Weight Watchers International's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Weight Watchers (WTW)

Weight Watchers International, Inc. (NYSE:WTW)

Q4 2013 Earnings Conference Call

February 13, 2014 5:00 pm ET


Corey Kinger - IR, Brainerd Communicators, Inc.

Jim Chambers - President & CEO

Nick Hotchkin - CFO


Meredith Adler - Barclays Capital

Glen Santangelo - Credit Suisse

Jerry Herman - Stifel

R. J. Hottovy - Morningstar

Matthew Jacob - ITG Investment Research


Good afternoon and welcome to the Weight Watchers Fourth Quarter and Full Year 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Corey Kinger. Please go ahead.

Corey Kinger

Thank you, Laura, and thank you to everyone for joining us today for Weight Watchers International's fourth quarter and full year 2013 Conference Call. With us on the call today are Jim Chambers, our President and Chief Executive Officer; and Nick Hotchkin, Chief Financial Officer.

At about 4:00 p.m. Eastern Time today, the company issued a press release reporting the fiscal 2013 results for the fourth quarter and full year. 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 SEC. 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. Please go ahead.

Jim Chambers

Thanks, Corey, and good afternoon, everyone. Today, Nick and I would like to do a few thing, update you on our Q4 and full year 2013 performance, tell you how 2014 has started and the implications for 2014 guidance and, as promised on our Investor Day three months ago, share with you our progress against our transformation plan.

At a high level, our Q4 performance of $0.54 per share was in line with expectations as good cost management was partially able to offset a deteriorating top line, which included the first ever quarterly decline versus prior in Internet revenues. Furthermore, the start of the year is proving to be every bit as challenging as we thought, if not more so. The headwinds from free apps and activity monitors have only continued to intensify and are significantly impacting consumers. And our marketing efforts in the early part of this year have been less effective than we had hoped putting our top and bottom lines under greater pressure.

During our Investor Day on November 6, we shared our assessment of the state of the Weight Watchers business. We were frank about the challenges we face and clear about the strengths we have to work with to turnaround our business. I'd like to recap that story starting with a three-point summary of our situation assessment.

First, our offerings have become less appealing in this changing market largely because our innovation approach and our approach to the consumer in general have not been sufficiently market driven. In addition, we have a big task at hand to modernize our technology architecture and create a more efficient product development engine.

Second, our costs have increased over time, particularly G&A and technology costs, but also our meetings business operating expenses where we have not been quick enough to flex down the cost structure as recruitment trends turns negative.

Third, on the positive side, we have a lot of strengths to build on.

The Weight Watchers program works. We have a great brand with high awareness and deep trust. We have a large community of past and present members and our organization is passionate and mission driven, including many thousands of talented services providers supporting our members' weight loss efforts in the field on a weekly basis.

In response, we share the four strategic pillars that make up the transformation plan we are aggressively pursuing. First, we must improve our immediate performance in tough competitive conditions. We need to deliver every bit of top line we can and work hard on our cost agenda.

Second, we need to create product advantage through reimagining our offering, building more quickly, and constantly validating at a consumer level.

Third, we must expand aggressively into healthcare. And finally, we need to continue to strengthen our organization building capability and increasing agility.

We remain confident in these strategies to transform this great company and we are making progress against key elements of our multiyear transformational plan. To add to our update I would like to outline the tactical priorities we have under each strategic pillar and detail our current efforts therein.

First, as you recall, is improving near term performance. As Nick will discuss in more detail, we are seeing softness across all of our large markets. With respect to this year's program enhancement, our marketing has failed to generate the expected interest in Simple Start. As a result, the take up rate has been slower than unexpected, but from those who have pursued it the feedback is positive. As a product enhancement Simple Start has more potential than last year's innovation, with the marketing introducing it has been less effective. The net of this is that we have not been able to combat the increased pressure on consumer consideration from free apps and activity monitors.

