Weight Watchers International, Inc. Q4 2008 Earnings Call Transcript

| About: Weight Watchers (WTW)

Weight Watchers International, Inc. (NYSE:WTW)

Q4 2008 Earnings Call

March 4, 2009 5:00 pm ET


Sarika Sahni – Investor Relations

David P. Kirchhoff - President, Chief Executive Officer & Director

Ann M. Sardini - Chief Financial Officer


Michael Binetti – UBS Securities, LLC

Karen Howland – Barclays

Chris Ferrara – Bank of America Merrill Lynch

Analyst for Greg Badishkanian – Citigroup

Bob Craig – Stifel Nicolaus

Michael Binetti – UBS Securities, LLC


Welcome to the Weight Watchers International fourth quarter and full year 2008 earnings teleconference call. During the presentation all participants will be in a listen only mode. Afterward you will be invited to participate in a question-and-answer session and instructions will be given at that time. As a reminder this conference call is being recorded March 4th, 2009. At this time I would like to turn the call over to Sarika Sahni of Weight Watchers International.

Sarika Sahni

Thank you to everyone for joining us today for Weight Watchers International’s fourth quarter and full year earnings conference call. With us on the call are David Kirchhoff, President and Chief Executive Officer and Ann Sardini, Chief Financial Officer. At about 4:00 p.m. Eastern time today the company issued a press release reporting its financial results for the fourth quarter and the full year 2008.

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 everybody that this call will contain forward-looking statements.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. The company does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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

David P. Kirchhoff

Thank you for joining us as we review Weight Watchers International’s performance for the fourth quarter and full year 2008. Before I review the results of Q4 2008 I want to remind everyone on this call that we will be providing a full presentation of our business and 2009 strategic initiatives tomorrow morning at 9:00 am in New York City. It will be webcast on our corporate website whose address is www.WeightWatchersInternational.com.

This will provide an opportunity for management to discuss some much richer analysis of our business as well as to review a number of new initiatives which will benefit our business in 2009 and beyond. Therefore tonight’s call will focus primarily on the business results of Q4 and fiscal 2008. In some respects the fourth quarter was relatively stronger than our expectations given the trends we observed through Q3.

Nonetheless the difficult economic climate has continued to impact our business trends as the consumer faces ever increasing stress. It has become clear that this recession is fully global in nature and is therefore affecting all of our major markets. As we noted last quarter the primary impact of the economy has been on our meetings business specifically on enrollments while retention in our meetings have been stable.

In addition in meeting product sales have begun to soften particularly in the US which we believe is also a result of consumers tightening their spending. We did see some benefit from the soft launch of our new program in the US, UK and Australia in December. As I begin to review our financial results for comparability I would like to remind everyone that fiscal 2008 ended on January 3rd and contained a 53rd week.

This means we had 14 weeks in this year’s fourth quarter versus 13 weeks last year. Also the results I am about to discuss exclude the Q4 benefit from the reduction of the UK VAT liability which Ann will cover in more detail later. Total company Q4 revenues declined 2.1% versus the same period in 2008 as our non-US business was significantly impacted by unfavorable changes in currency exchange rates.

The effect of a stronger dollar reduced our non-US revenues by $22 million in the fourth quarter versus prior. On a constant dollar basis total company revenues were up 4.4%. Without the 53rd week and the currency effects fourth quarter total revenues were up about 1%, meeting fees were flat, Internet revenues were up 16% and in meeting product sales declined 5%.

As reported global paid weeks in our meetings were up 8.3% while global attendances were down 1.6% for the quarter. Without the 53rd week Q4 meeting business paid weeks were up 3% while global attendances were down 4.8%. Global paid weeks for our meeting and Weight Watchers Online offerings were up a combined 11% and were up 7% without the benefit of the 53rd week.

After a relatively soft fall campaign for 2008 versus 2007 the WeightWatchers.com business improved toward the end of 2008. For the fourth quarter the WeightWatchers.com business unit whose results did not contain a 53rd week saw an increase in revenues of 11% on an as reported basis and 16% on a constant currency basis. Weight Watchers Online paid weeks were up a strong 19% for Q4 2008 versus Q4 2007.

For the full year 2008 total revenues were $1.5 billion an increase of 5% versus 2007. Without the impact of the 53rd week as well as prior year’s impact of the adverse UK VAT ruling which was recorded in 2008 total revenues for the year were up 5%. 2008 meeting business paid weeks were up 8% while attendances were down 4.3%.

Turning to EPS excluding the benefit from the reduction of the UK VAT liability taken in the fourth quarter Q4 2008 EPS was $0.54 an increase of 8% or $0.04 over Q4 2007. For the full fiscal 2008 year reported EPS was $2.60 which includes a net charge of $0.17 per share related to the prior year’s impact of the adverse UK VAT ruling versus $2.48 per share in 2007.

Excluding the prior year UK VAT charges from 2008 and the early extinguishment of debt charge of $0.02 from 2007 full year 2008 EPS was $2.77 an increase of $0.27 versus 2007 or 11%.

It was gratifying in this difficult economic environment that we were able to deliver significant EPS growth and to finish the year in the middle of the EPS range we provided last February of $2.69 to $2.89 per share after taking into account the current year impact of the UK VAT ruling and the cost of our China JV.

As you may recall these two items were not part of the original guidance we had provided in February 2008. I will now briefly review our results in our major geographies and business units. As is our usual practice I will provide all of the gross statistics outside the US on a constant currency basis.

First our North America meetings business, total fourth quarter NACO revenues were $190 million an increase of 1% versus the same period last year. Without the benefit of the 53rd week NACO revenues in the quarter were down 4.2%. For the full year NACO revenues were up 2.3% versus fiscal 2007. Without the 53rd week full year NACO revenues were up 1%, product sales per attendance were down 1.2% compared with Q4 2007.

