WTW 3Q12 Earnings Transcript

7/29/2019 WTW 3Q12 Earnings Transcript

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Company Name: Weight Watchers Intl.

Company Ticker: WTW US

Date: 2012-11-05

Event Description: Q3 2012 Earnings Call

Market Cap: 2,807.13

Current PX: 50.44

YTD Change($): -4.57

YTD Change(%): -8.308

Bloomberg Estimates - EPS

Current Quarter: 0.874

Current Year: 4.083

Bloomberg Estimates - Sales


Current Year: 1817.833

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Q3 2012 Earnings Call

Company Participants• Lori Scherwin

• David P. Kirchhoff

• Nicholas P. Hotchkin

Other Participants• Glen J. Santangelo

• Chris Ferrara

• Brian Joseph Wang

• Bob L. Craig• Peter C. Wahlstrom

• John A. Faucher

MANAGEMENT DISCUSSION SECTION

Operator

All participants, thank you for standing by. The conference call is ready to begin. Ladies and gentlemen, welcome to

Weight Watchers International Third Quarter 2012 Earnings Teleconference Call. During the presentation, all

participants will be in a listen-only mode. Afterwards, you'll be invited to participate in a question-and-answer session

and instructions will be given at that time. As a reminder, this conference call is being recorded today, November 5,20102.

At this time, I'd like to turn the call over to Lori Scherwin of Weight Watchers International. Please go ahead.

Lori Scherwin

Thank you, operator, and thank you to everyone for joining us today for Weight Watchers International's third quarter

2012 conference call. With us on the call is Dave Kirchhoff, President and CEO; and Nick Hotchkin, CFO.

At about 4 o'clock P.M. Eastern Time today, the company issued a press release, reporting its financial results for the

third 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 measure are

also available as part of the press release.

Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be

aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results

to differ materially from those discussed here today. These risk factors are explained in detail on the company's filings

with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of

forward-looking statements and risks and uncertainties of such statements. All forward-looking statements are made as

of today, and except as required by law, the company undertakes no obligation to publicly update or revise any

forward-looking statements, whether as a result of new information, future events, or otherwise.





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I would now like to turn the call over to David. Please go ahead.

David P. Kirchhoff

Good afternoon and thank you for joining us as we review Weight Watchers International's performance for the third

quarter of fiscal 2012. Overall, 2012 is wrapping up very much in line with our prior guidance, with Q3 coming in

somewhat better than our expectations and Q4 expected to come in somewhat below on the bottom-line because of

factors we will discuss.

On a constant currency basis, Q3 2012 total revenue was up 2.7% over the prior year period, with meeting fees down

2.4% and meeting product sale down 8.4% and Internet revenue growing 24%. Global combined paid weeks were up

9% in Q3 2012 versus the same period last year. Global meetings paid weeks were down 4.2% in Q3, while global paid

weeks for our Online product were up 23%. For Q3 2012, our operating income margin was down 160 basis points

versus the prior-year period up 30.7% – to 30.7%. While gross margin was up 80 basis points versus prior to 59.4%,

marketing as a percentage of revenue was up 90 basis points, primarily reflecting continued investment in drivingawareness of our Weight Watchers Online product. G&A as a percentage of revenue was up 150 basis points versus

prior, primarily reflecting investments in technology and staff to support our key strategic initiatives such as B2B. Q3

2012 EPS was $1.20 compared to $1.09 for the same period in 2011, benefiting from our share repurchases earlier this

year. We experienced about $0.04 of unfavorable forex impact in the third quarter of this year versus prior.

Before Nick reviews our financial results in greater detail, I'd like to provide additional context on our Q3 performance

Our results in our meetings business remained under pressure in our North American, U.K. markets and were more

buoyant in our Continental European market. As expected, Q3 NACO attendances as a percentage were down high

single-digits versus prior, while paid weeks as a percent performed somewhat better at low single-digit declines versus

prior. As we noted on our last call, we're now at the tail end of our two-year innovation cycle, and we've been running

our current marketing campaign for over two and a half years. On the positive side, our annual brand pricing measures

during the third quarter showed continued overall strengthening of the Weight Watchers brand in key measures such as

relevance, effectiveness, and modernity. However, right now, we're lacking news in either program or marketing todrive the kind of cut-through necessary for the current economic environment, particularly in the midst of an

all-encompassing political campaign season. As I will discuss later, we plan to change this as we enter January 2013.

The U.K. meetings results were more of a disappointment for us in Q3 but not entirely unexpected. The combination of

a very difficult macroeconomic context in that country with the lack of program news and a much less effective 2012

marketing campaign has put pressure on this business all year long. Again, this changes as we enter 2013. Consistent

with our expectations, our Continental European meetings business performed quite well in the third quarter,

particularly given the very difficult economic conditions across Europe. Having attendance growth in positive mid

single-digits and paid weeks growth in double-digits reflects the impact of program news and – that program news and

fresh marketing can have to help offset the effects of a retrenching consumer economy.

Finally, our WeightWatchers.com business has continued in Q3 to deliver very solid double-digit revenue and volume

growth versus the same period in 2011, benefiting from a strong entering active subscriber base and continued surge in

growth in our CE and Canadian Internet businesses. U.S. Online recruitments were under more pressure in Q3, whichwas driven by the same factors that are affecting the NACO meetings business. As well, the WeightWatchers.com U.K

results have been weak for most of the year, again a reflection of a marketing campaign that's not cutting through as

well as the effect of being in an off-cycle innovation year. Like the meetings business, the Weight Watchers Online

business will have the benefit of a fully refreshed marketing campaign, along with the new program launch as we enter

January 2013.

I'd now like to turn the discussion over to Nick, who will review our financial and volume results in greater detail.