In this context, the first pillar one priority is to maximize our consumer activation. In nearly all markets we are changing up our advertizing rotation and introducing reshot or re-cut ads that focus on what has resonated better, a mixture of a more direct focus on Simple Start as a new program and here in the U.S. launching new Jessica Simpson ads beginning next week.

The second pillar one priority is cost management. We continue to work on our cost agenda on which despite progress in 2013, we have further work to do. While, Nick will go into our plans in more detail, 2014 will include a more significant effort on G&A expense. In fact after four years in row of significant increases in the G&A expenditure, we will be reducing total G&A in 2014, and this is despite making substantial investments in healthcare and in our product innovation and development capability. As you saw in 2013, we will continue to reduce spending on outside contractors, while ensuring that we are building strength within the organization where it is most needed.

Our third pillar one priority is to re-plan our marketing investment to efficiently breakthrough a busy consumer activation environment influenced by heightened interest and engagement with free apps and activity monitors. Within this effort we will be reducing marketing spend this year, consistent directionally with our decreased revenue forecast.

Finally, we have made the explicit strategic decision to focus our resources on those markets with the highest near term potential. By way of example since we last spoke we have shuttered our China operations.

Our second strategic pillar is creating product advantage through reimagining our offering. Our focus here is on creating strategic capability for more efficiently and with more confidence build things that consumers want. This won't happen overnight, but we are making progress and are committing more resources to this effort.

We are fast cycling ideas through validation via customer feedback in the real world conditions. In particular, we are building our learning in the area of support not to mention critical to the Weight Watchers brand differentiation. We are engaging consumers around channels of contact, phone, video, text. We are finding out how they do and don't want to be contacted. How much contextual prompting is preferred versus open-ended dialogue? How aggregated content broadcast such as the webcast are received and for what support objectives they are appropriate?

We want first timers come to our digital landing pages and observe how confusing it is for them to learn about us. We see how in this case we've been to focus on the repeat customer. We have performed detailed research comparing our digital offerings through emerging competitors. We understand the performance of individual key features as well as overall perceptions around ease-of-use and reported weight loss. We understand where we are strong and where we have opportunities and are actively working improving our product.

We are learning a lot about how to add value to our offer. Through this, we have already identified the direction of our 2015 winter diet season product innovation. With teams in place, focused on the technology build, researching marketing positioning options, and identifying the field with delivery capabilities required for success.

Our third strategic pillar is our expansion into healthcare. The first priority here is to build the foundation, which includes investing further in HIPAA compliance, data capture, and the systems required for eligibility verification, billing, and reporting. By way of example, we have designed a tablet base system that will allow us to create an easy to operate platform for our meetings environment, as well as create a stronger and more modern member experience in general.

Our CTO Dan Crowe is playing a pivotal role in these efforts and we're leverage external domain expertise where most appropriate. We expect that by the end of Q2 we will select the key technology partners for systems build out through the balance of the year.

This brings us to the second priority within delivery: establishing partnerships with health plans. We are in discussion with a select number of health plans for launch of new or expanded benefit offering to their members for potentially as early as the 2015 benefit season. We're very pleased with the progress of these discussions and are exploring a variety of approaches to leverage the evidence-based and consumer engaging strengths of the Weight Watchers program within a health plan benefit offering. We expect to continue to update you on our progress on this front as we move through the year.

The third priority within pillar three is to continue to grow our strategic accounts direct to employer relationships.

Our fourth and final pillar is strengthening the organization. The first priority here has been to build a strong senior team and model the culture we desire. I'm encouraged by our progress here. We've established a great team. They're a team that is incentivized for success and get us to do the turnaround portion of our transformation and scale to growth beyond.

Within the last 12 months we've promoted our two best operators to run both halves of our international business, recruited a new Head of Human Resources, a new CTO, and most recently, as announced in November, Lesya Lysyj joined us to run our North American business from Heineken where she was CMO for U.S. I'd worked with Lesya for five years at Cadbury and I know she will contribute greatly developing our brand strategy, improving our consumer activation and delivering results in the North American marketplace. The entire team is advancing a culture of empowerment, agility, collaboration and results orientation.