Q4 paid weeks were up 3% on an as reported basis and down 3% without the 53rd week. As reported attendances were down 1.4% in Q4 2007 versus Q4 2007. Without the benefit of the 53rd week and prior period acquisition NACO attendances were down 8.2%. While this is comparable to the trend we saw in Q3 the fourth quarter attendance had actually been tracking at somewhat weaker levels prior to the soft launch of our new program Momentum in early December.

We will be reviewing the details and value proposition of the Momentum program in more depth during tomorrow’s investor presentation. In brief this program took the most compelling elements from both the points plan and the core food plan and combined them into a single more powerful plan. Response by our service providers and members has been extremely positive.

Consistent with what I noted in the Q3 call the economy continued to have a significant impact on enrollment levels in the NACO business in the fourth quarter. Across the board consumers have significantly curtailed spending impacting virtually all discretionary consumer products and services.

While the economy has significantly impacted our enrollment trends we have not seen any further degradation of our retention for Monthly Pass during Q4 2008 or during the first two months of 2009 versus what we shared on our Q2 2008 earnings call. Throughout Q4 2008 and for the first two months of 2009 we have seen no evidence of decreased usage of credit cards by our US customers.

In fact during the first two months of this year penetration of credit card based commitment plans like Monthly Pass has increased. As I wrap up NACO it is clear that 2009 will be a challenging year. Under the expectation that macro consumer trends will continue to be worse in 2009 versus 2008 we expect our attendance trends in 2009 to range from high single digit to low double digit negative.

Now on to our international business units, for the fourth quarter excluding the effect of the UK VAT ruling UK revenues were up 8% driven by the continuing benefit of the Monthly Pass plans. Paid weeks were up a strong 21% while attendances were flat compared to the same prior year quarter. Without the benefit of the 53rd week UK paid weeks were up 15% and attendances were down 1%.

The attendance trend was an improvement to the trend that we saw in Q3 2008. Like the US the UK market responded positively to its new program Discover which was soft launched in December 2008. But also like the US the UK market has slipped into significant recession. While it was gratifying that we did not see any falloff in attendance trends in the fourth quarter given a weakening economy we’re planning for mid to high single digit attendance declines in 2009.

Continental Europe revenues were up 9% for Q4 2008 versus the same period in 2007. As was the case in Q3 CE results benefited by the revenue in paid weeks lift provided by Monthly Pass in Germany and France. Total Continental Europe paid weeks were up a robust 23% for Q4 2008 and up 18% without the benefit of the 53rd week.

Total CE attendances in the fourth quarter were down 4% on an as reported basis and down 5.5% without the benefit of the 53rd week. This was comparable to the trend we saw in Q3. Again as the global recession takes hold and without the benefit of an innovation in this year we expect CE’s attendance trends to weaken to high single digit to low double digit negative.

Moving on to WeightWatchers.com, as we noted on the Q3 call WeightWatchers.com had a difficult comparable because of the unusual impact of a Monthly Pass television spot that aired in September through October of 2007. This resulted in a period of unprecedented exposure and media weight for the Weight Watchers Online product in 2007 which created a tough growth target for 2008.

As we moved beyond of the effect of that TV campaign we saw the online business return to its prior growth trends as we moved from November into December. For Q4 Internet revenues were up nearly 16% on a currency adjusted basis versus the same period in 2007. Paid weeks for Weight Watchers Online were up a strong 19% and end of period active subscribers were up 16% at the end of 2008.

For the full year Internet revenues were up 24% on a constant dollar basis and paid weeks were up 26%. As a lower priced product Weight Watchers Online is performing as a useful hedge against difficult economic conditions otherwise affecting our business. In fact we expect WeightWatchers.com to continue to show double digit global subscriber and revenue growth in 2009.

Now I would like to turn the discussion over to Ann Sardini who will elaborate further on our Q4 and full year performance.

Ann M. Sardini

Our fourth quarter 2008 financial results included a number of exceptional items that distort the comparison to prior year fourth quarter. Fourth quarter consolidated company revenues on a reported basis were $346.2 million an increase of 0.6% versus $344 million last year. On a comparable to prior year basis revenues rose a similar amount of 1% but there were significant puts and takes.

Most notably fourth quarter revenues were inflated by a $9.2 million reduction in our UK VAT liability. As you will recall in the second quarter of 2008 we received an adverse ruling regarding the amount of UK lecture income that can be deemed VAT exempt. As a result we recorded a $28.5 million charge for multiple prior years’ VAT in that quarter.

We recently received notice that amounts for certain periods prior to Q1 2005 were no longer owed because the applicable statute of limitations had expired. The associated $9.2 million benefit from the reduction in VAT charges increased our fourth quarter revenues by 2.7% versus prior year. Three other non-comparable items reduced revenues by a net of $10.3 million or 3% in this year’s fourth quarter versus prior as follows.

First we had unfavorable foreign currency translation which reduced our fourth quarter revenues significantly by $22.5 million or 6.5%. Second, the current year impact of the UK VAT ruling reduced our Q4 net revenues by a further $1.4 million. Third and partially offsetting these was a $13.6 million or 3.9% favorable revenue impact from an extra week at the end of the fourth quarter versus prior year, week 53.

Because our fiscal year ends on the Saturday closed to December 31st rather than on that actual date Q4 2008 was a 14 week quarter ended January 3rd, 2009. To summarize whereas reported revenues excluding the prior period VAT adjustment were 2.1% below prior year adjusted revenues excluding these three items were up 1% versus the prior year quarter.

