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

Good afternoon, folks, and welcome back to Goldman Sachs Global Staples Forum, the virtual version. We look to have you all back and live and on stage in New York next year. But for the time being, we're doing this remotely. And so far today, I think it's been going reasonably well. Up next, we have Weight Watchers on our virtual stage. So bear with me, I've got a quick disclaimer or risk statement to get out of the way before I get into an introduction. So on for the riveting part. 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 SEC filings for a discussion of the risk factors that may affect its results. Okay. That's out of the way now. So here we go. Joining me next on stage is Mindy Grossman, the President and CEO of WW; and Nick Hotchkin, CFO, Operating Officer, North America and President of Emerging Markets. Ms. Grossman joined WW as President and CEO in July 2017. Prior to joining WW, Ms. Grossman served as CEO of the Home Shopping Network for nearly a decade and prior to that, held various leadership roles at Nike, Polo Jeans, Ralph Lauren. Mr. Hotchkin has served as CFO of the company since August 2012. Prior to joining WW, he served as VP of Finance for the U.S. Retail Division of Staples. So 2, well-seasoned vets with lots of diversified experience. Now the company, WW, has gone through a tremendous amount of change since Mindy has taken over, the largest being a more aggressive thrust towards transforming the business into a more digitally oriented company. While the transition has not been without some bumps and twists, I think most outside observers would declare it a success so far. But of course, now we've got another twist, that being COVID-19. So let's turn to management to understand the evolution and pathway going forward.

Mindy, why don't I start with you? And let's forget about COVID-19 for a minute. But prior to that, your business had a pretty good start to the year. Through February, you are on pace to deliver roughly 15% subscriber growth in 1Q '20, if my math is right. Your highest since 1Q 2018 and a sharp acceleration from what we saw in 2019. So remind us the adjustments you made in tactics deployed to drive this type of acceleration.

Thank you, Jason, for that. It's great to be here. To your point, we have been on the transformation journey to really become a digital transformation business, a transformation from not just the leader in healthy weight management globally, but a complete leader in overall wellness. And that has been accelerating, and we came into 2020 with a very strong start, ending Q1 with over 5 million subscribers for the first time in our history. We had the launch of myWW, the most personalized program in the history of the company, which resonated in every market, strong global marketing efforts. And then certainly in the U.S., the WW presents Oprah's 2020 Vision Tour was an unheralded success selling out to crowds and arenas, generating 8 billion-plus media impressions. And at the same time, really focusing our investments in our digitally enabled human experience with all 5 million of those members having strong digital tools, strong app and our Connect platform driving communities. So those trends were important coming into this because like everyone else, starting in the back half of March, we saw some -- we saw recruitment come down. We were one of the first, let's call it, physical -- you would call it, retail, but our studios, we made the decisions, looking through the lens of the safety and security of our employees and our members, to pause our studios. But at the same time, we looked through the lens of how do we keep our community together in a world where people are going to need community, motivation and support more than ever going through this crisis. So in a matter of 6 days, we were able to train 14,000 coaches and guides. We pivoted the product and tech team to accelerate and create a new opportunity for virtual studios as well as Connect Groups for each of those studios. And we launched that in 12 countries simultaneously. And in the first week alone, we had 12,500 workshops launched. And that capability was really appreciated and needed by our member base, particularly the current environment. We have just announced that we'll very, very selectively and safely look at opening some of our studios. But at the same time, we also said that we're taking a significant look at our studio footprint and what that really is going to be for the future. And then in addition, we had announced, over the past couple of quarters, that we were going to be launching a whole new vertical of membership for our company launching later this year, which was around a digital platform plus Virtual Group Coaching, which could not have come at a better time and had been in the works, because we feel that not only are people going to want our digital assets, but they are going to want the accountability, the support. And coaching is really an asset for us whether it be in the physical space or whether it be in the digital space.

