Good afternoon, and thank you for joining the Second Quarter 2022 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 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.

Good afternoon. On today's call, we will be making some forward-looking statements. And while we are making those statements in good faith, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in the documents we filed with the SEC. We will also be discussing some non-GAAP financial measures. These non-GAAP and adjusted numbers refer to measures that exclude items management believes impact the comparability for the period referenced. Please see the earnings release for additional information on our comparability items. These GAAP to non-GAAP reconciliations can be found in the earnings press release and the slides we will be reviewing on today's call, both of which can be found in the Investor Relations section of our website. I'll now turn the call over to Chairman and CEO, John Agwunobi.

Thanks, Eric, and good afternoon, everyone. Thank you for joining our second quarter 2022 earnings call. You might have noticed that we've enhanced the format of our call by adding a slide presentation to accompany our verbal remarks. We hope the enhancement not only makes it easier to absorb our quarterly update, but also provides for a richer understanding of our business performance. I'll start with the highlights of what we'd like you to take away from our call today. First, I'm pleased to announce our second quarter financial performance exceeded the top end of our guidance range for net sales, volume, adjusted EBITDA and adjusted EPS. As you might recall, last quarter, we saw a slowing of business trends and certain underlying KPIs at the end of the first quarter, which continued in April. With that backdrop, we're also pleased to update you that, compared to April, our business trends and metrics appear to have stabilized in the months of May and June. That said, we acknowledge that there's still a significant amount of work to accomplish, particularly around improving our new distributor and new preferred customer metrics. I'll go deeper into our KPI trends in a moment. To address the macroeconomic landscape that many companies are facing, we implemented meaningful price increases in mid-June to partially offset the dramatic inflationary increases that we are seeing in our input costs. As a reminder, our raw material manufacturing overhead and freight costs are increasing ahead of local consumer price indices. We believe the timing of these pricing actions largely drove the top line outperformance that we achieved in the second quarter. Specifically, pre-buying ahead of the price increase resulted in sales activity being pulled forward from July into June. Our guidance for the third quarter includes the impact of this…

Thank you, John. I'll start by reviewing our financial performance for the second quarter, followed by guidance and close with comments related to our capital structure, cash and share repurchase activity. Second quarter net sales of $1.4 billion represents a decline of 10.3% on a reported basis compared to the second quarter in 2021. As John mentioned, net sales were materially above our guidance range, largely due to increased activity in the month of June as a result of prebuying ahead of the pricing action we executed mid-month. Normalizing for the prebuying that took place in June, we estimate net sales for the quarter would have been in the upper half of our guidance range. The U.S. dollar strengthened significantly against most major currencies during the second quarter and had a significant impact on our Q2 results as well as full year forecast. FX was a 440 basis points headwind to net sales, which was 170 basis points unfavorable compared to the Q2 guidance. We benefited from 510 basis points of pricing, which was largely from the price increases taken prior to the start of the second quarter. We will not see the majority of the benefit of the pricing actions taken in mid-June until the third quarter. Moving to margins, where adjusted EBITDA of $195 million resulted in an EBITDA margin of 14.0%, which outperformed our margin expectations for the quarter. Although gross profit of 77.3% in the quarter was a sequential improvement, it drove an EBITDA margin headwind versus prior year of approximately 200 basis points, primarily driven by increased input costs in our supply chain related to raw materials and manufacturing overhead as well as shipping costs. Within SG&A, we experienced an approximate 110 basis point headwind related to distributor promotional spend. This headwind was largely from…

[Operator Instructions]. Our first question comes from the line of Chris Neamonitis with Jefferies.

Congrats on a nice quarter. My first question is just around the demand following the pricing action in June. So it sounds like you're keeping a watchful eye on trends. And I know you're sitting here today with only 1.5 months of data. But based on what you're seeing through July, could you tell us what you're seeing relative to trends in demand?

Yes, I'll take that one. Thanks for that question. Obviously, that is something that we're watching closely. It's a little different to comment yet on what we're seeing in July. We really need to see August to make those comparisons to really kind of isolate what is really demand elasticity versus all of the other factors that are going around the world, the macro backdrop that we're experiencing. So we'll need a couple of months, August and September especially, to really have a comparison where we can isolate what is demand elasticity versus other factors.

