Good afternoon, and thank you for joining the first quarter 2023 Earnings Conference Call for Herbalife Limited. During the company’s opening remarks, all participants will be in a listen-only mode. Following the opening remarks, we will conduct a question-and-answer session. As a reminder today's conference call is being recorded. I would now like to turn the conference over to Erin Banyas, Vice President and Head of Investor Relations to begin today's call.

Thank you, Twanda, and good afternoon and good evening everyone. Joining us today are Michael Johnson, our Chairman and CEO; and Alex Amezquita our Chief Financial Officer. Before we begin today's call I would like to direct you to the forward-looking statements on page 2 of our presentation and in our earnings release issued earlier today, which is available under the Investor Relations section of our website. The earnings release includes a discussion of some of the more important factors that could cause results to differ from those expressed in any forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. 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 period's preference. Please refer to our earnings release for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. Following today's call, the presentation materials will also be made available under the Investor Relations section of our website. And with that, I will now turn the call over to Chairman and CEO, Michael Johnson.

Thanks Erin and welcome to Herbalife on behalf of all of us. Good afternoon to our investors and shareholders and all of our stakeholders. Thanks for joining us today. This is my second call back after my return. We joined you in February and -- February 14th and then and now we are in the midst of a significant change and we're more comfortable with that than we have been in a long time. And I'm going to continue on the promise that we made in our last call in February that our sales will grow and our results will improve. We're evolving. And that's what's been happening over the last six months and it's going to continue. We still aren't where we want to be but we have embarked on a significant journey as we laid out on our earnings call in February. Since then we've engaged more closely with our distributors than we have since 2019. That's hard to believe. We launched our new brand. We've seen net sales trends improve and we are full steam ahead on executing Herbalife One, our new digital platform. By working closely with our distributor digital team to make sure Herbalife One provides the content data and transaction capabilities to grow their business, I'm excited and frankly very confident that executing on this transformation we will build our business stronger reduce our costs and focus us on all the important elements and metrics in our business. We've secured the balance sheet since then. We've made management changes to align key talent with key initiatives. We are streamlining our team for better operations, product innovation, data and sales analytics and improve productivity. We have worked very hard to make sure our distributor and customer engagement has increased. We are embracing on change as…

Thank you, Michael. I'll begin my section with key financial highlights for the quarter. First, quarter net sales of $1.3 billion were down 6.3% compared to the prior year. Year-over-year reported net sales trends in all five regions improved compared to the fourth quarter trends. Currency pressure continued to weigh on our results during the quarter resulting in a 370 basis points currency headwind to net sales. Q1 gross profit margin of 76.2% was approximately 80 basis points below prior year. Currency movement drove significant pressure on our gross profit margin resulting in an approximately 150 basis points headwind compared to the first quarter of 2022. Over the past year, our pricing actions have outpaced input cost inflation and if not for currency we would have had year-over-year gross profit margin expansion this quarter. While the US dollar has been on a weakening trend since the third quarter of 2022, it is still stronger than currency rates during the first quarter a year ago. Should rates stay relatively constant, we anticipate gross profit margin improvement to Q1 in the balance of the year. First quarter adjusted EBITDA of $129 million was below first quarter of last year. This reduction was driven primarily by the lower top line in the quarter and a currency headwind of approximately $37 million. Additionally, as Michael mentioned, our in-person events have increased in 2023, with event spending up $20 million in the first quarter of 2013 compared to the same period last year. Note that approximately half of the $20 million is due to the timing events that occurred in Q1 of this year as compared to Q2 of last year. Adjusted diluted EPS of $0.54 was negatively impacted by a $0.32 currency headwind. Adjusting for the currency headwind and the timing of event spend…

Thank you [Operator Instructions] Our first question comes from the line of Chasen Bender with Citi.

Good afternoon. Thanks for taking the question. I'd just like to start on the distributor trends, specifically just in context of the historical quarter over -- quarter-over-quarter change we usually see from 4Q to 1Q. Active sales leader's trends actually look to be improving for a couple of your markets like North America which I think probably reflects all the work you're doing. But they actually step back in a couple of others like EMEA and LatAm. So I'm just wondering is there something unique to those markets that are inhibiting the stabilization relative to North America, or is it just macro? Just any comment you can provide there would be great.

