WW International, Inc.
Q1 2020 Earnings Call Transcript

Published: 29 Apr 2020

[Operator:]

Good day and welcome to the WW International First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.I would now like to turn the conference over to Corey Kinger, VP Investor Relations. Please go ahead.

[Corey Kinger:]

Thank you to everyone, for joining us today for WW International's first quarter 2020 conference call. At about 4

[Mindy Grossman:]

Thanks, Corey. Good afternoon everyone. Thank you for joining our call today, and I hope all is well with you and yours. It goes without saying that a lot has changed since our last earnings call only two months ago. Our commitment to our members and the WW community we have created is more important than ever.Our purpose is to inspire healthy habits for real life for people, families, communities, the world for everyone. That was true two months ago. It's true today and will continue to guide everything we do long into the future. I could not be more proud of how our team has come together globally to support our member, the WW community, and each other during this unprecedented time.A few overarching principles that are guiding our actions, first, the health, safety and support of our employees and members is paramount. In mid-March, when the COVID-19 situation escalated, we took quick globally coordinated action and paused our in-person workshop and implemented virtual workshop in order to continue to provide studio members with the support, encouragement and community that is integral to the WW experience.Again, we know our members and let's continue to meet them where they are. Overnight the world changed, as did the consumer mindset. We immediately revamped all of our content and communication to address the concerns they're having today.In addition, we ramped up the frequency and volume of our content to ensure our members feel supported, cared for and connected. We're closely listening to our members through quantitative surveys and our virtual workshop and on connect. These daily real-time insights are guiding our approach to all content, both member marketing and recruitment oriented marketing.Third, we will continue to invest to innovate. While we are certainly being aggressive on the expense management at this uncertain macro environment, we're also prioritizing the actions that will enhance the member experience and engagement, and maintain WW's position as the trusted leader in weight loss and wellness, delivering a connected, digital and deeply human community experience. We will continue to advance the experience with new value added features, tools, creative content and thought leadership to promote both recruitment and retention.Turning to our Q1 results, our winter season to our 2020 is off to a strong start. The global launch of the new more customized myWW program resonated in every global market. The WW Presents

[Nick Hotchkin:]

Thanks, Mindy. As discussed, WW had a strong start to 2020, due to the successful launch of our new myWW program, a well-executed global marketing campaign, and high visibility from the WW Presents

[Mindy Grossman:]

