WW International, Inc.
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Good afternoon and welcome to the Weight Watchers First Quarter 2017 Earnings Conference call. All participants will be in listen-only mode. 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, Investor Relations. Please go ahead.

[Corey Kinger:]

Thank you, Gary and thank you to everyone for joining us today for Weight Watchers International's first quarter 2017 conference call. At about 4

[Christopher J. Sobecki:]

Thanks, Corey and good afternoon everyone and thank you for joining us. Today, I will discuss our first quarter performance and successful winter season. Nick will then provide further detail on our financial results and our improved outlook for the year, and Thilo will wrap up with an overview of our progress to-date. But before discussing the results, I'd like to start by highlighting last week's announcement that Mindy Grossman will be joining Weight Watchers in July as CEO. Mindy is coming from HSN, where she has been CEO since 2008. Under her leadership, HSN transformed into a lifestyle network, launched industry-leading digital innovations, and formed unique partnerships with leading brands and personalities. She is widely recognized as a business leader and innovator. Mindy's outstanding track record in executing business transformations, her bold, innovative thinking, and her understanding and focus on the customer experience make her the perfect leader to unlock Weight Watchers' full potential. Now, turning to the first quarter performance, in Q1, we continued to build on last year's recruitment momentum and delivered the best quarter in recent times. Q1 global member recruitment was up in the double digits, on top of double-digit growth in last year's first quarter, with good performance at our Meetings business and particular strength in Online. As Nick will discuss, this momentum translated into revenue growth of 9% on a constant currency basis, and with our high-margin business model, this strength flowed through to the bottom line. Q1 was the sixth consecutive quarter of positive year-over-year member recruitment. End of Period Subscribers increased 16% over the prior year to 3.6 million, with Meeting End of Period Subscribers up 11% to 1.5 million and Online End of Period Subscribers up 20 % to 2.1 million. Total Paid Weeks were up 13% in Q1 with Meetings up 8% and Online up 17%. North America, our largest market, delivered good performance in Q1 in both Meetings and Online. In addition to the continued improvements we're making to our products and services, we are continuing to refine our promotional strategies and strengthen our capabilities and execution across all areas of our marketing mix, including broadcast, digital and social channels. Weight Watchers continues to benefit from Oprah Winfrey's involvement. Examples include the significant media coverage we received during the winter season in North America, with great interest in her success in the program as well as her cookbook titled Food, Health and Happiness. Beyond celebrating Oprah and other members' success in our U.S. winter season TV campaign, we also launched a new subscriber feature, which we call Connecting with Oprah, where she inspires and engages with members. Now, turning to international. As we discussed on our last call, we are applying many of the key learnings that were fundamental to turning around North America to our international markets, and I'm happy to report that it is working. Our international performance has markedly improved versus last year. In addition to benefiting from the same product improvements that are helping North America, our teams are doing a great job in better optimizing the visitor site experience in these markets, rolling out effective marketing campaigns and promotional programs. Continental Europe delivered strong member recruitments in Q1, primarily driven by growth in Online. While Q1 member recruitment in the U.K. remained down year-over-year, Online member recruitment was positive. The U.K. team, supported with key global resources, is highly focused and we are taking steps to begin to turnaround this business in the U.K. Let me close my section by saying the entire Weight Watchers' team is excited that Mindy will be joining to lead this company going forward. She will bring vision and passion for where we can go and what we can be. On behalf of the Board, I also want to thank everyone across our global businesses who have worked tirelessly over the last few years to turn this business around. Versus where we were, our program is better, our digital products are better, our Meeting experience is better, and our members recognizing it and they're benefiting from it. On many, many dimensions, our teams are executing better and more consistently, and our improving results reflect those efforts. Overall, with two strong winter seasons in a row, we have strong momentum heading into the rest of 2017. To sustain this momentum, we remain focused on member experience, fast action and engagement. While it's too early to a have read into the spring season, as our advertising campaigns just kicked off, we are confident in our marketing approach. Our campaigns are based on recent learnings, highlight living a joyful life in Weight Watchers, invoke the power of the Weight Watchers' community. Our proven program, foundational capabilities and strong reputation for efficacy and trust provide us with immense opportunities to further advance our offerings and brand in the years ahead. I'll now like to pass it to Nick.

