Sarika Sahni – Director, IR
David Kirchhoff – President and CEO
Ann Sardini – CFO
Jerry Herman – Stifel Nicolaus
Chris Ferrara – Bank of America
Weight Watchers International, Inc. (WTW) Q1 2010 Earnings Call Transcript May 6, 2010 5:00 PM ET
Good evening, ladies and gentlemen, and welcome to the Weight Watchers International first quarter 2010 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session, and instructions will be provided at that time. As a reminder, this conference call is being recorded today, May 6, 2010. At this time, I’d like to turn the call over to Ms. Sarika Sahni of Weight Watchers International. Please go ahead.
Thank you. And thank you to everyone for joining us today for Weight Watchers International’s first quarter 2010 conference call. With us on the call are David Kirchhoff, President and Chief Executive Officer, and Ann Sardini, Chief Financial Officer. At about 4:15 P.M. Eastern Time today, the company issued a press release today reporting its fiscal results for the first quarter 2010.
The purpose of this call is to provide investors with some further details regarding the company’s financial results as well as to provide a general update on the company’s progress. The press release is available at www.weightwatchersinternational.com.
Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. The company does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
I would now like to turn the call over to Mr. Kirchhoff. Please go ahead, David.
Good afternoon and thank you for joining us, as we review Weight Watchers International’s performance for the first quarter of fiscal year 2010. Consistent with the direction we gave in the last earnings call, Q1 2010 proved to be one of the more challenging quarters at Weight Watchers has faced. The combination of residual slowness in the economy, unprecedented bad weather in our largest market, and comping against the new program launch last year in our US and UK markets created uniquely difficult operating conditions.
As a result, we experienced soft enrollments in our business in both our key US and UK markets, only partially offset by the successful launch of our new ProPoints program in Continental Europe and a continued growth of our global WeightWatchers.com business. As we will discuss later in this call, the early results of Q2 look significantly more favorable.
Before I run through those specific quarterly results, I want to point out that we have modified our approach to our earnings press release to more clearly bridge between our GAAP and non-GAAP financial results, as well as other key metrics. I will focus my remarks on the financial and operating metrics that provide comparability and insight into the performance of our business. I hope you find this new approach helpful.
On a constant currency basis, Q1 revenues declined 4.5% with meeting fees declining 7%, product sales and other revenues declining 6%, and Internet revenues growing 11%. From a volume perspective, combined global online and meetings paid weeks grew by about 1%. Global paid weeks in our meetings were down 4% versus the prior year quarter while paid weeks for Weight Watchers online were up a solid 11%.
Q1 2010 EPS was $0.58 compared to $0.61 for the same period in 2009. After adjusting for the impact of the adverse UK self-employment ruling, along with last year’s restructuring charges, Q1 2009 EPS would have been $0.63 on a comparable basis. Among the factors negatively impacting Q1 2010 EPS was $0.02 per share of higher interest expense.
I will now briefly review our results in our major geographies and business units. First, our North American meetings business. Total NACO revenues were $195 million in Q1, a decrease of 8% versus the same period last year. NACO meeting fees declined 9% while in-meeting product sales declined 4%. NACO Q1 2010 paid weeks were down 8% versus the same period in 2010 while attendance was down 15%. To better understand the drivers behind the weak Q1 2010 volume figures, it is useful to review the trends we saw beginning in Q4 2009.
As I noted on our February call, NACO had been seeing moderating growth trends during the months of October and November. However, when we began to lap against the launch of momentum program in December 2009, we saw a significant drop in relative volume albeit during a typically low volume time of year.
2010 is an off-cycle program innovation year, which resulted and that’s not having meaningful news to entice new consumers into our doors in the first quarter this year. Moreover, in January of last year, we saw a surge of attendance from existing monthly pass members coming to meetings and check out the new gross margin.
We did not have the same benefit this January. It is not clear that when we were pursing out the relative effect of the recession versus momentum innovation in our Q1 2009 results, we underestimated the impact of the new program launch. Our results from this year’s quarter were further impacted by extraordinarily bad weather. In my 10 years at Weight Watchers, I cannot recall a more difficult time from a weather perspective on the North American business.