Nicholas P. Hotchkin





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Thanks, Dave, and good afternoon, everyone. I've had a great first two months at Weight Watchers, and I'm excited to

be with an organization that has such an important mission as well as a terrific business model. Furthermore, my early

days have confirmed my going-in belief that this company has a large portfolio of future growth opportunities.On to the numbers; picking up where Dave left off, let me start with WeightWatchers.com. Third quarter Internet

revenues rose 22% versus the prior-year period, or 24% on a constant currency basis. Paid weeks grew 23% in Q3, with

double-digit growth in the U.S. and even stronger growth in Continental Europe and Canada. As we expected, overall

global recruitments in Q3 were slightly positive, driven by strength in Continental Europe and Canada, partially offset

by softness elsewhere, particularly in the U.K. Among other factors, U.S. recruitments were impacted in Q3 from

lapping last year's "buy-one, get-one" and other promotions that we did not repeat this year. This negatively impacted

U.S. recruitment volume, but we benefited from higher price realization versus the same period in 2011. Looking

forward, we remain comfortable with our current guidance of 15% to 20% second half growth in paid weeks, yielding

full-year growth of 25% to 30% for WeightWatchers.com.

On to the meetings business, starting with North America; total NACO revenue in Q3 2012 was down 3.3% versus the

same period in fiscal 2011. This represents moderation versus the 6.4% decline we saw in the second quarter versus

prior and the 9% decline in the first quarter versus prior. NACO Q3 2012 paid weeks declined 3.6%, while attendancedeclined 9.4% versus the prior-year period. In-meeting product sales declined 6.6% versus Q3 2011, due to lower

attendance versus the prior-year quarter, partially offset by an increase in product sales per attendance, which grew

3.1% versus prior. Similar to WeightWatchers.com, Q3 volumes in NACO were negatively impacted by lapping a

BOGO and another promotion that we did not repeat this year. This negatively affected recruitment but, as with

WeightWatchers.com, benefited revenue per paid week versus prior.

Similar to the first half, part of the weakness in NACO stemmed from the regional at-work issue that we have discussed

throughout the year. Importantly, while the regional at work business was still down considerably versus Q3 2011, the

business performed in line with our expectations and has stabilized, leaving us well situated for the 2013 selling season

which begins this month. Also, importantly, the strategic national accounts part of the business continues to perform

very well and, while still a small part of the overall B2B business, it is growing by double-digits. Consistent with our

previous guidance, we expect the full year negative impact to operating income associated with the at work issue to be

about $19 million.

While Q3 showed a moderation in the negative trends NACO has experienced this year, we note that the consumer

backdrop has remained muted. In addition, like many other businesses, we were directly affected by Hurricane Sandy

last week with significant drops in enrollment levels and attendances throughout the Northeast. While we quickly

restored normal business operations across most of this critical region, we do expect certain key markets such as New

Jersey and Long Island, both high-penetration markets for us, to continue to be adversely affected through the next few

weeks. It is difficult to precisely estimate the impact of the hurricane, but we would anticipate a potential impact of

1.5% to 2% on attendances and paid weeks in the fourth quarter. For the fourth quarter, while we continue to expect

high single-digit declines in paid weeks, we now expect low double-digit declines in attendances versus the same

period in 2011.

Towards the end of the quarter, we acquired our first franchise in some time, the Southeastern Ontario region in Canada

for $17 million. Since the quarter end, we also purchased an additional franchise, covering part of the Adirondacks in

New York and Vermont. These franchises are relatively small and will have de minimis impact on financial results for

fiscal 2012. As a reminder, franchise acquisitions have always been an opportunistic use of our free cash flow as they

make strategic and financial sense. Owning more of the North American meeting system gives us greater control of the

brand, lets us cut back redundant back office spend, and enables us to better leverage both national marketing and the

field infrastructure. For these reasons among others, franchise acquisitions tend to be accretive in the first full year

following purchase.

Next, the U.K. meetings business; the business continued to witness volume and revenue declines versus prior and at

accelerating rates as compared to the first half of the year and our prior expectations. Third quarter paid weeks declined

12.5% versus the prior-year period, and attendances were down 17.5% versus prior. We expect further pressure in Q4,





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with volume down in the 20% range versus prior. Our 2012 marketing approach clearly did not meet our expectations,

and we are looking forward to 2013 when the U.K. will be launching a fresh new approach which is more in line with

the playbook we have employed in the U.S. and Continental Europe. We look forward to upcoming calls when we canshare more details.

Finally, the Continental Europe meetings business; Q3 2012 paid weeks grew 12.1% versus prior, and attendances were

up 4.9% versus prior, with France and Germany leading the way on the heels of the ProPoints 2.0 innovation and ad

campaigns rolled out earlier this year. We expect continued growth in Continental Europe in Q4, albeit at slower rates

than in Q3.

Now, to review some key financial metrics for the quarter; our other revenues, which includes franchise commissions

and licensing revenue, declined 8.1% on a constant currency basis versus the same period last year. In Q3, gross margin

rose 80 basis points to 59.4%, driven by a mix shift in revenues, with growth in the WeightWatchers.com business

offset by weakness in the meetings business. Pressure in the meetings business remains a function of softer volumes as

well as incremental expense associated with the retail upgrade; one-time expenses associated with a call center

upgrade; and contraction in, in meeting product sales margin, due primarily to lower sales of enrollment products. For

the full year, we now expect gross margin expansion of about 100 basis points versus prior, as compared to our earlierexpectation of 100 to 150 basis points versus 2011. This is due to deceleration in fourth quarter gross margin leverage,

driven by both higher costs and lower volumes.

Meetings pricing, as measured by lecture income per paid week, was up about 2% on a constant currency basis or about

flat on a reported basis. This had a greater impact in Q3 versus earlier in fiscal 2012 as we start to realize more benefits

from the price increases taken last year, particularly in NACO and the U.S. WeightWatchers.com business. We'd note

that about 60% of active NACO members are now in the higher price, and we'd expect more price realization as we

look forward towards 2013.

