WW International Inc (WW) 2012 Q2 法說會逐字稿

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

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

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

As a reminder, this conference call is being recorded today, Wednesday, August 1, 2012.

At this time, I would like to turn the call over to Ms. Lori Scherwin of Weight Watchers International.

Please go ahead.

Thank you, operator.

And thank you to everyone for joining us today for Weight Watchers International's second-quarter 2012 conference call.

With us on the call is David Kirchhoff, President and CEO.

At about 4.30 Eastern Time today, the Company issued a press release reporting its financial results for the second 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 has been previously been announced, the Company has hired a new Chief Financial Officer, Nick Hotchkin, who starts his employment with the Company as of August 20 of this year.

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

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

Please go ahead.

Good afternoon, and thank you for joining us as we review Weight Watchers International's performance for the second quarter of fiscal 2012.

Overall, Q2 2012 financial results were in line with our expectations and previously provided guidance.

However, as we will discuss later, we're now taking a more cautious view of the second half of the year.

During June and July, we've seen weakening in our business trends we believe driven by the combination of increasing uncertainty in the economy, as well as some indications of wear-out of our current advertising campaign in the US.

Turning back to a review of the second quarter.

On a constant-currency basis, Q2 2012 total revenue was up slightly at plus 2.3% over the prior year period with meeting fees down 5.5% and meeting product sales down 8.1%, and Internet revenue growing 31%.

Global combined paid weeks were up 11% in Q2 2012 versus the same period last year.

Global meeting paid weeks were down 4.7% in Q2, while global paid weeks for our online product were up 30%.

For Q2 2012, our operating income margin was effectively flat to prior.

While gross margin was up 1.5 percentage points, marketing as a percentage of revenue was up 1.8 percentage points primarily reflecting continued investment in driving awareness of our Weight Watchers online product.

G&A as a percentage of revenue was close to flat versus prior.

Q2 2012 EPS was $1.36 compared to $1.17 for the same period in 2011, benefiting from our share repurchases earlier this year.

We experienced about $0.06 of unfavorable ForEx impact in the second quarter of this year versus prior.

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

First, our North American meeting business.

Total NACO revenue, which includes the US and Canada, in Q2 2012 was down 6.1% on a constant-currency basis versus the same period in 2011, a slight improvement over the negative 8.9% result for the first quarter.

NACO meeting fees declined 6.3%.

In-meeting product sales declined 7.5% versus the prior year quarter, driven entirely by attendance volumes declined, as product sales per attendance grew 2.7%.

NACO Q2 2012 paid weeks declined 5.5%, while attendance has declined 9.9% versus the prior year period.

As was the case in Q1, a material portion of the volume shortfall was a result of the continued impact of the execution issues we had earlier this year in the small accounts portion of our corporate business.

Excluding the corporate business, NACO paid weeks and attendances in the second quarter were down an estimated 3.6% and 7.4%, respectively.

In reviewing the NACO results, I will first provide an update on the status of our efforts to address the issues in the small accounts corporate business.

As noted on our previous two calls, our issues in the small account portion of our business were driven by our decision to transition all of our corporate accounts, including smaller accounts, from defined [length] series to a corporate version of monthly pass.

This resulted in changes, disruptions, and problems in the following areas.

One, in shifting to an automated web-based sign-up process, we lost the benefit of having an on-premise information session, which is an important recruiting tool to ensure that enough employees are signed up at a given work site to allow a new [at-work] meeting to start.

Two, there were a number of technical problems associated with the web-based enrollment portal.

And three, significant changes in procedure created extra burdens for the sales organization, which resulted in slow follow-up on new sales leads and in addressing issues.

By March we had fully diagnosed all of the issues, and determined a proper path forward, and began to systematically implement changes including -- one, fixing the technical issues associated with the online enrollment portal; two, fully reinstituting the on-premise information sessions; and three, beginning in early September, we will return to selling fixed duration series for accounts with less than 5,000 employees and without a subsidy in place.

By that point, we will have effectively addressed and fixed all of the issues which have negatively impacted the volume of meeting starts since January this year.

These changes, combined with a wide range of other initiatives to improve selling effectiveness and product management, should make the selling process in our small accounts business stronger than it's ever been before.

The key selling season for the small accounts portion of the corporate business begins in the Fall, and we plan to be positioned to be operating at full capacity when it begins.

Despite all of our efforts to make up the difference from the weak start, we won't be able to compensate for the significant double-digit declines in enrollments we had in this sector of our business in the first quarter.

For the full year, we now expect operating income associated with this line of business to be negatively impacted by about $19 million.

As we look to 2013, our expectation is that we will recover much of the volume we lost this year.

This, combined with continued growth in the strategic accounts portion of our corporate business, will be a meaningful revenue and profit driver in 2013.

The second significant issue facing our North American meetings business comes from our efforts to attract members through our traditional consumer channel.

While enrollment levels were solid in April and early May, we saw a considerable slowdown beginning in June and continuing into July.

While these are traditionally slower months for enrollments, we are nonetheless concerned by the trends we're seeing.

During the last two months, we, like many other consumer businesses, have seen clear indications of consumer disengagement as consumer confidence levels and spending have fallen.

Our ability to enroll members into our program is linked to consumer confidence and spending, given that the timing of a consumer's decision to start a weight loss effort is inherently discretionary.

Whereas in 2011, we had the benefit of a strong innovation and a relatively fresh advertising campaign to counter the general economic weakness, this year we do not.

It is clear that being at the tail end of our typical two-year renovation cycle, and in the third year of our marketing campaign, coupled with increasing weakness in the economy is negatively impacting our business.

Despite our challenges in attracting members, retention remains strong.

