Good afternoon, and thank you for joining the Second Quarter 2021 Earnings Conference Call for Herbalife Nutrition Limited. On today’s call is Dr. John Agwunobi, the company’s Chairman and CEO; John DeSimone, the company’s President; Alex Amezquita, the company’s 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.

[Technical Difficulty] 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 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 revisions 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.

Good afternoon, everyone. Thank you for joining us on the call today. During the second quarter, we delivered worldwide reported net sales of $1.6 billion, growth of 15% compared to the prior year. Net sales grew by double digits for the fourth straight quarter. All three of our core product categories grew double digits led by the Energy, Sports and Fitness category, which increased 45% compared to the prior year. All of our regions except China experienced net sales growth in the quarter with four of our six regions increasing by more than 20%. We will discuss China in detail towards the end of my remarks. The underlying fundamentals of our business remain strong. For the third quarter, we are guiding reported net sales to be in the range of down 1% to up 5%. For the full year, we expect net sales growth to be within a range of 8.5% to 12.5% compared to the prior year. In addition to our net sales and EPS guidance, this quarter we have initiated guidance for adjusted EBITDA. For the full year 2021, we expect to generate between $875 million and $935 million of adjusted EBITDA, which highlights the ongoing profitability and underpins the cash flow generation of our business. Alex will provide detail on our new guidance and why we believe this incremental metric is valuable for investors as they analyze our business. Now, let me get into our Q2 performance in more detail. The North America region grew by 7% in the quarter, primarily driven by continued strong momentum in the U.S. It is important to note that the single-digit growth is up against an extraordinarily high prior year comparison period. However, the two-year stack growth rate of 47% in the U.S. accelerated compared to last quarters’ two year-stack. We…

Thank you, John. Second quarter net sales of $1.6 billion represents an increase of 15% on a reported basis compared to the second quarter in 2020. This was the largest quarterly net sales result in company history. The growth was broad-based as over 50 of our markets grew by double digits or more. We had net sales growth in four of our five largest markets, consisting of the U.S., which grew 6%, China, which was down 16%, India, up 93%, Mexico, up 23% and Vietnam up 60%. Currency was a tailwind to net sales in the quarter, representing a benefit of approximately 520 basis points, excluding Venezuela. Reported gross margin for the second quarter of 79.2% decreased by approximately 60 basis points compared to the prior year period. The decrease was largely driven by unfavorable country mix, primarily from China representing a smaller portion of our overall company sales. Second quarter 2021 reported an adjusted SG&A as a percentage of net sales were 32.6% and 32.9% respectively. Excluding China member payments, adjusted SG&A as a percentage of net sales was 26.6%, approximately 30 basis points unfavorable compared to the second quarter of 2020. This was largely due to a return to more normal levels of advertising promotion and sales event spending, which was significantly disrupted during the second quarter 2020. For the second quarter, we reported net income of approximately $144.2 million or $1.31 per diluted share. Adjusted earnings per share of $1.52 was a beat of $0.15 above the top end of our Q2 guidance. Our expected year-over-year currency benefit for the second quarter should have been approximately $0.10 lower than originally projected, which translates to our actual currency adjusted EPS, exceeding the top end of our guidance range by $0.17. This resulted in the largest quarterly adjusted EBITDA…

Thank you. [Operator Instructions] Our first question comes from the line of Wendy Nicholson with Citi. Your line is open. Please go ahead.

Hi, good afternoon. My question first is with regard to the revised outlook for sales, which comes down just a little bit relative to your prior guidance, which is not a big deal. But I’m just wondering, is that sort of exclusively a result of the change in the China growth expectation. Or is that a little bit of function of the America’s business or which region would you say is the biggest Delta in terms of your prior expectations and leading to that negative revision?

Hi, Wendy. Good question. I’ll take that one. The guidance adjustment is exclusively due to our revised forecast in 2021 from China. The rest of the portfolio in the aggregate is performing right where we thought it would, three months ago. And the change in that top line is related strictly to China.

Got it. Fair enough. And I guess just then related sort of as a follow on, I mean, China just seems to be a very stubborn market and kind of hard to predict and hard for a lot of direct sellers to get their arms around. I guess, the question is kind of what gives you confidence that the actions you’re taking in that market today are the right actions. I know you said you’ve just recently put in some changes, but are you starting even here early in the third quarter to see any traction from those initiatives? Or is this really going to be sort of a 2022 recovery story for China?

