Q2 2022 WW International Inc Earnings Call
Good day and welcome to the Ww International second quarter 2022 earnings Conference call.
All participants will be in a listen only mode.
They simply take no coffee, especially if they're pregnant with barky followed by DRAM.
After todays presentation, there will be an opportunity to ask questions.
To ask a question. Please press Star then one. Please note. This event is being recorded I would now like to turn the conference over to Corey Kindred Investor Relations. Please go ahead.
Thank you for everyone for joining us today for Ww International's second quarter 2022 conference call.
At four P M. Eastern time today, we issued a press release reporting our second quarter 2020 results.
The purpose of this call is to provide investors with some further details regarding the company's financial results as well as to provide a general update on the company's progress.
Press release is available on the company's corporate website located at corporate Ww.
Ww Dot com supplemental investor materials are also available on the company's corporate website in the investors section under presentations and events.
Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are also available as part of the press release.
Before we begin let me remind everyone that this call will contain forward looking statements investors should be aware that any 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 Exchange Commission. Please.
Please refer to these filings for a more detailed discussion of forward looking statements and the risks and uncertainties of such statements. All forward looking statements are made as of today and except as required by law. The company undertakes no obligation to publicly update or revise any forward looking statements whether as a result, you information future events or.
Otherwise.
Joining today's call Arsema Sistani CEO , Ed <unk> CFO I will now turn the call over to Steve.
Thanks, Corey good afternoon, everyone and thank you for joining us today when I last spoke with you in May I've been at weight watchers only seven weeks.
I shared my assessment of the business.
Our priorities in Boston, where we're headed.
I've spent the last 90 days diagnosing performance building out our product roadmap and executing on some of the initiatives necessary to simplify the business and refocus our efforts on value drivers.
<unk>, helping people who want to lose weight do just that.
The scientific facts that excess weight is associated with increased health risks. It's also well established that losing even modest amounts of weight significantly improves health.
We know the need for weight loss solutions is higher than ever before according to the World Health organization obesity is preventable.
And yet more than $1 9 billion adults worldwide are overweight to that point, we have seen a recent successful launches of effective obesity drugs, but high prices focused them on a minority of cases and do not address the mass market needs.
Our consumer insights tell us that people not only need to lose weight.
Want to lose weight and a healthy sustainable way.
Their motivation and go isn't about fitting into skinny jeans.
It's about health.
I came into weight watchers with a clear eyed vision that building a digital community.
Around a shared interest of health and weight loss is the key to remember success and subscriber growth.
And now after three more months at the company.
I'm, even more confident that it is the right path forward.
They watch us in the past was it true phenomenon.
Movement even.
Pride and excitement for being a member was not for our science backed number one doctor recommended weight loss program.
It is but rather because of the positive empathetic community and coaching that brought the program to life.
The move to digital has been successful in that 80% of the members now access weight watchers via a mobile first experience, but not enough attention has been paid you're bringing what we do best and our workshops to the digital experience.
That's what our product team is focused on delivering and when I am committed to fixing.
It will take time to evolve, but I anticipate many wins along the way we are acting with urgency to simplify the business drive throughput and ensure accountability.
In the second quarter, we executed on a number of initiatives to do just that with the goal of stabilizing current sign up trends and returning to sign up growth in 2023.
This year it will be a transition year one of critical actions that will lay the groundwork for the years ahead.
A quick rundown on what we executed so far.
Previously announced we commenced a restructuring to simplify and flatten the organization in order to minimize redundant workflows and improve decision making.
These actions were primarily focused on reducing layers of executive leadership with V. P N about position decreasing by about 30%.
We have realigned the reporting structure of our international leadership teams.
Set of having country level GM roles. We are now operating with a broader regional view consolidating key functions. We believe these structural changes will allow for more effective management of resources as we operate as one global team.
We are optimizing our workshops business driving increased attendance year over year, while managing our cost structure and expanding gross margin in the U S. We closed 24 fixed locations in the quarter, bringing our footprint to approximately 400 fixed locations and 703rd party locations at.
At the same time, we are investing in our coaches who are the heart of our in person experience.
That gave me first all U S member facing employees received a wage increase and move that has boosted morale and demonstrated our commitment to workshops.
We completed the sunset of our digital 360 product with the process commencing immediately following our May earnings call, when we announced our decision.
I'm pleased to say the process has gone smoothly, which is helping us retain these members consistent with our expectation.
Turning to our consumer products and E Commerce business.
As we previewed.
Have begun rationalizing our SKU count in North America.
At the end of Q1, we have 358 active skus with 20% contributing approximately 80% of the consumer product revenue.
By the end of Q2, our active SKU count was 113.
We are also refocusing our efforts to grow our high margin licensing business.
And we continue to evaluate our business. There are two very recent updates first we've decided that carbo, our coaching program for kids and families, which we acquired in 2018 no longer fits into our go forward plan. Therefore, we will sunset the program effective August 19.
This is not a decision we came to likely a thesis for the acquisition was that weight watchers can help carbos scale.
The synergies in reality, we're not their kids and families have unique needs, but I don't believe we are best suited to provide.