As many of you have heard, Jessica Simpson entered into a partnership with us, and she's been on the program for the past few months.

She's doing great on the program, and we're excited to work with her.

We believe Jessica will be a great role model and spokesperson for us, along with Jennifer Hudson as we enter 2013, but we're not assuming that this new partnership will result in much enrollment benefit in 2012.

In this context, we're now operating under the assumption that enrollment trends for the remainder of the year will be worse than we had originally forecasted.

While we originally expected second-half attendances to be roughly flat to prior, and for paid weeks to grow modestly, we are now forecasting high single-digit declines in attendances and paid weeks.

Now, on to the international meetings business.

As expected, the UK business continued on its existing negative trend in the second quarter, as enrollment levels remain weak.

Q2 2012 total meetings business revenues declined 11% on a constant-currency basis, with meeting fees down 13% and in-meeting product sales down 12% versus the prior year period.

As noted on our last quarterly call, the UK's advertising campaign has been relatively ineffective in driving enrollment since it was launched this past January, particularly in light of the recessionary environment in that country.

As we noted previously, the process of redoing an advertising campaign takes time; however, the UK team is continuing to work toward its goal to prepare 2013 with a completely new, higher-impact advertising campaign.

For the remainder of the year, we expect the trends in the second half to effectively mirror the first half of the year.

Moving on to continental Europe.

Continental Europe continued to be a bright spot in our meetings business despite the weak economy, with particular strength in France and Germany, which are both benefiting from high-impact advertising campaigns and the ProPoints 2.0 innovation we launched earlier this year.

Overall, total CE meetings business revenues grew 5.7% on a constant-currency basis in Q2 versus prior, with meeting fees up 7.5% and meeting product sales down 1.8%.

Paid weeks grew 11% compared to prior, while attendances grew 2.7%.

We expect these revenue and volume trends to continue throughout the second half of the year.

Moving on to www.weightwatchers.com.

For the second quarter, overall results for our Internet business remained strong, particularly in our CE business.

Internet revenues were up 31% on a constant-currency basis, paid weeks for our online product were up a similar 30%, and end-of-period active subscribers were up 26%.

Recruitment trends in the first half of Q2 were strong for the Weight Watchers online product across the board, including in the US.

However, the end of May and much of June was weaker due primarily to differences in the promotional campaigns employed, as well as a somewhat different media mix.

Online sign-ups have since strengthened in the US, although not to the levels that we had previously forecasted.

The fact that we are at the end of our two-year innovation cycle, and the increasing weakness in the economy are also having an impact on the www.weightwatchers.com business tempering the overall growth rates relative to what we saw in the first half.

For the second half of the year, we expect paid weeks growth of 15% to 20%.

This will result in full-year volume growth of roughly 25% for the year rather than the previously provided guidance of 30%.

The difference in operating income resulting from this forecast change is roughly $20 million for the year, most of which will come in the second half.

Despite our second-half outlook, we see significant growth ahead of us for the Weight Watchers online product both domestically and internationally.

Our strategy will be to continue increasing value in both program and software tools in ways that no one else can match.

This, combined with the new program innovation and fresh marketing in 2013, will create new opportunities to drive further growth in this highly profitable product line while we still deliver an excellent financial result in 2012.

Now, I will review some additional financial results for the quarter.

Our other revenues declined 2.8% on a constant-currency basis.

Within this, franchise commissions declined 11.2% versus prior, licensing revenues were up 2.5% without the benefit of a one-time termination fee from a licensee whom we replaced.

In the quarter, currency negatively impacted revenue by 2.5%, operating income by 2.3%, and net income by 3.7%, resulting in a roughly $0.06 negative impact to diluted EPS.

For the balance of 2012, we're assuming continued softness in key exchange rates for our business, notably the euro.

Gross margin rose 150 basis points to 60.6% in the quarter, a high watermark driven mainly by the mix shift toward our higher margin www.weightwatchers.com business.

The gross margin benefit from the www.weightwatchers.com business was partially offset by a decline in meetings business gross margin, which was negatively impacted by lower volume, as well as expenses associated with our new healthcare and B2B initiatives.

Meetings pricing as measured by lecture income per paid week was down about 1% versus prior.

Although we're starting to realize benefits from the price increase taken last year in the US, it was offset this quarter by the continued mix shift to monthly pass on a global basis, the impact of the monthly pass transition in the small accounts portion of our corporate business in the US, and some promotional timing changes in the quarter.

We expect to see improvement in this pricing metric in the second half of 2012.

For the full year, we expect gross margin expansion of 100 to 150 basis points driven by improved price realization and continued benefits from the dot-com business.

Within the second half, the large majority of the year-over-year increase will come in the fourth quarter relative to the third.

As expected, marketing investment was up in support of the men's initiative in the US and the international online TV campaigns.

Specifically, marketing rose 14.4% on a constant-currency basis, and was up 180 basis points to 17.3% of revenue.

For the year, our marketing spend expectations on a dollar basis are unchanged, but given the weaker top-line outlook, as a percentage of sales we now expect marketing to be up around 300 basis points for the full year versus 2011.

In the second half, we expect a much larger increase in Q3 relative to Q4.

G&A declined 10 basis points as a percentage of sales to 11.6% in Q2, which was below our earlier expectations due to the timing of investments and the impact of lower expenses tied to business performance.

We remain committed to investing behind our long-term growth platforms including B2B, technology, and CRM, and expect full-year dollar spending to be in line with our prior expectations.

However, given the lower sales outlook, on a percentage of revenue basis, we now expect SG&A to be up about 100 basis points for the year.

We thought it would be helpful to provide a little more color on our spend levels for key initiatives.

