Herbalife Ltd. Midwest IDEAS Conference

Welcome everybody to the Midwest IDEAS Conference. I am Philip Cooper with Three Part Advisors. Our next presentation comes from one of our investor relations clients, Herbalife. That is traded on the New York Stock Exchange under the ticker symbol HLF. Presenting for the company today are Samantha Holloway, V.P. of Investor Relations, and Scott Schaefer, S.V.P. of Finance and incoming Chief Financial Officer. Scott. Or excuse me, Sam.

Good afternoon, everyone, and thank you for joining us today, whether in person or via the webcast. I am Samantha Holloway, Head of Investor Relations at Herbalife, and I am joined by Scott Schaefer, our Senior Vice President of Finance and Transformation, and incoming CFO, who will lead the presentation. Before we begin, I would like to direct you to the cautionary statement regarding forward-looking statements on page 2 of our presentation, which is available under the investor relations section of Herbalife's website. This presentation includes a discussion of some of the more important factors that could cause results to differ from those expressed in any forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. As is customary, the content of today's presentation will be governed by this language. In addition, during today's presentation, we will be discussing certain non-GAAP financial measures.

These non-GAAP financial measures exclude certain unusual or non-recurring items that management believes impact the comparability of the periods referenced. Please refer to our presentation materials for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. With that, I will now turn it over to Scott to begin today's presentation.

Hello, everyone. My name is Scott Schaefer. Like Sam said, I will be the incoming CFO starting in January. Before I start, just a quick little background about Sam, because she is pretty incredible. She has been with the company now for a number of years, but has a finance background, has been through pricing, FP&A, but the last two years, she has actually led sales for North America business. If we get into Q&A, she is going to be a great person to help answer some of our questions about North America. About myself, and move forward while I am talking. Been with the company since November of last year. Prior to that, was 16 and a half years with zappos.com, online footwear, apparel, subsidiary of Amazon.

So part of the reason why I am joining, I think it is important to tell you is, I care about the purpose, a company with purpose, and this is a company with purpose. I think purpose in terms of helping our customers reach their health goals and health outcomes, as well as for our distributors creating great business opportunities, and we do that on a global scale. Then, again, the opportunity side, I think we, and we will get into some of the detail, we have a business that has amazing secular tailwinds, that is in 95 markets, that is super powered by 6.4 million people inside of our broader distributor network. Over 2 million that are active at this point in time. This represents growing market segments. Everything that we are in has TAMs that are in growing markets.

Again, I think we are in a great place, and again, I see both purpose and opportunity here, and I am excited to share some of the purpose and opportunity. Again, at a quick high level, some of the statistics here that I think are important to you is our distribution network, and we will get into some more details on that. We are in 95 markets. We are heavily concentrated in kind of the top 20 of them. No single market represents over 50% of our business, and I will give you some geography a little bit later. We have over 144 unique products that we sell across these 95 markets, covering everywhere from weight management to protein base to NAD+, to personalized supplementation. So a lot of different products that I think broaden a really good portfolio, and again, we will get into some more portfolio details later.

Last year, we did over $5 billion in net sales, generating $658 million in EBITDA, and we are now expecting full year growth for this year, and we can share full year guidance a little bit later. As well as we have had steady increase in what our EBITDA margins have been over the past couple of years. Herbalife is an incredible cash-generating business, even in some of the difficult times coming out of COVID, has always been strong in terms of our operating cash and free cash flow. So it is represented here in just what we have generated year to date, $147 million of operating cash. An important part of the journey that we have been on also, and I will carry you through this, is some of the debt that we have retired. We had a high debt balance, about $2.8 billion, coming 2021.

Since that time, we have paid down about $800 million of debt, and our goal is to get down to $1.4 billion of gross debt, $1 billion in net debt by 2028. So another $600 million that we expect to pay down through 2028. In terms of our business, the way that we go to market is we are a direct seller. We leverage an incredible distribution network, and the way that the distribution network works is that we have new people that come in, and they start learning the business, understanding the products, understanding what the opportunity is. Then we have kind of this base of existing people, but really the bottom of the funnel are what we call active sales leaders or sales leaders. These are the ones who have started to establish a business. They have a customer base that they are working with.

They start to become eligible for different levels of compensation and production bonuses. They are the ones who are doing the vast majority of the work. The retention of this group is extremely important. What we have seen is we have seen a growth of our average active sales leaders, the people that are producing, by about 4.3% in consecutive quarters now. On top of that, we will show it a little bit later too, our retention rate of this group is 70%. The U.S. actually leads that at 78%. We just went through a refi process where we refied our revolver and term loan as well as some of the senior debt. We went down from a 12 handle to a 7 handle. Our senior debt is at 7 and 3 quarters. We have done a great job cleaning up the balance sheet.

In just this refi process, we now expect to save $45 million of interest savings just at that current balance. We are going to get even more savings as we continue our pay down journey. At a broad level, we have our new CEO who came in, Stephan Gratziani, who was our number 2 distributor for a long period of time. He was with the business for 32 and a half years. He understands this business, understands how we need to continue to move and evolve. The vision that we see up on the screen is the one that he helped us create, which is to be the world's premier health wellness company, community, and platform. One of the things that is different about us comparing against other direct sellers is we have a distribution channel that is incredible. It is our superpower. Again, over 2 million people that are active as part of our sales channel.

What that distribution network has done over the past 10 years, we have generated $50 billion in top line. A differentiator for us is nutrition clubs. It is not just the direct sales, if you are door to door, that is not really the models anymore. Different distributors have different ways that they go to market. The most common one, and the differentiator for us, is our nutrition clubs. The type of clubs, they vary by different regions. For the U.S., for instance, it is more of a single-serve consumption model. We work with our distributors. They are independent owners of these businesses, and what they do is, think of it as the Starbucks, right? You go in and you get your daily coffee or your daily tea.

A lot of customers come in as part of their health journey and have that meal replacement shake. We say, if we can replace a McDonald's meal with a shake the distributor has, right, we are helping people become healthier. Across the globe, we have 63,000 nutrition clubs. The U.S., we have 9,000. Additionally, these clubs generate roughly about a third of the volume inside of the U.S., and about half in terms of what the nutrition club operator's business is in total. Across that, we have about 49 million transactions that occur annually across 3.7 unique customers. Where is the growth coming from? We have now started to see consecutive quarters of growth, 9 consecutive quarters of growth within our active sales leader, 4th consecutive quarter of growth for net sales.

So again, active non-sales leaders, this is kind of this middle bucket of the funnel, right? You have new people that are coming in, the existing base that is now starting to get their footing in. We have seen consecutive quarters of growth of this existing base. Then really these sales leaders, we are seeing 4.3% the one who are doing the majority of the volume. And seven quarter of that. In the latest quarter, 4%. Because distribution, not every market all goes in the same way. There are macroeconomic factors and geopolitical factors that vary. But because we are so geographically distributed, we do not necessarily have to have everybody going up at the same time for us to have a positive net sales. And usually it is a couple of them that are moving up and down.

Where we are seeing a lot of growth right now is actually within APAC. You can see APAC sales, net sales in Q2 was up 15.2%, India being a large leader in this, which was heavily driven by the tax change, the GST change that took place in September of last year. And with that, the fundamentals of that business continue to grow. As they had some price decreases that occurred from the government goods and services tax, they have been able to build on top of an already strong business. And so you can see that their sales leader growth has grown by a little over 12%. LATAM, which represents about 17% of the business, which includes Mexico, South America, and Central America, has continued to see sales growth also, 16% sales growth. North America kind of went through a bit of a journey, coming out of COVID.