And the second update.
We have evaluated the effectiveness of our in App rewards program and made the decision to phase out walnuts wins after years of building sticky gaming and social experiences I'm confident that our path forward for driving better activation and engagement breast and native features meant to inspire and motivate.
This is a muscle we won't be flexing between our product and behavioral science teams for our members to achieve better outcomes.
In short our team gained a lot of ground in the quarter and it's because we are now committed to instilling a company culture, a bias to action data informed decision, making and evergreen innovation.
We are leveraging our data to identify and then encourage the behaviors that correlate with member success.
Of course, we know that food and weight tracking are critical.
But what are the behaviors and metrics that really matter.
For example.
<unk> party, we identified that getting it user to a three person video chat in their first 24 hours with a credit was critical to retouch. It we call this time to party.
And Facebooks early years, there J P. I was getting a user to seven to 10 days, having a singular focus on the Aha moment is paramount to growth.
At weight Watchers, we're honing in on identifying our Ah hah moments and this goes much deeper than sign ups for months of retention by driving the behaviors and the connections that lead to member success. It will help us create a network effect that delivers efficient acquisition improved engagement and longer retention.
As part of this analysis.
It is now clear that our 2022 program innovation personal points.
Could have and should have performed better.
Negatively impacting our sign up performance.
We have been digging deeper to diagnose why personal points did not resonate with consumers and lagged behind our recent innovations.
There are elements of personal point that moved to sign sports such as the ability to deliver a program for members living with diabetes and a new points algorithm that incorporates the latest in nutritional science, including advances in fiber healthy batch and added sugar.
The good news is that the science and the efficacy of personal points isn't the challenge. The challenge is that we added complexity to the experience when consumers were begging for simplicity.
We lost personal point, saying that no two people are alike. So no two plans are like.
But I believe weight watchers superpower has always been its ability to unite people into a community.
And the data supports this point of view.
Remember as long for simplicity.
And connection friends.
For instance, the ability to easily find other member like easy sharing of recommendations and recipe really part of a supportive group.
A weight loss journey hard it can be lonely the easier we can make it for people to comprehend and connect the better off they will be.
We are critically evaluating and testing ways to update our program combining the best elements validated by data and behavior science to deliver and improve program experience that is simple effective and engaging.
In addition to food program evolution, we remain focused on creating a new app experience our tech and product teams are executing on the roadmap of future pipeline around our three pillars of coaching accountability and community.
For example, since I joined we've already shipped feature improvements such as predictive food tracking optimized onboarding.
Wait tracker improvements and coming soon nutritional label scanning improvements.
So individually these updates may seem small it represents how we're modernizing the app and increasing our development velocity and delivering those quick wins.
For instance, a single UI update and the purchase funnel led to double digit growth in our workshop take rate.
While we execute on our product roadmap. We are also taking actions to stabilize sign up trends in the back half of beer.
<unk> investment into our fall marketing campaign, particularly as we see increased efficiencies in social media and search as an opportunity to be a lever in driving our business.
With that in mind I'm pleased to announce that Amanda tell us and we'll joined weight watchers as our chief marketing Officer on August 15th.
Amanda is an analytical product minded full stack marketing leader adept at brand strategy and performance marketing.
She has nearly 20 years of experience working with gross omnichannel and subscription businesses.
Looking ahead.
There are several initiatives that I believe are central for weight watchers as part of our competitive advantage.
One is our workshops the in person member experience is a critical differentiator.
In June we launched an omnichannel recruitment campaign to reinvigorate our workshop business, which helped drive the highest week of workshops sign ups since January and resulted in overall improved trends in June versus May.
At the same time community activations, such as motivational Mondays and walking weeks tested well delivering high satisfaction scores among participating members. We will continue iterating to identify what drives the best engagement and recruitment potential for workshops.
Another focus area, we talked about on our Q1 call is serving members living with diabetes. The prevalence of diabetes among adults in the U S with a BMI over 25.
Estimated to be 12%.
The percentage of our U S members self reported as people living with diabetes.
Just about half that illustrating a significant under penetration and what should be our highest need segments.
The first step to serving this population with adding the capability to create a food plan specifically designed for their unique needs.
Which we delivered with the introduction of our latest program.
The efficacy of our program was validated by the positive results from our three center clinical trial.
Results from the six month trial demonstrated that weight watchers diabetes tailored program have clinically meaningful and statistically significant effects, including.
Reduction in H B, a onesie I'd 0.76.
Average body weight loss of five 7% and decrease in weight or waist.
Waist circumference by more than two inches.
Decrease in diabetes distress by nine 8%.
Additionally, participants experienced a 13, 1% decrease in hunger and 13% improvement in overall wellbeing.
We are complementing our diabetes program with content and product features.
And tailor our core product for people living with diabetes.
Last month, we added the ability to track blood glucose in the weight watchers, App, which gives members the ability to see patterns and changes over time as they track their glucose alongside their diet.
In order to further enhance our offering we have entered a strategic partnership with Abbott's a.
