Weight Watchers International, Inc. (NYSE:WTW) Q4 2009 Earnings Call Transcript February 25, 2010 5:00 PM ET
Sarika Sahni – Director, IR
David Kirchhoff – President and CEO
Ann Sardini – CFO
Jerry Herman – Stifel Nicolaus
Chris Ferrara – Banc of America Merrill Lynch
Alvin Concepcion – Citigroup
Ken Goldman – JPMorgan
Michael Binetti – UBS
Ladies and gentlemen welcome to the Weight Watchers International fourth quarter and full year end 2009 earnings conference call. During the presentation, all participants will be in 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, February 25th, 2010.
At this time, I would now like to turn the call over to 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 Fourth Quarter and Full Year Earnings Conference Call.
With us on the call are David Kirchhoff, President and Chief Executive Officer and Ann Sardini, Chief Financial Officer. At about 4:15 P.M. Eastern Time today, the Company issued a press release reporting its financial results for the fourth quarter and full year 2009.
The purpose of this call is to provide investors some further details regarding the Company’s financial results, as well as to provide a general update on the Company’s progress. The press release is available at www.weightwatchersinternational.com.
Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company’s filings with the Securities and Exchange Commission. The Company does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
I would now like to turn the call over to Mr. Kirchhoff. Please go ahead, David.
Good afternoon, and thank you for joining us, as we review Weight Watchers International’s performance for the fourth quarter and full year 2009.
Overall, our Q4 results slightly exceeded our earlier expectations, as we saw moderating trends during the quarter in several of our business units both the volume and profitability basis.
While our business continued to be adversely impacted by the global recession, particularly in the U.S. our actions helped moderate negative trends in the fourth quarter, most notably in our international meetings businesses and in our WeightWatchers.com business. In particular, we saw a significant improvement in the trends in our Continental European business following the soft launch of the new program Pro Points.
As I begin to review our financial results, for comparability, I would like to remind everyone of several key items impacting 2009 and 2008. First, fiscal year 2008 had 53 weeks compared to 52 weeks in fiscal 2009. The majority of the impact of this extra week in 2008 was in the fourth quarter. In order to provide comparability in our results, we’ll be providing comps in which we compare our fiscal Q4 2009 with the comparable 13-week period in Q4 2008.
Second, reported Q4 2009 profitability was adversely impacted by our taking of $37 million accrual to reflect our recently announced adverse ruling regarding tax withholding for our leaders in the UK.
The EPS impact for this for both the fourth quarter and the full year 2009 was $0.33. Of which, approximately $0.29 relates to the prior periods of 2001 to 2008 and approximately $0.04 related to fiscal 2009. This ruling relates to our long-held position that our leaders in the UK are independent contractors and not employees. We plan to appeal this ruling.
Third, in fiscal year 2008, we recorded charges to reflect the adverse ruling in the UK with respect to VAT. Q4 2008 included a $9.2 million benefit from a partial reversal of the accrual of the UK VAT ruling resulting in an EPS benefit of $0.08 in the last year’s 2008 quarter.
On an as-reported basis, total Company Q4 2009 revenues declined by 10% versus the same period in 2008. After adjustments, revenues declined by only 1% with continued softness in NACO offsetting improved results in the international meetings and WeightWatchers.com businesses.
The international business benefited from a combination of improving volume trends and favorable currency effects. On a constant currency and adjusted basis, Q4 '09 revenues declined 5.2%. Global meeting fees were down 14.2% on as-reported basis and declined 2.9% on an adjusted basis. In-Meeting product sales declined 4.6% as reported, but grew 6.4% on a comparable basis.
As reported, Q4 global paid weeks and our combined meetings and online businesses were down 1%, but were up 5% on a comparable basis. In our meetings, as reported, global paid weeks were down 5%, but were up 4% on an adjusted basis for the quarter.
After adjustments, we saw meetings paid weeks growth in each of our geographies, including slight growth in NACO. As reported, attendances were down 15% globally, but were down 6% on a comparable basis.
In our WeightWatchers.com business, we saw revenue growth of 10%, paid weeks growth of 8% and end-of-period active subscriber growth of 12% in the fourth quarter compared to the same period in the prior year.
For the full year 2009, total revenues were $1.4 billion, a decrease of 9% versus 2008. After adjusting for currency and without the impact of the 53rd week, as well as the prior year’s impact of the adverse UK VAT ruling, which was recorded in 2008, total revenues for the year declined 5%.
For the full year, combined paid weeks for the meetings and online businesses were flat as reported and increased by 1% on a comparable basis. For the meetings business, full year paid week declined 4% as reported and were down 2.7% on an adjusted basis. While full year attendances declined 10% as reported and 8.5% on a comparable basis. For the Internet business, full year paid weeks grew 10%.
As reported, Q4 '09 operating income declined 50%, largely a reflection of the Q4 charge for the UK self employment case. Without the impact of the UK VAT accrual reversal in last year’s quarter and the self-employment case this year, Q4 2009, operating income declined by 4%.
After adjusting for the impact of the extra week in Q4 '08, Q4 '09 operating income grew 5%. Excluding the net UK charges, operating income margins grew 110% basis points versus the comparable '08 period, driven by 160 basis-point improvement in gross margins.
For the full year 2009, after accounting for the restructuring charges, the self-employment case and the VAT ruling, full year operating margins were flat at 28.5% versus '08.
I think it is important to highlight that we were able to effectively hold on to our operating margins despite a drop in revenue, as a result of one, careful cost control, and two, the flexibility of our variable cost model. As reported, Q4 EPS was $0.24 versus $0.62 in the comparable period in 2008.
Excluding the impact of the UK self-employment case, Q4 2009 EPS was $0.57. This compares a $0.48 for Q4 2008 after adjusting for the benefit of the VAT accrual reversal and the extra week in last year’s quarter.
After adjusting for the self-employment tax ruling, the VAT reversal and the extra week, the underlying EPS was up 19% in the fourth quarter, driven by higher operating income and lower interest expense.
For the full fiscal 2009 year, as reported, EPS was $2.30 compared to $2.60 for 2008. Without the impact of the adverse UK self-employment tax ruling and restructuring charges associated with our cost-saving initiatives, 2009 full year EPS was $2.68. Excluding the impact of the extra week, as well as the adverse VAT ruling, 2008 EPS was $2.71. On this comparable basis, 2009 full year EPS was down 1% versus 2008.
I will now briefly review our results in our major geographies and business units. First, our North American meetings business. Total Q4 2009 NACO revenues were $158 million, a decrease of 16% versus as reported Q4 '08 revenues. Without the impact of the extra week in 2008, NACO revenues declined by 9%.
For the full year, NACO revenues declined 12% on as-reported basis and declined 10.5% on a comparable basis. NACO paid weeks declined 7% in Q4 '09 versus Q4 '08 on an as-reported basis and increased 1% on a comparable basis. This reflects a significant improvement versus the 11% decline we observed in Q3 and reflects the benefits of the mix shift toward Monthly Pass, largely, but not completely, driven by the BOGO promotion in Q3.
