Weight Watchers International, Inc. (NYSE:WTW)
Q2 2010 Earnings Conference Call
August 5, 2010 5:00 PM ET
Sarika Sahni – Director, IR
Ann Sardini – CFO
David Kirchhoff – President and CEO
Jason Anderson – Stifel Nicolaus
Chris Ferrara – Bank of America
Ladies and gentlemen, welcome to the Weight Watchers International second quarter 2010 earnings teleconference 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 given at that time. As a reminder, this conference call is being recorded today, August 5th, 2010.
At this time, I would 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 second 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 PM Eastern Time today, the company issued a press release reporting its financial results for the second 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 on the company’s corporate website located at www.weightwatchersinternational.com
Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measure are also available as part of the press release.
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. Please refer to these filings, our more detailed discussion of forward-looking statements and risks and certainties of such statements.
All forward-looking statements are made as of today and except as required by law, the company undertakes no obligations 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 second quarter of fiscal year 2010.
After a very difficult first quarter, our second quarter business results improved significantly as we began to see strengthening in our NACO meetings business and robust growth in our WeightWatchers.com business. While we’re not yet seeing consistent growth across all of our markets, the trends we’re now seeing are far superior to those of Q1 and which we’re experiencing the combined impact of the economy, weather, and less than effective marketing.
The NACO and WeightWatchers.com businesses both responded very well to the newly launched marketing campaign with an almost instantaneous uplift on enrollment trends beginning on April 1st. On a constant currency basis, Q2 revenues were a modest 1.8%, with meeting fees effectively flat, in-meeting product sales down 1%, Internet revenues growing over 20%, and other revenues declining 7%. This overall increase in revenue compares favorably to the 4.5% revenue decline we experienced in Q1.
From a volume perspective, combined global online and meetings paid weeks grew by about 8% in the second quarter versus the prior year. Global paid weeks in our meetings were up about 1% versus the prior year quarter while paid weeks for Weight Watchers online were up a robust 22%. Again, this was a substantial improvement versus the paid week’s trend we saw in Q1 in both the meetings and WeightWatchers.com business.
Q2 2010 EPS was $0.73 compared to $0.76 for the same period in 2009.
I will now briefly review our results in our major geographies and business units. First, our North American meetings business. Total NACO revenues were a $196 million in Q2, effectively flat versus the same period in 2009. This compares favorably to the 8% declined we experienced in Q1. NACO meeting fees declined by 1% versus prior, while in-meeting product sales grew by 5%.
NACO Q2 2010 paid weeks were down 2% versus the prior year period as compared to the negative 8% trends in Q1. Q2 attendances were down 5%, which was a market improvement from the minus 16% trend we observed in Q1.
As noted on the previous earnings call, Q1 enrollments were extremely soft due to a combination of factors, including the lack of program news, the sale marketing campaign, and unprecedented weather conditions. The January through March period is traditionally the largest enrollment period of the year for our business.
Meaning, that our week enrollments in Q1 resulted in very weak attendances in paid weeks levels as we ended Q1. This effectively put us in the hole that was difficult to climb out of this, we moved through our seasonally lighter and normal periods like in the year.
On April 1st, our North America team launched new marketing campaigns that starts to tap into the voice of our members in a new and compelling way. In the case of the NACO meetings business, this campaign heavily featured our new spokesperson Jennifer Hudson in a fully integrated PR and advertising campaign. We saw a median improvement in the enrollment activities of our business, which were sustained through the second quarter. Perhaps most importantly, NACO saw a significant improvement in its never-member (ph) enrollment trends, the first of weakness for us in recent years.
Whereas we have been seeing double-digit enrollment declines in the first quarter, enrollments in the second quarter began to trend ahead of prior year levels. By the end of the second quarter, we had closed most of the paid weeks’ deficit.
Our attendance deficit which lags enrollments in paid weeks had also significantly narrowed. Suffice it say, we’re very pleased to see the effectiveness and strength of our new marketing campaign. It is also encouraging to observe the significant impact that the marketing and advertising can have on enrollment trend even without the benefit of other initiative that will be kicking at the end of this year.