A global leader in diabetes care to create a seamless experience for people, who use weight watchers and Abbott freestyle libre portfolio of continuous glucose monitoring system.
The integrated product experience is expected to become available to U S numbers in 2023.
In other words, we are partnering the world's number one CGM with our number one doctor recommended weight loss program to make it possible for people living with diabetes to reach their weight and healthy living golf balls.
While enjoying the foods, they love and consulting with their health care provider to gain better control of their glucose levels.
And now I will turn the call over to Amy to discuss Q2 performance and our outlook.
Thanks FEMA.
The actions, we have taken to rightsize, our cost structure enabled us to expand our adjusted operating margin year over year, Despite revenue pressure in the second quarter.
Adjusted operating income was in line with our expectations, while topline demand trends were softer than we expected.
Particularly for digital subscription and e-commerce.
Combined with an FX headwind revenue was down 13% in Q2 versus prior year.
For Q2, 2022 we finished the quarter with $4 3 million subscribers.
And 12% from the prior year and approximately 100000 below our expectation primarily due to worsening sign up trends in our digital business during the quarter.
As Steve mentioned, the Sunset of D 360, with largely completed in the quarter and the impact of conversion was consistent with our expectations.
The majority were transitioned to workshops no. These members remain on D 360 pricing 29 95 per month in the U S.
It is impacting year over year comparisons, particularly for workshops.
Our Q2 and 127000 of D 360, former subscribers were included in the total end of period workshops subscribers number of 828000.
Excluding the impact of these transitions D 360 members and this period workshops subscribers would have been down 6%.
End of period digital subscribers would have been down 13% year over year.
Revenue of 270 million was down 13%, including approximately 350 basis points of FX headwind.
This decline is greater than we had anticipated due to further pressure on digital sign ups and e-commerce.
E Commerce sales were down 25% in the quarter, mainly as a result of lower traffic and conversion.
We're actively rationalizing our SKU counts and has seen a modest impact on revenue in the quarter, but the resulting improvement in gross margin as we exit unprofitable skus.
Adjusted gross margin of 61, 9% is up approximately 60 basis points from prior year.
Primarily related to operating leverage from the actions, we've taken to optimize our studio footprint and a reduction in labor costs.
Marketing spend in the quarter of 52 million was down 9% year over year and lower than we planned and FEMA mentioned, we plan to lean into the fall marketing campaign to stabilize sign up trends in the back half ahead of the 'twenty two 'twenty three winter season.
So we expect to redeploy some of the marketing savings to the back half of the year.
Adjusted G&A was 57 million was down $12 million or 18% versus prior year with some benefits from FX.
We are starting to realize the savings benefit from Q2 restructuring actions in the quarter for which we took an expected restructuring charge of approximately $19 million.
Additionally, Additionally, we have been cautious with spending in the current environment.
Adjusted operating income was 58 million down versus the prior year with revenue pressure and FX headwind, but in line with our expectation.
GAAP EPS was a loss of seven cents, which was negatively impact by 47 cents of items impacting comparability.
These included 30 cents from noncash intangible impairment charges 20 cents in net restructuring charges.
Partially offset by a three cents benefit from out of period tax adjustments.
A note on impairments, we conduct our annual intangibles impairment testing in Q2.
To determine the favorite value of franchise rights acquired and goodwill.
In Q2, we took a noncash impairment charge primarily related to franchise rights acquired from our Canada operation.
Our restructuring plan as announced last quarter is on track.
You will recall that this action was focused on streamlining the organizational structure, which will primarily impact G&A.
In Q2, we recorded approximately $19 million of restructuring costs.
We expect to report an additional $8 million in the back half increasing our full year estimate to $27 million.
We expect annual savings to be over 35 million up from our prior estimate of $30 million when in your 2022 savings approaching $20 million at the high end of our previously expected range.
Shifting to our outlook for 2022.
We expect continued revenue pressure in the back half of the year as a result of lower end of period subscribers at the end of Q2, and a steeper sequential decline of subscribers from Q1 to Q4 than is typical.
In addition, we expect continued macroeconomic factors to impact category demand and to create FX headwinds.
We are assuming that the demand trends will continue in the back half and are managing the business accordingly, while.
While the product and marketing teams develop and execute plans to break through those trends.
Additionally, we will continue to execute our restructuring plan with the goals of managing costs and simplifying the business, which will enable us to refocus resources on higher impact initiatives.
With the jump off point of $4 3 million subscribers at the end of Q2, which is about 100000 lower than we forecasted we would expect to end the year in the range of three five to $3 7 million subscribers.
Revenue for the full year is now expected to be down in the low to mid double digits.
And year over year expansion in the first half I would expect adjusted gross margin for the full year to be in the range of prior year at 61%, which is up 100 basis points versus our prior guidance.
Related to marketing, we're down around $15 million year over year in the first half as we expected in our prior guide we plan to shift some of that savings to the back half I'm expecting marketing to be at or below $255 million for the full year, which is down from 'twenty to 'twenty one.
Excluding items affecting comparability adjusted G&A will likely land in the $245 million range in.
