WW International Inc (WW) 2010 Q1 法說會逐字稿

Welcome to the Weight Watchers International first quarter 2010 earnings conference call.

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

Afterwards, you'll be invited to participate in a question-and-answer session.

Instructions will be provided at that time.

As a reminder, this conference call is being recorded today May 6, 2010.

At this time, I'd like to turn the call to Ms.

Sarika Sahni, Weight Watchers International.

Please go ahead.

Thank you and thank you to everyone for joining us today for Weight Watchers International first quarter 2010 conference call.

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

About 4:00 p.m.

Eastern time today the Company issued a press release reporting its fiscal results for the first quarter 2010.

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 at www.weightwatchersinternational.com.

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

Investor 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 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 2010.

Consistent with the direction we gave in the last earnings call, Q1 2010 proved to be one of the more challenging quarters that Weight Watchers has faced.

The combination of residual slowness in the economy, unprecedented bad weather in our largest market, and [comping] against the new program won last year in our US and UK markets created uniquely difficult operating conditions.

As a result, we experienced soft enrollments in our business in both our key US and UK markets only partially offset by the launch of our new Pro Points program in continental Europe and continued growth of our weightwatchers.com business.

As we will discuss later in this call, the early results of Q2 look significantly more favorable.

Before I run through the call results I want to point out that we have modified our approach to more clearly bridge between our GAAP and non-GAAP financial results as well as other key metrics.

I will focus my remarks on the financial and operating metrics that provide comparability and insight into the performance of our business.

I hope you find this new approach helpful.

On a constant currency basis Q1 revenues declined 4.5% with meeting fees declining 7%, product sales and other revenues declining 6% and Internet revenues growing 11%.

From a volume perspective, combined global online and meetings paid weeks grew by about 1%.

Global paid weeks in our meetings were down 4% versus the prior year quarter while paid weeks for Weight Watchers online were up a solid 11%.

Q1, 2010 EPS was $0.58 compared to $0.61 for the same period in 2009.

After adjusting for the impact of the adverse UK sell employment ruling along with last year restructuring charges, Q1 2009 EPS would have been $0.63 on a comparable basis.

Among the factors negatively impacting Q1 2010 EPS was owe $0.02 per share of higher interest expense.

I will now briefly review our results in our major year graphs.

First, our North American business.

Total NACO revenues were $195 million in Q1, a decrease of 8% versus the same period last year.

NACO declined 9% while in-meeting product sales declined 4%.

NACO Q1 2010 paid weeks were down 8% versus the same period in 2009 while attendance was down 16%.

To better understand the drivers behind the week Q1, 2010 volume figures it is useful to see the trends we saw in 2009.

As I noted on our February call, NACO has been seeing growth trends during the months of October and November.

However, when we began to lap against the launch of the program in December of 2009, we saw a significant drop in relative value albeit during a typically low volume time of year.

2010 is an off cycle program innovation year which resulted in us not having meaningful news to entice new customers into our doors the quarter this year.

Moreover, in January last year we saw a surge of attendance from existing monthly pass members coming to meetings to check out the new program.

We did not have the same benefit this January.

It is now clear that when we were parsing out the relative effect of the recession versus momentum innovation in our Q1 2009 results, we underestimated the impact of the new program launch.

Our results in this year's quarter were impact by bad weather.

I cannot recall a more difficult time from a weather perspective on our North American business.

Meetings closure were up 44% for the full quarter and even meetings left open in the impacted areas that were affected hurting both attendance and, most importantly, enrollments.

For many customers it's all too easy to procrastinate the first step of starting a sustained weight loss effort and this winter tough weather gave customers a perfect excuse to stay home.

The soft volume trends were most pronounced in January and February and we began to see some moderation in March.

This is consistent with the passing of the January, February snow as well the diminishing impact of lapping the initial launch of the (inaudible) program in the prior year.

While the poor weather was not unanticipated the fact that we did not have a new program was not.

It is now clear that the collective impact of our advertising and PR in January did not have nearly enough impact and cut through in this crowded and competitive environment.

Quite frankly, we were out shuttered by our competitors in one case, in a duplicitous manner that we vigorously and successfully challenged in court.

The poor start of this year has been a wake up call for me and my team to take a more different, more aggressive approach to getting our message out.

As the first step in this new direction, on March 28 we launched a louder more aggressive marketing campaign and it has already had a visible impact on our enrollment trend.

