WW International Inc (WW) 2010 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International third quarter 2010 earnings teleconference call.

During the presentation, all participants will be in a listen-only mode.

Afterward, you will be invited to participate in the question-and-answer session, and instructions will be given at that time.

As a reminder, this conference call is being recorded today, November 9, 2010.

At this time, I would like to turn the call over to Sarika Sahni of Weight Watchers International.

Please go ahead.

Thank you.

And thank you to everyone for joining us today for Weight Watchers International's third quarter 2010 conference call.

With us on the call are David Kirchhoff, President and Chief Executive Officer, and Ann Sardini, Chief Financial Officer.

At about 4:00 p.m.

eastern time today, the Company issued a press release reporting its financial results for the third quarter 2010.

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 www.WeightWatchersInternational.com.

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 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.

I would now like to turn the call over to Mr.

Kirchhoff.

Please go ahead, David.

Good afternoon.

And thank you for joining us as we review Weight Watchers International's performance for the third quarter of fiscal year 2010.

Our business continued to show encouraging signs during the third quarter, particularly in our WeightWatchers.com and NACO meetings businesses.

Overall participation of our brand in our critical North American market significantly exceeded the levels of this time last year, with solid growth in total paid weeks fueled by our Weight Watchers on-line product and improving trends in our meeting business.

On a constant currency basis, Q3 revenues grew 3.5% over the prior year period, with meeting fees up slightly at 1%, and meeting product sales up 1%, Internet revenues growing 22%, and other revenues declining 9%.

This overall increase in revenue was a slight improvement over the trend we saw in Q2.

From a volume perspective, combined global online and meetings paid weeks grew by 11% in the third quarter versus the prior year period.

This 11% growth compares to 8% year-over-year growth in Q2, and 1% growth in Q1.

The improvement in paid weeks trends is being driven by improvements in both our meetings and online businesses as we progress through the year.

Global paid weeks in our meetings were up 3% versus the prior year period in Q3, while paid weeks for Weight Watchers on-line accelerated further to a robust 26%.

Q3 2010 EPS was $0.59, compared to $0.68 for the same period in 2009.

Included in the Q3 2010 result was a $0.05 reserve taken in the quarter for the pending settlement of a litigation in California.

Without the impact of this reserve, Q3 EPS would have been $0.64.

I will now briefly review our results in our major geographies and business units.

First, our North American meetings business.

Total NACO revenues were $169 million in Q3, up 2% versus the same period in 2009.

This is a slight improvement over the flat year-over-year trend we saw in Q2, and a substantial improvement over the 8% decline we experienced in Q1.

NACO meeting fees grew 2% versus the prior year period, the first time we've seen positive trajectory in this trend this year, and meeting product sales grew by 5%.

NACO Q3 2010 paid weeks grew 3% versus the prior year period, the first time we've seen growth in this metric this year, despite a one week delay to the start of our fall marketing campaign.

As a result of this delay, and the negative impact from the timing of July 4, Q3 attendances were down 4%.

Without the impact of these two factors we estimate Q3 attendances would have been down roughly 2%.

2010 continues to be a tale of two periods -- Q1 and the rest of the year.

As we've discussed on prior calls, the critical first quarter was a period in which we did not have news to fuel marketing, so our marketing was not punching its weight and we experienced difficult weather conditions beyond our historical norms.

Since the launch of our revamped marketing programs beginning on April 1 of this year, we've seen stabilization of our volumes.

As with the case in Q2, third quarter enrollments were flat to slightly positive versus the prior year period.

In addition, we continued to benefit from strong retention of members who purchase our Monthly Pass commitment plan.

These two trends have allowed us to come close to rebuilding the membership base that was weakened by our soft first quarter recruitments.

We continue to see strong consumer response to our marketing campaigns featuring Jennifer Hudson, including the launch of several new spots this fall.

Marketing that authentically communicates the real successes that our members can achieve in adopting a healthier lifestyle with Weight Watchers clearly resonates with consumers.

This much harder hitting marketing has allowed us to stay relatively strong despite consumers remaining cautious with their discretionary spending.

Looking forward, we expect our volume trends in the fourth quarter to roughly mirror the third quarter, with attendances slightly below prior year and paid weeks effectively flat with prior year.

As noted on the previous call, the NACO team has been working throughout the year to consolidate its base of meetings in order to focus our efforts on our strongest locations, time slots and leaders.

Much of this work is now behind us as we finish the year with a much tighter meeting network.

As of the end of October, our US meeting base is now about 13% smaller than it was this time last year.

The beneficial effects of this have already become apparent.

The average number of attendances per meeting in the third quarter was up 6% versus the prior year, a trend that should show further improvement in the fourth quarter.

The impact of higher attendances per meeting is, one, more vibrant and energetic meetings, an important ingredient for the motivational element of our program; two, higher commissions to our service providers, and; three, improved profitability for the Company.

The NACO team is now in the home stretch for preparing for it's new program launch in November 27, leading into it's traditional January marketing campaign.

As we've noted on previous calls, the scope and size of this program launch is substantial.

This changeover effects virtually every single aspect of the operations of the business, including training, supply chain, products, licensing and other areas.

Roughly 20,000 of our North American service providers have had the opportunity to become new members on this new program for the past six weeks.

The response has been tremendously positive, and they're eagerly awaiting the opportunity to share the new program with their members in December.

Now, on to the international meetings business.

The UK business continued to struggle in Q3 with the difficult consumer economy and without the benefit of program news or our new marketing approach implemented in NACO.

The UK 2010 Q3 meetings business revenues declined 6% versus the prior year period, on a constant currency basis, comparable to the trend in Q2.

Third quarter paid weeks were effectively flat at 0.5%, while attendances declined 9%.

