Edited Transcript of WTW Conference Call or Presentation of Results, Nov. 5, 19 at 22:00 GMT | LIMITED TIME OFFER !

NEW YORK, November 9, 2019 (Thomson StreetEvents) – Transcript of the conference call or earnings presentation of WW International Inc, Tuesday, November 5, 2019 at 10:00 pm (GMT)

WW International, Inc. – VP of the IR

* Mindy F. Grossman

WW International, Inc. – President, CEO and Administrator

* Nicholas P. Hotchkin

WW International, Inc. – Chief Financial Officer, President, North America Emerging Markets Officer

Oppenheimer & Co. Inc., Research Division – MD and Senior Analyst

* Jason M. English

D.A. Davidson & Co., Research Division – Senior Research Analyst

B. Riley FBR, Inc., Research Division – Associate

UBS Investment Bank, Research Division – MD and Equity Research Analyst at Consumer Hardlines

Welcome to WW International's third quarter 2019 earnings conference call. (Operator Instructions) Please note that this event is being recorded.

At this point, I would like to hand over the conference to Corey Kinger, in charge of Investor Relations. Please go ahead.

Corey Kinger, WW International, Inc. – Vice President Investor Relations (2)

Thank you Allison and thank you all for being here on WW International's third quarter 2019 conference call. At approximately 4:05 pm Today, Eastern Standard Time, we have issued a press release reporting our results for the third quarter of 2019. The purpose of this call is to provide investors with some additional details about the financial results of the company, as well as a general update on the company's progress. The press release is available on the company's website, at corporate.ww.com address. Additional investor materials are also available on the company's website, in the Investors section under Presentations and Events. Reconciliations of the non-GAAP measures disclosed during the conference call with the most directly comparable GAAP financial measures are also available in the press release.

Before I begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that all 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 documents for a more detailed discussion of the forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and, except as otherwise required by law, the Company assumes no obligation to publicly update or revise such statements, whether as a result of new information, future events or otherwise. Mindy Grossman, President and Chief Executive Officer; and Nick Hotchkin, Chief Financial Officer, Head of Operations, North America and President of Emerging Markets.

I will now give the call to Mindy.

Mindy F. Grossman, WW International, Inc. – President, Chief Executive Officer and Director (3)

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Thank you, Corey. Hello everyone and thank you for participating in our call today. We ended the third quarter with 4.4 million subscribers, up 6% over the previous year, which is a positive momentum compared to our second quarter, reporting 1.5% subscribers at the end of the period. This is the highest level of subscribers in the company's third quarter as a result of our progress in returning our hiring trend to a positive trajectory and retention of members. This strong performance generated revenue of $ 349 million in the third quarter, operating income of $ 95 million and EPS of $ 0.68. Thanks to the improvements we have made to the entire industry, to all aspects of our advertising campaign, research, eCRM, studio engagement, etc., I am proud to say that the recruitment of our members has been positive in the whole world. third quarter. Digital subscription registrations continue to show year-over-year gains, and the enrollment trend for Studio has continued to improve. We expect an acceleration of recruitment growth in the fourth quarter.

Our average retention has continued to increase and is now barely more than 10 months in the world. This is an important milestone for our brand, reflecting the intense focus we have placed both on improving our studio experience and creating a market-leading digital ecosystem. , with which our members commit each day. Although retention trends may be unstable when launching a new program, we are confident that these retention gains, determined by our engagement strategy, will be retained during the summer season. winter. As we have discussed throughout the year, we have identified five priority areas for 2019 that all align with our key goals of recruiting, retaining and enhancing the WW brand. These are the execution and marketing strategy, the Studio strategy and future experience, 2020 innovation, personalization and activation of the global community. Our teams have done a remarkable job improving our marketing performance since the beginning of the year, and the results translate into a sequential improvement in our subscriber and revenue trends. Our fall marketing campaigns have stimulated all of our global markets. September has been our best recruitment month from one year to the next until now this year, thanks to television advertising in our major markets. Our advertising creators in the United States showcased the experience of 10 of our members who visited Oprah Winfrey at her home in Maui and shared their stories on the Internet. Social and digital networks have also been very effective at generating increased traffic globally.

The power of our science, but also the fun of our creativity, resonates well with the public. We continue to be agile and flexible, adjusting our mix in real time to efficiently drive traffic and conversions. In addition to recruiting-driven marketing, our teams do an excellent job of communicating with current members, which improves the user experience and promotes loyalty. Among all the points of contact of our members, we focus on commitment and measurement. We've improved our email marketing capabilities to include more personalized and differentiated content in our monthly member newsletter, which results in higher click rates. Members appreciate and respond to more personal content. In August, I therefore launched a personal monthly newsletter, offering members a glimpse behind the scenes of WW, sharing my experience as a member, also sharing my family life, my social life and my life. life. life. In addition, I communicate frequently with members directly via Connect and other social channels. Having this ability was fantastic to keep the pulse and become a genuine member of the WW community.

