Weight Watchers International, Inc. (NYSE:WTW)
Credit Suisse Annual Health Care Conference Call
November 10, 2011 10:30 am ET
David Kirchhoff - President & CEO, Director
Good morning, everyone, and welcome again to the 20th Annual Credit Suisse Healthcare Conference. And when I launched coverage on this next company, Weight Watchers, I got a lot of phone calls, but all anybody wanted to know was, why a guy covering healthcare for 17 years is picking up a consumer company?
I think people thought I was trying to change my career path, but it's really a company I found that was building a budding and a very good healthcare business around a core of a very successful consumer franchise. It's my pleasure to introduce David Kirchhoff, who is the President and CEO of Weight Watchers to present that story to us.
Good morning. Yes, in fact, it is very much the case that we are a company with a considerable identity crisis in so much as, Charles is exactly right. I mean for many, many years, going back to our founding in 1963, we've always been a direct-to-consumer company. Yet we increasingly find ourselves also being seen as an internet company which I will talk about in a little bit and I think frankly most importantly as we go into the future whether we wanted to be one or not, we are in fact becoming a healthcare company.
We had our first ever healthcare conference this year, this January through JPMorgan conference and we've since been fortunate enough to pick up coverage by a healthcare analyst and I say that because if you think about the long-term growth strategy for our business, I think what you are going to see is more and more clear that our destiny is very much intertwined with the future direction of healthcare, both in the United States as well as abroad.
So some of you may have seen this chart from time to time, which is from CDC which shows a progression of obesity over time. It’s not a political map. And what you can basically see is you know about 1990 there was not a state in the union that had obesity rates in excess of 14%. If you looked at, actually there was one of these in 2009 where Colorado was still the shade of blue and of course as a state they were very proud about the fact that they are the least obese state in the union, but I would also point out the fact that if you look at Colorado in 2010, it would have greater levels of obesity than any other state in the union in 1990.
This is sadly no longer a uniquely American phenomenon, it is also a global phenomenon. UK, Australia, Western European countries, kind of across the board are sadly catching up in terms of obesity trajectories and we’re even beginning to see obesity show up in emerging countries and economies such as China, Brazil places like that and it’s not complicated to understand why is that where you have affluence, you have availability of calorie dense foods, dining out increasing portion sizes and you also have increasingly sedentary lifestyles. People aren’t moving around for their jobs they way that they used to. And low and behold obesity becomes kind of an affliction of wealth.
The significance of it is become increasing clear and the simplest way that I can express it is what I call kind of the unfortunate math of obesity, which is if you take $2.5 trillion of healthcare spending in the United States and you consider the fact that about 75% of that goes to the treatment of chronic disease. Of those chronic diseases, if you look at World Health Organization estimates, they in turn are driven anywhere 50% to 80% by lifestyle.
And it leaves you to the inevitable conclusion is that if you are ever going to have long-term containment of healthcare costs in this country or any country it is literally impossible to do it without going about the messy business of getting people to live their lives in a different way.
You know, it’s hard to open up a newspaper these days and not hear the litany of disease states that are associated with obesity, from heart disease to diabetes to things like hip and knee joint replacements, sleep apnea, so on and so on. In fact it seems like a new one comes up just about every other day.
If you look at the impact to the cost of this, obesity today is about 10% of the healthcare expenditure in the United States. It’s directly driving, if you look at the impact of obesity from a broader perspective, for example for employers you are looking at its impact on productivity engagement, presenteeism, absenteeism so on and so forth to the extent that it really is beginning to become and has become a significant issue.
Let me take a specific example within it, which is probably the most significant example within it, but sadly not the only one which is diabetes. Today about 11% of Americans are now diabetic. That’s effectively doubled from 1970 in terms of percentage of population. If you look at the latest CDC estimates that came out about a year ago, the estimate was that by the year 2050, one out of every three Americans would be diabetic, fed old Americans and I will just let that sink in for a second.
