WW International Inc (WW) 2009 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Weight Watchers International's First Quarter 2009 Earnings Teleconference Call.

During the presentation, all participants will be in a listen only mode.

Afterwards there will be a question and answer session.

(Operator Instructions)

As a reminder, this teleconference call is being recorded today, May 7, 2009.

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

Please go ahead.

Thank you and thank you to everyone for joining us today for Weight Watchers International First Quarter 2009 Conference Call.

With us on the call are David Kirchhoff, President and Chief Executive Officer; and Ann Sardini, Chief Financial Officer.

At about 4.00 p.m.

Eastern Time today the company issued a press release reporting its financial results for the first quarter 2009.

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 www.weightwatchersinternational.com.

Before we begin, let me remind everyone that this call will contain forward-looking statements.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission.

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

I would now like to turn the call over to Mr.

Kirchhoff.

Please go ahead, David.

Good afternoon and thank you for joining us as we review Weight Watchers International's performance for the first quarter of fiscal year 2009.

Overall Q1 2009 was within our expectations and consistent with the overall guidance we provided on our last earnings call.

As expected, our business has been significantly impacted by two key factors -- one, the global recession and two, the strengthened US dollar.

With respect to the economy, we felt the impact primarily in enrollments, US product sales and to a lesser extent a slight softening of retention due to increased credit card declines.

May Co was the largest source of softness and results but was within our expectations, while some of our overseas markets held up relatively better, particularly the UK.

Weightwatchers.com had a solid first quarter with low double digit growth in the actual subscriber base for its Weight Watchers online products.

Finally licensing grew a respectable 5% on a constant currency basis despite our premium positioning.

In reviewing our financial results, I would like to remind everyone that our Q1 results versus prior year benefited from the timing of Easter which fell in the second quarter this year versus the first quarter last year.

Our meetings business also marginally benefited from the fact that our fiscal 2009 year commenced on January 4th this year versus December 30th last year.

The impact of these two timing events is most significantly seen in the attendance figures, while revenue was less impacted due to our shift to a commitment plan pricing model.

Total company Q1 revenues declined by 11% versus the prior year period.

Most of this decline was due to the strengthened US dollar which impacted our results around the world, particularly in the UK where the value of the UK pound against the US dollar declined by over 27% versus last year's first quarter.

On a constant currency basis, global revenues declined 2.5% versus the prior period driven by softness in our May Co business.

For the first quarter, as reported meeting fees declined 12%, product sales and other revenues declined 15%, while internet revenues were up 6%.

On a constant currency basis, meeting fees declined 4%, product sales and other revenues declined 4%, and internet revenues grew 11%.

From a volume perspective, global paid weeks and our meetings were down 2% versus the prior period quarter, while global attendances were down 5%.

Without the benefit of the late Easter and the later start to the fiscal year, global paid meetings weeks would have been down approximately 5%, while global attendances would have been down 10%.

In contrast, paid weeks for Weight Watchers online were up 14% for the first quarter versus Q1 last year.

Global paid weeks for our combined meetings and Weight Watchers online offerings were up 3% on an as reported basis and flat without the benefit of a late Easter and later start to the fiscal year.

Operating income declined 16% on an as reported basis and 11% on a constant dollar basis, excluding restructuring charges associated with our first quarter cost savings initiatives.

Gross margins declined by 190 basis points as the decline in volume resulted in lower meeting averages as we elected to keep our meetings open to minimize destructions to our members.

The gross margin decline what somewhat offset by a reduction in marketing as a percentage of revenues.

We expect the cost savings initiatives we implemented in Q1 to benefit our gross and operating margins later in the year.

Q1 2009 EPS was $0.61 on an as reported basis or $0.64 excluding the impact of Q1 restructuring charges.

This compares to an EPS of $0.72 in Q1 2008.

The unfavorable UK VAT rolling resulted in two cents of lower income and FX resulted in a negative five cent impact on 2009 EPS.

Without the impact of FX and the restructuring charges and adjusting for the UK VAT, first quarter EPS would have been one cent below prior year in line with our expectations.

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

First, our North American meetings business.

Total first quarter NACO revenues were $212 million, a decrease of 7% versus the same period last year.

NACO meeting fees declined 6%, while in meeting product sales declined 14%.

Q1 paid weeks were down 5.5% on an as reported basis and down 7.2% after adjusting for a later Easter and a later start to the fiscal year.

As reported attendances were down 5.4% in Q1 2009 versus Q1 2008.

Without the benefit of prior period acquisition and adjusting for the impact of a later Easter and start to the fiscal year, NACO attendances were down 11%.

We knew we faced a difficult economy this year and as a result actively worked on a terrific new program and advertising campaign that we hoped would offset the bad economy.

In fact members have received the New Momentum program with great enthusiasm and our advertising campaign has scored very well in numerous copy tests and advertising metrics.

