Q2 2019 Earnings Call

And welcome to the W.W. second quarter 2019 earnings Conference call.

All participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

Sorry. Your question. Please press Star then two please note. This event is being recorded.

I would now like to turn the conference over to Corey Kinger Investor Relations. Please go ahead.

Thank you Ben and thanks, everyone for joining us today for W.W. second quarter 2019 conference call.

About four or five P.M. eastern time today, we issued a press release reporting our second quarter 2019 or so.

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

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

A couple of little Investor materials are also available on the company's corporate website in the Investor section under presentations.

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 laid in detail in the Companys filings with the Securities 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, you information feature that square otherwise.

Joining today's call, our Mindy Grossman, President and CEO and Nick Hotchkin, CFO operating Officer, North America President of emerging market.

I'll now turn the call over quantity.

Thanks Corey.

Good afternoon, everyone and thank you for joining our call today.

<unk> focus creative marketing a detailed execution by our global teams I'm proud to say that we ended the quarter with 4.6 million subscribers.

1.5% from a year ago, and beating our expectations.

In fact this is the highest Q2 end subscriber levels the company's ever had.

That's right, it's a significant month by month improvement in our recruitment trends and the continued strength in member retention.

This drove revenue was 369 million operating income of 105 million.

Yes.

Gross and operating margins at Es, all nicely outperformed our expectations.

[noise] member recruitment trends gains momentum in the second quarter.

Digital recruitment is running positive for the quarter as a whole not only stabilizing the business, but also providing a foundation upon which we can return to a growth trajectory.

Digital gained momentum across all our geographic markets with particular strength in Continental Europe .

Studio plus digital recruitment also showed a relative improvement.

We are intensely focused on me for any studio positive recruitment trajectory in the second half of the year.

Q3 is off to a strong start which is particularly encouraging.

Off Air in July this year versus in 2018, where we where TV in the summer, but not during the fall season.

We are looking forward to returning to TV during our upcoming fall campaign in the U.S. as well as several international markets.

As we've outlined previously we have five key priority areas for 2019 that all in line with our key objectives of recruitment retention and elevating the W.W. Brad.

Your marketing execution strategy studio strategy and future experience.

2020 innovation.

Personalization and global community activation.

Starting with marketing execution, which was a major driver of our Q2 performance.

I'm glad to say that our spring season marketing campaigns for effective and deeply impactful across all our global markets driving a notable uptick in our recruitment trends sequentially.

Our integrated global campaign leverage the unified message it work.

Our adapted locally to share the stories up our members as well as our celebrity ambassadors conveying joy enthusiasm is illustrating has W.W. delivers weight loss that fits into your life.

I'm sure. Many of you saw the U.S. campaign with Oprah Winfrey surprising W.W. members with a video call to celebrate their success on W.W.

He married this approach in many of our international markets, including utilizing Allison had into the UK and north sea levels in Germany.

The surprise and delight. These calls on this it has definitely resonated across media channels and social.

Our digital marketing continues to drive this all creating interest that converting at very attractive cost for acquisition.

Our performance marketing approach on social platforms is going very well driving increased traffic and interest within new audience.

We're finding success in a variety of digital AD covering topics, including highlighting member weight loss results sharing success stories, featuring the science of that W.W. program reinforcing our holistic approach to weight loss and missed by saying what it means to be on W.W.

We are now localizing, our best performing U.S. assets for use on social channels, our international markets.

As a result of these expanded digital marketing initiatives, we are generating significantly higher impressions in website traffic year over year.

Eating our awareness of new audiences.

We are focused on further optimizing our digital exposure to convert prospects into members.

Our celebrity ambassador roster continues to grow and diversify from lot 11, tantalum out in the U.S. Alison habit in the UK to SAP arbitrage in Australia.

The announcement that Australian TV House sat monetize join W. W delivered a significant change in our sign up trends in this market and to continue the momentum. We are currently teaching her and TV campaign in key Australian market.

In total our sellout celebrity ambassadors have a combined reach of 112 million social media followers with whom they are sharing their data that journey.

So far in 2019, our baseness 11 original content generating 1.4 billion impressions worldwide.

Recently, both Kate Hudson and Robbie Williams surprised fans by sharing details up their weight loss success on W.W.

In addition to sharing her 25 pound weight loss take continues to share the waste W. W is integrated into our life, including cooking W.W. recipes or family using our in a barcode scanner while grocery shopping.

Robbie discussed his own mindset shift and how that's impacting his baby stores and improving his lifestyle, even joking a concert goers is the British Summertime festival about how many smartpoints ours on it.

