WW International, Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Ladies and gentlemen, welcome to Weight Watchers International Second Quarter 2013 Earnings Teleconference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, August 1, 2013. At this time, I would like to turn the call over to Lori Scherwin of Weight Watchers International. Please go ahead.

[Lori Scherwin:]

Thank you, operator and thank you, to everyone, for joining us today for Weight Watchers International Second Quarter 2013 Conference Call. With us on the call are Jim Chambers, our newly appointed President and Chief Executive Officer; and Nick Hotchkin, Chief Financial Officer. At about 4 p.m. Eastern Time today, the company issued a press release reporting the second quarter financial results of fiscal 2013. The purpose of this call is to provide investors with some further details regarding the company's financial results, as well as to provide a general update on the company's progress. The press release is available on the company's corporate website located at www.weightwatchersinternational.com. Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are also available as part of the press release. Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to Jim. Please go ahead.

[James R. Chambers:]

Thank you, and good afternoon, everyone. I'm happy to be with you on the call today and look forward to meeting you in due course. I've enjoyed partnering with Dave since I joined this January and would like to congratulate him on his long-standing contributions to the company and wish him all the best. His leadership at the company will be missed, and we value the seeds he has planted for our growth agenda. I'm also honored by the Board's confidence in my ability, and I'm thrilled by the opportunity to lead this company forward with a talented team by my side. I trust that you've seen our earnings announcement. Current results and the near-term outlook, which Nick will walk you through in more detail, fall short of our aspirations. While I am proud of the progress the team has made on the cost front, we need to be more aggressive and more innovative in our efforts to drive recruitment and top line results in what is proving to be a very challenging operating environment. While we're still evaluating elements of our long-term strategic plan, which we'll be prepared to share at the November 6 Strategic Outlook Investor Day, I'm pleased to have this opportunity to discuss my early observations with you today. Appreciating I have been at the company for a little over 6 months and I'm brand-new to this role, I will not be sharing a detailed strategy blueprint on this call but look forward to doing so in November. I'd like to start by sharing some perspective on my background and relevant experience. I've spent my entire career in, or supporting consumer facing businesses. Although nearly half my experience has been in general management, I worked in multiple functions from marketing, to operations, to corporate planning and even spent a couple of years as Head of Information Technology a while back. I've had the privilege of leading some wonderful organizations in a variety of segments from food, to beverages, to market information services. I've been accountable for developing winning strategies and driving execution for some of the world's largest and best-known brands including OREO, Trident and Remy Martin. For most of those years, I have worked in companies that were dependent on large field organizations, and I'm a deep believer in the power and strategic potential of an aligned and well-supported field-centric model. I joined Weight Watchers for 2 principal reasons

[Nicholas P. Hotchkin:]

Thanks, Jim, and good afternoon, everyone. The second quarter contains similar themes to the first quarter, namely

[Operator:]

[Operator Instructions] First question is from Glen Santangelo from Credit Suisse.

[Glen J. Santangelo:]

Jim and Nick, I'm kind of curious. Nick, when you gave guidance at the beginning of the year, you sort of laid out your expectations for sort of paid weeks as well as the online business, and sort of looking at the first 2 quarters of results, I mean you did reasonably well compared to that initial guidance. And it just seems like the numbers are really falling off a cliff in the back half of the year and yet, you're sort of suggesting that, listen there's nothing in the next 5 months we can do to prop up any type of utilization. And it almost seems like you've given up to some extent on the 2014 marketing campaign. And so I'm just trying to figure out relative to what happened in the first half, why the declines are so steep in the second half and why do you have so little confidence in your ability to sort of influence your utilization with a marketing campaign in 2014.

[Nicholas P. Hotchkin:]

Let me assure you, we're certainly not giving up, and the whole team is applying the same intense focus on our commercial initiatives as we are on our cost savings initiatives. What you're seeing in the second half of the year is the natural flow through of what has been a weak recruitment environment, a tough start to the year flowing through into paid weeks and revenues in the back half of the year. Since we last gave guidance, what we've seen is a deteriorating trend in recruitments, particularly on our online business and we feel that some of that is driven by the continued sudden explosion of interest in free apps and activity monitors. Of course, we're very focused on making 2013 as good as it can be, that's why we reacted nimbly to put new advertising in place in the United States with Ana Gasteyer, that's why we're very focused on preparing for our fall campaign. But realistically, as you know, Glen, in our business, the big opportunity to change the trajectory of the business is in the winter diet season. So frankly, what you're seeing in our second quarter forecast, second half forecast, more than anything, is the natural math, if you will, of the very tough recruitment environment and one which got harder since the last time we spoke flowing through to back half revenue.

