WW International, Inc. (WW) Q4 2012 Earnings Report, Transcript and Summary

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.

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.

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. Our new goal is to convince the growing number of people who are inclined to seek online weight loss help that if they're going to invest their time and effort in trying to lose weight online, they should invest in the best method: Weight Watchers. What we've been seeing this January is softness in never-member recruitment in Weight Watchers Online but continuing strength in recruiting rejoins and continuing strength in retention. To us this reflects the fact that people who have used Weight Watchers Online, and are therefore aware of the value proposition, are choosing to come back rather than turning to free apps. However, as to those who have not yet experienced the value proposition, we have not connected with them with our marketing. It is the combination of our trusted brand, our program built on 50 years of accumulated intellectual property and behavioral and nutritional science, and our ability to aggressively develop enabling technologies to allow consumers to access that program, that constitutes a value proposition that no one else can match. Years of high satisfaction score and weight loss success are the hallmark of the Weight Watchers Online product. The indications that we're seeing from many of these free apps is that, while they're frequently downloaded, they often are used only a few times and then sit idly on the consumer's device. In this context, the modest investment of $18.95 per month for Weight Watchers should be an easy decision for any consumer to make to get the delivery of actual weight loss success, which is ultimately what wins in the marketplace. Finally, one of our concerns going into the new year was what impact falling off the fiscal cliff would have on U.S. consumer confidence resulting from what would have been a broad-based tax increase. While the worst of that was avoided, the payroll tax holiday expired and consumers saw their paychecks shrink by mid January. Indications are that consumer confidence dropped significantly in January, which is the macro indicator most closely correlated with Weight Watchers recruitment. Suffice it to say, the timing was less than ideal for us. On the positive side, B2B in the U.S. has stabilized in the small accounts business and continues to grow nicely in the strategic accounts business. The news has also been somewhat better in CE in the U.K. The Weight Watchers Online business in those regions has been strong for the first 6 weeks of the year. However, the meetings business, particularly in the U.K. and Germany, has been buffeted by severe weather, so enrollments during 3 of the 4 key weeks of January were down significantly. The teams are taking steps to attract people that otherwise would have joined earlier, but the exercise of making up for a weak January has always proven to be very difficult with our business. Nick will now walk through more of the specifics on the fourth quarter along with some additional forecast data for 2013.

