Weight Watchers International, Inc. (NYSE:WTW)
UBS Global Healthcare Services Conference
February 7, 2012 09:00 ET
David Kirchhoff – President and Chief Executive Officer
I am pleased to introduce David Kirchhoff, the President and CEO of Weight Watchers International. There will be a breakout session in the Broadway Room after this. Thank you.
David Kirchhoff – President and Chief Executive Officer
Good morning. I see at least a couple of you chose through, thank you. For those of you who are having pastry, just remember, it’s never too late to walk away from baked goods. So, before we get going the usual disclaimers are in play, in terms of forward-looking statements and all that other good stuff. It’s an interesting time for us. This is our second UBS Health Care Conference, and just recently, we had our second JPMorgan Healthcare Conference, so may respects, it has been a coming out for us in the world of healthcare.
This is a business that has – we’re almost 50 years old. It’s traditionally been a direct-to-consumer business. It is a wonderful business that I’ve been proud to be a part of for the better part of 12 years. It is a tremendous brand in terms of high brand recognition, high member and customer satisfaction, amazing net recommendation scores, tremendous reach, 45,000 meetings a week and it is from a consumer proposition, it is a brand that is continuing to extend into new territories including younger women and that difficult 50% of the population known as men.
It is also – in addition to this traditional core meetings business, we also have a wonderful online business, a subscription-based model. It is a business that commands its own advantages in the marketplace. It is also a business that has had tremendous growth characteristics over the past 10 years. And it is a business that has proven itself to be highly globally scalable.
And if you look at the combination of this internet business in this meetings face-to-face business, the consumer side of Weight Watchers is an incredibly tremendous business with tremendous growth opportunities in front of it. And it’s also an incredibly attractive economic model with high gross margins, negative working capital, low capital expenditures as a percentage of revenue, high return on invested capital everything else, and tremendous cash flow characteristics.
More recently, we have been finding ourselves whether we wanted to be or not, we are becoming a healthcare company. And the reality is you’ll see me walk through in a little bit that this is a business that is addressing a problem that has become one of the biggest health issues facing our planet. It is a business as I’ll walk you through which is uniquely position to be the frontline solution in treating obesity, particularly before it becomes a disease state. And we think it is going to ultimately offer tremendous new growth opportunities for the business while also allowing us to have a need and bigger impact on our mission, which is to help people lose weight sustainably by adapting a healthier lifestyle and our strategy which is simply to be better at helping people and to find more people to help.
Okay. So, many of you may have seen some of these maps of the United States or for those who have not, this is showing the progression of obesity since 1990. I’ll point out the fact that 1990 there was no state in the union with greater than 20% obesity rates, and then in 2010, there was no state in the Union with less than 20% obesity rates. In fact the healthiest state in 2010 Colorado would have been the least healthy state in 1990. Sadly, this is no longer a United States phenomena but it’s a global phenomena with rising obesity rates in countries across the globe. If you would have told me when I first joined Weight Watcher 12 years ago that China would have an obesity issue, I would have thought that was crazy, but low and behold where you have rising affluence in increasing disposable income. You have proliferation of calorie-dense foods in the form of processed foods as well as proliferation of dining out options, changing the lifestyle and everything else. So, with prosperity comes obesity, with obesity comes chronic disease.
So, chronic disease today in the United States, of the $2.5 trillion we spend on healthcare, it’s about 75% driven by the treatment of chronic disease. And if you look at the drivers of chronic disease, those disease states that really attacks the health system, they are significantly driven by lifestyle choices earlier in life. In fact according to World Health Organization, chronic disease has influenced depending on conditions 50% to 80% by lifestyle. So, it leaves you with a simple reality. Then if you want to have a chance or a hope driving down healthcare costs, currently 18% of GDP. If you want to drive that down over time, there is no way to do it without going about the messy sometimes difficult business of getting people to change the way they live, getting people to adopt different behaviors. There is frankly, just no other way around it.
A case study of this and the most obvious example is type 2 diabetes. Now, if you look at that map that is up there on the right, you’ll notice that it looks very similar to sort of the heat map in terms of obesity, which is obviously not a surprise. If you are obese, the likelihood of your becoming type 2 diabetic is about 500% higher than if you are ata normal weight.
Consider just a couple of facts, which is that there are 22.5 million, getting close to 25 million Americans who are currently diabetic. That’s about a 11% of the population, that’s up versus 5% in 1970. However, there are about 78.5 million Americans who are now pre-diabetic. These are people who are within the next 10 to 20 years are at a highly elevated likelihood of becoming diabetic themselves.
