Q2 2020 WW International Inc Earnings Call

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Thank you for your patience good day and welcome to the W. W. International second quarter 2020 earnings Conference call, all participants will be impossible only about.

You need assistance for single conference specialist Sparky buys you. After today's presentation the won't be an opportunity to ask questions asked the question you might start one well your touchtone phone.

So what's your question. Please press Star then too.

Please note so that is being recorded.

I went to turn the call approach over check Corey Kinger, Vice President Investor Relations. Please go ahead.

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[noise] transferring some tough technical difficulties. Please standby while this issue its results. Thank you.

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Thank you everyone for joining us today for W. W.

International second quarter, 2020, <unk> conference call and about four o'clock PM Eastern time today, we issued a press release reporting our second quarter 2021.

The purpose of this call is to provide investors with some further details regarding the companys financial results as well have to provide a general update on the company's program.

A press release is available on the company's corporate website located at corporate duct W.W. Dot com.

Fundamental investor materials are also available on the company's corporate website in the Investor 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, our Mindy Grossman, President and CEO, Nick Hotchkin, CFO operating officer, North America, and President emerging markets I'll now turn the call over to Mindy.

Thanks, Corey good afternoon, everyone. Thank you for joining our call today I hope that all of you along with your family or friends are safe and healthy.

We began our strategic shift to a purpose driven and deeply impactful technology experience company long before March of 2020.

However, there is no doubt that our digital transformation has accelerated with the onset of coded 19.

Our digital first strategy as both obvious and evident in our strong second quarter results.

As we indicated in our mid June update digital member trends have had strong momentum and with their favorable margins are the key drivers of our future growth and profitability.

Although 2020 has certainly been a year of unique and unprecedented challenges for US. All it is also serve to reinforce our belief in our strategy. The resilience of our business model and the relevance of our global brand as well as a significant opportunity we have for W.W. dip.

Positively impact People's lives.

The recent trends in our business demonstrate that consumers are looking for science based affordable and proven wellness and weight loss program that is both digitally enabled and provide the wheel human connection.

Our second quarter results underscore the relevance and importance of our value proposition in today's environment as the trusted leader in weight loss and wellness.

I am proud and thankful for our talented dedicated and passionate employees, who put W.W. members first and everything they do you have been instrumental both in navigating the here and now and also positioning W. W. For the years ahead.

We ended Q2 with 5 million subscribers up 9% year over year and a record level for the end of Q2 and practically unchanged from our typical seasonal peak at the end if you want.

This growth is due to strong marketing execution in terms of delivering our message and value proposition to audiences in a way that is both clear and relevant to their needs and across all channels digital social PR and of course TV.

Due to the residents of our marketing we extended our us bring TV campaign into the summer running both through June and July with good results.

Brand method and value proposition within further amplified by the four week virtual experience with Oprah with resonated with audiences around the world.

Member recruitment trends for digital gain momentum globally over the course of the quarter, bringing digital subscribers to 3.9 million up an impressive 23% year over year.

Given the dynamic growth of our digital subscribers in Q2, now about 80% of our members our digital only and about 20% our studio plus digital with this shift. We're also seeing a demographic change with 51% of members going into two being below the age of 45 in the.

Second quarter on a constant currency basis digital revenues were up 15%.

This strength was offset by the declines in studio fees and products sales due to studio closure as a result with covance.

In total revenues were 334 million down 9% on constant currency.

Notably adjusted gross margin was 60% in Q2 up nearly 200 basis points year over year due to the benefit of an increase mix of digital subscribers combined with effective cost management as we reduce our studio footprint.

This is the highest adjusted gross margin we have seen in the past easier.

Adjusted operating income margin was 28% flat year over year.

This strong operating and financial performance demonstrates the resilience of our business model and provides a solid foundation as we continue to manage through the current environment and position W.W. for the long term.

Our last earnings call I highlighted many of the digital features and enhancements, we have launched to better serve numbers and deliver a robust experience I'm happy to say that these new innovations have resulted in increase and overall engagement trends, which as you know are a key driver of retention and ultimate.

Remember success.

Example, new features such as our water tracker have been enthusiastically received with over 2 million W.W. members tracking hydration and we recently enhanced our sleep tracker to sync with connected devices, making it easier for members monitor their progress and improve their sleep habits.