In short, while we were experiencing additional pressure on the topline we were diligently managing expenses to preserve profitability.
We are revising our adjusted operating income guidance to incorporate additional FX headwind and we now expect full year adjusted operating income to be in the $155 million to $165 million range.
The effective tax rate for the year is expected to be approximately 24% for clarity. This excludes the impact of restructuring impairment and other items affecting comparability.
And full year interest expense is expected to be approximately 81 million about $5 million higher than prior guidance due to higher interest rates.
Therefore, GAAP EPS is expected to be in the range of 25 to 30 cents per fully diluted share, which incorporates the net negative impact of approximately 55 cents of restructuring impairment and other items affecting comparability.
Turning to the balance sheet, we continue to generate steady cash flow from our subscription model and low Capex and working capital. We ended Q2 with approximately $149 million of cash an increase of 21 million versus quarter, one plus an undrawn $175 million revolver.
And we will continue to manage cash and liquidity responsibly choose.
Q2, net debt to adjusted EBITDA leverage ratio was four eight times up slightly from four six times at Q1.
We expect our trailing 12 months leverage ratio to increase over the back half of this year and into 2023.
Opex and D&A, primarily driven by capitalized software are expected to be approximately $45 million and 40 million respectively.
As we have discussed we expect to end 2022 with a year over year decline in subscribers.
Given the nature of our subscription business model, starting subscriber base is an important component of revenue even before factoring in any benefit from sign up growth.
At the midpoint of our expected ending subscriber range for 2022, the lower 2023 openings subscribers would translate into a revenue headwind in 2023 of approximately $70 million again. This is before factoring in any lift from members sign up growth.
In 2023.
In summary, we performed within earnings expectations for the quarter. Despite a challenging macro landscape for the balance of the year. We are focused on stabilizing subscriber trends, while managing cost appropriately and ensuring a scalable cost structure is in place for operating.
<unk> expansion I will now turn the call back to Sema.
Thanks Amy.
2022 is a year of transition for weight watchers.
I am confident we were making all the right decision to return the company to profitable growth.
We now have a narrow set of priorities and a streamlined organization with a lower cost structure and.
And data informed rigor for faster decision, making and greater ownership.
Weight watchers through its experience at the intersection of Science and community has been the gold standard ineffectiveness.
We are proud of our heritage and our mission to help people better manage their weight by providing a sustainable science back program grounded and nearly 60 years of experience over 130 peer reviewed studies and over 35 randomized controlled trials.
We have the science, we have the coaching expertise.
We just need to bring our DNA into our digital experience. So members feel connected inspired.
Supported.
When we do that.
I am confident the business will return to growth.
Thanks for joining us today, and we are now happy to take your questions.
We will now begin the question and answer your question.
To ask a question you May press the stores and one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
And our first question today will come from Betsy <unk> with Wolfe Research. Please go ahead.
Great. Thank you for the question My first one just on digital subscriber trends have you guys seen an improvement in trend in the current quarter and then you talked about investing in marketing in the back half to stabilize with subscriber trends why not to play those dollars in 2023, guys. See then when you guys have a stronger track record.
Of generating strong return on that spend.
Hey, Spencer Thanks for the question.
So.
Well, we spent a lot of time diagnosing subscriber trends and a cultural landscape is difficult post COVID-19 you people are shifting behaviors, but it's our responsibility to ensure that we are relevant in a changing dynamic so.
Well you know, we know that weight loss the need for weight loss is higher than ever before this is a big market and our penetration is relatively small it's proven that weight watchers is two times more effective for weight loss and doing it yourself and we havent said that enough because over the past few years, we've had behind wellness versus being probably.
This fall about what set us apart we're the number one doctor recommended program for weight management, and we didn't do ourselves any favors by moving away from a clear wait last message.
So that all being said we believe there are a couple of contributing factors to the to the performance we were down $15 million in marketing in the first half <unk> 5 million of that was the second quarter, we pulled back on marketing in Europe , given the macro environment. We just didn't think we could capture enough mindshare for the money.
And that's why we're redeploying that spend in the second half.
As mentioned in our you know personal points kind of perform better for us both from a program and a marketing perspective, we know M. P S and engagement with lower and ultimately Q2 recruitment relates back to word of mouth from Q1 lift and then finally you know despite simplifying the message the spring campaign didn't breakthrough.
And improve the trajectory of sign up so.
You know what that means is that.
It's.
The cultural landscape shifting we didn't move with it and now we're doing all the right things to turn the tide and I'm confident we're on a path to grow by improving our program simplicity focusing on not on the critical product pillars, delivering a marketing message that makes us an deniable and you know too.
More specifically to your question, we've we've historically leaned on marketing to do the heavy lifting of recruitment and we're focused on a strong product backlog.
Including program enhancements, that's going to.
Support and take the lift off the shoulders of marketing but.
But you know we're on this rolling rolling process, and so we need we need to cut through and the fall is the time for us to start that narrative. So that we can build on it in the winter season.
So that's our focus at the moment.
And you know I am already seeing data on a b tests that we that we haven't even rolled out yet that we're on the right Paso I'm really confident.