As we noted on our last call, the strength of our brand has always been in the voice of our members and service providers. We’ll return to those roots in our advertising strategy and so far it is paying strong dividends.
As we move into the third quarter, we experienced strong enrollment patterns in the seasonally slow month of July driven by an incremental advertising campaign we’ve been running the last two weeks. Again, it’s another indicator of how well executed marketing and promotional programs and absolutely move the enrollment needle.
We have a solid array of marketing initiatives coming on stream in NACO over the course of the rest of the year. A way of example, we will be launching our 3rd Annual Lose for Good Campaign at the end of August. In the fall campaign, the NACO team is heavy preparation mode for the launch of this important new program at the end of the year.
On the operational front, the NACO team has also spent the last year rationalizing our network of meeting to allow us to focus our efforts on our stronger locations, time slots and service providers. The net effect of this has been an 8% reduction in the total number of meetings for North America. It is important to note that our enrollments per meeting have been running on a solid positive trends throughout Q2 and now into Q3.
Further, our attendance per meeting has recently moved in the positive territory versus the prior year. We view both of these trends as very positive indicators of the momentum of the business. This will give us an even stronger foundation from which to build as we move into the second half and from there onto our new program launch.
Based on current trends, we’re revising our volume forecast for paid weeks to be roughly flat on a year-over-year basis for the second half of the year and are forecasting mid single digit declines in attendance. Having the weak Q1 will continue to impact our full-year 2010 NACO performance levels, which has to be expected given a seasonal importance. Nonetheless, the positive momentum that began in Q2 and has been continuing into the third quarter has been a welcome turn.
Now on to the international meetings business, UK 2010 Q2 meeting revenues declined 6% on a constant currency basis and improved over the minus 12% in Q1. Second quarter paid weeks grew at 1% benefiting from increased monthly pass penetration rates. Attendances declined 9%, again an improvement over the weather impacted Q1 trends.
The UK business continues to struggle with a difficult consumer economy as well as the lack for revenues. The UK’s traditional branded marketing campaign in January this year was not very effective and the UK is now closely evaluating how best to apply the learning from NACO on the marketing front. The UK team believes that the combination of a grass root focus marketing campaign, plus an exciting new program launch will give this market a significant opportunity to drive much improved enrollment growth beginning early next year.
Over the near term, we’re now forecasting the current trends are materially change and therefore expect low single digit declines in paid weeks and a high single digit to low double digit declines in attendance for the remainder of the year.
Moving on to Continental Europe, our Continental Europe business maintained momentum under new program launch ProPoints throughout the second quarter. Constant currency in Q2 total revenues grew 5% versus prior year, a slight improvement over the Q1 trend.
Paid weeks were up a solid 11%, benefiting from strong Q1 enrollments as well as favorable monthly pass penetration rates. Attendances increased 3%, comparable to the Q1 trend. Overall ProPoints have been very well received by our members in this market.
In terms of organizational earnings, our analysis indicates that our marketing campaign used to launch the new program this past January were very effective and significantly improving re-enrollments from last member, but did not immediately capture the attention of a never-member.
With the benefit of knowing what works well and what did not work well in our Continental Europe program launch, our NACO and UK markets are focused on developing advertising to support their upcoming program launches that will be much more effective in attracting never-members when they launched this January.
While Continental Europe has more recently started to see some positive word of mouth, which will begin to benefit never-member growth, something we are working hard on to continue to build. But this doesn’t change the fact that our marketing must work harder to attract never-members.
As in the UK, our CE teams have also been motivated by the success of the recent NACO marketing efforts and they’re actively speaking to develop their new marketing campaign for January 2011 that will drive the increase in never-member enrollments. For the duration of the year, we expect the volume trends will be easy to continue roughly up the current level.
Moving on to WeightWatchers.com. WeightWatchers.com had its highest growth quarter in the number of years with a substantial acceleration of growth in both, our more established US business as well as continued growth in our younger, faster growing international business.