In addition, the integration of fit on a video fitness platform not only bolsters our portfolio fitness content, but provide numbers with workouts. They could do at home all well seamlessly seeking to fit point.

Yes. Its recent launch our members completed over half a million fit on workouts and spent over 75 million minutes working out.

We're adding gamification, we recently launched a fit on fans connect challenge a three week partnership with fit on trainers that encourage members to try different type of fit on workout.

This grew that fit on fans group engagement exponentially, we will continue rolling fit on l. globally over the balance of the here.

As we accelerate our digital transformation, we're increasing our focus on producing original created content for our members that incorporates our unique expertise and behavior change science and community building to drive engagement accountability and results.

Our four week Oprah's your life and focus a vision forward virtual experience was truly a first of its kind, bringing people together virtually from all around the world and alive interactive experience and with three and a half million views. It came at a time when the world needed at most.

Virtual experience generated 30 billion media impressions and drove significant social media conversation.

In addition to hearing from over herself listeners heard from a variety of inspirational and diverse special guests from celebrities that just Kate Hudson and Duane the rock Johnson to wellness expert such as life Costain Shetty relationship expert at airports sale as well as numerous W.W. members about their perspective.

Challenges victories and experiences.

Each week included an online workbook for participants to assess their wellness close and based on their ability to focus connect adapt and commit.

The learnings from the wellness assessment exercises from both the virtual experience and the nine city arena toward this year are being leveraged into our innovation pipeline as we add new features and content into W.W. that members value.

We see the opportunity to create new differentiated content experience that continue to elevate the W.W. brand and provide value across our membership offerings digital only.

Oh, plus digital and coming later this year, a new membership fear for virtual coach led communities.

I haven't content encoding experiences that are insightful interactive engaging we believe we will have a greater opportunity to attract new members to W. W. Appeal to younger more diverse audiences retain members longer and make a lasting impact on millions of lives.

Looking to the fall season, we aim to further our momentum and build our brand presence as we ramp up to winter.

Our integrated fall campaign will include TV, both linear and streaming new digital channels and influence or Activations to help drive new audiences.

Having a wider array of content will also enhance our ability to deliver a more personalized experience for our members. However, they wish to engage with W. W.

Our goal is not to maintain but to advance W.W. his position as a trusted leader in weight loss and wellness delivering a connected digital and deeply human experience for sustainable behavior change.

As a reminder, when cobot 19 escalated in mid March we took quick globally coordinated action and pause our in person workshops and implemented virtual workshops around the world continuing to provide studio members with the support encouragement and community that is central to their W.W. experience.

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Well face to face experience will always be apart of W. W. We're strategically repositioning our studio business to have a smaller real estate footprint with fewer locations.

It will provide an update on our studio strategy and progress shortly but I'm pleased to say that over the past few months. We have started resuming attendance schedule of in person workshops in many areas.

Of course enhanced safety procedures are in place and we will continue to monitor the situation closely at a local level as the health safety and support of our employees and members is Paramount.

We will also continue to operate virtual studios to support our members and give them the community and support they need.

As you likely read in our press release. This afternoon I am thrilled to announce that Nick Hotchkin has been named Chief operating officer of W. W. A new role assuming responsibility for all our global market as well as our health solutions business.

Nick has been an invaluable partly me since I joined W.W. three years ago and his experience from in eight years as CFO. In addition to his leadership of North America operations. This past year, making the perfect person to this global role as we accelerate our business transformation.

I'm also excited to announce that Amy O'keefe will be joining W.W. as chief financial officer her deep expertise in operational finance and her proven track record of driving business growth, while maximizing profitability makes a uniquely qualified to join our team.

He has more than 25 years of financial expertise joining W. W. After three years as CFO of drive deleverage healthcare, a leading private equity backed medical equipment company based in Port Washington, New York. She previously held CFO positions as advanced systems and being in holdings.

I have several corporate finance positions with increasing responsibility as Stanley Black <unk> Decker.

On behalf of the entire executive team I look forward to Amy joining us in October.

I will now turn the call over the next and then I'll come back to discuss our 2020 priorities and key initiatives.

Thanks, Mindy I look forward to continuing to drive our strategy in partnership with you and our global teams in my new role as Chief operating officer, and I look forward to welcoming aiming to W. W. As our new Chief Financial Officer.

The past the is it W. W have being the most rewarding it might urea to see how far the company has come as being an incredible.

Leave the future opportunities even greater.