Yeah. So generally, the trends of our active sales leaders are going to be a lagging effect of what you see on the new distributors and preferred members. And as you saw for much of 2022 and particularly the markets that you've noted, the funnel for those for our active sales leaders has been our new member KPIs have been in decline. So the funnel or filling, those active sales leaders, I think it would be natural to expect some softness in our active sales leaders. With that said, there's still significant strength I think in the number of active sales leaders that are still participating in the business. So where we currently sit with the strategic initiatives in place, our current level of active sales leaders and the trends that we expect it can still set us up for overall growth by the end of the year. I don't think that that is something that, we think of as prohibitive, but clearly those are metrics and those are KPIs that we're focused on as we think about how to implement our overall strategic initiatives.

Got it. I appreciate that color. And then just on the pre-tax charges related to the Transformation program. Can you remind us exactly what is in that $27 million bucket? And it sounds like, there's just a little bit of cleanup left relative to the $60 million expectation. But just relative to the 7% global reduction in workforce that you announced last quarter are those costs part of that, or are there additional charges related to that program that we've yet to see?

So the lion's share of that $27 million is personnel cost. We talked about retention separation costs those types of things. As we mentioned in the last quarter, this was a pretty significant portion of this broader plan where there's overall a net workforce reduction of about 7%, 13% growth 7% net. So the $27 million is the execution of those personnel changes.

Okay. So, the 7% reduction in global workforce that $27 million and total $60 million captures that. There's not an additional charge coming as you continue to work through personnel. Did I understand that correctly?

There will continue to be incremental expenses, but the $27 million that you referenced is largely execution on a personnel level so for separation and retention purposes.

Okay. Got it. And then just on the credit amendment obviously increasing the leverage covenant gives you a lot of breathing room in 2Q, but in the second half as you roll off some of the stronger 22 years old implies a big step-up in EBITDA, ostensibly like that's when the business is -- has had time to digest a lot of the changes you've made and more of the cost savings are going through. But can you just speak to your confidence in staying within the leverage covenant? And just remind us if there are any other covenants that are at risk of being tripped?

Yeah, so the covenant that we had amended was the default covenant on our senior credit facility. And we don't see any risk of that -- of breaching that covenant in 2023 or beyond. Even when we step down in 2024, we're stepping down after our 2024 converts are paid down. We actually have even with the step down more financial flexibility post that date with a step down than we do for the remainder of 2023. So we feel highly confident of those levels. I'll just leave it at that.

Got you. That’s helpful. I’ll pause there and pass on. Thanks very much guys.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Van Sinderen with B. Riley. Your line is open.

Yes. Hi, everyone. And kind of if you can bear with me this is a little bit of a multipart question here, but can you speak more about what you're seeing in North America, what you're hearing from kind of your key North American distributors, what the new distributor adds and overall distributor retention metrics look like in North America. I'm not sure if I saw that maybe buried somewhere. And then I know you said you expect year-over-year sales growth for the whole company in Q4. Do you expect North America segment to inflect year-over-year growth in Q4 as well, or if not, what do you think needs to happen to return to growth in North America?

Yeah. So I think overall -- so first, let's start with the retention metric. The retention metric that we provide is an annual metric. So you could keep digging for it, but you're not going to find it. It's only in our case that we provide that. We provide that on an annual basis. If you look in our supplementals, you can look at something that approximates retention as we go along which is activity or activity percentage. And again, that's provided in our supplemental on our website. So you can kind of get an idea of that in between those annual retention tests. As it relates to overall growth, we're not providing market-by-market guidance, but obviously what would be instrumental in achieving overall growth in the company by the fourth quarter would be significant improvement in North America. I think that is a core tenet in our overall expectation of overall company growth is we're going to have to see significant improvement in North America. Will that translate into specific growth in North America at that time? I think we'll have to see. But obviously, significant recovery is part of that overall thesis.

And I mean you have some regions I think you called out Mexico and maybe it was Brazil that were actually positive. So as we think about the other part of North America and I don't know maybe Michael wants to speak to this, but what do you believe needs to happen to get North America back to let's say close to flattish or hopefully closer to flattish as we exit the year?