Reported net income of $47.6 million was up 19.7% including the UK VAT retroactive benefit and up 4% without it. Reported Q4 EPS was $0.62 included $0.08 of benefit from the reduction of the prior year’s UK VAT charge. Without this benefit Q4 2008 EPS was $0.54 up 8% from $0.50 in the prior year.

In the operations commentary that follows I will exclude the impact of both lowering the retroactive VAT assessment and the current year increasing VAT resulting from the negative ruling and I’ll cover the impact of China separately. As David noted attendance trends picked up from the Q3 levels. Q4 attendances of $12.8 million were 1.6% below prior all in and 4.8% below excluding week 53.

Paid weeks were up 8.3%. Global meeting revenues the combination of meeting fees and in meeting product sales were $257.8 million a 2.9% decrease versus fourth quarter last year. In constant currency total meeting revenues rose 4%. Constant currency meeting fees rose 5.5% globally on the strength of Monthly Pass in our international markets. Meeting fees were down 0.9% in current dollars.

The difficult economic environment was evident in our in meeting product sales performance. Product sales per attendee which is posted gross throughout the year were flat to prior in local currency in the fourth quarter. Total in meeting product sales declined 1.6% in local currency or 9.9% in current dollars.

WeightWatchers.com revenues were $43.6 million in the fourth quarter an increase of 15.5% in constant dollars or 10.6% on an as reported basis up from $39.4 million last year. WeightWatchers.com paid weeks grew 18.8% and end of period active online subscribers rose by 16.3% to 679,000.

Across the company paid weeks rose 11.3% to $30.8 million. Looking at the results by geography in NACO attendances of $7.8 million were down 1.4% versus the prior year level but paid weeks rose 3.1%. Excluding acquisitions paid weeks were up 1.8% with attendances 3.8% below prior.

Despite the attendance shortfall NACO’s fourth quarter total meeting revenues including in meeting product sales were up marginally to $170.6 million an increase of $0.6 million or 0.4%. The slight uptick in revenues is a reflection of the impact of the growth in paid weeks on meeting fees which rose 1.1%.

In meeting product sales declined by 3.4% reflecting the movement of our members away from higher priced items. In the international meeting business fourth quarter meeting revenues including in meeting product sales were $87.2 million an increase of 8.6% in constant currency but with the significant negative impact of currency translation meeting revenues were down 8.6% on a reported basis.

Attendances of $4.9 million declined 1.9% in the quarter compared to prior year. International meeting fees were robust up 12.7% in local currency driven by the 20.1% paid week gross attributable to our Monthly Pass markets. Monthly Pass is now in UK and two of our continents in 13 countries. On a reported basis international meeting fees declined 5.3%. As in the US international product sales are softening consistent with the difficult economic climate.

The growth in international in meeting product sales per attendee which had been over 10% in local currency in the first half of 2008 decelerated in the fourth quarter to 1.2%. Total international in meeting product sales were down 0.7% on a local currency basis and down 16% in current dollars.

The UK performed well given the economic climate attesting to the increased acceptance of Monthly Pass in the market. Local currency meeting revenues including product sales increased 8.6% on a comparable to prior year basis with attendances of $2.4 million at the same level as last year’s fourth quarter and paid weeks up 20.6% to $3.6 million.

UK meeting revenues declined 15.7% in current dollars. In Continental Europe which now has two countries with Monthly Pass meeting fees rose 14.8% versus the same period last year in local currency despite a 4% decline in attendance. There were $3 million paid weeks in the quarter and $2.1 million attendances. On a reported basis Continental Europe’s meeting fees rose 4.8%.

In meeting product sales were $13.5 million in Continental Europe an overall decline in local currency of 2.3% versus prior but an increase of 1.8% per attendee. This performance also represents a slower growth rate than earlier in the year as we have seen in other markets.

Other revenues which includes franchise commissions, licensing and revenues from our publications were $25.3 million an increase of 5.5% in constant dollars as increases in licensing revenues more than offset lower franchise commissions. On a reported basis other revenues declined 1.6%. Licensing revenues in the fourth quarter were up a strong 16.9% in local currencies to $15.8 million with particular strength from our dairy product licenses in the US.

Licensing revenues on a reported basis were up 6.9%. Franchise commissions were $3.1 million in the quarter down 13.5%. Excluding the impact of acquisitions made in 2008 commissions on the remaining franchises declined 6.9% versus prior year with demonstrable impact from the weakened US economy.

Our consolidated gross margin in the fourth quarter excluding the impact of the UK VAT ruling was 52.3% down 10 basis points from 52.4% in last year’s fourth quarter. Week 53 contributed 40 basis points to the gross margin in the quarter. While margins remain strong given our variable cost business model there was margin compression in the meeting business driven primarily by fewer attendances per meeting.

In addition we incurred ramp up costs for Monthly Pass in Europe, costs associated with innovation launches in US and UK and the products business experienced pressure from a change in the sales mix toward lower priced products and one time supply chain cost in NACO.

WeightWatchers.com margins expanded in this highly scalable business which carries a structurally higher gross margin. Fourth quarter 2008 marketing spend of $40 million was virtually flat with prior year in constant dollars. On that basis Q4 marketing as a percentage of revenues was slightly lower than last year at 11.7% versus 12.1 % in 2007.

Excluding the impact of the 53rd week in 2008 which resulted in a higher proportion of 2009 winter diet season marketing expense in the quarter than in the quarter a year earlier the spend was down 9% on a local currency basis and down 4.1% on an as reported basis.

