WW International Inc (WW) 2007 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, welcome to Weight Watchers International First Quarter 2007 Earnings Teleconference Call.

  • [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded today, May 3rd, 2007.

  • At this time, I would like to turn the call over to Sarika Sahni of Weight Watchers International.

  • Please go ahead.

  • Sarika Sahni - Manager, Investor Relations

  • Thank you, Jean and thank you everyone for joining us today.

  • With us on the call are David Kirchhoff, the President and Chief Executive Officer of Weight Watchers International and Ann Sardini, the Chief Financial Officer.

  • At about 4 p.m., Eastern Time today the Company issued a press release containing financial results for the first quarter of 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 everybody 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 a result of new information, future events or otherwise.

  • Now with that, I'll turn the call over to Mr.

  • Kirchhoff.

  • Please go ahead, David.

  • David Kirchhoff - President & CEO

  • Good afternoon and thank you for joining us as we review Weight Watchers International's performance for the first quarter of fiscal 2007.

  • During the first quarter we began to see the benefits of some of our transforming initiatives, particularly Monthly Pass and the stepped up marketing of our Weight Watchers online business.

  • We have also begun to take meaningful steps to address key challenges in the area of both retention, keeping our members engaged in the program longer and relevance, increasing the appeal of our programs to a higher proportion of the overweight population.

  • Looking at our financial results, revenue grew by 17% in the first quarter with growth across all of our major revenue sources, including meeting fees up 18%, in-meeting product sales up 19%, WeightWatchers.com revenues up 14% and licensing revenues up 15%.

  • Our Q1 results benefited from favorable foreign currency exchange rates which added $12.6 million to our revenue.

  • Excluding currency adjustments, our Q1 revenues grew by 13%.

  • In the first quarter, in our worldwide meetings business, total paid weeks, our new volume metric, were up a solid 17%, driven by the impact of Monthly Pass adoption and the recent franchise acquisitions in our North American meeting business, as well as the continued recovery of our U.K.

  • business.

  • Meeting attendance growth, however remained soft at 4.4% as we continue to be impacted by weak enrollment trends.

  • Total paid weeks for our Weight Watchers online product were up 22%, driven mainly by our first ever Weight Watchers online TV campaign in the U.S.

  • Operating income grew 11%, reflecting the combined impact of our revenue growth, offset by our increased investment in marketing.

  • In Q1, we increased marketing spend by 31% versus 2006, primarily reflecting two key investment areas.

  • One, returning North America closer to the spend levels we incurred in 2005 and 2004 as measured by percentage of revenue and as I just referenced, two, our first ever national advertising campaign for Weight Watchers online.

  • On the bottom line, including a $0.02 non-recurring charge for the early extinguishment of WeightWatchers.com debt, we reported EPS of $0.63 for the first quarter, as compared to $0.56 per fully diluted share in last year's first quarter.

  • Excluding this year's non-recurring charge, EPS increased by 16% to $0.65 per fully diluted share.

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

  • First, our North American meeting business.

  • Total first quarter [NACO] revenues were $216 million, an increase of 19% versus the same period in 2006.

  • First quarter meeting fees were up 21% in NACO, primarily driven by the positive impact of Monthly Pass, as well as the impact of franchise acquisitions made in 2006, which more than offset soft enrollments.

  • Without the benefit of acquisitions, meeting fees were up a solid 11%, despite the lower Monthly Pass price.

  • As we discussed on the last call, we continue to see very strong member interest in the Monthly Pass commitment plan.

  • In the first quarter, nearly 50% of our attendances were from Monthly Pass members, which is double the level we saw in Seasons Pass in the first quarter of 2006.

  • In our new world of significant Monthly Pass participation, attendance is no longer the best volume metric for predicting revenues.

  • As Ann discussed during our investor presentation this past February, paid weeks is a new additional volume metric designed to give greater transparency into the number of Weight Watchers customers in our system over the course of a fiscal period.

  • As a reminder, we calculate meetings paid weeks by summing total commitment plan paid weeks and total pay as you go weeks.

  • As a result of the high flow-thru of Monthly Pass members from the fourth quarter and the continuing high take-up rates of Monthly Pass in the first quarter, total paid weeks, excluding acquisitions, were $13.8 million, up 18% versus the $11.8 million in the first quarter of 2006.

  • Our commitment to and excitement about Monthly Pass continues to grow as we learn more about how our members are using it.

  • We're most excited about Monthly Pass and that we believe it will lead to better weight loss.

  • This is the result of one, eliminating the negative impact of missed week fees and two, creating a convenient and well-priced package that gives the customer all the benefits of meeting combined with free access to the best internet weight loss tools in the market.

  • We've recently been conducting clinical research which is showing very exciting preliminary results.

  • In a randomly controlled trial, we are finding that people who are assigned to attend meetings and to use etools are losing more weight on average than those who are assigned to just attend meetings.

  • This scientific result confirms our previous observation that with the combination of access to meetings a monthly subscription to etools, we have the opportunity to create a new gold standard in weight loss.

  • With respect to Monthly Pass in 2007 is both a transition year and a learning year.

  • As we continue to build our experiential database and related earnings, we wanted to share some of our initial observations based on the actual member behavior we're now seeing.

  • First, elimination of the missed week fees affects.

  • As we discussed before, the missed week fees create a number of unintentional affects which are not ideal for serving the weight loss needs of our members.

  • Most importantly, analysis we conducted last year suggests that there was a significant number of members who would cycle through multiple enrollment cycles throughout the course of the year, often seeking to take advantage of our free registration offers rather than pay missed week fees.

  • Joining and canceling and joining and canceling in rapid succession over the course of the year is a far from ideal customer experience and it is not the best way for members to view their weight loss journey.

  • As a result of implementing Monthly Pass, we're seeing a much steadier level of engagement by our members and the rapid re-enrollment effect has been greatly diminished.

  • Second, sample bias and enrollment patterns.

  • As we have indicated on previous calls, the greater revenue and attendances of Monthly Pass enrollment cycles is not purely incremental to revenues and attendances.

  • First, we believe that there is and will be a bias for Monthly Pass to have greatest appeal to members that were already likely to be the most committed.

  • Therefore, we would expect the retention of our remaining pay-as-you-go customers to be somewhat lower than our overall business was in the past.

  • Second, the elimination of rapid reenrollment cycles for a subset of our customers means that in some cases we are replacing two or three enrollment cycles for a given customer over the course of a year with one continuous Monthly Pass enrollment cycle.

  • Three, retention.

  • The most recent data on Monthly Pass member behavior suggests that we can expect paid retention of eight months or better per enrollment cycle, versus our preliminary estimate of at least six months.

  • And finally, attendances.

  • We're not estimating 16 or more attendances per Monthly Pass enrollment cycle versus 13 for Seasons Pass and 10 to 11 for our average pay-as-you-go enrollment cycle, prior to the introduction of Monthly Pass.

  • However, these numbers are not directly comparable for all the reasons I just discussed.

  • Taking all of these factors into account, we are modeling Monthly Pass to have a positive but modest impact on 2007 attendance.

  • One part of the Monthly Pass experience that we will continue to monitor closely is the degree to which our subscribers are attending meetings.

  • From a customer service perspective, we will continue to do things very differently than the stereotypical recurring payment models like the traditional gym model by making it easy for members to cancel their monthly pass subscription and to always treat them fairly if any billing issues arise.