The marketing efforts of our members have also increased the visibility of our loyalty and rewards program, WellnessWins, both in the app, in e-mails and in social marketing. Our current goal is to help improve the tracking of food and activities, even during the holiday season, and to expand our incentive rewards catalog. Since their launch a year ago, members have won ($ 6 billion) in wins. Donations to WW Our good social impact initiative, providing fresh fruits and vegetables to families in need, continues to be one of the most traded awards, illustrating the anticipated payment effect in the WW community and raising nearly $ 0.5 million. These victories provide our members with positive reinforcement and motivation to continue their journey.

We have always been obsessed with the consumer and the brand. And while we focus on improving the perception of WW's relevance, we continually monitor the brand's perception and brand awareness. Since the winter, in most markets, the new WW logo, known as Weight Watchers, has been the subject of growth or maintenance, and the relevance brand continues to improve. We focus on improving the perception of the brand's modernity, especially among potential members, and on the fact that WW is recognized as a project for me. With the upcoming launch of our new innovation agenda, we believe we are well positioned to make significant progress in these areas by 2020.

NPS trends, which are an indicator of customer satisfaction, are very positive for our studio and our digital experiences in our geographic markets. Our application experience continues to receive high ratings among our membership base, demonstrating that the digital experience combined with a highly tactile, in-person community provides invaluable value to members. Member engagement for apps remains strong, with strong trends in the percentage of members who follow food, register their weight, use Connect and synchronize a fitness machine. In September alone, nearly 2 million members used Connect. And in the third quarter, our members created nearly 2 million messages, 13 million comments and gave over 60 million likes. The number of members clocking one device each month was over 1.6 million in the third quarter, compared to about 1.3 million the previous quarter. Community and commitment are at the heart of everything we do. The more a member has points of contact, the more likely it is that he continues his way and has even more success. And when we influence a person's life, it creates a coaching effect that affects family and friends, spreads healthy habits and creates lasting change.

So I will now give Nick the call to discuss our finances and prospects, and then I will come back to discuss our priorities and plans for 2020.

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Nicholas P. Hotchkin, WW International, Inc. – Chief Financial Officer, President, Emerging Markets and Operations Officer North America (4)

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Thank you, Mindy. Before discussing our initiatives regarding our studio strategy and future experience, I will review our third-quarter financial data and take stock of our outlook for the full year. We closed the third quarter with 4.4 million subscribers, up 6% year-on-year, higher than we expected. The number of end-of-period digital subscribers increased 13% year-over-year to 3.1 million, up from the 8% gain recorded in the second quarter. Lastly, the number of Studio subscribers at the end of the period decreased by 7% year-on-year to 1.3 million, an improvement over the 11% decline recorded in the second quarter.

Total global recruitments were positive compared to the 3rd quarter. In September, the launch of our fall marketing campaign accelerated the trend in September, but we are confident that we are well positioned for the launch of our winter innovation. Recruitment channels, such as Invite a Friend and Integrated Purchase, continue to work well for us and are very effective at attracting members for the first time. In the third quarter, about 15% of our global recruits joined through these two channels.

In the third quarter, total revenue amounted to $ 349 million, down 3% from one year to another in constant currency. Digital Subscription Products grew by 9% and Studio Products decreased by 13% in constant shift. Continental Europe was our best-performing segment, with total sales up 3% from the previous one. The gross margin rate was 56%, down 300 basis points from the previous year, at constant exchange rates, due to lower revenue, launch for the winter as well as increasing inventory reserves compared to last year. Earnings from operations were $ 95 million, down 19% from the same period last year, at constant currency, primarily due to a reduction in the impact activity related to the decrease in revenues compared to the period of the previous fiscal year. Our tax rate for the third quarter was 22%, which was lower than we had previously anticipated. Third quarter GAAP EPS was $ 0.68. This compares to the $ 1 BAC GAAP in the third quarter of 2018. EBITDAS was $ 109 million in the third quarter, compared to $ 135 million for the same quarter last year.

Let's move on to our perspectives. We expect the trends in our business to continue to increase in the fourth quarter. We are still forecasting that the FY 2019 business figure will reach at least $ 1.4 billion, despite the increased currency difficulties over the second half of the year. Our revenue forecast now assumes a negative foreign exchange impact estimated at $ 28 million compared to the $ 20 million anticipated in our August call and our $ 12 million call in May. These forecasts also imply a continued shift in membership to digital subscriptions and anticipate further improvements in recruitment trends in the fourth quarter. Although product sales have declined since the beginning of the year, we expect that they will become positive in the fourth quarter as we will benefit from our expanded range of offerings and enhancements. trends in studio attendance. Overall, we expect subscription revenues to account for approximately 85% of our total revenues in 2019.

We continue to expect revenues from North America and the United Kingdom to be below 10% year-over-year, at constant exchange rates. And we now expect revenue for continental Europe as a whole to be slightly higher than constant-year revenue for the year. Our full-year GAAP EPS guidance range has increased from $ 1.63 to $ 1.75. This forecast is based on 70 million shares outstanding for the full year.

For the rest of my comments, I'll talk about the mid-point of our BPA range over a full year and at a constant exchange rate. We expect fourth quarter gross margin to decrease by approximately 300 basis points, reflecting initial investments to support the upcoming launch of the program. We anticipate a gross margin decrease of approximately 150 basis points for the full year 2019. Marketing expenses in 2019 are expected to be approximately $ 245 million. We will continue to be flexible and flexible in our approach, investing in initiatives that deliver results. And we will launch our winter television advertising campaign after Christmas. General and administrative expenses in 2019 are expected to be slightly north of $ 250 million.

