Q3 2021 WW International Inc Earnings Call

Okay from those discussed here today.

Doctors are explained in detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward looking statements and the risks Glynn certainties of such statements. All forward looking statements are made as of today and except as required by law. This company's undertakes no obligation you publicly update or revised any forward looking.

Statements, whether as a result of new information future events or otherwise.

Joining to call, our Mindy Grossman, President and C. O <unk> C O L. L. A b O T C. S O <unk> turn the call over timidity inquiry good afternoon, everyone.

Before we get started I want to give context to the announcement last month about my decision to sit down as president and C. E O W. W. After the first quarter of 2022.

When I joined weight Watchers in July 2017 to lead the transformation of the brand I knew it was an opportunity to have both a business impact and human at that hour.

Your purpose.

Inspire healthy habits for real life for people families communities the world for everyone to be the brand that can democratize wellness for all is truly what ww represents today.

We have transformed digitally creating a holistic wait and wellness ecosystem.

Expanded and diversified our member base and leverage the power of community at the core of all that we do.

I am proud to have built and led the extraordinary Ww team through this transformation and the challenges of the past two years.

But what I'm truly excited about is the launch next week of the most groundbreaking food program innovation in the company's history and.

An entirely new science base personalized program for efficacious livable sustainable healthy weight loss and overall wellness.

My intention is to leave the company through this launch in the winter of 2022 season, and then provide a seamless transition to new leadership.

This has been a profound experience and I will always be part of the Ww family as a member and advocate and an ambassador for all that we do and I can assure you that the entire WCW team shares a common purpose and will carry on the impactful work that we do it around the.

World each and every day.

But turning now towards the third quarter results.

Okay.

Because we believe innovation is so important and powerful today, we will be providing you with a preview of the key program elements ahead of Monday's official launch.

In addition to give you a behind the scenes perspective on this breakthrough new program, we will be hosting a virtual innovation event on November 18th for analysts and investors.

During the event, we will share more color on the development process, the science and insights behind our new program and discuss how we are bringing it all to life.

<unk> will be announced in the coming days.

As I've mentioned previously the cross functional multi year effort behind this innovation was the most comprehensive and well executed that I've witnessed since joining ww.

On Monday to globally launch are Newfield program with truly individualized plans that are accustomed built for each member.

Each member will have a unique point budget and their very own zero point food split based on the foods, They say they love and can't live without.

For the first time since 2015, we are updating our proprietary award winning point system to account for added sugar and saturated fat fiber and additional nutrients.

Ww's team of registry dietitian and nutrition scientists develop the rigorously tested modernized feed algorithm to reflect the latest science and healthy eating recommendation and nutrition.

And for the first time members will now be able to earn points for practice state unhealthy behaviors, enabling them to grow their daily budget by eating non starchy vegetables, reaching a daily water goal and exercising.

We have purposely created a scientifically advanced program that puts our members front and center. So they can find satisfaction adopting healthy habits that are livable realistic and sustainable.

As part of the Onboarding assessment, each member takes to customize their zero point toothless and personalized budget. Those members who indicate they have diabetes will receive a food plan specifically tailored to their unique food needs.

Guiding them towards foods that are less likely to impact blood sugar levels and consistent with the American diabetes Association and the international Diabetes Federation guidelines.

We believe this is a powerful program innovation as Richard Research has proven at individualized programs work and helping people achieve their weight loss goals.

During the six month clinical trial participants experienced clinically significant results as it pertains to their weight and overall health and wellness.

Not only did we see clinically significant weight loss. During this time, but we also saw notable improvements in overall quality of life and will be decreased hunger and food cravings and improvements in both physical activity and adoption of healthy habits app.

<unk> always from the innovation launch to late December our primary focus will be on inspiring and Onboarding. Our current members to the new program and experience building a network of millions of Ww members, who could advocate for the program and create excitement during a winter recruitment season.

We are also aiming to start building momentum ahead of our fall winter campaign with targeted pre winter digital and social assets launching prior to December 2006.

<unk> recently begun reopening in person workshops due to the easing of local COVID-19 restrictions.

We are making progress on optimizing this business and increased workshop gross margin to 33% in Q3.

We aim to return workshops to a 40% plus gross margin.

We now have a highly flexible workshop cost structure through our realigned physical footprint.

Managing the in person business for the smallest fixed footprint augmented by highly flexible studio app or third party locations, ensuring the availability of workshops to the majority of the population with about 90% of U S households, within a 30 minute drive of our workshop locations.

We expect to end 2021 with about 430 Ww branded studios in the U S down from about 800 pre COVID-19.

These locations will be augmented by approximately 650 <unk> locations in the U S.

And this footprint will provide us with ample capacity for a step up in attendances in January.

And we will continue to evaluate studio profitability on a quarter by quarter basis, and adjust our workshop footprint to support demand.

Grew up slightly year over year in Q3.