Our second pillar of fourth priority relates to efficiency. As part of our commitment to reduce G&A expenses we're working hard on creating a more agile and efficient organization. Our plans are not final but we know this won't be a uniform exercise. There will additions and reductions but overall we will be a smaller organization.

We will continue to add investment in healthcare and the product and R&D organization is charged with our core growth strategies. In most other parts of the organization we will be reducing investment by eliminating redundancies, improving our processes and getting smarter about setting priorities and making tradeoffs.

For now on technology, we're asking the team to focus its efforts on adding value to our core offerings including critical work on the 2015 innovation. As a result, our commitment to reduce G&A this year does not include material net savings in tech which represent the size of the portion of the total expense. Efficiencies in tech will come in 2015 and beyond as we improve our delivery model.

Before I hand it over to Nick, I'll leave you with us. We have a clear view of our situation; we know what the issues are. We don't like our performance so far in 2014 and we are working hard right now to improve this. Our plans for the 2015 product innovation and healthcare initiatives are on the right track. I've got the right team and we're motivated to deliver our transformation plan.

Over to Nick.

Nick Hotchkin

Thanks, Jim, and good afternoon everyone. For fiscal 2013, our reported EPS is $3.63 as compared to $4.23 in the prior year. Included in our fiscal 2013 EPS is a $0.24 charge associated with our April, 2013 refinancing, and included in fiscal 2012 is the $0.07 benefit from an accrual reversal related to our tax settlement. Excluding these items, we delivered 2013 EPS of $3.87 within our guidance range of $3.85 to $3.95 when compared to our prior year EPS of $4.16. All of my subsequent remarks today will exclude both of these items from P&L comparison.

The major theme of 2013 was consistently weak and deteriorating recruitment performance resulting in paid weeks and revenue trends that became progressively worse throughout the year. As expected, Q4 was our weakest quarter. Total company revenue declined 11% in Q4. Fourth quarter total paid weeks were down 8.5% with declines in both our online and meetings businesses. Despite continued nimble cost management these top line trends put substantial pressure on the P&L resulting in Q4 operating income declining 26.7% to $79 million.

Q4 EPS of $0.54 included $0.04 of cost associated with the shutdown of our China operation.

Now on to fourth quarter business performance starting with weighteatchers.com. As Jim mentioned, our Weight Watchers Online business had its first ever quarter of declining revenues in Q4. Fourth quarter Internet revenue declined 5.2% (inaudible). End of period global active online subscribers declined 7% to 1.7 million from 1.9 million at year end 2012.

Moving to meetings, end of period global monthly (inaudible) declined to 1.2 million from 1.4 million at year-end 2012. Our North America meetings business remained under pressure and in the fourth quarter total NACO meeting fees declined 13%, paid weeks declined 11% and attendance was down 13%. In-meeting product sales declined 29% with products sales per attendee down 19%. The franchise acquisitions we have completed in the past year contributed about 3% of NACO's top line results in the fourth quarter.

Within B2B, the strategic business grew 10% in Q4. Key new account wins in Q4 2013 included Coach USA, the University of Colorado and Winn-Dixie. However, the regional at work business, which is not subsidized, followed similar trends as our B2C business.

Next UK meetings. In the quarter, paid weeks and attendance were down in the low 20s. Finally, in our Continental Europe meetings business paid weeks were down 2% and attendance was down 6%.

Globally, our other revenues, which include franchise commissions and licensing revenue, declined 10% in the quarter.

Now I will review some key financial metrics for Q4 2013. In the fourth quarter, gross margin declined 170 basis points to 55.1%, with full year gross margin of 59.1% 60 basis points below the prior year. There were declines in both the meetings and weightwatchers.com segment. For both segments operating cost deleverage was a key factor. For meetings, there is the additional impact of our U.S. service provider compensation changes.

