Herbalife Nutrition Ltd. (NYSE:HLF) Q1 2019 Earnings Conference Call May 2, 2019 5:30 PM ET Company Participants Michael Johnson - Chairman and CEO John DeSimone - Co-President and Chief Strategic Officer Dr. John Agwunobi - Co-President and Chief Health and Nutrition Officer Alex Amezquita - SVP of Finance & Strategy and IR Eric Monroe - Director, IR Conference Call Participants Tim Ramey - Pivotal Research Doug Lane - Lane Research Beth Kite - Citi Hale Holden - Barclays Operator Good afternoon and thank ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | --- | --- | --- | |---------------------------------------------------------------------------------------------|-------------------------------------------------------------------------- ...

AbbVie Inc. (NYSE:HLF) Consumer Analyst Group of New York Conference January 21, 2019 5:00 PM ET Company Participants John DeSimone - Co-President & Chief Strategic Officer John Agwunobi - Co-President & Chief Health & Nutrition Officer Conference Call Participants Akshay Jagdale - Jefferies Operator Today, please join me in welcoming Herbalife to the conference. As many of you know, Herbalife is a global nutrition company founded in 1980, today with a market cap of about $9 billion. It sells weight managem ...

Financial Data and Key Metrics Changes - For Q4 2018, reported net sales were $1.2 billion, a 9% increase compared to Q4 2017. Full year 2018 worldwide reported net sales reached $4.9 billion, reflecting a 10% year-over-year increase [11][12] - Volume points for Q4 2018 were approximately 1.5 billion, representing an increase of about 11.8% compared to Q4 2017, marking the largest fourth quarter volume point results in the company's history [12][13] - Reported net income for Q4 was approximately $48.9 million, or $0.34 per diluted share, while adjusted earnings per share (EPS) was $0.63, exceeding guidance [14][15] Business Line Data and Key Metrics Changes - The U.S. business saw a volume increase of 12% compared to Q4 2017, with year-over-year growth in every quarter of 2018 [18] - In China, volume points increased by 4% in Q4, although growth decelerated compared to previous quarters due to tougher comparisons [18] - Mexico recorded a 10% growth in volume points, achieving the largest fourth quarter in its history [19] Market Data and Key Metrics Changes - The Asia Pacific region reported a 30% year-over-year increase in volume points, marking the fourth consecutive quarter of record performance [19] - The EMEA region grew by 11% in Q4, with significant contributions from Spain, Turkey, and South Africa, all exceeding 20% growth [19] - The company set volume point records in four of its six regions: AMEA, APAC, China, and Mexico [12][19] Company Strategy and Development Direction - The company aims to continue its growth trajectory and expand its mission globally, focusing on innovation and technology to enhance distributor productivity and profitability [10][22] - A significant emphasis is placed on product development, with over 230 new products launched in 2018, including a new high-protein iced coffee [23][24] - The company is implementing segmentation strategies to improve visibility and customer experience, with plans to launch in Brazil in Q2 2019 [29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's strong foundation and growth potential, highlighting the dedication of independent distributors and employees [10][11] - The management acknowledged challenges in the Chinese market due to regulatory scrutiny but remains optimistic about long-term growth [42][68] - The company anticipates a challenging Q1 2019 due to the 100-day campaign in China but expects recovery in subsequent quarters [42][68] Other Important Information - The company recorded a non-cash charge of approximately $29.5 million related to U.S. tax reform, impacting net income for Q4 [13][14] - Adjusted effective tax rate for Q4 was 26.4%, lower than expectations due to various factors [16] - The company generated $648 million in cash flow from operations in 2018, a 10% increase from 2017 [17] Q&A Session Summary Question: Concerns about the number of new products launched - Management clarified that the new products are spread globally and include many flavor extensions tailored to local markets [32] Question: Clarification on the 2K qualification program - Management indicated that the program is a test and may not be permanent, pending