WW International Inc (WW) 2015 Q2 法說會逐字稿

Good afternoon, and welcome to the Weight Watchers International second quarter 2015 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Corey Kinger, Investor Relations.

Please go ahead.

Thank you, Laura, and thank you to everyone for joining us today for Weight Watchers International's second quarter 2015 conference call.

With us on the call are Jim Chambers, our President and Chief Executive Officer; and Nick Hotchkin, our Chief Financial Officer.

At about 4:00 PM, Eastern Time today, the company issued a press release reporting the FY15 second quarter 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 www.weightwatchersinternational.com.

Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are also available as a 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 and Exchange Commission.

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.

I would now like to turn the call over to Jim Chambers, President and Chief Executive Officer of Weight Watchers International.

Jim?

Thanks, Corey.

Good afternoon, everyone, and thank you for joining us for today's call.

Our second quarter results came in ahead of our expectations.

And while we still have work to do, we're making solid progress on our transformation.

To begin, across all major geographies, recruitment trends improved substantially in Q2 versus what we saw in Q1.

Globally, total year-over-year recruitments, while still negative, were the best we have seen since the fourth quarter of 2012.

And notably, we had positive year-over-year online recruitments in North America, also a first since Q4 2012.

Second, we're on track against our previously communicated objective to improve our cost structure by over $100 million on an annualized basis in 2015.

Third, we are getting ready to launch one of the most significant and comprehensive program innovations in the history of this company; something that we are increasingly confident will change the trajectory of our business.

To quickly recap our second quarter performance, revenue was $310 million, adjusted operating income came in at $71 million and adjusted earnings per share was $0.42.

End of period global actives declined 17% year-over-year to $2.8 million, with $1.6 million online and $1.2 million in meetings.

Stronger advertising and promotion contributed to the improvement in the Q2 recruitment trend.

Our US spring season marketing campaign, which reflected a strong call to action and was paired with engaging creative resonated with consumers.

Our promotion plan continues to generate profitable member recruitments.

Our promotion tactics reflected a mix of traditional economic incentives, as well as newer events such as our Lose 10 Lbs On Us promotion, which drove engagement in richer ways.

We will continue to build on Q2's successful advertising and promotional approach into the fall season and beyond.

Late this year, we will be launching perhaps the biggest innovation to our proven program in our history.

We are not going to share the specifics ahead of the commercial rollout, but as we stated before, the underlying desire for weight loss is still a very important part of the equation.

However, the consumer wants to get there through a more holistic mindset of healthier eating, fitness and emotional strength, with weight loss being a critical element of this bigger picture.

In support of this launch, we are developing a new market campaign that will capitalize on the innovation and leverage the media and creative principles that historically had been successful in driving recruitments in our business.

Turning to our tech transformation.

You will recall that at the start of this turnaround, our tech platform was a legacy challenge and one we committed to making an enabling asset.

We are on track to operate with far more speed and greater capabilities, but at significantly lower costs.

Our tech and product teams are doing a tremendous job in building the capabilities to strengthen our offerings and enabling a pipeline of innovation.

For example, in the second quarter, we upgraded our visitor site, supported by a new content management system, delivered enhancements to search and navigation on our mobile products and introduced our Weight Watchers app for the Apple launch.

Our tech transformation is fully in sync with our broader efforts for our winter season 2016 innovation.

We feel good about our progress and our confidence and our timelines.

The majority of our consumer-facing capabilities will be operating on our new modern platform ahead of the program launch.

As we have built out our base of internal tech talent, we've ratcheted down our use of external resources and thereby reduced our expenses.

With our new labor, development and infrastructure models in place, we are getting a lot more from tech at a significantly lower cost.

To give you some perspective, technology-related cash spending this year is expected to be around $85 million in total, down from $115 million at our peak last year.

And we expect to end the year at a roughly $60 million annual run rate.

Turning to our healthcare business.

Following the smooth, operational launch of our partnership with Humana earlier this year, we are proving our internal capabilities to deliver against healthcare market needs including HIPAA compliance, billing and data reporting.

We are fully committed to the partnership and demonstrating its potential.

We are learning a lot together about how to best engage with Humana's covered population.

As we have previously communicated, we do not expect the Humana partnership to deliver meaningful revenue this year.

However, we continue to believe in the opportunity in the healthcare channel and remain convinced that Weight Watchers can play an important role in the healthcare system's fight against obesity.

And now, I will turn it over to Nick.

Thanks, Jim, and good afternoon, everyone.