We have focused on driving a consumer products revenues in 2022, as we believe we have a significant opportunity to capture a greater share of wallet.

And advancing into the App experience with integrated technologies to have greater capabilities for covert bundling personalization check count and post purchase experience to drive incremental and repeats purchases.

In addition, we are consuming opportunities to rebuild on licensing business in particular by expanding our brand and some product categories followed up by Memphis.

For example, throw a new licensing partner and facilities are recently launched loading a threat is available at nearly fall funded walmart's throughout the United States.

On the ship with fibre one we'll take up in January with Ww branding and assign a papa appearing on packaging nationwide.

Turning to our health care and diabetes business.

The same recruitment pressures facing on each of C.

Also impacting members Signups on a b B C channel.

In addition, the sunset artworks chuchow portion of instances in 2020.

We never expect this business to generate slightly under $40 million in revenue in 2021.

We believe we have a solid foundation for growth and the launch of a dedicated Ww offering specifically designed for people with diabetes of help accelerate our efforts to expand this business.

In summary.

The third quarter revenue performance did not meet our expectations, we exited nimbly with colds correct to cause sanctions given the operating environments. We look forward to the launch of our New program next week, which we expect to drive strong interests and signups across both new unless members.

And now I will turn it over to Amy to discuss on financial performance and outlook.

Thank you Nick.

In Q3, we expected revenue to be down in the low single digits.

While recruitment trends have proven difficult to predict in an uncertain environment. We wanted to provide you with an updated view of our expectations for the year.

While we are focused on maximizing performance the impact of the recruitment shortfall in Q3 will create a headwind in Q4, and we expect to end the year with subscribers down in the mid single digits compared to 2020.

We expect full year 2021 revenue to be modestly above $1 2 billion down in the low double digits with workshop revenue, while sequentially improving each quarter expected to be down nearly 40% for the full year.

Digital revenue is expected to be up in the mid single digits consumer products and other revenue is expected to decline approximately 20% year over year.

As a reminder, the revenue from the 2020 vision tour of approximately $16 million did not recur in 2021.

Adjusted gross margin for the full year is expected to be approximately 61% expanding 270 basis points from the prior year.

We expect full year adjusted operating income to be in the range of $210 million to $220 million.

GAAP EPS, which incorporates approximately 51 per share negative impact from one time items.

<unk> is expected to be in the range of 80 to 90.

Related to capital structure and cash at the end of Q3, we had approximately $188 million in cash and an undrawn revolver of $175 million. We ended the quarter with a net debt to EBITDA leverage ratio of four three times.

Our full year interest expense is expected to be $88 million, which is down approximately $35 million from the prior year.

Excluding the impact of restructuring charges on our P&L, we expect our full year effective tax rate to be approximately 22% cap.

Capital expenditures, primarily driven by capitalized software are anticipated to be in the $40 million range in 2021 dip.

Depreciation and amortization is expected to be approximately $48 million, including accelerated depreciation related to studio closures.

In addition to continued investments in technology, and digital product resources, which fueled the growth of the business. We will continue to evaluate the potential to acquire remaining franchise territories.

In summary, while revenue did not meet our expectations. We are pleased that the diligence cost actions. We have taken enabled us to deliver operating profit slightly ahead of our plan during the quarter, while still prioritizing critical investments in innovation and marketing to drive profitable growth in 2000.

'twenty two.

Looking ahead, we expect to end 2021 with a year over year decline in subscribers, which given the nature of our subscription business model translates into a revenue headwind of approximately $25 million entering 2022.

Note that this is only a starting point before factoring in any benefit from expected member recruitment growth next year.

While we are not providing 2022 revenue guidance today, given our upcoming new fluid program launch and our marketing plans for winter. Our objective for next year is to deliver higher recruitment.

End of period subscriber growth and increased revenue and profitability.

I will now turn the call back to Mindy.

Thanks, Amy we.

We believe our new food program innovation is launching at just the right time.

This powerful new innovation provides truly individualized plans demonstrating exactly with Ww dispense deliver clinically significant weight loss through a livable sustainable program, where members are inspired and supported by a community of members and coaches.

Opinions, social media platforms, and following to drive engagement and conversation about the new food program and Ww across all membership types.

In addition, there will be highlighting our industry first interactive coaching and content experience into <unk> 60, which is delivering ww in a new modern way.

These messages themes and strong call to action will be adapted throughout our international markets and multi platform campaigns across linear TV and streaming digital social PR and search.

We will utilize a mix of high performing offers to appeal to a broad range of new and lapsed members emphasizing longer term commitments, which maximize subscription lifetime values.

In addition, we are further optimizing our website and app store presence to remove friction highlight value and drive conversion.

In summary, while the pandemic environment may consumer behavior is difficult to predict in 2021, we believe we have the right playbook to drive profitable growth in 2022.

We saw it throughout the year in terms of consumer behavior change, which related to performance.

