point more people can afford the product.

It becomes more of a replacement spend instead of discretionary spend because you're getting a meal. It's a meal replacement shake, you're getting a meal. It’s meant to be instead of breakfast having a bowl of shake/tea now or instead of lunch have it. And so, instead of going to McDonald's where you're going to spend your $5, you come to Herbalife and spend your $5 and have a different feel to it.

So, it becomes more accessible, it has a replacement spend, the discretionary spend feel to it. And for distributors, it's got more of a tangible business element than just traditional direct selling. In traditional direct selling, whatever model you may be familiar with, it's generally characterized by a distributor meeting their customer very infrequently and asking for big purchase order, whether it’s a Tupperware or Avon Pick-it [ph].

You know you have a party at home and you might do that once a month, and people spend a decent amount of money. Where now, at a nutrition center, customers are coming to the distributor, and its frequent interaction and low price point, and it flips the model upside down and it has created more sustainability, but more importantly, it created a community.

And that community helps people stay on program. Think of joining the gym, you know you’re more likely to go to -- some people can get up every morning, they have the self-discipline to go to the gym and workout on their own. Others need to meet friends there and create discipline through accountability of somebody else and have a personal trainer, this is like having a personal trainer, but for nutrition. So it makes it more sustainable.

Alex Amezquita

And I think the add-on to it, particularly in the category of nutrition, where there is so much lack of information or misinformation to have someone that you go into daily and get something personalized for yourself. Now, I am 6’1, 200 pound and I might be training to cycle, that’s very -- there’s very different nutritional needs than someone who might be a 23-year-old female, who just had a child, right. Her nutritional needs will be dramatically different.

And so, to go someplace where you actually can get some educated advise around what your specific nutritional needs are within the context of what John just mentioned around that community, it’s really powerful. And I think – that's why I started with, we are a nutrition company that uses direct sales. Direct sales tends to be – this environment tends to be highly effective for this category. It's much different than just walking into a retail store or a shopping online, because what you need, how much, how much protein do you need, how much carbs do you need, what – for my size, for my goal, so that's what we really, I think that core competitive advantage really differentiates us in this model.

Unidentified Analyst

Can you put some numbers around for the number of nutrition centers, number of distributors, and then, again, help us just from a perspective, think about that down line advantage but just – maybe some numbers to help improve?

John DeSimone

Yeah, go ahead.

Bosco Chiu

So nutrition centers, there are different types, and again, but we are in 90-plus countries. In some countries, that nutrition environment is just there has somebody's a living room in their home. They don't rent space, they doesn't like customers from the neighborhood to come in their living room, and in another case they rent commercial place for establishing. Sometimes they've large and they workout together as a team, like you saw, sometimes there 300 square feet, and it's like a commercial living room, and it's just a social gathering spot.

So I say that's they want to use the number, because it's – I don't know the exact number, but it's maybe 100,000 clubs globally, and it's something that we know exactly, because some clubs have to register, they're commercial clubs. They have to – they download our tools, and we have great visibility, or just threw out of their home when we have less visibility. We still require them to register, but if they don't, you some time you just don’t know whether to -- especially if it's our home. So it's a meaningful number, it's – I want to say 8,000 in the U.S., which is probably – which is really have great visibility, is required to turn in their customer transactions to us every month. So that just gives you some perspective on the number of clubs, the number of distributors. We have 4 million-ish members around the world, some are distributors, some are customers they just want to buy it at discounts, so they sign-up as a member, but that's the board number.

Unidentified Analyst

And I don't want to hurt too much on the changing in the regulatory framework, but I think it's important, because two things have emerged as live their. One is that it's created a customer connection for you. The requirement to actually document – head back to giving you information that in the future state of data is power has become valuable? And then the second thing is just thinking about technology more broadly and how you build tools and tool sets and modules for your distributors to be more effective? And how that fits under the context of this new kind of regulatory model that you're working in?