For 2012, these investments totaled $39 million, and are $20 million incremental to what we spent in 2011.

The largest buckets in terms of incrementality are healthcare and CRM, which total roughly $11 million.

Within healthcare and B2B, we're spending against new hires, technology, training and consulting.

Our Q2 operating margin declined 30 basis points to 31.7%.

Below operating profit, our interest expense was $8.8 million higher than the prior year quarter due to higher debt levels, and we also had a one-time charge of roughly $2 million related to the write-down of an investment.

We have no change to our prior expectation for share count at 56 million in the second half leading to a full-year average count of 61 million shares driven by the tender and related share repurchase we executed earlier this year.

We ended the quarter with $2.5 billion of debt on the balance sheet, and $2.4 billion of net debt.

Our net debt-to-EBITDA[S] ratio was 4.4 at the end of the second quarter, and we expect to finish the year roughly at the same level.

Furthermore, we expect full-year 2012 interest expense to be in the range of $85 million inclusive of $3 million to $4 million of incremental amortization of fees related to the transactions.

In Q2 we had cash flow from operating activities of $70 million.

Our priorities for free cash flow remain unchanged -- franchise acquisitions, deleveraging from the transaction, and paying our quarterly dividend.

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

Looking forward -- despite a strong year for Weight Watchers online and our CE business, we are very far from satisfied with our results for this year.

While NACO in the UK undoubtedly had difficult comparables given the success of last year's innovation, we can and will do better to drive more consistent results in these businesses.

Weight management has proven to be sensitive to consumer discretionary spend, and larger macroeconomic trends have not been favorable.

For example, a review of Internet search volume for us and our largest competitors suggest that consumer interest in the weight management category as a whole has been soft.

Fundamentally, the process of convincing a person to start a weight management process is never an easy one, as consumers are often inclined to procrastinate, particularly when they're anxious about other things such as the economy, political climate, et cetera.

In review of 2012, our business was particularly hurt by the following.

One, a continued weak consumer economy in both the US and Europe.

Two, the executional breakdown of our small accounts corporate business.

And three, a weak UK advertising campaign.

Based on the economic trends we're seeing, we do not have expectations of a brighter consumer economy in 2013.

However, our experience in 2011 demonstrates that the combination of innovation and fresh marketing can allow us to rise above macroeconomic trends.

With all of this in mind, we have much in the works for 2013 including -- one, a new program.

While it is still too soon to reveal many of the details, we're in the process of ramping up the development of a significant new program upgrade across all of our major markets, currently planned for launch in time for January next year.

We believe that this new program has the potential to significantly improve our ability to help members make sustained changes in their weight loss behaviors.

While this innovation is not of the same scope as the platform change we launched with ProPoints in 2011, we believe it will be meaningful nonetheless.

Two, new advertising campaigns.

With all the learnings from 2012, as well as the opportunity to build new partnerships with new brand ambassadors, such as Jessica Simpson, we will be in a position to deliver much more effective marketing campaigns next year.

Three, recovery of the small accounts business.

With the execution issues that caused the January breakdown behind us, we plan to enter 2013 with our strongest selling capability ever.

At minimum, recapturing a significant portion of the volume we lost this year would result in a meaningful financial improvement for 2013.

Four, continued growth in our strategic accounts business.

This line of business has grown significantly in 2012, and is beginning to become much more revenue-significant in our corporate portfolio.

We will have more specifics to share about our plans and expectations for this business in future earnings calls.

Five, we remain on track to have 80% of our retail system fully converted to stronger locations and better stores in the US by year-end.

Of course, we're continuing to work on our long-term growth objectives, particularly in the healthcare context.

All of the trends here are continuing to be favorable for us in the medium to long term.

Most recently, the United States preventive services task force updated its recommendations on obesity for physicians with the following key points.

One, the doctor should screen all adult patients for obesity.

Two, the doctor should refer patients with a BMI of 30 or higher to intensive multi-component behavioral interventions.

The recommendation defines elements of the intensive multi-component behavioral therapy to include -- group sessions, individual sessions, setting weight loss goals, improving diet or nutrition, physical activity sessions, addressing barriers to change, active use of self-monitoring, and strategizing how to maintain lifestyle changes.

In other words, programs like Weight Watchers.

It then went on to note that although intensive interventions may be impractical within many primary care settings, patients may be referred from primary care to community-based programs for these interventions.

Four, the recommendation was given a rating of B. The Affordable Care Act either requires or provides strong incentives for all major payers to cover USPSTF recommended preventive services, either A or B ratings, and such coverage must be with no cost sharing.

The result of the B rating under this recommendation on obesity is that any non-grandfathered group health plan or individual health insurance coverage must cover the screening referral to intensive multi-component behavioral therapy, and by implication, should ultimately lead to the covering the cost of the therapy, ie, Weight Watchers.

There is a significant distance between a USPSTF recommendation and actually securing reimbursement for Weight Watchers, but we believe that these types of changes to the healthcare system will only benefit us in the coming years.

We're actively developing and refining our broader healthcare strategy, objectives and milestones, which we will share on future calls.

Undoubtedly, we will have to pursue a range of strategies and pilots to unlock this opportunity.

Guidance -- given the weakness we're now seeing in the NACO business that began in June, and some of the spillover effect on the US Weight Watchers online business, we're in the difficult position of having to reduce our guidance for this year again.

The second-half recovery that we previously forecasted will not happen.

A revised view of the NACO and www.weightwatchers.com business has a combined effect of $0.40 to $0.50 per fully diluted share.

We also see some additional vulnerability in Europe given economic uncertainty, as well as additional ForEx exposure.