Hey, Wendy, this is John. I’ll answer that one. So I’ll put it in a couple of buckets. So first China’s while down and consistently down now for a few quarters, the sequential nominal volume point is about flat. So they’ve showed consistency. So whatever happened, it’s now feels like it’s hit a new foundation. And so I view that as positive. So it has a tough Q3 comp as John said in his opening comments, but we just annualize that in Q4, really when China dropped volume by 18%. So things get easier and China will be less of a drag just by way of context, I wanted to mention that. The initiatives we’re putting in place are initiatives that we’ve seen work in other markets as we try to build sustainable businesses, one of them being these Nutrition Clubs that have daily visit clubs, which is different than how China has done clubs in the past. They’ve done like seven-day programs, 30-day programs, 90-day programs. And now they’re opening in more rural communities. There’s a lot of energy behind it. So I don’t want to overstate, where they are in the development of these clubs, but I can tell you our service providers and our management team has a lot of energy put behind this. And there’s a lot of excitement around it. Those are the figures on there yet. But we do know if we can find the right formula for these rural Nutrition Clubs that based on the history of things we’ve seen elsewhere, that this could be a strong growth engine for us. So that’s one. Two, digital cost is something that is really just an important strategy, not just in China, but globally, but even more important China, which is a very digital oriented society. So I think those are the right things we have not yet seen the uptick from these initiatives, like, I said, we’ve seen some stabilization. I say that cautiously, but we’ve seen some stabilization and now offer that stabilize base we think these initiatives will work.

Perfect. Thank you very much. I’ll pass it on.

Thank you. And next question comes from the line of Steph Wissink with Jefferies. Your line is open. Please go ahead.

Thank you. Good afternoon, everyone. My first question is just a follow-up to Wendy’s question on China. I’m wondering if we can just unpack, couple of the things that you mentioned. I think it was a decrease in the number of service providers and then also the activity of your existing providers. What are the KPIs that you’re going to be watching for over the next several weeks that suggest that turn in those measures? Or are there other measures that you’re going to be monitoring that would help give you some indication that these initiatives are taking hold?

Well, we look at a lot of measures, but of course the two that we spoke to in the opening, which is one is, how many new what we’ve seen people coming in, who are coming in for the business is an important metric, because it increases reach. And equally important, what’s the activity level and how often are these new – service providers or even sales reps, which is a step below service providers. How often are they ordering in a given month? How many months are they ordering that tells you how active they are, which is a predictor of how retained they are. So those are the ones that will have the most visibility. They won’t be the only ones we look at, but those are the ones we’ll look at and probably update you on Investor Day.

Okay. And then Alex, just as a follow-up and connected to China, just help us think through the balance of margins, SG&A and gross margin. So I need to make sure that we recognize the China being down that there’s probably going to still be some gross margin headwind, but you’ve had some nice SG&A offsets. So how should we think about the balance in the back half?

Yes. I mean, you nailed it, right? So when China changes disproportionately as a percentage of net sales, either on year-over-year comps or sequentially, you’re going to see a gross profit headwind. That gets made up in other parts of the P&L. So net-net from an OI perspective, it’ll net out, but yes, as a percentage you’ll see some headwind and that’s effectively what you saw in Q2. So you saw, if you look at the year-over-year gross profit coming down from where we were in 2020, that’s largely because of mix, currency and pricing sort of offset each other. And that percentage came down, because of the China mix. Overall from a profitability standpoint, if you look at our OI, you see OI increasing by about 40 to 50 basis points year-over-year. So overall, the profitability doesn’t change from the net sales mix, but from an OI perspective, but from a gross margin perspective, it is. So I think you kind of nailed it, but that is an important distinction to make.

Okay. Last one is a quick one just on pricing. And we’re hearing from a lot of companies that commodity shipping costs are creating some inflationary conditions and passing through some pricing. Can you talk a little bit about your pricing strategy for the next, maybe even 6, 12 to 24 months?

Sure. So pricing for us, a sort of a rule of thumb for us is around the world, we increase prices about an annual basis sometimes twice a year, consistent with the local inflation of that market. So whether it’s in the U.S. or somewhere outside of the U.S., whatever local CPI is in that market. We have the pricing power to match price increases in that market. So presumably, if this continues and I know that there are some competing views from the fed and otherwise of whether or not the local wage inflation and raw inflation is transitory or more permanent. Should it be more permanent? You’ll see that in inflation and if that does happen in inflation and we should to be able to take advantage of that through price increases. So we’re keeping an eye on it. From a near-term perspective, we have long dated contracts on our major [indiscernible] So we don’t see that volatility from week-to-week or quarter-to-quarter. We have a little bit more visibility into what that looks like, so we will continue to monitor it, but I don’t anticipate any sudden spikes on our input costs. There may be some areas of pressure from some of our more packaging, that type of thing. But in terms of the large share of our input costs, we have longer term visibility into those changes.