Again, this trend was almost identical to our Q2 results.

The UK made the decision to pull back its media investment in the fall campaign and to focus its effort on its new program launched in November.

Accordingly, Q3 and October enrollment levels have been very soft.

Similar to the US, the UK team has been deeply focused on the launch of its new program, ProPoints, which went live in our meeting rooms this past Sunday, November 7.

Like in NACO, the response from UK leaders who have been on the new program has been outstanding.

The UK continues to invest significant energy to ensure that this new program launch is executed in a high quality manner.

For the balance of the year, the UK team will remain focused on helping our existing members with the transition to the new program, while simultaneously preparing for their January campaign drive.

Given the decision to pull back on marketing spend for the fall campaign, we expect relatively soft volume trends in the seasonally less important fourth quarter.

We're forecasting slightly negative paid weeks and high single to low double digit attendance declines for the fourth quarter.

Moving on to Continental Europe.

Over all, the CE meetings business revenue grew 6% in Q3 versus the prior year period, comparable to the Q2 trends.

Paid weeks for the third quarter were up 4%, and attendances were down slightly at negative 2%.

While we're seeing varying levels of growth across most of our markets in Europe, the key exception to this is France.

In the third quarter, France was hit hard by a new fad diet referred to as the Dukan diet.

This diet is very similar to the low carb Atkins diet that was extremely popular in the US back in 2003 and 2004.

We believe it is an extreme diet that results in short-term weight loss but will ultimately be rejected by the French consumer.

Nonetheless, it is having an impact not dissimilar to what the US experienced with Atkins seven years ago.

As Atkins came in like a tidal wave, it seemed to recede almost as quickly.

We expect the same in France.

Notwithstanding short-term competitive issues in France, the European teams are hard at work, readying their winter marketing campaigns.

We believe our biggest opportunity in Europe next year is to develop marketing campaigns that connect solidly with consumers who have never been to Weight Watchers before, a segment we refer to as "Never Members." The ProPoints launch campaign in Europe largely focused on reactivating lapsed members, and somewhat ignored the triggers needed to bring in Never Members.

This in turn has limited the total impact that this important new program has had in this region.

The implications of this are two-fold.

First, the European management teams are working hard on new campaigns that will be more effective for January.

In general, we need to develop much more compelling marketing in Europe that cuts through the clutter and presents a modern and contemporary image of Weight Watchers that will appeal to Never Members.

Second, our UK and US teams have incorporated the learnings of the CE launch into the preparation for their respective program launches this year.

Accordingly, we expect the US and UK marketing campaigns to be much more effective in delivering the news of the new programs to Never Members as we enter January.

The fourth quarter is a seasonally very slow time of the year for CE.

It is therefore more volatile from a volume perspective.

CE is being negatively impacted by two factors in Q4.

One, the continued competitive issue in France and, two, lapping the soft launch of ProPoints last year.

Therefore, we expect slightly negative paid weeks for Q4 and attendances to be down in the single digits.

Moving on to WeightWatchers.com.

The WeightWatchers.com business continues to surpass our expectations.

In the face of a difficult consumer economy, this business reached new highs in the third quarter of this year.

Q3 Internet revenues were up 22.5% on a constant currency basis versus the prior year period, an improvement over the plus 20% trend we experienced in Q2, and a substantial improvement over the plus 10% trend we saw in Q1.

Paid weeks for the Weight Watchers on-line product were up 26% for the third quarter versus the prior year period, and end-of-period active subscribers were up 27%.

Growth in our Internet businesses was geographically strong across the board, particularly in the US, despite the fact that our US Internet products have been available for much longer than in many of our newer international WeightWatchers.com markets.

All of our evidence continues to show that the driver behind the acceleration in the growth rates of the on-line business has been marketing, and word of mouth buzz.

We've been able to continue to drive growth through a combination of compelling advertising, effective promotions, and increasing media waits.

Importantly, we've been able to increase marketing investment behind this product while experiencing lower cost per acquisition.

We believe that the outstanding growth of the online business was also a reflection of the consumer's increasing receptivity to Weight Watchers.

It's worth noting that we were able to maintain stable paid weeks in our North American meetings business while growing online paid weeks in the mid-20s.

As a result, total combined paid weeks in our North American business were up 11% in the third quarter, a clear demonstration of the consumer's acceptance of our brand and approach.

For the fourth quarter, we're forecasting 25% to 30% on-line paid weeks growth, an upward revision of our forecast from last quarter.

We're now forecasting Internet revenue growth of greater than 20% for the year, as this business is approaching the $250 million annual revenue mark.

It is also worth noting that this high margin business will account for close to 25% of total Company operating income for the year.

On the product development front, we're preparing for several key releases in Q4, including the upgrade of the online product for the new programs, our first iPad application launch, iPhone application launches in the UK and Australia, and new subscription sites for Belgium and Spain.

Now I'd like to turn the discussion over to Ann, who will elaborate further on our Q3 performance.

Thank you, David.

And good afternoon, everyone.

Recapping our financial results for the third quarter, third quarter revenues of $330.6 million increased 1.9% on an as-reported basis, and were up 3.5% on a comparable constant currency basis.

Constant currency revenues grew 0.4% in the meeting business, and 22.5% in the WeightWatchers.com business.

Net income of $44.4 million in the quarter was 15.5%, or $8.1 million, below the Q3 2009 level.

For comparability, there's an adjustment to last year's third quarter expense which should be noted.

The adjustment relates to the adverse court ruling we received with regard to leader's self-employment status in the UK.

The ruling, which resulted in a charge to last year's fourth quarter, $1.1 million of which relate to the third quarter of last year, has a similar on-going impact for each quarter going forward.

