Good afternoon, and welcome to the WW International Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Corey Kinger, Vice President of Investor Relations. Please go ahead.

Thank you, everyone, for joining us today for WW International's fourth quarter and full year 2022 conference call. At about 04:05 p.m. Eastern Time today, we issued a press release reporting our fourth quarter and full year 2022 results. The purpose of this call is to provide investors with some further details regarding the Company's financial results as well as to provide a general update on the Company's progress. The press release is available on the Company's corporate website located at corporate.ww.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 a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Joining today's call are Sima Sistani, CEO; and Heather Stark, Interim Principal Financial Officer. I will now turn the call over to Sima.

Thanks, Corey. Good afternoon, everyone, and thank you for joining us today. Before I get into our results, I want to highlight our plans to enter the clinical weight management space. Weight Watchers is the most trusted provider of proven and sustainable weight loss, grounded in the latest nutritional and behavioral science. We support members across the full weight loss spectrum. Obesity is a complex chronic condition that includes both biological and behavioral components. There's growing scientific evidence that for some prescription chronic weight management medications can address the biological components of obesity. To support and accelerate our entry into this space, we have entered into a definitive agreement to acquire Weekend Health, doing business as Sequence, a subscription digital health platform offering clinical access to prescription chronic weight management medications. Sequence is a technology platform that integrates patient and clinician experience, providing eligible members with ongoing access to online clinical care and medication management. We will be pairing Weight Watchers nutrition and behavioral science expertise and community with the Sequence platform to create a comprehensive solution. Importantly, this solution will not be for everyone. We are hard at work enhancing our member experience around coaching, accountability and community with a number of features on our product road map rolling out this year in order to make Weight Watchers even better. At the same time, we will expand our scope to also serve the cohort of people in need of a solution that incorporates prescription medications. I will discuss the details on this acquisition and our clinical strategy more shortly, but first, turning to our 2022 results and recent performance. We ended 2022 with 3.5 million subscribers, approximately $100,000 higher than our forecast due to sign-ups and cancellation trends outperforming our expectations, improving our starting point and momentum heading into…

Thanks, Sima. Before reviewing our results and outlook, I would like to cover the details of our planned acquisition of Sequence. Since its launch in late 2021, the Company has quickly grown into a $25 million annual revenue run rate business, serving 24,000 members across the U.S. by effectively scaling its technology platform through word of mouth. WW will acquire the Company in a transaction valued at $132 million, inclusive of a minimum of $26 million of Sequence's cash assets on the balance sheet. The effective purchase price is $106 million net of the cash assets. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close during the second quarter of 2023. Upon closing, WW will pay the owners $65 million in cash, which will require $39 million from us, net of Sequence's cash assets, and $35 million will be paid in approximately 8 million newly issued shares of common stock of WW. Subsequent cash payments of $16 million each will then be paid on both the first and second anniversaries of the closing. The acquisition is expected to be accretive to WW earnings per share by the fourth quarter of 2023. Now turning to our 2022 full year results, we finished 2022 with 3.5 million subscribers, ahead of our guidance by approximately 100,000 subscribers with both sign-ups and cancels outperforming our forecast in the fourth quarter. In line with our guidance, full year revenue of $1.04 billion was down 14% or down 11% on a constant currency basis. Adjusted gross margin of 60.5% for the full year was down approximately 70 basis points from the prior year, primarily related to the mix of subscription revenue, 30 basis points of that decline was due to unfavorable foreign exchange. Marketing expenses of $245 million were…