  • As well, while Monthly Pass members are attending more meetings than other members, we think there is much we can do to proactively communicate with our Monthly Pass members through direct mail, the internet and other methods during our enrollment cycle to encourage them to attend additional meetings.

  • We know that the duration of active engagement with the program is the best predictor of weight loss success for our members.

  • While we don't believe or expect that every member will attend every meeting, we will do all that we can to get them to attend as many meetings as possible.

  • Turning to meeting attendance, overall NACO attendances in the first quarter were plus 7.3% versus the same period in 2006.

  • However, without the impact of acquisitions, NACO attendances were a disappointing minus 2.6%.

  • The softness in Q1 attendances is primarily the result of our continued challenges in enrolling new members.

  • As we discussed at our February investor's day, we continue to believe that these enrollment challenges are the result of our marketing programs not effectively distinguishing us as a unique solution in the mind of the consumer, particularly those who have not had first hand or recent experience with Weight Watchers.

  • In this day of diet overload and popular culture in advertising, we have clearly not been breaking through to consumers and separating ourselves from all of the noise of the marketplace.

  • We took one solid step in Q1 when we shifted our advertising models from spot TV to national TV.

  • As a result, we were able to significantly increase our overall presence and to increase our share of voice on TV with a relatively modest incremental spend in the TV medium.

  • However, increasing share voice is only part of the solution.

  • I believe that our issues are less the result of our media weight and more the result of the insufficient impact each of our advertising spots makes.

  • As a brand, we already have nearly ubiquitous awareness.

  • Our challenge is in the image that is associated with that awareness.

  • Therefore, our advertising must accomplish three basic tasks.

  • One, it must be noticed when it's seen.

  • Two, if it is noticed, people must associate the spot with our brand.

  • And three, assuming number one and number two are accomplished; it must communicate something new about Weight Watchers that causes the consumer to reconsider us as a solution with which they could be successful.

  • As we have said, we tend to do well with these criteria with recently lapsed customers.

  • But we do not accomplish them with never members or long-term lapsed customers.

  • Our tracking research on our January spots confirms that our advertising is not coming through as much as it should and it is not adequately differentiating ourselves from the rest of the weight loss space.

  • As I discussed during our February's investor day, there is far too much that we're doing within Weight Watchers that we have not adequately shared with perspective customers.

  • There are many gaps between consumer's perceptions of us and reality, including the fact that there are many new things and innovations that we have not advertised in a world that values newness.

  • For this reason, the NACO marketing team elected to put our agency account up for review in an effort to bring in a completely fresh look at how we advertise and market.

  • I'm very pleased to announce that we've selected McCann Erickson as our new U.S.

  • agency.

  • We have the same team that developed and led the highly successful MasterCard campaign that was crucial to reigniting that brand.

  • In this new agency we believe we have a partner that shares our belief that Weight Watchers is an approach that stands apart in the myriad of mostly unsuccessful weight loss and diet aids.

  • We have a critical opportunity to make our case in a much more emphatic and contemporary way to the consumer.

  • Wrapping up NACO, we had a strong quarter in product sales.

  • Despite soft attendances, product sales were up 10% in NACO, excluding franchise acquisition.

  • Product sales per attendance surged particularly in our new starter kits and electronics.

  • Moving forward, we expect double digit growth in NACO revenues driven by double digit growth in paid weeks as we continue to benefit from the positive impact of Monthly Pass.

  • With our models assuming modest incremental impact from improved Monthly Pass retention, we expect full year 2007 organic attendances to be flat to low single digits as we continue to work to our underlying enrollment challenges.

  • Now onto the U.K.

  • The U.K.

  • was able to successfully make up ground that it had lost last year in quarter one.

  • For the first quarter of 2007, U.K.

  • revenues increased by 13% on a local currency basis, driven by a 9.8% increase in attendance and a nearly 14% increase in product sales per attendance.

  • Beginning in January, the U.K.

  • accomplished several important deliverables.

  • One, it launched a new and fresh advertising campaign.

  • Two, it rolled out its streamlined and improved program materials.

  • And three, it introduced a new quick and easy feature designed to help new members more successfully get engaged with the program.

  • The early results of the advertising campaign have been encouraging.

  • And both the revamped program and the quick and easy feature have been very well received by members and leaders alike.

  • Going forward, the U.K.

  • team will focus on continuing to build on the promising start of this new advertising campaign.

  • As well, it will continue to pursue the same retention building initiatives that we are pushing for in all of our markets in order to provide a more consistent meeting experience to each of our members.

  • As the relatively easily comparable to Q1 2006 passes, we expect the U.K.

  • growth rate to begin to moderate to the levels normally expected of our most mature market at low to mid single digit attendance growth.

  • However, we now have a new opportunity to reignite the business as we look to launch Monthly Pass in this market toward the end of the year.

  • Moving to continental Europe.

  • While continental Europe continues to be a challenge, we began to see some moderation and results.

  • For the first quarter 2007, total revenues were up 3.4% on a currency adjusted basis and attendances were down 6.6% versus the comparable period in 2006.

  • This attendance trend represents a modest improvement over the 11% attendance decline in the fourth quarter of 2006.

  • The Q1 continental Europe attendance was also negatively impacted by relatively weak flow through of attendances from a tough Q4 2006.

  • The Power Start mini innovation proved to be effective in appealing to lapsed members, but it was not a significant enough change to the program to create [campaignable] news to appeal to never members.

  • Our issue in the market continues to be our ability to attract never members.

  • Our management teams in Europe are now pursuing a path similar to their U.S.

  • counterparts and placing their agency accounts under review.

  • Moving on to WeightWatchers.com.

  • As we discussed on the last call, we have had the somewhat unusual paradox of being the market leader in the internet space and have a rapidly growing business that still has relatively low awareness in the mind of the average weight loss interested consumer.

  • Everyone seems to know Weight Watchers but relatively few people know we have an online weight loss plan for the self-help dieter.

  • While we have always been active in advertising Weight Watchers online through internet advertising, we have recognized that this is a medium best suited for converting consumers already considering our products and services.

  • As a result of this, we elected to begin advertising on a medium better suited for building awareness, TV.

  • I'm very pleased to announce that the response to our first national advertising campaign for Weight Watchers online has exceeded our expectations on the basis of volume and cost per acquisition.

  • For the first quarter, Weight Watchers online paid weeks increased by 22%.

  • Due to this success, we've elected to add a second TV campaign that already kicked of this spring.

  • I'm also pleased to announce that we launched our internet men's product ahead of schedule.

  • Weight Watchers online for men gives us a new opportunity to appeal to a very large market segment that might not have otherwise considered Weight Watchers.

  • Weight Watchers etools for men gives us the ability to have a Monthly Pass offering for our male meeting members that creates a much more relevant overall experience for them.

  • We began the process of building awareness for these new offerings through our PR efforts featuring Jenny McCarthy and Ron Darling, leveraging spring training.

  • We have also begun to include the tagline, "Now Customized For Men" on our Weight Watchers online TV spots that began on Easter.

  • As we continue to get learning's in critical mass, we will have increasing opportunities to add to the volume of our marketing activities.

  • In total, we expect continued double digit growth in our revenues for our WeigthWatchers.com business, driven by strong Weight Watchers online revenues, offset by the continued shift of Weight Watchers etools revenues to Monthly Pass.

  • Finally, our licensing business had a solid first quarter with revenue growth of 16%.