So what has this experience so far taught you that's going to help you sharpen that proposition? The Digital plus digital coaching, the new program that you already kind of had in the works, but arguably, you're -- I agree, a phenomenal opportunity to sort of beta test some components earlier than you expected.

Yes. To your point, the move to Virtual Group Coaching has given us a tremendous amount of insights in a number of ways. Between our Connect platform that all 5 million members are a part of as well as our ability to monitor behavior and conversation and even tracking what people are eating in real time is really informing us as to what people are really going to need in different type of environments. And we feel that the development of that program was very strong, but now we're able to even fine-tune it further based on the behaviors we're seeing. And it gives us -- I've said to you before, Jason, that it's really about we want a member, right, and it's the member who's going to designate what is -- what experience is going to be most important to them: the digital assets; the Digital plus virtual coaching; and in some cases, the physical aspects. And we want to meet people where they are, and our ability to use technology and really marry it to meaning to help people live better lives is going to be more important now than ever. I mean we are seeing in real time people's perspective on health and wellness, not as a luxury, but as a necessity, especially having lived through and living through this crisis and knowing who it affected more. And we also see why new members are signing up, obviously, in particular, in our Digital membership because everyone's doing a reassessment right now on how they live, how they work, how they play and how they spend. And health is going to be very top of mind.

You mentioned you've seen people sign up of late for potentially different motives or reinforced motives, stronger motives than in the past. But I guess my question is, how many people are signing up of late? Clearly, you had really strong momentum to the first part -- for the first 2 months of the quarter. Trends decelerated substantially in the back part of March. Now that we've been in this quarantine, shelter-at-home, many of us, perhaps not living the healthiest life, snacking too much, maybe less mobile, one can envision a scenario where there's some pent-up demand. The consumer is going to want to kind of get back in better shape and reengage with programs like yours. And I guess the question is, are you seeing any of that? Has there been any bend in the trend line to give you confidence that, that behavior is happening?

Yes. Jason, it's Nick. Let me take that. I mean we said, when we updated The Street at the end of April that in any given year, Easter is typically the beginning of our spring season. And we -- based on good marketing and good approach to bringing people in, we did experience a seasonal lift as you'd normally expect. And we're encouraged that this whole trend's turned positive starting mid-April, some real good recovery there. At the same time, we said that the Studio business with all our studios closed, recruitment trends continue to be pressured, and we expect that studio recruitment and sign-up trends to be pressured during the COVID crisis. Sitting here a few weeks later, I feel pretty much the same way. It's terrific that our marketing is hitting home and people are joining us to experience our digital offerings and have been pleased with the continued strong trends in digital. And as expected, with our studios closed, obviously, about 25% of the people typically join studios. As expected, those sign-up trends have remained weak, which will impact Studio revenue in Q2 as we indicated. Importantly, beyond those recruitment trends, the fact that we've got such great content out there, not only the virtual studio offering that we put in place so quickly, but also content in the app, such as sleep and hydration, not to mention the Oprah virtual tour that we launched just last Saturday. I'm still not seeing a significant spike in cancellation rates, and that's gratifying and shows, I think, our strategy of working through this crisis is working for us.

And one of the byproducts of working through this crisis, I think we touched on a couple of times, is an acceleration of your transformation in digital. Let's go down that rabbit hole a little bit further. It's clearly part of your strategic vision is to become more digital in nature. And the studios are -- studio members are important, I know. The level of loyalty is high. Their engagement's high. But if this -- I guess where I'm going is to try to understand the economic implications of an accelerated shift. We can all do the math. You mentioned 25% of subscribers come in through to the physical + Digital component, but it's closer to half of overall sub dollars just because the cost for those -- they pay more, to be part of it. And there's some commission tied to that, but even take that out, if all else held constant, if you migrate one consumer from a physical + Digital, simply to a digital-only list, it suggests that you're going to lose out profits. Back of the envelope, it's around $120 per sub switch. And I don't know if that's right or not, but I think you'll agree with the principle. It obviously assumes you can't rightsize the cost structure, though, which presumably you can over time. So how do you balance that? How do you balance trying to get people onto a digital program, while at the same time, wrestling with the economics of it and try to offset maybe the cost burden on the physical side but not so rapidly that the service level drops. It seems like it's a very difficult balancing game to walk and one that's even more difficult in the current situation, where things may be accelerating far faster than you initially anticipated.

