Q3 2021 WW International Inc Earnings Call

November 4, 2021

Good afternoon, and welcome to in a W. W International third quarter of 2021 call.

Call, all participants will be and listen only mode should you need assistance. Please signal conference specialist by pressing the Sarky followed by female after today's presentation there'll be an opportunity to ask questions.

To ask a question you may cost, Oregon, one on your Touchtone phone to withdraw your question. Please press Star then too. Please note that the bank is being recorded I would not like to turn the conference over to Cory Kinter Investor Relations. Please go ahead.

Thank you to everyone for joining us today for W. W. International third quarter of 2021 conference call at about four o'clock P. M. Eastern time today, we issued a press release reporting our third quarter 2021 results. The purpose of this call is to provide investors with some further details regarding the company's financial.

Sauce.

To provide a general update on the company's progress the press releases available on the company's corporate website located at <unk> Dot W. W. Dot com.

And it will be best to materials are also available on the company's corporate website and the investors section under presentation benefits.

<unk> get measures disclosed on this conference call to the most directly comparable gas financial measures are also available as part of the press release.

We begin let me remind everyone that this call will contain forward looking statements investor should be aware that any forward looking statements are subject to various risks uncertainties that could cause actual results to differ materially from those discussed here today.

Packers are explained in detail 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 risk of uncertainty of such statements. All forward looking statements are made as of today and except as required by law. This company undertakes no obligation publicly update or advise any for.

Looking statements, whether as a result of new information future events or otherwise.

I need to call, our Mindy Grossman, President and CEO, Nick <unk> C O L. A b O Keith CFO <unk> turn the call over to Mindy inquiry good afternoon, everyone.

Can we get started I want to give context to the announcement last month about my decision just stepped down as president and C. E O W. W. After the first quarter of 2022.

When I joined weight Watchers in July 2017 to lead the transformation different I knew it was an opportunity to have both a businessman and he's that.

Our purpose, we just fire healthy habits for real life for people family commuting. These business for everyone to be the brand that can democratize wellness for O is truly what W. W. <unk>.

Today.

We have transformed digitally creating a holistic wait and wellness ecosystem.

<unk> I don't remember base and leverage the power of community at the core of all that we do.

<unk>.

I am proud to build an extraordinary W. W. T through this transformation and the challenges of the past two years.

But what I'm truly excited about is the launch next week of the most groundbreaking food program innovation in the company's history.

An entirely new sign space Personalised program for efficacious, livable and sustainable healthy weight loss and overall wellness.

My intention is to leave the company through this lunch and the winter 2022 season, and then provide a seamless transition to new leadership.

It lost prioritization of the last several months has resulted in 2021 being a more challenging year than we anticipated.

However, in no way diminishes, our enthusiasm and confidence in our 2022 food program innovation and the potential it has to drive significant sign of momentum in January at the time of year with many people focus on their goals for the year ahead and re prioritize their health and wellness.

On Monday November eight we will be launching our new food program globally.

Because we believe this innovation is so important and powerful today, we will be providing you with a preview of the key program elements ahead of Monday's official launch.

In addition to give you a behind the scenes perspective on this breakthrough new program, we will be hosting a virtual innovation event on November 18th for analysts and investors.

During the event, we will share more color on the development process, the science and insights behind their new program and discuss how we are bringing it all to life.

Details will be announced in the coming days.

As I've mentioned previously the cross functional multi year effort behind this innovation was the most comprehensive and well executed that I've witnessed since joining ww.

On Monday to globally launch are Newfield program with truly individualized plans that are accustomed built for each member.

Each member will have a unique point budget and their very own zero point food split based on the foods, They say, they love and can't live without that.

The first time since 2015, we are updating our proprietary award winning point system to account for added sugar and saturated fat fiber and additional nutrients.

Ww's team of registered Dietician, and nutrition scientists develop the rigorously tested modernize food algorithm to reflect the latest science and healthy eating recommendation and nutrition.

And for the first time members will now be able to earn points for practice safe healthy behaviors, enabling them to grow their daily budget by eating non starchy vegetables, reaching a daily water goal and exercising.

We have purposely created a scientifically advanced program that puts our members front and center. So they can find satisfaction adopting healthy habits that are livable realistic and sustainable.

As part of the Onboarding assessment, each member takes to customize their zero point toothless and personalized budget those members who indicate they have diabetes will receive a food plan specifically tailored to their unique prudent guiding them towards foods that are less likely to impact blood sugar.

Levels and consistent with the American Diabetes Association and the International Diabetes Federation guidelines.

We believe this is a powerful program innovation as Richard Research has proven at individualized programs work and helping people achieve their weight loss goals.

During the six month clinical trial participants experienced clinically significant results as it pertains to their weight and overall health and wellness.

Not only did we see clinically significant weight loss. During this time, but we also saw notable improvements in overall quality of life and will be decreased hunger and food cravings and improvements in both physical activity and adoption of healthy habits.