Below the line, we now assume that interest expense will be approximately $ 136 million for the full year and an effective tax rate of approximately 23%. While awaiting the development of regulations likely to affect the tax on foreign income, our tax rate for the whole of the US $. fiscal year may not exceed 20%, which is reflected in the upper portion of our indicative BPA range. For the year, we expect operating expenses, capitalized software, studio and network enhancements to be around $ 60 million and D & A expected to be approximately $ 50 million. dollars.

I would now like to spend a few minutes talking about our capital structure and our cash generation. Our liquidity position is strong. At the end of the third quarter, we had $ 239 million in cash and an unused $ 150 million revolver. Given the improvement in business trends and strong cash generation at the beginning of the fourth quarter, we decided to prepay $ 50 million of term loans, bringing the total amount of voluntary prepayments of this year to $ 100 million. We expect EBITDAS of approximately $ 360 million for the full year, which will help maintain our strong cash generation. We have a debt structure consistent with the agreement and the ability to prepay our term loan at any time. We closed the third quarter with a leverage ratio of 3.85 times net debt on EBITDAS. Note that the debt calculations used in our credit agreement are based on the senior lien. And at the end of the third quarter, our consolidated net debt / EBITDAS leverage ratio was 2.92. Thanks to our highly liquid business model, we have the resources and flexibility to not only run our business and reduce our debt, but also to continue to invest in initiatives that will contribute to our growth. Beyond direct investments in operations, we can also look for M & A capabilities and franchises, technologies and digital products, such as our recent acquisition of the Las Vegas franchise in October.

Going forward, we expect to end 2019 with more year-over-year subscribers, which, given the nature of our commercial subscription model, translates into a modest revenue for 2020. It should be noted that this is only a starting point for taking into account the expected benefits. growth in membership recruitment next year. And while we do not provide specific revenue guidance for 2020 today, given our momentum and successful initiatives this year, coupled with the upcoming launch of our new program, we plan to increase recruitment, increase the number of subscribers and increase revenue and profitability in 2020.

Before returning the call to Mindy, I would like to discuss our initiatives regarding our Studio strategy and our future experience. Studio's resumption of growth is an important part of our strategy. The intense focus on the company has led to a steady improvement in trends since the beginning of the year and we expect Studio Studio recruitment to become positive in the fourth quarter. Despite these actions, the Studio sector continues to weigh on our revenue statistics, the price of a Studio subscription being double that of a digital subscription. And as we expect digital growth to continue to outpace Studio's, our Studio strategy has short and long-term components. In the short term, we are launching another workshop participation challenge, encouraging members to stay engaged during the November and December holidays. We have seen great success in our participation challenge in September earlier this year and we intend to continue our momentum until 2020. In addition, we are adding milestone rewards to our members. These moments of recognition and celebration are powerful motivators that are an integral part of the members' journey.

On the people side, we are very fortunate to have a group of passionate and committed coaches and guides who inspire and encourage members every day. Historically, we have recruited our coaches only from among our studio members. We are also recruiting from our digital members who are equally passionate and committed. And we believe this approach will be beneficial if we are looking to attract new audiences and benefit more from our coaches in a digital environment as well as in the studios.

In addition to these short-term actions, we reinvent the Studio experience and we see a path to a variety of experiences that meet the needs and demands of our members. The 28 high-volume US studios now have ongoing experience, complemented by an expanded selection of retailers and a full-time studio manager mobilizing members, spurring attendance and sign-ups, and raising awareness of local community.

We are also testing Studio within a store located in partner stores, such as our newly opened driver with Kohl's in Dekalb, Illinois. And the first reactions have been positive and allow new member registrations and Studio upgrades only from digital members of Studio. To reinforce our brand presence this winter, we will test ephemeral seasonal stores in busy locations where customers can learn more about WW and speak with a coach. At the same time, we will continue to have a flexible footprint allowing us to leverage third party sites, what we call Studio, to reach communities where we only have a few meetings a week.

Finally, we are currently testing virtual group coaching in several markets. We are very excited about this and plan for a wider launch later in 2020 to give members more ways to engage with our coaches and other members in whatever format is right for their lives. And with that, I would like to return to Mindy.

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Mindy F. Grossman, WW International, Inc. – President, Chief Executive Officer and Director (5)

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Thank you, Nick As a goal-oriented organization, we strive to provide our members with a deeply human and personal experience, optimized by technology and based on an effective, science-based program that delivers results sustainable. I am very pleased to announce that next week we will be launching our new innovation program on a global scale. As a reminder, our latest program innovation was in December 2017. All details will be released on Monday, November 11th. This new program will constitute our most personalized weight loss plan to date, leading to clinically significant weight loss model healthier eating. We are constantly listening to our community and we know that our members want a more personalized approach. We are excited and look forward to launching this program. And as always, no food will be banned on the Internet.

Beyond our 2020 food innovation, our goal is to constantly customize the WW experience, so that each member feels we understand it, we know it and we provide a program specifically for them. . In anticipation of our innovation launch, we have worked intensively with our Studio teams to ensure that our coaches and guides have the training and support they need to effectively advocate for the new program. Through a combination of live training and virtual micro-learning sessions, our teams are well prepared and excited about the imminent launch.

