WW - NASDAQ

Good day, and welcome to the WW International, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Corey Kinger of Investor Relations. Please go ahead.

Thank you, everyone for joining us today for WW International's Third Quarter 2023 conference call. At about 04:00 P.M. Eastern Time today, we issued a press release reporting our third quarter 2023 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.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 and Exchange Commission. Please refer to these filings for 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 Sima Sistani, CEO; and Heather Stark, CFO. I will now turn the call over to Sima.

ThanksCorey.Goodafternooneveryoneandthankyouforjoiningustoday.I am thrilled and gratified to confirm that we have now successfully returned Weight Watchers to a subscriber growth trajectory. A significant achievement and a direct result of our work in reinvigorating our core business.Q3 ended period subscribers totaled $4 million, up 6% year-over-year. This Q2 to Q3 sequential change is the strongest in our reporting history.In addition, this is our first quarter of reporting year-over-year subscriber growth since Q4 2020. Before I dive into our results, I want to remind everyone of our 4 priority areas for 2023 which we have remained laser focused on as we turn around the business; 1.Reinvigorating our core business through an evergreen product innovation strategy and a modern marketing toolkit. 2.Compounding our head start in the Clinical space. Clinical is highly complementary to our core offering and we now have a portfolio of solutions to meet the broad and evolving needs of members. 3.Being a partner of choice for health providers, payers and employers by leveraging our expertise and relationships and a step program solution that delivers a cost effective behavioral and Clinical weight management solution, setting a new standard of care in the space. 4.Building community experiences, both in real life and digital that will broaden our reach and increase engagement and satisfaction for both behavioral and Clinical pathways. We are executing well on each of these initiatives and have hit several key milestones in recent months. Let's start with our core business. Our activation rate, ametricdefinedbyamember's food and weight tracking engagement and weight loss progress during theirfirst30daysontheprogram,continueto trend in the right direction with Q3 up approximately 7% year-over-year and a reminder activation rate matters, because activated member’s attrition rate is roughly half of a non activated member and they are more successful on Weight Watchers over the long term. Similarly, our engagement rate, which is measured across our entire membership base beyond those the first 30 days also continued to trend positively with Q3 up approximately 13% year-over-year.NPS or Net Promoter Score as a measure of how likely our members are to recommend the program to a friend for our digital business also continued to improve up 12 points since Q1 2022 and reaching its highest level in the last two years demonstrating the enhancements to our product over the past year are driving member satisfaction.A key component of our core business reinvigoration is the introduction of high-value product features that drive both member engagement and retention.Two examples this quarter include the recently launched what to eat tab in our app as well as progress and trends. While its early days, these enhancements are driving an increase in food and weight tracking which we know are critical to member success.As we outlined earlier this year, we shifted a portion of our annual marketing spend from Q1 into Q3 to better optimize our CAC efficiency throughout the year. This strategy was successful in continuing our sign up momentum and bolstering our starting subscriber position headed into next year.We have been adept at managing to customer lifetime value acquired or LTV. So far in 2023, approximately 80% of sign ups chose a 6 month or greater initial commitment.This is up from less than 70% in 2022. This extends the period of time the subscribers receive commitment term pricing. Therefore, lowering absolute dollar monthly revenue. Importantly, over the member's subscription link, it improves our financial return and ensures we are building toward the long term health of the business.Turning to our Clinical offering. While GLP-1 medication shortages continues as expected throughout the quarter, we remain extremely pleased with our progress despite the supply constrained environment.Clinical subscribers ended the quarter at 45,000 an increase of approximately 23% from Q2, a growth rate which we believe exceeds the growth rate of the total number of GLP-1 prescriptions dispensed expense demonstrating that we are taking share in this developing market.We are encouraged by the progress and the future potential for this critical and unique pathway.While the vast majority of our marketing to date has been focused on our core Weight Watchers business. We've also been conducting small scale marketing tests, primarily in digital, social and email for our Clinicaloffering. In order to continue to seed awareness and generate data informed learning ahead of the return of GLP-1 medication supply. As I stated on our last earnings call, we see this time as an opportunity where we can utilize this window to scale up operations. We continue to onboard new clinicians up another 20% since the end of Q2, as we are focused on delivering a strong and timely member experience. Behind the scenes, our teams have been hard at work at integrating the sequence in Weight Watchers platforms.I'm impressed with the agility and dedication of our teams as they become one unified team to advance and enable a seamless member experience.Ahead of our peak season, we will be introducing a dedicated program for Weight Watchers members on GLP-1 medication. As we know, there are different needs for someone on chronic weight management medications.For many, these medications are highly effective,however, they are most effective when used in conjunction with lifestyle interventions. We are using our expertise to develop a tailored program that addresses those needs such as prioritizing a nutrient dense diet and protecting against loss of muscle during weight loss.We believe this tailored offering will be a unique differentiator and competitive advantage for Weight Watchers.Whether a member receives their prescription through us or not. While GLP-1 seemed to be in the headlines every day, it remains a confusing environment for consumers. We are leading this conversation and will continue to be the trusted resource for those interested in exploring if such a pathway is right them. As a global leader in weight health, we are reframing the conversation around weight man in order to destigmatize obesity and make evidence based solutions achievable and accessible to those in need. To help organizations navigate this new landscape Weight Watchers for Business, which was previously referred to as WW Health Solutions, is building on our existing employer sponsored business with a full spectrum weight health platform called Pathways for employers and payers looking to manage costs and improve health outcomes for their population. Weight Watchers for Business utilizes evidence based Step Therapy with proprietary de-escalation protocols designed to drive Clinically significant weight loss outcomes, while controlling costs, a leading third party actuarial for validated model shows that implementing the Weight Watchers program could yield a 3.9 times ROI for employers cover GLP-1 medications, with an estimated net saving of $3375 per participant per year over a two-year period. Take note, as this is worth saying again, implementing the Weight Watchers model for those on GLP-1 can deliver both health outcome and cost savings.Given cost is top of mind concern for payers, we are confident that our proprietary pathway solution is best in class in the market and sets us well apart competitively.I'm confident we are taking the right steps to deliver a B2B offering that is not just viewed as an employee perk but as a true partner of choice for value based care.This is a process that won't be accomplished overnight, but one that I am very enthusiastic about for the mid and longer terms. Finally, on our fourth priority building community experiences. For my first day at Weight Watchers and as a long time member myself, I have stressed the importance of the 3 pillars of coaching, accountability, and community.The community of Weight Watchers members, both in workshops and digitally in our app is a unique differentiator that is often essential to member’s weight loss journeys.We know that members connecting in real life is an impactful and differentiated part of the Weight Watchers experience and we are exploring ways to bring more of that impact to our entire community of members in the years ahead. I believe, IRL is essential to building lasting communities. Our teams are eagerly testing new features and service designs for how we foster and enable in person connections, while enhancing them digitally. In summery. 2023 has been a transformative year for Weight Watchers.We've returned our core business to subscriber growth, quickly positioned our Clinical business as the gold standard in weight health with the ability to scale as supply comes back and launchedthe next wave of enhancements to our product and program that will provide the foundation for a more engaging digital experience. Each of these milestones on a standalone basis represents huge progress for our organization. When combined, the progress and advantage is exponential.That's the wide space where we see a unique opportunity for Weight Watchers to drive huge value. There is no question in our mind that the combination of behavioral program with the Clinical option for those who need it supported by both in-person and digital communities represents a sizable opportunity and one on which only Weight Watchers can deliver. I will now turn the call over to HeathertodiscussourQ3 financialresultsandoutlook.

