WW International Inc (WW) 2011 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International's third-quarter 2011 earnings teleconference call.

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

Afterwards 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 8, 2011.

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 2011 conference call.

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

At about 4 PM eastern time today, the Company issued a press release reporting its financial results for the third quarter of fiscal 2011.

The purpose of this call is to provide investors with 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 measure 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.

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

Kirchhoff.

Please go ahead, David.

Good evening, and thank you for joining us as we review Weight Watchers International's performance for the third quarter of fiscal 2011.

Weight Watchers had another solid quarter, benefiting again from strong performance in our North American, UK, and WeightWatchers.com businesses.

The initial launch of our new program is now well behind us, and it was gratifying to see continuing strength in the business, and high levels of consumer interest in our brand and unique approach to weight management.

Once again, volumes in WeightWatchers.com were very strong, which further contributed to robust top-line growth, margin expansion, and excellent bottom-line results.

On a constant-currency basis, Q3 2011 revenues grew 26% over the prior year period as compared to the 24% revenue growth we experienced in the second quarter of this year.

Meeting fees were up 19%, and internet revenues grew 65%.

From a volume perspective, combined global online and meetings paid weeks grew by 38% in the third quarter of 2011 versus the prior year period.

This was very similar to the volume growth we achieved in the second quarter of this year.

Q3 2011 paid weeks for our meetings business grew 20% versus the prior year quarter, while paid weeks for our online business were up 67%.

Q3 2011 EPS was $1.09 compared to $0.59 for the same period in 2010, a growth rate of 84%.

Favorable foreign currency drove $0.02 of this EPS gain, and we also benefited from a $0.05 tax benefit from our international operations.

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

First, our North American meetings business.

Total revenues in NACO, which includes the US and Canada, were $208 million in Q3 2011, up 23% on a constant-currency basis versus the same period in 2010.

This growth rate was virtually identical to what we had experienced in Q2 of this year.

NACO meeting fees grew by 25% in Q3 2011 versus the prior year period, entirely driven by volume growth.

In-meeting product sales grew by 22%, a significant improvement from the 5% growth rate we experienced in Q2 of this year, benefiting from new product launches, as well as good growth in our enrollment products.

NACO Q3 2011 paid weeks grew 26% versus the prior year period, while attendances grew by 14%.

This growth rate reflected somewhat of a moderation of the growth rates we experienced in Q2.

Our average class size was up 20% versus the prior year, which helped contribute to stronger gross margins in the NACO business.

Enrollments remain double-digit positive for most of the quarter with the exception of a few weeks in August when the combination of the debt ceiling debate and the US credit rating downgrade seemed to dominate the news, and we had a negative impact on consumer confidence.

In September, we saw enrollment levels bounce back nicely as we benefited from effective marketing, as well as the publicity around the release of a clinical study published in the Lancet, globally one of the most respected medical journals.

The Lancet study was a breakthrough publication for Weight Watchers.

This large randomized clinical trial was led by investigators from the Medical Research Council of the University of Cambridge in the UK.

The study was conducted in the UK, Germany, and Australia, with close to 800 people in the sample.

In the study, doctors would randomly refer an overweight and typically obese patient to either Weight Watchers meetings or to a standard care program led by a primary care provider.

After 12 months, participants in the Weight Watchers arm achieved two times the weight loss and were more than three times more likely to achieve a 10% weight loss as compared to the standard care group.

The study demonstrated the power of a partnership between doctors and Weight Watchers to have significant impact on patient success.

Moreover, just this past Friday, another publication, The British Medical Journal, released a new study further validating Weight Watchers' superior approach to weight management.

These studies clearly demonstrate our ability to be among the most effective tools for addressing front-line obesity.

Our clinically proven efficacy combined with the fact that our program is highly cost effective and scalable adds further evidence to our unique ability to positively impact obesity.

As of mid-October, we went off the air from an advertising standpoint as we entered into the traditionally quiet holiday period that starts with Halloween and runs through Christmas.

At the end of November, we will begin lapping a soft launch from PointsPlus, a period of exceptional PR and buzz that resulted in an unusual spike of enrollments during the last week of November and the first two weeks of December last year.

We do not expect to see similar numbers this year, as we are not undertaking a program launch on the magnitude of PointsPlus.

Further, we estimate that 4 to 5 percentage points of our attendance growth in Q4 last year came from existing paying members, mainly Monthly Pass members who otherwise may have been less engaged during this time of year, coming to the meeting rooms in large numbers to pick up their new program materials and learn about the changes.

This effect accounted for approximately two-thirds of the 6.5% attendance growth we experienced in Q4 of last year.

Given the unusual spike in enrollment, and this abnormally high return rate of our existing members last year, for Q4 this year we expect paid weeks growth of 10% to 15% and flat attendance.

This outlook is consistent with our previous forecast.

Now, on to the international meetings business.

After a relatively slower July and August, the UK business bounced back with double-digit growth rates in September.

As a result, it delivered a very strong Q3.

The UK saw third-quarter revenue growth of 21% on a constant-currency basis versus the prior year period, with paid weeks growth of 18% and attendance growth of 10%.

With a better marketing campaign, the UK team was able to deploy a stronger media plan in Q3 of this year compared to last year.

This in turn resulted in significant enrollment growth in September, which continued through the remainder of the campaign in October.

Like NACO, the UK will begin copying the launch of its new program, ProPoints, beginning in early November.

However, the strength of its October enrollment growth will more than compensate, and we expect this business to generate Q4 paid weeks growth in the mid-teens, as well as mid-single digit attendance growth.

Moving on to continental Europe.

CE is finishing what has been a difficult year, as it has been retooling its marketing and program efforts behind the scenes in preparation for 2012.