So Q1, we came out feeling positive based on both the qualitative and quantitative evidence that we saw as well as the digital sign ups, which is why we articulated where we thought we were going to go.

When we got into Q2.

After the early part we started to see a fairly dramatic shift in what we were seeing from everything from search trends to what we were hearing from consumer.

And it was pretty consistent across markets.

And it really was as you said people, saying this is what I want to do right now I have been through a lot.

And this is not what I'm going to focus on at the at the moment.

And that really started I think what we said like after the first few weeks of Q2 and.

And so what we've been trying to do is navigate as effectively as possible really look at the pulse points.

And yes was Q3 softer than we had anticipated which is why the team was incredibly nimble in managing both our costs and making decisions strategically on where our marketing spend was going to go particularly in.

Q4, because of how strongly we felt about the upcoming innovation and the reason that we've been articulating our perspective on why we have such confidence in that is yet.

Program itself.

Something we can truly scream from the rooftops as new endeavor has been done before.

But what we've already seen what we've always seen if you look at 2016 2018.

Let's talk about what you're seeing them on consumers last quarter, you talk about wellness fatigue, and and that being a headwind subscriber growth, but are you seeing that sentiment start to reverse and then as you look at the competitive environment out there has there been any impact from a lot of your peers, who have been raising money.

Players like new room and have done that over the last last few few months yeah. So I'll give you a perspective any we obviously do a lot of quality.

I think I use the expression green shoots we intentionally took a conservative approach.

Two pew for because of the level of it certainly we still feel is it. So we don't want to get ahead of ourselves in any way and we want to really focus on the launch. So that's how I would describe that as it relates to the competition clearly their significant competition, but across more than weight loss.

Competitor. She just had a lot of fitness demand in competition et cetera, and so from our perspective, what we're doing is looking to for about performance marketing perspective, maximising every dollar of our spend going into winter and.

Thank you heard me before say, we'd be allocated spend so we could be as.

Strong as possible, particularly leading up to and then when our big campaign launches December 26th and really leveraging and are ambassadors are influencers and really creating as much conversation the other.

Saying that we look forward to is when we do have a launch of something like that to such a degree. The initial focus is on our existing members because we effectively really utilize them for significant word of mouth to start building momentum going into the winter season.

And this is a very kind of breakthrough in engaging where we do see where we're going to have conversation. So what we're actually going to do is allocate some.

Resources, even before the big launch on December 26th to start building momentum.

Got it that's helpful. And then Mindy could you just comment on on how you're preparing the business for for the eventual change in in leadership and has that had any impact on how you guys are planning for the 2022 diabetes in our marketing or just get any organization ready.

Still significantly down year on year, just because we have markets, where we don't even have our workshops up yet.

So obviously, that's a different factor.

And we've intentionally planned.

We haven't planned a huge lift in the fourth quarter from the.

<unk> innovation launch because we wanted to have a modicum of conservatism, even though we're excited about what the opportunity is.

And I would just add Samantha as well that the.

Scriber trends that our recruitment trends in Q3 really drove the revenue shortfall remember in a subscription based business model those revenue impacts carry into Q4.

For Q4, we further reduced.

This is our forecast and in these point, we took we took an approach to just reset our expectations to Q3 trends, which performed a bit worse than in Q2, and so that that's what you are seeing carry into Q4.

Looking particularly in September versus what it is.

Good to see how quickly the team nimbly react to it.

Sure.

Sure.

Marketing resources into into.

Into Q4.

Got it. Thanks, that's all for me thanks, guys.

The next question is from Lauren <unk> of Morgan Stanley. Please go ahead.

Hi, This is Nathan feather on for Lauren.

Can you just talk through in a little bit more detail, what you're seeing in the marketing environment.

Was there any impact from <unk> within the quarter and then given the kind of headwinds you've seen there how is that impacting how you're thinking about the 22 food plan innovation marketing plans.

He needs and we couldn't hear it was there any impact from we missed that part could you repeat the first part of the question.

Any impact from <unk> the App.

Apple privacy changes.

Oh, okay.

Okay.

Hey, Michael either Susan Hi, This is Mike Swartz on for Michael Lasser. Thanks for taking my question.

Alright.

Hurting lie about industrywide pressures.

Are there any company specific challenges that you think that we will be faced in the last quarter of an impact the results.

And as the rebranding from weight Watchers tww had any impact.

Actually in 2020, obviously until kind of Covid changed the perspective at the end of the first quarter.

What we tend to see is a significant influx of lapsed members.

As well as new members, which is why we normally see a spike in our workshop sign ups, but we think theres an opportunity this year for us all to have also to get lapped digital members and have them upgrade to <unk>.

62, or more premium coach led experience.

So we're very much.

Focused on strategy for lapsed Heather when they come back how do we match them with the right membership vertical for them.

And then certainly attract new and also match them with the right membership vertical for them.

Okay.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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