Herbalife Nutrition Ltd. (NYSE:HLF) Q4 2021 Earnings Conference Call February 23, 2022 5:30 PM ET Company Participants Eric Monroe - Senior Director, Investor Relations John Agwunobi - Chairman and Chief Executive Officer John DeSimone - President Alex Amezquita - Chief Financial Officer Conference Call Participants Wendy Nicholson - Citi Steph Wissink - Jefferies Jeff Van Sinderen - B. Riley Mary Ann - Bank of America Doug Lane - Lane Research Matthew Berry - Miller Value Partners Hale Holden - Barclays Op ...

PART I [Business](index=5&type=section&id=Item%201.%20Business) Herbalife Nutrition is a global direct-selling nutrition company with 6.3 million members, focused on weight management and subject to extensive regulation [Product Sales](index=5&type=section&id=Product%20Sales) Weight Management dominates product sales at 58.1% in 2021, with Formula 1 as the top-selling line and consistently low returns Net Sales by Product Category (% of Total) | Product Category | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Weight Management | 58.1% | 59.8% | 61.8% | | Targeted Nutrition | 28.2% | 27.6% | 26.2% | | Energy, Sports, and Fitness | 9.5% | 7.9% | 7.2% | | Outer Nutrition | 1.9% | 2.0% | 2.0% | | Literature, Promotional, and Other | 2.3% | 2.7% | 2.8% | - The company's best-selling product line, Formula 1 Nutritional Shake Mix, accounted for approximately **27% of net sales** for the year ended December 31, 2021[18](index=18&type=chunk) - Product returns and buybacks were consistently low, representing approximately **0.1% of net sales** for each of the years ended December 31, 2021, 2020, and 2019[22](index=22&type=chunk) [Our Network Marketing Program](index=7&type=section&id=Our%20Network%20Marketing%20Program) The company operates a direct-selling model with 6.3 million members, including 2.5 million preferred members and 2.3 million distributors - As of December 31, 2021, the company had approximately **6.3 million Members**, including **2.5 million preferred members** and **2.3 million distributors** in segmented markets[32](index=32&type=chunk) Sales Leader Retention Rate (excluding China) | Re-qualification Period Ending | Retention Rate | | :--- | :--- | | January 2022 | 68.9% | | January 2021 | 67.9% | | January 2020 | 66.5% | Number of Sales Leaders (as of end of February) | Region | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | North America | 95,402 | 71,202 | 66,264 | | Mexico | 73,043 | 72,866 | 75,475 | | South and Central America | 58,316 | 61,535 | 64,929 | | EMEA | 158,153 | 130,438 | 121,297 | | Asia Pacific | 173,582 | 158,815 | 133,817 | | **Total (ex-China)** | **558,496** | **494,856** | **461,782** | | China | 68,301 | 70,701 | 89,077 | | **Worldwide Total** | **626,797** | **565,557** | **550,859** | [Business in China](index=10&type=section&id=Business%20in%20China) Herbalife's China business model adapts to local regulations, prohibiting multi-level marketing but permitting direct selling through independent service providers - The business model in China differs from other markets due to local regulations; multi-level marketing is not permitted, but direct selling is[50](index=50&type=chunk)[51](index=51&type=chunk) - Independent service providers in China are compensated for marketing and sales support services, not through the royalty override system used globally, with compensation based on sales and service quality[53](index=53&type=chunk) [Resources](index=10&type=section&id=Resources) The company's "seed to feed" strategy emphasizes supply chain control, with 60% of inner nutrition products manufactured in-house and a global distribution network - The company's four manufacturing facilities (HIMs) produce approximately **60% of its inner nutrition products** sold worldwide[57](index=57&type=chunk) - In 2021, approximately **19% of products** were purchased from the top three third-party manufacturers[59](index=59&type=chunk) - The company's distribution network includes over **1,600 distribution points** and partner retail locations globally[61](index=61&type=chunk) [Regulation](index=12&type=section&id=Regulation) Herbalife is extensively regulated by agencies like the FDA and FTC, notably under a 2016 Consent Order dictating U.S. business practices - The company's products and business are regulated by numerous agencies, including the FDA and FTC in the United States[68](index=68&type=chunk)[70](index=70&type=chunk) - A 2016 Consent Order with the FTC requires the company to segment its U.S. members into 'preferred members' and 'distributors' and to base distributor compensation on documented retail sales[82](index=82&type=chunk) - The company is subject to a 1986 permanent injunction in California that prevents specified advertising claims and mandates that payments to