investment presentation - boothlaird€¦ · •u.s. news & world report best diet –4 years...

November 17, 2014

Investment Presentation

CEO & FUND MANAGER

Jonathan Booth, CFA, CPA/ABV

This presentation does not constitute an offer to sell or solicitation of an offer to buy any security. Any such offer only may be made pursuant to the investment partnership’s confidential private placement memorandum and related documents.

DISCLAIMER

• Investment fund headquartered in Baton Rouge

• Approach to investing:

• Out-of-favor stocks that are mispriced due to uncertainty or fear, misunderstanding or obscurity

• Conduct significant due diligence to overcome those hurdles

• Invest only at a deep discount to intrinsic value

• Limited to 10 to 15 best ideas

About Booth-Laird Investment Partnership

Booth-Laird Investment Idea

• NYSE: WTW

• Global leader in commercial weight management

• Behavior modification/diet program offered via group meetings and online

• 50+ year operating history

• $1.6B market cap

• 42% owned by Artal

• Present in 23 countries

Profile

Growing Industry

Source: magicJack

Where WTW Fits In

Source: magicJack

• Meetings

• Monthly Pass vs pay-as-you-go

• In-Meeting Product Sales

• Bars, snacks, cookbooks, food and restaurant guides with PointsPlus values, magazine, PointsPlus calculators, and ActiveLink activity monitors

• Weight Watchers Online

• Apps and advertising revenue

• Licensing

• Franchises

• 15% of global attendance

Business Lines

Revenue Breakdown

• Geographically: 65% U.S. / 35% International

49.4%

12.3%

30.3%

8.0%Meeting fees

In-meeting product

sales

Internet revenues

Licensing, franchise

royalties, and other

• Down 65% from peak of $80.73 hit March 16, 2012

Stock’s 3 year decline

• Stock selling for <8 ttm FCF & <6 Avg. FCF last 5 years

• Negative market sentiment on ability to compete with DIY devices and free apps

• Two year decline in paid weeks – market uncertain will ever reverse

• Market underestimating

• Efficacy of the program

• Brand strength

• Low cost advantage

• New Management

• B2B Healthcare Opportunity

• Exceptional cash flows

Opportunity

• 50 years of research to support it

• Clinically proven – 80+ peer-reviewed studies in 20 years

• U.S. News & World Report Best Diet – 4 years running

• Strong Retention – 8 to 9 months

• Behavior Modification vs diet

Best-in-class Program

2013 clinical results support multiple touch points

Source: magicJack

• Group leaders – each a successful former WTW customer

• Difficult to replicate scale – various meeting locations and times

• Network effect – more valuable to each customer as more customers join

Meetings are the key

• Average customer is overweight, middle-class white female in her 50’s

• Unlikely to succeed without group support

• Slow to adopt technology

• Less sensitive to price changes or changes in the economy

• A fairly large group - long time to erode

Unique Niche

• “Weight Watchers is what you try when you’ve tried everything else.” – Weight Watchers management

• WTW works but is seen as hard

• Consumers are drawn to misperception of “easy fix” of apps and devices

• Many lack self-discipline required, abandon after initial trial

• These customers are the type who would consider WTW and have temporarily chosen the fad option

• WTW will eventually get many of these customers

• Retention has remained the same at 8 to 9 months for years

• Proves the program remains strong

• Delivery and Marketing are key for getting back the trial users

Temporarily Losing Trial Customers

• Free apps and wearable devices still require self-discipline

• People who succeed with these tools are not considering Weight Watchers as an alternative to begin with