As Jim discussed, our Q2 results demonstrated a marked improvement in the recruitment trajectory as compared to our first quarter, especially in online.

While total recruits remained negative, the overall trend improved substantially versus Q1, especially in North America, where online recruitments comped positively for the quarter year-over-year.

In Q2, total company revenue declined 16.5% on a constant currency basis to $310 million.

And we delivered adjusted operating income of $71 million.

GAAP EPS was $0.49.

Excluding modest restructuring costs and a $0.07 gain as a result of our debt tender offer, adjusted EPS was $0.42 per share.

Turning now to our results by geographic segments.

In the second quarter, total North America revenues declined 18.4%, with meeting fees down 17.8% and online revenue down 17.5%, all on a constant currency basis.

Meetings paid weeks declined 18.3% and online paid weeks declined 22%.

On a constant currency basis, in the UK, second quarter total revenue was down 17.4%, with meeting fees down 16.5% and online revenues down 15.5%.

Meetings paid weeks declined 15.4% and online paid weeks declined 17.7%.

In Continental Europe, total revenues declined 9.1%, with online revenue down 8.3% and meeting fees down 11.7%, all on constant currency.

Online paid weeks decreased 8.5% and meetings paid weeks declined 9.8%.

Now, to the P&L detail, on an adjusted basis.

In the second quarter, gross margin was 51.3%, representing a decline from the prior year of 590 basis points on a constant currency basis.

Our marketing spend was $40.3 million, declining $2.5 million on constant currency.

G&A expenses were $47.9 million, a decline of $11.4 million on constant currency as we continued to exercise stringent cost discipline across the organization.

Our GAAP Q2 tax rate was 40.2%.

And now, I'd like to provide our outlook for 2015.

We expect the improved recruitment trend versus Q1 to continue in the back half of the year, with North America outperforming our previous expectations.

However, we still anticipate that total Q3 and Q4 recruitments will remain down year-over-year.

We are encouraged that good marketing and promotions have helped stabilize the business, but we do not expect to see a return to positive recruitment until next year after the launch of our new program innovation across all major markets.

So for the full year 2015, we continue to expect a revenue of approximately $1.15 billion with foreign exchange accounting for an approximately $75 million decline versus prior year.

Now for some detail on our volume metrics.

Total paid weeks are expected to be down in the mid to high-teens for Q3 and for the full year.

In North America, we anticipate that third quarter and full year revenues will decline by up to 20% on constant currency and Q3 total paid weeks will decline in the high-teens.

In the UK, we expect revenue for Q3 and the full year to decline in the mid-teens on constant currency.

UK Q3 total paid weeks are expected to decline in the mid-teens.

And for Continental Europe, we expect revenues to be down in the mid-to-high single-digit range on constant currency for Q3 and the full year.

CE Q3 paid weeks are expected to be down in the mid-to-high single-digits.

Turning to our P&L, let me give you some color on our promotions strategy.

We continue to view the strategic use of promotions as an effective way to drive recruits in our category.

Recall that we implemented price increases late last year in North America.

Even with the use of promotions, our price realization has been marginally higher in 2015 than it was in 2014.

And importantly, we have seen no meaningful change in our member retention patterns.

We expect a gross margin percentage decline year-over-year of about 500 basis points in Q3, which reflects our lower volumes as well as our strategy to have our leaders engage with members online as well as the P&L impact of our tech investments.

We expect a full year gross margin rate decline of approximately 525 basis points versus 2014, which is primarily driven by our lower volumes and also reflects higher winter season preparation costs this year.

This also includes around 30 basis points of unfavorable foreign exchange impact.

Q3 marketing expense is expected to be down slightly versus last year, and for the full year, marketing expense is expected to be approximately $200 million, down about $60 million from 2014 as we focus our spend on key media that drives recruits and lower non-working media costs.

Approximately $15 million of the year-over-year decrease is driven by foreign exchange.

We expect G&A in the $190 million range for the full year, split relatively evenly across the quarters.

This compares to $234 million in G&A last year and approximately $10 million of the year-over-year decrease in G&A is driven by foreign exchange.

Our cost savings initiatives are progressing on plan and this guidance reflects our $100 million gross cost savings target for 2015 on a constant currency basis.

After our significant head count restructuring early in the year, year-to-date restructuring charges totaled about $6 million.

And for the full-year 2015, we anticipate restructuring charges of approximately $10 million, with the balance primarily related to planned office space consolidation.

Below the line for the year, we expect interest expense to be approximately $122 million and that tax rate to be approximately 40%.

