WW International Inc (WW) 2012 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International's first quarter 2012 earnings teleconference call.

During the presentation, all participants will be in 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, May 2, 2012.

At this time I would like to turn the call over to Laurie Sherwin, Weight Watchers International.

Thank you to everyone for joining us today for Weight Watchers International's first quarter 2012 conference call.

With us on the call is David Kirchhoff, President and Chief Executive Officer.

At about 4.00 PM Eastern Time today, the Company issued a press release reporting its financial results for first quarter of fiscal 2012.

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 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.

As you all know, the Company is in the process of conducting a search for a new CFO, which we will update you on at the appropriate time.

Consequently, for this call, Dave's remarks will also cover the financial section of the Company's results.

I would now like to turn this call over to David.

Please go ahead.

Thank you for joining us as we review Weight Watchers International's performance for the first quarter of fiscal 2012.

As you may recall, Q1 2011 was an outstanding quarter, with paid weeks growth of 72% in our on-line business and 23% in our meetings business.

In Q1 this year, I'm gratified that consumer engagement with the Weight Watchers brand continued to increase with global combined paid weeks up 12% over last year's historically high watermark.

Despite 72% growth in on-line paid weeks last year, we were able to grow paid weeks by another 35% in Q1 2012 by investing in marketing behind the on-line business, specifically against growth opportunities with men and in our international markets.

On the meetings business, we believe a key driver of long-term growth will be to embed Weight Watchers more directly in the healthcare system.

The potential of this opportunity is clearly demonstrated by the fact that Weight Watchers penetration is an order magnitude higher when meetings are partially or fully subsidized as opposed to being fully paid by the consumer.

We're already seeing the clear benefits of this approach among some of our large corporate accounts that provide subsidies.

As part of our healthcare-focused efforts, we rolled out monthly paths to our corporate accounts in North America in Q1 2012.

Unfortunately, this rollout created execution issues with our North American small account corporate business, which negatively impacted our results.

These execution issues, combined with the disappointing advertising campaign in the UK, resulted in a 5% decline in paid weeks for our global meetings business in Q1 2012, versus the prior year period.

Let me get into some more specifics on our Q1 2012 performance.

On a constant currency basis, Q1 2012 revenues were flat at plus 0.5% over the prior year period with meeting fees down 6% and meeting product sales down 13%, and Internet revenues growing 39%.

For Q1, our profit was lower on flat revenue due to increased marketing.

Marketing expense in the first quarter was up 36% versus prior, in support of growth initiatives.

Mainly the first men's winter TV campaign for Weight Watchers Online in the US, and the first TV campaigns of any kind for Weight Watchers Online in Continental Europe.

I will discuss our marketing investment more fully later in my remarks.

Q1 2012 EPS was $0.74, compared to $1 for the same period in 2011.

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

First, our North American meetings business.

Total NACO revenue, which includes the US and Canada, in Q1 2012 was down 9% on a constant currency basis versus the same period in 2011, with NACO meeting fees declining by 7%.

In-meeting product sales declined by 14% versus the prior year quarter, driven primarily by volume declines, with product sales for attendants also down 2.5% due to lower enrollment product sales this year versus last, a function of lapping the points plus innovation launch last year.

NACO Q1 2012 paid weeks declined 6% while attendances declined 12% versus the prior year period, driven most significantly by execution issues in the small account portion of our corporate business, which I will explain in detail shortly.

Excluding the corporate business, NACO paid weeks and attendances in the first quarter were down an estimated 3% and 8%, respectively.

After enrollment growth of better than 70% in Q1 of the previous year, and in light of the first price increase ever in our monthly pass offering, we knew it would be a challenge to match that quarter's strong volume results.

As we referenced on our Q4 call, our challenge was made more difficult by a significant execution issue on the small account portion of our corporate business.

As we noted, we undertook an effort to transition our corporate business from fixed duration series, i.e.

12- and 17-Week, to a corporate version of monthly pass.

This effort was undertaken principally to meet the requirements of newer, large corporate accounts that prefer the monthly pass billing model and value proposition.

We had a smooth transition process with our large national accounts.

However, we ran into numerous problems in transitioning the small account portion of our corporate business, which still accounts for the vast majority of this line of business.

The root of the issue was an effort to replace direct personal contact to organize and secure meetings and commitments from employees with an automated process utilizing a dedicated web page sign-up process.

As a result, many of our meetings were not able to meet the minimum threshold of members to establish a new meeting, and new meeting starts were therefore down dramatically during the critical first three weeks of the year.

By the time we had identified the issue and diagnosed the problem, it was too late for us to make a positive difference in that part of the business during this critical time of year.

Under normal circumstances, we would have expected to have had attendances in this part of the business to be at least flat versus prior, given underlying employer interest.

However, as a result of this execution issue, attendances in the small account corporate business were down 30%.

With the issue now identified and diagnosed, the team has begun to implement a series of steps to remediate the problem and begin recovering the meetings base for this line of business.

