WW International, Inc. (WW) Earnings Call Transcript & Summary

This call is not for media representatives or Bank of America Securities investment bankers or commercial bankers, including corporate and commercial FX. All such individuals are instructed to disconnect now. A replay will be available for Bank of America Securities investment bankers and commercial bankers, including corporate and commercial FX. The replay is not available to the media. Good day, and welcome to the Bank of America Securities WW International Call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Olivia Tong with Bank of America. Please go ahead.

Great. Thanks. Good afternoon, everyone. And thank you for joining us. I'm Olivia Tong, the HPC analyst for Bank of America. We're delighted to have with us WW, a global wellness and weight loss company at the Bank of America Consumer Conference. First things first, safe harbor statement. Some of the statements that WW will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that WW makes are based on assumptions as of today, and WW undertakes no obligation to update them. Please refer to WW's Form 10-K for a discussion of risk factors that may affect its results. With us from the company are CEO, Mindy Grossman; and CFO and COO, Nick Hotchkin. Thank you both for being here.

Thank you.

Great to be here with you.

Thanks. I'll start with a few questions and then we'll turn to Q&A. Of course, anybody who's on the line, if you prefer that I ask, just feel free to e-mail me or at Bloomberg, message me, and I'm happy to do so.

But first, let's make sure that people are familiar with your recent initiatives, your performance. So can you just start by discussing the start to this year's diet season and the myWW program?

Sure. Thanks, Olivia. 2020 has been off to a strong start for us. We have over 5 million subscribers as we sit here today for the first time in our history. And recruitment growth year-to-date is up in the double digits in all our geographic markets. myWW, which soft-launched in November and then our marketing campaigns began the end of December, is resonating in every market. And what we're excited about is that it is appealing equally to new labs and our existing member base. And it's the first time we have ever had a customized program where you take an assessment and you are matched to a plan for you, and your content is then matched for you for your plan. The global marketing efforts, combined with the new program, are driving member sign-ups. And that is -- they were definitely resonant across every market using our ambassadors, using real members around the world with members' success around the power of personalization in myWW. In the U.S., the WW presents Oprah's 2020 Vision Tour, which just concluded on Saturday, having reached over 135,000 people in 9 sold-out arenas across the U.S., has certainly resonated both in the amount of press and impressions, but also the incredible word-of-mouth around not just the tour itself, but the presence of WW and what we bring to people. And I can say, being at every one of them, because we're certainly integrated into it, it's not just the 135,000 people, but when they left, how they were going to communicate that to so many more people. And our average retention is over 10 months, which is a record level. So obviously, pleased that we were able to see momentum in the business each quarter after last first quarter and to have tailwinds going into 2020. And if you look at the member base today, those over 5 million members, they all are incredibly equipped with our digital tools, our 4.8-star app with over 1 million reviews. But also very important, Connect, which is our community platform, is really delivering very high engagement, higher than we have ever seen. So the core of what we do has always been the science-based efficacy, sustainability and livability of our program certainly for weight loss. But today, we really think of ourselves as a wellness company with the world's leading sustainable weight-loss program. And it's a combination of those things, both in our digital experiences and our physical experiences, that have been so powerful. So as we think about 2020 and where is our focus and where are our priorities, just like we articulated last year, the teams are, again, very prioritized and very focused on the things that have the greatest potential for recruitment, retention and elevating the brand. So let me just first talk about coaching. Jean Nidetch was the first coach. And fast forward to today, we will be amplifying the power of coaching and building community. So today, all our digital members have the capability of chat with a coach. Then we also have our 15,000 coaches and guides in our 30,000 workshops a week. And we have one-on-one personal coaching. But later this year, and we've been in pilot mode in many countries, we are launching Virtual Group Coaching, which we're very excited about, will give us a new vertical for both revenue, retention and certainly great for the brand. And it's really about meeting people where they are and giving people the WW experience that is going to work most effectively for them. So this is an opportunity for us to recruit new members, but it's also an opportunity for our digital members to be able to upgrade to community and accountability experience. So excited about that and underway, and we'll be launching that later this year. We're continuing to build out what we have referred to as our wellness ecosystem. So if you look at the verticals of nutrition, activity, mindset and motivation, rewards and recognition, community with Connect as well as our chat with a coach, we will be deepening every one of those areas, plus we will be adding a sleep vertical. We've just -- we've concluded significant pilots, and that will be integrated into our experience. We have Hydration launching within about the next month. And we're working on a version of a wellness score that will be integrated as well. On the consumer product side, as you know, last January, every product that started appearing on shelves all fit our new criteria as a healthy living brand, so no artificial sweeteners, preservatives, colorings, et cetera. So really representing a healthy brand with all our new branding. And that product scope expanded throughout the year. So you now see our products, not just in our workshops, but also on our newly launched e-commerce platforms, our Amazon store, the Cibo Expresses at the airport, our Kohl's partnership, so where we can really show up as a healthy living brand and product. So you'll continue to see product expansion across other categories, whether it be in the healthy kitchen or other areas of wellness and a build-out of our marketplace as well as the integration of commerce within our app. I talked about this, but I'm now talking about it as a priority within 2020, which is our WW Health Solutions business. So how do we be a partner of choice for employers, providers, physicians, payers, et cetera? As you know, we built an entirely new team to drive that business. We built a third tech hub in Toronto to be able to support those efforts and to be able to provide the right technology, the right dashboards and the right support, and we've been expanding our employer base. So expect to hear more about that over the course of the year. And then finally, community activation events and created content, all of which is going to allow us to both diversify our consumer base and maximize engagement, not just of our members, but put our brand out there. So if you look at the tour itself, in addition to the attendees, we also launched WW Now, both on our Instagram platforms, our YouTube platforms, our Facebook platforms, and we've seen very high engagement. And the amount of content that was created off of the tour has been significant, and you will see that being leveraged. A lot of people don't realize that, that team is our team. We produce that tour. And that group and that talent will be taking that forward into future activations as a separate opportunity vertical for the company, again, to focus on recruitment and retention and the brand. So if I kind of wrap all of it around, I think the team did really great work throughout the course of 2019 to set us up for 2020 as a return to accelerated growth. And in the guidance we gave, that's what we expect to see.