Marketing spend was up in Q3 in support of our new initiatives, namely in the WeightWatchers.com business in

Continental Europe where we started TV for the first time this year. Marketing rose 8.9% versus prior on a constant

currency basis and was up 90 basis points as a percent of sales. As expected, this was less of an increase than we saw in

the first half of 2012, but it was also less than we thought for the quarter itself, largely due to timing which shiftedroughly $4 million of marketing expense from the third quarter into the fourth quarter. As such, despite the

lower-than-expected Q3 marketing expense, we continue to expect marketing to be up 300 basis points year-over-year

for fiscal 2012.

G&A expense as a percent of revenue rose in Q3 2012 versus prior by 150 basis points to 13.5% as we continue to

invest in our growth initiatives including B2B, technology, and customer relationship management. There were also

costs this quarter related to our headquarters office move next year, which we previously expected to incur in Q4. For

the full year, we still expect G&A expense to be up about 100 basis points versus prior.

As a result of the factors I've just discussed, our total company Q3 operating income declined 4.6%, or 2.2% on a

constant currency basis, with reported OI margin down 160 basis points versus the prior-year period to 30.7%. In the

quarter, foreign currency negatively impacted our total company revenue by approximately 2.1%, operating income by

approximately 2.3%, and net income by approximately 2.5% versus the prior-year period, resulting in a roughly

negative $0.04 impact to fully diluted EPS.

We have no change in our prior expectations regarding share count, with about 56 million shares outstanding on

average in the second half, leading to a full-year average count of approximately 61 million shares, driven by the tender

and the related share repurchase we executed earlier this year. We also continue to expect a tax rate of 38.5% for the

full year. Further, we continue to expect full year 2012 interest expense to be in the range of $85 million, inclusive of

$3.5 million of incremental amortization of fees related to the share repurchase transactions.

We ended the quarter with $2.4 billion of debt and $2.3 billion of net debt. Our net debt to EBITDAS ratio was 4.3

times at the end of the third quarter and we expect to finish the year at roughly 4.4 times, consistent with prior

guidance. In Q3, we generated $121 million cash flow from operations. The main uses of cash included $79-million





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debt reduction, $16-million capital expenditure including software capitalization, $17 million for the Canadian

acquisition, and $10 million in dividend payments to our shareholders. Year-to-date cash flow from operations remains

strong at $301 million. Our overall priorities for cash flow remain unchanged, invest in our growth initiatives, reduceour debt levels, return cash to shareholders through our quarterly dividend, and opportunistically execute franchise

acquisitions.

I'll now turn this back to Dave for some concluding remarks on the outlook and our strategic priorities.

David P. Kirchhoff

Thanks, Nick. We're now in the process of wrapping 2012, a year that has been difficult from a financial and operating

perspective, but also a year that has been very important in making critical progress against our long-term strategic

plan. We expect to enter 2013 with a much stronger game plan than was the case in 2012, which includes the following

five key highlights.

One, a new global program innovation; our global and regional program development teams have been workingintensely throughout the year to ready our next new major program innovation. We will be able to provide greater

details and context when we begin introducing the program innovation to our current meetings members and Online

subscribers in early December. Our focus, when we launched PointsPlus and ProPoints two years ago, was to create a

much stronger and more future-facing nutritional platform for our members that reflected many of the advancements in

nutritional science that had occurred over the previous 12 years. Given the core role that points and tracking play in the

day-to-day of our members' lives, it was not surprising that this program news had particularly significant effect on

both media and member buzz. Our new innovation launch for 2013 continues our efforts to fully revamp and expand

our program platform, now with a much larger focus on behavior change techniques. While we do not expect this new

innovation to have the same kind of enrollment impact as the 2011 PointsPlus launch, we do see it as a far more

significant enhancement than what we did in January 2012. And, we view it as a critical step in the ongoing evolution

of how we help our members not only to lose their weight, but also to create a real path to keep the weight off.

Two, refreshed and new marketing campaigns; we will complement our program innovation launches with new andfully refreshed marketing campaigns across our major markets. The U.S. and U.K. will be launching completely new

campaigns that build upon everything that worked in the previous NACO campaign. Our CE markets will take their

successful current campaigns and build upon them with a range of new creative treatments, new celebrities, and other

significant improvements. Over the past three years, we have aggressively invested to build our brand and to drive

awareness of our Weight Watchers Online product. More recently, we have focused on gaining a stronger analytical

understanding of which marketing media is performing for us and which is less optimal. With these insights, we will

enter 2013 with a more optimized advertising media mix in both TV and digital, which will allow us to continue to

drive customer acquisition but at a lower overall level of spend.

Three, refresh the U.S. retail infrastructure; as of the end of October, we now have converted approximately 65% of the

total system, and we remain on track to be about 80% through our retail upgrade for North America by December 31.

We expect this initiative to be effectively 100% completed by the end of 2013.

Four, revitalize B2B business. All of the issues that created the pressure on our regional small account business are nowbehind us. We will be entering 2013 with a segmented offering that recognizes the crucial differences in needs between

our regional small accounts and our national strategic account businesses. In the small account business, we have been

transitioning new accounts back to the familiar 13 and 17-week series offerings and away from monthly pass. In the

strategic account business, the focus will remain on offering monthly pass from Weight Watchers Online. Throughout

the year, the new B2B management team has also been completely revamping the sales and operations of this business

and we will enter 2013 with some much stronger and more consistent selling capability. With the remediation efforts in

the small account business behind us, we can also focus more of our attention to building the strategic accounts

business which had a great year despite the many distractions to the team.





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Five, continued investment in our WeightWatchers.com business; much of 2012 has been focused on rolling out the

full toolkit of web and mobile apps across our major geographies as the WeightWatchers.com business outside the U.S.

has become increasingly important to us, both from a top line and bottom-line perspective. As well, the team has beenworking hard to ready the Weight Watchers Online product to have full functionality to support the new program

launch, which will create even greater differentiation from the much narrower competitive applications currently

available in either web or mobile platforms. The unique selling proposition of the online product is that it builds upon

the proven and trusted Weight Watchers brand and program and makes them more engaging through useful tools and

technology. We will look to aggressively press that advantage in the marketplace next year.