[Glen J. Santangelo:]

Jim, maybe as a follow-up to that, I mean, I'm sure you don't want to share your 2014 marketing plans with us, but I mean, is it your anticipation in the back half of the year embedded within those expenses, you're going to ramp up to some extent the marketing expenses for January 1? And at this point, I mean, even if you don't want to share the details, does the company have a plan in terms of its marketing strategy for January or is it a little bit too early in the process for that?

[James R. Chambers:]

Well, I will pick up on your reference that I won't share too many details about our commercial plans for obvious reasons. But to repeat one portion of what Nick said, you should absolutely take away that we are intensely focused on improving our commercial operations and particularly, consumer activation. With respect to January, we do have a plan and we do have a consumer activation plan that we feel excited about. We think it's rooted in something that our consumers will respond to and we're going to pursue it aggressively.

[Nicholas P. Hotchkin:]

One thing I want to stress, Glen, as we look to '14, we've discussed that the issue with free apps is they're taking trial out of the market. We view that as a temporary phenomenon because we know that our program works. We believe, as Jim has said, in the science behind our program. And frankly, we know that when we get our program news and our marketing execution right, wonderful things can happen to this business. So we haven't given any guidance today on what we think our '14 recruitment outlook will be, but all we're talking about is the starting actives hole that we face as a result of the '13 recruitment environment. We are very focused on driving recruitments in this business.

[Operator:]

The next question is from Jerry Herman from Stifel.

[Jerry R. Herman:]

First question, I sense that there's a growing concern about online as you're talking through this conference call. Given the acceleration or deceleration, I should say, and negative comps in sign-ups, do you feel now that there's something that structurally has changed? In other words, are consumers now expecting free apps? Does that necessitate price reduction? How do you think about that?

[James R. Chambers:]

This is Jim, Jerry. I think, as Nick referenced, we think there's a lot of competition for trial and forces distracting the enrollment mechanism associated with free apps and with activity devices in general. But I think it's critical to make a distinction between competition for trial and alternatives to our proven and effective program. And as a stand-alone activity with consumers, we're reasonably confident that these things are not going to change the trajectory of the obesity challenge. Turning that around and looking at them as the potential additives to a strong program like ours, we think through time, there are real opportunities for us to strengthen our offering on the basis of what we're seeing have a real appeal for consumers. So I think these are challenging forces in the short run that do affect the online business, but these are things that we feel strategically, we can turn to our advantage.

[James R. Chambers:]

I think that's absolutely right, Jim. And look, we have experience in that regard, in our own business with our successful active link partnership with Philips and we're seeing those take-up rates in our meetings business, the power of seamlessly adding something new to our program offering and enriching our membership experience. Just coming back to the free apps issue, all of our research and our customer insights tell us that calorie counting just gets boring after a while, and folks just can't stick on the program and don't learn any lifestyle change behaviors while they're on the free apps. So it's taking trial away from our business, but we know that we have a holistic program that can work going forward.

[Jerry R. Herman:]

And then just a quick question about the compensation changes. Could you maybe add some color there in sort of the P&L impact of those changes?

[Nicholas P. Hotchkin:]

I won't have too much detail here because as you can imagine, I think it's very important for our service providers to hear those changes from the company first, and we're in the process of rolling those out. But let me tell you about what we're trying to achieve. We're really trying to ensure that our service providers feel that they're getting fairly compensated for what they bring to Weight Watchers and the investment they make in Weight Watchers. And in that regard, our compensation program frankly, was a little complicated and we're simplifying it. As we simplify it, we're maintaining the performance elements of it and we're maintaining the variability elements of it. It's a -- as we've said, 75% of the cost of the program rollout is the back half of the year versus first half of the year. And if you look at our gross margin trend, it's 1 of the top 3 drivers of the deterioration in our back half gross margin trends. The other 2, of course, being the weaker revenue environment and the less mix benefit driven by the slower growing .com business.

[Jerry R. Herman:]

I promise this will be my last question. It's for Jim and it's kind of comprehensive but if you can try and answer it in a succinct way, Jim, the question is how do you think about the growth rate for Weight Watchers? You got this tremendous market opportunity yet the key metric of measurements i.e. attendance, hasn't really grown for the better part of a decade. You got high margins, strong cash flows, much of which goes to de-leverage the company, which is in part, reflective of your majority owners action. How do you think about the growth profile of Weight Watchers on a going forward basis with those inputs?

