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

Welcome to our 1 p.m. panel with WW International, which will be hosted by Wendy Nicholson. Wendy, you are now live and can commence.

Thanks. Good afternoon, and good morning to those of us in the states. It's my pleasure to host the management team of WW International. Today, we've got Mindy Grossman, who is President, Chief Executive Officer and a Director of the company. We've got Amy O'keefe, who is the Chief Financial Officer, who only recently joined the company. So it will be great to get her perspective. And from Investor Relations, we've got Corey Kinger. So thanks, everyone, on the WW side for joining us. Really appreciate it. And just wanted to kick off kind of, Mindy, with you. I mean, obviously, this has been an unbelievable year of change. You guys have pivoted and adapted unbelievably quickly and effectively. But as you look back on the pandemic, what would you say are the greatest learnings you've had about your business and about your customer set this year?

So Wendy, great to be here. COVID has had an impact on every aspect of consumers' lives. And what we are seeing is it's causing a significant and radical reappraisal of how people live, how they work, how they spend, what they value. And what we've seen is that wellness and health and wellness have ratcheted up significantly in people's perspectives because they've realized that's the one thing they need to have to kind of live a better life. And as much as it's been disruptive, it has also accelerated many of the strategies that were already in place as we were transforming and evolving our business. So to your point, when the pandemic hit, we made a very sharp pivot, particularly with our studio business because we, obviously, for the health and safety of our employees and members had to shut our offices and shut our studios, and we had 30,000 workshops a week. And because of the investments we made in talent, in product and tech over the last number of years, in 6 days, we were able to pivot and train 12,000 to 15,000 coaches and guides, and we launched virtual workshops simultaneously in 12 markets. And they have continued to today. And what was a pivot along a strategy that we'd already been doing has now become an incredible asset. And yesterday, we launched our new membership verticals, and one of them is digital plus unlimited workshops across the world. So today, in the United States, for example, we are operating workshops 16 hours a day, 7 days a week to give people the support they need. And the reason we were able to do all of that is not only do we have the agility, the entire focus of the organization is on serving our members' needs to really give them 24/7 access, both digitally as well as if they want the support of coaching and community as much as they can, 24 hours a day.

Perfect. Now -- and before -- I could definitely run this entire panel for our full 50 minutes. I have so many questions. But if anyone in the audience has questions, you can log them through Zoom or you can e-mail them directly to me, wendy.nicholson@citi.com. But back Mindy to what you've been talking about, in terms of who you think your target customer is, who has it been historically? And who do you think it is now? I know you've talked a little bit about how some of the newer sign-ups are a younger age. Do you think there will be stickiness with those younger consumers? And do you look at this as an opportunity to maybe broaden your sort of addressable market, if you will?

Oh, absolutely. We see the addressable market being very significant because our program works for everyone. And when we came out with our impact manifesto of inspiring healthy habits real life, people, families, communities, the world, for everyone, the idea was truly to democratize wellness. And how we define ourselves today is really a wellness technology company with this human-centric overlay of support. And when the company first started, it was about the science behind program for healthy weight loss built on community. But now we've built a complete wellness ecosystem across nutrition, activity, mindset, sleep and communities. So that's who we service. What we're seeing now with the dramatic acceleration of digital sign-ups, particularly in this environment, 51% are under the age of 45. So we're definitely getting a younger customer. But what has happened is our retention is also staying at an all-time high. So because of all of the assets and many were prior, but a lot that we've launched this past year that were in the pipeline have created higher level of engagements than what we've seen because of the personalization, the content, et cetera. So we feel strongly about who we can service. Another element has been, we've had a focus on diversifying our member base. A great example of that is this Wednesday, we launched Digital 360 as a membership vertical in the U.S. and in the U.K., and it will be rolling out to other markets in Q1. And the way we define it is built by millennials for millennials. So it is a complete 24/7 experience of on-demand coaching, content and community. That is a new vertical for a new audience, and it's what they expect. So if you look at how we're going to meet members where they are, no matter where they are, we will have our digital myWW+ experience, which launched November 16, which is truly a very personalized approach to our entire experience with assessment, both pre-paywall, post paywall. And it is the first time in a non-food innovation year, we have launched a significant innovation for the consumer. So that's the base of everything. Then you have Digital 360, which builds on that around the coaching, community and content. Then you have the Digital plus unlimited workshops. And then we've always had the ability to have one-on-one coaching, but we're actually launching that platform on a much deeper level in 2021. So if you think about anyone who's looking for the ability, how do they need a partner in their health journey and healthy weight loss journey, we've given them the opportunity to have all the tools and the level of accountability and experience that they want.

