Operator: Ladies and gentlemen, welcome to Weight Watchers International Fourth Quarter and Full Year 2010 Earnings Teleconference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded today, February 17, 2011.
At this time, I would like to turn the call over to Ms. Sarika Sahni of Weight Watchers International. Please go ahead.
Sarika Sahni - IR: Thank you, and thank you to everyone for joining us today for Weight Watchers International's fourth quarter and full year 2010 conference call. With us on the call are David Kirchhoff, President and Chief Executive Officer and Ann Sardini, Chief Financial Officer.
At about 7.00 am Eastern Time today, the Company issued a press release reporting its financial results for the fourth quarter and full year 2010. The purpose of this call is to provide investors with some further details regarding the Company's financial results, as well as to provide a general update on the Company's progress. The press release is available on the Company's corporate website located at www.weightwatchersinternational.com.
Reconciliations of non-GAAP measures disclosed on this conference call to the most comparable GAAP financial measure are also available as part of this press release.
Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today.
These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and except as required by law, the Company undertakes no obligations to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
I would now like to turn the call over to Mr. Kirchhoff. Please go ahead, David.
David Kirchhoff - President, CEO and Director: Good afternoon, and thank you for joining us as we review Weight Watchers International's performance for the fourth quarter and full year of fiscal year 2010. While we began 2010 with a week first quarter we steadily improved results each subsequent quarter and I'm pleased to report that we ended the year on a much more positive note.
Benefiting from the successful launch of an important new program in North America and the other the English speaking markets as well as increasing strength in our weightwatchers.com business, we saw a meaningful acceleration of our business in Q4 2010.
Our North American business showed particular strength with solid growth in attendances for the first time since the recession began in late 2008. It is worth noting that we saw solid growth in both, our North American meetings enrollments and on online signups.
On a cost and currency basis Q4 revenues grew 15.6% over the prior year period with meeting fees up 8%, in-meeting product sales up 25% and internet revenues growing 32%. This increase compares very favorably to the 3.5% total revenue growth we saw in Q3 of 2010.
From a volume perspective combined global online and meetings paid weeks grew by 13% in the fourth quarter versus the prior year period. This 13% growth is a further acceleration to the plus 11% year-over-year growth we reported in Q3. The increase in Q4 paid weeks was driven principally by rapid growth in our Weight Watchers online subscription business as well as further strengthening in our North American meetings business. Global paid weeks in our meetings were up about 3% versus the prior year period in Q4, while paid weeks for Weight Watchers online accelerated further for the third consecutive quarter to plus 33% versus prior.
Q4 2010 EPS was $0.66 compared to $0.24 for the same period in 2009. Included in the Q4 2010 result was $0.02 of benefit from the reversal of a prior year VAT accrual. Included in the Q4 2009 result was a $0.32 accrual for an unfavorable tax ruling in the U.K. regarding the self employment status of our leaders in that country. After adjusting for these two items, Q4 2010 EPS was $0.64 compared to $0.56 for the same period in 2009, an increase of 14%.
Suffice to say, we're gratified that our fourth quarter results were able to deliver EPS for the full year of $2.56 above the original full year EPS guidance range of $2.25 to $2.50 that provided this time last year, and we'll provide a full year recap and remarks.
I will now briefly review our results in our major geographies and business units. First, our North American meetings business; total NACO revenues were $180 million in Q4, up 14% versus the same period in 2009. This is a significant improvement over the slight growth we saw in Q3. NACO meeting fees grew by 9% versus the prior year period, benefiting from higher meeting fees per paid week as well as volume growth. In-meeting product sales grew by 46%, driven by the heavy sales of enrollment products associated with new program launch.
NACO Q4 2010 paid weeks grew 4% versus the prior year period with steady increases in our membership base commencing with the program launch in late November.
NACO attendances for Q4 increased 7%, again a significant improvement over the negative 4% trend we saw in Q3. To put our Q4 results in context, it is useful to review some of the key steps we have implemented so far to reenergize our NACO business since the week Q1 performance.
