Herbalife Ltd. Q2 FY2023 Earnings Call

Good afternoon, and thank you for joining the Second Quarter 2023 Earnings Conference Call for Herbalife Limited. As a reminder, today's conference 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. You may begin.

Thank you, Tuwanda, and good afternoon, evening, everyone. Joining us today are Michael Johnson, our Chairman and Chief Executive Officer; and Alex Amezquita, our Chief Financial Officer. Before we begin today's call, I would like to direct you to the cautionary statement regarding 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 statement 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'll 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 periods referenced. 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.

Thank you, Erin, and good afternoon and good evening, everyone. I want to start today with one simple message, that our team and I are feeling as confident about Herbalife today as we ever have. There are so many good things going on in our company. We are building strong momentum and our trends are improving. Our net sales for the quarter were $1.3 billion, and this is the second quarter in a row that our year-over-year net sales trends improved. In addition, our overall financial performance has improved from the first quarter of this year. And while Alex will present all the numbers, I can confidently say we're making steady progress. Since our last earnings call, we've been on a world tour. We've hosted 5 Extravaganza. And for those who aren't familiar, these are large multi-day in-person regional distributor training events. We started in Singapore, and then we were off to Nanjing, Lima and Bengaluru. And just last weekend, we were in San Antonio, Texas. And it's important to note that these are the first in-person events we've held in Singapore, China, Peru and India since 2019. This is a time for our distributors to train, to motivate, to understand, to shape the business methods and develop recruiting techniques and reenergize their business. Over 90,000 of our distributors attended these 5 events. In Singapore, many of our distributors were first-time attendees. In Nanjing, a majority of the attendees were millennials and Gen Z. In Lima, the event sold out in 2 months, so we offered a virtual option, which garnered an estimated 10,000 additional virtual distributor attendees. In Bengaluru, we had a record attendance, so we split the main event into 2 separate sessions. And in Texas, in addition to our main event, we hosted a mega fit hour and filled the streets of San Antonio with distributors working out in the heat and the heart of Texas. I spent a lot of time with many distributors at these events to understand their stories and how their businesses are doing. Our distributors are more energized and engaged in our business than I've ever seen. We'll be back on the road in September as we head to Kazakhstan, Mexico, Brazil and Poland. These events are super important and set in motion new recruiting and retailing activity. It goes without saying, our Herbalife distributors are our #1 asset, and they are gifted entrepreneurs. We have many long-term successful distributors with solid down line organizations, and we also have many upcoming leaders from younger generations that are introducing new innovative daily methods of operations or as we say, DMOs. They are embracing the healthy active lifestyle movement with weight loss and transformation challenges, fit camps, digital marathons and even more. We recognize our world is evolving, and our business is evolving to modernize with it. We are continuing to launch products on a regional basis. During the second quarter we launched a Red Ginseng product in an individual ready-to-drink format, locally produced for the Korean marketplace. In this past week under the North American Extravaganza, we launched our vegan line, Herbalife V, for the U.S. marketplace. This line includes 5 plant-based products, including 2 protein shakes, a greens booster, a digestive support and immune support product. The plant baseline is made with organic ingredients backed by science, quality tested and easy to incorporate into a daily routine. They are third-party certified vegan organic Kosher and non-GMO. And I can attest, they all taste great. Initial reactions from distributors have been overwhelmingly positive. The plant baseline opens the door to not only a whole new group of customers and distributors, but also provides an opportunity for existing distributors to expand their business. This launch is a testament to our commitment of product quality and market innovation. Speaking of quality and innovation, our internal team, world-class technical partners and a team of distributors have been fully immersed and engaged in the development of Herbalife One, our new fully integrated modernized digital technology platform. We're excited about this digital frontier. It is the face of the new Herbalife. That's a modern look and feel and is more representative of our new brand. It will streamline distributors' businesses, accelerate data utilization, reduce costs and simplify transactions for both distributors and customers. With this, we are launching a new Herbalife and are supporting our distributors and their customers with modern and innovative tools in order for them to grow their businesses. This quarter, we began launching Herbalife One. We kick off the website launch in Singapore, where we will test, refine