Q2 Internet revenues were up 20% on a constant currency basis, compared to the plus 10% trend in Q1. Online paid weeks were up 22% in the second quarter. And end of period active subscribers were up an outstanding 26% by the end of Q2. This compares to the 11.5% growth in our active subscriber base as of the end of Q1.
I’m happy to note that in the quarter, we passed the 1 million subscriber milestone finishing Q2 with 1.06 million active subscribers. In the US, we have signup growth rates for our online products, levels not being since we began TV advertising of this product in 2007.
Our online business clearly benefited from a highly effective advertising campaign that conveyed the many positive aspects of the Internet products of leveraging the voice of our very happy subscribers with compelling advertising treatment.
As we enter the third quarter, we are continuing to see robust growth in our global WeightWatchers.com business. For the duration of this year, we are forecasting 20% plus online paid weeks growth. As always, the technology team continues to be busy on the product development front, with numerous product improvement release, it releases in both our US and international website.
This past January working together with the NACO team, they launched monthly passes the first time in Canada.
Now, I’d like to turn the discussion over to Ann, who will elaborate further on our Q2 performance.
Good afternoon, everyone. As David noted, our second quarter operating results (inaudible) improvement trend versus the first quarter. Our financial results recap as follows.
Second quarter revenues of $376 million, which increased 1.1% on an as reported basis were actually up 1.8% on a comparable constant currency basis. Net income of $56.3 million in the quarter was 4.2% below the Q2 ‘09 level on an as reported basis, but down 1.4% from the impact of unfavorable foreign currency is renewed.
In addition, Q2 2010 includes increased interest expense of $2.6 million pretax, which accounts to the 2.8% is declined in net income versus the prior year in the quarter. Reported EPS was $0.73 versus $0.76 from last year’s second quarter, a decline of $0.03 in total, but with $0.02 of negative foreign currency exchange accounting for most of the decline.
There are two items related to expense in the second quarter of last year which should be noted. First of these is a restructuring charge of $2 million, taken in last year’s second quarter associated with cost savings initiative, which when removed increases 2009 Q2 EPS by $0.02.
The second adjustment relates to the adverse UK court ruling we received with regard to leader self-employment status. This ruling resulted in a charge in the fourth quarter of last year, $1.1 million of which related to the second quarter of 2009 and which was a similar ongoing impact to each quarter going forward. Adjusting the second quarter 2009 for comparability reduces Q2 ‘09 EPS by $0.01.
After adjusting 2009 for both of these items and 2010 for the negative impact of foreign currency translation, EPS for the second quarter of 2009 is $0.77 as compared to $0.75 in 2010, with higher interest expense of $0.02 included in the 2010 quarter. Our second quarter 2010 operating income of a $112.2 million increased 0.7% on an as reported basis.
In the operations overview that follows, I’ll discuss our operating performance on a currency neutral basis and adjusting for the items discussed above.
On this basis, our 2010 Q2 operating income increased 29% as compared to the 2009 second quarter level. Our operating income margins declined 20 basis points, 29.9% on the same basis, primarily a result of higher marketing as a percentage of revenue, which I’ll review later in this report.
Summarizing improvement in volume trends in the second quarter, the global paid weeks growth trend improved remarkably versus first quarter performance, up 7.7% in this quarter versus the prior year to $36.8 million as compared to 0.6% in the first quarter of this year. Second quarter global attendance patterns of our meetings followed a similar improvement in each trend, down 4.4% in the quarter as compared to minus 12% in the first quarter.
Online end of period active subscribers increased by 25.8% in the second quarter this prior year as compared to an increase of 11.5% in the first quarter of 2010.
Looking at the meeting business, paid weeks increased 0.8% globally in the quarter, driven by an 11.2% increase with Continental Europe. NACO’s improving trend, while meetings each week were negative 1.8% level and UK showed moderate growth, up 1.2%.
In terms of second quarter attendance versus prior year, NACO was down 4.9%, UK was down 8.5%, and Continental Europe attendance was up 3.2%.