Given all the above, we are now forecasting EPS of $4 to $4.20 for the year.

As we look at 2013, we're optimistic about our ability to strengthen our trends, but we realize that we will start the year with a lower membership base in our meetings business given expected weak second-half 2012 recruitments.

At this time, I would like to take questions.

Thank you.

We will now be taking questions from the telephone lines.

(Operator Instructions)

Our first question is from Chris Ferrara from Bank of America.

Please go ahead.

Thanks.

David, can you talk a little bit about CPAs and marketing and I guess the decision to keep the marketing budget in dollars despite the weakness?

I mean, I know it sounds like the right thing to do, but it's a little -- deviates a little bit from what we've seen from you guys in the past.

So, can you just talk about your feeling on the returns in those investments and the change in velocity there?

Yes.

It's a great question, Chris.

Thank you.

When I look at the marketing spend, let me first make the distinction between the marketing investments we've made in the dot com business versus the investments we've made in the meetings business.

We continue to feel good about the marketing investments we've made in the dot com business relative to many of our are expected CPAs and overall marketing efficiency.

I mean, with some of the drum roll top-line weakness we've seen in June and July that we're expecting to go into the second half, that will obviously have somewhat of a deleterious impact on marketing efficiency.

But we continue to believe that the return on investments on those dollars are going to be -- continue to be attractive.

What we saw is we got in June and July which was something that we weren't expecting, is that we ramped, for example, four weeks of advertising in June and we've been running another four weeks of advertising in July.

And, frankly, we simply did not see a very meaningful lift in terms of enrollment levels when we turned on advertising versus when advertising was off.

And, to us, that's a pretty clear indication that the advertising messages that we're delivering which, as you heard me mention in my remarks, are getting toward very much of the tail end of that campaign are just not having [saliants] with consumers, particularly in kind of this current macro context.

So, we think it's sort of the combination of general consumer sentiment and the fact that we are now effectively in the third year of this particular marketing campaign.

And that those two things, they came on a lot faster than we expected in terms of what seems to be wear out.

And the fact that we didn't see mix obviously if I had foresight into that, we wouldn't have been on air in June and July because I can't believe that the return on investment of that would be attractive.

And that leaves us with another frankly six weeks of marketing we have coming up this fall.

As I think you know, the majority of the advertising that we purchase we buy in the up-front market and, as a result, to a certain extent, say six months or more out we have a certain amount of flexibility in terms of reducing or trading off some of our advertising commitments.

But the relative speed in which sort of this kind of top-line responsiveness softening happened I think limits our options in terms of making adjustments to the marketing spend this fall.

So, to a certain extent, the dying for the second half of this year has been somewhat cast.

I think what this is showing us is that as we go forward into 2013 I think we need to seriously evaluate other options to afford ourselves more flexibility to be a little bit more responsive in the way we deploy marketing dollars.

So that we can, on one hand, be opportunistic when we have a good hand we can effectively pull back some of that spend that would be on the margin less efficient when some of the sort of broader trends are working against us.

Thanks.

That's helpful.

And I guess to that effect, the SG&A is now you are saying up 100 basis points, is a little more.

There is also -- you guys aren't choosing to pull any levers there, right, to kind of manage earnings a little bit and I'm just curious, curious why you are taking that approach?

Well, if you look at the G&A for the second half of the year, in particular there's a number of ins and outs.

There's things as esoteric as comping against an accrual drop that we had last year that we don't have this year, that's impacting G&A.

We're out of time on our lease of our office building right now, so we're having to incur some costs for a move that's going to be happening in April of next year.

So there are a number of one-time events that we just couldn't avoid or move out of.

The areas where we are particularly seeing G&A spending that we're continuing to sort of push behind are what we consider to be kind of critical investment areas.

So, for example, our efforts around B2B and related healthcare initiatives, for example, includes a significant strategy consulting effort in the healthcare space which is going to be an important part of building out that sort of three-year strategic plan.

We felt that it was important to continue investing behind that given the critical role we believe that that salient business unit is going to play in our future over the coming years.

And related to that there is a certain amount of technology spend that we are having to deploy, particularly in terms of data capture and meeting rooms that's going to be important in terms of unlocking that opportunity.

On the other hand, when I look at other aspects of G&A, I would characterize the organization as having a fairly high degree of lockdown in terms of differing hirings, cutting back expenses anywhere we can find them.

And so we're in kind of the balancing act of making sure we don't cut off oxygen to critical investment areas while at the same time sharpening our pencils in places where it's not going to have a meaningful impact on business results.

Got you.

One last one dot com.

I know you are saying it held in very well this quarter, right, and the back half of the year you're looking at 15% to 20% growth, I think you said.

Can you talk about the cadence of that?

Are we talking about a much higher growth rate in Q3 versus Q4 or do you think they'll be relatively evenly spread.

And then if you could just kind of comment, even if it's qualitatively, on the growth rate of that business and the sustainability of the annual growth number?

Yes, the expectation we have in terms of volume growth in paid weeks in Q3 and Q4 are fairly comparable looking for, let's say, give or take 15% to 20% paid weeks growth, there might be a little bit of variation within that.

If you look at what impacts dot com, it's both the combination of the advertising that's specifically developed to drive awareness of the dot com product, but it also -- the dot com product benefits as the brand in general is doing well.

So, if your brand campaign, the broader brand campaign loses a little bit of salience that also has somewhat of a negative impact on the dot com business.

And then furthermore the same thing is true for being at the tail end of the innovation cycle.

So, when we look at the -- so, therefore, in a lot of what we're doing and forecasting the second half of the year is really based on making a judgment call based on what we saw which was a relatively more sudden shift in June and July in choosing to be conservative on that basis.