As discussed on our last earnings call and provided in our business update announcement on June 15th.

Starting in the Middle of April digital recruitment trends returned to growth on a weekly basis compared to the prior year period.

As we see growth trend accelerated over the course for the quarter ending June surpassed the weekly recruitment growth rates, we saw in the first quarter financially escalation covert 19 in mid March.

This reserve strengthening digital sign ups has offset the continued decline in studio due to covert 19 studio closures.

In Q2, roughly 90% of member sign ups chose our digital offerings.

Overall member retention remains above 10 months.

These solid recruitment and retention trends robot Q2, and subscriber level to an all time high of 5 million.

Q2 revenue was 334 million down 9% year over year on a constant currency basis due to the further mix shift towards higher margin lower priced digital subscriptions.

Increased mix of digital subscriptions and the speed of our actions to right size the cost structure for the current environment drove an exceptionally strong adjusted gross margin of 60%, which is adjusted to exclude restructuring charges.

As we move to a more digitally enabled business model over time, our high margin model will be increasingly evident and is a key attribute of our operating and financial flexibility.

In fact.

Above 195 million in gross profit dollars in Q2, 75% regenerated fight digital subscriptions.

Adjusted operating income margin was strong at 28%.

Our GAAP PPS was 20 cents.

In addition to a higher tax rate in the quarter.

[music] to 2020 bps was negatively impacted by a total of 47 cents in onetime charges.

Including a 12 cents per share impact from our organizational restructuring.

End of 35 cents per share impact from stock option expense associated with the extension of our partnership with Oprah Winfrey through 2025.

Excluding these one time items EPS would have been 67 cents compared to 78 cents in the prior years second quarter.

As discussed on our last call operating and financial objectives for 2020 are.

Maximize recruitment and retention with a focus on subscription lifetime value.

And should we continued to deliver our high quality and engaging member experience across all platforms.

Strategically repositioned our studio business and deliver on a 100 million cost savings initiatives with reductions underway across cost of revenues marketing and DNA.

Continue to focus on E commerce.

Continue to invest in our products and type capabilities to take advantage of future opportunities and finally maintains strong liquidity and financial flexibility.

I am pleased to see that we have been delivering on each of these initiatives strengthening MWW for both the immediate and longer term.

While we are strong believers in face to face coaching the changes to our studio business unlikely to be long lasting.

We will continue to nimbly manage the studio cost structure, given the significant decline in studio revenue.

Looking at our USA real estate.

The start of the yes, we had nearly 800 leases for W.W. branded studios.

We are consolidating many of our workshops into these W.W. branded locations, where we have more control over health and safety.

We also have already permanently closed more than 100 branded studios, bringing the U.S. studio base through about 650 locations today.

Looking ahead, we are focused on maximizing the smaller footprint to be the cornerstone of our personally workshop and retail experience.

At the start of the year. We also had about 20, 303rd party locations with month to month rental arrangements.

Given the current cobot environment. These locations have been closed since mid March and will be reopened only on a very selective basis.

Looking into 2021, we have 189 studio leases up for renewal and the average lease length about 615 W.W. Studios is only 26 months. So we have ample real estate flexibility.

Social workshops continue to be extremely well received by members with many expressing a strong desire for them to continue posts co bid as members enjoy the convenience.

These virtual workshops also provide greater access to our coaches, particularly in areas, where we don't have a studio location that fall. We plan to continue offering workshops virtually in addition to exploring strategic palm locations to serve an even broader member base.

Looking ahead to fall, we will maintain the global creative strategy localized for individual market needs. In addition to showing up in digital social and Fiat Influencer Activations, we will return to TV across all major markets.

To evaluate maxing efficiency, we look at subscription lifetime value and customer acquisition cost.

While there are seasonal fluctuations on a full year basis in the U.S.

LTV to CAC ratio has been about five to one.

As mentioned earlier, we've had success in driving member sign ups with compelling longer tenured plans.

In the U.S. nearly 50% of our member sign ups. So far on 2020 chose a six month old Greta initial plan.

Approximately 30% chose a three month initial commitment and about 20% started on a month to month plan, which includes members joining in.

Via the Apple store.

Since we've introduced a two week free trial in the App store our conversion rate on these trials has been impressive.

And I've touched a sign ups accounted for 80% of our total U.S. sign ups in Q2.