G&A expenses in the fourth quarter excluding expenses associated with the China JV project were $42.1 million a decrease from the prior year level of 7.8% in local currency and 13.2% in current dollars this despite increased depreciation resulting from our IT investment. We reduced G&A spending in the quarter in response to economic conditions including freezing hiring.

As a percent of revenues G&A excluding China expenses decreased 12.4% of revenues versus 14.1% in the prior year quarter. As noted on our prior calls 100% of our China Joint Venture is consolidated into our operating income with our partner Groupe DANONE’s 49% ownership deducted as minority interest before net income.

On an operating basis in the fourth quarter the 100% investment in this startup venture was $2.8 million of pre-tax expense a combination of marketing and G&A. The consolidated operating income margin excluding the current and prior year’s impact of the 2008 UK VAT ruling and excluding the China investment was 28.1% in the quarter as compared to 26.2% last year.

As noted above marketing and G&A as a percent of revenues were each below prior. Interest expenses in the fourth quarter 2008 was $24.4 million down $2.3 million or 8.5% versus fourth quarter 2007. Our average debt outstanding in the fourth quarter 2008 was $1.66 billion. In the quarter we benefited from a 43 basis point reduction in our average effective interest rate down from 6.3% in fourth quarter last year to 5.87% in this year’s fourth quarter.

This resulted form a combination of lower market rates and a step down in spread over LIBOR which took effect during the first quarter of 2008. Finally I’ll review in brief our consolidated cash flow for the full year and our balance sheet. In the full year we generated $337.9 million of cash from operations excluding interest.

Due to the timing of year end the 2008 fiscal year included both payments for 2007 expenses and prepayments of 2009 expenses. These amounted to a net depletion of approximately $40 million of 2008’s cash flow. After capital expenditures of $31.6 million our 2008 free cash available to service our capital structure was $306.3 million.

With our available cash we made interest payments of $96.7 million, paid our quarterly dividends of $55 million and repurchased 2.8 million of our shares for approximately $116 million. Fluctuations in the balance sheet between year end 2007 and 2008 primarily reflected an increase in current assets a result of higher prepaid taxes.

In addition the acquisition of three small franchises in the first half of 2008 resulted in a $19.4 million increase in franchise rights acquired. Current liabilities reflect $117.5 million of our debt moving into the current category. A word about our debt, our required debt pay down in 2009 is $162.5 million which we will fund with our free cash flow. In 2009 57% of our floating rate term debt is hedged.

Starting in January 2010 90% will be hedged. We continue to enjoy the step down in interest rates spread over LIBOR which results from maintaining less debt to EBITDA rates below 3.5 times. Now I’ll turn it back to David.

David P. Kirchhoff

There is no doubt that the macro economic conditions of 2008 have created challenges to our business throughout this year and particularly in the second half. As we enter 2009 we fully expect conditions to remain at least as severe if not worse and given further deterioration of unemployment and other related variables.

The consensus view seems to be not to expect the consumer to begin increasing spending levels until at least the second half of 2009 and more likely 2010. As I noted before the response to the new program from both members and leaders have been overwhelmingly positive.

However given the severity of the economic downturn and how it is weighing on consumers it is clear that our new program and advertising campaign have not had the impact on consumers’ minds that they would have had in more normal times. In providing guidance for 2009 we believe prudence and conservatism is appropriate. We’re in the midst of a global economic storm which few of us have experienced in our lifetime.

Despite this fact the strength of our brand, the loyalty of our customer base and the variable nature of our business model are serving us well in this environment. In fact although we expect fiscal 2009 to be a year in which revenues show modest declines as a result of the global recession and strengthening US dollar we expect we will be able to hold our operating margin percentage this year.

Based on the trends we have seen in our business in the first two months of the year we are projecting our global meeting room attendance to decline between 8% and 12% during 2009 versus 2008. Furthermore assuming that the US dollar remains at current levels we estimate that unfavorable exchange rates relative to 2008 will have an approximate negative $100 million revenue impact in 2009.

Partially offsetting these trends will be an increase in the penetration of our commitment plans, double digit growth in our high margin WeightWatchers.com business and modest growth in our licensing business as well as tight expense controls. On the point of expense of control we have recognized since the middle of 2008 that we were facing a difficult economic period.

Throughout 2008 we began taking an even more rigorous approach to managing our expenses. For example we instituted a hiring freeze beginning late summer. As it became apparent that the economy would remain difficult throughout 2009 we tasked our operating leaders to identify ways of eliminating additional costs. Each of our business units has worked very hard over the past few months to identify cost reduction opportunities that can both reduce expense while simultaneously making the company stronger in the process.

The initiatives they are taking will result in an organization that is leaner, more agile and more efficient and ultimately more competitive. This morning we announced internally a reduction in force that will affect 140 positions or approximately 7% of our full time positions most of these in G&A related departments.

These reductions plus other cost savings initiatives will result in an approximate annualized savings of $17 million and a 2009 savings of $13 million. We estimate the restructuring costs associated with this effort will be $4 million to $5 million in 2009 which will likely be charged in the first quarter.

Weight Watchers has a business model that is able to weather difficult economic periods. The majority of our costs are variable in nature which allows us to flex our business and match resources with demand. We will continue to look at this equilibrium over the course of 2009 as trends move up or down.

With the aforementioned fixed cost reduction efforts layered on top we believe that we can hold our operating margin percentage with historic levels. Taking all of this into account for 2009 EPS we’re forecasting a range of $2.50 to $2.75 per fully diluted share before any charges associated with the reduction in force we announced today.

This range does include approximately $0.18 per share of negative year-over-year currency impact based on current exchange rates and an expected increase in loss related to our China JV of $0.06 in 2009 from $0.03 in 2008. At this time Operator we would like to take questions.

