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

Good morning. My name is Bill Reuter, and I'm the consumer services analyst here at Bank of America. We're very pleased to have Amy O'Keefe, the CFO; as well as Corey Kinger, Investor Relations from WW with us today. Right now, we're in the middle of the holidays where weight management is not top of mind, but New Year's is right around the corner, which is obviously your big season. So I guess thank you for joining us.

Thanks for having us, Bill. We're happy to be here.

Good. So for any investors who are logged in through their interface, please feel free to enter any questions. I will try and get those answered. In the meanwhile, I will kind of just kick it off of here. But during the third quarter call, you guys talked about how the industry was soft. A little bit of a reduced interest and weight loss relative to historical periods, not just seasonality. I guess, can you talk about what are some of the factors that maybe be causing the reduced interest? And is it just entirely related to COVID?

Sure. If I reflect back to the beginning of 2021, we were still in varying stages of lockdown, vaccines were on the horizon and people were hopeful, right, that a return to normal would begin at the beginning of 2021. And we, as a company, we're quite confident and supported by our research that when people did feel more comfortable returning to their new normal, they would be focused on restarting their wellness or weight loss journey. And so coming out of Q1, our end-of-period subscribers were up. Our digital business was up 16% in subscribers at the end of Q1. But then what actually happened as people began to reenter society after a year plus of lockdowns and restrictions, people really were more interested in reconnecting socially and going to restaurants, in traveling and getting back to their perceived prior pre-pandemic normal. And what we found with our consumers was that sentiment was more surrounding, "Hey, I want to live my life without restriction. I need a moment of grace. I need some time to feel normal again before I recommit to a weight loss plan." And it's interesting because people acknowledged weight gain well documented, we looked at a study over 42% of people gained 29 pounds or more over that pandemic period of time. So people were acknowledging weight gain. People were acknowledging an intention to do something about it, but they wanted a pause. And we saw that play out in external data, search trends, for example, search trends for diet and diet programs, weight loss diets and weight loss programs were down on a year-over-year basis in Q2 heading into Q3 and in fact, Q3 worsened a little bit in terms of that sentiment. And so what we're finding is that people just wanted a little time without feeling like they were restricted in any way. And so -- but what we're really excited about is one thing seems never to change in this industry is that people begin to refocus on wellness goals and weight loss goals during the New Year season. So our big winter season is coming up, and we're bringing to market an innovation that we think is going to break through that trend of sentiment.

Yes. You touched upon the new food program. I guess can you talk a little bit about this to investors. This is obviously new to me as well as them. So maybe just give us a little bit of a summary of what are some of the key points that you guys are excited about?

Sure. We're really excited. So we launched what we believe to be our most innovative food program innovation in the company's history. So we launched the beginning of November. It was a soft launch. So it's not aided by marketing. Our winter marketing campaign doesn't start until the 26th of December. So when we think that the marketing dollars are most efficiently used. But the program itself is really all about personalization, personalization, personalization. And so it is delivering a unique food plan for every member based on personal preferences. And so you'll get a list of ZeroPoint foods tailored specifically to you developed through a personal assessment. And so we find that personalization really feels -- really makes people feel that the program is livable. And when the program they feel is livable, then it becomes very efficacious. And so personalization is what our consumers were asking for and what we think we deliver in a big way. In addition to that, we've also changed the points algorithm, so to speak, right? So we've added a points algorithm for unsaturated fats for protein, for fiber, for no added sugar, right? So we have incorporated into the personal plans more healthy food choices. And then another big feature of the plan, which we didn't have in the past, was the ability to add points to your daily budget for exhibiting healthy behaviors, whether it's activity or drinking water or eating non-starchy vegetables, you can add points to your budget. And the feedback that we heard on that was it makes people feel like they're more in control of their plan, that it's not just depleting that they can also do things actively in order to add that back. And then I guess, I'd say a final feature of the innovation is in the personal assessment, you can identify as a person living with diabetes. And so many people -- there are tens of millions of people around the world, in the U.S. alone living with diabetes. And one of the bigger challenges that this community has is trying to figure out what to eat. And so when you itself identify as a person living with diabetes, this food plan will create a plan specifically for you. Changing some of the ZeroPoint food, for example, it wouldn't make any sense to have fruit, for example, in your ZeroPoint foods list. And so this program, we headed out for a 6-month trial at the University of Connecticut, and we were extremely pleased with the results during the trial because it's new to market, right? But we did have results during the trial that indicated clinically significant weight loss that improvements in quality of life, improvements in activity and really manifesting automaticity in healthy habits, right? The people generating, doing healthy habits automatically was also a big features of the program. So we're excited about the launch and really feel like this innovation combined with a period of time in the year when people are thinking about health and wellness, it is really going to drive growth for us.

I can see that makes sense. In terms of workshops, understandably, there was incredible challenges during the COVID pandemic peaks. I guess what do you think the future of workshops is either both over the next year or 2 and then over the next 5 years? And then I guess if there's any way you can talk about what percentage of workshops are profitable at this point in light of kind of thought about closing some?

