Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Sarika Sahni - Investor Relations

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

Ann M. Sardini - Chief Financial Officer

Analysts

Robert Craig - Stifel Nicolaus

Vivian Ma - Oppenheimer

Alvin Concepcion - Citigroup

Chris Ferrara - Merrill Lynch

Michael Binetti - UBS

Karen Howland - Lehman Brothers

Weight Watchers International, Inc. (WTW) Q1 2008 Earnings Call May 5, 2008 5:00 PM ET

Operator

Ladies and gentlemen, welcome to the Weight Watchers International first quarter 2008 earnings teleconference call. (Operator Instructions) At this time, I would like to turn the call over to Sarika Sahni of Weight Watchers International. Please go ahead.

Sarika Sahni

Thank you and thank you, everyone, for joining us today. With us on the call are David Kirchhoff, President and Chief Executive Officer of Weight Watchers International; and Ann Sardini, Chief Financial Officer. At about 4:00 p.m. Eastern Time today the company issued a press release containing financial results for the first quarter 2008. The purpose of this call is to provide investors with some further details regarding these results and a general update on the company’s progress. The press release is available at www.weightwatchersinternational.com.

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

Now with that, I will turn the call over to Mr. Kirchhoff. Please go ahead, David.

David P. Kirchhoff

Good afternoon and thank you for joining us as we review Weight Watchers International’s performance for the first quarter of 2008. In the face of a difficult consumer environment, interest in the Weight Watchers brand, approach, and philosophy remain solid. There’s little doubt that consumer discretionary spending has been negatively impacted by recent events. Despite this, our combined recruitment levels across meetings and online through April has held to prior year levels.

From a business perspective, Weight Watchers' performance for Q1 was largely consistent with the expectations we presented during our last earnings call. NACO performed slightly better than we thought, the U.K. performed roughly in line with our expectations, and weightwatchers.com continued to exceed them. Our performance in Continental Europe was mixed, with France and Belgium showing strength while Germany showed weakness, particularly in the back half of the quarter.

Total Q1 revenues grew by 9% with meeting fees up 9%, Internet revenues up 28%, and product sales and other revenues up 6%. Excluding foreign currency adjustments, total revenues were up 6%.

Global paid weeks for our meetings and Weight Watchers Online offerings were up a combined 12%. Global paid weeks in our meetings were up 7% while global attendances were down 6.7%, or 7.7% without the benefit of prior period acquisitions.

We would estimate that the timing of New Year’s Day and Easter accounted for 2.5 percentage points of this shortfall. Of course, in the case of the Easter timing shift, we will get a comparable benefit in Q2. Holiday timing had much less impact on weightwatchers.com as this business unit does not have a physical attendance factor. For Q1 2008, our Internet revenues were up 28% versus prior year and our global year-end end-of-period active subscriber base for Weight Watchers Online was up 30%.

Operating income grew 1% and our operating income margin was down 230 basis points to 26.7% in this year’s first quarter.

Due to the early Easter this year, we launched our spring marketing campaign during the last two weeks of the first quarter, while last year it did not begin until the second quarter. As a percentage of revenue, marketing expenses were up 210 basis points compared to last year.

On the bottom line, we reported EPS of $0.72 for the first quarter compared to $0.65 per fully diluted share, excluding one-time items in last year’s first quarter, an increase of 11%.

I will now briefly review our results in our major geographies and business units. First our North American meetings business -- total first quarter NACO revenues were $228 million, an increase of 6% versus the same period in 2007. Q1 paid weeks were up 8% versus prior year as the beneficial impact of our monthly pass commitment plan was present but as expected to a smaller degree than in prior quarters. This is due to the fact that by the first quarter last year, the monthly pass member base had begun to stabilize following its initial launch. Q1 attendances were down 5% in total and down 6.7% without the benefit of prior period acquisitions.

As I noted on the Q4 call in February, we believe that NACO enrolments continue to be adversely impacted by the lack of a meaningful program innovation in close to four years. While we cannot rule out some impact from the current economic environment on consumer discretionary spending, we believe the lack of a new program accounted for the majority of our shortfall. We have not observed any impact from the economy on other metrics, such as monthly pass. In fact, we have seen some increase in monthly pass penetration and monthly pass retention has been very stable at better than eight months on average.

As we discussed in our prior call, early indicators from our new advertising campaign have been encouraging. This campaign has scored better than any in recent history in key measures such as advertising persuasion. Based on what we learned from our winter campaign, we further optimized our executions for the spring campaign and while we are only a month into the spring marketing campaign, very early indicators on NACO volume performance are somewhat improved over first quarter trends, which we find encouraging. Taking this into account, as well as the offsetting benefit we will get from an early Easter this year in comparison to last year, we expect our second quarter attendance to come in low single digit negative in comparison to last year.

For the full year, we now expect NACO to improve to mid single digit negative attendance and mid to high single digit revenue growth, assuming no major surprises from the economy in the second half.

Now on to the international business units -- first off, in order to provide apples-to-apples comparisons, all the growth [statistics] I’m discussing will be provided on a constant currency basis. For the first quarter, U.K. revenues were up 7%, driven by the August price increase and the benefit from the continued adoption of monthly pass, a plan that was introduced in Q3 2007. U.K. paid weeks were up 7% while attendances were down 7.6% versus prior.

Monthly pass penetration in this market mirrors the rate we saw in Q4, although over time we see opportunity to increase its penetration. Like NACO, the U.K. is in need of a new program innovation and like NACO, there is potential for economic uncertainties to weigh in the minds of consumers in that market. While our Q1 attendance was at the low end of our expectations, we continue to expect full year attendance, as well as second quarter attendance to be roughly flat year over year. In addition, we are very confident that we will deliver a solid financial performance in this market as the benefit of monthly pass continues to increase as we move through this year.