Thanks, Dave, and good afternoon, everyone. As Dave referenced, in the fourth quarter, we realized a $0.07 of EPS benefit from the settlement of our U.K. tax litigation. Recall that between 2009 and 2011, we had recorded a reserve of approximately $44 million but we ultimately settled for about $36 million. All of my subsequent remarks today will exclude this benefit from P&L comparisons. Now onto fourth quarter business performance, starting with weightwatchers.com. Fourth quarter Internet revenues rose 18% on a constant currency basis. Paid weeks also grew 18% in Q4, with double-digit growth in both the U.S. and international. Germany and Canada continued standout performance on the heels of first-time TV marketing. Sign-up growth was positive in the U.S., Canada and Continental Europe, offset by flattish performance in the U.K. End-of-period active subscribers were also up 18% as compared with end of year 2011. This is somewhat better than our earlier expectations, with a late quarter pickup in sign-ups in the U.S. and robust growth in Continental Europe. And after several quarters of softness, U.K. sign-up trends began to stabilize. Within the meetings business, total NACO revenue in the fourth quarter 2012 was down 2% versus the same period in fiscal 2011. This represents moderation versus the declines witnessed in the first 9 months of the year. NACO fourth quarter 2012 paid weeks declined 7.3%, while attendance declined 14.5% versus the prior-year period. We continue to estimate that Hurricane Sandy had an approximately 2% impact on NACO volumes. In-meeting product sales grew 6.1% versus Q4 2011, as an increase in product sales per attendee offset lower attendance. Next, the U.K. meetings business. The business continued to witness volume and revenue declines versus prior, and that accelerating rates in Q4 as compared to the first 9 months of 2012. Fourth quarter paid weeks declined 17.8% versus the prior-year period and attendances were down 21.9% versus prior, in line with our guidance. Finally, the Continental Europe meetings business. Our Q4 2012 results were in line with our expectations. Paid weeks grew 9% versus prior and attendances were up 1% versus prior, benefiting from marketing and program use. Our other revenues, which include franchise commissions and licensing revenue, declined 9.3% on a constant currency basis in Q4 versus the same period last year. Licensing saw sales growth, benefiting from new product licenses and an expanded product line in existing categories, including yoga and canned goods, but franchise commissions, publishing and the magazine were down. Now for some key financial metrics for the quarter. In Q4, gross margin rose 30 basis points to 56.5%, driven by a mix shift towards weightwatchers.com as well as accretion within weightwatchers.com, partially offset by erosion in the meetings business. Pressure in the meetings business remains a function of softer volume as well as onetime expenses associated with the call center upgrade and the impact of onetime expenses and the depreciation associated with our ongoing retail upgrade. Separately, we refined our approach to recording rent expense with a onetime negative gross margin impact of 50 basis points, but without any cash flow impact. Meetings pricing, as measured by lecture income per paid week, was up about 4.8% on a constant currency basis in Q4, an improvement relative to earlier in the year, as we started to realize more benefits from the meetings business price increases taken at the end of 2011, particularly in NACO. At the end of Q4, 64% of active NACO Monthly Pass subscribers were on the higher price, and 78% in the case of U.S. Weight Watchers Online. Marketing spend was up approximately 6% in the fourth quarter or up 60 basis points as a percent of sales as we geared up for our January campaign. G&A expense rose 21% in Q4 or up 230 basis points as a percent of sales as we continue to invest in our growth initiative, including B2B, technology and customer relationship management. Higher medical claims this quarter and the impact of an accrual reversal in 2011 were also factors. As a result of the factors I've just discussed, our total company Q4 operating income declined 7.4% on a constant currency basis, with reported OI margin down 270 basis points versus the prior-year period to 26.5%. Our Q4 tax rate was 36.8%, below our expectation of 38.5%, driven largely by a onetime true-up on Canada's tax rate. In the quarter, foreign currency impact was negligible on our results. Now some color on the outlook for 2013. In online, we saw a spike in recruitment when we launched Weight Watchers 360, and early into 2013. But overall, as Dave indicated, year-to-date weightwatchers.com 2013 sign-up trends have been disappointing. For the year, we are assuming that weightwatchers.com paid weeks will be flat to slightly positive versus prior year. In the first quarter, which benefits from a higher incoming active base versus the year ago, we are assuming mid to high single-digit flow. Similar to weightwatchers.com, we saw some strengthening in NACO enrollments when we launched Weight Watchers 360. However, given disappointing recruitment results to start the year, we are also assuming -- we are assuming full year and Q1 attendances and paid weeks will decline in the low to mid-teens. At the end of December, we purchased our Memphis franchise for $10 million. Impact on Q4 and 2013 is negligible. In late January of this year, we signed an agreement to purchase the Alberta-Saskatchewan region of Canada for approximately $36 million. We continue to believe that franchise acquisitions, when we can buy them at an appropriate price, represent a great use of free cash flow given the strategic and financial value and we will continue to do these opportunistically. The U.K. marketing campaign is better than last year's, and we also saw strength in this market when we launched Weight Watchers 360 in December. Unfortunately, challenging weather conditions, and a similar macro backdrop as in the U.S., have taken a toll on early 2013 results in our key campaign season. As a result, we are assuming mid- to high-teens declines in the first quarter attendance and paid weeks, given the lower incoming active base, with full year 2013 decline improving to a negative high-single to low double-digit. Weather has also been a factor year-to-date in Continental Europe, particularly in Germany, and our outlook is for paid weeks and attendances to be flat to down slightly. Moving down to P&L. Gross margins are assumed to decline 200 to 300 basis points, with Q1's decline in the neighborhood of negative 200 basis points given the volume outlook. We are therefore committed to realizing several opportunities to improve our cost structure. More on that shortly when we discuss G&A. We are currently assuming that marketing expense will decline by $25 million plus for the full year. This decline is consistent with our previously communicated release that we have identified marketing efficiencies, most notably in digital. Note the large majority of this spend reduction falls outside of Q1, so we do not believe this is a key driver of year-to-date volume softness, aside from the elimination of a U.S. men's campaign. As you'd expect, given our current volume outlook, we have kicked off a process that scrutinized all areas of expense. And we are taking a 0 base approach. Over several years, we have experienced cost creep in both G&A and operating expenses. And we believe we have significant opportunities to be more efficient with our spend going forward. There are several areas of focus, including reducing professional fees and consulting, negotiating better terms with vendors and optimizing our call center spend. Every part of our business has a mandate to work for the corporate team in identifying and then realizing savings to, first and foremost, fund our future growth initiatives, such as B2B and technology, but also to help mitigate weakness across our core business. More to come on this cost program on future calls in terms of savings and timing. Prior to the impacted savings from this initiative, we are assuming an increase in G&A of 250 to 300 basis points as a percent of sales, half of which is coming from B2B and technology investments. Below the line for the year, we expect a share count of 56 million, a tax rate of 38.5% and interest expense of $85 million to $90 million. For 2013, we expect to spend about $70 million on CapEx, down from around $80 million last year. This includes roughly $20 million related to our headquarters move, offset by the near completion of the U.S. retail initiative. D&A for the year should be about $45 million. We ended 2012 with approximately $2.3 billion in net debt and a 4.2x net debt-to-EBITDA leverage ratio. Our overall priorities for cash flow remain unchanged: Invest in our growth initiatives; opportunistically execute franchise acquisitions; reduce our debt levels; and return cash to shareholders through our quarterly dividend. I'll now turn this back to Dave.