<unk> always from the innovation launch to late December our primary focus will be on inspiring and Onboarding. Our current members to the new program and experience building a network of millions of Ww members, who could advocate for the program and create excitement during a winter recruitment season.

We are also aiming to start building momentum ahead of our fall winter campaign with targeted pre winter digital and social assets launching prior to December 2006.

First of all markets have only very recently begun reopening in person workshops due to the easing of local COVID-19 restrictions.

We are making progress on optimizing this business and increased workshop gross margin to 33% in Q3.

The aim to return workshops, 340% plus gross margin.

We now have a highly flexible workshop cost structure through are really physical footprint.

Managing the in person business for the smaller text footprints augmented by highly flexible July.

Third party locations, ensuring the availability of workshops to the majority of the population with about 90% of U S households, within a 30 minute drive of a workshop.

Location.

We expect to end in 2021 with about 430 Ww branded studios in the U S down from about 800 pre Covid. These.

These locations will be augmented by approximately 650 studio at locations in the U S and.

And this footprint will provide us with ample captaincy press stacked up in attendance as in January and.

We will continue to evaluate studio profitability on a quarter by quarter basis, and adjust our workshop footprint to support demand.

While overall recruitment trends have been challenging this year as consumers navigated a slow and uncertain of global recovery from Covid.

Retention continues to be strong demonstrating.

Demonstrating how much harm members claimed bother you in that Ww program coaching and community.

Digital retention is holding steady at nearly 11 months and workshop retention continues to improve sequentially each month with the overall number of attention now approximately 10 and a half months.

Turning to consumer products business.

Lower digital numbers signed up some expected and therefore lower traffic to our online shop resulted in e-commerce sales coming in below plan.

We also have some modest continued impact on global supply chain pressures in sales several best selling items.

Some people with diabetes.

Accelerate our efforts to expand this business.

In summary, while our third quarter revenue performance did not meet our expectations, we exited nimbly with cause corrective cost actions given the operating environment.

We look forward to the launch of our New program next week, which we expect to drive strong interests and sign ups across both new and lapsed members. This winter.

And now I will turn it over to Amy to discuss our financial performance and outlook. Thank.

Thank you Nick.

In Q3, we expected revenue to be down in the low single digits, we can download workshop revenue headwinds offset by growth in digital while.

Digital revenue grew in the quarter compared to 2020, it did not grow at the rate that we expected.

Is it a recruitment trends versus last year worsened in Q3 compared to Q2.

So driving lower revenue in e-commerce.

The impact from revenue declines was offset by strong gross margin performance the execution of our G&A cost savings initiatives and an intentional shift of planned marketing investments into Q4.

In Q3 total revenue of $293 million was down 9% year over year, while digital revenue was up 3% year over year. It did not offset the 28% decline in workshop revenue.

We ended Q3 with $4 5 million subscribers down 4% year over year with digital subscribers down, 3% and workshops subscribers down 11% year over year in the quarter.

Adjusted gross margin was 62% up approximately 270 basis points from the prior year, mostly as a result of digital revenue mix. In addition, gross margin and workshops improved year over year by over 600 basis points as a result of the cost reduction actions taken.

Adjusted operating income of $88 million reflected lower than expected G&A in the quarter and the deliberate shift of marketing investments into Q4.

The execution of our G&A cost reduction initiatives as well as continued adjustments in our workshop footprint resulted in $9 million of restructuring costs in the quarter, which was above our estimate of $6 million to $8 million.

Incorporating the <unk> <unk> negative impact of restructuring, which was offset by <unk> <unk> benefit from a change in tax valuation reserves Q3, GAAP EPS was <unk> 65.

Turning to our outlook for the full year 2021, while recruitment trends have proven difficult to predict in an uncertain environment. We wanted to provide you with an updated view of our expectations for the year.

While we are focused on maximizing performance the impact of the recruitment shortfall in Q3 will create a headwind in Q4, and we expect to end the year with subscribers down in the mid single digits compared to 2020.

We expect full year 2021 revenue to be modestly above $1 2 billion down in the low double digits with workshop revenue, while sequentially improving each quarter expected to be down nearly 40% for the full year.

Digital revenue is expected to be up in the mid single digits consumer products and other revenue is expected to decline approximately 20% year over year. As a reminder, the revenue from the 2020 vision tour of approximately $16 million did not recur in 2021.

Adjusted gross margin for the full year is expected to be approximately 61% expanding 270 basis points from the prior year.

We expect full year adjusted operating income to be in the range of $210 million to $220 million.

Three forces, which fuel the growth of the business, we will continue to evaluate the potential to acquire remaining franchise territories.

In summary, while revenue did not meet our expectations. We are pleased that the diligent cost actions, we have taken enabled us to deliver operating profits slightly ahead of our plan during the order.

While still prioritizing critical investments and innovation and marketing to drive profitable growth in 2022.

Looking ahead, we expect to end in 2021 with a year over year decline in subscribers, which given the nature of our subscription business model translates into a revenue headwind of approximately 25 million entering 2022.

Note that this is only a starting point before factoring in any benefit from expected member recruitment growth next year.