• Most free app downloads do not get used beyond initial trial

• Devices and apps are not the easy fix consumers hoped for

Free apps and devices collect dust

• Weight Watchers brand built over 50+ years

• Value of brand proven by quality and volume of licensees

• $5B spent in 2013 on Weight Watchers branded products

Strong Brand Name

U.S.A. U.K. Continental Europe

Australia/New Zealand

General Mills Finsbury Bischofszell Conair

Kraft Foods Greencore Campofrio Fonterra

Foster Farms Rivermill Kuhlmann Tasti

Russell Stover Vimto Marie LDC

Conair Walkers Parmalat

Applebee’s Warburtons Yoplait

Schreiber Foods Weetabix

Wells Dairy Yoplait

• Strong word-of-mouth

• Strong brand recognition

• Licensing – paid by other companies to promote WTW on their products

• Free meetings after 6 weeks at target weight

• Essentially a loyalty program

• Walking advertisement

Low Customer Acquisition Costs

• Meeting staff primarily paid on commissions

• Leaders passionate about work paid base plus commission

• Space generally rented as needed – 1 meeting at a time

• Attendance/meeting biggest driver of profit margin

• Spread rent/overhead over more people

• Sell products in-meetings (food, cookbooks, etc.)

• $5 avg. spend per attendee per week

• Online offering low fixed costs – higher margin

Low, Variable Cost Structure

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

C-ROIC

High Cash Returns on Invested Capital

• Avg. 39.7%

Booth-Laird Calculation using FCF as numerator

• C-Suite entirely new since August 2012

• Previous management became entrenched

• No sacred cows with new management

• Findings:

• Program and brand are core strength

• Delivery method needs upgrading

• Marketing needs improvement

• Target other demographics

• Embrace technology

• Reverse cost creep

• Continue B2B healthcare opportunity

New Management

• Getting the marketing right is key

• Winter season is most important – just like gym membership

• WTW has stumbled in recent years after highly successful 2011

• Focused on “new voice and message to make brand more inclusive and aspirational”

• Focused on hope and behavior modification

• Trying to differentiate from typical diet

• Sharing knowledge gleaned from marketing in different markets

• Targeting new demographics

Improving Marketing

• Modern consumer increasingly wants what they want, how they want it, and when they want it

• More personalization, especially in the beginning

• Simple Start program

• Providing 1x1 service

• Bringing human support online

• Providing greater personalization and connection in between meetings for members

Improving Delivery

• Significant investments and new hires made in IT

• New Chief Technology Officer October 2013

• Created role of VP of Digital Product Engineering Sept 2014

• Integrated popular activity monitors

• Fitbit

• Jawbone

• Co-marketing partnership with Fitbit in Germany

• Leveraging iOS 8 and HealthKit to improve app

• Acquired technology start-up Wello Q2 2014

Embracing Technology

• $150M in annualized savings achieved

• Marketing and Professional Fees reduction

• Partially offset by new investments in IT and healthcare investments

• Reduced workforce 15%

• Consolidating small meetings and reducing drop-in hours

• Enhanced procurement procedures and renegotiated vendor contracts

Reversing Cost Creep

Healthcare Opportunity (1 of 2)

Source: magicJack

• B2B service offering – preventive care

• WTW annual cost far less than higher annual healthcare costs for overweight employees

• Grew from $0 to $75M in revenue in short period of time

• 200+ companies

• Primarily self-insured companies

• Expect to be approved for insurance reimbursement 2015

• Developing technical capabilities – privacy, security, etc.

• Expect to eventually be approved for Medicare/Medicaid

• Expect $300M revenue opportunity

• Similar margins to traditional business

• 15-20% of revenue

Healthcare Opportunity (2 of 2)

• Large debt balance due to stock buybacks

• Debt, net of cash = $2.04B

• Effective interest rate only 3.6%

• $298.5M due April 2016

• Less than cash on the balance sheet as of latest quarter

• Remainder due April 2020

• No financial ratio covenants

• Interest payments easily handled by strong cash flows

• Stated goal of reducing debt load

High Debt Levels - Manageable

• Driven by high profitability per customer

• Negative cash conversion cycle – paid by customer before forced to pay vendors and employees

• Float

• No working capital investment required for growth

• Limited capital expenditures required

• Elevated in recent years for IT and healthcare investments

• Coming down to maintenance level of ~1.5 - 2.0% of revenue

Exceptional Cash Flow (1 of 3)