As is typical for this time of the year, we're still in our budgeting process, and we will not be in a position to provide

earnings guidance for 2013 until we release our Q4 results in February. That said, I would like to provide some key

thoughts and considerations for next year.

One, starting customer base; we expect our meetings business membership base to enter 2013 about 10% smaller than

was the case when we entered fiscal 2012. For context, we would need to drive roughly 10% enrollment growth for the

year, a substantial turnaround from the trends we experienced in 2012, for us to get to flat versus prior on meetings paid

weeks for the full year 2013. On the positive side, we expect to benefit by entering 2013 with an Online subscriber basethat is about 15% larger than was the case last year.

Two, new programming campaigns versus macro economy and competition; we're not anticipating any tailwinds from

the consumer economy in North America for 2013, and we expect conditions in Europe and the U.K. to be the same or

worse than 2012. As well, we recognize that in an environment where there is pressure on consumer discretionary

spend that the proliferation of so-called free apps has the potential to create additional pressure on our ability to recruit

new people. Our plan is to overcome these challenges with major program improvements as well as new marketing

campaigns that allow us to rise above the clutter and noise and to create further differentiation in our offering versus

other alternatives.

Three, efficiencies versus investments; as noted, we expect to see significant improvements in our marketing efficiency

in 2013 versus 2012. This will be somewhat offset by the impact of higher costs resulting from initiatives such as B2B

as well as the depreciation and amortization associated with our retail rollout and systems investments among otherfactors. Our B2B investments will be focused on people and technology as we continue to build this platform.

Given macro health trends and the need for prevention, the long-term context for Weight Watchers is only going to get

stronger. Clinical evidence continues to pile up that shows over and over the inherent strength of Weight Watchers to

deliver medically significant weight loss cost effectively in its scale. The most recent example of this was featured in

the Journal of Obesity in which an NIH-funded study researchers were surprised to discover that Weight Watchers was

at least as good, if not better, than the significantly more expensive behavior modification program delivered in an

academic clinical setting, previously considered the gold standard of lifestyle-based weight loss treatments. This adds

to the high-profile research featured last year in the Lancet and British Medical Journal. All of these studies show the

same underlying driver of our success. We are unmatched in our ability to keep customers engaged in a behavior

change process for long periods of time. Weight loss effectiveness is purely a function of combining a sustainable

program with continued engagement so that new habits and patterns have time to set in. Nobody comes close to us in

accomplishing this. We will be even better at this next year when we further integrate our new state-of-the-art program

with a combination of group support, website, activity monitors, apps and other tools to help people stay actively

engaged and on track. We believe that this comprehensive value proposition gives us a decisive advantage over any

competitive offering. We will further leverage these advantages in both the B2C and B2B context.

Guidance; overall, our 2012 outlook is essentially in line with our expectations, though with some puts and takes across

the quarters. Based on the specifics of our outlook that Nick discussed, we're narrowing our guidance for 2012 full year

EPS to be between $4.00 and $4.10 versus a range of $4.00 to $4.20 previously provided. This range includes about

$0.05 from incremental investment costs not included in previous guidance as well as $0.02 to $0.03 from projected

negative impact from Hurricane Sandy. The actions that make up these incremental $0.05 include, one, the acceleration

of the transition to a new call center that will be up and running, with improved customer service capability ahead of





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our program innovation; and two, our decision to air a different combination of ads at the tail end of Q4 versus our

original plan, which will result in the pull-forward of certain advertising production costs into 2012.

Finally, I want to mention that we're planning on holding an Investors Day in the first half of next year, where we willbe focusing on our long-term strategic plans and milestones.

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

Q&A

Operator

Thank you. We'll now take questions from the telephone lines. [Operator Instructions] The first question is from Glen

Santangelo from Credit Suisse. Please go ahead.

<Q - Glen J. Santangelo>: Yeah, thanks. And, good evening. David, I just want to talk to you about the situation in

the U.K. Clearly, it continues to be a challenge for the company. I'm curious in getting your perspective. What do youthink you can do to correct the situation there? Obviously, they had a less-than-effective marketing campaign. But,

when you look at Continental Europe, it continues to do well, particularly on a growth perspective. And, as I think

about those economic climates as being relatively similar, which could be a false assumption, I'm just curious as to why

the problems are so centric in the U.K.

<A - David P. Kirchhoff>: Yeah. We would actually have the same point of view in terms of comparability of

macroeconomic context between the U.K. and CE. Really the difference you're seeing is that in the case of CE they're

executing much more consistently against their marketing playbook. And, the gap is pretty significant right now versus

what we have currently in the U.K. And, furthermore, they did a better job I think of pushing out program news and the

program news was relatively more significant for them; whereas, the U.K. did not have as nearly a significant program

news in 2012. And, I think the significance of that is something that we've seen pretty consistently during this difficult

economic climate is that across our markets, when we have compelling advertising and news – program and service

news, we're able to break free of the macroeconomic context, consumer confidence trends, et cetera, and drive resultsthat separate. Whereas, when we're relatively more quiet in terms of the impact of that our marketing programs are

happening as well as the lack of program news, we find that we end up getting pulled down by the economy almost at a

disproportionate rate. I think the implication for that is a few-fold. First off, for me what it suggests is that, from here

on out, our operating assumption needs to be that every single year across our major markets we need meaningful

program news or meaningful news in either program, technology, and/or service. The second thing it means is that we

have to execute very consistently against our marketing playbook in each one of our major countries and whatever we

have out there has to feel fresh and sharp to drive people's imagination, inspiration, everything else. We didn't have that

in the U.K.; you see the impact on the business. We did have it in CE; you see the impact on that business.

<Q - Glen J. Santangelo>: Thanks for that. If I could just ask one follow-up; I did want to talk to you about the

investment policy in Q4. Sounds like you're spending a nickel in Q4 and I think if I heard you just correctly in your

closing remarks that's going to be a new call center and the decision to run some new TV ads in December and so

you're pulling some costs forward. Where's that call center? Is it in the U.S. and – or is it in Europe? And, thensecondly, as you think about these new marketing campaigns and product rollouts for January 1, should we expect to

see those in the next couple of weeks? And, any elaboration on what we should expect would be helpful.

