Weight Watcher's International Q4 2007 Earnings Call Transcript

| About: Weight Watchers (WTW)
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Weight Watcher's International Inc. (NYSE:WTW) Q4 2007 Earnings Call February 14, 2008 5:00 PM ET


Sarika Sahni - Manager of IR

David Kirchhoff - President and CEO

Ann Sardini - CFO


Scott Mushkin - Banc of America Securities

Alvin Concepcion - Citigroup

Chris Ferrara - Merrill Lynch

Michael Binetti - UBS

Jerry Herman - Stifel Nicolaus


Ladies and gentlemen, welcome to Weight Watchers International fourth quarter and full year 2007 earnings teleconference call. (Operator Instructions).

At this time, I would now like to turn the call over to Sarika Sahni of Weight Watchers International. Please go ahead.

Sarika Sahni

Thank you, Tina, and thank you everyone for joining us today. With us on the call are David Kirchhoff, President and Chief Executive Officer of Weight Watchers International and Ann Sardini, Chief Financial Officer.

At about 4 p.m. Eastern Time today, the company issued a press release containing financial results for the fourth quarter and full year 2007. The purpose of this call is to provide investors with some further details regarding these results and a general update on the company's progress.

The press release is available at www.weightwatchersinternational.com.

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. The company does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Now with that, I will turn the call over to Mr. Kirchhoff. Please go ahead, David.

David Kirchhoff

Good afternoon and thank you for joining us as we review Weight Watchers International's performance for the fourth quarter and full year 2007.

I will be organizing my remarks into three sections for today's call. First, a brief financial review of Q4 and full year 2007 results; second, a recap of major 2007 strategic initiatives, progress to-date and major priorities in 2008; and third, guidance for 2008.

First, Q4 and full year 2007 results.

Weight Watchers had a solid financial performance for Q4, driven, as has been the case all year, by contributions from our Monthly Pass commitment plans strength in our Weightwatchers.com business and continued growth in our licensing business.

Total company Q4 revenues grew by 21%, driven by growth in all three lines of business, with meeting fees up 22%, Internet revenues up 24% and product and other sales up 15%. Without the benefit of favorable foreign currency adjustments, revenues were up 16%.

Operating income grew 15% and our operating income margin was down 120 basis points to 26.2% in this year's quarter.

Higher gross margins for Q4, 2007 were more than offset by higher G&A which was up on continued IT investments.

As a percentage of revenue, marketing expenses were up 40 basis points on last year driven principally by production costs for the new January campaigns.

On the bottom line, we reported EPS of $0.50 for the fourth quarter compared to $0.39 per fully diluted share, excluding one-time items in last year's fourth quarter, an increase of 28%.

For the full year, consolidated revenues were up 19%, operating income was up 15% and EPS was $2.50, an increase of 21% excluding one-time items in both years.

With respect to volumes in our meetings business, in the fourth quarter, total paid weeks worldwide were up 20% primarily driven by the impact of Monthly Pass adoption in North America and the beginning of the benefit of Monthly Pass in the UK and Germany.

As we forecasted on our last earnings call, attendance in the quarter remained soft, with overall global attendance growth at negative 2.8%.

Growth in total paid weeks for Weight Watchers Online product was up a strong 27% for the fourth quarter, with end-of-year active subscribers also up 27% versus prior

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

First, our North American meetings business.

Total fourth quarter NACO revenues were up a $170 million, an increase of 22% versus the same period in 2006. In the fourth quarter, Monthly Pass continued to contribute significantly to top line growth, albeit at a slower pace than in Q3, reflecting its lapping of the uplift of Monthly Pass in Q4 last year.

NACO meeting fees were up 26% versus prior and up 22% without the benefit of prior period acquisitions.

For the full year, NACO revenues were up 24% with acquisitions and 16% without. Full year meeting fees were up 20% with acquisitions and 19% without. Q4 NACO paid weeks were up 29% and full year paid weeks were up 37%.

As noted, this rate of growth remained strong, albeit after the peak of 51% we saw in Q3. Again this normalization of growth rates was predicted based on Monthly Pass now being in the market for 15 months.

While during 2008, we will continue to accrue revenue benefit from the introduction of our Monthly Pass commitment plan; its impact on our year-over-year revenue growth will moderate through the year as our Monthly Pass membership base stabilizes.

For the fourth quarter, enrollment activity remained soft as we completed our third straight year without a meaningful innovation to our program, a point I will come back to later.

Accordingly, our NACO attendances were minus 2.4% for the quarter and down 0.6% for the year. With the benefit of recent franchise acquisitions, attendances were up 1.1% for the quarter and up 7.7% for the full year.

Now on to the international business units.

Let me start by noting that as I discussed our international businesses in order to provide apples-to-apples comparisons, all of the growth statistics I am discussing will be normalized for constant year-over-year currency.

For the fourth quarter, UK revenues were up 23% driven by the August price increase, Monthly Pass benefit and continued strength from product sales. UK Q4 attendances were down 2% versus prior.

While the penetration rates of Monthly Pass are still below those of NACO, they are above our initial expectation and are already having a significant impact on the UK top line.

For the full year, UK revenues were up 14% primarily driven by Q4 strength as well as strong growth in both meeting product sales and licensing revenues that had been outstanding throughout the year.

In Continental Europe, Q4 revenues were effectively flat of plus 2%, weak attendances of minus 9% were offset by strong product sales and the benefit of Monthly Pass in Germany in the fourth quarter. For the full year, Continental Europe revenues were flat at 0.8% with attendances for the year at a disappointing minus 9%.

Again, I would note that Continental Europe just completed its third year without the benefit of material program innovation.

Moving on to WeightWatchers.com. WeightWatchers.com capped off an outstanding year with Q4 revenue growth of 24% despite the loss of eTools revenue, now that eTools is offered for free with Monthly Pass.

For the full year, WeightWatchers.com grew top line by 18%. Our highly successful Weight Watchers Online product achieved end-of-period subscriber growth of 27% compared to growth rates of 21% in Q1, 22% in Q2 and 25% in Q3.

Our efforts to boost awareness of Weight Watchers Online with TV advertising have been successful. The Online business further benefited from strengthening retention in the second half of the year, as we continue to make numerous improvements to the functionality and performance of the website. It is worth noting that in Q4, WeightWatchers.com accounted for 20% of the company's total operating income.

Now I would like to turn the discussion over to Ann Sardini who will elaborate further on our Q4 and full year performance. After Ann's remarks, I will return to the topic of our strategy and direction forward in 2008.

Ann Sardini

Thanks, David. Good afternoon, everyone. Our 2007 financial success was driven by revenue growth and gross margin expansion resulting from Monthly Pass which ended the year having achieved 93% global growth in installed base over 800,000 members and by Weight Watchers Online which drive significant benefit from its first year of national television advertising growing end-of-year active to 27%.