While the launch of our program and our messages are imminent, all the amplification of our marketing will begin after Christmas. This winter, we will launch a targeted campaign highlighting the new WW program, weight loss results and success stories from individual members who have successfully lost weight in the new WW program, including those from our ambassadors of global celebrities, such as Kate. Hudson, Tamela Mann, Helen Segara, Robbie Williams, Sam Armytage and many others. It will be a robust integrated campaign on television, social networks, digital and public relations. Oprah Winfrey will also feature in our American and Canadian campaigns, as well as many members, explaining how the new WW program is customized for you.

As we have already discussed, one of our other priorities is to galvanize communities and reach new and diverse audiences through events, activations, content and events. experiences. We launched this initiative with events around World Wellness Day, at ESSENCE Fest, WW Good events and a number of special wellness events across our markets. . We will continue to mobilize in 2020 and beyond, by encouraging the community and bringing people together in a new way. And starting in January, we have an extraordinary opportunity to do what WW and Oprah Winfrey do best, bringing communities together for a common goal of health and well-being. Together, we will present Oprah's Vision 2020, Your Life Online, presented by WW Presents, in 9 US cities. 80% have been sold nationwide. The press coverage has been fantastic so far, generating 23 million impressions online and nearly 19 million mentions on radio and radio. We look forward to announcing special guests and getting more details on the tour in the coming weeks. We are excited to be able to host the 2020 Oprah Vision 2020 Tour, in front of over 100,000 participants, with a training effect that will be significantly more important early in the year.

Harnessing the unparalleled power of an in-person experience and extending it to our global community is one of the many ways in which WW inspires the community as a global wellness partner, making it accessible to all. People are looking for experiential, creative, empowering and fulfilling experiences. Creating and delivering such events is now essential to reach new and diverse audiences and connect them with WW. We also explained that we wanted to have healthy cooking, encompassing all products, foods, content and experiences. As we grow our brand, WW comes to new places, from Barclays Center cafes and menus to healthy cookware and food items on sale in 250 Kohl's stores. And now, WW is at the airport. Nos en-cas WW instantanés, entièrement reformulés et reconditionnés, sont désormais disponibles dans plus de 80 marchés CIBO Gourmet dans 9 grands aéroports américains, dont JFK, LaGuardia, Newark et Chicago O'Hare. Et comme nous cherchons à avoir un impact sur la définition d'une cuisine saine, en plus de nos repas sains avec Blue Apron, nous collaborons maintenant avec Sur La Table, offrant des cours de cuisine WW dans plus de 80 de leurs points de vente. Nous sommes ravis des taux de remplissage des classes à venir, avec les favoris asiatiques, la classe WW étant le cours de cuisine WW le plus populaire à ce jour.

Nous travaillons également activement à la transformation complète de notre activité Solutions de santé. Notre objectif a été de former une toute nouvelle équipe, d'optimiser notre offre de programmes et de développer les systèmes technologiques nécessaires à l'amélioration de nos processus et de nos rapports. Avec une équipe revigorée, nous visons à accroître la notoriété de WW en tant qu'avantage de bien-être et à démontrer la valeur de WW à des partenaires stratégiques représentant les employeurs, les fournisseurs, les médecins et les payeurs. Nous avons une grande liste de clients, nous constatons un engagement accru et des possibilités beaucoup plus vastes dans les années à venir. Nous parlerons plus en détail des opportunités à court et à long terme pour cette activité en 2020.

Nos équipes du monde entier sont extrêmement enthousiastes et énergiques alors que nous concrétisons notre vision d'inspirer des habitudes saines pour la vie réelle et d'assurer le bien-être de tous. Avec un nouveau leadership dans bon nombre de nos pays, nos équipes sont énergiques et concentrées sur l'amélioration des tendances en 2019 et la mise en œuvre des priorités qui contribueront à un avenir plus fort.

En résumé, nos résultats du troisième trimestre démontrent clairement notre capacité à relancer l’activité, et WW est sur le point de revenir à une trajectoire de croissance en 2020. Je suis confiant dans nos stratégies et nos plans pour améliorer notre marque et diversifier notre public. , élargissant notre présence et assurant une croissance et une rentabilité durables à long terme. Nous aurons un élan vers 2020, accéléré par le lancement de notre nouveau programme d’innovation, soutenu par une campagne hivernale vigoureuse et par l’engagement accru et l’enthousiasme croissant suscité par notre expérience studio repensée. De plus, la tournée WW Presents, tournée Vision 2020 d’Oprah, concentrera votre vie, renforcera notre message et encouragera la communauté et l’enthousiasme tout au long de la saison hivernale. Merci de nous rejoindre à l'appel aujourd'hui.

Et avec cela, nous allons maintenant passer l'appel à l'opérateur pour Q & A.

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Questions et réponses

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Opérateur (1)

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(Instructions de l’opérateur) La première question de ce jour viendra d’Edward Yruma de KeyBanc Capital Markets.