Q4 '09 NACO attendances declined by 18% on an as-reported basis versus Q4 '08 and declined by 10% on a comparable basis.
During the months of October and November, we have seen improving trends in both paid weeks and attendances in the NACO business, reflecting some improvements in enrolment trends as well as the benefit of continued mix shift toward Monthly Pass.
By the end of November, year-over-year NACO attendance trends have moderated to minus 7%, while paid weeks were up low single digits. However, December was a much more challenging month for NACO, as we began to lap the soft launch of the Momentum program in 2008.
Enrolment patterns during the last three weeks in December 2009 were considerably softer than the spike we’d observed in the comparable weeks in '08. As we’ll discuss later, it is clear that the Momentum launch continued to benefit our business more in the early parts of 2009 than we had earlier thought.
Similar to Q3 trends, NACO in-meeting product sales per attendance were up a solid 6% despite the pressures of the economy. However, as a result of lower attendance, total NACO in-meeting product sales fell by 2.5% in Q4 '09 versus Q4 '08 on a comparable basis and were down 13% on an as-reported basis.
Now on to the international business unit, overall, the international meetings business results showed continued improvement in trends in Q4, building on the improving volume trends we’d seen in Q3 and also benefiting from favorable year-over-year currency exchange rates.
While revenues were down 7% on as-reported basis, last year’s Q4 revenues were upwardly skewed by a VAT accrual reversal in the UK and the extra week in Q4 '08. Excluding these effects, international revenues were up a strong 10% in Q4, driven by more favorable currency exchange rates this year.
In the UK, Q4 2009 as-reported revenues were down 19% versus Q4 '08. However, on a constant currency and adjusted basis, UK revenues were up 10%. On an as-reported basis, UK paid weeks were up 1% and attendances declined 8%. However, after adjusting for the extra week in Q4 '08, UK paid weeks and attendances were up 10% and 1% respectively.
The relative softening of the UK results in Q4 versus the very strong trend we observed in Q3 reflects the impact of lapping the launch of the Discover program in this market in December of 2008. This pattern is very consistent with what we observed in NACO during similar weeks.
Product sales per attendance were up significantly in Q4 '09 on both an as-reported and constant currency basis. The UK licensing business also remained strong, despite the challenges of the economy and apparently unaffected by the intensifying competition in grocery trade.
Perhaps the most exciting news from the fourth quarter was in our Continental European Meetings business, where we saw significant improvement in the attendance trends, driven by the late November launch of the new Pro Points program.
On an as-reported basis, paid weeks and attendances were down 5% and 11% respectively. However, after adjusting for the extra week in Q4 '08, paid weeks were up 5% and attendances were down 3% as compared to the minus 11% trend we observed in Q3 of this year.
CE revenues were flat on an as-reported basis. On a constant currency basis and excluding the extra week in last year’s fourth quarter, revenues declined by only 2%.
In late November, Continental Europe soft launched a new program called Pro Points. For the first time since we launched points over ten years ago, we have completely revamped the points formula to reflect the cumulative advancements in nutritional science and understanding that have taken place over the past decade.
The Pro Points program also incorporates a host of other enhancements and changes designed to improve livability and a continued push toward healthier more satisfying food choices. The changes were wide-ranging and significant and they required a high degree of operational execution across literally every management function from training to marketing to supply chain.
The CE management team did an outstanding job launching the new program and were able to minimize the cost impact of the significant changeover. The enrolment trends we saw in CE in December were universally strong, even in countries where we’re experiencing the most difficult challenges.
Response from both members and service providers has been great. As we’ll discuss later, the positive consumer response of this new program launch has continued in CE during the first part of Q1 2010.
Moving on to WeightWatchers.com, results for WeightWatchers.com in Q4 largely mirrored the improving trends that we’ve observed in Q3. Q4 Internet revenues were up 10%, paid weeks for our Weight Watchers online program were 8% and end of period active subscribers were up 12%.
Growth in Q4 was driven by improvements in our U.S. business as well as continued robust growth internationally. Important milestones in the WeightWatchers.com business in the fourth quarter included a launch of the Pro Points version of our online subscription product in our CE countries, including Germany, France and the Netherlands. We also launched Weight Watchers online for the first time in Sweden during this period.
Now, I would like to turn the discussion over to Ann Sardini, who will elaborate further on our Q4 and full year performance.
Thank you, David, and good afternoon, everyone. First to recap, our fourth quarter 2009 results are summarized as follows on an as-reported basis before adjustments for comparability.
Consolidated company revenues of $311.3 million, decreased by 10%. Operating income of $50.2 million declined by 49.7%. Net income of $18.7 million was 60.7% below the 2008 level and EPS of $0.24 versus $0.62 last year.
As David noted throughout his remarks, our fourth quarter 2009 and 2008 results included a number of items that distorted the comparison between the quarters. In summary, these were as follows.
In the fourth quarter of 2009, we recorded a $36.7 million charge to cost of revenues associated with an adverse UK tax ruling which we received in February 2010 regarding the self-employment status of our leaders in the UK.
The $36.7 million accrual represents $25.2 million for assessments made for the year’s April 2001 through April 2007 and an additional $11.5 million in accordance with GAAP for years beginning April 2008 to the end of fiscal 2009, which have not yet been assessed. The amount accrued for 2009 alone, which would be similar in 2010, was $4.2 million.
There were also two items of magnitude that impacted our fourth quarter 2008 results which (inaudible) comparability. As you may recall, in 2008, we also received a negative UK tax ruling with respect to Value-Added Tax or VAT.
While this ruling caused us to reduce revenues in the second quarter of fiscal 2008 based on the then assessed amount, our assessments for period prior to 2008 were reduced later in the year, resulting in a fourth quarter 2008 benefit to revenues of $9.2 million.
Secondly, as we guided in our last earnings call, our fourth quarter 2008 benefited from an extra week. This year’s fourth quarter was a normal 13-week quarter, but because our fiscal year ends on the Saturday closest to December 31st rather than on that actual date, in some years, there will be 14 weeks in the fourth quarter, as was the case in 2008.
This year’s fourth quarter began on October 4th 2009 and ended on January 2nd 2010. For comparability in our fourth quarter operational review, we’re comparing to last year’s 13 weeks ended on January 3rd 2009. The extra week in the fourth quarter of 2008, which ran from September 28 through October 4th, and is excluded for purposes of comparability, increased revenues in Q4 '08 by approximately $21.3 million and operating income by approximately $7.8 million.
Q4 2009 revenues adjusted for the items above and also excluding $12 million of favorable impact from currency translation, decreased by 5.2% versus the reported decline of 10.1%.
Our net income, which was $18.7 million on an as-reported basis, 60.7% below the 2008 level, is actually up 16.7% in constant currency after adjustments. Earnings per share, which was $0.24 in Q4 '09 and $0.62 in Q4 '08 on an as-reported basis are also up year-over-year in constant currency as adjusted to $0.57 in Q4 2009, an increase of 16.6% over $0.48 in a year-ago quarter.