In meeting products, sales per attendee for the year also posted impressive results growing by 13.6%.

Total consolidated company revenues were 19% higher in comparison to last year, reaching $1.47 billion. Gross margin topped 55%; a 70 basis point increase over last year and operating income grew by 14.6% to $435.6 million.

Our net income for the year is $201.2 million compared to $209.8 million for the full year 2006. EPS grew 17.5% from the year-ago level to $2.48 and $2.11 on a GAAP basis. On the more comparable basis, EPS grew 21.4% in 2007 to $2.50 from $2.06 in 2006.

This EPS excludes early extinguishment of debt charges taken in both years and it excludes from 2006 a $6.3 million reduction in tax reserves related to our adoption of FIN 48 Accounting for Uncertainties in Income Taxes.

The decline in full year net income versus prior year resulted from $59.7 million of higher interest expense which was incurred in conjunction with the funding of our first quarter 2007 buyback of 19.1 million shares.

Earnings per share in the year benefited from the now lower number of shares outstanding.

Consolidated company fourth quarter operating results continued the growth pattern seen in earlier quarters.

Revenues were up 20.5% versus prior in Q4 to $344 million. We gained 70 basis points in gross margin moving up to 52.4%, versus last year's 51.7% and operating income increased 15.1% to $90.1 million.

As with the full year, fourth quarter net income of $39.8 million was the below last year's $44.3 million because of higher interest expense. The incremental debt that we took on resulted in a $13.1 million increase in interest expense. However, earnings per fully diluted share benefiting from the associated share buyback rose 11.1% in the quarter to $0.50 versus $0.45 a year ago.

Excluding the aforementioned reduction in 2006 tax reserves which benefited the fourth quarter 2006 by $0.06, our 2007 EPS increased a robust 28.2%, as compared to $0.39 in prior year.

Looking at our fourth quarter for more of an operations perspective.

As David indicated, revenues from all major sources posted strong gains in the quarter, with meeting fees up 22.4%, product sales up 15.2% and Internet revenues up 23.9%. Fourth quarter meetings fees grew $38.2 million globally, to $208.7 million. While worldwide attendance in the period declined by 2.8% to $30 million as a result of sluggish recruitment, the value of each enrolling member has risen markedly in those markets where we've launched our Monthly Pass commitment plan.

Our Monthly Pass members are staying engaged in the program longer, using our Internet delivered eTools to help them stay on track and they are attending a few more meetings on average during each enrollment cycle.

Product sales in our meetings enjoy a sixth consecutive quarter of growth, up 10.3% over Q4 last year in local currency on the ongoing strength of our successful strategy of refreshing and rotating product offerings on a regular basis.

On a per attendee basis, the increase in product sales was 13.4% in the period, contributing in a significant way to the rising value of each member. WeightWatchers.com revenues grew 24% in the quarter to $39.4 million.

Now in terms of o some of the specifics of the geographies, NACO's fourth quarter meeting revenues including in meeting product sales were $170 million, 22.4% higher than last year, with growth for attendee in both revenue categories driving gross margin expansion in this geography. There were nearly 700,000 Monthly Pass active at year end 2007. NACO's meeting revenues were up double-digit versus prior throughout 2007 ending the year with 24.8% growth, 7.9 of it coming from acquisition.

Monthly Pass drove year long gross margin expansion for NACO. This fall, we launched Monthly Pass in two of our internationally markets, UK and Germany. These launches along with the significant price rise taken in the UK and strong production sales across most of our internationally market moved fourth quarter internationally revenues up 7.1% versus prior on a constantly currency basis, this despite an 8.3% decline in total international attendances in the quarter.

Concurrent dollars international fourth quarter revenues were $108.9 million, an 18.3% increase over prior.

Full year international revenues were $469.5 million, up 13.9% in U.S. dollars with 4.3% in local currency. Full year attendance was 24.6 million in 2007, 4.4% behind prior year.

Looking briefly at the UK and Continental Europe separately, UK meeting revenues were strong 38.9 million in the fourth quarter, up 23.5% in local currency and the combination of the August introduction of Monthly Pass and the pricing action.

For the full year, UK posted a 13.7% increase in meeting revenues, benefiting from Season Pass in the first half as well as fall diet season items mentioned above.

In fourth quarter 2007, the Continental Europe's meeting revenues were $46.4 million, up 2.5% with constant currency. For the quarter, meetings fees declined though at a lesser rates than attendance which was off 9.5% in the quarter while product sales were up by 12.2%.

For the full year, Continental Europe's meeting revenues of $199.7 million were flat with prior on a local currency basis. In meeting product sales, which grew considerably on per attendee basis, were nonetheless deflated by the 8.5% decline in full year attendance versus prior.

WeightWatchers.com metrics have been outstanding all year, with full year revenues up 17.5% to $154.1 million from $131.1 million last year despite the lower demand for paid eTools in Monthly Pass market.

Revenue growth of the dot-com develop was up 23.9% in fourth quarter from $31.8 million last year to $39.4. Online end-of-period active subscribers rose 27% in the quarter to 584,000.

Moving to a review of our other revenues, franchise commissions grew by 9.3% year-over-year in the quarter despite declines resulting from our reacquisition of three North America franchises over the past year.

Same-store franchise commissions grew 20.5% in the quarter to $3.6 million. Many of our U.S. franchisees are benefiting from our move to a national TV advertising platform and there is some benefit year-over-year from favorable currency exchange in our international franchise commissions.

Our other revenues grew 16.7% in the quarter to $22.1 million. Licensing revenues in the fourth quarter increased 16.4% to $14.8 million. Revenues from our publications were $7.2 million in the quarter, up 17.5% on prior. For the 2007 year our other revenues were $80.1 million, an increase of 17.2% with licensing contributing the lion's share, up 21.4% on a full year basis.

As I noted earlier, our consolidated gross margin delivered an incremental 70 basis points versus prior in the quarter to 52.4%. The business experienced some downward pressure in Continental Europe largely as a result of lower meeting averages. However, revenue related gains in NACO and UK more than compensated.

Our fourth quarter marketing investments increased $8.3 million or 24.8% over last year's level to $41.8 million. NACO began its winter 2008 ad campaign in late December as planned spending $3 million more than prior year in the quarter. Continental Europe also spent ahead to support the launch of its winter diet season [PowerFlex Innovation].

And as I mentioned earlier, WeightWatchers.com continued to invest in national TV in the US with strong results.

First quarter marketing was 12.1% of revenues in 2007 versus 11.7% in 2006. For full year 2007, marketing expense rose 29% or $46.4 million above the 2006 level. Just as a reminder, our 2006 marketing expense was flat with 2005 level. In 2007, we began, in earnest, to review our advertising agency relationships on a worldwide basis, made changes and developed our communications strategy.