Global revenues of $376.7 million (inaudible) 1.8% in the second quarter, lecture income revenues of $214.2 million or 0.2% behind the prior year’s quarter. Overall lecture income per meeting paid week declined slightly to prior year by 1% mainly as a result of globally higher penetration of the value price monthly pass and increased promotional activity.
Second quarter global and meeting product sales were $68.2 million, down 0.9% versus prior. On a per attendee basis, global and meetings product growth were up 3.6% and NACO increasing 9.2% on the strength of promotions and new consumable products introductions which were very well received. Internationally, products growth per attendee declined 2%.
Moving to WeightWatchers.com second quarter revenues was $60.6 million grew 20.3% across all major markets, combination of salary retention and signup grades. Paid weeks grew by 22.2%.
Now turning to a review of the performance of licensing, franchise commissions and revenues from our publications, these revenues of $22.5 million declined 6.2% in total versus the prior year level. Our licensing revenues of $15 million in the quarter declined 5.9% versus last year.
Domestic licenses declined 5.1%, partially resulting from the change in two of our licensing relationships. International licensing was down to 0.8%. In the US a way of reference, the largest set of retail categories frozen entrees was down roughly 10% 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 current economic environment.
Franchise commissions which totaled $3.2 million in the quarter were down 9.6% with US franchise commissions down 8.9%.
Second quarter gross margin was 56.2%, 80 basis points improved from last year’s second quarter adjusted level. This gross margin expansion reflected growth in our higher margin at WeightWatchers.com business and the positive impact of higher attendances for meeting in Continental Europe driven by the innovation.
Q2 marketing expenses were $56.7 million, up 6.5% in constant currency. The increase is the result of heavier investment in WeightWatchers.com marketing which has successfully driven incremental online sign-ups in revenues. Marketing as a percent of revenue was 15% in the second quarter 2010 as compared to 14.3% in the comparable quarter last year.
Given the positive results of our marketing efforts, we’ve actually increased our marketing in the third quarter which will lead to a shift in earnings compared to fourth quarter. Second quarter G&A expenses were $42.8 million, 8.3% decrease in as reported basis. In constant currency and excluding $2 million of restructuring charges from the prior year quarter, G&A expenses increased 5.1%. We gained efficiencies from reductions initiated last year but these were offset by higher legal fee and higher bad debt expense particularly in our international licensing. As a percentage of revenues, G&A was 11.4% in the second quarter of 2010 from a 11% in the second quarter 2009, excluding restructuring charges.
In summary, our consolidated operating income margin was 29.8% in this 2010 quarter as compared to 30.1% in the prior year as adjusted.
Moving to interest expense, in the second quarter interest expense was $19.6 million, up $2.6 million or 15.5% from the Q2 2009 level. The increase is the result of a higher portion of our debt being hedged as well as higher interest expense rising from our recent debt expansion. Our effective interest rate in the quarter was 5.03% compared to 4.18% from the second quarter of last year. Our current projection for interest expense in 2010 is approximately $77 million for the full year.
Our cash flow from operations in the second quarter 2010 was $98 million before interest payments of $17.9 million. After CapEx of $5.7 million, we had $92.3 million of free cash available. We returned cash to our shareholders for the payment of our quarterly dividend of $13.5 million and by repurchasing $28.3 million of our stock. In addition, we made interest payments of $17.9 million, and incurred $11.3 million of refinancing cost and reduced our debt marginally by $7.5 million.
We ended the second quarter 2010 with $1.41 billion of debt as compared to $1.53 billion at the end of the second quarter of 2009.
And now I’ll turn it back to David.
Thank you, Ann. Reported performance for the first quarter was a significant disappointment and wakeup call for me and my management team. I have been very pleased and gratified to see the team rise to challenge particularly in the all important NACO market. The positive impact of the spring marketing campaign was a clear demonstration of our ability to begin moving the business back to the growth mode but we do not expect the macroeconomy particularly low consumer confidence to provide much win to our sales over the course of this year. It is highly motivating for the team to feel the confidence beginning to move enrollment levels forward. This is particularly true as most of our planned growth driving initiatives will not begin to provide a positive contribution until we move into 2011.
