WW International Inc (WW) 2014 Q3 法說會逐字稿

Good afternoon, and welcome to the Weight Watchers Third-Quarter 2014 Earnings call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to the conference over to Ms. Corey Kinger, Investor Relations.

Ms. Kinger, the floor is yours, ma'am.

Thank you, Mike.

And thank you for everyone for joining us today for Weight Watchers International's Third Quarter 2014 conference call.

With us on the call are Jim Chambers, our President and Chief Executive Officer; Lesya Lysyj, the President of our North American Business; and Nick Hotchkin, our Chief Financial Officer.

At about 4:00 PM Eastern Time today, the Company issued a press release reporting the FY14 third-quarter results.

The purpose of this call is to provide investors with some further details regarding the Company's financial results, as well as to provide a general update on the Company's progress.

The press release is available on the Company's corporate website located at 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.

I would now like to turn the call over to Jim Chambers, President and Chief Executive Officer of Weight Watchers International.

Jim?

Thanks, Corey.

Good afternoon, everyone, and thank you for joining us.

As Corey said, here with me today are Lesya Lysyj, the President of our North American business, and Nick Hotchkin, our CFO.

Let me begin by outlining what will cover today in our prepared remarks.

We will start by updating you on our business performance, as well as the progress we're making on our transformation initiatives.

Lesya will provide additional commentary on our Pillar 2 work, with a particular focus on our initiatives to reposition our brand in support of our growth agenda.

Nick will then take you through the details of the Q3 financial results, give a progress update on our cost management actions, review our outlook for the balance of 2014, and provide color on the building blocks for 2015.

It's been about a year since we first shared with you our transformation plan, starting with our situation assessment and resultant core strategies.

Since that time, we have updated you regularly on our strategies for returning our business to growth, including the strengthening of our organizational capabilities in key areas like consumer insights, innovation, and the application of technology.

2015 represents a critical period in our multi-year plan.

It begins with the key winter season, where we will take the first market visible steps in the direction of our new strategies.

As indicated, I will continue the dialogue on our transformation progress by talking to each of the four strategic pillars of our plan, which by way of reminder, are: one, driving immediate performance improvement; two, re-imagining our core offering; three, growing our healthcare business; and four, strengthening our organization.

First, our business performance.

In the third quarter, we delivered total revenue of $345 million, adjusted operating margins of 27%, and adjusted earnings per share of $0.68.

While these results are down year over year, they reflect a slight sequential improvement in our top-line trend, as well as the results of strong cost management.

Our recruitment trends in Q3, while showing some improvement over Q2, remained negative in both meetings and online, and were down in the majority of the countries in which we operate.

Recruitment continues to be the biggest challenge in our business, as we continue to face strong competition for consumer trial from an evolving competitor set, including mobile apps and activity monitors.

Turning our recruitment around is our top priority for 2015.

Let me turn to our Pillar 2 strategy for re-imagining our core offering.

As you may recall, Pillar 2 includes both the strengthening of our offering in the marketplace, as well as the repositioning of our brand.

Please note that given competitive sensitivity, we will not be providing significantly more detail about our 2015 winter season initiatives on this call.

But I think it is important to reprise our strategic direction.

As I said on the last call, it is our fundamental belief that tools alone, technology alone, food programming alone, will never reach the levels of success that are possible when they are brought together and combined with expert human engagement to guide and provide accountability.

The strength of the Weight Watchers brand is and always will be in the human connections that make the weight loss journey successful.

A core element of Weight Watchers success has always been the interaction and support that takes place in our meetings among our members and service providers.

Until now, our online product has been missing this element.

As we head into 2015, we'll be expanding the personalization, support, and community elements of our offerings, leveraging our talented service providers.

Our 2015 offering will be expanded to provide one-on-one personal advice from Weight Watchers experts to our online members for the first time, while also providing greater personalization and connection in between meetings for our meeting members.

Through our thousands of Weight Watchers experts, we will be pairing, at scale, the world's leading clinically-proven weight-loss program with the personal support, skills, and community needed for a successful weight loss journey.