Thanks, Nick. We remain confident that we're focused on the right actions, not only to best serve our members today, but to position WW as a leader in delivering human impacts through technology. At the highest level, the themes of our 2020 priorities are unchanged. And our key objectives of recruit, retain and elevate the WW brand will continue to guide all our actions as an organization.As Nick mentioned, we are making a number of critical decisions and cost reductions to manage through this challenging time, and therefore, have an even higher degree of prioritization to ensure we are best allocating resources, towards the actions that will help us better serve members and drive the business today, tomorrow and beyond.Our 2020 priorities are, one, amplifying the power of community through coaching, accelerating our digital transformation to deliver virtual coaching and community in an enhanced way is now even more essential. We are on track for our launch of an entirely new, digitally enabled, community focused and coach led business vertical later this year. This new offering will not only reflect the immense learning from running virtual workshops at scale, and our ongoing test pilots a virtual group coaching, but also our 57 years of experience in creating community.We believe this new vertical will provide a unique differentiator and tier to the WW experience, and drive both new recruitment and retention. As we evolve and create more personalized offerings and build highly skilled coaching talent, we're focused on providing solutions to our members in the format set that their lives best.Second, we will continue to build our wellness ecosystem, deepening the app experience and gamification. It's important that we continue to evolve and be recognized as a trusted partner in total wellness, spanning nutrition, activity, mindset, motivation, hydration and sleep. We are rapidly introducing new features and tools to help our members improve their overall health and wellness, forming a deeper integration between all these important factors.In early May, we will be launching sleep tracking. Our science team has completed a body of work on sleep. And we know that consumers and in particular, our members, have a strong interest in sleep related measurement and tracking, as well as actionable content for improvement. Sleep is even more top of mind these days, so we are eager to give our members added tools to help them during this time.In addition to the features and content we build ourselves, we've been expanding our partnerships to bring even more value added complimentary experience to WW members. In our fitness vertical, WW has just launched a partnership with Fit On to bring members in-home video fitness classes via the WW app. Fit On content integrated into the WW app is currently in our Australia and Canada market, and we'll be launching in the U.S. in the coming weeks.The experience will provide members with curated video fitness programs that will be personalized based on member engagement, and will span a variety of workout types. Fit On joins our fitness partner Active, which has been providing audio fitness content, and ClassPass, who will offer in-person content. We look forward to expanding our relationship with ClassPass, when fitness centers begin their reopening.In our mindset vertical, we continue to offer our members headspace and have expanded our expert content around mindset stress and support. People love to find ways to be challenged and compete, whether it be in the analog or virtual world, and we know the more fun they can have and the more incentive they have while doing it, the more engaged they will be. Challenges, streaks and other forms of friendly gamification will be accelerated.Third, as Nick mentioned, ecommerce growth and product expansion is a significant opportunity. I'm pleased to say that on March 23rd, we integrated WW Shop into our app versus only being available online. We are ramping up our ecommerce plans and intend to make WW Shop, a primary way to purchase our consumer products, in addition to in-studio purchasing. In just a few months, our U.S. ecommerce sales have already exceeded U.S. ecommerce sales for all of 2019.Our digital-only members now have awareness and accessibility and are responding. In addition, we will be expanding the assortment of our current product categories and launching new product verticals for WW over the course of the year, Health Solutions and being the partner of choice.As we've discussed before, we see a significantly larger opportunity for our health solutions business in the years to come. Our health solutions team has done considerable foundational work in building out the talent and technology to support and drive this business. We've made the needed investments, and believe we now have the technology and platform to allow us to enhance the experience and value, for our current partners and to attract new partners.As people look for solutions to improve their overall health by managing their weight, we intend to be the partner of choice for wellness and weight loss, across employers, providers, physicians and payers. We are focused on increasing awareness of WW as a wellness benefit and demonstrating not only the economic, but the human value of WW and population health.And finally, community activations events and created content will allow us to accelerate our efforts to both diversify our customer base and maximize engagement. We believe community activation events and content are even more important now than ever before. We're focused on producing unique and engaging live virtual content, that fosters real life connections and inspire people to live their best life.On March 7th, we wrapped the nine city nationwide sold out WW Presents

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Lauren Cassel with Morgan Stanley. Please go ahead.

[Lauren Cassel:]

Great. Thanks for taking my question and for all the color, it's really helpful. The color on total digital recruitment over the last two weeks turning positive is obviously great to hear. Just curious, have those subscribers looked any different than your average digital subscriber? Just trying to understand if maybe you're attracting a new subscriber in this environment?And then my second question is just any way to quantify the increase in engagement that you're seeing, change in minutes per day being spent any sort of quantification around that would be great? Thanks.

[Mindy Grossman:]

Sure. So, we've obviously been pleased to see the digital recruitments, particularly in the last couple of weeks. And we will be identifying specifically. But overall, we've seen diversification of our digital memberships continue to accelerate. So we would see that being part of it. The one thing that's been very interesting is we've been really looking at the comments of new digital members coming into Connect. And what we are really seeing is this heightened sense of, I need to be healthy for myself and what is really driving people to join in this environment.One of the benefits we have because of our Connect platform and now with virtual group coaching, both qualitatively from our tracking measurement, and quantitatively from hearing and listening to people, we do a daily behavior change in real-time. And even over the course of this crisis, we've seen escalating recognition that people need to take a different assessment of their health, and it's got to be more of a necessity than a luxury.We also have definitely seen everything from changes in food tracking. So for example, flower ranking goods are up 52% people are at home, they're baking. So we've all pivoted and said what are our healthy recipes that we can give people. What are they looking for? You heard us say just in our ecommerce, our snacks, we just launched very quickly a whole flavored, do it yourself movie popcorn. I mean, we're really seeing what people are doing.In activity we're seeing not surprisingly, more workouts during the day not just morning and night, as people are home. Members are logging much longer walks, yoga frequency is up. So, that's really the level that we can see. Because we put in the healthy giving challenge, we're really seeing our wellness wins, escalate. And food tracking has definitely grown over the past couple of weeks. So, we will continue to be able to almost track behavior in real-time.

