Q3 2022 WW International Inc Earnings Call
Good afternoon, and welcome to the Ww International third quarter 2022 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I'd now like to turn the conference over to Cory Kinder Investor Relations. Please go ahead.
Thank you everyone for joining us today for Ww International's third quarter 2022 conference call at about four P. M. Eastern time today, we issued a press release reporting our third quarter 2022 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. The press release is available on the company's corporate website located at corporate Ww Dotcom.
Supplemental investor materials are also available on the company's corporate website in the investors section under presentations and events.
Conciliation 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 also explained in detail in the company's filings with 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 of new information future events or.
Otherwise.
Joining today's call are seamless sistani CEO and CFO .
CFO I will now turn the call over to Steve.
Thanks Corey.
Good afternoon, everyone and thank you for joining us today.
We are encouraged by early indicators that our data informed approach to product development focused on our core pillars of community accountability and coaching.
Yielding positive results.
That being said we are eyes wide open that our turnaround will take time.
We have a substantial amount of work to do to update our products to deliver the most compelling solution.
But the initiatives driven in a short time that I've been here already are resulting in a sequential improvement in our year over year, a sign ups trend.
We have identified critical experience moment and increased member retention and are leaning in.
Building momentum for us through the next year and beyond.
Despite headwinds I'm confident that we will continue to grow our position as the leader in our category.
We have a program that works members, who love US 60 years of efficacy in a space, where new entrants come and go.
We are turning that solid foundation into a best in class digital experience for the future.
We have been consistent that 2022 would be a year of transition shifting focus and resources back to what we do better than anyone else weight loss and away from initiatives that were not driving an impact and complicated the member experience.
We have done that with urgency.
We have improved trends and are focused on positioning the company for a return to growth.
The need for efficacious and sustainable weight loss solutions remains constant.
Our remit is to make weight watchers a solution of choice.
Relative to Q2, while still down on a year over year basis, we delivered an improvement in sign up trajectory during the quarter with sign ups coming in modestly above our internal expectations. Despite demand pressure in our category.
We were pleased with the performance of our creative the fall campaign, where our simplified messaging and our stance of being unapologetic about weight loss broke through.
The U S renting modern high energy spot with a simple message that weight watchers is here for people who want to lose weight.
The campaign has proven to be effective both for efficient member acquisition.
As well as positive brand building.
We showed up differently and consumers took notice.
Importantly, not only among former weight watchers members, but also new consumer cohorts.
Our awareness is up significantly year over year and on par with winter campaigns, despite significantly lower spending.
This box became a topic of conversation on social media showcasing our ability to breakthrough culturally.
And we saw significant increases in brand consideration.
We are seeing positive impacts from the shift from traditional media buying to data driven global performance marketing, but in housing our team in North America, we are faster to market responsive to media and creative trends and more efficient with the spend and.
And we will be leveraging all of these learnings as we head into our peak season.
Yeah.
But while we are making progress on sign up trends. We also saw a modest uptick in cancellations during the quarter largely related to six month commitment plans that ended in July .
We have found that member engagement and satisfaction has declined with personal points compare to prior programs.
An issue we are actively solving for.
There's some way reinforces what we already knew.
That our program and our product must provide a simple and engaging member experience.
As a result, our teams have begun tracking a new measure activation rates.
Activation rate is defined by a member's engagement and progress during their first month on the program and is directly tied to member success.
Our data shows that activated members churn at a rate that is roughly half of a non activated remember.
In addition, the science and our data supports that these members will be more successful on weight watchers over the long term.
Now that we are measuring activation rate, we have observed promising uptick in recent months demonstrating that the changes we have made to the app are working.
Driving the behaviors and connections that lead you remember successful create a network effect that delivers efficient acquisition and longer retention.
We are now better able to calibrate our product roadmap moving forward.
With that in mind, we have considerably increased our technical velocity shifting feature improvements to increase engagement and retention and our product. Recent changes include a meaningful update to our food search algorithm with past results showing a double digit reduction in customer service contacts and a reduction in churn.
[noise] streamlining weight tracking to drive consistent accountability demonstrated by a material increase in the usage of this feature.
Last month, we rolled out a new onboarding funnel in the U S increasing the share of sign ups choosing our premium product.
And we enhanced or enough encouragement of weight in food tracking activity, which has contributed to the increase in our activation rate. This is demonstrated that our gamification techniques are meaningful lever and we are excited about future iteration planned in the coming quarters.