Working in synergy with our new offerings will be a strengthened and repositioned brand.

We have great potential to make Weight Watchers a more inviting and inclusive brand, and as a result, to reach wider set of consumers with more compelling communications.

In a few minutes, Lesya will share a bit more about her background, and will update you on our overall brand development strategy.

As I mentioned, winter season 2015 represents the first market-visible steps in our new strategy.

Our goal is to deliver an innovation pipeline extending well beyond the start of next year, rolling out product and service enhancements on a more continual basis.

Evolving our core program, better reaching underpenetrated demographics, and touching consumers at more stages and moments on their journey to a healthier lifestyle continue to be important considerations, as we make fundamental changes in how we define and present Weight Watchers.

Our third strategic pillar is growing our healthcare business.

Our focus here continues to be market readiness, and we are investing our technology and operating infrastructure.

We are making good progress.

And early next year, for the first time, we will be operational with new capabilities that improve member data collection, reporting eligibility validation, enrollment and participation tracking, as well as enhancements to our privacy environment.

With these new capabilities in place, and given the long sales cycles, we continue to anticipate that 2016 will be our first year of meaningful incremental healthcare revenue.

We are in active discussions with leading health insurance providers and continue to target launching at least one early partnership relationship in 2015.

Lastly, Pillar 4, strengthening our organization, where we continue to focus on talent, capabilities, and cultural evolution.

We have worked hard on developing our internal roster, as well as accessing new capabilities from the outside.

With respect to new hires, there are a few specific individuals that I would like to mention that are bolstering our competencies in the critical areas of technology application, marketing, and insights.

The first is Michael Lysaght, Senior Vice President of Digital Engineering, who will lead our development efforts for all of our digital offerings.

Michael has a strong track record building high-performance consumer-facing technology products.

Next is Maurice Herrera, Senior Vice President of Marketing, who will head up our US marketing team and will work closely with Lesya on our brand repositioning.

Maurice brings to Weight Watchers 17 years of top-tier consumer marketing experience across multiple categories.

Finally, Deb Benovitz, our global head of Consumer Insights, will play a strong role in making us an even more consumer-driven organization by deepening our insights around current and future members.

Deb has more than 25 years of experience in leading insight work in high-engagement consumer categories.

All three are seasoned leaders, and we are excited to have them onboard.

The power of our mission and the potential of our transformation continue to provide us access to top management talent.

We continue to make progress on our technology in line with the plan Dan Crowe, our CTO, laid out for you on our Q1 earnings call.

All major new development is being executed in an agile model, resulting in faster output, and leveraging cloud hosting and services for future economic benefit when we turn off our legacy systems.

We are strengthening our engineering teams, and making progress on consumer-facing development on our new offerings, as well as operations support systems, such as field automation and healthcare market readiness.

Our technology investments are modernizing our architecture and changing the fundamental productivity of our delivery environment.

Now I will turn it over to Lesya.

Thanks, Jim.

Having now been in the North America President role for just about a year, I'm excited to share with you my part in the journey to transform our business.

By way of background, I have a long career with consumer packaged goods companies like Cadbury, Kraft and, most recently, Heineken.

As a brand marketer, I have worked on 20 different brands in 9 categories, along the spectrum of brands with tangible benefits, like Hall's cough drops, to highly lifestyle-driven ones, like Dos Equis.

I've also been a Weight Watchers meetings member for over 20 years.

Not only do I come to the Company with a love of what Weight Watchers does, I also have a huge appreciation for the thousands of service providers at Weight Watchers.

They are the backbone of our organization.

And I personally have benefited from and can appreciate the inspiration, accountability, and support that they provide for our members.

Let me start by saying North America's performance, both for meetings and online, is obviously not where it needs to be.

I fully expect that as the largest contributor to overall Weight Watchers performance, North America will lead the turnaround of our business.

The most important factor in driving this turnaround is attracting new consumers to Weight Watchers.

As Jim mentioned, Pillar 2 is about both our offerings and our brand.

And I see three big areas to improve under this pillar, which represent significant opportunity for us.