Moving closure is we’re up an unprecedented 44% for the full quarter and even meetings left open and the impacted areas were affected earning both for tenants and most importantly enrollments. For many consumers, it’s all too easy to procrastinate the sometimes difficult first step of starting its gain weight loss effort. And this winter’s tough gave many consumers a perfect excuse to stay home.
The soft volume trends were most pronounced in January and February, and we began to see some moderation in March. This is consistent with the passing of the January/February snow, as well as the diminishing impact of lapping the initial launch of the momentum [ph] program in the prior year. While the program was not unanticipated, the fact that we did not have a new program was not. It is now clear that the collective impact of our advertising and PR in January did not have nearly enough impact than cut-through in this crowded and competitive environment.
Quite frankly, we were outshouted by our competitors. In one case, in a duplicitous manner that we’ve vigorously and successfully challenging court. The poor start of this year has been a wakeup call for me and my time to take a more different, more aggressive approach to getting our message out. As the first step in this new direction, on March 28, we launched a latter, more aggressive marketing campaign and it has already had a visible impact on our government trends.
Word of mouth has always been the most effective way to create interests in weight watchers and our new campaigns that touches the megaphone divorce conversations by using the voices of our members, online subscribers and meeting leaders to passionately convey the benefits of Weight Watchers. This campaign fully integrates all aspects of a marketing mix, including TV, website, Internet, PR and direct mail. As part of this campaign, we enlisted Jennifer Hudson in Oscar, Golden Globe and Grammy Award winning singer sectors.
Prior to the April 1st launch announcement, Jennifer had been confidentially participating in Weight Watchers working with the real life meaning letter and using the Internet tools, including the new iPhone application extensively. So we’ve had fantastic success and our transformation was already apparent to the public, prior to the announcement of our partnership with Weight Watchers. It’s been more than five years since the Duchess of York had been fully integrated into our marketing campaigns.
When we made the decision to once again work with the celebrity spokesperson, we had several criteria. One, we wanted an A-list celebrity who had broad-based appeal and who could help expand our relevance through her appeal to multiple demographic groups, including young people. Two, we wanted a celebrity partner who really believes in the Weight Watchers’ approach and was going to live Weight Watchers as much like our members do. The celebrity who can showcase the sustainable lifestyle based approach of Weight Watchers.
Jennifer demonstrated that an incredibly busy on the move lemon can learn to navigate management environment. She may be often in the spot light, but most place to very much like our other members. She sees the value of having Weight Watchers be our partner for a healthy lifestyle. And because she truly believes that, she is able to communicate the benefit of Weight Watchers in a real and authentic way.
All major research suggests that the consumer has responded very favorably to Jennifer and were very pleased with our partnership. In the first few weeks of the spring campaign, volume trends in both paid weeks and attendances have improved significantly from what we experienced in Q1. While I’m pleased with the early enrollment trends, I would caution that we are only five weeks into this new campaign.
The other bright spots in the NACO business in Q1 included further increases in monthly pass penetration rates, improving monthly pass retention, as well as higher in meeting product sales. Product sales for attendance in Q1 were up a robust 15%, driven by a combination of successful new product launches along with a very effective commercial campaign.
While we are pleased with the favorable April enrollment trends, we believe that prudence should be applied to forecast the NACO volume trends. Therefore, for the remainder of the year, we are forecasting mid-to-high single-digit paid week declines and high-single digit to low-double digit attendance declines.
Now on to the international meetings business. UK 2010 Q1 revenues declined 11% on a constant currency basis driven by promotional discounts and enrollment softness. Revenues were further adversely impacted by the return of VIP rates from 15% in Q1 2009 back to the historical 17.5% in Q1 2010. Paid weeks declined by 3% and attendances declined 13%.
The situation in the UK during Q1 was very similar to that of NACO with volumes being significantly impacted by, one, weather. Unprecedented snow in the first two weeks of January resulted in a loss of nearly 50% of the enrollments in those critical first two weeks. More than any other of our major markets, the UK is particularly dependent on New Year’s resolution volume. While weather was less of a challenge for the remainder of the quarter, as expected, the UK was not able to make up for the volume loss.
Two, timing of program innovations. Like the US, the UK did not have the benefit of a new program to provide product news in its winter marketing campaign in Q1 of this year as against the new program launch last year. As is the case with NACO, it is clear that we need to take a different, more aggressive path in getting our message out in this market as well.