Yes. Let me give you a perspective on that, and Nick can walk through some details. I said it earlier. It's very important that we focus on the member needs, right? And we have multiple products at multiple price points, if you will, and with the appropriate cost structures to deliver -- to be able to attract as many people as possible. And so yes, we have our Digital membership, and we're certainly enhancing the engagement and working to really accelerate the growth of that business. We have the new premium product on top of that launching, which we feel we will attract new members, but also have the potential for Digital members to upscale to the new program where they're going to want more coaching, more support, and then we will still have a virtual plus physical experience. So the combination of that is where we feel the growth is going to come from. From a profitability perspective, and again, I'll let Nick go into more detail, that membership is very profitable, particularly on the digital side. The other 2 areas of the business that also have potential are our e-commerce and product expansion, which we've begun to accelerate. All e-commerce launched in the app, March 23, certainly seeing a lot of growth. Obviously, we don't have the sales right now in our studio, but we see future -- the e-commerce and product expansion being strong, and then we have the content play. Obviously, we launched the Oprah event that will be 4 consecutive Saturday. We felt in this environment, we wanted to be able to make it accessible to everyone for free: a, because we think people need it more than ever; and b, it's great exposure to our brand. We had 0.5 million unique people tune in just for the first session alone. But ultimately, that content area of the company is another wholesale opportunity for us. So that's kind of how I would really look at it. Nick, you want to elaborate further?

Yes, certainly. Thanks, Mindy. Look, I think, Jason, like you're thinking about it the right way. Look, the starting point is important. The fact that we entered this crisis with good momentum in the business, a great digital platform already, and a strong response to myWW. But to your point, yes, certainly, we're implementing $100 million cost savings plan versus our initial 2020 annual operating plan because we know we need to take cost actions to maintain flexibility. And obviously, what we announced on Friday, our restructuring was part of those considered moves as part of that $100 million cost reduction strategy, both a reduction in the studio footprint and also the corporate realignment. Beyond that, you're absolutely right to think the monthly price per studio will have been twice that of digital. So as Studio drops and Digital accelerates, that certainly has an impact on the revenue base of the company. But bear in mind that both Studio and Digital are very profitable businesses. Imagine the incremental margins on the digital subscribers, for example, very high flow-through to the bottom line. So the Digital business rebounding is certainly a positive, while studio recruits remain very sluggish. And of course, the fact that we're able to keep our members in our brand because of all the content is important too. How I think about it longer-term is, I'm excited that we're launching a new digital virtual product later this year at a higher price point than digital that kind of continue to have us have options beyond our purely digital package that we sell for around $20 a month.

And will there be capacity constraints in these virtual coaching sessions? So do you want -- in other words, I presume there's a real live coach there. And to make sure -- make sure that you have good quality, that there's going to be some sort of cap in terms of the number of participants you allow in the rooms?

Yes. We've tested the group -- remember, we've been in pilot on the Virtual Group Coaching. We tested it in Sweden, we tested in Canada. So we feel we have a measure of what is the right maximum number, because you still want people to feel they have a community, and we have to kind of build the coaching parameter around that. But we feel confident that through the right affinity groups and how we can build coach demand, et cetera, that's not a concern.

