WW International, Inc.
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Good day, and welcome to the Weight Watchers First Quarter 2018 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, Cameron, and thank you to everyone for joining us today for Weight Watchers International's first quarter 2018 conference call. At about 4

[Mindy F. Grossman:]

Thanks, Corey. Good afternoon, everyone. Great to be speaking with you today. We ended the quarter with 4.6 million subscribers worldwide, the highest level in the history of Weight Watchers, driven by the enthusiastic global response to our new program. To put that into context, that's an increase of 1 million subscribers from a year ago. Furthermore, our average retention is well over nine months, also the highest level in our company history. Our member recruitment performance coupled with record retention fueled strong financial performance in the first quarter. And the power of our high margin subscription business model was readily apparent with strong flow-through to profitability. On a year-over-year and constant currency basis, revenue was up 20%, an acceleration from prior year level. Gross margins expanded 410 basis points, and operating income nearly doubled. Importantly, the strength was global with North America, Continental Europe and the UK markets all delivering double-digit revenue growth and higher profitability. Weight Watchers has always been the authority on healthy effective sustainable weight loss and weight management. 2018 is no different with our new program supported by excellent marketing propelling growth worldwide. WW Freestyle, as it is known in the U.S., is our most flexible, livable program ever. Ahead of our winter season, we enhanced our highly successful and effective SmartPoints system by expanding zero Points foods from only fruits and vegetables to more than 200 delicious satisfying foods, which encourage members to eat healthier. Across the world, our members are realizing weight loss that meets or exceeds that from our prior program, which is notable considering our members now have more than 200 zero Points foods they can enjoy without tracking. Member engagement has been incredible. Our impactful program and marketing message resonated with consumers in all of our major markets, driving strong member recruitment throughout Q1. And in fact, our top global signup days in our history occurred in the first two weeks of 2018. Our winter marketing campaign was our most globally coordinated and integrated to-date, spanning TV, digital and social media, and highlighting the freedom and flexibility of the Weight Watchers program with enthusiasm and joy from real members. In addition to our largest market, North America, delivering a third strong winter season in a row, our international markets performed very well with our largest Continental European markets, France and Germany, achieving record member recruits in the quarter. France was our strongest performing market in Q1 with a breakthrough marketing campaign featuring singer Hélène Ségara. Across all our markets, we are making significant progress in integrating our marketing campaigns across all channels, including TV, digital media and social. In Germany, using our creative both on television and in online video with effective and expanding our reach. And in the U.S., our ad campaigns featuring Oprah Winfrey highlighted the freedom and simplicity of WW Freestyle. Starting in January, WW Ambassador, DJ Khaled engaged with and entertained millions on social media, and the enthusiastic positive response by his followers has been remarkable. To demonstrate the livability of the program, we went on the road during DJ Khaled's North America concert tour in a one of a kind activation. Khaled's Kitchen, an immersive food truck experience, gave people a taste of WW Freestyle, and showed how healthy can fit it into any lifestyle anywhere. I had the opportunity to attend the Chicago stop, and it was an amazing fun experience to see DJ Khaled and Chef Melissa share the freedom and flexibility of WW Freestyle with fans. The themes that drove our performance in Q1 have continued into the spring season with integrated marketing campaigns encompassing television, digital, social and leveraging our influencers and ambassadors. For example, in the UK, we work with the Chef'd social media influencer to launch our new Bakes cookbook, with a social media campaign including a #wwbakesmembercompetition (00

[Nicholas P. Hotchkin:]