Members be based on retail value[80](index=80&type=chunk) [Human Capital](index=16&type=section&id=Human%20Capital) As of December 31, 2021, Herbalife Nutrition had approximately 10,800 employees and is focused on diversity, equity, and inclusion initiatives - As of December 31, 2021, the company had approximately **10,800 employees**, with **3,100 in the United States**[102](index=102&type=chunk) - In 2021, the company established diversity goals for women in global leadership and for racial/ethnic minorities in U.S. leadership roles[105](index=105&type=chunk) [Risk Factors](index=18&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks related to its business model, regulatory environment, and international operations, including dependence on members and currency fluctuations [Risks Related to Our Business and Industry](index=21&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry) The business is highly dependent on member retention, vulnerable to adverse publicity, intense competition, and concentration risk from its Formula 1 product line - The business depends on recruiting and retaining a large base of independent Members, who can easily leave the network due to low entry/exit costs[126](index=126&type=chunk) - The Formula 1 product line constitutes a significant portion of net sales (**27% in 2021**), creating a product concentration risk[147](index=147&type=chunk) - The COVID-19 pandemic has disrupted global supply chains and may continue to adversely affect business operations, including manufacturing and distribution[150](index=150&type=chunk) [Risks Related to Regulatory and Legal Matters](index=29&type=section&id=Risks%20Related%20to%20Regulatory%20and%20Legal%20Matters) The company operates under extensive and complex regulations, with significant risks from the 2016 FTC Consent Order and potential challenges to its network marketing program - The company is subject to a Consent Order with the FTC, and any failure to comply could materially harm its business, financial condition, and operating results[121](index=121&type=chunk)[180](index=180&type=chunk) - The network marketing program is subject to extensive regulation aimed at preventing pyramid schemes, and any adverse legal or regulatory determination could require changes to the compensation plan[176](index=176&type=chunk)[178](index=178&type=chunk) - The company faces material product liability risks for its ingestible products, which are not subject to pre-market regulatory approval in the U.S[190](index=190&type=chunk) [Risks Related to Our International Operations](index=34&type=section&id=Risks%20Related%20to%20Our%20International%20Operations) With 76% of 2021 net sales from outside the U.S., the company faces significant international risks including currency fluctuations, political instability, and complex regulations in China - Approximately **76% of net sales** for the year ended December 31, 2021, were generated outside the United States, exposing the business to international risks[199](index=199&type=chunk) - The business in China (**11% of 2021 net sales**) is subject to unique risks due to its modified business model and significant government control over the economy and regulations[214](index=214&type=chunk) - In August 2020, the company reached resolutions with the SEC and DOJ regarding FCPA violations in China, resulting in a deferred prosecution agreement and aggregate payments of approximately **$123 million**[209](index=209&type=chunk) [Risks Related to Our Indebtedness and Common Shares](index=38&type=section&id=Risks%20Related%20to%20Our%20Indebtedness%20and%20Common%20Shares) The company's debt instruments contain restrictive covenants, and the potential conversion of convertible notes could cause dilution, while Cayman Islands incorporation may limit shareholder protections - Covenants in the 2018 Credit Facility and other debt agreements limit the ability to pay dividends, sell assets, and incur additional debt[221](index=221&type=chunk) - The conversion of the 2024 Convertible Notes could require significant cash payments or result in the dilution of existing common shares[226](index=226&type=chunk)[227](index=227&type=chunk)[228](index=228&type=chunk) - Incorporation under Cayman Islands law means shareholder rights and director fiduciary responsibilities are not as clearly defined as in the U.S., potentially making it harder for shareholders to protect their interests[229](index=229&type=chunk) [Unresolved Staff Comments](index=42&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - None[247](index=247&type=chunk) [Properties](index=42&type=section&id=Item%202.