In the operations overview that follows, I will discuss our performance on a currency neutral basis and I will exclude the adjusted items discussed above. Our fully adjusted 2009 Q4 operating income was $87.2 million in the fourth quarter 2009, an increase of 1.9% as compared to the 2008 fourth quarter level.
Our operating income margin expanded versus prior year by 190 basis points to 28.2%. Cost savings initiatives and lower marketing spend were the drivers of the expansion.
Now, summarizing some of the operational trends. In the meeting business, paid weeks rose 3.5% globally in the quarter on a comparable prior year basis. Internationally, meeting paid weeks were up 7.9%, reflecting increasing Monthly Pass penetration in those markets. NACO meeting paid weeks rose 1.2%, mostly on the success of the BOGO promotion.
Lecture income revenues of $184.1 million in the fourth quarter were 6.6% behind the prior year quarter. While lecture income revenue was higher than prior year in the International Meeting business, the global rise in paid weeks did not translate to higher lecture income revenues globally, because of the BOGO promotion and NACO, which diluted lecture income by giving a free month to all Monthly Pass enrollees.
Global meetings fees per attendee increased by 1%, partially as a result of a 4.7% higher average fee per attendee internationally, driven by increasing acceptance of Monthly Pass. In NACO, meeting fees per attendee increased by 0.6%, despite the promotional pricing for our U.S. Monthly Pass product to BOGO. Attendance declined 6.4% globally with NACO attendance down 10.2%. International attendance fared better in the quarter virtually flat to prior, off 0.6%.
Fourth quarter global in-meeting product sales were $48.7 million, up 0.8% versus prior. On a per-attendee basis, global in-meeting product sales were up 5.8%, with NACO increasing 5.4% on the strength of new products introductions and promotions.
Internationally, product sales per attendee were strong as well, growing 4.2% on the strength of the UK’s 9.6% growth, which was partially offset by Continental Europe inventory depletion in advance of its November program innovation launch.
Moving to WeightWatchers.com, where strength across all major markets, especially internationally, drove fourth quarter revenues in this business up 6.4% over prior year. Paid weeks grew by 8.2% and the period active online subscribers also increased by 12.4% versus Q4 '08 to 763,000.
Now turning to a review of the performance of our other revenues, which include licensing, franchise commissions and revenues from our publications. Other revenues of $23.4 million declined 11.7% versus the prior year level.
Franchise commissions which totaled $2.6 million in the quarter, were down 21.8%, with U.S. franchise commissions down 21.7%, reflecting a deeper impact from the economy than NACO experienced.
Our licensing revenues of $16.4 million in the quarter declined 2.6% versus last year. NACO’s underlying growth, excluding the change in the Applebee’s and Yogurt relationships were 7.7%. International licensing was down slightly, minus 1.1% versus prior year, with the UK maintaining strong performance, which was offset by declines in Continental Europe.
Fourth quarter gross margin as adjusted was 53.6%, 160 basis points improved from last year’s fourth quarter adjusted level. This gross margin expansion reflects the positive impact of our operational cost saving initiatives and growth in our higher margin WeightWatchers.com business.
In addition, we took the opportunity in 2009 to rationalize the meeting base in some of our international countries, closing weaker meetings and building on stronger meetings for a better meeting experience for our members. This has resulted in better economics for our service providers and for us, with gross margins improving in the process.
Q4 marketing expenses were $36.9 million, a 13.2% decrease versus the prior year level, partially as a result of advertising rate efficiencies. In the U.S., national TV advertising rates reset in September each year.
In September of 2009, we were able to achieve lower media rates, down approximately 5% to 6%, which reduced our fourth quarter marketing expense, and which will continue to have an impact into 2010. Marketing as a percent of revenues was 11.9% this year as compared to 12.1% last year.
Q4 G&A expenses were $43.2 million, including $0.4 million of restructuring charges, a 5.5% decrease from the prior year level as a result of cost saving efforts undertaken throughout 2009. As a percentage of revenue, G&A was 13.7% in the fourth quarter 2009, excluding restructuring charges versus 13% in fourth quarter 2008.
As noted on prior calls, 100% of our China joint venture is consolidated into our operating income and our partner Groupe DANONE 49% share of the operating loss is reflected as non-controlling interest in the line item before net income. The operating loss of the venture was $2.9 million in the quarter, mainly a combination of G&A and marketing, as compared to $2.8 million in the fourth quarter last year.
In summary, our fully adjusted consolidated operating income margin was 28% in the 2009 quarter as compared to 26.9% in the prior year. The 110 basis point increase in OI margin was the result of higher gross margins and lower marketing as a percentage of revenue.
Interest expense in the fourth quarter 2009 was $16.3 million, down $8.1 million or 33% from the Q4 2008 level, from a combination of lower interest rates and lower debt outstanding. We paid down $194.5 million of debt during fiscal 2009. Our average effective interest rate declined 158 basis points to 4.29% from 5.87% in fourth quarter of last year.
And in terms of cash flow, we generated $348.2 million of cash from operations in 2009 before interest payment. After capital expenditures of $23.4 million, we had $324.8 million of free cash available to service our capital structure.
We made interest payments of $82.7 million, paid our quarterly dividend, totaling $54.1 million for the year and reduced our debt by $194.5 million. We ended the year with $1.453 billion of debt as compared to $1.648 billion at the end of fiscal 2008.
I’ll now turn it back to David.
Thank you, Ann. As we enter into 2010, we expect to face another challenging year, particularly, in our U.S. Meetings business. While there are some indications that the economy may be beginning to improve in certain sectors, frankly, we have not felt it in our U.S. market.
On the plus side, it seems that the near panic that gripped the consumer during the first part of 2009 has subsided into dull acceptance. However, the fact remains that unemployment is still at recent historic levels, investment retirement portfolios are still depressed and there’s little evidence of a meaningful recovery in home values. Reflecting all this, consumer confidence is at historic lows and as a result we expect the U.S. consumer to remain cautious throughout much of 2010.
I will now review our early 2010 results, growth strategy and full year volume forecast for each of our major business units. NACO; NACO has seen the most difficult set of circumstances of any of our major markets and business lines during the first six weeks of this year.
Our business here has been significantly affected by three major factors. One, the continued drag of the consumer economy, as just noted. Two, we are comping the launch of Momentum program last year.
As we continue to analyze the trends of 2009 and 2010, it is increasingly clear that while the Momentum program was not able to overcome the effects of economy in Q1 '09, it did bring meaningful benefits to our enrolment trends and propensity to attend trends in our Monthly Pass installed base during Q1 '09. In comparison, NACO does not have the benefit of a new program innovation in Q1 of this year.
Three, weather. While winter storms create problems for our Meeting business every year, the series of storms we have seen this year in many of our major U.S. metro markets has been unprecedented during my tenure at Weight Watchers and will significantly dampen our first quarter results.
By way of example, not including today, weather closures in NACO, were up 68% in the first six weeks of this year versus the same period last year. Notwithstanding the difficult near-term volume conditions in our NACO business, we recognize that we have a fundamental challenge of attracting members through our doors, particularly never members.