Given that we will be making a full presentation on our business tomorrow as well as leaving plenty of time for Q&A tomorrow it may make sense to address some questions in greater depth at that time.

Question-And-Answer Session


(Operator Instructions) The first question comes from Michael Binetti – UBS Securities, LLC.

Michael Binetti – UBS Securities, LLC

Just a couple of housekeeping questions first off. Could you tell me from where we sit today and what you have flowing through the P&L what we could expect for acquisition related boosts to North America attendance in 2009?

Ann M. Sardini

Probably in the range of 2%.

Michael Binetti – UBS Securities, LLC

From where we sit today, could you walk us through, I’m really trying to beat up on the attendance numbers here, can you walk us through how the attendance numbers, how you see them playing out through the quarter just so we have some idea of the cadence you guys are looking at?

I’m just trying to understand the run rate that you guys expect and what your guidance implies. David, it sounded like you were saying it could be at about today’s run rate or maybe even worse. So maybe you could just clarify that for us.

David P. Kirchhoff

You mean for 2009?

Michael Binetti – UBS Securities, LLC


David P. Kirchhoff

As we express the guidance for attendances in 2009 you know it’s an interesting exercise for the obvious reason being that the macro economic environment is to say the least volatile right now and it’s a little bit difficult to predict how the consumer mindset that we’re seeing in Q1 which is as bad as it’s ever been since it’s been measured what that’s going to look like in Q2 through Q4.

So what we did when we were forecasting our attendances for the year is we tried to come up with a reasonable range that somewhat reflected that inherent volatility in the broader environment but was based significantly on some of the trends we were seeing in the first two months of this year. I don’t have any reason to believe that we’re going to see degradation in the back half of the year nor am I presuming we’re going to see a sudden hockey stick in improvement.

We assume that what we’re seeing now is probably going to be fairly typical of what we see over the course of the year and that’s how we approached our view of the attendance forecast as we move through 2009 understanding that there’s the usual things associated with seasonality. For example Easter timing will somewhat benefit Q1 versus Q2 and there’s some of the usual idiosyncrasies that at this point you’re used to in following Weight Watchers.

Michael Binetti – UBS Securities, LLC

If I could just ask one last question, any way you could help us estimate the impact in the fourth of lapping that 53rd week for attendance?

Ann M. Sardini

Let me just calculate it.

David P. Kirchhoff

Let us get right back to you on that. Ann is just going to do a quick calculation.


Your next question comes from Karen Howland – Barclays.

Karen Howland – Barclays

I was wondering if I could dive a little bit more into the SG&A expense, Dave, that you had this recent quarter. Obviously very impressive even presumably a lot of that is coming from FX. Just wondering if you could give us a few more specifics of what was actually done this quarter and if you think this is a reasonable run rate for SG&A and then you’ll layer in the additional $13 million on top of that annually or for 2009?

David P. Kirchhoff

I think when you look at these, certainly you’re right that the G&A in fourth quarter of 2008 definitely had some benefit due to FX. As Ann referenced during her remarks we saw what was happening with the economy and we started taking steps even beginning last year. For example the hiring freeze in terms of closing out a number of positions that were open and I think that also had some beneficial impact.

There might be some ins and outs as we think about next year but certainly as you think about forecasting next year some of the things that you should probably consider from a modeling point of view is that first off the cost reduction efforts I mentioned are going to significantly impact the G&A line above and beyond what we’ve already talked about.

However keep in mind that most of that benefit is going to be in quarters two through four. You’re going to have some timing issues in terms of forecasting G&A and I think as we proceed throughout the year we can help you guys out in terms of guiding through some of those ins and outs.

Karen Howland – Barclays

But that $44 million or so that was reported this quarter, that’s a reasonable starting point on a quarterly basis to assume going forward?

David P. Kirchhoff

I don’t know if I would base it strictly on fourth quarter. My advice always when modeling G&A is to look at typically a couple of different quarters because some of the things with G&A that also have to be factored is that inevitably if there’s any accrual reversal that might be in one quarter and not versus another quarter as well as fluctuations in terms of IT spend and depreciation and amortization.

I think if I were modeling I might look over say a two quarter period as a basis for forecasting forward.

Ann M. Sardini

Also when you’re looking at the G&A you have to just remember that it is impacted by the currency and currency impact is certainly stronger in 1H than 2H on expense and revenues. I would look at that as well.

Karen Howland – Barclays

Is the G&A allocated similar levels to sales levels for different countries?

Ann M. Sardini

Somewhat similar but there is a headquarters component as well. So just bear in mind that it’s a little more heavily weighted to US than revenue is.

Karen Howland – Barclays

Turning to WeightWatchers.com and the Internet business, I apologize, did you say that the sales number that was reported, that $43.2 million, is that on a 52 week year?

David P. Kirchhoff

Thank you for asking the question. This is a vagary of the fact that WeightWatchers.com started as a separate company back in 2000. Weight Watchers International has kept track of its books if you will on a weekly basis throughout its history. When we started WeightWatchers.com back in 2000 we did the books on a monthly basis.

So the issue with the meeting business is that you would periodically have this effect where the Saturday followings ended up creating this situation that’s almost like a leap year although not quite where you would have this 53rd week pop up. That was never the case with WeightWatchers.com. What you’re seeing in the WeightWatchers.com revenue was true comparability 2008 versus 2007.

Because we never put WeightWatchers.com because it’s a separate accounting entity we never put it on the same weekly accounting basis that we did with the meetings.

Ann M. Sardini

While we’re on this week 53[inaudible], the impact on the fourth quarter of ’09 is about 4% negative from week 53 being in 2008 and on a full year basis it’s just about .5%.