Overall, CE revenues declined 10% in Q3 on a constant-currency basis versus the comparable prior year quarter, an improvement versus the trend we saw in Q2.

Paid weeks declined 6%, and attendance has declined 15%, also improvements on Q2 trends.

The CE team has spent this year focused on two areas.

One, preparing for a significant upgrade of its now two-year old ProPoints program, and two, upgrading its marketing capabilities.

They've made excellent progress on both fronts, and we're excited for our prospects in this market as we enter 2012.

As you may recall, unlike our marketing execution concurrent with the launch of our new programs in the US and UK, the CE marketing campaigns failed to entice never-members to join Weight Watchers in large numbers, something we hope to make progress on beginning in January 2012.

As an important side observation, we have seen the influence of the notable fad diet in France decline significantly in the back half of the year.

We believe that we now have an opportunity to help the people in that country adopt a much more balanced and sensible approach to managing their food choices as they move away from this extreme diet.

For the remainder of the year, we are forecasting Q4 paid weeks and attendance declines in high-single digits.

Moving on to WeightWatchers.com.

Once again, we have seen another outstanding quarter for WeightWatchers.com with significant growth across virtually every market.

Q3 2011 internet revenues were up 65% on a constant-currency basis versus the prior year period.

Paid weeks for the Weight Watchers Online product grew 67% in the third quarter, and end-of-period active subscribers were up 64%.

This growth is on top of the 26% paid weeks growth we experienced in Q3 of last year.

New sign-up growth throughout the third quarter was strong, and September was particularly strong, benefiting from higher marketing investment and from continued interests in our products for both men and women.

We again advertised our Weight Watchers Online for men product in the Fall with excellent response.

Men now account for approximately 15% of our Weight Watchers Online sign-up volume in the US, despite the fact that our awareness with this population is still relatively low, and we have yet to hit our stride in terms of marketing and PR targeting them.

As we end the year, we will be launching numerous enhancements to the website, and new mobile functionality in preparation for 2012.

We believe that these changes will further enhance our value proposition for both our Weight Watchers Online product and for our Monthly Pass commitment plan as we enter the new year.

As is the case in our NACO and UK meetings businesses, we will experience a relatively high sign up comparable in late November and early December, as we lap the soft launch of the new programs in the US and UK.

Despite this, we are now forecasting online paid weeks growth for Q4 at 55% to 60%.

It is worth noting that for the full-year we are forecasting revenues for our WeightWatchers.com business of approximately $400 million, a 66% improvement over fiscal 2010.

Is it also worth noting that this business unit will likely contribute over $200 million of operating income for the Company in 2011.

Now I would like to turn the discussion over to Ann, who will elaborate further on our Q3 2011 performance.

Thank you, David, and good evening, everyone.

The third quarter of 2011 delivered strong results, with strong growth rates in our key revenue and profit metrics, and a significant increase in operating leverage.

Our third quarter revenues were $428.4 million on a consolidated Company basis, an increase of 29.6% or 26.2% on a constant-currency basis versus the third quarter of last year.

Revenue growth was driven by the significantly higher membership base coming into the quarter as compared to Q3 of last year, as well as by customer recruitment growth within the quarter.

Operating income was $138.3 million, increasing by 52.9%, and outpacing the rate of revenue growth.

We delivered 490 basis points of operating income margin improvement in the quarter, primarily as a result of gross margin expansion.

I will provide the details around our operating levers later in this report.

Net income in the quarter of $80.7 million was up 81.5% versus last year, increasing at an even higher rate than the growth in operating income, with the spread resulting primarily from $5.4 million of lower interest expense than last year, and a $3.5 million one-time tax benefit.

EPS of $1.09 was up $0.50 from $0.59 in the third quarter of last year.

Our third-quarter 2011 EPS was positively impacted by $0.05 from the one-time tax benefit and by $0.02 from favorable foreign currency exchange rates.

While in the third quarter of 2010, EPS was reduced by a $0.05 charge from the settlement of a previously disclosed California litigation.

Now, I will provide some of the details of our operational results.

As we noted in our last earnings call, we came into this year with a significantly higher customer base than at the beginning of 2010, in both our meetings and WeightWatchers.com businesses, and the momentum of customer recruitment accelerated in the first half of 2011.

By the end of this year's third quarter, our Monthly Pass customer base had grown by 20.8%, and our online end-of-period active subscriber base had increased by 63.6% as compared to the third quarter of 2010.

Accordingly, our principle revenue metric, paid weeks, increased by 38.1% globally in the quarter on a consolidated Company basis, just slightly below the historical high growth level experienced in the first half of this year.

In our meetings business, third quarter paid weeks grew by 19.7% versus prior to $24.9 million.

And globally we had 12.6 million attendances, an increase of 8.7% versus prior.

In the WeightWatchers.com business, paid weeks increased by 66.6% versus a year ago quarter, but at a slightly lower growth rate than in Q2.

Sign up growth continues to be strong, and end-of-period active subscribers to the online product were 1.7 million at the end of the third quarter.

The moderation in paid weeks growth in the third quarter versus earlier this year is the result of comping against a strong and accelerating growth rate last year in sign ups and in the results in paid weeks.

2010 paid weeks were up 22% in the second quarter versus prior, 26% in the third quarter, and by the fourth quarter the growth rate had increased to over 33%.

This dynamic of comping against accelerating growth in the prior year will likely result in the further moderation of the WeightWatchers.com fourth-quarter paid weeks growth rate that David mentioned in his remarks to 55% to 60%.

Looking now at the impact of these volumes on our financial performance, with all the growth rates cited from this point on a constant-currency basis unless otherwise noted.

Our consolidated Company third-quarter revenue growth versus prior of 26.2% was comprised of 18.4% growth in the meeting business and 65.1% growth in the WeightWatchers.com business.