Okay. That's fair. And then maybe if I could ask about the sales guidance. Nice to see the reiteration today. But I'm curious, the outlook is still based on April trends run rating through the rest of the year, right? So maybe could you walk us through your thought process in leaving that unchanged despite what kind of sounds like an initial rebuild of momentum?

Sure. So really, you have a number of competing factors throughout the P&L, so I'll take it line item by line item. From an April run rate trend, and so we're talking about the underlying KPIs and the volume that is being achieved in each of our regions, that's effectively netting out to be in the same place as we -- back in April. So the guide in April versus the guide now effectively has very similar performance of the business for the remainder of the year. When you then take that business performance and go down the net sales line, you effectively have the pricing actions that we took in mid-June being counteracted by the FX headwind that we're seeing, the strengthening of the U.S. dollar in most major currencies. So effectively, all that pricing that we're getting is effectively netting out from FX. As you go down to EPS, some of that expense management that we saw in Q2 is going to make up for the -- of that same FX impact that I mentioned on our net sales line. But how that impacts EPS, we also have tax rate increasing, and we also have interest rates increasing on our variable rate debt. The combination of those 3 things, we're going to offset the lion's share of it. We're going to offset in our EBITDA, but there is a remaining $0.25 lowering in our EPS range. So again, a lot of different factors impacting each line of the P&L. But fundamentally, the underlying business and how we saw it sort of playing out for the full year, yes, there's a little timing issue of some of the pull forward that we saw in Q2 coming out of Q3, but effectively, the strength of our business coming off of our April levels.

Great. That's super helpful. And then maybe just last one for me, so if you were to recast the sales guidance, maybe using the old approach that embeds all of the various KPIs that you've historically looked at, how would that shake out versus what you've reiterated today? And then maybe separately, if we were to compare those KPIs to how they looked at Q1 when you last reported, is it safe to say there's been a broad-based improvement sequentially?

I missed a little bit of your beginning question. I think -- are you saying is our KPIs -- I'm going to answer this question as if you asked our KPIs today where they were in April. Is that the question?

That's essentially the question. And then if you were to use kind of historical approach of guidance setting, where would that land relative to what you've reiterated today?

Yes. So first of all, our guidance setting, we're using the same approach in which we used last quarter, which is effectively where we're run rating today. Where we're run rating today is effectively where we were run rating in April. So our KPIs haven't meaningfully changed. Now the one caveat to that is we had April, and it's not a lot of months of data, right? We had April. We saw May stabilize off of April. And then we had June, which was impacted by pricing. If you normalize for some of that price increase activity, you take reasonable estimates, you would have a June that looks stable off of May. And so that is effectively a stabilization of the KPIs that John mentioned at the beginning of this call. And so that's what's carrying forward into the guidance for the rest of this year.

Our next question comes from the line of Jeff Van Sinderen with B. Riley.

I know you mentioned product mix maybe shifting a little bit. Any trends you can touch on there? Maybe also speak to kind of what you're seeing in the weight control segment of the business, the performance segment. And then also, if you could just speak to the product, how you're rolling that out, how that's being received so far.

Yes, this is John. I'll take that. So we see the same trends in the product categories that we have seen really now for a couple of years, which is outperformance from a weighted standpoint in sports nutrition and then how the active lifestyle, healthy weight is dropping a little. And that's just where our new product launches are. That's where our new consumers are coming in. we see improved customer lifetime value for people who buy sports nutrition or health and wellness products versus weight management, which is not uncommon. We use weight management certainly as a change in lifestyle, but some people are very goal-oriented. So we continue to see that shift. It's small because, obviously, weight management is the biggest part of our portfolio, but we are seeing a shift. And we're seeing a shift in our distributor base, too. If you come to our events -- and we just had a big one in Detroit -- you'll see it's a lot of healthy people who are coming from more than just weight management. So we do see that trend. And we'll continue to see that trend. And of course, we're launching more sports nutrition products, and we're expanding it around the globe, and you'll continue to see that.