If you ask kind of what’s driving that. I would say it’s two things. First off we are getting better at treating people who are diabetic, but secondly it is basically a direct effect of the impact of obesity.
It is very much driving the increase in prevalence of diabetes across the country. You know, today this is a $200 billion year give or take condition. If you look at the impact of it, by the year 2050, it’s easy to see that this becomes in this country alone a $0.5 trillion a year condition. In fact, if you look at the cost of treating non-communicable diseases, the UN just came out with an estimate in September that I think it was by the year 2030 or 2040 that the planet would be spending $47 trillion a year treating chronic disease.
And when you ask the question like why is it that healthcare expenses become an increasing percentage of our economy with every single passing year? Yes for sure. Some of it has to do with the way the healthcare system is structured, but make no mistake. A lot of it has to do with increasing rates of underlying chronic disease, particularly cardiovascular and diabetes are two of the biggest contributors.
To me this graph on the left is kind of everything it needs to be said about why obesity is the issue that it is. So here’s what it is. Is that you basically have age going on the horizontal axis and you have the percentage likelihood or prevalence of diabetes going the vertical axis and what you see is the lower line of someone who’s at normal weight and the higher line is someone who is obese. And to me part of the issue is that if you look at someone who is 35 years old. Of course, if you are obese, you are at a greater risk of having diabetes. But really the issue is as you get later in life, this becomes a bigger and bigger issue, it’s a hockey stick.
And the problem with obesity is that if you look at what’s happening out here and people who are 35 years old and you ask the question of, for example the healthcare system, is it particularly motivated to address obesity for someone who is 35 years old on an ROI basis, the answer is probably not. But if you say, if I don’t address this person when they are 35 and wait until they become diabetic, when they turn 50, what’s the impact of that on cost on the healthcare system, it’s massive.
And so this ends up being currently from a healthcare perspective eminently biased toward procrastination. It’s the same thing with people and consumers. I mean it’s kind of like I'm stressed out. I know I should deal with this weight issues, but I really want that muffin right now super badly. So I am going to eat it and I am going to worry about this weight thing in a year from now and it ends up being this thing that the entire system is biased to procrastinate. That’s the bad news.
Here is the good news. To have an impact on from a health perspective with obesity is not a function of getting someone looking like Valerie Bertinelli in the cover of People magazine showing off her rockhard abs. It is modest levels of weight loss. So to dimensionalize that, for someone to lose 10% and an obese person who loses 10 % of the weight sustained. They reduced the risk of diabetes by greater than 50%.
So we are not talking about major shifts. We are talking about achievable changes in weight that come through the adoption of healthier habits and the financial and health benefit of it is actually frankly staggering. But I would also tell you it is difficult to do because here is the thing with obesity is that it is a health issue and it is a health condition, but it is not a disease.
It is not a disease in the sense that you can sort of pop a pill and make it go away. The problem with the obesity is that fundamentally dealing with it requires the establishment of healthier habits which means doing something enough times that you no longer have to think about it, which is the inherent nature of a behavior modification process which requires basically adherence, compliance, sticking with it for long enough, so that people can start to bet in those healthier habits and when they do, they can make a significant shift in their lifestyle and their weight and their health and everything else.
It is a condition that inherently lends itself to recidivism and other issues, but nonetheless we believe that it is fundamentally an addressable challenge. And the way we think about this is basically sort of starting with the individual or the patient in the middle and consider first off this issue of dealing with the procrastination. So if I give someone an incentive to basically address their health issue. In other words, it can be anything from healthcare premium discounts for adopting well behaviors and you see a lot of people safely in Cleveland Clinic others that are adopting these. It can be getting a doctor to take a more proactive role in terms of service in this issue with patients. There is a number of things that can be kind of their nudge to get someone into the process.
