WW International Inc (WW) 2009 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, welcome to the Weight Watchers International third quarter 2009 earnings teleconference call.

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

  • Afterwards, you will be invited to participate in the question-and-answer session and instructions will be given at that time.

  • As a reminder, this conference call is being recorded today, November 10, 2009.

  • At this time, I would like to turn the call over to Ms.

  • Sarika Sahni of Weight Watchers International.

  • Please go ahead.

  • Sarika Sahni - Director of IR

  • Thank you, and thank you to everyone for joining us today for Weight Watchers International's third quarter 2009 conference call.

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

  • At about 4:00 PM Eastern Time today, the Company issued a press release reporting its financial results for the third 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 general update on the Company's progress.

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

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

  • Investors should be aware 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.

  • Kirchoff.

  • Please go ahead, David.

  • David Kirchhoff - CEO, President

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

  • While there is no doubt that the economy continues to impact our business around the world, Q3 showed evidence of stabilization and modest improvement in most lines of business.

  • While some of this stabilization may be a reflection on an improved economic environment, our analysis suggests that the majority of improvement was the result of a number of actions taken by our businesses.

  • Specifically, we continue to see the positive benefit of promotional activity in reversing or at least ameliorating enrollment trends in our meetings business.

  • We also continue to see modest improvement in underlying retention.

  • Finally, monthly past penetration was strong across the board, particularly in NACO.

  • For Q3 2009, total Company revenues declined by 8% versus the prior year period.

  • Unfavorable foreign currency translation accounted for $11.5 million or approximately 40% of the decline in revenues.

  • On a constant currency basis, Q3 revenues were down 4.7% versus the prior-year period in 2008.

  • The top line results reflect an improvement on the trends we saw in Q2 2009 in which revenues versus prior were down 13% on an as-reported basis and 7% on a constant-currency basis, after adjusting Q2, 2008 revenues, for the unfavorable UK VAT ruling.

  • As was the case in Q2 2009, NACO accounted for virtually all of the Company's currency adjusted revenue short fall in the third quarter.

  • On an as-reported basis, global meeting fees were down 10%.

  • In meeting product sales were down 10%, other revenues were down 4% and internet revenues were up 4%.

  • On a constant currency basis, meeting fees were down 7%, in-meeting product sales were down 5%.

  • Other revenues were down 1% and internet revenues were up 7%.

  • From a volume perspective, total global paid weeks for our combined meetings and on-line business were flat to prior.

  • Global paid weeks in our meetings were down 4% versus the prior year quarter while global attendances were down 7.4%.

  • These trends represented a modest improvement over the trends we saw in the holiday timing adjusted results in Q2 which in turn were an improvement on the results we saw in Q1.

  • Global paid weeks for Weight Watchers Online were up 9% for Q3 of 2009 versus the prior year period.

  • Again, an improvement over the trends we saw in Q2.

  • Q3 operating income declined by 6% compared to the prior-year period.

  • Gross margins were essentially flat year-over-year at 54.9%, but total gross profit decline 8.5% as a result of lower revenue.

  • Q3 marketing and G&A expenses were 10% and 12% lower than the prior-year period, respectively.

  • As a percentage of revenues, marketing and G&A were 11% and 12.6%, respectively, a modest improvement versus Q3 2008 for both, despite the overall decline of revenue.

  • On an as-reported basis, Q3 2009 EPS was $0.68 compared with $0.67 in Q3 2008, excluding $0.03 of negative foreign exchange impact, Q3 EPS would have been $0.71, up 6% versus the prior-year period.

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

  • First, our North American meetings business.

  • For Q3 2009, total NACO revenues were $165 million, a decrease of 12% versus the same period last year.

  • NACO meeting fees declined 13% while in-meeting product sales declined 5% versus the comparable 2008 period.

  • Both paid weeks in attendances were down 11% in Q3 2009 versus Q3 2008.

  • This was a slight improvement over the trend we experienced in Q2.

  • Similar to the environment we have been seeing all year, consumer discretionary spending throughout Q3 remained under pressure.

  • While consumer sentiment about the economy seems to be improving, underlying issues impacting spending remains.

  • As noted earlier, the impact of the economy have been primarily on member recruitment efforts.

  • However, we continue to see strengthening and retention patterns despite pressures on credit card holders.

  • In early September, we launched in NACO our first major promotion other than free registration.

  • This particular promotion was a buy one, get one free, BOGO promotion, in which new enrollees who purchased a monthly pass would be credited their second month free.

  • This promotion had an immediate positive effect on our enrollment trends resulting in effectively a 10 to 15 percentage point improvement on the trend line during the seven week promotion period.

  • As we expected, we also saw significant increase in a proportion of new enrollments who are signing up for monthly pass.

  • Prior to the promotion, paid weeks and meetings were trending at 10% to 12% behind the prior year.

  • By the end of Q3, paid weeks are trending at roughly 6% to 7% behind the prior year.

  • This was a result of one, improved enrollment trends and two, a significant shift in monthly pass presentation.

  • Therefore, the most important learning from this effort was the confirmation that a more robust offering and promotion and value messages could have a meaningful impact on our volume trends in NACO.

  • This is similar to what we've observed in our international markets.

  • The most significant challenge of this specific BOGO promotion was the discount.

  • Assuming average retention or eight months for monthly pass subscriber, getting a free month amounts to effectively a 12.5% discount.

  • This in turn suggests that this particular promotion is effectively breakeven on a revenue and contribution basis.

  • As we noted on the last earnings call, the BOGO promotion would have a negative financial impact on Q3 and Q4 of this year due to the timing of revenue recognition.