Consider that this is – diabetes today is $180 billion a year condition in United States alone. Consider the impact of diabetes tripling by the year 2050, which is the latest CVC estimate. And you literally have a healthcare condition that is threatening to bankrupt the healthcare system we have today, particularly having its biggest impact in places that are poor and with elderly populations, i.e., Medicare and Medicaid. But frankly, the broader issue is that if you talk to CEOs of large corporations and you talked about all the things that make them the most crazy, they will talk about the fact that the average healthcare premiums of self-insured companies are paying have been going up 8% a year for the past 10 years, and obesity is a significant driver behind them.
Part of the problem with obesity that we see is that, if you look at this graph, we have age growing along the right and then you have the risk of, for example, diabetes going on a vertical axis. What you find is that the problem gets progressively worse as we get older. One of the issues is that this tends to lead to a certain amount of procrastination. So, in other words, the return on investments for someone who is 35 years old, who is obese, becoming normal weight may not be all that particularly compelling within say a two-year timeframe. However, as you look what happens as this person gets older, you effectively have what is a balloon payment in the form of obesity. So, as people tend to procrastinate this in favor of having a muffin right now either from a consumer point of view or insurance companies, say hey, we were turning our people every two to three years, given that can we really afford to make an investment in preventive care. You can see the condition that it has brought us to and you can see that, that condition is going to get worse.
If that’s the bad news, here is the good news. A 10% reduction in weight loss reduces the likelihood of you becoming diabetic by 58%, think about that. Medically significant weight loss is not being on the cover of people magazine, it is losing between 5% and 10% of your weight sustainably. It is achievable, but it’s not easy. The reason it’s not easy and I am always amazed although maybe I shouldn’t be that obesity is incredibly misunderstood as a condition. We are many of us function of an environment that encourages us with temptation to overeat all the time, the available calories per capita is up about 30% over the past 20 years, most of that in the form of foods with added sugars and fats. We don’t cook it home anymore. Lots of issues cause us to be obese. And effectively, our brands and our bodies want that food. It is possible to address, but only through the process of establishing healthier habits and getting rid of unhealthy habits and reengineering a personal environment, i.e., lifestyle change.
The process of changing habits is one that takes time and effort. It’s one that is subject to recidivism and lots of other challenges for the process. It is not a quick fix. It is not even a function of knowing what to eat. Most of us do know what to eat. It is a process of helping people through a behavior modification process. This is what we do at Weight Watchers. It is possible to do. It just takes the right framework and right approach to address it.
If you look at obesity from kind of a broader context, the Weight Watchers aside for a second and you say what can be done to address this issue. We see an opportunity for taking a full 360 degree approach in which we’re having a beneficial impact on environment that encourages us to make healthier choices. We’re giving people more incentives to take responsibility and accountability for their own health including their lifestyle. We’re providing people with mechanisms that encourage them to engage in programs that help them through the process and the foremost subsidy and reimbursement schemes and finally we’re giving people access to the right types of tools that can help them through the process because frankly for most people suffering from obesity it is too difficult a problem to address alone.
If you say okay, if we need to have tools on the toolbox what should be the criteria of deciding what those tools are and what we would say is we would look at it on four levels of competitive effectiveness. One whatever approach you’re taking should be based on the premises of sustainable change i.e. not a quick fix. It should be clinically demonstrated. It should be cost effective and it should be scalable i.e. capable of having a population wide impact. I happen to like these criteria because Weight Watchers does very well against them.
For those of you who don’t know Weight Watchers we are not in the food sales business, we are in the education and behavior change business. That’s basically what we do is that we help people through this process or a combination of education, behavior modification in a supportive environment. If you look at our behavior modification approach, it’s based on having a lay person or successful member who becomes a leader, facilitating a group support experience. It is about doing this in a very wide scale way, 12,000 leaders who have been through the program, who are delivering the outcomes. It is a program that in some respects is diet agnostic, whatever science says is the best food plan, it is the food plan that we put out there.
We worship at the altar of behavior change and lifestyle change. We’re not particularly wed to any kind of nutrition dogma if you’ll. It is a program that has been clinically demonstrated. I thank the good Lord all the time that I have been smart enough to get my Chief Science Officer, ample resources to conduct clinical studies. We’ve 69 publications over the past 15 years. This is not an easy thing to do, and it takes a long-time to build up that kind of base of science.
And if you look at the combination of that, our network of leaders who have been through this process in a number of other factors, this is a business and approach that has high degrees of differentiation and barriers to entry.