Our results in Continental Europe were mixed on a country-by-country basis and somewhat disappointing in aggregate. Total revenues in this geography were effectively flat at 1%. Continental Europe paid weeks were up 5%, our first positive result in over a year. Attendances were down 7% in total and down 3% on a holiday adjusted pro forma basis. This is a significant improvement in the trendline versus prior quarters but is not at our expectations.

The new Power Start program continues to be well received in all of our Continental European countries. In fact, excluding Germany, even with the New Year’s and Easter effects, recruitments were solidly positive during the first quarter. However, Germany is the largest country within the CE portfolio and it continued to struggle for new recruitments, particularly during the second half of the quarter when our marketing activities were lower.

On the positive side, it benefited from strong monthly pass penetration, strong retention, and a high propensity for monthly pass subscribers to attend meetings. However, enrolments in that quarter are still not meeting our expectations.

We are taking actions along several fronts in order to improve the situation. First, unlike the U.S., we believe that we are still not executing well with our marketing and we are working to rectify that. For a variety of reasons, including how we’ve historically marketed the brand in this market, the image of the Weight Watchers brand in Germany is not at par to where it generally is in our larger markets. Based on what we are learning through our consumer research, we will be taking actions to improve our perception in Germany. These actions will touch on everything we do in Germany, from how and what we communicate through our marketing to how we choose and train our leaders and to where we hold our meetings.

In addition, we are working now to increase the number of meetings we hold in Germany on a weekly basis. As a result of a difficult year, we experienced an up-tick in leader attrition in 2007, so we had to start 2008 with about 7% fewer meetings and filling the vacancies has taken longer than we anticipated. We believe this has had a direct effect on enrolments and attendances in Q1.

Through the efforts of our new German management team and the buzz over the new program and advertising, the morale of our current service providers has improved significantly versus 2007. We are now going through the process of increasing our recruitment efforts in order to return our meeting base to its prior size.

Having recently spent time attending Weight Watchers meetings in Germany and working with the local management team, I am confident that we can and will work through the issues necessary to return this country to a positive enrolment trend.

As with the U.K., we expect revenue in Continental Europe to continue to strengthen throughout the year as we enjoy the benefit of monthly pass in France and Germany.

Moving on to weightwatchers.com, weightwatchers.com exceeded our expectations for the first quarter in 2008. Total revenues were up 28% and our online active subscriber base was up 30%, the highest rate of growth we have seen in this business unit since 2003. Strong sign-up volumes in the U.S., Canada, U.K. and Germany, combined with country launches in France and Holland, allowed this business unit to deliver another outstanding quarter. Weightwatchers.com will see continued double-digit growth throughout the year, as well as margin expansion in the remaining quarters as we gain economies of scale in our marketing spend.

Now I would like to turn the discussion over to Ann Sardini, who will elaborate further on our Q1 performance.

Ann M. Sardini

Thanks, David and good afternoon, everyone. Before getting into the ongoing business results, I want to cover a structural point. Beginning in this first quarter, our reported results will include the impact of our China joint venture start-up. As we mentioned on our last call, in February we entered into a joint venture with Groupe DANONE to establish a weight management business in China. The joint venture is 51% owned by Weight Watchers International and 49% owned by Groupe DANONE.

In accordance with GAAP, the financial reporting of that business will be as follows: we will consolidate 100% of the results of the China joint venture into our operating results, and then adjust out the amount representing DANONE’s 49% ownership on a minority interest line item below operating income.

In the first quarter of 2008, the impact was minimal. The JV incurred $746,000 of startup marketing and G&A expense in total and our operating income was reduced by that full amount. $366,000 was then added back to net income, representing DANONE’s share, its 49% minority interest in the venture. Therefore, Weight Watchers incurred a net reduction to income of $380,000.

Including the impact of the joint venture, operating income for the first quarter was $116 million, net income was $57.4 million, and fully diluted earnings per share were $0.72. JV startup expenses will accelerate as the year progresses with the expectation that by year’s end, the total EPS impact will be in the range of $0.04 to $0.05.

Now and going forward for the rest of this year, I will continue to highlight the impact of the China JV, but as we stated on our last call, we’ve not included it in our 2008 guidance.

The remainder of my remarks today will address the operating results of the business excluding the China JV impact.

For the first quarter, consolidated company revenues were $437 million, an increase of 9.4% versus prior in current dollars and 5.9% in constant currency. Gross profit increased by $19.8 million to $245.9 million, and gross margin continues to be stable in the mid 50s at 56.3% in the quarter versus last year’s 56.6%.

Operating income increased 0.9% to $116.8 million, while net income in the quarter rose 7.3% to $57.7 million from $53.8 million last year. Earnings per fully diluted share grew 14.3%. Excluding $0.02 in 2007 for early extinguishment of debt expense, 2008 EPS of $0.72 compares to $0.65 a year ago, an 11.6% increase.

Our first quarter was negatively impacted by a marked shift of income resulting from two specific instances of holiday timing around Easter and New Year’s. New Year’s day occurred on Tuesday this year versus Monday last year. While the shift of one day may sound trivial, the impact on our 2008 results in comparison to last year was compounded. We lost one day of business because we reopened post holiday one day later in the week on Wednesday versus Tuesday last year, and further to that many of our members extended their holiday and did not begin their weight loss efforts until the following Monday, January 7th.

To help quantify this, week one attendances were down approximately 25% in the U.S. and nearly 50% in many of our international markets. We estimate that this cost us more than 1% of first quarter attendance.

The Easter shift had a somewhat larger effect. Easter occurred two weeks earlier this year in March versus April last year. Historically, the week prior to and the week after Easter Sunday are soft attendance weeks as they were this year, with an estimated loss of 1.5% of Q1 attendance. Further, our post-Easter spring advertising campaign began at the end of March, thus shifting some marketing expense into first quarter, about $6 million. The Easter shift will similarly benefit our second quarter results.

I’ll now go through the major factors contributing to our 9.4% first quarter revenue growth. Revenues from all major sources grew in the quarter. Meeting revenues were up 8.8%, product sales 4.6%, and Internet revenues posted a strong 28% growth.