It's fascinating and it's perfect timing that you've launched the Digital 360 when you did because, obviously, we're going into the holidays when we all eat and drink way too much. But do you think there's going to be any difference this year in terms of the seasonality of the business? I know you usually have that big spike come January in terms of subscribers. But do you get a sense that, hey, because we've all been working from home or eating a lot at home, maybe some of that's been pulled forward, and you already had that bump? Or how do you think about that?

I actually think that we're going into another significant season. And here's why, right, in the past, everybody would go in and it would be their resolution, right? I think this is similar, but different. I think people are looking for new beginnings and a new start. They want to put 2020 behind them, and they want to start a new. And health and wellness is absolutely a necessity. It's not a luxury anymore. And I think people want a reset. And that's when we see new joiners, and even what we're seeing with our existing consumers throughout the pandemic, people are looking for a level of control in their lives and the support that they can get from that. And so again, I always do a newsletter as Mindy, the member, not just Mindy, the CEO. And the title of the new one coming out is, no resolutions just new beginnings. And I think that's just mentally what people are really looking for.

It sounds like it could be a great message, particularly this year. I just got an e-mail and I want -- this is a total non-sequitur, so I don't want to just take away the momentum of the conversation we're having. But if I don't ask this now, I'm going to forget it. Amy, this is 1 for you. Can you help quantify the prospect for interest savings from refinancing your high cost 8 and 5/8 notes, what's the likely timing to start realizing those savings?

That is a non-sequitur, Wendy you think.

I got it out, so.

First and foremost, I just want to say that I'm pretty comfortable with our capital structure. This business and the subscription model generates a significant amount of cash. We've been working leverage down over time. But there's no question that we can take advantage of the interest rates in the marketplace right now. And so to me, it's when, not if, really, to be able to do that. The bonds are callable, the TLB is callable. And so I think we'll take advantage of that opportunity. I think it will be a matter of timing.

Got it. Fair enough. Okay. All right. Mindy, back to you in the guts of the business. In terms of all this excitement and exciting newness that you've got going on, how are you thinking about getting the message out there and branding? And I know Oprah has obviously been a huge ambassador for the WW brand over the last couple of years. Do you think you'll use her again this year? And is there a need for more investment on the marketing side?

Yes. Wendy, we're really excited about our marketing plans. Our big, big impact really starts December 26 across all platforms, whether it be TV, social, digital, earned media, et cetera. Our campaigns do integrate Oprah. I mean she's obviously been a great voice for the brand, but it also includes new talent like Ciara as well as our member ambassadors. So if you look at our ability to create impact in the marketplace, it's obviously our marketing messages, but it's also our tastemakers, our influencers that authentically live the brand. So the combination of all those things as well as myWW+, our new verticals and our external content as well as our pre-paywall assessment are all assets that we are going to be amplifying for the holiday season.

Got it. And can you talk about pricing of some of the new programs? I mean, obviously, you're offering so much more and so much more optionality in terms of when I want to get coaching, when I want to join a digital class. Is it a more expensive proposition today for me to join WW than it has been historically?

Well, actually, our digital membership, the way we think about it, particularly in these times, people value what they perceive as great value. And we continue to iterate within our app to provide that for people. Now with Digital 360, think of that more in the midpoint of our membership verticals, which is kind of the progression, which makes a lot of sense. The other thing to think about is not just the pricing of the membership, but the gross margin flow through. And one of the reasons you've seen in 2020, as much as we've had the revenue pressure because of studio closures, sign-ups, et cetera, we've seen incredible margin flow-through because you have a digital membership at 80%. And so think of Digital 360 as well as a high-margin membership vertical. So it's the combination of our price testing as well as our margin flow-through that provides the OI benefit.

Got it. And I want to get into sort of the income statement impact in a minute. But just if I'm a WW person who historically has really like going to the studios and having that sort of really direct personal interaction, as we allocate our vaccines, am I going to be able to do that next year? And how do you think about that part of the business coming back in and complementing all the great stuff you've done on the digital side?

Yes. Wendy, we do have studios open in certain markets where we're able to. And the way I would think about it some form of face-to-face interaction will always be part of our brand. However, we do have a smaller footprint that we're operating, but we're still servicing about over 70% of the U.S. population with the branded studios that we have, and then we've also partnered with hotels to expand our ability to accommodate people. But in addition, our virtual workshops that I talked about earlier, this allows us to transcend location and geography and bring people together who they can pick their coach. We've added a lot of exciting new coaches between Digital 360 and our virtual workshop business. They could find their cohort. They want to be with other young moms. It also enables people who are in different locations to come together, a mom and a daughter. So this is really going to give us ultimate flexibility. So with unlimited workshops, you could have the physical experience, if that's what you want in addition to the virtual experience. So it gives ultimate flexibility for people.

And Amy, can you remind us in terms of how many leases you have? I think you had 800 locations, you're down to roughly 650. But talk to us about what you think the optimal number of physical locations are going to be? And I assume that hotel operation or that hotel, whatever, channel that you've got is a little bit more flexible in terms of cost. Is that the right way to think about it?