And the last, but certainly not least, compared to most other obesity treatment methodology, this is highly cost effective with our most expensive product only at – now 992 a week, having just taken prices in December. The way Weight Watchers does what it does is, either through meetings, this is our group support approach or through online. Increasingly, give or take about 80% of the people who’re attending meetings do it via a program called monthly pass. Monthly pass basically gives you access to pretty much everything Weight Watchers has from group support, online tools, mobile applications etcetera. It is our gold standard, but the good news with Weight Watcher is it, no matter of who you’re and how you’re wired, we have a behavior change approach that is well suited and tailored to your particular needs.
If you look at the outcomes of all this, we have had an amazing couple of years in terms of meaningful high profile proof that Weight Watchers is the best way to go. So, specifically there was a large study that was published in The Lancet this past September, the way to think about this study, sample size a 100 Germany, Australia, and the UK. Patient sees doctor, patient is obese. Doctor randomly assigns patient either to attain Weight Watchers out in the while, not laboratory Weight Watchers or to attend a program being delivered through the doctor’s office.
At the end of 12 months those who attended the Weight Watchers arm had lost two times more weight and was more than three times more likely to get someone to a 10% weight loss. Also significantly the completed rate at the end of the 12 months, i.e. coming back for that final 12 months, i.e., coming back for that final way in was about 60%, which in the behavior modification world is a very good outcome. Of those 60% who completed, 35% got to a 10% weight loss, which in our world is knocking the ball out of the park in the messy world of behavior change.
The significance of this to me is that this is in some respects a great example of the healthcare system working. You take the example of U.K., you have a payer in the form of NHS providing vouchers. You have doctors prescribing Weight Watchers and creating a sense of urgency. And then you have Weight Watchers as a delivery system of education and behavior change. Everybody is doing the role that they’re best suited for and the outcomes can be incredibly compelling when this happens. If you look at it in terms of – if outcomes you look at in terms of cost effectiveness, in the U.K., there have been leaders in applying cost per quality as a way of evaluating different treatment approaches for different conditions. And you compare Weight Watchers at a 1,000 pounds per quality compared to treatment by physiotherapist or a psychologist or medication or surgery and we’re massively more cost effective.
The last point I want to make on this is the third study, and by the way the BMJ, our British Medical Journal had exactly the same results of which Weight Watchers was by far in six different arms that they compared was by far the most effective at delivering outcomes. The other study I want to reference is, was done by the same researchers who lead the Lancet study, where they did an audit of 30,000 Weight Watchers members who had been through the program though the NHS referral scheme. In doing that audit, what they found was weight loss outcomes, which are very similar to what they saw from the Lancet study, but what they also found was incredibly low variability of outcomes from location-to-location to location-to-location.
It wasn’t what they expected, they are used to of living in world with for example dieticians or doctors or nutrition, delivering programs with that are highly dependent on the individuals who is actually delivering this. But in the case of Weight Watchers what it demonstrated was that the entire system tended to deliver the exactly the same result. It make sense, these people are all trained in the same way, they are all recruited from the same pool i.e., successful members the delivering the same curriculum, that delivering the same program. Therefore they have very similar outcomes. The reason this matters, as the primary investigator from Cambridge pointed out to me is that we’re already running over 6,000 meetings a week in the U.K. This system is fully scaled up in delivering outcomes as we speak. If you are going to invent the perfect group base or community based approach for delivering behavior modification, it would look exactly like Weight Watchers. The good news is you don’t actually have to invent it, it already exists.
The way we see this evolving from the healthcare perspective overtime is based on that example from the U.K. where you have a collaboration between doctors leading the patient’s healthcare, and you can imagine in a world of ACOs and everything else where doctors are becoming more engaged in preventive care treatments as a way of preventing people from getting chronic conditions, that allows them to more comfortably stay in their capitated models as well as doing it because it’s simply the right thing to do. You can imagine payers being much more incented again in that same sort of capitated construct to drive down long-term cost. And you can imagine therefore then delivery systems like Weight Watchers being able to actually deliver the outcomes in partnership with payer and doctor. And we think that this is ultimately going to become an incredibly compelling approach to helping people address this problem. I’m not naïve, I don’t think it’s going to happen overnight, this is – it is not easy reengineering in industry sector that represents 18% of our GDP, but nonetheless everything we’re seeing continues to show us that the world is heading in this direction, and again, we feel like we are ideally suited to leverage it.
In the mean time, our approach is going to be, if you think about the universe of payers, you obviously have everything from self insured, state regulated insurance plans, i.e., individuals and small businesses, you’ve got state government and federal government employees and then finally you have CMS with Medicaid and Medicare populations. The self insured channel, which is a significant part of the covered lives in this country, we think is the most compelling and most straightforward channel for us to approach first.