First quarter global meeting fees were $255.5 million. Lecture income per attendee increased 13% worldwide on a constant-currency basis. In NACO, 62% of our meetings were derived from commitment plans, notably monthly pass. In addition to the U.S., we now have monthly pass in the U.K., Germany, Australia, and just recently in France. Accordingly, global meeting revenues grew in the quarter despite the 6.7% global attendance decline in the period referenced by David in his remarks.

Fueled by new product launches, in-meeting product sales per attendance increased 12.2% in quarter one this year versus last year.

Now a few specifics regarding our geographies financial performance. NACO’s first quarter meeting revenues, including in-meeting product sales, were $214.6 million, with per attendee growth in both revenue categories. This geography’s 6.1% revenue growth, which compared to a 5% attendance shortfall, was driven by 7.5% growth in paid weeks over prior year.

These performance dynamics in the quarter are the outcome of NACO having nearly 850,000 monthly pass actives at quarter end. Our monthly pass subscriber base held up well in retention and in some places even improved versus prior year.

Internationally, monthly pass is now embedded in the U.K. and Germany and is on the way to delivering hefty per attendee [meeting seat] growth. Trend on retention and propensity to attend among monthly pass members in our international markets are comparable to those of the U.S. at similar points in time with their respective launches.

Average monthly pass penetration of attendances is now 34% in the international markets versus 53% in the U.S.

Overall, international revenues rose 1.8% in local currency. Meeting revenues in the U.K. were up 6% in local currency and in Continental Europe, 2.1%. Paid weeks rose 4.5% in the first quarter, even as attendance declined 9.3% versus prior.

Also contributing to the international revenue performance in the quarter were a price rise take in the U.K. in quarter three last year and strength in product sales across most of our countries.

In current dollars, international first quarter revenues were $152.5 million, a 10.8% increase over prior.

Other revenues, which include franchise commissions, licensing, and revenues from our publications, constitute about 6% of our revenue base and were $25.9 million in the first quarter, growing 9.5% over the past year. Franchise commissions were $5.2 million in the quarter, up 1.5%. Excluding the impact of two franchise acquisitions made after Q1 2007, commissions on the remaining franchises grew 6.7% versus prior year.

Licensing revenues in the first quarter increased to 18.6% to $16.9 million, notably as a result of new product launches in the U.S. and negotiated higher royalty rates on existing licenses in the U.K.

Revenues from our publications totaling $3.3 million lost some ground in the quarter because of the timing of new book launches and were therefore 12.7% behind last year’s levels.

Our consolidated gross margin continues to be stable in the mid-50s. In the first quarter, we delivered 56.3% as compared to 56.6% in last year’s first quarter. The 30 basis point decline is largely the result of increased expenses related to the ramp-up of monthly pass in the U.K. and Germany and other adjustments to service provider compensation.

First quarter 2008 marketing spend was $86.8 million. Like-on-like Q1 marketing, excluding $6.1 million related to Easter timing, increased $9.9 million, or 14% over last year’s level. In the quarter, we invested heavily in the weightwatchers.com business, trying out TV advertising for the first time in the U.K. and Germany, and increasing online advertising in all weightwatchers.com geographies, which helped to efficiently drive strong growth in sign-ups.

In our international meetings business, primetime TV was more expensive and we experimented with out-of-home. The use of radio in one of our CE markets proved successful at driving enrolment growth efficiently and will be considered elsewhere in the future.

First quarter marketing was 18.5% of revenues ex early Easter impact and 19.9% of revenues in aggregate. This compares to 17.7% in the same period a year ago.

G&A expenses in the first quarter 2008 were $42.4 million, up 7% from the prior year levels. Each year in the first quarter we true up certain of our prior year employee benefit expenses, including medical claims. This year the true-up resulted in a $4 million reduction in 2008’s Q1 expense. Excluding this adjustment, G&A rose 10.6% in the first quarter versus prior year, with IT remaining the significant driver of the year over year increase, reflecting our continuing initiatives to invest in our systems infrastructure.

Expense growth in the IT area is a combination of higher depreciation as we bring new systems online and higher maintenance related to new systems already put into service.

The company’s consolidated operating income margin of 26.7% as compared to 29% in the year earlier quarter. Margin compression was a result of higher marketing expense.

Interest expense in the first quarter was $25.3 million, virtually flat to last year’s even though average debt outstanding rose $130 million to $1.65 billion.

The average effective interest rate was below last year’s at 6.01% versus 6.52% due to market conditions and due to the step-down in spread over LIBOR, which took effect at the end of February this year.

Interest expense will be progressively lower through this year, assuming debt paydowns around $230 million for the year, if no better use of cash, and a continuation of lower interest rates.

Net debt to EBITDA at the end of March was 3.24 times.

Our consolidated cash flow and balance sheet, which I’ll address briefly, are consistent with expectations. In the quarter, the company generated $133.1 million of cash from operating activities excluding interest.

After capital expenditures, $126.3 million was available to service our capital structure. With our available cash, we made interest payments of $27.2 million, reduced our debt by $59.6 million, and paid our quarterly dividend of $13.9 million. In addition, we acquired our West Palm Beach franchise for cash. The remaining cash balance at the end of the quarter was $59.4 million, up $19.5 million from year-end 2007.

Fluctuations in the balance sheet between first quarter ’08 and year-end ’07 primarily reflects the normal seasonality of the business. Deferred revenue was up $30.7 million, including the impact of additional monthly pass markets. The acquisition of West Palm Beach in January resulted in an $11.1 million increase in the franchise rights acquired and in addition, revolver payments during the quarter reduced the debt balance to $1.59 billion.

