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Executives

Sarika Sahni – Investor Relations

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

Ann M. Sardini - Chief Financial Officer

Analysts

Jerry Herman – Stifel, Nicolaus & Company

Christopher Ferrara – Bank of America Merrill Lynch

Gregory Badishkanian – Citi

Michael Binetti – UBS

Weight Watchers International, Inc. (WTW) Q1 2009 Earnings Call May 7, 2009 5:00 PM ET

Sarika Sahni

Thank you to everyone for joining us today for Weight Watchers International’s first quarter 2009 conference call. With us on the call are David Kirchhoff, President and Chief Executive Officer and Ann Sardini, Chief Financial Officer. At about 4:00 pm Eastern time today the company issued a press release reporting its financial results for the first quarter 2009.

The purpose of this call is to provide investors with some further details regarding the company’s financial results as well as to provide a general update on the company’s progress. The press release is available at www.WeightWatchersInternational.com. Before we begin let me remind everyone that this call will contain forward-looking statements.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission.

The company does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I would now like to turn the call over to Mr. Kirchhoff.

David P. Kirchhoff

Thank you for joining us as we review Weight Watchers International’s performance for the first quarter of fiscal year 2009. Overall Q1 2009 was within our expectations and consistent with the overall guidance we provided on our last earnings call. As expected our business has been significantly impacted by two key factors, one, the global recession and two, the strengthened US dollar.

With respect to the economy we felt the impact primarily in enrollments, US product sales and to a lesser extent a slight softening of retention due to increased credit card declines. NACO was the largest source of softness in results but was within our expectations while some of our overseas markets held up relatively better particularly the UK.

WeightWatchers.com had a solid first quarter with low double digit growth in the exit subscriber base for its Weight Watchers online products. Finally licensing grew a respectable 5% on a constant currency basis despite our premium positioning. In reviewing our financial results I would like to remind everyone that our Q1 results versus prior year benefited from the timing of Easter which fell in the second quarter this year versus the first quarter last year.

Our meeting business also marginally benefited from the fact that our fiscal 2009 year commenced on January 4th this year versus December 30th last year. The impact of these two timing events is most significantly seen in the attendance figures while revenue was less impacted due to our shift to a commitment plan pricing model. Total company Q1 revenues declined by 11% versus the prior year period.

Most of this decline was due to the strengthened US dollar which impacted our results around the world particularly in the UK where the value of the UK pound against the US dollar declined by over 27% versus last year’s first quarter. On a constant currency basis global revenues declined 2.5% versus the prior period driven by softness in our NACO business.

For the first quarter as reported meeting fees declined 12%, product sales and other revenues declined 15% while Internet revenues were up 6%. On a constant currency basis meeting fees declined 4%, product sales and other revenues declined 4% and Internet revenues grew 11%. From a volume perspective global paid weeks in our meetings were down 2% versus the prior period quarter while global attendances were down 5%.

Without the benefit of the late Easter and the later start to the fiscal year global paid meetings weeks would have been down approximately 5% while global attendances would have been down 10%. In contrast paid weeks for Weight Watchers Online were up 14% for the first quarter versus Q1 last year.

Global paid weeks for our combined meetings and Weight Watchers Online offerings were up 3% on an as reported basis and flat without the benefit of a late Easter and later start to the fiscal year. Operating income declined 16% on an as reported basis and 11% on a constant dollar basis excluding restructuring charges associated with our first quarter cost savings initiatives.

Gross margins declined by 190 basis points as the decline in volume resulted in lower meeting averages as we elected to keep our meetings open to minimize disruptions to our members. The gross margin decline was somewhat offset by a reduction in marketing as a percentage of revenues. We expect the cost savings initiatives we implemented in Q1 to benefit our gross and operating margins later in the year.

Q1 2009 EPS was $0.61 on an as reported basis or $0.64 excluding the impact of Q1 restructuring charges. This compares to an EPS of $0.72 in Q1 2008. The unfavorable UK VAT ruling resulted in $0.02 of lower income and FX resulted in a negative $0.05 impact on 2009 EPS. Without the impact of FX and the restructuring charges and adjusting for the UK VAT first quarter EPS would have been $0.01 below prior year in line with our expectations.

I will now briefly review our results in our major geographies and business units. First our North America meetings business, total first quarter NACO revenues were $212 million a decrease of 7% versus the same period last year. NACO meeting fees declined 6% while in meeting product sales declined 14%. Q1 paid weeks were down 5.5% on an as reported basis and down 7.2% after adjusting for a later Easter and a later start t the fiscal year.

