Q3 2020 WW International Inc Earnings Call

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Good day and welcome to the W. W. International third quarter 2020 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Corey Kinger Investor Relations. Please go ahead.

Thank you everyone for joining us today for W.W. Internationals third quarter 2020 conference call.

About four P.M. eastern time today, we issued a press release reporting our third quarter 2020 result.

Perfect that this call is to provide investors with some further details regarding the company's financial results as well to provide a general update on the company's progress.

Press release is available on the company's corporate website located at corporate that W.W. Dot com.

Supplemental investor materials are also available on the company's corporate website in the investors section under presentations anything.

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 Companys filings with 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, COO and any O'keefe CFO I will now turn the call over to Mindy.

Thank you Corey good afternoon, everyone. Thank you for joining our call today, our accomplishments throughout 2020 as we continue to navigate through an unprecedented environment has been a testament to the strength and resilience of our brand and business model, our ability to be ADSL and innovate and the access.

EPS no work of our talented and passionate W.W. teams around the globe.

This was further demonstrated in our Q3 results despite the negative impact of Cove it on our studio revenue.

We grew digital subscribers by 23% with strong growth in every geographic market.

This accelerated digital growth enabled us to achieve your on your comparable operating income levels and EPS growth.

This performance highlights our leadership position as the most effective and trusted partner in weight loss and wellness are high margin digital business model, a great degree of flexibility in our cost structure and our uniquely talented W.W. team.

W. W is a technology company, having offered digital solutions to our members for nearly two decades.

Today, our digital platform powered by our unique app delivers it truly differentiated tech enabled member experience.

It is the foundation for all that we do in delivering a robust and impactful wellness experience to members globally.

All W.W. is 4.7 million members utilize our digital platforms with over 80% of our members being digital only and 20%, having both digital and workshop, whether virtual or physical access.

As a direct to consumer digital subscription business, we are constantly innovating on behalf of our members' needs with constant new releases in our App that are informed by data from our members interaction, which gives us the ability to generate improved and personal at the W. W experience in real time.

Cold they did not slow down our W. W. Transformation in fact has accelerated our strategy when we identified the critical need to find a virtual solution for our global workshops, we executed that shift in six days.

Investments that we have made in our technology platform and our talent across the company enabled us to be nimble and agile and ensure that we were supporting our members with what is so important to them community, which is more critical now than ever and is also a key lever for both member acquisition and rich.

Pension.

It also enabled us to reduce our studio footprint, including the associated costs and focus on what we believe will be a different workshop experience of the future.

We launched ecommerce in or at mid March which was already planned pre cobot.

Given the studio closures, where most of our products sales took place we were able to partially offset the impact and have seen sales to our E Commerce channel growth, 300% in Q3.

Member penetration grew up in the triple digits and repeat purchases grew in the double digits.

We also continue to accelerate the transformation of our W. W. How solutions business and we re imagined events and experiences for a virtual world.

Helpful and engaging content and reminders to build healthy habits.

I'm pleased with all of these advancements as we continue to broaden our exposure to new and different audiences.

We're also on track to deliver new and exciting Ww innovations in queue for.

We will be building on the success of my W. W. With our newest and most comprehensive innovation outside of the food innovation with the launch of my Ww plus.

This is the first time, we have a significantly new tech driven program innovation focus on all of our pillars that we know have a measurable impact on weight loss and wellness Sep.

Nutrition fitness mindset and sleep will be more personalized backed by a I M machine learning the App will provide more insight features tools and value added content all informed by consumer demand.

My W. W plus will be rolling out to all members globally in November and will be the centerpiece of our winter marketing recruitment campaign, which I will speak to later.

In addition to our new program innovation. We are also innovating across all of our membership tears and we are launching a totally new membership tier which will allow us to reach new audiences.

Digital membership will be enhanced by the launch of my W. W. Plus and will continue to be the core foundation of all membership tears.

Coming in December and the U S and the U K, we will be introducing a mid tier entirely new experience called digital 360.

Private calls you may have heard me refer to this as virtual coach led community.

Digital 360 builds on the learning and success of Oprah 2020 vision tour and as a premium coaching experience with always on accountability through live and on demand content.

A new generation of coaches relevant to millennials anywhere experts it digitally delivering engaging and inspiring content rooted in nutritional and behavior change science digital 360 will build community in new ways for a new audience.

We see this as an opportunity to both attract new members.

And give our digital members the opportunity to upgrade to a more immersive experience.

Will be rolled out to all markets and spring 2021.

Digital plus unlimited workshops will replace our digital plus studio tier.

Building on the success of our virtual workshops, we will now be able to diversify our workshop offerings beyond the limitations of a geographic location.

Members will still have the option of a physical workshop, but they will now also be able to choose unlimited virtual workshops with the optionality to choose a coach cohort Ah lifestyle, a group of similar interests or a time of day, that's best for that for.

For example, we've already started a black women virtual group with over 200 attendees per workshop in our building on the learnings of these workshops to create additional cohort groups such as Spanish speaking groups and life stage cohorts that meets members unique neat.

Launching in winter the revamp digital plus unlimited workshops offering will provide W. W members, who want the workshop experience with more flexibility and convenience than ever before.

And to further deepen our personal interaction with our members who want additional guidance and support later in 2021, we will be re launching our personal coaching platform, which will deliver enhanced one O. One virtual access to a W. W coach with a more customized and personalized.

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Nick will provide further detail on our plans for growth across these offerings.

As you can see we have an agile and a bit and our positioning W. W. For the long term building on our platform as a technology experienced that delivers human in fact.

Next I would like to officially welcome Amy Oh, Keith to W. W. As our new C F O.