Word of mouth has always been the most effective way to create interest in Weight Watchers and our new campaign attaches a megaphone to those conversation by using the voices of our members, online subscribers and meeting leaders to compassionately convey the benefits of Weight Watchers.

This campaign fully integrates all aspects of our marketing mix including TV, website, Internet, PR and direct mail.

As part of this campaign we enlisted Jennifer Hudson, an Oscar, Golden Globe and Grammy Award winning singer/actress.

Prior to April 1 launch announcement, Jennifer had been confidentially participating in Weight Watchers working with a real life meeting leader and using the Internet tools including the new iPhone application extensively.

She has had fantastic success and her transformation was already apparent to the public prior to the announcement of her partnership with Weight Watchers.

It's been more than five years since the Dutchess of York had been fully integrated into our marketing campaign.

When we made the decision to once again work with a celebrity spokesperson we had several criteria.

One, we wanted an A-list celebrity who had broad based appeal and could help expand our relevance through her appeal to multiple demographic groups, including young people.

Two, we wanted a celebrity partner who really believes in the Weight Watchers approach and was going to live Weight Watchers much like our members do, a celebrity who can showcase the attainable lifestyle based approach to Weight Watchers.

Jennifer has demonstrated that an incredibly busy, on-the-move woman can learn to navigate and manage her environment.

She may be often in the spotlight, but in most ways she's very much like her other members.

She sees the value of having Weight Watchers be her partner for a healthy lifestyle.

Because she truly believes it, she's able to communicate the benefit of Weight Watchers in a real and authentic way.

All early research suggest that the customer has responded very favorably with Jennifer and we are very pleased with our partnership.

In the first few weeks of the spring campaign, volume trends in both paid weeks and attendances have improved significantly from what we experienced in Q1.

While I'm pleased with the early enrollment trends, I would caution that we are only five weeks into this new campaign.

The other bright spots in the NACO business included further increases in monthly pass penetration rates, improving monthly pass retention as well as higher in-meeting product sales.

Product sales for attendance in Q1 were up a robust 15% driven by a combination of successful new product launches along with a very effective promotional campaign.

While we are pleased with the favorable April enrollment trends, we believe that prudence should be applied to forecasting NACO volume trends Therefore, for the remainder of the year we are forecasting mid to high single digit paid week declines and high single digit to low double digit attendance decline.

Now on to the international meetings business.

UK 2010 Q1 revenues declined 11% on a constant currency basis driven by promotional discounts and enrollment softness.

Revenues were further adversely impacted by the return of VAT rates from 15% in 2009 back to the historical 17.5% in 2010.

Paid weeks declined by 3% and attendance declined 13%.

The situation in the UK during Q1 was very similar to that of NACO with volumes being significantly impacted by, one, weather, unprecedented snow in the first two weeks in January resulted in the loss of nearly 50% of the enrollments in those critical first two weeks.

More than any other of our major markets, the UK is dependent on new years resolution volume.

While weather was less of a challenge for the remainder of the quarter, as expected, the UK was not expected to make up for the volume loss.

Two, timing of program innovation.

Like the US, the UK did not have the benefit of a new program to provide product news in its winter marketing campaign in Q1 of this year as against the new program launched last year.

As it is the case with NACO, we need to take a more aggressive tact in getting our message out in the market as well.

While we expect some moderation in volume trends in the UK for the duration of 2010, we are forecasting low single digit paid week declines and high single digit attendance declines for the remainder of the year.

In the meantime, the UK team is heavily focused on preparing for the soft launch of its new program in late 2010 with the full supporting marketing campaign beginning January 2011.

Moving on to continental Europe.

With the benefit of a new program launch this year we saw trends begin to improve significantly in Q1.

CE revenues were up 3% for Q1 2010 versus the same period in 2009.

Paid weeks were up a robust 10% and attendance was up 3%.

This marks a dramatic shift from the double digit attendance declines we saw in CE throughout much of 2009.

This improvement in volume came despite bad weather conditions across much of Europe earlier this year.

As we shared in our previous call, CE launched a significant program innovation, Pro Point, in the market in late 2009.

Volume trend improvements were universal across large countries driven by a large influx of returning members who are attracted back by the many new benefits Pro Points offers, including a totally revamped points formula.

Member response has been terrific and the transitional issues associated with this major innovation has been limited.

Going forward, the challenge for the CE management team is to use to attract more members by levering the benefit of increased positive word of mouth being generated by the influx of successful returning members during Q1.