As reported attendances were down 5.4% in Q1 2009 versus Q1 2008. Without the benefit of prior period acquisitions and adjusting for the impact of a later Easter and start to the fiscal year NACO attendances were down 11%. We knew we faced a difficult economy this year and as a result actively worked on a terrific new program in advertising campaign that we hoped would offset the bad economy.

In fact members have received the new Momentum program with great enthusiasm and our advertising campaign as scored very well in numerous copy tests and advertising metrics. Unfortunately in this period of economic uncertainty the consumer has not been receptive to product news related to our service thereby negating what we believe would otherwise have been a growth driving program launch.

Consumers have significantly pulled back their discretionary spending and deferred their weight loss efforts. We’ve seen the impact of this most acutely in enrollments particularly never members where the decision to spend on any new service is highly scrutinized by consumers in this environment. While we saw a slight softening in retention versus the same period in 2008 the degree of softening is similar to what we’ve been seeing since Q3 of 2008.

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

Given the positive impact that some of these messages have been having in some of our international markets we believe that this could result in improved enrollment trends in the second half of the year. As noted NACO in meeting product sales were down 14% in Q1 2009 versus the same period in 2008 with product sales per attendance declining 9%.

Beginning in late March and continuing into April we have significantly increased product sales per attendance through new product launches and several very effective promotions. We therefore expect to see the in meeting product trends improve as we move into Q2 and for the rest of the year. We expect the remainder of 2009 to continue being a challenging time for our NACO business as the US consumer continues to struggle.

We expect Q2 volume trends to mirror the underlying Q1 trends with low double digit negative results. Of course on an as reported basis just as our Q1 attendance results were helped by the later Easter timing reported Q2 2009 attendance results will be hurt on a comparable basis. We’re cautiously optimistic that the trends in the second half could improve somewhat as we being lapping the effects of the recession.

We also believe that a more value oriented and promotionally driven marketing stance could improve our enrollment trends. In aggregate we are continuing to forecast full year 2009 paid weeks and attendance trends of high single digit to low double digit negative growth. Now onto the international business units, for the first quarter excluding the effect VAT ruling UK revenues were down 22% due to the significant decline of the British pound.

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

Like the US the economy has had a significant effect on the UK consumer and trading conditions across industries in the UK were difficult in the first quarter of 2009. However the UK team has taken a series of steps to improve the promotional messages of their marketing and to increase continuity in their advertising media placements.

This has resulted in strengthened enrollment trends in March that have continued into the second quarter. With these enrollment trends and higher Monthly Pass conversion rates we now expect some improvement in our UK attendance trends on an apples to apples basis for the second quarter of 2009 as well as for the remainder of the year.

Continental Europe revenues were down 16% for Q1 2009 versus the same period in 2008 and were down 3% on a constant currency basis. Paid weeks were up 4.4% for Q1 while attendances were down 9% versus the prior period in 2008. After adjusting for the late Easter and late start to the year paid weeks and attendances for CE were down 4% and 17% respectively.

As is the case in the UK several of our Continental Europe countries began to take a more promotionally driven marketing strategy for the spring campaigns which has helped moderate negative enrollment trends. As a result we expect to see improvements to volume trends as we move into the second quarter and beyond.

For the full year we continue to forecast high single digit to low double digit negative attendance and low single digit declines in paid weeks. In the meantime the Continental Europe teams are continuing to focus their efforts on running their operations for a significant program innovation for launch in January, 2010.

Moving on to WeightWatchers.com, WeightWatchers.com had a solid start to the new year despite the difficult consumer environment. Internet revenues were up 6% on an as reported basis and 11% on a constant dollar basis. Paid weeks for Weight Watchers Online were up a strong 14%. WeightWatchers.com results were particularly strong in some of our international markets.

This partially reflects our continued effort to drive awareness cost effectively through more integrated marketing campaigns. The only point of caution for the WeightWatchers.com business lies in the area of retention where we’ve seen some softening due to increased credit card declines. We’re continuing to monitor this closely and we’re evaluating options for improving retention rates.

The WeightWatchers.com team is continuing its aggressive product development pace with the upcoming launch of social networking functionality this spring. We’re also in active development of a robust iPhone application in time for the iPhone 3.0 software release this summer. I would now like to turn the discussion over to Ann who will elaborate further on our Q1 performance.

Ann M. Sardini

First quarter consolidated company revenues on a reported basis were $390.6 million a decrease of 10.6% versus $437 million last year. Two non-comparable items were responsible for most of the 10.6% decline in our first quarter year-over-year revenues, foreign currency conversion reduced our first quarter revenues significantly by $35.4 million or 8.1% representing 76% of the year-over-year revenue decline.