Exceptional Cash Flow (2 of 3)

0%

5%

10%

15%

20%

25%

2009 2010 2011 2012 2013 TTM

17.3% 17.8%19.6%

14.8% 15.2% 13.7%

1.7% 1.5%

2.5%

4.3% 3.5%

2.4%

FCF/REV CAPEX/REV

Exceptional Cash Flow (3 of 3)

0

100

200

300

400

2009 2010 2011 2012 2013 TTM

$242 $259

$357

$271 $262 $208

Free Cash Flow

• 13% TTM FCF yield

• 17% avg. FCF yield

• Legitimate wonder pill finally invented

• not likely to be any time soon

• Lost faith in the efficacy of the program

• unlikely after 50 years of positive results for customers

• Fail to ever get marketing right again

• Limited downside even if customer levels stays stagnant

• Unable to refinance or pay-off debt when it matures

• unlikely given strong cash flows

Risks to Consider

• Completed upside and downside valuation

• Upside very conservative – continued drop 2015, leveling out 2016, steep decline in profitability, then slowly recovers

• Downside aggressive to incorporate worst case scenarios –membership further declines and never recovers

• Booth-Laird Investment Partnership cost basis = $21

• Originally purchased in February 2014

• Also purchased LEAP’s with strike $13 expiring Jan 2016 for $7.85

• Up 32.5% on stock and up 119% on the options

• Recommend stock at current price, but not options

Valuation

Upside Downside

Valuation $46 $20

Stock Price $27.83 $27.83

Upside/(Downside) 58% (28%)

• Strong winter season for recruitment

• Successful insurance reimbursable health plan offering for businesses

• New technology partnership announcements

• Simply outperformance over time – time arbitrage

Catalysts

• Out-of-favor stock due to uncertainty over ability to compete with devices and free apps

• Market underestimating brand strength, quality of the program, low cost advantages, new management, and healthcare opportunity

• Scale difficult to replicate and niche customer difficult to erode

• Above all, exceptional and sustainable cash flows justify a considerably higher price while providing downside protection

Summary

CEO & FUND MANAGER

Jonathan Booth, CFA, CPA/ABV

Appendix

• Passed CPA exam, ABV exam, and all 3 CFA exams on first attempt

• 2006 Elijah Watt Sells Award (top 10 CPA exam score in the world out of 50,000+ test takers)

• 2008 Baton Rouge Business Report “Top 40 Under Forty” Award

• B.S., Accounting and M.S., Accounting from Louisiana State University

• 3+ years of auditing experience with two of the Big 4 accounting firms

• Exceptional performer every year & early promoted

• Lead senior of Fortune 500 audit client

• Former Assistant Director of State Economic Competitiveness under Governor Jindal

• Accredited Member magazine and SeekingAlpha.com contributing author

About the Managers:Jonathan Booth, CFA, CPA/ABV

• 7 years of accounting and auditing experience with

• KPMG – Big 4 accounting firm

• Postlethwaite & Netterville – largest accounting firm in Louisiana

• The Edgen Group – Manager of Financial Reporting

• Edgen-Murray Corporation – Assistant Controller

• B.S., Accounting from Louisiana State University

• M.B.A. from Southeastern Louisiana University

• Louisiana Society of CPA’s Business & Industry Committee

• 2012 AICPA Leadership Academy – one of 36 selected from across the nation for prestigious 4 day event

About the Managers:Kevin Laird, CPA

Contact Information

Booth-Laird Investment Partnership

9005 Westlake Avenue

Baton Rouge, LA 70810

(225) 767-1439

Jonathan Booth, CFA, CPA/ABV

Chief Executive Officer

Cell: (225) 978-1532

jonathan.booth@boothlaird.com

Website: www.boothlaird.com

Blog: www.boothlaird.com/boothlairdblog/

Twitter: http://twitter.com/#!/BoothLaird

Kevin Laird, CPA

President & Chief Operating Officer

Cell: (225) 229-6567

kevin.laird@boothlaird.com