<A - David P. Kirchhoff>: Absolutely. The call center that I referenced is specifically in the U.S. and it represents a

change of – we outsource our call center, and we're changing over call center vendors to someone with a capability set

that we think is going to be much more robust for us going forward across both our B2C and B2B businesses. So, it

was an important step for us to take. But, it had a series of one-time costs associated with the transition to the tune of

about $3 million and we made the decision to try to pull that into 2012 so that we'd be up and running with it as we

entered the January weight loss season. So that's really a cost that otherwise would have been borne in 2013; we made

the decision to pull into 2012. On the advertising, what you typically see with us – well, first off, the program launches





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as you might have – as you heard me reference, we're going to be entering what we refer to as the soft launch phase in

the beginning of December in most of our major markets. That's where we have a chance to share it with the people

that are still attending our meetings during the relatively slow holiday season. It gives our service providers a chance toget more comfortable delivering the new program in a live context, if you will, so that they can get their sea legs as we

enter into the January campaign where things tend to get a little bit crazy. So that's going to be happening in the

beginning of December.

In terms of the advertising, most of those spots – or virtually all those spots will be happening after Christmas.

However, depending on the lineup of spots we choose to use, the second we make a decision to air it for even just one

day in 2012 we have to pick up all of that production cost. So, what that really does is it's pulling forward advertising

production cost that we had thought was going to end up in 2013 and it's pulling it into 2012. And so, really, in terms of

the overall economics of the business, it's – none of these things are meaningful. It's really timing shifts between Q1

2013 versus Q4 2012.

<Q - Glen J. Santangelo>: Okay. Thank you.

Operator

Thank you. Your next question is from Chris Ferrara of Bank of America. Please go ahead.

<Q - Chris Ferrara>: Hi, thanks. How are you guys?

<A - David P. Kirchhoff>: Good, Chris. How are you doing?

<A - Nicholas P. Hotchkin>: Good, Chris.

<Q - Chris Ferrara>: Okay. I just wanted to talk about the 10% enrollment growth that you need to go positive in

meetings, right, in a year that – understanding enrollments this year in January were better than they were every year

but 2011. That said, right, when you have Jessica Simpson lined up and new products news that you're saying is

fundamentally different, maybe not the buzz, why is 10% enrollment growth such a difficult bogie to match?

<A - David P. Kirchhoff>: Well, here's the context I would put it in, is that we did much better than that for the vast

majority of 2011 versus 2010. So, to your point, it's not as though we've never seen it before. However, I think that if –

we're just trying to provide context. It's coming across a year that's relatively softer. I'm not in a position right now,

obviously, to speculate on exactly where we think our volume is going to be as we go into next year, other than to just

try to temper and at least give some context for people to think about it as they think about trying to model our business

for next year on what would be required for us to hit different milestones from a volume perspective.

<Q - Chris Ferrara>: Yeah. I'm trying to figure it out, though. So, you're saying there is no message in that. You're

just providing context but you really have no idea whether you can do the....

<A - David P. Kirchhoff>: Yeah. No, to your point, we're not actually – there is no hidden message where we're trying

to guide people toward any sort of volume growth assumptions next year. What we thought would be helpful was that

for those folks that were modeling is to just give them a sense of what would be effectively the break-even, if you will,

for – that we would have to achieve, in other words, to hit flat paid weeks of 2013 versus 2012 given that we're going

to be starting the year 10% lower. And, then from that, you can do your own extrapolation in terms of what you think is

reasonable and use that to basically then drive into the amount of paid weeks per volume growth you might expect to

see for us next year.

<Q - Chris Ferrara>: Okay. And, putting context around this product launch, right, so you're – if hear what you're

saying, you don't expect it to have the buzz obviously that a PointsPlus did, but you're saying it's a fundamental

modification. I know you're not in a position to talk details around it but why – can you talk a little bit about the nature

of why it wouldn't generate buzz like a PointsPlus would have?





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<A - David P. Kirchhoff>: Well, I think the thing about PointsPlus is that it was really a – in the world of Weight

Watchers and Weight Watchers members, changing the formula is a really big deal and it tends to create a lot of

commotion, mostly positive, some frustration because people get frustrated about having to change programs. But, ingeneral, it's creating an enormous amount of conversation, to the extent that it was apparently worthy of Page 1

coverage in the New York Times. I love, love, love this new program that we're going to be launching. I think it's

hugely important to us. I think it's a really critical step for us to take as an organization. But, I don't expect it to have

that same buzz-worthiness that a once-every-10-to-12-year change in the points formula will have that's based mostly

on intuition. But, I think – what I would point out is that when we launched PointsPlus we didn't launch it because we

thought it was going to blow the doors off in terms of buzz and January enrollments and all these types of things; we

did it because we felt that it was the right thing to do because it was a better nutritional platform for us going forward.

Our new program that we're going to launch, we're doing it not because we think it's going to generate huge buzz or

enrollments in January, but rather because we feel that it is a better platform for helping people not just lose weight but

keep it off. Therefore, it's the right thing to do. Now, it's up to us to try to find ways of making as much noise around

that as possible. The messaging for it – I think it's just – it's inherently more nuanced than the messaging of "oh my

gosh, they changed the points formula." So that's why I would temper a little bit. But, what I would say is, to me, it is amuch more significant change versus what we did in 2012.

<Q - Chris Ferrara>: Okay. That's great. I appreciate the color. And, just on marketing, it sounds like – using the

word efficiency for 2013, does that mean – is marketing going to come down in 2013 on a preliminary basis?

