Good afternoon and welcome to the WW International Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Corey Kinger of Investor Relations. Please go ahead.

Thank you everyone for joining us today for WW International's second quarter 2023 conference call. At about 04:05 P.M. Eastern Time today, we issued a press release reporting our second quarter 2023 results. 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.ww.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 as part of the press release. Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Joining today's call are Sima Sistani, CEO; and Heather Stark, CFO. I will now turn the call over to Sima.

Thanks Corey. Good afternoon everyone and thank you for joining us today. 2023 continues to be a pivotal and transformative year for Weight Watchers, a year where we return our core business to subscriber growth and catalyze our entry into the nascent, but clinical category. Our second quarter results only give me further confidence that we are on the right trajectory. We are focused on executing a narrow list of priorities that will deliver great impact across not our business, but also global health outcomes. To reiterate, across the organization, we are focused on four key areas; one, reinvigorating our core business and hitting our raised end of period subscriber targets for the year, including continuing year-over-year sign up growth in the second half of the year. Two, compounding our head start in the clinical space by continuing to drive efficient member acquisition to Sequence, increasing brand awareness, and expanding member retention. Three, being the partner of choice for health providers, payers, and employers by leveraging our expertise, relationships, and a step program engagement model that delivers cost effective end to end behavioral and clinical weight management solutions, setting a new standard-of-care in this space. And four, building community experiences, both in real life and digital that will broaden our reach and increase engagement and satisfaction for both behavioral and clinical pathways. We are also committed to doing our part to increase education and access to the weight health spectrum for communities in need. Now, turning to our Q2 results. We ended Q2 with 4.1 million subscribers, including approximately 37,000 clinical subscribers. Notably, in our Weight Watchers business, we ended Q2 with more subscribers than we did in Q1 with clinical only adding further to our subscriber base. This is the first time in our company's reporting history that we…

Thanks Sima. Turning to our second quarter results. As previously announced, we closed the acquisition of Sequence on April 10th, and results are now reflected in our financials as well as certain metrics are included in the clinical line of business. We ended Q2 with 4.1 million subscribers, including approximately 37,000 clinical subscribers, with both sign ups and canceled outperforming our forecast in the quarter. As Sima mentioned, this is the first time in our history of reporting subscribers that Q2 ended with a higher subscriber base than Q1. This is an additional proof point that the actions we are taking to stabilize and grow the business are working. Revenue totaled $227 million, which was 16% year-over-year, both on a reported and constant currency basis, primarily due to the lower subscriber base entering the year, coupled with the planned reductions in our consumer products business as we rationalized product skews in North America and continued the wind down of this line of business. In our international markets. Clinical contributed $8 million in revenue as a partial offset. Adjusted gross margin of 63.4% for the quarter was a record high and up 150 basis points from the prior year, primarily due to actions to reduce our fixed cost base with our workshop real estate restructuring. Marketing expenses of $51 million were down 1% year-over-year and were below our planned spend with our improved performance marketing capabilities and nimbleness adjusting to trends, we were able to increase efficiency and achieve both sign ups and GLTV above plan. Adjusted G&A of $59 million was up 4% year-over-year. Restructuring savings and expense controls were offset by the inclusion of $4.5 million in clinical G&A expenses, including approximately $2 million in intangible amortization from purchase price accounting consideration patients. Adjusted operating income was $34 million.…

Thanks Heather. Our team's hard work and innovative thinking are paying off. We are turning the corner and getting Weight Watchers back on a subscriber growth trajectory while setting the foundation for our next chapter with a portfolio of solutions to serve the full spectrum of weight health. To reiterate, our Weight Watchers business has returned to sign-up growth without increasing our marketing budget, fueling our return to subscriber growth in the back half and driving a subscription revenue tailwind going into next year. We drove a nearly 40% increase in clinical subscribers, primarily for positive word of mouth since the close of the acquisition and are scaling up our operations, increasing readiness and developing a dedicated lifestyle program for members on medications. We have increased our activation and engagement rates by advancing our digital first product roadmap, focused on coaching, accountability, and community. We are managing the business prudently, reducing our cost structure, and driving record high adjusted gross margins. And we are focused on returning the company to profitable growth, and are committed to reducing our leverage. Before we turn to Q&A, I would like to highlight the three new members of our Board of Directors since our last earnings call. Tracy Brown, EVP and President of Retail and U.S. Chief Customer Officer at Walgreens and the former CEO of the American Diabetes Association. Tara Kamat, former Chief Executive Officer and current board member of Tomorrow Life Sciences, and a board member of Strava, the leading subscription platform for Connected Fitness. Dr. William Schrenk, venture partner, Bio and Health at Endres and Horowitz, and a former Chief Medical officer at Humana. With these additions, we are further extending our thought leadership to cover the entire weight health spectrum, something completely aligned with our vision as the global leader in weight health. Thank you for joining us. We are now happy to take your questions.