Before turning the discussion back to David, I want to add a few comments regarding the rest of this year. In addition to the Easter impact and the attendance information that David has provided, there are a few more items I’ll point out. First, expect our global lecture income for attendance to increase low teens versus prior rest of year as a result of monthly pass. Marketing expense will grow in the teens versus prior, from Q2 to Q4 but we expect that it will be similar to last year as a percent of revenues.

Full year G&A as a percent of revenues is expected to be slightly less than prior and our IT investment will be ongoing throughout the year.

The 2008 fiscal year has 53 weeks, which adds an extra week to fourth quarter at the end of December. This additional week should generate about $0.02 of additional EPS.

And finally, all things being equal, interest expense should trend down across the rest of the year as we pay down debt incrementally, assuming of course that there is no better use for our cash.

Now I will turn the discussion back to David.

David P. Kirchhoff

Thank you, Ann. Our strong brand franchise generate very positive responses when we innovate and are able to effectively communicate the existence of new offerings to consumers. Weight Watchers Online and monthly pass are clear examples of this.

One specific area of focus right now in our innovation efforts has been in program development. We are now in the final stages of developing and testing a new program innovation for the U.S. and U.K. markets this December that our research suggests will provide a meaningful improvement to member success.

Our current program remains one of our foundational strengths and this new program should allow for a step-function improvement in that strength. While new programs take time to build once launched, as they rely on the impact of word of mouth, we certainly feel that we will have a compelling story for our 2009 winter advertising campaigns. This initiative is one of many we are pursuing that will contribute to our continuing efforts to increase retention and relevance.

In light of our performance so far this year, while still being mindful of uncertainty and the economy, we remain confident the company will deliver good top and bottom line growth this year. Based on our actual Q1 financial results, which are above our internal projections, as well as the early weeks of Q2, we are raising the lower end of the guidance range by $0.05 to $2.85, giving us a new range of $2.85 to $3.00 EPS for fiscal 2008.

At this time, we would like to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Robert Craig from Stifel Nicolaus. Please go ahead.

Robert Craig - Stifel Nicolaus

Good afternoon, everybody. Wouldn’t appear to be a lot of this going on but just in terms of measuring disengagement from monthly pass, if you could maybe comment on that. And I think Jerry asked a question like this last time around but based on those that did disengage for whatever reason, are you noticing any pattern or timetable for those reengagements?

David P. Kirchhoff

In terms of the likelihood of people to rejoin with monthly pass, if I understand that to be your question --

Robert Craig - Stifel Nicolaus

Yeah, that plus -- yeah, that plus just measuring the disengagements that have occurred from monthly pass so far and what kind of trend you are seeing there.

David P. Kirchhoff

Right. Okay, well first off, in terms of monthly pass retention rates, what we are seeing so far is at least as good as what we’ve seen in prior years. And frankly I think in particular with the economy being what it is, one of the things that we are watching closely was to make sure that monthly pass retention was holding up and the fact that it has and if anything, we’ve seen on the margins some slight improvement has been pretty encouraging. So we haven’t seen anything so far that suggests any retention issues with monthly pass at all, versus some of the opportunities we’ve seen in the past.

Now once somebody cancels monthly pass and goes on a hiatus from us, their likelihood to return, as we’ve indicated in prior calls, one of the tricky things in terms of calculating monthly pass reactivation rates, if you will, is that you need enough time between these relatively long subscription cycles, which have a mean of eight months each, to have enough time to get a good bead on what those return rates are actually going to look like.

And we feel that as we get into the middle of 2008, that we are going to begin to have enough of a data set to have a meaningful point of view on that. The one thing that I can tell you is that I look at our enrolment trends when I am looking at people that have never been with Weight Watchers versus re-enrolments, I haven’t seen anything in our re-enrolment trends that would give us any pause. And so based on that high level view of the business, we’ve certainly -- and everything we’ve also heard from our qualitative research is that satisfaction with monthly pass post subscription is certainly at least as good as what we’ve seen in the traditional pay-as-you-go model.

Robert Craig - Stifel Nicolaus

David, are you noticing any substantial differences in the socioeconomic or income profile of the monthly pass customer versus pay-go?

David P. Kirchhoff

Absolutely. Not surprisingly, there’s two requirements to do monthly pass -- one is you have to have a credit card and be comfortable using it in a recur-a-bill model. The second is you have to have Internet access.

Not surprisingly, if you skew a little bit above average in terms of income, and if you skew a little bit younger in terms of age, you are going to have a higher propensity to be a monthly pass consumer, whereas folks that are a little bit old and might not be as comfortable and folks that are feeling a little bit tighter in terms of total expenditures, consumer expenditures where we might expect to see a little bit lower penetration, that’s not inconsistent with what you would expect in most products like this, I don’t think. And in fact I would actually argue that even in older demographics that over time as that demographic gets more and more comfortable with the Internet, that we have an opportunity to further increase our penetration rates with monthly pass with that group.

Robert Craig - Stifel Nicolaus

Okay. Could you comment on your success on attracting any of the men folk to your meetings?

David P. Kirchhoff

The penetration of men in meetings versus women is fairly constant with what we’ve seen in the past year, give or take 10%. We haven’t really put a big marketing push behind advertising specifically to men for Weight Watchers and so I wouldn’t expect them to have a different point of view on the brand.

I think the good thing I can tell you with men, and this is true of both meetings and online, is that men who do Weight Watchers find it curiously compelling, and I’m counted as one of them but there’s this notion of the program and counting and everything else that really seems to resonate with men once they use it. The big challenge with men is getting them over that initial hurdle and perception that Weight Watchers is a service that is designed for women, which obviously isn’t the case.

So over time, that becomes a marketing opportunity for us.

Robert Craig - Stifel Nicolaus

Great, one last question and I’ll turn it over -- any planned price increases, either in pay-go or monthly pass or online?

Ann M. Sardini

We just had a price increase actually in the U.K. in the third quarter, late in the third quarter this last year. We were looking at a price increase in NACO. We are still looking. I think we are going to play it by ear a little bit relative to how the economy is doing. On monthly pass, we haven’t seriously looked at raising price at this time.