Mindy, quite a few initiatives that you have, and it sounds like you've got a fair bit to take you not only from 2020 but also into 2021. But maybe could we just start a little bit for this year. You had a great start to recruiting for this year with the mid-teens growth in subscribers that you're looking for, that's pretty substantial. There's obviously been some pushback also on the cost of getting there, the incremental margins for the business right now. So can you talk about why you think that's the right move, in your view, on overall cost and leverage opportunities from here?

Sure. I think if you look at it over the course of and a vista of time, there are definitely things that we are investing in for us to be able to accelerate that growth. Nobody wants the leverage in the business more than we do. It's a very cash-generative, as we have the revenue growth, leveraged business. But we also have to be cognizant of the fact that we are building for long-term, sustainable, accelerated growth as well as ensuring, to your earlier point, not just maximizing 2020, but going into 2021. So if you look at where we had the expenses, for example, in Q1, and then you compare it to the positive impact of kind of the halo and everything of the tour, for example, there's no one that wouldn't have spent that money. So we're very prudent in what we are investing in that is going to allow us for both short-term and long-term growth. And I can let Nick be a little bit more specific.

No, it's right. I think that's right. Look, it's such a high incremental margin, highly cash generative business model. But it's also essential that we invest for sustainable growth. It's important that we show that we can grow in the year after a food plan innovation in addition to getting the bump we always get when we launch a new food plan. So look, the investment this year is a little bit chunky. It's focused on product and tech investment that shows up primarily in G&A, and it's investment to drive future growth, build out the wellness ecosystem, the wellness score, the sleep for functionality, Virtual Group Coaching, all of which you can see have a pretty clear pathway to real revenue. Look, in '18, every $1 of revenue growth, that was converted to about $0.50 of operating income growth. In '20, when you do the math and adjust for things like the 53rd week in the specific direct tour investment, that's probably a conversion this year in the low 40s. And when I say chunky, I'd say that this business model has a lot of margin expansion opportunity. Gross margin, you'd expect that to expand due to digital mix and operating leverage. And I certainly see leverage opportunities in the marketing and the G&A lines over time also, although it just sounds like you noted, they are relatively flat on a percent of sales basis this year.