[Lauren Cassel:]

Great. Thanks so much.

[Operator:]

Our next question comes from Wendy Nicholson with Citibank. Please go ahead.

[Wendy Nicholson:]

Hi, good evening. My first question, I just wasn't clear on the $100 million in cost savings. I assume some of those are temporary. The executive compensation I assume will bump back up once we get through this. But what percentage of that $100 million in cost savings are permanent reductions to sort of the cost structure of the company?

[Nick Hotchkin:]

Great question. Thank you. Like, yes, the $100 million cost savings is -- this is the plan we had coming into 2020. And obviously, it's about getting the balance right between our excitement and our future opportunities and wanting to invest in the future, with the reality of this situation and wanting to take strong cost action to protect the downside.In three buckets, as you saw, G&A, marketing and operating expense. To your point, a lot of those G&A savings on the salary cuts, temporary move to a more efficient organization of course has lasting benefits.On the marketing side be clear, we're always going to invest behind marketing ideas that are working. On the cost of good sales side, look, as we shift to even more digital first strategy and wind up having a smaller studio footprint with fewer locations, that certainly has long-standing cost implications in terms of real estate.

[Wendy Nicholson:]

Okay. That's very helpful. And then my question on, I think, if I heard it right, you're increasing some of your marketing spending here in the June quarter, which is terrific. But, I guess,looking past-COVID and maybe when we all get back to more normal, not totally normal but more normal behavior, I guess the concern I have is on the lingering tail of sort of economic pressure and people who have lost their job, who might not be coming back to the workforce.So my question is, as you think about maybe increasing promotional spending, maybe lowering the cost of subscription, how do you think about that relative to advertising in terms of how much you want to invest, and in which bucket to sort of get as many members into the program on an affordable basis? Thanks.

[Mindy Grossman:]

Yes. Well, I think we can look at things two ways. One is and we have always felt that we want to be very much considered and accessible resource for people. So if you look at our digital membership for example, and certain promotions that we've done on x number of months free. We've seen longer commitment plans. So we're very agile in that.And actually what we've been doing is giving more and more value for what people are paying for. And I think that's really important. If you look at what people are getting for a digital subscription today, it is incredibly robust. And it becomes a real part of their life and day, and that's what's been important.The new vertical that we're going to be launching which is digital plus virtual group coaching, we see as another opportunity to not only give people the tools in digital, but to give them the coaching platform that people really want. And then we will still have our premium membership.So, of course, we're going to constantly look at what our promotions are. But really, what we're seeing, and I think the team has done an incredible job in marketing is to really quickly adjust the tone, the tenor, and what it is that people are really looking for and how are we going to approach them. And we're very fluid, and that's how we're looking at it right now.

[Nick Hotchkin:]

I think it sounds right. But just to add, we've got such a high incremental margin model that it always makes sense for us to spend marketing dollars, where it's working. As you can imagine, look, we're prepared for a wide range of scenarios here and looking at lots of modeling. And the future is hard to predict, but in the context of that $100 million savings plan a reasonable going in assumption is that the split of the savings could be roughly a third, a third, a third marketing G&A and cost of services. But of course, if in that context marketing is working, we'll put the dollars where they are working.

[Wendy Nicholson:]

Got it. That's very helpful color. Thank you so much.

[Operator:]

Our next question comes from Alex Fuhrman with Craig-Hallum. Please go ahead.