While we expect some moderation in volume trends in the UK for the duration of 2010, we are forecasting low-single digit paid week declines and high-single digit attendance declines for the remainder of the year. In the meantime, the UK team is heavily focused on preparing for the soft launch of this new program in late 2010, with the full supporting marketing campaign beginning January 2011.
Moving on to Continental Europe, with the benefit of a new program launch this year, we saw trends begin to improve significantly in Q1. CE revenues were up 3% on a constant currency basis for Q1 ’10 versus the same period in ’09. Paid weeks were up a robust 10% and attendances were up 3%. This marks a dramatic shift from the double-digit attendance declines we saw in CE throughout much of 2009. This improvement in volume came despite bad weather conditions across much of Europe earlier this year.
As we shared in our previous calls, CE launched a significant program innovation, ProPoints, into the market in late 2009. Volume trend improvements were universal across launch countries, driven initially by a large influx of returning members who are attracted back by the many new benefits ProPoints offers, including a totally revamped point formula. Member response had been terrific and the transitional issues associated with this major innovation have been limited.
Going forward, the challenge for the CE management team is to use this successful launch to begin to attract more members by levering the benefit of increased positive word of mouth being generated by the influx of successful returning members during Q1. Additionally, the CE management teams are focusing our efforts on other initiatives that will further long-term growth in Europe, including greater marketing effectiveness, innovating the core service offering, and building new sales channels such as At Work. For the remainder of the year, we are forecasting low-single digit attendance growth and high-single digit paid weeks growth for our CE business.
Moving on to WeightWatchers.com. WeightWatchers.com had a solid start in 2010 with particularly good growth in its international markets. Internet revenues were up 11% on a currency adjusted basis; online paid weeks were up 11%; and end of period acting subscribers were up 11.5%. During Q1, growth from the dotcom business was particularly strong in the UK where it benefited from an integrated marketing campaign and in Continental Europe where it benefited from both integrated marketing campaigns and from the new programs.
In the US in April, WeightWatchers.com launched its new advertising campaign, which leverages the same marketing approach we are now using for the meetings business, by enlisting and actively amplifying the voices of successful subscribers who talked about the positive impact Weight Watchers online has had on their lives. Again, we are cautious in interpreting the results of the campaign that’s only five weeks old. But we are very encouraged by the results so far with nice volume acceleration versus the trend in Q1.
As a side note, I am very happy to announce that a few days ago, WeightWatchers.com reached an important milestone, having surpassed the 1 million active subscriber mark. The WeightWatchers.com team continues its pace on product development with well received future upgrade releases for the iPhone and website applications. For the duration of the year, we are forecasting mid-double digit online paid weeks growth.
Now I would like to turn the discussion over to Ann who will elaborate further on our Q1 performance.
Thank you, David. And good afternoon, everyone. Recapping our first quarter 2010 as reported results, before adjustments for comparability, consolidated company revenues of $388 million were slightly behind prior year, decreasing by 0.7%. Operating income of $91.4 million declined 2.6%, while net income of $44.6 million was 5.8% below the Q1 2009 level. And EPS was $0.58 versus $0.61 in last year’s first quarter.
We have adjusted couple of items related to expense in the first quarter of last year, which should be adjusted for comparability. The first of these is a restructuring charge taken in last year’s first quarter associated with a reduction in force. Removing this charge from 2009 reduces expense by $3.1 million and increases 2009 Q1 EPS by $0.02. The second adjustment relates to the adverse court ruling issued earlier this year with regard to leader self-employment status in the UK. This resulted in a current and prior period charge to fourth quarter 2009 results and has an ongoing impact.
In the first quarter of 2010, this charge was $1.1 million. Adjusting the first quarter 2009 for comparability results in a similar charge, which reduces Q1 ’09 EPS of $0.01. After adjusting for both of these items, 2009 Q1 EPS was $0.63 and 2010 Q1 EPS was $0.58, $0.05 below the comparable prior year level, with higher interest expense accounting for $0.02 of the difference.