  • We were particularly pleased with the performance of several of our largest licenses, particularly cakes and frozen novelties.

  • Now, I would like to turn the discussion over to Ann Sardini.

  • Ann Sardini - CFO

  • Thank you, David and good afternoon to everyone.

  • I'll begin my financial review of the first quarter 2007 with an overview of our consolidated results.

  • First quarter consolidated Company revenues were $399.4 million, an increase of 16.8% or $57.4 million over the 2006 quarter, primarily as a result of strong per attendee meeting revenues.

  • Operating income rose 11.2% to $115.7 million, with marketing increasing 31.4% in the quarter.

  • First quarter net income was $53.8 million, lower than last year by 5.6% or $3.2 million, a result of $3 million of added expense associated with the early extinguishment of WeigthWatcher.com debt and significantly higher interest expense.

  • During the first quarter, we upped our debt level to finance the tender and repurchase of 19.6 million of our outstanding shares, that's 19.1 million shares.

  • The buyback lowered our share count on a fully diluted basis to 79.1 million with the first quarter averages higher at 85.7 million shares since the buyback took place a month into the quarter.

  • Our fully diluted share count next quarter should be near the 79.1 million shares.

  • Earnings per fully diluted share were $0.65 in the quarter, excluding early extinguishment of debt expense, a 15.5% increase from $0.56 in the prior year quarter.

  • Taking into account the debit extinguishment expense, EPS was $0.63 in this year's first quarter.

  • As I indicated, our worldwide operations generated a $57.4 million or 16.8% increasing revenues in the first quarter.

  • On a [inaudible] currency basis, revenues grew 13.1%.

  • Increased meeting revenues constituted about two-thirds of the growth.

  • Globally [inaudible] dollars, the average meeting fee extended by 9.9%, reflecting the impact of Monthly Pass in the U.S.

  • and some pricing actions in our international markets.

  • In-meeting product sales were also robust around the world, growing 9.5% per attendance on a constant currency basis, partially the result of newly designed enrollment products that appeal to many of our ongoing members, as well as our new enrollees.

  • WeightWatchers.com revenues grew 14% versus a year ago.

  • Now, in terms of meeting volume metrics, global meeting attendance reached 18.7 million in the quarter, versus 17.9 million in the year ago quarter.

  • Growth in the U.K.

  • and newly acquired North America franchise taken together added 1.4 million attendances.

  • While organic NACO and rest of world attendances were down by 26 million.

  • Before the recent launch of our new commitment [inaudible] in the meeting business, growth in attendance [inaudible] weeks mirrored each other, one metric told the story.

  • With Monthly Pass gaining a strong foothold in NACO and future roll out also in the world, we felt another metric, the paid week metric is needed to provide a greater degree of transparency and insight into our business.

  • The paid meeting metric captures total Weight Watchers paid membership by adding paid commitment plan weeks to pay-as-you-go weeks for a given period.

  • In the first quarter of 2007, paid weeks in the meeting business exceeded attendances across the world.

  • Most notably in NACO where overall attendance growth of 17.3% including acquisitions compared to paid week growth of 26.3%.

  • There were 22.7 million paid weeks in the meeting business worldwide in the first quarter, compared to 19.4 million last year, an increase of 16.7%.

  • Adding in the online business, global paid weeks topped 30 million, up 18% from 25.5 million in 2006.

  • I'll now cover our operations in a little more depth, first in meeting business by major geography, followed by our WeightWAtchers.com operation.

  • First to North American meeting business.

  • North America's first quarter meeting revenues, including acquisitions, grew 19.8% or $33.5 million to $202 million.

  • Driven by a 26.3% increase in paid weeks and surpassing the 7.3% rise in attendance.

  • Acquisitions contributed $15 million to the revenue growth.

  • Excluding acquisitions, meeting fees were up $14 million, despite a 2.6% decline in attendance year-over-year.

  • The average meeting fees per paid week, excluding acquisitions, was 5.6% lower in 2007 and 2006, which reflects Monthly Passes discounted pricing.

  • On the other hand, because Monthly Pass members do not attend every week, the average meeting fee per attendance rose 14% compared to last year.

  • And as David mentioned, product sales turned in strong performance, as well, up 12.6% on a per attendance basis.

  • Internationally, first quarter international revenues were $137.6 million, up 16.2% or 6% on a local currency basis, driven by strong product [inaudible] penetration throughout.

  • International product sales increased 12.2%.

  • Paid weeks rose 2% in the quarter.

  • Internationally our attendance results in the first quarter were mixed.

  • Total attendance was 7.7 million, up just .5% versus the prior year quarter.

  • The U.K.

  • returned strong attendance growth while our continental European countries for the most part were unable to gain any significant traction.

  • The U.K.

  • performed well on all measures with revenues up 13.2% in local currency.

  • In current dollars, U.K.'s first quarter revenues were $53.3 million.

  • Revenue growth was driven by 13.6% growth in product sales penetration and by an 11.6% increase in paid weeks, slightly higher than attendance, which was up a strong 9.8%.

  • Continental Europe's revenues for the quarter reached $68.6 million, an increase of 3.4% on a constant currency basis.

  • Meeting and product sales per attendee were up 13%, reflecting a strong response to new products.

  • Impact on revenues [inaudible] favorable currency exchange was 9.2%, bringing the total increase in continental Europe's revenues to 12.6%.

  • Paid weeks in continental Europe declined 6.3%, mirroring the decline in the attendance of 6.6%.

  • [Inaudible] direct result of continental Europe's not yet having significant penetration of commitment plans.

  • While still in the negative position, CU attendance is trending in the right direction, albeit slowly.

  • Now moving from the meeting and business to WeightWatchers.com.

  • WeightWatchers.com's total first quarter revenues rose 14.8% to $36.5 million from $31.8 million.

  • As we noted in the past communications, an increase in Monthly Pass meeting members will receive etools for free have resulted in significantly lower take up of paid etools, of paid internet products and meeting numbers.

  • While etools constituted 3% of our meeting numbers historically, now about half of our current attendances are Monthly Passes a worthwhile trade off for the Company, but the impact on WeightWatchers.com [inaudible] has been to temper somewhat its total revenue growth in the first quarter.

  • Online end of period active subscribers rose 21% in the quarter.

  • Our investment in national TV advertising has accounted for most of the 67% rise in .com's marketing budget in the first quarter drove the increase.

  • And the payoff for this investment will continue as we [inaudible] subscribes move through the year.

  • We entered the first quarter of 2007 with 603,000 active online subscribers.

  • Moving onto our other revenues.

  • Our franchise commissions excluding the negative impact of recent acquisitions grew by 11% in the quarter to $5.1 million.

  • During the second half of last year, we acquired four franchises.

  • In the U.S.

  • we acquired Indiana, Suffolk County New York and Western Michigan, bringing NACO up to over 80% of U.S.

  • attendances.

  • And also we acquired our Eastern Canada franchise, giving us over 50% of Canadian attendances.

  • Taking into account the lost commissions related to these acquisitions, franchise commissions declined by 17.2%.

  • Our other revenues, licensing and our publications were $18.5 million in the quarter, up 11.5% or $1.9 million over the year ago level.

  • Licensing revenues across the world when looked at in aggregate were $14.3 million in the quarter, an increase of 16%.

  • In the first quarter of last year a sizable catch up payment was made by one of our larger international licensees.

  • When this is excluded, the increase in licensing revenues rises to 20% in the quarter.