We will now begin the question and answer session. [Operator Instructions] The first question will come from Jason English of Goldman Sachs. Please go ahead.

Hey, folks. Thanks for slotting me in, I appreciate it. Congrats on the uptick in base business subscribers, it's a welcome surprise. I'm a little surprised though that you're cutting the revenue forecast. Like I get the $15 million trim on new clinical because the capacity constraints on drugs, but still with the uptick on subs and the cut being more than just the $15 million, it suggests a decent drop in revenue per subscriber. What is driving that?

Hi, Jason. Thanks for the question. Yes, as you know, the majority of the revenue adjustment that we are making is driven by the external factors of medication supply on clinical. The balance of it really is about the mixed shift that we're seeing between clinical core and workshop. So we're seeing more folks signing up for the digital business versus the workshop business, which is a higher margin business as well. So we're seeing that shift impact total revenue and also driving some of our improvement in gross margin.

And I should like to add there too, hey Jason, is that part of that is consistent with the broader economic story. So we're seeing some of our labs workshop members who are coming back in Q2 and choosing digital. And so that feels in line with what we're seeing from a macro perspective. But, NPS has remained really stable versus February of 23 earlier this year, and in fact is up 22 points year over year. So we feel really good that people are staying connected to the brand and still seeing it as a must have and just choosing the digital option as their way of staying connected to the program.

Understood. And one more follow up for me on the clinical side. I think, and sorry I was distracted, I think I heard you say you're going to launch this more aggressively later this year before the New Year's resolution sort of uptick or enrollment cycle, correct me if I'm wrong on that. But if so, what gives you confidence that the drug supply will be adequate enough? And secondly, where do you stand on clinician capacity? Because I understand I've always viewed this as a twin potential bottleneck. One is the clinicians. Do you have enough of them to operate the telehealth side? And the other is, do you have enough drugs to actually prescribe? So updates on both of those and the timing would be really helpful. Thank you.

Yes, no. So just to clarify what we had said there was that we are scaling up to be ready for when supply comes back and on the lifestyle program itself, the one that is specific for people on the GLP-1 journey, that that is going to be available ahead of peak season. And yes, I think this is a real opportunity. Look, we're already 4X the number of clinicians since the Sequence acquisition, and we even have a wait list of onboarding on additional clinicians. And so this, the shortage is obviously, we don't like this for our members and their experience and their needs, but in the meantime, what it's allowing us to do is scaling up to be ready for when the supply comes back on.

Got it. Thank you. Out of respect to my others, I'll stop there and pass it on.

The next question comes from Lauren Schenk of Morgan Stanley. Please go ahead.

Hey, everyone. It's Nathan Feather on for Lauren. Congrats on the strong core performance. I want to dig in a little bit on the lower expected Sequence revenue for the year and just the mechanics behind that. I mean, what's the kind of key driver between the lower revenue? Is it lower gross ad demand, higher churn if people can get access to supply, or is there kind of a revenue per subscriber dynamic? And would you potentially not charge subscribers, or would they pause if they can't find supply, just trying to think through dynamics and how it impacts your sub-base as we enter the year?

Thanks, Nathan. Yes, so, look, it's really early days, and certainly we didn't acquire Sequence for 2023, and we're confident that supply issues are not going to be a barrier to our long-term outlook. Obviously, there are more medications within the pipeline and lots of investments being made by manufacturers to get this right. As you can imagine, we're in touch with them and doing top-to-tops and understanding when and how we can expect that supply to come back on. What ends up happening, understandably, is this is a month-to-month program, and if we are unable to get somebody the medication, then that does impact churn. But more importantly, we're just not going out – let me take a step back and say we offer a wide formulary, so in a lot of cases, we're able to mitigate that by finding the, through our customer, through our care portal, finding the pharmacy that does have supply and or getting people started on a different medication while they're waiting for one of their other dosages or bran. In the meantime though, what it really means is we're not pushing our top of funnel activity as you even noticed in your recent report, you haven't seen us do much cross-selling and that is purposeful. We don't want to impact NPS by driving a lot of people into the funnel who then have a poor experience because of supply issues. So, this ends up being, as I mentioned, an opportunity for us to spend this time thinking through scaling, making sure the current members are having a really great experience, and increasing our readiness overall.