Q1 2010 revenues benefited by $15.2 million from favorable foreign currency translation. Excluding that benefit, revenues decreased by 4.5% versus the prior year level, with the impact of volume softness in the NACO and UK meeting businesses, partially offset by revenue increases in Continental European meetings and global online. Our net income on a constant currency basis after factoring in the 2009 adjustments was 10.9% below the 2009 Q1 level.
In the operations overview that follows, I’ll discuss our operating performance on a currency neutral basis and excluding the adjusting items discussed above. Our 2010 Q1 operating income was $91.4 million, a currency neutral decrease of 7% as compared to the adjusted 2009 first quarter level. Our operating income margin declined 60 basis points to 22.9% on the same basis. Gross margin expansions versus prior year driven primarily by WeightWatchers.com was offset by higher G&A as a percentage of revenues, which I will review later in this report.
Now summarizing some of the operational trends, first, in the meeting business, paid weeks declined 4.2% globally in the quarter. Internationally, paid weeks were up 2.4%, reflecting 9.9% growth in Continental Europe. UK meeting paid weeks declined by 3% and NACO meeting paid weeks declined 8%. As David noted, both UK and NACO were cycling against last year’s innovation and were impacted by severe weather dispute in the quarter, which lowered both enrollments and propensity to attend. First quarter global attendance was down 12%, with UK down 12.8% and NACO down 16%. Continental Europe attendance was up 3.4% on the strength of the innovation and despite its own weather issues.
Lecture income revenues of $218.2 million in the first quarter were 7% behind the prior year quarter, a result of lower enrollment levels in the prior year. Overall, lecture income per meeting paid weeks declined slightly versus prior year by 2.9%, mainly as a result of globally higher penetration of value price monthly pass. In NACO, lecture income for paid weeks declined 1.7%. Internationally, increased promotion activity versus the prior year quarter also had an impact, as did a reversion to higher UK VAT rates after a temporary government abatement. As a result, lecture income for paid weeks declined 3.8% across the international market.
First quarter global and meeting product sales were $80 million, down 4.4% versus the prior. On a per-attendee basis, global and meeting product sales were up 8.5% with NACO increasing 13.6% and the strength of new consumable product introductions, which were very well received in promotions. Internationally, product growth for attendee grew 1.7%.
Moving to WeightWatchers.com, with strength across all major markets, the combination of strong retention and signup growth drove first quarter revenues in this business up 10.9% over prior year. Paid weeks grew by 11.3% and in this period active online subscribers increased by 11.5% versus Q1 ’09 to $972,000.
Now turning to a review of the performance of our other revenues, which include licensing, franchise commissions and revenues from our publications. Other revenues of $22.7 million declined 9.3% versus the prior year level. Our licensing revenues of $15.4 million in the quarter declined 6.7% versus last year. Domestic licenses declined 10%, with 40% of the decline resulting from the change in the Applebee’s and Yogurt relationships.
Our remaining domestic licensing was down 6%, with 4% coming from the food category where the introduction of multiple new products this last year drove especially strong results. A way of difference, the largest better-for-you retail category, frozen entrees, was down roughly 4% in the quarter. Most of the products in the better-for-you category are premium priced and the category has experienced difficult trends in the recessionary environment.
International licensing was down 3.5%, with growth in the UK offset by declines in Continental Europe. Franchise commissions, which totaled $2.5 million in the quarter, were down 18.6%, with US franchise commissions down 20.3%.
Our first quarter gross margin was 54.6%, 50 basis points increase from last year’s first quarter adjusted level. This gross margin expansion reflected growth in our high margin WeightWatchers.com business and the positive impact of higher attendances for meeting in Continental Europe driven by the innovation.
Q1 marketing expenses were $74.5 million, flat versus the prior year level on an as reported basis, but down 4.6% in constant currency. There were no media campaign timing differences this year versus last, as Easter, which marks the kickoff of our spring marketing campaign, is in the second quarter in both years. Marketing savings resulted from efficiencies and timing of winter production. Marketing as a percent of revenues was 19.2% in the first quarter of 2010 as compared to 19.1% in the comparable quarter last year.