In addition because of the timing in 2008 of an unfavorable UK VAT ruling we recorded the associated UK revenue reduction for both Q1 and Q2 2008 entirely in Q2 thus requiring a $2.3 million adjustment to Q1 2008 to achieve comparability. When we adjust 2008 Q1 for UK VAT and exclude the impact of foreign currency 2009 first quarter revenues were $426 million down 2% from $434.7 million last year.

Now looking at the bottom line including the impact of our China joint venture, in the quarter we booked a $3.1 million pre-tax, $1.9 million net of tax charge associated with our previously disclosed first quarter cost savings initiatives. Net income in the quarter as reported was $47.3 million down 17.5% versus prior.

As noted in our press release adjusting 2009 by $1.9 million of net restructuring charges and adjusting 2008 by $1.6 million net for UK VAT timing Q1 ’09 EPS was $0.64 as compared to $0.70 in the year ago quarter. If we also add back $0.05 of negative FX impact our 2009 EPS increases to $0.69 just $0.01 short of prior.

Now recapping some of the operational trends that David discussed, globally in the meeting business first quarter paid weeks declined 1.8% versus prior while attendances declined 4.7%. Domestic paid weeks fell off by 5.5% but international paid weeks were up 5.5%. Monthly Pass penetration is increasing in our international markets where this product is less mature.

These combined factors resulted in global meeting revenues, that’s the combination of meeting fees and in meeting product sales posting a 3.3% decline in constant dollars. Global meeting fees declined 3% in local currencies less than the 4.7% attendance decline bolstered by increasing penetration of Monthly Pass in our international markets, UK, Germany and France.

A difficult economic environment was also evident in our in meeting product sales performance. Global product sales per attendee which grew substantially through much of last year posted a less than 1% increase in the quarter up .8% on a local currency basis. This was driven by our North America in meeting product sales performance which declined by 12.7% in constant currency.

Despite the soft economies in much of our international footprint product sales per attendee in our international business were strong in the quarter posting a constant currency growth of 9.6% compared to prior year. This growth level represents the continuation of the trend we saw in 2008 in the international business where product sales per attendee grew 7.8% overall as a result of successful new consumable product launches.

In the WeightWatchers.com business revenues increased 10.1% in constant dollars in the first quarter to $49.2 million on paid weeks growth of 13.9%. End of period active online subscribers grew 11.1% to 871,000. Now turning to a review of the performance of our other revenues which include licensing, franchise commissions and revenues from our publications, other revenues were $23.7 million up 1.9% from the prior year in constant dollars.

Despite the recession economy our licensing revenues in the first quarter were up 5.1% in constant currency to $15.7 million with particular strength in the US for both direct licenses and product endorsements. Franchise commissions were $4.1 million in the quarter. About a third of our franchisees are outside of the US and accordingly franchise commissions which were down 21.2% in current dollars decreased 15.6% in local currency.

Excluding the impact of acquisitions made in 2008 commissions on the remaining franchises declined 10.6% in constant dollars with the entire decline coming from the US franchises underscoring the impact of the weakened US economy. Our consolidated gross margin in the first quarter was 54.3% down 170 basis points from 56% in last year’s first quarter when adjusted for 20 basis points of UK VAT charge.

While lower attendance per meeting was the major causal factor given that we kept meetings open for service reasons in meeting product promotions in the US also put pressure on gross margins. In addition we had higher rental expense in some of our overseas locations as we’ve been selectively upgrading our venues and there were charges in NACO associated with the cost of rolling out broad bands to our meeting room locations.

The cost initiatives we’ve undertaken in our first quarter reach beyond G&A to cost of revenues areas such as supply chain, Monthly Pass performance and call center. These will become evident as the year progresses. In addition we’re continuing to undertake meeting placement analyses to ensure that we are properly matching supply with demand while at the same time minimizing disruption for our current members.

First quarter marketing spend of $74.6 million was down 6.5% from prior year in constant dollars. On that basis Q1 marketing as a percentage of revenue in our highest spend quarter improved to 19.1% from 20% last year. This is only partially the result of the timing of Easter which was two weeks later this year and is traditionally the kickoff of our spring advertising campaigns around the world.

In addition to Easter our teams have worked particularly hard especially in the meeting business to eliminate inefficiencies and we’ve used part of the savings for incremental marketing investment in WeightWatchers.com and selectively in some of our European countries. G&A expense in the first quarter of 2009 includes the $3.1 million charge related to the Q1 restructuring.