We've taken the opportunity to undertake a full review and analysis of our sales processes, and we will end up with a much stronger capability with small corporate accounts as a result.

However, missing the opportunity to set up meetings during the high conversion period of January through March will take time to overcome.

While we have been steadily closing the gap over the past six weeks, we are estimating that we will not be able to return to prior year levels of meetings until this summer.

The small account corporate business will ultimately emerge from this stronger, but for 2012 we estimate that our execution issues have cost us $0.07 of EPS in Q1, and will cost us roughly $0.15 of EPS for the full year.

In the meantime, our large corporate account business continues to proceed nicely, with a number of new account coming on stream.

Recent examples include accounts such as AstraZeneca, the city of Austin, and Penn State university, a nice reflection of the diversity of interest in this program.

The effect of lower enrollments in the first quarter will continue to affect our result as we move into the second quarter, which is starting with a lower base of members than was the case this time last year.

It's too early to get an accurate read on our spring campaign, due to Easter holiday timing and some changes in promotional strategy.

For the second quarter, we're forecasting NACO attendance declines in the high single to low double digits and paid weeks declines in the low to mid single digits.

We continue to work toward bringing attendances back to break even or slightly positive in the second half, with modest growth in paid weeks during this period.

On the revenue line, we will be increasingly benefiting from our price increase, as a growing percentage of our membership base will be on the new higher price.

We expect modest single-digit declines in NACO revenue in Q2, moving to single-digit positive growth rates in the second half.

Now on to the international meetings business.

As noted on the prior call, the UK was also facing difficult comparables as it lapped its Pro Points program launch from last year.

Q1 2012 total meetings business revenues declined 9% on a constant currency basis, with meeting fees down 6% and meeting product sales down 14% versus the prior year period.

The decline in product sales was driven almost entirely by lower attendances, as product sales per attendance was effectively flat with prior.

Attendances decline 14%, and paid weeks were down 6%.

This compares to the 22% growth we had in 2011 versus 2010 in both attendances and paid weeks.

As we noted on our last call, we have been disappointed by the results of the current advertising campaign in the UK.

The UK team attempted to take a new approach in its advertising.

In some ways, it was compelling and modernizing for the brand, but it proved to be ineffective in converting consumer interest into enrollments for both meetings and on-line.

The combination of facing last year's impressive comparable, and the less effective advertising resulted in a significant shortfall in enrollment levels throughout the first quarter.

As we move forward, the UK is seeking to be more consistent with some of the marketing strategies that have been successfully deployed in the US.

It will take time to develop and deploy the new marketing strategies fully, so we expect the UK to continue to under-perform throughout the rest of the year, with some modest moderation as the year progresses.

For the second quarter, we expect paid weeks declines in the high single digits and attendance declines in the mid teens.

Moving on to Continental Europe.

Results in our Continental European business were solid, benefiting from the implementation of a new marketing strategy.

Meeting enrollment growth rates in countries such as Germany, Belgium, and the Netherlands were all in the double digits.

It was gratifying to see a sizable shift in consumer interest in response to our new marketing campaigns in this region.

However, the softness of this business throughout 2011 meant that we started 2012 with a smaller membership base than was the case in the previous year.

As such, our Q1 results underplay the enrollment strength we saw throughout CE in the first quarter.

Overall, total CE meetings business revenues grew 2% on a constant currency basis in Q1 versus the prior year period, with meeting fees up 3% and meeting product sales down 3%.

Paid weeks for the first quarter 2011 grew 5%, compared to prior, while attendances grew 4%.

For the second quarter, we expect paid weeks growth in the high single digits and attendance growth in the mid single digits.

We expect this trend to continue throughout the second half of the year as well.

Moving on to WeightWatchers.com.

WeightWatchers.com enjoyed another strong quarter in Q1.

As we began the year, we were comping against a period in 2011 where we experienced triple-digit growth in sign-ups, and paid weeks growth of 72% versus Q1 2010.

Despite this daunting prior year period comparison, we were able to grow sign-ups at a growth rate of nearly 20%.

This, combined with the benefit of starting the year with a higher active subscriber base, allowed us to drive paid weeks growth of 35% versus Q1 of last year.

This volume growth translated into Internet revenue growth of 39% in constant currency versus the same period last year.

Globally, end of period active subscribers were up 32% to 2.4 million, cycling against 87% year over year growth in end of period actives in the first quarter of last year.

Two strategies played a critical role in helping us continue to drive growth in Weight Watchers Online.

First, men.

With the strong results we experienced in spring and fall marketing campaigns, we continued with our strategy of raising awareness of Weight Watchers to men in this year's winter campaign.

In this case we added to our marketing efforts by including our first major male spokesperson, Charles Barkley.

For the full quarter, men accounted for approximately 15% of our US sign-ups, despite being on air only six weeks with men's TV spots.

As a result, we were able to drive double-digit sign-up growth in the US market despite comping against triple-digit growth during the previous year, and not having the benefit of new program news.