In short.
There was a clear order of operations greater activation leads to improved engagement.
Which leads to greater weight loss and satisfaction.
Ultimately driving greater retention and positive word of mouth.
Which makes marketing more efficient driving sign ups.
I believe that as an organization, we need to be agile continuously testing learning and evolving the program to better fit the needs of members.
We are committed to instilling a company culture, a bias to action data informed decision, making and evergreen innovation.
As we noted during our last earnings call in August our analysis has shown that personal point could have and should have performed better.
After a challenging ourselves to understand how members behave through analytics and a laser focus on the activation rate we implemented the following actions.
Uncovered and diagnose issues with our current program to inform a new direction.
For the first time ever rolled out in a b tests to a subset of new members to inform a food plan changed from data.
And further validated the results early member survey results show that the simplified plan outperformed personal points on M. P. S supporting our decision to scale quickly.
And we did it all in under three months.
Because of this tremendous effort we plan to begin rolling out the simplified program in the coming weeks.
We believe the changes will make weight watchers easier to follow and help members achieve their weight law schools.
We announced his decision to our coaches recently and their feedback has been overwhelmingly positive.
This has been what their members have been asking for.
We will be retaining certain key elements of personal points, including the ability to deliver a program for members living with diabetes and appoints algorithm that incorporates the latest nutritional science, including advances in fiber healthy Fabs and added sugar.
There's no question that the weight Watchers program works.
That has been well documented in more than 130 peer reviewed studies at 35 randomized controlled trials.
We just need to deliberate better both from a product and brand standpoint.
As we look ahead to the peak winter season, we have the essentials in place to deliver a strong member experience that will put us on a path for improved performance.
However, we still have a good deal of work to do to deliver the connected community at the intersection of digital and I R. L that I believe is our future.
Which will drive subscriber growth.
I will turn the call over to Amy to discuss Q3 performance and our outlook.
Thanks FEMA.
<unk> operating income was ahead of our expectations in the quarter.
<unk> revenue pressure, including FX headwinds.
The actions that we've taken to address our cost base are delivering efficiencies.
For Q3, 2022 we finished the quarter with 3.8 million subscribers down 15% from the prior year.
As we mentioned our year over year sign up trends improved sequentially in Q3. However.
However, this was offset by a modest increase in cancellations.
Average retention slipped to just under 10 months in the third quarter.
Revenue of $250 million was down 15%, including approximately 420 basis points of FX headwind, primarily due to lower subscription revenues.
Adjusted gross margin of 61% was down approximately 130 basis points from a year.
Merrily related to the mix of subscription revenue with 50 basis points of decline due to unfavorable FX. However, adjusted gross margin remains strong with workshop adjusted gross margin improving over 400 basis points from prior year on a constant currency basis as a result of actions.
Taken to optimize the studio footprint.
Marketing spend in the quarter of $36 million was up just slightly year over here with increased working marketing offset by efficiencies in nonworking marketing and the benefit of FX.
Adjusted G&A was 55 million was down $5 million or 9% versus prior year, reflecting savings from our restructuring actions overall expense discipline as well as the benefit from FX.
Adjusted operating income was 62 million.
Down $26 million versus the year ago quarter, primarily due to revenue pressure and FX headwinds.
During the quarter, we identified several factors, including business performance market capitalization and interest rates that indicated a triggering event for impairment testing.
Q3, 2022 we recorded noncash impairment charges of franchise rights acquired totaling 313 million.
Impairment charges were almost entirely driven by an increase in the weighted average cost of capital.
GAAP net loss per share was $2.93, which incorporates the negative impact of $3.38 of items affecting comparability, including noncash intangible impairment and net restructuring charges.
A few updates to our previously announced restructuring plan you will recall that this action was focused on streamlining the organizational structure, which will primarily impact G&A. In Q3, we reported approximately 4 million of restructuring Corp chart of restructuring costs and expect to record 10 million in restructuring charges.
In Q4.
Increasing our full year estimate to $33 million versus our prior estimate of 27 million.
The increase in estimate reflects noncash impairment of operating lease assets related to the reduction of corporate office space, resulting in approximately $5 million of annual cash savings going forward.
In addition to rationalizing our consumer Products' SKU count in North America, we have made the decision to discontinue sales of consumer products and our international markets, both in workshops and online.
These lines of business or unprofitable.
We've started the wind down process and expect it to be complete in the first half of 2023.