One, revamping our marketing strategy; as we noted in our Q1 call we recognized that our marketing messages were simply not cutting through to our target audience and that they did not reflect the core energy and underlying vitality of our brand. We went back to the fundamental voice of our brand, the voice of our members. We sought to capture the uniqueness and authenticity of our member's experience by working with a high profile celebrity Jennifer Hudson. Like so many of our members Jennifer has had terrific success on the Weight Watchers program and she has been able to convey the power of the Weight Watchers experience in a compelling and authentic way.
Two, launching a major new program platform from which to grow; we made the decision to capitalize on 10 years of advancement in nutritional science while building on the strong equity of points, completely revamping our highly successful program of 13 years and rebuilding the points plan from the ground up. On November 29, we launched this new program PointsPlus in the U.S. market.
While based on the familiar methodology of budgeting and tracking, this new program is much more directly encourages and nudges our members to make healthier and more satisfying choices.
Three, focusing our meeting network; reflecting the impact the recession has had on our volumes, we further consolidated our meeting network in NACO to focus our energy on our strongest locations, time slots and leaders. Consequently, in Q4, our meetings base with 11% smaller than the same quarter in 2009. This combined with attendance growth increased the average number of attendances per meeting by 20%.
Busier meetings create a more lively experience for our members, improve compensation for our service providers and ultimately deliver higher gross margins for the Company.
The results of these efforts have been clear. Since 2003, the one area of our business that we have continued to struggle is to improve our ability to bring never members into meetings. This has been a drag on the top line of our business despite our success in significantly increasing retention revenue per enrollment and product sales.
With the launch of our new marketing campaign on April 1, we saw an immediate improvement to our never member enrollment trend. This trend improved further in Q3.
When we launched PointsPlus in late November, we saw another market upward shift in the enrollment trend. Prior to the program launch, never member enrollment growth has already moved into positive territory. After the program launch, even before we turned on our advertising for the new program, they had increased dramatically. This happened as we saw an explosion of press coverage in the new program launch across a wide variety of both national and local media.
The significance of our program change was readily apparent as evidenced by front page coverage by the New York Times. It's worth noting that the rapid growth we saw in enrollments happened without any meaningful investment in advertising during the seasonally quiet period.
Beginning the week after Christmas, we brought these marketing program news and PR elements together with the launch of a new campaign centered around Jennifer Hudson, as well as some of our members who are beta testers of PointsPlus.
The advertising we have created is having some of the highest impact I have seen during my career at Weight Watchers. This combined with higher media wave has resulted in further acceleration of NACO enrollments levels as we enter the new year.
In addition to the expected strong influx of rejoining members, this campaign succeeded in driving robust never member enrollments in the new year, something we did not see last year when we launched ProPoints in Continental Europe, which did not follow the same program launch strategy.
We continue to be very pleased with the execution of launch of PointsPlus. It was a significant change for many of our members as we fully changed our weight loss system literally over the course of a weekend. I could not be more proud of the exceptional manner in which our management team and service providers have helped members successfully manage the transition.
Perhaps the best news of all, our new program launch has seemed to accomplish what no previous nutritional program has been able to achieve. We have our members proactively eating a higher proportion of non-processed foods, particularly fruit.
The principle design (antenna of) the PointsPlus innovation was to find a way to more directly encourage our members to make healthier more sustaining choices. All early evidence suggests that in this regard it has been a major success in early weight loss results for our members is good.
Now on to the international meetings business; as noted on the last call, the U.K. team made a decision to significantly limit marketing this last fall prior to the launch of its new program ProPoints. This led to soft volume trends in the third quarter as well as the weeks prior to the November launch of the new program. Combined with difficult weather during the program launch, overall Q4 volumes were soft.
Fourth quarter, paid weeks were effectively flat, while attendances declined 11%. However, with regards to revenues, any softness in volume was more than offset in the quarter by very strong sales of the meeting products.
Q4 U.K. meetings business revenues grew 18% versus a prior period on a constant currency and comparable basis. Product sales grew robust 35% on a constant currency basis as member snapped up enrollment products for the new program.