and optimize the content and functionality as necessary prior to expanding it to approximately 40 additional markets that represent approximately 80% of our sales by the end of this year. Later this year, we plan to launch the new distributor e-commerce platform in the U.K. and Spain, with the majority of the remaining markets to launch in 2024. This has been a tremendous undertaking by the team and is a critical step as we continue to modernize and move towards our next chapter of Herbalife growth. As you've seen in the press, the GLP-1 agonist drugs are getting a lot of headlines. They were first approved by the FDA in 2005 to treat type 2 diabetes. And recently, certain brands of the drugs have been approved for weight loss, and we are watching this trend closely. We recognize that GLP-1 drugs do help certain individuals, and we are evaluating various paths and how Herbalife and our distributors can benefit from this potential demand, whether it is through a telehealth solution or providing support to adhere to a healthy lifestyle. But as we know, developing better nutritional and healthy active lifestyle habits requires behavioral change, which is a core strength of our distributor base and this is no different for those who are interested in the GLP-1 drugs. We will continue to study this and when we see an opportunity to capitalize on it, we will. I'm also very excited to announce an addition to our executive management team. After more than 32 years as an independent distributor and a proven track record of global business growth across 70 markets throughout North America, South America, Europe and Asia, Stephan Gratziani, will join the company as Chief Strategy Officer, reporting to me. This is a game changer. Our team internally and our distributors see this as a great opportunity to advance our business models, open our minds to greater opportunities and improve our speed to market. Stephan is one of our top 3 independent distributors in the world for 2022. He was named to the company's Chairman Club in 2010, and in 2018, he achieved the highest distributor level of Founder's Circle. He has built a tremendously successful business, and this is a wonderful opportunity for all of us. I have worked closely alongside Stephan for years. During his time as a distributor, he has been an integral member of various strategy and planning groups for distributors and the company. He is highly effective as a strategist and one of the most data analytic-driven people I know. He brings a new voice inside the company, the voice of the distributor with valuable field experience. In the ever-changing landscape of our business, we want the distributor's voice to be even more integral as a part of our company. Herbalife, as you know, is different than other companies that operate traditional business distribution channels. All of our top-line growth comes through the performance of our distributors, how well the company and its distributors work together and support each other in order to fulfill their individual responsibilities will dictate our potential for growth in the future. As we look to the future, Stephan will create even more synergy and alignment between the company and our distributors. It will be an advantage to have an executive who can leverage the decades he has spent developing skill sets, building sales teams and processes and navigating an ever-shifting marketplace. It is important to note that in connection with Stephan becoming an employee of the company, we have agreed to suspend his Herbalife distributorship and he has waived any rights to its distributorship earnings under the company's marketing plan during the term of his employment with the company. In addition, on Tuesday, Stephan stepped down from our Board of Directors. I would also like to announce that John DeSimone will transition from his position as Chief Strategic Officer to Special Adviser to Herbalife. John has also been an integral part of our organization for nearly 16 years and will continue to play a pivotal role going forward. I'm feeling really confident about Herbalife, more today than I ever have. We told you last quarter that our trends indicate we would see growth in the fourth quarter. And from where we are sitting today, we believe all key indicators show we will return to growth in the fourth quarter of this year. Things are changing in our world. With the gig economy, healthy lifestyle trends and consumer preferences, we believe we are well positioned to evolve in this changing world, and we'll continue to leverage best practices around the globe. Coming out of the pandemic, changes sped up, how we recruit, introduce and create successful business flow for a new distributor is job one for everyone at Herbalife. We're moving in the right direction. Herbalife One is progressing and on track. Our Board, distributors and management are all committed to our return to growth and margin expansion initiatives. We are laser-focused on top and bottom-line growth. I'm extremely confident in our decision to bring Stephan in to join the team. As I said before and will say again, we believe this is a game changer and will move the needle. And before I hand it over to Alex, I want to express my commitment to all our stakeholders. I'm more committed than ever to staying through this turnaround and ensuring a proper succession plan is in place. And with that, I'll turn it over to Alex, and we'll come back for closing remarks following the Q&A.