Okay. That's that's helpful and then with the decelerating subscriber trends do you think there's an opportunity to further pull costs out of the business, whether it's on operating costs or on advertising and optimizing that spend further.
Okay sensors Amy.
I think actually we we got ahead of that cost curve and so I've been pretty pleased you know I think we mentioned on the call that that we actually increased our estimate for the restructuring charge is actually increased to 27 million, we took 19 million and a restructuring charge in Q2, but important.
We've updated or increase our estimate of annualized savings on that so last time for the I think it was 16 to 22 million. We expected we were going to deliver a third year of annual savings. We've taken into 27, we think we're gonna be able to deliver 35, and so I'm quite pleased that we got it.
Of that out of the gate here and I think we'll see the fed obviously see the benefit of the full year impact of that going into 2023, and so I mean related to the restructuring itself. You know we talked to we talked to you guys factored in early May we were just starting to execute on the plan and as we.
We got into the details looking for cost synergies. We didn't think there was more there. So so we went ahead and increased our estimate.
Okay fair enough. Thank you.
Yeah.
And the next question will come from Stephanie with Nick with Jefferies. Please go ahead.
Everyone is correct me I'm honored us on for stuff, So you're talking about a focus on stabilizing subscribers in the back half of the year.
But then you followed that up with kind of your expectations with steeper declines in the back half.
More so than a typical right. The two questions I guess could you help me kind of reconcile that commentary and then too.
What kind of approach do you take the stabilizing subscribers, specifically I just asked because we've noticed some of the deeper discounts coming through and some of the longer sign ups.
So is that part of the strategy here and should we expect lower revenue per subscriber I guess in the back half of the year if that is the case.
Hey, Christmas Amy I'll I'll start that one on the AR on the sequential decline. So just to clarify that comment you know last time.
Last time at the midpoint of the range, we guided that end of period subscribers in Q1 to end of the year, which is something we watch very closely that slope of the decline was going to be about 16% and that was actually that actually was.
Pretty pretty much pretty significantly higher than our historical trend roughly right and the trailing five years prior to that it was down about 12%. So I felt like I.
I felt like we got the guide on end of period subs pretty close them you know what.
But candidly what we saw was a additional pressure on digital sign ups in the quarter. So in Q2.
Digital sign ups on a year over year basis worsen more than I expected than the same number quarter over quarter in Q1, and what we're seeing really is it's that we're not filling up the bucket them on sign ups as fast as we have that.
So it's really a site in other words, it's really a sign up trend issue is.
It's not a it's not a cancellation issue for them for clarity and so this is just all about sign up performance thought we found the bottom to hit is down 16% end of period. So from Q1 trend and we're trending and we're trying to you know a little bit more.
Worse than that.
From a trending performance what we've talked about is stabilizing those trends getting ourselves on the right path. So that we can get back to sign up growth in 2023.
Yeah, and I mean on the discount out of promotional pricing I I would just add that I mean, nothing has really changed where we're always testing and learning from new and different pricing and promotion strategies.
Yeah. That's super helpful. Both of you I guess has kind of a discounted cost.
Kind of resulted in any learnings thus far.
In terms of kind of price.
And new customer new subscriber sign ups.
Yeah. So so from a from a discounting perspective, you know our behavior hasn't changed very much in fact on a you know you guys know I look at revenue per paid week.
On if I look apples to apples on a year over year basis digital were actually up 2% and so we've been taking price in these price increases to offset some of the impact of the discounting so net net net.
We're actually a little ahead, you know from my perspective, we still continue to see urgency in discounting in the in the in the market moving sign ups and you know we've got.
We've obviously talked a lot internally about how to how to get how to get past that but we still see it pretty effective in the marketplace, but overall, we're not losing rate and we're still.
You know expanding margin on a on a quarter over quarter basis yeah.
Just add to that that the average discount priced between you know one to six months is roughly the same as most of our competitors and.
Ultimately, we need to compete on value not on price and you know that takes some time as we deliver our new product roadmap, but.
Whereas it's something we're focused on as we continue to test various pricing strategies.
Okay, Great. That's Super helpful. Maybe just last one for me to move away from subs, but you talked about kind of a weaker spring campaign, and then kind of moving into a a.
Our fall campaign, so should we be expecting any changes to the approach it and how you kind of market versus what you've done historically or at least versus the spring. Thanks.
Yeah I mean.
I think I mentioned that the at the top that we I don't think we did ourselves any favors by moving away from a clear way last message.
And we're going to be leading more unapologetically about weight loss.
So so we're looking forward to that and when you know where.
Looking at the fall for instance, we need to start building that narrative. It just doesn't happen overnight you have to.
Start positioning ourselves for change in building that that mindshare with the consumer into the winter. So you know you'll also see us testing and learning on that front as well, but I'm really excited about it because.
Ultimately, we've been rooted in science, where one of the few programs that fulfill all of the criteria that expert panels deemed necessary in order for behavioral lifestyle weight loss interventions to be effective in <unk>.
I, just think we need to shop out from the roof.