Q1 G&A expenses were $45.0 million, a 4.6% increase on an as reported basis. In constant currency and excluding $3.1 million of restructuring charges in the prior year quarter, G&A expenses increased 7.5%. We gained efficiencies from reductions initiated last year, but these were offset by higher legal fees, excluding our successful litigation with Jenny Craig and higher bad debt expense for a particular international license. As a percentage of revenue, G&A was 11.8% in the first quarter of 2010 versus 10.4% in Q1 2009, excluding restructuring charges. In summary, a consolidated operating income margin was 23.6% in this 2010 quarter as compared to 24.5% in the prior year quarter.
Before discussing our interest expense in the quarter, I’ll take a couple of minutes to review our recent financing activity. In early April, we concluded an amend and extend process, which extended the maturities of a portion of our term loans and revolving credit facilities, avoiding the need and the expense of refinancing of the entire credit facility, which would have faced by 2011.
This created sufficient liquidity to enable us to resume across the premise strategy of opportunistic franchise acquisition and returning capital to our shareholders. Through this amended expense process, we extended the maturities of approximately 55% of our term loans and 66% of our revolver on an average of approximately three years moving much of our maturities into 2015 and 2016, and we reduced the amortization along the way. That is lowering the required debt pay-down for a year.
Interest rate spreads on our extended term loans have increased to a very competitive 225 basis points and in our extended revolver, 250 basis points. Interest expense in the first quarter of 2010 was $18.7 million, up $2 million or 11.7% from the Q1 2009 level. The increase is a result of a higher portion of our debt being hedged, $900 million in the first quarter of 2009 versus $1.3 billion in the first quarter of 2010. The increase in interest expense arising from the debt expansion does not impact until the second quarter. Our current projection for interest expense in 2010 is approximately $74 million for the year.
In terms of cash flow, we generated $111.3 million of cash from operations in Q1 2010 before interest payments and before a $29.1 million one-time payment for retroactive UK back charges associated with the negative UK court ruling we received in 2008. After capital expenditures of $3.7 million and the aforementioned UK back payment, we had $78.5 million of free cash available for capital structure, made interest payments of $17.9 million, hit our quarterly dividend of $13.5 million, and reduced our debt by $38.8 million. We ended the first quarter 2010 with $1.41 billion of debt as compared to $1.57 billion at the end of the first quarter of 2009.
And now I’ll turn it back to David.
Thank you, Ann. Having completed the challenging first quarter of 2010, we are feeling somewhat more optimistic about our volume prospects for the duration of the year, particularly in NACO and WeightWatchers.com. Economic conditions certainly appear to be improving and the very early results of our spring campaigns in the US are encouraging.
The spring campaign launch was so early, is an indication of PR and advertising, can have a positive impact in checking our enrollment trends. In CE, we’ve demonstrated that we can change our trajectory by our program offering. While it is not easy to accurately predict how long the benefit from a new marketing campaign or program innovation will last, it is an important demonstration that our future destiny is under our control and can be driven by the actions we’ve taken.
Going forward, we are focused on all the leverage we have available to us as we begin to turn around some of the negative volume trends we have experienced. With that in mind, we are even more excited about our strategy of innovating our programs, transforming our retail infrastructure, and innovating our service offering. Along those lines, we are continuing to make strong progress as we prepare for 2011.
Let me provide a quick update on the status of these initiatives. As noted on the February call, we are working to ready our new program for soft launch in late Q4 in the US, UK, Australasia and Canada, with a full marketing push in January 2011, NACO’s retail transformation. We are continuing to make good progress in preparing for a full rollout commencing this fall. Specifically, we now have a center design that will effectively accomplish our goals of having centers that one, improve street side signs in front of store appeal; two, provide a more confidential land and member processing experience; and three, significantly improve the majority of our centers with that brand appeal.
By July, we plan to implement the full version of our retail vision of new center design, better location, and full retail hours in two major metro areas. For these two markets, we will be able to fully test and optimize the biggest model in operational approach. We can then parlay these learnings into a wider rollout beginning this fall. Further, our real estate team is now working against the backlog of existing leases and is looking to leverage continued soft commercial real estate environment.
Our belief is that the combination of our new, stronger, louder, more buzz worthy marketing campaign, with a modernized retail presence in a new program will create financial opportunities for volume growth in 2011. To execute our strategy, we are particularly dependent on having the right kind of leadership in our organization. It is with this in mind that I’m extremely pleased with last week’s announcement of the filling of the President, North America role. As many of know, David Burwick has assumed this role.