In the meetings business, meetings fees and in-meeting product sales combined rose 18% in the third quarter to $294.7 million.

Meetings fees in the quarter grew a robust 19.3% versus last year to $233.4 million, with NACO up 24.6%, and UK up 24.9%.

Increases in these markets were partially offset by performance weakness in continental Europe.

In-meeting product sales increased to $61.3 million globally, up 13.6%, outpacing the quarter's 8.7% attendance growth with strength in sales per attendee.

Our higher priced enrollment products sold well in the quarter, particularly in NACO where product sales per attendee were up 7.3%.

UK product sales per attendee were up 3.4%.

In the WeightWatchers.com business, the 65.1% revenue increase in the quarter to $101.9 million was bolstered by strong sign ups in our two largest markets, North America and the UK, but also contributed to by sign up strength in continental Europe, led by France.

Our other revenues were $31.9 million in the third quarter, up $4.5 million or 12.4% versus prior.

Other revenues include franchise commissions and sales of products to our franchisees, which were up a combined 30.3% or $1.3 million, and sales of our by-mail product and revenues from our publication, which rose a combined 21.5% or $1.9 million over prior year levels.

Licensing revenues, however, decreased by 1.1% in the third quarter versus prior.

An 8.9% increase in UK licensing was more than offset by declines in the US and continental Europe, driven partially by price resistance in a challenging economic environment.

Our growth margin increased by 460 basis points in the quarter, up from 54% last year to 58.6%.

The improvement was the result of the WeightWatchers.com business, whose cost of revenues are largely fixed, becoming a larger component of our revenue mix, and also the results of the 12% growth in the average attendance per meeting in this year's third quarter versus prior.

Marketing expenses for the third-quarter fiscal '11 were $61.5 million, up 52.7% versus the third quarter of '10.

Of this increase, 13% represents the amount spent for the aforementioned men's online marketing campaign.

The remainder of our marketing in the quarter drove subscriber growth in our WeightWatchers.com business, and enrollment growth in our meetings business in North America and the UK.

Marketing expenses as a percentage of revenues were 14.4% in the third quarter of '11, as compared to 11.9% in the prior year quarter.

Selling, general, and administrative expenses were $51.4 million for the third quarter of 2011, an increase of 2.5% versus the third quarter of 2010, which included $4.9 million of expense associated with the settlement of the California litigation.

In this quarter, selling, general, and administrative expenses increased 14%, primarily in support of growth initiatives, including technology for the development of our mobile platforms and additions to staff in support of B2B health care business development.

Selling, general, and administrative expenses as a percentage of revenues for the quarter decreased to 12% from 14.7% in the third quarter of '10.

In summary, our operating income margin grew by 490 basis points in the quarter to 32.3% versus 27.4% last year.

Moving now to interest expense, which was $13.7 million in the third quarter, down $5.4 million or 28.3%, a combination of a lower effective interest rate and lower debt outstanding.

Our effective interest rate decreased by 63 basis points from the third-quarter 2010 level of 5.06% to 4.43%, primarily as a result of the decline in the notional value of our interest rate swap.

Since the third quarter of last year, we reduced our average debt outstanding by $273.4 million, down from $1.4 billion on average in the third quarter of 2010 to $1.12 billion on average in the third quarter of this year.

Our Q3 2011 cash flow from operations before interest payments was strong at $132.8 million.

After CapEx of $10.4 million, we had $122.4 million of free cash available to service our capital structure, and to return cash to our shareholders.

In the quarter, we paid our quarterly dividends of $12.9 million, we made interest payments of $12.8 million, and we reduced our debt by $96 million.

Our debt outstanding at the end of third quarter 2011 was $1.07 billion, and our trailing 12-month net debt to EBITDA was 1.81 times.

Before wrapping up, as in our last call, I will spend a few minutes reviewing the 2011 financial impact of some of the operating initiatives and investments that we have been making to benefit the business in 2012 and beyond.

In the fourth quarter of 2011, these investments, having net cost to EPS of $0.12 to $0.13, $0.07 of which was reported on our last call, and an additional cost of $0.05 to $0.06, which represents marketing investments that we've added in the fourth quarter.

In our last call, we noted that we began advertising our online to men with our Spring 2011 campaign, and planned to continue through the Fall campaign resulting in a $0.09 net cost to 2011 EPS, $0.01 of which is related to the fourth quarter portion of our Fall campaign.

In addition, we communicated that we were planning to up our fourth quarter NACO spend by the equivalent of $0.02 EPS for production and early support of the winter 2012 campaign.

As we have now finalized our fourth quarter marketing plan, including preparing activities associated with our upcoming Winter 2012 campaign, our total marketing expenses should come in $0.05 to $0.06 above what we previously forecasted.

The investment areas that remain unchanged from the levels cited in our last call are with respect to the NACO retail centers and the development of our B2B health care business.

In terms of our NACO retail center initiative, we expect greater than 50% of our NACO retail centers to be fully upgraded by the end of this year.

This results in a $0.02 net cost to EPS in the second half of the year, $0.01 of which falls in the fourth quarter.

Finally, we're continuing our work to enable the development of our B2B and health care businesses, which include a next wave of IT infrastructure investment, as well as expense related to building our B2B health care team.

The IT investment is focused on member data and business intelligence with a view toward creating the reporting needed for these businesses, as well as towards generally providing a better understanding of our customers' behavior and needs, which creates the opportunity for enhanced personalization.

This combined investment for IT and the business team is still projected as a second half cost of $0.05 to EPS, $0.03 of which is being spent in the fourth quarter.

Now I will turn it back to David.

Thank you, Ann.

We expect to finish 2011 with the strongest financial performance in our history.