As with NACO the U.K. team has done an exceptional job of preparing and executing the launch of its major new program. Response from members has been terrific. By the end of the year, the program had already achieved solid notoriety and the awareness of the new program was high even before the January advertising campaign. The U.K. then launched its own advertising campaign in January, which drove significant growth in enrollment levels and building attendances in the new year.
It is important to keep in mind that the U.K. is comping against terrible weather for the first two weeks of January 2010. Nonetheless, the business is growing nicely even without the benefit of the weak weather impacted costs.
Moving on to Continental Europe; overall, the CE Meetings business revenues contracted 8% on a constant currency basis in Q4 versus the prior year period, driven by softer volume in in-meeting product sales. Paid weeks for the fourth quarter were flat to prior, while attendances declined 15%.
As noted on our Q3 call, our French business had been particularly weak, due to the competitive impact of fat diet that has achieved high notoriety in that country. Recognizing the need to set the record straight on fat diets, the French government just published a study that seriously called into question, the efficacy and safety of Dukan Diet, while giving Weight Watchers strong marks. The rest of Europe was somewhat soft, but not nearly to the same degree as France.
As noted on prior calls, our CE business did not see the kind of launch to its new program that we're now seeing in NACO in the U.K. As a result of a marketing campaign, that did not breakthrough and the lack of widespread PR in support of the new program, CE never saw the growth in never enrollments in its most important markets, France and Germany.
While we did get an initial surge of returning members, partially driven by our ability to target direct marketing towards them, the failure of the new program to attract never members is indicative of the fact that the launch never created meaningful buzz around the brand. Failure to achieve buzz and attract never enrollments in turn limited the ability of the new program to create building word of mouth and sustaining momentum behind the brand. In other words the program launch never truly achieve lift-off.
Benefiting from the learnings of the CE launch, our English speaking markets are now having a very different experience with their program launch.
We continue to see CE as a good long-term growth opportunity for the Weight Watchers brand. While we did miss the opportunity with our last program launch to create real excitement to drive further interest and awareness around their brand, we continue to believe that our approach towards sustainable weight loss through education and behavior modification is the right solution in CE.
The formula for bringing this brand to its full potential will require different communication strategies than what we've been deploying of late and we believe that some of our recent learnings in other markets can be applied here.
Moving on to WeightWatchers.com, the WeightWatchers.com business further accelerated in the fourth quarter. Q4 internet revenues were up 32% on a constant currency basis versus the prior year period, even stronger than the plus 22% trend we experienced in Q3.
Paid weeks for the Weight Watchers Online product were up 33% for the fourth quarter versus a prior year period and end-of-period active online subscribers were up 38%.
Prior to the PointsPlus launch in November, U.S. sign up volume for the online product was vigorous, comparable to level same throughout Q3. Immediately following the program launch, sign up volumes ramped up significantly. The rapid increase in the growth rate was contemporaneous with the same rapid increases in the growth rate that we saw in our NACO meeting enrollments.
In January, we launched new advertising spots for the Weight Watchers Online product in the U.S. We've been pleased to see even further acceleration of our Weight Watchers Online product growth throughout January and February.
While we're seeing robust growth across virtually all of our internet geographies, the fastest growth has been in our most developed market, the U.S. where new subscribers continue to make the largest and fastest growing part of our online sign up volume.
Throughout Q4, our weightwatchers.com technology team continued to push aggressively in product development including new country launches for Belgium and Spain. We also launched our first iPad application. As I will discuss later we plan to further ramp up to product development pace as part of our strategy to build on momentum in this highly profitable business.
Now I would like to turn the discussion over to Ann who will elaborate further on our Q4 and full year 2010 performance.
Ann M. Sardini - CFO: Thank you David. Good morning everyone. As you heard we have exceeded the top end of our guidance range provided during our third quarter call by $0.07 on an adjusted basis and $0.09 on an as reported basis, the increase is attributable to the new PointsPlus' program's success in driving enrollments, online sign ups and product sales beyond our expectations during the soft launch stage in North America and the other English speaking countries.