Thank you, Michael. I'll begin my section with the key financial highlights for the quarter. First, second quarter net sales of $1.3 billion were down 5.7% compared to the same quarter last year. This marks our second consecutive quarter of improved year-over-year reported net sales trends. Second, Q2 gross profit margin of 77% was a sequential improvement from the first quarter. The pricing actions taken over the past year have led to an approximate 300 basis point benefit to gross margin. The impacts of input cost inflation and FX continue to be a headwind to gross profit margin with approximately 180 basis points and approximately 90 basis points of headwind, respectively, compared to the second quarter of last year. Third, Q2 adjusted EBITDA was $170 million, achieving a margin of 12.9%, which was a 260 basis point improvement from Q1 of 2023. Fourth, adjusted diluted EPS of $0.74 was negatively impacted by a $0.12 currency headwind and a $0.06 six-month true-up for an upward revision of our full-year tax rate. Fifth, as reflected in our results, the strengthening of the U.S. dollar versus foreign currencies has had a negative impact on our reported sales and profitability. Assuming rates stay relatively constant, we expect a modest FX tailwind in the fourth quarter of 2023. And six, we continue to make significant progress with our previously announced transformation program. The results of our actions to date have exceeded our initial expectations. Based on what we have implemented through June, we now expect to deliver an incremental $20 million of annual cost savings, bringing our total expected program run rate savings to at least $90 million, with more than $45 million of these savings now expected to be realized in 2023, up from the approximately $35 million that we communicated to you in the first quarter. During the second quarter, we recognized an incremental $10 million of pretax expenses in SG&A related to the program, primarily for employee retention and separation costs, bringing our total program to date cost to $62 million. These expenses are excluded from our adjusted results. As a result of the incremental actions we have taken, we now expect to incur total program pretax expenses of at least $75 million, up from our previous estimate of at least $60 million. Reported net sales for the second quarter declined 5.7% year-over-year, which was negatively impacted by a currency headwind of approximately 150 basis points. This is the second quarter in a row that we have improved our year-over-year reported net sales trends despite the difficult year-over-year comparison in the current quarter due to the pull ahead of sales in the second quarter of '22 as a result of the 10% price increase implemented in most of our geographic markets across all product lines in June of 2022. Based on this trend in others, all internal indicators point to our return to top line growth in the fourth quarter of this year. Adjusted EBITDA for the second quarter was $170 million with 12.9% margin, which was primarily impacted by higher input costs and negative FX impacts. We posted net income for the quarter of $60 million with an effective income tax rate of 29.5%. Second-quarter diluted earnings per share was $0.60, with adjusted diluted EPS of $0.74. Reported diluted EPS was impacted by net charges of $0.14 related to both the transformation program and expenses related to our new digital technology platform, Herbalife One. Adjusted diluted EPS was negatively impacted by year-over-year currency headwind of approximately $0.12. Operating cash flows for the second quarter were approximately $136 million with cash on hand, up $72 million from the first quarter to $527 million at the end of the second quarter. Second quarter operating cash flows were driven by higher profitability, along with our commitment to execute on initiatives to optimize our working capital, which drove an approximate $46 million favorable impact in the quarter. Moving to Slide 8. We see the drivers of our year-over-year change in net sales. Pricing provided a 10.9% benefit in the period as a result of price increases implemented over the past 12 months, including the 10% increase across most markets implemented in June of 2022 that I just noted, partially offset by approximately 250 basis points of unfavorable country mix and other driven by higher sales in India and lower sales in the U.S. and China relative to the overall net sales portfolio. Local currency net sales for the second quarter were down 4.2% compared to the prior year with FX headwinds during the quarter of approximately 150 basis points. Moving to the adjusted EBITDA margin bridge. Adjusted EBITDA of $170 million resulted in a margin of 12.9%, 110 basis points below the second quarter of 2022. Adjusted EBITDA margin benefited by approximately 360 basis points due to our price increases over the past year, including the 10% implemented in June of '22. However, elevated raw material costs and manufacturing overhead costs continue to impact our results, which drove an adjusted EBITDA margin headwind of approximately 180 basis points versus the second quarter of last year. The impact of inventory write-downs was relatively flat year-over-year with country mix and other cost of goods sold contributing an approximate 50 basis