Additionally, the CE management team are focusing their efforts on other initiatives that will further long-term growth in Europe including greater marketing effectiveness, innovating the core service offering, and building new sales channels such as at work.

For the remainder of the year, we are forecasting low single digit and high single digit paid weeks growths for CE business.

Moving on to weightwatchers.com.

Weightwatchers.com had a solid start in 2010 with particularly good growth in the international markets.

Internet revenues were up 11% on a currency adjusted basis, online paid weeks were up 11% and end of period active subscribers were up 11.5%.

During Q1, growth in the dot com business was strong in the UK where it benefited from an integrated marketing campaign and in continental Europe where it benefited from both integrated campaign from the new program.

In the US in April weightwatchers.com launched its new advertising campaign which leverages the same marketing approach we are now using for the meetings business by enlisting and amplifying the voices of successful subscribers who talk about the positive impact weightwatchers online has had on their lives.

Again, we are cautious interpreting the results of a campaign that is only five weeks old, but we are very encouraged by the results so far with nice volume acceleration versus the trend in Q1.

As a side note, I am very happy to announce that a few days ago weightwatchers.com reached a milestone having surpassed the one million active subscriber mark.

The weightwatchers.com team continues its pace on product development with well received feature upgrade releases for the iPhone and website applications.

For the duration of the year we are forecasting mid double digit online paid weeks growth.

Now I'll turn the discussion over to Ann who will elaborate further on our Q1 performance.

Thank you, David, and good afternoon everyone.

Recapping our first quarter 2010 as reported results, before adjustments for comparability, consolidated Company revenue of $388 million were slightly behind prior year decreasing by 0.7%.

While net income of $91.4 million declined 2.6% while net income of $44.6 million was 5.8% below the Q1, 2009 level.

EPS was $0.58 versus $0.61 in last year first quarter.

There are just a couple of items related to expense in the first quarter of last year which should be adjusted for comparability.

The first of these is a restructuring charge taken in last year's first quarter associated with reduction in force.

Removing this charge from 2009 reduces expense by $3.1 million and increases 2009 Q1 EPS by $0.02.

The second adjustment relates to the adverse court ruling we received earlier this year with regard to leader self-employment status in the UK.

This resulted in a current and prior period charge to fourth quarter 2009 results and has an ongoing impact.

In the first quarter of 2010 this charge was $1.1 million, adjusting the first quarter 2009 for comparability result in a similar charge which reduces Q1 2009 EPS by $0.01.

After adjusting for both of these items, 2009 Q1 EPS is $0.63 and 2010 Q1 EPS is $0.58, $0.05 below the comparable prior year level with higher interest expense accounting for $0.02 of the difference.

Q1, 2010 revenues benefited by $15.2 million from favorable foreign currency translation.

Excluding that benefit, revenues decreased by 4.5% versus the prior year level with the impact of volume softness in the NACO meeting businesses partially offset by revenue increases in continental European meetings and global online.

Our net income on a constant currency basis after factoring in the 2009 adjustment was 10.9% below the 2009 Q1 level.

In the operations overview that follows, I'll discuss our operating performance on a currency neutral base and excluding the adjusting items we talked about.

Our 2010, Q1 income was $91.4 million, a currency neutral decrease of 7% as compared to the adjusted 2009 first quarter level.

Our operating income margin declined 60 basis points to 23.9% in the same basis.

Gross margin expansion versus prior year driven primarily by weightwatchers.com was offset by higher G&A as a percentage of revenue which I will review later in this report.

Now summarizing some of the operational trends.

First in the meeting business, paid weeks declined 4.2% globally in the quarter.

Internationally, meetings paid week were up 2.4% reflecting 9.9% growth in continental Europe.

UK meetings paid week declined by 3% and NACO meetings paid week declined 8%.

As David noted, both UK and NACO were cycling against last year's innovation and were impacted by severe weather this year in the quarter which lowered both enrollment and propensity attend.

First quarter global attendance was down 12% with UK down 12.8% and (inaudible) down 16%.

Continental Europe attendance was up 3.4% on the strength of the innovation and despite its own weather issues.

Lecture income revenues of $218.2 million in the first quarter were 7% behind the prior year quarter, a result of lower enrollment levels in prior year.

Overall, lecture income for meeting paid weeks declined slightly versus prior year by 2.9% mainly as a result of globally higher penetration of value price monthly pass.