further evaluation [34] Question: Impact of the 100-day program in China - Management noted that the program has affected Q1 sales but expects recovery in Q2 and beyond [37][42] Question: Insights on India and Brazil's performance - India showed strong growth with 50,000 new preferred members, while Brazil's performance was disappointing but expected to improve with segmentation [48][49] Question: Update on the coffee drink launch - The coffee drink has exceeded expectations, contributing over 2% to total U.S. sales [83] Question: Feedback on digital and technology initiatives - The HN-connect program has seen significant adoption, with 24,000 distributors signed up, indicating positive engagement [88]

Part I [Item 1. Business](index=5&type=section&id=Item%201.%20Business) Herbalife Nutrition is a global direct-selling company with a "seed to feed" quality control strategy and a unique business model in China - The company operates a direct selling business model to distribute its nutrition products across **94 countries** as of December 31, 2018[15](index=15&type=chunk)[16](index=16&type=chunk) - The company's best-selling product line, **Formula 1 Nutritional Shake Mix**, consistently represented approximately **30% of net sales** for 2018, 2017, and 2016[17](index=17&type=chunk) - Herbalife's "seed to feed" strategy involves significant investment in traceable ingredients, scientific personnel, product testing, and self-manufacturing, with company-owned facilities producing approximately **60% to 65%** of inner nutrition products sold worldwide[22](index=22&type=chunk)[24](index=24&type=chunk) - As of December 31, 2018, the company had approximately **4.5 million Members**, which includes 0.9 million preferred members and 0.7 million distributors[30](index=30&type=chunk) - The business model in China is distinct from the global model to comply with local regulations, which prohibit multi-level marketing but permit direct selling[50](index=50&type=chunk)[51](index=51&type=chunk) Product Mix as a Percentage of Net Sales (2016-2018) | Product Category | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Weight Management | 63.5% | 64.2% | 63.8% | | Targeted Nutrition | 25.4% | 24.5% | 23.6% | | Energy, Sports, and Fitness | 6.3% | 6.0% | 6.1% | | Outer Nutrition | 1.9% | 2.1% | 2.4% | | Literature, Promotional, and Other | 2.9% | 3.2% | 4.1% | [Item 1A. Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from its dependence on independent Members, compliance with the FTC Consent Order, and the complex regulatory landscape in China - The business is **highly dependent** on its ability to recruit, retain, and motivate a large base of independent Members, who can terminate their agreements at any time[99](index=99&type=chunk)[100](index=100&type=chunk) - The **2016 Consent Order with the FTC** imposes significant compliance risks and costs, and failure to comply could negatively impact business operations in the U.S[127](index=127&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) - Operations in China are subject to unique risks due to a modified business model required by Chinese regulations, with uncertainty regarding the interpretation and enforcement of these rules[136](index=136&type=chunk)[138](index=138&type=chunk)[143](index=143&type=chunk) - Approximately **80% of net sales** for the year ended December 31, 2018, were generated outside the U.S, exposing the company to foreign exchange and geopolitical risks[134](index=134&type=chunk) - The company's **Formula 1 product line accounted for approximately 30% of net sales** in 2018, creating a concentration risk[171](index=171&type=chunk) - The SEC and DOJ are conducting an investigation into the company's compliance with the **FCPA in China**, the outcome of which is uncertain[175](index=175&type=chunk)[633](index=633&type=chunk) - Changes in U.S. tax law may classify some non-U.S. subsidiaries as **Controlled Foreign Corporations (CFCs)**, which could have adverse tax consequences for certain U.S. shareholders[191](index=191&type=chunk)[192](index=192&type=chunk) [Item 1B. Unresolved Staff Comments](index=37&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved staff comments from the SEC - None[218](index=218&type=chunk) [Item 2. Properties](index=37&type=section&id=Item%202.