On this note I would like to provide a brief update on the status of some of these growth driving initiatives. New program launch, for competitive reasons we are not yet in a position to share all of the details in the new program beyond what we have shared in prior calls. However I can tell you that we have been running ongoing prototype sites with the new program for sometime now, the number of response continues to be extremely positive.
The more I see this new program in action, the more I believe it is the right program at the right time. Our job is to fully leverage this as we move into the 2011 winter campaign from January in our NACO, UK and Australian markets. To this end, the focus of the team is now for us to one, optimize training and preparation for our service providers to ensure a seamless transition for existing members; two, support the program launch by developing marketing campaigns to build up our recent success and seek new ways to capture the public imagination to drive both never members and lapsed members into our doors starting this January.
Our retail modernization program; our NACO team continues to make excellent progress in rolling out its retail transformation, specifically real estate. We began the process of systematically renegotiating leases and/or moving to improved locations and have the opportunity to see some examples on the ground recently in Tampa, Florida to a degree of improved retail visibility is compelling as well our real estate teams have done an excellent job inspiring attractive (inaudible) who have been excited, who welcome our brand into the prime retail location.
In numerous cases, we have been able to move from a lower end strip mall location to grocery store anchored prime retail locations without any net impact on our cost profile. In parallel, the rollout of our new center of design is progressing. In recent weeks, we have begun rolling out the new center of design in several locations and that was absolutely fantastic. Early response from service providers has been extremely positive.
We expect about three fourths of the work of our national retail modernization to be complete by the end of 2011. As part of this process, we are fully operating right now to entire metro market, Tampa, Florida and St. Louis, Missouri to inform and optimize the rollout of the market. By the end of September, the team will complete the upgrade process in Tampa and St. Louis, transforming all 28 centers in these two markets.
With all of the initiatives moving into place as well as other initiatives now in the pipeline, we are feeling good about our ability to drive growth as we move into 2011. As a sign of caution of healthcare had come (inaudible) and as obesity is increasingly being recognized as one of the biggest preventable contributors to this cause (ph), WeightWatchers is perfectly placed to play a center role in addressing this critical issue. One recent piece of evidence for this comes from the International Congress on Obesity, a once every four year event held in Stockholm, Sweden this past July.
During this congress, there was a presentation of the results of a large scale randomized clinical trial with over 700 participants that was performed across three different countries, the UK, Germany and Australia. This three-year effort was led by a group of premier independent researchers including those from the medical research council out of Cambridge University. The study compared the results of a doctor referring an overweight patient to WeightWatchers versus a doctor referring a patient to standard care provided by a nurse in their office.
Over a 12-month period, the WeightWatchers one lost two times more weight and delivered 2.5 times as many people (ph) to 10% loss compared to a standard care one. The results were highly compelling on multiple levels. First, individuals in the control arm standard care received a best case level of help in a conventional medical setting including getting a program to follow and follow-up visits and coaching from the doctor’s office. In actual practice due to the many time pressures on physicians in their offices, doctors rarely have the ability to deliver such levels of care.
Given this, the outstanding weight loss performance of WeightWatchers versus the idealized control arm is even more compelling. Second, one clear implication of this research is that the combination of a doctor plus WeightWatchers is incredibly compelling. The doctor is ideally positioned to create a sense of urgency to get the patient started along with the sense of accountability for the patient wanting to have a better follow-up visit. WeightWatchers plays the role of week to week delivery of the education, leader led support and behavior change in a way that would be very difficult if not impossible to replicate a doctor’s office.
Third, the study clearly demonstrated the clinical efficacy of WeightWatchers across multiple countries and cultural norms (ph). While WeightWatchers has performed numerous clinical studies in the U.S., this study firmly establish our clinical efficacy credentials overseas. Fourth, the lead investigators of this study actively commented on the unique role of WeightWatchers as a key frontline deliver mechanism of behavior change with our consistent efficacy and high scalability. This combined with a relatively low cost further confirms that WeightWatchers is uniquely positioned as the lead provider of lifestyle based weight management within the healthcare space.