Unfortunately in this period of economic uncertainty the consumer has not been receptive to product news related to our service thereby negating what we believe would otherwise have been a growth driving program watch.

Consumers have significantly pulled back their discretionary spending and deferred their weight loss efforts.

We've seen the impact of this most acutely in enrollments particularly in other members where the decision to spend on any new service is highly scrutinized by consumers in this environment.

While we saw slight softening in retention versus the same period in 2008, the degree of softening is similar to what we've been seeing since Q3 of 2008.

To personally counter the tendency of many consumers to tighten their wallets in this tough economic environment, NACO is currently evaluating options and actions to offer more aggressive promotional messages beyond the normal free registration offer during promotional periods.

Given the positive impact that some of these messages have been having in some of our international markets, we believe that this could result in improved enrollment trends in the second half of the year.

As noted, NACO in meeting product sales were down 14% in Q1 2009 versus the same period in 2008 with product sales per attendance declining 9%.

Beginning in late March and continuing in April, we have significantly increased product sales per attendance through new product launches and several very effective promotions.

We therefore expect to see the in meeting product trends improve as we move into Q2 and for the rest of the year.

We expect the remainder of 2009 to continue being a challenging time for our NACO business as the US consumer continues to struggle.

We expect Q2 volume trends to mirror the underlying Q1 trends with low double digit negative results.

Of course on an as reported basis, just as our Q1 attendance results were helped by the later Easter timing, reported Q2 2009 attendance results will be hurt on a comparable basis.

We're cautiously optimistic that the trends in the second half could improve somewhat as we begin to lap in the affects of the recession.

We also believe that a more value oriented and promotionally driven marketing stance could improve our enrollment trends.

In aggregate we're continuing to forecast full year 2009 paid week and attendance trends of high single digit to low double digit negative growth.

Now on to the international business units.

For the first quarter, excluding the affect of the UK VAT rolling, UK revenues were down 22% due to the significant decline of the British pound.

On a constant currency basis UK revenues were up 7%, paid weeks were up 8% on an as reported basis, and we're up 1% after adjusting for the late Easter and later start to the fiscal year.

UK attendances were flat with prior and an as reported basis and down 8% after adjusting for a late Easter and a later start to the fiscal year.

Like the US, the economy has had a significant affect on the UK consumer and trading conditions across industries in the UK were difficult in the first quarter of 2009.

However, the UK team has taken a series of steps to improve the promotional messages of their marketing and to increase continuity in their advertising media placements.

This has resulted in strengthened enrollment trends in March that have continued into the second quarter.

With these enrollment trends and high monthly pass conversion rates, we now expect some improvement in our UK attendance trends on an apples to apples basis for the second quarter of 2009, as well as for the remainder of the year.

Continental Europe revenues were down 16% for Q1 2009 versus the same period 2008 and were down 3% on a constant currency basis.

Paid weeks were up 4.4% for Q1 while attendances were down 9% versus the prior period in 2008.

After adjusting for the late Easter and late start to the year, paid weeks and attendances for CE were down 4% and 17% respectively.

As is the case in the UK, several of our Continental Europe countries began to take a more promotionally driven marketing strategy for the spring campaigns which has helped moderate negative enrollment trends.

As a result, we expect to see improvements to volume trends as we move into the second quarter and beyond.

For the full year, we continue to forecast high single digit to low double digit negative attendance and low single digit declines in paid weeks.

In the meantime, the Continental Europe teams are continuing to focus their efforts on readying their operations for a significant program innovation to launch in January 2010.

Moving on to Weightwatchers.com, weightwatchers.com had a solid start to the new year despite the difficult consumer environment.

Internet revenues were up 6% on an as reported basis and 11% on a constant dollar basis.

Paid weeks for Weight Watchers online were up a strong 14%.

Weightwatchers.com results were particularly strong in some of our international markets.

This partially reflects our continued efforts to drive awareness cost effectively through more integrated marketing campaigns.

The only point of caution for the weightwatchers.com business lies in the area of retention and where we've seen some softening due to increased credit card declines.

We're continuing to monitor this closely and we're evaluating options for improving retention rates.

The weightwatchers.com team is continuing its aggressive product development pace with the upcoming launch of social networking functionality this spring.

We're also in active development of a robust iPhone application in time for the iPhone 3.0 software release this summer.

I would now like to turn the discussion over to Ann who will elaborate further on our Q1 performance.

Thank you, David, and good afternoon.

First quarter consolidated company revenues on a reported basis were $390.6 million, a decrease of 10.6% versus $437 million last year.

Two non-comparable items were responsible for most of the 10.6% decline in our first quarter year-over-year revenues -- foreign currency conversion reduced our first quarter revenue significantly by $35.4 million or 8.1% representing 76% of the year-over-year revenue decline.

