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Weight Watchers International, Inc. (NYSE:WTW)

Q1 2012 Earnings Call

May 2, 2012 5:00 pm ET

Executives

Lori Scherwin – Vice President, Investor Relations

David P. Kirchhoff – President and Chief Executive Officer

Analysts

Christopher Ferrara – Bank of America/Merrill Lynch

Brian Joseph Wang – Barclays Capital Inc.

Bob Craig – Stifel Nicolaus

Greg Badishkanian – Citigroup

Gary Albanese – Auriga USA, LLC

Operator

Ladies and gentlemen, welcome to Weight Watchers International First 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 the question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded today, May 2, 2012

At this time, I’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 first quarter 2012 conference call. With us on the call is David Kirchhoff, President and Chief Executive Officer.

At about 4 O’clock p.m. Eastern Time today the company issued a press release reporting its financial results for the first quarter of fiscal 2012. The purpose of this call is to provide investors with 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 in the company’s filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements.

All forward-looking statements are made as of today and except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

As you all know the company is in the process of conducting a search for a new CFO, which we will update you on at the appropriate time. Consequently for this call, Steve’s remark will also come at the financial section of the company’s result.

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

David P. Kirchhoff

Good afternoon. And thank you for joining for us as we review Weight Watchers International’s performance for the first quarter of fiscal 2012.

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

In Q1 this year, I’m gratified that consumer engagement with the Weight Watchers brand continued to increase with global combined paid weeks up 12% over last years historically high watermark. Despite 72% growth in online paid weeks last year, we were able to grow paid weeks by another 35% in Q1 2012, by investing and marketing behind the online business, specifically against growth opportunities with men in the international markets.

On the meetings business, we believe the key driver of long-term growth will be to embed Weight Watchers more directly in the healthcare system. The potential of this opportunity is clearly demonstrated by the fact that Weight Watchers penetration is an order magnitude higher where meetings are partially or fully subsidized as oppose to being fully paid by the consumer. We’re already seeing the clear benefits of this approach among some of our large corporate accounts that provide subsidies.

As part of our healthcare focused efforts, we rolled out Monthly Pass to our corporate accounts in North America in Q1 2012. Unfortunately this roll out created execution issues with our North American small account corporate business, which negatively impacted our results. These execution issues combined with a disappointing advertising campaign in the UK resulted in 5% decline in paid weeks for our global meeting business in Q1 202 versus the prior year period.

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

On a constant currency basis Q1 2012 revenues were flat at plus 0.5% over the prior year period with meeting (inaudible) down 6% and meeting product sales down 13% and Internet revenues growing 39%. For Q1 our profit was lower on flat revenue due to increased marketing. Marketing expense in the first quarter was up 36% versus prior supported growth initiatives mainly the first men’s winter TV campaign for Weight Watchers online in the U.S., and the first TV campaigns of any kind for Weight Watchers online in Continental Europe. I will discuss our marketing investment more fully later in my remarks.

Q1 2012 EPS was $0.74 compared to $1 for the same period in 2011. I will now briefly review our results in our major geographies and business units. First, our North American meetings business. Total NACO revenue, which includes the U.S. and Canada in Q1 2012 was down 9% on a constant currency basis versus the same period in 2011 with NACO meeting fees declining by 7% and meeting product sales declined by 14% versus the prior year quarter driven primarily by volume declines with product sales for attendance also down 2.5% due to lower enrollment product sale this year versus last, a function of lapping the PointsPlus’ innovation launch last year.

NACO Q1 2012 paid weeks declined 6% while attendance have declined 12% versus the prior year period, driven most significantly by execution issues and the small account portion of our corporate business, which I will explain in detail shortly. Excluding the corporate business NACO paid weeks attendances in the first quarter were down an estimated 3% and 8% respectively. After enrollment growth of better than 70% in Q1 of the previous year and in light of the first price increase ever and our Monthly Pass offering we knew it would be a challenge to match that quarter’s strong volume results.

As we referenced on our Q4 call, our challenge was made more difficult by a significant execution issue on the small account portion of our corporate business. As we noted, we undertook an effort to transition our corporate business from fixed duration series i.e.; 12 and 17-week to a corporate version of Monthly Pass. This effort was undertaken principally to meet the requirements of newer, large corporate accounts that prefer the Monthly Pass billing model and value proposition. We had a smooth transition process with our large national accounts.

However, we ran into numerous problems in transitioning the small account portion of our corporate business, which still account for the vast majority of this line of business. The root of the issue was an effort to replace direct personal contact to organize and secure meetings and commitments from employees with an automated process utilizing a dedicated web page signup process. As a result, many of our meetings were not able to meet the minimum threshold of members to establish the new meeting, a new meeting starts with (inaudible) down dramatically during the critical first three weeks of the year.

By the time we had identified the issue and diagnosed the problem, it was too late for us to make a positive difference in that part of the business during this critical time of year. Under normal circumstance, we would have expected to have attendance in this part of the business to be at least flat versus prior given underlying employer interest. However, as a result of this execution issue, attendances in the small account corporate business were down 30%. With the issue now identified and diagnosed, the team has begun to implement a series of steps to remediate the problem and begin recovery in the meetings base for the (inaudible) business.