  • Our consolidated gross margin was 56.5% in the first quarter of 2007, 30 basis points above the 56.3% [inaudible] the first quarter 2006.

  • In terms of marketing, our first quarter marketing investment increased 31.4%, $16.9 million above last year's level to $70.8 million.

  • A significant part of the increase spend by two-thirds went into TV advertising.

  • In the U.S.

  • WeightWatchers.com began advertising on TV for the first time and NACO increased its TV investment, as well.

  • And U.K.

  • upped their TV spend also, as well.

  • We also invested more heavily in print and direct mail in this quarter.

  • As a percent of revenues, marketing increased to 17.7% from 15.8% in the first quarter of 2006.

  • G&A expenses in the 2007's first quarter were $39.6 million, up 14.6% from the prior year level.

  • 11.4% in constant currency.

  • As a percentage of revenues, G&A was down 20 basis points to 9.9%.

  • [Inaudible] G&A is and will continue to be impacted by our ongoing technology investment in upgrading our systems that began in earnest in late 2005.

  • In the first quarter, the combination of higher IT expense and higher depreciations was a responsible for 4.5% of the increase in G&A versus last year's Q1.

  • Also, the addition of four franchises to NACO contributed to the growth of absolute G&A dollars.

  • Our consolidated operating income in the first quarter was $115.7 million, up 11.2% from $104.1 million in the prior year's quarter.

  • Our consolidated operating income margin was 29%, 140 basis points lower than the prior year level of 30.4%, as a direct result of the higher marketing expense.

  • Regarding interest expense, most of you know during the quarter the Company increased its debt by $1.2 billion in order to complete its repurchase of a little over 19 million shares.

  • And also to retire the remaining $186 million of WeightWatchers.com high interest loans.

  • Primarily as a result of the associate increase in debt outstanding, the Company incurred $13.9 million of incremental interest expense in this quarter, going from $11.3 million last year's Q1 to $25.2 million.

  • Average consolidated debt outstanding rose over $812 million above last year's first quarter level to $1.52 billion.

  • The average affected interest rate however, moved up only 15 basis points to 6.52% from 6.37% the year earlier.

  • Now moving to an overview our consolidated Company's cash flow and balance sheet.

  • The Company generated significant free cash flow in the quarter.

  • Cash from operating activities, taking into account the higher interest expense was $102.3 million.

  • Free cash flow after capital expenditures of $6.8 million was $95.5 million in comparison with our net income for the period of $53.8 million.

  • Most of the cash flow in excess of net income arose from our negative working capital, deferred revenue in particular and the increase in permanent differences between booking cash taxes, particularly arising from good will associated with our franchise acquisitions.

  • The first quarter 2007 balance sheet reflects the normal seasonality of the business, as well as significant increase versus year end 2006 in deferred revenue, arising primarily from Monthly Pass and also in our debt balances.

  • Our end of quarter debt was $1.82 billion, up $969 million from the year end 2006 levels of $849 million as follows.

  • We borrowed $1.2 billion.

  • We paid down the WeightWatchers.com loan of $186 million and we made a voluntary resolve or pay down of $45 million.

  • Our pro forma net debt to EBITDA at the time of the refinancing is 4.3 times.

  • We're currently targeting additional pay downs that will reduce that to 3.5 times by year end.

  • Net debt t EBITDA of 3.5 was the trigger point for 25 basis points debt down in our interest rates [inaudible] over [inaudible].

  • Now I'll turn the discussion back to David.

  • David Kirchhoff - President & CEO

  • Thanks, Ann.

  • As we shared with you in February, Weight Watchers will achieve its long term growth aspirations by ever improving our member success and by increasing our overall relevance.

  • Accordingly, we are focused on continuing to make progress on our platforms of retention and relevance.

  • Over the past few months I've had an opportunity personally share this vision with many of our staff around the world and that will continue through the next several months.

  • The themes of focusing on member success and innovation are striking a powerful cord with our people.

  • Weight Watchers has an important role to serve in helping to solve the obesity epidemic and all of our staff is highly motivated to successfully transform Weight Watchers to the next level of capability.

  • In terms of specific progress against these initiatives, I can report the following.

  • On retention, we have now rolled out our leader retention score tool in all or our major markets.

  • Field management teams around the world are being provided these tools along with training on how best to use them and make progress to ensure that we're giving members our very best leaders.

  • As we noted on our last call, we are busily preparing Monthly Pass to launch in three markets by the end of this year, the U.K., Germany and Australia.

  • And as part of our effort to revamp program development, we have held over 30 program [IDA] sessions with employees of all levels in functional areas around the world.

  • We have also kicked off several important new market research projects, which we believe will bring critical insight into the biggest opportunities to make the weight loss process easier for our members.

  • In the area of relevance, as we've already discussed, we're looking for agency partners that can bring a fresh perspective necessary to help us reenergize our brand and our perception in the market.

  • To this end, we have put our agency accounts up for review in nearly every major market with the exception on the U.K.

  • which selected its new agency last fall.

  • Other progress on relevance, for the first quarter included the launch of TV advertising for Weight Watchers online, as well as the launch of Weight Watchers online for men.

  • I'm very pleased with the progress that our team is making.

  • We will succeed in our efforts because our mission is too important for us not to succeed.

  • All of us believe we can make a fundamental difference in the world by making a difference in our member's lives.

  • We all recognize that we can only do this if we operate at the very highest level in the most consistent way.

  • Finally, regarding guidance.

  • We are leaving our guidance unchanged for the full year 2007 earnings of between $2.33 and $2.47 per fully diluted share.

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

  • Operator

  • Thank you.

  • [OPERATOR INSTRUCTIONS] Thank you.

  • Your first question is coming from Chris Ferrara of Merrill Lynch.

  • Please go ahead.

  • Chris Ferrara - Analyst

  • Hey, guys.

  • I want to talk a little bit about Monthly Pass and what kind of work have you done about the tolerance of members to, I guess, in effect pay higher meeting fees per attendee?

  • Because if you're about 50% penetrated with Monthly Pass and, by the way correct me if my math is wrong, and your meeting fees per attendee in North America are like $14 right now.

  • The people who are adopting Monthly Pass are probably paying $15, $16, $17 in certain instances, right, for the actual effective meetings they're attending?

  • So, how do you model that out and how do you guard against people sort of revolting against that sort of thing, the higher pricing?

  • David Kirchhoff - President & CEO

  • I think the best way to answer that question is to talk about the mindset of a member who is participating in Monthly Pass.

  • A member who is participating in Monthly Pass is effectively paying $40 to get full access to a complete set of resources from Weight Watchers, both in the form of meetings, but also in the form of access to etools.

  • And so from their point of view, the starting proposition, particularly those who are already familiar with the pricing, Weight Watchers Monthly Pass is actually a great deal.

  • It's a nice discount that we provide for them and that's the way it's perceived.

  • And so I think for that point of view, members have a tendency to primarily look at pricing on that basis and they tend not to necessarily pull out their calculators and sort of try to divide how many meetings did I actually go last month versus what was my bill.

  • Chris Ferrara - Analyst

  • Great.

  • That helps.

  • Then also on marketing, can you talk a little bit about the flow through?

  • I mean, it sounds like you're up 190 basis points and it seems like you were pretty effective from where you're standing and you're going to another .com advertising program.

  • How do you think that flows through the rest of the year?

  • Do you see a similar increase?