John DeSimone

Yeah. So just by way of background, the new regulatory model basically means, we have now agreed to pay our distributors their compensation, not when products are purchased from the company, but when those products get to the end consumer. Okay? In order to make that work, we have to have visibility, when that get – and this is a U.S. only initiative. We have to have visibility as when the end user buys the product. So we created POS tools for distributors to use, and it gives us a lot of customer visibility. We know who the customer is, how often they buy, what they buy, what price point is. I mean, it's a lot of information and that information creates a big opportunity for us going forward to help our distributors sell more, because their biggest challenge for any distributor is how to leverage their time better, right, these are small business people, their single biggest asset is what they do, if they're out selling to one customer than are selling to another. How do we help technology through technology then service multiple customers think on, that's something we as a company wanting to do. We signed up an agreement with Salesforce. We are not good at it yet. Its data we are not used to having, but it's a big opportunity for us going forward. And I think, that's something you're going to see evolve significantly over the next 24 months.

Bosco Chiu

Yes. And just give you some context around that rate just that data would be the equivalent of a large CPG company acquiring data from CMI, IRI, Nielsen, and Euromonitor, that's all data that they're getting from a third-party, we’re literally connect -- collecting that data, primary data for us. We’re just learning how to actually use it, but just knowing that we're collecting that data and having that primary is going to be a tremendous asset for us going forward.

Unidentified Analyst

Talk about China, so far it's the probably the most topical questions we're getting is post the 100-day review of the broad nutrition phase of your business specifically, but broadly the new nutrition and claim space. How are you feeling about China? Do you feel like that from a financial performance perspective is the biggest lever of opportunity in the business this year? Or how should we think about the financial guidance you've given and where the potential upside might be?

John DeSimone

Yes, first, for those who don’t know, China had a 20-day campaign that crackdown on limited meetings, but what we really was trying to do is go out to companies that had health product claims that were false claims. We were not a target of that, but it really hurt our business and it hurt companies who do business like us in China, and now we're building a backup.

Out of that 100-day campaign came nothing structural that changes our outlook for China, because now it's timing. We couldn't host meetings or distributors couldn't host gatherings, if you had a Nutrition Club and you wanted to have 10 people for a weight loss challenge, you couldn't do it during the 100-day campaign.

So I did a couple of things, one is, to really hurt new distributors coming into the business during that 100 days. But it actually hurt people came into the -- from a prior 100 when you -- who now couldn't do the business. And so you lost a couple of generations of distributors through that process and how to get rebuild. So there’s a timing issue that's going to be ramped up.

In addition to the meetings that the government -- in China, any meeting most -- in most provinces, any meeting above 50 people are in gathering about 50 people has to get a permit, it's a communist country, that's they way they manage social stability, one of the elements of social stability in China.

And during the 100-day campaign, you couldn't get meetings approved, post 100-day campaign, you could start to get meetings approved, but they were smaller meetings, okay, so that's ramping up. And we expect what we said at our earnings call last month is we expect that to ramp up during the quarter. We'll end the quarter strongly and start the quarter, and that we'll return to growth in China at least our expectations are we return to growth in China sometime this year, and our long-term expectations for China haven't changed.

Unidentified Analyst

Maybe just walk through the financial outlook for this year, and then kind of multi-year formula as you think about top line and bottom line growth?

Bosco Chiu

Yes, I mean, I think we issued guidance at our last earnings call. Overall volume growth for the year, we anticipate and despite any alternative in China, we -- overall as a company, we will be growing. And it's probably worth noting too, I mean, Q1, China down, our volume down about 30%, but we -- as a company, again going back to the fact that we're in 94 markets in diversified, we grew as a company, 6% volume growth.

And I think if we think about long-term beyond 2019 long-term our growth, I mean that sort of level, that sort of mid single-digit to high single-digit that should be somewhere, where we're going, given the demand that we see as for the solution that we’re solving around obesity epidemic, rising health care costs, all those macro trends should support something in that vector, but yes.

Unidentified Analyst

In terms of the ingredients to get to the mid single-digit growth, do you need mid single-digit rep growth or distributor growth? Or do you find that product initiatives from the technology connectivity that you're providing from a productivity perspective that you can get better growth out of your existing population? Or is there a population element we should assume?

Bosco Chiu

So, historically, our growth historically and probably was changing always what we believe is changing. Historically, growth was based on rep growth, right. There -- a rep has a limited amount of access to customers, and they can only handle so many customers. And the way you reach more customers, you see sign when your customers are up with the rep, and they went and reach more, that was the nature of the business model.

Going forward with the use of technology, you can now increase, we believe increase the productivity of each customer that distributor has. The way to increase the productivity is through both the use of technology. And there is another initiative, which is to launch more products in the health and wellness and fitness space for which, we know through studies our customers, our Formula 1. Formula 1 are replacement products.