We continue experimenting with free trial and other marketing channels as we look to attract first time members to W. W as well as repeat members.

It is important to note during the free trial period. These trials are not counted as either sign ups or subscribers only upon conversion to a paid subscription are they counted as a sign up and to subscriber.

Looking ahead, we are confident in our digital transformation and our ability to drive long term growth through digitally enabled innovation.

In July which is a seasonally low volume period digital finest continue to trend is nicely positive year over year, which is encouraging as we approach all fall recruitment season.

Given the continued macro uncertainty we are not providing detailed subscriber revenue or EPS guidance at this time.

We would like to provide you with a few directional assumptions for your modeling.

Thanks, Frank talk Q3 year over year revenue trends for digital studio and product sales to be relatively similar to the trends experienced in Q2 with strong growth in digital offset by declines in studio related revenues due to the reduced availability of into.

Yes and workshops.

As we resumed in prison workshops, while rightsizing our studio cost structure.

We expect our overall gross margin to be in the mid 50% Rage. Importantly, however, as we continue to move to a more digital subscriber base, we expect to deliver on margin expansion over the longer term.

Well the interest expense is expected to be approximately 120 million.

And the Treasury Department recently released final regulations around guilty now permitting companies to a likes to exclude foreign income already subject to a high effective tax rate. We now in spite of full year 2020 tax rate will be approximately 20%.

We are a highly cash generative business was strong liquidity, we have a covenant lites debt structure and our term loan and bond maturity dates are not until November 2024, and December 2025, respectively.

Our cash balance at the end of Q2 was 150 million and our revolver was undrawn.

We are space, our cash bonds to increase during 2020.

Ended the quarter with a four times net debt to EBITDA fast leverage ratio or three times levered on a first lien debt basis.

As previously announced in June we amended our revolving credit facility, increasing their commitments to 175 million from 150 million and raising the consolidated first lien leverage ratio to up to five times together, providing for significantly more flexible.

Access to liquidity.

Reducing our leverage continues to be our overall capital structure priority.

And in addition to investing in technology and digital product resources on talent.

We will continue to evaluate potential tuck in acquisitions of technology companies that can augment some capabilities.

We may also continue to buyback R.W.W. franchises as you have seen in recent years.

In summary, we believe we are focused on the right priorities to maximize our churn offerings, while also innovating to drive future growth.

That I would like to turn it back to Mindy.

Thanks, Nick.

Before I discuss our priorities and upcoming milestones for the remainder at 2020, I first want to address Black lab matter and the critical needs the diversity and inclusion at W. W and in our society.

We have made it a priority to cultivate a wellness community a diversity and inclusion and while we are proud of the progress we have made over the past few years with our board our leadership team and our member base. We are greatly accelerating our effort and are taking further actions that are both measurable and to see.

Annabelle.

Well highlight just a few of the actions we have taken we have donated 1 million dollar and are matching employee donation to several non profit organization dedicated to positively influencing black lives.

We will be spotlighting black on businesses in the W.W. shop.

We have appointed ahead of inclusive leadership.

We have pledged to the CEO accident for diversity and inclusion initiative, we are creating new career and professional development program for a black employees as well as creating companywide educational programs aimed at eradicated bias and racism and we are requiring best practices in hiring to ensure diversity.

At all points, along the W.W. ecosystem.

When we released our impact manifesto in early 2018, we made our purpose very clear.

We inspire healthy habits are real life for people families communities the world for everyone to be the brand a truly democratizes wellness for all so it is up to all of us as individuals as an organization and its seller humans to advocate for our employees our members and arc.

We need and this is not an isolated objective, but one that will be ingrained across every priority and initiative at W. W.

We are focused on technology driven innovation.

Data driven personalization at every step of the member Gerry.

Powering community and creating meaningful experiences at every touch point.

That aligns to each of our 2020 priorities.

Further we will continue to build our wellness ecosystem deepening our app experience and adding further gamification.

We're focused on our 2021 winter launch and delivering a new and compelling programatic innovation as we anniversary My W. W. Our plans are exciting and will further our efforts around personalization motivation and weight loss success.

We intend to be recognized as the world's trusted partner in total wellness and behavior change spanning nutrition activity mindset motivation hydration and fleet operating leading digital features and tool to help our members improve their overall health and wellness.

I've spoken before of our next two priorities.

Amplifying the power of communities, who coaching and the importance of community activities and events and create a contact.