%20Properties) The company primarily leases its properties, including corporate offices and distribution centers, while owning a large manufacturing facility in Winston-Salem, NC - The company owns a large manufacturing facility in Winston-Salem, North Carolina, containing approximately **800,000 square feet**[248](index=248&type=chunk) - Major leased properties include corporate offices in Los Angeles, regional headquarters in Torrance, distribution centers in California and Tennessee, and manufacturing facilities in China and California[247](index=247&type=chunk) [Legal Proceedings](index=43&type=section&id=Item%203.%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference from Note 7, Contingencies, of the Consolidated Financial Statements - Information regarding legal proceedings is detailed in Note 7, Contingencies, to the Consolidated Financial Statements[249](index=249&type=chunk) [Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[249](index=249&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=44&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Herbalife's common shares trade on the NYSE, with no cash dividends since 2014, and a $1.5 billion share repurchase program authorized in 2021 - The company has not declared or paid cash dividends since 2014, and future dividends are at the discretion of the board[256](index=256&type=chunk) - On February 9, 2021, a new three-year, **$1.5 billion share repurchase program** was authorized, replacing a prior program, with approximately **$1.1 billion remaining available** as of December 31, 2021[257](index=257&type=chunk) Share Repurchases (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 – Oct 31 | 1,859,392 | $46.04 | | Nov 1 – Nov 30 | 380,000 | $42.07 | | Dec 1 – Dec 31 | 0 | N/A | | **Total Q4** | **2,239,392** | **$45.36** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=45&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For fiscal year 2021, net sales increased 4.7% to $5.8 billion, net income rose 20.0% to $447.2 million, and operating cash flow decreased to $460.3 million, with a global transformation program initiated Key Financial Results (Year Ended Dec 31) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $5,802.8 M | $5,541.8 M | 4.7% | | Net Income | $447.2 M | $372.6 M | 20.0% | | Diluted EPS | $4.13 | $2.77 | 49.1% | | Operating Cash Flow | $460.3 M | $628.6 M | (26.8)% | Volume Points by Region (in millions) | Region | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | North America | 1,783.8 | 1,735.0 | 2.8% | | Mexico | 851.0 | 879.7 | (3.3)% | | South & Central America | 497.8 | 535.2 | (7.0)% | | EMEA | 1,629.3 | 1,562.5 | 4.3% | | Asia Pacific | 1,960.1 | 1,690.2 | 16.0% | | China | 375.8 | 523.8 | (28.3)% | | **Worldwide** | **7,097.8** | **6,926.4** | **2.5%** | - In Q4 2021, the company launched a global Transformation Program to optimize processes, expecting **$25-$30 million in pre-tax expenses** through 2023, with **$12.9 million recognized in 2021**[362](index=362&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=68&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages foreign currency and interest rate risks using derivatives, with a hypothetical 1% interest rate change impacting annual interest expense by approximately $9.9 million - The company uses foreign exchange derivatives to hedge currency fluctuations on intercompany transactions and inventory purchases, with a notional amount of outstanding cash flow hedges of approximately **$54.5 million** as of December 31, 2021[422](index=422&type=chunk)[425](index=425&type=chunk) - The company is exposed to interest rate risk from its variable-rate 2018 Credit Facility, where a **1% change in interest rates** could alter annual interest expense by approximately **+$9.9 million or -$1.0 million**[430](index=430&type=chunk) [Financial Statements and Supplementary Data](index=70&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section includes the consolidated financial statements and an unqualified auditor's report, with loss contingencies identified as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[469](index=469&type=chunk) - The auditor identified 'Loss Contingencies' as a critical audit matter due to the significant management judgment required to assess the likelihood and estimate the amount of potential losses from legal and tax matters[477](index=477&type=chunk)[478](index=478&type=chunk) [Controls and Procedures](index=70&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, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[435](index=435&type=chunk) - Based on the COSO framework, management concluded that internal control over financial reporting was effective as of December 31, 2021[439](index=439&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees](index=72&type=section&id=Items%2010-14) Information for Items 10 through 14 is incorporated by reference from the company's forthcoming definitive proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's forthcoming definitive proxy statement[442](index=442&type=chunk)[443](index=443&type=chunk)[444](index=444&type=chunk)[445](index=445&type=chunk)[446](index=446&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=73&type=section&id=Item%2015.