We have customers that buy that product. They buy a lot of health and wellness and sports nutrition products elsewhere, because we don't have the product portfolio. So you combine the two, which is we felt that increase the portfolio or products we have in the Health and Wellness and Sports Nutrition space, and then use technology to help our distributors service more customers and create more economic outlook for the each one of their customers. So I think what you'll see is a productivity enhancement over time that we hadn't seen in the past, this industry hasn't seen in the past for the use of technology.

Unidentified Analyst

I do think from a financial perspective, I would think that that reduces the risk profile in the future testing of the model? So from a market perspective, wanting the higher multiple, how do you think about…

John DeSimone

Well, we didn't decide the multiple, I think you're going to think -- it certainly reduces your risk profile, if you can create greater economics for each customer that comes to the franchise, absolutely go with that.

Unidentified Analyst

And so you also see that falls through the P&L from a productivity on a margin basis? And maybe not margin rates, but just growth dollars?

John DeSimone

Dollars, but not percent, yes, you'll see it flow through on the dollar side. The reason you don't see it so much on margin is the two biggest cost we have are very variable, the product cost, which you might get a little leverage on. Given not a lot as most of the product cost is ingredient costs. And it's the competition we pay our distributors which is fixed based on the unit fee, if they sell more, they're going to make the same percentage, so therefore, we are not going to make a greater percentage, but you'll see the dollars flow through.

Unidentified Analyst

Yes. Okay. Any other big topics we haven't addressed? Any other questions from the audience? Yes.

Unidentified Analyst

[indiscernible]

Unidentified Analyst

The question was next three years any challenges that you see and what are they?

John DeSimone

Well, I think the biggest opportunity, which also is a challenge for us is launching more products in these other categories that are not weight management, because the earnings opportunity per unit for our distributors could be less, because some of those products don't fit the earnings model and our distributors enjoy with weight management.

And there's been some resistance along that journey, because some distributors think that means they can make less money. And the reality is they will make more money, because it’s going to be incremental sales. And so getting our distributors to understand and us to prove to them, that its more money, because we can launch the best product in the world, okay, distributors don't think they're going to make money, they're not going to sell. Again go back to beginning where our trials almost always driven by a push, distributors have to believe in what they're doing, it’s going to benefit them and their organization.

So through test of different economic models, we are proving to our distributors that they're going to make more money, that's by far the single biggest opportunity, I think we have as company to get more economic out of current customers who are already in our franchise, who already recognized us as a health of wellness company, or already recognized as a sports fitness company, but don't buy from us, because we don't have the product portfolio that they need, that's the biggest opportunity.

Unidentified Analyst

Terrific. So do you think about wallet share, I mean you're a piece of a broader wallet that’s already devoted to this category and you're only getting a proportionate amount, you have the permission to get a larger?

John DeSimone

From customers who already recognized, we already have permission to sell within these categories, we just don't have the products they're looking for.

Unidentified Analyst

And what do you feel like it is in terms of that, how the crossover is the proof in dollars in their bank accounts from a distributor perspective…

John DeSimone

Yeah, absolutely.

Unidentified Analyst

…you start to cycling?

John DeSimone

But there is enough momentum to run tests and there’s enough data for us we believe to prove that these tests are going to make distributors more money and that will create more acceptance.

Unidentified Analyst

Maybe just to put a tangible example behind it, can you give us one of your product examples, that you've seen tracking -- starting, but it’s taking time for the distributor to realize that they're going to make more money maybe just not the margin?

John DeSimone

Yeah. So there is, I mean, I can give you 10 different examples on this, probably 20 out there right now, but there is one with the particular product in Japan that we've launched with new model, and it's done tremendously well and the distributors that are sold it and make more money, and we can prove to distributors they need more money. So they want to do it now with more products, it builds momentum.

Once distributors are confident, they wanted to do more and more distributors do it, the more other distributors who want to copy it, right. So it's a journey, it's probably a three-year journey. But it's a gating item for launching products, which we already participate from a halo; our brand participates, which we are expertise in interaction.

Unidentified Analyst

I think we’ll leave it there, and I take you guys back in the room in case if there’s any questions. Thank you everybody.

John DeSimone

Thank you.

Bosco Chiu

Thank you.

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