Similarly, DJ Khaled highlighted is weight loss success on W.W. during a fun segment of this nature with Jimmy Fallon.

So in addition to presenting W.W. in a modern relevant way. These moments our aseptic engaging will lay the ball and highly impactful.

In short spring was a big step forward and we have a leverage our learnings into our fall campaign, which Nick will discuss in more depth shortly.

In addition to strong marketing execution, our team continues to make excellent progress in further enhancing the member experience.

And driving strong member engagement.

We closely watch MTS imagine for customer satisfaction and trends are nicely stable or improving for both our studio and our digital experiences and across our geographic market.

The value our members find in our mobile App and see more effective.

Hey, just steadily improved since January the average rating of new excuse me 4.8 start.

By delivering more content functionality gamification and human connection our Apis become an essential part of the W.W. experience with the majority of our members, including our digital.

Oh, plus digital members, who are also highly engaged on the app.

Member engagement continues to be strong with steady to rising trends in the percentage of members who are tracking food lucky way using connect and thinking of fitness.

Awareness of our newly launched connect which is increasing and the percentage of connect users visiting.

The 14 cents doubling in just a few months.

Thank you to our members, creating more than 2 million posts left nearly 49 comments came over 70 million like something that.

The number of members seeking an activity device reach 1.6 million in Q2, a new high and up from approximately 1.4 million.

Quarter.

In addition, more than 1 million members, each month and badly trapped physical activity.

Kevin strain that fitness and activity is very much a part of their wellness and weight loss journey.

In fact, we have found that members using active by the W. W.

Our tracking activity, 30% to 45% more often than I was not using after it and we look forward to bringing more active content to our members in the coming months.

W. W is truly a human impact companies that technology Foundation. The many ways that we've evolved our digital platform to better serve our members. It's something we're incredibly proud of.

I will now hand, the call over to Nick to discuss our financials and outlook and then I will come back and finish discussing our 2019 prior.

Thanks Mindy.

We ended the second quarter with 4.6 million subscribers.

Up 1.5% year over year and ahead of our expectations as a result of good execution.

And appeared digital subscribers were up 8.3% year over year to 3.2 million.

And then the period studio subscribers were down 11.1% year over year to 1.4 million.

While total global recruitment was still slightly negative for Q2 as a whole I am pleased to say that recruitment for digital members was positive in the second quarter.

And we expect total recruitment to also turned positive in Q3.

Recruitment channels, such as invite a friend and and that that's just continuing to work well for us and a highly effective in attracting first time members in Q2, approximately 15% of our global recruits joint through these two channels.

Total revenue in the second quarter was 369 million down 8% year over year on a constant currency basis.

Digital subscription revenues increased 6% and studio decreased 17% year over year on constant currency.

Gross margin rate was 58% down the 120 basis points year over year on constant currency much better than we had anticipated due to continued cost discipline.

Operating income was 105 million down 16% year over year on constant currency, primarily driven by operating de leverage on lower revenues versus the prior year period.

Q2, GAAP EPS was 78 cents ahead of our expectations. This compares to GAAP EPS of a dollar one in Q2 2018.

EBIT Das was 121 million in Q2 compared to 142 million in the year ago, Florida.

Turning to our outlook.

Overall, we expect our subscriber trend for the rest of the year to be consistent with our normal seasonality and <unk> and Q3, but subscribers approaching 4.3 million.

We believe that by giving people more ways to engage with W. W. We can drive even further increases in retention and we are starting to see the results.

Our global overall retention is now in the high Nines and I'm pleased to say that average retention of U.S. studio members and of International digital members on now both open 10 months.

We are intensely focused on further extending retention with various efforts to engage more with our members including through more personalized communications a more targeted when bank strategy for former members and by adding new enhancements animal game, if occasion to wellness wins.

We now expect full year 2019 revenue to be at least 1.4 billion. The slightly higher revenue guidance assumes an estimated foreign exchange negative impact of 20 million, which is 8 million more than anticipated previously.

This guidance also assumes a continued mix shift towards digital subscriptions and anticipate some further improvement in recruitment trends in the back half the year as we lap easier comparisons.

Well product sales were down year over year in Q1, and Q2, we expect product sales to turn positive in the second half as we benefit from expanded line of offerings and improving studio attendance.

Overall, we continue to expect subscription revenues to be about 85% of our total revenue in 2019.

We continue to try to strike North America, and the UK full year revenue to be down in the mid single digits on a constant currency basis, we now expect to continental Europe full year revenue to be flat year over year on a constant currency basis, a modest improvement versus our prior guidance.