I will speak to them, both together as our upcoming milestones and strategy for both of these priorities are very much intertwined.

We know that building virtual community and an enhanced away is more essential today than ever before.

Building on the success and key insights on the Oprah Vision tour, the reason virtual experience and the evolving needs at today's consumer we ever find our plans for an entirely new digitally enabled at community focused and coax wed premium experience specifically designed for a millennial audience.

We're on track to launch this new enhanced offerings in December.

A new group of coaches will deliver motivation accountability and deep insight entirely virtual to help members along their journeys they will engage in live and on demand experiences and hear unique content through a scalable modern digital platform.

Backed by science and human behavior psychology, this new virtual co centric experience will offer the tools and communities off by millennials looking for weight loss and total body wellness.

As we evolve and create more personalized offerings and bill highly skilled coaching talent, we're focused on providing solutions to our members in the format and communities that fit their lives that whether they be digital in person or virtual studios to virtual coax wet communities.

Or coming later in 2021, we launched one on one personal coaching offering.

In addition to our programmatic experiences we will continue producing original content events and experiences for all W.W. members as well as non members who want to join our wellness offerings.

Looking ahead, we envision more opportunities to produce unique events such as the virtual opened to where that expand the reach of W.W. to audience is worldwide. He is a critical elements of our strategy as we look to diversify our customer base and maximize member engagement.

Ecommerce growth and consumer product expansion is a significant opportunity and as an integral part of our digital acceleration strategy.

We envision W.W. as the go to for all things weight loss and wellness acquire healthy eating healthy kitchen and healthy lifestyle.

We will achieve this vision by driving brand perception and positive associations within the mines of consumer and by creating favorable interactions and memorable experiences.

Advancements our team has made to enhance our E. Commerce experience has been exceptional W.W. shop is no. Our primary channel for purchases. In addition to in studio purchasing with E. Commerce sales in Q2 of 300% year over year.

In addition to integrating the W.W. shop into our App in March we have been actively expanding our product lines and categories such as the launch of our movie time popcorn kit coming soon grab and go ice coffee.

The future at our digital commerce marketplace will span three different branding opportunities.

We are fully W.W. branded such as our me bars frozen novelty is breakfast streets and other foods is that.

Cobranded, where we partner with another brand to develop value add products such as pitching tool.

And curated product, where we highlight product that W.W. sound for you.

We are focused on increasing the percentage of member, particularly digital members, who buy W.W. products and our testing a number of initiatives to increase awareness and incentivize first time and repeat purchases.

Thank you to only a small percentage of our digital members purchase products on the recently launched Anat W.W. shop, demonstrating the significant opportunity found in just a modest increase to this penetration me.

In addition, we see opportunities through increasing frequency purchase and are exploring new ways to incentivize and reward repeat purchases.

That to be hearing more from us as we build upon or E commerce momentum.

To further development of the W.W. shot platform the rollout to more international markets exciting partnership a pipeline of new products and the opportunity to bring our products is significantly more W.W. remember we are positioning our consumer product portfolio for exponential growth in the years ahead.

And finally health solutions and being the partner of choice.

Our goal is for W.W. health solutions to be the best in class Digital health solution, you make W.W. accessible and affordable to a broader and more diverse population.

We believe healthy living as a human rights and we aspire to make wellness accessible to all not just a few.

We are actively evolving this business from being viewed as long as park to being a powerful partner in health by working with organizations to help their populations lose weight stay healthy and prevent chronic condition, we see a significantly larger opportunity in the years to come to greatly accelerate growth and we just significantly larger universe.

Consumers.

In the UK W. W is now a key partner with public health, England towards better health campaign to help people lose weight get active and better last week public health, England launch this adult health campaign to seize the opportunity for a national reset moment of health.

It follows research that shows that nearly two thirds of adults in the UK are overweight or living with RBC.

Among the initiatives under public health England's plan is the expansion of weight management services under the NHS to provide more people with the support they need to lose weight.

And then the U.S. last week, we announced that W.W. How solution has been added as a new wellness and weight management solution to Cvs Health point solutions management, offering which serves millions.

Joining the point solutions management platform will enable employers that you Cvs caremark for pharmacy benefit management to access W.W. whole solution, we simplified contracting preferred pricing and streamline eligibility and billing processing.

The new offering makes it easier for plan sponsors to add W.W. health solutions to their benefit packages.