%20Exhibits,%20Financial%20Statement%20Schedules) This section includes consolidated financial statements, the auditor's report, and an index of exhibits detailing debt, contingencies, and segment information [Note 5. Long-Term Debt](index=95&type=section&id=Note%205.%20Long-Term%20Debt) As of December 31, 2021, total long-term debt was $2.73 billion, comprising various senior notes and a credit facility, with a $24.6 million loss on extinguishment from a 2021 redemption Long-Term Debt Components (Carrying Value, Dec 31, 2021) | Debt Instrument | Amount (in millions) | | :--- | :--- | | Senior Secured Credit Facility | $1,088.6 | | 2.625% Convertible Notes due 2024 | $486.0 | | 7.875% Senior Notes due 2025 | $594.2 | | 4.875% Senior Notes due 2029 | $592.8 | | **Total (net of current portion)** | **$2,733.2** | - In May 2021, the company redeemed all **$400.0 million** of its 7.250% Senior Notes due 2026, recognizing a loss on extinguishment of **$24.6 million**[608](index=608&type=chunk) [Note 7. Contingencies](index=103&type=section&id=Note%207.%20Contingencies) The company is involved in numerous global tax and legal matters, including ongoing tax disputes, a 2020 FCPA settlement of $123 million, and a $12.5 million class action lawsuit settlement - The company is litigating tax assessments in multiple jurisdictions, including Brazil (approx. **$9.9 million withholding**, **$45.8 million ICMS**), India (approx. **$14.1 million VAT/Service Tax**, **$27.1 million income tax**), and Korea (approx. **$66.9 million customs duties**)[628](index=628&type=chunk)[629](index=629&type=chunk)[630](index=630&type=chunk)[632](index=632&type=chunk) - In August 2020, the company entered into a deferred prosecution agreement with the DOJ and a settlement with the SEC to resolve an FCPA investigation, paying approximately **$123 million** in penalties and disgorgement[639](index=639&type=chunk) - The company has agreed to the principal terms of a settlement for the Rodgers, et al. class action lawsuit, which involves a payment of **$12.5 million** into a fund, accrued as of December 31, 2021[640](index=640&type=chunk) [Note 10. Segment Information](index=112&type=section&id=Note%2010.%20Segment%20Information) The company manages its business through two reportable segments, Primary Reporting and China, with the U.S. being the largest single country by net sales Net Sales by Reportable Segment (in millions) | Segment | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Primary Reporting Segment | $5,173.3 | $4,732.2 | $4,125.1 | | China | $629.5 | $809.6 | $752.0 | | **Total Net Sales** | **$5,802.8** | **$5,541.8** | **$4,877.1** | Contribution Margin by Reportable Segment (in millions) | Segment | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Primary Reporting Segment | $2,175.6 | $1,983.6 | $1,793.6 | | China | $554.2 | $717.5 | $677.3 | | **Total Contribution Margin** | **$2,729.8** | **$2,701.1** | **$2,470.9** |

Financial Data and Key Metrics Changes - In Q3 2021, worldwide net sales were reported at $1.4 billion, a decline of 6% compared to the prior year period, but a 15% increase on a two-year stack basis compared to Q3 2019 [6][15] - Earnings per share were $1.09 per diluted share, with net income of $117.4 million, and adjusted diluted earnings per share of $1.21, exceeding the high end of revised Q3 guidance [7][17] - Adjusted EBITDA for the quarter was $222.4 million, also exceeding the high end of guidance [7][17] Business Line Data and Key Metrics Changes - The number of new distributors and preferred customers joining the business was down 19% compared to record numbers in Q3 2020, but up 28% compared to Q3 2019, excluding China [8] - The number of active sales leaders selling in the channel increased by 10% compared to the prior year period, excluding China [8] Market Data and Key Metrics Changes - Asia Pacific region saw a net sales growth of 11% compared to the prior year, led by India with a growth of 46% [8][10] - North America experienced a decline in net sales of 11%, but a 38% increase on a two-year stack basis compared to Q3 2019 [10][15] - EMEA faced a 4% decline year-over-year, but a 16% increase in the number of active supervisors [11][15] - In China, net sales declined by 30% compared to Q3 2020, with ongoing strategic initiatives aimed at improving performance [11][12] Company Strategy and Development Direction - The company remains confident in its long-term growth strategy, focusing on new product innovation and