Karen Howland – Barclays

On WeightWatchers.com it’s on a different reporting period than the consolidated numbers are?

David P. Kirchhoff

Ever so slightly.

Ann M. Sardini

By a couple of days, it’s on a calendar.

Karen Howland – Barclays

What percentage of WeightWatchers.com is international versus North America?

David P. Kirchhoff

We will actually be going through that for the first time in fairly gory detail tomorrow. So, you’ll be able to see exactly how that plays out over the coming years. So, you might find the answer a little bit more rich when we go through the PowerPoint tomorrow morning.

Karen Howland – Barclays

You don’t want to give us a quick preview tonight.

David P. Kirchhoff

I don’t mind giving it to you I’m just trying to remember what the percentage was off the top of my head. I mean it’s roughly – let us just get back to you with the precise number tomorrow rather than sort of giving you an estimate that’s going to be plus or minus 2% or 3%.

Karen Howland – Barclays

One last question, Dave you mentioned that the fourth quarter came in in line with your expectations however, looking at the paid weeks and the attendance growth that you had actually given rough guidance to, it appears that they actually came in quite below those numbers and I was just a little bit confused as to where the discrepancy was.

David P. Kirchhoff

My recollection was for example in talking about NACO we had suggested to look for a attendance trend in Q4 that was similar to the attendance trends we saw in Q3. Q3 organic attendance trends were in NACO on attendances they were about -7%, -8%. If you looked at sort of organic excluding 53rd week, excluding acquisitions and NACO in Q4, they were about -8%. The trend that we saw in the UK was actually a little bit better in Q4 versus Q3 and the trend we saw in CE was comparable.

Karen Howland – Barclays

It seems that the paid weeks somewhat though feel below expectations in the UK and CE?

David P. Kirchhoff

No. Paid weeks in the UK for the fourth quarter were pretty solid at 15%. I don’t think we guided on paid weeks in the last call, we were guiding strictly on attendances. So, let me answer the question differently, in terms of how paid weeks came in versus expectation, they came in pretty much bang on with what we were thinking about given the sort of same reflective attendance trends for NACO, the UK and CE. In fact, if anything, paid weeks in CE might have come in just a little bit better than what I might have thought while I was sitting here in Q3 and attendances for the UK certainly came in better in Q4 than what I was expecting given what we were seeing in Q3.


Your next question comes from Chris Ferrara – Bank of America Merrill Lynch.

Chris Ferrara – Bank of America Merrill Lynch

So, the attendance for next year, if we’re talking about attendance being down sort of high singles to low digits, what are you basing it on assumptions for potential degradation of monthly passes? Are you assuming it still sees no degradation? And, I guess what does it assume for retention in general for the year?

David P. Kirchhoff

When we provide the forecast of course when we’re doing our internal manipulations we’re looking at a combination of underlying drivers such as enrollments, retention rates, propensity to attend, a lot of different metrics. We historically have not broken those components out while providing guidance. I think that when we were taking a recessionary view of the economy we considered the potential for recessionary impact across the board. I think that the hypothesis that given how much of our business is on commitment plans that we could have some credit card exposure was not an unreasonable hypothesis and it’s one that we thought of.

We’ve certainly been gratified in the first two months that we have not seen any fall of on retention partners for monthly pass. So, so far based on the first two months of this year we’re pleased with the results we’re seeing. I think if anything, as I said before, with the program and reflecting the fact that it’s just been difficult to get the program news to sort of penetrate the public conscientiousness I think if there’s one place where we have we believe are getting some benefit from the momentum, discovery, etc., new programs has been possibly a little bit incremental in retention based on what we’ve seen so far in January and February.

The reason for that simply is that people seem to be really liking the new program and so that’s a good reason they’re staying. I think the nice thing about getting a retention benefit from a new program is that it doesn’t expire on the relative newness of the program so to speak. So, as I think about retention trends over the course of the year, I mean again, with this kind of environment it’s difficult to predict what’s going to happen.

If all of a sudden if every third credit card in America were to get sort of destroyed, yes that would have an impact on our business but I don’t think anybody is forecasting anything so dire. Nonetheless, it’s going to be a trend that we’re going to continue to watch closely. But, I think that the attendance trends that we’re sharing with you reflect a sort of balanced view in terms of the combination of enrollment and retention activity.

Ann M. Sardini

When you look at the fact that we are giving you a range of expectations, of guidance for 2009, the lower end of that range assumes obviously some degradation versus the upper end.

Chris Ferrara – Bank of America Merrill Lynch

I guess kind of following up a little and of course appreciating that you don’t want to show all the stuff at any given time but I guess how would you think inceptionally a recession affects the components of your ability to recruit people or of your attendance in general. You have a new product out there, I would imagine that you’d be expecting enrollment trends to pick up for 2009. Do you think the recession in general would hit enrollment trends harder than retention trends in general? So maybe you’re not looking for enrollment trends to pick up despite having a new product? Is that thinking about it right?

David P. Kirchhoff

I think the way we think about a recession and again, Weight Watchers hasn’t seen a recession like this I guess possibly ever in the 50 years that we’ve been around and certainly nothing that is vaguely comparable since the 70s and early 80s. So it’s been a little bit difficult to sort of estimate exactly how the business would react to this kind of consumer environment.

As I look at what we’re now seeing, what we would expect is think of it in terms of three components. One is enrollments of people who have never been to Weight Watchers before. Two, is enrollments of people who have been before so in other words lapse members or rejoins and three, is retention. Based on a whopping two months this year and a few months last year, what I would expect is that the most significant impact of a recession is going to be on a never enrollment.