A full year GAAP EPS guidance range has increased to 155 to 170, reflecting slightly improved revenue trends and good cost management, partially offset by strategic investments in the second half as we prepare for the upcoming program innovation launch and a winter season. This guidance assumes 70 million shares outstanding for the full year.

For the remainder of my comments I'll speak to the midpoint of our full year EPS range and on a constant currency basis.

We now expect gross margin rate to decrease by about 150 basis points in 2019 and improvement from our prior guidance due to increased digital mix and continued cost savings.

This implies Q3, and Q4 declines of about 300 basis points due to preparations for winter launch, including field training contact center staffing studio location improvements as well as higher inventory reserves versus a year ago.

Marketing expense in 2019 is expected to be approximately 250 million with Q3 spend of about 40 million.

Well continue to be flexible and agile in our approach investing behind initiatives that produce results and in addition to an always on digital and social marketing approach globally. This year, we'll run TV advertising in the fall and we're also planning to be very visible across all marketing platforms. Following our program launch in Q4.

Jana expense in 2019 is expected to be approximately 250 million with similar absolute dollar spending in Q3 and Q4.

Below the line, we now assume full year interest expense to be approximately 137 million and a full year effective tax rate of about 25%.

For the year, we expect Capex, primarily driven by tech spend capitalized software and studio network improvements to be in the 60 million range and DNA is expected to be approximately 50 million.

No I'd like to spend a few minutes talking about our capital structure and our cash generation.

Our liquidity position is strong.

With business trends, improving and strong cash generation in May we elected to voluntarily prepaid 50 million of term loans under our credit agreement, we do not anticipate having a required excess cash flow payment due in the first quarter of 2020.

At Q2 end after the 50 million prepayment, we had 190 million of cash on our balance sheet and an undrawn revolver.

We now expect Ebitdas of about $360 million for the full year, demonstrating our continued strong cash generation.

Absent any further debt prepayments, we'd expect to end 2019, with a cash balance slightly higher than the end of 2018.

We've got a covenant light debt structure and the flexibility to prepay our term loan at anytime we ended Q2 with a net debt to EBITDA leverage ratio of 3.7 times.

Note that the leverage calculations used in our credit agreement on a first lien basis, not Q2, and our consolidated first lien net debt to EBITDA leverage ratio was 2.9 times.

Looking ahead, we expect to end 2019 with more subscribers year over year.

Rich given the nature of a subscription business model would translate to a modest revenue tailwind entering 2020 nope, that's only the starting point before factoring in any benefit from member recruitment growth next year and while we're not providing specific 2020 revenue guidance today, but on the momentum and initiatives. This year combined with a upcoming program launch we plan to deliver higher recruitment subscribers revenue and profitability in 2020.

With a highly cash generative business model, we have the resources and the flexibility not only to operate the business, but also to continue to invest in initiatives that will drive our growth.

And now I'd like to reflect on my first full quarter, leading on North America business, the speed with which the team came together and the creative thinking and dedication has been truly inspiring.

When I took on the role I had two immediate priorities.

Just I wanted to prepare and execute strong spring and fall campaigns.

In close partnership with Gail to fit our Chief brand Officer.

Our spring campaign drove good sequential progress in our member recruitment trajectory and we aim to continue that momentum in the fall campaign, we should the U.S. will feature the experience of 10 of our members visiting Oprah Winfrey is home in Maui.

The joy and excitement from members as they share their stories is inspiring and highly engaging which we will be highlighting in an integrated campaign across TV, social digital and PR and I look forward to the campaigns launch early in September .

Second I wanted to get closer to our studio business and execute concrete near term actions to quickly improve performance in just a few short months. The progress made by our North America studio teams is demonstrating how concentrated focus can yield results.

And our actions in Q2 and included.

The studio listening to all the W. W leadership team and I have gained incredibly value insights from coaches and guides in group discussions in every major geography in the U.S. and this important feedback including results from field surveys and the newly formed field Advisory Council is informing our go forward studio actions.

Training.

We have elevated our training curriculum for coaches and guides with new focus sessions on our new wellness check in and workshop facilitation.

Celebration and the weight loss success.

Celebrating successes has always been an essential part of the workshop culture, we are adding more milestone charms, increasing the opportunities for coaches to celebrate members successes.

Attendance challenges this summer a workshop attended challenges challenge resulted in an uptake in members propensity to attend.

And we look forward to launching another challenge later this year, bringing more fun and celebration to the studio experience.

Open houses.

To enable both current members and potential members a link to learn more about W.W. and everything we offer in June we held a week of successful open houses across our studio locations.