In NACO, extra income for paid week declined 1.7%.

Internationally, increased promotion activity versus the prior year quarter also had an impact as did a reversion to higher UK rates after a temporary government abatement.

As a result, lecture income per paid week declined 3.8% across the international market.

First quarter global and meeting product sales were $80 million, down 4.4% versus prior.

On a per attendee basis, global and meeting product sales were up 8.5% with NACO increasing 13.6% on the strength of new consumable product introductions which were very well received and promotions.

Internationally, product sales per attendee grew 1.7%.

Moving to weightwatchers.com where strength across all major markets a combination of strong retention and sign up growth drove first quarter revenues in this business up 10.9% over prior year.

Paid weeks grew by 11.3% and end of period active online subscribers increased by 11.5% versus Q1 2009 to 972,000.

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

Other revenues of $22.7 million declined 9.3% versus the prior year level.

Our licensing revenues of $15.4 million in the quarter declined 6.7% versus last year.

Domestic licenses declined 10% with 40% of the decline resulting from the change in the Applebee's and yogurt relationships.

Our remaining domestic licensing was down 6% with 4% coming from the food category where the introduction of multiple new products improved last year drove especially strong results.

The largest Better For You retail category, frozen entrees, was down roughly 4% in the quarter.

Most of the products in the Better For You category are premium priced and the category has experienced difficult trends in the recessionary environment.

International licensing was down 3.5% with growth in the UK offset by declines in continental Europe.

Franchise commissions which totaled $3.5 million in the quarter were down 18.6% with US franchise commissions down 20.3%.

Our first quarter gross margin was 64.6%, 50 basis points improved from last year's first quarter adjusted level.

This gross margin reflects growth in our high margin weightwatchers.com business and the positive impact of higher attendances for meetings in continental Europe driven by innovation.

Q1 marketing expenses was $74.5 million, flat versus the prior year on a reported basis but down 4.6% on constant currency.

There were no media campaign timing differences this year versus last as Easter, which marks the kick off of our spring marketing campaign, was in the second quarter in both years.

Marketing savings resulted from the timing of winter production.

Marketing as a percent of revenue was 19.2% in the first quarter of 2010 as compared to 19.1% in the comparable quarter last year.

Q1 G&A expenses were $45.8 million, 4.6% increase on an as reported basis.

In constant currency and excluding $3.1 million of restructuring charges in the prior year quarter, G&A expenses increased 7.5%.

We gained efficiencies from reductions initiated last year but these were offset by higher legal fees including our successful litigation with Jenny Craig and higher bad debt expense for a particular international license.

As a percentage of revenue, G&A was 11.8% in the first quarter of 2010 versus 10.4% in Q1 2009 excluding restructuring charges.

In summary, our consolidated offering income margin was 23.6% in the 2010 quarter as compared to 24.5% in the prior year adjusted.

Before discussing our interest expense in the quarter I'll take a couple of minutes to review our recent financing activity.

In early April we concluded an amend and extend process which extended the maturities of a portion of our term loans and revolving credit facilities avoiding the need and the expense of refinancing the entire credit facility which we would have faced by 2011.

This created sufficient liquidity to enable us to resume our cash deployment strategy of opportunistic to franchise acquisition and returning capital to our shareholders.

Through this amend and extend process we extended the maturities of approximately 55% of our term loan and 66% of our revolver on average approximately three years moving much of our maturities into 2015 and 2016 and we reduced the amortization along the way, that is lowering the required debt pay down debt per year.

Interest rate spreads on our extended term loan increased to a very competitive 225 basis points in our extended revolver to 250 basis points.

Interest expense in the first quarter 2010 was $18.7 million, up $2 million or 11.7% from the Q1 2009 level.

The increase is a result of a higher portion of our debt being hedged, $900 million in the first quarter 2009 versus $1.3 billion in the first quarter of 2010.

The increase in interest expense arising from the debt expansion does not impact until the second quarter.

Our current projection for interest expense for 2010 is approximately $74 million for the year.

In terms of cash flow, we generated $111.3 million of cash from operations in Q1 2010 before interest payments and before a $29.1 million one-time payment for retroactive UK back charges associated with the negative UK court ruling we received in 2008.

After capital expenditures of $3.7 million and the aforementioned back payment, we had $78.5 million of free cash available for capital structure, made interest payments of $17.9 million, paid our quarterly dividend of $13.5 million and reduced our debt by $38.8 million.