We’ve taken the opportunity to undertake a full review on analysis of our sales processes and we will end up with a much stronger capability with small corporate accounts as a result. However, missing the opportunity to set up meetings during the high conversion period of January through March will take time to overcome. While we’ve steadily closing the gap over the past weeks we are estimating that we will not be able to return to prior levels of meetings until this summer.

The small account corporate business were all the mid way emerged from this stronger, but for 2012 we estimate that our execution issues have caused us $0.07 of EPS in Q1 and will cost us roughly $0.15 of EPS for the full-year.

In the meantime, our large corporate account business continues to proceed nicely with a number of new accounts coming on stream, recent examples include accounts such as AstraZeneca, the City of Austin and Penn State University, a nice reflection of the diversity of interest in this program.

The effective lower enrollments in the first quarter will continue to affect our result as we move into the second quarter, which is starting with a lower base of members than was the case this time last year. It’s too early to get an anchor read on our spring campaign due to the Easter holiday timing and some changes in commercial strategy.

For the second quarter, we’re forecasting and (inaudible) attendance declines in the high single to low double digits and paid weeks declines in the low to mid single digits. We continue to work to our bringing attendance who is back to break even or slightly positive in the second half with a modest growth in paid weeks during this period.

On the revenue line, we ill be increasingly benefiting from our price increase as a growing percentage of the membership base will be on the new higher price. We expect modest single-digit declines in naked revenue in Q2 moving to single-digit positive growth rates in the second half.

Now on to the international meetings business; as noted on the prior call, the UK was also facing difficult comparables as it lapped its ProPoints for (inaudible) from last year. Q1 2012 total meetings business revenues declined 9% on a constant currency basis with meeting fees down 6% and in-meeting product sales down 14% versus the prior year period.

The decline in product sales was driven almost entirely by lower attendance as this product sales per attendance was effectively with prior. The attendance was declined 14% and paid weeks were down 6%. This compares to the 22% growth we had in 2011 versus 2010 in both attendances was in paid weeks.

As we noted on our last call, we have been disappointed by the results of the current advertising campaign n the UK. The UK team attempt and take a new approach of its advertising. In summaries, it was compelling a modernizing for the brand or approved to be ineffective in converting consumer interest into enrollments for both meetings and online. The combination of facing last year’s impressive comparable in the less effective advertising resulted in a significant shortfall enrollment levels throughout the first quarter.

As we move forward, the UK is seeking to be more consistent with some of the marketing strategies that have been successfully deployed in the U.S. It will take time to develop and deploy the new marketing strategies fully, so we expect the UK to continue to underperform throughout the rest of the year with some modest moderation as the year progresses. For the second quarter, we expect paid weeks declines in the high single-digits and attendance declines in the mid-teens.

Moving on to Continental Europe, results in our Continental European businesses were solid, benefiting from the implementation of a new marketing strategy. Meeting enrollment growth rates in countries such as Germany, Belgium and Netherlands were all in the doubt-digits. It was gratifying to see a stable shift in consumer interest and response to our new marketing campaigns in this region. However, the softness of the business throughout 2011 that we started 2012 with the smaller membership pace then was the case in the previous year.

As such our Q1 results underplay the enrollment strength we saw throughout CE in the first quarter. Overall, total CE meetings business revenues grew 2% on a constant currency basis in Q1 versus the prior year period with meeting fees of 3% in meeting product sales down 3%. Paid weeks for the first quarter 2011 grew 5% compared to prior (inaudible) attendances grew 4%.

For the second quarter, we expect paid weeks growth in the high single-digits and attendance growth in the mid-single digits. We expect this trend to continue throughout the second half of the year as well.

Moving on to WeightWatchers.com, WeightWatchers.com enjoyed another strong quarter in Q1. As we began the year, we were comping against a period in 2011, where we experienced triple digit growth in signups, and paid weeks growth of 72% versus Q1 2010. Despite this dawning prior year period comparisons, we were able to grow signups at a growth rate of nearly 20%. This combined with the benefit of starting the year with a higher active subscriber base allowed us to drive paid weeks growth of 35% versus Q1 of last year. This volume growth translated into Internet revenue growth of 39% in constant currency versus the same period last year.

Globally, end of period active subscribers were up 32% to $2.4 million, cycling against 87% year-over-year growth in end of period actives in the first quarter of last year. Two strategies played a critical role and helping us continue to drive growth from Weight Watchers Online. First men, with a strong results we experienced in the spring and fall marketing campaigns, we continue with our strategy of raising awareness of Weight Watchers to men in this year’s winter campaign. In this case, we added to our marketing efforts by including our first major male spokesperson Charles Barkley.

For the full quarter men accounted for approximately 15% of our U.S. signups despite being on there only six weeks with men’s TV spots. As a result, we were able to drive double-digit signup growth in the U.S. market despite comping against triple digit growth during the previous year and not having the benefit of new program news. Cost per acquisition for this incremental marketing spend was within our plan target and in an additional bit of good news early indications are the retention for Weight Watchers Online for men is even higher than that for women.