Cost per acquisition for this incremental marketing spend was within our planned targets, and in an additional bit of good news, early indications are that retention for Weight Watchers Online for men is even higher than that for women.

Second, Continental Europe.

Prior to this January, we had not undertaken significant efforts to drive awareness of our on-line product in CE with above the line advertising.

This year we launched TV campaigns Germany, France, the Netherlands, and Sweden.

Growth in all four markets surged beyond our planned expectations.

Suffice to say we've been extremely pleased that in these markets that we have again shown that dedicated television marketing for on-line is a winning strategy.

As we enter into the second quarter, our US Weight Watchers on-line business has begun lapping the initiation of our men's advertising campaign of last year.

Despite this, we expect to generate positive sign-up growth in the US continuing in the second quarter.

We continue to see very strong growth rates in Continental Europe, this combined with starting Q2 with a 32% higher active subscriber base, will result in paid weeks growth of roughly 30% for the quarter.

While we expect sign-up trends in the second half to moderate somewhat, we anticipate strong double-digit growth in volume and revenue throughout the second half.

I will now review some additional financial results for the quarter.

Our other revenue declined 11% to $37 million in the quarter.

Within this, franchise commissions declined 11% versus the prior year period, based on trends similar to NACOs.

Product sales to franchisees were also soft versus strong selling in enrollment products in Q1 2011.

Licensing decreased slightly, to 0.5%, with softness in the US and CE, largely offset by strength in the UK.

Gross margin rose 100 basis points to 57.3% in the quarter, driven by mix toward our higher margin WeightWatchers.com business, as well as an overall increase within the dot-com business itself.

Partially overset by a decline in meetings business gross margin.

The meetings business gross margin was negatively impacted by lower average attendances per meeting, and by expenses associated with some of our new healthcare initiatives, and some one-time expenses associated with our retail transformation.

Pricing, as measured by lecture income per paid week, was down modestly in the quarter.

Although we are getting a benefit from the price increase taken on new enrollments, it is being offset by the continued mix shift to monthly pass on a global basis.

For the second quarter, we expect margin expansion of about 100 basis points, driven by the higher growth rate of the dot-com business.

For the full year, gross margins should be up around 200 basis points, as second half volumes improve and we get fuller benefits from pricing with a larger percentage of the membership base on the new higher price.

Our Q1 operating margin declined 650 basis points to 20.4%.

As expected, marketing investment was up significantly, in support of our men's and international on-line TV campaigns.

Specifically, marketing rose 36%, up 690 basis points, to 25.9% of sales.

This was a bit less than our expectation of a 750-basis-point increase in the first quarter due largely to timing.

For Q2, we expect marketing to increase 200 to 250 basis points in support of our Weight Watchers online product, particularly internationally.

For the second half, we expect marketing as a percentage of revenue to be flat versus prior in the aggregate, but due to timing campaigns Q3 should be much higher and Q4 much lower than a year ago.

Full year market as a percentage of revenue should be up 200 to 250 basis points for the year, consistent with our prior expectations.

G&A rose 70 basis points to 11% of revenue in the quarter.

Contributors to this increase were as expected.

Ongoing investments for future growth, including our B2B selling capabilities, technology product development, and new CRM platforms.

We expect G&A to increase as a percentage of revenue by roughly 50 to 100 basis points for Q2 and by 50 to 70 basis points for the full year.

Turning to cash flow.

In Q1, we announced and commenced our modified Dutch auction tender offer for the public and related share repurchase for our majority shareholder.

In total, we purchased approximately 18.3 million shares, at $82 per share, for a total cost of approximately $1.5 billion.

Note that we expected the tender in late March purchasing roughly 8.8 million shares from our shareholders, and then purchased the balance from our majority shareholder in early April.

We therefore ended the quarter with about 65 million shares outstanding, but currently have approximately 56 million outstanding.

As a result, our average share count should be roughly 57 million in Q2 this year, falling to approximately 56 million in the second half of this year, translating into a full year 2012 average share count of about 61 million.

In connection with these transactions, we successfully refinanced our debt at favorable rates and currently have about $2.5 billion in debt on the balance sheet, with an effective interest rate between 3.5% around 4%.

Note that this is higher than the roughly $1.8 billion we had at the end of the quarter, given the timing of the transactions.

For the year, we expect to pay down, at a minimum, $125 million in principal, and our full-year 2012 interest expense should be in the range of $85 million, inclusive of $3 million to $4 million of incremental amortization of fees related to the transactions.

Given these factors, the transaction is expected to be $0.50 to $0.55 accretive in 2012, with a meaningfully increased accretion benefit in 2013 and beyond as we recognize full-year impact.

In Q1, we had cash flow from operating activities of $111 million.

Now that the tender offer buyback and related stock repurchase are complete, our priorities for free cash floor are franchise acquisitions and de-leveraging.

We continue to expect the 2012 tax rate of 38.5%.