NACO upped its full year spending by 22% or $11.8 million investing in production and in media and non-TV format, NACO also had its promotional activities and research in support of our relevancy initiative. Also during the year, we began TV advertising for the WeightWatchers.com raising net businesses project by $15.2 million.

Currency exchange added 10% to our international marketing spend which was up 21.5% in total including expenses associated with the winter diet season innovation in Continental Europe. Total company's full year 2007 marketing was 14% of revenues versus 12.9 % in 2006.

G&A expense in the fourth quarter 2007 was $48.5 million, up 35.6% from the prior year level. IT is the largest driver of G&A growth accounting for more than a third of the increase. As we've mentioned on previous calls, we are in the midst of a multi-year investment initiative due to addressing long needed systems upgrades and adding new functionality. Higher IT expenses in the quarter result from the combination of increased depreciation as we bring new systems online and higher maintenance related to new systems already put in service.

The remainder of the fourth quarter G&A increased results from management infrastructure upgrades which have occurred during and after the fourth quarter 2006, as well as ordinary operational increases and the impact of foreign currency translation on our international expenses. In addition, the significant gain in an operating income versus prior year resulted in higher bonus expense.

G&A was 14.1% of revenues in the fourth quarter 2007 versus 12.5% in the 2006 comparable period. If we exclude the impact of the incremental IT investment, G&A was 12.9% of revenues in the 2007 quarter.

On the full-year basis, G&A increased $35.8 million or 26.1%. About one-third of this increase is directly attributable to our increased IT investment with the remainder primarily driven by the build-up of infrastructure in some of our international markets, foreign currency translation, support for franchise acquisitions and normal inflation.

The company's consolidated operating income in the fourth quarter was $90.1 million, up 15.1% from $78.3 million in the prior year quarter. Our consolidated operating income margin was 26.2% as compared to 27.4% in the year earlier quarter. The 120 basis point operating income margin reduction in the quarter was driven by the impact of investments in marketing and G&A as noted above.

Interest expense in the quarter which nearly doubled from $13.6 million last Q4 to $26.7 million this year was the result of the increase in our average debt outstanding which I mentioned earlier. The average effective interest rate is slightly below last year's at 6.30% versus 6.52% in 2006.

Average debt outstanding in the quarter was $1.69 billion versus $840.8 million in the year earlier quarter. Since the first quarter of 2007, when we raised our debt levels to fund the share repurchase, we paid down $215 million of debt.

Our net debt-to-EBITDA ratio at year end fell below 3.5 times. As a result, I am pleased to report that we have now crossed threshold that enables the 25 basis point reduction in our interest rate spread over LIBOR and that will become effective around March 1. This combined with declining LIBOR rates and lower debt levels should materially lower our interest expense in 2008.

Moving now to our consolidated company cash flow and balance sheet, the company generated significant free cash flow in this quarter. Cash from operating activities excluding interest was $82.2 million and after capital expenditure $71.6 million was available to service our capital structure.

We utilized our available cash to make interest payment of $28.9 million, reduced our debt by $38.1 million and pay our quarterly dividend of $13.9 million. As a result, the cash balance declined in the fourth quarter to $39.8 million.

In the full year 2007, we accumulated $413.7 million of cash from operations excluding cash interest. After $31 million of capital expenditure, $381.9 million remained available to service our capital structure.

We deployed the cash to pay $95.2 million of interest, meet our dividend payout totaling $68.5 million and pay down $215.2 million of debt. Typically, as is the case in fourth quarter and full year 2007, our cash flow exceeded net income primarily because of increasing negative working capital. In particular, our working capital has been favorably impacted by higher deferred revenue arising from Monthly Pass commitment plan and by higher permanent differences between booked and cash taxes that arise from increases in balance sheet goodwill as we acquire franchises.

Fluctuations in the balance sheet between year end 2007 and year end 2006 primarily reflect an $823 million increase in our debt balance including the impact (inaudible) and the $16 million increase in accrued interest. Both are directly a result of our first quarter 2007 refinancing. In addition, balance sheet deferred revenue was $60 million and franchise rights acquired increased by $32 million.

Just before turning the discussion back to David, who is going to cover our 2008 guidance, I will make a few comments that might be helpful in putting together your models.

First, let me remind you that the timing of Easter impacts both the attendance and the timing of our marketing spend. This year's very early Easter falls in our first quarter whereas last year Easter was in the second quarter. When comparing on a year-over-year basis, this change in timing has the effect of shifting 300,000 to 400,000 global attendances from this year's first quarter into this year's second quarter.

In addition, the marketing expenses from the first week of this year's spring campaign will fall into our first quarter. Last year all of the spring campaigns expense was booked in the second quarter.

This will result in a shift of about $7 million in marketing into first quarter relative to last year. While all this nets out when we were looking at the first two quarters combined, it will have the effect of enhancing our second quarter's financial results while depressing our first quarter results. Another point to keep in mind when you are looking at 2008 relate to this year's interest expense.

As I pointed out earlier the combination of lower debt, lower LIBOR rates and stepped down in the premium should result in full year 2008 interest expense being $17 million to $19 million lower in 2008 than in 2007, absent any incremental interest resulting from future franchise acquisitions were stock buyback.

And with that, I'll turn the discussion back to David.

David Kirchhoff

Thank you, Ann. As I assumed the role of CEO in January of last year, we came together as a management team to establish our long-term strategy and our near-term foundation building initiatives.

As we've shared many times our mission and our objectives are simple. One, more consistently helped the people to come to us achieve their goals, our strategic plank of retention and two, find more people to help our strategic plank of relevance.

Retention, the most important way to help our members achieve weight loss success is to keep them engaged in the program longer. Therefore, retention has become the most successful measure we use to evaluate our member engagement with their program. Our four major initiatives for improving the retention are: One having a payment system that is better aligned with long-term member participation, i.e., Monthly Pass. Two, more consistently allocating our meetings to our stronger leaders. Three, developing and adopting best practices in the meeting room and member experience. And four, innovating our programs in a way that is truly helpful to member success.

We made great progress in the first of these four initiatives with the successful implementation of the Monthly Pass in North America followed by its launch in the UK Germany and Australia last fall. The most important aspect of Monthly Pass is that it is simply a better way for members to engage with Weight Watchers. It gives them access to the best of what we offer in a convenient way that encourages longer-term participation.

The following two facts best illustrate the beneficial impact of Monthly Pass for our members. First, our members are staying engaged longer. The average Monthly Pass member maintains its subscription for about eight months versus three to four months of elapse time with Weight Watchers for a pay as you go member.

Second, our clinical randomized trial research shows that people who do both eTools and meetings lose 50% more weight than those that only go to meetings. In the second initiative leader performance management we made great strides particularly in the larger markets of NACO and the UK. In both markets, we made significant immeasurable progress in assigning more meetings to our stronger leaders.

With the new performance management HR discipline combined with stronger reporting and data analysis capabilities, our field management is now well equipped to make sure that we are giving our members the best experience possible. This starts with the leader and this will continue to be a point of focus for us in coming years.