Second, Continental Europe; prior to this January, we had not undertaken significant efforts to drive awareness of our online products in CE was above the line advertising. This year we will launch TV campaigns in Germany, France, the Netherlands, and Sweden. Growth in all four markets serves beyond our plan expectations. Suffice to say, we’ve been extremely pleased that in these markets we have shown that we have again shown the dedicated television marketing for online is a winning strategy.

As we enter into the second quarter, our U.S. Weight Watchers Online business has begun lapping the initiation of our men advertising campaign of last year. Despite this, we expect to generate positive sign-up growth in the U.S. continuing in the second quarter. We continue to see very strong growth rates in Continental Europe. This combined with starting Q2 with 32% higher active subscriber base will result and paid weeks growth of roughly 30% for the quarter. While we expect sign-up trends in second half to moderate somewhat, we anticipate strong double-digit growth in volume and revenue throughout the second half.

I will now review some additional financial results for the quarter. Our other revenue declined 11% to $37 million in the quarter. Within this franchise commissions declined to 11% versus the prior year period based on trend similar to NACOs. Product sales to franchises were also soft versus strong selling in enrollment products in Q1 2011. Licensing decreased slightly to 0.5% with softness in the U.S. and CE, largely offset by strengthens in the UK.

Gross margin rose 100 basis points to 57.3% in the quarter, driven by mix towards our higher margin WeightWatchers.com business, as well as an overall increase in the dot-com business itself. Partially over set by a decline in meetings business gross margin. The meetings business gross margin was negatively impact by lower average attendances per meeting and by expenses associated with some of our new healthcare initiatives and some one-time expenses associated with our retail transformation. Pricing, as measured by lecture income per paid week was down modestly in the quarter. Although, we are getting a benefit from the price increase taken on new enrollments, it is being offset by the continued mix shift to Monthly Pass on a global basis.

For the second quarter, we expect margin expansion of about 100 basis points driven by the higher growth rate of the dot-com business. For the full-year, gross margin should be up around 200 basis points, and second half volumes improve and we get fuller benefits from pricing with the larger percentage of the membership base on the new higher price.

Our Q1 operating margin declined 650 basis points to 20.4%. As expected, marketing investment was up significantly in support of men’s in international online TV campaigns. Specifically, marketing rose 36%, up 690 basis points to 25.9% of sales. This was a bit less than our expectation of a 750 basis point increase in the first quarter due largely to timing.

For Q2, we expect marketing to increase 200 to 250 basis points in support of a Weight Watchers Online product particularly internationally. For the second half, we expect marketing as a percentage of revenue to be flat versus prior and aggregate, but due to the timing campaigns, Q3 should be much higher and Q4 much lower than a year ago. Full-year marketing as a percentage of revenue should be up 200 to 250 basis points for the year, consistent with our prior expectations.

G&A rose 70 basis points to 11% of revenue in the quarter, contributors to this increase was expected. Ongoing investments for future growth including our B2B selling capabilities, technology project development, and new CRM platforms. We expect G&A to increase as a percentage of revenue by roughly 50 to 100 basis points for Q2 and by 50 to 70 basis points for the full year.

Turning to cash flow. In Q1, we announced and commenced our "modified Dutch auction" tender offer from the public and related share repurchase from our majority shareholder. In total, we purchased approximately 18.3 million shares and $82 per share for a total cost of approximately $1.5 billion. Note that we expected the tender in the late March purchasing roughly 8.8 million shares from our shareholders, and then purchased the balance from our majority shareholder in the early April.

We therefore ended the quarter with about 65 million shares outstanding, but currently have approximately 56 million outstanding. as a result, our average share counts should be roughly 57 million in Q2 this year following to approximately $56 million in the second half of this year, translating into a full year 2012 average share count of about 61 million.

In connection with these transactions, we successfully refinanced our debt at favorable rates and currently have about $2.5 billion in debt on the balance sheet with an effective interest rate between 3.5% and 4%. Note that this is higher than the roughly $1.8 billion we had at the end of the quarter given the timing of the transactions.

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

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

In Q1, we had cash flow from operating activities of $111 million. Now that the tender offer buyback and related stock repurchase are complete, our priorities for free cash flow are franchise acquisitions in deleveraging. We continue to expect the 2012 tax rate of 38.5%.

Before turning to our strategic focus areas, a quick housekeeping note. Our prior earnings release stated that Q4 2011 online paid weeks were $22.6 million; the correct number was $21.5 million. as a result, 2011 fourth quarter online paid weeks growth versus prior was 58.8% rather than 67.0%, and total company paid weeks growth was 30.7% rather than 33.9%. For the full year 2011, online paid weeks growth versus prior year was 67.6% rather than 69.7% and total company paid weeks growth was 37.3% rather than 38.1%.