Before turning to our strategic focus areas, a quick housekeeping note.

Our prior earnings release stated that Q4 2011 on-line paid weeks were 22.6 million.

The correct number was 21.5 million.

As a result, 2011 fourth quarter on-line paid weeks growth versus prior was 58.8% rather than 67%, and total company paid weeks growth was 30.7% rather than 33.9%.

For full-year 2011, on-line paid weeks growth versus prior year was 67.6% rather than 69.7%, and total Company paid weeks growth was 37.3% rather than 38.1%.

Looking forward.

I am heartened by the strong consumer demand and vibrancy of the Weight Watchers brand, as evidenced by our 12% growth in global combined paid weeks in Q1 2012, even on top of the outstanding growth we saw in Q1 2011.

However, I am disappointed by the financial performance this quarter, which was driven significantly by execution issues in both marketing and parts of our operations.

I bear responsibility for those misses.

This organization is incredibly committed to both our mission and to our shareholders.

Everyone deserves our very best levels of performance at all times, and we will continue to push ourselves to do better.

We believe passionately that we have a major growth opportunity for Weight Watchers and becoming more integrated into the healthcare system.

There is no other organization that can deliver weight management outcomes with our combination of efficacy, low cost, and scalability.

As I hear so many times when I talk to people in the healthcare space, Weight Watchers is now at a moment in time in which it can accomplish something truly great in helping the world pivot to disease prevention.

It is up to us to capitalize on this opportunity.

Organizationally, we have spent our last nearly 50 years as a grass roots direct-to-consumer company.

During that time, we have learned to be better than anyone else in helping people make sustained changes in their eating habits.

We understand consumers, and we know how to help them.

During the past decade, we have also grown progressively stronger in our ability to leverage technology to aid in the behavior change process.

All of this has resulted in a brand that has newfound strength and relevance with consumers.

One of our challenges moving forward is to develop a similarly compelling set of skills and aptitudes in serving the healthcare space, ranging from employers to payers to providers to governments.

This will require a new set of B2B skills.

We have continued to make excellent strides in hiring high-quality B2B leadership and talent, and we continue to move steadily up the learning curve.

While we do not expect this process to always be easy, we are fully committed to achieving our destiny as a leading player in healthcare.

In our traditional business, we're frustrated that we did not execute our marketing consistently across our markets, particularly in the UK.

However, we continue to learn and refine our marketing play book.

The quality of our marketing has improved substantially over the past five years.

We expect it to the keep improving over the next five years.

Now, a brief update of some of our ongoing strategic initiatives.

Retail upgrade.

We're making good progress on the retail rollout.

As of the end of Q1 2012, we have upgraded our move 289 of our NACO centers, or about 43% of total.

We continue to be on pace to be 80% completed by the end of 2012.

We view our retail upgrade as both an opportunity to gain near-term enrollment benefit and, equally importantly, an occasion to rethink how we use our retail centers to create new opportunities to innovate our service and our product offerings.

We'll have more to say about this on future calls.

Healthcare, beyond what we've already reviewed.

We will continue to spend 2012 building up our ability to attract and service large employer accounts, and we have a strong pipeline going into Q2 and beyond.

Our focus will continue to be on ensuring that we can service these new accounts with strong account management while also meeting their data reporting needs.

Technology.

Product development is a never ending process for the WeightWatchers.com team, and they have a busy schedule in front of them.

In particular, we now have multiple planned releases of mobile functionality in many of our international markets.

Guidance.

The extent of our enrollment challenges in Q1 was somewhat worse than we had originally anticipated when we provided guidance on the last call.

In particular, it has taken us longer to dig out of the hole we created for ourselves in the small account corporate business in the US.

Therefore, the impact to Q1 challenges will create pressure on our top-line results, and the remaining quarters of 2012, specifically in our meetings business.

For Q2, the flow-through of Q1 softness in the meetings business will result in declining revenue in the mid single digits.

Growth in internet revenues will provide a greater positive impact which should allow us to achieve total revenue growth for Q2 in the low single digits.

This, coupled with the financial impacts I discussed earlier, translates into operating income being flat-to-down in the low single digits.

As we move into the second half of this year, volume trends should stabilize in the meetings business, and we will continue to benefit from growing WeightWatchers.com volumes.

This, combined with the growing benefit from our price increase, should result in top-line growth in high single digits for the second half of the year.

Given this, coupled with the marketing timing I discussed earlier, operating income should therefore accelerate into Q3, and more so in Q4.

For the full year, we're narrowing and lowering our guidance range of 2012 EPS to $4.60 to $4.80, which includes $0.50 to $0.55 per fully diluted share accretion benefit from our tender offer transaction and related share repurchase.

This compares with the previously provided range of $4.20 to $4.60 per fully diluted, which at the time excluded a then-estimated 2012 accretion benefit of $0.45 to $0.60 per fully diluted share.

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

(Operator Instructions)

Chris Ferrara, Bank of America.