Yes. And it's really about efficacy of our marketing spend. So if you remember, one of the things we talked about over the past couple of years was, yes, we know that, that first quarter recruitment is important, but we want to use our marketing strategy and efficacy to have consistency throughout the year. So if you look at 2019 and the slope from subscribers from the end of Q1 to the end of Q4, the average over the past number of years was between 13 and 15. It was 8% in 2019. And we see that trend is what we would anticipate continuing. And that really speaks to, a, diversifying audience; b, leveraging our marketing spend at critical moments throughout the year, not just in the first quarter. So that's another important element going into 2020 and 2021.

Let's say, the only other thing I'd add is that you've seen us over the years have a very nimble and a flexible approach to the way we manage our cost. So we track everything carefully. If we're not getting the payback or we're concerned about the solidity of our top line, we can cost right.

Great. Why don't we talk a little bit about the tour and Oprah. She's obviously been a meaningful partner for WW, and it sounds like the wellness tour surpassed your expectations. What did the sign-ups look like? And are you seeing any meaningful lift from the cities that hosted the tour? Any change in terms of that? And do you expect those consumers who signed up on the tour to have a similar retention rate as any other member that would have normally signed up?

So let me just say, okay, what does the -- what did the tour deliver? Look, certainly, this is -- Oprah's superpower is galvanizing people to reassess how they can live their best life and set intention. And certainly, the WW overlay of what we can provide people in support of that was also very powerful. So in terms of the people who did sign up, whether that was in the arena or with the code that they were given, I don't anticipate them to look very different than our normal member who signs up. They've made a decision. They're going to do something for themselves. They see the power of the platform, and they're going to engage. So I don't see that. We were pleased with the recruits that we had on the tour.

My favorite part of the tour...

Nick was telling...

So walking around the concourse in each arena and give or take, given the size of the arena, saying about 1,000 people in each arena sign up for WW on the spot, that was fantastic to see. And look, it's hard to pass. So am I saying that Denver market was on fire for 2 weeks before the tour and in this week afterwards versus the chain? No. Can I say to the U.S. as a whole, in the context of every market being up double-digits recruitment that -- fueled by the new myWW program and great marketing, can I say that in the United States, we're getting a few points extra recruitment versus other markets? Absolutely. And I think that's the halo effect of the tour.

Yes. But to Nick's point, what's exciting is what we're doing is resonating in all markets. It's not distorted.

Great. That's good to know. You touched on this a little bit earlier, and I want to revisit it. Typically, in the non-innovation year, so next year, you sometimes run into some challenges. Obviously, 2019 was one of those periods. But prior periods, you were able to bridge the gap a little bit better. So can you talk about what you're doing to keep the growth strong in '21 despite, obviously, not have -- not being in a innovation year?

Yes, we have shown that we can grow in a non-innovation year. So let me just clarify on 2019. Of course, we were disappointed not to deliver the recruitment numbers that we had anticipated in Q1. But if you remember, we were doing 2 things. We were relaunching the entire brand as WW and Wellness that Works, in terms of campaign, modernity, resonance, all of that, while at the same time, we were recruiting for Freestyle. That Freestyle recruitment didn't land hard enough. So we didn't have the elevated recruitment goals. However, we still ended the first quarter at our highest recruitment numbers as well as retention. And obviously, we impacted quarter-by-quarter for the balance of the year. If we think of going into 2021, we're not trying to do more than one thing, right? We capitalize on the momentum throughout the year. We actually just did a qualitative and quantitative study in all our markets around the world, and we were thrilled to see that the my -- the WW mark was being recognized, that we had elevated perceptions of modernity and a program for me. So we know that the move on the brand side was definitely where we had to go from a modern consumer relevancy. But if you think of going into 2021, we've already in 2020 and 2019 started working on what was going to be new, what was going to be what we can talk about to engage new members, lapsed members and also create more opportunities for engagement with our existing members. So we feel that we have kind of the right plans throughout the year and to go into 2021.

I think that's right. Look, recruitment, yes, that's more challenging in the second year of a food plan innovation than in the first year. But bear in mind also, based on a strong 2020 that we forecast to deliver, that flow-through of revenue into '21 is a very nice store price into 2021. And then also, look, are we going to be changing our food plan every year? Of course, not. That would confuse all our members. We're in the early innings of personalization, and that cuts across food plan and food advice. Then look, you've already heard us talk about all the features and channels under development like sleep, wellness score, Virtual Group Coaching, a lot to drive the business.

Do you expect to see subscriber and sales growth in 2021?

Pardon?

Pardon?