Despite shaky consumer confidence across all of our markets, we achieved robust growth in our US and UK meetings businesses, and we drove our WeightWatchers.com business to new heights.

The brand has never enjoyed more popularity despite the presence of aggressive competition and the uncertainty of the economic environment.

We are very cognizant of the fact that at the end of this year we will begin comping against this resurgence of growth.

There is no doubt that the launch for PointsPlus in North America, and ProPoints in the UK last year, resulted in significant growth in enrollments, particularly in Q1.

As we enter 2012, we remain cautious about an uncertain economy.

In addition, we fully assume competition from other commercial weight loss competitors will be robust.

To this end, we have been working aggressively to meet this challenge of driving growth in 2012, while also staying focused on supporting those initiatives to drive growth in 2013 and beyond.

Specifically, we are very focused on executing well on early 2012 initiatives, including -- one, continuing to execute strong marketing.

We will be launching new marketing campaigns, which we believe will be our best yet in all of our major markets in the new year.

We are very excited about these campaigns, which will be supported by effective PR, and we expect they will deliver strong cut-through and ensure that we stay top of mind with consumers.

Two, improving our programs.

We believe that the PointsPlus and ProPoints are the best behavior modification weight management programs that have ever existed.

Our strategy is to take these programs and make them even better.

For this coming January, we will be launching new upgrades of PointsPlus from ProPoints in NACO and the UK, respectively, and an even more major upgrade of the current program in CE.

Three, accelerating our retail transformation.

By the end of this year, we expect that greater than 50% of our NACO retail centers to be fully upgraded in either location and/or design, with the vast majority of the upgrades occurring between now and the end of the year.

Our test markets for retail transformation have shown excellent high-teens incremental growth over control through the third quarter.

Four, continue to drive our WeightWatchers.com business.

This highly scalable product line continues to grow rapidly in all of our major markets.

With the scale we now have, we are able to continually invest in greater content, and new features and functionality.

Additionally, in 2012, one immediate opportunity will be attracting more men to Weight Watchers Online.

For the longer-term, much of our focus will be on continuing our efforts to better integrate Weight Watchers into the health care system.

We've made significant progress this year on multiple fronts -- one, clinical evidence.

The Lancet study was an important milestone for us, which has been further supported by the recent study by the British Medical Journal.

Both studies clearly demonstrate the high level of efficacy of Weight Watchers versus other approaches.

Two, sales and operational capability.

NACO has made significant progress in creating new sales, account management, and IT capabilities, and has major new corporate account wins with large self-insured employers to show for it.

We will continue to vigorously pursue our strategy of reaching the day in which doctors can easily refer Weight Watchers to their patients, knowing that they are covered under their health plans.

We're not there yet, but we believe we can find a path that gets us there.

When this happens, we believe that it will open up a substantial new channel for getting new customers engaged with us.

As we have said so many times before, there is no other organization on earth that can match our ability to deliver education and behavior modification for weight management with our combination of efficacy, cost effectiveness, and scalability.

Guidance -- given our year-to-date performance and our forecast for Q4, we now expect to deliver full-year earnings per fully diluted share of $4.05 to $4.10.

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

(Operator Instructions) Bob Craig, Stifel Nicolaus.

Thank you, operator, and good evening, everybody.

Dave, the first question is on customer retention and I will ask the question this way.

You may prefer to answer it a different way.

When you look at the pool of nevers that you signed up early this year, any indications to what percentage of those are still customers and has -- how is that tracked versus your expectations and/or historical trends?

What I would say is this.

Is that despite the higher level of enrollment levels in some of our core markets, for example the US and UK, we have not seen any material change in retention patterns.

In other words, the expected retention that we had been seeing historically for Monthly Pass, for example in NACO, has not changed this year.

And comparably, if you look at Weight Watchers Online, we are also seeing very consistent retention trends.

And so what I would say is that everything has been very much to our expectations.

Okay.

Second question, I was wondering if you could provide a little bit more color in terms of sizing up the corporate and healthcare effort and the resource that is being channeled there in terms of the sales force.

In terms of customer wins and also, too, has the Lancet study sparked additional interest in that regard?

The answer to the last question is absolutely.

I think the significance of the Lancet study and then the follow-up study which is the British Medical Journal, and the BMJ, it's also worth noting, that we had absolutely nothing to do with it.

It wasn't funded or sponsored by Weight Watchers in any way, shape, or form yet the results of the outcome were very consistent.

And if you look at the results of those two studies, what they demonstrated is that in terms of addressing and making meaningful change in weight loss and addressing obesity, that the affliction of obesity is one of lifestyle, which requires us to change the way we interact with our environment out in the world.

And what it showed is that it's a very difficult condition to address in a clinical setting.

Therefore that's why you saw Weight Watchers delivering such a higher level of efficacy.

And if you look at the companion Op-Eds in both of those journals their perspective on that was very consistent, that programs like Weight Watchers, and Weight Watchers in specific were pretty uniquely positioned in terms of delivering weekly education and behavior change.

But from my perspective, even more important than that,, is that when you have the combination of doctor referring to Weight Watchers, you saw basically a plus up effect.

Because the doctor's uniquely positioned to create kind of a call to action and Weight Watchers is uniquely positioned to deliver the behavior change.

Having that kind of clinical data is critically important when we call on major corporate accounts because it demonstrates what they already knew intuitively, which is frankly what's in our tag line, which is quite simply that Weight Watchers works.

Having the clinical background behind that in the eyes of chief medical officers at major corporations and in HR executives is a really important part of the equation.

And so all of these things are continuing to be kind of a pool of evidence that makes our proposition stronger and stronger.