After making this adjustment to the third quarter of 2009's comparability, net income in the third quarter of 2010 declines by 14.3%.

Third quarter net income was negatively impacted by a $6.5 million of pre-tax expense associated with the pending settlement of litigation in California, and by $2.4 million pre-tax of incremental interest expense versus the prior year quarter, resulting from the debt extension that we undertook earlier this year.

These items together account for 73% of the net income decline versus the prior year quarter.

Reported EPS was $0.59, versus $0.68 in last year's third quarter.

A decline of $0.09.

Adjusting the third quarter 2009 for the UK self-employment charge reduces Q3 '09 EPS by $0.01 to $0.67.

Third quarter 2010 EPS of $0.59 is $0.08 behind the prior year adjusted level, with $0.05 of the difference resulting from the charge taken in anticipation of settlement of the California litigation, $0.03 related to expenses associated with the upcoming program innovation in NACO and the UK, and $0.02 related to higher interest expense.

I'll now review the financial results of operations.

Our Q3 2010 operating income was impacted by the $6.5 million charge related to the pending California litigation settlement.

It came in at $90.4 million, a 10.7% decrease versus the third quarter of last year on an as-reported basis.

In constant currency, and after adjusting for the UK leader's self-employment rulings previously discussed, operating income declined by 8.3%.

In the review that follows I'll discuss our operating performance on this currency neutral adjusted basis.

On this basis, our operating income margin declined 350 basis points versus the third quarter of last year to 27.4%.

The impact of the $6.5 million of expense in the quarter related to the pending settlement of California litigation, was to reduce the OI margin by 190 basis points.

With gross margin virtually flat versus prior, despite costs associated with the new program launches, the remaining 160 basis points of decline was a result of higher marketing and, to a lesser extent, G&A as a percentage of revenues, all of which I will review later in this report.

Summarizing global volume trends in the quarter, global paid weeks of $34.3 million grew by 10.7% versus the prior year quarter, improving on the second quarter's 7.7% growth level.

Third quarter global attendance declined 4.8%, as compared to the third quarter of 2009.

Roughly on par with the second quarter's 4.4% decline, but markedly ahead of Q1's 12% decline.

Third quarter online end-of-period active subscriber growth continued the strong trend experienced in the second quarter, increasing by 27.4% in the third quarter versus prior year.

Looking now at the meeting business, paid weeks in the meeting business grew 2.6% globally in the quarter, driven by increases in NACO and Continental Europe.

NACO's improving trend in recruitment and monthly pass retentions brought meeting paid weeks in this business to a positive 2.8% growth level versus last year's third quarter.

In Continental Europe, paid weeks grew by 4.1% in the quarter, spurred by the first half of the year success of the innovation in driving recruitment and increasing monthly pass penetration.

In terms of third quarter attendance versus prior year, NACO is down 3.8%, and Continental Europe attendance decreased by 2.1% and UK was down 9.4%.

Lecture income revenues of $190.6 million were 1.1% ahead of the prior year quarter.

A change in revenue mix, more towards value priced monthly pass, partially as a result of increased promotional activity, resulted in a 1.4% decline in lecture income per paid week.

Higher penetration of Monthly Pass, however, results ultimately in longer retention and increased revenue over the customer life cycle versus the pay as you go payment model.

In meeting product sales, $52.2 million globally in the quarter, up 1.4% versus prior.

But up a strong 6.4% on the per attendee basis.

NACO's product sales per attendee increased 8.4% on the strength of promotions as we cleared inventory in advance of the upcoming innovation.

Internationally, strength in Continental Europe product sales per attendee drove a 4.9% increase.

In the WeightWatchers.com business, third quarter paid weeks grew by 26%, driving 22.5% revenue growth to $60.5 million.

The online business was strong across all major markets, a combination of strong retention and sign-up growth.

Our other revenues comprised of licensing, franchise commissions and revenues from our publications, declined 8.6% in the quarter, to $20.2 million.

Our licensing revenues of $14.4 million in the quarter decreased by 4.3%.

Licensing continues to be impacted by the weak economy and changes in consumer discretionary spending habits.

Franchise commissions, which totaled $2.8 million in the quarter, were down 0.7% with US franchise commissions up 1%.

Third quarter gross margin was 54%.

50 basis points below last year's third quarter adjusted level, with all of the decline attributable to expense associated with the pending California litigation settlement, a portion of which is included in operating expenses.

A combination of factors contributed to flat gross margin performance in the quarter versus the prior year level.

On the positive side, consolidated gross margin benefited from WeightWatchers.com gross margin expansion, as well as from the impact of higher meeting averages resulting from our meeting consolidation strategy and NACO and some of our Continental European countries.

These benefits were offset by the collective impact of significant expenses associated with the upcoming program innovation launches in NACO and the UK, as well as by the impact of lower product margins as we cleared inventory in anticipation of those launches.

Q3 marketing expense was $39.4 million, up 12.2%.

In the NACO and Continental European meeting businesses, incremental media and television production expenses resulted in higher marketing.

In WeightWatchers.com, heavier marketing expense investment versus prior efficiently drove online sign-ups.

Marketing as a percent of revenues was 12% in the third quarter of 2010, as compared to 11% in the third quarter of last year.

Q3 G&A expenses were $48.6 million, a 20.1% increase over last year.

Excluding expense associated with the pending settlement of the California litigation, a portion of which is included in G&A, G&A expenses rose 8.1%.

This increase was primarily the result of investing in business consulting services to assess future growth opportunities in NACO, and higher technology expenses from increased depreciation and continued investment in the website.

As a percentage of revenues, G&A was 14.6% in the third quarter of 2010, versus 12.6% in Q3 2009.