Thank you.

Thank you. And our next question comes from the line of Doug Lane with Lane Research. Your line is open. Please go ahead.

Yes. Hi, everybody. First question, Alex, in your adjusted EBITDA number, does that include stock-based comp?

Yes, it does.

Okay. And then, secondly…

In other words, the stock-based comp is not taken out of the number. It is considered an expense in the P&L.

Okay. So that is different what I heard. So thank you for clarifying. Okay. So the adjusted EBITDA does not adjust for stock-based comp.

That’s right. It’s loaded. It’s loaded with the expense.

Okay. That that makes sense. And then secondly, just stepping back, I’m looking at a metric that I keep an eye on the average sales leaders with volume points, which has now been up double digits for four straight quarters. And I honestly can’t remember a run where that number has been that strong, and it seems like it would be a pretty powerful lead indicator for your business going forward. So if you could just maybe get, if I could get your perspective on how you read that number, what’s driving the strength and what’s your viewpoint on the sustainability of that strength.

Hey, Doug, this is John D. I’ll take that question. So in terms of its impact in near-term performance, it’s one of the more important non-financial metrics. Because it talks about how many active salespeople we have. And obviously that’s important in predicting the next three, six, maybe even nine months. A leading indicator of active sales leaders is how many new people are coming in, which is the pipeline to becoming a sales leader. So it all flows into a model that we use or actually multiple models that we use. But if you were to look at one of the more correlating non-financial metrics near-term performance, it would be average active sales leaders. Now having said, it’s not a high correlation. But it’s one of the more correlated non-financial metrics.

And what do you think has been driving that, does this have to do with the macroenvironment being what it is or does it have – does a play off your recent segmentation strategy? I mean, what do you think is driving that, that particularly strong period for that number?

Hey, Doug, it’s John A here. So I think a couple of things, some might be more obvious to the listeners and others. First of all, I think our underlying business, which has kind of over the last three years, especially has been driven by a strategy of expanding our product portfolio, building out in each of our regions, in each of our markets, the strength of our distributor channel, and then things like Nutrition Clubs here in the U.S. and beyond that served as a great base. Now going into the pandemic, I think what then was layered on top was an acceleration of the uptake of social media and other digital strategies by our channel by our sales force and then of course, the increases in demand that we saw from consumers. Now, I do think that as you then take all of those things, those ingredients that I just described and translate them out into the future, you’re going to find that we have a distributor base that is much more linked to its consumers using digital technologies, social media, and so forth. And a consumer that continues to be much more in aligned with the need for healthy nutrition and the kinds of products that we sell. And then lastly, of course, I think an appreciation across both the distributor workforce and the consumers that health is controllable that, that it is driven by behavior. So having said that, I think technology, increase demand and a strategy that is working.

Okay. Thank you. That’s very helpful.

Thank you. And our next question comes from the line of Hale Holden with Barclays. Your line is open. Please go ahead.

Hi, thanks for taking the call. I had two questions. The first one is you made a comment in the script that the new Gen Z and Millennial distributors were more interested in sports nutrition. And I was wondering if you were seeing a definitive shift and what they were selling versus maybe some of your more tenured distributors.

Yes. This is John D I’ll take it. So I think it’s kind of a circle. So I think sports help attract a younger distributor and a younger consumer base into our franchise. And that was the driver. Once you bring in somebody who’s interested in sports, that’s the products they decide to sell. So yes, we are in fact seeing obviously higher growth in our sports nutrition products and energy products. It grew 45% in a quarter almost 4 times the growth rate of our weight management category in the quarter. So that is driven by the younger demographics of our distributor base and our customer base.

Right. And the second question is, you also mentioned that you were going to start restart, I guess hybrid meetings. The question is, would we – is that enough to see SG&A in the back half a pickup or not really?

Yes. The intention is that there is some expense in Q2 that we – that is delayed to the back half. So the intention is to continue to pick up that spend. Overall, there was more spend in Q2 2021 over 2020. The expectation though COVID is impacting various markets still in a way that, that has made planning difficult. And so some of that spending Q2 of this year that we intended to spend did get delayed to later in the year, so we can kind of deal with those adjustments, but the intention is to pick that spend up in the back half of the year.

Great. I look forward to the Investor Day. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Jeff Van Sinderen with B. Riley. Your line is open. Please go ahead.