Yes. So we believe that workshops are here to stay. We think that we have a cohort of members and nonmembers alike who are more successful on their weight loss journeys through in-person, face-to-face, community, accountability and regimens of schedule. And so we think that, that is very core to our competitive advantage, what we can provide in terms of coaching, in-person meetings, is here to stay. Now what we have seen is as people became more comfortable socializing, reconnecting, we have seen workshop members return to the brand. So we've seen sequential quarter-over-quarter improvement and growth in our workshop subscriber base. Now I think it's important to remember that it's not anywhere close to where it was pre pandemic, right? So it's coming back. It's heading in the right direction. It's coming back a little bit more slowly. And to give you an example, at the end of quarter 1 of 2020, for example, we had 1.5 million workshop members. By the end of '20, it was down by 50%, right? So people were not joining a vertical that they couldn't participate in, right? And so I think the question is what does that growth or recovery? What -- over what time frame does that take? And what we did as a business is getting to your profitability question, given that uncertainty took some pretty significant actions as it relates to the cost base. So a pretty -- we had hundreds of WW-branded least physical locations, short-term leases, 2 to 3 years, but nonetheless, it was an overhead burden that was being delevered, obviously, with the reduction in demand. And so we took action on that cost base. We have closed many studios. We have really rightsized that fixed overhead to the current demand profile. And now we're sort of waiting to see how long it takes over what glide path will these workshop subscribers return to the business. And so we look at store-by-store workshop profitability on a quarterly basis, right? And it will vary by region. It will vary by store, demand comes back here, demand doesn't come back there. And we take pretty real-time action. And then as consumers return and as that demand returns, we're replacing that physical experience with a flexible model. So where we're using a model that we're paying as we go, pay by the meeting instead of signing leases. And so we feel like we're in a good spot from a cost base perspective to get ready for the return of this demand and fully expect that we'll get our gross margin back up into the 40-plus percent range over the next several quarters.

I think that a lot of people, myself included, focus on the U.S. business because it's something that is readily around us. In terms of how the business in Continental Europe which the recent sales trends have been pretty similar to North America. Is there any difference in terms of the business now and what the outlook for the 2 businesses is, whether that is either with regard to consumer behavior or with regard to competition?

Yes. The program itself is identical around the world. So we've got the global technology platform. There will be differences, obviously, in language or naming conventions or content or assortment of consumer products, right? Market by market. But we're seeing very similar trends across the globe in terms of sentiment. So the businesses are performing quite similarly. Now I will say that the mix of the work pre-pandemic, the mix of the workshop business in the U.S. was higher than it was in our international markets. And so they were a little bit less sensitive to the return to an in-person experience. But on the other hand, the international markets really had quite a bit more stringent COVID restrictions in terms of returning to workshop or capacity constraints. In fact, several of our international market workshops only opened during Q3. They had been closed over the course of the pandemic. And so we're still kind of -- because we're just reopening and coming back to capacity in certain markets, we're still going to wait and see how quickly, again, how quickly people will be willing and able to come back into an in-person environment.

In the U.S., in terms of the demographics of your customers, are you seeing much of a shift or a change? And do you expect to see one? It was just last year that you kind of tweaked your digital offering with the 360, which had a little more technology, a little more focused on a more youthful customer. What is the plan there? Where do you think those demographics are going to go in terms of averages?

Yes. So overall, the profile of our members, it's interesting, right? So we have a strong repeat member experience. We've got over 58 years of history and consumers that return to the brand sometimes 4 or 5x over the course of a lifetime. But you're absolutely right. We have been looking and investing in new products in order to be able to shift the demographics to tap in to a different age demographic in our population. So for example, in 2021, approximately 40% of people who joined WW for the first time, were under 40 years of age, where our profile, typically our average member is a woman in her mid- to late 40s. And so we've done several things in order to try to expand our market share in a younger demographic. So number one, this cohort of people looks for something different. I think about what's the difference between what I needed versus what my 23-year-old daughter needs, right? One, they're looking for a holistic experience across wellness platforms, not just weight loss but mindset and activity and sleep for example. And in addition to that, they're looking for something very personalized. And we think that the PersonalPoints program that we just launched really delivers on that personalization across those wellness pillars. But specifically, this cohort is also looking for a different app experience than we've had in the past, right? They're not wanting to go to meetings, they're wanting to have content on-demand or live on their schedules, not ours. And so we launched the D360 program. It's just under a year ago. We launched in the U.S. specifically tailored to that live and on-demand content for that member cohort. And while it's experienced sort of the same challenge with consumer sentiment in 2021, we ended Q3 with 240,000 subscribers. And so we think this is going to be a really important platform for growth for this business in a new cohort of members for us.

For all the investors, if you have questions, please filter them through me. There's -- it has been one of my most well-attended presentations. So there are a lot of you out there, so don't be bashful. A lot of investors ask about maintaining the brand's relevance. It's obviously been around for a long time. It still scores at the top of the industry. I guess, how do you make sure that you maintain that? And I guess, what -- I mean, the breadth of competition is unending in terms of different ways in which consumers can try and achieve these goals. Where do you think the most competitive changes are coming?