At Weight Watchers we are truly blessed to have such a large group of committed and passionate service providers. Our job as management is to recognize who our stronger leaders are and then properly support training to compensate them. By doing so, we will continue to improve the quality and consistency of the service we deliver to our members.

And the third initiative member experience 2007 was a watershed year in the development of critical consumer and member insight. We completed several seminal pieces of research that have become invaluable sources of insight for the development of improved program and service offerings.

Specifically, we completed the large and comprehensive psychographic segmentation study, a major ethnographic study of member experience and a new meeting satisfaction research methodology. The result of all these efforts has been a step function improvement in our understanding of what works for different types of members and where are the critical needs and opportunities lie. As we go forward, we will be applying these learnings in everything we do.

Finally, in the area of program development, we've begun to make important progress. When I first presented our business strategy in February 2007, I stated that we had to be focused on creating program innovations that have the potential to improve the likelihood of member success. As I stated then, doing innovation strictly to feed marketing provides only short-term enrollment gains and is not a sustainable approach. With this philosophy, we have effectively raised the bar on what constitute a successful and acceptable program innovation.

Beginning last year, we implemented a more disciplined program development process designed to allow us to build a more consistent stream of meaningful innovations. This process starts with ideas and ends with operational improving concepts. The deep consumer research we did in 2007 has been critical to filling the funnel with the ideas that can truly address members underlying needs, gaps and wants.

We now have a very clear idea of what to focus on and where to prioritize our efforts and these insights are fueling the program innovations we will be launching in the future. The first example to come out of this process is Continental Europe's new program, PowerFlex which we just launched in late December and was its first major innovation in over three years.

For 2008, on the retention front, we will continue to increase Monthly Pass penetration in the US where it is now in its 15th month since launch, as well as to build Monthly Pass penetration in markets where it has only recently been introduced. We will also look to expand the Monthly Pass footprint in 2008 to include France at the minimum.

Leader performance management. We will continue to make progress in leader performance management. With the strong progress we've already made here in 2007, we're looking forward to reaching new milestones in 2008 and beyond.

Program innovation, leveraging the consumer insights that we mined in 2007, we have a very clear sense of where to focus our efforts in creating new meaningful program innovations. That work is underway, and we expect to launch significant program innovations for the US and UK markets in time for the January 2009 marketing campaigns. Furthermore, the funnel is being filled and we will return to a more regular innovation cycle.

Relevance. As I've shared with many of you on previous calls and at various presentations, we have a terrific opportunity to reenergize and differentiate our brand. We strongly believe that no company provides the kind of lifestyle base support aided weight management services that we offer. We are uniquely positioned as the one organization that can help people lose weight and keep it off by learning how to live a healthier lifestyle.

As I've said before, we are in the business of teaching people how to fish rather than just selling them fish. However, our advertising and marketing programs have not always reflected and effectively portrayed our uniqueness nor have they always been particularly effective on important advertising elements like customer persuasion.

To begin to address these issues, we undertook several key steps in 2007. We started by appointing new advertising agencies in virtually every market. We brought a new internal marketing talent. Bundling together, we developed advertising strategies that would allow us to create campaigns that lasted years, not months. Shifting brand perception is a job that doesn't happen overnight.

With our strategy in place, we then focused our efforts on improving creative execution and driving a simple differentiated brand message in a world full of diet, clutter and noise, Weight Watcher's is the program that works. This January, we launched new campaigns based on this new advertising strategy and communication architecture in both the US and Germany.

For 2008 on the relevant front, now that the new US and Germany campaigns are up and running, we are gathering early learnings to further improve their effectiveness with each marketing season. We will also have the opportunity to apply these learnings as we look to develop and watch new advertising in the UK and other markets later this year.

One new piece of news in our strategy of expanding relevance is our announcement to enter the Chinese market as formalized by the recent signing of a joint venture with Groupe DANONE. It is a sad reality that the obesity issue has found its way into developing economies as prosperity has reached countries such as China, India and others.

Obesity is now becoming a real issue in China, and we have an opportunity, and I feel an obligation, to provide lifestyle based solutions to that market. Having an experienced partner in DANONE will be critical in helping us jumpstart our entry. We now have a management team in place on the ground in China consisting of highly experienced Chinese executives from DANONE who will be leading this exciting new opportunity.

Moving on to 2008 guidance. As I noted earlier, we are now in NACO's fourth year without a major program innovation. And just as we'd seen in Europe, going this long without a meaningful program innovation negatively impacts recruitments. While the Kick Start add-on has been a very well received addition to our program, it is simply not significant enough to build a marketing campaign around.

In addition, I read the papers like everyone else and I have concerns about the impact of a weakening US economy. Without a new program innovation in NACO in 2008, we expect a softness in the enrollment trends we've been seeing both from never members and rejoining members to continue. As well, attendances will not be helped by Monthly Pass to the same extent in 2008 as they were in 2007 now that we're lapping.

While we will seek to use a variety of marketing commercial tools to hold volume up until we have a new program at the end of 2008, we feel it is best to be prudent and we are basing our plan and guidance assuming mid to high single digit attendance declines in NACO. Fortunately, since we will still have continuing financial benefit from Monthly Pass and our product sales for attendance and licensing revenue should continue to do well, NACO revenues should continue to grow in 2008.

Despite not having an innovation in 2008, the UK has gotten off to a solid start, running basically even with what was a strong first quarter last year. For the full year, we're forecasting flat attendances versus last year on this mature market. However, we expect a lift from Monthly Pass to generate very positive revenue growth in the UK.

Although it is still in its early days, we're very pleased with the results of our Continental Europe. With the significant new innovation being well received by members throughout Europe, attendances in the first six weeks of the year have trended back toward positive territory. Based on this early success as well as other planned initiatives, we're forecasting mid single digit positive attendance growth in 2008, a double-digit swing from the trends last year.

Finally, I can also report that WeightWatchers.com is off to a strong start again in 2008, as this relatively newer offering continues to gain traction and penetrating its target market, bringing hundreds of thousands of new people into the Weight Watcher's franchise. In the US, where we're now lapping marketing campaigns with no increase immediately, we are still seeing a continuation of strong growth. We're seeing even more significant growth in the UK and Germany where we launched awareness building TV adverting this January. For the full year, we're forecasting a paid week’s growth of 20%.

Let me remind everyone, as Ann mentioned, that this year's early Easter will have the effect when comparing to the prior year of reducing this year's first quarter attendance in revenue, while increasing revenue in attendance in the second quarter. In addition, an early Easter means that the first week of marketing expenditures for our spring campaign will fall into our first quarter this year versus falling entirely in the second quarter last year. What this means is that on a year-over-year basis our first quarter will appear weaker than the underlying trends and our second quarter will appear proportionately stronger.