  • As a result, the BOGO unfavorably impacted our Q3 operating income by approximately $1.5 million, and we project another $3.5 million of negative impact in Q4 for a total of $5 million in 2009.

  • This translates into roughly $0.04 per share for fiscal 2009.

  • Of course, we will recoup this in 2010 when we will have the benefit of all of the incremental volume without having to take any additional revenue dilution associated with the discount.

  • While we were conducting the BOGO promotion this fall, we were also undertaking a major market research effort to study other promotional messages that could have a positive impact on volumes.

  • That work is now done, and we have identified a variety of other new promotions that should drive volume as effectively as the BOGO, but without nearly as steep a discount.

  • We plan to launch one such promotion for the winter campaign in January 2010.

  • NACO and meeting product sales for attendance were up a robust 7% despite the pressures of the economy.

  • However, due to lower attendances, total NACO product sales fell 5% in Q3 2009 versus the same period in 2008, though this again was a significant improvement on the trend we saw in Q2 of this year.

  • Benefiting from the fall promotion, we expect continued modest improvement in NACO volume trends for the fourth quarter.

  • Please keep in mind that the as-reported Q4 comparisons across all metrics in our business, excluding Weight Watchers.com will be negatively effected by the fact that last year's fourth quarter contained an additional week.

  • After adjusting for the extra week in last year's fourth quarter, we're forecasting paid week declines of 3%, and we expect attendances to be roughly 10% below the prior year.

  • On an as-reported basis, including the extra week in last year's fourth quarter, we're forecasting paid week and attendance declines of approximately 10% and mid to high teens below prior year, respectively.

  • One other note about NACO's Q3 results.

  • I'm very pleased to announce the result of our second annual Lose for Good campaign.

  • By was of reminder, Lose for Good is a program in which we ask our members to contribute food to local food banks if they lose weight while we simultaneously make contributions to two charities focused on childhood hunger and nutrition.

  • We far exceeded the results of last year's campaign.

  • During the seven week campaign, our members lost 4 million pounds, our service providers volunteered to run 3,300 food drives across the country, a 50% increase, and our members donated 2 million pounds of food, a 33% increase.

  • At the same time, we will be contributing a combined $1 million again to share our strength in Action Against Hunger.

  • Suffice it to say, it is incredibly gratifying to see our members improving their health while helping people in their community.

  • It is even more gratifying to see their generosity in this difficult economy.

  • Now on to the international business units.

  • Overall, the international meetings business results showed improvements in trends in Q3 versus what we experienced in the first half of this year.

  • Revenues were up 2% on a currency adjusted basis.

  • Paid weeks were up 11% while attendances were down slightly at minus 1% versus the prior year period.

  • For the UK, our most heavily penetrated major market, third quarter revenues were up 15% on a constant currency basis with strength in meeting fees, in-meeting products and licensing revenues.

  • Paid weeks were up a robust 17% and attendances up 6% versus the prior-year period.

  • This compares very favorably with the paid weeks and attendance trend of plus 7% and minus 4% that we observed Q2.

  • The UK business has not been immune from the effects of a difficult consumer environment, and the volume trends we've experienced during major marketing campaign weeks have remained challenging.

  • However, the UK team has very effectively used efficient promotions combined with continuity marketing during times where our marketing activities otherwise would have been quiet.

  • As a result, the UK experienced significant growth through June, July and August, creating a sizeable increase in their customer base going into the fall marketing campaign.

  • We lost some of that ground during September, but we're beginning to see improvements in the trends again as we return to continuity advertising during the typically quiet late October/ early November period.

  • Importantly, the UK was able to use promotions which did not materially dilute average meeting fees.

  • Suffice to say the results of this strategy have been encouraging not just for the UK, but as a potential model for other major markets, including NACO.

  • After adjusting for the extra week in last year's fourth quarter, we're forecasting Q4 UK attendance growth from the low single digits in paid weeks growth from the high single digits.

  • On an as-reported basis, we're forecasting a UK attendance decline in the mid single digits in paid weeks flat with prior year.

  • While not as strong as the UK, we saw some improvement in volume trends in continental Europe in the third quarter.

  • Overall, CE, currency adjusted revenues were down 10% versus prior year.

  • Meeting fees in CE were effectively flat while in-meeting product sales were up 28%.

  • This drop in in-meeting product sales and product sales per attendance reflected the planned rundown of inventory in preparation for the upcoming new program in this market.

  • From a volume perspective, attendances declined 11%, a modest improvement from the trend in Q2.

  • Paid weeks grew 5% versus the prior-year period.

  • The management teams in Europe have been busy on a variety of fronts with a particular emphasis on preparing a major new program that will be soft launched over the next few weeks in advance of the January campaign.

  • This new program, named Pro Points, represents a significant change from the existing program in either CE or the rest of the world.

  • While it's still based on the principle of counting points, it represents a complete upgrade and shift to the program, including a new points formula.

  • In combination with host of other features, it represents a significant improvement in our program on the dimensions of health, satiety, science and flexibility into a single easy to use program.

  • Response from our meeting leaders have been outstanding and consumer testing has also been very strong.

  • After adjusting for the extra week in last year's fourth quarter, we are expecting Q4 CE attendance declines in the mid single-digits and paid weeks increases in the low single-digits.

  • On an as reported basis, we're expecting attendance declines in the low double-digits and paid weeks declines in the mid single-digits.

  • Moving on to Weight Watchers.com.

  • After facing somewhat tough comps in Q2, the Weight Watchers.com business saw some strengthening in its growth trends in the third quarter.