Prior to joining Weight Watchers, Dave spent 20 years at Pepsico with a range of critical roles, including Chief Marketing Officer for North American Beverages, and President and General Manager of Pepsi Quaker-Tropicana-Gatorade Canada, a $1 billion subsidiary. Dave’s experience as both a high powered marketer and an exceptional leader brings a whole new level of capability and leadership for the NACO organization.
Regarding EPS guidance, while we are seeing some improved volume trend versus our earlier expectations, we want to remain cautious. Two recent factors, which will have a negative impact on our earnings this year versus our earlier guidance assumptions, are the dollar’s significant strength in recent months, and as Ann mentioned, higher than expected interest expense resulting from our success in extending significantly more of our debt than we had earlier thought possible. Therefore we are maintaining our EPS range of $2.25 to $2.50 for the full year.
At this time, operator, we would like to take questions.
Thank you. (Operator instructions) Our first question is from Jerry Herman from Stifel Nicolaus. Go ahead.
Jerry Herman – Stifel Nicolaus
You didn’t want to attempt it, I guess. Hi, guys. How you doing? First question is with regard to sort of 2011 and the innovation in particular. David, I’m wondering if you can – I know you don't want to talk about the specifics of the innovation, but can you help us with regard to how much of a proxy ProPoints in Continental Europe is serving for you guys, and if you can expect a similar or better or less volume influence relative to Continental Europe.
If you think about the elements that we described of the ProPoints plan in Europe on the last call, some of the things we talked about was the fact that we were updating the formula based on advancements in nutritional science for the past 10 to 12 years that we were driving towards a plan that does an even better job of integrating health directly into the plan in terms of better-for-you healthy choices. And so I think the applicability of those types of learnings and trends to our English-speaking markets are absolutely valid and important.
The approach we take in program innovations is we work very hard to have – if the US and UK do an innovation one year, CE looks to sort of take everything that works really well with that innovation, it can build on it and take it to a new level. And we would certainly be hoping to in the case of the English-speaking market, now that they are up a bit, they will be looking to take what Continental Europe did and try to further up that. And so our programs absolutely build on each other, but they also look to improve with each successive version.
Jerry Herman – Stifel Nicolaus
Okay. And maybe you can just help us with regard to the economic read and, in particular, paid weeks and the retention in that program. And in the past, you’ve talked a little bit about consumer credit and what sort of influence that has had on that model, which obviously uses credit cards.
Are you talking about monthly pass –?
Jerry Herman – Stifel Nicolaus
Okay. I think what’s been gratifying on actually a number of different dimensions is, as we discussed and have been discussing over the past year-and-a-half, particularly going into the recession, we were concerned about some of the things that you talked about with credit card defaults and impacts of the economy and sort of credit lines being pulled back, might have on the consumer, and a knock on the fact that that could potentially have with monthly pass.
Frankly, the good news is that we just haven’t seen any evidence of that happen at all. And I say that because what we’ve been seeing pretty consistently is some very nice increases in monthly pass penetrations as a percentage of our total mix, for example, in North America, really up pretty significantly Q1 ’09 versus Q1 ’10. And furthermore, what we’ve been able to do is we continue to sort of have nice incremental improvements in terms of monthly pass retention. And so to the extent that the consumer has been pressured, I think that the actions that we’ve been taking have been more than enough to compensate for that. So the matter of fact of the consumer credit issues has not been present in our business so far.
Jerry Herman – Stifel Nicolaus
Okay, great. And just one quick one for Ann. You were helpful in your guidance with regard to interest expense for the full year. Can you talk a little bit about the average interest rate and the sensitivity to the expense relative to changes in interest rates generally?
We are hedged significantly. $1.3 billion of the debt is hedged at this point. So we are not terribly sensitive to LIBOR right now.
Jerry Herman – Stifel Nicolaus
This is one more information on the interest rates.
Jerry Herman – Stifel Nicolaus
I guess in the past you have offered the average interest rate on the debt. Again, that's probably a little less important, but –
Yes. We’re looking at in the neighborhood of 5% of these in the year.
Jerry Herman – Stifel Nicolaus
Okay. Great. Thanks, guys. I'll turn it over.