In summary, we anticipate solid top and bottomline growth in 2008. Our strengthening business in Europe, the positive impact from the continued rollout of our Monthly Pass commitment plan, good growth in our licensing business in meeting product sales and WeightWatchers.com will all combine to more than offset for the projected attendance weakness in NACO. Overall, we expect revenue growth to reach double-digits for the year and full year EPS between $2.80 and $3 per fully diluted share.

At this time, we would like to answer any questions you may have.

Question-and-Answer Session


(Operator Instructions). The first question is from Scott Mushkin from Banc of America Securities. Please go ahead.

Scott Mushkin - Banc of America Securities

Hey, David.

David Kirchhoff

Hi, Scott.

Scott Mushkin - Banc of America Securities

So I am on a cell phone here driving, but hopefully you guys can hear me, okay. Just to clarify your NACO thoughts, I mean are you guys seeing those types of declines currently even though you launched that major new ad campaign. And are we not going to really see retention and the relevance issue come together in NACO until '09?

David Kirchhoff

Well, let me answer those in order, I think. First of, when we said our guidance as we just share for attendance in NACO, it is based on the that we're seeing in the first six weeks of the year, reflecting everything that we think is going on. It is with the benefit of the new advertising campaign despite the fact that the first six weeks, we're not seeing positive attendance growth.

I am still very optimistic and positive about the attendance campaign in particular, in addition to generally getting feedback on that. We've also been doing quite a bit of quantitative research on it post-launch. And everything we're seeing from the campaign is that on a number of dimensions it's going quite well. In particular on the dimension of persuasion, in other words giving people a new reason to consider and rethink the Weight Watchers brand, it's scoring better than any campaign we've launched in quite some time.

And so, we are very positive about this campaign. The thing I would say about it is, this kind of brand shifting campaign is the kind of advertising that takes a period of time to really take hold. If we've done advertising for example with the completely new program and saying that Weight Watchers is this whole new thing, I would anticipate a more immediate reaction to the advertising.

But because the advertising is primarily about sort of general brand perception shifting, my view is that it takes a longer to really sort of penetrate the public consciousness. In terms of retention and relevance, I think there's a couple of things. If you look at retention first of, there are certain things that we've already launched that we've already been getting benefit from.

Monthly Pass was one of the retention initiatives and we've been benefiting that through last year and going in to this year. We are making measurable progress in terms of increasing average quality of service in our meetings via the leader performance management and we're getting a lot of good insights that's helping shape our thinking in terms of how to evolve our service offering as well as program innovation.

And so on all those dimensions, different things take hold at different points and time depending on the timeline associated with making them happen. But we're quite pleased with the progress we're in the retention initiative and more absolutely on track for where we wanted to be when we started this in the beginning of '07.

With respect to relevance, it would be my anticipation that as we continue to push this campaign in these themes, that I would expect for us to be increasingly effective in doing something that we haven't always done that well which is really differentiating our brand in the mind of members particularly never members.

As we build that platform, it's going to put us in a really good position that as do come out with the new program in 2009, it's going to be doing it with the brand in a much more solid place in the mind of consumers. And so the work that we have been doing on the relevance dimension particularly with respect to advertising that we are going to continue building on throughout the course of the year, I believe it's going to put us into a fantastic position to sort of further lever up, if you will, the benefit from the things that we're working on that we're going to be pushing into 2009.

Scott Mushkin - Banc of America Securities

Okay. So just a follow-up quickly and then I'll get off the line here. So did you see sequentially deceleration in attendance year-over-year as you move into the first quarter? So I want to be clear.

David Kirchhoff

As we move through the first quarter?

Scott Mushkin - Banc of America Securities

As you move into the first quarter over the last six weeks?

David Kirchhoff

It's always a little bit odd as we move into the first quarter because you have that period at the end of December where there is so little volume in the business given the holidays that it's kind of hard to get a gauge on how things look in December versus how things look in January.

The trends we're seeing in January, I mean first you have this sort of this odd situation in the first week where New Year was on a later day and lot of people just took the whole week off. But putting that aside, the kind of attendance trends that we are currently seeing are sort of what were -- it has been fairly consistent. So it's not like we're seeking kind of an increase in deceleration as we move through the first quarter. It's been kind of a steady state.

Scott Mushkin - Banc of America Securities

And then the final thing is going to the relevance and retention issue. Am I wrong to say that until you and maybe I'm thinking of that wrong, the intersection there is where you will become, you will start getting new people. And in other words, word of mouth has always been really important for you guys. And if so you intersect the relevance and the retention issue. It's going to be hard to drive new membership growth and we can't, we really don't expect that until '09 is what you're saying?

David Kirchhoff

Well as I said, here is the way to think about collective interest in Weight Watchers and maybe this is sort of different frame to put on it. The one thing I would point out is that even if you look at 2007 and when you think this is going to continue into 2008, net interest in Weight Watchers in North America is increasing.

If you look at the sheer number of customers, the 10 customers we have in 2007 versus 2006 they were categorically higher. Furthermore, if you look at and while we said there was an enrollment GAAP versus 2007 and 2006, it was more than made up for by the increased number of signups in Weight Watchers Online which is doing a good job of penetrating its respective market.

We would expect that to be a comparable trend as we go into 2008, but as we go into 2009 we then have the benefit of the continuing growth of '09, but we also have the benefit with the new program innovation of bringing back the sort of the ideal target numbers from the ideal segments for the Weight Watchers meetings business back into the fall than the way that the whole sort of thing rises.

The other point is we are making about that is that furthermore if you look at online subscriber versus a meetings member, a pay to go meetings member is comparable and value to us financially as the Weight Watchers Online subscriber. The Monthly Pass which was really kind of the best of both, if you will, is our highest value offering, both in terms of weight loss but also in term of financial return to the company.

And so, all those things, I think, together are going to continue working as we go through 2008 and into 2009. I do believe that once we are doing some of the things we need to do, and specifically, consider that as we work on the new program and as we also spend time finding ways to innovate our service offering, that the whole intent behind that is it's going to drive better member success, which to your point results in better word of mouth.

Our view was that we kind of needed to know where to focus on and we needed the right consumer insights to get there, and that's what a lot of 2007 was about. If that's the case, then 2008 is about basically creating and executing and implementing the designs that flow from that that begin to benefit us in 2009.

Scott Mushkin - Banc of America Securities

All right. That's interesting. And long call, but thanks for all the details. It was good, actually.

David Kirchhoff



Thank you. The next question is from Alvin Concepcion from Citigroup. Please go ahead.

Alvin Concepcion - Citigroup

Hi, everyone. Just wanted to know if some of the softness you've seen in the US, is that any impact from Alli?