We continue to expect CapEx of less than $35 million in 2015, reflecting more focus on tech cost savings.

G&A is expected to be in the $55 million range.

We are adjusting and updating our full-year adjusted EPS guidance to a range of $0.57 to $0.72.

This EPS guidance includes an approximately $0.19 negative impact from FX, but excludes the restructuring costs and the gains associated with our debt tendered.

Now, I'd like to update you on our balance sheet and capital structure.

At quarter-end, our cash balance was $150 million, which reflects the cash prepayments from our June debt tender.

Like our tender in Q1, we were able to prepay a portion of our B-1 2016 maturity at a 9% discount versus par.

Combined, in these two transactions, we spent $134 million in cash, resulting in savings of $14 million on our principal payments.

At Q2 end, we had [$144 million] (corrected by company after the call) in debt due in April 2016.

And we continue to be comfortable with our cash and liquidity position in respect to both meeting this obligation and funding our transformation.

During Q3, we decided to augment our already strong cash position.

And we fully drew down our available $48 million revolver.

Based on our expectations that we will generate cash in the back half of the year, and including the addition from the revolver drawdown, we expect to end the year with a cash balance of approximately $250 million.

Now, I'll turn it back to Jim for a few closing remarks.

Thank you, Nick.

Let me finish by thanking the entire Weight Watchers team around the globe for the solid progress we are making.

Our focus as we move forward is on building on a positive momentum from Q2 through the rest of the year, and setting a stage for return to recruitment growth in 2016.

If you look at the history of Weight Watchers, you will see that we have a successful track record of overcoming downturns in our business.

A key catalyst for revitalizing growth has consistently been major program innovation, supported by strong commercial execution.

We are confident we will be delivering a winning combination this winter.

Thanks for joining us today; I'll now turn the call to the operator for Q&A.

Thank you.

(Operator Instructions)

Meredith Adler, Barclays.

Hello.

Thanks very much for taking my question.

I guess I wanted to understand a little bit better how you think about this new program and maybe how you think customers or consumers are going to respond to it?

What does your focus group say?

And how long do you think it will take for people to really understand the changes you've made?

Meredith, I think I can answer some of that.

But as I said, there's certain details around the commercial plan that we won't touch on.

I think that consumers are going to understand this and align with this quickly.

What we've done is a deep understanding of where they are.

So, we're not creating something new for them.

We're meeting the key needs that they have described and how they want food to represent healthy eating to them and not simply calories and how they want to integrate fitness into their lives and how they want to find the strength to sign up and to continue in these kinds of holistic improvement efforts.

So, I think it's going to be a pretty - a pretty smooth uptick from that perspective.

In our testing, which is happening in a slightly different model this year than last year, this year, we're developing in a much more iterative way.

So, we have more testing and we have earlier testing of things.

We've had very positive responses to the elements that we have changed at a program level.

So, we're feeling quite confident about that as well.

Okay, great.

And then maybe I'm just curious to know what kind of feedback you've gotten from customers about the changes you've already made and how they can connect with Weight Watchers?

And is everything working the way you wanted it to?

So that - are you referring to the capabilities we put in place at the beginning of this year around -- ?

Yes, yes.

Bringing the leaders in contact with the member population?

That's right.

So, in -- I'll take that in two pieces, I guess.

The first has to do with our click-to-chat functionality that we've put into the product and the second has to do with Coaching, which we launched as a product.

So from a click-to-chat perspective, I think it's one of the things that represents the improvements in our digital product suite in addition to some of the other things I mentioned on the call, like search and navigation.

I think it's the access to leaders in the digital product is one of the things that has improved its performance.

And while we have a lot to earn and a lot to improve like any launch and product evolution, I think that has strengthened those products.

With respect to Coaching, we see pretty much the same thing that I referenced on the last call that the continuance of people being highly satisfied with the interaction with Weight Watchers Coaches in that one-on-one model, but still low penetration of Coaching as a product.

And while we work on testing ways to improve that penetration.

We're really excited about the fundamental -- the building block dimension of this, which is that the core strategy of getting the coaches to interact in the digital realm with Weight Watchers' members is creating resonance and is improving things.

So, a lot to do to drive the penetration of that product over time, but also suggest ways that we can use Coaching as an activity in different ways to strengthen our offerings overall.

Great.

Thank you very much.

R.J. Hottovy, Morningstar.

Yes, thanks.

Had another question about the program innovation that you're planning.

And Jim, I appreciate you not wanting to give too many details about the platform.