I think this is the kind of consumer, and I’m sure you all saw the same surveys that I did, I think it was last week or the week before, the New York Times said that 55% of Americans were concerned about being able to make ends meet, 60% of Americans were concerned about either losing their job or someone else in their household losing their job. I think in that kind of environment where people are sort of tightening down or saving rates or shooting up in everything else and all the macro variables that you guys are aware of, it’s very difficult to sort of break through to the person who’s never been with us before, may not fully appreciate the value proposition. I think that’s a more difficult environment with which to get trial.

I think that’s different than with rejoins. A lapse member who has been to us before knows Weight Watchers, understands the value proposition, understands how it will help them, understands that it makes sense and so we would expect that we would see something a little bit better on that side. Then in retention again, what we’re seeing so far is that we’ve been feeling pretty good about those.

I think the other thing in a recession that’s worth pointing out is that it is a business that sometimes we don’t talk that much about but if you look at WeightWatchers.com, we’re forecasting growth for 2009. I mean granted, maybe not at the sort of 25% range that we were looking at in 2007 but we’re still forecasting good solid low double digit growth for WeightWatchers.com.

The fact that actually we’re able to continue driving sign up or enrollment growth if you will in a fairly horrendous consumer environment we think is a good testament to the fact in terms of people sort of continuing interest in Weight Watchers that it’s still pretty strong. I think literally in the meetings business, particularly with never enrollments, we just see more people deferring for the timing being and waiting for sort of for the dust to settle on the economy.

Again, our operating assumption not knowing any better what the next few quarters have in front of us is that we would expect that affect is going to continue at sort of current levels throughout the course of this year on the meeting side but again, we would expect to continue seeing decent growth on the WeightWatchers.com business.


Your next question comes from Analyst for Greg Badishkanian – Citigroup.

Analyst for Greg Badishkanian – Citigroup

You mentioned the effectiveness of your marketing has been impacted by the weak economy. Have you seen any changes in the effectiveness of your marketing over the last couple of months? And also, how are you looking at marketing spend in ’09?

David P. Kirchhoff

If I look at the effectiveness of our marketing in Q4 to sort of more specifically parse the question, if I look at our marketing effectiveness in Q4, keep in mind that we just frankly don’t do a lot of marketing in Q4 so it’s a difficult period of time to look at. If I look at our marketing effectiveness in the first quarter, all of the testing results, and we’re going to share some of this with you tomorrow, all of the testing results that we’re seeing for example of the new TV spots we’ve been running in January and February is that they’re getting good response. The copy test results are very positive.

In fact, in a number of dimensions where historically we haven’t seen as good performance are doing very well. I think that literally you’re in a environment where trying to get a message out right now for many companies sometimes feels a little bit like shouting in to the wind. Nonetheless, we think that we are getting some benefit and we are getting some sort of recognition of the advertising of the new product because we’re getting feedback to that affect, it just may not be of a degree that we would have gotten under normal times.

In terms of marketing spend over the course of next year, our expectation is that first off our competitors are going to be dealing with a similar situation so everybody is going to be carefully monitoring the marketing spend over the course of the year so I don’t anticipate a significant share of voice issues for any of us. What I would expect is that we would be able to hold marketing as a percentage of sales in 2009 versus 2008.

That means that if we’re therefore expecting some reduction in top line revenue, we would expect a similar amount of reduction in 2009. The other point I also want to make about marketing spend in 2009 is that in any given marketing budget when you look at it there are those expense specifically in [inaudible], in other words working dollars that we know to be high return on investment in terms of the enrollments per dollar spent.

Then, there’s going to be those marketing vehicles which are good ideas under normal times but under difficult times the ROI becomes increasingly difficult. So, when you’re scaling back your marketing a little bit to reflect the new shape of the demand curve, what it allows you basically to do is to start reducing some of those things that were frankly a little more incremental and a little bit more nice to have any way so you can moderate your marketing spend without losing much of your enrollment effectiveness. You effectively put yourself in an environment where you really focus just about every penny you spend on marketing in to things that you know drive business.


Your next question comes from Bob Craig – Stifel Nicolaus.

Bob Craig – Stifel Nicolaus

Just a couple of quick ones, any planned pricing adjustments to either monthly pass or pay go as you go through this year?

David P. Kirchhoff

No plans to take it up given the environment. I expect you might be asking the opposite question, are we planning on taking prices down? Well, first off we wouldn’t take prices down per say but a different question might be are we thinking about maybe taking a more aggressive posture in promotions. To that end, we have not done so in the first two months of this year with respect to Weight Watchers, for example, monthly pass and free registration and sort of the usual promotions that we run.

We are looking at ways of making sure that our message is hitting the point of value and in an appropriately strong way. We will continue to evaluate different potential promotions to determine if we see something that we think is going to give us a sort of positive revenue lift, we will absolutely take a look at it. But, what we don’t see is doing something radical that would somehow completely shift the economics of the business because then that would put us potentially in a more difficult position as we look to come out of the recession going in to 2010. We will evaluate it but we will do it prudently.

Bob Craig – Stifel Nicolaus

David, any actions being contemplated to sort of bolster the product sales side? The introduction of any lower price SKUs?

David P. Kirchhoff

We are going to continue to look for ways of bolstering product sales. On the product sales side I think that is a place where promotions can make a lot of sense. It’s a little bit of a different environment because at that point we’re talking about a captive customer base because the products are exclusively available in our meeting rooms and I think that affords us a little bit more flexibility on promotion schemes.

So, I think promotion schemes are potentially going to be more interesting on the in meeting product sales side. But, the other important thing on the product sales side is that it’s an opportunity for us to be maybe even more aggressive in terms of getting some new products out the door. A good example of this has been we recently came up with a very simple device, it’s not very expensive it’s $5 which think of it as just a little clicker that you can continue clicking and it sort of ratchets the points up.