David Kirchhoff

No. That we don't think. We have no reason to believe that Alli is having any significant impact on our business, particularly if we look at the trends. I mean, as I understand it, Alli's best quarter of sales were in the second quarter, and as I understand it, its Q3 and Q4 was relatively less robust, if you will. And furthermore, I think what they're calling for is sort of flattish some growth from the US in 2008. As well, as I've stated before when asked that question, Alli, we believe, is a diet alternative, if you will, is more likely to impact other approaches, which are kind of more of a "do it for me" style of weight loss, such as prepared meals and things like that. Whereas if anything, what we would expect to see is that Weight Watcher's members could make the decision to also take Alli to further supplement their success.

Honestly, I've asked the question a lot of times and I spend a lot of times kind of out in the field with leaders and territory mangers and members and everything else. And every time I pose the question, I kind of get blank stares back. I mean I really think that they're appealing and focusing on a different target market segments than we are.

Alvin Concepcion - Citigroup

Okay. Great. And do you think that some of that may be because you are mostly reactivation business, does that sort of isolate you from that impact?

David Kirchhoff

Well, I'm not completely sure I know what you mean by that, but let me give it a try. If what you're asking is whether our rejoins are less susceptible to the message of Alli, I'd suppose I could say that, I could see that. But we also get a fairly high percentage of our people we call never members or people that haven't been with Weight Watcher's in ages. And I would argue that it's more the kind of people that are attracted to us.

In other words, if you think about the people that are interested in adopting and having a sustainable weight loss through a healthy lifestyle, as I referenced before, earlier in 2007, we did this kind of fairly massive psychographic segmentation study, and clearly one of the things that comes out of that is the recognition that different people are wired in different ways. And what I would suggest is that the kind of segment that we appeal heavily to is not the kind of folks that would be focusing on pharmaceutical solutions, if you will.

Alvin Concepcion - Citigroup

Okay. Great. And final question regarding your franchisees. What's your strategy towards acquiring them? How aggressive will you be and what kind of multiples are you sort of willing to pay?

Ann Sardini

We're continuing along the same lines that we have been since we started our acquisition program. We talk to any franchisee that's interested potentially in selling. We are eager to acquire certain of our franchises. We do obviously valuations and due diligence and reviews before we take anything on and they are extremely accretive to us. In terms of aggressively seeking, that's really not how it's gone. It's been more of an opportunistic acquisition when somebody approaches us.

Alvin Concepcion - Citigroup

Okay. Thank you.


Thank you. The next question is from Chris Ferrara from Merrill Lynch. Please go ahead.

Chris Ferrara - Merrill Lynch

Hi, guys. Dave, did you expect attendance in North America to react better than it did in January so far?

David Kirchhoff

Yeah, I would have hoped. I mean it's one of these things where I would have conversations and they're probably listening. So this is for their benefit too. I've had conversations with the marketing team saying it's ridiculous for you to think that being out with the new advertising campaign is going to suddenly turn trends around that for four weeks. But I'd be lying if I didn't see I was a little bit susceptible to the same sort of hope and expectation.

That being said, I would suggest that, if I'm looking at it logically, the outcome we're seeing is not inconsistent. I think one thing I want to come back to which is kind of an important point which is then the enrollment trends we're seeing now are not inconsistent with the enrollment trends we were seeing last year. What the difference is that last year we had a full year affect of Monthly Pass, accreting attendances, above and beyond, per enrollment cycle, if you will.

And so that has the benefit of sort of helping us kind of close the gap a little bit. But now that we've left it, we don't get the full benefit of that anymore. So we're sort of standing without, from an attendance point of view, some of that lift for Monthly Pass. Now the good thing is, is that we're still getting a bit of that lift from a revenue point of view. So that's why we're still looking for positive revenue growth for NACO this year.

Chris Ferrara - Merrill Lynch

Got it. Why will it be a year before we see a new product coming through or another innovation?

David Kirchhoff

The best way I can describe it is that I'm pretty insisted that the program that we launch be a fantastic program. I want the kind of program that people walk out of it and say, "That was unbelievably great, I can't believe that, you guys have never done this before, it's fantastic." Those are my unreasonable expectations for the kind of response we're going to get. And first, to get that kind of response, we have to do this the right way.

It was hard for us because we have things that we could have played with that were in the pipeline last year, but when we looked at it we asked ourselves the question are these things going to meaningfully impact member success or not? And the conclusion we came to is the things that we had to offer were not the types of innovations that we felt were going to have a meaningful impact on member success. And while we probably could have made hay with them with marketing, it's just didn't feel like the right thing to do.

So while we were doing tons and tons of consumer work, it's hard for me to express how important that has been to our thinking into focusing and prioritizing our plans for program development, that brings us into this year. Now if you think about it, when you launch a new program, the best way I can describe -- this is why it takes long -- is first-off you need to iterate a bunch of times with the prototype you're developing and working on to make sure that you are working through all the second and third order effects that come with a significant innovation, and to make sure that we're constantly checking back with both never members and current members that we are not missing anything because it's tricky business in the behavior modification world.

The other thing I would also point out is that we've got give or take 7200 leaders alone in NACO and getting 7200 leaders trained and comfortable and ready for action is something that it takes time and focus and it's a lot of hard work. And so our view, if you kind of look through the whole timeline, believe it or not, hitting January is going to require a consistent and steady effort and it's going to require milestones which we will hit. But nonetheless, the timing is about right if we're going to get the right program out.

Chris Ferrara - Merrill Lynch

And just one quick one, what are guys thinking about for SG&A, for marketing, as you head into 2008. And I think originally you said marketing would probably be flat as a percentage of sales year-over-year, but can you just give an update on that may be?

Ann Sardini

Well, I think it will be up a little bit as I am looking at it now, having gone through the whole process of planning 2008. I think G&A on the other hand will be flat as a percentage of revenue, a little bit perhaps run rate than fourth quarter of this year.

Chris Ferrara - Merrill Lynch

And I am sorry. Just one more, on the top-line guidance I think Dave you said revenues you think you will reach double-digit revenue growth, is that including or excluding currency?

Ann Sardini

It's excluding. We budgeted our currency at the rate that we have on average for this year, so there is no currency impact.

Chris Ferrara - Merrill Lynch

Thank you very much. I appreciate it.

David Kirchhoff



Thank you. The next question is from Michael Binetti from UBS. Please go ahead.

Michael Binetti - UBS

Hi, guys. And congratulations on the nice quarter there. Just real quick tactical question for you on the Monthly Pass uptake, could you give us a rough idea what percent of attendees in this quarter were at your meetings in U.S. on Monthly Pass?

David Kirchhoff

Yeah, we're seeing roughly a consistency in the trend of penetration, just a few things on Monthly Pass, thanks for brining that up. We are seeing fairly consistent trends in terms of overall penetration rates in NACO versus what we've being seeing from those last year. The other thing that I'll point out, which is that encouraging particularly given, maybe some early concerns we had about the economic climate is that the retention for Monthly Pass in January is held up very nicely, as has propensity to attain meetings. So Monthly Pass continues to be a good source of stability for us.