Q4 marketing spend was down over $11 million versus prior. For the full year, marketing spend was $296 million down $58 million versus 2012. Note during Q4, we implemented a new accounting treatment for marketing support received from Vendas whereby this funding is recognized as Weight Watchers revenue and also reflected as gross marketing spend. For the year and the quarter the impact of this change was $11 million $1 million of marketing respectively.

The marketing spend decline for the year was driven by reductions in TV production and digital spend as well as the absence of a men-specific U.S. account name in 2013.

Q4 G&A expenses increased $8.7 million versus prior largely driven by one-time expenses such as the cost associated with shutting down our China business. For the full year 2013, G&A spend was at $15 million.

Our Q4 tax rate was 41.4%, higher than normal driven by the China closure and some other one-time adjustments. In the quarter, foreign currency impact on our result was negligible.

In 2013, cash flow from operations remained strong at $324 million. We ended the year with $175 million in cash and $2.4 billion in debt, which has no restrictive financial covenants.

Now, I will discuss our outlook for 2014. As Jim has said, while we have strong confidence in this team's ability to execute a successful transformation, we knew that 2014 would be a very challenging year. We were hopeful that our Simple Start program would have a positive impact on our recruitment trajectory. Unfortunately, due to the competitive clauses that Jim has discussed, and the campaign that underperformed, our recruitment trajectory worsened.

Given the lowest starting active space versus prior and the weight recruitment environment, we now expect revenues to decline in the high teens and are forecasting revenue of roughly $1.4 billion for 2014.

For the first quarter, 2014, we expect weightwatchers.com paid weeks to decline in the mid teens versus prior and high teens for the full year. For meetings in North America, we anticipate that full year and Q1 attendances in paid weeks will decline year-over-year in the low 20% range.

In the UK, we expect attendance in paid weeks declines versus prior in the 20s for both the first quarter and the full year.

Finally for CE, we anticipate paid weeks and attendances to be down mid single-digits in Q1 and the year.

Now some color on top. Our philosophy is to invest in key areas in support of future growth, but to cut aggressively elsewhere. As Jim mentioned, headcount reductions will be part of our plan.

In fiscal 2013, we made good progress towards the $150 million annual growth savings goal we announced at our Investor Day. This goal included approximately $60 million of marketing spend rightsizing, which we realized in 2013, and approximately $90 million in gross annual operating expense and G&A efficiencies to be achieved between 2013 and 2015. As we see it now, we will meet the savings goal by the end of this year.

Moving to gross margin, despite expected operating expense savings, gross margins are anticipated to decline roughly 400 basis points for the full year 2014, with Q1's decline in the same neighborhood. This decline is driven primarily by operating deleverage across both our meetings and online businesses, and also includes the incremental expense in 2014 related to our new U.S. service provider compensation program.

In line with Jim's remarks, our Q1 marketing spend will be broadly in line with prior. We are currently anticipating that marketing expense for the full year 2014 will decline by roughly $20 million.

As you would expect, keeping our intensified scrutiny on all areas of expense, in 2014, G&A will decline for the first year since 2009. We expect 2014 G&A to be down low single-digit advantage percentage prior despite our plan to spend up to an incremental $20 million on the combination of healthcare and new product development. Absent this planned investment, G&A is expected to decline by double-digit percentages in 2014. And the go forward plan holds for further double-digit percentage reductions in G&A in 2015, driven in part by the opportunity to reduce our tax spending once we have revamped our technology model.

Below the line for the year, we expect interest expense of approximately $125 million and the tax rate of 38.5%. For 2014, we expect to spend about $50 million on CapEx with G&A for the year of about $45 million. Generating cash to pay down debt is our clear capital structure priority.

Our 2014 earnings guidance reflects the fact that the revenue decline has substantial stress on our P&L. It also reflects a continued aggressive focus on cost. However, while reducing cost is a necessary building block of our transformation, by itself it would be insufficient. That's why we are investing in support of product innovation particularly for the winter diets season 2015 and healthcare.