[Nicholas P. Hotchkin:]

Thanks, Chris. Q1 was a strong quarter. On a year-over-year basis, revenue was up 9% on constant currency, paid weeks grew 13%, and End of Period Subscribers increased 16%. It's great to see such positive momentum in the business and we are intensely focused on delivering sustainable growth throughout 2017 and beyond. For those of you who are newer to our story, I'd like to take a moment to explain our business model, specifically, the lag from recruitment growth to revenue growth and the flow-through to the bottom line. Using the U.S. as an example, our typical customer joins with a three months' commitment and receives a discount for that initial period, followed by monthly renewals that are full rate; in the U.S., $44.95 a month for Meetings or $19.95 a month for Online. Our average retention or length of stay is eight to nine months. We are a seasonal business with approximately 40% of our annual member recruitment and a disproportionate amount of annual marketing expense occurring in the first quarter. As such, Q1 bears the lion's share of the cost of attracting new members that captures only a portion of the associated revenue. Given solid member recruitment growth throughout 2016, we ended 2017 with 230,000 more subscribers than the prior year. This tailwind entering 2017, combined with strong member recruitments in winter 2017, generated Q1 revenue of $329 million, up 9% or $27 million on a constant-currency basis, and operating income of $30 million, up $17 million versus prior year on a constant-currency basis. This reflects the operating leverage in our business model and the low incremental cost to serve new recruits. GAAP EPS was $0.16, which included a net benefit of $0.17 related to the previously announced cessation of operations in Spain. This reflected a tax benefit of $0.18 per share, offset by $0.01 per share of related expense. For reference, in the prior-year first quarter, GAAP EPS was a loss of $0.17. Going into 2017, we are focused on maintaining momentum in North America and improving its national performance. We are successfully delivering on these goals. In Q1, on a year-over-year basis, North America revenue increased 11% on constant currency and End of Period Subscribers increased 17%. In Continental Europe led by our largest markets, Germany and France, revenue increased 7% on constant currency and End of Period Subscribers increased 19%. In the U.K., while revenue declined 4% on constant currency due to continued weakness in the Meetings business, End of Period Subscribers increased 7%, primarily due to Online subscriber growth. And now, I'd like to update our outlook for 2017. We expect revenue momentum will continue to build throughout the year with Online growing faster than Meetings, with full-year 2017 revenue north of $1.25 billion. Note that 2017 includes an expected negative foreign exchange revenue impact of $15 million. We are raising our full-year GAAP EPS guidance to a range of $1.40 to $1.50, reflecting the strong Q1 performance and our continued confidence for the year. For the remainder of my comments, I will speak to the midpoint of our full-year EPS range and on a constant-currency basis. In North America, we expect full-year revenues to be up in the low-double digits, reflecting continued momentum. In the U.K., we now expect full-year revenue to be down in the low-single digits. And for CE, we now expect full-year revenue to be up in the mid- to high-single digits. Reflecting cost efficiencies at higher volumes and stronger-than-anticipated Q1 performance, we now expect gross margin to expand approximately 125 basis points for the full year. This reflects improved operating leverage, partially offset by investments in product development, and a lower contribution from licensing. We continue to balance investments in growth initiatives with cost discipline. Marketing expense is expected to be approximately $200 million for the full year and G&A expense is also expected to be approximately $200 million for the year. Below the line for the year, we expect interest expense to be approximately $111 million, and we are assuming a tax rate of approximately 30% for the full year, which incorporates the Spain tax benefits. We expect CapEx, primarily driven by tech spend and capitalized software, to be consistent with prior-year levels at approximately $35 million, and D&A is expected to be $50 million. We continue to have a strong liquidity position. We ended the quarter with $135 million in cash and no draw on the revolver. And for the full year, we expect EBITDAS north of $300 million. As a reminder, our $2 billion B2 term loan is not due until 2020. Our debt has no financial leverage covenants, and we have the ability to prepay before maturity. As discussed previously, we are targeting a net debt to EBITDAS ratio of less than 4.5 times by year end 2018. With that, I would like to turn it over to Thilo.