David, first of all, are you still sticking with the 30% to 35% paid weeks growth on the dot-com business?

Because it sounded -- in the pieces you gave, it sounded like that might not be the case anymore.

We're definitely looking for 30% for Q2 -- in that range.

And we think that we should have good momentum going into the second half.

And I just want to see the full results of the spring campaign come in.

So let me provide a little bit of additional guidance once we get into our Q2 call.

But the 30% to 35% for the year -- you don't necessarily feel good about at this point?

No, because actually if you think about it, we started Q1 with 35%; we're at 30%; and so 30% for the year actually should be -- 30% to 35% should actually be still reasonable, in striking distance.

Okay.

Okay.

Gross margins, and I know you gave some puts and takes -- the mix benefit alone should have you generating gross margin benefit year on year in the range of about 200 to 300 basis points, right?

Depending on how you cut the numbers.

This quarter it's only up 100; it looks like Q2 it's like that.

If you can talk bigger picture, do you expect there to be consistent gross margin drags where the mix lift that's been a big part of the gross margin story just is not really realistic any more, over the long term?

Could you just give a little more color on that?

Yes, the color I would give is that the mix lift toward the dot-com business you described is the way I would dimensionalize it.

The drag for this particular quarter was due to softer attendances in NACO, which in turn drove down meeting averages.

As well, there was a little bit of investment in some of the healthcare efforts -- ended up on the cost of goods line, as did some one-time expenses with retail rollouts.

One of the things -- if you think about what we did with the price increase in the beginning of the year, is we took pretty much the most conservative approach we could have taken by grandfathering it.

So what that meant was, it was sort of maximal drag on enrollment, because it impacted everybody new who would be enrolling, but we really didn't get much benefit of it in the first quarter.

By way of example, I would estimate if you look at our NACO meetings fees, roughly a third would be those on the higher price, as opposed to those on the grandfathered price.

What happens over the course of the quarter is, that 33% continues to go steadily up as the year progresses, and you have more and more people on the new price, which in turn becomes gross margin accretive.

So what you end up with is a second half where you're getting mix benefit on -- with the dot-com business, you should see stabilization, in terms of average meeting size versus what we saw in Q1.

And then, finally, you start getting the benefit of the higher pricing that really starts hitting its stride as you get into the Summer/Fall.

Those things in combination is what then causes gross margin to lift back out.

Got it.

Just one last one.

Okay -- obviously, the small business piece that had a big impact, but it's more than that.

There is some leakage elsewhere throughout the P&L.

Can you talk a little bit about the visibility you have into earnings this time of year, especially in light of the fact -- you just bought back a quarter of the Company at $82, and the stock is going to be materially below that.

I was just wondering if you can comment on that a little, and then I'll jump off.

Okay.

The visibility of the Company -- if you look at the P&L, the aspects of the Company where we have terrific visibility is -- on the volume line, it's retention, which continues to be rock solid.

So that's very predictable.

We have good predictability in terms of monthly pass mix.

How we think pricing is going to be rolling in -- we have good predictability on where we're going to be deploying marketing dollars, how G&A is going to come in, and we have got good visibility in terms of operating expense and cost of goods.

Obviously, the one part of the business that's always the most difficult to forecast, is the number of people enrolling in a given period of time.

And so really, if you think about what we have as data points right now, is we have the benefit of Q1, which, to your point we knew it was going to be a tough quarter and we knew it was a tough comparable.

Yet we had multiple self-inflicted wounds, particularly at the small account business, which is frustrating, as well as the UK marketing, which is also frustrating.

But nonetheless I think, as we look out in the year going forward, the good news for us is that the impact of enrollment, the further out you get into the year, has a diminishing impact in terms of the total financial results for the year.

Because a greater portion -- they ultimately account for a greater -- a lesser portion of the membership mix going forward.

So in other words, if you have variability in enrollment volume -- say, for example, in December -- it really doesn't have a big impact in terms of overall financial performance if you take it at the extreme.

So I think that, as the year progresses, we're getting increasing visibility into the business that's giving us a much stronger comfort level of where we are.

With respect to the tender, keep in mind the reason for doing the tender was because we had gotten to a point that we had felt that our capital structure had become inefficient, with a relatively high-weighted average cost of capital, because we're so much heavily weighted toward equity.

And so we felt that this was a business that could take on more leverage, that could return and distribute back to shareholders, and we could have done that in a special dividend, or we could have done it in the form of a share repurchase.

We chose to do it in the form of a share repurchase, as a way of returning value to shareholders while improving the efficiency of our capital structure.

We made the decision to do that when we did because the debt markets were there, and everything else was -- the timing was appropriate.

So we made it independently of that.

We weren't trying to time the market.

And we believe that while, again, we're disappointed and frustrated by some of the specifics around Q1, it has not changed our perspective on the long term.

And frankly, medium term growth prospects for this business, which is all the reasons I've been incredibly excited about it throughout last year, going into this year, and going into the next five years; all those things are in place.