Similar to like imagine a guy counting attendance coming in to like concert venue or something. This was just a very simple way of sort of like keeping track of your points in your pocket if you will. They’re selling like hot cakes. I think those types of product launches plus some sort of good creative thinking in terms of promotions within in meeting product sales I think can go a long way in terms of reversing otherwise what I think would be a much more difficult trend to fight against in terms of product sales for attendance.


Your next question comes from Michael Binetti – UBS Securities, LLC.

Michael Binetti – UBS Securities, LLC

Just a quick follow up from the last question there, I think you mentioned on the last call and I couldn’t remember if you said it today, you gave some specific product types that you were seeing slow down at the meeting level, maybe some of the bigger ticket items which seems pretty obvious. I’m just wondering, based on everything that you’re seeing today and the types of items that you’re seeing maybe slow down in the classroom in terms of product sales, does your guidance imply product sales to slow more than attendance in the year?

David P. Kirchhoff

Ann is going to take a quick look to confirm but certainly our expectation is as we look out over 2009 that we would expect to see a little bit of softening of product sales per attendance as we go in to next year sort of based a little bit on the trends that we’re seeing right now and our current forecasts. However, I think that some of that slippage may not fully contemplate some of the initiatives that I was talking about on the previous question. So, I think that it’s a place where we might have a few more options in terms of reversing the trend. But, Ann do you want to build on that?

Ann M. Sardini

There is a bit of slippage implied in our revenue numbers, not dissimilar to some of what we saw in the fourth quarter.

Michael Binetti – UBS Securities, LLC

Then just a quick follow up, could you maybe talk a little bit – you guys gave some helpful comments about how to think about the operating margin for the year, maybe help us think about the gross margin a little bit better as far as what you guys can do to kind of combat deleveraging at the meeting level? Maybe just how that works on the ground, how long it takes, do you close down meeting areas? What kind of room do you have to reduce labor in the existing meetings and what kind of time frames do you need to make those kind of moves if you were to see another leg down from the consumer in general here?

David P. Kirchhoff

Here’s the good thing to the extent that being in this environment can ever be a good thing but, if I look at the flexibility of our business, one thing to keep in mind is that Weight Watchers has for a very long time had a business model that understood the need to be able to vary and flex with changing conditions and demand and that’s simply a function of the fact that we have a highly seasonal business. So, we have a long history of opening and closing meetings as is appropriate to reflect the underlying demand.

So, we have a system that is very well attuned to making some of those adjustments. So, on the variable costs side which would be the most direct way of looking at it would be the size of the meeting base, we have a decent amount of flexibility. In fact, even where we have six locations which is about two thirds of our NACO attendance, by way of example in centers, even within centers we have flexibility in terms of adjusting how many meetings per week are in that center, what day, what time, some of those types of things.

So, unlike a traditional retailer where they’re sort of stuck with the kind of significant fixed overhead and it takes them a long time to adjust the size of their infrastructure, we actually have a lot more flexibility. Now, if you look at the other elements of gross margins, there is a fixed component to a certain extent that is rent and then the other significant of that would be local management, territorial field management and that part would be more fixed.

But, certainly if you look across the board our ability to sort of reshape gives us a fair bit of flexibility. Ann do you want to comment just for the year in terms of the way of looking at gross margins?

Ann M. Sardini

Just what I was going to add is that even on the rent side we do have an ability to look at what the real estate situation is in the various markets that we’re in and potentially renegotiate or if not renegotiate, move to different venues that are less expensive because I think we can take advantage of the market right now.

David P. Kirchhoff

What’s also interesting, and you’re going to have a chance to meet tomorrow our new President of North America Steve McCormick who is already making a terrific impact on the business. Not to steal too much of Steve’s thunder, I think we’re also looking at this environment opportunistically. If you look at it from a rent perspective it’s maybe a different way of looking at it and Steve will be able to take you through tomorrow some different ways of thinking about our locations strategy.

Michael Binetti – UBS Securities, LLC

If I was to look at the ‘03/’04 period which kind of the glory days of the Atkins diet in the US and I look at the cost of meetings line that you guys break out specifically and I look at that as a percent of the standalone non-online revenues, in ’03 you saw about 95 basis points of pressure there and then another 200 in ’04. What should we think about as far as what’s different now versus then as far as trying to figure out where we want to come out in our models for that margin line next year? Is that a very similar thing like we can maybe get caught with a couple of basis points of costs that you can’t get out in a quick down turn? Or, maybe anything you can help me think about on that.

David P. Kirchhoff

First off, there’s the overall gross margin for the business. One thing to keep in mind is that one of the things that is working nicely in our favor is that if you look at our two growth vehicles which is basically .com and licensing, they have extremely high gross margins. So, the part of the business where you would really want to make sure it’s doing well from a mix point of view is doing relatively speaking much better.

So, that’s one of the things as you model out gross margin for the corporation as a whole that you absolutely should think about is that we’re going to be getting lift from a mix perspective on gross margin on that side. I think it would be our expectation that that would probably be enough to relatively offset any slippage that we saw on the meetings side.

Ann M. Sardini

I think there will be some compression in Q1 for example but, as we move through the year, the cost initiatives that David talked about will have an impact on our gross margin and I don’t think that we’re going to see too much deterioration in the meeting business gross margin.


There are no further question registered at this time. I will turn the meeting back over to you Mr. Kirchhoff.

David P. Kirchhoff

Thank you for joining us today and I look forward to sharing more with you tomorrow morning.


This concludes today’s conference. Please disconnect your lines at this time. We thank you for your participation.

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