Excluding this charge in 2009 G&A expenses for the quarter were $40.7 million a 3.4% increase in constant currency from the prior year level and a 5% decrease in current dollars this despite expenses related to our China JV and increased depreciation resulting from our IT investments. The benefit of much of our restructuring cost will begin to be felt starting next quarter.

As a percent of revenues G&A excluding the restructuring charge was 10.4% in 2009 versus 9.9% in the prior year quarter adjusted for UK comparability. As noted on prior calls 100% of our China joint venture is consolidated into our operating income and our partners [inaudible] 49% ownership is deducted as non-controlling interest in a line item before net income.

On an operating basis in the first quarter 2009 100% investment in the venture was $1.7 million of pre-tax expense mainly a combination of marketing and G&A. This compares to $0.7 million in the first quarter last year. Excluding restructuring charges the consolidated operating income margin was 24.8% in the quarter as compared to 26.2% last year with last year adjusted for the UK VAT comparability.

Interest expense in the first quarter 2009 was $16.7 million down $8.6 million or 33.9% versus first quarter last year. We benefited from 196 basis point reduction in our average effective interest rate which was down from 6.01% in first quarter last year to 4.05% in this year’s first quarter as a result of lower market rates. Our debt level at the end of fiscal 2008 was $1.648 billion and the end of the first quarter was $1.569 billion.

Finally I’ll review in brief the consolidated cash flow for the quarter and our balance sheet. In the first quarter we generated $143.3 million of cash form operations excluding interest. After capital expenditures of $6.8 million we had $136.5 million of free cash available in the quarter to service our capital structure. With our available cash we made interest payments of $33.9 million, paid our quarterly dividends of $13.6 million and reduced our debt by $78.6 million.

As I indicated on our last call and during our Investor Presentation our priority use of cash is debt pay down. Our required debt pay down on our term loans this year is $162.5 million. Other than the debt pay down of $78.6 million fluctuations in the balance sheet between Q1 ’09 and year end ’08 primarily reflect the normal seasonality of the business. Now I’ll turn it back to David.

David P. Kirchhoff

During these difficult current economic conditions the strength of our business model allows us to manage the short term challenges our business faces while continuing to invest in upgrading and reinvigorating our platforms. We have substantially completed most of the restructuring and cost reduction activities we referenced on the last call and will achieve all of our targeted $13 million 2009 expense reductions.

We will see the benefit of these savings beginning in Q2 and continuing throughout the year. as Ann referenced we took most of the restructuring charges associated with the aforementioned savings in Q1 this year. We’re making very good progress on many of these initiatives we reviewed at our Investor Presentation on March 5th.

In particular we’ve completed the initial development of a new design for Weight Watchers centers which will be pilot tested in four existing locations by early summer. We believe that the new look and feel as well as the functionality of the new design reflects a significant step function improvement at a reasonable cost. This will allow us to better serve our members and to better present our brand.

We are taking advantage of the weakened real estate market to improve the quality of our locations without significantly increasing costs. We’ve already begun to make location upgrades. With respect to 2009 EPS guidance we are maintaining our forecasted range of $2.50 to $2.75 per fully diluted share before restructuring charges.

As noted earlier Q1 was a particularly difficult comparable as we did not have any of the restructuring savings and the negative impact of the currency conversion was at its most pronounced. While we expect currency to continue providing a headwind over the next few quarters its negative impact should begin to lessen as we proceed throughout the year. At this time Operator we would like to take questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question is from Jerry Herman – Stifel, Nicolaus & Company.

Jerry Herman – Stifel, Nicolaus & Company

I’m wondering if you folks would be willing to update us on the penetration rates of Monthly Pass in the respective geographies? I know you talked a little bit about this at Investor Day and wondering if you can give us an update there?

Ann M. Sardini

In terms of the penetration of attendance in NACO we’re roughly in the same ballpark, around 60%, a little over 60%. UK is doing well, climbing close to 40%, Germany is way up in the 60s as is France. So we’re doing well I think across the board especially given the economy that we’re facing to penetration and Monthly Pass.

David P. Kirchhoff

In particular in the UK still we were continuing to see upside as the conversion rates are increasing with each passing month.

Jerry Herman – Stifel, Nicolaus & Company

You said Germany 60% plus?

Ann M. Sardini

Yes.

Jerry Herman – Stifel, Nicolaus & Company

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

David P. Kirchhoff

Historically the way Weight Watchers has promoted the meetings business has been through free registration which back in the pay as you go environment registration fees were not an insignificant portion of the cost of joining meetings. We found ourselves increasingly in a situation where with more and more of our members on programs like Monthly Pass, the allure of free registration is lost under the fluster compared to other promotions.