[James R. Chambers:]

I think if you look at a measure of engagement, as we do, paid weeks, that has shown up to this year, consistent growth, I believe, for the last 5 years. So I can turn maybe a bit to the -- what's beneath your question, less on a quantified basis and more in general as to how I see the forces that might affect growth in the future for the company. And I did mention them a bit in the earlier remarks. I think there's an extraordinary opportunity here. I don't think I've ever worked in a business before where the potential market is as enormous as this is. I think it is a tricky category to market in but as Nick said, when we get those variables right, we can have tremendous impact. And I think historically, our product has been bifurcated between an online product and a meetings product. And as we look to the future and as we become much more consumer-driven in the way we construct our offerings, I think there's a real opportunity to innovate and to offer something that will be stronger in the market. And my belief in that is strong and that, as a consequence as you would imagine, translates into a belief that I think we can improve growth rates over the long term. There's a lot of work to do there. There's a lot of conceptual thought. I hope to share more with you guys about that in November at the Analyst Strategy Day, but we have a lot of work to do but I'm bullish, driven by the fundamentals that we can create a good long-term outlook.

[Operator:]

[Operator Instructions] The next question is from Greg Badishkanian from Citigroup.

[Gregory R. Badishkanian:]

And just thinking about -- thinking out to kind of next year in innovation, are you planning to launch innovations in all of your markets, some of those, and have you done any test marketing that might give you some more confidence that in terms of the potential success of what you're planning for the next year's diet season?

[James R. Chambers:]

Well, I think the general comment about information regarding future innovation is going to be that we probably wouldn't share too much about that. We will share more again in November. I know you're going to get tired of me saying that, not too long from now, if you haven't already, but we will share more in November about our strategies and the directions of those strategies, and there will be a high component of innovation driving our efforts as we go forward to meet the market. So let me just leave it at that and...

[Nicholas P. Hotchkin:]

I think that's absolutely right. Yes, are we looking at driving growth in all markets in '14, yes. It's a international effort.

[Gregory R. Badishkanian:]

So the biggest driver do you think of -- that's impacting some of your metrics that's -- do you think that's just -- as you said, it's free apps and the trial that it's getting but it's not necessarily going to be successful, so eventually, they'll come back to Weight Watchers I guess, similar to -- say, like the Atkins fad or the low carb fad, things like that where they try it, it has an impact and then the next few years, you recover from it. Is that what you're thinking? Is it impacting also your in-class business as much as the online business or is it more the online business?

[Nicholas P. Hotchkin:]

Our recruitment profile on both sides of the house has been weak. Specifically, this year, as we've said, there's been a slowdown on online business. But, you're absolutely right, Weight Watchers has faced this issue before. Our sector, there's a slight fad nature, if you will, to the space in which we operate. And history shows that folks come back to the holistic program that works.

[James R. Chambers:]

And then if I could just add as a bit of a repeat, that the flip side of this is that this is also evidence of a lot of consumer interest in things that generally, they feel might help their health and wellness and their lifestyle going forward. So in the short run, while we think there's interest there, it might not translate into medium-term success using those devices and using the free apps alone. That interest is a big factor for us to consider as we contemplate what components should make up our future offerings and as we contemplate our strategic stance for working with the marketplace. Are we going to be a little more singular and a little more internally focused and do everything ourself or are we going to open up the power of this multimillion member community to work with other partners in a way that strengthens the brand and strengthens our footprint.

[Nicholas P. Hotchkin:]

As much as Jim commented in his remarks, there's an opportunity to reimagine our offering, absolutely. And I hope it's very clear that we don't like our recruitment environment right now but frankly, I'd be much more concerned if there had been any change to the satisfaction of the members on our program or retention of members in our program, and it's very important to note that satisfaction remains very strong and retention on the program is consistently as good as it's ever been.

[Gregory R. Badishkanian:]

One more question. To Jim, when you -- let's say we're 3 years from now, looking back, would you say that the changes that you're planning to implement are minor tweaks when you look back on it or are they going to be some major changes that we should plan ahead?

[James R. Chambers:]

Look, I think we're approaching this as a transformation on a strategic level. On the short-term basis as we deal with performance, which is one of the 3 priorities I mentioned before, I think we look at that, as Nick said, with the urgency on both cost and revenue. That feels like turnaround in its effort, turnaround in its focus. But when we look longer-term to your question, 3 years out looking back, that is a transformation. And I think the components of that are getting the right strategies, the strategies that relate to our commercial operations, the strategies that relate to the way we deliver our programs. But very importantly, developing the focus and the ability to execute at a much higher level than we have in the past and aligning the power of the mission and the focus of the organization against these opportunities. So figuring out what are the short list of strategies that we really want to align around and then building the clear plans and accountabilities and metrics and all the things that are required to make a business go forward quarter-after-quarter, building that execution model. That, to me, if we look back 3 years out and we saw that in our rearview mirror, that's something I think we would be proud of.

[Operator:]

There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Chambers.

[James R. Chambers:]

Well, thank you for your participation in today's call. While disappointed with the near-term performance and outlook, we remain excited about the longer-term opportunities in front of us. We're working hard to transform the business and get the top line moving and are confident in our ability to deliver. We look forward to ongoing dialogue, sharing more of our plans and providing progress updates over the coming months. Thank you.

[Operator:]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.