Robert Craig - Stifel Nicolaus

Okay, great. That’s very helpful. I’ll turn it over. Thanks.

Operator

Thank you. The next question is from Vivian Ma from Oppenheimer. Please go ahead.

Vivian Ma - Oppenheimer

Just a few questions; on the interest expense expectation, you had mentioned in prior period about $17 million to $18 million and now that, you know, with the comments on LIBOR being lower, do you have a new range that you are looking for for this year?

Ann M. Sardini

I’m not sure I recall the $17 million to $18 million number, Vivian, but our rate has gone down from 6.52 to 6.01. We have taken the step-down as a result of our net debt to EBITDA coming down below 3.5 times. I don’t think -- I don’t anticipate another step-down this year, so what we basically estimated in is our current rate for the rest of the year, but do remember that we’ll be paying down debt across the year, so as we pay down more debt, as we accumulate more cash across the year, pay down more debt, the interest expense will go down across the year.

Vivian Ma - Oppenheimer

And then correct me if I’m wrong, as LIBOR goes down, does the 6.01 also varies with that through the year?

Ann M. Sardini

Yes.

Vivian Ma - Oppenheimer

Okay. Also wondering about the gross margin outlook for the rest of the year -- are you expecting a similar trend to the first quarter, it will be down year over year?

Ann M. Sardini

I’m actually not. I think that going -- the first quarter is a little tough because one of the things that you see there is that we have a lot of our monthly passers attending, which tends to make the lecturing come for attendance, while it is up, it’s not up as much as, for example, in the fourth quarter when there’s a much lower propensity to attend. And that of course would drive up margin.

But we are looking towards the end of the year, starting to grab back margin and actually come up higher than we are, than we were last year.

Vivian Ma - Oppenheimer

On a full-year basis?

Ann M. Sardini

Yes.

Vivian Ma - Oppenheimer

Okay, and last question is on -- if you could comment on the online business, the performance of the men’s website specifically for the quarter?

David P. Kirchhoff

We are still seeing fairly comparable trends on the men in terms of percentage or penetration of total. You know, again as I was saying, the thing with men and online is that when we measure -- we do fairly regular and exhaustive satisfaction research and on the metrics that we look at, such as did it meet overall level of expectation, would you recommend it to a friend, is it worth the money, et cetera, what we are finding with men is that it performs at comparably high levels to what we’ve seen historically with women. And so again we view that as a great sign.

But remember that the one thing we really haven’t done with men is we haven’t gone on top of the mountain and started shouting that Weight Watchers has a product for men. And I think for us to do that, we have to be at a place where we can make the decision to start doing probably above the line marketing to get any meaningful drive behind it.

In our decision process for making the move to start doing above the line marketing with men is ultimately going to be a function of how well developed -- I mean, I think there’s two tests. First off, there is do they like the product or not and the answer to that clearly is yes. Then the second question is that is there enough critical mass in the business that we think that when we turn marketing on that we’ll have enough of a base of the business to sort of show good ROI because we are a kind of inadequate tipping point, if you will. And then of course balancing the decision to spend money against men versus all the other decisions that we might be evaluating in terms of investing and marketing.

So that’s kind of a long-winded way of saying the decision to really start pushing that product in my mind, it’s not so much a function of if but frankly when.

Vivian Ma - Oppenheimer

Is the breakdown between men’s and women’s online similar to the meetings, like 90-10?

David P. Kirchhoff

It’s a teeny bit higher in the case of online, so I would say that online, if my memory serves me correctly, it ranges from typically 11% to 13% in any given week.

Vivian Ma - Oppenheimer

Okay, great. Thanks very much.

Ann M. Sardini

One more thing -- I just realized what your $17 million was, which was the low end of the range of interest savings that we cited --

Vivian Ma - Oppenheimer

Right.

Ann M. Sardini

Yeah, the range was $17 million to $19 million and I think now we are trending more towards the 19.

Vivian Ma - Oppenheimer

Okay, perfect. Thanks very much.

Operator

Thank you. The next question is from Alvin Concepcion with Citigroup. Please go ahead.

Alvin Concepcion - Citigroup

I just wanted to see how you would characterize the current ad market. In other words, how are ad rates trending currently?

David P. Kirchhoff

Well, I think that -- you mean the cost for us to purchase advertising?

Alvin Concepcion - Citigroup

Yes.

David P. Kirchhoff

Okay. The media market I am sure, which is fairly similar to what you are hearing from the other consumer companies you are following is that it is not a great time for anybody to be in the business of placing TV ads right now, with the shift from network to cable and everything else. That said, and while we certainly I think like everybody else, we have seen some media inflation, you know for the first time, there’s been a number of changes in the way we buy. As you’ll recall, historically we used to buy everything on the spot market back before we reached a certain threshold level in terms of company-owned versus franchise. And in the beginning of last year, we were able to finally start doing a national buy.

This year, we were able to do the national buy with enough time that we were able to participate in the up-front, which allowed us to actually do better than what we had typically seen. So if you actually look at NACO marketing spend on TV and related, we were actually able to hold up pretty good media weights without a significant increase in expenditure on the NACO side.

Alvin Concepcion - Citigroup

Okay, and then do you have a breakout of what your marketing spend is in the U.S. versus international?

Ann M. Sardini

Yeah, we do have that. We haven’t typically shared it but I can give you sort of -- a little bit of information. If I’m looking at the U.S., I would say that the U.S. -- are you talking about just media now or total marketing?

Alvin Concepcion - Citigroup

Total marketing.

Ann M. Sardini

U.S. is about 40% of the total.

Alvin Concepcion - Citigroup

Okay, great. And then I’m sorry if I missed it, but did you provide guidance on attendance for Continental Europe for the second quarter and the year?