As we enter 2013, we obviously have a different set of expectations on the online business because we kind of get back to the point that, yes, the economy is still difficult.

But then the dot com business you have the benefit of the fact that it has a relatively lower price point which has traditionally allowed it to fare better during the recessionary environment that we've now been in for the past three or four years.

And then if you add on top of that the benefit of program news, continued innovation around the actual set of software tools and new marketing campaigns that we believe that those are the types of things that are going to allow us to sort of push growth back into the volume of that business.

Also recognize that for us by the time you get into the second half of the year in terms of marketing levers like there's really not that much left.

We have a fall campaign which is our latest campaign of the year versus winter and spring.

It's not very many weeks and then you're kind of like -- we basically go dark in November and December, so there's not a lot to be done to shift the trends.

So, I think a lot of what you're hearing about both dot com as well as with the meetings business more broadly is a reflection of the fact that given what we're seeing right now, given the degrees of freedom we have and the options we have in the second half, this really is lending us to spend, therefore, the vast majority of our time of doing what we can to manage as financially as responsibly as possible in the second half while making sure that we are in position as we enter January 2013.

Thanks for all the color, Dave.

The next question comes from Jerry Herman of Stifel Nicolaus.

Please go ahead.

Thanks.

Good afternoon, everybody.

David, first question is about pricing and, in particular, any evidence that last year's increases are having an impact especially in light of the economic circumstances.

And then conversely, sort of given that notion would the new program also be potentially accompanied by some promotional activity?

In terms of pricing, it's always a little difficult for us to tease out what might be impacting our ability to bring members in or in better years what's helping our abilities to bring members in.

But specifically with pricing I can't rule out the possibility that it has contributed a little bit to the effect that the headwinds are having on us.

I would tell you on a positive note that I can say definitively is that the price increases had zero negative impact on retention.

In other words, we're able to see people who came in at the new price, look at their retention trends longitudinally and compare that to people who came in at the old price, look at their retention trends longitudinally and we don't see a difference between the two.

So, from a retention point of view we don't see anything.

From an enrollment point of view, it's harder to tease those things out.

What I would tell you is that the price increase we took this year which, again, was the first one we had taken in six years, and the rate in which the consumer economy is going, at some point if you need to take pricing you have to take pricing because given it doesn't seem like the consumer environment is going to turn around any time soon.

I don't necessarily have any second guesses or regrets about increasing pricing in January.

And I certainly believe that as we enter 2013 were there any issues in terms of it having inability of us to attract new members I think that would be largely mitigated.

Also keep in mind the way we communicate that price increase is we tend to in our marketing and in our web pages where we talk about the pricing and different options we refer to it in dollars per week.

And at our current price point we're still below $10 per week, so we haven't crossed that threshold.

One other point on pricing is that in the first quarter because it was not applied to people that were already customers prior to putting the price in i.e.

we grandfathered people, only about 33% give or take of our paid weeks in the first quarter, a third were at the higher price point.

That increased to, say, give or take 50% of our paid weeks for North America in the second quarter, that's going to continue increasing over time.

So that's why we expect to finally start getting some good leverage on paid week as we enter into the second half and certainly as we enter into the first quarter of 2013.

In terms of promotional activity around a program, what I would say is that our historic practice is that when we think that we have meaningful program news and something to talk about, we do everything we can to talk about it.

So, I think you could absolutely expect us using a range of vehicles such as PR and others, to make sure and direct mail particularly for lapsed members, to make sure we're doing a good job of communicating what's new in the new program.

And, again, while apologizing for not being able to get into the details, we feel like this program is another very important step forward in terms of the way we systematically help people not just lose weight but keep it off.

Great, thanks.

And you alluded to actually the next question I was going to ask and that 's about retention.

Can you perhaps update us on the retention trends in some of the key channels in the business, i.e.

paid weeks, pay as go and online?

Yes.

The continued good news for us is that even during economically tough times retention has continued to show itself to be incredibly resilient.

So, despite the fact that we've seen a fairly steady drop in consumer confidence throughout 2012, we haven't seen any drop in retention on either monthly pass or on Weight Watchers online.

So, those continue to hold up really well, I mean.

It's a bit of a recurring theme is that when the economy bites us, it does it almost exclusively in the form of our ability to enroll new members into the program.

And, again, it's why we're as focused as we are in making sure that we have something that's much higher impact as we go into 2012 so we can be much more effective in turning some of those trends around.

Great, thanks.

I'll turn it over.

Our next question is from Brian Wang of Barclays.

Please go ahead.

Hi, David.

Actually, just a follow-up on the last question.

Aren't enrollments a much smaller percentage of the total in the second half of the year?

So, I guess if you just comment on that?

Yes.

They absolutely are a smaller percentage of total.

If you look at the enrollment impact on our business -- when I think about it, I actually think about it for seven months of the year because I start with June which is when we first started seeing a slowdown.

And I take it -- and I just basically take June and July and I project it forward across the five months that follow.

September and October are pretty strong months for us whereas November and particularly December are relatively soft except for the last week of December which is typically a very big week.

So, if you look at the seven months that we're talking about versus the first five months, I think it's safe to say the first five months are a bit bigger but not necessarily as much bigger as you might think.

All right.

Thank you.

I'm sorry.

Yes.

I had a couple other follow-ups?

Please.

Thank you.

Just also going to the -- on the small account business, I guess what changes have you made in people, accountability or incentive that gives you the confidence that that will be executed better going forward?

Yes, kind of everything which is we have a new person who is responsible for the sales organization in that small accounts business.

We're putting in an entirely new process that we're using to measure and keep track of in-bound leads, conversion of leads, getting a much clearer visibility into the pipeline for sales reps.