Interest expense in the third quarter 2010 was $19 million, up $2.4 million, or 14.1%, from the Q3 2009 level.

The increase is a result of a higher portion of our debt being hedged, as well as higher interest expense rising from our recent debt extension.

Our effective interest rate in the quarter was 5.06%, that's compared to 4.19% in the third quarter of last year.

Our current projection for interest expense in 2010 is approximately $76 million for the full year.

Our cash flow from operations in Q3 2010 was $108.6 million before interest payments.

After capital expenditures of $6.6 million, we had $102 million of free cash available.

We returned cash to our shareholders through payment of our quarterly dividends of $13.2 million, and by repurchasing $48.6 million of our stock.

In addition, we made interest payments of $18.1 million, and reduced our debt by $17.8 million.

We ended the third quarter 2010 with $1.39 billion of debt as compared to $1.47 billion at the end of the third quarter of 2009.

Now I'll turn it back to David.

Thank you, Ann.

As we begin to ramp up 2010, it has been a year of mixed results, starting with a weak first quarter and then a stabilization and improvement of our NACO meetings businesses in Q2 and Q3, and an acceleration of our online business during the same period.

All of our research continues to show that the consumer is still under considerable stress and remains highly anxious about the economy and their ability to make ends meet.

Accordingly, they continue to be incredibly cautious with discretionary spending across categories, including weight loss.

In that context, the improved trends of Q2 and Q3 have been heartening, as we believe that they are a reflection of our improving level of execution in our business, and a strong testimony to the inherent appeal of our online business.

We began this year with a series of initiatives to transform our business over the next three to four years.

Step one, marketing.

Our North American team did an excellent job in significantly improving the impact of our advertising campaigns with the launch of the Jennifer Hudson themed marketing for the meetings business as well as our new Weight Watchers on-line spots.

This advertising taps into the power source of the Weight Watchers brand, our members, in a way that clearly communicates our uniqueness and relevance in dealing with weight and lifestyle issues.

We have numerous opportunities now to build on this success in the US market and to make similar gains in our international businesses.

This starts with the upcoming January campaigns.

Step two, transform our retail infrastructure.

Beginning this year, the US took a significant opportunity to change the face of Weight Watchers on the ground.

There was a time that a hidden Weight Watchers made sense, when obesity affected 10% of the population.

Obesity is now a main stream majority issue and it's time to address it in the bright light of day.

Accordingly, it's time for Weight Watchers' retail presence to stand proudly out in more visible, convenient locations with bright store fronts and more modern designs.

We've now effectively completed the full conversion of our two pilot markets, Tampa and St.

Louis.

I've been down to both of them, before and after the transformation, and I was struck by the significance of the shift in our now street visible presentation.

Final touches and center launches were occurring throughout September and October, so it's still too early to get an accurate read on results although preliminary data points are encouraging.

As of the end of this year, we will have renegotiated or moved approximately 90 leases, or 12% of our total network.

This work will continue over the next two years and will be largely complete by the end of 2012.

Step three, invest in technology.

Technology has become an increasingly important part of our weight management offerings.

For the past 10 years we've invested steadily in new country launches for Weight Watchers Online and Monthly Pass, now available in eight countries with more to follow.

Our continued investment in product development, including social networking and mobility, has been critical in improving the utility and appeal of our offerings to both Online subscribers and Monthly Pass members.

We plan to continue and to accelerate the pace of product development going forward.

Step four, modernize the program.

We launched a major program innovation in Continental Europe late last year.

The learnings from this launch have been tremendous from a training, member service and marketing perspective.

Armed with these learnings, we now look to introduce major program innovations in the US, UK, Australia and Canada.

They will be officially available beginning in November on a staggered basis, with full marketing pushes during our traditional January marketing campaigns.

It is not our intention to use this earnings call to present the value proposition of these new programs to the public.

So, we're remaining circumspect on the specifics for each country until we have fully launched in all four markets.

However, I can say that I believe that these new programs will set a new framework for which to transform the eating habits and choices that we all make in a healthier way.

This program will represent an even stronger platform from which we will build our education and behavior change efforts going forward.

Suffice it to say, I'm excited and optimistic about its long-term impact on our meeting members' and Online subscribers' success.

Step five, innovate our offerings and open new channels.

It is increasingly clear that obesity has become one of the most significant health issues effecting the US and other industrialized countries around the world.

By way of example, diabetes is currently a $174 billion condition in the US alone.

Several weeks ago, the CDC estimated that the incidence of diabetes would triple to one out of every three Americans by the year 2050, creating a health condition that many say could bankrupt the healthcare system.

As we've noted on prior calls, Weight Watchers is uniquely positioned to play a significant role in addressing this issue, as a result of our approach and model which is; one, clinically demonstrated with over 60 clinical publications over the past 15 years; two, low cost, at only $9.22 per week for Monthly Pass and $4.43 per week for Online in the US; three, scalable, with almost 50,000 meetings per week globally addressing the needs of 1.4 million people in our meetings each week, and another 1 million people online; four, oriented toward lifestyle based, sustainable weight management.

Simply stated, Weight Watchers is the only at-scale provider of education behavior modification for weight management in the world.

Our position uniquely situates us as a key player in addressing obesity from a healthcare perspective.

By forming the right partnerships and relationships with various constituents in the healthcare system, including doctors, payers, and public health organizations, we can open an entirely new channel of access to bringing members into our program.

To this end, we recently entered into a partnership with Merck to collaborate to educate doctors in the US on the effectiveness of the Weight Watchers lifestyle approach.

We expect to begin a major pilot of this collaboration this coming January.

I expect to have more news on other initiatives supporting this business for us in upcoming calls and presentations.

With all these initiatives, my team and I are excited and optimistic for the future.