And our next question will come from Alex Fuhrman with Craig Hallum Capital Group.
Go ahead.
Hey, guys. Thanks for taking my question I wanted to ask about the membership shortfall that you experienced in the second quarter, if I'm understanding your comments correctly. It sounds like that was mostly or from a reduction in new members coming into the program. It seems like that would be.
The big shortfall 100000, just in the months of May and June considering those are typically pretty small recruiting bonds. I mean has there been any change to your existing members retention.
He kind of drop off on membership that you wouldn't be normally seeing as kind of part of the normal membership curve just trying to reconcile that that fairly big shortfall. During during a period that normally you wouldn't have a ton of people coming into the brand anyway.
Yeah, Yeah, I understand so so a couple of things number one.
It's mostly coming from from digital so if I look at the end of period subs at the end of it and bear in mind also there's some noise in here related to <unk> hundred 60.
But just because it's just to clarify I tried to go through that on a call because it is kind of it's kind of complicated and the border. So we did sunset D 360 pushed those subscribers into workshop and so workshop scribes workshop balance is about 127000 more subs.
Digital has less compared to previously reported so I'm going to talk to you at our receded thesis here for a second so digital ended period. So at the end of Q2 were down 13% restated workshop subs, where we're down six and I understand I understand where you're coming from.
Thanks.
Think that digital certainly came in.
The performance.
Sequentially declined on a year over year basis from Q1 to Q2 and it was a it was at a much higher piece from a sign up perspective.
We expected and so you know there were a lot of moving pieces for sure in this market.
Really felt like in the guide and the forecast that we found the bottom.
And so I think I think some of this is I think some of this is just you know hey did we did we factor in.
Every everything that we did we get into the guide them all of the moving pieces right and so the other part of this.
Alex is that we also within the quarter. So so we expected to spend about $5 million more in marketing than we actually spent.
And it all came out of Europe , and so Europe , given some of the macro headwinds they were facing didn't feel like they were gonna be able to get.
The sheer mindset with everything that was sort of going on in the region and really stepped on and really stepped on the brakes.
And I think that it's so so while we got the cost efficiency benefit of $5 million of marketing.
Where.
We're crudes or sign up you know sort of where that much lower than we had anticipated. So yeah. I agree that that 100 that that 100 was a pretty a pretty good guide Miss it's like giving a reduction of $5 million of marketing I can't we just we just haven't found the bottom.
I mean sema.
Yeah, I mean, I I I, just want to add to that.
You talked about personal points kind of performed better for us and.
Q1, we saw Oh, no you know looking back at our engagement metrics.
Even though it delivers on the same at the same level in terms of nutritional and science science efficacy.
It's a complicated program and so if you arent as activate it.
Then youre not spreading the word and that impacted us in Q2 and the good news is we can fix that we were.
We're already working on.
A thesis around the path for.
And.
You know I think that.
Certainly, we're able to rectify and improve that engagement.
So we're looking forward to doing that and continuing to evolve the program.
So again, we're I mean, we're not paying it didn't work, but it could've been a lot better and we know what we need to do to improve it.
Okay that makes a lot of sense. Thank you both.
And our next question will come from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yes, Hello seem on the last call you talked and you referred to you know I R. L.
Talked about.
How important strategically it is that in person kind of workshop experience.
The thing that you didn't think it could be replicated in the digital world and today I don't know, maybe I'm imagining it but it sounds like you're you're you're changing that a little bit right now, saying they need.
I need to find a way to bring that experience to digital so can you clarify your thinking and also.
You had alluded to maybe the idea of a one product one price offering that all subscribers can have access to a workshop type experience.
Can you.
Let us know what you're thinking currently on that thanks.
Sure sure.
So let me clarify what I am talking about IRR, all experiences I'd definitely say that I'm alluding to the.
Workshop experience is about a peer to peer experience. It's the coaches are facilitating but people are on a journey together, they're coming for the weight loss, but they're staying there because of the belonging because of the connection because people are supporting each other through their weight loss journey.
That's the part that I'm, saying is missing from digital.
Digital ends up being a very lonely experience and remember we're coming out of two years of Covid, where people feel lonely or than ever and.
Weight loss is an emotional problems you in order to solve it you need an emotional solution only something that other humans can provide so.
You know just as a reminder.
I what had been a part of this program since 2014 I came in with a clear vision of where I think we should go and what's going to catalyze the future of this product I spent decades building sticky social and gaming experiences that do just that bring empathy to online experiences.
But when I'm, saying that we need to bring more of that magic online.
Not saying it literally.
I I I mean figuratively that we can build better community come for the weight loss. Please stay for the community.
That answer your question.
Yeah, absolutely and what about the idea that maybe you have to simplify even further 211 product offering.
Yeah, you know we're testing a lot of different pricing strategies I think that we can simplify how we show up on the gas side and you know more on that front.
Nothing to report at this time.
<unk>.
Okay and then when you were talking about you kind of referred to a strong program backlog.
Is that referring to like I'm, just curious your thoughts on the cadence of new program innovation. So it's been kind of every other year that there's been a major launch.