And with this (ph), we are even better situated to speak and develop opportunities to actively work with both the medical community and public and private healthcare systems. We look for more developments in this area in the future.
Regarding EPS guidance, given the seasonality of our business, it is hard to recover from weak volumes in the winter season during Q1. As a result of our fiscal Q1, we’re maintaining the upper end of our guidance range at $2.50 per share, however with our improved volume results and our NACO and dot com businesses, we’re raising the lower end of our EPS range by $0.10 to $2.35.
At this time operator we would like to take questions.
Thank you. (Operator Instructions). We thank you for your patience. Our first question is from Jason Anderson from Stifel Nicolaus. Please go ahead.
Jason Anderson – Stifel Nicolaus
Good evening everybody. How you’re doing, I’m here for Jerry and Bob (ph) today. One thing, could you update us on the penetration rates of monthly pass by market and also is there a, I mean I thought a 100% would be a sealing for that. Is there a sealing you guys manage to for that?
Ann is going to pull up some of the penetration data but while she is doing that, what we’ve said historically and what we’ve been seeing is generally speaking increases in penetration rates and monthly pass even as we continue end of this year. At some point, we bump our head up against the theoretical sealing which is people should have access to some levels to the internet use of the monthly pass value proposition. And there is certainly going to be those people that might not be comfortable using their credit card in (inaudible) basis. And so I think to your point, it seems unlikely that a 100% penetration is a near term possibility.
But I do believe what we’re seeing is that the value proposition being able to get sort of unlimited accessed meetings as well as all the internet tools is an incredibly compelling package particularly given the value of monthly pass. So I have every reason to believe that the vitality of the monthly pass proposition will continue unabated and I certainly would expect overtime opportunities to sort of further increase penetration. The relative degree of increase in penetration is obviously going to vary from country to country depending on where they are at the particular moment in time.
Jason Anderson – Stifel Nicolaus
We had sort of significant increases in penetration. If you look at North America for example, we’re up to 63% of attendances in the second quarter of this year versus little less than 60% last year at this time. If you look at the UK, we’re growing from about 55% over 60% and if you look at Germany we have a huge penetration of 80% versus like 75%. So we’ve increased penetration times across the board.
Jason Anderson – Stifel Nicolaus
Great. Thank you for that color. And it doesn’t sound like you probably have time to analyze this later half results but on the retail modernization projects I don’t – have you see enough to see any results and attendances or enrollments and I sounded pretty fresh but I didn’t know how early in the quarter or this year you would started that?
Well the latest version of the design is going to up – it’s going to be up in the members as of Sunday, so I think it’s definitely too early to comment on that. And the lease renegotiation process, they’re – it made fantastic progress for example in the St. Louis and Tampa markets. It’s still a bit early and I also think that it would be prudent once we have new locations and designs our end to give them a chance to settle in so that we can sort of look at the data and have enough of a longitudinal dataset so we can get a better sense of what incrementally we think that they might be doing for us.
I can tell you that on a very basic level, the share retail presence of what they now look like in the locations where we’re now being positioned is a significant improvement from where we were, I mean really Weight Watchers has an opportunity to go from many places being someone invisible to having a nice presence that really pops them and attractive in modern way.
Jason Anderson – Stifel Nicolaus
Great. Well, I’ll be looking forward to hearing results for that, and one other question here on the marketing front, and I believe you referenced 3Q possibly more marketing if I heard that correctly. Could you give us, I guess some more color on 3Q and 4Q ‘010 and then possibly fiscal ‘011 on maybe a percent of revenue, should we see an uptick like we saw this quarter?
Yes, I mean if you’re looking at 3Q you’ll probably see more of an uptick as a percentage of revenues even then you saw in the second quarter. And 4Q that will come down a bit. We’re not up here to disappoint to talk about our marketing expenditure revenue in ‘011. I will say that we’re pretty happy with our marketing results and that’s why we’re increasing our investments for the quarter.