Once somebody is dealing with the weight issue then it’s a function of how do you put them in an environment where they are encouraged to make healthier choices, where the healthy choice is the easy choice. This can be things like you know nutritional labeling in restaurants and lots of other things, cleaning up cafeterias in the workplace so on and so forth. It is equipping people with a right set of chores to help them through the processing and I'll talk about that in a minute and it is eliminating the barriers that would often cause someone to quit by providing things like reimbursement subsidies, convenience.
And what I would tell you on the last point is that we have a number of large corporate clients now and in virtually every case where they go to a significantly subsidized model, so not even reimbursement, subsidized model anywhere from 50% to 100% we almost always see a radical shift 2 to 3x in the penetration of the people within that population that are taking advantage of the services offered for example through Weight Watchers.
And so these things can actually have a sizeable effect. If you look at the overweight population, 70% of Americans are overweight or obese and so the question is what are the right kind of treatment modalities to address this population? And what I would tell you is that there is a lot of deferred situations, circumstances, usage segmentations, set of graphic segmentations so on and so forth that the bottom line is that I think to address obesity from a treatment point of view you’re going to have to have a range of solutions, but whatever is in that tool kit we believe should be held to the standards of comparative effectiveness.
So whatever is in the tool kit from obesity treatment point of view should be clinically demonstrated. It should be based on a premise of sustainable change; it should be cost effective and it should be scalable. You actually see in places likely UK for example, nice criteria for the National Health Service we’re already doing this and we’re already laying some of these things out. We happen to like these four criteria figures because as you are going to see we do quite well against all four.
If you look at what Weight Watchers are offers many of you – some of you may notice some of you may not, but basically think of it as kind of the historic business and still our core business which is the face-to-face proposition. This is a Weight Watchers community – it’s actually the clinical term for what we do is a multi-parameter intensive behavioral therapy for the treatment of obesity. It goes without saying, we don’t use those words in our advertising, but nonetheless that kind of what we do if you think about there is a compliance mechanism to weigh in it is a community group that is led by a lay leader; I say lay not in nutritionist but someone who is personally experienced success of the Weight Watchers delivering a clinically developed scientific program.
And if you look at kind of what their experience is its incredibly effective from behavior modification point of view. My entry point to the business was back in 2000 which was to help start-up the Weightwatchers.com business which is a way of basically doing the Weight Watchers program strictly on line, people keep track of their points; it’s a fully personalize plan where they can be basically literally as I tell people as quick and as balancing and check what Weight Watchers online is to keep in track your points.
In late 2006, we launched something called monthly pass which basically took all of the online tools that we have developed in the face-to-face experience and it brought it all together and it is by far, what we believe is kind of a gold standard in terms of highly effective behavior modification methodology applied to a mass audience.
What I would tell you is that you know we are continuing to press incredibly aggressively, here is a picture of the website you will also see an iPhone and an iPad; everybody has iPhone applications, but I would tell you is that for us mobile applications have been an absolute game changer in terms of behavior modification, the ability of tracking points, having it synchronized to the website. If someone now goes into a center and has a WAN it shows up on our iPhone instantaneously on the weight loss chart. So sort of providing kind of this connected issue in the 360 degree experience is one of the things that continues to differentiate us very significantly from anybody else in this space.
Specifically, if you look at what makes us different versus other weight loss companies, simply stated, its lifestyle. We are not Jenny Craig, we are not Nutrisystem, those guys are food companies. We are literally in the business of teaching people how to adopt smart, healthy habits and we do it in a supportive environment. We are actually diet agnostic, if Dr. Atkins have been right, you would see Weightwatchers doing a low-carb program. We never believe the science nor did the scientific community which is why we never did a hard core or a low-carb program, but whatever is the best available science, in nutritional science, that has been fully vetted is one what our program is based on and it changes all the time.
I am going to talk about the new program launch we did last year as a reflection of that. But the core aspect of helping people address behavior change in a supportive environment is very much the heart and DNA of what we do and it is also what makes us highly effective from a behavior modification point of view.