Pricing and promotion, we are implementing a new office strategy designed to boost studio conversion by highlighting the reasons to choose studio.

Studio experience by year end most of our locations will have new W.W. studio signage and who will also have refresh the look and feel of over 75 locations.

Further in select high volume locations, we're hiring dedicated studio manages to elevate our retail experience drive community awareness attendance and enrollment.

And finally, new tools for new members to get started.

And an example of best practice sharing from Europe , We've introduced a meal planning guide to help studio members onboard during the first two weeks with W. W.

With these initiatives, we're confident we're on the right track.

To improve on near term performance trajectory and with that I'd like to turn it back to Mindy. Thanks, Nick.

So as Nick mentioned were intensely focused on implementing local market adaptations of the immediate actions Nick discussed globally.

For motivation incentive challenges to open houses from Citi. Your location enhancements to expanding our range of W.W. products. In addition, and as discussed on our last call. We are putting customer satisfaction at the heart of everything we do.

With our proprietary and customized global Quad track system, we're getting real time MPS data on our studios down to the individual workshop level and are using data across all our decision making.

Long term, we are both elevating and creating new experiences for our members are in person workshops with 16000 studio team members worldwide are a key differentiator and providing that community and inspiration that many people look for in that weight loss and wellness journeys.

Were testing a more elevated retail strategy, where potential members can learn more about W.W. outside of our workshop sessions experience a variety of wellness programming and see our growing line of products. We've also revamped studio spaces in Germany, Australia and are working on bringing these new experiences to other markets.

As part of our partnership with Kohls to Democratize wellness, we're opening our first W.W. studio Nicole store later this month. In addition to hosting W.W. workshops. This swap hedges square foot studio in the greater Chicago area will be opened 72 hours a week and have a schedule of additional wellness programming.

The location also includes dedicated retail space, where we can showcase an expanded assortment of W.W. products.

We're excited to open is test and learn location to explore the potential for future in store studios extended hours and expanded programming.

There's no doubt that this pilot will inform future studio experiences.

We are also in conversations with other potential strategic partners on how we can integrate W.W. into their platforms.

Building upon the first phase of the revamp of our entire consumer product line earlier, this year, where we we formulated and repackage, our entire line of products globally, which TEP.

Well, we're testing a W. W section in the health food aisle in three big retail retail stores.

And as part of our strategic partnership with calls you can now find ww products in over 200 stores and online and as we expand our robust lines of products, including cookbooks and kitchen tools snacks to meal kits, we intend to make an impact in defining the healthy kitchen and build momentum in 2020.

As we live up to our purpose of inspiring healthy habits for real life for people families communities. The world for everyone. We plan to offer more ways for people to engage with W. W. As a technology experience company with human impact. This will include new ways to engage with our qualified and motivating coaches as we provide members with the deeply human and personal experience. We're currently pilate piloting virtual group coaching to bring the guidance and inspiration provided by our coaches even more W.W. members, particularly digital members an entirely new way integrated into our App experience.

As I talked about previously one of our key priorities is to galvanize communities through events Activations content and experience.

Anyone Bloom who's leading this newly created area of our business is building a talented and inspire team and our efforts kicked off this summer with a series of dynamic event tied to cultural moments, bringing people together for a joyful memorable and shared experience.

To celebrate global Wellness day, we partnered with Emmy Award, winning choreographer and America's got talent Judge Julianne Hough, and global dance and wellness phenomenon DAYBREAK or skip a day with the Sunrise workout and dance Party.

The event featured live musical performances celebrity appearances and a high energy dance class design and led by Huff, which was also livestream from our Facebook page. The response was fantastic with news of the events generating over 87 million impressions.

Then in July we partnered with essence for its 25th an essence fest, the world's largest cultural entertainment and empowerment experience for black women with over half a million attendees.

To celebrate health and wellness and create community around healthy living we curated a three day W.W. brand activation with a variety of community events and onsite experiences, including an interactive center stage discussion with Tamblyn man and Lani Love.

W.W. workshop, an activation of the new essence health hub and the first ever New Orleans day breaker Dance Party our presence at the event generated more than 24 million impressions and feedback regarding our activation has been enthusiastic showing the potential to expand on diversification of audience through community.

In late July we hosted our first ever global community event aboard the six W.W. crews and our first European sailing in the Mediterranean with members joining us from seven countries across the globe, we created immersive wellness experiences in both English and German that prove you can practice healthy habits everywhere, including on vacation.

On a local level in Qubec, our Canadian team hosted our first well in this weekend in June .