We ended the first quarter 2010 with $1.41 billion of debt as compared to $1.57 billion at the end of the first quarter of 2009.

And now I'll turn it back to David.

Thank you, Ann.

Having completed the challenging first quarter of 2010 we are feeling somewhat more optimistic about our volume prospects for the duration of the year, particularly in NACO and weightwatchers.com.

Economic conditions certainly appear to be improving and the very early results of our spring campaigns in the US are encouraging.

The spring campaign launch, while still early, is an indication that PR and advertising can have a positive impact in our enrollment trends.

In CE we demonstrated that we can change our trajectory by our program offering.

While it is not easy to accurately predict how long the benefit from a new marketing campaign or innovation will last, it is an important demonstration that our future destiny is under our control and can be driven by the actions we take.

Going forward, we are focused on all the levers we have available to us as we begin to turn around some of the negative volumes trends we have experienced.

With that in mind we are exciting about innovating our programs, transforming our retail infrastructure and innovating our service offerings.

Along those lines we are continuing to make strong progress as we prepare for 2011.

Let me provide an update on the status of these initiatives.

As noted on the February call we are working to ready our new program for soft launch in late Q4 in the US, UK, Australasia and Canada with a full marketing push in January 2011.

NACO's retail transformation.

We are continuing to make good progress and preparing for a full rollout commencing this fall.

Specifically, we now have a center design that will effectively accomplish our goals of having centers that, one, improves street signs in front of store appeal.

Two, provide a member experience and, three, significantly improve the modernity of our centers and with that brand appeal.

By July, we plan to implement the full version of our retail vision of new center design, better location and full retail hours in two major metro areas.

For these two markets we will be able to test and optimize the business model and operational approach.

We can then parlay these learnings into a wider rollout this fall.

Further, our real estate team is working against the backlog of existing leases and is looking to leverage continued soft commercial real estate environment.

Our belief is that the combination of our new stronger, louder more buzz worthy marketing campaigns with modernized retail presence and a new program will create opportunities for volume growth in 2011.

To execute our strategy we are particularly dependent on having the right kind of leadership in our organization.

It is with this in mind that I am extremely pleased with last week's announcement of the filling of the President of North America role.

As many of you know, Dave Burwick has assumed this role.

Prior to joining Weight Watchers, Dave spent 20 years at PepsiCo with a range of critical roles including chief marketing officer for North American Beverages and President and General Manager of Pepsi, Quaker, Tropicana, Gatorade Canada, a billion dollar subsidiary.

Dave's experience is high power marketer and an exceptional leader brings a whole new level of leadership to the NACO organization.

Regarding EPS guidance, while we are seeing some improved volume trends versus our earlier expectations we want to remain cautious.

Two reason factors which will have a negative impact this year versus our earlier guidance assumptions are the dollar significant strength in recent months and, as Ann mentioned, higher than expected interest expense resulting from our success in extending significantly more of our debt than we had earlier thought possible.

Therefore we are maintaining our EPS range of $2.25 to $2.50 for the full year.

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

Thank you.

(Operator Instructions).

Our first question is from Jerry Herman from Stifel Nicolaus.

Go ahead.

Hi, guys.

How you doing?

First question is with regard to sort of 2011 and the innovation in particular.

David, I wonder if you can, I know you don't want to talk about the specifics of the innovation, but can you help us with how much of a proxy Pro Points in continental Europe is serving for you guys?

And if you can expect a similar, better or less volume influence relative to continental Europe.

If you think about the elements that we described of the Pro Points plan in Europe on the last call, some of the things we talked about was the fact that we were updating the formula based on advancement and nutritional science for the past 10 to 12 years that we were driving toward a plan of doing a better job of integrating health directly in the plan in terms of Better For You healthy choices.

So the applicability of those types of learning and trends are absolutely valid and important.

The approach we take in program innovation is we work very hard to have, if the US and UK do an innovation one year, CE looks to take everything that worked really well with that innovation and build on it and take it to a new level and we would certainly be hoping to, in the case of the English speaking market now that they are up, they would be looking to what continental Europe did and further up that.

So our programs absolutely build on each other but they also look to improve with each successful version.

And maybe you can just help us with regards to the economic read and, in particular, paid weeks and the retention in that program.

In the past you talk a little bit about consumer credit and what sort of influence that has had on that model which obviously use credit cards.

Are you talking about monthly pass?

Yes.

Absolutely.