So thank you. We're so engaged with our distributors right now in North America. It's hard for me to imagine a time when we've been more analytically data-driven engaged with that group of distributors than ever before. So we have taken each state and broken it into sections in terms of to try to validate and understand what models are working. We have been working with a group of distributors in the Southeast into New York and in Texas and then here in California. We're very energized and excited about what they see in the business, especially around Nutrition Clubs fit clubs and getting the healthy active lifestyle back into our business that kind of fell apart during the pandemic and we're seeing an uptick in that. But the overall strength is going to be one that is going to have to take place across a lot of states and across a lot of regions in a very short period of time. And so I wouldn't predict that that's going to happen quickly. I think it's going to happen systematically. It takes 12 months for a new distributor to open up a Nutrition Club. So we have a lag there. It takes a little time for them to understand how to operate these clubs most effectively. Our social media selling is on the uptick, but it needs to be refurbished. And we are building -- we have a San Antonio, Extravaganza coming up. We'll launch an extremely positive new line there of products that we think will enhance and help Nutrition Club operators, build out their customers even stronger, but this takes time. So, I don't want to use the word lag, because I've never liked that word much, but it's a reality right now that once we get these in place, it takes a little time for them to have effect. The energy and excitement among our distributors super high. And how that translates into numbers will take a little time.

Okay. That's fair. And then if I could, just wanted to get a sense, I guess, of what trends you're seeing even just sequentially in terms of weight management products, maybe how that -- if there's anything to call out by region. I know India has been really strong. And then maybe just touch on kind of key new product rollouts for 2023, and then any new products that you have rolled out so far kind of traction you're getting there so far this year? And then also as part of that just if you could just update us on the SKU rationalization process?

Yes. So I'll take just overall, I think, the bright spot of our product categories is that we think about it is still in the energy fitness category. If you look in the Q, we actually are having positive year-over-year net sales growth in that category. And that's primarily being led by the energy products within that category and predominantly led by India as a region in driving that growth. I think for the rest of weight management and some of the other products, they're just holding serve with the overall with the -- how the overall markets are trending. So we'll continue to our product rollouts, I think, you've seen some of them. We've talked about some of the vegan line coming out in North America, and some of our other products are really incremental to our existing product philosophies, but more to come on with products as we are launching Herbalife 2.0. I know we have -- I don't know if we want to mention you'd like to…

How many cats do you want to let out of the bag? You just mentioned the vegan line. So that's okay. All right. So I'm looking at Frank, who's our Chief Operating Officer now, and also the former Head of North America and the Americas. We've got a lot of products in the pipeline right now. Our product release program is extensive in this company. The SK -- the SKU rat -- that is going on inside the company is going to remove, Mark you're sitting here, how many -- what is the SKU rationalization number exactly?

15% of our portfolio.

15% of our portfolio is going to be reduced and that's going to allow us more innovation, the use of resources to put towards innovation. We have a new member and I mentioned it last time of our product development team, and innovation team here the gentleman who brought us Herbalife24, Dr. John Heiss, who's looking at every piece of our product portfolio right now. We have a couple of major, or should I say, product innovations that I don't want to tip right now that are going to be released in the near future. We'll test a few in some marketplaces. This is our new mentality and here is to test it to make sure it works. We have a couple of products in Europe Vital Complete that's delivering some very early positive numbers to us. India has a self-contained product line there. They continue to enhance and create new products. We're looking at our innovation center in Asia, as a huge opportunity for us. I just don't want to tip the hat on some of these products that are coming, because our distributors don't know about them yet. We work closely with the distributors to make sure that everything, we're bringing to the marketplace has a distributor method of operation that it fits in and works closely with their business. I know that's a little bit of a political answer for you, but that's the best you're going to get right now.

Okay. Thanks for that. And thanks for taking my questions.

Thanks, Jeff.

Thank you. Please stand by for our next question. Our next question comes from the line of William Reuter with Bank of America. Your line is open.

Hi. Good afternoon. Thanks for taking the question. Firstly, you commented that the benefit of pricing was 13% in the quarter. I know you've been hesitant to take additional price increases after the large one last summer. Where are you guys in terms of additional price increases for the remainder of the year?