[Alex Fuhrman:]

Hi. Thank you very much for taking my question. Certainly, hope everyone at WW is doing well. One thing I wanted to ask about is Mindy, I think you'd commented in your prepared remarks that as you kind of look to 2021 and beyond, WW will likely have a smaller physical real estate footprint. I was wondering if you could talk a little bit more about that. Is that in some ways, kind of a reaction to what's been going on in the last couple of months? Or is there's always been within your plan that you've been executing over the last few years?Just curious, how we should think about, your physical locations and in terms of WW branded locations versus third party locations. And then, as you're starting to test more things like your partnership with Kohl's, how we should think about your footprint over the next few years?

[Mindy Grossman:]

Right. So, I'll make a few comments and I'll let Nick speak to this too. So, Alex, as you know, this has been an ongoing transformation of the business for a number of years. And as you know, our studio business is about 25% of the business. And we've been investing heavily in our digital assets and our evolution, frankly, to both diversify and broaden our base, as well as give members and give everyone really what they need. So, this is not an overnight reaction. However, it obviously stands to make sense that given the current environment, some of our plans will accelerate.As you know, around the world, we have branded locations and then we have other locations. Our primary focus right now is obviously safety and security, and when we do decide to open it will be very staggered.To your point, we definitely have an opportunity with partners to diversify both locations, whether they be for workshops, whether they be wellness check-ins, and a lot of different and we will continue to pursue those opportunities as well.Nick's been working very closely obviously with his role as the Head of North America, and working with the teams on the real estate strategy in the field. So, I'll let him talk a little bit about it. But it is definitely a work in process, because we're not planning to entertain any kind of reopening strategy until the end of May. And even then, it will be very controlled and measured and we will learn.

[Nick Hotchkin:]

I think that's absolutely right, Mindy. Hi, Alex. And so just to give a little bit of U.S. color but to echo Mindy as work in process position. Imagine like this as a location-by-location analysis and discussions with landlords et cetera. But in the United States we've got about 3,300 locations right now, and 2,500 of those are what we call studio at third party, very casual locations. 800 of those locations are studio.So, as we look at how best to serve our members going forward, you can imagine we're more likely to look at those studio ads that are close to our branded studios, and look at the opportunity to focus off footprint in some of those areas. But, especially since we've been so thrilled with the response to virtual studio and seeing our members enjoying it, we will be very thoughtful in our assessment.

[Alex Fuhrman:]

Great. Thanks that's really helpful. I appreciate the color. Thank you.

[Operator:]

Our next question comes from Kara Anderson with B. Riley FBR. Please go ahead.

[Kara Anderson:]

So, you've kind of touched on it a little bit Mindy, but I just wanted to get your perspective on how you think this business performs in a recessionary environment. Do you think that the work you've done to become more of a wellness company focused on health, with a pretty strong digital asset at this point makes you less susceptible to sort of in consumer discretionary budgets? And have you done any surveys or gathered any feedback from your members to see where they position you?

[Mindy Grossman:]

Yes. We've looked at historically and actually Nick can talk to this more over the course of different years, including 2008, 2007, et cetera. And we haven't had the big swings of impact, I think part of it's because of our accessibility, and very importantly, the fact that we have community that's particularly powerful from a retention point of view. But, clearly, everybody's seeing impact right now, but what I'm very focused on is, as consumers move out of this, what are they going to be looking for?And, as I mentioned earlier, this idea of health and wellness not being a luxury, but a necessity in people's minds. And if you marry that to community motivation and support, this idea of healthy habit formation as a ritual is more important than ever and so is trust. And so, I think for us, our focus has been how do we leverage 57 years of what we've been able to provide people, and do that even more and even more broadly, and how we reach people coming out of this, I think is going to be more important than ever.