  • David Kirchhoff - President & CEO

  • Well, first off let me just share one thought about interpreting the marketing increase for the first quarter of this year, specifically the portion of the marketing increase that was associated with Weight Watchers online.

  • And this is a dynamic that we've seen in the many years that we've been running that business, which is we incur revenue benefit from each customer acquisition over a period of, you know, give or take nine months, whereas we recognize all the expense associated with that customer acquisition as it's incurred.

  • The impact as it tends to have from a margin point of view is that it's depressive in the period in which you have the membership drive and then in the period in which you're effectively dark, you tend to see a significant pick up in overall profitability.

  • As I mentioned, we are planning on running the Weight Watchers online, in fact we're not planning.

  • We're running a Weight Watchers online campaign.

  • This spring, I think follows open for discussion based on the results we see as well as some other things that we're contemplating.

  • And we would expect for the rest of NACO to continue running, give or take -- we certainly don't anticipate running significantly less than prior year, but we would expect to be continuing to run sort of at or above.

  • Chris Ferrara - Analyst

  • Okay.

  • Great.

  • That's helpful.

  • Thank you very much.

  • Operator

  • Your next question is coming from Brandon Dubell of Credit Suisse.

  • Please go ahead.

  • Ann Sardini - CFO

  • Hi, Brandon.

  • Operator

  • He jumped out of queue.

  • One moment, please.

  • Your next question is coming from Scott Muskin of Bank of America Securities.

  • Please go ahead.

  • Scott Muskin - Analyst

  • Hey, guys.

  • Thanks for taking my question.

  • So, I guess what I'm going to poke at is the number of people actually using Weight Watchers.

  • It seems like it's been flat to down now for a while and I guess one of the things I want to know is what do you think is causing that?

  • I know you talked a lot, David, about relevance.

  • But do you think it's other competitors in the market?

  • Do you think it's missteps the Company has made?

  • Or it's the combination?

  • And then, I guess, is there any indication that that is changing?

  • And the final question is, is how do you change it?

  • I mean, do you have an action plan?

  • I mean, is that really the crux of what you're trying to do is get that number up?

  • And then I had another housekeeping question after that.

  • David Kirchhoff - President & CEO

  • Okay.

  • Well, first off, not getting away from the primary point of your question, but just as a point.

  • One of the reasons that we introduced paid weeks is that it gives a little bit more of an accurate picture on how many customers are floating around the system.

  • And actually on that basis, we had more paying customers in the first quarter 2007 than we did in the first quarter of 2006.

  • So, actually our share size of our customer base engaged with Weight Watchers had increased.

  • That's significantly due to the fact that we had this terrific flow through of Monthly Pass members from the prior period.

  • And so that's how Monthly Pass was accruing benefits to our efforts to increase the size of our customer base.

  • Putting that aside, I think your question in terms of how do we improve our relevance is one of the topics that's obviously high in our minds.

  • I really do continue to believe that again if you look at where Weight Watchers is and as we've said during the February investor call as we continue to say now, there's no shortage of sort of so-called diets that are out there.

  • Diet books, NutraSystem, competitors, people advertising on people, so on and so forth.

  • We believe that we have a good opportunity to reposition ourselves.

  • I think where we've struggled a little bit is, I think that Weight Watchers, as I mentioned is a pretty ubiquitous brand.

  • I mean, everybody knows who we are.

  • The problem is, is that we really haven't communicated anything to the customer base that gives them new information about Weight Watchers.

  • So in other words, if I already knew who Weight Watchers was and I already had a perception of who Weight Watchers was and we haven't done anything to change that perception, we certainly necessarily expect that that customer is necessarily going to come on their own to just make the decision to join Weight Watchers.

  • I think for that reason, the one thing about our past practice is that we talked about with the benefit of hindsight, is that I think we understated the degree of newness.

  • And I think it's too bad in some ways, although it's eminently fixable, because Weight Watchers has actually been doing a lot of important innovations.

  • We talked about Monthly Pass specifically as an example and we look at a proposition that we truly do believe and this is what we believe is the single most important thing about Monthly Pass, put aside all the financial benefits and incremental revenue per cycle and all that good stuff.

  • The thing that matters about Monthly Pass is that it is a better weight loss proposition.

  • To us it creates a completely new way for a customer to interact with Weight Watchers in a couple of different areas.

  • First in meetings and second through the internet, in a way that we think is incredibly compelling.

  • Historically that would be the kind of thing that we probably wouldn't even mention and customers could be pleasantly surprised when they show up in a meeting and discovered Monthly Pass.

  • I think the type of thing that we might consider going forward is the fact that we can be much more aggressive about talking about the innovations and the newness that we have.

  • And I think if we do that, combined with an advertising strategy that better makes our case as to why we're different than every other diet out there and we do believe we are very different from every other diet out there, that that will be what is necessary to really unleash the power that we think has now become a little bit dormant in the brand.

  • Scott Muskin - Analyst

  • Interesting.

  • So, just two clarifications here.

  • Well, a clarification and a housekeeping.

  • So, the number of people using is up and revenue per person is falling, right?

  • Is that --?

  • David Kirchhoff - President & CEO

  • That's exactly what Ann was talking about.

  • I mean, I think that if you look at Monthly Pass, the discount per paid week for Monthly Pass is 20% versus pay as you go.

  • So, that is exactly the tradeoff.

  • Now, if you looked at the missed weeks, then it tends to make it up.

  • Scott Muskin - Analyst

  • Interesting.

  • Okay.

  • Then I was wondering if you could give us [inaudible] is for Ann, the [FX] impact on gross margins and overall operating margins?

  • Ann Sardini - CFO

  • The FX impact on revenues, Scott is losing about 3.7% of total Company revenues.

  • In terms of margin, it doesn't really have any impact at all because it affects your cost lines, as well.

  • Scott Muskin - Analyst

  • Okay.

  • Perfect.

  • Thank you.

  • Operator

  • In queue, your next question is coming from Brandon Dubell of Credit Suisse.

  • Please go ahead.

  • Chris Unknown - Analyst

  • Hi, guys.

  • It's actually Chris.

  • Sorry I got cut off there earlier.

  • I just wanted to focus for a second on continental Europe.

  • I guess first my question was have you hired a country manager there yet in Germany?

  • And if so, just looking out at the rest of the year, beyond the easier comps that you're going to experience, what else make you confident that you're actually going to return to positive attendance growth there by the end of the year?

  • David Kirchhoff - President & CEO

  • What's happening and to answer your question specifically [inaudible] process for the GM in Germany, it's still in process and so my very capable head of continental Europe is continuing to run Germany on a day to day basis.

  • And I'm sure that he's absolutely looking forward to the day when that's no longer true.

  • But for right now, we have a very steady hand at the helm.

  • I think if you look at what needs to happen in continental Europe, in some ways it mirrors and perhaps lags a little bit of what we've seen in some of our other markets.

  • But specifically, as we've said, I think the thing we need to do to get continental Europe back on track is to, I think again their issue is primarily a marketing and innovation issue.

  • They haven't had anything that was incredibly significant to communicate.

  • And I think that the Power Start, get off to a great start mini innovation was incredibly helpful for brining in rejoins.

  • But it wasn't enough news; it wasn't in itself compelling enough to sort of ignite the imaginations of the never member.

  • And so for that reason we believe that ultimately, not just the turnaround but frankly the return to the growth that we've been seeing in continental Europe before will happen as we introduce more meaningful product innovations and program innovations and, for example, Monthly Pass is one of the things we've already announced that we're working on for Germany.