Thanks, Nick. We see an incredible world of opportunity for Weight Watchers, but we're far from satisfied with our near-term results. We know that the process of getting people to proactively step forward and make a fundamental change in their lives is not easy. Lifestyle change and sustainable weight loss take work and commitment. Weight Watchers prides itself on doing right by our members by giving them the tools they need to truly tackle difficult problems and not to promise overnight instant success. Inherent to our category is the reality that consumers often make decisions on hope, so the challenges of the latest quick-fix are always difficult. This is compounded by the fact that our category is also directly impacted by consumer discretionary spend, which has been unfavorable over the past few years. In the short term, we're actively working to adapt our marketing to the reality of our current competitive context. Much of the work in the past 5 years has greatly improved the underlying strength of our brand. Today, we're a much more visible brand with greatly improved image of modernity. This isn't hope on our part but rather based on measured brand scores. According to our tracking study, growing percentages of consumers describe Weight Watchers as "for people like me" and as "a plan that fits my lifestyle" as well as "more modern." We now have a program that is even better suited to longer-term behavior change in ways that are completely unmatched. We believe passionately in our mission and the role for us to play in fighting the obesity epidemic. We see the success of our members every day, and we know that there are many, many more tools that we can bring to bear to help consumers deal with this difficult problem. We can and will grow our B2C business, but it will require us to be much more aggressive in certain areas than have been the case in the past. We still do not appeal to nearly as broad a consumer market as should be the case given the efficacy of our program. Given our combination of science, intellectual property, technology, skills and passionate people on the ground, we have the longer-term opportunity to combine these elements in ways that we had never done before. Doing so will require a greater willingness to depart from the usual ways that Weight Watchers has offered. Group support will always stand at the core of our offering, but we have the opportunity to also create versions of Weight Watchers that allow us to appeal to a wider customer base. We can do all this in a way where we can simultaneously increase our consumer appeal, while more directly tapping into the true sources of our competitive advantage. We do not believe the emerging technologies of mobility, wearable devices, social media, et cetera, as threats. Rather we view them as valuable tools to leverage with our intellectual property, face-to-face capabilities, expert advice in science and our ability to integrate all the above in novel ways to grow our business and once and for all tackle the obesity epidemic. We will continue to invest behind our B2B health care initiatives, with a particular focus in developing our data collection capabilities and continuing to build out our account management skills. As noted earlier, our strategic business is off to another great double-digit growth start, and our small account business has been stabilizing. We brought in multiple new strategic employer accounts, including the City of Boston, the City of Newark, New Jersey and several major health systems, among others. We will continue to build on that success. Over the last several years, we've been increasing our investment in areas such as technology, B2B and others as a way to pursue a multitude of opportunities. Without rapid top line growth, our G&A as a percentage of revenue is too high. As many of you know, we recently hired Jim Chambers as our Global President and Chief Operating Officer. Jim brings a wealth of experience with significant leadership roles in companies ranging from Nabisco to Cadbury to Kraft. His leadership will allow us to take our impact and execution to an entirely new level of performance. By way of example, I've asked Jim, in partnership with Nick, to take a fresh look at our organization, how it's structured and how we're delivering against our opportunities and objectives. I believe this effort will yield higher organizational performance as well as lower cost. On a separate but related point, after a long and great career with Weight Watchers, Melanie Stubbing, the current President of Europe, will be leaving us in April and moving onto her next chapter. Jim has elected not to replace her in her position but instead to elevate Corrine Pollier, the current GM of France, to lead all Continental Europe and to have Corrine and Andrew Knight, GM of U.K., report directly to him. In addition, Mike Basone, our current CTO and President of weightwatchers.com, has chosen to pursue other opportunities. Mike will be with us until the middle of the year. Mike has been with us since the beginning days of weightwatchers.com. Both Mike and Mel have made huge and enduring positive impacts on our organization and both will be greatly missed. The earnings guidance we will provide reflects the scope of uncertainty that we've seen. Our earnings guidance reflects an assumption that the underlying trends that we're seeing right now will persist through the duration of the year. The impact to the volume will be significant with full year forecasted global meetings attendances and paid week declines in the high-single to low-double-digits. We're assuming flat to slightly positive full year paid weeks growth for Weight Watchers Online business. However, we will show some benefit from higher pricing and continued mix shift toward Monthly Pass. Therefore, we're assuming low-double-digit revenue declines for the full year. We will work to manage marketing and G&A spend in the context of revenue loss, but we will do so without endangering our investment areas. Therefore, we're providing a relatively wide range of EPS guidance for the year of $3.50 to $4, with the lower end assuming no change in recruitment and the higher end reflecting realization of benefits from our cost savings initiatives. We expect to tighten this forecast on our Q1 call when we have greater visibility into volume trends and when we will have quantified our cost reduction opportunities. In the context of the current business environment and our need to focus the team on moving the business forward, we have decided to schedule our Analyst Day for the second half of this year. We're committed to sharing more specifics of our long-term plan with you, including a deep dive in the B2B and other critical growth areas for this business. At this time, operator, I would like to take questions.

[Operator Instructions]

And before we start questions, if I could just make 1 point. I misspoke. On our assumption for revenue for the year, we're assuming low-single-digit revenue declines, not double-digit revenue declines. Thank you for that. Sorry.

[Operator Instructions] Our first question comes from Bob Craig of Stifel. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: David, just broadly speaking, it sounded to me like what we're going to see from Weight Watchers going forward is perhaps a greater strategic emphasis on the online side versus the meetings business? Is that an accurate assessment of what you've been saying?

No. That's not the way I would characterize it. What's interesting, Bob, is that historically, up to now, we've been able to operate effectively with 2 offerings: Monthly Pass and Weight Watchers Online. In both, we've been able to add value to both, Monthly Pass, particularly through retention, increasing retention in meetings business. And Weight Watchers Online has given us an effective way of bringing in more people into the commercial dieting space. But what's really been happening particularly over the past year is that there, this notion of dieting online is really taking hold and people are now using not just Weight Watchers but pursuing a variety of other approaches, albeit one that, I believe, are generally going to be less effective for them. I think what we see going forward is an opportunity to sort of break free of the historic approach of being purely focused on having a purely online offering and a purely meetings offering that includes an online component and doing variations of the above that make differing advantages of the components we have in face-to-face interaction, our underlying science and everything else, to conceive of entirely kind of new versions, if you will, of Weight Watchers that build upon what we do, that allow us to kind of spread our offering out to appeal to a wider range of consumers. I think one thing that's -- a really important point to make, and this was seen in a recent independent academic study in the Journal of Internal Medicine but it's also borne out by a lot of our internal research, is that when you look at what actually drives efficacy in terms of successful outcomes, what we see is that the things such as apps in online and Internet offerings really reach their full potential when combined with human face-to-face interaction. And it's really the combining of all of these elements that you have the greatest outcomes in terms of weight loss success. And we believe that over time, that this is the most critical thing for us to focus on. So I continue to actually believe more and more that face-to-face elements are going to be an even in some respect bigger part of kind of who we are. I just think it's going to take evidence potentially in forms above and beyond the traditional group support. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: That's helpful. Second question is what are your thoughts, David, on trying to enhance affordability in this kind of environment? I know that obviously you had price increases that you've taken over the last 18 months. I don't know whether that's -- been a detrimental -- had a detrimental impact on attendance. But any thoughts on increasing promotional activity or potentially even using some temporary price rollbacks?