To answer your first question, in terms of where we are in the sales organization and major account wins, in terms of the sales organization, we started this year with a very talented VP of Sales.

And he, in turn, has been building a team underneath him of some very capable account managers who are now in the process of getting some big wins.

I would share with you more the names of those accounts but, at this point, we haven't cleared that for public release with those accounts.

But what I can tell you is that it has been very helpful in terms of giving us really good operational experience, in terms of much larger scale accounts than we typically have had.

And it's giving us critical learning in terms of knowing how to scale up our account management practice and all the operational requirements associated with that.

So that we can look toward 2012 as a year in which we began accelerating the pace of account wins and inclusion and really begin to drive a key part or component of the healthcare segment which is appealing to large self-insured plans.

In other words, large corporations as kind of the lowest hanging fruit as part of our broader effort to make critical -- achieve critical mass in the healthcare channel.

That's very helpful.

Last question and I will turn it over.

Ann, thank you again for the breakout of expenses but when you look at those major buckets of 2011 spending, how is that likely to trend in 2012?

Will that spending be higher, lower or relatively flat year-over-year?

That is such a good question, Bob.

But we're really not talking right now about our 2012.

I really can't provide any help with that.

I'm sorry.

That's okay.

I had to try.

Thanks.

Charles Brady, Credit Suisse.

Thanks.

Good afternoon, everybody.

My first question is just on the retention rates.

I just want to make sure I was clear on the response to the last question, if you can just tell us about how retention rates have trended for new versus returning members for the weekly, monthly, and online.

The way we track retention is we look at aggregate.

We focus principally on aggregate retention rates across all of our customer base including both brand-new customers who have never been to Weight Watchers before, as well as rejoins.

So we generally have sort of a kind of regular metric.

We look at the aggregate.

And what I'm saying is that the aggregate for both meetings, Monthly Pass, as well as Weight Watchers Online, if you look at retention on a month-by-month basis across enrollment cohorts, it's been very consistent.

So we really haven't seen any change or any meaningful change in retention in 2011 versus 2010, despite the fact, for example, in Monthly Pass you have a surge of never members that we hadn't seen before.

We are still seeing very consistent trends.

So retention has proven itself to be very predictable in the business this year compared to last.

And also the price increase, which I'm wondering, did that have any impact or were you able to keep the same retention rates even with the price increase?

Yes.

And for those who may not have been focused on this.

We did pass a $1 price increase for the US Weight Watchers Online product in September of this year.

We went from $17.95 to $18.95.

Since that happened in September, we are really kind of only six weeks away from that.

Give or take.

It's really way too early to make a call on the impact that it's having on retention.

What I can tell you is that what we have done taken price with Weight Watchers Online in the past, we generally haven't really seen any impact at all, in terms of retention rates.

And we certainly in terms of sign up volume for Weight Watchers Online, is we look at late September through October, we certainly haven't seen any evidence that it had any impact on that -- those sign up rates.

What I will tell you is that Weight Watchers Online is a lower priced product.

It's our lowest priced product actually.

And so being at $18.95, it's still a pretty great deal.

And so that's also just worth keeping in the back of your mind.

Then my second question just on the Merck relationship.

How is that going and are you seeing physician referrals result in new enrollment?

Any plans to expand that relationship and since the Lancet article was published, have you seen any change in the referral rates coming through that channel?

Here is the way I look at the healthcare opportunities specifically with doctors, is that from our perspective, really what makes the healthcare channel pivot for us and kind of reach a key inflection point, is when you have that scenario that I was describing in my prepared remarks, which is patient sees doctor, patient is obese, the doctor has a conversation with the patient about referring them to Weight Watchers knowing that they are covered by the health plan.

And it's -- in other words when both doctors and payors are both engaged and sort of acting in a way that's consistent with referring patients to Weight Watchers, from my perspective that's when the whole thing really starts to move.

Payors really aren't there right now.

We think over time they are going to get there.

We are seeing indications that there is a path to get there that we feel very positive about.

So therefore, really with doctors our focus in working with our partners from Merck has been more to understand sort of given the complexities of the operating environment within a doctor's office and the limited amount of time that they have with patients, what is the best way to get a doctor to engage in the conversation?

How can we get the learning from that process and how can we try some different approaches in terms of working with different medical practice configurations and other things so that, as we get the payor part of the equation to tip in our favor, we then have a good game plan with doctors.

So really the partnership with Merck right now has been much more focused on figuring out how this model works from a doctor perspective.

And our perspective in terms of how it actually drives significant volume through the business, happens more, I think, when the whole system comes together.

Thanks.

Just one last one related to that with this Lancet article and the British Medical Journal article.

In your back pocket you would seem to have a unique hunting license to actually go out and seek reimbursement from the national healthcare systems of other countries.

And I'm wondering if you could just tell us what investments you are making in that regard, are there any milestones we should look for or any -- anything we should keep in mind as we try to model when to expect you to achieve reimbursement from some of those national health systems?

I think, and keep in mind that some of these have been relatively more recent news.

Particularly the clinical studies in the Lancet and the BMJ.

If I were to say where we're prioritizing our efforts, our closest in healthcare opportunities are in the UK and the US.

In the UK the NHS already refers patients to Weight Watchers with vouchers.

It's still a relatively smaller part of our business in the UK, but it's a practice that's already happening, which is an interesting model because it's really the first major payor that's around the world that's really doing anything with this, in terms of working with programs like Weight Watchers.

Now as you probably know, the NHS in the UK is kind of going through a period of transition as they move away from primary care trust, so we are in a little bit of a period of flux while they settle into the new system that they are going to be going to.

In the case of the US, we view that as probably one of our best near-end opportunities, just because the impact that obesity is having on healthcare cost is as pronounced as it is.

One would argue that the US should therefore have a greater sense of urgency.