While some will take time to fully bear fruit, we believe we're already seeing some of these benefits, and they should become increasingly apparent as we fully roll out these initiatives over the next few years.

Weight Watchers has a crucial role to play in being the first line of defense and offense in addressing the obesity epidemic.

We believe that we're taking the right steps to allow us to increasingly capture this opportunity, fulfill our mission and generate shareholder value simultaneously.

Regarding our EPS outlook for the year, we're providing a new range of $2.42 to $2.47 per fully diluted share.

This new earnings guidance now includes a $0.05 charge for the pending settlement of a California lawsuit which was not included in our prior guidance range of $2.35 to $2.50 per fully diluted share.

At this time, operator, we would like to take questions.

Thank you.

(Operator Instructions)

First question is from Bob Craig from Stifel Nicolaus.

Please go ahead.

Thank you, operator.

Good evening, everybody.

Just a couple questions on Monthly Pass to start out.

I wonder if you could update penetration rates by geography and also comment on any disengagement that you've been experiencing there?

Well, in terms of the penetration rates, they've gone up across the world.

As I'm looking at NACO, we've gone from about 65% to about 70% of our attendance is Monthly Pass.

The UK has gone up about 5 points, and rest of world as well.

If we're looking at the UK, we're in around the 65% range, and if you're looking at the major European countries, we're at about 80% penetration of attendances from Monthly Pass.

We haven't seen any decline in retention at all.

It's actually been doing very well.

Would you expect that 80% level that you've achieved in Continental Europe, is that a pretty good target for your other geographies?

Or, is there some limiting factor to some of the other geography that may not exist there?

As we've always said, the theoretical limiting factors on Monthly Pass is, one, Internet access, and, two, the willingness to use a credit card in a recur-billing model.

Each year what we've seen is, to varying different levels, increasing penetration rates.

With the US being as high as it is right now and, frankly, with a lot of European countries being at similar,and sometimes higher, ranges, we feel pretty good about the penetration we're achieving.

But we've always surprised ourselves a little bit with the fact that the penetration seems to keep pushing itself up.

So it's, on one hand, it's difficult for me to imagine obviously 100% penetration, given some of the aforementioned constraints that I just mentioned, but I don't have any specific data that would necessarily put an absolute ceiling on this above and beyond, say, I don't know, 90% or 95%.

How long it takes to get there s to be determined.

I know you don't want to divulge a lot of information about the innovations, but it was certainly been on the UK website, looking at the ProPoints information there.

Is a more accurate way, or accurate way, of describing what you might be doing here, it really revolves around the more accurate way to assess points values based on food characteristics and how the body processes foods?

Is that the general gist of what you're going to be doing in terms of the innovations?

I think that I appreciate and understand the desire for additional clarity behind it.

It's very important to us that we make our first priority to get the launch as strong as we possibly can and to get messages out in the best way possible.

And given that this is a public forum, that's why we really don't want to use this as a way of talking about the value proposition of the innovations.

So I apologize terribly with the fact that I can't go into greater detail in terms of what I see as sort of the underlying oomph behind this, but we're not too many weeks away from that.

That's understandable.

Could you give some sort of guidance as to what your plan is in terms of marketing spend, at least as a percentage of revenue as we head into the launch in the fourth quarter?

We're looking at a higher percentage of revenues, of course, than what we've seen in the third quarter.

And it will exceed also what we spent last year in the fourth quarter.

So, I think you're probably looking at somewhere in the range of what we did in the second quarter, a little bit less than that as a percentage of revenue.

Okay.

That's great.

Thanks, guys.

Appreciate it.

Thank you.

The next question is from Chris Ferrara from Bank of America.

Please go ahead.

Hey, guys.

How are you?

Good, Chris, how are you?

Good, thanks.

Could we start out with pricing?

I know there's -- there's a couple things going on effecting product sales per attendee.

And one of them seems like it's the monthly Pass, another one is just promotion and pricing.

I know, Ann, you mentioned something about in the mix that more of your mix is moving toward Monthly Pass which is -- we know it's a little less expensive.

You also I think mentioned something about promotion on it.

So, how do I think about that and how do I think about modeling that going forward?

I mean, as Monthly Pass hits sort of a high penetration rate and stays there, will you then have sort of a negative pricing effect from there?

Or, will that be the end of the positive pricing per meeting that we've been seeing?

Or, I guess I'll let you guys talk, but I'm just trying to think about how I think about meeting fees per attendance going forward.

Separating the product sales piece apart from the Monthly Pass piece, I think there is of course a difference in price from pay as you go, but overall you get the longer -- the much longer retention, which of course adds to customer value.

But there's also -- we have not raised the price of Monthly Pass in any market to this point, in any of our major markets to this point, and so there's always a component potentially of pricing there as well.

In terms of the product sales, what we're seeing a lot in the third quarter is high product sales per attendee as a result of promotions to clear out inventory.

So, that's really effecting what you're seeing in terms of the growth in product sales per attendee in NACO and UK and some of the other markets.

So, that will come down a bit as you go into the next quarter, as we finish that process and start selling the innovation product.

Chris, one -- a couple points I would just add on top is that a number of the promotions that we have been running in NACO as well as Europe have been oriented around increasing penetration of Monthly Pass as well as driving an overall lift in enrollment levels.

And as a result of that, what you sometimes see is a short-term degradation of price per paid week, if you will.

But over the life of a subscription, as Ann noted earlier in her remarks, it is absolutely accretive if you want to think of it that way on a pricing point of view versus the pay as you go model.

So, you could look at price realization per attendance or price realization per paid week.

Price realization per paid week in a world with greater Monthly Pass penetration will by definition be lower than it is per -- versus pay as you go, because by definition it's value priced.