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Edward James Yruma, Marchés des capitaux KeyBanc Inc., Division de la recherche – MD et analyste de recherche principal (2)

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Donc quelques rapides pour moi. D'abord, merci d'avoir fourni au moins un peu de réflexion sur la manière de cadrer l'opportunité financière pour 2020. Je sais que par le passé, lorsque vous êtes à la hausse du point de vue du recrutement de membres, les marges de contribution se situent dans la fourchette des 50% et plus. Je sais que vous ne donnez pas de conseils. Mais y a-t-il quelque chose qui ferait en sorte que l'année prochaine soit différente, une? Et puis deux, évidemment, beaucoup à discuter de la nouvelle innovation du programme. En ce qui concerne le lancement du programme, en quoi ce lancement serait-il différent de ce que vous avez fait en 17 et peut-être d'un point de vue financier? Est-ce un lancement plus vaste qu’alors et peut-être contextualiser la façon dont nous devrions penser à la hausse?

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Nicholas P. Hotchkin, WW International, Inc. – Directeur financier, Président de l'officier responsable des marchés émergents et des opérations en Amérique du Nord (3)

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Regardez, d'abord, sur l'économie. Écoutez, nous avons le même excellent modèle commercial que celui que nous avons toujours eu et des marges supplémentaires très élevées avec la croissance, et nous nous y attendions certainement en 2020.

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Mindy F. Grossman, WW International, Inc. – présidente, chef de la direction et directrice (4)

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En ce qui concerne l’innovation du programme, ce qui nous enthousiasme le plus, c’est qu’en raison de sa nature personnalisée, nous pensons que cela séduira non seulement les nouveaux clients, mais aussi les clients inutilisés, mais également notre base existante, ce qui nous donne une très grande satisfaction. large éventail de personnes à qui le programme fera appel dans un environnement où les gens recherchent plus de personnalisation et de personnalisation. Et nous pourrons y parvenir avec une efficacité, des essais cliniques et des résultats significatifs dans tous les domaines du programme. Je pense que vous voyez que nos efforts de marketing sur toutes les plateformes sont cohérents. Nous pourrons donc lancer notre programme d’innovation par l’intermédiaire de tous nos canaux de marketing et sentir que nous aurons un message très clair en 2020.

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Opérateur (5)

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Notre prochaine question aujourd'hui sera posée par Alex Fuhrman du groupe Craig-Hallum Capital.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, division de la recherche – Analyste principal de recherche (6)

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Je voulais poser quelques questions. Je veux dire, il semblerait que vous soyez en train de piloter ou d’avoir lancé votre nouveau programme au tout début dans deux de vos plus petits marchés. Juste curieux de savoir comment ça a disparu. S'il y a eu des enseignements intéressants de ce lancement initial? Et puis, en y réfléchissant un peu plus largement, il semblerait que ce soit un peu plus tôt dans le calendrier que lorsque vous avez lancé Freestyle il y a deux ans. Juste curieux de savoir si cela devait donner aux gens plus de temps pour s’adapter? Exactement ce que vous pensez du calendrier du lancement du nouveau programme de diète et comment cela se répercutera sur la saison occupée du mois ou des 2 prochaines années.

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Mindy F. Grossman, WW International, Inc. – présidente, directrice générale et administratrice (7)

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Yes. C'est Alex. Nous avons adopté une approche très structurée et disciplinée à l’égard du lancement et nous voulions clairement faire des essais pilotes sur certains marchés afin de nous assurer que toute notre technologie était active, notre messagerie. Vous verrez donc clairement cela dans le monde entier et tout le monde sera diffusé lundi dans le monde entier, ce qui nous réjouit beaucoup. En ce qui concerne le timing, les équipes y travaillent depuis très longtemps. Et nous sommes plus en avance que nous avons été. Nous sommes donc convaincus que nous devons nous rendre sur le marché et que nous sommes en mesure de galvaniser notre base de membres existante est un réel point positif. Mais l'essentiel de nos efforts de marketing, y compris nos efforts de marketing de masse à grande échelle, a vraiment lieu après Noël.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst (8)

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Génial. That's really helpful. And then, Mindy, I think you mentioned in the prepared remarks that you're pretty confident that you're going to be able to hang on to increases in retention that you've seen recently, that you'll be able to hang on to those through the winter season. Just wondering if you can elaborate on where that confidence comes from? Is it something you're seeing in the numbers today? Or is that also related to rolling out the new programs then?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (9)

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Yes, I think it's really important. And as you hear every time I speak about retention, I'm maniacally focused on engagement. And we measure that in every aspect of the business, digitally, physically engaging and tracking and engaging in community. And a lot of the efforts and what we've delivered to people across the ecosystem of nutrition, activity, mindset, our WellnessWins program and community really all have contributed to that. So the measure of engagement that we're seeing is at an all-time high, and that gives us the confidence along with the fact that we have the new program and we'll have kind of a lot of noise about the positivity of that.

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Operator (10)

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Our next question today will come from Olivia Tong of Bank of America.