We’re confident the plans and initiatives that we have in motion will enable us to redefine and reinvent our service business and thereby to fully reverse our enrolment trend and to put our NACO business back on a positive long-term growth trajectory.
Obesity continues to be one of the most vexing health issues facing the U.S. and broader industrialized world. In this country alone, nearly 150 million American adults are overweight or obese and obesity accounts for nearly 10% of the total healthcare budget. By all accounts, its impact on healthcare costs will get worse not better, unless fundamental changes are made by each individual dealing with the weight issue.
We firmly advocate the fundamental belief that there is no way to systematically address obesity without individual lifestyle change. There is no way to systematically address lifestyle change without the critical tool of intensive behavioral therapy.
To provide behavior change, the only logical model is one that is clinically effective, sustainable, cost-effective and scalable. The community-based model, such as Weight Watchers is the only model that can reliably address each of these four criteria.
While we have great optimism about the role that the emerging technologies can contribute to the behavior change tool kit, we do not believe that the need for face to face interaction delivered in a group model can be replaced. Therefore, it is our fundamental opportunity and obligation to present a version of group support that addresses today’s consumers' expectations.
For our current members the satisfaction with Weight Watchers is as high as ever. However, it is clear that the Weight Watchers meeting has not kept pace with consumers' expectations of it; it is convenience, modernity and other barriers to participation. It is also clear to us that all the barriers to participation that do exist, can and will be shed.
In short, we have the opportunity and mandate to reinvent the Weight Watchers service experience in a profound and fundamental way. We began down this path in 2008 and we have made considerable strives in the past two years.
2010 will be a critical year for NACO, as we now begin to put in place and operationalize the key elements of this reinvention process. While it will be 2011 before we begin seeing the benefits of these changes, let me be clear in stating that our objective is nothing short of building a new Weight Watchers Meetings business that will return NACO back to a long-term secular growth trend and position Weight Watchers to more effectively contribute to stemming the obesity epidemic impacting our society.
While not all conclusive, some of the current initiatives which will become more visible as we progress through this year include, one, improving our retail presence to increase visibility, modernity and convenience of the brand.
Real estate. We expect to renegotiate or move half of our 825 fixed location center network by the end of 2010. During 2009, we completed an exhaustive statistical analysis of our real estate footprint and have found numerous areas for improvement. Far too many of our locations lack visibility, convenience or frankly, are in undesirable locations.
And we have the opportunity, particularly, in the current commercial real estate market, to upgrade many of these locations without materially altering our economic model. We hired an experienced real estate executive to the NACO team and recently signed a national contract with Cassidy Turley as our U.S. broker.
Center design; we are finalizing the design of our pilot centers to improve branding, weighing confidentiality and front of store retail appeal. We’ll be ready to begin rolling out these new designs by the summer of this year.
Open hours; toward the end of 2009, we began to expand the hours of most of our centers and will continue increasing open hours as we improve locations and retail brand appeal. The value of increasing hours will be improving our ability to convert foot traffic into enrolment and to significantly increase convenience for our members.
Two, as I noted above, it is impossible to offer a holistic behavior modification solution without the benefit of physical interaction, which clearly requires a physical place. The changes above will create a new and exciting physical place that can serve as the community nexus that holds a widening range of service offerings and innovation.
We are now actively working on developing new concepts and pilots to test new obesity service approaches that will allow us both to extend our offering to existing members, as well as increase the range of segments we serve.
While I’m not yet prepared to discuss the specifics of these new initiatives, rest assured that we are actively working to fill the service innovation pipeline.
Three, one innovation that I can reference more specifically is the new program that we’ll be launching in NACO in late Q4. That will improve upon the points program launched in CE and that will be one of the most significant program launches in over 12 years for the NACO market.
We fundamentally believe in the points approach and its ability both to educate and to provide a clinically demonstrated behavioral tool that is critical for lifestyle change. We built a considerable equity in points and we will look to build upon it as we finalize our new program.
We have a major opportunity to fully revamp the successful framework with a major and comprehensive evolution that will result in a new state-of-the-art points program. We’ll have more to discuss about this as the year progresses.
Four, while variables such as weather and lapping last year’s program have impacted our Q1 volume results in NACO, we also believe that our popular hungry marketing campaign as now run its course.
Accordingly, our marketing team is writing plans to launch an exciting new advertising campaign concurrent with the upcoming Spring Valley season. This, along with other marketing initiatives, should enhance our ability to drive near-term enrolment improvements as we move further into this year.
I’m confident that the cumulative and combined effect of all of these initiatives will have the same kind of transformative effect on our meetings experience that points had on the ease of use of our program.
Since many of these initiatives will not be implemented until later this year and beyond, we are conservatively forecasting a year of tough conditions for NACO, with a view toward recovery in 2011. Therefore, for 2010, we’re forecasting mid double-digit attendance decline for Q1, moderating to low double-digit decline for the full year.
International; we expect the near-term performance of our International Business to be a tale of two very different sets of circumstances. Starting with the UK, we have seen a challenging start to 2010 as a result of, one, like the U.S., the UK faces tough economic conditions and does not have the benefit this year of a new program to bolster enrolments and attendance patterns.
Two, weather. Winter weather was particularly unkind to the UK, where we experienced unprecedented snow during the first two weeks of January. Over the course of the first two weeks of January, we had to close over 20% of our meetings. And due to difficult conditions, we estimate that we lost almost half of our normal enrolments.
More than any other market around the world, the UK heavily depends on enrolments during the first two weeks of January. And while enrollments have significantly improved since those first two weeks, it will take some time for us to recover that lost attendance and enrolment base.
Therefore, we expect UK volume trends to improve as we proceed throughout the year, but are anticipating a tough Q1. Accordingly, we are forecasting low single-digit declines in attendances and paid weeks for the full year.
The UK will continue to focus on the high quality marketing and service execution that served it well throughout 2009, as it simultaneously works on several key initiatives that should bring much stronger growth in 2011. Like NACO, the UK is readying for the launch of its new program in late 2010 with similarly high expectations.
Continental Europe; results during the first six weeks in 2010, were much stronger than what we’ve seen in our English speaking markets. While we have also seen the negative impact of weather, most notably, in Benelux and Germany, and the economies continue to be weak across most of CE, these drags have been more than compensated by the vibrant trends we have seen resulting from the continued strength of the Pro Points launch.
Many of our CE countries are experiencing stronger volume trends than they have seen in the past five years. Accordingly, our CE managers will continue to focus heavily on maximizing the gains from this new program throughout the year, while also continuing to pursue their long-term, more fundamental innovations to the core service offering.
While we are excited about the early response we’re seeing to the Pro Points program, we are still early on in the launch and have not yet built the above plan enrolment trends into our forecast. Therefore, for the full year we are forecasting attendance and paid weeks growth of low single-digits and mid single-digits respectively, although we believe there could be upside in these forecasts.
It is important to note that this growth will come despite a 4% meetings base consolidation. It is also important to note that this trend compares to a minus 10% trend in 2009, reflecting a significant shift in momentum.