Therefore we are providing EPS guidance for the year of $1.30 to $1.60 with the lower-end assuming no change in current recruitment trends. Note that this guidance incorporates the fact that fiscal 2014 includes a 53rd week, which bridges the last week of December 2014 and the first week of January 2015. And this 53rd week has an expected negative $0.04 impact on our full year EPS. Also during the first quarter, we intent to finalize plans to resize the organization, and one-time costs associated with this planned restructuring are not included in this guidance. We expect Q1 2014 be our toughest comparison given that marketing spend will be broadly in line with the prior quarter and not all of our cost efforts will have kicked in.

We will now open it up to questions.

Question-and-Answer Session


(Operator Instructions) And our first question will come from Meredith Adler of Barclays Capital.

Meredith Adler - Barclays Capital

May be I'd like to just starting by talking a little bit about what you saw happening in the fourth quarter as the quarter progressed and then what you've seen in the first quarter in terms of both paid weeks and online sign-ups?

Nick Hotchkin

Well, Meredith first you know what since we last spoke on our November 6, Analyst Day of course 2014 is worse than we thought, and that's reflected in both Q4 results that showed continued strain on our top line business including weightwatchers.com turning negative for the first time and into their winter diet season.

So it's really that tough recruitment environment. I think as we've said that was based on the fact that while we feel Simple Start was a better innovation than last year, our marketing could have been more effective as to support it. That's why you see us moving quickly on all front launching new Jessica ads for example next week to know to get as much top line out of this year as we can.

Meredith Adler - Barclays Capital

And then may be -- sorry.

Jim Chambers

When we spoke back in November, I think we were continuing a consistent diagnostic observation about what was happening around the free apps and activity monitor space, which have always been closely related to consumers perception of weight management and we admitted at the time that the hardest thing to project would be coming into the key diet season whether the rising interest in these devices from a trial perspective is going to have a bigger impact than the trend had suggested. And we have seen that, if you look in everything from Internet search trends to app store rankings to share a voice in social media, you can see that it was indeed a very crowded and noisy environment within which we saw a trial as we started this year.

Meredith Adler - Barclays Capital

And then maybe I just -- I have a question about whether there are any limitations on your ability to provide support online and actually get paid for it. Somebody I think I have heard that they are in your contract with franchises there are limits on how you do that. Can you talk a little bit about is that's true and how you work around it?

Jim Chambers

I think there is a degree to which we can address this. And I think fundamentally that we are seeing in concert with everyone who operates Weight Watchers brand and service in the country now that things that might have been true in 10, 20 years ago, things that might have been associated with choices we made 5 to 10 years ago about how we offer our products are probably not what the consumer of today is looking for. And as we work with our franchise partners, we're going to need to solve the consumers problems and we think we can do that, we know we have the assets to do that and we think we have the operating flexibility to do that. We are learning and we are sharing with our franchise partners and we are looking strategically at the future hand-in-hand to make sure that we can bring everything Weight Watchers has to bear against the new consumer definition of the fitness in weight management markets.

Meredith Adler - Barclays Capital

And then my final question would be about you're talking about rightsizing the organization but I'm not exactly sure what that means. You've obviously used outside contractors a lot; you have to be very careful how you cut marketing. So what does it mean to right size?

Nick Hotchkin

Well I've talked about it Meredith in terms of what G&A, it means that, kind of I think 2014 will be watershed year for the company that will reduce G&A, after four years of increases. We've locked on in our G&A target and committed to reducing G&A, the mix of headcount reductions and professional fees reductions is being finalized both will play an important role in that 2014 exercise.

What I would like to stress though that as we managed G&A and frankly every other cost on the P&L, we would like to feel that we're being responsible in showing aggressive P&L managements in the short-term, but it's within a long-term strategic focus. That's because we are confident as Jim has said that we do have the right strategy to change the recruitment trajectory and that's why while we're managing costs tightly we are continuing to invest in the future and that's reflected in the guidance that we've given.


And our next question will be from Glen Santangelo -- I'm sorry Santangelo of Credit Suisse.