By the way, even if you are going to get bariatric surgery, everybody who is in the bariatric surgery business knows it will go better if adopted the lifestyle change. If somebody comes up with an amazing weight loss medication, it will work better with lifestyle change. We’re not in the business of partnering with surgeons or drug companies for the delivery of obesity medications and things like that, but for anybody who is taking one of those medications and then come to Weight Watchers, I would guarantee you that their success would be significantly magnified.
Now if I go back to these four criteria in terms of who we are, sustainable lifestyle base I talked about that, clinically effective and we’re talking about a little bit more, but basically we have more than 65 publications over the past 15 years, we very much worship at the alter of clinical evidence, cost effective 922 a week firm up the past products $4.38 a week for Weight Watchers online. Scale of population impact 45,000 meetings every single week delivering the face-to-face experience. More than 12,000 waiters who have every single one of them has been through the Weight Watchers program and has had successful are delivering these meetings. We’re literally everywhere in virtually all the countries in which we operate.
You know briefly, although this is incredibly significant to our business, we believe there has been a lot of clinical researches come out particularly over the past year. So let me talk about a couple of studies very fast past. First off Lancet; the Lancet was a large scale clinical study which you have basically obese patients see doctor, obese patient is referred to randomly either to attend Weight Watchers out a while in this case for UK, Australia and Germany or there are prescribed standard care delivered by a healthcare professional in that doctor’s office. Never mind the fact that that rarely happens in nature because doctors frankly don’t have time to do that, but that was the control arm.
At the end of 12 months, the Weight Watchers’ arm has lost two times more weight and have gotten three times as many people to a medically significant or 10% weight loss. The significance of this from my point of view is it’s just a reflection of the fact that the obesity of the health issue is very difficult for doctors to address on their own. They are not set up for it and not trained for it, they don’t have the right kind of background for it, because the way solve obesity is learning how to navigate a restaurant; it’s learning how to reengineer your kitchen; it is understanding why you feel the need to eat after dinner. It is figuring how to incorporate exercise.
These are topic areas that just tend not to lend themselves to a clinical setting. However, a doctor can create a sense of urgency and accountability around the weight management process like no other which to us suggest that there is an incredibly powerful partnership to be formed by bringing these elements together and I’ll talk about that in a second.
The Lancet study was just reaffirmed; we funded that study, we didn’t have any thing to do with designer results and that was the medical research council in Cambridge. BMJ, British Medical Journal just came out with the study last week, exactly the same results. And in fact they compare Weight Watchers versus seven other arms and we handle it beat every single one of them including commercial competitors and three different variants of weight management provided by primary care, including dieticians. And we have nothing to do with the study; we didn’t fund it, we barely even knew about it before it happened it just happened scientifically.
The last one was by the same investigators from the Lancet study from MRC, well basically for the UK, they can already refer patients to Weight Watchers and effectively what this study showed that they looked at the records of 32,000 people there and we have been through Weight Watchers and weight loss results were very consistent with the study for Lancet but here is why the study was very significant. There was incredibly low variability of outcome from location to location throughout the country of United Kingdom.
The significant of this is that the investigator didn’t expect to find out. They thought it would be highly variable and highly depended based on who is running the meeting, but the fact of the matter is that all of these leaders running the 6,500 meetings a week in the UK, they are all the same basic DNAs successful members. They are all delivering the same program, they are all delivering the same curriculum, they all have the same training and so it’s incredibly consistent. Why does this matter? Because you don't actually have to invent Weight Watchers, it already exists. It’s already fully scaled up. There's already 6,500 meetings a week in the UK. There's already more than 20,000 meetings in the US. You don't actually have to go out and invent a group support behavior modification system. It’s fully scaled up. It’s fully clinically vetted and in fact it’s very cost effective.