Here's kind of the way I look at price, which is obviously in the context of value. When I think about value, the good news, if you will, for us across both Weight Watchers Online as well as with meetings is that the recruitment issues we're facing is not from rejoins. In fact, if I look at the U.S. online business, which is -- had kind of the toughest time of all our online markets, Weight Watchers rejoin activity, if you will, returning subscribers was up nicely over prior year, as well. Retention has really held up very nicely over the course of the past number of years including the worst of the Great Recession. And then finally, if I look at scores that our members and subscribers give us in terms of perceived value, they remain as high as they've ever been. So what that tells me is that once we get people going into the program, we don't have an issue from a value recognition point of view. Now I do think that a challenge that we're facing right now is clearly therefore on trial, driving trial into Weight Watchers, particularly for people who have never used us before. And given the context of difficult economic circumstances and the fact that there's these things like free apps and those types of things, I think it's putting additional pressure on us to think of new and better ways to convey our message and market our message and communicate our value proposition. But I wouldn't rule out the possibility that there are ways of us thinking about better and more effective ways to promote the product that could also stimulate trial. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Last one for me and I'll it over. Where are you versus where you think you need to be in terms of internal infrastructure to be able to grow the B2B business, the large corporate business?

We've made great progress in the past year. And that team is really coming together nicely. We made a couple of great hires. We're continuing to build out the technology infrastructure. That's probably the hardest part of this, is really making sure that we have the data collection and capture capability to service the needs of some of these large accounts. It's our expectation that -- so what we're doing with that is we're in the process of rolling out laptop computers in sort of what we call travel locations, including locations on the work site. Our plan is right now, this year, to roll out about 500 of those, which, among other things, would allow us to cover the top 25 strategic accounts -- or 25 of the top strategic accounts by the end of the year and that's really a learning platform that we can then take into the next year. And at the same time, even in the context of managing costs in G&A much more closely, we're making sure that we properly cordon off certain investment areas to make sure that they're getting the adequate oxygen they need to continue building out so we can capture this opportunity. I'll continue to make the point that on the health care side of the opportunity set, the more time we spend talking to people, ranging from employers to health systems to insurance companies and everything else, the more we see that there's a tremendous pent-up need, that as the health care world shifts from pay per -- fee-for-service to population health or capitated models, then that is going to drive demand for preventive care services. And in that market, if you look at our 80-plus clinical studies, the fact that we're low-cost and the fact that we have a fully scaled up solution puts us in a position to have significant differentiation from many other obesity treatment out there. I think it's absolutely crucial that we keep pace on making sure that we're continuing to build out what we have to do for that opportunity set so we can grow into that while at the same time reenergizing our B2C business.

Our next question comes from Glen Santangelo from Credit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: David, I'm just kind of curious. Based on the trends that you've seen now through the first 6 weeks of the year, could you -- it sounds like you're forecasting paid weeks in attendance on average between NACO and international down kind of low-double-digits, and so I'm curious if you could speak maybe to the conservatism of your new outlook, particularly on the context that it sounds like you're going to be trimming your marketing expectations from your -- or your marketing dollars from your original expectations. And I'm kind of curious as to, given that you're disappointed with the enrollment to date, I mean, does it make sense to trim those marketing expenses at this point in time?

Yes, I should probably clarify that a little bit. So first off, in terms of our expectation, I mean, it's always, obviously, a tricky time of year for us to forecast the full year because we're literally -- if I kind of look at where the business has been over the past 2 or 3 months, volume trends, both online and meetings, as you heard Nick talk about, all the way through December are actually looking pretty good. And the first week of January was actually quite good, particularly for the U.S. online business. So that looks so -- things were looking up. And it really wasn't until the second, third week of January that we saw a significant drop. And what we have effectively done in building our forecast is we've assumed that, that depressed level of volume that we've seen in weeks 2 through 5 of the year so far, 2 through 6 really, is going to be persistent over the course -- the full course of the year. So that's effectively the methodology that the forecast is built on. Whether that's conservative or not, I mean, I hope you're right. But we felt that, that was a better way to forecast the volume of the business. Now the marketing point is a little bit of a different point. We're not actually reducing marketing beyond what we were planning on doing when we entered the new year. So nothing is happening in the marketing budget that's in response to the current conditions. The 2 things that are changing in the marketing, principally speaking, 1 is we did make the decision to take 1 year off of our men's awareness driving campaign, mostly because the cost for acquisition we were seeing, particularly in the spring and fall, were not at our levels of expectation in terms of what was profitable marketing spend, which could -- we think arguably is partially a result of the way that we were doing it in terms of creative execution and other things. What we chose to do therefore was, rather than, for example, advertising Weight Watchers for men in January, what we chose to do instead was to shift some of that marketing, not all of it but some of that marketing support behind the German Weight Watchers Online campaign. But nonetheless, our expectation for the year is that taking out the men's marketing does reduce some of the marketing pressure, and that was always in the plan. The other part of the plan is reducing the amount of money we spend on banner advertising specifically. And our reason for that is not because we're worried about managing our marketing budget in the context of what's happening with the overall P&L, but it was more driven out of a recognition we had that we were increasingly coming to the conclusion that the CPA, the cost per acquisition associated with many of banner ads, were worth anything significantly understated, and therefore were not economic for us to do, i.e., we were losing money on them. And so what we're effectively doing is, in the reduction of digital advertising, we're eliminating nonproductive spend because it just wasn't driving nearly enough volume for the cost of getting that volume. So that was the assumption based on our analysis going into the year. And if you actually look at the volume trends we're seeing, Nick alluded to in January, the impact of that shift in digital strategy really doesn't hit until Q2, 3 and 4. And the reason for that is that organic demand during those last 3 quarters is generally going to be less, which means banner ads that were a little bit suspect under normal circumstances suddenly become much more suspect. So the way I would actually express it is that if we see opportunities to get into the market with advertising and marketing that we believe is going to deliver at a cost effective CPA, we will absolutely spend that money. So we actually continue to have appetite to look for new ways of investing marketing dollars, but what we're doing is we're applying perhaps an even greater level of discipline in making sure that we're getting the right ROI out of what we do. So I think the opportunity for us is to find better and more effective marketing vehicles so that we can have reason to spend more money. Glen J. Santangelo - Crédit Suisse AG, Research Division: I appreciate all that color. Maybe if I could just ask 1 quick follow-up. You kind of commented on sort of the increasingly competitive online landscape. And sort of given the proliferation of all of these online apps, how do you think about the sustainability of those growth trends, what you've seen in the dot-com business? Now it sounds like based on your expectations, you've sort of tempered that growth outlook for 2013, I'm guessing that's somewhat consistent with what you've seen in the first 6 weeks of the year, but do you still feel confident that, despite all that increased competition, you should still be able to grow this business year-over-year, not only in '13 but as you look out over the next couple of years?