In some respects you can kind of look at the NACO meetings business as operating still with the promotion but nothing unusual and certainly nothing that reflects any of the typical promotional activities that you’re seeing from a lot of other service companies and other retailers. So we’re now evaluating a number of different possible approaches that we’re going to be putting into test shortly so we can measure lift versus cost.

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

I mean one of the things that Monthly Pass affords us is a much greater revenue per enrollment cycle so it affords us flexibility in terms of how we think about charging for the product to get people in the door. Based on that we feel that with the testing protocols we now have in place we think that there’s a good opportunity to possibly put something new in place for NACO going into the fall campaign beginning at the end of August.

Operator

Your next question is from Christopher Ferrara – Bank of America Merrill Lynch.

Christopher Ferrara – Bank of America Merrill Lynch

I’m trying to understand basically what you’re saying big picture here. It seems to me like even with the shift, you guys have guided to attendance being down high singles to low doubles, it seems like this quarter kind of came in sort of like that when you adjust for the timing shift and you’re also talking about taking a lot of measures on the promotion side to make things better.

It almost sounds in tone like things are really worse than you thought on the attendance side and Q1 was really tough but yet the numbers don’t really seem worse than what you seemed to think before. I’m obviously misreading you somewhere but can you give a little color on that like what maybe I’m misinterpreting?

David P. Kirchhoff

Possibly my tonality. Actually when I look at the attendance rates they’re very much in line with what we talked about when we reported the Q4 results and we first started talking about what we were seeing for Q1. There is no doubt that the economy is presenting some challenges and again, as particularly for NACO, we had hoped as we had finished the end of the year that having a really good program and a really good advertising campaign was going to provide sufficient umph to our efforts that it was going to offset the impacts of the economy.

But, as I referenced during my remarks during the investor presentation, we’re in an environment right now where the consumer just was not receptive to hearing those messages. I’ve been very heartened by the fact that in our international markets, particularly the UK where we’ve been doing some interesting things with some cost effective price promotions that we’ve been able to show some very nice enrollment trends towards the end of Q1 going in to the spring campaigns.

We look at that as a reflection of what a lot of people are seeing with this economy, that the consumer is being trained right this red hot minute to look for additional savings and value opportunities. So what I’m simply suggesting is that I think it’s just the reality of the environment we’re in that our largest business such as NACO which effectively has been at full price all throughout this economic period might need to take a somewhat aggressive stance.

I think the timing for that is good because we were already getting to the point where it was time for us to start seeking alternatives to free registration as our most compelling promotional offer. So, there’s nothing going on with attendances that I find to be particularly concerning versus the expectations we already had and frankly, as I look at the meeting business going forward, I’m incredibly exited about things that we have in front of us in terms of from a broader perspective, obviously we know that the obesity issue isn’t going away.

We continue to believe that as research continues to demonstrate that behavior modification is the way to deal with this issue and that we’ve got the right service and the right solution to solve that. I think as I go back to our investor presentation, the thing that I think we have to be focused on is taking down the barriers that prevent never members from getting in to the fold. So, that’s a function of improving the convenience of our meetings, making sure that our meetings themselves are delivering relevant and [inaudible] topics to contemporary lifestyle and presenting ourselves in the way that consumers have been acclimated to expect with modern retail branding, good locations, things like that.

So, when I look at things such as the new NACO center designs, it’s difficult to express how much of a night and day change those designs by way of example represent. As I look at the difference that we’re already seeing in some of the locations that we’re upgrading I think some of those things are significant so when I think about what a meeting is going to feel like in two years and I compare it to what it feels like today which is something that already delivers a highly efficacious solution I’m incredibly optimistic about the forward prospects of the business.

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

Christopher Ferrara – Bank of America Merrill Lynch

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

David P. Kirchhoff

I think in this recession I think we have to. It’s difficult to look at a single retail and service offering where they are not pulling that lever. So, the fact that we haven’t been I think is a missed opportunity with the benefit of hindsight and so we’re going to look to correct that as we go in to the second half of the year.

Christopher Ferrara – Bank of America Merrill Lynch

Could that, and maybe this gets in to more detail than you wanted to but I mean, I presume since monthly passes is such a big piece of the business at this point, is monthly pass on the table as far as the pricing adjustment?