And I think, ultimately, I have absolutely no doubt in my mind whatsoever that we are going to be driving significant shareholder value that is going to continue to validate that the decision that we made with the tender was a really smart one.

Brian Wang, Barclays.

My first question is related to the retail transformation, or the relocations and remodeled stores.

If you could just talk a little bit about what you're seeing from the sales lift?

Whether you're seeing -- obviously, it's a little bit weak.

If you could just talk how that batch of stores -- I think it was about 25% of the stores -- were done prior to the first quarter, and just how those performed relative to the group that was not done?

Sure.

Let me first off dimensionalize the impact that those new store openings could have on our business.

What I mean by that is, we started the year with 25% of our system being upgraded, if you will.

If you think about the attendances that happened in NACO, about 55% of those flow through these retail centers.

So really, if you take 25% to 55%, you're talking 12% to 13% of the attendance base was eligible for lift, if you will.

And so, because we had a relatively lower starting base, it did it not have the opportunity to have the aggregate impact on the business that we would have liked to have seen.

That was one of the things that we were hoping to have in our back pocket, or wind in our sails, if you will, going into this year.

But if just -- there were too many things with local regulations, and permitting and everything else, that we weren't able to quite get to that 50% target that we -- or goal that we had set for ourselves.

In terms of measuring lift, we're now getting into a period where it's getting harder to do.

When we first measured lift, we were doing it on control markets where we could get a true apples-to-apples read.

Remember, it's a little bit complicated by the fact that we have centers that are often surrounded by traveling locations.

That's where we saw, full market-by full market, the 15% to 20% lift.

What we're now seeing is that, as leases come up, we're take those opportunities to upgrade stores.

And so, it's substantially more difficult to isolate impact, because there's a lot of other store network effects that are pretty hard to disentangle.

What we know anecdotally is that we're still seeing a lot of excitement.

Anecdotally, we still see and hear lots of stories of big jumps in enrollment in various locations.

It's just harder for us to measure scientifically.

What I would also point out about the stores is that, while we believe that we're continuing to get, and will continue to get, additional benefit in terms of -- that you get from greater visibility, walk-by traffic, everything else -- is that this new network of stores, from a strategic point of view, we think is a pretty big deal.

The difference between having a network of locations that are hidden and mostly closed and less desirable locations, versus new locations, which are brightly lit, very visible, in convenient locations, and open during normal retail hours, allows us to begin using our store network as a strategic asset that begs the question of what else can we use those stores to do?

And how can we use this new platform to further innovate the way that we help people through our behavior change process?

Again, we'll have more things to talk about that on later calls.

But I view this retail platform as a critical new strategic platform that is going to do a lot of good things for us, above and beyond just the immediate benefit of enrollment lift.

All right.

Great.

Also, just moving over to the business to business, the healthcare initiative.

Obviously, there was some problems in 1Q with the transition from fixed week -- fixed payment -- to the corporate monthly pass.

If you could just explain to us how you go about fixing that?

Does it just entail training employees, how to sign up on this sort of on-line portal thing?

Is the problem fixed now?

And I heard that the portal was actually down for a little while during 1Q.

Can you confirm or deny that, please?

(laughter) Absolutely.

Yes, we did have a couple of technical glitches with the portal.

It wasn't down very much.

That was the lesser of the issues.

Really, the primary issue with the small accounts is -- to put some more color around it, imagine you're with a small account, i.e.

a single location.

There's an employee who is a Weight Watchers member who is excited about having Weight Watchers on campus.

He or she would attempt to gather typically 20 other people at that location and get them on board, at which point they would meet a minimum threshold.

We would have something called an information session, where typically a Weight Watchers leader, sometimes with the sales rep, they would come in, give an information session, get people excited, and secure commitments that would allow us to tip over and secure that we had enough confirmed memberships that we could then open up the meeting.

Because there's typically a minimum meeting size, depending on situation, of anywhere from 15 to 20.

If we fall short of that minimum meeting size, the meeting doesn't open at all.

And effectively, those people have to fend for themselves by finding a local community meeting, which will effectively mean lost enrollments.

What was happening was, that information session where the person is on site -- what we missed in that is that it played a critical role in getting those last four or five incremental members, which made the difference between opening the meeting and not opening the meeting.

In our effort to replace that with this fully automated web-based solution, we lost the sense of urgency, if you will, in how we got that new meeting initiated.

What we've now done is, we're still keeping that web portal open, but what we're also doing is, we're returning to the practice of having these information systems, so we can not lose the benefit of that urgency.

What we're also doing is that, because the team feels terribly about the miss and everything else, they're operating with a tremendous sense of urgency.

In a full court press to really scrap and push to get accounts that otherwise were lost, to try to get them signed back up.

It's a lot harder to do in that March and April than it is to do that in January.

But they're still, with each passing week, making pretty good progress, in terms of -- systematically, slower than we'd like -- but systematically closing the gap.