  • Internet revenues were up 4% on an as reported basis and up 7% on a currency adjusted basis.

  • Paid weeks were up 9% and end of period active subscribers were up 9%.

  • Trends in the US Weight Watchers Online business improved with a 450 basis-point increase and sign up volume growth in third quarter 2009 versus prior as compared to the second quarter of 2009 versus prior.

  • After passing a period of tough comparables in July, growth rates in August and September returned to higher levels.

  • Like NACO, Weight Watchers.com in the US also offered a free month promotion in September.

  • The effect was not as significant as the impact we observed in NACO.

  • Now having the benefit of the earlier mentioned promotional market research, we believe that there are much more impactful and efficient promotional offers that can provide higher levels of boost to this growth vehicle.

  • As has been the case during Q2, we saw continued improvements and retention for Weight Watchers Online in the US.

  • We launched an iPhone application for our on-line and monthly pass subscribers in late September and early feedback has been fantastic.

  • In the first five weeks since launch, we have had nearly 200,000 downloads.

  • The international portion of Weight Watchers Online continues to experience robust growth, particularly in the UK and Australia.

  • This growth was driven by a combination of effective promotion and marketing campaign integration.

  • For the fourth quarter, we're forecasting overall paid weeks growth consistent with Q3 results.

  • Finally, licensing.

  • While we don't always allocate significant time in our remarks to discuss our licensing business, I think periodic updates are appropriate and useful.

  • Overall licensing revenues in the third quarter were down 5.6% on an as-reported basis versus the same period last year and down 1.3% on a currency-adjusted basis.

  • Virtually all the shortfall in licensing revenues was in NACO, which was directly impacted by two historically significant deals.

  • In one case, we did restructure a contract with a major licensing partner, Applebee's, and reduce minimum payments.

  • In other case, we have a significant fall off in revenues from a license partner who recently had an ownership change.

  • Without the impact of these two contracts, our licensing business in both the US and globally would have been up 8% on a currency adjusted basis for the third quarter.

  • In our international licensing business, we have seen mixed results.

  • Our UK licensing business continues to flourish while our German license range has seen difficult conditions.

  • We will be seeking opportunities to export the capabilities and learning from successful markets like the US and UK to other markets in our international portfolio.

  • There is no doubt that this economy created tougher trading conditions in the grocery business.

  • However, as we continue to push in the development of products that are truly differentiated from a weight management and healthy lifestyle perspective, we believe that our brand will continue to thrive and grow long into the future.

  • Interestingly, increasing competitive conditions in grocery have also created new opportunities for us.

  • We now have a new and vibrant business in providing endorsements for high quality products that carry other companies' brands.

  • Notable recent examples include General Mills with Progresso soup and Green Giant side dishes.

  • We're also in active discussions about endorsement arrangements with numerous other major CPG companies.

  • The value of our brand and the value of our endorsement are very real and have demonstrated impacts with consumers.

  • Now I would like to turn the discussion over to Ann who will elaborate further on our Q3 performance.

  • Ann Sardini - CFO

  • Thank you, David, and good afternoon, everyone.

  • First, to recap on an as reported basis, our third quarter 2009 results summarizes as follows: Consolidated Company revenues of $324.5 million decreased by 8%, operating income of $101.2 million decreased by 6.1%, net income was virtually flat to prior, down 0.2% and EPS was $0.01 -- was up $0.01 to $0.68 versus $0.67 last year.

  • Foreign currency conversion skewed our operating results when comparing to prior year.

  • Extracting the currency impact, our revenues were down 4.7% rather than 8%, and our operating income was down 2.7% rather than 6.1% as reported.

  • While the revenue decline was volume-related, with global paid weeks flat to the prior year and global attendance lagging by 7.4%.

  • As David outlined, our third quarter operating performance was an improvement in trends from our second quarter 2009 results.

  • Net income on a constant currency basis rose 4.5%, driven by lower interest expense which was down $4.6 million, primarily a combination of lower interest rates and lower debt outstanding.

  • EPS in the quarter, excluding the currency impact was $0.71, up 6% from $0.67 in the year-ago quarter.

  • In my operations overview that follows, I'll discuss our performance on a currency-neutral basis.

  • Our operating income was $101.2 million in the quarter, down 2.7% on a currency adjusted basis versus prior year.

  • Our operating income margin expanded versus prior year, up 60 basis points to 31.2%.

  • The impact of cost savings initiatives and lower marketing spend more than offset gross margin compression in the meeting business that resulted from lower volumes and price promotions.

  • G&A and marketing were both down as a percentage of revenue.

  • Now summarizing some of the operational trends that David discussed.

  • In the meeting business, paid weeks declined 3.8% globally in the quarter versus prior.

  • Internationally, paid weeks were strong, up 10.6%, reflecting increasing monthly past penetration in our international market.

  • NACO meetings paid weeks decreased by 10.6% in the fourth quarter, but the trend improved as the quarter progressed.

  • Attendance patterns were similarly split.

  • Global attendance declined 7.4% in the quarter with international attendance performing better, down 1.4% on the strength of the UK, versus a decline of 11.1% in NACO attendance.

  • Global meeting revenues, that is the combination of meeting fees and in-meeting product sales, were $244.4 million in the third quarter, a 6.7% decline in constant dollars.

  • Global meeting fees were $191.5 million, a decrease of 7.1% on a constant currency adjusted basis from the prior-year period.

  • Global meeting fees per attendee increased by 0.3% in constant dollars.

  • The promotional pricing for our US monthly pass product, the BOGO, had the impact of reducing meeting fees for attendees, which were down 2.2% versus prior in the US.