<A - David P. Kirchhoff>: Yes. That's pretty much what we said. So, you weren't imagining that. But, here let me put

a little bit more context around that. I think the thing is that, if you look at where we spend money, it is primarily in

television and digital. And, within digital, you have banner campaigns, you've got search, you've got affiliate programs,

you've got eCRM, you've got social media, you have all these things. And, effectively, what the trick is in thinking

about direct response marketing and optimizing cost per acquisition. Effectively, what the marketers have to try to do is

come up with an attribution model, if you will, where they give credit to different placements for driving customer

acquisitions, enrollments, online subscription, those types of things. We've been in the market in a very big way and in

– and particularly over the past two years, what we have now been able to do with the data set that we've accumulated,

we're able to look backwards, do a lot of statistical and other types of analysis to come to some judgments on whichaspects of those overall programs – digital and television – that we think are delivering the best bang for the buck and

which do we think are going to be less efficient and basically re-jigger the mix, if you will, so that we can drive

towards more efficient CPAs which would allow us to continue driving volume in the business, but doing at a lower

level spend.

<Q - Chris Ferrara>: Got it. Thank you.

Operator

Thank you. Our next question is from Brian Wang of Barclays. Please go ahead.

<Q - Brian Joseph Wang>: Great. Thank you. Just a quick follow-up on some of the last points that were made; just

on the 10% enrollment growth necessary next year that you discussed, can you just talk a little bit about – obviously,the small accounts business is down a lot, especially in the beginning of the year last year. Wouldn't that at least

partially make up for, if you could get – obviously, under the assumption you get a lot of that back, wouldn't that make

up for a lot of the – that 10% growth necessary?

<A - David P. Kirchhoff>: Well, I think, Brian, what – you're obviously going to spend some time going through with

the benefit of this call and this transcript is you'll be going through some of your own modeling efforts in trying to

piece together some of those data pieces. Certainly, as you heard me reference, having the – a lot of the execution

issues for the small accounts business behind us gives us an opportunity to start of 2013 in a much better place. I think,

when you model out and look at the entirety of what 10% means across the entire NACO business, you would probably

come to the conclusion that fixing what we did in the at work business just on its own would not be nearly enough to





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make up for what you'd have to do to get to that 10% enrollment growth. Given that historically – one way to maybe

dimensionalize is that historically the at work business has been about 12% of our North American attendances. This

year because the issues it's down to closer to, say, 10%. So, reverting that back, you can imagine how that doesn't getyou nearly all the way there.

<Q - Brian Joseph Wang>: That's fair. And, then just on the new call center, obviously, you said you've pulled it

forward into 4Q. Do you have just the timing on the potential opening for that just to – I'm assuming you built in a

cushion – little bit of a cushion to make sure that it's up and running and fully functional before, obviously, you hit the

most important time of the year.

<A - David P. Kirchhoff>: Yes. There's a really robust plan in place that will – don't make me go through all the

details of it but there's a really robust plan in place in the transition across the two vendors to make sure that we handle

that in a single swipe. But, we're very tuned into the fact that, whatever happens, we need to be bulletproof as we go

into January 1.

<Q - Brian Joseph Wang>: Great. And, then just one final one on the – obviously, you made these – a couple of small

franchise acquisitions this quarter and even since the last quarter. Does that mean – I think it's been a few years sinceyou made one prior to that. Is it something that you find more attractive? I know a lot of the international franchise

licenses are still out there. Have you looked at using some of the cash flow for that?

<A - Nicholas P. Hotchkin>: Look – thanks, Brian. It's Nick. Great question. Look, we've found franchise acquisitions

consistently attractive from a strategic and a financial standpoint. The field infrastructure synergies, for example, the

back office synergies and G&A savings too, all make them accretive in the first full year of operations. So, it's an

opportunistic play for us. In terms of other opportunities going forward, of course, it depends more on franchisees'

willingness to sell than anything else. And that tends to be impacted as much by family financial planning than

anything else. Are folks potentially more interested in selling in a year like 2012 versus a banner year at 2011? Maybe

but, bottom line, we like them. We'll continue to pursue them opportunistically.

<Q - Brian Joseph Wang>: Great. Thank you.

Operator

Thank you. The next question is from Bob Craig, Stifel, Nicolaus. Please go ahead.

<Q - Bob L. Craig>: Good evening, everybody.

<A - David P. Kirchhoff>: Hi, Bob.

<Q - Bob L. Craig>: David, are you at all concerned that the early launch using Jessica Simpson stole any thunder

form early next year's marketing campaigns?

<A - David P. Kirchhoff>: No. One of the things, when you work with Jessica – who by the way is doing great – is

that whether we put her on advertising or not, she's in the public eye. So – and I think the good news for us is that she's

having good success. And so, right now the public eye is favorable. But, it's – she is – given how high profile she is, I

think there's only so much we can do on that front. But, she has been doing great on the program. We're so thrilled with

the success that she's having. We think that there is a great partnership to be had that we're going to be actively

pursuing and building with her as well as continuing to work with other folks such as Jennifer Hudson, Charles

Barkley, et cetera. So, I think from our point of view we're really happy with the amount of material that we have to

work going into our 2013 campaigns.

<Q - Bob L. Craig>: Okay. David, I think in the past you've mentioned some internal gating or limiting factors in

building the large corporate business, things like the data mining capability, et cetera. Where do you stand in that

regard now?





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<A - David P. Kirchhoff>: We're continuing to make great progress against it and understanding and appreciating the

importance of that question, this is one of the reasons why we felt that it would be helpful and useful for us to have a

good solid Investor Day in the first half of next year because that would really allow us a chance to lay out the B2B andhealthcare strategy by way of example in all its glory, including all the key milestones and everything else, in terms of

what needs to be in place when, how much investment do we think is going to needed to get there, and what does

success ultimately look like as well as providing something that I think the investment community has been looking

for, for a long time, which is a long-term perspective on what to look for from this company from a top and bottom-line

growth perspective. So, let me defer most of the specifics of it to that. And, above and beyond that, what I would say is

that we've been making great progress this year in terms of developing the underlying customer database infrastructure,

putting on the CRM tools, business intelligence, everything else.