First, enhancing the unique value that Weight Watchers provides, which is inspiration, accountability, and support in all parts of our offering.

Second, better adapting to changing consumer expectations for personalization and convenience.

Third, evolving our brand, which is already iconic and highly credible to be more relevant and aspirational to a wider audience.

To address the first two points, we are enhancing our digital experience to add more value to our offerings.

We announced the integration of popular activity monitors, Fitbit and Jawbone.

And we continue to leverage API technology to allow our members to integrate wearables, in-home devices, apps, and ecosystems into their Weight Watchers experience.

We also have added new features to the Weight Watchers app for iPhone that make both food and activity tracking easier.

We will soon deliver other improvements to our digital experience, including a new visitor site and enhanced search functionality.

As Jim mentioned, we also will be making our offering more robust this winter by bringing human interaction, which is Weight Watchers' biggest competitive advantage to online subscribers, while also providing greater personalization and connection in between meetings for our meetings members.

Onto the third opportunity, making the brand more relevant and aspirational.

On this topic, I would like to step back for a moment.

Having worked on many brands, I can tell you that this brand and category are really like no other.

The category is highly emotional and multi-layered from a consumer standpoint.

In addition, our brand competes in a space which has changed over the last few years.

Consumers are reframing the diet and weight loss category, which had been associated with depravation and negativity, into a more positive place called health and wellness.

While Weight Watchers enjoys high consumer awareness, high trust, and high equity rooted in efficacy, our offering is still seen from the outside as more of a diet.

But here's the irony and the good news; we're not about diet.

What we do is, we actually help people change their habits.

We teach you how to live, to eat, to navigate, to get back on track when you fall down.

Ultimately, we help you change your relationship with food.

We have a mission which we have now clearly articulated at Weight Watchers.

And that is to change people's relationship with food for good.

The important pieces of this mission are relationship, food, and for good.

Relationships have ups and downs and layers of emotion.

And food is to be celebrated, and is our primary focus.

And changing your relationship with food for good means both for the better and for permanently.

The communication strategy we have been working on with Wieden & Kennedy, Portland, is built on consumer research which has shown us that our mission can resonate strongly with today's consumers when communicated in an authentic way.

Consumers tell us that acknowledging their skepticism about claims like -- it's easy, or, it's fast -- and speaking honestly is unique and inspires hope and is powerful coming from the Weight Watchers brand.

We're excited to be able to launch a new voice and message very soon.

We will continue to target primarily women, and have an opportunity to expand our voice to be more relevant to a slightly younger audience.

And show-up in more diverse types of media, which can reach both our current and younger consumers.

In summary, I am confident in our ability to reposition our brand, which is a key ingredient in turning our business to growth.

Health and wellness is about long-term behavior change, and so are we.

While we are changing and improving many things at once during this period of transformation, we are starting with an incredibly iconic brand and a strong reputation of credibility.

We are building off this foundation to bring relevance to the brand, while re-imagining our offerings to address real consumer needs: convenience, personalization and support.

Thanks, and over to Nick.

Thanks, Lesya.

Good afternoon, everyone.

Let me start by walking you through our Q3 results.

In Q3, we saw some improvement in our top-line trend, with total Company revenue declining 12.9% to $345 million.

Third-quarter global paid weeks were down 12.4%, driven by declines in online and meetings.

End-of-period global active subscribers declined 12.5% to 2.9 million, with active online subscribers of 1.7 million, and monthly pass active subscribers of 1.2 million.

While the competitive environment remains challenging as we work to attract consumers to our brand, once they engage with Weight Watchers, consumers value our service as shown by our continuing solid retention levels.

Average length of stay in Q3 remains steady, at roughly eight months for monthly pass members and nine months for Weight Watchers online subscribers.

As we have seen throughout 2014, despite continued cost discipline, our lower revenue has put substantial pressure on the P&L.

This resulted in an adjusted operating income decline of 26% in the third quarter versus prior.

EPS was $0.68 on an adjusted basis in the third quarter.

This excludes a $0.01 impact from previously-announced restructuring activity.