We do, for the following reasons. Fundamentally, the thing that I take the most heart in is that after years of having people actively subscribing to and paying for Weight Watchers Online, they see tremendous value in it and they have great success on it, which is the thing that ultimately matters. And again, we've seen this in satisfaction studies we do multiple times per year, every year. We see this in the fact that actually -- one way of thinking about this is that if there was an issue with the value proposition for Weight Watchers Online, we wouldn't be seeing repeat activity, because those people would naturally sort of be gravitating towards other options, presumably things like free apps. But that's not actually the phenomena we're seeing. People are absolutely coming back to us. And furthermore, we haven't seen any loss in retention. So I mean, that's what leads us to the point of view that the value proposition remains strong. I think what you're seeing happen is that -- and we've seen this kind of anecdotally, including industry references across a wide range of a lot of these self-tracking help apps, is that there's a tendency for people to download them onto their device, and in many or most cases use them a few times and then stop using them. The impact of that on us, short term, is that, that effectively takes that person out of the mix. Now the fact that they ultimately haven't lost weight means that they're still going to have a weight problem, in that, they're still going to come back to us. And I think the thing that I want to keep emphasizing is that when you talk to a Weight Watchers Online subscriber and say what is it that you're buying when you get Weight Watchers Online, they will say, first and foremost, they're doing Weight Watchers and the technology is something that enables the possibility of doing Weight Watchers in an online context, but they're buying the program basically. And so when I kind of come back to the value proposition and the things that we can do to both improve how we communicate it but also the things that we can and are going to be doing to continue making it better and better both this year and in the years to come in ways that I think are going to be difficult for 6 guys in a box compete for the match, that I think we're going to be in a position that, that business gets stronger. Now 1 way to think about this is the paid weeks for Weight Watchers Online are roughly comparable to the paid weeks for the meetings business, yet the Weight Watchers Online product has a considerably lower price point, which on that basis alone would suggest that there's headroom for growth. I think that it's effectively -- to me, this in some respects sort of similar to, for example, writing a low carb label, if you want to think of it that way. There's part of this, which is the trial wait, that we have to kind of get through with a lot of these apps. But I think we view it as an opportunity to kind of up our game in terms of what innovation in that product looks like and how we drive it going forward as well as how we market it.

Glen, if I could just add 1 more thing to this marketing conversation. We looked at our guidance for '13, actually view it on the context of what '12 was, we spent $344 million of marketing in 2012 and a high watermark of 18.8% of sales. And so that's why partly, why we think there's opportunity to look for pragmatic sensible efficiencies without of course doing anything to choke off recruitments.

Our next question comes from Brian Wang of Barclays.

The first question I have is sort of a follow-up on some of the other questions that have already been asked. But I guess do you think 1 of the issues in the year-to-date trend is that the new Weight Watchers 360 program wasn't a big enough change or upgrade? And is there any way to know that the year-to-date weakness is being caused by the weak advertising methods rather than other country-specific issues such as potential in the program?