Jason Anderson – Stifel Nicolaus
I think it’s also worth noting that if you do that, from a P&L impact perspective, one think to keep in mind is that as we spend incremental marketing dollars particularly in the back half of the year, the revenue benefit from those is limited in terms of what we’re going to observe in that particular quarter, whereas we are going to recognize all the expenses and obviously as incurred.
And so these are going to be, this incremental marketing is going to be going in a way where it is absolutely driving incredibly positive return on investment over the course of that enrollment, but the revenue benefit and contribution margins from that enrolment we’ll be experiencing, for example not just in Q3 but Q4 and frankly going in to 2011.
Jason Anderson – Stifel Nicolaus
Good points and thank you for that. That’s all I had.
Thank you. (Operator Instructions) our next question is from Chris Ferrara from Bank of America. Please go ahead.
Chris Ferrara – Bank of America
Hey guys, how are you?
Good Chris, how are you?
Chris Ferrara – Bank of America
Good thanks. So look I’m understanding of course you don’t want to give too much detail on the new program when I get that, can you at least try to give a little color on what you think this new program has (inaudible) 17, I guess obviously qualitatively, I mean what are the different aspects that would give you this increased degree of confidence because your confidence seems to have ramped each time you’ve spoken to us I guess over this year?
Yes and I apologize for being slightly evasive on this point, above and beyond what we’ve already talked about I mean a lot of what I’m seeing from this program, a lot of the details of why I think it’s so great are going to be speaking to qualities that we’re going to do our best to keep under our head and so we have a chance really for our marketing campaigns together and that’s why for relative reasons, I’m hesitant to get into much detail.
During the month of early August about the specific value of the new program. Other than to say that, it’s sort of, its cumulative effect on member behavior and a really positive and empowering way. It’s just been really exciting to see and member satisfaction has been incredibly encouraging. And I apologize ahead of time but I can’t go into too much more detail around that, certainly as we get into the next quarter, we’ll be able to get into a bit more specifically.
Chris Ferrara – Bank of America
Okay and I guess it sounds like what’s driven better recruitment more recently, is it Jennifer Hudson campaign in NACO and I mean tell me if this is wrong or right, I guess should we be thinking about in a way that like that’s what’s helping now but the true recovery of NACO will really come down to this innovation in how you market, right. Jennifer Hudson and obviously she is your spokesperson, I don’t know if that’s going to help but the specific campaign that’s going on right now, but it doesn’t necessarily translate to success in January right, would translate to success there is going to be the success of the innovation, right?
Well I don’t think I would characterize it exactly like that, I mean symbolically we understand what you’re saying but I would characterize it a little bit definitely. And the way I would characterize it is that if you go back to kind of what we experienced this past Q1, we own the fact that the marketing that we had on the air had gone along in the (inaudible) it was not really cutting through, it was not compelling, it was not making the right kind of emotional connection with potential customers. It wasn’t creating the kind of excitement and buzz that’s necessary to attract NACO members.
We really didn’t have any PR to speak up. And frankly that was a huge issue for us in terms of just not being part of the conversation and so I look at that and then I compare the marketing programs we’re running right now, having marketing that more than punches its way in terms of advertising, having strong and compelling PR, just this week, Jennifer Hudson is now on the cover of InStyle Makeover magazine which is going to be sitting on the charts for the next six months. I think the value of having an (inaudible) like Jennifer is tremendous in terms of giving a PR custom role (ph).
And what I would say is that the marketing continue to deliver in a powerful and incremental way even as we go into 2011, I agree with you that and frankly even if I didn’t have a new program in 2011, I’d be feeling pretty good about my prospects going in to Q1, clearly on the back of the marketing in terms of making it significant improvement versus plan that we stop. Now layer on top of that, the news value of having a major new program layer on top of that beginning to see very early benefits of the retail efforts that are going to be continuing into 2011 and then there is other thing that we’re continuing to work in the pipeline that are also going to be contributing for the NACO environment story.