Through the collaboration plan sponsors can offer their member W.W. digital offerings, which are accessible virtually anywhere to meet members, where they are helping them along their weight loss and wellness journey.

Third by the Koby graces employers will need to take on a greater role in advancing employee health and wellness. In addition people are seeking out more virtual option.

I've personally spoken with many health care providers recently, and they said patients often now prefer for consultations to be done virtually we are truly seeing a dramatic shift in consumer preferences and one that I believe is here to say.

We are confident that we're focused on the right actions not only to best serve our members today, but to position W.W. as a leader in delivering human impact to technology.

We know that good health and community are essential and having the tools to better manage your health should not be considered a luxury but in this that city. We are focused on making W.W. accessible unbelievable to more people than ever before broadening our reach offering W.W. new format and.

Leading new engaging experiences that help members along their wellness journey.

Thank you for joining us on the call today and with that we will now turn the call to the operator puts you in it.

Speakers you may on mute your launch we will now begin the question answer session asked a question. You May proceed Star then one on your Touchtone phone.

If you are using speakerphone, please pick up your handset before passing the keys.

Well George Your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.

Well first question will come from stuff was wissink with Jefferies. Please go ahead.

Thank you good afternoon, everyone I'm, Indiana two part question for you one it's really just to clarify you talked about a premium experience targeting millennial in the back half of the year is that similar to our aligned with the virtual coaching model or is that something separate that's more targeted towards that.

I think demographic.

No that is that is separate so is a whole new vertical of membership that we will be launching now we are going to continues some virtual workshop for our workshop number but this is a completely different vertical we're bringing in a new.

Who cohort of coaches, it's very content, driven and community driven.

And we're very excited we will be in between from a pricing perspective, our digital and our workshop membership, but I really think it is going to accomplish two things it will attract new audience you diverse audience.

It's also an opportunity to up sell from digital for those people, who want more accountability more engagement and more community.

That's great and then just one follow up for your neck and this is more just the Numerics question, but you mentioned that the July business has continued to demonstrate some nice acceleration so almost looks like your businesses defying the historic seasonal pattern can you talk a little bit about if you think through the back half of the year, how we should think.

About the the normal seasonality not waterfall effect versus what you're able to actually off site and making some ground relative to that historic trend.

Okay, very pleased with the rebound and a growing nicely in July also which is important as we approach.

A full a campaign, but having a Q2 and of subscribers be at a 5 million at all time high Q2 and.

Effectively a equaling a there the Q1.

Number also 5 million.

Was it was a very important achievement as far as and so to your point on a seasonality look to last year's seasonality was pretty exceptional historically, a peak to trough declining joining me here.

8%.

On Q1, two or year end, but certainly our performance in Q2.

And you know the of the speed of that digital growth for subscribers up 23%, there's a very encouraging quarter.

Okay. Thank you.

Our next question will come from Lauren Castle with Morgan Stanley. Please go ahead.

Great. Thanks, So much my first question was just on on the real state. The color you gave what was helpful. But I guess, how should we think about what the right number of branded Geo location. There is long term and then ultimately what sort of savings do you think we can see there I think you know in 2019 you spent.

A little over 50 million on rented at 20 or $30 million, there, yeah sort of ballpark, what could be seeing and and 21 and then my second question is just around marketing spend in the back half of your you noted ever turn to TV in all markets and that's all I guess you how should we think about marketing spend a they're an important quarters.

Yeah look in terms of the real estate footprint you see that it's a very flexible. So we can nimbly adapt to any environment. You see is running the play of concentrating our business in those W. W branded studios.

We can control the health and.

Safety environment. So thats why were concentrated on those six 650 W.W. branded studios today and will only open those.

You know third party studio apps selectively though in terms of the savings from that we're well on track to deliver a 100 million.

Cost savings plan. This is our plans coming into the yeah. No said before that about a third of that is cost of sales, which would cover rent that's a marketing in about a gene a so the rent savings.

Incorporated with those cost of sales savings, which frankly should be the more permanent part a of the 100 million cost savings plan terms of maxing, what you saw we underspent marketing.

This year in terms of.

Dollars spend versus last year, frankly, I think we published over Oh wait in terms of the efficacy in the wonderful marketing efforts for the team.

Should we deliberately slowed down marfan Q2, because the uncertainty of Cove it going forward with the momentum. We have you can expect us to Tony continue to spend at levels that the momentum of the business does.