Yes. It's a great question. And I think one way to think about what we call program innovation or new programs is that there are some changes that we make which are designed to improve the process and be more effective once somebody has already started. And there are others that are designed to make Weight Watchers feel more acceptable and more appealing. So I'll give you a couple of obvious examples of the latter, which is when we launched points and moved away from food exchanges, it greatly expanded our potential audience by creating a virtual Weight Watchers that was very simple and sort of much more accessible to people that were living on the go. When we launched Weight Watchers Online, which is an innovation in it's own right, it basically gave people a way of doing Weight Watchers but allowed them to have the option of doing it online, and that brought a lot of new people into the brand. PointsPlus, similarly, was very kind of catchy in that there was these sort of pre-approved, new formula, more nutrition-based, more nutritious, that was very -- it leant itself to word-of-mouth and it was a good trial vehicle. I think what we learned with Weight Watchers 360 is that we were very focused and almost single-minded in our design of improving the behavior change techniques for people once they started. And our assumption was that if we were really good at doing that, that we could somehow find a way to like come up with a catchy way of marketing it so that people would sort of get it. I think what you'll see with Weight Watchers 360 and what we've seen from our tracking studies is that people definitely know that Weight Watchers has a new program, but they have no idea what it is. And for a person who doesn't know Weight Watchers, what we couldn't find was that kind of singular grabby way that would really sort of ignite their interest and drive trials. And I think that sometimes that's a little bit endemic when you have a program change that's very much focused on kind of the internals of once you've already started. I mean, and to be honest with you, frankly, if I look at Weight Watchers 360, in some respects, it gets stronger as you get closer to your goal. And actually it's a great way of helping people think for maintenance, but that's a long way from someone who's just starting. So I think what we learned from this is that we were hopeful with this new program that we could find a way of therefore communicating it to create a lot of buzz and excitement to get people who have never done Weight Watchers before to come to us. But we could not find a message in this new program that delivered against that objective. That would have been difficult enough but -- and frankly, we don't have to have program news to get value for marketing. And our intention going into this year was we're going to have both program news and the new advertising campaign featuring a new spokesperson and ambassador. Like, I don't know what the probability that we would be kind of experiencing the conditions we experienced. I mean, Janet's [ph] wonderful for Jessica, and I couldn't be happier for her, but the timing in terms of how it worked with our campaigns couldn't have been much worse. And at that point, literally as we were finding out, we were going into filming and there was just not a thing we could do about it. So we just tried to have -- to make the best that we could. It meant that we kind of had to spend more time basically reverting back to effectively the old advertising creative. So we kind of got a double whammy of a program that didn't really convey and drive a lot of trial interest by itself. And that combined with an advertising campaign that did not provide the newness in advertising that we were hoping to have.

And that sort of leads me to the second question I had. I think you mentioned that you were going to do a new marketing message for the spring? Is that sort of a major revamp? Because I guess last year when U.K. your marketing message missed you needed to wait, I don't think it was 1 full year, but you basically waited about 1 year due to lead times on those campaigns. So if you could just talk a little bit about that, please?

Yes. That's a good point. One of the tricks with the spring is that we also -- because it's just one of those years where things are just happening in a particular way. This was a year with a very early Easter. In fact I think it's the earliest Easter can be. Don't ask me to explain the Gregorian calendar dynamics of how that works. But it's an early Easter, which means we don't have a lot of time between now and when we get our advertising spots out for the spring campaign. What that effectively means is that we can do some changes and tweaks to the advertising, but any place where we feel like our strategy, our underlying strategy, might not be quite right, so, for example, I talked about Weight Watchers Online, means it really limits our ability to do a complete revamp. So what we can do is we can punch certain points a little bit harder, we can change a couple messages up, but it doesn't afford us time to do a complete sort of relaunch, if you will, and come up with an entirely new advertising campaign, but we can do some things on the margin. So I want to kind of temper expectations, which is one of the reasons why we have assumed that the volume trends we're seeing now persist throughout the year. I want to temper expectations of how far we can get in spring but recognize that we're going to be doing kind of a big reevaluation of the strategy that would put us in a better position potentially in fall and certainly by next winter campaign.

Okay. And then just one last one. This one's probably for Nick. Can you please discuss the debt covenants? I guess it's the -- guidance came in at the low end of the range, whether that would sort of trip up any of the debt covenant. Is there any issues there?

Yes, good question. And as you can imagine, as a ex-corporate treasurer who lived through the global financial crisis, covenants and the capital structure is something I look at closely. We've got real strong cash flow. I'm comfortable with our covenants. And the debt market is hard, always open to ways to optimize our capital structure, but no plans at this time and we're very comfortable with our covenants.

Even at the low end, do you think it's fine?

Yes. Look at -- you can do the same math. I can do it but -- yes, I mean, we're basically -- I'm comfortable with our covenants situation.

Our next question comes from Peter Wahlstrom of Morningstar Investment.

Circling back to the online topic, are you seeing more competition primarily in the U.S., or is this a global issue where it's equally prevalent in the U.K. and Continental Europe?

It's a great question. We actually see proliferation of applications across the global market. To the extent that it's had impact, the impact seems to be strongest in the U.S. Now I think, one of the things that's worth pointing out is that just in general, the shift of consumer usage around smartphones and tablets is obviously taking lots of organizations by surprise. I'm not -- I think the rates of adoption have been fairly consistent across most of the Western economies. So again, what is worth noting is that the online business in Europe is running ahead of prior after comping a good year. So I think that's a positive sign, despite the fact they also have some pre-app competition. It may not be quite as intense as what we're seeing in the U.S. where it can, basically, the U.S. app environment can support a lot more players than a country with a smaller population. But I also think that it is worth noting that there's other things at play. I mean, the macro impact of what's going on with the U.S. economy, again it obviously didn't do us any favors, particularly in the context that I just described, the competitive context, with the payroll tax going through the beginning of January could not have been worse timing from our perspective. So I think you do have a couple of factors that were sort of working together in an unfortunate way. Again, I view these as opportunities. I don't have any doubt that I've got a better mousetrap with Weight Watchers Online, in terms of helping people systematically deal with the weight issue, than they can get from any 1 singular app. I think the challenge is for us is to use this as an opportunity and a catalyst to be that much more aggressive.