WeightWatchers.com; we fundamentally believe in the role that technology can and will play in the weight management behavior change process. We were pioneers on the Internet back in 2000 and we continue to drive an aggressive technology agenda ten years later. In 2009, we fully embraced social networking with a complete revamp of our online community tools, including blogs, self-formed communities, challenges and other innovations.
In 2009, we launched our most ambitious mobile platform to-date with the iPhone launch in September of last year. Our view of this application was not to create sizzle for marketing, but to create stake albeit a healthy cut for our online subscribers and Monthly Pass members.
We set out with the intention of creating a completely new and complementary way of helping people stay on plan by letting them keep the points plan in their pocket.
As of the end of January, we had over 0.5 million downloads of the application. The iPhone application now accounts for over 13% of our total points tracker transaction volume. It has quickly become the program weapon of choice for hundreds of thousands of members.
These innovations are a benefit both to our WeightWatchers.com online subscribers as well as our meeting members who use Monthly Pass. The WeightWatchers.com team will be continuing its heavy product development phase with continued efforts in mobile technology and social networking.
Further, it plans to continue its aggressive international push with Weight Watchers online launches in several new countries this year. We expect another strong year for WeightWatchers.com in 2010, benefiting from continued growth in the international portion of the business, as well as continued solid performance in the U.S. We’re forecasting Weight Watchers online paid week growth for 2010 similar to the 10% we delivered in '09.
Finally, China, we continued to make good progress in developing our China model through 2009. We now have three fully viable centers, two in Shanghai and one in Nanjing. We expect to begin more aggressively pushing out the operating template in 2010, with expectations for more meaningful growth beginning in 2011.
Considering the current trends we’re seeing in our NACO meetings business, it is clear that 2010 will be a challenging year for Weight Watchers from a financial perspective, but a productive year as we build out the elements of our longer-term growth platform.
We are very bullish on our prospects for 2011, as we see multiple elements coming together. One, the new programs; two, a revamped service model, and three, hopefully an improving economy. Therefore, the key challenge for 2010 will be to ensure that the initiatives necessary for the 2011 return to growth are executed in a superior manner.
With this in mind, while we will continue to focus aggressively on cost management and promotional effectiveness in 2010, we’re making a conscious decision not to reduce our infrastructure in a way that inhibits growth in 2011. To this end, we are providing a fairly conservative financial forecast for 2010.
Consistent with the aforementioned volume forecast in each of our business units, we’re forecasting global paid weeks and attendances for our Meetings business to decline by low single-digits and high single-digits respectively. Accordingly, we are forecasting single-digit revenue declines and single-digit OI declines.
While we are anticipating volume declines, we should be able to significantly moderate gross margin impact, as we also rationalize our meetings base to focus our energies on our stronger locations and time slots.
We expect 2010 EPS to be negatively impacted by the operating income declines, and we’re forecasting a 5% increase in our aggregate interest expense, as we expect to seek at some point this year to extend the maturities on some portion of our debt. With all of this in mind, we’re forecasting full year EPS of $2.25 to $2.50.
At this time, Operator, we would like to take questions.
Thank you. (Operator instructions). We have a question from Jerry Herman with Stifel Nicolaus. Please go ahead.
Jerry Herman - Stifel Nicolaus
Thanks, hi, guys.
Jerry Herman - Stifel Nicolaus
David, I’m wondering if you can help us with the competitive landscape in addition to the economic impact. I’m wondering what you’re seeing there. It appears that we’re seeing a little bit more of your competition talking about the use of coaches and consultants. And I’m wondering if anyway that might be cannibalizing your methodology in anyway?
We’re certainly not unfamiliar to the pattern of our competitors and to draft off of our proven methodology and the strength of our brand. They’ve been doing it for years. And we think that, of course, a testament to the strength of our model. I think that if I look at the competitive landscape, in general, I guess my comment would be that it felt to me somewhat anecdotally, because all the data hasn’t come in, that there certainly seem to be quite a bit of volume in terms of noise from the overall weight management category. And that’s not just the commercial competitors we’re all familiar with, but just a wide range of things, from cookie diets to cleanses and all sorts of other good stuff or in this case probably not so good stuff in terms of cannibal weight loss.
And so, I think our feeling is that with all this increase in noise, our expectation is that over time that’s going to continue to be the case, if not amplified. I think it’s one of the reasons why we’re feeling that with all the gains and improvements and enhancements we’ve made in terms of the quality of our marketing programs, we think that we have an opportunity to once again up the volume, in terms of the impact that our marketing programs have. And it is important to note that that includes on one hand, traditional brand building advertising. But, I think it also has a lot to do with the fact that we have a huge asset in the millions of people who have had fantastic success with Weight Watchers.
And I think that the opportunity for us is to harness that, both in our traditional marketing communications, but I think, most significantly, to find a way to couple that even more effectively in PR, to make a very clear point that while all these competitors are out there claiming to be like us and claiming to have elements that resemble us. There is only one Weight Watchers, and there is only one Company out there that has our model and the opportunity for us is to drive that message home.
Jerry Herman - Stifel Nicolaus
Question about the actual centers and the lectures in fact. Could you quantify what the CapEx impact is going to be the center revamp as well as what sort of expenses might flow through there? And also related to the UK ruling on the contractors versus employees, has there been any noise in the U.S. with regard to a similar treatment?
Let me take the last question first, which is the U.S. is not a self-employed model. And so the U.S. does not face the same kind of threat of a tax authority going after us that was the case in the UK, so it’s a completely different labor model. In the U.S., the people that work at Weight Watchers are employees, primarily part-time, they are not considered contractors.
In terms of your first question, in terms of the centers, it’s a great question and let me try to help dimensionalize it a little bit. When we talk about revamping the centers, first off, you heard me talk about real estate, and as you heard me say, we have an opportunity, particularly, in this environment to lock in leases, in which we’re able to either negotiate better rates in locations that we like or to upgrade locations in probably a way that’s fairly cost-effective, particularly, if you consider the improvements in visibility and branding and marketing benefit, everything else that we get. And so that’s why earlier in our remarks, from a real estate perspective, we don’t anticipate in having any kind of material effect on our economic structure.
In terms of open hours, yes, our plan is to be open longer, but what we’re finding so far is we’ve been gradually increasing hours, is that we have an opportunity to do things like increased product sales and potentially over time increase enrolments in a way that makes it fairly easy to cover the incremental labor expense. Again, we don’t see a long-term impact on our economic structure.
If you look at the centers themselves, think of it this way. First-off, on one hand, we have a lot, which is 825. On the other hand, they are small. The average size of a center in NACO is 1,600 square feet. We’re not talking about 10,000 square foot boxes or 25,000 square foot boxes. So 1,600 square feet does not require an enormous amount of money to do a complete upgrade and fit out to.
Historically, our fit outs for a typical center might be anywhere, say, call it $20,000 a pop to $25,000 a pop. And if you look at the new approach to the new design we’re taking and we are still looking to sort of finalize and achieve scale economy and everything else, we believe that we can bring these centers in, at say, closer to $50,000. So call it an incremental $25,000 per center to $30,000 per center.