  • This offset the impact of 7% higher average fee per attendee internationally, which was driven by increasing acceptance of monthly pass in its international markets.

  • Third quarter global in-meeting product sales were $52.9 million, down 5% in constant currency in total, but up 2.6% on a per-attendee basis.

  • The increase was driven by NACO in-meeting product sales per attendee, which increased 6.9% on the strength of new product introductions and promotions.

  • Internationally, product sales per attendee declined 3.6% in constant currency, driven down by continental Europe inventory depletion in advance of its upcoming program innovation launch.

  • Elsewhere internationally, product sales per attendee were strong, growing 12.8% and partially offsetting the 19.2% decline in continental Europe.

  • Moving to Weight Watchers.com, third quarter revenues in this business of $49.7 million increased 6.7% over prior year on a constant currency basis on the strength of the international market.

  • Paid weeks grew 8.8%, end of period active on-line subscribers also increased by 9.3% versus Q3 2008 to 825,000.

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

  • Other revenues of $22.1 million performed nearly at the prior-year level, down 0.7% in constant dollars.

  • Franchise commissions which total $2.9 million in the quarter were down 12.4%, reflecting the impact of the weakened US economy.

  • Our licensing revenues of $16 million in constant currency generally performed well in the quarter.

  • NACO's underlying growth was 8.1% and international licensing was up 8% versus prior year, with the UK maintaining strong performance.

  • Licensing in total was down 1.3% versus prior year.

  • Our consolidated reported gross margin in the third quarter was 54.9%, 20 basis points lower than last year's third quarter.

  • The effectively flat performance this year was negatively impacted by a combination of lower attendance per meeting and promotional activity, but was largely offset by the positive impact of our operational cost savings initiatives in gross margin accretion in Weight Watchers.com.

  • Q3 marketing expenses were $35.8 million, a 10.4% decrease in current dollars from the prior year level.

  • In constant currency, third quarter marketing spend of $36.7 million was 8.1% lower than the prior year level, partially as a result of advertising rate efficiencies.

  • In addition, in continental Europe, we shifted marketing from third quarter to fourth quarter in further support of the launch of our program innovations.

  • Marketing as a percent of revenues was 10.9% this year as compared to 11.3% last year.

  • Q3 G&A expenses were $40.9 million, a 12.2% decrease in current dollars from the prior-year level.

  • In constant currency, G&A expenses decreased by 9.6% from the prior year level and were 70 basis points lower than last year as a percent of revenue at 12.5%.

  • We gained operating leverage as a result of benefits from our restructuring earlier this year and other cost-saving efforts which took hold in the second quarter.

  • As noted on prior calls, 100% of our China joint venture is consolidated into our operating income, and our partner group (inaudible) 49% share of the operating loss is reflected as non-controlling interest in the line item before net income.

  • The operating loss of the venture was $2.1 million in the quarter.

  • Mainly a combination of G&A and marketing, as compared to $1.8 million in the third quarter last year.

  • In summary, our consolidated operating income margin was 31.2% in the quarter as compared to 30.6%.

  • The 60 basis-point increase in OI margin was the result of lower marketing and G&A a percentage of revenues.

  • Interest expense in the third quarter of 2009 was $16.7 million, down $4.66 million or 21.9% in the Q3 2008 level.

  • As a result of lower market rates, our effective interest rate declined 90 basis points to 4.19% from 5.10% in the third quarter last year.

  • Our required debt paydown in 2009 is $162.5 million.

  • In the first nine months of this year, we reduced our debt by $172.9 million.

  • In terms of cash flow, we generated $96.3 million of cash from operations in the third quarter before interest payments.

  • After capital expenditures of $5.7 million, we had $90.6 million of free cash available to service our capital structure.

  • We made interest payments of $16.3 million, paid our quarterly dividends of $13.5 million and reduced our debt by $55.6 million.

  • Currently, we're focusing on using our cash for debt paydowns.

  • We ended of the third quarter with $1.475 billion of debt versus $1.648 billion at end of fiscal 2008.

  • Other than the debt paydown of $172.9 million, fluctuations in the third quarter '09 balance sheet as compared to the year end '08 balance sheet primarily reflect the normal seasonality of the business.

  • Just a final note for those of you who are modeling our business on a quarterly basis.

  • As you look at Q4, keep in mind that this year's Q4 is a normal 13-week quarter, starting on October 4, 2009 and ending on January 2, 2010.

  • This will compare to last year's quarter which had 14 weeks, starting one week earlier on September 28, 2008 and ending on January 3, 2009.

  • The extra week in 2008, which was from September 28 to October 4, added approximately 1.1 million attendances and $21.3 million of revenue to 2008 Q4.

  • Additionally, as mentioned on our last call, the BOGO promotion that we ran in NACO and in Weight Watchers.com US will dilute Q4 earnings per share by between $0.03 and $0.04.

  • Now I'll turn it back to David.

  • David Kirchhoff - CEO, President

  • Thank you, Ann.

  • Throughout this year, we've taken important steps to address the short-term challenges of this difficult economy.

  • Promotion and value messaging, which has allowed us to positively impact near-term enrollment activities as well as to leverage the inherent cost effectiveness of our program versus commercial competitors, increasing retention by more effectively addressing member concerns during call center inquiries and having a more consumer friendly credit card approach.

  • Reducing G&A by streamlining processes and aggressively negotiating with vendors, improving alignment of responsibilities in our field management organization.

  • For example, NACO recently realigned responsibilities between territory managers and trainers in a way that will allow us to increase the amount of training time and increase the number of coachings provided to each service provider.

  • In other words, leaders and receptionists.