digital transformation [13][14] - The goal is to increase sales from new product development to 25% over the next five years, up from 14.5% [14] - The company plans to provide guidance for 2022 in February, as part of the Q4 2021 earnings release [12][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by the ongoing pandemic and the Delta variant, impacting predictions for channel behavior [7][12] - The company expects to see better year-over-year comparisons in Q4 compared to Q3, despite the unpredictability of the pandemic [30][32] - Management is monitoring inflationary impacts on the business, particularly in supply chain costs [19][37] Other Important Information - The company generated approximately $375 million in operating cash flow through the first nine months of the year, with cash on hand at $678 million at the end of Q3 [20][21] - Share repurchases totaled approximately $162 million in Q3, with expectations to complete around $100 million in Q4, totaling nearly $1 billion for the full year [21] Q&A Session Summary Question: What levers will be used to reinvigorate productivity levels among existing sales leaders? - Management indicated that timing for new product launches is based on events to promote and educate distributors, focusing on engagement and customer acquisition [22][23] Question: How is the company addressing inflation and pricing? - The pricing policy remains consistent, with increases aligned with local inflation, and management is assessing the impact of supply chain cost increases [25][26][27] Question: What is contributing to the wide guidance range for the full year? - The wide range reflects the unpredictable impact of the pandemic on various markets, making forecasting more challenging [29][30] Question: Can you provide insights on the North America market's performance? - Management noted that August was a low point for volume, but they expect Q4 to show better comparisons than Q3 [33][34] Question: What is the outlook for China and the initiatives in place? - Management expressed optimism about long-term growth opportunities in China, despite recent declines, citing government initiatives and digital transformation efforts [50][52] Question: How is the company managing working capital and cash flow? - Management explained that fluctuations in working capital are timing-related and should normalize in 2022 [54][55] Question: How does the company view the long-term focus on weight management? - Management highlighted the increasing awareness of healthy weight management and its importance in the current health landscape [68][70]

Financial Data and Key Metrics Changes - The company reported worldwide net sales of $1.6 billion for Q2 2021, representing a 15% growth compared to the prior year, marking the largest quarterly net sales result in company history [8][22] - Reported gross margin for Q2 2021 was 79.2%, a decrease of approximately 60 basis points compared to the prior year, primarily due to an unfavorable country mix, particularly from China [23] - Net income for Q2 2021 was approximately $144.2 million, or $1.31 per diluted share, with adjusted earnings per share of $1.52, exceeding guidance by $0.15 [24] Business Line Data and Key Metrics Changes - All three core product categories experienced double-digit growth, with the Energy, Sports and Fitness category increasing by 45% compared to the prior year [8] - The North America region grew by 7%, with a two-year stack growth rate of 47% in the U.S. [10] - The Asia-Pacific region saw a 38% growth, with India growing 93% and Vietnam growing 60% [11][12] - The EMEA region achieved a 22% growth, with Turkey up 63% and Italy up 38% [13] - Mexico grew 23%, marking its first quarter of double-digit growth since 2013 [14] Market Data and Key Metrics Changes - China experienced a 16% decline in net sales compared to Q2 2020, representing approximately 11% of global net sales [17] - The South and Central America region grew 23%, led by Chile with over 200% growth [14] Company Strategy and Development Direction - The company is focusing on a preferred customer program, which segments the member base into distributors and preferred customers, now live in 25 markets representing approximately 70% of total net sales [15][16] - The company is investing in digital platforms and adapting the Nutrition Club model in China to improve service provider activity and new entrance metrics [18][20] - The company aims to leverage the growing interest from Millennials and Gen Z in sports nutrition and clean label products [16] Management's Comments on Operating Environment and Future Outlook - Management expects Q3 2021 net sales to be in the range of down 1% to up 5%, with full-year growth guidance adjusted to 8.5% to 12.5% [9][26] - The company remains committed