[Thilo Semmelbauer:]

Thanks, Nick. It's great to see the benefits from the many enhancements and changes we've made now coming to fruition. An increased focus on consumer insights informed many of the improvements we've made from the meeting room to our digital products, from sign up and on boarding to ongoing engagement. In addition, our partnership with Oprah has greatly accelerated our progress. She is a passionate member and a strong strategic voice for the company. Our strong Online performance in Q1 with paid weeks up 17% year-over-year, coupled with the strong Online usage and engagement metrics that we're seeing, validates our offerings in a market filled with countless free apps. In addition, we're pleased to see the strength of Online across most of our international markets. It gives us confidence in our technology strategy, which combines a vastly improved global technology platform with localization and customization. The agile process that's now in place is all about continuous improvement, incorporating feedback from our members, testing and rolling out enhancements and new features. Over a year ago, we marked a major evolution in the Weight Watchers' program with the launch of Beyond the Scale, which inspires and guides members to eat better, move more and start to shift their mindset. This holistic approach is resonating with consumers, and importantly, it is delivering improved weight loss success. We will continue to enhance and evolve our program under this healthy lifestyle approach. Finally, and as Chris mentioned, we're excited that Mindy Grossman will be joining as Weight Watchers' CEO in July. Until then, Chris, Nick and I are fully engaged working with the Weight Watchers team on delivering our plan to improve the member experience and accelerate member growth. I'd also like to take a moment to thank the entire Weight Watchers team. The progress we've made is the direct result of your dedication and shared passion in helping transform the lives of people around the world through weight loss and healthier living, and I believe the best is yet to come. To those on the call, thank you for joining us today and we'll turn the call to the operator for Q&A.

[Operator:]

We will now begin the question-and-answer session The first question comes from Alex Fuhrman from Craig-Hallum. Please go ahead.

[Alex Joseph Fuhrman:]

Great. Thanks so much for taking my question and congratulations on another terrific diet season. I'd love to start by asking, I mean, obviously, the big news this month is Mindy Grossman joining Weight Watchers as CEO. I think that was certainly a positive surprise to most people when we saw this – we'd love to get just a little bit of background on how that came to be. Obviously, anyone who's looked at HSN closely knows Mindy has been there a tremendously long time, would be curious how you were able to get her to join Weight Watchers. And then looking out to her start in July, I mean, obviously, the company has made tremendous progress over the past year or year-and-a-half, I mean, doesn't seem like there are really any fires that need to put out or crises to be dealt with. You know, we'd be wondering what you might anticipate Mindy will have on her plate in terms of projects when she starts with the company in July, what some of the things that she might look to be working on this year before the end of 2017. And then I suppose as a related question, as you look ahead to diet season 2018, at what point in the year would you normally expect to have your marketing plans finalized?

[Christopher J. Sobecki:]