Okay, and just a quick one one clarification is there an opportunity he more rent savings and 21 or do you think the vast majority of that is going to happen in 20.

It will really well nimbly manage the business and.

Let me say, we've got a flexible a real estate footprint with a 190 89 net lease renewals and a 2021, so no but we're committed to no was this a dose smaller real estate footprint very committed to creating a fantastic face to face studio in retail.

Well a experience so do we have a great opportunity to do that in addition to as Mindy said for those areas that onset of five face to face studio continuing to off as vishal workshops to our members.

Okay. Thank you so much.

Our next question will come from that from a Sabah Toyota with Guggenheim Securities. Please go ahead.

Yes. Thank you for taking the question I was wondering if you can give us some color on the characteristics of the subscribers that have joined in recent months, particularly around age and the mix a first time users versus returning and if there's anything to call out with respect to just the overall behavior and engagement levels of those cohorts relative to what you typically see on the platform.

Yeah, well, we have seen with this acceleration of our digital membership is definitely a diversifying our audience. So as I mentioned about 51% of the members joining are under 45.

And that does a pretty broad swath. There. So that we are definitely seen we've also been very focused in our marketing around diversity influencers et cetera. So that's also a help in that regard now what we are theme is.

Is there isn't dramatic differential between what people are doing based on the cohort, but what we're excited about is we are seeing greater engagement year on year overall across all of our vertical and that's really because of the work that we've done around personalization.

Across you know nutrition fitness you know fit on is a personalized video fitness for you and it now things up with all our <unk> point.

And what we're seeing across and we're also seeing.

We.

Launch connect group a while ago. So what we are seeing is people are finding their own cohort that they want to interface with so whether that young mom College student Black women men et cetera, we have a lot more opportunity.

For integrated engagement and that is why our retention is where it is.

Okay, Great and then maybe just to follow that can you talk about how the pricing strategy has evolved here throughout the first half the year and you were thinking about the launches that you have later this year in and what you're seeing in the market right now just what your approach towards promotional activity is in the second a 2020 any color there would be great. Thank you.

Yes look at pricing and promotions strategy has been pretty constant.

Year over year over year no idea when you look in detail it numbers, you'll see a few things pretty says is pretty stable price realization on the digital side. For example in February we we talk to dollar.

Price for on a new member sign ups and that's a factor there and look on the studio site. In addition to the impact of no offering longer a longer term plans, which makes so much economic sense with us because it makes sense because they give a discount to get the.

The longer retention as you can imagine newly covered.

I mean, we've been.

Implementing various members saves a strategies, but overall no approved promotion in pricing strategy is intact and working well for us I feel like best in the quarter was a great results. So we're getting from the two week free trial and the App.

I'll start it really shows how the team is a innovating and trying new things a great great way to attract new members to the brand and the conversion from pre trial to pay that has been impressive.

Great. Thank you.

Our next question will come from Edward Yruma with Keybanc capital markets. Please go ahead.

Hey, good evening, Thanks for taking my questions I guess first what is retention has been like on the on those customers that had entered through the studio product and maybe haven't been able to engage that physical experience second I guess on the studio side. When you have reopened I guess in some markets any commentary on behavior.

And then just one other quick one when when someone does a digital through App store I'm, assuming that there's a significant take from Apple does that change the economics of the product. Thank you.

Well I comment on the retention side, where it was thrilled that a retention is over 10 months and as when do you said, that's that's driven by the and engagement strategy on on the studio side. It's helped immensely that we introduced.

The actual workshops on nonmembers find them convenient and are using them and and joining them several of the.

Absolutely, yes for those that digital subscriptions.

Yeah.

We pay a apple or a.

Commission on those of our pricing strategy in the App store comprehends that so the incremental margins on those sign ups or are a terrific.

So I'm, sorry, I might have missed the middle part of the question.

No no I'd actually the you Oh R&D reopening studios when you when you have seen markets, where you've been able to reopen yeah any significant commentary on performance. There yeah. It's been really interesting because we really were not 100 within sure what the.

Reaction was gonna be once we were opening we put into place a scheduling tool because obviously, we can't have as many people there at one time. So we've had more meetings with less people and so people reserve and sign up and just in the first couple of days we.

We're sold out.

So people really.

The the ones that really feel that there could there.