Thanks, Mindy. Our momentum accelerated in the first quarter of 2018 with strong global recruitment and retention, driving top line growth and margin expansion. But before I get into the results, for those of you who are newer to our story, the core of our business is our high-margin subscription business model. Monthly subscriptions account for approximately 80% of our total revenue, and we are able to use marketing very effectively to drive recruitment. Using the U.S. as an example, the majority of our members join with a three month or longer commitment and receive a discount for that initial period, followed by monthly renewals at our full rate of $19.95 a month for online or $44.95 a month to also include meetings. We have predictable seasonal trends with approximately 40% of our annual member recruitment and annual marketing expense occurring in the first quarter. As such, Q1 bears the lion's share of the costs of attracting new members that captures only a portion of the associated revenue. On a global basis, average retention is now well over nine months in both meetings and online, representing more than 15% increase versus three years ago. This reflects improvements in the member experience and increasing engagement with tools like Connect, our social media platform, embedded in our app. We have also seen success in our long-term commitment plan offerings. Looking at the U.S. signups in Q1, 25% chose an initial six-month plan versus only 5% taking the six-month option a year ago. Turning to our Q1 performance, year-over-year recruitment growth rates comfortably exceeded levels attained during our last two winter seasons, bringing our end-of-period subscribers to 4.6 million, up 1 million or 29% from prior year, driven by very strong WW online performance. Total paid weeks were up 27% year-over-year in Q1, with double-digit gains in all of our major geographies. Q1 total revenue of $408 million increased $64 million or 20% year over year on a constant currency basis, an acceleration from the 14% year-over-year growth rate we saw in Q3 and Q4 of 2017. The strong operating leverage in our business model is reflected in the strong flow-through to profitability in the quarter. Gross margin rate was 54%, up 410 basis points year-over-year on constant currency. And operating income of $62 million increased $29 million or nearly doubled on a constant currency basis from the prior year first quarter, with 580 basis points of operating margin expansion. And while marketing expense was higher on a year-over-year basis, it declined as a percent of sales, as we focused on the efficiency of our spend. To demonstrate the effectiveness of our marketing, looking at our U.S. signups in Q1, the ratio of subscriber value to cost per acquisition was 5

[Mindy F. Grossman:]

Thanks, Nick. In February, we shared our bold move, our new purpose and vision to become a leading global healthy living brand. Our purpose is to inspire healthy habits for real life for people, families, communities, the world, for everyone. Not only am I pleased with our strong performance in Q1, and even more pleased and impressed by the progress our team has made in internalizing our purpose and operationalizing our bold moves. Our ambition is to be the health partner for everyone, democratizing access to wellness. 95% of people trying to lose weight are doing it on their own. We want to help them inspire them and be part of their journey to lead healthier lives. The world doesn't need another diet. The world needs a leader in wellness and a brand that can bring wellness to everyone, not just a few. We want to bring wellness to all people, no matter age, gender, race, ethnicity, life stage, geographic location or income. It is our intention to bring science and scale not only to weight management, but also increasingly to activity and positive mindset through partnerships and collaboration. Everything we do is first screened to our purpose filter and through the lens of member recruitment and retention. And I'd like to highlight five key initiatives that will have impact on 2018 and beyond. The first is Summer of Impact, people want to get healthy year-around, not just in January. All you need to do is look at Google Search trends to know that. We're preparing to launch our Summer of Impact, a global campaign, celebrating the Freestyle You (00

[Operator:]

Thank you. Your first question comes from Alex Fuhrman from Craig-Hallum Capital Group. Please go ahead.

[Alex Joseph Fuhrman:]

Hi. Thank you very much for taking my question, and congratulations on a really terrific start to the year.

[Mindy F. Grossman:]

Thanks. Alex.

[Alex Joseph Fuhrman:]

So, wanted to ask a little bit more about the Freestyle program. Seems like that that's been a real home run for the company this year. A couple of things I'm curious about, now that you have a few months under the belt, I mean it's obviously a much more simple program for members to follow. Have people been losing the same amount of weight or are reaching the same health goals as they have under the prior program? And then, just thinking more broadly about the new people that you've been attracting, since you switched over to the Freestyle program, how does that cohort look compared to the people who joined under the prior program? Do people have the same health goals? Is it still looking to lose the same amount of weight? And then, you mentioned some very impressive statistics about user engagement and how many items are being tracked and scanned and logged. Has that changed at all since the program has turned over to Freestyle?

[Mindy F. Grossman:]

Sure. So, we could not be more pleased with the engagement with Freestyle, and actually our members have been losing equal to more weight on the program and that's with the addition of the 200 free foods. And you used the word simplicity, it's so important for our members they have a program that so easily fit into their and their families' lives, and that's what they're really appreciating and, of course, it works. So that's a proof point. In terms of – I think you saw the 40% number of new recruits. What we are seeing is a big change in the conversation around Weight Watchers around a broader set of cohorts, and that's what we're excited about. So, if you look at Kevin Smith, DJ Khaled, Chef Eric Greenspan, all of a sudden, there's conversations around young dads. So, we have very specific goals and in today's worlds of marketing, we can be a discrete around custom audiences, we can target the right influencers who are going to inspire other people. So, you will see over the course of the year and the next year, the diversification of our marketing and our influencer base to be able to do that. And we're definitely seeing and we do a lot of customer insight surveys that there is a greater awareness of Weight Watchers and a greater awareness of us as a wellness company, not just as a weight company. Now, I do want to say that we will never lose our position as the number one leader in healthy weight loss management around the globe. We know it's still very critical. We want to impact the health of people, but if we can move that into a bigger, broader perspective, that's even stronger as we integrate activity and mindset, because that is people's all the tools that are going to help them on that journey.