Looking forward, I am heartened by the strong consumer demand and vibrancy of the Weight Watchers’ brand as evidenced by our 12% growth in global combined paid weeks in Q1 2012 even on top of the outstanding growth we saw in Q1 2011. However, I am disappointed by the financial performance this quarter, which was driven significantly by execution issues in both marketing and parts of our operations. I bear responsibility for those misses.

This organization is incredibly committed to both our mission and to our shareholders. Everyone deserves our very best levels performance at all times and we will continue to push ourselves to do better. We believe passionately that we have a major growth opportunity for Weight Watchers and becoming more integrated into the healthcare system. There is no other organization that can deliver Weight management outcomes with our combination of efficacy, low-cost and scalability. As I here so many times when I talk to people in the healthcare space, Weight Watchers is now at a moment in time in which they’re kind of accomplish something truly great in helping the world pivot to disease prevention. It is up to us to capitalize on this opportunity.

Organizationally, we have spent our last nearly 50 years as the Grassroots, direct-to-consumer Company. During that time, we have learned to be better than anyone else in helping people make sustained changes in their eating habits. We understand consumers and we know how to help them. During the past decade, we’ve also grown progressively stronger and our ability to leverage technology to aid in the behavior change process.

All of this has resulted in a brand that has new found strength and relevance with consumers. one of our challenges moving forward is to develop a similarly compelling set of skills and aptitudes and serve in the healthcare space, ranging from employers to payers to providers to governments. This will require a new set of B2B skills. We’ve continued to make excellent strides in hiring high-quality B2B leadership and talent. and we continue to move steadily up the learning curves. While we do not expect this process to always be easy. we are fully committed to achieving our destiny as a leading player in healthcare.

In our traditional business, we’re frustrated that we did not execute our marketing consistently across our markets particularly in the U.K. However, we continue to learn and refine our marketing playbook. the quality of our marketing has improved substantially over the past five years; we expected to keep improving over the next five years.

Now a brief update of some of our ongoing strategic initiatives, we cannot upgrade them. We're making good progress on the retail rollout. as of the end of Q1 2012, we have upgraded or moved 289 of our NACO centers or about 43% of total. We continue to be on pace to be 80% completed by the end of 2012. we view our retail upgrade as both an opportunity to gain near-term enrollment benefit and equally, importantly an occasion to rethink how we use our retail centers to create new opportunities to innovate our service and our product offerings. We'll have more to say about this on future calls.

Healthcare, beyond what we've already reviewed. we will continue to spend 2012 building up our ability to attract and service large employer accounts and we have a strong pipeline going into Q2 and beyond. our focus will continue to be on ensuring that we can service these new accounts with strong account management, who’ll also meeting their data reporting needs.

Technology, product development is a never-ending process for the WeightWatchers.com team, and they have a busy schedule in front of them. In particular, we now have multiple plan releases, a mobile functionality in many of our international markets.

Guidance, instead of our enrollment challenges in Q1 was somewhat worse than we had originally anticipated when we provided guidance on the last call. In particular, it has taken us longer to dig out of the hole, we created for ourselves in the small count corporate business in the U.S. And therefore the impact of Q1 challenges will create pressure on our top line results in the remaining quarters of 2012, specifically in our meetings business.

For Q2, the flow-through of Q1 softness in the meetings business will result in declining revenue in the mid-single digits. Growth in Internet revenues will provide a greater positive impact, which should allow us to achieve total revenue growth for Q2 in the low single digits. This coupled with the financial impacts I discussed earlier, translates into operating income being flat to down in the low single digits.

As we move into the second half of this year, volume trends should stabilize in the meetings business and we will continue to benefit from growing WeightWatchers.com volumes. This combined with the growing benefit from our price increase should result in top line growth and high single digits for the second half of the year.

Given this coupled with the marketing timing I discussed earlier, operating income should therefore accelerate in the Q3 and more so in Q4. For the full year, we are narrowing and lowering our guidance range of 2012 EPS to $4.60 to $4.80, which includes $0.50 to $0.55 per fully diluted share accretion benefit from our tender offer transaction and related share repurchase. This compares with the previously provided range of $4.20 to $4.60 per fully diluted, which at the time excluded, a then estimated 2012 accretion benefit of $0.45 to $0.60 per fully diluted share.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is Chris Ferrara of Bank of America. Please go ahead.

Christopher Ferrara – Bank of America/Merrill Lynch

Hey, thanks. I guess first of all, are you still sticking with the 30% to 35% paid weeks growth on the .com business, because it sounded – in the thesis you gave it sounded like that might not be the case anymore?

David P. Kirchhoff

We’re definitely looking for 30% for Q2 in that range. and we think that we should have good momentum going into the second half. and I kind of want to see the sort of the full results of the spring campaign come in. So, let me provide a little bit of additional guidance once we get into our Q2 call.

Christopher Ferrara – Bank of America/Merrill Lynch

But 30% to 35% for the year, you don’t necessarily feel good about it at this point?