%20Properties) The company leases most of its properties but owns a large manufacturing facility in Winston-Salem, North Carolina - The company leases most of its physical properties, including its corporate executive offices and major distribution centers[219](index=219&type=chunk) - The company owns an approximately **800,000 square foot** manufacturing facility in Winston-Salem, North Carolina[220](index=220&type=chunk) - Leased manufacturing facilities are located in Suzhou, Nanjing, and Changsha, China[219](index=219&type=chunk) [Item 3. Legal Proceedings](index=37&type=section&id=Item%203.%20Legal%20Proceedings) Details on legal proceedings are referenced in Note 7 of the financial statements - The report refers to Note 7, Contingencies, for details on legal proceedings, including tax disputes, an FCPA investigation, and the FTC Consent Order[221](index=221&type=chunk)[614](index=614&type=chunk) [Item 4. Mine Safety Disclosures](index=37&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[221](index=221&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=38&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common shares trade on the NYSE, dividends were terminated in 2014, and a new $1.5 billion share repurchase program was authorized in 2018 - The company's common shares are listed on the New York Stock Exchange (NYSE) under the symbol **"HLF"**[223](index=223&type=chunk) - In April 2014, the company **terminated its quarterly cash dividend** to utilize cash for share repurchases instead[228](index=228&type=chunk) - On October 30, 2018, a new five-year, **$1.5 billion share repurchase program** was authorized, with the full amount available as of year-end[230](index=230&type=chunk) - **No common shares were repurchased** during the three months ended December 31, 2018[231](index=231&type=chunk) [Item 6. Selected Financial Data](index=41&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year summary of key historical financial data, showing net sales of $4.89 billion and a shareholders' deficit of $723.4 million for 2018 - The company provides a reconciliation from its non-GAAP measure "Retail value" to the GAAP measure "Net sales," with a 2018 Retail value of **$7.71 billion** reconciling to Net sales of **$4.89 billion**[237](index=237&type=chunk) Selected Financial Data (2014-2018) | (in millions, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Net sales** | $4,891.8 | $4,427.7 | $4,488.4 | $4,469.0 | $4,958.6 | | **Operating income** | $683.1 | $617.1 | $458.1 | $583.6 | $513.5 | | **Net income** | $296.6 | $213.9 | $260.0 | $339.1 | $308.7 | | **Diluted EPS** | $1.98 | $1.29 | $1.51 | $1.99 | $1.70 | | **Total assets** | $2,789.8 | $2,895.1 | $2,565.4 | $2,477.9 | $2,355.0 | | **Total debt** | $2,453.8 | $2,268.1 | $1,447.9 | $1,622.0 | $1,791.8 | | **Total shareholders' (deficit) equity** | $(723.4) | $(334.7) | $196.3 | $(53.5) | $(334.4) | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=42&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2018, net sales grew 10.5% to $4.9 billion, driven by strong volume growth, while the company refinanced its debt and continued share repurchases - Net sales for 2018 **increased 10.5% to $4.9 billion**, while net income **increased 38.7% to $296.6 million**, or $1.98 per diluted share[273](index=273&type=chunk)[274](index=274&type=chunk) - The company refinanced its debt in August 2018, entering a new **$1.25 billion senior secured credit facility** and issuing **$400 million in senior notes** due 2026[375](index=375&type=chunk)[384](index=384&type=chunk) - As of December 31, 2018, the company had working capital of **$216.2 million**, a decrease of $737.3 million from 2017, primarily due to changes in cash and current debt[399](index=399&type=chunk) Worldwide Volume Points (2016-2018) | (in millions) | 2018 | 2017 | % Change | 2016 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | **Worldwide** | 5,892.0 | 5,379.4 | 9.5% | 5,582.1 | (3.6)% | [Results of Operations](index=46&type=section&id=Results%20of%20Operations) Net sales in 2018 increased 10.5% to $4.9 billion, driven by volume growth across most regions, leading to a net income increase to $296.6 million - Gross profit as a percentage of net sales **increased to 81.2%** in 2018 from 80.8% in 2017, primarily due to retail price increases[309](index=309&type=chunk) - Selling, general, and administrative (SG&A) expenses **increased to $1,955.2 million** in 2018 from $1,758.6 million in 2017, driven by higher service fees and member promotion costs[312](index=312&type=chunk)[313](index=313&type=chunk) - The