Yes. Obviously, 13% quarter-over-quarter is a massive number. I think if you look at sort of the performance post that -- post the price increases that we predominantly took mid last year, there is some level of demand elasticity and there's some level of market saturation, particularly in the US and some Western European markets in terms of the ability to continue to take price. And so, while we're not necessarily made whole from a gross profit margin on all the input supply chain escalations that we've seen over the past year and change, there does seem to be a limitation for how much pricing we can continue to pass on to the market. So, I think what you're going to see from us in 2023 is some level of price increases on a lot lower level than what we executed on in 2022. And we're just really going to monitor it closely and see how -- on a market-by-market basis, how those price increases are being impacted. But -- so overall I would summarize, much more conservative in terms of the amount of price increases, we're going to be taking and really taking a more prudent view on demand elasticity as we move through 2023.

Okay. Previously you had noted that free cash flow this year should be above 2022. I don't think I heard an update Alex in your prepared remarks on that. I know your first quarter you said was below kind of historical levels. Where are you on that thought process?

Yes. So the first quarter free cash flow is going to look unseasonably low. There are some timing impacts on that. So for example, some big cash flow items, a bonus that we paid in Q2 to distributor as part of their compensation program. We did that in Q2 last year, we did it in Q1 this year. That's a $70 million item. And there's a handful of other smaller costs that we saw in Q1 that's disproportionately bringing our first quarter free cash flow down. Overall, we expect for 2023 our operating cash flow to still be in excess of where we were in 2022. The variable then on free cash flow would just be how we execute against the Herbalife ONE and the CapEx we put against that whether or not we'll be above or below our free cash flow. So, long story short, OCF higher than 2022. And one of the variables that we still have is on the execution of H1 on where the free cash flow will actually land for the year.

Got it. And then just lastly for me. In terms of the debt that was repaid in the quarter, I have not seen that. It may be in the supplemental slides. But what debt did you target? Was it just the credit facility the revolver?

That's correct. We had $60 million drawn on the revolver, and then there's a balance of about $7 million of just your standard term loan amorts.

Got it. Okay. And that’s all for me. Thank you.

Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Hale Holden with Barclays. Your line is open.

Thanks for taking my call. I had two quick ones. Alex, am I supposed to understand the $20 million of additional kind of event spending in the first quarter, was just a timing shift from 2Q last year to 1Q this year, and so that's why SG&A looks a little elevated from I guess where we might have thought it would have been?

That's right. Well, $10 million of the $20 million. So $10 million relate to an event primarily the event held in Los Angeles that we call Honors. Last year it was in the second quarter, this year it's in the first quarter. So, $10 million of it is just timing and then, $10 million of it is more activity engagement around events as a method of promotional spend and engagement spend.

Got it. And so, the other question I had was on the leverage covenant increase that you got. If we're going to get back to revenue growth, is this a function of additional investment over the next six to nine months to kind of get the flywheel going faster that should be a drag to margins, or is it just simply an LTM timing from highs from last year that you're just trying to make sure that you have room for?

More of the latter. It's just simply as we move through the year, there may be some LTM flexibility that we would want as we go forward. By the way, removing the covenants to places that would still -- particularly, where it lands at four times, I mean still consistent with the covenant of an investment-grade covenant. So, it's really just actually getting -- what I would say kind of getting our credit facility with covenants that probably should have been more representative of what we should have been in the first quarter.

Okay. Thank you. Appreciate it.

Thank you. Our next question comes from the line of Anna Lizzul with Bank of America. Your line is open.

Hi. This is Yasmine on for Anna. Thanks for the question. So, given that Asia-Pacific outperformed the rest of your geographies on regional volume point metrics, are there any learnings you can take from that region and apply to regions where you see steeper declines?

100%. I mean that is one of the things that we do well as a management team as we look at what's working well in any particular region and we work with our distributors and get those best practices in other places of the world. Now, the principal driver of that in the APAC region is India. That is the principal driver of the overall regional growth where India was up significantly Q1-over-Q1. India has been a growth driver now for us for a number of years and for at least the past handful of quarters. We've been taking deep dives in the Indian market and what's working well there and working with our distributors to have some of those best practices communicated to other markets around the world.

And I'd say just to add to that it's not just India. It is in marketplaces where we see distributors succeeding even though the overall market may be down. We are working very closely with those distributors, both with data analytics practices, where they are in the marketplace, getting down to the grassroots with them. We have some distributors who are doing fabulous in North America doing fabulous in Europe. And we want to make sure we're exporting those ideas as fast and furiously as we possibly can. That's what these extravaganzas are about. That's what these big meetings are about is to bring in voices from distributors who are successfully employing the Herbalife business model in their marketplace to train and teach other distributors on how to do the same. So, while India is a success story and we love it and it's doing great there because the energy enthusiasm and business practices there are fantastic. We have pockets of success all over the world. In Brazil, Mexico, North America, Europe, Asia, we're seeing all sorts of things. It's just -- we now need to globalize those as fast as we can in the marketplace.