David P. Kirchhoff

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

Christopher Ferrara – Bank of America/Merrill Lynch

Okay, okay. And then I guess gross margin and I know you gave some put and takes. The mix benefit alone should have you generating gross margin benefit year-on-year in the range of about 300 basis points or depending on how you cut the numbers, this quarter it’s only up 100, it looks like Q2, it’s like, I guess you can talk bigger picture, I mean do you expect there to be just in gross margin drags where the mix lift that’s going to be big part of the gross margin, so this is not really realistic any more of the long term, could you just I guess give a little more color on that.

David P. Kirchhoff

The color I would give is that the mix lift towards the .com business you described is the way we dimensionalizing. The drag for this particular quarter was due to softer attendance at NACO, which in turn dropped our meeting averages, as well there was a little bit investment and some of the healthcare efforts ended up on the cost of goods line, as it’s some one-time expenses of retail roll outs.

One of the things, if you kind of think about what we’ve done with the price increase in the beginning of the year as we took pretty much the most conservative approach we could have taken by grandfathering it. So what that meant was sort of maximal drag on enrollments, because it impacted everybody knew who would be enrolling, but we really didn’t get much benefit of it in the first quarter. So by way of example, I would estimate that if you’re looking at our NACO meeting fees roughly a third would be those on the higher price as opposed to those on the grandfathered price.

What happens over the course of the quarter is that 33% continues to go steadily up as the year progresses and you have more and more people on the new price, which in turn becomes gross margin accretive, so what you end up with is the second half where you’re getting mixed benefit with the .com business, you should see stabilization in terms of average meeting size versus what we saw in Q1.

And then finally you start getting the benefit of the higher pricing that really starts hitting its stride, as you get into the summer fall. And so those things in combination is what then causes gross margin to left back out.

Christopher Ferrara – Bank of America/Merrill Lynch

Got it. and I guess this one last one, obviously the small business piece that had a big impact, but it’s more than bad. I mean there is some leakage else at the P&L. I guess can you talk a little bit about the visibility you have in the earning this time of year, especially in light of the fact that I mean just brought back a quarter at the company at $82. The stocks are going to be materially below that I was just wondering if you can comment on that a little and I’ll jump off.

David P. Kirchhoff

Okay, so the visibility of the company if you look at the P&L, the aspects of the company where we have terrific visibility as on the volume line of retention, which continues to be [Roxell], so that’s very predictable. We have good predictability in terms of Monthly Pass mix.

How we think pricing is going to be rolling in, we have good predictability and moreover going to be deploying marketing dollars, how G&A is going to come in, and we’ve got good visibility in terms of operating expense and cost of goods. Obviously, the one part of the business that it’s always the most difficult to forecast is the number of people enrolling in a given period of time. And so really, if you think about what we have is data points, right now as we have the benefit of Q1, which to your point, we knew it was going to a tough quarter and we knew it was a tough comparable, yet we have multiple self inflected wounds particularly at the small cap business, which is frustrating as well as the UK marketing, which is also frustrating, but nonetheless I think as we look out from a year going forward, the good news for us is that the impact of enrollments further out you get into the year has a diminishing impact in terms of the total financial results for the year, because greater portion, all the monthly income grew less portion of the membership mix going forward.

So in other words, if you have variability in enrollment volumes say for example, in December it really doesn’t have a big impact in terms of overall financial performance, if you’re taking at the extreme. So, I think that as the year progresses we are getting increasing visibility into the business that’s giving us a much stronger comfort level at where we are.

With respect to the tender, keep in mind the reason for doing the tender was because we’ve gone to a point that we had felt that our capital structure had become inefficient with relatively high weighted average cost to capital, because we are so much heavily waited toward equity and so we felt that this was a business that could take on more leverage that could return and distribute back to shareholders and we could have done that in a special dividend or we could have done in the form of a share repurchase, we choose to do in the form of a share repurchase, as a way of returning value to shareholders, while improving the efficiency of our capital structure and we made the decision to do that when we did, because the debt markets was there and everything else was sort of the timing was appropriate and so we made a independently of that, we weren’t trying to time the market and we believe that you know while again we are disappointed and frustrated by some of the specifics around Q1, it has not changed our perspective on the long-term and frankly medium-term growth prospects for those business which is all the reasons I have been incredibility excited about it throughout last year going into this year and going to next five years all those things are in place and I think ultimately I have absolutely no doubt in my mind what so ever that we are going to be driving significantly shareholder value that is going to continue to validate that the decision we made with the tender was a really smart one.

Christopher Ferrara – Bank of America/Merrill Lynch

Thank you.

Operator

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

Brian Joseph Wang – Barclays Capital Inc.

Yeah, hi, thank you for taking the questions. I guess my first question is related to the retail, transformation or the relocations in remodeled stores, I guess if you could just talk a little bit about what you are seeing from the sales list, whether you are seeing, obviously it’s a little bit weak, so I guess could you just talk, how that batch of stores, I think – about 25% of the stores were done prior to the first quarter and to have those performed relative to I guess the group that was not done?