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Olivia Tong, BofA Merrill Lynch, Research Division – Director (11)

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First, on the test markets, if you could just talk a little bit about how you measure performance there? What are sort of some of the KPIs to influence your decisions? And then if there's going to be any pricing changes that come with the new innovation?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (12)

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So a lot of the things we're testing are — we know the efficacy of the program, right? So what we're really testing is, you can imagine, globally around the world, all of our technology changes. So we're making sure that, that's going to be a seamless experience for people, that they will be onboarded into whatever new program. So most of the attention is really being paid to the execution of the program, not necessarily marketing efforts, which really launch going forward. But we're very pleased with what we're seeing. Now that we truly operate as a global organization, I think you've heard us talk a lot about tests in markets from our Group Virtual Coaching that now will be rolling out globally. So we're really leveraging our capabilities to test, accelerate and roll out. And this is another great example of that.

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (13)

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Yes. Olivia, like, on the price side, like no broad — no price change — no change to our strategy there. As you've heard us say many times. Our focus is really on delivering value to our members, to attract more people to the brand and to have them stay longer, and that's what we'll plan to do this winter.

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Olivia Tong, BofA Merrill Lynch, Research Division – Director (14)

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Got it. That's very helpful. Just 2 follow-ups there. First, on the meeting (biz), I guess I was a bit surprised how challenged it was this quarter. And how does that in any way influenced you as you prepare for the launch? What does it mean as you prepare that meetings decelerated that dramatically. And if you could talk about things that you're doing to sort of prop that up at…

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (15)

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Yes. So just to say, this was the least deceleration in a very long period of time. So we feel that we're making great progress in our Studio business, and we've said that we see that returning to growth. So I just need to clarify that.

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (16)

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Studio sign-ups, recruitment during the quarter was down year-over-year, but in the single digits and marked improvement from Q2 and Q1. And revenue, look, yes, still down 13% in constant currency in Q3. Bear in mind that our fall campaign happened in September, so it was our strongest month. We got some of that revenue in Q4, and a decent improvement from down 17% in Q2. So good progress in the Studio business, a lot of focus. But obviously, we're delighted that we're going to have a new program to shout about here on Monday.

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Olivia Tong, BofA Merrill Lynch, Research Division – Director (17)

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Génial. Just one last thing. In terms of external partnerships. There's no shortage that you have of external partnerships, whether it's lifestyle services, workouts, food, Amazon, et cetera. But one area you haven't partnered so far is pharma. So what's your thought there and partnerships overall going forward?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (18)

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Yes. So I mentioned on the call, our Health Solutions business, which is our B2B, or as I call it B2B2C business to recruit. So we're doing a lot of work there, particularly in areas of diabetes and other areas. So we continue to look at partnerships across the spectrum, and we'll be sharing with everyone those that we'll be moving forward with into 2020.

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Operator (19)

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Our next question today will come from Jason English of Goldman Sachs.

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Jason M. English, Goldman Sachs Group Inc., Research Division – VP (20)

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I guess I want to come back to a couple of the questions that Olivia had. First, on the meeting subs — or building off the topics, I guess. The meeting subs, the guidance for year-on-year growth in the fourth quarter, if I heard that correctly. Is that based on what you've seen so far this quarter? Or is it based on an expectation of what the new program will bring?

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (21)

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Yes, look, so we expect Studio recruitment to turn positive year-over-year during the fourth quarter.

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Jason M. English, Goldman Sachs Group Inc., Research Division – VP (22)

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And is that recruitment? Or is that — would you expect that to translate into overall subs being up year-on-year?

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (23)

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No. We're talking recruitment. And so as we launch new programs, sometime during the quarter, we expect to turn positive.

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Jason M. English, Goldman Sachs Group Inc., Research Division – VP (24)

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Got it. That's helpful.

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (25)

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Yes. And as Nick mentioned, obviously, with the campaign, we saw sequential improvement across the business. So one thing I want to talk about, and Nick talked to it in his discussion on the Studio business as a whole, what we're very focused on is really meeting people where they are. And in today's environment, giving them the support they need, how they want their support. So every member we have has our digital experience. And we still have 1/3, approximately, of our members who still want that face-to-face physical experience, and we want to support them, but we're looking at opportunities to do that while also exposing the brand to new customers, like the Studio that we have with Kohl's in Dekalb and some of the pop-ups that we'll be doing that Nick mentioned. What we're also very excited about is the launch in 2020 of virtual group coaching. So now we'll be able to give to a digital experience, virtual group coaching, one-on-one coaching and if they want, the physical experience of coming together and then lastly, the community activation. So we'll really be able to meet people where they are and how they feel they need the best support.

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Jason M. English, Goldman Sachs Group Inc., Research Division – VP (26)

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It sounds exciting. One quick follow-up on the pricing strategy question. I understand as we look at revenue per seller, revenue per user that there's a mix component here of the digital outpacing meetings. But even when we cut through that and just look at the rev per sub for meetings, it continues to fall quite a bit year-on-year. I know this was a topic on the last quarter call too, and you mentioned that pricing comps, sort of, promo comps actually ease in the back half, suggesting that we should see an abatement of that, but we're not really seeing an abatement. What's driving that compression? And what appears to be pricing for meetings?

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (27)

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Yes. Look, you're right, Jason, that if you look at — compare paid weeks on the Studio side versus revenue per Studio, you see some price realization in Q3. No real change to promotional strategy. A good driver of it is our focus on driving people to sign up initially for longer-term retention plans, but that's a key driver of it.