But given that you've said that it ties into the idea that consumers want a more holistic approach to wellness and fitness and that Weight Watchers being a key component of that, just trying to get a sense of what shape this program takes.

And how you fully address the other parts of the holistic approach that you don't actively have a competency in such as the fitness and wellness?

Whether this means exploring other options or other partnerships, or just other ways, how you offer a more complete solution, any details that you could give us that would be helpful?

And then additionally, is there any other additional cost required with this - with this platform?

Yes, I think unfortunately, your question's right down the middle of the fairway of details around the program that I don't really want to address too deeply.

We do - of course had development costs associated with the program and testing costs associated with the program.

I've referenced the technology approach to how we are building it.

And I'll say we will continue to, as I mentioned to Meredith, we will continue to leverage the strategy of increasing the presence of our service providers into the digital realm, but I can't give too much more detail than that.

Yes, R.J., I'll just talk to the cost of a program a little bit.

Obviously last year, we introduced the strategic capabilities that Jim mentioned.

And within our 525 basis points of gross margin deterioration, probably around 100 basis point of that is added delivery cost associated with bringing our service provider to the online space, obviously that's in the past.

In the forecast for 2015 that we've shared today, the move from a 450 prior gross margin deterioration guidance to 525 now, that's primarily driven by the one-time costs linked to the introduction of our winter season innovation, including training of service providers and supporting materials and supporting technologies.

So, the costs to launch are certainly all baked into our guidance.

Thanks.

Second question I had just is regarding the healthcare initiatives, and just whether or not - what kind of ideas you have and what the pipeline looks beyond Humana?

And any other ideas and in terms of how you go about finding your healthcare partners and what they're saying on that end.

And then also if you have - now that you're beyond six months with the platform with Humana, any kind of statistics on the members that you've been able to enroll through Humana?

Any retention rates or anything like that, any details that you could share with us on that end that, that would be helpful.

Thanks.

Sure.

So, our work with Humana, as you mentioned, started about six months ago when we kicked off.

And our primary focus has been around improving our operational capabilities to meet what the healthcare channel requires in terms of privacy and data management and reporting and things of that nature.

It's important to note that we have only recently dug into turning on the marketing effort.

So we're switching the focus from proving out the operations to engaging their populations and we're working with them on how best to do that.

Overall, I would say from 18 months ago, maybe even a little more when we started talking about the healthcare initiative, the one thing that has proven to be a bit different is how the interpretation of the regulations have unfolded.

So as the - as we believe that we meet the requirements for the USPSTF's recommendation around intensive behavioral counseling and therefore should be covered, the interpretation of plans in the health channel, their interpretations have been much slower to evolve.

And frankly, there has been quite a bit of confusion around what this means and who meets these requirements.

So overall, I think this has made it a little more difficult for us to develop a pipeline quickly, but hasn't lowered our expectation for what this can do for us over time and how important a role we can play in that healthcare system.

In 2016, I would say that it's probably another learning year for us with smaller number of partners as we continue to influence folks and prove to them that we meet the requirements.

And continuing to push our strength as a broad scale-based, cost-effective and highly, from a weight loss perspective, efficacious provider.

And we'll just keep those strengths in mind as we continue to develop the channel.

Thanks for the color.

Alex Christensen, Craig-Hallum.

Hey guys.

Looks like you guys had a good quarter, especially the way that the market is responding this afternoon.

I just had a couple questions for you guys.

The first one, the thing that struck me was -- it looks like sequentially, even despite not being the peak of diet season, your active subscribers in North America grew.

And so, I was wondering what kind of -- what you're taking from that?

What specifically with your promos was strong and how you're going to integrate that into your next diet season?

So, that's -- I'll take this from the point of reference around what specifically drove the improved performance and particularly in North America.

I think I had mentioned before that our digital products fundamentally are getting better.

They're getting stronger.

But to add to this, our advertising and promotion efforts in North American markets were stronger.

We combined the 'Lose 10 pounds on us' promotion with a return to, I'll call it, the tactics from a media perspective that have been proven in the category, which are based more on call to action advertising and higher levels of GRP.

So we've changed up our media mix.

We've changed up the creative.

We integrated a promotion that has a lot of leverage at the consumer level.

And I think that is what has improved the trend fundamentally.

With respect to the promotion, I mentioned Lose 10 lbs on us.

It's been a good performer for us and it works at a couple of levels.

It works like the rest of our promotions have.

It works at a fundamental economic level that encourages participation.

But it also had some pretty good kind of behavioral influences on the consumer.