Sure. Okay. Yes. Just, it was more me teasing out, just trying to understand what it looks like, how it's all going to work. A quick reminder to the audience on the webcast, those who are dialed in. If you have a question, feel free to submit it. I'll be able to see it, and I will do my darndest to get it -- make sure it gets asked in one way, shape, form or another. Mindy, or Nick, whoever wants to answer this. But Mindy, you mentioned the virtual Oprah experience. It seemed incredibly well timed to me. Because I kind of teased this out or threw out a hypothesis earlier. We track a lot of the Nielsen data and look at what consumers are buying. If you look at the shopping list, it reads like a holiday baking list of flour sales, cookie dough sales, everything through the roof. Like people seems like they're sheltered at home, and they are going for the ultimate comfort food right now. Now we all know what follows the holiday time frame. That leads us into New Year's resolution. People wake up and go, okay, that was fun, now it's time to get in shape. Any reason to believe that we could or couldn't see a similar sort of behavior in the post-quarantine world where consumers wake up, exit the home and say, "Okay, it's time for my post-quarantine resolution. I've got to get in shape." And you potentially benefit from another spike, an unanticipated counter-seasonal spike for you, if you will.

Yes. I mean to your point, we are able to see behavior in real time. And we're keeping very close to when new members identify -- self-identify themselves on Connect on why they joined. And throughout this time, I think people are becoming more and more aware that they're going to need to start taking care of themselves kind of after the bunkering down, if you will. It's interesting, we even see what people are tracking because we can adjust our healthy menus in real time to what people are looking for. So what was fresh fruits and vegetables, all of a sudden, people were eating canned goods and all of a sudden, people were baking. So we were giving healthy versions of all those recipes. But again, as I mentioned earlier, I think the realization for people of what's really going to be an important reappraisal of how they live, work, feel, how they take care of themselves. We want to be there for them. Because I think it's going to be necessary. I mean we know for a fact that of a big population of those who succumb to coronavirus, obesity was the #1 factor because of all the underlying issues. And that's going to become a real focus for people, for employers, our Health Solutions business. As you know, we've really invested in as well in the technology. I think how consumers, how employers, health providers, I mean, I think how people are going to be looking at things as we come out of this crisis are really going to become top of mind and a focus.

Yes. That point on partnering with employers, hopefully trying to get some degree of subsidization, which could obviously boost your subscriber levels and provide some more diversification, that's been part of the dialogue, the strategy for a long time. I think even predating you, Mindy, and going -- and Nick knows first hand going back quite some time. But we haven't seen a lot of progress on that front. What are the obstacles to making real headway there? And is there a real reason to believe? Like, hey, maybe now this is the catalyst. Maybe now this is the breakthrough that allows you to really get progress.

Yes. One of the reasons that it's only of late that I actually started speaking to this is because coming into the company, I realized we had work to do. I think it's less about thinking of it as B2B and more about B2B2C. So it's not just selling into a client. It's creating engagement. It's giving the right tools, it's giving -- having the right engagement. And to do a lot of that, we needed to enhance the technology. We created a third tech hub in Toronto, totally focused on that business. We brought in a new team and new leadership of the Health Solutions business. And we're at that point that we're very focused on what the future growth of that business is. We're seeing engagement with our customers even through this crisis, and they certainly feel we're an important asset. But we feel that we're positioned for the future well for that category.

Interesting. Okay. Some new developments that I wasn't quite aware of, probably just because it -- I wasn't paying attention or it just was lower on the totem pole in terms of areas to focus.

Yes. We had it as one of our key priorities as we articulated coming into the year, and it continues to be. But I'm being very measured in the growth, the approach, the strategy, the right partners, which I think is important. We're building something for long-term potential.

That's interesting. Now on the consumer front, the virtual experience with Oprah, I did not get a chance to tune in last Saturday. I did, however, go with my wife to like the live event in February. I got to say, it was quite the immersive experience. It was way more integrated with Weight Watchers, the brand, than I had expected. It was an absolutely impressive event. Tell me about how this virtual experience with Oprah came to be? And is it as powerful of a branding mechanism for Weight Watchers as the live events were?