Got it. Okay, that's great. And I know earlier in this call you guys talked a little bit about just regional performance. And I guess with the reopening in China, would you mind providing some color on why China results were weak this quarter?

Well, on a year-over-year basis, certainly they were down. I mean I actually look at it sequentially from where they were in the fourth quarter and actually you had volume increase in the Q1 versus volume in Q4. You typically don't see that because in the first quarter Chinese New Year, Lunar New Year significantly impacts not just the week, but almost the whole month for the first quarter. And so to see sequential improvement in a quarter when you have the market really not fully engaged. And further we know in China, even though that Zero-COVID policy was lifted during the quarter, there was really a month where a large swath of the population actually contracted COVID and was out of work. People were down and out of the count to the extent that we actually had to close our manufacturing facilities for the month of February. There were so many citizens that were impacted. So, to have those sort of headwinds and to still have sequential volume increase, I actually am quite pleased with how China actually rebounded from that. I'm looking forward to see how the second quarter goes there.

Yes, we have an impact in China where now we are just getting back to live meetings in the last couple of months where Nutrition Clubs are starting to reopen in that marketplace. You've got to realize that in China when they went into lockdown it was much different than any place on the face of the earth. It was a true lockdown. Our clubs were heavily and highly impacted. We didn't have the ability to get to the digital platform as fast as we would have liked. We're working on that right now. But I think without being too positive here or too negative, I think we're going to see some interesting news out of China over the next couple of quarters.

Okay. Great. That’s very helpful. Thank you, guys and I’ll pass it along.

Thanks, Anna.

Thank you. Please stand by for our next question. Our next question comes from the line of Karru Martinson with Jefferies. Your line is open.

Good evening. When you look at the cost for distributor events do you feel that that's on par with kind of what you were spending pre-pandemic, or does this represent a step up from that period as well?

I think it represents what's consistent with pre-pandemic particularly in the event spend. It's a little bit more than the pandemic times. Particularly we had a pretty significant shift from events to some other types of promotional spending. So I don't think it's that aligned with historical run rates. And quite frankly it's what the business needs more than anything right now. So I think it's -- as we think about where to put the spend this is I think an effective use of it.

Okay. And then have you seen the changes in the new distributor compensation start to kind of impact that sign up, or is it just too early in that process?

Yes. So, yes. So we've seen -- I mean it's early stages, but we have seen positive impacts from both of the marketing plan changes that we made in February. It's less around sign-ups. Those marketing plan changes that we made is really about motivational impacts in distributors that already have their feet wet are looking to really grow their organizations into larger substantial business. It's really for that sort of middle distributor I would say. And so we're seeing good signs of those impacts taking hold. It is going to be something that is going to take months if not quarters for it to really full bear fruit but we're very pleased with the progress so far.

Thank you very much, guy. Appreciate it.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back to Chairman and CEO, Michael Johnson.

Thank you all very much. Thanks for being on this call. I get pretty excited during my presentation because we're seeing positive trends here. We've got a management team and a distributor base that's fully energized. We've said that before but we're really starting to see some changes in the atmosphere here. We're excited about the new digital platform. We've got some wonderful products rolling out. Our distributors our Board our investors employees super excited and aligned on where we are. These have been a tough couple of years for Herbalife without a doubt. Not in my experience have I ever seen this happen in our company, but I know and I know everybody else knows in here that we're on a pathway to improve success in the company. We're on a pathway to frankly improve a lot of lives in this company. This is a super unique company. I am really excited to be back here. I said that six months ago I'm going to say it today. And probably say it again in six months. This company is just something special and we know that the best days of Herbalife are ahead of us. So thank you for being with us. We're looking forward to seeing you next quarter. Hopefully, we'll be here with some better numbers. It's going to take a little patience and time, but we know Herbalife is on a path to success. So thank you all very much. Thanks for being with us and I wouldn't be me if I didn't say let's go Herbalife.

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