You kind of rethinking that or do you expect that cadence to be the same kind of going forward.
No I said product backlog, so just to be clear I mean features that we will be shipping within the product.
That help modernize our UI and and and and basically helped deliver a better app experience.
Program innovation.
You know look I think that the program has done a yeoman's work for us over the past years, and what we really need to do is get into a place where we have a more evergreen approach them, but you know and we're seeing that right now we're not we're not going to wait two years to solve.
Issues that we see in this program at the moment, we're going to roll them out and we're going to we're going to evolve and continue to improve that that program, but just to be clear about when I was talking about the backlog I was I was referring to our product roadmap.
And byproduct I mean, the mobile app experience.
Okay, great. Thank you so much.
Thanks Linda.
And our next question will come from Lauren sick with Morgan Stanley . Please go ahead.
Hi, This is Nathan Fowler on for Lauren New noted pulling back in marketing in the EU, given the kind of weaker macro macro backdrop. There how would you think about the directory of subscribers. If the U S. Consumer is part of that being a little bit more like the EU consumer.
And then a second one on carbo can you talk a little bit a little bit about what didn't work there and then how we should think about the financial impact for the rest of it.
Excellent.
Yeah, Hey, this is Jamie.
Just just to be clear.
Performance in North America and Europe .
In the quarter what was quite similar so for example, if I look at it if I look at end of period subscribers by segment North America was down 11%.
<unk> was down.
Europe was down was down 12%.
The health what so just to clarify my comment Europe actually pulled back on marketing on a year over year basis.
Because they didn't think.
That they weren't going to get the share of mindset that they that they felt like they were you know that they felt like that investment would have warranted. When they still ended up from an end of period perspective, roughly roughly in the same place in North America.
We are it was a little bit, but we actually that's it.
About I think it was just about a million bucks on a year over year basis in Q2, and Europe and North America ended up at the same spot from a front end perspective, and so there wasn't so performance in each market ended up roughly roughly in the same spot, but if you look at segments like for example.
Operating income in Europe ended up in a better spot on a year over year basis. The North America did because we pulled back on that marketing I don't know if that yeah. No. If that's what you're getting at or not did that answer that part of your question.
I guess, just kind of thinking about today.
To the extent that the performance was the theme across the two how should we think about that macro impact going forward to the extent that if the marketing pulls back and the trajectory is the same as something that's really a bad thing right because of the lower tax I guess I'm trying to think more about maybe more broadly the macro impact there to the extent the consumer gets more.
Generally.
Yeah I mean.
I think that I think what it told us in Q2 with it we made the right decision in Europe , right put forth pulling back ending up and this is in the same spot I think I think the flip side to that right is it the challenge.
What the performance challenge was more in the U S than it was in Europe .
And we've talked about the reasons that that you know with me some of the reasons or some of the factors that we think are driving that I think has hit disproportionately in the U S. For example, we've talked about we've talked about some of the.
Some of the macro trend some of the shifts in consumer sentiment we've talked about.
D 360.
Conversion that certainly made the quarter, a little bit noisier than it otherwise than it otherwise would have you know when Siemens talked about the impact of first of personal points and so that's you know that is the trend that we are trying to stabilize in the back in the back half.
And Oh.
I would just also say you know weird.
Where we've now and house, our performance marketing function and so we have the ability to move nimbly and that's also part of the reason where we're looking at fall because we see an opportunity to spend more efficiently.
But moving to the second part of your question on Carbo like honestly, that's a really small part of our business. So.
And.
You know I I think that the.
But there was initially a thesis that we could help carbo scale and make a dent in the.
With pediatric obesity.
But I just.
I think that the synergies in reality, we're not there and on a personal note my mother actually has done pediatric obesity consulting and.
This is a cause I care.
Deeply about.
And kids have unique needs and I just don't think that we are the best to provide a solution.
Alright, great helpful. Thanks Bill.
And our next question will come from Sean <unk> with Morningstar.
Go ahead.
Hi, Thanks for taking the question.
My first one is just about the long term profitability of the business to recognize it's pretty tough to guide from here, but maybe you can help us think about a baseline for G&A.
So maybe last year's 269 million.
Mark it up by 3% for pretty question $20 million off of that and then the incremental 15 for 23 is that kind of a way to think about it.
Hello, Paul.
That was a that was that was fast and very forward looking and so I think I'm not in a position to guide on that here's what I will say, though.
I think in Q2, we were at a run rate of 50.
G&A was at 57 million right.
I think you add some inflation I think you'd add some inflation to that.
And a little bit.
The full year impact of the restructuring savings that haven't hit yet and we're looking at G&A being down in 2023 on a year over year basis from from what we guided today.
Right right right now I think I'm not in a great position to nail that down for 2023, I would say over time. However, the goal would be for us to get G&A back under 20% as we as we as we exit this year with a really scalable fixed cost structure for when we bring.
[noise] back sign up growth.
I'll just add.
And I know, we keep saying this but I feel like it's worth repeating but the need for weight loss is higher than ever before and.
We're doing all the right things to turn the tide.