But the flip side is that you have such longer retention over a base of attendances that your price per attendance actually expands.

And so my view is is that we're doing a better job job capturing value in each enrollment cycle.

And so if one looks really at pricing as value achieved per enrollment cycle and revenue accretion, I think we're doing much better.

Got it.

That makes sense.

So are you guys promoting -- sounds like you just said that -- you're promoting more around increasing penetration for Monthly Pass?

Do you think also -- is promo a tool that you guys haven't used a lot in years past?

Is it a new tool you're using, and should we expect more of those promotional price points on Monthly Pass around the innovation in November as well?

Is that a good way to think about it?

I think it's a really astute observation.

In some sense, we've always had promotion in our tool kit, our marketing tool kit if you will, typically in the form of free registration.

But what has been important to use, one of our Holy Grail goals, has been to find a way of advertising more consistently over the course of the yea.

And what we find is that increasingly we've come to the view that there's this dimension of our business which is very similar to a classic retail mode, in which if you're going to put advertisement out and marketing out, it's substantially more effective when combined with a good, clever promotional tag to drive action.

By way of example, we were able to actually advertise for NACO meeting business this July, continuity advertising in a period that we traditionally have not been successful in advertising in.

We were able to do it because we were able to come out with a good promotion, in that case it was a join for a dollar.

And so one of the things we're doing is, we're doing more promotion of some level in a way that will allow us to stay on air longer, and to keep our message out there longer.

Because people are trying to lose weight all the time, and so therefore one of our objectives is to always be there whenever they have the impulse to take a weight management effort.

And so it's therefore very necessary that we have some sort of promotional hook present.

That said, we're very careful in making sure that any promotion we do provides lift in excess of any discount given.

And so all of our promotions are going to be absolutely revenue accretive over the -- and margin accretive ultimately over the duration of each enrollment cycle.

And so I give our marketing teams a lot of credit for really getting a lot, lot better at integrating smart, effective promotional strategies, combined with harder hitting and more compelling above-the-line advertising.

And so this is sort of an increasing level of confidence and capability I would, therefore, say in our marketing efforts.

Great.

That's really helpful.

I appreciate that.

And I guess one other one on the dot-com, and this question probably becomes more and more relevant as you watch paid weeks in dot-com creep above NACO paid weeks.

I think you might have mentioned a little bit earlier, but how do you think now about cannibalization?

I think in the past it wasn't big enough.

It didn't matter as much.

Now it's got to be a very real concern, right, that it's going to be hard to grow meeting attendances or meeting paid weeks in North America with dot-com doing as well as it has.

I think you said that you kept it flat despite the dot-com growth.

How are you thinking about that going forward?

Can both of these aspects of the business grow at a robust rate?

Yes.

Call me a glass 7/8 full kind of guy.

Any time I have a close to $250 million business unit that's growing 20% a year with really high margins, that generally makes me pretty happy.

So that's kind of my starting point.

With the specific question as to whether or not dot-com is cannibalizing the meeting business, this continues to be our view -- We have segmented the weight concern consumer 100 different ways to kingdom come, and what we find consistently is that the relevant dimension of understanding different types of consumers is that different people need different things, to make an obvious point.

What we find is that there are those consumers out there that are interested in the benefit of a structured program like Weight Watchers, who want access to tools and things that will help them lose weight, but generally are looking for a less intensive form of help.

And these are people who otherwise wouldn't have been in the Weight Watchers franchise at all, if you will.

And these are the people that largely would believe are bringing into the Weight Watchers Online business.

Whereas, what we find consistently, is that people that are interested in a more intensive form of help, that has the benefit of the accountability of an in-person weigh-in, personal support by a person whose face they can see, and the support and education that comes from the community experience, that those people continue to gravitate towards meetings.

Now, I look at the NACO results in the following way -- First off, if I think about the lens of the recession, the dot-com product, the Online product, has a relatively lower price point of $17.95 per month.

Therefore, those consumers that were predisposed to the dot-com product, it was more of an incidental purchase for that segment of consumers than say, for example, Monthly Pass, which is $39.95 per month.

So, therefore, it's our belief that the recession had a disproportionately harsh impact on the meetings business.

But the fact that the Online business within its segment is growing at the rate it is, in the face of a difficult economy, we view as tremendously good news.

Our strong belief, based on everything we've seen, continues to be that Weight Watchers Online is substantially incremental.

And I take some comfort in that assertion because, once again, Weight Watchers Online in the US really started to fly off the shelf on April 1, which was the same time we also saw an immediate positive shift in the enrollment trends for the NACO meeting business.

In other words, they both shifted up at the same time.

And so the fact that we're having unprecedented growth in the Online business over the past two quarter, while actually making some positive traction which we believe we can continue to push forward as we go into the coming years, with our face-to-face product, the meetings business, we think is a good example of how these two businesses ultimately reinforce themselves.

To build the case even further, what the growth of the Online business has allowed us to do is increase marketing investment against that product, which has allowed us to significantly increase overall marketing spend in North America, which has accrued overall benefit to the brand.

And so, therefore, as a result, if you look at North America, total participation in the brand, if you define it as number of paid weeks, which is effectively a proxy of the membership base, is up 11% versus a prior year period which I think is a really good result.

As I look forward, particularly with with the meeting business, and I think about the role that it has to play, the fact that the face-to-face experience works as a behavior modification vehicle, clinically speaking, particularly as I think about tying into the healthcare system, I think that the role of our face-to-face product meetings is going to play an increasingly important role.

I don't see that going away.

I think both products have their own appeal to their own different segments.

I appreciate all that color and I want to ask -- when does the -- the incremental expenses around launch in the cost of goods sold for the quarter, when do we see that cycle through, if at all?