Thank you. Our next question is from Chris Ferrara from Bank of America. You may go ahead.
Chris Ferrara – Bank of America
Hey, guys. Dave, you said the trends I guess in North America going into the second quarter and the spring campaign looked a lot better. And I understand you want to take it all in stride and be conservative about it, but it sounds like you are guiding, maybe I got this one, attendance down kind of mid-double digits still. Is that right? And I guess why doesn't any of this improvement you see at all kind of translate into the attendance outlook, especially if weather is not going to be as bad, comps are getting easier, stuff like that?
Chris, you’re right. I mean, we want to be conservative for a number of reasons. And then let me also get back to the attendance map, if you will, in terms of it being a lighting indicator of enrollments. But first off, in terms of being conservative in the forecast, our view is that we have sort of five weeks that we are really excited about. But it’s only five weeks. We’re going to be running this campaign actively right up until about Memorial Day, and then as we know, as we (inaudible) we tend to go dark for a period of time.
I can’t tell you exactly how those sorts of follow-on effects is going to be during those periods, nor can I forecast what the fall is going to look like. And so because I don’t know the lasting impact in the sort of ongoing impact that this approach is going to take, I have no reason to sort of doubt its viability and its validity. But because I don’t have kind of visibility and sort of actually seeing the data, our nature is to just be conservative in the way that we are looking at it and that is sort of factored into some of the sort of rest of your trend as we were suggesting in terms of a forecast for NACO.
The other thing I would suggest is that if you look at the challenge of 2010 specifically and you look at the impact of a really soft enrollment numbers and the all important winter campaign is that what that has attended, what that does is it basically builds up a deficit via installed base that sort of beginning in Q2 of this year. And so it kind of creates a hole, which effectively was sort of peaking at 16% that we’re now in the process of trying to fill back up. There is a dependency on significant enrollment volume during that winter campaign, but it’s sort – it's hard to completely make that up.
And so I think for the combination of all those reasons, that’s why we’re being fairly conservative. You know what? We take a lot of – what has been encouraging to see is that there clearly was an immediate reaction in terms of our enrollment trends when we started this new marketing campaign. I mean, literally by the day we started this new marketing campaign, we saw a shift in the enrollment trend that was pretty stark. Maybe one thing that I might do to sort of help dimensionalize it is to give you a sense of how to think about that minus 16% attendance in North America in terms of some rough estimates, back-of-the-envelope estimates of how some of these different factors affected it.
If I were looking – if I were trying to sort of disaggregate weather out of the minus 16% on attendances, I would say, without the sort of ill weather effect, the attendances would have been, say, let’s call it minus 10% to minus 12%. If I tried to then back out the impact of comping against momentum program, I might have said, let’s say that’s another 5%. That would suggest maybe sort of organic minus 7%, minus 8% depending on how you look at it in Q1. And we’ve effectively turned that to flat with the launch of this campaign.
And the thing I would point out is this campaign is just one element. This is not the entirety of our strategy. But it’s an important part of our strategy and we have other things that we are looking to have to kick into gear particularly as we move into 2011, which is why when we look at the cumulative effect, I’m gratified and sort of pleased to see the impact that the campaign has had on the enrollment trends. It is going to improve on some of the trends that we saw in terms of helping us make up for some of those lost enrollments from the winter campaign. But that’s why in prepared remarks, I talked about the fact that I’m particularly excited that when I see this business, once and for all, this core meetings business in NACO firing on all cylinders, marketing, retail innovation, program innovation, all those things combined. That’s when I absolutely see this business moving in the direction as the rest move.
Chris Ferrara – Bank of America
That's great color. I really appreciate that. And one of the things you mentioned, I guess you said you outshouted and back to this content. How do you think about word of mouth today versus marketing campaigns? And compared to 2001 when you guys first went public, it was all word of mouth. I mean, has the environment – I mean, it hasn’t been obvious thing, but I mean, the environment which you get shifted more toward the media and more toward the need to be campaigning externally. Is that right? Does that make sense?
You know what’s funny, Chris, is that we actually look at it in a very different way. And this was, to us, a realization and almost – not an epiphany, but it makes – it's kind of a little bit too dramatic. But we have this experience where we felt like we have just finally gotten to the point this January with over so much noise in the market, that somehow we were being missed in the conversation.