I really do believe that, coming out of this, we're going to have a much more thoughtful and well executed approach to dealing with small accounts.

That will ironically put us in a much stronger position, having gone through this mini-crisis, than had we not gone through it at all.

Right.

And just a follow-up with that -- do you think there's a chance that you permanently lowered the urgency?

Or having a sales leader on site seems like it's a more conducive way to get people to sign up; whereas I don't know how they would go about explaining the urgency of getting those last, quote, four or five people, to get the meeting on site.

I probably didn't do a good job of articulating it.

We are going to have that, in addition to having the website.

Okay.

It will be both, going forward?

It is going to be both.

The other thing we're going to do is that, for very, very small accounts -- and now could I be talking about a local high school -- we're going to reopen the possibility that they don't to have go to monthly pass.

They can still do fixed series.

So what we're also doing is, we're really getting smarter about segmenting our approach.

And ironically, we did this to benefit the large accounts, and the large account part of the business is going just great.

So that had the desired outcome, and we believe that large account part of the business is going to be where most of the growth is, as we go out two, three, five years.

We think it's a pretty tremendous opportunity for us, and that is absolutely on track.

The problem is, is that right this red-hot second it's just not that big a part of today's mix.

And just one last separate question is just on the change in the reported fourth quarter on-line paid weeks.

Could you just explain why there's the change, why it's updated?

Yes, it was a clerical error, literally, because we had a manual process for loading some of that data into our system, and it was a clerical error that we just frankly missed.

We've since automated the process, and we've tightened up some of our controls around non-financial metrics, particularly paid weeks, so it's been dealt with.

It had zero impact on financial results.

Great.

Bob Craig, Stifel Nicolaus.

David, in hindsight, what was the problem, do you think, with the UK marketing?

And, looking at most of your countries, now -- in Germany, France, NACO, obviously -- is what they're lacking an effective spokesperson?

I think that's part of it.

What they were lacking was -- I think what an effective spokesperson does, when it works for us, is, if you have someone who people can relate to, who is also having a weight issue, but their success is very visible.

It is always amazing how much inspiration people take from that.

And they tried something that was a little bit of a different approach.

They were using real members, but they were using lots of real members.

And they tried some different things that they thought was an appropriate reflection of, culturally, where they thought the British consumer was, and they tried something that was a little bit different.

I think one of the balances that we're always trying to reach as an organization, is that we want a management team, and we want local management teams, that will try things, that will try to push the envelope, and will periodically try to take risks to help us grow and develop the business.

And we're always trying to manage to what degree do we push things top-down versus let local management teams stretch their legs and try different things.

And in this case, my judgment was to be supportive of the UK team in trying something a little bit different.

It didn't pan out.

I think one of the broader statements that I would make about Weight Watchers is that, I'm frustrated by the execution issues, because they are things we could have avoided, and that's disappointing.

At the same time, I don't want this organization becoming risk-averse.

We're not going to get to where we need to go if we're not willing to try things and not willing to push ourselves a little bit.

That does mean, from time to time, we're going skin our knees.

I think we need to be more careful where we run, but we need to keep running.

When I look at the UK marketing, while I am disappointed and I think, frankly, they look at what's happening, for example, in Germany, where they are using a celebrity spokesperson and their business is going just great.

Their on-line business in particular is on fire right now.

So, they look at that and say -- okay, we get it, and we know that we need to have something that looks a lot closer to that.

They came to that conclusion on their own, as opposed to having it pushed down.

Okay.

Was monthly pass, the price increase there, do you think that was a headwind to new enrollment at all?

You know, it can always create a little bit of a headwind.

Again, because it really impacts new people coming in the door.

I can't rule out that, that might have had some effect on it.

And with pricing increases, as you know, you do them periodically, and sometimes you recognize in the very short term, you might encounter a little bit of resistance.

But then you recognize that, as you're sitting there this time next year, you're incredibly glad that you did it.

And I think that's going to be the case with NACO, and think it's going to be the case with the UK as well.

Okay.

You mentioned the male retention being greater than women.

Did you expect that, number one, and should that continue?

No, men never cease to baffle me.

(laughter) We did not expect that.

I was -- I actually thought that their satisfaction scores -- satisfaction scores among guys doing Weight Watchers Online tend to be a little bit better than women.

I didn't think that, that would translate into a lift on retention.

But it's a funny thing.

It continues to be curious and amazing to me, the number of guys that I run into now who are talking about doing Weight Watchers.

And they are guys that I never would have expected to be doing Weight Watchers, and they're having tremendous success with it.

It's certainly gratifying to see them having success, and to seeing them sticking with their subscription even longer than what we had anticipated.

Great.

Greg Badishkanian, Citigroup.

If you look at -- just keeping on men -- over the next year or two, how big do you think that could be as a percentage of your North American business?

It's a tricky one to dimensionalize, but let me throw out a couple of statistics for you, to maybe help ballpark it.