Brought together members and non members alike for a weekend of positivity fitness healthy food and importantly, fun with the W.W. community.

In Germany, we are providing our coaches with the tools to cure rate around events and engage small groups of local members, which events such as hiking and wellness weekend at a date or the special dinner event.

And building upon the successful W.W. good wellness. Many festivals, we hosted last summer. This year, we are hosting five k. healthy habit walks around the U.S. and Vancouver, Canada.

All of these events are great. Examples of how we are thinking differently and illustrate the range of experiences W. W can represent.

Community is such an important element of wellness and has been one of the most powerful parts of the W.W. experienced since its founding.

In September we will be announcing a multi pronged activation of community events, including events in partnership with Oprah Winfrey, which we'll be launching early in the new year.

Harnessing the incomparable power of an in person experience and extending it to our global community is one of the many ways W. W is inspiring community as the world's partnering wellness, making accessible to all and of course as these community events continued to gain traction next year. They should have a halo effect on our recruitment and retention trends.

We are also actively working on the complete transformation of our health solutions business, which has traditionally been working with employers to deliver ww as a covered benefit for their workforces. This is a small business today, but one where we see a significantly larger opportunity.

As we transform our health solutions business. In addition to our having built a new team our strategic priorities, including transforming how we serve small and mid size employers revamping our business development and growth model streamlining the process for client and member Signup and engagement and upgrading our supporting technology systems to serve the needs of our strategic partners, representing corporations governments health plans and physicians.

Building out these technology systems will be a priority of our new Toronto Tech hub.

Our work is still in development, but I look forward to sharing more about our strategies and go to market plans in 2020.

And finally as discussed on our last call. We are on track to launch our 2020 New program innovation during Q4 and look forward to introducing everyone to a new way to follow W. W. We've taken the learnings from W.W. freestyle, New scientific research Leverages. The latest in food science behavioral science, a consumer preferences to create the most personalized Ww program yet we believe our 2020 innovation will appeal not only to our current members who love the flexibility of Ww freestyle, but also to potential first time and returning members who are looking for a more personalized program that provides a structure and support for sustainable results.

In addition to conducting clinical trials to verify efficacy. The innovation has undergone extensive consumer testing to ensure we're delivering a program that fits the needs of even more people.

So to close our second quarter results have clearly demonstrated our ability to deliver steady sustainable momentum for the remainder of the year and enter 2020 with a return to accelerated growth.

I know I've been CEO of Ww for more two years and I have never felt more confident that we're on the right path to broaden our appeal attract more diverse audiences and drive long term sustainable growth.

So thank you for joining us on the call today and with that we'll now turn the call to the operator for QNX.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

Please limit your questions to one question and one follow up per person.

If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Oh.

Our first question comes from Brian Nagel.

With Oppenheimer. Please go ahead.

Hi, good afternoon.

Hi, Brian Hi, Brian .

Congrats on nice quarter.

Thank you.

So the question I have.

First off with regard to.

Subscriber growth, we see now an improving trajectory the last couple of quarters.

If we look back at the did the weaker trends in the start of the year in one of the key factors. There was what we think was.

W.W. not.

Catering back to that lapse remember her so the question is we look at this improving trend now or are you starting to see the wild remembered that may have not come back or whether you're sure to reengage with with W.W. to what extent if not excuse to what extent does that got to ask dr. going to lift your August overall subscriber growth.

Yeah, we have seen a mix of both new and lapsed and the steady momentum of the recruitment growth, but I will say where that laps growth accelerates.

Dramatically is when we launch new innovation and as I mentioned on the call, but we're excited about is this innovation should appeal to both new.

Current and lapsed, but that's where we should see a accelerated met momentum of lapse, but for now we have been recruiting both new and lapsed in this resurgence of recruitment.

Thats right and like Brian .

Bear in mind that you kind of know.

The scale of the turnaround since those first few weeks in January I mean, having that digital.

Recruitment.

Be positive in Q2 and be able to say that we see a pathway for global recruitment and studio recruitment for it to be positive.

In the back half of the year.

In a non innovation year, and knowing that were laughing a little bit better than a year of freestyle last year, I mean, I've been pleased with the scale of the turnaround and frankly look you're looking at.

Yes, a little bit of a historical scope I mean this is the second best recruiting year ever.

Returning to growth knowing that we've got a new program coming.

I've been real pleased with the first six months.

That's great.

Oh Oh.

Hold on just a bit more drilling the comment you made there, but as we look at these as these trends now and obviously, we're all their eyes are on your makes you index. We ended the year would you will you or your seasonal peak.

The ultimate business, where we really are they distinct are they distinct periods. The member now is distinct from what we will see later this year.