to the China market despite recent declines, believing in its long-term growth potential [21] - Management highlighted the importance of digital strategies and community engagement through virtual nutrition clubs as key to future growth [12][18] Other Important Information - The company initiated guidance for adjusted EBITDA for the full year 2021, expecting between $875 million and $935 million [9] - The company completed approximately $98 million in share repurchases during Q2 2021 and anticipates completing approximately $200 million in share purchases for the remainder of the year [28] Q&A Session Summary Question: What is the reason for the revised sales outlook? - The guidance adjustment is exclusively due to the revised forecast in 2021 from China, with the rest of the portfolio performing as expected [34] Question: What gives confidence in the actions taken in China? - Management noted that while China has been down for a few quarters, there is stability in volume points, and initiatives like Nutrition Clubs are expected to drive growth [36][39] Question: What KPIs will be monitored in China? - Key metrics include the number of new service providers and the activity levels of existing providers, which are predictors of retention [42] Question: How will margins be affected in the second half? - A gross profit headwind is expected due to changes in the sales mix, particularly from China, but overall profitability is anticipated to remain stable [44] Question: What is the pricing strategy in light of inflation? - The company plans to adjust prices annually based on local inflation, maintaining pricing power in various markets [47] Question: What is the outlook for the weight control segment? - There is no significant change in ordering behavior related to weight control, with a general trend towards healthier nutrition products [65] Question: What is the leverage target? - The leverage target remains at three times growth, with the company currently slightly under that target due to significant EBITDA growth [67]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The company's unaudited condensed consolidated financial statements detail its financial position, performance, and cash flows [Unaudited Condensed Consolidated Balance Sheets](index=3&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased while total liabilities increased, widening the total shareholders' deficit as of June 30, 2021 Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$2,966.7** | **$3,076.1** | | Cash and cash equivalents | $837.5 | $1,045.4 | | Inventories | $538.3 | $501.4 | | **Total Liabilities** | **$4,257.9** | **$3,932.2** | | Long-term debt, net | $2,752.8 | $2,405.5 | | **Total Shareholders' Deficit** | **$(1,291.2)** | **$(856.1)** | [Unaudited Condensed Consolidated Statements of Income](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Income) Increased net sales drove significant growth in net income and diluted EPS for the three and six-month periods Condensed Consolidated Statements of Income (in millions, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,552.3 | $1,346.9 | $3,053.9 | $2,609.3 | | Operating income | $237.9 | $189.7 | $460.4 | $285.3 | | Net income | $144.2 | $115.1 | $291.6 | $160.7 | | Diluted EPS | $1.31 | $0.82 | $2.63 | $1.15 | [Unaudited Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow decreased while significant share repurchases drove a net use of cash in financing activities Condensed Consolidated Statements of Cash Flows (in millions) | Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $286.9 | $385.0 | | Net cash used in investing activities | $(68.4) | $(49.4) | | Net cash (used in) provided by financing activities | $(419.8) | $588.4 | | Net change in cash | $(207.7) | $900.6 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail key accounting policies, debt increases, global tax contingencies, and significant share repurchases - Total long-term debt increased to **$2,779.2 million** as of June 30, 2021, primarily due to the issuance of **$600.0 million** in 4.875% Senior Notes due 2029[38](index=38&type=chunk)[65](index=65&type=chunk)[68](index=68&type=chunk) - The company is engaged in various tax disputes globally, with key contingencies in Brazil (**~$48.8M**), India (**~$41.4M**), and Korea (**~$57.6M**)[78](index=78&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) - The company repurchased approximately **14.8 million common shares** for an aggregate cost of **$719.0 million** during the first six months of 2021, including a significant purchase from Carl C Icahn[130](index=130&type=chunk)[135](index=135&type=chunk) - Subsequent to the quarter end, the company amended its 2018 Credit Facility to **increase borrowing capacity** and reduce applicable interest rate