[Nick Hotchkin:]

Totally agreed. And as you can imagine, we look at a lot of history, and especially in the context that it's clear here that, our revenue and our financial performance will be below what we have planned when we entered the year. But, when you look back to the last recession, if you look at 2008 to 2009 period, the company was so different. The digital business was in its infancy. We didn't have an app. The subscription business, the shift to monthly pass was in its infancy.So, like any other company here will we be impacted, while our studios are closed? Absolutely. But what we're seeing here, especially from virtual studio, there's such a customer need for coaching in a virtual world. And so adding our coaching strategy to content focus and the community that we've always excelled that’s providing. Now that's kind of how we're thinking through managing in a potentially recessionary environment.And to be clear, why I mentioned we're prepared for a wide range of scenarios, we're not expecting a quick snap back here. We're forming our plans, assuming that the economy and consumer behavior will be impacted for more than a few months.

[Kara Anderson:]

And a quick follow-up on some other comments, just curious if you've seen any patterns or trends in recruitment, in this pandemic as things have improved in some areas, if you've seen any specific geographies trends emerging?

[Mindy Grossman:]

Yes. The impact as well as the recovery, particularly in digital has been global. It's been pretty consistent.

[Kara Anderson:]

Great. Thank you so much.

[Mindy Grossman:]

Thanks.

[Operator:]

Our next question will come from Edward Yruma with KeyBanc Capital Markets. Please go ahead.

[Edward Yruma:]

Hey, guys. Thanks for taking my question. I hope all is well and hope you and your teams. I guess first, on the studios business, are you paying rent, while the studios are closed? And do you have any potential relief from your landlords? And then I guess, second, as you think about I think as mentioned, kind of length of stay is still around 10 months. What behaviors are you seeing of the traditional studio customer from a retention perspective? And I guess, is it fair to assume that despite kind of virtual studio opportunities that their retention may see some temporary impact given the studio closures? Thank you.

[Nick Hotchkin:]

Yes. Let me take the real estate question first. Going back to my illustration of 2,500 third party locations in the United States. We pay for those, when we use them. On the 800 branded studios, we have been fulfilling our lease obligations, as you can imagine. We are and we will be in conversations with the landlords going forward in this environment.In terms of retention, I've been pleased that we haven't seen a meaningful uptick in cancellation rates, and that retention has held at 10 months. Obviously, I can't predict the future, but I'm pleased that our strategy of adding content, and so quickly transitioning to a virtual studio product has been working well for us.

[Edward Yruma:]

Thank you.

[Operator:]

Our next question comes from Brian Nagel with Oppenheimer. Please go ahead.

[Brian Nagel:]

Good afternoon. Thank you for taking my questions. So, I want to -- I mean, we've a bit of a follow-ups from the prior questions. But just to really focused on this improving trend, that you've seen during the last -- improving subscriber growth trend last couple of weeks. So I understand better. In your prepared comments, you mentioned that Easter served as historically as Easter served as a catalyst there. Is there also stepped up or improved messaging on the part of WW that's helped to drive this trend later?

[Mindy Grossman:]

So we take it two ways. As I said, growth in digital membership is where we've seen the uptick. But what we did when this entire crisis started, we withdrew every piece of content that we had in market. And that team pivoted, as I said in kind of my prepared remarks, we ramped up our content machine, both in social as well as our digital platforms. The TV that we've been running for the past couple of weeks, it's real people, real stories, real world support. And so the tone and tenor has obviously been relevant to the environment.Our next phase of our TV campaign also inclusive of real members, including Oprah, and that will launch. But, the message is really we're here from you, we're here for you. We are here for all your wellness needs, certainly, weight being part of that and community being part of that. So I think that message is resonating. And I think we do have this ability to listen and hear in real time. So what the marketing teams have done is work to have the highest degree of flexibility in terms of the both what the content is, as well as where the content platforms are. And we'll continue to do that.

[Brian Nagel:]

That's very helpful. And then as a follow-up to that Mindy. As I've been speaking with a number of consumer type companies through this crisis. So one theme I'm hearing rather consistently is declining rates for digital marketing. So I guess the question I would have is, I don’t know recognizing it goes back to your comments, Nick that you heard this -- your saving costs, and you laid that out very well. But are you seeing declining rates? And as we think, as you begin to pull out is potentially, could you lead even further into your marketing as a result of these lower rates?