Fair Point. And maybe that ties into -- one of the previous questions was asked about revisiting the pricing model or using promotions. And I guess based on your response, that even though Weight Watchers is set to become more aggressive in the online space, you don't view this as the company is having to make a structural change to a pricing model. Maybe it's a tiered service or something along the lines of all options on the table? Is that fair to say?

I mean, I think there's a lot of options on the table. But I think one of the options that I'm not contemplating is changing the fact that Weight Watchers Online, even at current price point of $18.95 a month, is a great value for the customers that are using it based on what they tell us. I think that the point I was making earlier is that if our challenge is driving trial, and that is our challenge right now, there's -- I think it's a very fair question to say are there -- in addition to having a different marketing strategy/message, are there other things we can think about in terms of promotional strategies that might be more beneficial to driving trial in a competitive context? And I think that is absolutely on the table.

Okay. And taking a step back, when you mentioned that you're seeing success with returning members and retention in contrast to the never-members and maybe some of the online pressures, are you seeing a subtle demographic shift, maybe where you're missing out on a younger individual or a particular income segment of the population?

Not really, although let me take a step back and say we only have, again, 5 or 6 weeks of data for January. So we're not that deep on demographic trends. I would be surprised, but that's 1 of the analyses that we'll be taking a look at. If there was an income effect, the obvious hypothesis would be those people at the lower end of the income spectrum are the ones that are seeing the biggest hit on disposable spending as a result of the payroll tax, because that effectively was a regressive tax increase. And so if there was going to be a place where I thought that was going to have particular impact on it -- on us, I would say it would be for households earning $60,000 to $70,000 or less. But again, I think it's going to be a little while until we have a read on that.

Okay, fair enough. And one last item. In December, Vivus announced better-than-expected prescription growth from its Qsymia product. I'd asked about that a couple quarters ago, but wondering if you're seeing that as having a material impact on either a detractor for new signups or maybe the way that people perceive Weight Watchers?

As I understand it, and I had a chance to listen to the Vivus presentation when I was out at San Francisco at the health care conference, I think they're -- you have to put their trial numbers in the context of what they were expecting and where they are in the distribution strategy. I think if you looked at the sheer number of people getting prescriptions on -- for their weight loss drug, in terms of just absolute numbers, it's pretty tiny right now. So I think what you're hearing from them is more how it compares versus our expectation on a slow rollout. I'll make the point that even in places where Qsymia is getting coverage, as I understand it, you're still looking at a co-pay of $40 or $50 a month. So I think -- and that's where there's coverage. So I think, look, we take every competitive threat, as you've already heard, we take every competitive threat seriously. The other -- I would say though that with these medications that consumers are going to have to pay significant out-of-pocket for them under virtually all circumstances, and certainly compared to the price of Weight Watchers. I'll also continue to make the point that those -- that all of these obesity medications approved or to be approved were predicated as an adjunct to a behavior change effort as opposed to a replacement to a behavior change effort. And so, like a lot of things, we think that this does -- if all these things drive greater interest around behavior change, the question is how do we leverage that increased interest?

Next question comes from Dara Mohsenian of Morgan Stanley.

Dave, I just want to take a step back and get more of a long-term view around the meeting business. Historically, organic attendance in North America has been declining pretty consistently over the last decade except for a couple of years. And obviously, it looks weak again in 2013. And it seems like that goes beyond just the ineffective marketing message you cited. I just want to get your perspective on what the big issues are holding you back on the meeting business, and as you think about the business going forward, are there game changers in terms of how you manage the business that can help reinvigorate growth?

Yes, I think there's a -- I would characterize it the following way. I mean, I would think that, to your point, I would say that when we have the right combination of marketing and program news we're able to drive some pretty nice growth in terms of enrollment activity around the meetings business, specifically I'm talking about 2011. Frankly, even if I looked at recruitment trends in the beginning of 2000 -- at the first half of 2012 for NACO meetings, those enrollment numbers were at or nicely ahead of 2009 and '10, they just had a tough comp. It really was toward the back half of the year that we saw increasing pressure from enrollment activity, and that's obviously continued into this January in the meetings side of the business. I think, from a longer-term perspective, I see a couple of things. First off, I do see a world of Weight Watchers in which there is more in the offering than just online and meetings. So I think that you could see various ways of us leveraging our face-to-face capabilities going forward. I think the reality is, is that every study that comes out again shows that the thing that is most predictive of weight loss outcomes and efficacy are often things that surround -- are surrounded by group support. It works from a behavior change point of view on a multitude of dimensions. And unlike traditional retailers being disintermediated by online options like Amazon and things like that, there's no alternative out there that delivers weight loss outcomes like the combination of group support combined with Internet and apps. So my underlying presumption is that when you have something that does a better job of driving weight-loss success, that there are ultimately ways of driving it. So the trick for us is figuring out how to unlock those opportunities in a B2C context. And again, I think that what I view this, Dara, and this is something that I think, maybe, in some respect, speaks to some of the things that you've written about the company over the years, is that we have to recognize that in some respect that we need to be that much more aggressive in how we innovate and present our overall offering. The other point I would make is that, interestingly, if you look at the Weight Watchers meetings model for example in a B2B context, where things like clinical data and outcomes and measurability and those types of factors become that much more important, and so if you asked me from a longer-term point of view, I think there are things we can do to push and drive the B2C business, but I also view, over time, meetings becoming kind of a lead offering of behavior change for the treatment of things like prediabetes. And so when you move into a health care context, interestingly enough, that part of our business, effectively Monthly Pass and variants thereof, becomes an even more compelling offering for us to have that ends up being the thing that is lower cost than other alternatives that are out in the market. So I think that as I kind of look at it, I've always -- I've expected over the past year that sort of what I'll call lighter versions of Weight Watchers, such as Weight Watchers Online and others, are going to get an increasing percentage of our B2C business and activity. But that kind of the all-singing, all-dancing version of Weight Watchers, which is Monthly Pass, is going to increasingly become the lead horse as we push into B2B health care states.