In addition, because of the timing in 2008 of an unfavorable UK VAT ruling, we recorded the associated UK revenue reduction for both Q1 and Q2 2008 entirely in Q2 thus requiring a $2.3 million adjustment to Q1 2008 to achieve comparability.

When we adjust 2008 Q1 for UK VAT and exclude the impact of foreign currency, 2009 first quarter revenues were $426 million, down 2% from $434.7 million last year.

Now looking at the bottom line, including the impact of our China joint venture.

In the quarter we booked a $3.1 million pretax, $1.9 million net of tax charge associated with our previously disclosed first quarter cost savings initiatives.

Net income in the quarter as reported was $47.3 million, down 17.5% versus prior.

As noted in our press release, adjusting 2009 for $1.9 million of net restructuring charges and adjusting 2008 by $1.6 million net from UK timing -- UK VAT timing, Q1 '09 EPS was $0.64 as compared to $0.70 in the year ago quarter.

If we also add back $0.05 of negative FX impact, our 2009 EPS increases to $0.69 -- just one cent short of prior.

Now recapping some of the operational trends that David discussed.

Globally in the meeting business first quarter paid weeks declined 1.8% versus prior, while attendance declined 4.7%.

Domestic paid weeks fell off by 5.5%, but international paid weeks were up 5.5%.

Monthly pass penetration is increasing in our international markets where this product is less mature.

These combined factors resulted in global meeting revenues -- that's the combination of meetings fees and in meeting product sales -- posting at 3.3% decline in constant dollars.

Global meeting fees declined 3% in local currencies, less than the 4.7% attendance decline -- both due by increasing penetration of monthly pass in our international markets: UK, Germany and France.

The difficult economic environment was also evident in our in meeting product sales performance.

Global product sales per attendee, which grew substantially through much of last year, posted a less than 1% increase in the quarter -- up 0.8% on local currency basis.

This was driven by our North America in meeting product sales performance which declined by 12.7% in constant currency.

Despite the soft economies in much of our international footprint, product sales per attendee in our international business were strong in the quarter posting a constant current growth of 9.6% compared to prior year.

This growth level represents the continuation of the trend we saw in 2008 in the international business where product sales per attendee grew 7.8% overall as a result of successful, new consumable product launches.

In the Weightwatchers.com business, revenues increased 10.1% in constant dollars in the first quarter to $49.2 million on paid weeks growth of 13.9%.

In this period active online subscribers grew 11.1% to 871,000.

Now turning to a review of the performance of our other revenue which include licensing, franchise commissions, and revenues from our publications.

Other revenues were $23.7 million, up 1.9% from the prior year and constant dollar.

Despite the recession economy, our licensing revenues from the first quarter were up 5.1% in constant currency to $15.7 million with particular strength in the US for both direct licenses and product endorsement.

Franchise commissions were $4.1 million in this quarter.

About a third of our franchises are outside of the US and accordingly franchise commissions which were down 21.2% in current dollars, decreased 15.6% in local currencies.

Excluding the impact of acquisitions made in 2008, commissions on the remaining franchises declined 10.6% in constant dollars with the entire decline coming from the US franchises underscoring the impact of the weakened US economy.

Our consolidated gross margin in the first quarter was 64.3%, down 170 basis points from 56% in last year's first quarter when adjusted for 20 basis points of UK VAT charge.

While lower attendance per meeting was a major causal factor given that we kept meetings open for service reasons, in meeting products promotions in the US also put pressure on gross margin.

In addition, we had higher rent expense in some of our overseas locations as we've been selectively upgrading our venue, and there were charges in NACO associated with the cost of rolling out broadband to our meeting room locations.

The cost initiatives we've undertaken in our first quarter reach beyond G&A to cost of revenues areas such as supply chain, monthly pass fulfillment and call center.

These will become evident as the year progresses.

In addition, we're continuing to undertake meeting placement analysis to ensure that we are properly matching supply with demand while at the same time minimizing disruption for our current members.

First quarter marketing spend of $74.6 million was down 6.5% from prior year and constant dollar.

On that basis, Q1 marketing as a percentage of revenues in our highest spend quarter improved to 19.1% from 20% last year.

This is only partially the result of the timing of Easter which was two weeks later this year and is traditionally the kick off of our spring advertising campaigns around the world.

In addition to Easter, our teams have worked particularly hard, especially in the meeting business, to eliminate inefficiencies and we've used part of the savings for incremental marketing investment in Weightwatchers.com and selectively in some of our European countries.

G&A expense in the first quarter 2009 includes the $3.1 million charge related to the Q1 restructuring.

Excluding this charge in 2009, G&A expenses for the quarter were $40.7 million, a 3.4% increase in constant currency from the prior year level and a 5% decrease in current dollars.

This despite expenses related to our China JV and increased depreciation resulting from our IT investment.