David P. Kirchhoff

We typically don’t provide guidance for the next -- well, actually, no, sometimes but -- I think for Q2 , we would expect us to be very small negative single digit to flat versus prior, which is roughly in line with what we’d expect to see for the full year. I was thinking of a different level of guidance on a quarter basis.

Alvin Concepcion - Citigroup

Okay, thank you.

Operator

Thank you. The next question is from Chris Ferrara from Merrill Lynch. Please go ahead.

Chris Ferrara - Merrill Lynch

I was wondering if you had -- and I don’t know if seasonality messes with this but do you have an idea of what your trends are with respect to meetings attended during the eight-month duration of monthly passers?

David P. Kirchhoff

What we’ve typically said about that, Chris, is that if you look at somebody throughout their tenure of monthly pass, and what I’ll also do is I’ll use a typical pay-as-you-go enrolment cycle by way of contrast, is that during the first two months, most people are going to most meetings and it is really a period of the greatest active engagement in terms of doing the program. And I know that when I do Weight Watchers, I am absolutely one who falls into this.

In the pay-as-you-go world, what would happen is people would sort of end up in their third month and they would end up missing a bunch of meetings and they simply stop going and we would term their membership, if you will. Whereas in the case of monthly pass, they are still attending but not with as much frequency as they were in the beginning. As they start moving into a phase of the program where they are continuing to do Weight Watchers but maybe the level of intensity by which they are following the program becomes slightly more casual. And then typically what we would see is that when people would run into a rough spot and they felt a desire to sort of re-up their level of commitment, that we might see meeting intensity increase again.

So by way of example, if somebody were to sign up for monthly pass let’s say in April, and so they are going to meetings in April and May and they are still going in June, but then July and August hit and it’s vacations and barbeques and everything else, their likelihood of attending meetings might drop very significantly but then there is a very high likelihood that we see them show up again and come Labor Day, they start showing up at meetings. And I know that when I’ve worked the meetings as a receptionist, that’s what I’ve seen.

Chris Ferrara - Merrill Lynch

That helps. I guess what I was trying to get to is have you seen a change in that level of commitment say at month four of the typical eight-month duration that a monthly passer would be there -- in other words, do you track the number of meetings that a monthly passer goes to during that mean eight months and has that changed since monthly pass first started rolling out?

David P. Kirchhoff

Yeah, definitely. I mean, as a general rule of thumb, the metric that you are referring to is what we refer to as propensity to attend. And certainly propensity to attend is at its highest percentage in month one and predictably, you would expect it to be a lower propensity to attend percentage in month eight.

That’s a general rule. If I look at propensity to attend trends in this year versus prior year, they’ve at least held up, if not slightly better.

Chris Ferrara - Merrill Lynch

Okay, and I just wanted to get back to the innovation that you were talking about. I guess it seems like with no impact from the macro environment that you are citing so far anyway, which is obviously a good thing, the biggest drag to your attendance growth or your volume growth within the meeting business is this lack of innovation, right? I mean, it seems like a lot is hinging on this potential early ’09 or late ’08 innovation. So what gives you the kind of confidence that you can have something that really does change things up when it’s been so many years since we’ve seen something like that?

David P. Kirchhoff

Right. I mean, if I take a step back and look at what I believe is necessary to drive medium and long-term growth in the business, it continues to be -- and it’s around these planks of retention relevance but it kind of boils down into sort of our areas. The first is sharper, more differentiated advertising that does a better job of differentiating our brand equity. The second is right leader in the right meeting with the right training. The third is having innovative -- you know, a constant state of innovating programs that does a better and better job of addressing fundamental member needs, wants, and gets. And finally, there is innovating the service itself and finding, identifying, and implementing best practices in the actual meeting room environment.

You know, the program innovation is one that can work really powerfully in tandem with marketing particularly if the program innovation addresses fundamental member needs and wants.

And as I’ve said in the past, our historic approach to program innovation, we sometimes got ourselves into trouble because we could be accused of either not coming out with enough innovations or coming out with innovations that I think could have historically been argued as almost sometimes kind of a window dressing, if you will, used to fuel the marketing engine.

The reason I feel good about this particular program we are working on is that I know the needs and wants that it’s trying to assess. I’ve had the opportunity to sit myself in research and focus groups, as I’ve listened to people go through pilot tests. And I’ve had enough exposure to it to believe that the things that it’s trying to communicate and address are real.

And on the basis of that, I feel good about it. Now, do I want to put sort of the future of humanity at stake with this new program? I mean, a couple of things on that -- first off, no, because I think we have to execute against all four dimensions that I mentioned. And secondly, I think the other thing that is very important for us to recognize is that good program innovations take time to build and the reason is that -- I’ll always come back to the fact that give or take roughly six or seven out of 10 enrolments we get are at the recommendation of a friend or family member and that’s word of mouth, and word of mouth frankly takes a while to build because word of mouth really starts to happen when members achieve success.

And what we see in good programs is that good programs actually build over time as opposed to sort of one massive pop. Now, all those caveats aside, I feel like if we have a program that innovation that is significant enough that we can build a marketing campaign around it that will address fundamental benefits for consumers, that that’s reason to be excited about what we have for the winter campaign and everything I am seeing so far puts me in an on average more excited place.

Chris Ferrara - Merrill Lynch

That’s really -- I appreciate all the color. I just wanted to ask I guess one follow-up to that, and I don’t even know how you could answer this but just to sort of give color -- I mean, if you launch this campaign and it doesn’t -- or this program and it doesn’t go as you’d expect it to go. In other words, the results aren’t as good, would you -- do you think hypothetically you would turn around and say we just didn’t have the right innovation or might you draw another conclusion just on how viable the meeting business is in the long-term?

David P. Kirchhoff

No, I would never come to that particular point of view. You know, the thing I would look at a program innovation is that what I would address, and certainly every time we launch a new program there’s an opportunity to go back and take a look at it and say what are the elements of it that worked well and what are the elements that could have worked harder. And if we are doing regular program development, we can always find an opportunity to further improve our program with subsequent releases.