effective income tax rate **decreased to 36.1%** in 2018 from 54.6% in 2017, primarily due to a lower net tax expense related to U.S. Tax Reform[320](index=320&type=chunk) Net Sales by Geographic Region (2018 vs. 2017) | Region | 2018 Net Sales (in millions) | 2017 Net Sales (in millions) | % Change | | :--- | :--- | :--- | :--- | | North America | $948.3 | $840.2 | 12.9% | | Mexico | $467.9 | $442.7 | 5.7% | | South & Central America | $437.6 | $474.3 | (7.7)% | | EMEA | $977.0 | $868.7 | 12.5% | | Asia Pacific | $1,053.4 | $915.9 | 15.0% | | China | $1,007.6 | $885.9 | 13.7% | | **Worldwide** | **$4,891.8** | **$4,427.7** | **10.5%** | Net Sales by Product Category (2018 vs. 2017) | Product Category | 2018 Net Sales (in millions) | 2017 Net Sales (in millions) | % Change | | :--- | :--- | :--- | :--- | | Weight Management | $3,105.8 | $2,842.5 | 9.3% | | Targeted Nutrition | $1,243.5 | $1,082.8 | 14.8% | | Energy, Sports, and Fitness | $308.4 | $263.8 | 16.9% | | Outer Nutrition | $91.9 | $93.9 | (2.1)% | | Literature, Promotional, and Other | $142.2 | $144.7 | (1.7)% | [Liquidity and Capital Resources](index=61&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is sourced from operating cash flow, with debt used for share repurchases, and a significant portion of cash held by foreign subsidiaries - Net cash provided by operating activities **increased to $648.4 million** in 2018 from $590.8 million in 2017[369](index=369&type=chunk) - In August 2018, the company entered into a new **$1.25 billion senior secured credit facility** and issued **$400 million in senior notes** due 2026 to repay its 2017 credit facility[375](index=375&type=chunk)[384](index=384&type=chunk) - As of December 31, 2018, foreign subsidiaries held **$870.3 million** of the company's total **$1.2 billion** in cash and cash equivalents[387](index=387&type=chunk) - During 2018, the company repurchased **11.4 million common shares for approximately $600.3 million** through open-market purchases and a tender offer[394](index=394&type=chunk) Contractual Obligations as of December 31, 2018 | Obligation (in millions) | Total | Due in 2019 | Due 2020-2021 | Due 2022-2023 | Due 2024 & Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Convertible senior notes due 2019 | $688.5 | $688.5 | $— | $— | $— | | Convertible senior notes due 2024 | $629.4 | $14.4 | $28.9 | $28.9 | $557.2 | | Senior notes due 2026 | $632.0 | $29.0 | $58.0 | $58.0 | $487.0 | | Senior secured credit facility | $1,329.9 | $76.7 | $157.9 | $317.3 | $778.0 | | Operating leases | $253.7 | $43.1 | $63.7 | $35.5 | $111.4 | | **Total** | **$3,741.2** | **$1,013.9** | **$348.7** | **$445.0** | **$1,933.6** | [Critical Accounting Policies](index=68&type=section&id=Critical%20Accounting%20Policies) Key accounting policies involve significant judgments in revenue recognition, inventory valuation, impairment testing for goodwill, and accounting for income taxes - Revenue is generally recognized upon delivery when control passes to the Member, net of product returns and distributor allowances[409](index=409&type=chunk) - Allowances for product returns are based on historical rates and are not significant, amounting to approximately **0.1% of product sales** for 2018, 2017, and 2016[410](index=410&type=chunk) - Goodwill and marketing-related intangible assets are tested for impairment annually; a 2018 qualitative assessment indicated **no impairment**[412](index=412&type=chunk)[413](index=413&type=chunk)[414](index=414&type=chunk) - The company evaluates the realizability of deferred tax assets and recognizes tax benefits for uncertain positions only if it is **more likely than not** that the position will be sustained[420](index=420&type=chunk)[421](index=421&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=71&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from foreign currency exchange rates and interest rates, which it manages with derivative instruments and by fixing rates on certain debt - The company is exposed to foreign exchange risk and uses short-term derivatives to reduce exposure to currency fluctuations[429](index=429&type=chunk) - The company is exposed to interest rate risk on its variable-rate 2018 Credit Facility, where a hypothetical **1% change in interest rates** would change annual interest expense by approximately **$10.0 million**[436](index=436&type=chunk) - As of December 31, 2018, the