Importantly, we will continue to license consumer products and international markets and expanding this channel remains a priority.
In total we now expect annual savings from our restructuring actions to be over $40 million, which includes sub lease income up from our prior estimate of $35 million within your 2022 savings approaching 20 million.
We expect further revenue pressure in Q4 as a result of lower end of period subscribers at the end of Q3 and a significant FX headwind.
We expect to end the year at approximately $3 4 million subscribers, which we'd be down 18% on a year over year basis revenue.
Revenue for the full year is now expected to be approximately 1.04 billion down in the mid teens on a reported basis, reflecting FX pressure and lower subscribers.
Adjusted gross margin for the year is expected to be similar to 2021 at approximately 61%.
For marketing, we anticipate full year spend to be down approximately 15 million from 2020 one.
And G&A for the full year is expected to be in the 235 million range down 10% year over year.
We are revising our adjusted operating income guidance to reflect lower revenue and incorporate additional FX headwinds.
We now expect full year adjusted operating income to be in the $150 million to $155 million range.
The effective tax rate for the year is expected to be approximately 23%.
For clarity this excludes the impact of restructuring impairment and other items affecting comparability.
Full year interest expense is expected to be approximately 81 million.
Know that we have a 500 million dollar hedges to protect against rising interest rates on our variable rate term loan of $945 million.
And our $500 million notes are fixed rate, so only 31% of our total debt is floating.
Therefore at our current debt level, we anticipate interest expense to be approximately $90 million in 2023.
Therefore, our GAAP EPS loss is expected to be in the range of $3.16 to $3.21 per diluted share.
Which incorporates the net negative impact of approximately $3.94 of restructuring impairment and other items affecting comparability.
Turning to the balance sheet, we continue to generate strong cash flow from our subscription model and benefit from low capex and working capital.
We ended Q3 with approximately $188 million of cash an increase of $40 million versus Q2, plus an undrawn revolver.
Q3, net debt to EBITDA leverage ratio was 5.2 times up from four eight times at the end of Q2.
Drivers.
Given the nature of our subscription business model, starting subscriber base is an important component of revenue even before factoring in any year over year change and sign up you.
Using the expected ending subscriber level of 3.4 million for 2022.
Lower 2023 openings subscribers would know translate into a subscription revenue headwind in 2023 of over $90 million on a constant currency basis.
To help illustrate.
In a scenario where sign up in 2023 are flat with 2022 and assuming the same pricing Nixon F X Ray.
Subscription revenue would be over 90 million lower your over here.
In addition, the actions we've taken to rationalize consumer products in North America, and exit and international markets will also create a product sales headwind in 2023 of approximately $20 million, albeit with a negligible impact on earnings and a favourable impact of working capital.
In summary, while we exceeded our adjusted operating income expectation during the third quarter, the negative impact from F X and a lower opening active base will further pressure financial performance Q4 and into 2023.
We are confident that we were taking the appropriate cost actions and will continue to do so as required to manage the business through the earnings Strath.
I will now turn the call back to Zima.
Thanks Amy.
With that context, we are looking ahead to 2023 and focused on the following.
Improving our sign up trends over the course of the year and returning to a year over year growth trajectory in the second half 2023.
Improving new member activation, which would translate into games and retention.
Shifting key digital product milestones, including new enact community features in the first half of 2023.
And later in the year are integrated product feature with Abbott.
Exercising strong cough disciplined throughout the organization.
And executing on a narrow list a clear priorities.
Which we believe are the critical drivers for returning the company to a growth trajectory.
I believe that we were better when weight watchers with a movement.
People were proud to be members.
It came to us for education.
But more self for support.
Whenever I meet members from the G. Neidich era, they love to tell me that they are a weight-watcher.
Their identity is wrapped in our brand.
These women make up the bulk of lifetime members and show us that meaningful long lasting retention is possible when we get the experience right.
As we move into our 60th year, we must evolve to deliver the experience of today.
The consumer has changed culture has changed technology is changing.
To maintain our position as the global leader in sustainable Science fact weight management.
We have to better meet consumer needs across education and tools.
Human Love support <unk>.
Health indicators in inside and clinical intervention.
And our growth strategy must mimic those needs.
Coaching and community is part of our DNA with 80 per cent of our members now being digital only our App must've ball from being a second screen tool to a truly digital first experience.
From enhanced community features two device integration there are significant opportunities for us to match our premium in studio experience with a premium digital counterpart.