David P. Kirchhoff

Sure, so let me first half dimensionalize the impact that those new store of things could have on our business. What I mean by that is we started the year with 25% of our systems being upgraded if you will. If you think about the attendances that happen to NACO about 55% of those flow through these retail centers so really if you take 25% or 55% you are taking 12% to 13% of the attendance space that was eligible for lift, if you will and so because we had a relatively lower starting base, it did not have the opportunity to have the aggregate impact on the business that we would have like to have seen.

That was one of the things that we are hoping to kind of have in our back pocket or winning our sales if you will, going into this year, but it’s just too many things with local regulations and permitting and everything else that they just we weren’t able quite get to that 50% target that the goal that we set for ourselves.

In terms of measuring lift we are now getting into a period where it’s getting harder to do, when we first measure lift we were doing it on control markets where we get a true apples-to-apples reading and remember it’s a little bit complicated by the fact that we have centers that are office run by traveling locations, that’s where we saw kind of full market by full market with 15% to 20% lift.

What we are now seeing is that as leases come up, we are taking those opportunities to upgrade stores and so it’s substantially more difficult to isolate impact because there is a lot of other store network affects that are pretty hard to disentangle. What we know anecdotally is that we are still seeing a lot of excitement anecdotally. We still see in here lots of stories of big jumps and enrollments in various locations, it’s harder for us to measure scientifically.

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

The difference between having a network of locations that are hidden and mostly closed and less desirable locations versus new locations, which are brightly let, very visible and convenient locations and open during normal retail hours allows us to begin using our store network as a strategic assets that bank the question of what else can we use those stores to do, and how come we use this new platform to further innovate in a way that we help people through a behavioral change process. And again we will have more things to talk about that on later calls. But I view this retail platform as a critical new strategic platform that it’s going to do a lot of good things for us above and beyond just the immediate benefit of enrollment lift.

Brian Joseph Wang – Barclays Capital Inc.

All right, great. Thank you. And also just moving over to the business-to-business healthcare initiative, I guess obviously in other words some problems in 1Q with the transitions from fixed week, the fixed payment to the corporate monthly pass. I guess if you can just explain to us how you go about fixing that it, if you just can tell, training employees, how to sign up on this sort of online portal thing, and I guess is the problem fixed now and I heard that the portal was actually down for a little while during 1Q. Can you confirm or deny that please?

David P. Kirchhoff

Absolutely. Yeah, we did have a couple of things, which was at the portal, it wasn’t down very much. That was the lesser of the issues. Really the primary issue with the small accounts is, to put some more color around it, imagine you are with a small kind i.e., a single location, there is an employee who is a Weight Watchers member is excited about having Weight Watchers on campus. He or she would attempt to gather typically 20 other people at that location and get them on board at which point they would meet a minimum threshold. We will have something called an information session, where typically a Weight Watchers leader sometimes with the sales rep they would come in give an information session, get people excited and secure commitments that would allow us to sort of tip over and secure that we had enough control memberships that we could then open up the meeting, because there is typically a minimum meeting size depending on situations anywhere from 15 to 20.

If we are short of that minimum meeting size, the meeting doesn’t open at all. And effectively those people have to pen for themselves by finding a local community meeting, which will effectively mean watch the enrollments. What was happening was that sort of information system session where the person is on site. What we missed in that is that it played a critical role in sort of kind of getting those last four or five incremental members, which made the difference between opening the meeting and not opening the meeting. In our effort to replace that, with this kind of fully automated web-based solution we lost the sense of urgency if you will, in how we got the new meeting initiative.

So what we’ve now done is, we are still keeping that one portal open, but what we are also doing is, we’re returning to the practice of having these information systems so we can not lose the benefit of that urgency. What we are also is that, because the team feels terribly about missing everything else. They’re operating with a tremendous sense of urgency in a full court press to really sort of scrap and push to get accounts than otherwise were lost, try to get them signed back up.

It’s the last hurdle to do that in March and April than it is to do that in January, but there is still with each passing week making pretty good progress in terms of systematically slower than we like, but systematically closing the gap. And I really do believe that coming out of this, we are going to have a much more thoughtful and well executed approach to dealing with small accounts. That will ironically put us in a much stronger position. Having gone through this mini crisis than have we not gone through it at all.

Brian Joseph Wang – Barclays Capital Inc.

Right, and just a follow-up to that, do you think there is a chance that you permanently I guess lower the, I guess urgency or I guess having the sales leader on sites, seems like it’s a more conducive way to get people sign up whereas I don’t how they will go about sort of explain urgency of getting those lost call four or five people to get the meeting on site.

David P. Kirchhoff

I probably didn’t do a good job of translating it. We are going to have that in addition to having the website,

Brian Joseph Wang – Barclays Capital Inc.

Both going forward.

David P. Kirchhoff

It’s going to be both. The other thing that we are going to do, is that for very, very small accounts and now I could be talking about a local high school. We are going to reopen the past building, they don’t have to get the Monthly Pass, they can still do (inaudible). So what we’re also doing is we are really getting smarter by segmenting our approach, when ironically we did this to benefit the larger accounts. And the larger account part of the business is going just great.

So that have the desired outcome and we believe that large account part of the business is going to be where most of the growth is, as we go out two, three, five years, We figured some pretty tremendous opportunity for us. And that is absolutely on track the problem is that right this red hot second it’s just not bigger part of. today’s mix.