This is Chris, Alex. Thank you for your questions. Maybe just starting with – you asked for some color on the process. Let me start by saying that the board entered this process really for the first time certainly since we've been involved with the idea of going outside and finding the best possible candidate. And I think the establishment of the office for the CEO was meant to provide stability and leadership in this interim period, so it wasn't going to be any time pressure in terms of the process. So the process was thorough. It was – we had the fortunate that attracted a lot of interest. We saw a lot of terrific candidates. But at end of the day, Mindy was the board's number one pick. And we were fortunate enough to – that she was excited about the opportunity. I think we're aligned with her and we have – Weight Watchers as a company is – we're only touching a very small fraction of the market that we're going after. And I think what we see and what she sees is the opportunity, now that we have a solid foundation, we have positive mix, and we have a pipeline of innovation that's there is how do we take this company forward and move it to a whole new level. I think we're excited, she is excited, and I think we are fortunate to end up with a terrific person to lead this company going forward. So, she is going to start in July, as you mentioned. I'd rather not go in – I am going to let her speak for herself when she arrives in terms of what her areas of focus will be and so on. So I'll let her speak for herself, specifically, on that point when she arrives. And you're right, we're not fighting a kind of fires right now. So I'm sure she will engage and she has certainly ideas of where she wants to take the company. As far as the diet season 2018, the planning, it has been and continues underway. I mean, we certainly believe we know – we know where we're going. There's a lot of work to be done. But these are things that the day we – by the time we get to January 1 of 2017, we're ready working what we're going to do in 2018. So we're excited about where we're going. And I guess I'll stop there.

[Alex Joseph Fuhrman:]

Great. That's terrific. That's certainly very helpful. The other thing I wanted to ask about just looking at the results, it seems like the U.K. business, particularly Online, has really rapidly looks like hit an inflection point. Just wondering if there was any specific thing driving that, a significant change to how you do business over there? Or maybe your marketing program for this year? Do you think that maybe you're starting to take some market share back in the U.K. or not sure it may be too soon to make that call, but just wondering what is driving the pretty quick inflection point there in the Online business in the U.K.

[Christopher J. Sobecki:]

I think, one thing, I think Thilo spoke to on the call, I think the whole digital – we're doing well in Online across the board including the U.K., I think the digital product – the experience to our members improved significantly over the last year or so. I think that's certainly part of it. When you have a better product, people are going to be more receptive to it. I think we've begun to take some early steps in terms of improvement, execution on the marketing side in the U.K.; I think that's certainly a driver. We've spoken in the past, the U.K. is a little bit but unique situation that we have a long-time entrenched Meeting's competitor in the U.K. and we, obviously, as we mentioned in our remarks, we are focused on turning around not only the Online business, but the Meeting business as well. But I think the Online is kind of a leading indicator of where we're going.

[Thilo Semmelbauer:]

Yeah. This is Thilo. I'll just follow up on Online a little bit. I think, we're pleased with the performance. The paid week is up 17% globally with Online. Why is it? I think, the bottom line, it's a much better product than a year ago. We've made improvements not only in conversion from the visitor side, but in on-boarding new users to learn the program and our tools. It's easier to track, it's easier to find recipes. For our members, we now have a streaming platform for video, which we're using for Connecting with Oprah. So there's been a tremendous improvement in the stability. So, the result is that the ratings of our apps in the U. S. and in other markets are consistently now 4 stars to 4.5 stars, where a year ago, it was much lower. And while we don't disclose our engagement metrics, we're really seeing strong engagement with the product. So that's very gratifying. And I think, again, it shows that the value proposition of our offering is very sound.

[Alex Joseph Fuhrman:]

That's very helpful. Thank you very much.

[Operator:]

The next question comes from Frank Camma with Sidoti. Please go ahead.

[Frank Camma:]

Good afternoon, guys, and congratulations. Just a couple of quick ones. Just a follow-up on the Online, did you see any change in sort of the demographic of your customer on the Online that you can talk about from years past?

[Christopher J. Sobecki:]

This is Chris. I don't think we're seeing any dramatic shift in the demographics. I think we spoke in the past, we have a lot of efforts underway as we look to shift those demographics – for example, go after the millennials. But we have a lot of millennials, I think a lot of that work is still due to come, and certainly it's not driving our first quarter.

[Frank Camma:]

Interesting. And on pricing, because you made the comments about the pricing, with discounting and stuff, which you obviously always do in the beginning of the year. But can you talk about what you expect sort of over time as those discounts – do you expect to kind of push the discounting as hard this year or do you feel that the offering can sell itself? So wondering if you can just talk about that a little bit.