[Nicholas P. Hotchkin:]

Hey, Alex. This is Nick. Just to add, Freestyle is our homerun, but we're really reaping the benefits of having developed a world-class digital app to support all of our 4.6 million subscribers, and that's why that retention now is well over nine months, an all-time high.

[Alex Joseph Fuhrman:]

That's great. Thank you both. And then, would love to ask, if I could, it's about your advertising. I'm sure a lot of people on the call have seen the commercials that you started coming out with a couple of weeks ago. If I recall, I don't think you really did much advertising in the first few weeks of April last year, and it sounds like the campaign has gone well. So, looking ahead to your Summer of Impact campaign, and you haven't really advertised historically much in the summer. Can you talk a little bit about the opportunity to become a little bit more of a year-around presence on advertising? If I recall there were some times also in the fall in October and November, where there wasn't a lot of advertising? Is the plan to be having some level of marketing and advertising consistently throughout the year now?

[Mindy F. Grossman:]

Yes. So, we believe that we should have an ongoing presence around healthy living. Now, that does not mean there aren't going to be, what I call, the Pavlovian times of year that you will ramp that up, whether that's January, whether that's in summer. But we believe that a more regular cadence is how we want to approach it. I think you also heard from Nick that (00

[Nicholas P. Hotchkin:]

Okay. Look, I think the strategy of ambassadors and influencers is really enabling us to be visible throughout the year also.

[Alex Joseph Fuhrman:]

Thank you very much. And then, lastly, if I could just ask, I think you mentioned in the prepared remarks that it struck me that – correct me, if I'm wrong about the numbers. But I think it was 25% of new members this year signed up for the six-month version of the initial signup versus 5% a year ago. If those were in fact the right numbers, what was driving such a huge increase in that, you have been marketing the offerings differently or is it just really people just that much more gung ho about joining Weight Watchers?

[Nicholas P. Hotchkin:]

Yeah. It's – the numbers in the U.S. mix in Q1, absolutely right, 25% of signups in six months versus 5%. And I think it's the team kind of showing real good nimbleness and agile testing and learning to get the marketing messages and get our behavioral economics messages right. Oftentimes, best offers aren't the biggest discounts per se. The ones that psychological hooks that get people to join. That's why Lose 10 Lbs on Us was so successful for us. And that's why I think offering people the chance to join on six months plan upfront is working well for us too.

[Alex Joseph Fuhrman:]

That's very helpful. Thank you both very much.

[Mindy F. Grossman:]

Thanks.

[Operator:]

Thank you. Your next question comes from Kara Anderson from B. Riley, FBR. Please go ahead.

[Kara L. Anderson:]

Hi. Good afternoon.

[Mindy F. Grossman:]

Hi, Kara.

[Kara L. Anderson:]

Just one for me. When you think about the big picture of being a total wellness app or company that really works for everybody, what do you think you can do better or how do you think you can do better on the fitness side? And how is the utilization of the fitness portion of the program among your members today?

[Mindy F. Grossman:]

Yeah, I think we have a huge opportunity, Kara. And we've got dedicated teams focused both on the activity side, as well as the mindfulness side. We have tech and product teams, as well as those teams working on what potential partnership we would have. So, if you look today, people are tracking activity. They have a certain number of activity points a week. But we feel the integration is going to be that much deeper. The second opportunity is the more we can use data to prompt and anticipate and recommend both on the food side as well as activity and mindfulness. So, we have a long range plan, where we'll add additional elements within the app journey as well as within the content journey and what we discussed in our physical environment. So, you will continue to see implementations over the course of the next couple of years.

[Kara L. Anderson:]

Thanks.

[Operator:]

Thank you. Your next question comes Greg Badishkanian from Citi. Please go ahead.

[Frederick Wightman:]

Hey, guys. It's actually Fred Wightman on for Greg.

[Mindy F. Grossman:]

Hi, Fred.

[Frederick Wightman:]

If we look at the strength that you guys have seen in international markets, I mean they accelerated again this quarter. Is that changing how you are thinking about rolling out the platform into some of the markets that you are not in today?