margins[159](index=159&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=39&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses strong net sales growth driven by increased Volume Points, despite a significant decline in China [Volume Points and Results of Operations](index=41&type=section&id=Volume%20Points%20and%20Results%20of%20Operations) Volume Point growth in Asia Pacific and EMEA drove a 15.2% increase in Q2 net sales, offsetting a sharp decline in China Volume Points by Geographic Region (in millions) | Region | Three Months Ended June 30, 2021 | % Change YoY | | :--- | :--- | :--- | | North America | 505.6 | 2.7% | | Mexico | 214.7 | 0.6% | | South and Central America | 121.1 | 11.0% | | EMEA | 445.2 | 9.5% | | Asia Pacific | 489.9 | 38.9% | | China | 106.6 | (26.3)% | | **Worldwide** | **1,883.1** | **9.5%** | - The decline in China's Volume Points is attributed to business strengthening efforts and the continuing impact of the pandemic and prior government reviews[176](index=176&type=chunk)[232](index=232&type=chunk) Net Sales by Product Category (in millions) | Category | Three Months Ended June 30, 2021 | % Change YoY | | :--- | :--- | :--- | | Weight Management | $908.6 | 11.7% | | Targeted Nutrition | $429.4 | 18.6% | | Energy, Sports, and Fitness | $149.8 | 44.6% | | Outer Nutrition | $27.4 | 5.4% | [Liquidity and Capital Resources](index=58&type=section&id=Liquidity%20and%20Capital%20Resources) Operating cash flow decreased due to working capital changes, while the company refinanced debt and continued its share repurchase program - Operating cash flow decreased to **$286.9 million** for the six months ended June 30, 2021, from $385.0 million in the prior-year period, due to unfavorable working capital changes[254](index=254&type=chunk) - In May 2021, the company issued **$600.0 million** of 4.875% Senior Notes due 2029 and used proceeds to redeem its **$400.0 million** 7.250% Senior Notes due 2026[268](index=268&type=chunk)[269](index=269&type=chunk) - A new **$1.5 billion share repurchase program** was authorized in February 2021, with approximately **$1.4 billion** remaining as of June 30, 2021[274](index=274&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=66&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages foreign currency and interest rate risks through derivative instruments and a mix of fixed and variable-rate debt - The company uses foreign exchange derivatives to reduce currency exposure, with a total notional amount of **$516.2 million** in outstanding forward contracts as of June 30, 2021[301](index=301&type=chunk)[306](index=306&type=chunk) - The company's variable-rate debt is exposed to interest rate changes, where a 1% rate change could impact annual interest expense by approximately **$10.2 million**[308](index=308&type=chunk)[309](index=309&type=chunk) [Item 4. Controls and Procedures](index=70&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of June 30, 2021[313](index=313&type=chunk) - **No material changes** to the company's internal control over financial reporting occurred during the quarter ended June 30, 2021[314](index=314&type=chunk) PART II. OTHER INFORMATION [Item 1A. Risk Factors](index=73&type=section&id=Item%201A.%20Risk%20Factors) Key risks include dependence on Members, regulatory compliance, the FTC Consent Order, and challenges in international operations - The business is highly dependent on its ability to **recruit, retain, and motivate** a large base of independent Members[333](index=333&type=chunk) - The company is subject to the **2016 Consent Order with the FTC**, which imposes significant compliance costs and operational requirements in the U.S[372](index=372&type=chunk)[377](index=377&type=chunk) - Operations in China are subject to a modified business model and **unique political, economic, and regulatory risks**[399](index=399&type=chunk)[401](index=401&type=chunk)[404](index=404&type=chunk) - The **COVID-19 pandemic** has amplified many business risks, potentially impacting the supply chain, Member activity, and overall economic conditions[320](index=320&type=chunk)[353](index=353&type=chunk)[355](index=355&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=95&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company continued its $1.5 billion share repurchase program, buying back 1.82 million shares during the second quarter Share Repurchases for Q2 2021 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2021 | — | — | | May 2021 | 275,568 | $52.41 | | June 2021 | 1,546,612 | $53.87 | | **Total Q2** | **1,822,180** | **$53.65** | - As of June 30, 2021, the remaining authorized capacity under the company's **$1.5 billion share repurchase program** was approximately **$1.4 billion**[432](index=432&type=chunk)[433](index=433&type=chunk)