Putting in sort of frankly sales tools that honestly when I look back I would argue that we probably should've had them placed in the first place.

But, again, it's sort of as we're kind of getting better at becoming sort of more what I will call B2B skills, we're employing a lot of those practices that you would expect from a company that perhaps had already been doing it for 20 years.

So, we're putting in a pretty wide -- we really have had a full court press on that business over the past six months going through every single nook and cranny of it and completely changing around the entire way that we manage it and being much more focused on it.

And frankly more focused on it than we've been in the 12 years plus I've been associated with Weight Watchers.

So, when I look at the plans that we have in place and I look at the amount of attention being put against it and I look at the leadership we're deploying against it, it makes me feel much more confident that we're going to be in a much better position going into this October than we were when we were going in last October.

Can you just let us know -- I think first quarter is the attendance in that small accounts business was down about 30%.

Can you give us an update for what that was in the second quarter?

It was down less in the second quarter.

What I would say is that it was at least as significant is that if attendances were down 30%, enrollments were down even more than that in the small account portion of that business.

So, what I would say is that the attendance trends, and actually more specifically the paid weeks trends, that we've seen have continued to moderate over the course of the year.

Again, we had hoped that we were going to be able to cross the line and become even with prior year by this time.

That's not happening quite yet, but I think now we're talking more in kind of the single digits on paid weeks versus prior today than as opposed to where we were in the first quarter.

All right.

And do you have any visibility into where -- if those customers are going to some of your competitors, whether they're self-dieting, or whether they're just not doing anything?

I don't know if you have any visibility into that?

I think that the trick, the problem or however you want to think about it is that there's really not that many competitors that do exactly what we do in terms of providing group support and behavior modification for weight management for corporate customers.

So, I think what literally happens is, and again I'll continue to press upon the point that this was the small accounts portion of the corporate business.

Our business in the large account side of the portfolio is up significantly in double digits.

So we're doing fine.

We have new accounts that we just brought on board yet again this quarter.

That part of the business is doing fine.

In fact the only thing that's at all an issue on the strategic businesses is that we've had to allocate so many resources to clean up the small account.

We didn't have quite as much focus on building up the strategic side of the business as we would've liked.

Fortunately, we can start bringing more attention back to the strategic side of the business.

If you go back to the small account portion of the business, a lot of times this would be a local school where historically we had a 20-person meeting.

And as a result of us not being able to get enough critical mass for the meeting, I think what's mostly happening is they're simply not having a meeting on site.

And so the opportunity now comes back to us as we approach this coming January to win back as much of that business as we possibly can as well as bring in new small account business.

Right.

And then just one last one touching on that part large employer.

Obviously, you said it was up double digits, but I'm guessing that's off a pretty small base?

You've talked about it a lot.

I guess what gives you the confidence that you will have succeed with this initiative and what can you share with us that gives -- that will give us a little bit more confidence?

I know you invested obviously a lot of money into that and you talk about -- a lot about the opportunity which we agree is huge, but I guess we get not a huge amount of color on progress that's being made.

Let me say a couple things on that.

First off, I agree that we have not yet been in a position to provide the clarity for the investment community that we'd like to in terms of a lot more specifics around our plans, milestones, and targets for the large account business.

We're in the process of actually pulling a lot of that together as we speak.

And I think on the next -- the coming next couple of calls without being too definitive on timing, we're going to be able to share a lot more specifics in terms of what our two to three year expectations are for that business.

Because I can understand that without seeing that it's kind of hard to measure and understand success.

What I would say for right now is that that business was almost negligible three or four years ago.

There was like two or three or four or five accounts that were meaningful.

It's now about give or take a quarter of a our corporate portfolio.

So, it's become material and significant for us.

What I would say is that even though it's become material and significant, even today if you look at the number of accounts we have where we have meaningful business, the way it is tending to work is they tend to be large kind of leading edge, wellness, HR practice organizations where we're seeing really high penetration and participation rates sometimes going into the double digits across all employees.

So, what we tend to have right now is a small but increasing base of highly engaged accounts.

And if you look at the business for as large as it is versus the penetration across all of the large strategic accounts that we might target where we would have and hope to have large penetration, I would say that we're two outs into the first inning.

We're still incredibly early days in terms of demonstrating meaningful penetration.

So, we remain incredibly bullish on this opportunity.

We recognize though that to capture it, again and this is what we've been saying on past calls is that we have to be able to execute on a number of different dimensions which are relatively new for us as an organization.

Specifically, we have to make sure that we have the product right for this kind of client.

We have to make sure that we have the pricing, particularly as it relates to the pricing structure of the product.

We have to make sure that we have the right kind of the sales organization and sales process.

And we have to make sure that we can meet the expectations of these large accounts in terms of data reporting, being able to provide national coverage, those types of things.

So, we're working like crazy to make sure that we have all those capabilities installed so that we can finally get to this point of being able to turn on effectively or turn loose the sales organization to really start operating at full capacity to start bringing these companies in.

Because, again, the incredibly consistent message I'm continuing to get, particularly in rooms full of CEOs, is that there is a huge concern over that they're seeing in terms of benefit costs and health care costs and increasing recognition that they're not going to make progress against it until they can get their employees to more systematically adopt a healthy lifestyle.

So, I would agree with you that we are obviously also very enthusiastic about this opportunity.

We believe that given all of our inherent advantages in terms of being able to deliver clinical outcomes, being able to do it cost effectively, being able to do it with a brand their employees want, there's no one else that comes close.

We just need to make sure we have the right B2B tool kit so that we can service the accounts properly and once and for all capture this opportunity.