[Mindy F. Grossman:]

So, here is how we're thinking. We are definitely thinking that we have the potential to be a truly global business. And we are really working diligently to ensure our technology, our processes will allow us to be able to have the capabilities for further expansion. So, the way you should think about it, our focus right now is in the markets we're in, and growing them and strengthening them. Then, what we are doing is the strategy under Nick in emerging markets. The strategy of what markets, what timeframe and making sure that we have the technology or the potential partners or the right strategy going in for the brand. So, if you look at the goals that we set through end-2020, we did say that there will be new countries and or markets, but that will be later relative to launching after we've done the strategic and technology work.

[Nicholas P. Hotchkin:]

(00

[Frederick Wightman:]

Makes sense. And then, I think you said length of stay was up 15% versus three years ago. Can you just talk a little bit more about that? I mean how much more room is there to grow that into the future? And do you have a sort of a target in mind?

[Mindy F. Grossman:]

So, my target is that I'd like to be talking about retention in terms of years not months. And saying that, as I said, the lens that we're looking through for the prioritization of our investments, our strategies are around recruitment and retention. And we know that if we keep adding value for our members in our program, in our engagement, in our community, that will have an impact. And the more we talk about holistic wellness, not just weight, we become a different partner and we can serve a different content. And then, lastly, the more we can personalize the journey, the more we will see that. So, we do a tremendous amount of tests and learn, our efforts are all around that. We get constant feedback loops to make sure that we're servicing as much as we can for people at no matter what phase of their lives.

[Frederick Wightman:]

Great. And then the last one, you sounded a little bit more open to M&A going forward. Could you talk a bit more about what you meant by that? And what areas you might be looking to get involved in?

[Nicholas P. Hotchkin:]

I would say that improving our balance sheet as clear capital structure priority and look that's happening rapidly with us being 4.5 times levered now, down from just 5 times last quarter. So, growing the business and improving our balance sheet is our priority. But within that, as you us do successfully with small start-up acquisitions on the West Coast, selectively, if there are good strategic and economic rational, small tuck-in acquisitions, we'll consider them.

[Frederick Wightman:]

Thank you.

[Operator:]

Thank you. Your next question comes from R.J. Hottovy from Morningstar Research. Please go ahead.

[R.J. Hottovy:]

Thanks, and good afternoon. I had a follow-up question regarding both, I guess the new first time users that have come on to the platform as well as the retention rates. You've already talked about this as a broader demographic that you've been able to attract that first time user. And just curious to get your thoughts as you kind of start to hit the nine month period with all these first time users, whether or not there is going to be any new tactics to keep that retention rate going. Obviously, Mindy, you just talked about some of the techniques that you plan, but assuming that the WW rewards is a big part of that, but some of the other things that with a broader group, what are some of the new tactics that you'll be looking at particularly over the near future to really promote that retention rate?

[Mindy F. Grossman:]

Yeah. We still have so much room to grow in terms of diversifying our base. So, that's the first thing. And today, because of the capabilities within digital, both marketing and data, we could be so much more relevant to different segments of people, because we know who they are. So, that's definitely part of it. The second is really focusing and utilizing content in a different way for different audiences. And then, third, which – you mentioned rewards which is obviously going to be important, but allowing people within our digital community to find and form their own communities of like persons, like for example, we have a group called WWBros, right? They're in the Connect community, they connect with one and another and they've actually had a physical meet-up. So the more that people feel comfortable with people like themselves that they can share their journey, get inspired and communicate, that all becomes part and parcel of retention.

[R.J. Hottovy:]

Thanks. And the second question I had just had to do with partnerships that are out there and, potentially, maybe out there down the road. With the Healthy Kitchen relationship, it really shows that you are thinking outside the box, and looking to new avenues that can really take and put the brand and – but how do you manage that? And at what point do you maybe – are you – you balance it with maybe stretching yourself too far on some of these potential partnerships? Just trying to get a thought, how you're thinking about that. I mean, it's a very interesting partnership, the Healthy Kitchen relationship. Obviously, something the company's never done before, but how do you kind of test these different things that might be out there and maybe moving too fast in some of these categories? So, just curious to hear your thoughts on that.

[Mindy F. Grossman:]

Yeah. We're being very, very strategic. We're testing things in certain markets before we roll them out to other markets. There has been a lot of work underway here and we're testing and learning. And the global teams are organized so much better today around global sharing and leveraging and so, we will certainly do that. And I think, my background is in product, licensing, merchandising, marketing. So, having an understanding of that and knowing what the right capacity is to roll out, we will make sure that it makes sense. And we really did develop this purpose filter, which is what allowed us to look at the Healthy Kitchen. When we came out and said we're taking our name off of anything that has artificial ingredients, et cetera, and we are in the process of reformulating a lot of our direct source products that we sell to fit into this. So, it actually gave us more permission and capability to have the kind of partnerships that we'll be able to have in this space that we wouldn't have been able to do before.