Really, the next frontier for us in terms of data mining is going to be pushing out data capture into our at work meetings

and into our – what we call our traveler meetings, which would be Weight Watchers meetings that are happening in say

church, synagogue, community center, things like that. We're already getting real-time data pulled in from our Weight

Watchers centers. Once we have enough critical mass and data being brought in across, it really does significantly

enhance our ability of them providing real-time reporting back to our corporate clients. So, we're making good progressagainst that and it's worked. It's obviously, going to be taking us well into 2013.

<Q - Bob L. Craig>: Okay, great. Last one from me; any early read on investment spending levels in 2013? What I'm

really trying to get to is the swing factor. I think on the last call you mentioned $39 million in 2012 versus $20 million

in 2011. Any gauge on 2013 at this point?

<A - David P. Kirchhoff>: I think – and I'll ask Nick to give me a backup on this just to provide context, which is a lot

– we've been doing a lot of CapEx this year with the regional rollout. So that's been a fair bit of capital that we've been

deploying, going from 20% to probably by the end of this year 80% complete with the North American retail network.

Therefore, going from 80% to 100% would presumably be less. The flipside is that we're going to be ramping up a little

bit investment behind technology, so that's the data capture and all that kind of stuff. And so, there's going to be some

puts and takes. But I think what you're seeing is that we had a slug of CapEx that was associated with putting in ERP,

doing a corporate-wide Oracle initiative over a series of years that's largely now behind us. 2011 and 2012 became

significantly driven by – capital requirement became driven by our efforts around the retail rollout. Then that starts towind down and then going forward, the capital expenditures becomes much more focused around technology and data

capture.

<Q - Bob L. Craig>: Okay....

<A - Nicholas P. Hotchkin>: Look, Dave, I think that's very fair. In terms of CapEx, the uptick this year was driven by

the items Dave mentioned. Going-forward assumption right now, obviously, pending the finalization of our plan, I

wouldn't expect CapEx to be markedly different next year, less spend on retail transformation. But, of course, we've got

the build-out of our new headquarters coming into CapEx too. In terms of the initiative spend, yeah, look, we've

previously talked about $39 million and $20 million incremental for this year. Given the call center expenditure, that's

more like $42 million total and $23 million incremental versus 2011 for this year. And, we'll be finalizing the 2013

plan in the next couple of months.

<Q - Bob L. Craig>: Great. Thanks for the color.

Operator

Thank you. The next question is from Peter Wahlstrom of Morningstar Investment Research. Please go ahead.

<Q - Peter C. Wahlstrom>: Good afternoon. Thanks for taking my question.

<A - David P. Kirchhoff>: Sure.





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<Q - Peter C. Wahlstrom>: Now that you've cycled through last September's price increase for Online in the U.S. and

roughly, what, 60% of people are on the new pricing strategy, have you identified any pushback from former

subscribers who are looking to rejoin? And, then maybe taking a step back, assuming that that message isn't overlyreceived as a negative, is there a case against doing that, raising prices again in 2013, particularly as you're adding new

features to Online?

<A - David P. Kirchhoff>: So, just a couple of points of clarification. First off, monthly pass is at about 60% and that

price increase went in at the beginning of December last year. The Weight Watchers Online price increase went in

closer to, say, September of last year, if memory serves. So, Weight Watchers Online is now close to 70% of the

customer base in the U.S. is at the higher price point versus, say, 60% for monthly pass. So that's just more

housekeeping, if you will. I think the important thing from our point of view is that, despite the price increases, we

haven't seen any negative impact on retention at all, which is where we would've expected to see some of the blowback

if there was going to be blowback. So that leads us to believe that it's not likely an issue.

And, then particularly with Weight Watchers Online, you're going from $17.95 to $18.95. I'm not sure that the

psychology around that would be that compelling. In some respects, I think it was a bigger deal for us to go from

$39.95 to $42.95 on the meeting side, even though it's still less than $10 a week and we still advertise it that way. But, Ithink what happens when you do – and in the case of monthly pass, we hadn't touched pricing since 2006. That's almost

six years, so it was time. In the case of Weight Watchers Online, we've added great functionality, everything else.

We've been able to raise price successfully a number of times over the past. But, right now, we certainly haven't

announced any plans or any indications of touching pricing in 2013.

<Q - Peter C. Wahlstrom>: Okay. And, then as a quick follow-up, obviously, you've done quite well in the Online

space. Have you also continued to see momentum in signing up men? I know that, from what I recall, roughly 15% of

your new signups were from men. You're seeing still continued improvement in this population?

<A - David P. Kirchhoff>: What's been encouraging for us this year is that, to your point, historically men, for

example, in Weight Watchers Online were about 8% to 9% of total mix. This year it has been in the low mid-teens

throughout the majority of this year. What's been encouraging is that even when we've gone off air and some time after

being off air with the men's campaign is that we've seen that percentage of mix hold up pretty nicely. And so, I don'thave any doubt that we've made great progress this year in terms of materially shifting the male consumer's perception

that Weight Watchers has a viable option for them. And so, from our point of view, the efforts that we've placed around

advertising to men over the past 18 months, I would qualify as being highly successful in terms of shifting the brand.

<Q - Peter C. Wahlstrom>: Okay. Thank you.

Operator

Thank you. The next question is from John Faucher of JPMorgan. Please go ahead.

<Q - John A. Faucher>: Yes, thanks. Two questions here; the first is it seemed as though there was a slight change in

tone in terms of your discussion of the free app issue. Is this something where you've seen something going on in the

market where you've got a heightened level of concern here? And, then the second is, as we look at the marketingspending discussion, I'm assuming – it sounds like marketing is going to be down on a dollar basis, which would

obviously put it down as a percentage of sales, so obviously a pretty nice benefit from an operating leverage standpoint

Is there anything that you can see now that's going to work in the other direction, something that's going to put a little

bit of negative pressure in terms of your operating leverage for next year? Thanks.