Before giving some of the details of our fourth quarter results I'll provide a recap of our full year 2010 performance. On a full year reported basis, 2010 revenues were $1.45 billion, a 3.8% increase versus 2009. Paid weeks rose 7.8% over the prior year level, the Monthly Pass global installed base rose 16.5% to over 1,200,000 members by yearend and online end of year actives grew 38.2% to 1.05 million.
From a global perspective, the 2010 year which got off to a slow start began to see improving trends in the second quarter. The strengthening was driven by the NACO meeting business and accelerating growth in weightwatches.com. Both of these businesses saw success in driving membership growth from their spring in fall advertising campaigns.
Partially offsetting growth in these businesses was weak performance in the U.K. and a slowdown in growth in Continental Europe. As noted by David, the fourth quarter saw a surge in performance on the strength of good program innovation launches and meetings and online in North America, U.K. and Australia.
One a full year basis, 2010 operating income as reported rose 9.4% to $390.3 million including a $6.5 million charge related to the settlement of the California labor litigation. But there are certain adjustments required to present these results on a more comparable basis. In 2009, there were two significant non-recurring items which reduced operating income in that year by $38 million and which should be adjusted out for comparison purposes.
First, as a result of the adverse court ruling we received regarding the self-employment status of our U.K. leaders, a charge was recorded into 2009 operating income related to periods prior to 2009. This nonrecurring charge reduced 2009 operating income by $32.5 million, net income by $22.7 million and EPS by $0.29. 2009 operating income also included $5.5 million of nonrecurring restructuring charges associated with cost savings initiatives reducing EPS by a further $0.04.
Of lesser impact, the 2010 full year includes the benefit of a $2 million partial accrual reversal of a charge taken in 2008 for a negative U.K. bad tax ruling. The charge which was estimated and related to prior periods has now been actualized. This benefit increased 2010 EPS by $0.02.
When these adjustments are made, adjusted full year 2010 operating income declines 1.6% to $388.3 million from $394.6 million in 2009. As previously noted, the 2010 results included $6.5 million charge related to the settlement of the California labor litigation.
Net income for the full year 2010 was $194.2 million, up 9.5% and EPS of $2.56 (versus) 11.3% over the $2.30 prior year level.
After the adjustments noted above, full year 2010 net income decreases by 5.1% versus the prior year level, and EPS declines by 3.6% to $2.54 as compared to $2.64 in 2009.
Finally, the full year 2010 delivered $281.4 million of cash flow from operations, exceeding the 2009 level of $265.5 million.
Now, shifting to look at some of the details of our fourth quarter results; our fourth quarter revenues reached $356.7 million, an increase versus prior of 14.6% on an as reported basis and 15.6% on a comparable constant currency basis. Constant currency revenues grew 12.9% in the meeting business and 31.7% in the WeightWatchers.com business.
While net income of $48.9 million in the fourth quarter 2010 was $30.2 million above the Q4 2009 level on an as reported basis, an EPS of $0.66 rose $0.42; two of the adjusting items noted above impacted the fourth quarters in both years. Fourth quarter 2010 included the $2 million pre-tax U.K. VAT-related accrual reversal, which benefited EPS in the quarter by $0.02. Fourth quarter 2009 included $35.6 million of pre-tax expense related to the U.K. leaders of self-employment status ruling for periods prior to Q4 2009. This charge reduced Q4 2009 EPS by $0.32.
On a comparable basis, after adjusting for these items, net income in the fourth quarter of 2010 grew by 9.2% over the prior year level, $47.6 million from $43.6 million in the prior year quarter and earnings per share on this basis was $0.64 in the quarter, an increase of 13.8% or $0.08 versus $0.56 in the prior year period.
Looking at our operational performance, our Q4 2010 operating income of $96.3 million increased 91.8% versus the fourth quarter of last year on an as reported basis, but increased 9.8% to $94.3 million on a comparable basis after the previously noted adjustment. Adjusted operating income increased 11% on a currency neutral basis.