  • These initiatives, among others, are allowing us to become more efficient, more streamlined while improving service, quality of training and brand positioning.

  • At the same time we continued to make significant progress in long-term efforts to transform our core meeting business.

  • Today, I'd like to provide some specific highlights on our efforts to bring a modern retail experience to our business.

  • Center 2010.

  • Center 2010 is our effort to completely revamp the look and feel of our centers.

  • The objective of this effort is to, one, improve the functionality of the center and servicing the needs of our members.

  • Two, significantly upgrade the modernity and freshness of our brand and three, create an environment that encourages people walking by to come in, to learn more and ultimately enroll.

  • In July, we opened up four pilot centers, two in Atlanta and two in New York.

  • We undertook the quantitative survey to understand member reaction to the new design and the results have already exceeded expectations.

  • We saw significant double-digit improvements across key brand equity measures, top two box on a 5-point scale including, "modern, up to date brand", which increased by 19%.

  • The scores assessing the center itself increased by an even greater degree.

  • That said, we believe we can make these new designs work even harder, and the NACO team is now in the process of making further design revisions to address all of the areas for opportunity identified in our research and analysis.

  • The plan is to then further enhance our pilot centers before we begin rollout strategy starting in 2010.

  • Real estate.

  • As we noted on earlier calls and presentations, we believe that our location network is far from optimized.

  • Given the impact this difficult economy is having on commercial real estate, we're proactively seeking to lower our real estate costs in good existing locations and move the locations with better visibility, foot traffic and convenience.

  • Working with a well respected third-party analytics firm, we're now completing a comprehensive analysis of our full meetings network.

  • We will then transition from this analytical effort into a comprehensive initiative to upgrade the quality of our location network over the next three years.

  • We expect to begin signing new leases in the first half of 2010.

  • Drop in hours.

  • Most of our centers are only open when a meeting is happening and are otherwise closed.

  • This means that members who miss their meeting do not have the opportunity to come in for a quick weigh-in.

  • It also means that consumers interested in learning more can only visit the center when it is at its most busy.

  • As of the fourth quarter of this year, all of our centers will have at least some time zones designated as drop-in hours in which people can come to the center to learn more, buy products or simply have a weigh-in.

  • The value of this new feature is improved convenience in an environment that is more conducive in enrolling new prospective customers.

  • We believe that our retail presence can and will work harder for us.

  • By combining better locations with more modern stores and more convenient hours, we can significantly increase our brand appeal, improve convenience for our members, and more effectively (inaudible).

  • Historically Weight Watchers has relied exclusively on marketing and word of mouth to attract new enrollments and has not sought to use its more than 825 fixed retail locations to acquire customers.

  • Other retailers such as Starbucks leverage their retail stores to bring in new customers and spend very little on marketing.

  • We believe that the right answer for Weight Watchers is somewhere in the middle.

  • By finding the right balance, we have an opportunity to substantially increase trial and repeat enrollments while simultaneously shifting consumers' perceptions of the brand, its relevance and its convenience.

  • With respect to 2009 EPS guidance, we're now narrowing the range to $2.58 to $2.63 per fully diluted share before restructuring charges associated with our previously announced cost savings initiatives.

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

  • Operator

  • Thank you.

  • We'll now take questions from the telephone lines.

  • (Operator Instructions) We will now take question from Mr.

  • Jerry Herman from Stifel Nicolaus.

  • Please go ahead.

  • Jerry Herman - Analyst

  • Good evening, everybody.

  • David Kirchhoff - CEO, President

  • Hi, Jerry.

  • Jerry Herman - Analyst

  • Let's start with promotions, if we can, David.

  • I appreciate the feedback on that.

  • You were good enough to quantify the EPS impact of the promotional activity.

  • Is there a way to quantify the volume impact as part A of the question?

  • And then part B of the question is, you referenced the possibility of doing some of that next year in the next diet season.

  • Should we assume that you're likely to do that throughout 2010 in the key diet season?

  • David Kirchhoff - CEO, President

  • To answer your first question is, I mentioned during my remarks, what we saw from a volume prospective.

  • I mentioned two different metrics.

  • One I mentioned that during the seven weeks in which we're running the promotion, we estimate that we saw a 10% to 15% improvement on the enrollment trend line.

  • And so that was sort of an immediate like-for-like response to the promotional offer.

  • That was the first metric we mentioned.

  • The second metric we mentioned was that we started paid weeks in the beginning of the quarter as running at roughly minus 10% to minus 12%, and we ended the quarter at minus 6% to minus 7%, and most of that, if not all of that, was a result of the promotion.

  • So that's the direct impact that it had on volumes.

  • Jerry Herman - Analyst

  • Okay.

  • David Kirchhoff - CEO, President

  • To answer your second question, we ran the BOGO knowing it that it was going to be a significant promotion and that it was -- it felt like the right promotion for us to run during a typically slow season.

  • We knew that it had a relatively higher hurdle rate in terms of overcoming the discount in terms of the amount of lift it would have to provide.

  • But we really wanted to get a sense for it, because we hadn't historically done promotions other than free registration.

  • We really wanted to get a sense for how this new kind of promotion could potentially impact our business as well as how we would execute it through the field because it was something different than what our service providers were used to.

  • So it was a significant learning effort for us.

  • While we were doing this, as I mentioned during the remarks, we were doing some pretty comprehensive market research, in which we were testing 50 to 100 different potential promotional messages to understand which ones could potentially provide the most response to our business, in terms of intent to purchase, while also understanding the economic impact of each.