And so my view is that having the right kind of program development process means a willingness to constantly come out with new and better versions of the same and sometimes those are going to be tweaks and sometimes are going to be more major.

I think that if you see what a program does, I mean, if I thought that the only thing you had to do to drive this business was develop a good program, that would be a fairly simple thing to do in terms of driving the business. And the program is very important but it is not the only thing -- that if I’m going to drive the kind of growth that this business I believe is inherently capable of, it is going to be a function of us executing across all four different dimensions of the leader, marketing, program development, and service innovation.

Chris Ferrara - Merrill Lynch

Thanks a lot, Dave. I appreciate all the time.

Operator

Thank you. The next question is from Michael Binetti from UBS. Please go ahead.

Michael Binetti - UBS

Thanks for taking the question. Just a quick tactical question -- what percent of the 9.5% revenue growth was the currency lift this quarter?

Ann M. Sardini

Currency was --

David P. Kirchhoff

About a third.

Ann M. Sardini

Yeah.

David P. Kirchhoff

It was nine and change without, and it was -- well, nine and change with and six and change without, if memory serves.

Michael Binetti - UBS

Got it. And one other quick question for you, Ann; in the past, you’ve said about a third of your free cash flow you guys kind of earmark for franchise acquisitions, then maybe a third to debt and a third to shareholders. Is that still a good estimate for us to go by for 2008 as far as you can tell where we are sitting today?

Ann M. Sardini

Well, it’s a little different now because we’ve acquired so many of our franchises, that there aren’t a tremendous number of large ones left. We are still acquiring, we’re still talking to franchisees. But I’m not sure that we would put a -- we would have the opportunity to put a whole third of our cash towards the franchisees.

Absent that, paying down debt, which has a nice impact on EPS, and then of course the dividend and at some point, if it makes sense, we would continue our share buy-back program.

Michael Binetti - UBS

Okay, so it sounds like near-term, the focus may be more on debt, on the debt pay-down. And the reason I ask because it seems like the 3.5 times EBITDA that you guys -- the threshold that you crossed last quarter seemed to be kind of a comfort level for you, if I wasn’t mistaken.

Ann M. Sardini

Yeah, I was glad to get passed that, actually.

Michael Binetti - UBS

And then maybe one question for you, David -- in the U.K. you said you saw a slowdown of the uptake to monthly pass in the quarter from -- I believe that was sequentially from the fourth quarter, correct?

David P. Kirchhoff

No, we were saying comparable, roughly comparable to what we saw in the fourth quarter.

Michael Binetti - UBS

Okay, and what --

David P. Kirchhoff

But lower -- but what Ann referenced is that the penetration rates are lower than that of NACO.

Michael Binetti - UBS

Okay. And so then what gives you -- I think you said you felt with a little confidence that that could reaccelerate in this second quarter. Is that related to something you are seeing economically over there or is that related to something you guys can do internally as far as execution and getting folks to trade to that?

And then the longer term question is, you know, we’ve talked about this on past conference calls, that you think that -- you guys wonder how far the actual total penetration of monthly pass can be and in the U.K. and Europe versus levels in the U.S., just because maybe U.S. consumers are more friendly to leaving the credit card online and being charged monthly.

David P. Kirchhoff

Although you know what is interesting about that is if there was one country in Europe that is comparably comfortable with a credit card, it is the U.K. They are very Americanesque in their love of credit cards. And so I don’t see that particular issue as being a top in terms of our cap on the U.K. penetration rate opportunities.

I think the answer to your first question, the opportunity to increase penetration in the U.K. is significantly one that is within our own control and exactly as you pointed out, it’s going to come down to execution, having the right incentive schemes in for our service providers to make it worth their while, training and doing a better job I think of communicating the full range.

In fact, one of the biggest challenges we have in selling out monthly passes is that it is such a rich offering. If you look at the combination of what you get in terms of access to what happens at meetings but also what you can get via the Internet, which comes with it, is that I think we still have a much better opportunity to sort of more fully describe not only everything you get but also the impact that it can have on long-term weight loss, which as we’ve seen from clinical studies has been fairly substantial with 50% lift in people that are doing both meetings and e-tools as opposed to people just doing meetings.

So in terms of the U.K. and certainly in terms of our European markets, I think the way I would characterize it is that I would say not so much that those are long-term structural impediments to the increase in penetration rate but more of what I would say is basically a lag effect.

I just think that the European markets, from what I’ve seen, are just going to typically be running on some of those dimensions a couple, three years behind what we are seeing in the U.S. in terms of consumer behaviors.

Michael Binetti - UBS

Okay, and then if I could just wrap up with one other quick tactical question -- if you had to estimate about what percent of pricing you have running through the North America business right now, what would that be in the quarter?

David P. Kirchhoff

Can I ask you to clarify -- what do you mean by what percent of pricing?

Michael Binetti - UBS

I think you guys took some pricing in some markets, maybe on the pay-as-you-go plan.

David P. Kirchhoff

So how much of the NACO system did we put in a price increase say in the last 12 months?

Michael Binetti - UBS

Yes. I’m sorry, in the quarter.

David P. Kirchhoff

None in the past quarter.

Ann M. Sardini

None in the quarter.

Michael Binetti - UBS

Okay, thanks.

Operator

Thank you. The last question will be from Karen Howland from Lehman Brothers. Please go ahead.

Karen Howland - Lehman Brothers

Thanks. Ann, can you clarify -- I think you said you expect SG&A to improve this year. Were you talking as a percentage of the sales or on an absolute dollar --

Ann M. Sardini

Percentage of sales.

Karen Howland - Lehman Brothers

Okay, perfect. And you also had indicated the one-time true-up of your medical claims was about $4 million or so to SG&A this quarter?