Yes. Hi, just a follow-up to that on the in-person meetings, maybe you could just touch on the digital engagement trends, how those are evolving during reopening, our people, distributors just shifting to do more in-person, or I guess how much of the digital engagement way of operating do you think will stick?

Well, I think, I’ll start with that one Jeff. Thanks for joining the call. So I think that the tools that the distributors have learned over the past year, that they’re not going to necessarily just abandoned and there’s real benefits of reach, there’s real benefits of scale. There’s real benefits of productivity that will endure undoubtedly endure. The opportunity to now use where in some markets, it’s this isn’t everywhere yet. But to use their bread and butter skills in-person, obviously from a mix shift standpoint, as they go back to some of their in-person, there’ll be – it’s like squeezing air in a balloon, right. So naturally a percentage of their time they spent digitally will be spent in-person. With that said, the benefit of being able to do both is that they can use whichever tool is the most effective, whatever they’re trying to accomplish. So the way we see it is that our distributors are now armed with more tools to depending on where they need to spend their time, whether there is an in-person need to develop that stickiness, that long-term customer relationship, or there’s an ability to use digital tools to help with productivity scale, those types of tools. That’s how we see things going forward.

Okay. And then, I haven’t heard a lot of talk about kind of the more weight control oriented part of the business. It seems like pre-COVID restrictions tended to drive weight gain and some parts of the world I believe including U.S. Any more color you can give us on trends you’re seeing around weight control, with reopening and I guess your outlook for that segment of the business going forward.

Yes. I don’t – with respect to the correlation to weight gain and the interest from a weight gain perspective, we haven’t seen that in – if we look at baskets or if you look at product information that we don’t really see that in sort of the ordering behavior. Now, clearly there are consumer trends pointing to the fact that, and this could be validated by third parties, not just us that generally populations are looking for opportunities to be more healthy and to put nutrient dense products in their body going forward. So we’re obviously a company that benefits from that consumer trend. And so going forward, we look to continue to capitalize on that consumer trend.

Okay, great. Thanks for taking my questions and best of luck.

Thanks, Jeff.

Thank you. And our next question comes from the line of Carla Casella with JPMorgan. Your line is open. Please go ahead.

Hi, I may have missed it, but did you give a leverage target?

It’s – our leverage target has been the same leverage target that we’ve had for quarters, if not years. Its 3 three times growth. Obviously over the past couple of quarters, we’re a little bit under that even on a pro forma basis with the recent debt financing, refinancings, et cetera, which is really more of a function of our denominator. EBITDA growth has just been so significant. So we’re a little bit under that target. We’ve always said there’ll be ebbs and flows. We may be under it. We may be over it depending on maturities and depending on EBITDA growth. But we feel really good about our capital structure right now. And we’ll continue to monitor and look for opportunities to always hover around that 3 times growth, so that we are managing overall our company has an investment grade debt company.

And your ratings, they don’t reflect investment grade yet. They’re split between BB and B on the bond. Had you have a sense for what the agencies want to see. And if you’re as you get is size and diversification enough versus something else they’re waiting to look for a potential upgrade.

Yes, so 100%. So we’re hopeful. We’re on that path to investment grade. We’re managing this company so that we can achieve that. Obviously, we know it takes time for the rating agencies to sort of catch up to where we think we belong. From a financial point of view, I don’t think there’s a ton of disagreement that our financial metrics are representative of that. And I think they’ll continue to look for assurance in the business model as we go forward in sort of just continue to execute and continue to be consistent and can continue to show how we’re differentiated overall from a direct selling perspective in terms of our risk profile.

Okay. Great. Thanks. The rest of my questions have been answered.

Thanks, Carla.

Thank you. And I’m showing no further questions at this time. And I would like to turn the conference back over to John Agwunobi for any further remarks.

Thank you. Well, let me start by thanking all of you for joining us. We appreciate the opportunity to explain where we are and more importantly, where we’re going. With that comment in mind, I’m going to put a shameless plug here. We have Investor Day, our Investor Day coming up. It’s going to be on September 14 at 8:00 AM Pacific Coast Time. Go to the IR website, the Herbalife Nutrition, IR website it’s brand new. It’s – we’re very proud of it, and we’re going to be making it better with time, but the details will be available to you there, how to log on, how to – it’s going to be a Virtual Investor Day, obviously. Beyond that, I would just say we’re very proud of our distributors around the world for their work. They’ve done an amazing job, helped us deliver this fourth straight quarter of double-digit net sales growth. And we’re all very excited about the future. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.