While we are not providing 2022 revenue guidance today, given our upcoming new food program launch at our marketing plans for winter. Our objective for next year is to deliver higher recruitment.

Those periods subscriber growth and increased revenue and profitability.

Uhm membership types in.

In addition, it will be highlighting our industry first interactive coaching them content experienced in June 16th which is delivering ww in a new modern play.

These messages and strong call to action will be adapted throughout our international markets and multi platform campaign across linear television streaming digital social P R and search.

We would you like to mix of high performing offers to appeal to a broad range of human lapsed members emphasizing longer term commitments, which maximize subscription lifetime value.

In addition, we are further optimizing our website and absorbed presence to remove friction highlight value and drive conversion.

In summary, while the pandemic environment may consumer behaviour difficult to predict in 2021, we believe we have the right play grow to drive profitable growth in 2022.

And it really was as you said people, saying this is what I want to do right now I have been through a lot and this is not what I'm going to focus on at the at the moment and that really started I think what we said like you know after the first few weeks of.

Q too and so what we've been trying to do is navigate as effectively as possible really look at the pulse point.

And yes was cute three softer than we had anticipated which is why the team was incredibly nimble and managing both our costs and making decisions strategically on where our marketing spend was going to go.

Particularly in queue for because of how strongly he felt about the upcoming innovation and the reason that we've been articulating our perspective on why we have such confidence in that yes. The program itself.

Is something we can truly scream from the rooftops is new and never has been done before but what we've already seen what we've always seen if you look at 2016 2018 and 2020.

2016, we saw at 28% growth and sign ups.

The man competition et cetera, and so from our perspective, what we're doing is looking to for about performance marketing perspective, maximising every dollar of our spend going into winter and I think you heard me before say we'd be allocated spin.

So we could b as.

Strong as possible, particularly leading up to and then when our big campaign launches December 26th and really leveraging and our Embassador are influencers and really creating as much conversation the other.

Saying that we look forward to is when we do have a launch of something like this to such a degree. The initial focus is on our existing members because we effectively really utilize them for significant word of mouth to start building momentum going into the winter season.

And this is a very kind of breakthrough in engaging where we do see where we're going to have conversation. So what we're actually going to do is allocate some resources even before the big launch on December 26th to start Bill.

The momentum.

Because although we saw improvement it's still significantly down year on year, just because we have markets, where we don't even have our workshops up yet.

So obviously, that's a that's a different factor and.

<unk> intentionally planned.

We haven't planned a huge lift in the fourth quarter from the innovation launch because we wanted to have a modicum of conservatism, even though we're excited about what the opportunity is.

And I would just add Samantha as well that the subscriber trends at our recruitment trends in Q3 really drove the revenue shortfall remember in a subscription based business model those revenue impacts carry into Q4.

For Q4, we further reduced our forecast them in these point. We took we took an approach to just reset our expectations to Q3 trends, which performed a bit worse than in Q2, and so that that's what you are seeing carry into Q4.

Looking particularly in September versus flows.

Good to see how quickly the team nimbly react to it.

To shift.

Shift.

Marketing resources into into.

Into Q4.

Got it. Thanks, that's all for me thanks, guys.

The next question is from Lauren Chung of Morgan Stanley. Please go ahead.

Hi, This is Nathan feather on for Lauren.

Can you just talk through it a little bit more detail, what you're seeing in the marketing environment.

Was there any impact from <unk> within the quarter and then given the kind of headwinds you've seen there how is that impacting how you're thinking about the 'twenty two reclassification marketing plans.

He needs and we couldn't hear it was there any impact from we missed that part could you repeat the first part of the question.

Yeah any impact from <unk>, the Apple privacy changes.

Oh.

Okay.

Go ahead.

Hey, Michael by the Susan Hi, This is Mike Swartz on for Michael Lasser. Thanks for taking my question.

Michael.

A lot about industrywide pressures are there any company specific challenges that new thing figured it'd be faced in the last quarter been impacted results and has the rebranding from weight watchers tww had any impact.

Actually in 2020, obviously until kind of Covid changed the perspective at the end of the first quarter.

What we tend to see is a significant influx of lapsed members as well as new members, which is why we normally see a spike in our workshops.

Lineups, but we think theres an opportunity this year for us all to have also to get lapped digital members and have them upgrade to be $3 60 to a more premium coach led experience. So we're very much.

Focused on strategy for last.

When they come back how do we match them with the right membership vertical for them.

Thank you.

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

Yeah.

[music].

Good afternoon, and welcome to the Ww International third quarter 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Sarky followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you may call.

Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Cory Kinder Investor Relations. Please go ahead.

Thank you to everyone for joining us today for Ww International's third quarter 2021 conference call at about four o'clock P. M. Eastern time today, we issued a press release reporting our third quarter 2021.

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.

Press release is available on the company's corporate website located at corporate Ww Dot 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.

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 files.

For a more detailed discussion of forward looking statements and the risks and uncertainties of such statements.