Our Pillar 1 initiatives to drive short-term improvement are helping with revenue and cost improvements across many areas of our business.

And as a result, Q3 EPS came in ahead of our internal expectations.

In the quarter, foreign currency was a $0.01 benefit.

And in the prior-year, third quarter recorded and adjusted EPS was $1.07.

Turning now to our results by geographic segment, which I will discuss on a constant currency basis.

Our North America business continues to be our most precious market due to volume declines.

In the third quarter, total North America revenues declined 17.3%, with meeting fees down 15% and online revenue down 20.8%.

Meetings paid weeks declined 16%, and online paid weeks declined 17.6%.

In-meeting product sales declined 22.6%, with product sales per attendee down 10.9%.

During the quarter, we continued to exercise cost discipline, including reducing underperforming drop-in hours, consolidating small meetings, and renegotiating vendor contracts.

These actions helped margins, but were more than offset by fixed costs deleverage.

In the UK business, third-quarter total revenue was down 13.8%, with meeting fees down 9% and online revenues down 10.9%.

Meeting paid weeks declined 8.2%, and online paid weeks declined 9.3%.

While revenue is still negative on a year-over-year basis, the UK market has made significant performance improvements over the course of the year and has good momentum heading into the winter season.

In Continental Europe, total revenues declined to 0.9%, with online revenues up 5.5% and meeting fees down 3.9%.

Online paid weeks increased 13.8%, benefiting from a higher active subscriber base at the beginning of the quarter, as compared to the beginning of Q3 2013.

Meeting paid weeks declined 3.9%.

With margins and profits up year over year in the third quarter, Continental Europe is clearly our best performing geographic segment due to the actions our teams have taken to bolster our competitive position, including more effective marketing.

Now to review some additional financial metrics for the third quarter.

We incurred pre-tax restructuring charges of $0.7 million in connection with our previously-disclosed plan to restructure our organization and field operations, bringing total year-to-date spend to $10.9 million.

We expect to incur only a few hundred thousand dollars of additional restructuring charges in Q4.

Now to the P&L detail, excluding the impact of our restructuring expenses.

In the third quarter, gross margin declined 420 basis points from the prior year to 54.3%, primarily due to operating cost deleverage; the impact of our 2013 US service provider compensation changes; as well as certain promotional and inventory management reserves.

Q3 marketing expense decreased $11.4 million versus prior to $36.8 million.

Reflecting lower TV advertising activity, lower production costs, and less digital advertising.

Q3 G&A expenses were roughly flat versus prior at $59.4 million, with our cost savings initiatives being offset by ramping spend in connection with our technology reinvention and healthcare initiative.

Our Q3 tax rate was 33.6%, which came in lower than anticipated due to timing in mix across our international operations.

Looking at our balance sheet and cash generation, we ended the quarter with $327 million in cash.

And cash flow from operations totaled $76 million in the quarter.

We expect full-year cash flow from operations to be approximately $250 million.

As a reminder, our $2.4 billion outstanding term loans do not have a debt to EBITDAX leverage ratio covenant.

And our next meaningful debt maturity is the $300 million due in 2016.

We recently amended our revolving line of credit, saving about $1 million in annual and drawn revolver fees by reducing its availability to $50 million, which we believe is an appropriate level given our strong cash position.

We continue to have no current plans to utilize this bank facility.

Now I will discuss our latest outlook for 2014.

Based on the incremental improvements in top-line trends, we now expect total revenue to approach $1.5 billion for the full year.

We anticipate year-over-year revenue in paid weeks to be down in the low- to mid-teens for the full year.

In North America, we anticipate that full-year revenues could decline by up to 20%.

And total paid weeks will decline in the mid-teens, with meetings paid weeks performing slightly better than online paid weeks.

In the UK for the year, we expect revenue and total paid weeks to decline by approximately 10%, with online and meetings paid weeks performing in a similar way.

For Continental Europe, we expect revenues for the year to be slightly positive.

Total paid weeks are expected to be up in the low-single digits, with online paid weeks growing and meeting paid weeks declining.

Now some details on the cost lines.