And then I can talk a little bit about where we are now versus what we haven't gotten to, going forward.

So first off, in terms of -- what is the aggregate theoretical potential?

Men are as likely to suffer from obesity as women, and the health effects that they experience are the same as what women experience.

So, the net aggregate need is at least as high for men as it is for women.

However, they are about half as likely to do something about it.

They tend not to face, at least today, the same sort of peer pressure around media, and having to feel like they need to look thin and everything else, that you see with women.

So they have been historically less likely to take action.

So if you take that 50%, what is likely to do something about it?

That would suggest that a theoretical mix of men would be, say, a third.

That's -- I believe that the willingness of men to deal with the weight issue will increase over time as increased recognition of the ill health effects of obesity become more and more clear.

Then there is -- what are we doing, if we're currently -- say, for example, 15% in Q1 -- what stands between us and getting to that higher level as we go into the future?

And within the US, I would say that if you look at, for example, 2012, we're going to be on, I think with guys, men's advertising, a total of 16 -- 15 to 16 weeks for the full year.

It's still not a huge media weight.

One opportunity for us is to use the same play book we used for Weight Watchers on-line to increase media weights, and to be on-air more weeks, which is a formula that worked really well for Weight Watchers Online.

The other opportunity for us is that we have not yet launched Weight Watchers Online for Men in any of our international markets.

And that's also an opportunity that we believe is going to be in front of us.

Good.

Looking at the North American business, if you exclude the corporate accounts business, did your core meetings business -- did that improve throughout the quarter and into April?

What's interesting, if you look at 2011 -- if you look at the enrollment trends in 2011 compared to '10 and '09, we had a just incredibly great enrollment period that did not let up until literally we went off promotion, getting in toward the end of March, prior to getting into the Easter timing.

And, as I looked at 2012, one of the things that I was comparing to is, I was doing that comparison to 2011.

But I was also comparing to 2010 and 2009, which didn't, obviously, have anything of the magnitude of Points Plus launch.

And the good news was that 2012 enrollments from both nevers and rejoins were pretty consistently ahead, nicely ahead above '09 and '10.

I think that was a good indicator that, notwithstanding the huge blip we got from the Points Plus launch in Q1 of last year, if you look at it on a sustained trend line, the enrollment levels we saw in 2012 look pretty reasonable to us.

And the Easter shift, how did that impact trends?

Literally, the problem with Easter shift is only one of interpreting Q2 results.

Easter last year was two weeks later, and so we have -- right now, we effectively have three weeks of like-on-like comparison, spring campaign-to-spring campaign.

We did, promotionally, something a little bit different.

We did a two-week BOGO this spring, then jumping to join for free.

So there's some ins and outs.

It's simply just too early to fully sort through what we've seen in the spring campaign, because we can only meaningfully look at three weeks of data.

Good.

Gary Albanese, Auriga.

I don't mean to beat this issue, but with the tender -- I know you said you don't try to time the market, and I'm sure that you guys were planning this well in advance of the announcement date in February.

But did you take a step back and think about, with the weakness that you were seeing, that maybe you should sort of postpone it and wait and see?

And maybe reintroduce, maybe like a month later than you actually did?

When we put the tender in place, we made that decision as we were working up to the earnings release for Q4, when we provided guidance.

And the decision we made that the right way to handle this was to announce the tender at the same time we were announcing Q4 results and providing guidance for the year, and that fully put the process in place.

The process at that point -- the tender was going through its very regimented and structured process.

And so it would have been just the wrong thing for us do to make some decision midway through the process, based on a couple of extra weeks of data beyond where we were during the Q4 call, to do something differently.

From our point of view, I feel pretty comfortable that we timed it in terms of, making sure that we were providing the right information to selling shareholders.

It was the right opportunity in terms of securing the debt financing, because the debt markets were open.

It was the right timing, in terms of making sure that the market had full and adequate information.

And all those things together is what we used to arrive to the decision to launch the tender when we did.

Okay.

Just on another issue -- with the price increase last year, more so in the meetings business, do you think that's acting as a little bit of a drag?

Or is that inconsequential, do you think, to the customer decision at this point?

It's always a little hard to say, when you have so many different things in play, including the [companyance] program launch, et cetera, et cetera.

Again, the point I would reiterate is that, because we make the decision to grandfather existing members, by running a price increase in the beginning of January, it really -- you could argue that it has a disproportionate effect on enrollment-driving activities.

Because it only affects new people enrolling, and we really don't get a lot of financial benefit from it.

Yet we generally are biased to do these types of actions and moves in January, because that's also going to be a higher-converting period.

We knew that if we did in this January, over the full year, we'd be getting full benefit from that price increase, even though we knew that there was some possibility that it could create some near-term headwind during the first couple of months of the year.

So it's always a little bit of a judgment call.

But I think, in the final analysis, it was probably still the right judgment call.

Mr. Kirchhoff, we have no further questions, sir.

Okay.

Well, thank you very much 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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