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Operator (28)

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Our next question will come from Linda Bolton-Weiser of D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division – Senior Research Analyst (29)

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I just wanted to know, can you give us any color on how the sign-up — or ticket sales, rather, are going for the Oprah tour? Are they kind of in line with expectations or above or what so far?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (30)

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Yes. Sorry. We're very excited about the response. They are very much ahead of expectations. We've had incredible press, conversations about it. People are very excited to experience what it is we'll be delivering to those markets. And as I said, we're touching hundreds of thousands of people across those markets, but the messaging and amplification will be that much more. So we're very pleased.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division – Senior Research Analyst (31)

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And then my second question was just on the competitive landscape because you have mentioned some of the issues last diet season had to do with competition, keto, for example. Are you anticipating anything like that in this upcoming diet season? And is there anything you can sort of get ahead of the competition or anticipate a little bit better if there is some sort of competitive threat? And how are you kind of rank-ordering Noom in the competitive landscape? Is that threatening or less threatening? Or how do you rank that versus keto?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (32)

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Yes. So how I would say, is there's always going to be competition, and we are acutely aware of who that competition is and what they're doing. And what we're focused on is what we are doing to be able to accelerate our business and differentiate what we do, not only for names competition, but people thinking they can get healthy themselves. We are very excited, clearly, about our new program innovation because we think it's going to fill a need that we don't feel currently exists today that we've been working on through our science teams, and we've been very pleased with all clinical trial results that we'll be able to articulate. The efforts we're making around all the enhancements in our digital assets, which you've heard us talk about, the increased engagement that we're seeing as a result of that. So I think we're — not think. We're going into the season eyes wide open but very clear about what we have that is distinct and differentiated.

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (33)

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I think that's right. Look, I like many things about this quarter. Obviously, we've seen the over 10-months retention milestone, returning to global recruitment growth. But the response of folks to a market-leading digital ecosystem, seeing each segment having double-digit increases versus prior end-of-period virtual digital subscribers shows the response to our digital assets.

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Operator (34)

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And our next question today will come from Michael Lasser of UBS.

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Michael Lasser, UBS Investment Bank, Research Division – MD and Equity Research Analyst of Consumer Hardlines (35)

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Given the momentum of the business has had and the fact that you'll be launching the new program, Mindy, is there a subscriber growth number as you look out over the next few quarters that you would be disappointed with if you didn't achieve? The market's already assuming that you're going to get back to full subscriber growth both — within the meetings business. But is there a level of growth that you would be disappointed with?

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (36)

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Michael, look, obviously, look, we're not providing guidance today other than saying based on this momentum, not only on recruitment but on retention, we've got great tailwinds heading into next year. We're excited about this new program. Certainly, like any definition of success for next year has recruitment subscribers, revenue and profit growth in 2020.

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Michael Lasser, UBS Investment Bank, Research Division – MD and Equity Research Analyst of Consumer Hardlines (37)

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And my follow-up question is, you're in this cycle now where you're having an innovation that would drive growth every couple of years by new program launches. Is there any eye towards trying to make the business just a bit more sustainable, independent of program launches? And how do you achieve that goal?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (38)

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Yes, Michael, that is a great question. Certainly, we feel that innovation based on what we're seeing in science and technology and consumer behavior is something that we're known for and where we have to continue innovating. But innovation goes beyond a food program. And many of the things that we're doing in other areas of the business, whether it's science applied to activity and what we're doing there, we have pilots around sleep. We're focused on mindset. So the key is for us to have a continuous flow of innovation, not just the nutrition side, although we know how critical that is, particularly for weight loss. But the team's focus is to be able to constantly be delivering enhanced innovations and results to create greater engagement and recruitment absolutely.

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Michael Lasser, UBS Investment Bank, Research Division – MD and Equity Research Analyst of Consumer Hardlines (39)

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Without providing specific guidance, if we're talking a year from now or when we're talking a year from now, do you think you'll be at that point where you'll just have constant innovation coming and not — obviously not just on the food side?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (40)

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Well, that's certainly our goal. And then what we're focused on in different areas of the business. This is the — one of the first conversations I've really had about our Health Solutions business. I think we mentioned on the last call that we have created a third tech hub in Toronto that is servicing that business and other areas of personalization and AI. So we're constantly iterating on innovation. And I think that's going to be important in all the segments of our business.

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (41)

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Look, a great question, Mike. We've shown as recently as 2017, they're going to grow in the second year of a food plan, innovation. And look — and that's why we're so focused on engagement and retention. That's why we're so focused on multiple growth levers, like what Mindy just mentioned, Health Solutions, we're excited about partnerships, new demographics, emerging markets, too.

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Operator (42)

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Next question will come from Brian Nagel of Oppenheimer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst (43)

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So I've got — first question I want to ask is on the new product innovation. So maybe you've discussed it a lot here. It's obviously launching soon. You've tested it. I'm sure you're pleased with what you've seen in the test. But the question I have is how flexible is this? Or how — are there levers you could pull that if you launch it next week and you're not getting the response you expected or it's underperforming, there's ways you could tweak it into the year-end and prepare then better for the New Year's — the early part of next year?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (44)

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So the innovation itself, thousands and thousands of people have gone through this. So it works. So we have no concerns about the program and the innovation itself. So I think that's important. If what you're asking is how we're amplifying it, that we're always constantly iterating and tweaking. But one of the things we're excited about going into 2020, it's very clear, very simple. It's the new program, the efficacy, what it does and the ease, simplicity and the results. That's a very clear message that we believe will resonate. But to be clear, the program itself has been received extremely well.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst (45)

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That's helpful. The second question I have, not — sorry to be nitpicky here, but I guess it's more for Nick. But the product margins in the quarter were down, if I did the math correct, in excess of 1,000 basis points. I think you had guided to 300. Was — is there some call out there as to why the product margins were so — were particularly weak here in Q3?