One of the reasons we’re able to do it at a relatively low price point per center, if you will, is because we’re doing it effectively in accelerated pattern. So, historically, when we would upgrade our centers in NACO, we would do it over a nine-year period. But in this case, we are doing it over a three-year period, which allows us to accelerate and get scale on purchasing kits and that’s the approaches many use value engineering to get a beautiful looking centers at very effective rates.
Furthermore, as we do the real estate strategy, we’re looking to go from three years to five years on our leases, which also allows us to extend out depreciation. And so, if you look at kind of all the puts and takes, structural economics effectively remains basically unchanged. If you take that, coupled with the fact that we’re no longer going to be having to invest at the same level of capital in IT systems, now that most of our Oracle work and our ERP work is behind us, that also has the benefit of helping to somewhat ameliorate the impact of CapEx.
And so one of the reasons that is exciting is that if I look at kind of the net effect of this effort, it’s incredibly substantial, I believe, based on what I continue to see from the pilot centers we’re running, improvement in terms of the experience, look and feel. But we’re going to be able to do it in a way that is not going to have any sort of material effect on the structural economics of the business.
Jerry Herman - Stifel Nicolaus
And then just one last one for Ann, before I turn it over. And relating to David’s comment about interest burden for the full year, maybe just a clarification there, I know in your annual report last year you gave a very good sensitivity analysis, I’m wondering if we can talk either about a sensitivity analysis or specifically the 5% comment?
The interest expense that we’re expecting for 2010 is about $70 million on the year. Part of that is because we’re anticipating that we’re probably going to do an extension to smooth out some of our payments on our debt. So that’s what you should expect to see, with about $19 million in the first quarter, just to clarify that for you.
Jerry Herman - Stifel Nicolaus
Great, thanks very much, guys. I will turn it over.
Thank you. Our next question is from Chris Ferrara with Banc of America Merrill Lynch. Please go ahead.
Chris Ferrara – Banc of America Merrill Lynch
Hey, thanks. David, I was wondering, you’re talking a lot about things like changing locations of centers and more open hours and things like that. I guess I’m trying to understand, as you see it, the weakness in attendance, particularly, in North America, how much of that hinges on the need to have the Weight Watchers name, out there more, versus just needing to shake up dieting, like pointed it back in 1999? How do you balance those two? Because it sounds like a lot of the dialog is around some of these shorter-term fixes and I just want to get a sense from you like how big a deal you think those shorter-term or – sorry, more marketing type pitches are relative to just the need to get something new out there?
Yes, I guess, Chris, I would say that I partially agree with you, because I agree with the point that you are making, which is substantially upgrading our retail infrastructure, does have a marketing benefit. Having more visible locations and having sort of more obvious external branding appeal is a very useful thing to have from a marketing point of view just in terms of increasing overall brand impression and kind of points of contact. What I would characterize differently is that I actually believe that if you look at the net effect of sort of what is going to feel like to go to a Weight Watchers center when we’re done with the process versus what it feels like right now, it represents a fairly substantial shift in consumer perception.
And again, I go back to the barriers to participation. When people tell us that they’re concerned or they say, I know Weight Watchers, I trust it, I’ve friends who have lost weight, I’m just not sure if its what I want to do right now, a lot of what they’re telling us is that there’s some of these continuing misperceptions about sort of how modern the brand is. And part of that is exacerbated when they show up or see or hear about a center that it would look like it was sort of decorated circa 1985 and it’s behind a strip mall you’ve never been to or sometimes even in an industrial park.
I will share with you an interesting insight, is that, when we have things like open hours, what we find is that people are able to sort of, if they miss the meeting, they simply show up and have a weigh-in and they can talk to somebody briefly. If you look at that, it fundamentally creates kind of a different feel for the Weight Watchers experience. It creates a completely different level of flexibility, in a way that people as they’re going through their chaotic lives, have sort of a new outlet and a new way of participating and staying with the program and it really goes a long way in terms of opening up what it means to participate in Weight Watchers.
I think even more, if you look at what you get once you have kind of this new retail infrastructure, it’s one of the reasons I referenced, I was being a little bit vague about some of the things that will be coming behind us, but it creates a new holding container that allows us to start doing much more aggressive service innovations in terms of the ways that we deliver the behavior modification we do in our meeting centers and our locations.
If I then take that, and I take what is going to be a very substantial upgrade and shake up of the current program, if you will, while building on sort of all the things that make it great, I look at the kind of the cumulative effect, even the Weight Watchers of 2011, even more so the Weight Watchers of 2012 and beyond, it is going to feel very different. And that’s why we believe that if you look at the cumulative effect of all these things, we believe it’s going to have the kind of transformative effect that you’re referencing when you talk about the way that points first shook up dieting back when it was launched in the late 90s.
Chris Ferrara – Banc of America Merrill Lynch
Thanks. And I guess where do you derive that confidence from? I guess I mean some of the companies I’m accustomed to are more like CPG companies, right, where you have a scientist in a white coat trying to come up with a new molecule that cleans you shirt better, something like that.
And there is an inherent difference in how you guys innovate, I guess, and I’m curious for your thoughts on that, because at this point your NACO attendance is the lowest it’s been since prior to the Vaco [ph] deal, right in 2000; it’s 20% below peak, but you sound pretty confident that you think that this new program is going to really turn things around. So I guess I want to get a sense for how far through the development process is this and why is it different than the last few innovations that we have seen?
There’s a couple different things in there. First off, you asked why am I confident If you ask me why I’m confident of this overall program, the first thing I’d say is it’s very different than a CPG, which is an industry I’m familiar with based on my own past experience, where you have the product and then you have the way that you market it and the lab coats and everything else.
What you’ll tend to see in service businesses, particularly, if you look at things like retail, that if you follow the retail trade and then you have a retailer saying that they’re doing a complete and total revamp of their store network, the expectation of the analyst following that retailer would be to expect a significant shift in volume trajectory. It’s sort of standard fare.
And so, I would suggest you is that some of these things that we’re talking about, I think it’s easy to underestimate the kind of impact they have in terms of consumer impression. And I think it’s important to understand also. I mean, if I look at the sheer quantity of market research that we’ve done, we know why people like us and we know the barriers to participation and we know that the things that we’re doing are going to be addressing those barriers to participation. And so, therefore from my perspective it’s simple math.
And so, from that point of view, if you look at service industries, because, I mean, sometimes there is sort of speculation that somehow the need for kind of going to a place going away. I don’t believe it. I don’t believe it. First off, because I know from clinical research it simply doesn’t work in behavioral therapy for most people if they don’t have the benefit of a face-to-face interaction.
There were people a number years ago who said universities were going to be going away because of online education that bank centers or bank locations were going to be going away because of ATMs, none of that really happened. The consumer finds new equilibrium; they begin to recognize what they get from face-to-face and then you eventually get people recognizing that. I really believe that providing the modern version of the Weight Watchers meeting and service experience and all the innovations that come with that is substantial.
I also believe that when you couple that, not one in isolation, but when you couple that with a significant program innovation and this is a more significant program innovation, knowing what I know I know about it, the ones we’ve launched in the past, I have absolutely no doubt that as we start putting these things into place that they’re have the kind of impact on the business that we think that they’re going to have.