  • And so we absolutely plan on running new promotions that perhaps in new promotion language that you may not have seen before, as we get into 2010, it would be our expectation that we could do that, identifying promotions, that would have hopefully, and should have, similar effect on volume that we saw with the BOGO promotion, but without nearly as much revenue dilution.

  • And so that work is still going in terms of planning out the calendar for 2010, but we do see that as a growth lever as we go into next year.

  • Jerry Herman - Analyst

  • Great.

  • And then with regard to the UK, you mentioned promo and continuity type activity.

  • Could you maybe get a little more detail on that?

  • David Kirchhoff - CEO, President

  • So when I say continuity marketing, what I mean is that historically, Weight Watchers would have a winter marketing campaign in which they might be on air for most of the weeks of, let's say January and February, and then we might go dark.

  • In other words, we don't have any significant above the line marketing, TV print, whatever, in the period beginning March going into Easter.

  • Then we might run the spring campaign, which would go for, say Easter, five, six weeks, depending on the country.

  • Then we would be effectively dark again throughout the course of the summer.

  • And then in September, again, we would go back on air for, say, four, six, seven weeks, depending on the country, and then we would go dark again throughout the rest of November -- a chunk of October and November and then into December.

  • We define continuity marketing as running marketing during traditionally sort of slow times.

  • So for example, running marketing in say June and July, either print, daytime TV, whatever the case might be.

  • When I say continuity marketing, that's what I mean.

  • So in the particular case with the UK, what they were doing was they were running advertising during those summer months, and they were combining it with some effective promotions that the -- the depth of the discount was not that significant, but the consumer response to the language being used was significant.

  • So, in other words, there were promotions that didn't cost us a lot of money, but they drove a very good response rate, and that allowed the continuity marketing effectively to work.

  • And so that's basically what the UK did.

  • Now the obvious follow-up question to that is for us to contemplate how that could create opportunities to pursue similar strategies in other countries, and that's something that's currently under evaluation.

  • Jerry Herman - Analyst

  • Great.

  • And then just one last one with regard to licensing.

  • I know it is a small piece of revenue, but profitable.

  • Can you talk about the pipeline of opportunity there and then maybe the impact on North America with regard to Applebee's and change in ownership.

  • Are they more permanent changes at this point?

  • David Kirchhoff - CEO, President

  • Yes, I think first of, in the case of Applebee's, it's really a one of a kind license.

  • It is not a grocery business, obviously, it is a restaurant chain.

  • And in the North American business, it is the only one of its type.

  • So in their case, I don't want to go into all of the details in terms of what drove the decisions for both of us, other than to say that it was a unique set of circumstances that would not apply to our other licenses.

  • In the case of change of ownership, these things happen sometimes and there ends up being a difference in terms of how products are executed through and everything else.

  • Again, it was a significant enough shift in terms of how that particular license was being operated that we saw impact in terms of the results at the grocery level.

  • And so, again, as I mentioned during my remarks, if you pulled out those two fairly unique circumstances, NACO actually had a fairly solid Q3 in terms of driving licensing growth.

  • When I talked -- the concluding remarks on licensing was to talk about there is this interesting effect that if you take categories that are incredibly competitive that are under significant pressure, such as soup, what we've seen is that we could absolutely provide benefit and add value to somebody else's brand, in this case, Progresso by General Mills, and doing the same thing now for Green Giant.

  • And so what is interesting is that you can actually have categories in which you have quite a bit of heavy competition in the existence of a Weight Watchers endorsement can make the difference in terms of creating differentiation.

  • So that is an example of where we're announcing growth opportunities and as I mentioned, we're in active discussions on a number of specific opportunities.

  • But what I also don't want to lose sight of is that there is a tremendous amount of white space.

  • There is a lot of categories out there.

  • There is a lot of eating occasions that really haven't been tapped into in terms of weight management and healthy weight loss opportunities, and we see similar opportunities internationally, as well.

  • The international licensing business is effectively the same size as the US licensing business.

  • And if I look at the UK, which has been -- their grocery trade has been under terrific competitive pressure with each other, yet we've still been doing incredibly well, partially because we have a terrific range of products that are differentiated and are continuing to perform well.

  • And I think that there is a lot of the tactics and approach that have been taken in the UK.

  • By way of example, there is no reason why they can't be replicated more fully in other countries that have maybe lagged their performance somewhat.

  • And so while we do recognize that in some respects, particularly in this economy, the grocery trade has been undergoing changes, we see our brand in our approach in our differentiation as holding up even through tough times, and further than that, it's been interesting that particularly in the competitive front, we've seen it open up new growth opportunities that we hadn't even contemplated before.

  • Jerry Herman - Analyst

  • Great.

  • Thanks very much.

  • I'll turn it over.

  • David Kirchhoff - CEO, President

  • Yes.

  • Operator

  • Thank you.

  • The next question is from [Olivia Tone] from Bank of America, please go ahead.

  • Olivia Tone - Analyst

  • Hi, good afternoon.

  • I want to talk a little bit about NACO.

  • It sounds like the BOGO promotion is working as you had expected, maybe a little bit better, so -- with declines accelerating as the quarter progressed.

  • I'm wondering why, if you have a full quarter of it in Q4, as opposed to just September and in Q3 you expect attendance to decline by the same amount on organic basis in Q4 -- in W3, it sounded like it got a lot better as each quarter progressed.

  • David Kirchhoff - CEO, President

  • I think that the way that I would suggest more tracking volumes, if you're trying to understand the impact of that promotion is to focus on paid weeks, not attendances.

  • What you have -- attendances can get increasing confusing to follow, because attendances are a function of the install base of monthly pass subscribers.