point headwind. Within SG&A, promotional spend contributed an approximately 40 basis point headwind year-over-year, largely due to the return of in-person events, including our 4 large extravaganza distributor trainings held during the quarter across 3 different regions. As we've stated, we believe these events are bringing renewed energy to attending distributors, which will, in turn, result in trends continuing to improve this year. Also within SG&A, we benefited from an approximately 10 basis point improvement in salaries and bonus as we begin to realize cost savings related to our transformation program partially offset by increased bonus accruals in the current period. Currency was an approximate $17 million headwind on adjusted EBITDA during the quarter, resulting in approximately 110 basis point negative impact on adjusted EBITDA margin. Turning to Slide 10. We are encouraged that our average active sales leaders remains relatively stable versus the first quarter of 2023. For the second quarter, we had approximately 459,000 average active sales leaders, which was relatively flat versus the first quarter of 2023 and 11% above the second quarter of 2019. As a reminder, this metric shows the monthly average number of sales leaders that have activity from either their own purchases or those of their preferred customers or nonsales leaders downline. Moving to Slide 11. We are introducing a metric that we believe will be useful to better understand the underlying trends in the business. Within the chart, we can see the trend in the number of unique preferred customers and non-sales leaders that have purchased product during each respective quarter for the past 4.5 years. We believe this metric is useful as it provides insight into the number of individuals that are actively engaged and primarily behave as customers within the business in any given period. As you can see, we have continued our upward trend of active preferred customers and non-sales leaders from approximately $1.5 million in the fourth quarter of 2022 to $1.7 million in the second quarter of 2023, whereas in 2022, our actives declined from the first to second quarter. We believe this is evidence that distributors are reengaging with their organizations and customers in their communities. We recognize our world is evolving, and our business needs to modernize with it. Based on the age demographics of our average active sales leaders, along with active preferred customers and non-sales leaders, we see that about 50% of the individuals are millennials and Gen Z, which is an indication that our business and products are continuing to evolve and resonate with the younger generations. The strategic initiatives we are implementing better position us to connect with this important demographic. Moving to our regional results. The EMEA region was relatively flat year-over-year on a reported basis and up 2% on a local currency basis. In Latin America, reported net sales were favorably impacted by FX, primarily the Mexican peso whereas net sales in local currency were down 4%. Mexico reported net sales grew 12% compared to the prior year, while down 1% in local currency, partially offsetting year-over-year declines in Chile, Colombia and Brazil. The Asia Pacific region saw a slight decline in local currency net sales with reported net sales down 6% due to unfavorable fluctuations in FX. India continues to lead the region posting another quarter of year-over-year growth with reported net sales up 16% and up 23% in local currency. In North America, the decline in reported net sales was primarily driven by the U.S. market's 11% year-over-year decline. This is a key market for us, and we are laser-focused on stimulating engagement and productivity with the launch of several new initiatives in the market such as healthy active lifestyle activities. These are distributed on events that combine the use of Herbalife products with a fitness element such as group fitness classes or a 5K run. In China, the year-over-year net sales trends have improved for 2 quarters in a row, both on a reported basis and in local currency. For the quarter, net sales in local currency were down 10%, with reported net sales down 15%. Turning to our capital structure and cash position. During the quarter, we increased our cash on hand by $72 million to $527 million, and our $330 million revolving credit facility remains fully undrawn and available for borrowings. We ended the quarter with a 3.7x gross leverage ratio, and we were fully compliant with all debt covenants. Effective July 1, our benchmark rate for the senior credit facility is set to SOFR and LIBOR is no longer referenced. CapEx for the 6 months ended June 30 was $69 million, including our investments in Herbalife One. We expect total CapEx for the year to come in around $150 million to $200 million, inclusive of Herbalife One, and expect CapEx to remain elevated through 2025. Our capital allocation and long-term use of cash priorities remain unchanged. As always, our #1 priority is to service our debt as we work towards investment-grade metrics and our targeted gross debt leverage ratio of 3.0x. We plan to use free cash flow generated in 2023 to continue to reduce our nominal debt levels. This concludes our prepared remarks. Operator, please open the line for questions.

Our first question comes from Chasen Bender with Citi.

I just wanted to start on the volumes and the members. Trends look good across most of your markets on a sequential basis. And not to nitpick too much, but in North America and LatAm, it looked a little bit softer relative to the rest of your geos. Can you just kind of unpack that performance for us and kind of frame whether that was in the reference of expectations you guys had or how that came out?

Chasen, yes, thanks for that question. So if you look at the North America and similarly with the LatAm metrics, especially the distributor metrics, what we're seeing as a second quarter where you have stabilization off of the first quarter. And so we're encouraged to see that stabilization. When we were here 3 months ago, we were seeing a rate of change on those distributor metrics, and we knew that those metrics, even though that we're seeing lots of signs of energy and reengagement in the metrics themselves, we haven't seen that stabilization yet. So now posting a second quarter where you have similar trends, while we don't see it going necessarily as up as we would like at this point, we at least see the stabilization. And so for those particular markets, as you couple it where you're seeing rates of increase in the overall company from other markets, that's what's given us this confidence of growth in the future, stabilization in the market that weren't necessarily so, the ones you've mentioned, coupled with return to growth metrics in our other markets.

Got you. And then could you just give us your latest thoughts on price increases on a global basis? Are you still thinking it's kind of CPI, CPI minus, is that kind of the right level? And are there kind of any places where you're thinking about maybe holding back more than others?

Yes, there are definitely different markets with varying levels of price sensitivity. Overall, the world has reached a saturation point for price increases. We monitor this very closely. Moving forward, it seems that CPI is the upper limit for price increases. Some markets may even find this ceiling too aggressive at the moment. We do not anticipate implementing any pricing strategies above CPI in the near term. Instead, we expect to set prices at CPI or potentially even lower in certain markets.

Got you. And then just to sneak one more in. I know you did a lot of the heavy lifting last December with the convert offering. But in terms of the remaining $260 million portion of that '24 converts, it sounds like the plan is still to tackle those with free cash flow. But maybe just give us an update on those specifically. And then if you started to think about how you're going to plan for the 2025 senior notes?

Yes. Good questions. So for the converts due in 2024, we continue to park cash. You'll see our cash balance increased this quarter over last quarter. So we'll continue to park cash and the cash flow that we generate between now and then, we'll use that excess cash to pay that down when it comes due. We haven't begun to address our 2025 yet. It's obviously in our strategic plan overall, but there aren't any specific moves that we've begun to implement to address the 2025 stack, but that is obviously something very front and center as we think about our overall capital structure.

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

It's great to hear you guys so fired up about the future. I realize there are a lot of inputs, but all things considered, what is the outlook do you think for gross margin in the second half?

Yes. So we landed this quarter at 77.0%, and as we said last quarter, we knew we were going to improve off of where we were last quarter, which was at 76.2%. Largely, that was a product of just where FX rates were and some modest improvements in some other parts of just the overall gross margin structure. At this point where input cost inflation is, where transportation costs are, where wages are, where our ability to take price, et cetera, all those types of inputs. For the rest of this year, we're largely going to be in that 77.0%, maybe there's an opportunity for a little bit of margin expansion, depending on where currency rates sort of shift for the rest of the year. But the longer-term opportunity where we see that expansion at this point of the year given that we're halfway through, will largely start to be in 2024. There are still opportunities in all of those categories. We are starting to see spot rates for some of our input costs continue to come down. There will be a little bit of a lag between when we can catch up to those market rates where we have some short-term contracts catch up to market rates and other things like our manufacturing variances and overhead can start to improve as we start to see our forecast stabilize and in fact, grow. And to the extent that we can start running our manufacturing facilities a bit more productive than they are currently, we'll start to see that flow through our gross profit margin. But those are all opportunities that we see as a 2024 opportunity. And the rest of 2023, as your question asked, probably hovering in this 77%, maybe a bit of expansion, but I wouldn't expect something materially more than maybe 0.5 point.

Okay. Fair enough. I wanted to ask about the launch of the new vegan line. Has it been launched globally? What's the status regarding where it has been launched, and how are you adapting it for different markets? Also, what are your overall expectations for the new vegan line?

This is Michael. The vegan line, known as V in the United States, is a packaged line featuring five products that just launched last weekend. It's received an incredibly positive response. While we won't disclose the numbers at this moment, the reception is very encouraging. In Europe, the Middle East, and possibly India, we also have a vegan line available. In Europe, the presentation isn't as refined as it is here, so we are considering rebranding and repackaging to expand that product line. The U.S. version is third-party certified, organic, and natural. We are extremely proud of this product line. Additionally, for anyone who has tried green drinks, I highly recommend you give this one a try because it tastes great, which is not common for vegan products.

Yes, it seems like that will be the first green vegan drink I've ever tried that actually tastes good.

I couldn't agree with you more. I've tried a lot of them and they haven't lasted long. So this is a really good tasting product.

Terrific. I think all your products really are aimed toward good taste and that's a real positive selling point. I understand you guys are testing in Singapore in Q3, but what are the other milestones we should be looking for as you ramp the Herbalife One platform?

Yes. The Herbalife One platform has reached a significant milestone with the beta launch in Singapore. The primary customer-facing aspect will be the website, which helps validate the essential underlying architecture needed to support additional applications anticipated for 2024 and beyond. This initial beta test involves substantial functionality being tested, along with the visual brand representation that distributors will start to utilize. It's a significant advancement for us. Later this year, we plan to launch distributor e-commerce capabilities in the U.K. and Spain, which will also be an important step forward.

Our next question comes from the line of John Baumgartner with Mizuho.

Maybe first off, Michael. I wanted to ask about where the company stands right now in terms of Herbalife One, just sort of converting on the related revenue opportunities, the cross-selling, the retention benefits, just sort of the capabilities associated with the first-party data. How are you thinking about the timing until we see those benefits begin to ramp? And what are sort of the interim steps until it sort of kicks in?

I want to ensure I understand your question and its context. Are you asking about Herbalife One in relation to recruiting, retailing, and retention? I didn't quite catch the question fully.

Well, I guess applying the first-party data you've been accumulating over the past five or six years since the settlement could help in thinking about Herbalife One, integrating different apps, and streamlining all the data, which might kickstart that initiative going forward.

Yes. I'll begin the answer, and Alex or Frank can add their thoughts if they wish. The data management and opportunities we have are enormous. We are collaborating closely with our distributors to upsell and analyze customer profiles to understand their ordering behaviors, similar to how Amazon implements upselling. Our aim is to integrate this process with our distributor network, ensuring we enhance their marketplace activities without causing any disruptions. In terms of data management, especially regarding nutrition clubs and point-of-sale systems, we are working to ensure that distributors will gain improved access to their own data as we move forward. This will enable them to optimize their operations, whether in clubs or through online social media sales. Furthermore, I want to highlight Stephan Gratziani's contribution, as he will play a significant role in helping us format this data to benefit our distributors' business practices.

Yes, I’ll add to that. John, it's a great question. When we discuss data, it encompasses a wide range of elements within the ecosystem. There are numerous actions we can take with data today without needing Herbalife One as a prerequisite. However, additional ways to gather and express ideas about data will emerge, such as implementing a win-back campaign, which will be much easier on the new platform than it is currently. We will have various options to leverage or obtain new data that will assist us in developing new strategies, but this is just one aspect of the broader data landscape. There are other ways we are utilizing data. As you've mentioned, we have been collecting data for five or six years. We are currently leveraging the data we receive from customers in the U.S. and the preferred customer program elsewhere. Although this process may not be as efficient until Herbalife One is fully integrated, we are still optimizing and utilizing it in our market strategies.

Okay. And then Alex, sticking with North America and looking at the volume softness there, you mentioned the signs of the stabilization on the distributor front. But looking at the year-on-year volume erosion from Q1 to Q2, do you have a sense as to how much of that was from more pronounced elasticity as opposed to anything on sort of the mechanical side with distributor productivity? How do you think about the balance of those headwinds, elasticity relative to productivity for the back half of the year?

Yes, that's a great question and one we have considered multiple times. Demand elasticity does play a role in those figures. It's challenging to break down the impacts from productivity and marketplace changes versus the specific demand elasticity of e-commerce. However, the overall market is in an innovation phase, looking to market more effectively today. This involves reevaluating the value proposition. In North America, we're seeing significant shifts where our concept of a healthy active lifestyle is being applied in new ways, specifically through our body transformation program, which represents a fresh approach to reaching the market. This is reflected in the way distributors successfully implement these concepts, creating new and innovative strategies to utilize established ideas and highlight their value. Given the 20% price increases in the U.S. over the past year, understanding and communicating the value proposition is crucial for attracting customers. It's no longer sufficient to rely solely on brand recognition or past selling points; we need to effectively engage with the market today and moving forward based on value. The market is adapting in its own way to these needs.

And then just one more for me, if I could. I wanted to come back to the vegan line, the V. On one hand, it's very much on trend in the space. But then at the same time, there's some risk, I guess, of some cannibalization. And I'm curious, in terms of the feedback from your distributors in this development process, has the view been that the lack of sort of a broad-based plant line has been a limiting factor in new consumer uptake for the company? I'm just curious how you're thinking about cannibalization relative to incrementality on the net for that V line?

I believe what we're doing with the V line will significantly grow our business. We're targeting a low-risk group that is not likely to switch between products. There has been a consistent demand for a vegan line within our company for years. Since my return, I've had discussions with numerous distributors who now have access to opportunities that were previously unavailable to them. They can offer a variety of choices within their clubs that they haven't had before, allowing them to present a product line to the market that appeals to a broader audience. While not everyone is a vegan, many individuals, including myself, identify as part-time vegans. I personally consume certain vegan products during the week and eat fish on the weekends, making me what some call a flexitarian. This is an option we've lacked within our product range so far. I'm always enthusiastic about our product launches, and distributors share that excitement. The response we're seeing on social media and the acceptance of this product has been incredible, rivaling some of the most successful launches I've witnessed. Our distributors are very enthusiastic about it. The product tastes excellent, which will provide us with a significant advantage in the marketplace.

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

I just have two. Out of the total that you expect to spend on Herbalife One, how much have you spent thus far? And you mentioned that CapEx will be elevated through 2025. Should we kind of just assume it will be in the same range as you expect this year, like $150 million to $200 million?

Yes, I'll take that. The overall program expense hasn't changed significantly. There might be some shifting of dollars from 2023 into 2024. We're still looking at a capital expenditure of between $150 million and $200 million this year. A lot of that will depend on how the beta test goes in Singapore and how things roll out. There are just some timing differences regarding when the expenses will occur. Overall, the program remains unchanged, and we want to clarify that we expect to maintain an elevated capital expenditure through 2025. We've communicated that before, but we wanted to make sure it was clear in case anyone missed it. So, there aren't any significant changes to the program or the spending amount, just slight differences in timing as the end of this year approaches, and some expenditures may be pushed into 2024.

Okay. And then for my second question, we have clearly seen inflation across the board. You implemented a significant price increase last July. What kind of feedback are you receiving from your distributors regarding potential price reductions? Is this something you might consider to enhance engagement?

I wouldn’t say there is a broad reduction in price. We did implement a selective price decrease on our Herbalife24 line in the U.S. market, mainly due to competitive pressures rather than concerns about overall demand elasticity. We wanted to ensure that this strong product line allows our distributors to remain competitive. Generally speaking, as I mentioned earlier, most markets are saturated. I don’t believe we are at a stage where we would think about reversing any of the price increases we’ve made so far. At this juncture, we are focused on being careful and deliberate about how we proceed with pricing.

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

I had two questions. First, Alex, regarding the expectations for the fourth quarter. Does that bring you back to year-over-year growth in America, or do you think that might take longer than the first quarter?

Yes, we typically receive questions about regional forecasts, so I will stick to our usual response. We do not provide forecasts on a regional basis, so I cannot comment on what is included in the total company growth estimate. However, as I mentioned earlier, if current trends continue, we have work to do to improve these trends throughout the third and into the fourth quarter. If the pace of change remains consistent, we expect to see net sales growth in the fourth quarter.

Michael, it’s a bit challenging for me here on the East Coast, but are you considering evaluating GLP-1s? I wanted to discuss whether there’s a way you could pursue this that would not negatively impact your finances in 2024.

Well, you were cutting in and out there. So can we try that just 1 more time? I heard the GLP-1 on distraction, but...

Yes. The question was whether you could explore the GLP-1 market in 2024 in a way that is either margin neutral or cash flow neutral. Some of the margin uplift you should expect in 2024 would be absent that.

I think that's really the only way we would approach it. We're looking into various alternatives. There are different telehealth companies with promising prospects. Some have recently announced partnerships, and we are very close to it. I don't want to raise any expectations, but I want to assure you that we are studying this very carefully to see if it aligns with both our business opportunities and our company culture. We need to ensure that we're making choices that fit well, as all of these products, whether it's Wegovy or Ozempic, require foundational lifestyle changes to be effective. No drug will work without those changes. Our product complements these because there may be protein or muscle loss associated with these treatments, along with side effects that are still emerging. However, that doesn’t mean we can’t integrate them into our program and offerings in some way. We are analyzing it thoroughly.

Our next question comes from the line of Anna Lizzul with Bank of America.

This is Jon Keypour on the line for Anna. I just had a question about the state of the consumer by region. If you guys could go into a little bit of detail by reporting segment and sort of give us a picture of how the different macro factors are playing out there at the consumer level, please?

Yes. Rather than discussing each region individually, I view China as a distinct market with its own dynamics. China is emerging from a period of strict COVID restrictions. The first quarter was tough, with many people contracting COVID, but now the situation is improving. Retail spending surged in May, though it moderated in June. Overall, the market is returning to normal. Our second quarter results reflect improvement compared to the first quarter, and when comparing the first quarter to the fourth quarter of 2022, we see continued progress. Generally, consumer preferences are aligning with expected trends, and it's encouraging to see the market gradually recovering after a challenging period. In contrast, the U.S. is facing significant hurdles as it navigates post-pandemic adjustments. I addressed the North American market in my earlier comments. Europe presents a different scenario, with greater market diversity allowing for a quicker recovery compared to other regions. The year-over-year improvements from the first to the second quarter in Europe are notable, while North America mostly showed signs of stabilization. Similar trends are observed in Latin America, while in the Asia Pacific region, which includes India, we see a mix of performance. India is experiencing strong growth, showing over 20 percent growth in constant currency. However, some areas in Southeast Asia and Indonesia are lagging behind, reflecting a delay in the post-pandemic recovery phases we witnessed in the U.S. and Western Europe last year. We're aware of these lagging issues in Southeast Asia and prepared to tackle them effectively, primarily through enhanced distributor engagement, training, and grassroots marketing efforts, tailored to the unique needs of each region while addressing the shifting consumer preferences globally.

Our next question comes from the line of Karru Martinson with Jefferies.

When you look at the return to growth in the fourth quarter, is it that the active sales leaders and distributors need to grow kind of from the stable base that we have now, or is it the productivity of those distributors need to improve?

I believe both factors are important. However, the primary focus right now will be on productivity, as that will likely be the metric that shows the most improvement. All of our metrics will continue to enhance as we progress through the quarter and into the fourth.

Okay. And then just from a housekeeping perspective. When I look at a year ago gross margin at about 78% in the model for the third quarter, I was just trying to square that with kind of the 77% target range that we're talking about earlier. Is there something in the year ago that we should be aware of when we're kind of modeling out for the rest of this year for the third quarter?

The biggest factor to consider right now is how currency comparisons from last year to this year will play out. In the third quarter, the U.S. dollar strengthened significantly. While I can't provide a precise model for you, I would suggest focusing on these trends for your projections. However, I don't see any fundamental issues in the business that would impact the comparisons.

Okay. So still in that 77% to maybe, as you said, up 0.5 point kind of how we should think about the rest of the year.

Yes. And again, the big volatility in that number at this point will be really how FX moves.

I'm showing no further questions in the queue. I would now like to turn the call back to Michael Johnson for closing remarks.

Thank you all for joining the call. We appreciate your presence and trust in us, and we're committed to rewarding that trust. My passion for this company is stronger than ever, and we are making progress that excites us. There's still a lot of work ahead. I've never seen our team so engaged and dedicated to returning to growth as I do today. The enthusiasm among our distributors will propel us into the next phase. Herbalife One is on track, and our distributor operations are evolving. We are experiencing transformation globally, sharing ideas, and increasing distributor activity is crucial. People are returning with more energy than ever. We believe the marketplace will work in our favor as we continue our efforts, and I'm excited because we're on the right path and gaining momentum. Bringing Stephan Gratziani onto our team enhances our ability to innovate and connect with the marketplace, providing great opportunities for our distributors and employees, who will take pride in moving this company forward. Our team is remarkable, we are focused on success, and we're committed to helping people live their best lives. Thank you all. I can't conclude without saying, let's go Herbalife. Thank you.

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