David P. Kirchhoff

Well, monthly pass being our primary offer, I think if you look across our meetings offering those would be the things that we’d be looking to do. I think that the focus on promotion would be to increase higher trail because again retention has held up pretty nicely notwithstanding the slight bit of softening which I referenced which really hasn’t gotten any worse as we’ve gone through the first three months of the year compared to what we were seeing in the back half of last year.

So, the issue with promotion is one of driving higher trial and getting more people in the door and therefore driving enrollments. What’s nice about monthly pass is given that you have such a high revenue per enrollment cycle, we actually have a fair bit of flexibility to try some different approaches to do that. So, monthly pass is absolutely on the table.

The other point I want to make about monthly pass is that you might have heard me reference some of the improvements we’re making to the Weight Watchers online products specifically having Facebook like functionality in the form of social networking as well as having a significant iPhone application. I want to point out the fact that all of those product enhancements also accrue benefit to NACO’s monthly pass proposition.

So again, when I think about sort of what monthly pass is going to feel like as we go in to the fall with social networking, with meetings, with all the tools, with an iPhone application, with everything sort of kicking and a compelling value proposition I feel very good about it.

Operator

Your next question comes from Analyst for Gregory Badishkanian – Citi.

Analyst for Gregory Badishkanian – Citi

I just wanted to see if we could get a sense for attendance or recruitments, however you’d like to answer, how that trended throughout the quarter and even in to April excluding maybe the Easter shift and acquisitions?

David P. Kirchhoff

I think what we’ve suggested is that for the second quarter particularly for NACO that we weren’t seeing a significant change in trajectory once you factor through the respective changes for holiday timing, etc. And, that we saw some possibility of some potential attendance upside in the second half of the year although we haven’t baked that in to our guidance forecast. We see some possibility for attendance upside depending on how the comparables go given that we’re going to be lapping the effects of the recession next year and give the potential upside from promotions, we haven’t used any of that to adjust our overall guidance for the business.

As you probably heard me reference, the attendance tends for example in the UK have improved somewhat versus what we saw in the first quarter on kind of an apples-to-apples basis. In CE, it’s variable depending on the country but we’re seeing some signs of hope there. So, I think in those aspects of the meeting business I think that’s probably the appropriate level of attendance guidance. If that’s helpful.

Analyst for Gregory Badishkanian – Citi

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

David P. Kirchhoff

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

Analyst for Gregory Badishkanian – Citi

Have you seen any benefits from the locations you’ve upgraded in terms of retention or recruitment? Any additional color you have on that?

David P. Kirchhoff

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

Analyst for Gregory Badishkanian – Citi

I was just wondering if you can give an update on the upside, the economics of the monthly pass and maybe the dollars per enrollment cycle if that’s changed at all.

David P. Kirchhoff

It has not changed significantly. I did reference the fact that there was a slight bit of softening with retention with month pass but again, nothing more significant than what you would have seen in the financial results reflected in the second half. So, really no change on that dimension and I think actually if anything, some of the cost reduction initiatives we’re taking, particularly in Europe should reduce some of the gross margin hits we currently take on monthly pass having to do with fulfillment and transaction processing and things like that. So, on the cost side of monthly pass that’s some of the improvements that we’re seeing that we had outlined in our previous estimations around cost reduction activities.

Operator

Your next question comes from Michael Binetti – UBS.

Michael Binetti – UBS

A quick housekeeping question, I think since the last time you guys guided when we talked to you guys in March you said that fx was going to be about $0.18 hit to your earnings guidance and I think the Pound and Euro have improved a little sense then. Is there any way you can give us an update on what you think the fx number is for the year?

Ann M. Sardini

Yes, it’s improved just about $0.01 at this point.

Michael Binetti – UBS

For the whole year Ann?

Ann M. Sardini

Yes.

Michael Binetti – UBS

Could you maybe help us walk through the cadence on the operating margin for the year? I think last time we talked you were hoping to hold the operating margin steady for the year, is that correct?

Ann M. Sardini

Actually I think we were also talking about the gross margin for the year. Yes, I can give you some color on that.

Michael Binetti – UBS

Then also maybe how the SG&A and the marketing will play out in the quarters would be helpful.

Ann M. Sardini

In terms of the gross margin you saw that the first quarter was down 190 basis points. That is not what we’re expecting on a full year basis. The first quarter had some things in it that drove down the numbers but really aren’t part of the underlying run rate.

In the quarter we had higher rental expense and some catch up rental expense, some other onetime things like a makeup supply chain hit. But, we expect to see a better picture in the second quarter. We won’t have 100% of our savings that we’ve gotten from our cost initiatives hitting in the second quarter but you will see some of it. In the third quarter you’ll start to see parody with prior, we will have the savings full embedded in and by the fourth quarter we could end up with a plus in gross margins.