The reality is that if you are a head of benefits, head of HR, CEO and you are weighing off different benefit programs you offer and someone tells you that they have a benefit programs that’s going to drive down long-term healthcare cost, that it’s going to improve employee engagement, that’s going to help you with absenteeism and increasing presenteeism and you compare that to other benefits you offer, all the sudden weight management starts looking incredibly attractive. This is where a lot of our time and attention is being focused on right this minute. You saw some of these examples perhaps in a release we put at the beginning of this year, highlighting two recent new accounts, American Express and the New York Stock Exchange that was part of our ringing the Closing Bell Ceremony was sort of announcing in that partnership.
The point is that these accounts are interested and willing to be engaged in doing it in a compelling and meaningful way. We already have a number of major accounts that are already up and running, developing, showing great outcomes. The Cleveland Clinic is a fantastic example of this with their employees
Really our focus therefore is making sure that we do a good job servicing these accounts. We can deliver the outcomes for their employees. What we need to make sure of is that we can also meet the expectations in that account in terms of reporting, marketing with inside the company, other aspects that are more of a traditional B2B skills set. As a direct-to-consumer company, this is a new set of skills that we have been developing. We want to make sure, we do a great job with this. So, that as we develop this channel, we are executing well against all facets of it.
But we ultimately believe that the self-insured channel by itself is going to become incredibly compelling. While longer term, we also focus on doing things that positions us that as payers such as CMS, again state regulator plans and others begin to move more toward preventive care. We want to make sure that we have the right data, the right clinical outcomes and everything else, so that we become the obvious place for them to go to in terms of delivering frontline weight management solutions.
Just a couple of recent examples, Kasiarz I already mentioned, American Express, NYSE, Cleveland Clinic, NBC Universal. What we typically find is that those accounts that have meaningful impact are providing some level of subsidy for their employees, anywhere from 50% to 100%, as well as effective in-house marketing programs and other things and the penetration rates we can get, when all these elements come together are quite compelling.
Other things that have been happening with the business, we are now on our second year of our major platform shift from points to PointsPlus. PointsPlus is a critical platform for us to start steering people toward healthier and more nutrient-dense food choices. PointsPlus 2012 made a number of substantial improvements to make it more livable, more personalized in a number of other benefits. As well as continuing to loaded with technology. We spend give or take close to $25 million a year on the development of customer face and behavioral change applications.
Recent examples may look kind of simple, but for example on my iPhone, I have a little barcode scanner that I can flash in front of any food in the grocery store, it will immediately tell me how many points it is. I can use it at the comparison shop. I can add it to my tracker. It’s a little thing, but it’s a little thing that makes the process of making healthier choices easier, more engaging, more fun and we are now an organization in a business that is heavily focused on delivering a combination of great technology and great high-touch personal experience in support to help people through this process.
I think I have already mentioned most of these, but most recently also launched this last year of Android application in iPad as well as a full redesign of our subscriber website. We have been systematically changing out our retail footprint. Just a quick example of this, this is Boston, on the top you see Ware Street, you got a little bit of metaphor here. We would be on top of that thing with 44 in the big in the read me on sign you wouldn’t really know. And in fact, if you are looking at the window below you would see electronics and some digital content intended for adult audiences. This is what the old center look like and you would have to go up those stairways.
The news center is on Summer Street, the wide opens up. It is street level. It’s visible and as you can see it has a much more modern look and feel. We have been able to systematically drive through this change and do it cost effectively at the same time and when we have done it for example on our control markets that we tested in St. Louis in Tampa, we saw a terrific lift in terms of enrollments.
We are continuing to drive hard from a marketing point of view. Many of you are probably familiar with the ever present Jennifer Hudson campaign. We have recently been weighing in, looking around the rooms something that many of you probably connect a little bit more with – with men and specifically with Charles Barkley is first ever male spokesperson and just like that, Weight Watchers has become a brand not for women but a brand for everybody. And when frankly Charles looks at me he tells me I need to get my actually together my inclination is to actually listen to him, it’s kind of intimidating that way.
So, in summary, what you have is all these things happening with the business from a growth point of view and in terms of opening up new channels such as healthcare opening up new demographic channels such as men continuing to modernize our presence on the ground our retail efforts and continuing to drive hard against innovation in terms of technology, as well as our program. You add that to a highly compelling economic model and we believe that this is a beautiful business that is going to have the opportunity to become that much bigger and more beautiful as time goes on.
Particularly, if you look at the economic model, it will be driving against. And I think this is just a review of some of our trends for Q3 of last week. I’ll make the point that we are reporting earnings next week. So we’re obviously in a quiet of period in terms of Q4 as well as guidance for 2012. Thank you very much.
[No Q&A session for this event].