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 Mindy Grossman, President and CEO, Nick Hotchkin, CFO, Amy <unk> CFO.

I'll turn the call over to Mindy. Thanks, Corey good afternoon, everyone.

Before we get started I want to give context to the announcement last month about my decision to step down as president and CEO of Ww after the first quarter of 2022.

When I joined weight Watchers in July of 2017 to lead the transformation of the brand I knew it was an opportunity to have both a business impact and a huge success.

Our purpose.

Inspire healthy habits for real life for people families communities the world for everyone to be the brand that can democratize wellness for all is truly what ww represents today.

We have transformed digitally creating a holistic weight and wellness ecosystem.

We expanded and diversified our member base and leverage the power of community at the core of all that we do.

I am proud to have built and led the extraordinary WWE achieved through this transformation and the challenges of the past two years.

But what I'm truly excited about is the launch next week of the most groundbreaking food program innovation in the company's history.

Entirely new science based personalized program for efficacious livable sustainable healthy weight loss and overall wellness.

My intention is to lead the company through this launch and the winter 2022 season, and then provide a seamless transition to new leadership.

This has been a profound experience and I will always be part of the Ww family as a member and advocate and ambassadors for all that we do.

And I can assure you that the entire WWE team shares a common purpose and will carry on and impactful work that we're doing around the world each and every day.

Turning now to our third quarter results.

Revenue was below our expectations and digital growth did not offset the expected year over year headwind from the workshop business.

Year over year digital recruitment trends soften further from Q2 levels, bringing our total end of period subscribers to $4 5 million down 4% year over year.

And digital subscribers to $3 7 million down 3% year over year in the third quarter.

Traffic and search continued to be under pressure and we believe this is industry wide trends for digital weight loss programs. We are deliberately adjusting our spend putting more investment into the fourth quarter, but we believe our new marketing assets will have greater impact by amplifying our exciting new food program.

<unk> innovation.

We managed our cost structure effectively to deliver an adjusted gross margin of 62% in the quarter.

In addition, we executed on our G&A cost reduction plans driving savings ahead of our initial expectations for Q3, and focusing our resources behind the initiatives, which will drive a successful 2022.

The shifting consumer behaviors around weight loss prioritization of the last several months as resulted in 2021 being a more challenging year than we anticipated. However in no way diminishes, our enthusiasm and confidence in our 2022 food program innovation and the potential it has to drive.

<unk> signed a momentum in January at the time of year with many people focus on their goals for the year ahead and re prioritize their health and wellness.

On Monday November eight we will be launching our new food programs globally.

Because we believe this innovation is so important and powerful today, we will be providing you with a preview of the key program element ahead of Monday's official launch.

In addition to give you a behind the scenes perspective on this breakthrough a new program, we will be hosting a virtual innovation event on November 18th for analysts and investors joining.

During the event, we will share more color on the development process, the science and insights behind our new program and discuss how we are bringing it all to life dita.

Details will be announced in the coming days.

As I have mentioned previously the <unk>.

Functional multiyear effort behind this innovation was the most comprehensive and well executed that I've witnessed since joining ww.

On Monday to globally launch are Newfield program with truly individualized plans that are custom built for each member.

Each member will have a unique point budget and their very own zero foods list based on the foods, They say they love and can't live without.

For the first time since 2015, we are updating our proprietary award winning point system to account for added sugar unsaturated fiber and additional nutrients.

Ww's team of registered Dieticians and nutrition scientists develop the rigorously tested modernize food algorithm to reflect the latest science and healthy eating recommendation and nutrition.

And for the first time members will now be able to earn points for practice saving healthy behaviors, enabling them to grow their daily budget by eating non starchy vegetable reaching a daily water goal and exercising.

We have purposely created a scientifically advanced program that puts our members front and center. So they can find satisfaction do adopting healthy habits that are livable realistic and sustainable.

As part of the Onboarding assessment, each member takes to customize the <unk> list and personalized budget those members who indicate they have diabetes.

<unk> food plan, specifically tailored to the unique prudent guiding them towards as they are less likely to impact blood sugar levels and consistent with the American diabetes Association and the international Diabetes Federation guideline.

We believe this is a powerful program innovation as Richard Research has proven that individualized programs work and helping people achieve their weight loss goals.

During the six month clinical trial participants experienced clinically significant results as it pertains to their weight and overall health and wellness not only did we see clinically significant weight loss. During this time, but we also saw notable improvements in overall quality of life and will be decreased Honduras.

Food cravings and improvements in both physical activity and adoption of healthy habits.

As always from the innovation launch to late December our primary focus will be on inspiring and Onboarding. Our current members to the new program and experience building a network of millions of Ww members, who could advocate for the program and create excitement during a winter recruitment season.

We are also aiming to start building momentum ahead of our fall winter campaign with targeted pre winter digital and social assets launching prior to December 2006.

Food program innovations have historically been high member recruitment catalysts for Ww with the launches of <unk>, plus smart point speed style and my Ww all driving sign up growth I will speak more about our winter season marketing plans shortly but first I will turn it over to Nick.