Looking at gross margin, we continue to expect our full-year gross margin to decline by up to 400 basis points.

As previously noted, this decline in gross margin gets worse as we move through the back half of 2014.

Particularly in the fourth quarter, due to the timing of incremental investments in the winter season and our healthcare initiative, as well as accelerated depreciation of some of our legacy technology assets as we begin to replace them with new capabilities.

We anticipate that full-year marketing expense will decline by up to $35 million, which implies Q4 spend will increase compared to the prior-year fourth quarter, driven by the marketing initiatives we will be implementing in support of our winter season launch and the inclusion of a 53rd week.

For the full year, we continue to expect G&A to be down low-single-digit percentages versus prior, which includes our cost savings initiatives, offset by the impact of the incremental investments we are making in the business.

Below the line for the year, we expect interest expense to be approximately $123 million.

With regard to taxes, our expectation is that our tax rate will be approximately 37% for the full year, due to Q4's expected marginal profitability in aggregate and the expected mix of profitability across our international operations.

Q4, we expect to have an unusually high tax rate, in the 45% range.

For the full year, we expect CapEx of about $50 million, and D&A in the high $40 millions.

As a result of the better-than-expected third-quarter, we are raising our 2014 adjusted EPS guidance to a range of $1.95 to $2.05.

As a reminder, while this guidance is above the original expectations we outlined for the year, it remains well below the $3.87 in adjusted EPS we delivered in 2013.

Next I'd like to take a minute to take you through some of our current thinking for 2015.

A year ago, at our Investor Day, we discussed that in this multi-year transformation, 2014 would be a challenging year.

And we expected to return to recruitment growth in 2015, which would lead to revenue growth in 2016.

While we are disappointed about this year's drop in profitability and are not satisfied with our results, 2014 has been a year of emerging green shoots.

And we remain confident in our ability to deliver on our strategic agenda.

Now, with regard to our current thinking on 2015.

Due to the negative recruitment trends experienced in 2014, we will begin 2015 with a lower starting actives base, which we now expect to drive a negative impact of up to $0.55 of EPS next year.

Note that this EPS impact is independent of any 2015 recruitment assumptions.

It's just a quantification of the starting point to assist you with your modeling.

We remain confident that our new offerings and the repositioning of the brand will make 2015 the inflection point for our business.

To drive this change in our recruitment trajectory, after two successive years of substantial marketing efficiencies, we expect to keep marketing spend similar to 2014 levels.

However, we will continue to be responsive and nimble in our marketing execution.

As we have previously discussed, 2015 will be another investment year as we continue our investments in technology to advance our healthcare initiative and to build out our innovation capabilities.

Therefore, on top of the 2014 spend, in 2015, we anticipate an incremental expense of approximately $25 million, or $0.26 per share, weighted to the first half of the year.

We expect our tax run-rate to be lower in the back half, following our wind down of our legacy technology systems.

In addition, by leveraging our service providers in new ways, we will be consciously adding costs to our product delivery.

While we expect this to lower our gross margin rate modestly, we are confident that this a favorable strategic and financial decision for our business.

In line with our transformational plan, we continue to expect 2015 to be a challenging year on the bottom line for Weight Watchers.

It will also be one that will set the stage for top and bottom-line growth in 2016 and beyond.

As usual, we plan to provide you with our financial guidance for 2015 in February.

Thanks, everyone.

I will now turn the call back to Jim.

Thank you, Nick.

To reiterate, we are excited and confident we can execute our plan.

We are focused on near-term delivery, re-imagining our offering and repositioning our brand, healthcare market readiness, and strengthening our organization.

For 2015, turning our recruitment trajectory around is our top priority.

There remains a lot of work to be done, but we are encouraged by our early progress.

Thanks again for joining our call today, and we will now open it up for questions.

Thank you, Sir.

(Operator Instructions)

Glen Santangelo, Credit Suisse

Thanks.

Good evening.

Jim, I just want to follow up on some of the prepared remarks you made with respect to your winter season initiatives.