<A - David P. Kirchhoff>: So, on the first question on apps, part of the reason I wanted to proactively bring it up was

just because it's been a constant part of conversation and dialogue with the investment community and I wanted to

basically be responsive to it. Here's my take on apps is that they're – they have, obviously, been out there for some

period of time. Lots of people are downloading free apps. They're all over the place. There is lots of companies

developing free apps. It's like ten guys and a box of pizza and you have a free app. What I've seen, and I've spent a lot





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of time like looking closely at them, going out to technology conferences where I've met the people that are running

these companies, nice guys, hard workers. I think there's a couple of issues. First off, there's really not a business model

to be found among any of these companies, which I think begs a question of sustainability over the long term.Secondly, frankly, the bigger issue that I see with free apps is an issue that has been vexing across the app space within

the broader healthcare area was that you'll hear a lot of people in healthcare complaining about underneath their breath

sometimes and sometimes not underneath their breath, which is people download an app and use it for two weeks and

then put it away. And, the problem that I see with apps is that they're effectively calorie counters and they are

applications that make counting calories a little bit easier, but they're not based on an actual program. They're not based

on a lot of behavior mod science. There's really not that much there. And, I believe that, therefore, from our point of

view – we take every competitive challenge seriously.

But, from our point of view, I think given what we have going for us and going into next year, we believe that we're

going to have a value proposition that is nowhere even close to being in the same place as a lot of these applications,

which were much more narrowly defined. But, we haven't seen anything different this month versus what we saw six

months ago, to answer your question directly.

The second question in terms of puts and takes is you probably heard me reference during my call; while the attention

is on the cost savings in terms of getting better operating leverage by having a more efficient marketing mix, we are

cognizant of the fact that at the same time on the G&A line you're going to see more D&A flowing through both G&A

and gross margin actually related to the retail rollout as well as amortization of investments we've made in systems with

customer data capture, these types of things. And, then finally, we've been building up this – effectively this business

unit – this B2B business unit, which is sales folks, operations folks, people like that. We're effectively incubating it

within our organization. And so, it has all the costs associated with it. So, effectively from a operating leverage

trade-off, you're trading off improved efficiencies on marketing versus investments that show up a little bit in gross

margin and show up more in G&A.

<Q - John A. Faucher>: Okay. Thank you.

Operator

Thank you. [Operator Instructions] You have a follow-up from Chris Ferrara of Bank of America. Please go ahead.

<Q - Chris Ferrara>: Hey. Thanks for taking it. Just wanted to ask about the – so the paid weeks per attendee

continue to climb, like, they're running up at a decent clip, mid to high single-digits. Does that suggest that – do you see

increased penetration of monthly passes? Why would the paid weeks per attendee continue to be climbing right now in

North America and in most places actually?

<A - David P. Kirchhoff>: Particularly, if you look at the last quarter in Q3, I think there's a couple of things I'd call

out. Yes, monthly pass penetration is doing well. The second thing I'd call out is that due to some vagaries of the shift

in the at work business from series to monthly pass, that has changed some of the mathematical dynamics between

attendance and paid weeks levels in a way that doesn't suggest any kind of significant underlying business dynamics

but is more just a function of the math of how attendances work versus paid weeks, depending on the product thatyou're deploying.

And, then secondly, I think you could reasonably infer, if you've had a relatively softer enrollment period – so, for

example, when we chose not to run the BOGO promotion and a couple of other things, to the extent that that created

any kind of downward pressure on enrollments for NACO during that campaign period, what that means is that

effectively your membership base at that point in time is relatively "older", i.e., people further into the tenure of their

membership. And, those types of vagaries can result in periodic separations between attendances and paid weeks.

But, I think most importantly if you look at the propensity of someone to attend a meeting at a comparable tenure so,

say for example, someone who is in their second month of Monthly Pass, are they more or less likely to attend a

meeting today than was the case a year ago? What you find is that the likelihood of attending a meeting is very similar





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to what it was a year ago and it has more to do with some of the transitional things you sometimes see that can cause

periodic disconnects between attendances and paid weeks, which is why we focus on paid weeks as the critical measure

of volume.

<Q - Chris Ferrara>: Got it. Thank you. And, just one last one, I promise. The rate of growth in a dotcom business in

the U.S. versus elsewhere, I know you – I think you quoted double-digit growth in both. But, how wide is that gap and

will the U.S. be up double-digits in 2013 do you think?

<A - David P. Kirchhoff>: Well, let me not speculate on 2013 explicitly, but let me talk a little bit about the dynamics

that affected signups for Weight Watchers Online in the U.S. in 2011 and 2012. And, I think what you have is a

confluence of a couple of events. On one hand, you have a structural shift which is increasing awareness of Weight

Watchers Online in a U.S. context that's been driven by continued successful efforts around marketing to drive

awareness that, in fact, there is a way of doing Weight Watchers that is purely online. And that, I think, is much at stake

– it's much in play right now and it's as successful as it's ever been right now, as was the case in 2011. In 2011, what

you also had is on top of that you had the benefit of a huge program launch and a relatively, at the time, fresher

advertising campaign that gave that added benefit in 2011. So, the fact that sign-up growth rates in 2012 have been

comparable to those in 2011, I actually view as very good news given the size of the comp. And, then when I look forward to 2013 and I think about what we're going to have going for us is that we will have program news, we will

have new advertising campaigns for Weight Watchers Online so that those things should be net pluses for us as we

think about that business next year.

<Q - Chris Ferrara>: Got it. Thanks for being patient with me.

<A - David P. Kirchhoff>: Absolutely.

Operator

Thank you, Mr. Kirchhoff, you have no further questions. Please go ahead, sir.

David P. Kirchhoff

Thanks. In closing, I'd like to thank the entire Weight Watchers team, many of whom are listening on the call, for a

solid Q3 performance. I'm excited about the impact of our global program innovation and our marketing strategies we'll

have in 2013. Thanks for joining us today, and I look forward to speaking with you again at our next quarterly earnings

release.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time. Thank you for your

participation.

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WTW 3Q12 Earnings Transcript

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