The benefit of much our restructuring costs will begin to be felt starting next quarter.

As a percent of revenues, G&A, excluding the restructuring charge, was 10.4% in 2009 versus 9.9% in the prior year quarter for UK comparability.

As noted on prior calls, 100% of our China joint venture is consolidated into our operating income and our partner moved to own 49% ownership is deducted as non-controlling interest in a line item before net income.

On an operating basis in the first quarter 2009, the 100% investment in the venture was $1.7 million of pretax expense mainly a combination of marketing and G&A.

This compares to $0.7 million in the first quarter last year.

Excluding restructuring charges, consolidated operating income margin is 24.8% in the quarter as compared to 26.2% last year with last year adjusted for the UK VAT comparability.

Interest expense in the first quarter of 2009 was $16.7 million, down $8.6 million or 33.9% versus first quarter last year.

We benefited from a 196 basis point reduction in our average effective interest rate which was down from 6.01% in first quarter last year to 4.05% in this year's first quarter as a result of lower market rates.

Our debt level at the end of fiscal 2008 was $1.648 billion and we ended the first quarter with $1.569 billion.

Finally I'll review in brief the consolidated cash flow for the quarter and our balance sheet.

In the first quarter, we generated $143.3 million of cash from operations excluding interest.

After capital expenditures of $6.8 million, we had $136.5 million of free cash available in the quarter to service our capital structure.

With our available cash we made interest payments of $33.9 million, paid our quarterly dividends of $13.6 million, and reduced our debt by $78.6 million.

As I indicated on our last call and during our investor presentation, our priority use of cash is debt pay down.

Our required debt pay down on our term loans this year is $162.5 million.

Other than the debt pay down of $78.6 million, fluctuations in the balance sheet between Q1 '09 and year end '08 primarily reflect the normal seasonality of the business.

Now I'll turn it back to David.

Thank you, Ann.

During these difficult current economic conditions, the strength of our business model allows us to meet the short term challenges our businesses faces while continuing to invest in upgrading and reinvigorating our platforms.

We have substantially completed most of the restructuring and cost reduction activities we referenced on the last call, and will achieve all of our targeted $13 million 2009 expense reductions.

We will see the benefit of these savings beginning in Q2 and continuing throughout the year.

As Ann referenced, we took most of the restructuring charges associated with the aforementioned savings in Q1 this year.

We're making very good progress on many of the initiatives we reviewed at our investor presentation on March 5th.

In particular, we've completed the initial development of a new design for Weight Watcher centers which will be pilot tested in four existing locations by early summer.

We believe that the new look and feel as well as the functionality of the new design reflects a significant step function improvement at a reasonable cost.

This will allow us to better serve our members and to better present our brand.

We are taking advantage of the weakened real estate market to improve the quality of our locations without significantly increasing costs.

We've already begun to make location upgrades.

With respect to 2009 EPS guidance, we are maintaining our forecasted range of $2.50 to $2.75 per fully diluted share before restructuring charges.

As noted earlier, Q1 was a particularly difficult comparable as we did not have any of the restructuring savings and the negative impact of the currency conversion was at its most pronounced.

While we expect currency to continue providing a headwind over the next few quarters, its negative impact should begin to lessen as we proceed throughout the year.

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

Thank you.

(Operator Instructions)

Our first question is from Jerry Herman with Stifel Nicolaus.

Please go ahead.

Stifel Nicolaus.

Good afternoon, everybody.

Hi, Jerry.

I'm wondering if you folks would be willing to update us on the penetration rates of monthly pass and the respective geographies.

I know you talked a little bit about this at investor day and wondered if you can give us an update there.

Sure.

In terms of the penetration of attendance in NACO we're roughly in the same ballpark -- around 60% -- a little over 60%.

UK is doing well climbing close to 40%.

Germany is way up in the 60s as is France.

So we're doing well I think across the broad especially given the economy that we're facing in terms of penetration and monthly pass.

In particular in the UK still we -- we're continuing to see upside as the conversation rates are increasing with each passing month.

And you said Germany up 60% plus?

Yes.

Wow.

Okay.

Very good.

David, maybe could you give a little bit more color on the promotional type activities that might occur -- how that would work and maybe what sort of changes may take place with month pass, if any?

Historically the way Weight Watchers has promoted the meetings business has been through free registration which back in the pay as you go environment registration fees were not an insignificant portion of the cost of joining meetings.

We found ourselves increasingly in a situation where with more and more of our members on programs like monthly pass, the allure of free registration has lost some of its luster compared to other promotions.

And so in some respects you can kind of look at the NACO meetings business as operating still with a promotion, but nothing unusual and certainly nothing that reflects any of the typical promotional activities that you're seeing from a lot of other service companies and other retailers.