Glen Santangelo - Credit Suisse

Well, Jim, I wanted to ask you about analyst day, at Analyst Day you were willing to look a little bit beyond 2014 into 2015. You seem to suggest that there was a possibility we would see some revenue growth out in 2015. Kind of curious if you're still comfortable with that. And then kind of as a follow-up, when I look at the structural problems created by the free apps and the activity monitors, it kind of seems like may be that structural problem is gaining a little bit of momentum. And so, I appreciate all the detail on the four pillar strategy, but I'm kind of curious, as you sort of move forward, it feels like you're moving, continuing down the same path with Jessica Simpson. On the marketing front it seems like a little bit of more of the same to us, and I'm kind of curious to get your perspective and do you think if it's time to rethink the playbook on the marketing front, and also rethink the playbook on the way you distribute the product to your end consumers?

Jim Chambers

Let me take the --

Glen Santangelo - Credit Suisse

And I think it's during the Analyst Day. So I'm just kind of curious if there has been any change in your thinking, given may be the development of these structural issues?

Jim Chambers

Right, Glen, I'll take the first piece. Basically we said at Analyst Day that we were confident that our recruitment trajectory would turn during 2015 and that we return to revenue growth in '16 and become $2 billion Company in 2018. We believe that as much as ever and its single-digit CAGR from the 2014 starting point to get there. We're confident we can turnaround the B2C business and Collins making no great, no inroads on the healthcare side of the house also.

Nick Hotchkin

And Glen, just to confirm your second question had two pieces, essentially product strategy relative to free apps and marketing playbook, and is the current tactical approach more of the same?

Glen Santangelo - Credit Suisse

Yes, Nick, It just kind of feels like with respect to the marketing program you're going to rerun the Jessica Simpson ads, and obviously that would help recruitment to some extent, but it just kind of feels like -- I'm kind of getting your perspective do you feel like the structural problems of the apps and activity monitors do you feel like it's actually getting worse here in 2014 relative to what we experienced in the past 18 months, and if so do you have to rethink the playbook on those fronts to try to deal with those pressures?

Nick Hotchkin

All right. So I think tactically, we have reacted. I don't know that I would say rethink the playbook, that's management interpretation so I'll try to build on that. But let me go back to the free app I mentioned for the moment. What has gotten more challenging is reaching breaking through the consumer noise to present the message. If you're in any space of consumer consideration around weight and fitness, it got much more active through the fourth quarter and into the first quarter so far this year. And I think that means on one level we have to be louder and we have to be more direct and unfortunately that wasn't the tactic we took with the free apps that we ran initially.

I'll come back to the product side of this, but I'll then I'm going to bridge now to the marketing side. So we had through analysis understood that what was not working was the breakthrough in association with Simple Start as a new way to going Weight Watchers. Well three of the four ads that was just not breaking through, for the other it was just happening at a category north. But diagnostically putting two pieces of information together when we watch the real time relationship between now Jessica on TV in a better PR, kind of environment doing a fantastic job talking about her real experience, we could see an immediate response in our side of the house with respect to people coming to the website and joining the program. And so the pivot that we made from a contingency perspective was to leverage that same communication environment and leverage how great she looks now and how honest her report is about her progress and that's essentially the edge you're going to see next week.

Stepping up a little bit from that, we have a giant opportunity with this brand. We're a category leading brand that is so well known in its space that's really important to people. And I think fundamentally it's a difficult category. We've done lots of different things over the last five years, but what we need to do is we need to operate like that category leader from a brand aspiration perspective. We need to build the brand architecture that's going to allow us to put our products and benefits underneath that and shout like a category leader.

And a big move forward in that regard is having people who can do that and I will put pressure on her and point to at the same time, I think having worked with Jessica I know she can do that. And so we're upping the challenge on ourselves to reframe how we approach the brand and reframe how we're going to leverage marketing inside this category. We know when we get it right, there is a tremendous consumer response and we think we can do much better.