I know you don't want to give up too much to the competition at this point, and it sounds like that the product is going to have a lot more human connection both on the meeting side as well as on the dot com side of the business.

This is the last sort of public communication you'll have.

Is there going to be any way you're going to disseminate your marketing strategy, or we're just going to watch it unfold at this point, and then discuss it kind of after-the-fact.

I'm curious if you can maybe elaborate or give us any more color?

If some of your marketing initiatives will follow trends that we've seen historically, with either sponsors or TV time or any different way you are going to market the product this year that you can give us color on?

Glen, thanks for the question.

I wish I could, but as your lead-in suggested, I won't provide additional detail on what we're doing.

I will reiterate what you referenced, is that we will be providing more human support in our offerings going into winter season.

I think you will have to just watch it unfold.

Hopefully excitedly, but I think you will have to watch it unfold.

Maybe if I can shift gears.

Nick, I want to follow up on this 2015 guidance.

It sounds like the recruitment waterfall maybe improved a little bit from last conference call, so the hole we're starting in 2015 sounds little bit than what you thought 90 days ago.

I'm assuming if that is the case, just kind of following -- I think you said there'll be recruitment growth in 2015, but we won't have revenue growth until 2016.

Is that implying that revenue growth will still be negative in 2015?

Yes, Glenn.

Thank you for that.

Before I answer that question, just let me clarify from my prepared remarks.

I think I might have said online paid weeks for Continental Europe increased 13.8%.

I should have said 3.8%.

Glen, turning to your question.

We did see incremental improvements in our trends since we last spoke and that's why, whereas, previously we estimated the negative EPS impact associated with our lower starting actives base at $0.60 of EPS, now it's up to $0.55.

As you've heard from Jim and Lesya, we're excited about what we're bringing to market and how we will advertise that.

We've reiterated that this will be the inflection point for our business, and we expect recruitment to turn positive during 2015.

When, exactly, and what our recruitments would be, I think I'd be foolhardy to try to estimate that, and that's why we give guidance in February.

Lesya, maybe if I could just ask you one question.

In your prepared remarks, you seemed to suggest that North America you feel confident can lead the turnaround at the company, but, just kind of listening to the other commentary on Continental Europe, and it's obviously been the best geography in the company.

Maybe if you can just reflect on -- or Jim, perhaps, reflect on what works well in Continental Europe that doesn't work in the North American market; because I'm just not sure exactly the differences between the geographies.

Maybe it's a cultural difference.

But, it just seems like you have strategies working elsewhere that don't work here, and vice-versa.

I think at the highest level, the biggest difference in performance is around our competitive frame.

In the US, at a greater pace and with greater consumer interest than the other markets, I'm generalizing.

We saw the emergence of these new competitors that competed with us for trial.

We've been of the opinion that the percentage of folks for whom these new competitors represent a full and successful solution is not that high, but nonetheless, we've been consistent in saying that the impact on trial is there.

So those forces are greatest than the US.

That's created the greatest headwind in the US.

Beyond that, there are some secondary considerations.

That's really the biggest difference.

Okay.

Thank you so much.

John Faucher, JPMorgan

Thank you.

I was wondering if you could just provide a little bit more detail on the gross -- you made some comments about healthcare and the investments in healthcare impacting the gross margin.

Can you talk a little bit about how it is that those investments are impacting gross margin?

What type of investments they are?

As we think about modeling that through, is that something where that's just going to be a short-term impact or is that a longer term impact going forward on the gross margin?

Thanks.

Yes, hello John.

This is Nick.

Let me take that.

For 2014, starting with -- in Q1 and Q2, you saw gross margin declines in the 300 basis points range, driven primarily by operating at deleverage and increased service provider compensation.

As we got into the back half of this year, the deterioration in gross margin has worsened, primarily due to ramping up investments in tech and healthcare, and also costs associated with our winter launch.

That's why we're still guiding for 400 basis points decline from gross margin this year as a whole, which as you will see implies up to a 600 basis point deterioration this fourth quarter.

Looking forward, we've noted in today's call that we've made some good strides; our investments to re-invent our technology systems this year and build our healthcare capabilities.