Thanks, Heather. We are encouraged by trends indicative of a positive trajectory during 2023. This year, our digital product focus is on creating community and enabling food decisions during members' first month, which we know drives their activation and resultantly subscriber retention. A strong connected community is the glue that keeps members coming back to Weight Watchers. To better enable these connections, member chat functionality is expected to be in beta in early Q2. We believe this will allow members to create relationships they are excited about, members with each other, coaches with members, workshop groups, even people in your existing network, if you wish to bring them along your journey. Chat will lay the foundation for a rich digital community based on an interest craft. We are also developing new streamlined spaces in our app, including a Want to Eat tab, which will help support members' eating decisions including guides to comment challenges, improved mill planning, a restaurant finder, recipes and more, and a space dedicated to progress and trends allowing members to better see the connection between core behaviors like food, activity and weight tracking as it relates to their weight management progress. Then behind the scenes, we are making foundational improvements to our search algorithm through database and tracking flows to remove friction from the central accountability mechanism of our program. And to improve our coach experience, we plan to launch a new platform for our coaches that will help them better engage with members in real life as well as digitally. As I've highlighted before, our app is evolving from being a second screen tool to a truly digital-first experience from enhanced community features to device integrations, there are significant opportunities for us to match our premium workshop experience with a premium digital counterpart. In summary, we are focused on improving our sign-up trends and for the second half of the year, returning to year-over-year growth, improving member activation rate, which would drive gains in retention, exercising strong cost discipline throughout the organization and executing on a narrow list of priorities, including our entrance into clinical interventions for weight management, all of which we believe are the critical drivers for returning the Company to a growth trajectory. Thanks for joining us today, and we are now happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Some interesting announcements here, especially about the acquisition of Sequence here, I guess if we could start with that, certainly seems like there's been a lot more moves from the pharmaceutical industry to get involved in weight management here. How do you envision deciding who in your program, you're really going to market this approach to? I think, Sima, in your prepared remarks, you mentioned some criteria about who would even be eligible for the clinical approach. But I think the numbers you kind of sketched out are describing something in the neighborhood of half of the adults in America and presumably more than half of your own membership. So can you just give us a sense of as you get into the back half of the year and closed this acquisition? How are you going to go after that opportunity? And who in your membership base will be targeted for that?

Hi, Alex, thanks for your question. Yes, I mean, we're really excited about being able to provide our members with a clinical intervention. And as I noted, these medications, they're not for everyone, and there's been a lot of hype in the media, let's say, and I think that's even more reason why we need to lead the conversation from a point of responsibility, chronic weight management medications provide a really amazing opportunity to address the biological underpinnings of people who are dealing with a chronic condition around obesity. And in terms of the market, look, at the end of the day, the decision is between the clinician and the patient. This is a subscription-based weight management platform and I think the really interesting aspects about it outside of it being a very seamless UX experience for both the patient and the clinician is that it is truly a a tech platform, meaning they have taken the complex -- the complex parts around insurance authorization and they've put it on tech rails. And so that allows us to scale in a way that is unlike other companies in the space and really increase access to those who medically qualify.

Okay. That's really interesting. And then just to make sure we're all on the same page here. I think you mentioned in the prepared remarks, being in a position to return to growth in the second half of the year. Can we interpret that to mean year-over-year revenue growth in the third or fourth quarter? And is that with your business as it stands today? Or is that the expectation of after you acquire Sequence that will help get you to that growth?

So that was ahead of the announcement around the acquisition of Sequence. We've always that last year was all about stabilizing and this year was the year that we expected to see top line, meaning sign-ups grow in the second half of the year. Now with this acquisition, we have some work to do to understand the impact, but that's something that we expect to update in the future after closing. So, that is not part of our current position around seeing that activation, NPS, engagement have all been improving and giving us all the indications that we can expect to see sign of growth in the second half of the year.

The next question is from Brian Nagel with Oppenheimer. Please go ahead.

So my first question, just with respect to the shift in marketing. So I know this is difficult to answer. But if you look at -- so you shifted marketing with now more of a focus later in the year, and that had an impact upon subscriber growth here early in '23. So, I guess the question I have there is, I mean, do you have any idea like how much of that shift has held back to subscriber growth here early in the year? And then second to that is like you mentioned in your prepared comments, I mean, historically, Weight Watchers experience most of its growth, let the sign-ups in the early part of the year, you're working to kind of normalize that through the year. But is the marketing message the same? Or would you be going after a different type of subscriber as you push marketing later in the year?

Yes. Thanks for your question, Brian. So as we noted, I mean, we were really focused on bringing LTV CAC efficiencies, and we were able to improve in January, 11% higher than January of 2022. And so, we had -- we made a very intentional decision to push that spend to the second half of the year to align to not only more efficient spend, but to align to key product launches. And so even with media spend being down 24% year-over-year in January, I think we outperformed our internal expectations, and we expect to use the spend in the second half at more efficient ratios and just improve both the total signups for the year. From a marketing standpoint, I mean, our reasons to believe, I think are -- have are really breaking through with more culturally and more modern both performance marketing and brand messaging. You might have noticed we moved more to a, let's call it, entertainment type of approach versus an influencers versus celebrities, that led to four-point increase in brand affinity. So, we're seeing a lot of indications that we're on the right path to modernizing our brand and increasing the appeal. But our target here remains the same.