Brian Joseph Wang – Barclays Capital Inc.

And just one last separate question, just on the change in the reported fourth quarter on line paid, can you explain why there is a change, why is it updated.

David P. Kirchhoff

Yeah it was a clarifier literally because we had a manual process for loading some of that data into our system. And there was a clinical area that we just frankly missed. We have since automated the process and we have tightened up some of our controls around non-financial metrics particularly 10 weeks. So, its been dealt with, it had zero impact on financial results.

Brian Joseph Wang – Barclays Capital Inc.

Okay, thank you very much.

David P. Kirchhoff

Yep.

Operator

Thank you. Our next question is from Bob Greg of Stifel Nicolaus please go ahead.

Bob Craig – Stifel Nicolaus

Thanks good afternoon everybody.

David P. Kirchhoff

Hi, Bob.

Bob Craig – Stifel Nicolaus

David in hindsight what was the problem do you think with the UK marketing and looking at most of your countries now Germany, France, NACO obviously is what they are lacking an effective spokesperson.

David P. Kirchhoff

I think that is part of it. What they are lacking was, I think what an effective spokesperson does when he works for us is if you’ve someone who people can relate to is also having a weight issue, but their success is very visible, it’s always a main thing how much inspiration people take from that. And they have tried something that was a little bit of a different approach they were real members, but they were using sort of lots of real members. And they tried some different things that they thought was an appropriate reflection of kind of culturally where they thought the British consumer was. And they tried something that was a little bit different. And I think one of the balances that we’re always trying to reach as an organization is that we want a management team and we want local management team that will try things, that will try to push the envelope and we are periodically try to take risks, and help us grow and develop the business.

And we are always trying to manage to what degree do we sort off push things top down versus local management teams stretch their legs and try different things. And in this case my judgment was to be supportive of the UK team and trying something a little bit different. It didn’t pen out and I think one of the broader statements that I would make about Weight Watchers is that I’m frustrated by the exclusion issues because there are things we could have avoid it, and that’s disappointing.

At the same time, I don’t want this organization becoming a risk of us. We’re not going to get to where we need to go, but we’re not willing to try things and we’re not willing to push ourselves a little bit that does mean from time-to-time we’re going to skin our knees. I think we need to sort of be more careful where we run, but we need to keep running.

And so when I look at the UK marketing, while I am disappointed and I think frankly, they look at what’s happening for example in Germany where they are using celebrities spokesperson and their business is growing just great. Their online business in particularly is completely on fire right now. So they look at that and say, “Okay, we got it.” And we know that we need to have something that looks like closer to that. They came to that conclusion on the row and as opposed to having a pushdown.

Bob Craig – Stifel Nicolaus

Okay, was Monthly Pass the price increase there, do you think there was a headwind to new enrollment at all?

David P. Kirchhoff

I can always create a little bit of a headwind, again because it really impacts new people coming in the door. And so I can’t rollout that that might have had some effect on it. And with price increases, as you know I mean you do them periodically and sometimes you recognize in the very short-term. You might encounter a little bit of resistance, but than you recognize that as you’re sitting there at this time next year, you’re incredibly glad that you did it. And I think that’s going to the case. With NACO, when I think it’s going to be the case with the UK as well.

Bob Craig – Stifel Nicolaus

Okay, you mentioned the male retention being greater than women, did you expect that number one and should that continue?

David P. Kirchhoff

No, men never sees the bafflement, we did not expect that I actually thought that their satisfactions scores among guys doing Weight Watchers Online tend to be a little bit better than women. I didn’t think that that would translate into a lift on retention, but it’s a funny thing. It’s continues to be curious and amazing to me, the number of guys that I run into now or talking about doing Weight Watchers and there are guys that I never would have expected to be doing Weight Watchers and/or having tremendous success with it. And so it’s certainly gratifying to see them having success and seeing them sticking with their subscription even longer than what we’d anticipated.

Bob Craig – Stifel Nicolaus

Great, thanks David.

David P. Kirchhoff

Yeah.

Operator

Thank you. Our next question is from Greg Badishkanian of Citigroup. Please go ahead.

Greg Badishkanian – Citigroup

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

David P. Kirchhoff

It’s a tricky one to dimensionalize, but let me provide a couple of statistics for you to maybe help sort of ballpark it. And then I can talk a little bit about where we are right now versus what we haven’t gotten to going forward. So first half, in terms of what is the aggregate theoretical potential. Men are as likely to suffer from obesity as women and their health affects that they experience are the same is what woman experience, and so that kind of net aggregate need is at least as high for men as it is for women.