Michael Binetti - UBS

And I think last talk about; you said it's over 50% it is still hovering around that area?

David Kirchhoff

That' right

Michael Binetti - UBS

Okay. I appreciate that. And then I guess just one other tactical question. I have a follow-up is, I guess, how can you compare that the Monthly Pass have taken the UK and Germany in its early days to what you saw maybe in the U.S. a year ago?

David Kirchhoff

It's lower and we expected that it would be lower, that's due to a number of reasons. First of, it has to do with the way the credit cards are used by a given market. It also has a little bit to do with growth of penetration of e-commerce scenario and penetration of few other things. But nonetheless, I would say that while it's lower, it is ahead of our expectations that we originally had and it's not a million miles away.

Michael Binetti - UBS

Got it. And then I just guess one last question. How do you separate competition from the economic sluggishness you're seeing in the NACO outlook? And I guess, maybe an add-on to that question, what extent do you feel you are sensitive to trade down in the diet category, perhaps to some of the lower cost online options that people may look at?

David Kirchhoff

Well, the good news is that we have an online business and it's holding up well. The good news also from a trade down point of view particularly if we were seeing sensitivity around the economies, I mentioned before we might have expected to see some of that in cancellation rates which we have not seen. So that is also good.

I would actually point out that if you look at, Weight Watchers versus large commercial competitors, we are actually less expensive. So if you compare us to particularly the prepared meal businesses, we are a lower cost option.

In terms of the online business, coming back to that again, there really isn't a significant online competitor out there other than the ones who are, I don't know the one-fourth or one-fifth our size. We are the by far leading player in the online weight loss space in the U.S.

Michael Binetti - UBS

Thank you.


(Operator Instructions). The next question is from Jerry Herman from Stifel Nicolaus. Please go ahead.

Jerry Herman - Stifel Nicolaus

Good Afternoon, everybody.

Ann Sardini

Hi Jerry.

Jerry Herman - Stifel Nicolaus

Let me start with a really big picture question. Could you guys update us on sort of the demographic of the typical user namely, age, income levels, so on and so forth?

David Kirchhoff

Yes, sure. For the meetings business, age is fairly reflective of the overweight population in general, call it 45, 47, Weight Watchers, skews above average on income, and it skews above average on education.

If you look at Weight Watchers Online, it is going to run a little bit younger. It has been a little while since I have recently looked at that number, but it is going to run typically about 5 years below what we see in the meeting business or more in some cases, I would have say closer to 40.

And then in the case of Weight Watchers Online, it's may be even higher education or may be as a result of the age, comparable income and then typically another difference between online meetings is that people to do online have a little bit less weight to lose and people who go to meetings because they are appealing to different markets.

Jerry Herman - Stifel Nicolaus

Great. And then just a couple of questions about Monthly Pass, you noted David that the retention was actually pretty good in January, haven't seen a lot of cancellations increased. Just to be clear those cancellations of paid weeks, i.e., credit card usage, I mean does that actually hold true also for attendance in meetings in the early part of the year?

David Kirchhoff

Yes, I am sorry, that's the metric that we refer to internally as propensity to attend.

Jerry Herman - Stifel Nicolaus

Okay, great.

David Kirchhoff

And what we are seeing is that propensity to attend trends, that's a mouthful is comparable this year to what we saw last year which is positive?

Jerry Herman - Stifel Nicolaus

Okay, good. And it looks like the longevity of the Monthly Pass is about the same as what you shared in the past?

David Kirchhoff

Yeah, that's right.

Jerry Herman - Stifel Nicolaus

Is it too early to tell the amount of time, if you have it at all, it takes them to reengage if they disengage?

David Kirchhoff

It's a great question. One of the tricky things and this is based a little bit on my experience kind of growing up on the dot-com side of the business where we've already had a nine-month product in Weight Watchers Online is that it takes a lot more time has to elapse before you really start getting a good deal on that, because you just need enough distance between when people start canceling versus when they return because everything is kind of elongated if you will. And so it's still a little bit early for us to speculate on that.

Jerry Herman - Stifel Nicolaus

Okay, great. And a just a couple of sort of strategic flash numbers questions. The IT spending is pretty high, it's making an impact. When does it start to tail-off and how does that show up in CapEx?

Ann Sardini

We have, at least, another year, probably a little bit more than that. And the tail-off will not be back to the original levels that we were prior. Right, David?

David Kirchhoff


Ann Sardini

Just because we wanted to upgrade our meeting rooms to try to do some automation there and to keep current with all of our systems and processes. So this year, I think, we're about $30 million in IT spending, about $19 million higher in depreciation. I think the depreciation will go up for about another year and a half, two years, and then you'll start to see it come down because more and more is going to be hitting expense directly.

David Kirchhoff

Yeah. I'll add just a little bit of flavor on top of Ann's comments. A good example is what Ann referred to as meeting automation. Said differently and said by someone who is now working as a receptionist, some of our meetings have point of sale terminals and some have what we refer to as paper tallies. We’re trying to get more and more of our centers, about half right now, with point of sale terminals. It gives us a bunch of advantages.

First-off, we can process members more quickly. It makes life a lot easier for the service provider that open and close the meeting. In some ways, most importantly, it allows us to the future potential of more directly connecting what's happening with the member in the meeting versus with our databases, which ultimately can connect back with the website as we integrate all those systems.

And so, we think that the investments we're making on that side are going to be important parts of how we drive service delivery in the coming years. And then, there have been investments that were a long time coming, going back to Y2K when we pulled out all the cash registers, we're sort of getting back to kind of the modern day, if you will.

Jerry Herman - Stifel Nicolaus

And then, just one final quarter, if I might. The JV in China, could you maybe give us a read on the expected ramp rate there and the initial investment and any potential, at least, initial dilution?

David Kirchhoff

What I would say is this, it's still early days. And we're in the process of sort of working with the management team of the JV, as well as with our partner to timeout what expenses are going to be happening when, what's going to be in 2008 versus 2009? What I would say right this red hot second is that first-off, I'll point out that the good news with a joint venture like this is that we'll be sharing expenses 51/49 with our partner.

And given that and given everything I'm seeing, I cannot imagine that we'd be spending anything more and probably less than $5 million in 2008. But it's still early days and we'll probably get back to more specifics on future calls.

Jerry Herman - Stifel Nicolaus

Okay. Great. Thanks, guys.


Thank you. The question is from Chris Ferrara from Merrill Lynch. Please go ahead.

Chris Ferrara - Merrill Lynch

Hi, thanks for taking a follow-up. Is the Monthly Pass cash accretive to gross margin yet as a concept that like across the company?

Ann Sardini

I think you saw that our Monthly gross margin is up about 70 basis points on the quarter and the year, and it's largely coming from North America from Monthly Pass.

David Kirchhoff

Yeah, it is.