In my remarks that follow, I'll discuss our operating performance variances on a currency neutral adjusted basis. While company fourth quarter revenues grew 15% over prior, marketing and operational costs associated with the new program launches resulted in a reduction in our operating income margin versus prior.
The OI margin in the quarter was 26.6% as compared to 27.6% in Q4 2009, a decline of 100 basis points. The cost factors will be discussed in more detail later in this report.
First, summarizing global volume trends in the fourth quarter, global paid weeks continued on a growth trajectory for the fourth consecutive quarter, reaching $34.6 million in Q4 2010, an increase of 13% versus prior.
Global attendance was nearly flat with prior in the quarter, down 0.8%, reflecting the impact of the new program launch in November. The launch drove NACO attendances up 6.8% for the quarter, which served to offset attendance shortfalls elsewhere. It's worth noting that nearly flat global attendance in Q4 compares with declines of 4.4% and 4.8% in the second and third quarters and 12% in Q1.
The online end-of-period active subscriber base was 38.2% in the quarter versus prior to 1.05 million continuing the strong trend experienced through 2010.
Looking out to the meeting business; meeting revenue, comprised of meeting's fee revenues and in-meeting product sales, were up 10.6% in the quarter to $254.7 million. Meeting fee revenues were $194.6 million, 6.7% ahead of prior, a combination of paid week's growth and less promotional activity in the fall campaign, particularly in NACO. We also had some pricing actions notably in the U.K.
In-meeting product sales were $60.1 million globally in the quarter, up 25% versus prior in total and up a strong 26% on a per attendee basis. NACO's product sales per attendee increased 36.7% and U.K.'s rose 52.3%. The new program launch in those geographies drove existing as well as new members to purchase program guides and kits which were typically sold primarily to new enrollees.
Revenues in the WeightWatchers.com business grew 31.7% in the fourth quarter to $62.4 million on the strength of 33.2% paid weeks' growth. The online business was strong in sign-ups and retention across all major markets.
Our other revenues which are comprised of licensing, franchise commissions and revenues from our publications were flat in the fourth quarter, $23.3 million.
Licensing revenues of $14.9 million decreased 3.7% in the fourth quarter versus last year. U.K. licensing was up 6.2% in the quarter on the strength of increased distribution and some new products, elsewhere licensing in the better-for-you product category continues to be negatively impacted by changes in consumer discretionary spending habits.
Domestic licensing decreased 5.9% in the quarter.
Franchise commissions which totaled $2.7 million in the quarter were up 3.9% with U.S. franchise commissions up 10% bolstered by the new program introduction.
As I noted earlier in my remarks, our revenue growth over prior year did not result in margin expansions as a result of expenses associated with the launch of the new program. The gross margin was 52.9% in the fourth quarter, 70 basis points below last year's Q4 adjusted levels.
In the meeting business, the provision of new program meeting materials to all attendees as well as the impact of product discounting, pre-innovation of clear inventory and during the innovation to promote the purchase of enrollment products reduced gross margins.
A boost in meeting averages in NACO offset part of the margin compression as did growth in the highly scalable WeightWatchers.com business. Now that most of our current members have received their new program materials, we can expect year-over-year gross margin improvement as we move into 2011.
The operating income margin declined to further 30 basis points versus prior beyond the 70 basis point gross margin decline to 26.6% from an adjusted 27.6% in Q4 '09 as a result of stepped up marketing. Our marketing investment increased 27.4% above the prior year quarter level to $46.5 million primarily for increased media weight both in anticipation of the January hard launch on the new program in NACO and to drive strong online signups in WeightWatchers.com.
We made the decision to increase our marketing investment in the quarter despite the negative impact on margin, but because of the benefit it would have on strengthening the business in 2011. Marketing as a percent of revenue was 13.1% in the fourth quarter 2010 as compared to 11.8% in fourth quarter of last year.