Ann M. Sardini

There was more to that than medical claims. There were a couple of other areas of benefits. What happens is that until the calendar year is over, you don’t really know what your total experience is until you get all of your information back and so we always at the beginning of the year in the March quarter by the end of March, we know where everything stands and we do our true-up of our accrual, and we do that pretty much every year. It varies though in terms of size. Sometimes the medical claims can be extremely high and sometimes you get a year where it’s not, so --

Karen Howland - Lehman Brothers

And for the $4 million, is that $4 million lower year over year or is that a $4 million true-up for pat last year?

Ann M. Sardini

Four-million true-up for last year.

Karen Howland - Lehman Brothers

Okay and so that was what, about $0.03 or so to earnings?

Ann M. Sardini

Yes.

Karen Howland - Lehman Brothers

Okay.

David P. Kirchhoff

Now the flipside of that is that if you look -- so that was a benefit to the G&A line but the flipside is one of the things that we are now experiencing on G&A is that as we have been ramping up our IT spend over the past couple, three years, what we are now dealing with is that we have -- we are now paying for the D&A experienced through that spend and furthermore, because of the nature of the technology projects we are currently doing have shifted to development of software, from development of software to maintenance of existing software systems, the degree to which we capitalize is now lower than what it has been in years past and so there is a number -- it’s not quite the four, it’s close to the three -- that sort of hurt us on the other side form an accounting point of view in G&A in Q1.

So there’s sort of -- I guess what I’m suggesting is that there’s ins and outs of the G&A that are impacting us.

Karen Howland - Lehman Brothers

Right, but the G&A -- the higher depreciation that you are experiencing should continue to occur throughout the course of this year.

David P. Kirchhoff

Yeah, but -- and that’s true. I think what I am suggesting though is if you look at our actual cash expenditures on IT versus prior years, we’re not seeing nearly as much of an increase in dollar bills going out the building, as would be suggested by the increase in G&A.

Ann M. Sardini

Yeah, it’s pretty much stable in terms of what we would be spending across the year but compared to last year, you will have significantly higher IT expense because of the depreciation that is coming on board from things that were put into service in 2007 and also because, as David said, we are capitalizing less as we are tweaking existing systems and maintaining them.

Karen Howland - Lehman Brothers

And did you give what the D&A was for this quarter?

Ann M. Sardini

I didn’t but I can.

Karen Howland - Lehman Brothers

That would be great.

Ann M. Sardini

It will take me a minute, so if you have another question.

Karen Howland - Lehman Brothers

I went on your website and I noticed that the -- it was still free registration and it seems like it has been throughout the course of the last quarter. I was wondering if that was -- for meetings -- I was wondering if that is normal for this time of year, or if it’s concerns as far as North America being weak, so continue to try to entice people to the meetings?

David P. Kirchhoff

Not even a little bit. The free reg schedule we are running is identical to what we’ve been running in periods past. I think the difference, if anything, you might see is that it’s also going to be impacted just around the timing of the Easter Holiday in terms of when it is in or out. But if you look at the sheer number of weeks we are running free reg this year versus last year, it’s comparable. And we certainly have made no promotional changes in any response to anything we are seeing in the economy or otherwise.

Ann M. Sardini

On the D&A question, $6 million in the quarter, which is about 50% higher than last year.

Karen Howland - Lehman Brothers

Ann, did you indicate what that other income line, it was about $2.5 million or so?

Ann M. Sardini

I didn’t. What that is is one of the pieces of the impact of FX on the quarter, foreign currency translation benefits. Within the operating expense, you have the foreign currency that is a result of your normal expenses and revenues that you are collecting, expenses that you are paying out. The $2.4 million is the impact of inter-company payables and receivables that were very favorable as a result of the tremendous increase in -- particularly the Euro versus the first quarter last year.

Karen Howland - Lehman Brothers

And do you know what foreign exchange would have been, what the impact to the earnings?

Ann M. Sardini

Do I know what it would be to earnings? Yes, it’s about $0.03 to earnings.

Karen Howland - Lehman Brothers

Okay, and then finally, I was wondering --

Ann M. Sardini

And that includes that --

Karen Howland - Lehman Brothers

That includes the 2.4.

David P. Kirchhoff

Yes.

Karen Howland - Lehman Brothers

And finally, I believe in the last quarter with Continental Europe, you were indicating for the first five weeks the attendance were flat to slightly higher than flat, and obviously that shifted sometime throughout the course of this quarter. I was wondering if there was anything in particular that you viewed as far as what was driving that shift. Was it just Germany or -- I guess what happened there?

David P. Kirchhoff

What I had said in my prepared remarks was that it was just Germany, that what we saw in the first five weeks of the year was very strong enrolment trends as we were out in heavy advertising -- not heavy compared to years past, necessarily, but just a normal, heavier period of advertising for January, that that plus the new program innovation was driving high enrolment activity. But what we saw when we got into the back half of the quarter was as the marketing volume was significantly reduced, as it often is, that the business in terms of an enrolment perspective, softened in the second half of the quarter. And in Germany, oddly enough, that was exacerbated somewhat by the fact that Germany is one of those European countries that has kind of a dual holiday effect around Easter. And what they do basically, I don’t know if you are familiar with it but they are one of the only countries around that still celebrates carnival with a gusto, and a lot of the country takes the better part of the week off and that’s around Ash Wednesday.

And so we had a number of just sort of odd timing events with respect to marketing in Germany that had some negative impact in terms of the German performance throughout the year. But I think the other thing with Germany, if I’m just being honest, is that they also continue to be impacted by the fact that they’ve had a harder time ramping up their meeting infrastructure this year, which was a hangover frankly from last year. And I think that they also have some other opportunities to take stock of a number of different aspects of their operations to sort of continue to drive longer term improvement, whereas what we saw in the majority of the other countries in CE was just generally a very strong first quarter.

Karen Howland - Lehman Brothers

Great. Thank you very much.

Operator

Thank you. I would now like to turn the meeting back over to Mr. Kirchhoff.

David P. Kirchhoff

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

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Weight Watchers Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts