Herbalife outlook upgraded to stable, ratings affirmed by Moody’s

Investing.com -- Moody’s Ratings has revised the outlook for Herbalife Ltd. (NYSE:HLF) to stable from negative, while affirming its B1 Corporate Family Rating (CFR) and other ratings. The decision reflects the company’s improved leverage, positive trends in distributor recruitment, reduced input costs, and debt repayment, which have contributed to an increase in free cash flow.

Herbalife’s restructuring and transformative actions over the past year have resulted in better operating margins and stronger free cash flow generation than previously anticipated. This led to a decrease in the company’s debt-to-EBITDA leverage to 4.4x as of December 31, 2024, down from 5.2x at the end of 2023. Moody’s expects Herbalife to continue focusing on reducing its debt balance, aiming for a total principal amount of outstanding debt of $1.4 billion by the end of 2028.

The company’s global diversification supports its credit profile, as pressures and weak sales volumes are not uniformly experienced across different regions. Despite an increase in new distributors, the industry and business model remain challenged, with sales volumes still negative. However, if the trend of new distributor wins continues, sales volumes are likely to turn positive in 2025.

Moody’s also recognized Herbalife’s improved liquidity position, upgrading its speculative grade liquidity rating to SGL-2 from SGL-3. As of the end of 2024, the company had $415 million in cash and an undrawn $400 million revolver. Moody’s anticipates that Herbalife will generate at least $175 million of free cash flow in 2025 and that all share repurchases will remain suspended until management’s gross leverage target of 3.0x is achieved.

Herbalife redeemed $65 million of the unsecured notes due in September 2025 in February 2025. Liquidity sources provide good coverage of the remaining $197 million of September 2025 notes outstanding as well as the roughly $20 million of required annual term loan amortization. The company plans to repay the unsecured notes due September 2025 using a combination of internally generated cash and revolver draw. As a result, senior secured instrument ratings may change depending on the evolution of the debt mix to include less unsecured debt cushion.

Herbalife’s B1 CFR reflects its niche product and service offering in the competitive nutrition and weight loss industry, good free cash flow, and an aggressive financial strategy driven by high leverage and debt-financed share repurchases. The company’s strategies to restore growth are showing some signs of effectiveness, with a year-over-year increase in average active sales leaders in the fourth quarter of 2024. Moody’s expects sales volumes to turn positive by the end of 2025 due to the favorable trend of three consecutive quarters of year-over-year new distributor gains.

The ratings are supported by consumer focus on health and wellness, product innovation, predictable free cash flow, and excellent geographic diversity. The nutrition and wellness sector is expected to witness strong long-term demand due to an aging population, high obesity rates, and a continued focus on wellness.

Moody’s stated that ratings could be upgraded if Herbalife demonstrates sustained growth in sales and profitability with good liquidity, and adheres to a more conservative financial strategy. Conversely, ratings could be downgraded if earnings decline due to factors such as a contraction in the sales force or product volumes, pricing pressure on higher costs, or a deterioration in liquidity.

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