Well I think it's important.

Our best.

No effort is really to have a tailwind.

Of momentum going into our new 2020 innovation because as Nick mentioned, we're also seeing improvements in retention. So the bigger the tailwind we can have.

The more we can impact retention as well as new recruitment over that period of time.

Thank you very much.

Our next question comes from Michael Lasser with Qbs. Please go ahead.

Good evening. Thanks, a lot for taking my question can you compare the level of discounting and promotions you did in the second quarter of this year to the second quarter of last year.

Yes, I would say.

Marketing.

Playbook was.

No it was.

Was similar in terms of price realization.

We did have some.

Pricing.

You know a negative pricing on the studio side of the business is.

But but not a it wasn't a meaningful driver of our financials heading into the back half of the year.

We've got some favorable pricing comps, so I'd expect that situation to be improved in the back half the year.

How much would I was I would say two to Michael the the.

On the stress of the improvement in trends.

Sizable improvement in trends from a weak January but getting better month by month.

I'd I'd view it is driven by a multi faceted.

Action plan and all the actions.

We've.

Weve described we're not we're not buying recruits and in any way shape or form.

Okay. So in many you outlined a long list of accomplishments.

But you're proud of and the progress that organization, making.

Where do you feel you're falling short in where do you feel the biggest opportunities for improvement.

So.

Last about falling short, but some of our efforts are further ahead than others.

I think that.

The team as it relates to our marketing efforts, our digital efforts, our social efforts really have accelerated throughout the year I think Nick talked about our efforts around studio were starting to see the impact of that towards ER and the second quarter and now going into July . So I think some of it is really a timing of when these elements.

Are seeing the impact and so we as a team and I think I will say that the team. We have today is impressive across all areas of the business. So we measure the K P eyes across to make sure that we're seeing improvement step by step because not everything is that it's same juncture in time.

And with that being said it really would you attribute most of the improvement so what.

W W city, rather than perhaps.

Some leveling off in interest in the competing diets that maybe had been waiting on on the performance.

Well, it's definitely our efforts and you know we we look at measurement. We look at competition, we look at a consumer perception and what I can say is both our NPS and more importantly, our consumer perception scores as well as our engagement scores are higher than they've ever been so you know to know that our existing base is more highly engaged than they've ever been that tells us that what were delivering is creating a lot of value and that's really important to our ongoing success.

Our next question comes from Frank Camma.

With Sidoti. Please go ahead.

Hi, Thanks for taking my questions.

Hi, My questions really focuses on given how well you're doing on the digital side can you talk about your ability to convert.

Those people that join just as digital onto the meeting side.

Yeah, So I think there's.

Definite opportunities to engage our digital only members in new ways to engage with the brand. So certainly there's an opportunity for studio as Nick mentioned, we have found success with open houses open houses combined to invite a friend's articulating to our digital members. We also see an opportunity I mentioned before and you'll hear more about this the idea of creating another path for virtual coaching and whether that four existing studio members, who also want the flexibility or in particular, our digital members, which could ultimately create additional revenue streams are there and then creating new opportunities for new types of studios, we mentioned calls, but there are other things that we will be testing for.

Different types of workshops in different types of environments and the key is meeting people, where they are and giving people the diversity of how they want to interface with the brand, but it's definitely important to note that that phase.

Can you talk at all about the update on that because that that used to be a pretty.

Significant revenue stream.

And then you know like life, you know what the biggest part of our no revenue stream as a you know a products that we are you know source to attempt to sell in our studios in more and more a and e-commerce channels, but no pure licensing so about a EUR 30 million a business further demand.

Okay I agree with the kids.

You know we have brought on a new head of products and licensing I think answered experience. That's also my background and were doing a lot of work. The first thing we needed to do was make sure the products that had our brand on them or products that lived up to what we want our brand to represent hence all the new products in market today and the expansion of those products, which ultimately will give us the opportunity to have our products in more venues other than just our studios.

We've also been working on our own E Commerce platform.

With investments in technology. So we can we launch them in 2020.

We launched our first to Amazon stores in U.S. and Canada.

So as we expand our products, we want to have multiple points of distribution.

Got it thank you.

Our next question comes from Michael Swartz with Suntrust. Please go ahead.

[laughter].

Just wanted to touch on the cadence of marketing spend this year.

Thanks, Mindy said you were off the air in July and I guess some of those resources are going to going to hit it hard in the back half of the year can you talk to it I mean, how much of that was a tactical shift versus something that was.

Strategic it really plan going into 2019.