If you look at cost per quality, which is cost per quality adjusted-life year, in different obesity treatments surgery 6,000 to 8,000 British pounds, medications, similar, if not worse, exercise physiotherapist behavior with a psychologist etcetera. And there's Weight Watchers at anywhere from one-fourth to one-tenth. So, basically most effective, lowest cost fully scaled up. Really now, it’s a function of how do we plug into the healthcare system and that's going to be a reflection of finding ways of collaborating with doctors and finding ways of building partnerships with payers.
From our point of view, therefore, the world that we see in the simple way to express this page is patients sees doctors, doctor says you’re obese, you’re pretty diabetic, you’re at risk. I am giving you a referral to Weight Watchers. It’s covered by your united health plan or whoever, not complicated and frankly the way things should work, it’s not what happens today. Doctors are more likely to refer to Weight Watchers than any other program by far, but it’s not really built into continuing medical education, they’re not really necessarily always felt comfortable having that conversation.
Most payers do not cover weight management and they certainly don’t cover or they may cover a dietitian or bariatric surgery. In some cases, they rarely cover community-based programs like Weight Watchers, but it’s becoming increasingly clear in a world of accountable care organizations, in a world where the Affordable Care Act requires anything graded A or B by the USPSTF requires $1 coverage on preventive care services would going into this place. This will happen. It’s now up to us to figure out how to execute to make it happen.
While we are doing that we are going to continue innovating like crazy. We did a complete revamp of our program from points to point plus, which was reflecting the fact that the old map of points which was principally calorie counting was no longer state-of-the-art and the state-of-the-art was something that basically would use the heavy modification tools to steer people towards non-process food, fruits, vegetables, you know, lean proteins, grains, whole grains, things like that. That’s effectively what this new program was built for. We’re already seeing good evidence of it in action. We’re completely revamping our retail network. As I tell people, like this is literally before and after. You can’t even see us. That’s city night club over there and I think that store sold pieces of string. I am actually not making that up.
It wasn’t truly a great sea location, lovely great folding chairs, slight walls. This is the new location, pretty green chairs, attractive fixtures, branding. We’re basically doing a complete re ramp of our real estate. We are not even paying more for the full system because we’ve done a much better of optimizing our network and we’re already seeing the benefit of higher enrolment for center by simply having good street visibility as well as sort of large permanent branding.
Just because we are becoming a healthcare doesn’t mean we’re ever going to take the foot off the gas from a marketing point of view. In fact, our consumer-facing business and our nascent healthcare business, we believe, over time are very much going to feed each other, which is motivating people through our advertising. For people like [Jennifer Hudson], through successful members like these three laughing men, who actually are us with Weight Watchers, but these are the type of things that stimulate and could help stimulate someone into actions.
It also strengthens the brand. If you are getting an employee – an employer-based program, do you want to white label program from, I can’t remember the name, insurance company and they want Weight Watchers. It’s pretty clear. And so these things very much become mutually re-enforcing. A lot of our action this year in terms of our growth has been on the back principally of our marketing programs and our new program platform, but over time, we think all these things are going to start working together and it’s going to continue to combine with what has always been a very attractive business model, to kind of put more specificity around that; really high gross margins, very much predictable marketing G&A, negative working capital, minimal capital expenditure, crazy return on investor capital. This is the year that we are having meetings, paid weeks. That’s our membership metric has had a nice bounce back.
The online business was just crazy. This year our WeightWatchers Online business is going to do roughly $400 million in revenue, driving about a 50% operating margin. So, it’s going to contribute about $200 million of OI this year and it’s had absolutely spectacular growth. You can see we would basically read some kind of an inflection point and so if you look at 2011 trailing forth, it is a period which we have never had this kind of growth in our history. This is the most popular this brand has ever been and we think it’s only to get more so. As we do that, we are going to continue to do what we have been doing which is delivering a lot of free cash to the bottom line returning shareholders, you know, between 2006 and 2010 we generated about $1.2 billion of free cash. And that is structurally just kind of the nature of this business. That’s it.
Thank you David and we’ll take Q&A in the Canyon Room, out the doors into the right. Thank you.