Yes. I would just add -- this is John Agwunobi. I would just add that I think, across the broader nutrition and fitness space, we're seeing -- and this is a long-term trend. We're seeing people sports nutrition for their weight management goals. In other words, people who typically would have gone after a weight -- what we would traditionally call a weight management product, a high-protein, low-calorie product, for example, are increasingly going to sports nutrition solutions as an alternative there, whether it's a part of their fitness environment or their lifestyle, they're looking for products that are designated as sports nutrition products, the line is blurring between the 2 categories. Now the good thing as it relates to us is we play strong in both spaces. So no matter where the customer goes, whether it be the traditional weight management category that we offer, Formula 1 being the anchor product in that range or our Herbalife24 sports nutrition category, we find that the customer moves freely back and forth between the two, seeking high-protein supplementation and low-calorie nutrition, and we offer both in both categories. We're seeing growth, as was mentioned, significant and impressive growth, I think, in our sport nutrition category and growing at a lower pace over on our weight management side.

Okay. So I'm sorry, just to clarify, you're saying weight management is still growing?

Yes. I mean, as a category. Let me see if I can pull up the exact number of the categories -- the category.

So to be clear, Jeff -- this is Alex speaking -- our year-over-year growth rates, I mean, for net sales were down 10% year-over-year, right? So we have -- but the same trends of sports and fitness outpacing our weight management category is still consistent. So if you look in the Q, I think our weight management is down double digits, and we have our energy, sports and fitness effectively flat. So you still have that significant outperformance. But to -- from a growth or contraction standpoint, I just want to be clear, there's still a contraction, but the energy and sports and fitness is outpacing our weight management. Again, that's just reflective of our overall company performance.

Right. But it sounds like we've seen some stabilization here in the last couple of months, and I believe you're guiding to Q4 inflecting to up year-over-year. So it seems like you're going to have growth somewhere, and it's been -- from what you're saying, it sounds like sports nutrition is really going to continue to be the fastest-growing segment. Correct me if I'm wrong on that.

Yes. So just to make -- I mean you heard from a lot of people answering this question, so let me see if I can recap it -- question, so let me see if I can recap it. Sports nutrition, we expect to outpace performance of the other categories in nutrition. And that's from just a percent of the pie, right? So let's look, I mean, we have other performance criteria we're measuring and other performance measurements. But within the pie of what we sell, we expect faster growth in Sports Nutrition than in weight management. This opportunity, all of the categories that we sell, we expect to return to growth before and growth next year. But the opportunities within the 3 big categories we have, which is weight management, health and wellness products and sports nutrition, we expect the fastest growth to come in sports nutrition.

Right. Well, I mean, given kind of what you're seeing the shift to people, I guess, maybe using sports nutrition more for weight control, that seems to be a real positive, I would think. One other thing I wanted to ask you about, and then I'll let someone else jump in, just wanted to ask if there's anything more you can offer and giving us color on the Herbalife One product, what that will consist of. Obviously, it's a large investment, and it seems like it's extremely well thought out, and I would think going to be a phenomenal product with that level of investment. But maybe you could just talk about some of the benefits for distributors, consumers and then also the data from that system that you'll collect, big data that you can analyze and apply to improve your business.

Yes. Let me start there. So thank you for the question because it does allow us to kind of, I think, emphasize how important this feels to us internally. Our distributors have, for many years, spoken to the need for us to use our front end, our consumer-facing and our distributor-facing technology as a competitive tool, as a way to differentiate us from the competition. As you can imagine, our online interaction with new distributors and new customers, it's the first interface that people typically have. It helps define the brand. And so a big part of Herbalife One is about making sure that the experience online, whether that be through social media interactions with the company or traditional online interaction with it, making sure that, that experience reflects the modern -- you'll forgive the phrase -- sexiness of our business, in other words, we want to make it a tool that helps attract people into the lifestyle, into the community that is Herbalife Nutrition. The technology itself, our hope is that it will make signing up of new distributors faster and more efficient. Our hope is that it makes transactions, whether that be distributors to company or distributor to customer transactions, faster and quicker and more efficient. It's also a way, as you point out, for us to gather data and to use that data not only to do the traditional kind of e-commerce type work that everyone else is doing, and it's time for us to now do the same, but we also think that there's knowledge there that we can use to better kind of decide what products we should get into next in each of our regions. What -- how to package and promote both bundles and individual products to our customers. The bottom line is…

Great to hear. It sounds like it's going to be phenomenal. Best of luck.