Finally with respect to the free app from a product perspective, what I've said is we certainly compete on one level for consideration with respect to all the noise that's happening there, but on another level free app beating them, it's just not our strategic objective. This is an enormous market and we are the leader. We're focused on building this market by delivering results; delivering weight loss for people and making them feel better about their lives, making them feel healthier. So we compete with them for consideration, but that's not the strategic objective to beat the free app phenomena. We can do much, much better.


And the next question will be from Jerry Herman of Stifel.

Jerry Herman - Stifel

I just want to circle back to the rightsizing or costs perspective. Nick, previously you sort of benchmarked what you thought the cost structure of an organization this size should be, and I'm wondering if you could maybe update that to help us determine what incremental savings you guys might be looking at?

Nick Hotchkin

Yes, certainly Jerry, we upsized our cost saving goal on Investor Day to $150 million and we're going to achieve that goal quicker and I stress within that $150 million cost savings goal all that includes from a marketing standpoint is the rightsizing of spend in '13. So it's taking out $90 million of costs across operating expense and G&A and operating expense has everything from looking at vendor efficiencies to the number of meetings we need to drop in ours et cetera.

In G&A, it's building on our progress last year, on professional fees, keeping doing that but also having the headcount reductions that we've discussed. So of that $90 million of OpEx in G&A that we were going to achieve by the end of this year as part of the $150 million plan that's probably split two-thirds, OpEx, one-third G&A. So a big chunk out of both and as we are stressing, we are deliberately preserving investment in tax this year, so that we can use Dan and his expertise to revamp our tax capabilities, but we will be focused on tax efficiencies going forward also.

Jim Chambers

Just a point to add about how we are doing this. As Nick said before, but now in my words we are working hard on the cost agenda, but we are protecting our path to growth and doing this very strategically. It is comparatively easy to have a blind and blanket x percent cost challenge pushed onto an organization, it is comparatively more difficult, but at the same time want to build an organization that is cheaper, but it's also more agile and it's more fit for purpose. And these are the possibilities that we are putting together and I'm confident we are doing that well and the senior team has engaged on that. And as I said the plan is not final, but that's our goal for the processes to come out of the other side of the exercise as an organization that is -- it is smaller and it is responsible from a P&L perspective, but it's also better.

Jerry Herman - Stifel

Jim, question for you, I know you get this one a lot, but just wanted to get your updated thoughts here on your value proposition, and when I think about that I think about what you charge in price and what it costs you. And it sounds like you're talking about some enhanced services perhaps that implies higher cost. And then likewise can you just address your most recent thoughts on price relative to competition?

Jim Chambers

I won't say too much about price, yes we are looking a range of very significant potential product enhancements. Some would bring more cost and periodically more pricing potential, but that's down the road, we're not at that point of thinking about that yet.

With respect to the other side of the value proposition, if you will, there is a, when we do the research looking at our products, looking at competitive products, clearly at the level of tools versus having a program and a plan at the level of tools there are things that are increasingly becoming available for free. There is a piece of this and it's becoming commoditized. I don't think that's the piece that drive success and therefore I'm don't think that's the piece that's going to determine the value proposition of our products going forward. We have to put more of the enhancements that you're referring to into the products but we have such a broad field of opportunity that I'm confident that we can do that. But I'm not going to talk too much to pricing in the short-term and well Nick, if you want to add to that?

Nick Hotchkin

No, I think the only thing I would add is that in every area of the business, I see the Weight Watchers team really being market facing and deciding what we need to do to have a winning value proposition for the customers. So for example during our winter diet season, offer and our promotional approach, we reduced the hurdle, the upfront financial commitment, if you will that somebody needed to pay at the moment of sign-up to join the Weight Watchers online. And so that shows the mentality of the market facing effort that Jim is bringing to the company.


And the next question will come from R. J. Hottovy of Morningstar.

R. J. Hottovy - Morningstar

Had a question regarding the technology investments for not only 2014 and beyond, really wanted to get a sense for how you approach the make versus buy decision with respect to technology investments. Or more directly have you valuated certain mobile platforms that already exist and have proven successful with respect to recruitment efforts that you might be able to roll into the current Weight Watchers platform? Have you evaluated that as potentially better use of capital than building something in-house? Just wanted to get your thoughts on that.