And so I think, from that point of view, our perspective is that if you look at kind of the universe of payors in the US, that our first priority is the people who are most motivated which are large self-insured plans, and that's the corporate initiatives that we are now talking about.

But then we're going to have an opportunity to make our case with private insurance, in other words individuals and small businesses, state regulated plans, et cetera, state employers, federal employers, as well as ultimately CMS and Medicaid and Medicare.

I think it's going to be a process to get there.

We're still in the process, frankly, of working through our strategy in terms of go-to-market and how we bring all these elements together.

And we are probably further there than in terms of thinking, for example, how do we activate the healthcare system and in a country like Belgium or Germany, but we're also making progress in that front as well.

So to more directly answer your question with that context and backdrop, what I would suggest is that, as we get into next year, I think we will be able to provide maybe a little more specificity, in terms of where exactly we think these milestones are most likely to lay down.

Thank you.

Chris Ferrara, Banc of America.

I'm just wondering -- I guess David when you talk about driving growth in 2012, it seems to be in the context of topping the launch.

Can you just talk about when you say growth, growth of what?

Can you just be a little more specific, I guess.

Without doing the thing that I won't do which is getting into specific forecast on 2012, which, as you know, that's something that we've always done with our Q4 report that would presumably be coming some time around the end of February.

So with that caveat in play, what I would say is that it is our expectation and we are literally in the middle of budgeting, as we speak.

So that process is ongoing.

It's our expectation that, as we look at the year 2012, that we will be driving growth from a revenue therefore bottom-line perspective.

Okay.

And I guess and since you mentioned already the budgeting process.

Can you just talk a little bit about how hard or easy it is to budget 2012?

How much of this just depends on your ability to hit the right message with marketing program and with this upgrade?

Do you feel good about the predictability of your budgets or do you just got to try and stay conservative and just deliver what you say you're going to deliver?

It's a unique and clever way of trying to get me to get into more details on our 2012 budget so I give you huge credit for that.

What I would say to my flip comment aside.

What I would say to answer your question, our starting point with in terms of looking at 2012 is that, for example, if we look at what's happened this year, one of the things that's worked really well for us is we've been very successful in getting new people into the door at Weight Watchers, particularly in the US and UK.

Both with meetings as well as with WeightWatchers.com.

Those never members, those never enrollments weren't coming, for example, because we had a new program.

They were coming because we had great marketing, we were cutting through, we were very much top of mind.

And so therefore when we look at -- when we look for example at our ability to do the same and even better next year, we take a lot of, obviously, comfort knowing that if we do a great job of executing our marketing programs we will be able to deliver good outcomes.

And so if we take that -- if we take the fact that there is some predictability that's going to come from the fact that half of our retail network will be upgraded next year, we know we have some predictability and visibility in terms of, for example, marketing programs to further drive the WeightWatchers.com business, lots of other things we're putting in place.

I think we feel like we are sort of armed with enough arrows in the quiver, so to speak, that we feel like we have enough things going for us that we are going to be able to be significantly in control of our destiny as we go into next year.

That helps, I guess.

And maybe I was trying to be -- trying to go at it the other way.

I'm not really looking for specific guidance.

I guess and how you're framing it.

Because it kind of seems like a difficult thing to predict from anyone, whether it's internal or external.

It kind of is and it isn't.

If I'm just looking at 2012 in terms of this year, and you look back over the quarters, Q1, Q2, Q3 and Q4, really if there was a quarter that was particularly out sized as you heard my prepared remarks, it was the first quarter, and beyond that what we've been seeing is that, even with the first quarter, which had really good enrollment levels, we have been driving enrollment growth throughout Q2 and Q3.

So really if you look at the tricky part of forecasting the business would therefore be trying to get a bead on exactly how Q1's going to pan out, but really in terms of sort of like over the course of the year as we look out over the course of 2012 and look at what we are going to be up against in terms of comps from 2011, it's mostly a Q1 story and then it normalizes pretty considerably.

Okay.

That helps.

And I guess one other thing and tell me if this is just not thinking about it the right way.

If you go back to 1999, when Points originally launched.

In North America you are comping growth on growth on growth with attendance levels adjusted for acquisition but really aren't materially different from where they are today I guess in a market that's grown pretty considerably.

So I guess I is it the right way to think about it that you should expect a comp positive in NACO attendance over time, maybe not in Q1 but over time.

It seems like unless the dynamics have changed in the industry that considerably.

I'm just curious of your thoughts around that.

I think what you could infer from my statement that we are going to grow 2012, is that for us to grow the full-year 2012, we would have to do exactly what you just described.

And so from that point of view -- it's a little tricky in terms of comparing 1999 versus 2012.

Not the least of which is that there is more unpredictability in the world with the economy and everything else.

Competition is certainly operating at a different level today than they were back when we first launched Points back in 1999.

But I would also argue that we have a team that is executing at just a really fantastic level.

It's a team that's got a lot of confidence and a lot of belief in themselves and the things that they are putting in place were much more, I would argue, aggressive and opportunistic than we were in the past.

So it's sort of comparing this innovation cycle with the one back from Points means there is a lot of things that are different.

But frankly, from our point of view, we believe that as we look into the future and particularly as we look at 2012 and frankly for sure as we look in the years beyond, we really believe that Weight Watchers is entering into a place where it is our destiny and our obligation to have a much bigger impact on impacting obesity than we are even today.

Healthcare is going to be a big part of that.

Continuing to drive the consumer business is going to be a big part of that.

And none of those things changed and that's kind of the way we look at it.

Gary Albanese, Auriga.

Hi, good evening, everybody.

Now that you have the September online price increase of $1.

What do you think your pricing power is for the monthly meeting pass given the value that holds?