And remember seeking in person community.
Workshops will continue to set us apart.
We are working to ensure we have the right workshops open in the right places and stopped by the right coaches to deliver with excellence.
Program that we know will drive success for our members.
Weight watchers needs to be a culturally relevant bran that delivers again today.
We must breakthrough the noise with are reasons to believe namely science community live ability and sustainability.
Thank you for joining us today, and we're now happy to take your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speaker phone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Spencer hate Us with Wolf Research. Please go ahead.
Good afternoon, Thanks for taking my question.
Can you talk a little bit about what's driving the applicant cancellations and can now has that been trending exiting the quarter and if you think any changes need to be made from a pricing standpoint to to improve member retention.
[noise] Hi, Spencer.
So the checking cancellation as we mentioned was we saw about 50.
That it was driven mostly by the six month plan.
So we relate that back too personal points and if all satisfaction with that program and you know, we don't anticipate having to take any different actions around around pricing to address that rather we've focused on addressing the <unk>.
Graham itself.
N as noted or you know within the last three months have rolled out and tested a new version that.
That is based on a cohort of members on personal points that we saw outperforming.
So we're excited to be again rolling that out in the next few weeks and anticipate.
And associated lift an activation right with that.
Okay. That's that's helpful. And then as we looked at the next diet season, how are you approaching this one differently than than the team has in the past and and just in any any additional thoughts on I was thinking about simplifying the program going forward, whether that's membership tears or other ways to make the program easier to use.
[noise] sure sorry, there's some feedback on the on the line, that's making a little bit hard to hear but I think you asked about our peak season. So you know this this is a program simplification.
And you know which is different than our or traditional innovation years, and I think it's exciting the way we're evolving too in evergreen innovation cycle, we're taking into account.
Our existing member base, and what's working for them and we've heard loud and clear from coaches and from our members that they are asking for a more simplified program and so not only have we improved the you ask we have also observed as I mentioned a specific cohort.
That has outperformed NSC more success and by that we mean engagement and weight loss and so that is something that we can speak to me.
Meaningfully as we look to you know in the in the fall with all about consideration and and and really showing up from our brand standpoint, and the peak season is about turning that consideration into confession and so we're going to have meaningful value to speak to them to our target consumer and that's that.
What we're that's what we're really focused on moving into the peak season.
Okay, great. Thank you so much.
Mmm.
Next question is from Jason English with Goldman Sachs. Please go ahead.
So I have a good evening, thanks for calling me.
A couple of questions. So first I guess stick on the topic of the approaching dioceses in the recruitment cycle.
Should we expect any new news our marketing from like spokesperson anything like that or is the message really gonna be about coming back to basics keep it simple and the the simple fly program you're talking about.
Yeah. That's that's right look I I think that in the past we've relied on new news to drive interest and we're saying at the moment that the new news is really about simplification. That's again, we're we're listening and we've heard our members and.
And that's what they're asking for and not only that but again, we've observed that those members on this version of the program.
Are are better activated and have better success and so I think that's a powerful message to to our existing member base, who has been who's been asking for this change, but also two new customer cohorts and our lapsed members who are are.
Who need that reason to believe and <unk>.
And the and the reasoning there around the science of live ability community. It's all it's all there and so we're we're really excited about showing up in that way and matching sort of our learnings from the past and what works with our new and house performance marketing muscle and being more nimble.
[noise] around how and when we deliver those messages. So you know that's what we're looking forward to in the peak season. In addition to some exciting community feature improvements that will roll out throughout Q1.
Thanks for that and on cancellations do you have any good Intel on where the cancel the consumers are going whether it be like these new farm of solutions like with Kobe or maybe to a competitor like noon or just the.
DIY World and getting off the pay program and if you do have they didn't tell can you share what you've learned from it.
That's an interesting question you know I think that when we look at our market and we think about it more broadly.
The demand overall for in the wellness pain is still there you've got 70% of adult Americans, who are struggling with uhm overweight and obesity and they're looking for for opportunities to for support and so you know ultimately.
When we think about our competitive landscape more than anything it's the competition is doing it yourself and that really intensified over COVID-19, where you know everybody was learning how to be more industrious I mean gosh my husband was fixing our washer my brother.
Teaching himself how to play the guitar and people turn to social media and two different resources to add find the support to to try to lose weight and so when we see people cancelling your moving off our plan.