Improving the program sympathy, it's focusing on our critical pillars around community accountability coaching pivoting, our marketing and as I said you know we've we've already seen the progress we were running.
A b test that we haven't rolled out yet.
Where we're seeing a lift and it gives me confidence that we're on the right path to growth.
Got it that's helpful. So I guess really.
Quickly for Amy.
We're thinking about this businesses, calling back towards sort of a high teens operating margins makes it below 20% operating margin is that.
Altogether inappropriate or is that about what you're looking at internally and then maybe for Cmos as.
As we start to think about who are the programs that we're rolling out in a lot of investments that we're making.
Workshops and.
Marketing and so on.
Metrics that you're monitoring internally that we should be looking at in terms of saying we're out of the worst of this is that gonna be like sometimes it could be a bump and that's bigger than that.
What are you kind of looking for.
With respect to that.
As it relates to as it relates to operating margin.
I think the overall goal right, where we're in a structure, where we've got you know.
60, plus percent I mean, we were running close to 62% is in the in Q2. So we've got you know.
Really strong gross margins that I think is is scalable with growth rates. So we've done a lot of work on turning our operating expenses from fixed to variable, particularly with our real estate on the workshop side of business and by the way workshop gross margin in Q2.
Was up to 37% rate. So we were we were kind of 40% post pre pandemic and we've been we've been climbing back up and so I think that we're doing all the right things to.
To take costs out of the business on a timely basis and shift fixed cost to variable cost. So so if I had to sort of pontificate out loud about what my my goals would be for operating margin.
I would love to keep gross margin.
Above 60%.
I'd love to get G&A back into the 20% or something 20% range right and I think and I think marketing we've seen marketing as a percent of sales over the last several years increase pretty significantly with with with inflation.
Particular, we are impacting that spend and so if we had you know for example, marketing in the 'twenty two 'twenty, 3% range that would get me like my goal is to get this business back to 20% operating margin I think the hard part for me to answer is how long is that going to change.
Right and so I think I think that is variable doable overtime I need sign ups to to to return to growth in order to start returning to earnings growth and getting the leverage on that cost structure.
And I'll I'll pick up on the on the metrics.
So.
Obviously, we're not going to share the details for competitive reasons, but I can say.
We're looking at regular engagement and weight loss progress during the first months of key.
Second it starts with identifying the moments that matter the aha moments.
Described earlier.
And then the.
The much larger and essential stuff is predictive behaviors, where are the encouragement of triggers that make more members more likely to actively engage.
Are those where the metrics that revealed that we could be doing better on.
On our points program for instance.
And while we're working on these where some are simultaneously simplifying and enhancing the app experience watching all those engagement trends closely as we as we shipped.
Ship those various features so the end result is going to be weight loss success and that ultimately leads to more people, saying they got they've found success with weight watchers that word of mouth is.
A critical driver of of subs for us So we're.
That's why we're focused on right now.
Yeah.
Very helpful. Thanks, so much.
Yeah.
And our next question will come from Michael Lasser with UBS. Please go ahead.
Good evening, Thanks, a lot for taking my question Mhm anything.
Anything to happen in external environment, either from a competitive standpoint, or an economic standpoint in order for you to reverse the subscriber growth trends.
Hey, Michael.
No I don't actually I think that I think this is our responsibility is to is to breakthrough and to operate in whatever environment, where given the.
And I would actually say more than anything it's the cultural landscape that has shifted and and we havent moved with it so we need to change the paradigm.
We're doing all the right things to turn the time at <unk>.
And.
You know I I I think that.
I think all ultimate ultimately.
We havent done ourselves any favors by ceding the.
And hiding behind wellness over the last few years and you're you know you're going to see us coming out with much more.
Provocative message moving forward.
One that's focused on weight loss because all of them.
Exactly okay.
Do you think you didn't really emphasize the weight watchers brand name in order to get subscribers back to where they've been historically because of the Ww moniker just doesn't resonate as well.
As we watch this stuff.
We're embracing weight watchers, it's a it's an important part of our heritage and our legacy.
W. W still our corporate name and it's is there and I you know I mentioned before it hits our nickname if you will.
Weight watchers will you'll see that much more prominently yes.
Okay. Thank you very much good luck.
Thank you Michael.
And this will conclude our question and answer session I'd like to turn the conference back over to see what's the Sony for any closing remarks.
So we know the need for weight loss is higher than ever and as I. Just mentioned the onus is on us to remind people that health is not a discretionary matter.
Since 1963 weight watchers has been rooted in science, we are one of the few programs that fulfill all the criteria that expert panels deemed necessary necessary.
In order for behavioral lifestyle weight loss interventions to be effective.
I've been on this program since 2014.
I came in with a clear vision of where I think you should go what will catalyze our product and ultimately our business.
We're focused on improving program simplicity and.
Enhancing those critical product pillars, and delivering a marketing message that makes us undeniable, we have a strong thesis on the path forward I'm confident we're doing all the right things to return the company to growth and I just want to thank you all for joining US today, we look forward to keeping you updated throughout the year.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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