We -- just to make an obvious point, we don't speculate in terms of specific pricing actions that we may take in the future.

I would point out the fact that we haven't taken pricing on Weight Watchers Monthly Pass, anyway, in the US since we first launched it in mid I think 2006.

And so if you ask me, do I think that there is ever an opportunity to take a look at pricing for Monthly Pass, therefore given that in the backdrop I would say yes, there is.

But we haven't announced any specific plans around it.

Okay.

And are you still seeing the same sort of break down between like the monthly and the sort of pay as you go or weekly basis?

We are a little bit higher on Monthly Pass as a percentage of paid weeks in Q3 of this year than last year.

Call it 75%, for example, in North America this year versus I think 72% last year.

Okay.

And you mentioned before about timing of the promotions or the marketing versus last year and how you kicked in a little bit earlier.

It won't be that way this year.

Can you sort of, I guess, talk about what we should expect to see in terms of timing when the new marketing should start to roll out.

Will there be new announcements with some of your new initiatives prior to that, via press release?

We have not historically put out press releases to announce new marketing programs.

Our way of announcing new marketing programs is to actually put them out into the world.

And we do that mostly because it is the best way to have maximal impact, in terms of consumer response.

And therefore, our practice has been much more to comment on those marketing initiatives after we've had a chance to put them in play.

Because really, if you ask our marketers, their perspective is they want everything they can possibly do to have the biggest impact possible in terms of sort of surprising and delighting consumers with great new ad campaigns.

Okay.

And then last question, with your cash still at a pretty high level, any other consideration to share buybacks going forward?

We certainly have availability in our share buyback program.

We have like $200 million there.

So we have the authorization to do that.

Of course, we will continue to pay our dividend, pay down our debt as appropriate.

And other things that could come along, like franchise acquisitions, are always on our radar screen as well.

Those are generally our uses of cash and nothing has really changed.

Thank you.

Ken Goldman, JPMorgan.

Hi, good evening, everyone.

I want to ask a slightly negative question.

Despite all of the success you've had this year, your attendance this quarter was actually 0.5 million lower than it was at the same point in 2008.

Your paid weeks were up 24%, but your attendance is up only 2% on a two-year CAGR basis.

I understand why this is happening, I know we've gone over this in prior calls to some extent.

I just want to get to one question.

The core of your business is still, if I'm correct, word-of-mouth marketing.

Isn't there at least some concern internally that, unless attendance rises more, you may have to boost paid weeks a bit more via advertising or promotion, and then maybe that cuts into the operating margin potential a bit?

Or is that really just not the right way to think about it?

No, I wouldn't think about it that way.

This is one of the fundamental issues with attendance is, it becomes a less and less useful way of sort of addressing kind of where the business is, either in terms of the number of customers we have and then certainly in terms of the revenue of the business.

Let me give you a for example.

Right now there is kind of a spread, if you look in the third quarter between paid weeks and attendance growth rates versus last year's Q3.

One of the reasons for that, for example, if you look at NACO, is that the enrollment patterns for this year were very different than the enrollment patterns for 2010.

What I mean by that is that, 2010 we had a very soft first-quarter enrollment drive that was followed by increasingly strong enrollment trends as we entered through -- as we continued through the course of 2010.

This year we had an incredibly strong enrollment drive in the first quarter as opposed to the quarters that followed.

The impact of that is that you have a whole bunch of customers that came in the beginning and say January and February, a lot of those guys, a lot of those customers are reaching kind of their eight month point.

In other words, their mean expected retention on Monthly Pass and, as you can imagine, their likelihood to attend a meeting declines as they get toward the tail end of their subscription.

What this means is that if you look at the average tenure of the Monthly Pass base in Q3 of this year, it is so to speak, therefore older than it would be in Q3 of last year, which is one of these things that creates kind of this mismatch between paid weeks and attendances.

So if I really look at, okay, what's going on in terms of the factors driving this sort of behind the scenes.

It's one of the reasons why, when I'm looking at the business, I focus primarily in terms of where paid weeks are because that's the most accurate way of getting an assessment of how big the membership base is in the business.

And I feel better about saying that because I know that the enrollment trends that we have been seeing that we have also been referencing in our comments have been pretty consistently strong, incredibly strong in the first quarter but pretty consistently strong all the way through Q2 and Q3 with a couple of sort of 2 to 3 weak bumps here and there.

So when I look at that, it suggests to me that the meeting business that we are seeing, in terms of overall activity levels in 2011, has actually been quite strong, certainly compared to 2010 and 2009.

Now consider the fact that if you are comparing to 2008 -- 2008, as you know the recession kind of had full impact going into September of 2008.

And consumer confidence dropped to its lowest level since the Great Depression or whenever they first started measuring it.

And the economy has sort of stayed in a down pattern really through 2011.

But despite that, if you look at paid weeks and sort of how big the membership base is and then you put on top of that how many people have been signing up for Weight Watchers Online, if you compare 2011 with 2008 we have massively more interest in the brand in 2011 than we did in 2008.

And to me that's the best way in terms of looking at the overall health of the business, overall level of interest in the program, and overall level of interest and excitement around the brand.

Okay.

That's helpful.

And then a question on gross margin.

We've seen it go up 160 BPS in the first quarter, 290 in the second year-on-year and then, if my numbers are right, 460 in the third quarter, so you are getting great growth there.

It's difficult though given that kind of growth, which is step changes every quarter to forecast that out.

Without talking about 2012, I'm just curious how we think about the sustainability of gross margin growth.

I guess, a corollary to that is you really gave us helpful insight tonight and I appreciate that into the EBITDA margin and a little bit for the dot-com business.

In our mind, should we assume that the percent of sales devoted to marketing and SG&A in that dot-com business is similar as for the rest of the Company?

