Weight Watchers International Inc (WTW)

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Weight Watchers International (WTW)

Q4 2012 Earnings Call

February 13, 2013 5:00 pm ET

Executives

Lori Scherwin

David P. Kirchhoff - Chief Executive Officer, Acting President of North America, Executive Director and Chief Executive Officer of Weightwatchers Com

Nicholas P. Hotchkin - Chief Financial Officer and Principal Accounting Officer

Analysts

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Brian Wang - Barclays Capital, Research Division

Peter Wahlstrom - Morningstar Inc., Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Olivia Tong - BofA Merrill Lynch, Research Division

Presentation

Operator

Welcome to Weight Watchers International Fourth Quarter and Full Year 2012 Earnings Teleconference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, February 13, 2013.

I would now 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 Fourth Quarter 2012 Conference Call. With us on the call is David Kirchhoff, Chief Executive Officer; and Nick Hotchkin, Chief Financial Officer.

At about 4:00 p.m. Eastern Time today, the company issued a press release reporting the fourth quarter and full year financial results of fiscal 2012. The purpose of this call is to provide investors with some further details regarding the company's financial results as well as to provide a general update on the company's progress. The press release is available on the company's corporate website located at www.weightwatchersinternational.com. Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are also available as part of the press release.

Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the SEC. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements.

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

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

David P. Kirchhoff

Good afternoon and thank you for joining us as we review Weight Watchers International's performance for the fourth quarter of fiscal 2012.

Overall, our fourth quarter results exceeded our incoming expectations. While Nick will provide more details on our Q4 results, at a high level, Q4 2012 EPS was $1.03 on an as-reported basis and $0.96, excluding a $0.07 benefit from the U.K. tax settlement that Nick will discuss later. This compares favorably with an EPS of $0.86 in Q4 2011.

On a constant currency basis, Q4 2012 total revenues was up 1.7% over the prior-year period, with meeting fees down 3.5%, in-meeting product sales flat and Internet revenue up 18%. Global combined paid weeks were up 4.5% in Q4 2012 versus the same period last year. Global meetings paid weeks were down 7.9% in Q4, while global paid weeks for our online product were up 18%. Before Nick reviews our financial results in greater detail, I'd like to provide perspective on early trends we're seeing in 2013.

In early December of 2012, we launched our new program named Weight Watchers 360 in North America, with different names in other regions. The design principle of this new program was to build upon the PointsPlus program, which was rooted in tracking, by incorporating additional tools and support that encourage our members to create healthier food environments and to help them focus on habitualizing the underlying behaviors of the healthy lifestyle. This methodology was designed to help our members not just lose their weight but also to develop the skills necessary to maintain their weight loss. The program was designed to further improve member results and provide further differentiation of our underlying program. Early feedback from staff and members was encouraging.

While we did see some improvement in recruitment trends when we soft-launched the program in December, this early momentum has not sustained itself. In fact, in January and into the first part of February, we have seen double-digit declines in recruitment versus prior across both our U.S. meetings and U.S. Weight Watchers Online businesses. While we fully expected our decision not to run a men's-focused advertising campaign this year will cost us in recruitment growth in our U.S. Weight Watchers Online business, this only partially explains the weakness in that business.

Needless to say, we're not happy with the trends we're seeing. Clearly in the U.S., we've not gotten the traction we expected, particularly with never-members from the Weight Watchers 360 launch. While we believe we've gotten cut through with our new advertising campaign, we have reason to believe that our January ads lacked the persuasion we needed.

The focal points of the new advertising campaign were the program news as well as sharing the success of our newest spokesperson, Jessica Simpson. Jessica had terrific success in the program, losing 50 pounds since she began in the summer, and we were thrilled to share that news with the public. However, as we approach the end of the year, we became aware that Jessica had become pregnant, which required us to take steps to adjust our advertising campaign. While we could not be happier for Jessica and her family, the news and the gossip around her pregnancy may have overshadowed any focus on her weight loss success.

As well, although we believe that the new Weight Watchers 360 program will create a much stronger behavior change platform for us, its benefits have proven difficult to communicate in a quick, compelling way, particularly for someone who does not know Weight Watchers. The team is working hard to develop a more compelling advertising for the spring campaign.

Our Weight Watchers Online advertising has done a great job over the past few years of creating awareness for losing weight online and driving trial of our online product by advertising the fact that you could lose weight successfully online. This worked well for us over multiple years, a time during which there was no meaningful competitive online alternative.

Over the past year, however, there's been an increase in proliferation of free applications, and Google Trends metrics indicate that consumer interest in these apps is up significantly this January. It's now clear that the weightwatchers.com awareness-driving strategy that has been so successful at driving millions of people in the weightwatchers.com started losing some effectiveness roughly 6 months ago. We now need to shift gears to leverage the groundswell of people interested in weight loss mobility tools by communicating the full value proposition of Weight Watchers Online, and the behavior modification approach on which it's based.

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