Thanks, Sima. Turning to our third quarter results. Note that all year-over-year financial comparisons are on a constant currency basis. We ended Q3 with 4 million subscribers, including 45,000 Clinical subscribers.Our core Weight Watchers subscriber change from Q2 was the best third quarter sequential performance in our reporting history. The actions were taken to stabilize and growth the business are working. Revenue totaled $215 million down $38 million year-over-year.Breaking this down, subscription revenues, which included $10 million in Clinical revenue, declined $20 million, as we have a higher mix of subscribers within their initial pricing commitment periods and an increased mix of high margin digital subscribers.Importantly, consumer products and other revenue declined $18 million due to the strategic decision to wind down our low margin consumer products business. Adjusted gross margin of 66.2% for the quarter set a new record high and was up 490 basis points from the prior year driven by our actions to reduce our fixed cost base with our workshop real estate restructuring combined with the effect of mix shift to our higher margin digital business.Marketing expenses of $48 million were up 33% year-over-year, but slightly below our planned spend.I've highlighted in prior calls, we continue to focus on high-value member acquisitions and redeployed the majority of our first half marketing savings, primarily into Q3 which helped drive a second consecutive quarter of year-over-year sign up growth.Adjusted G&A of $57year over year was up 4% versus prior year due to the including of $5 million in Clinical G&A expenses including approximately $2 million in intangible amortization from purchase price accounting considerations, which more than offset the benefits of restructuring and expense controls in the quarter. Adjusted operating income $37 million.Restructuring charges totaled $6 million in the quarter as we continue to streamline our organizational structure. While we expect to incur restructuring charges in the range of $50 million for the 2023 plan, it is driving approximately $50 million of in-year savings roughly split between G&A and operating expenses benefiting gross margins. Income tax was a benefit of $38 million in the quarter, which consistent with last quarter reflects the impact of an unusually high negative annual effective tax rate, driven by a valuation allowance, and small pretax loss reflected in the company's full year fiscal 2023 guidance.GAAP EPS was $0.54, which incorporates the net positive impact of $0.48 of items impacting comparability, which includes evaluation allowance and net restructuring charges mentioned earlier. Turning to our Clinical line of business. We are encouraged by the third quarter performance and ongoing integration efforts in face of a challenging supply environment. As a reminder on Q2 earnings call, we noted that the demand for GLP-1 medications has outpaced supply and that the shortages of these medications created a revenue impact versus our initial expectations from earlier in the year. While shorter term supply constraints remain, we have no change from the outlook we provided in August nor is there any change in our convictions about the strong multiyear growth opportunity and the significant market we believe this represents. We continue to utilize this time to increase our scaling readiness and integrate operations. While this negatively impacts near-term gross margins, we believe we will be ready for the pending improvement supply.Therefore, Q3 adjusted gross margin was north of 30% compared to north of 40% previously and we expect this to continue in Q4 of for improving with revenue scaling. Shifting to our outlook. We are encouraged by the subscriber trends we are seeing.As a reminder, the seasonality trends in our business mean that Q1 is traditionally our annual peak in end of period subscribers slipping to a Q4 trough with Q4 tending to be the lowest recruitment quarter of the year.We expect to end the year with total subscribers above3.7 million, modestly higher than the prior guidance of 3.7. Within this, we expect Weight Watchers subscribers, excluding Clinical, to be above 3.6 million at year end up from 3.5 million at the end of 2022. With respect to Q4, while we expect continued signup momentum, core Weight Watchers signup are expected to be down modestly year-over-year, largely due to the timing of week 52 in 2022, which included New Year's Eve, a high sign update for Weight Watchers.Our outlook of ending the year modestly above 3.7 million subscribers represents the best seasonal slope since we've been reporting total subscribers.As a reminder, in Q1, our highest volume quarter for sign ups, 41% of sign ups chose a 9 month or greater initial commitment up from 12% in prior year Q1, which effectively pushed out the timeline of when this larger cohort of members comes up for renewal from Q3 to Q4.We expect full year revenue to be at the low end of previously provided range of $890 million to $910 million due to the revenue dynamics in our core Weight Watchers business discussed earlier. We continue to expect Clinical revenues to be $30 million for Q2 to Q4 in aggregate. Given our anticipated increase in subscriber levels year-over-year we expect to have modest subscription revenues headwind in to next year due to the addition of Clinical. Partially offset by a slight revenue headwind in the core Weight