It's because we're not giving them the value and that's what we're focused started we're confident that we're doing the work and the product and the program to ensure that we are giving outsized value.
For what they pay for so so <unk>.
So that's really I I think what's happening there as we saw with the M. P. S. On personal point people were not happy with that program and so when the opportunity came they rolled off of it <unk>.
And I think that we have been able to diagnose that we're addressing it we're going to go back and speak to those members, who who did choose to to leave our program and let them know that we've addressed the problem and and I I I think that there is a real big opportunity there again, when we're thinking about.
[noise] innovation into more evergreen style is for us to continue to think about how to make the program, we have better versus trying to always deliver something shiny their new news can come in a lot of different packages and for US that's about taking the program that we have that.
We know works for people and continuing to elevate it and make it better because that leads to more positive word of mouth, which leads to more application to <unk> leads to two more efficient sign up.
So that's the virtuous cycle that we're trying to create here and and what we're focused on.
Now in terms of the second part of your question you you did mention the pharmaceuticals and.
I think that there are still significant financial barriers to the drugs in order for them to it for for those for the drive to address mass market need and you know outside of that though I. Just think generally it's really exciting look we're we're here to help people manage.
Their way to lose weight.
And there are there is a population where a clinical intervention is necessary to to help jumpstart their their weight law schools and so we're really excited to see the the the the pharmacology evolve into into partner. So so that we can ensure.
Reduce those interventions responsibly and eventually get people off the drugs, so that they're not living with that for the rest of their lives.
And and so I think that it's it's a very interesting space for us, especially as the you know the leader in the market.
Who's been around for 60 years.
Clearly <unk>.
I I believe we make a great partner to the pharmaceutical companies that are looking for ways to bring responsible weight management to that population.
Got it makes sense. Thank you.
Again, if you have a question. Please press Star then one.
The next question is from Alex Ferman with Craig Hallum Capital Group. Please go ahead.
Alright, thanks very much for taking my question, you know I'd like to talk a little bit more about the the increase in cancellations that you're seeing I'm curious if some of the region's you operate in that are experiencing particularly high inflation like Europe and the U K are seeing an outsize chunk.
Of cancellations and then if I could just get a little bit more color on the the comment you made about people kind of rolling off the six month membership after they signed up for personal points can can you give us a sense of how many of your members in the brand today signed up during personal points and.
How would that compare to you know what percentage of your membership in in November in a new program year would typically be in that new program is it is it about the same just curious you know what what share of your membership has that personal points membership.
Well certainly thank you for your question anybody who's finding up for for weight watchers would've been signing up for a personal point and about 50 per cent of our sign up stirring.
Last Pea season signed up for <unk>, six month plan, which cancelled as a higher rate than the prior year as as we mentioned so we believe this to be this object in B a Q3 event.
And and I'm really confident in our ability to address it as I noted before we are now we have a new measurement and activation right. This is a key metric for us.
It's the way that we look at new member engagement in the first 30 days it based on specific actions that we're we're we're making their data science, we've been able to model that as a leading indicator of success.
And so when you looked at when it when we were looking at its activation in January 2022, compared to 2021 level, we had already seen at that 0.5% drop an activation and the trend.
Moving in the wrong direction now <unk>.
I'll remind you that I joined about seven months ago, and I've been incredibly impressed that in a short amount of time, we have been able to turn that lying around and make it smile. So that five per cent drop an activation that I mentioned, we've already narrow that gap back to 2021 levels and that is happening through our.
Shipping velocity around new features and the work that we're doing and we haven't even rolled out our new simplified program yet so I again, I think that that up taking cancellations with a Q3 event.
And we're looking to meaningfully improve it because as we improve activation we also reduce churn.
Okay. That's that's really helpful. And then the other part of the question sorry was that it was a long question is are are you seeing that drop off evenly throughout the globe or or have you seen a particularly big hit in Europe and the U K.
It was even around the globe.
Okay. That's very helpful. Thank you very much.
Thank you.
This concludes our question and answer session.
I just turn the conference back over to see in this society for any closing remarks.
So with nearly 60 years of weight loss advocacy in a community of millions we have a strong foundation on which to build a digital experience for the future.
We have work to do to deliver the connected community that I know with our future, but I'm confident that we have the essentials in place to deliver a strong number experience. This is going to put us on a path for improved performance or return our company to sustainable growth.
We're looking forward to our peak winter season, and connecting with you again in the future. Thank you so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Mmm.
[music].