And so what I see is initiatives that layer on top of each other. And that are going to have continuing spending strength as opposed to something that gives us say a three or four month profit and then goes away.
Chris Ferrara – Bank of America
That’s helpful, I appreciate that. And can you – I guess can you quantify or put some numbers around the bump up in recruitment trends and can you remind me what that cost was that we’re looking at right, just to get a sense of just how big because I understand that the attendances follow this and you put yourself into disadvantage with the first quarter, but can you just try and put some numbers around what the recruitment look like more recently.
Yes, I’ll sort of, I’ll cluster around it a little bit. As you know we don’t release specific enrollment numbers because of the nature of the metric and it has its own complexities in terms of getting like, unlike comparability. As I referenced in the last call, and its consistent with this as you heard me say in my prepared remarks. We bumped up sort of on enrollment kind of slightly positive, is a way I would characterized it, I’m not sure if I wanted to mention why is it in terms of numbers but sort of slightly positive for the second quarter.
And then certainly we’re seeing a continuation on trend in Q3 and Ann have you got something you want to add to that?
Significant change in…
That was versus being down double-digit.
In the first quarter, so I mean it’s sort of if you – sorry to answer your question if you’re looking at a before and after, it went from sort of double-digit down to sort of slightly positive. So the sort of the net bump was pretty (inaudible). Chris Ferrara – Bank of America
I got you, but this – I mean, so down it sounds like if there is specific recruitment trends in Q1 would have eventually led to us further deceleration of the tenant. Now you’ve gone slightly positive. How do I think about slightly positive with a big new advertising campaign within A list celebrity, I mean I got like, I get the change from Q1 to Q2, right. But I’m trying to get, I guess dimensionally I mean I don’t want to – like I guess that this stuff takes a little longer to turn around right, you’re not going to go from no momentum to massive momentum but is that, like if we think about the absolute not just the change from Q1 like forget Q1 for a second, is Jennifer Hudson driving low, just modestly positive recruitment trends, a good thing or is that just kind of okay?
Well no, I think it’s a great thing because again as you heard me mention that it’s not the only thing we’re doing, it’s one thing that we’re doing and its already by itself an isolation having an impact and I think the other thing that you heard me mention in my prepared remarks is that most significantly it had an impact or members. And you – I mean Chris you’ve been on these calls for more quarters and you’ve (inaudible) and as you know NCAO (ph) enrollments have been a source of sort of ongoing weakness and if there is sort of one thing that’s been dogging us, it has been starting with trend on members (ph) and to sort of see and keep in mind it’s also not like the spring campaign hasn’t enormous amount of media way behind it.
So you again see the change and the shift in trend, we found to be incredibly compelling. Frankly, rejoins will tend to follow members (ph) in future periods obviously. And so what this campaign has shown us is that marketing specifically for Weight Watchers meeting can absolutely be driven, it can be driving increased interest by people who have never darkened our doors before and this is in a very important point to us.
I think the other thing I want to point out is that if you look at just the overall participation in the brand, and frankly look at it at a global level, is that our total paid weeks are up 8% versus the prior year period, which is I would argue fairly significant uptick in interest and better than frankly what you’re probably seeing in most of the systems or categories product.
The online business is absolutely been on first. I don’t know how else to put it. What’s interesting about the online business is that their advertisements did not rely on the celebrity. It leverages that same concept of work of mouth and word of our members but it did it in a different way but it did it in a way that had the same kind of (inaudible) was incredibly compelling and what we’re seeing is that the collective impact of both of those things is that consumer, sort of net consumer interest in Weight Watchers absolutely increase in a significant and measurable way in the second quarter on the back of marketing by itself without the benefit of all these other things that I talked about.
Chris Ferrara – Bank of America
That’s really helpful, I appreciate on the color as always, thanks,
Thank you. I would now like to turn the meeting over to Mr. Kirchhoff.
Thank you for joining us today. And I look forward to speaking with you again at our next quarterly earnings release.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
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