But we're not done, and that's why we've indicated in today's call an incremental investment of $25 million 2014 over 2015.

The other thing of note, to reiterate on our gross margin, is that we've noted that we're adding costs to our product delivery, and we expect that to impact the gross margin rate modestly.

I hope that helps.

Thank you.

Greg Badishkanian, Citigroup.

Great.

Thanks.

Is fourth quarter EPS about negative $0.01 to $0.09, just as a housekeeping.

Within that -- sort of within that range, I believe our adjusted EPS year-to-date is $1.97.

When you look at the guidance for Q4, and obviously it's the smallest quarter we have in the year from a revenue standpoint.

And we've noticed that the GM -- the gross margin environment I've just discussed, and we've also noted that marketing is going to be up, year over year, probably due to the 53rd week and our launch activities.

A lot of unknowns in Q4.

Timing of investments, and exactly what revenue will be but you're understanding our guidance correctly.

Okay.

Great.

Maybe I would have expected you to have had a little bit higher guidance given the consecutive beats that you have had, but it sounds like you are also being a little bit conservative too, but I understand the --

Yes, and I think if you looked at the beat we have had this quarter, when you looked at it I would say, yes, a third of the beat was probably the timing of the international tax issues; two-thirds operational issues; a little bit of extra revenue never hurts in our higher margin business.

We deliberately shifted some Q3 marketing spend into Q4.

So, those were the major moving parts.

Okay.

Fair enough.

You mentioned that recruitment is down but it's improved.

How is the competitive environment?

Has that been changing over the last few months, or has it been pretty consistent throughout the year?

The second part to that question is looking into 2015, do you think that your new innovation in innovations that you will be launching will be enough to improve your value proposition for your online business and/or your classroom business versus the competition, right now?

Are you going to really change that value proposition in a meaningful way?

I think the competitive frame has changes, and will have changes in the players, but the fundamentals of being in the large attractive market, that its bringing people in who feel that they can compete with fast and light footprint-- (inaudible) But that is not changing.

As we head into the holiday season, I think we're going to see lots of participation by folks who compete with us from a consideration perspective.

Turning that more broadly, as I referenced before, while that's a general comment across the markets, the things that we are doing we think directly will affect -- address, rather, the value proposition on our business.

From a timing perspective, I think we'll be getting earlier into the competitive frame development in the non-US markets than we have in US.

The results of our activities there will actually improve our competitive position and improve our value proposition.

But yes, I think that at a high level, what has created magic in this business for a long time in the meetings side of the business, we are doing more of that, we are doing more of it in-between the meetings business for those folks, and we're bringing that to the digital side of our business for the first time.

That's a fundamental change.

That we are amping up those value creation moments, and that is going to address -- that's going to act to strengthen our value proposition.

Just finally, in terms of advertising and marketing, because it's going to be really critical to driving recruitment and sales.

How far along are you in that process, and how comfortable do you feel that you will be able to step up the effectiveness of advertising for the new innovations that you are going to be launching?

I'll take that.

I think we are far along, and I think we're feeling very good about it.

At a high level, there's an opportunity to be more engaging, more relevant, and more memorable.

As I said, I think as we're talking to people in a more authentic voice, consumers have told us that is important to them, and it's credible to them and inspires hope.

So we are far long, and we're feeling good about it.

Great.

Nice job on the quarter.

Good luck with next year.

Thank you.

Jerry Herman, Stifel.

Good evening, everybody.

Jim, I wanted to ask about the new product, and can you talk about the process of launch and how it's been, say, tested or piloted regarding the launch?

Historically, there's been sort of a soft launch to Weight Watchers.

Can you talk about how you will go about that process?

I think both in terms of the pieces of the offerings that change as well as the pieces of consumer activation and how they relate to one another.

We do go through rounds of exposure for consumer reaction all the way through formal testing.

It's a mix of those kinds of tactics.

This is a trickier category than some that I have been in, to feel that you've gotten the perfect read such that you can then say what is going to happen when you go live.

But we have worked hard to present as much of it in real-world situations to our consumers as possible.