This is Heather. I would just add to that. We are modeling marketing for the full year to be flat year-over-year. So, the -- with the shift in spend, we are expecting overall efficiency of spend improvement and an alignment to the spend to our product road map and as well with the acquisition of Sequence and closing in the second quarter.

And I just do want to add to around the product launches and the new features we expect to come. I keep saying the -- a big point of improving our product is the product needs to do the marketing for us. Weight loss is a very word-of-mouth experience. And so, we expect people to come for the weight loss. We want them to stay for the connection, the community and the success ultimately drives NPS. And as we noted, the NPS on digital was 7 points higher on workshops, it was 10 points higher. So, those are all indicators that we're headed in the right direction to increase the organic acquisition funnels as well as paid.

That's very helpful. And if I can just ask one unrelated follow-up. So with respect to the acquisition, I mean, I -- apology for a while if I'm thinking about it incorrectly, it's the first time that Weight Watchers has made an acquisition like this. Obviously, unique time in the health space with what's going on, but should we think about this as a one-off or is Weight Watchers now actively seeking more acquisition opportunities to build out the product offering?

So that's -- look, this represents a paradigm shift in our industry and one that we felt that it was important to address with a full stack solution. We did build-versus-buy analysis here and ultimately realize that as the way of spectrum advances to include clinical pathways as the leader in weight loss management solutions, that was something that we needed to provide alongside our behavior change program and gives us the unique ability to provide a holistic solution. And nobody else out there can do what we can do. When you get a script for these medications, it is medically advised to do it alongside a lifestyle behavior change program. And as you know, we are the number one doctor-recommended behavior change program. And so, the two things combined are what help people have -- consumers have better outcomes. And so, I think that this is going to be a first-of-its-kind solution, and it is an ad offering on top of what we already do with our core and premium programs.

The next question is from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Yes. So, I'm just wondering on the drug side of things here, there have been weight loss drugs available over the years at different points in time, new drugs coming in. What is it that's really different now that makes you really want to merge this aspect with your existing business? Like what is it that's different? Is it the insurance aspect? Or can you give a little more color on that?

Happy to Linda, thank you. Yes, I mean, we strongly believe that these latest advancements in prescription chronic weight management medications represent an innovation in our in our space today. And we're at this pivotal point where we can build new capabilities to expand our market and obviously reinforced by our foundational strengths. And the thing is with these particularly GLP-1s, due to their newness, limited availability, the significant financial expense they haven't been adopted more broadly yet. And yes, we expect to help people gain access through this preauthorization insurance engine. And we see this as a real opportunity for the future to be a holistic care partner and help our members navigate the side effects and the challenges that come up with taking these medications. I might add here actually, Linda, what's interesting to note, just in general on the space, if you -- if you look at the 2010 and the interest in weight loss and the interest in Weight Watchers, they used to track each other. Over the last decade, we've seen the -- that interest in Weight Watchers diverging from the interest in weight loss. Well, over the last 18 months, there's been a real rise in popularity and interest in these medications. And for all the reasons that the drug companies have detailed limited side effects and success, but ultimately, now that the supply chain challenges are being resolved and more insurance plans are covering these medications. Access is expected to increase, and that will be an opportunity for us to expand on the market and continue to be the science-backed leader and provider of choice across all pathways, whether clinical or lifestyle or functional for that matter.

And can I just ask, you've mentioned several KPIs that are kind of going in the right direction. But I guess we're just almost interested in new member sign-ups. Is there any -- a little bit more color you could give? Like, is it improving, in other words, less down year-over-year, month-by-month as you go along? Or is year-to-date first quarter much better than fourth quarter. Can you -- is there anything you can give to give us confidence that it's going in the right direction?

Yes. I mean the trend is improving. And I just want to keep pointing people to the fact that we intentionally chose to drop our media spend. And as we noted in the local, we saw that the trend improve over Q3 -- Q2 and Q3 as well as into Q4 and now peak. So, we're feeling good about that and expect to update more in the next call.

I would add to that as well. We do expect to spend into Q3 at a more efficient LTV to CAC ratio, and we do expect to see a return to improved trends in the second half.

The next question is from Michael Lasser with UBS. Please go ahead.

On the strategic rationale behind the acquisition, to what degree do you think your difficulty in signing up new members is because of the pharmacological solutions that is making weight loss different today than it's been in the past. And so, this is an effect that trying to hedge an existential risk that Weight Watchers might be facing over time. And as part of that, how do you manage the cultural challenge of integrating these two businesses because for so long, Weight Watchers message and culture has all been about the behavioral modification rather than a fix like uphill to take.