So clearly when you know we had obviously some of the issues. We had in January we did a very significant de brief we looked at the balance of the year. Both in terms of our creative our marketing strategy. Our on air spend our digital spend we did a tremendous amount of testing and I. This is very offensive a in terms of the approach for the balance of the year. What I said was the reason I was pleased with the strong performance in July as we didn't have we werent on air in July we've been on air earlier in the spring. So some of it is just a change in cadence that was intentional, but we clearly proved that we can have stronger marketing now I'm not minimizing the effectiveness of being.

Our strategic times.

So the fact is we will be on air starting early September for fall, which we were not last year. So that's an opportunity in multiple markets.

And then really be set up to go very broad across our channels. When we launch our 2020 innovation. So that was all a very conscious planned out FX effort, but the thing that you should notice is that our presence and the diversity of our assets.

In our digital and social channels is light years from where we were and that's attributed to the new teams. We've built certainly with that expertise within the organization.

Thats right I mean, Michael look we're investing behind things that are working and things that we like and so yes, Q3 always that we said we'd.

No spend about 40 million and marketing you know thats up 5 million or so versus last year in Q4, no within our guidance would be up by at least that that same amount and so we're certainly investing.

Behind the momentum we see in that reflects how we feel about our business right now.

Okay, Great and just help me understand I think you said one of the drivers of the lower gross margin in the back half of the year is inventory reserves did I hear that right.

And I guess with that what's that tied to if it is yes. This is really tied to no oh any any year, where you have a you know a program changes where you will you get into a go inventory no shifts and frankly last is particularly in Q3 last year, we had some inventory reserve favorability because our product sales switch over and launch went much better than we than we thought it could have thought so no uh huh.

Inventory reserves in the back half of the year like using Q3 as an example, as they will be down 300 basis points actual run rate of that gross margin change probably more like 200 and in Q3. So a is that end.

Investing in things to drive our our launch and train a try not field and a ramp up our contact center to be ready for a new program.

Great. Thank you.

Our next question comes from it.

Yuma.

With Keybanc capital markets. Please go ahead.

Hey, Good evening guys. Just two quick ones for me first it seems like some of the success recently has been on the digital side, just any changes in demographics on the digital customers.

Versus some of the previous one then I think it had tended to skew younger I know, it's still early but any any kind of initial read on their persistence and then as a broader question I know you touched upon kind of improving them identity on the studio offer and any of the new locations opened up a do you have any initial insights on.

And maybe quick fixes you can make to the rest of the studios to help them a more modern kind of viewpoints. Thank you.

Sure. So I'll answer them in two ways on the digital side, we are definitely seeing a broader diversity and as a matter of fact I think we mentioned on the last call that we launched connect groups, which is allowing individuals to self identify whether that's around identity or whether that's around hobbies, what's around life stage, and that's giving us a window actually into how people are interacting with our brand. So that's everything from young moms to college to men too.

GBT queues. So we now are up to a significant number of groups and you know that's reflecting the diversity of who is connecting with our brand and and the reality is.

It works.

Across you know.

You know gender age.

But this is actually also giving people to share experiences together and were aiming ultimately to do the same.

Within our.

Studios the thing to think about is our studios you know again. This is not a decorating project. This is how do we really evolved the content. The experience is coming in you know we've been testing a number of things in smaller format before a bigger launch.

We've done some efforts in Australia, and Germany already.

And are definitely seeing them more engagement, we can create so whether that's healthy cooking classes, whether it's other elements to inform or in Canada kind of the wellness events. So we're going to we're doing a lot of testing, but we in the U.S. as Nick mentioned, we have about 75 locations that will have enhanced experience studio managers and well be doing different type of events and more always on programs. There. So we will get a lot of learnings from that.

Our next question comes from Greg Badishkanian with Citi. Please go ahead.

Good afternoon. This is actually Spencer had us on for Greg. So I just had a question on capital allocation with your shares trading where they are today what is your thought process on.

Potentially doing share repurchases at these levels.

Yes look good we're focused on investing.

And our future a future growth and continuing to improve.

Our our balance sheet.

No I get that back down below our long term leverage.

You know what target and then also look we'll always consider.

Tuck in acquisitions, particularly those that can.

Improve our index tolerate attack in product.

Capabilities.

Got it makes sense and then you guys have been utilizing your partnership more with Oprah how do you see that partnership evolving going forward.

No.

Obviously much more than that partnership.

Certainly and act as a board member and obviously a lot better in a in a company and we have an incredible relationship and as you saw from some of the campaigns and mentioned some.

Events that will be activating going into 2020, but I also think it's important to note that the momentum and the improvement in our business and the acceleration.