Great. That's really helpful. Thank you.

The next question comes from Linda Bolton-Weiser of D.A. Davidson. Please go ahead.

Yes. Hi. So, it seems like on the drug shortage issue that we have seen some news articles and developments about Novo Nordisk actually starting to file suit against compounders. And my understanding, without being a drug analyst, my understanding is that when that happens it's like a sign that their supply is ramping up adequately, when they start to crack down on these compounders. So I guess then I'm surprised to hear this about the shortages when it seems like actually the news was to the contrary, that there would be increased supply. So can you just comment on that? Yes. supply. Can you just comment on that?

Yes. Look, I mean, NOVO has been public in saying that they're still seeing will go be at 0.25, 0.5, and 1 shortages through September. They've also said that sex sender old dosages through the end of 2023 and beyond. Your guess is as good as mine, I think, in terms of what they're, the kind of going after compounder says. But frankly, my perspective on it is there's a lot of misinformation, there are a lot of bad actors, and when people have poor results on the compounded substances, they then use the brand names, or quote unquote weight loss medications out in the market to explain their side effects and their issues. And it actually has nothing to do with their products. So, I think it's a sound strategy on their part, but we can confirm that the shortages are still very much being felt in the market, and I'm happy that there is a broader strategy to reel in the bad actors.

Okay. And can I also ask just about your trend of return to member growth? Are you able to say like which months it turned positive year-over-year? And is there any trend of acceleration of year-over-year growth, or is it just steady, or is it kind of just variable month-to-month? Is there any way you can tell us how the trend is going?

Hi, Linda. I think we're seeing continued improvement in our trends through the course of the year. I wouldn't want to pinpoint a specific moment in time, but recall we had our, solid step up in subscribers out of Q4 2022 and into Q1, and again now here in Q2 we're ending with a step up out of Q1 for the first time in history. This is all pointing towards continued progress on the step change we're making towards growing our subscriber base. Hopefully that helps.

And I'll just add, hey, what this is saying is the changes we're making are working. I've said it from the beginning, activation rate is a leading indicator, and that number continues to smile. So we are really excited about what's to come. We haven't even introduced our biggest features yet and, we've noted that the progress and trends and what to eat tab are coming in the fall. And so, this is us leading with a digital first experience and really putting our data informed learnings to work.

Okay. Thank you. That's it for me.

Thank you.

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

Hi, everyone. This is Isabel Thompson. I'm for Michael Lasser. Thank you for taking our question. Maybe just in the second quarter alone, there was only a modest increase in those clinical members since the acquisition closed. Were the supply constraints the only reason these subscribers haven't been ramping faster or were there other factors at play here? And how do you plan to put marketing behind the Sequence business moving forward?

Isabel, thanks for your question. So I'll start by saying I disagree that 40% uptick since acquisition is modest. But I will note is that we also saw that traction in a environment of supply shortages. And that really, again, again goes to reflecting our ability to help members through our wide formulary and through our customer, through our care program, the Sequence program. And I want to emphasize that we have these really big synergies. We're able to provide solutions across the Weight Health spectrum. Now combining both the lifestyle intervention of Weight Watchers with clinical care. On the tech side, we're combining billing, creating one identity through all channels. And to your question regarding we're starting to marketing. That's also another important synergy where we're going to have TAC efficiencies between our solutions. We have demonstrated ability to drive interest from people on our site to the clinical intervention and our initial tests and performance marketing. And again, we're not standing here on top of funnel, because we want to ensure we protect the NPS during the supply shortages. But we've been testing and we can see that the combination of Weight Watchers alongside the Sequence brand has really improved ROIs. So we expect to really do more of that when the macro environment has improved.

Thank you. That's very helpful. And then maybe as a follow-up, are you doing any discounting of the core program to drive sign-ups higher there? And then, separately, do you have a sense of how many new and existing members are currently taking GLP-1 prescriptions?

I'll speak first to the discounting question. So, we do have discounting activities going on, much like we always have. I would say, it's not necessarily ramped up or differentiated approaches to discounting. And our approach is quite similar to other best-in-class subscription businesses where members joining pay less should they commit to longer-term plans. So, we continue to operate with discounting such as that and we're really pleased to see that the pricing and promotional activity that we're carrying out in 2023 is proving out to be both revenue and CLTB accretive both in-year and in the long-term. So, we're really pleased with the outcomes.

Thank you.

The next question comes from Brian Nagel of Oppenheimer. Please go ahead.