Financial Data and Key Metrics Changes - The company reported net sales of $1.5 billion for Q1 2021, an increase of 18.9% compared to the prior year, marking the largest first quarter net sales results in company history [6][12] - Net income for the first quarter was approximately $147.4 million, or $1.33 per diluted share, with adjusted earnings per share of $1.42, representing a 61% increase over last year [13] - Reported gross margin for Q1 2021 was 79.1%, a decrease of approximately 150 basis points compared to the prior year, primarily due to foreign currency fluctuations and increased freight costs [14] Business Line Data and Key Metrics Changes - The sports nutrition product line saw worldwide net sales increase by approximately 34% during the first quarter [7] - Core weight management products grew by 16%, while targeted nutrition products increased by 21% [7] - The company experienced net sales growth in four out of its five largest markets, with the U.S. growing by 28%, India by 37%, and Vietnam by 45% [12] Market Data and Key Metrics Changes - The Asia Pacific region achieved a record quarter with net sales growth of 22% year-over-year, driven by significant growth in India (37%), Vietnam (45%), Malaysia (55%), and Australia (62%) [9] - The EMEA region set a new quarterly net sales record with year-over-year growth of 37%, with notable performance in the UK (up 157%) and Turkey (up 70%) [10] - In China, net sales declined by 11% compared to the first quarter of 2020, aligning with expectations as the sales force transitions through recent marketing plan enhancements [9] Company Strategy and Development Direction - The company has raised and narrowed its full-year 2021 guidance, now projecting net sales growth of 9% to 15% [8] - A focus on digital transformation in China is underway, with a new middleware platform being developed with Alibaba expected to be deployed in Q2 2021 [9] - The company plans to host a virtual Investor Day in August to provide deeper insights into its strategy and growth initiatives [10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong consumer demand for Herbalife Nutrition products and the effectiveness of their strategies to attract new demographics, particularly in sports nutrition [11] - The company acknowledged ongoing challenges in certain markets due to the pandemic but remains optimistic about future growth opportunities, especially in China [36][37] - Management highlighted the importance of customer retention and plans to share more on this strategy at the upcoming Investor Day [10] Other Important Information - The company generated $110 million of operating cash flow in Q1 2021, lower than the previous year, but anticipates stronger cash flow for the full year [18] - Share repurchase activity totaled approximately $621 million in Q1 2021, with $612 million in cash remaining on hand after these repurchases [18][19] Q&A Session Summary Question: Guidance for the second quarter and market expectations - Management acknowledged the wide range of guidance for Q2 but noted that it is narrowing as consistency improves post-COVID-19 [22] Question: Growth in sports nutrition and customer demographics - The sports nutrition line aims to attract both existing weight management customers and new demographics, particularly younger consumers [24][25] Question: Raw material inflation and pricing strategy - The company has long-term contracts for raw materials, mitigating immediate inflation impacts [28] Question: Performance in China and marketing plan effectiveness - Management expects to see a turnaround in China, with ongoing consumer-based initiatives and a successful personal store model contributing to growth [34][36] Question: Impact of stimulus benefits on distributor growth - No significant correlation was observed between stimulus checks and daily sales, indicating that other factors are driving distributor growth [48] Question: Changes in demand patterns in reopening markets - Demand remains strong across all markets, with variations based on local COVID-19 responses [55] Question: Consumer health landscape and product demand - Demand for sports nutrition products is growing, but the increase is attributed more to strategic initiatives than macro demand changes [58][59]

Herbalife Nutrition Ltd. (NYSE:HLF) Q4 2020 Earnings Conference Call February 17, 2021 5:30 PM ET Company Participants Eric Monroe - Senior Director, Investor Relations John Agwunobi - Chief Executive Officer and Chairman of the Board Alex Amezquita - Chief Financial Officer John DeSimone - President Conference Call Participants Doug Lane - Lane Research Hale Holden - Barclays Capital, Inc. Sebastian Barbero - Jefferies William Reuter - Bank of America Merrill Lynch Ivan Feinseth - Tigress Financial Partner ...