Jim Chambers

I think those are great questions. The first part of this is a bit of a deferral, but in a good way, the next call we will have Dan Crow talk to you about, he is our new CTO, and he will talk to you about his vision and his direction integrating the technology environment with the product development environment here at Weight Watchers. And I would say in crude evaluation, we know we have a significant opportunity to build things that are not only consumer validated but they happened more quickly and overall they happen much more productively. We know we have some challenges to work through the historical technology architecture and we will do that and Dan will share that as I said.

With respect to make versus buy, we are very open to both pads there and in fact we will do a fair amount of our healthcare developments on the outside with folks who had done that before and not pay to do the learning for the first time. So very open to that as a technical strategy and we will talk more deeply about that on the next call when Dan shares his thoughts.

Nick Hotchkin

Yes, the only thing I would add to that of course within the definition of buy that can include the partnerships to, so it's not like acquisitions or a necessary prerequisite of our strategy, a lots of folks we can partner with along the way.


Our next question will come from Matthew Jacob of ITG Investment Research.

Matthew Jacob - ITG Investment Research

Just a little bit ago you mentioned that you reduced the upfront hurdle to join online, which I think referred to the elimination of the initiation fee during January. I guess one thing is, it seems like that probably encouraged new members to sign up for a one month plan, which had the best value this year rather than a three month plan, which traditionally had been the best value for new members. So, wondering if you have a way to kind of measure the engagement of these new one month members and any color on what you expect that promotion shift to be to churn and average membership duration for online? Because last year you had these new members locked in typically for three months, whereas this year you only have them locked in for one month are now kind of seeing them come up for renewal.

Nick Hotchkin

It's a good question and we look at our retention across Weight Watchers online very carefully for every cohort like you should imagine with that offer there was a sizable shift in the number of folks that are not choosing that option somewhere in the range of close to half of the U.S. subscribers. I think it was a good play and some good learning's for us to apply to our promotional strategy going forward. I haven't seen it resulting in any material retention member loss issues so for, but we will continue to track it.

Matthew Jacob - ITG Investment Research

I guess it's early to judge that given that a lot of people probably haven't had a chance to churn yet. Are there -- is there a higher churn or lower duration baked into your assumptions for this year the guidance you issued?

Nick Hotchkin

Probably that's -- that strategy is something we had tried to previously in another market. So we had some familiarity with it. So we are comfortable right now with our assumptions in that regard.


And next we have follow-up question from Meredith Adler of Barclays.

Meredith Adler - Barclays Capital

Yes, I just want to know whether you have actually sized the cost of what you will be doing in the first quarter. How much are you going to spend on resizing the organization, or is it too early to say that?

Nick Hotchkin

Yes, Meredith, it's Nick. I think it's too early to say because our plans are not finalized and that's why the guidance we've given excludes those severance costs. But I would be surprised by still what I know today of the total cost of the plan it wasn't mid to high single digit.

Meredith Adler - Barclays Capital

Mid to high single-digit?

Nick Hotchkin


Meredith Adler - Barclays Capital


Nick Hotchkin

I don't say, no, no, basically I believe it will be more than $5 million. The exact amount will depend on the finalization of the plan.

Meredith Adler - Barclays Capital

And then I would like to just follow-up on the last question before mine about what is built into your guidance. You said that you have experience in other markets with the one month program. Are you saying that you used the information you had from those experiences to embed in your guidance about how many people will not be retained after the one month?

Nick Hotchkin

Yes, I'm saying we use that experience to decide to use the approach in the United States and our forecast includes the right assumptions. We know the model of retention for one-month sign-ups.


This concludes our question-and-answer session. I would like to turn the conference back over to Jim Chambers for any closing remarks.

Jim Chambers

Yes, I would just like to thank everybody for joining the call today and thank you for your interest in our company.


The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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