Because it seems like the dot-com mix alone should have contributed 50 basis points to gross margin this quarter, I would imagine, and certainly the higher number of attendances per meeting would have done something similar.

So it looks like a pretty sizeable number.

Could you quantify and talk about what the time frame of this is?

It's about $4 million in the quarter, and it ends in the quarter, actually.

So it's contained -- it's self-contained in the third quarter.

Yes, Chris, to build on Ann's point, if you go back to the gross margin of the meeting business, there were three what I'll call "one-time things" that had a negative impact in comparing gross margin for Q3 of the meetings business versus Q3 last year.

Obviously, there's the $4 million that Ann referenced of the program innovation.

But there was also, as you heard her mention, there was some impact from the legal settlement, as well as a comparability issue due to last year with the UK self-employed changes of status.

And so, if you take those things out, gross margin in the meeting business was effectively flat year-on-year.

And then if you further look at gross margin within the meeting business, on the plus side you have the meeting average going up, which is accreting gross margin.

On the down side you have product sales margin in Q3 was down, but a lot of that had to do with clearing inventory again in preparation for the upcoming innovation.

That's helpful.

I guess you guys don't want to give the breakout of the legal settlement by SG&A versus COGS?

Not at this point.

I really appreciate all the time.

Thanks, guys.

Thank you.

The next question is from Ken Goldman from JPMorgan.

Please go ahead.

Good evening, everyone.

WeightWatchers.com, I'm going to play devil's advocate.

Not that I have a particular opinion on it.

I'm going to play the negative side of it.

What bites us there?

You guys mentioned -- obviously it's doing great and you mentioned that it's doing better than you expect.

What's causing it to do better than you expect, and we're seeing great growth right now.

What would cause that growth to slow down in the near term or in the long term?

Obviously, there's a law of large numbers.

But just thinking about what's driving that growth and what may stop that growth from moving up unless you guys put some more marketing support behind it.

I think it's a great question.

And in terms of -- you look at these growth rates and you say "Gee, that's pretty impressive.

What do you do for an encore?"

Certainly, there's going to continue to be a opportunity to continue to press against marketing, both in terms of making it more effective, as well as where we can get the right kind of efficiency to increase and continue increasing weight against it.

My starting point is I always go back to the fact that the sheer population, 135 million people in this country, have a weight issue.

And so, even as excited as I am by how big this 1 million global subscriber base is, in so many ways I feel like we're still just scratching the surface in terms of the kind of impact we can have both in our Online in the short-term, but also in our meetings business going forward.

I think for us to stay on our game, what we're going to find is that the Online space in theory is a -- you could argue it's a more competitive space.

A little bit the way I look at that is a little bit different, because it's not like other people haven't made a play for the online space.

They generally haven't been successful because, frankly, they don't really have a program and they don't really have a brand that has a lot of credibility with consumers.

And the biggest thing that I've always had going for us with Weight Watchers Online is the Weight Watchers name.

People come to our website on their own.

A significant part of our traffic is traffic that we don't have to go out and buy, which has allowed us to maintain fairly cost effective cost per acquisition, which somebody who was trying to do Diets Are Us dot-com would have a much harder time with.

So, with that, what that's always allowed us to do, is to invest money back into product development, which we continue to do with gusto.

And what that's allowed us to do is to continue to push ourselves to both stay with trend and, increasingly, stay ahead of trend, in terms of continuing to press an aggressive product development agenda.

And the best examples of this is that -- Yes, everybody's got an iPhone application, but we designed it -- in my perspective, our iPhone application the right way.

From day one was designed with cohesion and synchronicity with the website in mind.

So, everything is perfectly synchronized in a way that I think really creates a compelling value proposition, particularly because I can't tell you how many subscribers and members in our meetings I've met who now tell me that they're more regularly tracking their points because of the ease and convenience of having a great mobile application.

That statement is ten times more powerful, I would argue, when it's anchored in a respected, clinically proven program.

And, in the case of Monthly Pass, surrounded by a face-to-face group support system.

I think that our product development efforts have that much more power and impact.

But to be clear, the onus is on us that we have to stay with, or in front, of what's going on out there, or somebody's going to sneak in.

And so that's one of the reasons why you're going to continue hearing us talk about increasing investment both in marketing and product development with the Online business.

Which, by the way, also a quick benefit to the meeting business, because Monthly Pass gets so much of that same functionality that you see in Online.

Thank you for that.

One more for you, and then one quick one for Ann, if I can.

There's a lot on your plate right now.

That's a good thing.

Right?

You're rejuvenating the centers.

You're closing some other centers down.

You're introducing the new ProPoints plan.

You're moving it over from overseas.

I won't rehash all of it, but -- Are you comfortable that that's all okay to do at once Or do you feel that there may be more people that need to be brought in on the management level?

It's hard for us to tell on the outside, exactly how smoothly some of those transitions are going.

So if you could give us some idea of how you feel your capabilities are, not you as an individual, but as Weight Watchers as a whole, in handling all that, that would be helpful.

My general preference would be to talk about how wonderful I am, and how much I'm making this happen all by myself.

But that's not the case.

Honestly, we really have an incredible and talented management team that makes us all look good.

We've got a great team in international that's making a lot of amazing things happen.

They've been a serious source of innovation for us as an organization.

As you rightly pointed out, they made a major leap in the program, which we're now attempting to successfully build on in our English speaking markets.

I've got a fantastic team running North America.

We hired [Dave Burwick], out of PepsiCo, is now leading North America for us.

He's got a great team.

He's a fantastic leader.

[Melanie Stubbing] is a great leader for international.

Mike (inaudible) is a great leader for dot-com.

It feels like an Oscar's acceptance speech.