Even if we end up the year in sort of 50 to 100 basis points down versus prior I think that’s pretty good performance given where we are in gross margin and given the environment that we’re in. Looking at marketing our expectation on marketing is that it will hold roughly for the full year as a percent of revenues as compared to prior. It’s a combination of us kind of weeding out some inefficiencies in the marketing in the meeting business and then pumping some dollars in to dot com growth and collectively in to some of our foreign markets as well.

David P. Kirchhoff

I think GM again, on sort of an as reported basis we would expect it to hold as a percentage of revenues given where we are reflecting some of the savings that we’ve been able to achieve.

Michael Binetti – UBS

And when you maybe G&A could be within 100 points this year, that also obviously takes in to effect perhaps some promotional activities that might reduce top line meeting revenues?

FM

Yes, I kind of said 50 to 100. To a degree certainly outside the US we’ve got that embedded in to the numbers. In the US, we’re still doing some analysis so I can’t say that we’re 100% embedded in.

David P. Kirchhoff

But if you think about it Michael, the guidance we provided didn’t assume either the upside from doing more aggressive promotions nor did it assume the gross margin impact so it assumes kind of no promotions in the second half and a continuation of the trend. Obviously, we wouldn’t be putting this in to place unless we thought we were going to get reasonable lift.

Operator

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

Christopher Ferrara – Bank of America Merrill Lynch

I guess can you guys talk a little bit about the dot com business? I guess how are you thinking about the long term growth of the business? I mean local currency was up 11% which obviously is a very good number and you’re comping some really tough numbers but, how are you thinking about growth in that business over the next couple of years?

David P. Kirchhoff

I think when I continue to look at dot com it’s still such a small level of penetration versus its target market or its target segments of self help dieters and we’re still just starting to scratch the service in terms of international expansion. Then furthermore, when I look at our ability and I look at some of the things we have sort of for launch this year and the continuation of product development activities going in future years to me there is no end in sight in our ability to continue driving growth.

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

One thing that has been out there in a press release which you might have seen is that we recently launched Weight Watchers online in China. We don’t have plans to market it over the next few months because we really want to make sure that the product is set, that it’s been burned in properly and that the Chinese consumer is responding well. But, it’s another example of the fact that we continue to have significant international terrain in terms of growing that business.

The other point I would make on dot com is, and I’m not saying that we would do this or not do this but I’m saying for example in NACO we’ve never really promoted it. We offer people a free week trial to induce but we haven’t really pulled out any stops in that dimension as well. So, as I kind of look across the board I see significant opportunities as we go in to 2010 and beyond to drive that business.

I think frankly the other thing that’s impacting us a little bit that you’ve already referenced in dot com is just simply mix as it relates to the impact of foreign currency. We’re getting fantastic growth in the international part of the dot com business which to me is incredibly important in terms of proving that business model out from a global perspective. It’s unfortunate timing that that’s the part of the business where for ex is having a significant impact.

So, when I think about the as reported growth we’re going to see with dot com I don’t think it will even tell the full story of how strong the business is. But, we’ll lap that as we get in to the end of this year. So again, as I look at 2010 and particularly with recovery of the economy on top of everything else I feel good about what’s going on with the dot com business unit.

Christopher Ferrara – Bank of America Merrill Lynch

Then I guess can we talk about fx for a second? I mean, I would have expected as you move in to next quarter or even in this quarter you would have seen a bigger fx transaction drag rather than translation and it wasn’t one of the major highlights that you guys called as far as why GM was down 170. So, can you talk a little bit about that and why you haven’t seen that?

David P. Kirchhoff

Can you elaborate on what you mean by transaction drag?

Christopher Ferrara – Bank of America Merrill Lynch

I guess maybe I have your supply chain wrong but I would have thought in international markets you’d still have some US dollar based production costs that would have driven local currency expenses higher as they take place in deflated currencies relative to the dollar?

David P. Kirchhoff

Not so much. Most of what is in our overseas markets is sourced overseas. So, when you look at our international markets for ex tends to impact both top line and cost line to a similar degree.

Ann M. Sardini

You do have a line in the P&L that is called other expense and other income and that’s where the intercompany washes out to the extent that we do source in one place and put it in another but it’s very small.

David P. Kirchhoff

By way of example it was a plus in our P&L last year while it’s a drag this year. Actually, as I think about it, the only other place where there is a little bit of what you’re describing is in dot com where all of the development happens in the US and so to the extent that those costs are shared with international that would be one place where you see a little bit of that drag but not that much.