More to come on that.

Great.

Thank you.

Maybe I'll sneak one last question in.

On the dot com business I believe you started investing on the advertising a little more heavily in the second quarter of last year, now you fully lapped those incremental investments.

And I guess you can make the -- one can make the argument that while you made those incremental investments in the advertising it drove obviously very strong growth on the online business and you probably even have additional growth because of the average customer sticking around for eight or nine months.

But what would your response be to the fact that you are seeing a slowdown already as you lapse over those advertising investments on the online business?

Yes.

I think again what I would talk about is specifically to the slow down I would suggest that the slowdown that we're seeing June that we're now forecasting throughout the rest of the year again is significantly a function of where we are relatively speaking on the advertising campaign and where we are into the innovation cycle.

So, I wouldn't -- my inclination would not be to overly extrapolate from what we're saying we're going to see over the next six months to extrapolate that beyond for those reasons.

That said, you're right.

Last spring we turned on advertising to men for the first time and this year we're on air with men winter, spring, and fall.

We turned on advertising for the first time for dot com in CE this January, and now we're on January spring and to a certain extent in a couple selected places in fall.

What I would suggest though is that even in some of those places we've been in relatively light weights in not very many weeks of the year.

And what we've typically done is as we're able to work out CPA targets to our satisfaction, we look for opportunities to be on air more weeks and to look for opportunities to potentially heavy up GRP's per week.

And so as we look at the dot com business, the way I generally look at it is, for example, if you take the US, you look at paid weeks for online and paid weeks for meetings, for the first time online paid weeks are now surpassing the level of paid weeks we have in meetings.

However, if I look at the relative price point of Weight Watchers online, $18.95 a month versus meetings at $42.95 a month, I would argue that the paid weeks for online should be actually quite a bit bigger than what we're currently seeing for the meetings.

And what that suggests to me is that we still have a good distance to go until we start to sort of more fully penetrate this opportunity even within our existing countries -- more mature countries, such as the US.

All right.

Thank you.

Yes.

Our next question is from Peter Wahlstrom from Morningstar Investments.

Please go ahead.

Good afternoon.

Thanks for taking my question.

Absolutely.

Certainly, in the last couple months we've seen headlines about new diet pills coming to market and FDA approval and so forth.

You've talked about what turned out to be fad diets in the past.

Could you talk a little bit about how you might have or you might be baking in those pills coming to market in the second half and your full-year projection?

We're not assuming any impact of diet pills in our forecasts for the second half for the simple reason that we don't think that you're going to see significant deployment of diet pills in the second half.

If you look at what is going to be required for them to get full release to start marketing diet pills the way that they're looking at scaling up their efforts in terms of reaching out to doctors.

And the fact that as it currently stands, very few health plans actually provide reimbursement for diet pills.

And there's a lot of unanswered questions in terms of what the relative price points are going to be, how doctors are actually going to feel about prescribing them.

I mean, the way I look at these two particular diet pills, and I think it's interesting to look at the FDA language around it in which they suggested that these diet pills could be beneficial to lifestyle change efforts.

So, in other words -- and to me that's interesting because it's not that they're saying take this pill to lose weight and you'll be more effective if you also change behavior, they're saying change behavior and this pill might make you more effective in doing so.

In other words, lifestyle change remains at the center of what the recommendation is to physicians with respect to even medication.

Now, you have two medications out there.

One is Lorcaserin in which the clinical outcomes haven't been particularly stellar compared to if you look at average weight loss compared to other weight loss drugs that have been out in the market.

But it has the advantage of having relatively modest side effects.

Then, you have another in the form of Qnexa which would appear to have somewhat better weight loss outcomes, particularly at heavier dosages.

But the issue I think for Qnexa continues to be questions over at those heavier dosages what is the impact of side effects and what does it do in terms of drug adherence and everything else, not to mention potential issues down the road.

All this is to say our natural wiring as an organization and my natural wiring is to be paranoid about everything.

And so obviously I am concerned about any new threat that comes into the market, but what I would say particularly with respect to this medication is that I take some comfort in the fact that we have seen this before.

I would argue that when Alli came on the market over the counter a couple -- three years ago honestly, that was incredibly terrifying because that was effectively a previously prescribed weight loss drug, Xenical, that was being sold over-the-counter that had a giant pharma company in the form of GSK doing massive trade spend behind it to the point that they literally were almost having the appearance of buying out drugstores.

Where anybody could basically buy these pills and not bother with talking to their physician in price points that were frankly affordable and we literally saw no impact on our business.

So, we haven't gotten hit by a diet drug since -- and, again, I'm not saying we're not going to be impacted in the future.

But what I am saying is I fundamentally believe over the short, medium and long-term that lifestyle has to remain at the center of meaningful and sustained weight loss as an obesity treatment.

Okay, thank you.

And circling back to the retention item.

Given that outlook and weaker consumer sentiment, I was wondering if you are seeing maybe a shift in the current population, current subscribers from the meeting to the online.

As you point out, Weight Watchers is a discretionary purchase.

Are they looking to pare back or are those individuals just dropping out entirely or could they be changing channels?

None of the above.

In fact, what we're saying is that once people are with us, we're seeing good economy, bad economy -- recently it's been only bad economy.

But once people are with us and once they're enrolled, we've seen literally no change in retention behaviors.

So, in other words, we haven't seen any loss of retention in our meetings product over the past seven months.

And we look at this longitudinally every month, down trading from meetings to online at any greater rate than we've ever seen in the past nor are we seeing any indications of increase in cancellation rates as a result of softening consumer sentiment.

Very good.

And one last item.

As you see a structural growth in the dot com business, are you also able to sell the Weight Watchers product?