We feel confident with the reactions that we have been getting from them.

Is there a soft launch planned in terms of timing?

I think that falls a bit into the camp of information from a competitive perspective that we'd be sensitive to.

I think it's safe to say that we will flow these offerings changes into the marketplace in a way that gives us increasing confidence that we're going in the right direction.

Great.

A question about the corporate market, and forgive me if this is nitpicking, but I thought you guys had previously framed some visibility around the corporate market as an announcement this year for a major partnership, that you said a launch in 2015.

The question, obviously, is there a drift in any way on your ability to deliver or sales cycles extending in any way?

I don't think it's as much around our ability to deliver.

I think we have always thought that the major market entry point is 2016, we hope to have some early partnerships in 2015.

We -- I think had assumed it might be faster to actually signing and announcing that, but we're still confident that will happen.

It's a long and deliberate sales cycle, and we're doing something for the first time that maybe we'd been talking about for a long time but for the first time we are standing up these capabilities.

So it just takes a lot of back-and-forth to ensure that we're all comfortable with what the relationship would be.

But, I'm still confident that we will have an early relationship in 2015 and still confident the strategic potential is there for 2016 and beyond.

Okay.

Great.

Just one clarification on guidance.

The $0.60 versus of $0.55, I think previously you talked about a mid-teens decline in subscribers.

I'm assuming that more like low-double-digits at this point.

Then with regard to your assumption around that.

I'm trying to understand what it implies for the new subscribers next year.

Does that effectively assume that the activity on new as flat versus this year or identical to this year's trends.

Is that the way we should think about that?

If I understand the question, we're not giving any indication today of what we think recruitments will be next year, other than the fact that we've got some great program news.

Adding value to our online offering, which has been a particular pain point for this year.

It's been the first year our online business has shrunk year over year, down $75 million of revenue this year, so that will help.

In terms of the spotting position, that $0.60, and now up to $0.55, I'd describe it as a slight to no change, given the incremental better top-line environment we've seen since we last spoke.

We'll still start 2015 with somewhere in the region of 400,000 fewer people in the brand we started 2014 with.

Okay.

Great guys.

I will turn it over.

R.J. Hottovy, Morningstar

Thanks.

I had a question, a technology related question.

I was wondering, and I realize it's pretty early stage with your relationship with Fitbit and the healthkit relationship as well.

I was wondering if you had any early learnings from that to share with us, particularly with regards to recruitment opportunities, engagement levels with members, as well as potential direct marketing.

Just any color that you've had early on with those relationships would be helpful?

It is early.

But, in general the relationships have had a very positive impact on our service providers, a positive impact on our members, so we're very encouraged by the potential that these relationships indicate for our strategies in general.

Because as we know people think about fitness, they think about weight management very closely together.

There are good statistics that over 50% of the weight management attempts are accompanied by a similar consideration around exercise or fitness and so, bringing these things together is very positive from a strategic perspective.

The early stages to your question have been very positive.

Thank you.

A follow-up question for Nick.

Just trying to get some clarity for 2015 capital expenditures.

Trying to get some sense of where directionally they may stand, relative to 2014 and how that $25 million incremental investment you talked about for next year.

Is that in addition, potentially, to what we saw in 2014?

Just want to get a little more color for modeling purposes.

Yes.

If I start with the second question first.

No, at the start of this year, we said we'd have approximately $20 million of expense related to investments in technology, healthcare, and innovation capabilities and we have.

So, the $25 million that we've disclosed today is on top of that 2014 spend.

In terms of CapEx -- CapEx this year in the $50 million range is down off the highs of last couple of years, as we went through our retail portfolio update.

CapEx is to the point where it's almost exclusively driven by our tech transformation/ tech spend, and the associated software capitalization.

Not in a place today to guide on exactly what CapEx will be for next year.

But I wouldn't expect it to return to the highs you saw over the last couple of years.

Thanks.

Well, this concludes our question-and-answer session and today's conference call.

We thank you all for attending today's presentation.

At this time you may disconnect your lines.

Thank you, and have a great day, everyone.