  • But I think frankly if I look at the advertising that happens in a lot of continental Europe, particularly in the countries such as Germany where we struggled, to be honest with you, it hasn't exactly been our best.

  • And so, I think as a result of that, that's why that country in particular has continued to have difficulty.

  • We still haven't found the right solution in terms of really kind of sparking the interest of the never member.

  • Chris Unknown - Analyst

  • Okay.

  • And then I apologize if you already said this but what kind of attendance growth are you expecting by the end of the year?

  • Are you still expecting to get back kind of flat for the year?

  • Is that what you're thinking?

  • David Kirchhoff - President & CEO

  • Yes, roughly.

  • Roughly flat to sort of low single digits.

  • Chris Unknown - Analyst

  • Okay.

  • And then just a couple other ones.

  • First it's kind of a cleanup question.

  • Stock based comp; I don't know if you can give me that number for the quarter?

  • Ann Sardini - CFO

  • Let me just clarify that what David was saying was excluding acquisitions, in terms of the attendance growth.

  • Stock based comp for the quarter, $2.7 million.

  • Chris Unknown - Analyst

  • Okay.

  • And that's all in SG&A, right?

  • Ann Sardini - CFO

  • Yes.

  • And it's roughly the same as last year, so it's a push.

  • Chris Unknown - Analyst

  • Okay.

  • And then last one, Season Pass in Europe and the U.K., I'm just wondering what that tick up there has been so far?

  • It looks like attendance as in paid weeks are roughly the same?

  • So, I'm just trying to gauge what the interest has been so far?

  • Thanks.

  • David Kirchhoff - President & CEO

  • The reason we put Season Pass in and we talked about this a little bit at the investor conference.

  • [Inaudible] talked about it a little bit at the investor conference in February.

  • The reason we put Seasons Pass into those countries was not necessarily as a business driver, but more because we had so much success in NACO by introducing Seasons Pass first and it was a very effective way of helping our service providers start to think about the benefits of commitment plans to the members.

  • And really understand how to communicate those benefits.

  • And so while we're in the development process of Monthly Pass, it's a relatively low cost way of having sort of true kind of on the ground training with the service providers.

  • And so fro that reason, we didn't overly aggressively price it and we didn't push it as hard as we might have if we were really counting on that as a long term payment plan.

  • All that being said, I think that's why the impact of it has been moderate.

  • And finally in continental Europe, we did not bring it in Germany in January, as we had had it last fall.

  • And did introduce it in France, but we introduced it later in the diet season because they had a more novel approach for how they were incorporating Seasons Pass, using it to bridge two diet seasons.

  • Chris Unknown - Analyst

  • Thank you.

  • Operator

  • And your next question is coming from Michael Lasser of Lehman Brothers.

  • Please go ahead.

  • Michael Lasser - Analyst

  • Hi, guys.

  • Thanks for taking my question.

  • I may not do a very good job of asking or formulating this question, so please bear with me.

  • But given the new commitment plan and the folks who are using those approaches are going more often or they don't have the disincentive to have to pay twice like you did under pay as you go if they miss a meeting.

  • So, perhaps these people are going more than they otherwise might've been.

  • Is there a risk on the back end that you may have a more difficult time reactivating these customers if they are arguably going to be more successful as they're going through the program the first time?

  • And to what extent do you think you're seeing this type of second derivative perhaps?

  • Because we're getting a year or two removed from when you introduced the Season Pass.

  • And so perhaps there was a mentality with some of the customers who were on pay as you go originally who didn't give a full commitment.

  • Had only gone to a couple of meetings and then just dropped.

  • And came back.

  • And now that they're on a commitment plan, they're just less likely to come back to the Company.

  • David Kirchhoff - President & CEO

  • Let me try to answer and if I don't quite get your question, please feel free to absolutely reformulate and take a second pass.

  • Michael Lasser - Analyst

  • I told you I wasn't going to formulate it --

  • David Kirchhoff - President & CEO

  • No, that's all right.

  • That's all right.

  • It's a lot of interesting new dynamics for us all to get our heads wrapped around.

  • Let me give you an example of how I look at Monthly Pass versus pay as you go from a personal experience.

  • And interestingly enough, I have been a paying member at Weight Watchers meetings since I first joined with WeightWatchers.com and for whatever reason, probably because I was too lazy to expense it, I've always paid my own way.

  • When I first started going to Weight Watchers, I was a pay a you go customer.

  • And I would go to meetings and I remember my first cycle I missed meeting; I came back.

  • They gave me a by.

  • I missed another; I came back.

  • I had to pay for it.

  • And then at some point I stopped going and at that point I realized that I'd had veto reregister and so I started thinking that I'd way for registration again.

  • And I kind of sort of fell of the system, so to speak.

  • I started having spending the past year gaining lots and lots of weight and traveling around Europe, I started Weight Watchers meetings again in the beginning January as Monthly Pass subscriber.

  • And I went to meetings dutifully fro the first six to seven weeks and I lost a nice little chunk of weight.

  • And then a bunch of things happened.

  • I think I had earnings calls and Board Meetings and travel and vacation and everything else and low and behold three or four weeks passed I hadn't been to a meeting.

  • What I found particularly coming back from vacation is I had gained weight and so therefore I said gees, I really should do something about this.

  • This isn't good.

  • And it was fine because I had my Monthly Pass card and I just went back to a meeting and I started losing more weight.

  • That's not that I think everybody really cares that much about my personal life, but more I think it's a good illustration of what we see happening with members over and over again.

  • In which they're able to think about Weight Watchers in a much longer duration.

  • You know, with so many diets out there talking about weight loss in terms of weeks, it's nice that we can actually provide something that allows the members to sort of reframe their weight loss experience in terms of months because if you look at how much weight they actually had to lose on average, many months is what it's going to take for them to get there.

  • It's a journey, not a sprint.

  • And so I think from that point of view, Weight Watchers Monthly Pass is a good thing.

  • I think another way of looking at it is, frankly it's a little bit like what we used to have with Exchange before we went to Points.

  • So, you used to be with Weight Watchers that if I'm doing Exchange, there were certain foods that were bad foods and if I had any of those foods, I was effectively off the diet.

  • So, as soon as I stopped doing the diet as specifically prescribed, I was off the diet and at that point I would sort of go onto whatever previous lifestyle I had.

  • Some of the nice things with points was that it basically created a way of getting out of that box by giving people the ability of having flexibility as their circumstances change.

  • And in an interesting way, we think Monthly Pass is very annulated to that in that you can have periods where you're intensively going to meetings and then you can have periods in which you may not being to meetings but getting that card mailed to you every month is a good reminder that Weight Watchers was always here for you and we're always interested in getting you back into meetings.

  • Michael Lasser - Analyst

  • Okay.

  • Well, you look pretty trim last I saw you so that must be working.

  • David Kirchhoff - President & CEO

  • Thank you.

  • Michael Lasser - Analyst

  • Let me just phrase question a little differently.

  • If you look back at those folks who originally signed up on the commitment plan a year or two ago, are those folks coming back to the program at a rate that was consistent or lower or higher than the average?

  • Or what you might have expected?

  • David Kirchhoff - President & CEO

  • I don't really think we've seen a difference.

  • Michael Lasser - Analyst

  • Okay.

  • And with organic attendances down 2.6% and the attendances from flow through of the fourth quarter Season Passes it would imply that nevers or the number of attendees was down significantly more than 2.6%.

  • How should we think about the order or magnitude, down 10%?

  • Down more than that?

  • David Kirchhoff - President & CEO

  • Well, first off I think the question -- if you're asking attendances, which is the number of people who actually attended the meeting in a given period, that was down 2.6%.

  • It wasn't down more than that.

  • To be clear, Monthly Pass, everything that we're seeing from our early analysis, and keep in mind these are early days -- we've only had Monthly Pass out here for I think a little bit under six months or it has been six months.

  • Everything we're seeing with Monthly Pass is that it is that is absolute accretive to attendances and attendance and meetings.

  • What that would therefore suggest is that enrollments are a bit softer than attendances, which in fact is exactly what we've seen an that Monthly Pass effectively helps to bolster.

  • And that's why I said before that the softness in attendances is primarily a reflection of the softness in enrollments.

  • Michael Lasser - Analyst

  • Okay.

  • And the last question.

  • The difference between paid and attendances was about 3.8 million or there were about 3.8 million missed meetings in the first quarter of '07 versus s1.5 million missed meetings in '076.

  • So, that grew about 150%, but the percentage of folks on commitment plans was up less than double, so it went from 30 to 50%.

  • Are the people that, the incremental people who are signing up for commitment plans missing more meetings/

  • David Kirchhoff - President & CEO

  • No.

  • It's a great question and welcome to the wonderful world of Monthly Pass mathematics.

  • So, let me do my best to try to describe the dynamics, which is what you have in the Monthly Pass subscriber base in Q1, you had people who both signed up for Monthly Pass in Q1 and you also had the Monthly Passes who signed up prior to Q1.

  • And you could imagine if you have a Monthly Pass subscriber who's been on Monthly Pass for four months, their attendance intensity, in other words the likelihood to attend a meeting in any given individual week, is lower than it would be during their first month.

  • It's hardly a surprising effect.

  • So effectively what you had is a mix of Monthly Passers who have been with us for a while, in some cases four months, as well as Monthly Passers that are brand new.

  • What we're seeing is that the Monthly Passers that are brand new are attending at least as many meetings, actually more than the pay as you go people who are also attending at the same point and time.

  • So, actually attendance intensity is higher for the Monthly Passers than it is for the pay as you go.

  • I think that where it starts to get interesting to interpret attendances therefore is you have to start then looking at what is the average age of your Monthly Pass subscriber base.

  • But let me also give you sort of an example of kind of what attendance means in this new world.

  • And the best example I can give is literally of a gym, although I do that sort of tentatively given some of the associations with certain gyms.

  • Which is if you attend a gym effectively attendances for a gym would be akin to a gym reporting when I actually showed up to bench press.

  • In other words, it's when I actually showed up in the gym would the equivalent of attendance and you can imagine that there is times when I'm going to the gym a lot and there's times when I'm not going to the gym very much at all.

  • There are times when I'm very regular about it and then there are times when something happens and I'm not very regular.

  • And so, how many times I actually attend a gym starts to disconnect more and more in terms of predicting revenue, which is exactly why we went to this metric of paid weeks, because it's much more [analygis] to a reflection of the customers that are actually kind of in the stable so to speak.

  • Michael Lasser - Analyst

  • Okay.

  • And last, just [inaudible] question.

  • Will you continue to provide both attendances and paid weeks and if there is some change will you provide some historical context, historical data so we can build our models accordingly?

  • David Kirchhoff - President & CEO

  • You know our intention was to provide both.

  • And we really hadn't thought that much in the future.

  • I think you can expect, when we talk about revenue drivers, because it's mathematically more appropriate, when we talk about connecting volume with revenue.

  • So, you can expect us to talk primarily about paid weeks in effective income per paid week versus revenue because those are the much more direct drivers.

  • Where we would be looking at attendance, I think for different reasons.

  • Michael Lasser - Analyst

  • Thank you very much for taking my questions.

  • David Kirchhoff - President & CEO

  • Absolutely.

  • Operator

  • thank you.

  • Your next question is coming from Amy Chasen of Goldman Sachs.

  • Please go ahead.

  • Amy Chasen - Analyst

  • thanks.

  • I just wanted to know.

  • There's obviously some bullish stuff going on in the U.K.

  • with the advertising taking hold and using your materials.

  • Is any of that stuff that you can bring to the U.S., particularly the advertising?

  • David Kirchhoff - President & CEO

  • Yes.

  • Absolutely.

  • And what I liked about that U.K.

  • advertising campaign was that if you look at that spot and you compare it to the spots that we from around the world, it had a very different feel to it.

  • So before when I was sort of talking about the three simple things you can do to have a better ad, one of them was to be noticed.

  • And the second was to be clearly associated with Weight Watchers.

  • The third was then to tell you something you didn't know.

  • I think that the U.K.

  • ad in particular did very well in number one and number two.

  • It absolutely had cut through.

  • I listened to numerous radio shows being sort of sent over the internet from the U.K.

  • where they were talking about the ad and having a dialogue about it and different people's feelings about weight loss for their spouse.

  • And there was a whole conversation that started and I think that's the kind of thing you get when you have really sharp creative.

  • I think that being said, I honestly believe that the U.K.

  • and I know the U.K.

  • team believes as well, but they have an opportunity to sort of further improve the strength of their creative because I think that we still have an opportunity in that country to continue to telegraph a lot of the newness of Weight Watchers in addition to catching people's attention.

  • But certainly I think as we think about the U.S., I think being a little bit more bold and sharp in our advertising is something that's going to be very important for us as we go forward.

  • Amy Chasen - Analyst

  • Okay.

  • Great.

  • Thank you.

  • David Kirchhoff - President & CEO

  • Yep.

  • Operator

  • Thank you.

  • Your next question is coming from Jerry Herman of Stifel, Nicolaus.

  • Please go ahead.

  • Jerry Herman - Analyst

  • [Inaudible] everybody.

  • A couple of questions about Monthly Pass.

  • In the fourth quarter it was about 50% of total and the first quarter likewise.

  • Is that a reasonable level that this should plateau?

  • I mean, is 50% sort of the way we should look at Monthly Pass as a percent of total?

  • David Kirchhoff - President & CEO

  • I think we can increase it.

  • I think that as more and more people get comfortable with it, we have an opportunity to improve it.

  • I mean, there are certain factors that you can say are so called limiting factors that represent a ceiling for penetration.

  • And I actually saw this in some meetings I was sitting in last week, is that you might get a periodic member and maybe on average she's a little bit older who is maybe doesn't have an internet connection.

  • And so for that person, I think that it's obviously something that's not going to make sense for them.

  • But I think for lots of other customers, there is an opportunity.

  • I think the other opportunity that we're still working through is that right now if you're a At Work customer, there is no way to participate in Monthly Pass.

  • But we're working with the At Work team to see if we can identify ways of using this kind of model for the At Work environment.

  • In particular because we believe that again sort of the value proposition of online and offline is a strong one.

  • Jerry Herman - Analyst

  • Are you convinced that Monthly Pass is not acting as a deterrent to new members at all, given the --?

  • David Kirchhoff - President & CEO

  • No, I think it's a plus.

  • Well, first off it couldn't be a deterrent for new members because we haven't told anybody else outside the meeting it even exists.

  • Jerry Herman - Analyst

  • Okay.

  • That's fair.

  • And then with regard to Monthly Pass cancellation rates.

  • I guess based on your commentary about the duration of those folks, since the program is only whatever, either or nine months old and the average duration is eight months, that would imply a very low cancellation rate.

  • Is that true?

  • David Kirchhoff - President & CEO

  • That is absolutely accurate.

  • Jerry Herman - Analyst

  • And is there any seasoning?

  • David Kirchhoff - President & CEO

  • Our expectations.

  • Jerry Herman - Analyst

  • Would you expect, David any seasonality of cancellation?

  • In other words, as we move into the summer where might they be more inclined to cancel?

  • David Kirchhoff - President & CEO

  • You know an interesting phenomenon that I can share with you from my experience in the internet days is that we looked at that and what was interesting about that is that we tended not to see a pick up in cancellations during summer periods or after Thanksgiving, between Thanksgiving and the Christmas holiday.

  • And so literally the retention characteristics we've seen for Weight Watchers online are almost lock step, regardless of when somebody enrolls in that particular product.

  • And my guess would be that Weight Watchers, that the Monthly Pass is going to behalf much the same way.

  • Jerry Herman - Analyst

  • Okay.

  • Great.

  • I'll turn it over.

  • Operator

  • Thank you.

  • Your next question is coming from Greg Badishkanian of Citigroup.

  • Please go ahead.

  • Greg Badishkanian - Analyst

  • Great.

  • Thanks.

  • I just wanted to walk through some of the details on how long customers stay in the program?

  • And when you look at the Monthly Pass, I think you mentioned about eight months and pay as you go something in the range of 10 to 11; is that right?

  • David Kirchhoff - President & CEO

  • We said eight months and pay as you go 10 to 11 attendances per enrollment cycle.

  • There could be one or two missed weeks in there.

  • Greg Badishkanian - Analyst

  • Okay.

  • And so when you look at a year ago period, the first quarter of last year and you look at the testing that you had done, how long was the people on the seasonal pass?

  • What was the duration there, as well as the pay as you go?

  • And sort of as you go into more people on the Monthly Pass, are you seeing that duration of the dieters stay on the diet longer?

  • Is that sort of an evolution here?

  • David Kirchhoff - President & CEO

  • Well, certainly based on the numbers that we're sharing, you can assume that somebody on Monthly Pass will be engaged with Weight Watchers longer than somebody on pay as you go.

  • I think you can also assume almost by definition that that's also going to be the case of Seasons Pass.

  • I mean, Seasons Pass was a defined 17 weeks.

  • Now, there's a chance that somebody was already attending meetings prior to those 17 weeks and certainly they might be attending for a few weeks afterwards.

  • But I think that the numbers that we shared with you, if you look at what we're seeing right now, it is 16 attendances is what we're estimating for Monthly Pass right now.

  • And we've said last year before the introduction of Monthly Pass, Seasons Pass was at roughly 13 and pay as you go was a 10 to 11.

  • And so based on an early set of data, that's kind of where we are right now.

  • Now, the one thing that I do want to continue to point out these two effects, unless we think that they're purely incremental and they are incremental, but they're not purely incremental.

  • Is that we have two things that are also in play.

  • First off we are seeing evidence that not surprisingly there's a little bit of self selection in this in so much as the people that are leaning toward Monthly Pass are on average maybe a little bit more committed, meaning that the pay as you go retention that remains is a little bit lower.

  • The second effect we're seeing is that and we hadn't really every really focused on this as much, although we knew that I happened to a certain extent was that again there really was this sort of subset of customers on pay as you go who would stay, they would be on the program for anywhere from 8 to 10 weeks.

  • They'd have a missed week; they'd drop out and they're re-enrolling after three or four months.

  • And so what we might have is that in the old world that customer would be a member for a while.

  • They'd go dark for a while in our world.

  • They'd become a member again during the same calendar year, whereas now we're effectively replacing them with one long continuous cycle.

  • And so for those two reasons, what we're absolutely seeing is that Monthly Pass is accretive to attendances but just not in a directly incremental way.

  • Greg Badishkanian - Analyst

  • Great.

  • Okay.

  • That makes sense.

  • Also, you had mentioned that you exceeded your volume and I believe customer acquisition cost targets for online.

  • What was the customer acquisition cost this quarter and last quarter?

  • David Kirchhoff - President & CEO

  • Better than break even.

  • Greg Badishkanian - Analyst

  • So, that's good.

  • Is that something you maybe don't want to disclose in a public --?

  • David Kirchhoff - President & CEO

  • It's getting a little detailed.

  • Greg Badishkanian - Analyst

  • Yes.

  • Okay.

  • David Kirchhoff - President & CEO

  • Competitive reasons.

  • Greg Badishkanian - Analyst

  • Yes.

  • Okay.

  • Good.

  • Thank you very much.

  • David Kirchhoff - President & CEO

  • Absolutely.

  • Operator

  • Thank you.

  • Your final question is coming from Mary Resotco of KeyBanc Capital Markets.

  • Please go ahead.

  • Mary Resotco - Analyst

  • Hi guys.

  • Thanks for taking my question.

  • I'm actually in for Jeff Stein today.

  • Just a quick question.

  • I don't want to [inaudible] you guys.

  • I know on the .com side the focus this quarter was gearing more towards men.

  • I'm curious if you did see a pick up in the percentage of male subscribers online compared to last year?

  • David Kirchhoff - President & CEO

  • Yes, we did.

  • Mary Resotco - Analyst

  • Could you quantify that at all?

  • David Kirchhoff - President & CEO

  • You know it's such early days.

  • Mary Resotco - Analyst

  • Okay.

  • David Kirchhoff - President & CEO

  • That what I would say is that based on sort of a whopping four weeks, we've seen some pick up.

  • But I wouldn't want to get into too much more detail than that, particularly at this stage in the game.

  • Mary Resotco - Analyst

  • Is it meeting your expectations?

  • David Kirchhoff - President & CEO

  • Sure.

  • Mary Resotco - Analyst

  • Okay.

  • Good.

  • And then just one last quick question.

  • I know you guys said that you've hired a new advertising team.

  • When are you guys expecting to start to see changes from them?

  • Are they already hired on?

  • Are they already at work or?

  • David Kirchhoff - President & CEO

  • Yes.

  • Well, I don't know if you've been following the trades at all.

  • We were able to announce that because it seemed like literally the second -- well, it doesn't matter.

  • It came out in Advertising Week not too long ago.

  • We're still in the process and sort of working through some of the details.

  • But they're already engaged with us.

  • They were attending some brainstorming sessions this week; that's terrific.

  • I don't want to be too specific about what's going to happen when, other than to say we're just -- they've completely bowled us over.

  • We're thrilled and we're excited about the things that come from them.

  • Mary Resotco - Analyst

  • Okay.

  • Thank you very much.

  • David Kirchhoff - President & CEO

  • Thank you.

  • Operator

  • Thank you.

  • There appear to be no further questions and I would like to turn the floor back to management for any closing comments.

  • Please go ahead.

  • David Kirchhoff - President & CEO

  • Thank you for joining us today and I look forward to sharing more information with you at our next earnings release call.

  • Thanks very much.

  • Ann Sardini - CFO

  • Thank you.

  • Operator

  • Thank you.

  • This concludes tonight's Weight Watchers International First Quarter 2007 Earnings Teleconference Call.

  • You may now disconnect your lines at this time.

  • And have a wonderful evening.