And when I say the conversation, I mean the conversations that happen every day with people who are talking about the need and desire to lose weight ensuring tips and ideas on how they are going to approach it. And we had those nagging feeling we weren’t being part of it. What was frustrating for us is that we by far more than any other organization have strong word of mouth. We have people all over the place that are speaking and passionate advocates for the approach, the lifestyle and the sustainable approach that we pay toward weight loss. And I think that, to us, kind of the clue in was developing a marketing campaign that directly harness that word of mouth and did it in a way that if you want to think about it, pardon the buzzword, but it’s almost crowd sourcing our advertising and our messages in a way that amplifies what was happening in nature.
And so we actually think the beauty of the approach that we can take that other people can’t is we can basically take word of mouth, advertising and PR and then think of them as sort of three points on a triangle that’s sort of work and reinforce each other in a consistent set of messages in a way that nobody else can do. And I think that the upside of that is, is that it comes across as a message that is fundamentally different from what you are going to see from, I believe in my own prejudice way, some of my competitors, and that we are going to have a message that is most importantly authentic.
Chris Ferrara – Bank of America
Great. That's helpful. And just I guess one other quick thing on the licensing side. Is licensing still a focus? Can you give a quick update on how you feel about that? Is it something that's been ignored as you tried to focus the rest of the business or should we think about this as kind of a slightly declining business over time?
Absolutely not. It is very much a focus for us. I mean – and it is clearly a focus for the licensing team, and they are working hard against it. I think that – and it is consistent with Ann’s comments. There is – I think there has been some misunderstanding about the licensing category that relates to some of the product lines that we carry. But if I look at our licensing portfolio, I think of it in sort of two dimensions. One is the dimension of some situations that I truly do believe was somewhat unique such as the change in the Applebee’s relationship, which was a function of new ownership and new management, and different strategic priorities on their part. Some sort of complications in the relationship which had to do us a change of ownership that we believe is ultimately addressable in kind of the uniqueness of a relationship in soup which had much more to do with just the timing of when a bunch of new SKUs came on in inventory stocking this time last year as opposed to this year.
If I look at the other aspect of licensing category, the truth is that the better-for-you category, if you see sort of across the board, has been a bit of a victim in a recessionary environment. I believe it’s a victim on two dimensions. One, better-for-you products do tend to carry a bit of a price premium and this hasn’t exactly been the best grocery market to have premium priced products. And two, this has been an environment with all this anxiety around a recession that I believe has lent itself to sort of the opposite, which is comfort eating.
And so for example, when I look at kind of the frozen diet entrée category, your Lean Cuisines, Healthy Choice, Smart Ones, if I look at that combined category, it was down about 7% in 2009 and down about 4% in 2010. And I absolutely believe that that category is, there is no doubt in my mind that’s going to get a second win, because the consumers still need to start making better choices. And so the opportunity for us to capitalize on that when the consumer does start making better choices and they do start returning better-for-you foods and then to make sure that we have the right license fees lined up. Both were building against the stable business we have as well as continuing our process and seeking new relationships.
Chris Ferrara – Bank of America
But that new relationship seeking process, I mean, how is that going? I mean, building –
You know, I think it’s one of these things where we would always like it to go faster, and I think we can look for opportunities to make it go faster. But at the same time, we’ve had some nice wins, getting out of the gates in January with Kraft, with Bocca Burgers and Jell-O on an endorsement deal that has been really successful so far. Green Giant is a relatively new endorsement program for us. And so particularly on the endorsement front, we’ve had some good successes, and I believe this is a place where frankly success breeds success as we continue to build good case studies. I think we’re only going to do better in that category.
And so I really do dispute the notion that that Weight Watchers presence in retail in any way, shape or form will diminish over time. One of my proof points for that is that if I look, for example, at the UK, which has the same sort of recessionary environment and some of the same pressures on grocery retail, their licensing business is up again this year. And so I think that some of the notions in terms of grocery dynamics, I’m just not sure it’s true. I really do believe that much of what we’re seeing in this category is a function of the recession in the premium prices. And that will pass over time.
Chris Ferrara – Bank of America
Great. Thanks for all the time. Sorry to take up so much.
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