However, they are about half as like we reduce something about it. They tend not to face at least today the same sort of pressure around media and having a feel like they need to looks and everything else that you see with women. So they have been historically was likely to take action. So if you take that 50% is likely to do something about it that would suggest that a theoretical mix of men would be say a third that’s I believe that the willingness of men to be able to weight issue will increase over time as increased recognition of health affects of obesity would become more, more clear. Then there is what are we doing, if we’re currently say for example, 15% in Q1 what stands between us in getting to that higher level as we go into the future. and within the U.S., I would say that if you look at for example, 2012, we’re going to be on I think with guys, men’s advertising a total of 15, 16 weeks for the full year and still not a huge media weights. and so one opportunity for us is to use the same playbook we used for Weight Watchers Online to increase media weights into beyond more weeks, which is a formulative work really well for Weight Watchers Online. The other opportunity for us is that we have not yet launched Weight Watchers online for man in any of our international markets and that's also an opportunity that we believe is going to be in front of us.

Greg Badishkanian – Citigroup

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

David P. Kirchhoff

What’s interesting if you look at 2012, 2011 sorry, if you look at the enrollment trends in 2011 compared to ‘10 and ’09. we had a just incredibly great enrollment period that did not let up until literally we went off promotions getting in toward the end of March, prior to getting into the Easter timing. and as I looked at 2012, one of the things that I was comparing to is I was doing that comparison up to 2011, but I was also comparing to 2010 and 2009, which didn’t obviously have anything of [value] to the PointsPlus launch, and the good news was that 2012 enrollments from both members and rejoins were pretty consistently ahead, nicely ahead of both ‘09 and ‘10. So I think that that was a good indicator that notwithstanding sort of the huge blip we got from the PointsPlus launch in Q1 of last year. If you look at it kind of on a sustained trendline, the enrollment levels we saw in 2012 looks pretty reasonable to us.

Greg Badishkanian – Citigroup

Yeah. In the Easter shift, how did that impact trends?

David P. Kirchhoff

Literally the problem with Easter shift is only one of interpret in Q2 results, I mean, Easter of last year was two weeks later.

Greg Badishkanian – Citigroup

Yeah.

David P. Kirchhoff

And so we have – right now, we effectively have three weeks of like-on-like comparisons, spring-campaign-to-spring-campaign.

Greg Badishkanian – Citigroup

Right.

David P. Kirchhoff

We did promotionally something a little bit different. we did a two-week program this spring then jumping to join for free. and so there are some ins and outs, it’s simply just too early to sort of fully sort through what we say in the spring campaign, because we can only meaningfully look at three weeks data.

Greg Badishkanian – Citigroup

Yeah, thank you.

David P. Kirchhoff

Yeah.

Operator

Thank you. We have a question from Gary Albanese of Auriga. Please go ahead.

Gary Albanese – Auriga USA, LLC

Hi, David.

David P. Kirchhoff

Hi, Gary.

Gary Albanese – Auriga USA, LLC

Hi. It just – I don’t mean to beat this issue. But with the tender, I know you don’t try to time the market and I'm sure if you guys going to – were planning this well in advance of the announcement date in February. But can you just sort of take a step back and think about what the weakness in the – that you are seeing that maybe you should sort of postpone it and sort of wait see and maybe reintroduce it maybe like a month later than you actually did?

David P. Kirchhoff

When we put the tender in place, we made that decision as were working up to the earnings release for Q4 when we provided guidance. And the decision we made the right way to handle this was to announce the tender at the same time we were announcing Q4 results and providing guidance for the year, and that fully put the process in place. The process of that point, the tender was sort of going through, it’s very regimented and structure process. and so it would have been just the wrong thing for us to do to make some decision kind of midway through the process based on a couple of extra weeks of data beyond where we were during the Q4 call to do something differently.

So, from our point of view, I feel pretty comfortable that we timed it in terms of making sure that we’re providing the right information to selling shareholders, it was a right opportunity in terms of securing the debt financing, because the debt markets were open. it was the right timing in terms of making sure that the market had full and adequate information and all those things together is what we used to arrive to the decision to launch the tender when we did.

Gary Albanese – Auriga USA, LLC

Okay, thanks for that. Just another issue, with the price increase last year, when we saw in the meetings business, do you think that's acting as a little bit of a drag or is that sort of inconsequential, do you think to the customer decision at this point?

David P. Kirchhoff

It’s always a little hard to say when you have so many different things that play, including the comprehensive program launch et cetera, et cetera. Again, the point I would reiterate is that because we make the decision to grandfather existing members, by running a price increase at the beginning of January, it really kind of – you could argue that it has a disproportionate effect on enrollment driving activities, because it only effects new people enrolling and we really don’t get a lot of financial benefit from it.

Yes, we generally are buys to do these types of actions and moves in January, because that’s also going to be a higher converting period. And we knew that if we did this in January, over the full-year, we’d be getting full benefit from that price increase. Even though, we knew that there was some possibility that it could create some near-term headwind during the first couple months of the year. So it’s always a little bit of a judgment comp. But I think in the final analysis, it was probably still the right judgment comp.

Gary Albanese – Auriga USA, LLC

Thanks, David

David P. Kirchhoff

Yeah.

Operator

Thank you. Mr. Kirchhoff, we have no further question sir.

David P. Kirchhoff

Okay. Well, thank you very much for joining us today and I look forward to speaking with you again at our next quarterly earnings release.

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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