It created a buzz and a more sharable construct that this was new from Weight Watchers and it's created a different kind of invitation to Weight Watchers.

I think consumers have seen us always, given us the due credit for being an effective weight loss program, but seen us maybe a bit more about transformation.

And this was an invitation as I mentioned.

It was 'Lose 10 pounds'.

It seemed doable.

It seemed inviting.

It was something that wasn't as off-putting.

And so, we found it had a very strong effect.

So we ran that promotion on the signup dimensions of web and mobile obviously, but we also integrated into the television advertising and digital, and it had a much better than the trend we've been seeing.

It had a pretty strong impact.

So I think that is the biggest driver.

Okay.

Great.

I mean that's very helpful.

Other - another question, looking at - I know you guys have talked in the past about as volumes decreased a little bit in your weight loss centers, you're consolidating two meetings into one so that you can save on expenses there.

How is that going, have you seen success in keeping a critical mass in those meetings?

Yes.

No, it's part of our $100 million cost saving strategy and you see the impact of that demonstrated in the year-over-year decreases in marketing and G&A.

But operating efficiencies and meeting consolidations are important part of that strategy also, and the teams are executing that strategy well.

Now, obviously despite all those great efforts, still see gross margin deteriorating 525 basis points this year.

That's primarily driven by the volume impact and the fact that, as I mentioned, we added some cost to this system for click-to-chat.

We're comfortable that as we return to recruitment growth in 2016, we've got a optimized meeting network to take advantage of that growth.

Great.

Thanks James.

Thanks Nick.

John Faucher, JPMorgan.

Thank you.

Just want to follow up on some of the effectiveness of the promotion with a couple of questions here, which is, you guys have been talking to your consumers a lot lately.

And I guess, is this something, taking the price points down and what have you, is it not something that had come up in all the research that you guys have been doing with your consumers?

And then, I guess as you look at sort of the consumers you brought in, when is it the right time to know whether they are going to stay, right?

So you brought them in for what is a shorter-term promotion.

What - how long before you know whether they will stick with you over the longer term?

And then, I guess the third question here would be - and I apologize for asking three questions at one time.

If this is working, why not amp-up the marketing behind this promotion instead of taking the marketing spending down over the balance of the year?

Thanks.

So let me see if I can try the first couple in a general sense.

So, having been around and worked in a number of categories, one of the things that has really been impactful about this category is when we promote, we have very profitable returns on that promotion.

I've been in businesses where that's not the case.

And so, the range of things we do is within a context of, number one, they're all - they're all pretty profitable events.

With respect to price, in talking to our consumers, I think price in this category has an economic effect like it does in other categories.

But it's not a very rational category and therefore, price has an emotional effect too, it's a stimulant to do something.

It's a removal of a barrier.

The comment I was making about what was unique about or not unique, but impactful about the 'Lose 10 pounds on us' was that beyond that, the dimensions that the consumer is engaging with were sort of new forms of attractiveness that were associated with the structure of the promotion itself.

So not to get too deep into this, but 'Lose 10 pounds on us', as I mentioned, '10 pounds' seemed manageable.

'On us', seemed to be, we're doing this together and you have confidence in your program, so you're behind it.

And so, the dialogue with consumers around this was less about the price dimension and more about the other things that this promotion was saying and how it was creating momentum for them to join.

With respect to the marketing question, as executed, we did tie it with marketing, the promotion is present in the marketing spots.

With respect to how much marketing we might do in the future and whether it's effective, that's a dynamic proposition.

And we have consistently said that where we see tactics that work, we'll spend more money on those tactics.

In the aggregate, I think we have the right kind of marketing budget for us and we'll spend it behind the things that generate the most results.

Yes, let me just add to that, John.

On pricing, a declining gross margin this year, it's all about volume and it's all about investments in the business.

So, the overwhelming driving factor is meetings, deleverage.

So, frankly, within that 525 basis points of gross margin deterioration, just want to stress that the total impact of pricing and promotion for the year is positive 20 basis points.

So, our price realization in the business is higher than it was in 2014, partly because of the price increases we took in North America, but that's being followed up with the strategic use of promotions as we've discussed.

And then importantly, we track the behavior of people on the program very closely.

And whether or not somebody joins our program for a one-month or three-months sign-up initially, whether or not they're joining 'Lose 10 pounds on us' promotion or 'Free Starter Kit' offer or a 'Bring a Friend' promotion on the meetings business, we're pleased with our retention trends in all aspects of the business that we see any meaningful impact in our retention trends.

Got it.

Thank you.

And that concludes our question-and-answer session.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.