[Mindy Grossman:]

Look, what Nick has said, as we've outlined even our cost efficiencies, particularly in the marketing area, if we see performance and if we see what we're doing working and great efficiency, we're going to spend against it because it's going to have impact.

[Brian Nagel:]

Thank you very much.

[Mindy Grossman:]

Thank you.

[Operator:]

Our next question will come from Michael Lasser with UBS. Please go ahead.

[Michael Lasser:]

Good evening. Thank you all for taking my question. Nick, I know you're not providing guidance, but trying to model your second quarter is uniquely difficult. Can you provide some help on how we should be framing at least the studio business? The digital business is pretty straightforward, but studio business, how should we be thinking about modeling that in the second quarter?

[Nick Hotchkin:]

Yes. Hi, Michael. If you look at the components of the revenue as you clearly say, having the digital business trends and growing in the last two weeks is very encouraging. Having retention hold at 10 months, has also been a bright spot. So, the remaining two key factors on the revenue side of course, studio recruits from the middle of March through now, they have been very weak. And so I think since the end of the quarter as the decline from 5 million to 4.9 million subscribers in total is primarily reflective of that weak studio recruitment environment. So the Q2 revenue picture is impacted by that. And, of course what is being closed for studios through the end of May, I think the studio revenue was the main factor impacting Q2.The other final contributor to the revenue picture product sales. But, we've been very pleased with our growth in our ecommerce business, as Mindy mentioned, in the Q2 where the studios are closed. Yes, it's unlikely that while ecommerce is growing fantastically, it's unlikely that the ecommerce can offset the fact that we're not selling any consumer products in our studios right now.So, I think those are the moving parts on the revenue side. And then of course, on the cost side, you see us moving very quickly on every aspect of our cost structure to make sure that we can maintain our margins where we can. But of course, less revenue hurts margin.

[Michael Lasser:]

I'm so sorry if I missed this. But when -- as the studios are closed, do you collect the revenue from paid weeks from -- from your studio subscribers?

[Mindy Grossman:]

So, I think it's really important to note that this pivot that we made to virtual studios, as well as enhance Connect Group, and as well as the online digital content, we're actually providingour studio members with the same coach level of support and their community, as well as new enhanced Connect Groups in between, which is why our retention is holding at that 10 months.

[Nick Hotchkin:]

Absolutely.

[Michael Lasser:]

But are you getting any indications that once those members in the studio business their paid week runs out because they're not -- they don't have anyone to go and maybe they don't find value in that, that you're going to see your retention fall in the coming month?

[Mindy Grossman:]

We're obviously focused on providing all our members with what they need to maintain their community. And I think you heard all of the assets that we've launched that were in the pipeline. And we'll continue to obviously serve our members and support them as much as possible. And then we're going to learn a lot as we start reopening studios, what assets and what sort of relationship members want to have.

[Michael Lasser:]

Understood. Thank you very much, and good luck.

[Mindy Grossman:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mindy Grossman for any closing remarks.

[Mindy Grossman:]

Well, thank you, everyone. We're confident that we're focused on the right actions certainly not only to best serve our members today, but to position WW as a leader in delivering human impact through technology. And creating community has always been at the heart of what we do. I think it's even more important today to create meaningful communities that allow our existing members to connect. But it's also going to allow us to diversify our consumer base and maximize engagement.So I believe that this combined with consumers heightened awareness and need for weight loss, and healthy living solutions positions us well for the future. We're going to continue to focus and prioritize coaching, community, created content, and thought leadership to our members in ways that are personal and authentic.And I really want to once again, thank our passionate and talented WW team, for always keeping our members at the forefront, and continuing to innovate and to create value for them and for WW. So thanks, everyone for joining us today. I hope you and yours are well. And I look forward to speaking with everyone again soon.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.