Chris Ferrara – Banc of America Merrill Lynch
Thanks, I appreciate you taking the time.
Thank you. Our next question is from Greg Badishkanian with Citigroup. Please go ahead.
Alvin Concepcion – Citigroup
Hi, this is actually Alvin Concepcion in for Greg. Just a question, you mentioned weather impacted NACO so far in the first quarter. Historically, when weather has been an issue, is there pent-up demand such that customers just start to dilate or extend it out or do you just sort of lose those sales?
I think the sad reality is a couple of them come back; actually, what I would say is it depends when. So, for example, in the UK, impulse purchases matter. And impulse purchases in any category matter and if you lose an impulse purchase, very definition that impulse is gone and therefore that opportunity is lost.
Our biggest period for impulse purchasing is obviously in the winter. In the case of the UK, if you look at the first two weeks of January, it really was sort of cruel fate that we got hit when we did, because if I’m just being honest, a lot of those customers probably won’t be coming back to us for some period of time. They went off and did whatever other things they were going to do. And we’re going to just have to catch them next time around.
And the thing about weather is I tried to make a promise myself when I first assumed this role over three years ago that I wasn’t going to talk about it, because some weeks you have good weather, some weeks you have bad weather and it seem like ridiculous thing to keep going on about, but I can’t ignore the fact that the weather we’ve been seeing this year has been absolutely ridiculous.
And I have absolutely no doubt that if you look at the trends that we’re seeing in NACO in Q1, weather plays a significant role on it, if you look at the impact of weather had in the UK, in January, it was very real. And over time, I believe that we’re going to have an opportunity to bring those customers back in, but unfortunately particularly, with respect to Q1, at this point it is what it is.
Alvin Concepcion – Citigroup
Okay. And then I was just wondering if you could provide a little bit more color on your centers in China? I know it’s early. What’s the response been like there and what are some of your learnings so far?
Here’s the thing in China, which is that if you’re going to do business in China, you have to recognize that you’re going to have to try 20 different things and most of them aren’t going to work but a few are. And you have to have a high appetite for experimentation, because there are enough differences in the culture and the way the consumer operates, and the infrastructure and the environment, everything else, that you can’t just take a template that you have in a Western country and pass it to China and think it’s going to work.
And so, what the team has been doing in China throughout 2009 is trying sort of different retail operating models. The fact that they now have three fully functioning centers that are operating at a pretty high level of performance, particularly, sort of early versions, we find to be incredibly encouraging.
What I find to be most encouraging is that we now have meetings in China with over 40 people per meeting attending. And that’s the kind of meeting average that we would typically see in a mature market. When I see that, I see a real Weight Watchers meeting happening. And when I see that, I see the beginning of templates that can start to get rolled out. We don’t know everything we need to know in continuing to build out the business in China, but we’re starting to move up the learning curve and we’re going to continue to push hard on that in 2010.
Alvin Concepcion – Citigroup
And lastly, do you see an opportunity to create a product to address increasing childhood obesity and if so, what’s that opportunity like for you?
We’re incredibly attuned to the fact that childhood obesity is getting the attention that it deserves. The First Lady has chosen this to be her signature issue and she’s got a lot of support from the White House. Weight Watchers is a big believer in the fact that it can find a way to contribute to childhood obesity on a number of different dimensions and let me just leave it at that.
Alvin Concepcion – Citigroup
Okay, thank you.
Thank you. Our next question is from Ken Goldman with JPMorgan. Please go ahead.
Ken Goldman – JPMorgan
Hi, good afternoon, everyone.
Ken Goldman – JPMorgan
Question on how you balance I think what is a very smart strategy of getting people back into the meeting rooms, that’s your unique advantage, right? With the tendency of individuals in the United States right now to not want to go to meetings and to really do more of their work so to speak on the iPhone, at home on the Internet. That’s a tough balance, because I think there’s the opportunity on the Internet for you to gain some market share and to make some money, correct me if I’m wrong, by your own admission, that’s not quite as effective as having them go to the meetings all the time. I know they’re complementary, so it’s not either/or but I’m just curious how you think about that in terms of your marketing and how you want to work with the consumer in those different formats going forward?
What we’ve seen is that, over and over again, is that the kind of person that’s gravitating toward online does tend to be somewhat different and have a somewhat different set of needs than the kind of people that are gravitating toward our meeting. And so we have always believed that Weight Watchers online was a primarily incremental product in terms of the consumers that it was bringing in, based on everything we observed. A little bit less weight to lose, looking for a little bit less intensive form of behavior modification, kind of wired in a different way.
What I find interesting, I was just in a meeting out in Connecticut, a couple of weeks ago, and there was a guy, which I’m always glad to see, there was a guy who was having great success going to the meeting, and he had gone last year as well with maybe not quite as much success, but he is going gangbusters this year, and the leader asked him, what’s working for you this year? He said, well, I’m tracking for the first time. She said, well, what were you doing last year? He said I wasn’t tracking; I was sort of vaguely following the program. And she said, well what changed? He said the IPhone. He said it made it really easy to do it. It’s right in my pocket. There’s always a reason to track.
But he’s the same guy who was also saying that he couldn’t do it without the benefit of the weigh-in and the support of the group and everything you learn from the group. And so for him, didn’t want to have to choose; he wanted it all. He wanted all the tools and all the resources.
And so what we find is that our most efficacious product is actually both. When I see social networking, I don’t see it as a replacement to meetings; I see it as a complement to meetings. When I see tools like the iPhone and the Internet, I don’t see it as a replacement to meetings, but I see it as a complement to meetings. And I continue to believe that it’s going to be forever. The gold standard is going to be a behavior therapy methodology that relies both on the benefit of face-to-face interaction, accountability and support that goes with it, along with the convenience and connectivity that you get from technology.
And what I love of what we have at Weight Watchers in terms of our assets is we don’t have to arbitrarily choose. We can let the Internet business grow to some tastes, and we can continue to support its growth in an aggressive way. And at the same time we’ll also invest heavily in our face-to-face service, because we fundamentally believe in it as a behavior therapy methodology. And so, our view is that the right strategy is to push both and where possible find ways to connect the two.
Ken Goldman – JPMorgan
Okay, that’s helpful. And then, looking back about nine months ago, I think one of the feelings, rightly or wrongly out there was maybe '09, it’s fair to give Weight Watchers a pass, they had a real marketing campaign that was designed for non-recessionary times and perhaps they got blind sided by what was happening to the consumer. But I’m a little bit surprised, I guess, that guidance is so low for next year. And I would have thought that 2010 at least would have been close to flat, given that you had almost a year to prepare for recessionary times.
So, is it wrong for me to think that, hey, why does this have to be a last year? Why could you not design marketing programs a little bit more in line for where the consumer is right now, so that you can get some volume back; and then maybe in 2011, when your centers are ready to roll, you can really drive more attendance by plugging a lot more money into marketing. I wouldn’t expect you to market a lot more this year, given that your centers aren’t ready, but am I wrong to think about, hey, why does 2010 have to be such a disappointing year perhaps?