So we're now evaluating a number of different possible approaches that we're going to be putting into test partly so we can measure lift versus cost.

And I'd rather not go into the details of exactly what those promotions would be right now for competitive reasons, but I think we have a number of opportunities to significantly improve the value proposition to consumers and to do it in a way that doesn't significantly impact the overall economics of our business.

I mean one of the things that monthly pass affords us is a much greater revenue per enrollment cycle so it affords us flexibility in terms of how we think about charging for the product to get people in the door.

And so based on that, we feel that with the testing protocols we now have in place that we think that there's a good opportunity to possibly put something new in place for NACO going into the fall campaign beginning at the end of August.

Great.

Thanks very much.

I'll turn it over.

Thank you.

Our next question is from Chris Ferrara from Bank of Montreal -- Bank of America.

Please go ahead.

Hey, guys.

Just wondering if you can -- I guess, David, I'm trying (technical difficulty) --.

We lost you, Chris.

Can you hear me now?

Now we can.

Okay.

I guess I'm trying to understand basically what you're saying big picture here.

It seems to me like even with the shift, and you guys have guided to attendance being down high singles to low doubles -- it seems like this quarter kind of came in sort of like that when you adjust for the timing shift.

And you're also talking about taking a lot of measures like on a promotion side to make things better.

It almost sounds in tone like things are really worse than you thought on the attendance side and Q1 was really tough, but yet the numbers don't really seem worse than what you seemed to think before.

So I must -- I mean I'm obviously misreading you somewhere, but can you give a little color on it like what maybe I'm misinterpreting?

Possibly my tonality.

Actually when I look at the attendance rates they're very much in line with what we talked about when we reported the Q4 results and we first started talking about what we were seeing for Q1.

You know there is no doubt that the economy is presenting some challenges.

And again as particularly for NACO, you know we had hoped as we had finished the end of the year that having a really good program and a really good advertising campaign was going to provide sufficient umpf to our efforts -- that it was going to offset the impacts of the economy.

But as I referenced during my remarks during the investor representation, we're in an environment right now where the consumer just was not receptive to hearing those messages.

I've been very heartened by the fact that in our international markets, particularly the UK where we've been doing some interesting things with some cost effective price promotions that we've been able to show some very nice enrollment trends toward the end of Q1 going into the spring campaigns.

And we look at that as a reflection of what a lot of people are seeing with this economy that the consumer is being trained right this red hot minute to look for additional savings and value opportunities.

And so what I'm simply suggesting is that I think that it's just the reality of the environment we're in that our largest business such as NACO which effectively has been at full price all throughout this economic period, might need to take a somewhat more aggressive stance.

And I think the timing for that is good because we were already getting to the point that it was time for us to start seeking alternatives to free registration as our most compelling promotional offer.

So there's nothing going on with attendances that I find to be particularly concerning versus the expectations that we already had and frankly as I look at the meeting business going forward, I'm incredibly excited about the things that we have in front of us in terms of -- I mean from a broader perspective obviously we know that the obesity issue isn't going away and we continue to believe that as research continues to demonstrate that behavior modification is the way to deal with this issue and that we've got the right service and the right solution to solve that.

I think that as I go back to our investor presentation, the things that I think we have to be focused on is taking down the barriers that prevent other members from getting into the fold.

And so that's a function of improving the convenience of our meetings, making sure that our meetings themselves are delivering relevant and germane topics to contemporary lifestyle, and presenting ourselves in the way that consumers have been acclimated to expect with modern retail branding, good locations, things like that.

So when I look at things such as the new NACO center designs it's difficult to express how much of a night and day change those designs by way of example represent.

As I look at the difference that we're already seeing in some of the locations we're upgrading, I mean I think some of those things are significant.

So when I think about what a meeting is going to feel like in two years, and I compare it to what it feels like today which is something that already delivers a highly efficacious solution, I'm incredibly optimistic about the forward prospects of the business.

You know the economy is the economy and we've got to weather through that and we think we can do it and we think that there's some opportunities to trick up our enrollment trends by being more promotional and value oriented in the short-term while continuing to do all the things we need to do to drive long-term consumer interest in the core meetings business.

Thanks.

That's really helpful.

I appreciate that color.

So I guess it sounds like pricing is a lever that you guys are certainly thinking about with respect to you improving the value of the meeting to the consumer.

I think in the recession.

I think we have to.

I mean, it's just -- it's difficult to look at a single retail and service offering where they're not pulling that lever.

And so, the fact that we haven't been I think is a missed opportunity with the benefit of hindsight.

And so, we're going to look to correct that as we go into the second half of the year.

Now could that -- and maybe this gets into more detail than you wanted to, but I presume since monthly pass is such a big piece of the business at this point.

Is monthly pass on the table as far as a pricing adjustment?

Well, monthly pass being our primary offer -- I think if you look across our meetings offerings those would be the things we'd be looking to do.