[R.J. Hottovy:]

Thanks.

[Operator:]

Thank you. Your next question comes from Frank Camma from Sidoti. Please go ahead.

[Frank Camma:]

Good afternoon, guys.

[Mindy F. Grossman:]

Hi, Frank.

[Nicholas P. Hotchkin:]

Hi, Frank.

[Frank Camma:]

Thanks for taking the call. Just one quick clarification on the average length of stay here. Are you closer to 9.5 months then? Is that what you said? You said significantly well – you used that wording, I mean is there a way you can actually like define that? That would be one. But the other point maybe I just need to understand is, if I'm a meetings member, and I get to my goal weight, do I continue to pay when I'm on my goal weight?

[Mindy F. Grossman:]

So, I'll take the second question. It's really interesting, what we're finding is, yes, they may get to their goal weight, but it's the desire to have that community to give them the inspiration to keep themselves where they are. And it really is up to the individual, like what I'd like to say is let people discover the WW, that's going to resonate and work best for them. And in some cases, it's the digital app and the digital community; in some cases it's the meetings; in some cases people want to go to meetings, and then they want to take a break. I mean we're just trying to make the engagement, the content and the community such that whatever they choose, they want to stay.

[Frank Camma:]

I thought, maybe I had it wrong, at one point in time, didn't customer sort of – if they maintain their goal weight for a certain amount of time, they basically got comp program or do I have that wrong completely?

[Mindy F. Grossman:]

No, no, no, you do.

[Frank Camma:]

Oh.

[Mindy F. Grossman:]

But there's – yeah, if they've maintained their goal weight for a fairly long amount of time, then they can continue to comp, yes.

[Frank Camma:]

Okay, okay.

[Nicholas P. Hotchkin:]

And, Frank, yeah, you heard the number right. I mean versus three years ago, retention was eight to nine months for a long time. So however (00

[Frank Camma:]

Okay. My second question is, being a man, the only thing good about being on a diet is stopping it. I was wondering have you made any improvements with your mix with men? And the, second part of that is just demographics, in general, since you have this brand ambassador with Khaled and other people, have you seen any shift at all yet? It's been about six months – well, I guess not even six months. But are you seeing a younger demographic or are we still basically, female, 50-year-old is your primary consumer?

[Mindy F. Grossman:]

Yeah. So, how I'd answer that is, we're seeing movement. But that takes time. It's both movement of members. But what I'm really excited about we really see movement in perception, right, which is the start of where you have to go. And to your point...

[Frank Camma:]

Do you have targeted marketing for men like specific programs or anything, because I haven't seen that?

[Mindy F. Grossman:]

Yeah. What you're not going to see from us is some big announcement of Weight Watchers for men. That is not our strategy. Our program Freestyle works unbelievable for men, it works for women. It works across demographics. What we will be doing is targeting our – you'll see overall diversity in our marketing, like if you look at the commercial that we're running right now. And then you will see our marketing efforts in certain channels going after certain cohorts definitively. And as far as length, what we're trying to do within the program is become like just a monitor for healthy living and healthy eating and activity beyond just, I lost – because how many people we know, we lose the weight and then we turn around two months later. So, if you can have an ongoing dialogue around what it means to be healthy, ultimately people are going to have a better experience.

[Frank Camma:]

Does your app track other metrics such as blood pressure, et cetera, that would therefore tie those elements into health (00

[Mindy F. Grossman:]

Yeah. Today, we don't have, what I would call, the medical side of things. Our Chief Scientific Officer – we're constantly looking at what other elements could be valuable. Right now, we're focused on activity and mindset as the next wave of integration within the app.

[Frank Camma:]

Great. Thank you.

[Operator:]

Thank you. That concludes our question-and-answer session. I'd now like to turn the conference back to Mindy Grossman for closing remarks.

[Mindy F. Grossman:]

So, thank you, everyone. It's certainly a privilege to be at a company that deeply impacts the lives of millions. And I want to thank our global teams for everything they do. And thank you, everyone, for joining us today and your continued interest in our journey and in our business. And we look forward to keeping you informed on our progress. Thank you.