Our next question comes from the line of William Reuter with Bank of America.

You mentioned that pricing increased 5% on a year-over-year basis during the second quarter, but that didn't include much benefit of the June price increase. How large was the June price increase such to think about how much the year-over-year increase should be in the third quarter?

So the global price increase was 10%, which went into effect in mid-June. There were some markets that were not part of that global price increase, including China, India, Vietnam and Malaysia for regulatory reasons and otherwise. So those will be going into place in Asia Pacific, in Vietnam and Malaysia, that was earlier this month in July. We're slated to have that price increase in India in September and I think also in Q3 for China. So other than that, the world received a 10% price increase in mid-June.

That's very helpful. I can understand that with the shift in sales from July into June it may be very difficult to get any sources of data that indicate how consumers are responding to the higher prices. Is there anything you've heard from your representatives or that you've been able to see which can kind of give you a sense for how underlying demand may have changed or price elasticity?

Obviously, we have ears to the ground on all of this in all of our markets and really trying to understand that. I think it would be too early for me to really echo any of those anecdotes at this point because they would just be that. So let us collect the data. We'll come back to you in the quarter, and we'll kind of -- we'll give you sort of what we're seeing with a little bit of substance behind those comments.

Perfect. That's -- I can appreciate that. And then it sounded like the $50 million that had been kind of expected to be used for share repurchase, that will be opportunistic debt repayment during the third quarter. I then heard you say that you were going to return to share repurchases in the fourth quarter with that $50 million. Does that mean that you would not continue to opportunistically repurchase debt in the fourth quarter? Or it just didn't address that at all?

Yes. No, we just didn't address it explicitly at all. What happens in the fourth quarter, if you look at the midpoint of our guidance, the fourth quarter of our 2021 falls off. So you'll see our target leverage -- leverage ratios start to improve in the fourth quarter, once fourth quarter 2021 rolls off. So really, the -- is to manage our gross debt a little closer to target now. And the P&L should take care of itself to some degree in the fourth quarter. Obviously, if there's anything where we need to be a bit more prudent on our -- how much debt we're carrying, we'll certainly do that as we are now, but that's not in our expectation. So if we hit our guide, our expectation is we'll have sufficiently moved towards our target leverage, and we can reuse that excess cash back into our share repurchase program.

Our next question comes from the line of Hale Holden with Barclays.

I had two quick ones for you. The net investment in the Herbalife One IT infrastructure build of $200 million to $250 million over the next 3 years, I was wondering if the total investment of $400 million, is that just longer-dated? Or is there cost saves that offsets that to make the net number lower and how those numbers drives?

The net investment is reflective of we are currently investing in a number of our legacy technologies, being technology tools that are out in the market today. So what we're talking about when we refer to a net investment, it's the reallocation of that expected spend into Herbalife One. Does that make sense?

Yes, it does. And then the $50 million projected debt pay down in the third quarter, I was wondering if we should think about that going towards your variable debt or if you might go after deeper discount debt -- dollar discount debt.

It will likely -- we have $150 million drawn on the revolver right now, so we'll likely take the revolver down by the $50 million.

At this time, I would like to turn the call back over to Dr. John Agwunobi for closing remarks.

Thank you very much. Thank you all, by the way, for participating in the call and for your questions. I just want to close with a few thoughts here. First, it is something -- we're actually internally pleased to see that our numbers are beginning to stabilize off of the April number as was reported, as was mentioned by both myself and Alex. That was important. But the real work is ahead of us. And I think I want to leave both our investors and our community, those that follow us, with the clear picture. We're going to fight for more. We're not satisfied with where we are. We think it's good to see that things are stabilizing, but it gives us an opportunity now to focus on building into the future. We continue to project growth in Q4, as was mentioned. To get there, we're going to do some hard work internally and the teams are excited and motivated, both staff and our distributor partners out in the field. There is a sense of excitement. There's a sense of purpose that is tangible when you go to events, when you visit with distributors, when you talk with them one on one. And so as we look to the next phase of our journey, our focus is on making sure that we build off of this foundation, that we generate growth and, ultimately, shareholder value. I look forward to talking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.