I think that the focus on promotion would be to increase -- higher a trial.

Because again retention has held up pretty nicely notwithstanding the slight bit of softening that I referenced, which really hasn't gotten any worse since we've gone through the first three months of the year compared to what we were seeing in the back half last year.

So the issue with promotion is one of driving higher trial and getting more people in the door and therefore driving enrollments.

And what's nice about monthly pass is that given you have such a high revenue per enrollment cycle we actually have a fair bit of flexibility to try some different approaches to do that.

So monthly pass is absolutely on the table.

The other point I want to point out.

The other point I want to make about monthly pass is that -- you might have heard me reference some of the improvements were making to the Weight Watchers online products specifically having Facebook like functionality in the form of social networking as well as having a significant iPhone application.

I want to point out the fact that all of those product enhancements also accrue benefit to NACO monthly pass proposition.

So again when I think about what monthly pass is going to feel like as we go into the Fall with social networking, with meetings, with all the tools, with an iPhone application, with the whole -- with everything kicking and a compelling value proposition.

I fell very good about it.

Great.

Thanks a lot.

I appreciate it.

Thank you.

(Operator Instructions) Our next question is from Greg Badishkanian from Citi.

Hello.

This is actually Alvin Concepcion for Greg.

Just wanted to see if we could get a sense for how attendance or recruitments, however you'd like to answer, how that trended throughout the quarter and even into April excluding the Easter shift and acquisitions.

I think what we've suggested is that for the full year -- for the second quarter what we've suggested, particularly for NACO, that we weren't seeing a significant change in trajectory once you factor through the respective changes for holiday timing et cetera.

And that we saw some possibility of some potential attendance upside in the second half of the year although we haven't baked that into our guidance forecast.

We see some possibility for attendance upside depending on how the comparables go given that we're going to lapping the effects of the recession next year and given potential upside from promotions.

We haven't used any of that to adjust our overall guidance for the business.

As you probably heard me reference the attendance trends, for example, in the UK have improved somewhat versus what we saw in the first quarter on kind of an apples to apples basis.

And in CE it's variable depending on the country but we're seeing some signs of hope there.

And so I think you know in those aspects of the meeting business I think that's probably the appropriate level of attendance guidance if that's helpful.

And just to clarify the attendance guidance, does that include acquisitions or is that excluding it?

That would for NACO include acquisitions which is give or take about a 2%.

Okay, great.

And then have you seen any benefits from the locations you've upgraded in terms of retention or recruitments?

Is there any additional color you have on that?

It's too new to come to a conclusion on it.

Okay.

And then I'm just wondering if you could give an update on the economics of the monthly pass and maybe the dollars per enrollment cycle if that's changed at all?

It has not changed significantly.

I mean I did reference the fact that there was a slight bit of softening and retention with monthly pass, but again nothing more significant than what you would have seen in the financial results that were collected in the second half.

So really no change on that dimension.

And you know I think actually if anything some of the cost reduction initiatives we're taking, particularly in Europe, should reduce some of the gross margin hits we currently take on monthly pass having to do with fulfillment and transaction processing and things like that.

So on the cost side of monthly pass that's some of the improvements we're seeing that we had outlined in our previous estimations around cost reduction activities.

Thank you.

Thank you.

Our next question is from Michael Binetti with UBS.

Please go ahead.

Hey, guys.

Congrats on a good quarter.

Thanks, Michael.

A quick housekeeping question.

I think since the last time you guys guided when we talked to you guys in March you said that FX was going to be about an 18 cent hit to your earnings guidance.

And I think the pound and the euro have improved a little bit since then.

Is there anyway you could give us an update on what you think the FX number is for the year?

Yes, it's improved just about a penny at this point.

Okay.

For the whole year, Ann?

Yes.

Okay.

And then could you maybe help us walk through the cadence on the operating margin for the year?

I think last time we talked you were hoping to hold the operating margins steady for the year.

Is that correct?

Actually we were also talking about the gross margin.

The gross margin?

For the year.

Okay.

Yes, I can give you some color on that.

Okay, and then also maybe how the SG&A and the marketing will play out through the quarters would be helpful.

Thanks.

Sure.

Well in terms of the gross margin you saw that the first quarter was down 190 basis points.

That is not what we're expecting on a full year basis.

The first quarter had some things in it that were -- that drove down the numbers but really aren't part of the underlying run rate.

In the quarter we had higher rental expense and some catch up rental expense and some other one time things like a NACO supply chain hit.

But we expect to see a better picture in the second quarter.

We won't have 100% of our savings that we've gotten from our cost initiatives hitting in the second quarter, but you will see some of it.

In the third quarter you'll start to see parity with prior.

We will have the savings fully bedded in.

And by the fourth quarter we could end up with a plus in gross margin.