Immunity and their codes are important have come back and have engaged just in smaller and smaller groups, but to Nick's point, we've been very focused on the studios that we are branded owned and operated and albeit we will have a smaller footprint.

Is that still cover a significant percentage of our member and our real focus is how do we make them more and more a destination.

Great. Thanks, so much guest.

Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good evening.

Hi.

Thanks for taking my question.

The first question I haven't and maybe it's a universal Okay. A couple of prior questions as we look at the.

The sequential trend in.

As described him really remarkable how well Q2 was held up relative to Q1 and watching that normal seasonal pay because you look at the data.

What do you how do you what gives you the confidence that this is.

Much more reflection of the underlying efforts of W.W. versus sometimes Cork right now when the covert landscape.

It's definitely.

The work that we've done and the power of our trusted brand why people are really coming to us at this time.

You know if you think.

All of.

The innovation and what we've done over the course of the number of years and really building out this entire ecosystem of support and that's what's made a difference. It's not you know we've been able now certainly to accelerate it and we just launched hydration, we just want fleet.

I mentioned before we are seeing a higher engagement year on year, we're seeing and were monitoring when people join as new member you know what is their motivation and we are.

Equivocally is because were trusted where about sustainable livable behavior change and.

They know that they will also have the support of community and that's been pretty constant and that's why it's been accelerating.

Your next Monday.

Then a follow up you have wondered first off congratulations on your role.

Do you want to ask you are just maybe one final financial question before you had range.

[laughter] just as we see talk about the longwall talk about ongoing digital transformation W. W. Again include one successor, but how should we think about the investments they're ongoing investments needed to continue were maybe potentially complete this transformation.

Well, let you know we've been investing in the digital experience.

Continually and that you know thats why Weve got such a Oh, a market leading a award winning.

In the digital experience now so we know that I celleration if that digital first strategy is is very evident in our Q2 results, but it's not just on new and this is not that long term approach that.

Dave lives now to rapidly become a technology experience can we go going going forward I don't see any change to the.

Key tenets of the business model in terms of a low capex highly cash generative business model I think the biggest change for the business model as a mix shifts towards a richer mix additional subscribers and you see this summer in our Q2 results with that 60% gross margin you'll see us be.

This is where we were with a higher mix of studio, you'll see us be a lower revenue, but a higher margin company and we've definitely got margin expansion opportunities with this strong digital mix and the higher revenue.

Digital products on Mondays talked about the well launching this winter.

Thank you very much.

Our final question, so that will come from Alex Fuhrman with Craig Hallum. Please go ahead.

Alex.

Hi, Thanks for taking my question, a nice to speak with you all I want to ask Andy about something that that you didn't they prepared remarks, I think you'd said about 51% of the new members that that you signed up over the past few months have been below the age of 45 can you talk a little bit about how that compares to.

What you normally seen over the years. It is that tend to be a number that has fluctuated over the years or had that generally been pretty constant and can you talk a little bit about how much that might be driven by just didn't mix shifts with digital becoming a bigger part of the business. This year or do you also seen a changing your.

Your your incoming customer age within the digital product.

So I think I think it's a combination of thing it definitely has accelerated.

As we have moved toward a more digital experience and the weight of sign up you know in this quarter on the digital side being so strong, but we really saw that shift there.

That's number one number two I think part of it is.

We've had a strategy to go after new core cohorts and modernize the brand. So I think that definitely is is a factor as well.

And you know the biggest opportunity you know for US is always word of mouth.

We're community base business or you know and in addition to having great marketing I also think that the digital marketing effort and social marketing efforts.

Over the past year has been fantastic. So I think it's a combination of all of those things.

Great. That's really helpful. Thank you very much.

This concludes our question and answer session I would like to turn the conference back over to Mindy Grossman CEO for any closing remarks, well. Thank you everyone and while 2020 that certainly won't be the year any of US had envisioned just five.

Months' ago, I'd say the way our global teams quickly adapted to this changing environment and they were ready to reimagine anything and everything they do and were agile and pivoted to deliver the best experience for our members and that has been both motivating and inspiring.

And we continue to be focused on delivering coaching community creative content and thought leadership to our member in ways that our personal and authentic and by providing behavior change in human connection through technology. We can now truly deliver upon our purpose to inspire healthy habits for real.

Alive for people families <unk> the world for everyone. So.

So thank you for joining us today and I look forward to speaking with everyone again soon.

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