G&A expenses on the other hand declined as a percentage of revenue by 100 basis points to 12.9% in the fourth quarter of 2010 versus 13.9% in the prior year quarter. G&A expenses were $45.9 million, a 6.7% increase over last year, primarily driven by higher bonus compensation due to improved business performance and by continued development of mobile applications.
Moving now to interest expense which was $18.9 million in the fourth quarter, up $2.5 million or 15.5% from Q4 '09 level; this was primarily a result of the extension of debt maturities which we put in place during 2010. Our effective interest rate in the quarter was 5% as compared to 4.29% in the fourth quarter of last year.
Our debt balance at the end of 2010 was $1.365 billion as compared to $1.45 billion at the end of 2009 and net debt to EBITDA at the end of 2010 was 3.1 times.
Our cash flow from operations in the fourth quarter 2010 was $64.3 million before interest payments. After capital expenditures of $6.3 million, we had $58 million of free cash available. We returned cash to our shareholders through payment of our quarterly dividends of $13 million and by repurchasing $29.7 million of our stock leaving us with 73.4 million shares outstanding at year end. In addition, we made interest payments of $17.8 million and reduced our debt by $23.8 million.
Now, I'll turn it back to David.
David Kirchhoff - President, CEO and Director: Thank you Ann. This time last year we knew that we were facing a weak first quarter but we also knew that we had a coherent strategy for revitalizing the business.
Starting with the spring marketing campaign, the NACO meetings' business was stabilized and the WeightWatchers.com business started accelerating. We finished the year with robust growth, both in NACO and our NACO and dot com businesses as well as building momentum in the U.K.
We've entered 2011, with our best January in years. We're seeing terrific enrollment volumes in our NACO, U.K. and Australian businesses and we've seen even further acceleration of the WeightWatchers.com business.
In short, the Weight Watchers brand is showing a level of vitality and resonance in these markets that we have not seen in years.
As we look forward, we're very much focused on building on momentum in this business by continuing to press forward on our strategy to bring Weight Watchers to a new level of performance.
To this end, our strategy in 2011 will focus on; one, building on our marketing success. The fundamental goal of our collective marketing effort is to allow us to build social relevance. What we mean by social relevance is a state in which Weight Watchers is always top of mind in conversations that the average consumer has about weight loss. This will come from continuing to have a combination of high impact advertising, integrated PR, product news and innovation and effective promotions. As we're successful in bringing more new members and subscribers into the brand and as they experience weight loss success, our word of mouth should build and further help us to bring more people into the brand.
Two, rolling out our retail transformation. In 2010, we completed the full market transformations of two major metro markets, Tampa and St. Louis, in which we systematically improve the quality of retail locations and center branding and design. We've been able to accomplish the real estate upgrade without a corresponding increase in lease expense, due to our more efficient meeting location network and more favorable rent terms executed by a new real estate team.
We now have several months of data to compare these two markets versus control and I'm happy to report that they are showing an incremental enrollment lift of 15% to 20%. In fact, we've seen the same percentage lift in both, before and now, subsequent to the PointsPlus launch.
On this basis, we believe that the ROI in these incremental investments will be very strong and we'll provide a meaningful source of both growth and improvement to the visibility and modernity of the Weight Watchers brand. We're now actively rolling out this initiative throughout our NACO system and expect to largely complete this task over the next 18 to 24 months.
Three, aggressive products and service innovation. We believe that there are many more ways to make our proven and now improved program even more lovable, accessible and effective. To this end, we are working on a variety of service and program innovation concepts that we believe will add significant value to the member experience. Further, we plan to accelerate our technology product development efforts to increase our mobility offerings, product usefulness and community connections.
By way of example, our iPhone application has already been downloaded 1.5 million times and has become a convenient new way for people to keep themselves engaged in their programs.
We have our first Android application in development for a spring launch, and we are already working on our next iPad application. We are increasingly seeing the power of bringing technology together with our traditional face-to-face interaction to deliver a truly affective, ubiquitous and compelling weight management offering that no competitor can match.