My point is that we really do have the strongest management bench that we've ever had.

And that's not just with those folks and the people who are running corporate, but it goes now layers down.

And so I feel that this is definitely an organization that's pretty stretched, in terms of the number of initiatives that it's doing.

But I also feel it's an organization that's smart about knowing where to add resources in places that can drive investment and performance in our business, so that we can maintain a grip on our cost structure while still making sure that we're capturing all of our opportunities.

Ann, one quick one.

Can you -- I know it's maybe a little early, but can you give us some sense of cash used to pay down debt next year?

I think there's a little bit more coming due in 2011 than 2010.

Maybe just some parameters or some guidelines for that would be helpful.

Sure.

Our required paydown next year is about $166 million.

And do you expect to pay that, plus, or is that kind of what you're thinking will be the number?

As is always the case, we weigh the paydown against other opportunities that might come along.

Franchise acquisitions are always a question for us, share buyback program, you know about.

So we weigh our cash flow opportunities against those three things.

So I'm not ready to say if --

I tried.

Thanks, guys.

Thanks, Ken.

Thank you.

The next question is from Greg Badishkanian from Citigroup.

Please go ahead.

Great.

Thanks.

Hey, just wondering maybe if you could give us a little bit of color on the trends that you've been seeing in October, early November, if you can, versus that third quarter trend?

First off, great to hear from you Greg.

It is November 9, I think, so it would be a little bit crazy for me to talk too much about November.

But excellent try.

I think the October trends -- and the forecast that we gave for Q4 for each of the respective geographies were really done with the October trends in mind.

So what we're seeing in NACO through October is very similar to what we were seeing through the third quarter, and that's what's gave us some comfort in making that prognosis.

Same with dot-com.

Same with UK.

Same with CE.

What is unknown is the potential impact that the soft launch is going to have as we put these programs out and start going into December.

Now, that said, the percentages could look kind of interesting, but the enrollment levels in December are just so low in our business, that it would be nice to see some extra pop for it, but I think it's more appropriate for us to remain prudent as we look at our forecast for the duration of the year.

Great.

And on that vein, not to put you on the spot, but maybe what type of benefits would you see from the program in 2011?

And if you don't have maybe a forecast for that, maybe as you look back over the last number of years typically when you have an innovation at this level, what type of kind of bump-up would you see in business trends?

You know, I think one of the reasons why it's always -- as you know, the practice we have in terms of providing trends and forecasts for the following year is that the Q4 call is usually a pretty important and interesting call I think for the investment community, less obviously because of Q4 results and more, frankly, because it's our opportunity to give you a sense of how things are going, because at that point we have January under our belt.

In January, just such a high -- it's such a high impact month that a lot of the year is sort of ends up hanging on it.

Not completely, but a lot.

And so for that reason, I could tell you that program innovations like this absolutely provide lift.

One could look at the CE first quarter, albeit it was somewhat impacted by bad weather, and you could look at different analogs if you go back in time.

I really think that the best advice I could give you is to let's wait for that Q4 call when we can give you a good read on what's going on because at that point we'll have much better data that will allow us to guide you in terms of how to shape out the rest of 2011.

Sure.

Yes.

Absolutely.

And just on the competitive landscape, any major change in what you're seeing on that landscape in the US, UK, Europe, maybe kind of similar to I'm assuming in France with low carb, I'm assuming there's nothing kind of major going on in the other markets like in France, right?

Yes, you know, France has been a really interesting experience.

I'll say interesting.

I think for the French team it's not been very interesting.

It hasn't been that much fun for them, although they're doing a great job of dealing and responding with it and soldiering their way through.

But it's been interesting for me because I feel like I've seen in a lot of different countries that there will be a big fad diet, almost always a low carb diet, that comes and takes the country by storm, and then goes away and then we tend not to see it get replaced by anything else.

That was certainly the case with Atkins.

We saw something similar, for example, in the Netherlands, of all places.

And we've seen this pop up in a number of different countries.

What I would tell you is that, knock wood, we have never seen a competitive threat in the US in terms of direct impact on our business that rivals what low carb through Atkins and South Beach, the impact that had in 2003 and 2004.

Because ultimately the underlying methodology, although it was presented with scientific credence, was ultimately rejected by the scientific community.

And certainly was ultimately rejected by consumers because it asked them to cut out entire food groups from their life forever.

And so what you found was that Americans were unwilling to do without bread and pasta and fruit for the rest their life.

So they ultimately rejected extreme low carb diets.

And my guess is you're going to see something similar in France.

But France, they never had their Atkins.

So, I think that's what's going on in that country.

We really have seen very little impact of that particular low carb diet outside of the country.

And, in fact, if you look at a lot of these hot fad diets, most of them are spread by PR and word of mouth.

And PR and word of mouth, particularly in Europe, from Dr.

Dukan, is going to be in the French language.

So you can imagine it doesn't convey that well over borders.

And so outside of France, I have to say, knock wood, it's been pretty quiet.

Certainly in the US, if anything, it seems there's been sort of a serial knocking down of obesity medications over the last couple of months.

If anything it feels like we're even more left standing out there as the primary solution to addressing obesity.

Right.

It's interesting because, as you were saying, I was looking at my model and we were covering you back in '03 and '04.

You had eight quarters of negative organic attendance growth and it turned positive again.

Continental Europe never felt the impact from Atkins.

That's why I was surprised, particularly in France, given their culture, that that would have taken hold at this point.

I agree with you.

Thanks for the time.

Absolutely.

Thank you.

This concludes today's question session.

I would now like to turn the meeting back over to Mr.

David Kirchhoff.

Thank you for joining us today and I look forward to speaking with you again at our next quarterly earnings release.

Thank you.

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