Meaning, the products that you sell in meetings currently, are you -- do you have the same success with the take rate for that individual who is a dot com subscriber?

You know, we don't and we think it's an opportunity going into the future.

We -- you can purchase products via e-commerce if you're a Weight Watchers online subscriber.

So you can buy the bars and the pedometers and those types of things.

The penetration of those sales with the online subscribers is a tiny fraction of what we see with meeting members.

But the dot com team has increasingly become focused on trying to identify ways of potentially increasing penetration of e-commerce sales against a subscriber base.

We'll see how far it gets because I think one of the issues with e-commerce is that unlike when you are in a meeting room and you're seeing kind of everything right in front of you, I think it's hard to match the level of sort of impulse purchasing behavior that you're going to see in a Weight Watchers meeting room.

But, nonetheless, I would argue that there's probably more opportunity in driving e-commerce sales against Weight Watchers online subscriber base.

How meaningful that would be in terms of the overall scope of the financial organization is yet to be seen, but it is something that is on our mind.

Okay, thank you very much.

Our next question is from Greg Badishkanian from Citigroup.

Please go ahead.

Great, thanks.

First question is, I know you said it may not be as big as -- the new innovations for 2013 won't be as big as the ones that were launched last year.

But could it be pretty sizable relative to some other smaller launches that you've done in the past?

How would you categorize how impactful it could be?

Yes.

It's always a little hard for us to judge these.

What I would say is internally we love it and the response that we're getting internally, including from the people who would actually be responsible for delivering it, all the early indications are terrific.

It is definitely more significant than the change that we put in this year which I would say was a pretty modest level of innovation.

So I think it's what we would typically -- if I had to ballpark it, I would say it's what I would categorize as what we've historically called a major innovation.

So, let me kind of provide a little bit of color around my definitions.

I think of innovations in three buckets.

One is platform change, the next level down is major innovation and the next level down below that is what I would call minor innovation.

I would call Points Plus 2012 a minor innovation.

I would call Points Plus it felt a platform change, platform changes typically being every ten years.

Major innovations for us have typically been every two to three years.

Momentum was a major innovation, there were a number of others like it.

And I would put this current read in that category.

At least that's the expectation we have for it as we're thinking about our marketing and PR plans as we go into January.

Good.

Thank you.

Our next question is from John Faucher of JPMorgan.

Please go ahead.

Thanks.

Two questions.

First off, on the online business you talked about maybe seeing some other trends in online with some competitors.

Are you seeing any shift to some of the free products that are out there with the economic weakness.

And do you perceive this as being more of a threat if the economic weakness continues?

And then, secondly, it seems as though some of the executional problems this year came from trying to execute a number of different ideas at once, most of those in the first quarter.

So, you still got a lot on your plate at this point, so can you talk about sort of managing through lots of different things going on as we head into 2013 to ensure maybe some more significant -- more consistent execution, excuse me?

Thanks.

Yes.

Both good and fair questions.

Particularly, so let me start with the free app.

Of course I'm always concerned about anything that's being given away.

And there certainly has been a lot of distribution of free mobile applications that help people count calories, and that's typically what they've been.

Most of the apps I've seen they've tended to focus on one specific element of the weight loss process.

They tend not to have a complete program built around them.

And what I would say is that when we see people signing up for Weight Watchers online what we hear is that they want to do Weight Watchers the program and the software tools are merely a way of helping them do Weight Watchers.

So, their purchase decision isn't so much of comparing our points tracker versus someone else's calorie tracker, it's more a decision of do I want to do Weight Watchers because I know other people that have done Weight Watchers and is it a program that can work for me?

Further to that point what I would argue is that the Weight Watchers program is obviously, I would argue, I'm biased of course, but it's much more comprehensive form of behavior change and tools and resources stretching from not just mobile but also including website across.

And having a completely full-blown program that is much more comprehensive in nature than what is available in a free app.

Finally, what I would suggest is one of the challenges with free apps is that it is pretty easy to get to someone to download something that's free.

It's less clear how long someone is going to actually use it once they download it.

So, I wouldn't be surprised if you had a number of people out there that had three or four free weight loss apps on their phone and perhaps weren't even using any of them.

So, what I'm trying to say is that we, like any other competitive threat, we take this seriously and our best way of defending against it is to continue to oppress an aggressive agenda in terms of product and program development and getting people excited about Weight Watchers as a the way of helping them achieve their goals in a way that a free application would have a hard time matching.

And so that's kind of our starting point in terms of how we address that particular issue.

And I would also point out that a lot of the sort of massive downloads on free apps has been happening even while we were experienced, for example it was going all through 2011 when we were also experiencing a huge amount of sales growth for Weight Watchers online products.

In terms of the executional issues and sort of managing prioritization, exactly for the reason that you've cited we've been looking for ways of basically increasing management bandwidth in particular by having people more dedicated around specific opportunity areas in ways that we didn't have at the end of last year.

So, in particular, if I look at the issues that we are now dealing with in terms of the transition on healthcare, we did not have an executive dedicated to the health care initiative.

We do now.

As you've heard me reference on previous calls, Colin Watts, who we hired away from Walgreens, is now heading up that initiative and we did not have the benefit of his leadership when we were going through this transaction last year.

And so in recognition of what you're describing, we tried to make sure that we shored up key gaps in terms of making sure that we're getting the right kind of focus and prioritzation in terms of specific growth opportunities that we're trying to pursue.

Okay, thanks.

Yes.

Thank you.

There are no further questions registered at this time.

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

Okay.

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

Thank you.

That concludes today's conference.

Please disconnected lines at this time and we thank you for your participation.