[Nicholas P. Hotchkin:]

Hey, Frank, it's Nick. It's a good question. When I look at the Q1 versus our expectations, I was pleased that it was driven by revenue coming in a bit higher than we'd anticipated. And part of that was a strong March; part of that was product sales were good; but part of it was also team really focusing on good price realization. So we're pleased with our price realization in the first quarter. We're very focused on it going through the year. It was part of what allowed such a high percentage of our revenue growth to flow through to the bottom line, and when we look at our pricing equation, it's about giving people a reason to go from contemplating starting a journey to taking action. And the team globally has just done great work on creating what we call urgency moments, which aren't necessarily high economic discounts, but innovative ways to get people to think about engaging with Weight Watchers, and we've got good plans for that to continue this year.

[Frank Camma:]

Okay. Good. And my last question is just on the marketing spend since it was little less than I had modeled. Is that because you think you've got more effective spending or you just pulled back a little bit? Just wondering if you can just talk about that in general, just a level of spending relative to the revenue.

[Nicholas P. Hotchkin:]

Yeah. Obviously, marketing spend very important for us in the first quarter where we get about 40% of our recruits. So we were very, very visible. And we wind up spending essentially the same amount as we spent last year, despite January 1 and January 2 falling in this fiscal year and adding a week to our winter campaign. I think that gets to all the work that team is doing, maximizing our marketing efficiency and optimizing channels, digital and eCRM and particularly in Q1 were working well for us.

[Frank Camma:]

Great. Thanks, guys.

[Operator:]

The next question comes from R.J. Hottovy with Morningstar Research. Please go ahead.

[R.J. Hottovy:]

Thanks. I had a follow-up question on the earlier question about demographics and expanding the reach possibly there. Wanted to see if you have any thoughts about as Online has been growing faster, about maybe pushing the envelope a little bit harder on that, and whether or not that success you had there made you rethink your capital allocation policies, versus Online versus Meetings, to maybe go after that market a little bit more aggressively. Obviously, with the new CEO coming in, some of this may change with her insight, but just wanted to see preliminary what you are doing more aggressively to reach out there? What are the most near-term milestones you're looking forward to reach a wider demographic?

[Nicholas P. Hotchkin:]

Yeah, R.J., thanks for that. Let me start. I mean, I just want to stress that not only was Q1 a strong quarter, it was a balanced quarter also. So recruits were positive in both Online and Meetings. And bear in mind that the Meetings business was particularly strong last winter season. So, good to see within that 13% global paid weeks growth, 8% Meetings growth and 17% Online growth. So it was a strong, but a balanced quarter. And, of course, much improved digital presence and Online tools used by our Meeting members also. So it's been a really great add to the brand. I think going forward, we clearly have opportunities to have Weight Watchers appeal to a younger audience.

[R.J. Hottovy:]

Thanks. And just my follow-up – my next question – just had to do on your latest thoughts on your wearables strategy, and just kind of where we stand with that? I know there's sort of lot of partnerships signed the last couple of years. And just kind of latest thoughts on what's working? What might not be working? And just generally, broadly speaking, what your latest thoughts are on your wearables partnerships?

[Christopher J. Sobecki:]

I mean, we – many of our members are tied to activity monitors. I mean, we have a – and we connect – our apps will connect with, I think, most of the leading activity monitors out there and it ties into the app and helps them track FitPoints. And I think, we feel that for many people, an activity monitor tied to our program is big benefit to them. So that's – that continues to be the case. And we're tying those through – with approaches and tie-ins with a number of those providers. And our members choose which route they want to go.

[Thilo Semmelbauer:]

Yeah, this is Thilo following up on what Chris said, it's highly complementary to our offering for those members that find wearables helpful. We also believe that wearables by themselves are not the solution, and we see more and more of our members frankly doing both.

[Operator:]

This concludes the question-and-answer session. And the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.