Watchers business and as a reminder with the nature of our subscription business model there is a lag from subscriber growth to revenue growth. Shifting to consumer products and other. As we've previously communicated, earlier this year, we made the decision to sunset our e-commerce and consumer product offering. While we expect consumer products and other revenue to be in line with prior guidance and contribute roughly $65 million in revenues during 2023, approximately $50 million will not reoccur and will be a revenue headwind into 2024.Importantly, however, we expect this to be roughly neutral to operating income and we still plan to continue our high-margin licensing business.Adjusted gross margin is still expected be in the range of 62% to 63% for the full year as a higher mix shift to our digital business and continued read through of workshop actions is partially offset by increases in scaling revenue within our Clinical business ahead of supply increases. We expect full-year marketing spend to be approximately $24 million, slightly lower than previous guidance of $245 million, primarily due to underspend in Q3 mentioned earlier.Adjusted G&A expense is expected to be approximately $230 million for the year, slightly lower than the previous guidance of $235 million due to strong continued cost discipline throughout the organization.We continue to expect adjusted operating income to be at the high end of the previously provided guidance range of $80 million to $85 million.As a reminder, in Q2, we redefined adjusted operating income to exclude acquisition transaction costs related to the Sequence acquisition, including approximately $4 million of costs previously included in Q1 adjusted operating income.Our full year adjusted operating income guidance range therefore does not include these acquisition transaction costs. We estimate that the remaining charges related to the 2023 restructuring plan will be up to $10 million in Q4, slightly higher than our previous expectations as we continue to streamline our organizational structure. For the full year, excluding the impact of restructuring and acquisition transaction cost, we expect income tax expense to be approximately $15 million to $20 million, largely driven by the full year impact of valuations allowance discussed earlier. As we highlighted for the last two quarters, given the seasonal nature of our business, the outsized Q1 income tax expense was largely expected to reverse in the remaining quarters of fiscal 2023 when we expect to earn pretax income which continued in Q3.Excluding the impact of the valuation allowance, we expect an income tax benefit of up to $5 million for the full year consistent with our expectation from last quarter.As a reminder, given the small pretax loss, reflected in the company's full year fiscal 2023 guidance, any updates to the expected pretax loss or income tax expense, can result in significant impacts in quarterly income tax results. Turning to our capital structure and cash flows. We ended Q3 with approximately $107 million of cash plus an undrawn revolver.With our cash position, plus our revolving credit facility, we have more than sufficient liquidity for our working capital needs, including in-year cash outlays related to our restructuring actions and servicingdebt.We continue to expect that cash from operations will be a modest use of cash for the year, due to the approximately $45 million in expected restructuring cash payment which is slightly higher than the prior expectations of $40 million. At quarter end, our net debt to adjusted EBITDA leverage ratio was 8.8 times. We expect our trailing 12 months leverage ratio to further increase in 2023 due to lower EBITDAS levels through the rest of this transformative year.We remain committed to improving our leverage ratio as we execute this sizable turnaround, returning the business to profitable growth and positive cash flow generation.As a reminder, we have very attractive long term credit agreements with no maturities due until 2028 and 2029. These give us ample time to deliver on our transformation and growth strategies while also opportunistically considering capital structure options that benefit all stakeholders.We still expect full year interest expense to be approximately $95 million. As a reminder we have a $500 million hedge through Q1 2024 to protect against rising interest rates on our variable rate term loan of $945 million and our $500 million notes are fixed rate. Therefore, only 31% of our total debt is floating.We are currently exploring options for when the current hedges expire. Capex, which is primarily due to capitalized software is expected to be in the $40 million range, slightly lower than prior patients of $45 million.Depreciation and amortization is expected to be in the $55 million range, slightly higher than prior expectations of $50 million. While we are not providing operating or financial guidance for 2024 today, our intention is to maintain the leaner cost structure achieved through our recent restructuring as well as to operate within a similar marketing budget and approach of maximizing LTV acquired across the year.In summary, we are executing well against our strategy and meeting and in some cases exceeding our 2023 objectives.Encouraging subscriber trends, record adjusted gross margins, and improved cost structure position us well for profitable growth.I'll now turn the call back to Sima.