To discuss our operating performance in more detail.

Thank you Mindy I'd like to share some additional color on the performance of our global markets.

As Vicki mentioned, we ended Q3 with <unk>.

5 million subscribers, which was below our expectations as member recruitment trends further weakened during the quarter.

We ended the quarter with $3 7 million installed subscribers down 3% year over year.

Subscribers for our premium interactive coaching and content offerings and salt <unk> increased quarter over quarter, ending Q3 with 240000 subscribers, we will continue to optimize and build out this membership surgical.

And diversify the base.

End of period workshops subscribers were $763000 in Q3 up sequentially from seven.

48000 in Q2.

Our year over year workshop subscriber trends are stabilizing.

And the majority of our international markets I've, only very recently begun reopening in person workshops due to the easing of local Covid administration.

We are making progress on optimizing this business and increased workshop, thanks margin to 43% in Q3.

The aim to return the workshops to a 40% plus gross margin.

We now have a highly flexible workshop cost structure through our realigned physical footprint.

Managing the <unk> business for the smaller footprints.

Open pit by highly flexible July our third.

Third party locations, ensuring the availability of workshops to the majority of the population with about 90% of U S households, within a 30 minute drive.

Communications.

We expect to end 2021 with about <unk> hundred 30, Ww branded studios in the U S down from about 800 pre COVID-19.

Locations will be augmented by approximately 650 <unk> locations in the U S.

This footprint will provide us with ample capacity for our steadfast in attendance has been challenging.

We'll continue to evaluate studio profitability on a quarter by quarter basis, and adjust our workshop footprint to support demand.

While overall recruitment trends have been challenging this year as consumers navigate a slow and uncertain global recovery from Covid.

Retention continues to be strong.

Demonstrating how much our members find value in the Ww program coaching and community.

Digital retention is holding steady at nearly 11 months and workshop retention continues to improve sequentially each month with overall member retention.

Approximately 10.

Months.

Turning to our consumer products business.

No additional amendment signed up some expected and.

Therefore, lower traffic to our online shop resulted in e-commerce sales coming in below plan.

We also have some modest continued impact on global supply chain pressures in pricing and sales of several best selling items.

We now expect our ecommerce business to be modestly above last year's revenue of about $80 million and we continue to view this channel as an attractive growth opportunity.

And workshop product sales were up slightly year over year.

Q3.

We are focused on driving our consumer products revenues in 2022, as we believe we have a significant opportunity to capture a greater share of wallet.

We are investing into the app experience with integrated technologies and have greater capabilities for private bundling personalization checkout and post purchase experience to drive incremental and repeat purchases.

In addition, we are pursuing opportunities to rebuild our licensing business in particular.

Operator in some product categories pulled up the final numbers.

Example, through our new licensing partner and believe our recently launched line of credit is available at nearly 400, Wal marts throughout the United States.

Our partnership with fibre one will take off in January with Ww branding and assign a path.

Appearing on packaging nationwide.

Turning to our health care in diabetes business.

Same recruitment pressures facing our b to C business also impacting member sign ups and upbeat to B to C channel.

In addition, we sunset at works Jujube portion of this business in 2020.

We now expect this business to generate slightly under $40 million in revenue in 2021.

We believe we have a solid foundation for growth and that the launch of a dedicated ww offering specifically designed for people with diabetes will help accelerate our efforts to expand this business.

In summary, while our third quarter revenue performance does not meet our expectations.

United Nimbly with cost correct, some cost actions given the operating environment.

Forward to the launch of our New program next week, which we expect to drive strong interest and sign ups across both new and lapsed members.

And now I will turn it over to Amy to discuss our financial performance and outlook.

Thank you Nick.

In Q3, we expected revenue to be down in the low single digits with knowing workshop revenue headwinds offset by growth in digital our digital revenue grew in the quarter compared to 2020.

Not grow at the rate that we expected.

Total recruitment trends versus last year, a horse and in Q3 compared to Q2 also driving lower revenue in ecommerce.

The impact from revenue declines was offset by strong gross margin performance the execution of our G&A cost savings initiatives and an intentional shift some planned marketing investments into Q4.

In Q3 total revenue of $293 million was down 9% year over year.

Digital revenue was up 3% year over year, it did not offset the 28% decline in workshop revenue.

We ended Q3 with $4 5 million subscribers down 4% year over year with digital subscribers down, 3% and workshops subscribers down 11% year over year in the quarter.

Adjusted operating income of $88 million reflected lower than expected G&A in the quarter and the deliberate shift of marketing investments into Q4.

Incorporating the <unk> <unk> negative impact of restructuring, which was offset by <unk> <unk> benefit from a change in tax valuation reserves Q3, GAAP EPS was <unk> 65.

Turning to our outlook for the full year 2021.

Recruitment trends have proven difficult to predict in an uncertain environment. We wanted to provide you with an updated view of our expectations for the year.