Hi. This is William on for Brian. Thank you for taking our questions. So, I realize that you've touched on this topic quite a bit, but I just wanted to ask maybe a little bit differently. Our question is on the step-up in the core membership in Q2 from Q1. You mentioned reinvigorating your offering and other marketing efficiencies. Can you discuss further the drivers of this step-up? And also, any changes to the way that you would look upon the cadence of first half membership in your business going forward?

Sure. Hey William. Look, the drivers are product improvement, better data-informed performance marketing, and overall awareness and alignment with our new Weight Health approach. We're seeing a lot of continued momentum on our modern performance marketing. We under spent plan but drove better LTV and sign up. This is just a reflection of more nimble data informed decisions with in-house performance. We're moving cross channels, cross regions, and thanks to the centralized global marketing organization. So that's been a part of it, as I mentioned on the awareness front, lots of media activity, resonance with the work that we are doing, and I think being more authentic and forthcoming in our messaging. And finally, product improvement. We've said that activation is not just about the people we sign up today, but them doing better in their first 30 days, which is a signal that they're more engaged. And weight loss, let's be clear, this is a word of mouth product. And so when we drive up MPS, which we have, more people hear about it, talk about it, have success with it. And so not only does it help on the retention side, but it also has a positive impact on driving further organic signups. So, as we mentioned, the Q2 and a period sub excluding clinical is above Q1, and that is the first time in our company's reporting history. But I think that achievement is a combination of all of the things that I just spoke about.

Excellent. Our next question is on the balance sheet. To the extent that you plan to de-lever somewhat, when would you look to do this and then how would you carry it out?

Thanks for the question, William. I don't think that I would be committing to anything in terms of actions or timing or scale or activity. I would say, though, if we did do something, our intention would be to act in a way that benefits all of our stakeholders, producing our leverages and absolute capital priority, pleased with our strong liquidity and solid runway. But at this time, I wouldn't speak further. Thank you, though.

Thank you.

The next question is a follow-up from Jason English of Goldman Sachs. Please go ahead.

Hey, again, thanks for slotting me back in one more time. So, I was just going to help myself, I had to come back for more. You mentioned the lifestyle program for GLP-1 patients to come on later this year. I guess my question is around the viability of applying that to GLP patients who aren't coming through on Sequence. There's been some chatter out there around employers looking to make insurability conditional, potentially on some sort of behavior modification program such as your own. And I know you've got a lot of deep-seated relationships with many of those potential employers. So my question is very vague. I appreciate that. I'm kind of rambling now. But as we think about the forward, are you having discussions with these employers and is there a viable solution or a future where they could be authorizing use of these, but requiring participation on a program like yours and giving you a relationship? What is the likelihood that they actually recommend you as the program of choice for that? Thank you.

Hey, Jason, I love that you came back for more. So, and this is a great question. Look, we have a lot of enterprise experience. We've been running our B2B business for years. But in the past it's been viewed more as a perk and now we are getting a lot of incoming requests from new employers as well as our existing employers and also payers who want to talk about a covered benefit. And then the way that they need to manage and be able to provide these life-changing medications to their population is by figuring out the best way to recover the cost of the medication. And that means helping somebody such that it's a preventative tool for other chronic conditions, right? Heart disease, high cholesterol, hypertension, diabetes, some cancers. So what ends up happening is that we can take in and account for their entire employee population and basically bucket people into where they fall on the spectrum of Weight Health needs, whether they need a lifestyle intervention, whether they need a lifestyle intervention plus clinical pathway, and then in which case how do we de-escalate that over time and get them either off the medication if it's medically appropriate for that patient and/or move them to a different lower cost medication. And so this is work that we're doing right now in active discussions with. Also, by the way, on the science side, we are running trials. We're doing some in partnership with the Cleveland Clinic and other, institutions to show the efficacy of some of these plans. And so just to say, yes, I mean, I think that we are really uniquely able to provide that because we have our intensive behavior therapy program, because it's been around for 60 years, because it is the…

Good stuff. I'll end it there. Thank you so much.

Thank you.

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

I'm highly encouraged by the trends in our Q2 results, which are returning us to a subscriber growth trajectory. Not only will 2023 be an inflection point in our performance, but also be a year of dramatic improvement in our ability to help members achieve their goals through our portfolio of solutions to serve the full spectrum of Weight Health. We look forward to speaking with many of you at upcoming conferences, including at Morgan Stanley and the Baird Healthcare Conferences in September. Thank you for joining us today, and we look forward to updating you on our progress.

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