I think what's been gratifying on a number of different dimensions as we discussed and have been discussing over the past year and half, particularly going into the recession, we were concerned about some of the things that you talk about with credit card defaults and impact the economy and sort of credit lines being pulled back might have on the consumer and the effect that that could potentially have with monthly pass.

Frankly, the good news is that we haven't seen any evidence of that happen at all.

And I say that because what we've been seeing pretty consistently is some very nice increases in monthly pass penetration as a percentage of our total mix, for example in North America really pretty significantly Q1 2009 versus Q1 2010.

What we've been able to do to continue the sort of have nice incremental improvement in terms of monthly pass retention, so to the extent that the consumer has been pressured I think the actions that we've been taking have been more than enough to compensate.

The net effect of consumer credit issues has not been present in our business so far.

Great.

One quick one for Ann.

You were helpful in your guidance with regard to interest expense for the full year.

Can you talk about the average interest rate and the sensitivity to the expense relative to changes generally?

We are hedged significantly $1.3 billion of the debt is hedged at this point.

So we are not terribly sensitive to LIBOR right now.

Okay.

Great.

Do you want more information on the interest rate?

I guess in the past you've offered the average interest rate on the debt.

Again, that's probably a little less important, but --

We are looking in the neighborhood of 5%, roughly, in the year.

Okay.

Great.

Thanks guys.

I'll turn it over.

Thanks.

Thank you.

Our next question is from Chris Ferrara from Banc of America.

You may go ahead.

You said the trends in North America going into the second quarter and the spring campaign looked a lot better.

I understand you want to take it all in stride and be conservative about it, but it sounds like you are guiding attendance down mid double digit still.

Is that right?

I guess why doesn't any of this improvement you see at all kind of translate into the attendance outlook if weather won't be as bad, comps are getting easier, stuff like that.

You are right.

We want to be conservative for a number of reasons and then let me also get back to the attendance map, if you will, in terms of it being an indicator of enrollments.

But first off, in terms of being conservative in the forecast our view is that we have sort of five week that we were excited about but it's only five weeks and we are going to be running this campaign actively right up until about Memorial Day and then, as you know, we tend to go dark for a period of time.

I can't tell you exactly how this follow on effect is going to be during those periods nor can I forecast what the fall is going to look like.

So because I don't know the lasting impact in this ongoing impact that this approach is going to take, I have no reason to doubt its viability and validity.

Because I don't have visibility and seen the data, our nature is to just be conservative in the way that we are looking at it and that is factored into some of the sort of rest of your trends that we were suggesting in terms of forecast for NACO.

The other thing I would suggest is if you look at the challenge of 2010 specifically and you look at the impact of really soft enrollment numbers and the all important winter campaign what that does is builds up a deficit of the installed base that sort of beginning in Q2 of this year.

So it kind of creates a hole which effectively was sort of peaking at 16% that we are now in the process of trying to fill back up but there is a dependency on enrollment volume during that winter campaign that it's hard to completely make that up.

So I think for the combination of all those reasons, that's why we are fairly conservative.

What we take a lot of, what has been encouraging to see is that there clearly was an immediate reaction in terms of our enrollment trends when we started this new marketing campaign.

Literally by the day we started this new marketing campaign we saw a shift that was pretty stark.

One thing that I might do to help dimensionalize it is to give you a sense of how to think that minus 16% attendance in North America in terms of some rough estimates, back-of-the-envelope estimates of how some of these different factors affected it.

If I were trying to sort of whether disgregate whether out of the minus 16% on attendances, I would have said without the sort of ill weather that attendances would have been, say, minus 10% to minus 12%.

If I try to then back out the impact of comping against Momentum program, I might have said that's say that's another 5%.

That would suggest maybe sort of organic minus 7%, minus 8% depending on how you look at it in Q1 and we have effectively turned that to flat with the launch of this campaign.

The thing I would point out this campaign is just one element.

This is not the entirety of our strategy but it's an important part of our strategy and we have other things that we are looking to have to kick into gear particularly as we move into 2011 which is why when we look at the cumulative effect I am gratitude and pleased to see the impact of the campaign has had on the enrollment trends.

It is going to improve on some of the trends that we saw in terms of helping us make up for some of those lost enrollments from the winter campaign, but that's why in my prepared remarks I talked about the fact that I'm particularly excited that what I see the business once and for all this core business meeting firing under marketing, retail innovation, program innovation, all those things combined, that's when I absolutely see the business moving in the direction that it deserves to move.