  • So depending on what the average tenure is of different people within the monthly pass base at any point in time, that can have influence in terms of the attendance patterns.

  • If you want to look at something tracking behind the enrollment patterns, it is going to be paid weeks, because that's simply -- that's going to be a much more direct reflection of the relative size of the membership base, if you will.

  • And so that's why if you look at NACO exactly to your point, the BOGO promotion did work well in terms of driving incremental volume and enrollments and also in terms of increasing monthly pass penetration, which is why we were guiding to low single-digits for paid weeks in Q4, which would be a significant improvement on what we had seen in Q3.

  • And so in that sense, we're absolutely expecting volume improvement in the fourth quarter in NACO.

  • Olivia Tone - Analyst

  • Okay.

  • Fair enough.

  • Then the other thing is, what does -- it sounds like you have the got the promotion on in NACO, you have got -- it sounds like you're doing a little bit more promo in the UK as well.

  • What does this mean in terms of the marketing expense that hits the SG&A line going forward?

  • David Kirchhoff - CEO, President

  • What is interesting about the work that has been done in the UK this year is that they have been able to effect a lot of the changes and improvements they've made without substantially shifting their total marketing expense.

  • And I attribute that to them doing, among other things, a really good job of media planning and optimizing around media vehicles.

  • What I would also say is that we've tried continuity in the past in other markets.

  • In other words, marketing during seasonally low periods or dark marketing periods, and they haven't historically worked well, but I think what we recognize is that continuity marketing really is most effective when combined with a strong promotion.

  • And so in other words, the marketing that's supplied against it is marketing that can easily pay for itself on a cost per enrollment basis.

  • So while we're -- what I don't want to do is spend too much time forecasting what we are going to be doing in 2010 because historically, that is a conversation we reserve when we're discussing our Q4 results next year.

  • I don't have any reason on the basis of the work we're doing with promotion or anything else, to believe that there's going to be any substantial change in terms of economics around marketing as a percentage of revenue.

  • Olivia Tone - Analyst

  • All right.

  • Thanks very much.

  • Operator

  • Next question is from Greg Badishkanian from Citigroup.

  • Please go ahead.

  • Alvin Concepcion - Analyst

  • Hi, this is Alvin Concepcion in for Greg.

  • I think on the last call, you talked about completing some up front network ad buy in September.

  • Did that happen, and how do those rates compare to last year?

  • And also, what about outside of the US for the ad buy as well?

  • David Kirchhoff - CEO, President

  • Well, as you probably know from reading the newspapers, most people have completed the negotiations around the upfront.

  • And as you probably -- what I would suggest is that the types of trends that are generally being portrayed about the industry apply to Weight Watchers as well.

  • I think at this point, it -- I don't want to talk about the specifics of this shift we're seeing in terms of media dollars , but I think what you're generally seeing in term of the upfront purchase negotiations that are completed is that there has been some improvement in terms of cost for GRP.

  • So rates have gone

  • Alvin Concepcion - Analyst

  • Great.

  • And then regarding the new retail format, I think you mentioned you saw some double-digit increases in the pilot locations.

  • Did you see changes to the other metrics, like retention or maybe penetration of those markets?

  • David Kirchhoff - CEO, President

  • Well, actually, what I referenced was we saw double-digit increases in terms of brand equity measures.

  • Alvin Concepcion - Analyst

  • Okay .

  • David Kirchhoff - CEO, President

  • I didn't speak to volume trends.

  • And I think that the problem -- it's not a problem.

  • When you only have four pilots, it has been our experience that you need to be really careful in terms of trying to interpret volume trends.

  • Our objective with these pilots is particularly to understand functionality for our existing members as well as overall impressions with respect to the brand.

  • Now, what I would say is that the kinds of shift we were getting in people's perceptions of the brand in terms of particularly, do they think Weight Watchers as a whole is a modern and contemporary brand, to see top two box scores increase by 19%, it's -- I cannot imagine a single other thing that we would do in marketing that would have a similar impact.

  • And so I think everything we've seen in terms of members' reactions to the new designs has been absolutely fantastic, and I'm particularly heartened by the fact that those designs arent even nearly as good as they are going to be by the time the team is done with them.

  • There is a lot of other opportunities that we're currently going after.

  • Ultimately, we have an opportunity when we are in locations that are getting good foot traffic, to have stores that draw people in that encourage people to come in, ask questions, learn more, get more comfortable.

  • And that we believe is going to represent a significant shift in terms of our ability to enroll people.

  • In terms of your question, in terms of measuring retention, it's way too small a sample size and it's way too short a period of time to come to a conclusion on that right now.

  • Alvin Concepcion - Analyst

  • Would you expect any significant incremental costs for this in 2010 as you roll this out further?

  • David Kirchhoff - CEO, President

  • What I would ask is that as we continue to get more specific learnings and as we go into 2010 and as we start to come to the investment community with more specific plans for what a rollout might look like, that I would use that as an opportunity to talk about the specifics around the capital required and everything else.

  • Suffice to say that we believe that in pursuing such a program that it would be capital that would very easily return on its own investment, in terms of long-term growth contribution of the business.

  • Alvin Concepcion - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • Next question is from Ken Goldman from JPMorgan , please

  • Ken Goldman - Analyst

  • Good afternoon.

  • David Kirchhoff - CEO, President

  • Hi.

  • Ken Goldman - Analyst

  • I know you can't give guidance yet on 2010, but you may have addressed some of these, I had to hop off for a second.

  • But looking ahead in general, you get a little bit of tailwind from currency, you get the $0.04 benefit from the BOGO, your comps are easier next year, you're doing a store realignment, your marketing plan will be better aligned with economic realities which is something you weren't, unfortunately, able to do last year, necessarily.