Yes, absolutely. I think that third-party locations, that Mindy mentioned, are much more flexible from a physical footprint perspective. And for the cost base, really converts a fixed cost base into a variable cost base. Getting back to your question, I think the team did a pretty incredible job of addressing that fixed cost base as demand for that face-to-face experience diminished during -- in this pandemic environment. And so at the beginning of the year, we've reduced our global fixed branded location footprint by over 20%. The 800 fixed studio locations that you mentioned are in the U.S. that was at the beginning of the year. We expect that to be down below 650 by the end of the year. In addition to that, and Mindy mentioned this, we had a significant third-party presence at the beginning of the year, call it, 2,300 third-party locations. That's now down to 250. And so that portion of the cost base was already flexible, was already variable. And the company is looking at new ways of partnering for those variable third-party locations. Mindy mentioned hotel locations. We've also piloted 6 locations in CVS stores in their wellness hubs, where a member could go in, meet with a coach, do a weigh in. And those are all ways that we think that our cost structure can continue to vary with the demand in the face-to-face environment.

Got it. And I know WW kicked off this year with a pretty aggressive cost-savings target and cost-savings goal. Can you frame that, I know you're relatively new to the company. But as you've come in and taken a look at what the company has done from a cost-reduction perspective. How do you think about sort of opportunity for further savings going forward?

So back at the beginning of the COVID impact, the company launched a $100 million cost-savings program compared to the original plan. And I'm really pleased to report that the company is slightly exceeding that impact originally, if it had been intended to be split about 1/3, 1/3 and 1/3 between OpEx or cost of services, marketing and G&A. And the team got pretty aggressive, had to make some very tough decisions about employees and about studio locations. And really shifted the achievement of that cost savings more toward operating expenses or cost of services. And the benefit there, obviously, is those savings will be incorporated into the run rate going forward. The other half was in marketing and G&A. The company's employees took salary cuts, took profit-sharing cuts, had their bonuses impacted. And those types of things in our marketing program, we expect to not recur on a go-forward basis. So I think that the company took the right actions at the right time, which got us to a spot in quarter 3, where despite revenue that was down 8%, operating income was still flat to the prior year. So not only did they move quickly, it was very effective to preserve earnings through the third quarter.

So -- and I know you haven't given any guidance for 2021 yet, so I don't want to push you on that, but just so we're clear and have it in our consideration set. The magnitude of those costs on the sort of the discretionary, the bonuses, et cetera, et cetera. Just order of magnitude, how much of that do you think could come back in 2021, so we make sure it's in our G&A?

Yes. So as you mentioned, we're not providing guidance. But as I said, approximately half of the $100 million cost-savings plan was operating expenses in our gross margin, which I expect to recur going forward. And the other half, I would expect to reset. I think we're approaching 2021, certainly very optimistic about our growth opportunities, but cautious on the cost front. So we're going to continue on a quarterly basis to assess our cost structure and make sure that it's matched to demand. So you'll see us continuing to be very diligent about controlling costs going forward.

Perfect. And maybe now is a good time to drill in with you on kind of the impact on the P&L of the changes taking place in the business model from Digital Plus studio to mostly Digital, can you just run down the P&L and maybe dimensionalize impact on revenues, the mix of the business, maybe that you're thinking about. Again, I don't want to pressure on '21, but just currently and then the impact on the margins?

You got it. So on the digital side of the business, as we talked about, and I'll try to walk through the pieces of it. So the digital product on a monthly basis is about $21 for our members. And it has over 80% gross margin achievement in Q3, for example. On the other hand, on the studio side of the business, so the workshop side of the business, that product is about $45 a month. Now clearly, we're changing membership tiers going forward. But from a historical perspective, those were the 2 ways you could join WW. The workshop product had historically a gross margin of approximately 40%. Now with pressure on the revenue, that business was down 36% in Q3. We are seeing compression on that margin, which we're working back through our cost-savings initiative. But with the digital growth at those margin levels, we achieved a pretty incredible margin of 60% in Q3. And so we're seeing a gross margin rate mix shift toward the digital business at that 80% gross margin versus the 40% now below that. But -- and we expect -- but I would say, just to make sure we're clear on this, but it does have a negative impact on revenue, right? So the difference in the $45 product versus the $21 product compresses revenue in the short term. But from a gross margin dollars perspective, the economics are fairly neutral.

Got it. And fairly neutral on cash flow, too. Is there anything else I'm not thinking of as I think about the impact of the shift on your cash flow?

No. No. I think of it as pressure on revenue, fairly neutral on margin. And we need to continue to make sure that we are taking action to offset the deleverage impact of the fixed cost base in that studio business to get the workshop gross margins back up to -- back up in the 40% territory. That's a focus.