Chris Ferrara - Merrill Lynch

Got it. Thanks. And then just on the penetration levels, I think you said in the prepared comments that you wanted to improve the penetration levels of Monthly Pass in NACO. But again, I apologize if you said this, but what was the penetration level in the quarter? And can you drive the penetration level higher in the backup of declining attendances of that or those are not really related in that way?

David Kirchhoff

Yeah, I'd say they are not connected. I do think we can drive. I mean what I've said before is that the attendance thing that you're referring to is more a function of bringing new noses into the door, if you will, which doesn't have, is not necessarily or is not related to our ability to get the people who do come into the door, directed toward our best and lowest price plan, which is Monthly Pass.

There's lots of different techniques and maybe graded things that we're going to be doing to make sure that we continue driving members to Monthly Pass, again, because we think if we can get them on Monthly Pass and we can get them using the meetings and e-tools and everything else, we have a real shot at significantly increasing with our success.

Chris Ferrara - Merrill Lynch

Got it. Thanks a lot.

David Kirchhoff



Thank you. The next question is from Michael Binetti from UBS. Please go ahead.

Michael Binetti - UBS

Hi, guys. Thanks for taking the follow-up. Just a quick question on China, and I had one other tactical question. The China business, could you give us a little hint as to what that business is going to look like? Is it going to be a meeting business like you see here in the US or is it going to be licensing to known products or some mix of the two? I am just curious on that.

David Kirchhoff

Well, I'll first-off make the statement that particularly with a market like China, my sensitivity over competitive issues is heightened, if you will. And so, from that point of view, I don't want to go on into too much specifics, but I would say that the concept that we're focusing on in China would more closely resemble the primary business we're in, which is helping people lose weight as opposed to having a primary focus on licensed products.

Michael Binetti - UBS

Okay, thank you. And then I guess, maybe you can help us understand directionally if you see, I'm curious about kind of the regional transitioning in the U.S. Some of the consumers in retail companies have been affording a pocket of sluggishness and in some of the areas that had been in the headlines as far as the consumer slowdown, perhaps California, Florida. Have you seen I guess trends on a regional basis that have stood out to in those types of areas?

David Kirchhoff

It's an interesting question, normally we don't talk about regional trends within the NACO business, but noting in particular comes to mind in terms of any individual states being or regions being weak or soft.

Michael Binetti - UBS

Okay. And do you feel that you benefited maybe at all from some of the L.A. weight loss centers that we saw have been closing down lately in the quarter?

David Kirchhoff

I don't know. I mean I think that again it kind of goes back to who is your target market and I think our view is that I'm thinking you are referring to weight loss overall business if I understand that right.

Michael Binetti - UBS


David Kirchhoff

Again I think that that's appealing to kind of a different market segment than what we typically see has been our experience with L.A. weight loss; I mean they tend to be more a peripheral competitor to us because I think that they are going after a slightly different person.

And so I don't think that we've seen anything in particular. Now certainly we've working with them, as per weight loss have been working with a number of different companies to make sure that if there are people who are attending pure weight loss, if you go to the website Weight Watchers is visibly present. So that those people do have a place to go to, but I haven't seen any evidence that is driving any kind of meaningful volume to us.

Michael Binetti - UBS

Thanks again.


Thank you. The next question is from Scott Mushkin from Banc of America Securities. Please go ahead.

Scott Mushkin - Banc of America Securities

Thanks for taking a follow-up. So listen David I am sitting here, listening to this call, and kind of I guess I am a little depressed in the sense that you guys had great financial performance and the outlook for the next year looks pretty strong financially. But we are sitting here with, I think what everyone is probably thinking is a nickel business where attendance is, I guess you said, you are expecting down, mid-to-high single digits on attendance. I guess on just -- but at the same time you said that, total usage of Weight Watchers is actually up if you put dotcom in there. And so I am starting to wonder is it time that we did a, soul search on this meeting business and may be took a different approach.

David Kirchhoff

It is not a crazy question but I don’t look at it that way at all, and for the following reason. It is very simply the case that, having the meeting business without the benefit of any kind of significant news going into the fourth year is going to take a toll. We saw last year in Continental Europe and we are seeing what happens in Continental Europe when we did introduce a program, at least in the first two weeks of the year.

And so I really do have confidence that we can continue driving interest back in that part for the business. The other point out there, that I want to point out, and it is hard for me to express it enough, is that when you take Monthly Pass and you have both the benefits of the meeting and the benefit of the internet tools that really is a different proposition.

So I think that, I definitely wouldn't put meetings in kind of that, it is going away, box in any way, shape or form. It is just that online happens to be doing really well because it is allowing us to penetrate into a brand new target market for us.

And so, and I spend -- and Scott as you know, I spend a lot of time, out at meetings, out on the field, a lot of time with members, and the things that I am consistently seeing is we are having great success and I am seeing, younger people and older people, and I am seeing all sorts of different folks.

And so what I see is basically a business that just needs the right catalyst and it needs the right efforts, to bring it to a new place that is going to give us much more meaningful news that’s going result in more people coming in having better success and then the engine starts running again in terms of getting more new people on the door.

And in the mean time its just happens to be that we are also keeping the brand vital because we do have folks, the online business and the meetings business which collectively we continue to grow kind of overall net consumer interest and Weight Watchers year-over-year.

Scott Mushkin - Banc of America Securities

Yeah I mean, I guess I have taken this, may be, less with more or more with less, more less meetings, may be more formalized meetings, more centers, I mean that type of stuff. We talking for about how, a lot of ways these meetings are throwbacks of the 70s and 80s in the way they are structured and kind of the flip charts and all that kind of stuff and I guess that was the genesis of my question?

David Kirchhoff

I don’t agree with the characterization and now granted I have the benefit of the consumer research, that I can’t point to what you referencing as any particular issue with meetings at all.

Now let me finish, I am sorry, what I do think is absolutely what, I haven't talked about because I don’t have anything specific to share but clearly as you do all these consumer work and you get all these insights. I mean what I say after the graphic we literally we are following 45 members, month-in and month-out they went to the process.

When I say segmentation, it was a just massive and exhaustive study. The things we know now about what works really well and the things we know about what’s going to make the work it even better is very important to us and its what its going to allow us to do when the first thing that I am talking about is the fact that we are going to put out program innovation that we think is going to have a significant impact.

The other thing I'd point out is that it also opens the door for us to evaluate, what is the optimal service offering? How can and should our meetings evolve? How do we make it more effective and more efficacious for the members that are coming to it? I don't think that has anything to do with meetings being irrelevant per se because I don't agree with that. But I do think that we have no shortage of ideas now in terms of some of the things we need to do to make things stronger.

Scott Mushkin - Banc of America Securities

Alright, thanks. Thanks for considering my questions, I appreciate it.

David Kirchhoff



Thank you there are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Kirchhoff.

David Kirchhoff

Thank you for joining us today and I look forward to speaking with you at our next earnings call.


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

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