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (46)

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Yes. Well, let me answer that in a couple ways, Brian. Within the overall context of the business performed pretty much exactly the way I would have hoped in Q3, frankly, if not, as you saw in our post ahead of our expectations despite negative foreign exchange. So look, on the gross margin side, look, we expect to be down 300 basis points year-over-year and we were, and we've said about 100 of that was driven by year-over-year inventory reserve changes. And then on the consumer product sales side, if you're going there, good sequential improvement. They've been a real weak spot in the first half of the year. So seeing consumer product sales down 4.6% in Q3 and we're forecasting to return to growth in Q4. I feel pretty good about the consumer product sales trajectory also as people get their hands on our broad new assortment.

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (47)

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Yes. Just to give some context on the product sales side, if you remember, we reformulated, created and expanded 100% of all of our products. So starting in January, what you saw in our distribution channels of our Studios and e-commerce are all the new products. So we've had to scale and expand those assortments globally starting with the first of the year. So as Nick mentioned, we're now where we can see increases in the product sales. And because of the work we did and what the new products are, we're now actually able to distribute those products outside our own platforms. And that's what's exciting, and that's where we'll have an opportunity in each market.

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Operator (48)

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And our next question today will come from Michael Swartz of SunTrust Robinson Humphrey.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division – Senior Analyst (49)

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Just wanted to touch on the national television advertising program you started running later in the quarter. One point of clarification. Did you have a similar ad campaign — national television ad campaign last year at that time? And then, I guess, Mindy, with regards to how — maybe the response rate from consumers or the response from consumers, did that come in relative or above your expectations? And are there anything quantitative you can provide us about maybe how well that did and how well that continues to do into the fourth quarter?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (50)

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Yes. So if you remember, last year, we had a summer campaign that ran into the beginning of the third quarter that included TV, and we didn't have fall TV at the end of the quarter. In a lot of the learnings, we did shifts. So we didn't have TV early, and then we had TV as part of fall. But obviously, took a lot of the learnings that we did post January and a lot of the new campaigns. And what we saw in September with the fall campaign was very positive response, hence, the recruitment that you saw. Does that make sense?

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division – Senior Analyst (51)

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Yes. That's helpful. And maybe sliding over to Nick. Just with regards to your EBITDAS guidance for the year, you maintained it. Remind us, does that guidance add back the $6 million in — charges that you guys saw in the first quarter?

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Nicholas P. Hotchkin, WW International, Inc. – CFO, President of Emerging Markets & Operating Officer of North America (52)

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The ($350 million) adds back the restructuring charges, I don't believe so. Ce ne est pas. It adds back D&A and stock-based compensation.

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Operator (53)

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And our last question today will come from Kara Anderson of B. Riley FBR.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division – Associate (54)

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It's actually Marc on for Kara. Mindy, you talked about testing some pop-ups in high traffic areas. I'm wondering if you could elaborate on what type of high-traffic areas you'll be targeting. And then maybe some of the aspects you're hoping that will enhance the brand?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (55)

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Yes. We're finalizing all of those elements. But as we've seen, when we show up what we want to do is be able to attract audience that may not be familiar with the brand. So how can we give them an environment where there's a coach? They can understand the program, almost like have an Apple Genius Bar and interface with our products. So we're looking forward to doing some different things than we've done in the past for winter.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division – Associate (56)

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And then depending on the success, this could be rolled out to maybe a longer-term permanent strategy?

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (57)

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Absolutely.

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Operator (58)

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And ladies and gentlemen, this will conclude the question-and-answer session. At this time, I'd like to turn the conference back over to Mindy Grossman for any closing remarks.

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Mindy F. Grossman, WW International, Inc. – President, CEO & Director (59)

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Well, thank you, everyone, for being on the call. And I just want to reiterate that driven by the strong execution, our focus, the creativity of our global teams, the subscriber growth trends are gaining momentum, and we feel it's positioning us well for a strong start to 2020. We're excited to be launching our new program globally on Monday. So our most customized weight loss program ever. Our coaches and guides are certainly advocates and evangelists for the new program, and I think it will have broad appeal among current, returning and first-time members. And it will also be amplified by our most integrated marketing campaign that certainly will have a strong call to action. And then from January to March, we'll be spreading our message of wellness in the 9-city tour, the WW Presents Oprah's 2020 Vision, Your Life in Focus. So I want to thank you again for joining us today. And I truly hope you'll join Oprah and me at one of our tour stops this winter. So thank you.

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Operator (60)

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The conference has now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.

Edited Transcript of WTW Conference Call or Presentation of Results, Nov. 5, 19 at 22:00 GMT | LIMITED TIME OFFER !
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