Okay. And then it clearly sounds like you're focused SG&A efficiencies going forward. Can you discuss what the key areas you're looking at are in terms of potential cost cutting, and if we can expect a more broad restructuring program at some point or if you're focused more on belt tightening?

No, I think it's -- I would kind of put it into 2 or 3 big buckets of activity. I think first off, as we become larger as an organization, we have an increase in cost, but with that also comes an increase in organizational complexity. And I think it's mostly been a function of trying to do a lot of different things at the same time because we have lots and lots of opportunities in different places. I think 1 of the important opportunities we now see in the context of all of this is really tightening up our focus on the bets that we're making and making sure that we resource behind those bets and de-prioritize things that might have been nice to do but frankly aren't as important to our long-term future. And what that allows us to do is, therefore, tighten up organizational focus, and that allows us to reduce cost at the same time. I'll give you a really clean example of this, is that we literally have doubled the amount of money we spent on professional services over the past 3 years, and I'm talking tens of millions of dollars. And I'm not sure that we're getting the return on investment from that incremental spend as I kind of look back at it. So that's an example where I think we can significantly tighten up. We also have to prioritize to get there. So that's kind of the first bucket. The second bucket is that I think we have an opportunity to look at how we're structured as an organization, organizationally, and are there different ways of configuring ourselves that allow us to be both more agile and better at execution, and at the same time do things more efficiently with less cost? Then finally, I think there's always an opportunity, as 1 of my boardroom members refers to it as mowing the grass, which you can use to basically -- if you want to call it belt tightening, which is just taking a fresh look through the entire cost structure and cutting out those activities, leaning harder on vendors, those types of things. But the combination of all those things both reduces cost but also increases organizational effectiveness at the same time. And it's -- our view is not one or the other but both.

Okay. And then on the B2B spending increase in 2013, are you leaving 2013 in more of a sustainable type of spending base? Or should we expect still substantial spending increases on the infrastructure for B2B over time beyond 2013?

I think you can expect the areas of -- and a lot of this obviously is already built into our guidance. It's all, frankly, built into our guidance. But the places where we're increasing spending is, to a certain extent, people, although we now have a nice sort of core B2B team that's currently in place. But frankly, a lot more of where the money is coming from is the process of creating data collection capabilities in our meetings. That's probably the biggest area of spend. And at some point, we reach steady state on that. And I think once we have the data collection capability, the nice thing is that it's a platform that can actually serve a lot of ends: 1, enabling our health care opportunity; but 2, as we're getting real-time data on members as they're coming to us, I think it also creates some opportunities to certain point, tools around customer fragility and these types of things would give us opportunity to increase retention. So we think that the ROI for that activity is going to be very, very strong, we just want to make sure we execute it the right way. In terms of providing kind of a forward look beyond 2013 of the spend behind some of these, we're going to have a little bit more to share. Again, we were hoping to have the investor meeting, the investor conference in the first half, for all the reasons that are probably apparent right now, we need the team focused on the things they focus on right now. But we'll be in a position towards the second half to provide a lot more clarity for what that investment level as well as our expected return against it looks like in '14, '15 and '16.

Our next question comes from Olivia Tong of Bank of America Merrill Lynch.

Why do you think the recruitment trend started off well but then -- in both the meetings and online, and then decelerated quickly after that?

It's a good question. I think the most obvious thing is that when we have the soft launch, we did get some buzz from that. And I think that helped drive recruitment levels a little bit. I do think that there's also this interesting effect in January. If I had to hypothesize it, we're still kind of sifting through the data, but if I had to hypothesize, there are 2 things that were -- that changed in December. One was the macroeconomic. So this is when the payroll tax holiday went through. And I think there have been reports that a number of retailers have been sort of feeling the effect of this in January, but that's purely a January phenomena. Really the impact that people were seeing on their paychecks was happening in the second and third week. I think that explains part of it. I think, frankly -- and yes, January is the time when everybody is trying whatever the new thing is. And so you might generally see increasing pickup of whatever fad or quick fix approach it might be, and so that potentially wasn't doing us any favors. But frankly, most significantly, I think the fact that the messaging around the program and the advertising supporting it not hitting expectations, really you're going to see the effect of that mostly as you get into, like, weeks to and beyond January. And I think that's exactly what we're seeing. So we're just -- we're not getting the lift from our marketing that we would otherwise have gotten had things gone differently in terms of both the program having a connecting hook with the never-member as well as the impact of the advertising.

Got it. And then in terms of your guidance, you guys said that you've obviously got a pretty big range there, and you typically start the year with a pretty big range. But can you give a little bit more color in terms of what your expectations are on the bottom end versus the top end in terms of recruitment and then also on the cost saves, relatively speaking?

Yes, look, on the lower end of our guidance, essentially that the trends that we're seeing right now in recruitment have set throughout the year, duration of the year on the high end of the guidance. It incorporates the benefits of our lower prioritization and lower cost reduction activities that Dave's described, and that we kicked off last week with the team.

Last question that we have for today. I would like to turn the meeting back over to Mr. Kirchhoff.

Thanks. In summary, while the near term is challenging, we have experienced similar challenges in the past and have overcome them each time, and we will do so again this time. I look forward to speaking with you again at our next quarterly earnings release. Thanks very much.

The conference has now ended. Please disconnect your lines. We thank you for your participation.