You know even if we end up the year in sort of 50 to 100 basis points down versus prior, I think that's pretty good performance given where we are in gross margin and given the environments that we're in.

Looking at marketing, our expectation on marketing is that it will hold roughly for the full year as a percent of revenues as compared to prior.

It's a combination of us kind of weeding out some inefficiencies in marketing and the meeting business and then pumping some dollars into .com gross and selectively into some of our foreign markets as well.

In terms of G&A ...

I'm sorry, you go ahead on the G&A.

Yes, I was going to say I mean I think G&A again on sort of an as reported basis we'd expect it to hold as a percentage of revenues given where we are reflecting some of the savings that we've been able to achieve.

Okay.

And then -- Ann, when you say maybe the GM can be within 100 points this year, that also obviously takes into affect perhaps some promotional activities that might reduce this top line meeting revenues.

Yes, I kind of said 50 to 100 --.

Okay.

And you know to a degree certainly outside the US we've got that bedded into the numbers.

In the US we're still doing some analysis so I can't say that we are 100% bedded in.

But if you think about it, Michael, the guidance we provided didn't assume either the upside from doing more aggressive promotions --.

Right.

Nor did it assume the gross margin impact so it assumes kind of no promotions in the second half and a continuation of the trend.

Right.

And obviously we wouldn't be putting this in place unless we thought we were going to get reasonable lift.

Right.

Okay.

Thank you.

Thank you.

Our next question is from Chris Ferrara with Bank of America.

Please go ahead.

Hey, thanks for the -- thanks for taking a follow up.

I guess can you guys talk a little bit about the .com business.

I guess how are you thinking about the long term growth of the business.

I mean local currency was up 11% which obviously is a very good number and you know you're copping some really tough numbers.

I mean how are you thinking about growth in that business over the next couple of years?

I mean I think that when I continue to look at .com I mean it's still such a small level of penetration versus its target market or its target segments of self-help dieters.

And we're still just starting to scratch the surface in terms of international expansion.

And then furthermore when I look at our ability and I look at some of the things we have sort of for launch this year and the continuation of product development activities going in future years, to me there's no end in sight in our ability to continue driving growth.

The fact -- to your point -- that fact that .com was able to put up the kind of paid weeks growth that it did despite a difficult consumer environment I think is a reflection of two a certain extent the fact that it's a lower priced product which certainly helps it, but I think it's more of a reflection of the fact that it still has significant headroom and opportunity for further expansion.

You know one thing that has been out there in a press release which you might have seen is that we recently launched Weight Watchers online in China.

We don't have plans to market it over the next few months because we really want to make sure that the products are set, that it's been burned in properly and that the Chinese consumer is responding well.

But it's another example of the fact that we continue to have significant international terrain in terms of growing that business.

And the other point I would make on .com is and you know I'm not saying that we would do this or not do this, but in for example in NACO we've never really promoted it.

We offer people a free week trial to induce, but we haven't really pulled out any stops in that dimension as well.

So as I kind of look across the board, I see significant opportunities as we go into 2010 and beyond to drive that business.

I think frankly the other thing that's impacting us a little bit that you're already referenced with .com is just simply mix as it relates to the impact of foreign currency.

I mean we're getting fantastic growth in the international and part of the .com business which to me is incredibly important in terms of proving that business model out from a global perspective.

You know it's unfortunate timing that that's the part of the business where four x is having a significant impact.

So when I think about the as reported growth we're going to see with .com I think it doesn't -- it won't even tell the full story of how strong the business is.

But you know we'll lap that as we get into the end of this year.

And so again as I look at 2010, in particularly with the recovery of the economy on top of everything else I feel good about what's going on with the .com business unit.

Great.

And then I guess can we talk about FX for a second?

I mean I would have expected that as you move into next quarter or even in this quarter you would have seen a bigger FX transaction drag rather than translation.

And it wasn't one of the major highlights you guys called out as far as why GM was down 170.

So can you talk a little bit about that and why you haven't seen that?

Can you elaborate on what you mean by transaction drag?

(Inaudible).

Yes, I mean just -- I mean guess maybe I have your supply chain wrong, but I would have thought than in international markets you'd still have some US dollar based production costs that would have driven local currency expenses higher as they take place in deflated currencies relative to the dollar.

(Inaudible).

Not so much.

I mean most of -- most of what is in our overseas markets is sourced overseas.

Yes.

So it's -- when you look at -- when you look at our international markets, its -- four x tends to impact both top line and cost line to a similar degree.

You do have a line in the P&L that's call other expense and other income.

And that's where the inter-company washes out to the extent that we do source in one place and put it in another but it's very small.

And then by way of example it was a plus in our P&L last year while it's a drag this year.

Yes.

That's ...