That's great color.

I really appreciate that.

One of the things you mentioned you said you outshouted.

How do you think about word of mouth today versus marketing campaigns compared to 2001 when you guys first went public.

It was all word of mouth.

Has the environment shifted more toward the need to be campaign externally.

Does that make sense?

You know what's funny, Christ, is we actually look at it in a very different way.

This was to us a realization and almost, not an apophony because that may sound a little too dramatic, but we had this experience where we felt like we had just gotten to the point this January where there was so much noise in the market that somehow we were being missed in the conversation.

When I say the conversation I mean the conversations that happen everyday with people who are talking about their need and desire to lose weight and sharing tips and ideas on how they are going to approach it and we had this nagging feeling we weren't being part of it.

What was frustrating for us is that we by far more than any other organization have strong word of mouth.

We have people all over the place that are speaking as passionate advocates for the approach, the lifestyle and the sustainable approach that we take towards weight loss and I think to us kind of a clue in was developing a marketing campaign that directly harnessed that word of mouth.

If you want to think about it, pardon the buzz word, but it's almost crowd sourcing our advertising and our message in a way that amplifies what was happening in nature.

So, we actually think the beauty of the approach that we can take that other people can't is we can basically take word of mouth advertising and PR and then think of them as sort of three points on a triangle that work and reinforce each other in consistent set of messages in a way that nobody else can do.

And I think that the up shot of that is that it comes across as a message that is fundamentally different from what you are going to see from I believe in my own way some of my competitors in that we are going to have a message that is most importantly authentic.

That's helpful.

I guess one other quick thing on the licensing side.

Is licensing still a focus?

Can you give a quick update on how you feel about that?

Is it something that's been ignored as you tried to pull the rest of the business or should we think about this as a slightly declining business over time?

Absolutely not.

It is very much a focus for us and it is clearly a focus for the licensing team and they are working hard against it.

This is consistent with Ann's comments.

I think there's been some misunderstanding about the licensing categories as it relates to some of the product lines we carry.

But if I look at our licensing portfolio I think of it in two dimensions.

One is the dimension of some situations that I truly do believe are unique such as the change in the Applebee's relationship which was a function of new ownership and new management and different strategic priorities on their part, some sort of complications in the relationship which had to do with change of ownership that we believe is ultimately addressable and the uniqueness of a relationship in soup which had much more to do with the timing of when a bunch of new SKUs came on and inventory stocking this time last year as opposed to this year.

If I look at the other aspect of licensing category, the truth is that the Better For You category if you would see it across the board has been a victim in a recessionary environment.

I believe it's been a victim on two dimensions.

One, Better For You products do tend to carry a price premium and this hasn't exactly been the best grocery market to have premium priced product and, two, this has been an environment with all this anxiety around a recession that I believe has lent itself to the opposite which is comfort eating.

So for example when I look at kind of the frozen diet entree category, Lean Cuisine, Healthy Choice, Smart Ones, if you look at that combined category, it was down about 7% in 2009 and down about 4% in 2010, and I absolutely believe that that category, there's no doubt in my mind that will get a second wind because the consumers will make better choices.

So the opportunity for us is to capitalize on that when the consumer does start making better choices and they do start returning Better For You foods and then to take sure that we have the right licensing lined up both through the stable of business we have as well as continuing our process and seeking new relationships.

That new relationship seeking process, how is that going?

I think it's one of these things where we would like it's to go faster and I think we can look for opportunities to make it go faster but at the same time we've gotten some nice wins, getting out of the gate in January with Kraft, with Bocca Burgers and Jell-O on an endorsement deal has been really successful so far.

Green Giant is a new endorsement program for us.

Particularly in the endorsement front we have had good successes and this is a place where frankly success breeds success.

As we continue to build new case studies I think we are only going to do better in that category.

So, I really do dispute the notion that Weight Watchers presence in retail in any way, shape or form will diminish over time.

One of my proof points is that if I look for example at the UK which has the recessionary environment and some of the pressures on grocery retail, their licensing business is up again this year.

So I think that some of the notions in terms of dynamics I'm not sure it's true.

I really do believe that much of what we are seeing with this category is a function of the recession and the premium prices and that will passover time.

Thanks for all the time.

Sorry to take up so much.

(Operator Instructions).

There are no further questions registered.

I would turn the meeting back to the presenters.

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 call is now concluded.

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