ThanksHeather.I am proud of our team's achievements in 2023. We are strongly positioned to continue our momentum into 2024.While the environment remains dynamic, we will continue to be agile in our approach, take data informed actions across the organization and focus what is best for the long term health of our business as we enter our next chapter with a portfolio of solutions to serve the full spectrum of weight health. To reiterate our key achievements, we returned to year-over-year subscriber growth, even when excluding the benefit of Clinical, driven by the return to incentive growth in our core business.Clinical subscribers have increased nearly 90% since we announced the acquisition of Sequence earlier this year. We have increased NPS activation and engagement rates by advancing our digital first product roadmap, and we have delivered the highest gross margin in the company's by reducing our cost structure and managing the business prudently.We look forward to introducing a dedicated program for Weight Watchers members on GLP-1 medications, building momentum with Weight Watchers for business and serving more members through our portfolio of holistic solutions as members go through different phases of weight health. In short, we are focused on the actions that will return company to profitable, sustainable growth in the years ahead. Thanks for joining us. We are now happy to take your questions.

[Operator Instructions]. Our first question comes from Jason English from Goldman. Please go ahead.

Cool. I've taken too much time already. I'll let somebody else have a shot.

The next question comes from Linda Bolton Weiser of D.A. Davidson.

Okay. Thank you very much.

The next question comes from Alex Fuhrman from Craig-Hallum Capital Group.

Okay that’s really helpful. Thank you very much.

The next question comes from Michael Lasser from UBS.

Hi. This is Henry Carr on. Good evening for Michael Lasser. I just wanted to start off with the Sequence question. So you have 27,000 subs in Aprilat the time of acquisition and you've increased it about to 8000 to 10,000 per quarter.How should we think about this rate of about 8000 to 10,000 subscribers per quarter going forward? So basically once supply conditions improve, how do you expect this rate increasing? Can you speak a little bit more about that?

Henry, thanks for your question. At this time, we're not guiding into 2024. So I would say we've been conservative in our approach to the balance of the year, understanding the environment that we're in with the supply constraints.So we've taken that thinking through the balance of this year.

Great, thanks so much.