Is in every market and the idea of really using both our ambassadors and our members to articulate.

The benefits of W. W will continue to be part of our strategy and that includes where it makes sense in the marketing cadence.

To partner with Oprah.

Great. Thank you.

Our next question comes from Mark Weisenburger with B Riley FBR. Please go ahead.

Thank you good afternoon.

I Wonder if you could talk about how the digital marketing assets might resonate differently with your studio target demographic and if the data maybe shows a little longer conversion cycle.

And is that ultimately reflected in the sub growth for the back half of the year.

So let's sit back every single one.

Of our members.

In the digital assets.

Right. We have many many studio members, who are extremely and highly engaged within our communities, our app and and social.

But what we can do today is with the team and with the data we have the ability to do significantly more segmentation of our marketing outreach. So were serving up at any point hundreds of different assets, depending on who the individual lives or their current number are they not or this studio member what things would be interesting to them. So I think that's the most important part is our focus on personalization. So we can be as relevant to the audience that we're looking to appeal to and that includes our studio.

Nick first of all thanks for the color on international digital and U.S. studio customers being above 10 months in duration at this point, it's hoping we might flip it or look at it a different way and look at where you're at what you're seeing in terms of first time compared to legacy and lapsed users.

Is there any difference in terms of retention levels that you're seeing between this between us different cohort groups right now.

No great question, but yes look a behavior of folks on a.

Program No you know tends to be remarkably you know outcome consistent whether or not the first time use is done W. W. Many times before before a you know what offer they join on so a retention strong and making progress across the board.

And then just a quick follow up by Nick can you talk about some of the improvements that you're looking at for the studio you'd mentioned pricing and promotion I'm guessing that's still a work in progress, but any thoughts you might have in terms of driving and the digital to.

Digital customers and converting to studio customer and what that might mean for pricing going forward.

Yeah. Good luck.

When they focus on the pricing in the.

Promotion on the studio side is probably a one on one of the stress it's more about small about language and presentation in content than Oh economics of the of the offer Uh huh.

Per se I mean were having some success seal highlighting the absolute dollars to be saved a on studio versus digital that once was just because it's too actually the revenue for example, so that's that's the main focus area like I think go overtime as being able to no incense a you know digital members. The two accounts of workshops and try them to well try I read digital coaching that we've said where Ah Ah were implementing and testing I think there are great opportunities that that that's why I like the open houses so much because that gives a wonderful coaches and guides a chance to talk to people who aren't as familiar with WWF.

Thanks.

Our last question will come from Jason English with Goldman Sachs. Please go ahead.

Hi, guys. Thank you it looks like I'm, a I'm closing act appreciate that [laughter] I'm thinking.

Hi, a couple of quick questions first Monday with the fourth quarter right around the corner.

Are you in a position to give us any more color on what this this new program the personalization entails.

Just.

Yeah to give context.

Obviously, it's been a long time and the development.

We have done as you can imagine all extensive testing as I said, it's the most personal program personalized program we've had to date.

And were excited about the diversity of who is going to appeal to both existing new and lab.

And we'll obviously give you a lot more color as we move forward on the specifics.

But kinda that's how we are talking about it right now.

Okay, I look forward to that more color and I want to come back to the gross margin question.

'cause it's been we've been impressed with the roughly flat gross margin year on year through the first half of the year.

And.

In context, a bit surprised by the guidance for roughly 300 basis points compression in the back half.

I I heard you on the inventory reserves is.

As part of that but can you go back in and just drill down a little bit more on what some.

What's causing the compression in the other areas of investment.

Yeah like I mentioned the.

So.

Inventory reserve moving parts in Q.

Launch so that's.

At least.

100 basis points, there and.

In Q4, so you kind of do that comparison the gap from where we are we like Juan.

120.

Constant currency in Q2 to 200.

Run rate is that in the back half the year is much.

As much closer and the main main drivers there are no investments.

In the business as Weve discussed investing in things to drive future revenue and growth and then also a we've been very clear today that we are doing lots of things to improve the trajectory of our.

Studio business, so within that gross margin guidance, we're assuming we have a less of a mix.

Benefit within our gross margin year over year add than we had in the first half of the year.

Understood makes sense and congrats on bending the trend on recruitment. Thank you.

Thank you.

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

Sure. Thank you everyone and as I continue to say, it's incredible to be part of a company that deeply impacts the lives of millions and thank you for joining us today and all the interest in W. W. And we look forward to keeping you informed on this journey and we're glad to see.

They are sustainable and positive momentum. Thank you.

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