Because that would help us understand kind of where that gross margin growth is coming from.

How much is from the internet and how much is just from the rest of the business and you guys really being more efficient there.

Let me answer the first part of your question and then David will take the second part.

If you look at what the drivers are for gross margin growth, they are -- it's fairly simple.

It's the fact that the dot-com business has a higher gross margin and is becoming as it's growing it's becoming a higher proportion of the total revenue mix.

So you can continue to assume that if that continues you will get more accretion in gross margin.

In the meeting business, we are getting it from higher attendances per meeting.

So to the degree that those attendances increased per meeting you will get the increase as well.

Of course, the meeting business is a little more limited in terms of exactly how high the gross margin can go because eventually a meeting becomes too large and you have to open another meeting.

So there is room there.

But the lion share is really related to the dot-com and the mix of dot-com as a proportion of total revenue.

I mean, if you look at the economics of the internet business, which is, as you rightly point out, they're very different in many respects than what you see with meetings -- they are both incredibly attractive in their own way.

They are both high margin, they're both very cash flow friendly.

But if you look at the internet business, it is one where you have a relatively more modest fixed cost base, which is effectively the software development company, the engineers and creators and content folks and everybody else that comprises the amount of money we invest back in consumer face and web application development and these types of things.

That's kind of the fixed cost.

Then you have marketing expense and that then drops to the bottom-line.

And if you look at the internet business, it's give or take a 50% NOI business right now.

It is one in which marketing, as a percentage of revenue, is going to be relatively higher for the WeightWatchers.com business than it is for the traditional meeting business but it's one in which gross margin are also substantially higher for WeightWatchers.com than it is for the Weight Watchers meeting business.

And it's a business that weight scales nicely.

What this therefore allows us to do is to be pretty aggressive in looking for opportunities to invest in marketing as long as we are hitting our cost per acquisition bogeys, which we are pretty relentless on making sure that we are doing.

Which allows us to continue to look for ways of opportunistically seeking growth options -- seeking growth opportunities in the online business by increasing marketing spend.

I don't know if that answers your question.

It does but if your marketing spend is actually higher than -- it implies your gross margin is above 80%.

Is that unreasonable?

Yes.

Yes it's unreasonable or yes it's accurate?

It is not unreasonable.

Thank you.

Greg Badishkanian, Citigroup.

Great, thanks.

Just a few quick ones, hopefully.

Does the guidance include the $0.05 benefit from taxes or do you exclude that in your guidance?

It's included.

It's included.

Okay.

Helpful.

And then also you listed several drivers for 2012.

Is there one that you could point at as having potentially the biggest impact?

No, I think they all feed on each other pretty directly.

They're all very much mutually re-enforcing.

I wouldn't hang my hat on any one of them.

In fact, I take a lot of comfort knowing that we have all of them going into play.

Good.

And then just a little bit more color, trends I think you said bounce back in September after kind of all of the issues that were going on in the macroenvironment.

And that momentum has continued into November and then just differentiate between from a revenue perspective or a meeting attendance perspective, what was the kind of the difference there during that period of time?

When you said difference during that period of time you're talking about September?

Yes, the change in trend and did just the change in trend for both of those components.

I'm -- I can't get into -- I don't want to get into sort of very specific quantitative assessments of enrollment levels in August versus September, other than to say that it was -- we were still -- September was definitely a much better month.

And what we saw was that there was October I think was -- has also been a pretty solid month from an enrollment perspective.

Quite frankly as soon as you hit Halloween and all of the advertising turns off, it's a really quiet period from an enrollment perspective.

You just don't see that many people signing up for a new weight loss effort.

And so it's just not nearly as useful in terms of predicting overall trends that are impacting the business.

It's kind of just too quiet to infer much useful from it.

I could hear about October and just finally it sounds like continental Europe could be a nice opportunity to capitalize on the new program.

Maybe what changes in terms of marketing or any kind of color on initiatives that you're planning for 2012 without being too specific?

Yes, the two big things in CE that they have been focusing on for 2012 as I referenced, one is the new program and it's always helpful to have news, particularly when the news reflects what we believe is a very nice improvement over what is already a really great program being delivered in a really good way, by service providers in that country as well as through their online products we sell in those countries.

And so that by itself is it's great to have that wind in our sails as we go into 2012 in CE.

And is it also great when I've had the benefit as I've had to see the work that's been done so far, in terms of their marketing campaigns.

I think they've made fantastic progress.

I'm excited about what they are going to bringing into the market and it gives me a terrific sense of optimism for that business as they go into the new year.

Yes.

Agreed.

Thank you very much.

Anand Vankawala, Avondale Partners.

Thanks for taking my question.

Quick follow-up on the CE program innovations.

Will there be a soft launch for the CE program in the fourth quarter or is this going to be full launch in the first quarter of next year?

We almost always do a soft launch with program changes.

It would not be of the kind of scope that we pursued when we launched PointsPlus and ProPoints in the US and UK last year.

But those programs will be kind of live in the wild as we go into the end of November through early December.

At which point, as you know, Europe really does truly shut down around the holiday season in terms of consumer engagement on these types of things.

But we will get some good operational experience running with the new program for a good three or four weeks prior to going quiet over the holidays and then coming back into January of 2012.

Perfect.

Thanks.

And then just following up on a comment you made during the prepared remarks on the men's initiative, I think you said 15% of the new sign ups were men after you launched the marketing initiative.

How is that compared to last year?

That would be up typically versus last year and as well the period this year prior to turning on men's marketing in our spring campaign.

I want to say it was closer to 9%.

Perfect.

Thanks.

This concludes the question and answer session.

Mr.

Kirchhoff, please go ahead.

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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