Okay, just a couple of things. If you look at the beginning of 2010, again, it is a fundamental reality, is that we are comping against a new program last year which we don’t have this year. And so, there’s no doubt that that’s impacting results, particularly, in the important first quarter, which has knock on effects throughout the year. And as we noted, we do expect things to moderate over the course of the year.
If I look at the marketing and the advertising we’re doing, it’s not like I believe that there is a variant of it that is so perfect for a recession that I believe it would have resulted in a fundamentally different outcome. I think that thought it’s fair that on some level that there is a version of our marketing and an evolution of our marketing program that will allow us to do a better job in terms of driving near-term results and we’re working hard to push against that, so that we can start sort of clawing back a little bit of the hit that we took in Q1.
But nonetheless, I think that the reality is that I think some of the things that we’re fundamentally doing with particularly the economy, which hasn’t gotten any better, and the things that we believe that are necessary to completely sort of change around people perception of the meeting experience, we’re just not going to have the benefit of it being in place.
And so, we are incredibly confident and positive that the strategy that we’re talking about right now, which is a strategy that we started talking about last year that these types of things will have the kind of impact on the results that we think that they’re going to have.
But in truth, I will admit to, in the first quarter, being a little bit surprised by the magnitude of some of the hits that we saw, and with the benefit of hindsight, of course, we are scrambling to sort of think through or the different ways that we could have and should have marketed and that we can potentially apply throughout the course of this year, but I believe that a lot of this is for us continuing to sort of ride out what is obviously a difficult environment; but to do it in a way that we’re going to do the things that are going to lead not to sort of an aspiration of flattening out, but rather an aspiration of significant and sustained growth going forward.
Ken Goldman – JPMorgan
Okay, thanks very much. And thanks as always for the detail, both backward looking and forward looking, it’s very helpful in understanding the Company.
Thank you. The next question is from Michael Binetti with UBS. Please go ahead.
Michael Binetti – UBS
Hey, thanks, guys. Ann, maybe could you help us dimensionalize the impact on the gross margin in the quarter from maybe some of the different push and pull in there? Maybe look at the mix shift, the higher margin businesses versus the BOGO, maybe versus the closure of some of the weaker meetings that you guys talked about?
Going into 2010 specifically?
Michael Binetti – UBS
In the fourth quarter I guess and then maybe in 2010, how you see it as well?
Let me start a little bit with the 2010, because I think everybody’s going to need that for their modeling and then we’ll kind of backtrack a little on the fourth quarter. David talked through the volume and revenue guidance, which I will just remind everybody of. We’re talking about negative single digit revenue change; we’re talking about paid weeks being negative low single digit and attendance being negative high single digit.
And when that attendance, particularly, piece happen, you’re going to see some compression in the gross margin. The attendances per meeting will be a little bit lower. And to your point, the change in the geographic mix, with NACO not doing as well, more towards the international, which has somewhat lower margins. So we’ll see some growth margin compression. We’re not talking about significant, but maybe 100 basis points, something like in that neighborhood of compression there.
In terms of the G&A and the marketing, with the negative revenue, you’re probably going to see some increase there in terms of percentage of revenues for G&A and marketing combined. On the cost side, we’re continue to be prudent managing our costs, focus on reducing where we can, but we’re not anticipating another major restructuring similar to what we had in 2009. We’re going to continue to invest in our marketing and will see some slight increase there, given the innovation and the dot.com marketing success, we’ll see something there.
Just to finish up in terms of the interest expense, I think I answered Jerry; we’re looking at about $70 million right now on a full year basis for interest expense. We may end up refining that because as you probably recall, we put an amendment in place to our debt covenants in June of last year that allows us to extend some of our maturities on some of our tranches and we’ll probably do that at some point this year, which may affect what the interest expense is within 2009. So that’s kind of the picture for 2010
In terms of 2009, the fourth quarter, you did have an impact from the BOGO, but, generally speaking, between the cost initiatives that we put in place throughout the year, the meeting compression a little bit in the international that pushed up the gross margin and the dot.com performing well and it having a higher gross margin, that’s what you are seeing in terms of the dynamics of the gross margin.
I think one other point I might add in, and this goes back to the earlier question in terms of sort of even the gross margin compression and some of the things that Ann talked about, is that, our belief is fundamentally that notwithstanding the current challenges that we’re dealing with in 2009 now going into 2010 that we do not believe that meetings are necessarily in a point of cycle of decline, but meetings are in need of being revamped and it is going to put them into a point of ongoing growth.
And so, with that in mind, we made the very conscious decision, as we said before, to basically hold on to our infrastructure where appropriate. Now, in appropriate places, we can look to do some meeting consolidation purely as a function of sort of coalescing our membership base around stronger locations and time slots.
But I think that we’re making again the conscious decision not to shrink our meeting infrastructure significantly, because although we recognize that there’s a near-term margin hit in some of the compression that Ann’s referencing, that it would be the wrong thing to do in preparation for what we see is a pick-up in growth as we go back into 2011.
Michael Binetti – UBS
Okay. And then if I can just follow-up with one quick final question there. I know you walked through a couple numbers before and I think I missed the actual number, but I’m focusing a little bit on the location changes that you guys are making. And I’d really like to know if there is any kind of financial metrics you can give us related to the investment, the investment of the new locations for one, but secondly, maybe the lift that you’re seeing on average as you move to these new locations; lift in attendance, lift in revenues. And what kind of hurdle rates of return on the investment you’re using to justify the decision, so we can think about that versus your corporate rate where that may trend as we work through our models and long-term forecast?
Okay, for whatever it’s worth, you might find the transcript helpful, because I ran through a bunch of the metrics on the first question. But to sort of recap that, real estate, again, we believe that the new locations themselves are going to be effectively economics neutral and that we believe that we’re going to be able to significantly upgrade many locations with no change in rent, because the environment in which we signed the lease three years ago versus the environment today, that we have a number of locations where we’re going to be able to get lower cost leases.
And so those locations where we actually decide to pay up, those are going to offset those, and in some cases, where we pay up where there would also be an expectation in terms of increased foot traffic resulting in higher enrolment levels and everything else. And so, we’re going to be sort of carefully doing our analysis on that. Because the change over in locations is going to start happening shortly, we don’t yet have the data that we can share back to you to sort of show you kind of the proof in analysis and metrics. But we are pretty confident and comfortable that we’re going to be able to achieve that.
In terms of center economics, the cost of these fit-outs, again, those were some of the CapEx numbers that I referenced earlier, in which, the variables that you’re going to want to consider is capital cost per center of what we used to spend, i.e. $20,000 to $25,000 versus what we’ll be spending on the new designs, i.e. $50,000, period of depreciation, historically, three years, now, five years as we extend out leases and the rate of change. So, historically, maybe turning the system over a nine-year period of time, and in this case, accelerating it to a three-year period of time. And so those are the metrics that are in place.
Michael Binetti – UBS
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to the presenters.
Thank you for joining us today and I look forward to speaking with you on our next call.
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