And actually as I think about it -- the only other place where there is a little bit of what you're describing is in .com where all of the development happens in the US and so to the extent that those costs are shared with international that would be one place where you'd see a little bit of that drag but not that much.

That's -- that's helpful.

And then also I guess of the major drivers and I don't want to make you run through this again because I know you hit it in some detail, but in the lower attendance per meeting that's hitting gross margin -- and I know you said you're taking some -- that you were doing some research to figure out I guess if your meetings are in the right place if I understood that right?

I mean did I understand that right and is there a chance that you can close meetings or are you just not really thinking that way -- you're looking more for the boost in attendance rather than trying to shut meetings down?

I mean I think when we look at meetings by and large the fixed costs for operating a meeting is not that significant.

The majority of cost structure that builds into the meetings at the contribution line is variable in nature.

So you know when you're looking at the decision to keep open or close or meeting, you can also find yourself in a situation where it makes more sense to keep it open from a gross margin dollar perspective versus a gross margin percentage perspective.

And furthermore what we don't want to do is inadvertently create havoc in the lives of our members.

In some cases you know we're going to have on the margin some of those meetings where it just doesn't make sense to sustain them at such a low level of attendance and in those cases we would look to take some action and try to consolidate.

There are certain places where there might be back-to-back meeting where it might make more sense to consolidate them into a single meeting and in a number of other circumstances like that.

We've got a pretty good methodology for evaluating through that process and making sure that we do it in a way that's careful, that doesn't inadvertently result in the loss of any significant level of attendances.

So we're pretty methodical in our approach.

And despite all that as we think about -- as Ann talked through the gross margin sort of view over the coming quarters -- with a view toward effectively keeping our meetings open, the gross margin hit of that if you look at it over the course of the year is included in that 50 to 100 basis point range in terms of sort of softness versus prior year.

So we feel like it's at a manageable level, that as we come out of the economy we're going to be in a better position having kept a number of those meetings open as well.

Great.

Thanks again for taking all the questions.

Yes.

Thank you.

Our next question is from Michael Binetti with UBS.

Please go ahead.

Hey, guys.

Thanks for taking a follow up.

Sure.

I just wanted to ask you, I think the post-Easter period is a big new diet enrollment period for you and I was just wondering if you could give us a look at how the days or the weeks after Easter fed this year on a year-over-year basis?

I think that the guidance I was providing in terms of the trends we're seeing in April was intended to sort of address that.

I mean we typically don't get into our volume results on a day-by-day basis.

But the guidance I was providing is that if you compare sort of campaign over campaign and period over period that the underlying trends we're seeing as we now move into the spring season in NACO are fairly similar to the trends we were seeing prior to the spring campaign season -- so not a significant change.

As I referred to, I think by way of example those trends have been a little bit more positive in the UK reflecting I think some of their promotional activities as well as some other factors.

But you know I think that it's not a significant change on trend.

Okay.

And then if I could just follow up real quick, I think at the analyst's day, David, you and I spoke about maybe if we could get some kind of a look at the return investment data statistics around some of the new locations -- how much you guys are having to put into either (inaudible) or something like that and then (inaudible).

Is there any way you can give us an early look at that?

Yes, I think I followed you.

You were breaking up a little bit, but I got the jist of that.

Okay, there's two dimensions to what we were talking about.

One is on location and the other is on updating the look and feel of the center.

With respect to location, as I referenced, our intention is to take advantage of the current environment which is a bit more of a buyer's market from a real estate point of view.

And to take advantage of that environment to try to lock in rental rates possibly for longer periods of time either at lower rates for what is already a good location or in some respects more importantly to look to use it as a way of upgrading locations while staying cost neutral from a rent perspective.

And so that's the way we're approaching it on the location side particularly with respect to NACO.

On the sort of center fit out branding look and feel side, the approach we've been taking, we've been working with a very good design firm that does a good job with this is recognition that just because something looks better doesn't mean it has to cost more.

And so the intention that we're taking into in developing kind of the sort of the center of the future if you will is trying to keep the cost neutral for what we would typically pay anyway where we'd -- to change locations or to do a retrofit which we do on a regular basis each year of those locations.

And so the relative capital end for any given location the intention is to work like heck to kind of keep that cost neutral and everything we're seeing so far suggests that we can do that.

And is there -- I mean is there any way you can give us an average (inaudible)?

No.

I mean the reason I can't do that is it's too new in the locations and ...

Okay.

...

we're just in the process of building in the pilot locations.

And ...

So it's still too early days.

Okay.

And is there anything new to talk about with the four centers you were testing at Wal-Mart?

No, nothing new at this point.

We continue to be very satisfied with their performance.

Thank you.

Thank you.

There are no further questions registered at this time.

I would now like to turn the meeting back over to Mr.

Kirchhoff.

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

Thank you.

The conference has now ended.

Please disconnect your lines at this time.

Thank you for your participation.