Digital revenue is expected to be up in the mid single digits consumer products and other revenue is expected to decline approximately 20% year over year as a reminder of the revenue from the 2020 vision tour of approximately $16 million did not recur in 2021.

Adjusted gross margin for the full year is expected to be approximately 61% expanding 270 basis points from the prior year.

We expect full year adjusted operating income to be in the range of $210 million to $220 million.

GAAP EPS, which incorporates approximately 51 cents per share negative impact from one time items.

<unk> is expected to be in the range of 80 to 90.

Related to capital structure and cash at the end of Q3, we had approximately $188 million in cash and an undrawn revolver of $175 million. We ended the quarter with a net debt to EBITDA leverage ratio of four three times.

Our full year interest expense is expected to be $88 million, which is down approximately $35 million from the prior year.

Excluding the impact of restructuring charges on our P&L, we expect our full year effective tax rate to be approximately 22%.

Capital expenditures, primarily driven by capitalized software are anticipated to be in the $40 million range in 2021.

Depreciation and amortization is expected to be approximately $48 million, including accelerated depreciation related to studio closures.

In addition to continued investments in technology, and digital product resources, which fueled the growth of the business. We will continue to evaluate the potential to acquire remaining franchise territories.

In summary, while revenue did not meet our expectations. We are pleased that the diligence cost actions. We have taken enabled us to deliver operating profit slightly ahead of our plan during the quarter, while still prioritizing critical investments in innovation and marketing to drive profitable growth in 2000.

'twenty two.

Looking ahead, we expect to end 2021 with a year over year decline in subscribers, which given the nature of our subscription business model translates into a revenue headwind of approximately $25 million entering 2022.

Note that this is only a starting point before factoring in any benefit from expected member recruitment growth next year.

While we are not providing 2022 revenue guidance today, given our upcoming new program launch and our marketing plans for winter.

Our objective for next year is to deliver higher recruitment.

End of period subscriber growth and increased revenue and profitability.

I will now turn the call back to Mindy.

Thanks, Amy we.

We believe our new food program innovation is launching at just the right time.

This powerful new innovation provides truly individualized plan demonstrate exactly what ww dispense deliver clinically significant weight loss to a livable sustainable program, where members are inspired and supported by a community of members and coaches.

We believe the combination of this new program and the traditional new year's reset moment with spark increased interest in Ww as consumers recommit to their health and wellness during the important winter season and drive significant member recruitment in 2022.

Our winter marketing campaign will highlight how our new program is our most advanced editor and.

Since easily into your life because it is designed uniquely for EU, allowing you to live the life you love and lose the late Q1.

This is Scott <unk>, our chief marketing Officer, and I would just in California last week for the filming of our U S Winter campaign assets with Oprah Winfrey and James Gordon.

Just as with scale and scope of the food program innovation is unprecedented so is the array of marketing assets, we will be deploying this winter.

In television and digital over and James will be amplifying program, highlighting what makes ww different and motivating others to join Ww and commit to their health and wellbeing to weight loss.

The advertising campaign will also feature a diverse and inspiring group of member investors sharing their authentic stories and success with the new program.

And in addition to being featured in select digital marketing assets, our talented and aspirational decreased 60 coaches will be utilizing and social media platforms and following to drive engagement and conversation about the new suite program and Ww across all membership types.

In addition, they will be highlighting our industry first interactive coaching new content experience due to <unk> 16, which is delivering ww any new modern way.

These messages and strong call to action will be adapted throughout our international markets and multi platform campaigns across linear TV and streaming digital social PR and search.

We will utilize a mix of high performing offers to appeal to a broad range of new and lapsed members emphasizing longer term commitments, which maximize subscription lifetime values.

In addition, we are further optimizing our website and app store presence to remove friction highlight value and drive conversion.

In summary, while the pandemic environment may consumer behavior is difficult to predict in 2021, we believe we have the right playbook to drive profitable growth in 2022.

As we have seen with past food program innovations. We are confident that this revolutionary new program will resonate with new and former members alike create excitement to the category and demonstrate our competitive advantages as we deliver a proven science based program through an award winning App with coach Inc. Content.

And community.

Thank you for joining us today, and we're now happy to take your questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

The first question is from Alex Fuhrman of Craig Hallum. Please go ahead.

Okay.

Great. Thank you very much for taking my question.

I'm curious.

The shortfall there.

Hi, I might have been nice to speak to you Mindy and certainly wish you all the best in life after their Ww.

Wanted to ask you about the shortfall in digital revenue certainly seems relative to three months ago. When you reported the last quarter. Obviously, the reopening of the economy has had perhaps not gone as quickly as we all would have hoped to have seen that one of the driving factors.

Why do you think digital weight loss programs across the board have not performed well in the third quarter just kind of curious if there is more of a.

An overarching explanation for why you think the entire industry has slowed down over the past couple of months.

Yeah. So if you look at the trajectory of what we saw throughout the year in terms of consumer behavior change which related to performance.

So Q1, we came out feeling positive based on both the qualitative and quantitative evidence that we saw as well as the digital sign ups, which is why we articulated where we thought we were going to go.

When we got into Q2.

After the early part we started to see a fairly dramatic shift in what we were seeing from everything from search trends to what we were hearing from consumer.

And it was pretty consistent across markets.

And it really was as you said people, saying this is what I want to do right now I have been through a lot.

It is not with ongoing and focus on it at the moment.

And that really started I think what we said like.

After the first few weeks of Q2.

And so what we've been trying to do is navigate as effectively as possible really look at the pulse points.

And yes, with Q3 softer than we had anticipated which is why the team was incredibly nimble in managing both our costs and making decisions strategically on where our marketing spend was going to go particularly in.

Q4, because it has strongly we felt about the upcoming innovation and the reason that we've been articulating our perspective on why we have such confidence in that is yet.

Graham itself.

Something we can truly scream from the rooftops as new and never has been done before.

But what we've already seen what we've always seen if you look at 2016 2018.

2020.

2016, we saw 20.

28% growth in sign ups.

Because of the winter innovation 2018, 42% and in 2020 before the Covid Lockdown, 30%.

And I think that combined with what we're seeing is again early green shoots in terms of what we're hearing from consumer and what we're seeing is that a combination of the program the timing and going into the winter season.

Is.

What we have the confidence in for growth in 2022.

Great. That's really helpful. Thanks, Mindy and looking forward to seeing the details of the new innovation.

Thank you.

The next question is from Spencer Hanus of Wolfe Research. Please go ahead.

Great. Thank you guys.

Last quarter, you talked about some wellness fatigue amongst your consumers are you seeing that sentiment start to reverse at all as you're welcome to <unk>.

Into 2022, and then are you seeing any impact from competitors who've been doing pretty significant fundraising over the last few months.

We're also doing incremental marketing spend as well.

Did you I'm, sorry could you repeat that it was difficult to hear.

Yeah.

Yes.

Could you just talk about what you are seeing amongst consumers last quarter, you talked about wellness fatigue, and not being a headwind to subscriber growth, but are you seeing that sentiment start to reverse and then as you look at the competitive environment out there has there been any impact from a lot of your peers have been raising money.

And players like new home and have done that over the last last few few months, yes. So I'll give you a perspective I mean, we obviously do a lot of quality quantity and I think I used the expression green shoots we intentionally took a conservative approach.

On <unk> four because of the level of uncertainty we still feel exist. So.

So we don't want to get ahead of ourselves in any way and we want to really focus on the launch. So that's how I would describe that as it relates to the competition clearly there is significant competition, but across more than weight loss competitor had a lot of fitness.

Man, the competition et cetera, and so from our perspective, what we're doing is looking to.

From a performance marketing perspective, maximizing every dollar of our spend going into winter and I think you heard me before say, we allocated spend so we could be.

B as.

Strong as possible, particularly.

Leading up to and then when our Big campaign launches December 2006.

And really leveraging.

Our ambassadors are influencers and really creating as much conversation. The other thing that we look forward to is when we do have a launch of something like this to such a degree.

Initial focus is on our existing members because we effectively really utilize them for significant word is now to start building momentum going into the winter season.

And this is a very kind of breakthrough and engaging where we do see where we're going to have conversation. So what we're actually going to do is allocate.

Resources, even before the big launch on December 26 to start building momentum.

Got it that's helpful. And then maybe could you just comment on how youre preparing the business for for the eventual change in leadership and has that had any impact on how you guys are planning for the 2022 diet season, our marketing or just getting the organization ready.

Yes, we have an incredible talent in this organization and I think I've said this before.

The purpose driven factor.

What we are doing to impact People's lives every day is a very galvanizing mission as is growing the business and performing it's very important to the team.

Im not leaving immediately it's important to me as well as the team that we make sure. The transition is as effective as possible and I can absolutely say that the organization.

What they've accomplished for this launch is beyond anything I've seen.

And I don't expect that to change.

Okay got it that's helpful. Thank you.

The next question is from Andrew Roma of Keybanc. Please go ahead.

Hi, This is Samantha on for Ed.

So my first question is what would the incremental headwinds in Q3 that caused digital revenue growth to fall short of expectations and declined versus Q2 and will any of these headwinds prolong into Q4.

Yeah.

So as I mentioned before just what we were seeing in cadence.

Which is.

Why we were conservative going into Q4, because we did see.

The headwinds that we did in Q3, particularly on the digital side and slowing.

Different on the workshop side, because although we saw improvement it's still significantly down year on year, just because we have markets, where we even have our workshops up yet.

So obviously, that's a different factor.

And we've intentionally planned.

We haven't planned a huge lift in the fourth quarter from the innovation launch because we wanted to have a modicum of conservatism, even though we're excited about what the opportunity is.

And I would just add Samantha as well that.

Subscriber trends at our recruitment trends in Q3 really drove the revenue shortfall remember in a subscription based business model those revenue impacts carry into Q4 for.

<unk> for Q4, we further reduced our forecast and in these point.

We took we took an approach to just reset our expectations Q3 trends, which performed a bit worse than in Q2, and so that that's what you are seeing carry into Q4, yes.

Yes, looking particularly in September versus wires.

Good to see how quickly the team nimbly react.

To shift.

Marketing resources into Q.

Paul.

Got it. Thanks, that's all for me thanks, guys.

The next question is from Lauren Chung of Morgan Stanley. Please go ahead.

Hi, This is Nathan sat around for Lauren.

Can you just talk through it a little bit more detail what you are slowly in the marketing environment.

Was there any impact from <unk> within the quarter and then given the kind of headwinds you've seen there how is that impacting how you are thinking about the 22 presentation marketing plans.

We couldn't hear it was there any impact from we missed that part could you repeat the first part of the question.

Any impact from <unk>, the Apple privacy changes.

Oh, okay.

Really play into a.

A factor in what we're doing.

I would say that.

Our winter plans are incredibly comprehensive both from a.

Channel point of view assets and strategy et cetera, I think I mentioned in my comments that I was out in California.

<unk> last week and I can say that I think it's beyond what we've done in very comprehensive.

Obviously, we did have some challenges over the past.

Kind of 18 months because of Covid with really being able to bring a lot of our assets.

<unk> lead to life, because we use we are people we use round numbers, we use them in an environment we use.

Power of Oprah that power.

<unk> and so that's really enabled us to bring everyone together and create a different dynamic across what will ultimately be able to use across all our all of our channels.

Okay, great. Thank you.

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

Hey, Michael either Susan.

This is Mike Swartz on for Michael Lasser, Thanks for taking our question online.

Michael we've heard a lot about industry wide pressures.

Are there any company specific challenges that you think maybe there'll be faced in the last quarter that impacted results and as the rebranding from weight watchers to Ww has any impact.

Actually what <unk>, what's interesting about that because it's been very important to us as we've not just re branded kind of quote unquote weight watchers to ww, but as we've really articulated who we are as a brand not just around the leader in <unk>.

Science based weight loss, but also around the holistic wellness offering around long term sustainable behavior change and wellness and actually not just in terms of recognition, but in terms of perception in terms of who we are.

A broader audience.

That's actually been very positive so.

I wouldn't say that our challenges are because of where our brand is that actually more of an opportunity for us going forward because of the environment that we're in that we're not just.

One linear thing that we have an offering that's much more fulsome.

And then as it relates to the competitive environment is what I said before we have to look at every area of competition.

Which we do and we're aware of.

Every area of business, where things are trending but what we do know is there certainly was.

Heng.

Any color on.

In the category as a whole, but we do believe that that is.

Shorter term pressure as we go into winter.

Thank you.

The next question is from Stephanie Wissink of Jefferies. Please go ahead.

It's correct me I'm honored us on for Steph and I apologize you had talked about this because I dropped off the call for a second but I think I heard you mentioned the falloff in subs over the last couple of quarters being due to.

Maybe more not wind the focus on wellness at the moment.

This potentially important aspect of flag here. So the question is really do you feel more strongly positioned to recapture or reactivate the subscribers, especially.

Especially with the innovation launch.

Kind of a day of reactivate their appetite to focus on wellness, that's kind of the sort of implied so maybe if you could bifurcate out how you are thinking about growth coming from prior versus new subscribers.

Okay.

Yes, that's a great question. So just to give you a perspective.

A significant innovation year in what you saw.

Actually in 2020, obviously, Intel kind of Covid changed the perspective at the end of the first quarter.

We tend to see is a significant influx of lapsed members.

As well as new members, which is why we normally see a spike in our workshop sign ups, but we think there is an opportunity this year for us all to have also to get lapped digital members and have them upgrade to <unk>.

62, or more premium coach led experience.

So we're very much.

Focused on strategy for labs.

When they come back how do we match them with the right membership vertical for them.

And then certainly attract new and also match them with the right membership vertical for them and all of the pre assessment work that we now do to match the member with the actual food program, that's going to be exclusive to them.

We also match them with the membership vertical that's going to be right for them.

More comprehensive than we've ever done in the past.

That's super helpful. And then day. Thank you.

This concludes our question and answer session I would like to turn the conference back over to Mindy Grossman for closing remarks.

Thank you.

Thanks, everyone for being here today, great to talk to you.

We're clearly looking forward to the announcement of the fleet program innovation on Monday, and can't wait to share all the details, but I want to thank our global team for all their incredible work in its development from science GMA truths from operations to technology digital product to marketing content.

Coach Inc. A cross functional effort that has to go into the creation of a food program like this and bringing it to life.

Is unparalleled.

And it truly showcases the competitive advantage and Ww with our proven program based on nutrition and behavior change science.

We're confident that this program will resonate with consumers.

Create excitement.

Spanned our global impact and most important provide a trajectory for profitable growth in 2022 and beyond.

I'm very much looking forward to sharing more with you at our virtual event on November 18th and I Hope Youll join us so thank you.

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

Q3 2021 WW International Inc Earnings Call

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