Christopher Ferrara – Bank of America Merrill Lynch

Also, I guess of the major drivers and I don’t want to make you run through this again because I know you hit it in some detail but the lower attendance per meeting that’s hitting gross margin and I know you said you are doing some research to figure out I guess if your meetings are in the right place, if I understood that right. Did I understand that right and is there a chance that you can close meetings or are you just not really thinking that way, you’re looking more for the boost in attendance rather than trying to shut meetings down?

David P. Kirchhoff

I think when we look at meetings by in large the fixed cost for operating a meeting is not that significant. The majority of cost structure that is built in to meetings on the contribution line is very low in nature. So, when you’re looking at the decision to keep open or close a meeting you can also find yourself in a situation where it makes more sense to keep it open from a gross margin dollar perspective versus a gross margin percentage perspective.

Furthermore, what we don’t want to do is inadvertently create havoc in the lives of our members. In some cases, we’re going to have on the margins some of those meetings where it just doesn’t make sense to sustain them at such low level of attendances and in those cases we would look to take some action and try and consolidate. There are certain places where there might be back-to-back meetings where it might make more sense to consolidate them in to a single meeting and a number of other circumstances like that.

We’ve got a pretty good methodology for evaluating through that process and making sure that we do it in a way that’s careful that doesn’t inadvertently result in the loss of any significant level of attendances. So, we’re pretty methodical on our approach. Despite all that, as we think about, as Ann talked through the gross margin sort of view over the coming quarters with a view towards effectively keeping our meetings open, the gross margin hit of that if you look at it over the course of the year is included in that 50 to 100 basis point range in terms of sort of softness versus prior year. So, we feel like it’s at a manageable level that as we come out of the economy we’re going to be in a better position having kept a number of those meetings open as well.

Operator

Your next question comes from Michael Binetti – UBS.

Michael Binetti – UBS

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

David P. Kirchhoff

I think that the guidance I was providing in terms of the trends we’re seeing in April were intended to sort of address that. I mean we typically don’t get in to our volume results on a day-by-day basis but the guidance I was providing is if you compare sort of campaign-over-campaign and period-over-period that the underlying trends we’re seeing as we now move in to this spring season in NACO are fairly similar to the trends we were seeing prior to the spring campaign season. So, not a significant change.

As I referred to I think by way of example, those trends have been a little bit more positive in the UK reflecting I think some of the promotional activities as well as some other factors. But, I think it’s not a significant change on trend.

Michael Binetti – UBS

If I could just follow it real quick, I think at the analyst day David you and I spoke about [inaudible] get some kind of a look at the return on investment [inaudible] around some of the new locations, how much you guys are having to put in to either revamping a current location [inaudible] closer to the street for curb appeal or something like that and then maybe [inaudible] can you give us a look at that?

David P. Kirchhoff

Okay, there’s two dimensions to what we are talking about. One, is on location and the other is on updating the look and feel of the center. With respect to location, as I referenced, our intention is to take advantage of the current environment which is a bit more of a buyer’s market from a real estate point of view and to take advantage of that environment to try and lock in rental rates possibly for longer period of times either at lower rates for what is already a good location or in some respects more importantly to look to use it as a way to upgrading locations while staying cost neutral from a rent perspective. So, that’s the way that we’re approaching it on the location side particularly with respect to NACO.

On the sort of center fit out branding look and feel side, the approach we’ve been taking, we’ve been working with a very good design firm that does a very good job with this is a recognition that just because something looks better doesn’t mean it has to cost more. So, the intention that we’re taking in to and developing kind of sort of the center of the future if you will is trying to keep it cost neutral for what we would typically pay anyway if we were to change locations or do a retro fit which we do on a regular basis each year of those locations. So, the relative capital in for any given location, the intention is to work like heck to kind of keep that cost neutral. Everything that we’re seeing so far suggests that we can do that.

Michael Binetti – UBS

Is there any way you can give us maybe average attendance list [inaudible] new locations at all?

David P. Kirchhoff

No, I mean the reason I can’t do that is its too new in the locations and we’re just in the process of building in the pilot locations. It’s still too early days.

Michael Binetti – UBS

Is there anything new to talk about with the four centers you were testing in Wal-Mart?

David P. Kirchhoff

No, nothing new at this point. We continue to be very satisfied with their performance.

Operator

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Kirchoff.

David P. Kirchhoff

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

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Source: Weight Watchers International, Inc. Q1 2009 Earnings Call Transcript
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