  • What am I missing in the sense that I'm looking ahead to 2010 and thinking, boy, there are some nice tailwinds you'll have going into that year, and if all things go as planned, which they never do, of course, it could be a fairly solid year.

  • David Kirchhoff - CEO, President

  • Oh, geez, I guess the best way to answer your question is that of course I'm incredibly bullish on the long-term growth prospects of the business.

  • So I share your enthusiasm.

  • What I would say is this: A lot of the initiatives, I was talking about, for example, real estate, store upgrades, open hours, things like that.

  • As you probably heard me describe, think of that as, it's going to, at minimum take us about three years to turn over our real estate portfolio, so that is not something we get all of the benefits from in say, the first half of 2010.

  • We look at that as a long-term transformation for our core meetings business or at least the retail aspect of it.

  • There's certainly a lot of other things that we're working on that we haven't been talking about but we also think are going to benefit -- accrue significant benefit to our core offerings.

  • And that's all designed to really put the core business on a long-term secular growth trend that it deserves to be in.

  • In terms of near-term opportunities in some of the things we described, certainly there is levers that we're eager to pull as we go into 2010, but again, I would like to continue to be circumspect.

  • Among other things, I don't know exactly what is going to happen with the economy in 2010.

  • IL think that there's reasons to believe that the consumer psychology, if nothing else, are going to be better.

  • But at the same time, spending dynamics, it is difficult to see how consumer spending dynamics are going to shift, given what's happening with unemployment issues.

  • With credit card holdings and everything else, I think that it still pays for us to be circumspect about how we think about next year.

  • So in other words, to continue our posture of planning conservatively while thinking more aggressively about long term growth.

  • Ken Goldman - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • The next question from Michael Binetti.

  • Please go ahead.

  • From USB.

  • Michael Binetti - Analyst

  • I just wanted to see if you would talk a little bit about cost savings initiatives that you talked about in the script.

  • And in particular, I want to make sure that I understand the changes you referenced related to the training function for the leaders in the meetings business.

  • I think you actually reduced the number of employees that train your meeting leaders, but I think you mentioned that the training time with leaders would actually increase.

  • I just want to make sure you can -- if you could just help me and make sure that I understand how the training of leaders is changing, and then I have a follow-up.

  • David Kirchhoff - CEO, President

  • Absolutely.

  • What we basically did was we increased the number of territories.

  • We used to have -- we historically have had two roles.

  • We had trainers and we had territory managers.

  • And what we did was we effectively increased the number of trainers and reduced their span of control.

  • And then what we would typically have is a situation in which sometimes trainer and TM, territory manager, at the same time would go in and give the same coaching for the same leader.

  • So in other words, there was duplication of effort.

  • And so what we did is we basically said we want our trainers focused on providing classroom training for service providers which would be sessions such as basic leader skills and things like that.

  • In training of our territory managers, to make them more effective at coaching and providing coachings for our service providers.

  • And so when we work through all of the math, what it effectively allowed us to do was to increase the number of coachings we provided, and then we're also doing a number of things that in addition to having more coachings is going to both improve the quality of the training provided as well as other types of training.

  • So this is providing online trainings and other things like that that are going to further supplement.

  • And so interestingly enough, just by being smarter about how we did things, we are going to actually have what we believe is going to be a much stronger training outcome in 2010 than we've ever had before.

  • Michael Binetti - Analyst

  • Okay.

  • Let me just ask a quick follow-up.

  • I was wondering if you would talk a little bit about trends in the at work business and whether you saw that business slow or accelerate in the quarter.

  • Thanks.

  • David Kirchhoff - CEO, President

  • In general with that work, it has been under a little bit of pressure as well during this year, just because employers -- certainly, we've seen it in lots of different places and I'm sure you've seen it in lots of different companies in your own universe, that major companies have not been shy about looking for opportunities to cut back on expense.

  • So on the margin, we've seen a little bit of pressure in the at-work business.

  • Not any worse than what we've seen in the traditional business.

  • But I think what is interesting is that one of the things that is becoming more and more clear is that the health care debate is continuing to heat up, obviously.

  • There's increasing frustration by a lot of people that more has to be done in terms of reducing long-term health costs, and what that's beginning to do is to shine a much brighter light on the impact that obesity and lifestyle have on health care costs, and that is particularly acute, or I guess realized by large self-employed companies that provide large self-employed insurance plans.

  • And so I would expect that companies probably look to adopt more aggressive stance in terms of providing benefits around wellness and lifestyle as we go into next year.

  • At the same time, the NACO team has been working very hard to do some improvement and realignment to its at work selling capability.

  • We now have a terrifically talented woman who's running network selling for us, and she's working to find ways and identify ways for us to be much more effective in outbound selling, which we believe is going to create an opportunity to make at work a significant near end growth opportunity as we go into next year.

  • Finally, one thing that we seen really benefit the at work business, similar to our traditional business is just being very smart about offering meaningful promotions that get that last one to two people that's necessary for us to get in that work meeting set, as well as providing incentives for people to reup at work meetings, we're getting some great learnings about that.

  • So I feel very good as we go into next year that we're actually going to have a very good tactical plan that is going to allow us to drive nice growth from our at work business.

  • Operator

  • Thank you.

  • There are no more questions.

  • I would like to return the meeting over to the management.

  • David Kirchhoff - CEO, President

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

  • Thanks.

  • Operator

  • Thank you.

  • The conference has now ended .

  • Please disconnect your lines at this time.

  • Thank you for