Amy is more than 25 years of financial expertise joining W. W. After three years obsessed CFO of drive double this health care, a proven track record of driving business growth, while maximizing profitability makes her uniquely qualified to join our team and we're excited that she is on board.

With that I'll turn the call over to Amy to discuss the Q3 results.

Thank you Mindy I first want to say, how happy I am to be joining the Ww team in my first month of W. W. I've been incredibly impressed by the talent of the team the passion commitment and energy that they have for each other the company it's mission and its members before.

Discussing two or three performance.

I'd like to tell you more about what drew me to W. W and my perspective on the company's accomplishments in this extraordinary here.

I began to engage with W. W. Early in 2020, My Ww had just launched Oprah 2020 vision tour was well underway and the winter season was off to a strong start I like many of you listened intently to the February earnings call learn more about the income.

Medical remember response to my W. W. The strength of the marketing program. The enthusiasm found on tour and a strong recruitment momentum across all global market. All of this was extremely attractive as with the high gross margin and cash generation of a direct to consumers.

[noise] subscription model.

Then as the COVID-19 situation unfolded over the next several months I was able to watch the company perform and respond in a time of crisis.

As a W. W member myself I knew Ww was well positioned with technology to be responsive in a remote environment.

But I was extremely impressed to see how quickly the company responded by launching virtual workshops to address members need and then the second corner with a record number of digital subscribers.

And of course as a C. F. O I was pleased to know that the company immediately took a hard look at it fixed costs and took action in short order the company put a plan in place to reduce it's 2020 cost plan by $100 million.

Reduce the real estate footprint and rationalize head count.

<unk> ability and cost discipline will continue to be cheap and our business planning going forward as we aim to transition to even more of a variable cost model.

Turning to Q3 performance.

We ended the quarter with 4.7 million subscribers up 5% year over year at a record level for the end of Q3 member.

Member recruitment transfer digital continue to be strong through the third quarter driven by continued nimbleness in our marketing strategies as we adapted well to ongoing shifts in the consumer mindset and demonstrated how ww not only delivers weight loss, but as part of a holistic approach to bettering health we.

Ended the quarter with 3.8 million digital subscribers globally up 23% year over year.

In Q3, nearly 90% of members sign up chose our digital membership up from approximately 70% in 2019.

As we expected workshop subscribers or studio plus digital were down 36% year over year or two 850000 due to significantly lower member sign up as a result of the pandemic.

As discussed previously we anticipate that it's overall trend will continue to pressure or workshops business going forward as in person gatherings remain limited.

We are right sizing the cost structure of our workshop business in response to this trend, while ensuring a high quality remember experienced via virtual workshops.

Member retention continues to be very strong at an all time high of over 10 months.

Revenues were down 8% or 9% year over year on a constant currency basic to $321 million.

Digital revenues were up 21% year over year on a constant currency basis.

Assistant with the outlet provided in August the strength was offset by the anticipated declines in workshop fees and overall product sales as a result of Covid pressures.

A year ago digital subscription revenues were roughly the same size as our studio plus digital fees fast forward to Q3 2020 digital subscription revenues are now two times studio and are growing in each of our geographic markets.

Adjusted gross margin of approximately 60% in the quarter was up over 350 basis points year over year.

We are intensely focused on right sizing our cost structure for the new operating environment and shifting to a more variable model. This strong cost focus combined with a mix shift to our high margin digital subscription business, where digital gross margins work over 80% in Q3 provide a solid.

Foundation for expanding gross margins over the long term.

In Q3, we delivered adjusted operating income of $95 million matching the year ago quarter operating income despite lower revenue demonstrating the impact of our high margin subscription model.

Hour gap EPS in Q3 was 78 cents compared to 68 cents in the prior quarter Q.

232020, EPS was positively impact by nine cents in one time items.

Unusually low tax rate of 13.6% in the quarter was due to a catch up benefit from the updated regulations around guilty permitting companies to elect to exclude foreign income already subject to a high effective tax rate.

This reversal benefited EPS by 11 cents per share. In addition, EPS included a two cents per share negative impact from our organizational restructuring.

While we have confidence in our plans given the continued macro uncertainty we are not providing subscriber revenue or EPS guidance at this time, but we would like to provide you with a few directional assumptions for your modeling on.

On the top line, we expect the overall trend that we saw in Q3 to continue in queue for with strong growth in digital offset by declines in studio related revenues.

As usual our queue for gross margin will be impacted by program launch costs and training.

A reminder, that physical 2020 includes a 53rd week, which bridges. The last week of December 2020, and ends on January 2nd 2021.

Due to the heavy marketing activity during that week, we expect queue for marketing spend to be approximately $15 million higher in Q4 versus the prior year quarter.

We continue to take Swift and deliberate cost action and we are on track for the $100 million cost savings plan that we announced in Q1 as a result, we are increasing the estimated expense of our previously disclosed cost savings initiatives to 22.5 million.

Up from a $14 million estimate previously provided driven by a strategic cost reductions to our global studio operations to adjust to anticipated consumer demand.

Pull your interest expense is expected to be approximately $120 million.

We continue to expect our full year 2020 gap tax rate to be approximately 20%, which implies an approximate 26% tax rate before restructuring charges in queue for.

While we're not providing guidance on 2021 at this time or intent for the upcoming winter season is to maximize recruitment opportunities across all membership types. We.

We expect a subscriber mix shift and declines in studio subscribers will result in in approximately $50 million full year revenue headwind in 2021.

In addition, a reminder, that Q1 2020 also had a $16 million revenue benefit from Oprah 2020 Vision tour, which was fully offset by tour related expenses.

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