So I mean I don't believe that AOMs have had a meaningful impact on our business thus far. The number of people actually -- people using such medications, particularly GLP-1s was relatively low in 2022, again, limited availability, injectable formulation, significant financial expense. This is about an opportunity we see for the future. Again, a lack of holistic care to partner with these medications and we have -- because of our lifestyle programs that you mentioned, because of our behavior change program, our nutritional signs, we have an ability to service these members alongside our program, helping them prioritize nutrient-dense foods, managing against muscle loss, understanding that these medications may be, in some cases, a lifelong commitment and these are areas where Weight Watchers can provide guidance, support and ensure that members weight loss journeys are done in a healthy, sustainable way. And I actually think that this is right alongside of our messaging. We've always been the science backed solution. And as we noted, this is where the science has advanced. And I think that again, when the science advances, so should we in the same way that we started to update our food algorithm to take into consideration, saturated versus unsaturated fat or fiber-rich food, this is the evolution, the understanding in a lot of ways that those who are struggling with obesity. In some cases, those obesogens are biological factors, there are genetic factors and willpower alone isn't going to get you there. So, it's a real opportunity to lead the discussion to help people manage the dietary issues associated with these drugs. And honestly, I think members, they have those who -- for those who medically qualified, they were right to know what the -- what their options are, how it works and if they choose to take a clinical intervention to ensure that it's administered responsibly and managed over the over the course of their membership.

My follow-up question is on the leverage situation. Do you have any covenants or other conditions that need to be met over the next few quarters in order to trip any contractual obligations that you have with your debt.

So, we came into 2023 with $178 million on our balance sheet, access to our revolver. And even with this acquisition, we have ample liquidity to meet our operating needs and to service our debt. And the debt itself is very favorable and with very limited covenants, but we don't expect any issue with.

The next question is from Jason English with Goldman Sachs. Please go ahead.

A couple of questions. First, the first quarter revenue guidance of $235 million, what is the Q1 end-of-period subscriber count that, that revenue figure is based on?

We expect 4 million end-of-period subscribers at the end of Q1.

Thank you. I'm sorry if you gave that number earlier. The restructuring -- you ran through a number of restructuring initiatives on the call. Can you give me -- and I apologize, I lost track a lot of it. I'm sure there's more I can get back out of the transcript, but what is the total cash outlay for restructuring and also, you walked through a few specifics on the deal. What's the cash outlay for the acquisition this year as well?

So, I'll speak first to the acquisition question, Jason. The total cash outlay in the current year is $39 million in cash.

And then the restructuring cash outlays for this year?

It's approximately $36 million in the current year.

And I loved all the stats you dropped on the brand health engagement, et cetera. But frankly, I would be very disappointed if you weren't seeing material improvement for survivor bias alone. Presumably, it's the more loyal, more engaged, how satisfy customers who are not leaving your franchise. So have you been able to go through and tease out that noise from the survivor bias? And if so, what is it telling you?

So actually, activation rate, Jason, is a measure of a new member in the first 30 days. So, I don't think that there is survivor bias in that. And we've noted that is up 5% year-over-year.

Yes. But you gave -- at least three other metrics that were related to surveys of existing members.

That's true. And we split those cohorts by tenure, and it's all very similar. So yes, that is a very reasonable thing to think about and consider and certainly, we look at that. But no, the NPS being up and the brand affinity being up is true across all of our cohorts. In fact, in some cases, in the newer members, we're seeing them to be actually higher because they are coming into our new simplified program and having a really great experience where for some existing members sometimes these changes can be hard.

This concludes our question-and-answer session. I would like to turn the conference back over to Sima Sistani for any closing remarks.

We are extremely excited about the future of Weight Watchers and our ability to positively impact so many millions of people to achieve their weight loss goals in a healthy, sustainable and scientifically recommended way. Our move into the clinical space will allow us to help even more people with a holistic program no one else can deliver. At the same time, we are going to make very significant improvements across coaching, community and accountability to take our already excellent offerings to an even higher level. We are already seeing improvements in engagement from these efforts, but even bigger improvements are coming. 2023 will be a year of dramatic improvement in our ability to help members achieve their goals. Thank you for joining us today, looking forward to speaking with many of you, including at the Morgan Stanley Technology Conference on Wednesday. We'll look forward to keeping you updated on initiatives we have underway. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.