aggregate notional amount of outstanding foreign currency contracts designated as cash-flow hedges was approximately **$43.8 million**[432](index=432&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=73&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section incorporates by reference the company's consolidated financial statements and the independent auditor's report - The consolidated financial statements, notes, and the report of PricewaterhouseCoopers LLP are incorporated by reference and located in Part IV, Item 15[440](index=440&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=73&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants - None[441](index=441&type=chunk) [Item 9A. Controls and Procedures](index=73&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that the company's disclosure controls and procedures were **effective** as of December 31, 2018[442](index=442&type=chunk) - Based on the COSO framework, management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2018[446](index=446&type=chunk) - There were **no material changes** in internal control over financial reporting during the fourth quarter of 2018[448](index=448&type=chunk) [Item 9B. Other Information](index=74&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[448](index=448&type=chunk) Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=75&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[450](index=450&type=chunk) [Item 11. Executive Compensation](index=75&type=section&id=Item%2011.%20Executive%20Compensation) Information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[451](index=451&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=75&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[452](index=452&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=75&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[453](index=453&type=chunk) [Item 14. Principal Accountant Fees and Services](index=75&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[454](index=454&type=chunk) Part IV [Item 15. Exhibits, Financial Statement Schedules](index=76&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section contains the company's audited consolidated financial statements, notes, the independent auditor's report, and an index of all filed exhibits [Report of Independent Registered Public Accounting Firm](index=80&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP issued unqualified opinions on the company's financial statements and internal controls, noting changes in accounting principles - PricewaterhouseCoopers LLP issued an **unqualified opinion**, stating the financial statements present fairly, in all material respects, the financial position of the company[465](index=465&type=chunk) - The firm also opined that the company maintained **effective internal control** over financial reporting as of December 31, 2018[465](index=465&type=chunk) - The report notes a change in accounting principle for **revenue from contracts with customers (ASC 606)** in 2018[466](index=466&type=chunk) [Consolidated Financial Statements](index=82&type=section&id=Consolidated%20Financial%20Statements) The financial statements show total assets of $2.8 billion, a shareholders' deficit of $723.4 million, and net income of $296.6 million for 2018 Consolidated Balance Sheet Highlights (as of Dec 31) | (in millions) | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,198.9 | $1,278.8 | | Total current assets | $1,805.0 | $1,860.3 | | Total assets | $2,789.8 | $2,895.1 | | Total current liabilities | $1,588.8 | $906.8 | | Long-term debt, net | $1,774.9 | $2,165.7 | | Total liabilities | $3,513.2 | $3,229.8 | | Total shareholders' deficit | $(723.4) | $(334.7) | Consolidated Income Statement Highlights (Year Ended Dec 31) | (in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net sales | $4,891.8 | $4,427.7 | $4,488.4 | | Gross profit | $3,972.5 | $3,579.1 | $3,633.8 | | Operating income | $683.1 | $617.1 | $458.1 | | Net income | $296.6 | $213.9 | $260.0 | Consolidated Cash Flow Highlights (Year Ended Dec 31) | (in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $648.4 | $590.8 | $367.3 | | Net cash used in investing activities | $(83.9) | $(95.2) | $(142.4) | | Net cash used in financing activities | $(593.1) | $(85.2) | $(252.3) | [Item 16. Form 10-K Summary](index=131&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no summary for this item - None[721](index=721&type=chunk)