Four, positioning Weight Watchers as a healthcare solution; as we have noted many times, the suicidal health impact of obesity can no longer be ignored. We believe that there is no other weight management solution that matches our combination of; A, a lifestyle-based sustainable solution, our orientation toward education behavior modification provided in a supportive environment is unmatched; B, clinically demonstrated results with more than 60 publications over the past 15 years; C, cost effectiveness delivered through our affordable community-based meetings business and our online offering; and D, a fully scaled solution capable of having a population-wide impact.
Our network of over 45,000 global meetings being led by over 12,000 leaders, each of them is a successful member, is unique. We have the right product for the right time in leading the fight against obesity. We bring unique set of assets to healthcare partners, including doctors and payers. We are committed to developing the capabilities necessary to tailor our offering to this audience, who are the partner to achieve the same.
As an example, we began our partnership with Merck to bring Weight Watchers to the doctors' office in a pilot this January. We see more opportunities ahead.
Guidance; in providing guidance for the year, we expect to see a considerable improvement in your financial performance compared to 2010. Despite very difficult weather this January in the U.S., we've seen robust growth in enrollments, attendances and paid weeks in our NACO meetings business. This has also been the case in the U.K. and Australia.
While our comparable from Q1 2010 is very soft, we find the absolute numbers we're seeing to be encouraging and the strength we've seen since our program launch is continuing. In particular, we're seeing the highest rate of never enrollment growth that we've seen in years.
As we began to lap the revitalized NACO and WeightWatchers.com advertising beginning in April, we expect to see some moderation in the trend but to be sure we're anticipating solid volume growth in our two largest meeting businesses as well as Weight Watchers.com through 2011.
From a volume perspective, we're forecasting attendance and paid weeks' growth in the high teens to low 20s for NACO in Q1 and in the mid teens for the full year. For the U.K., we're forecasting low to mid teens attendance and paid weeks growth for the full. For CE, we're forecasting high single-digit to low double-digit declines for the full year, as we look to move beyond our competitive issues in France and to find the right marketing strategy to elevate the brand to the same kind of status it enjoys in our other markets.
WeightWatchers.com was a big growth story in 2010, and we expect it to be an even bigger story in 2011. We are forecasting 60% to 70% subscription month growth in Q1 and 40% to 50% growth for the full year.
We expect the financial contribution from this high margin business to become even more meaningful in 2011.
We believe the volume growth across our meetings and online businesses will translate to 15% to 20% revenue growth for the year. In turn, we expect to deliver EPS of $3.50 to $3.85 in 2011. Once we have the fall winter campaign in the early part of the spring campaign behind us, we will be able to further refine this full year forecast.
Before we take questions, I would like to turn the discussion back to Ann to share some additional thinking for those modeling fiscal 2011.
Ann M. Sardini - CFO: A few notes on 2011 for those of you who are modeling our business. I'll first recap David's guidance on revenues. We expect 15% to 20% revenue growth in 2011 driven by full year paid weeks growth in each of our businesses as follows; in online, 40% to 50% paid weeks growth; in the meetings business, paid weeks growth of mid-teens for NACO and positive low to mid-teens for the U.K., but high single to low double-digit declines in the Continental Europe meeting business.
We expect gross margin expansion in the range of 200 basis points this year from a combination of three drivers, higher meeting averages and the lack of innovation related costs in the Meeting business, higher relative growth in the high gross margin WeightWatchers.com business and gross margin expansion within the highly scalable dot com business.
In terms of marketing, we plan to continue to invest through the year and anticipate full year marketing as a percent of revenues to be similar to prior year following roughly the same quarterly pattern.
G&A expense as a percent of revenues for the year should be only slightly below prior year levels. We plan to reinvest the benefits of scale into new initiatives and capabilities such as developing our selling infrastructure to support our healthcare initiative.
Finally we're projecting interest expense of $63 million for the year with $18 million in Q1 and approximately $15 million in each subsequent quarter.
I'll turn it back to David.
David Kirchhoff - President, CEO and Director: Thank you Ann. At this time operator we would like to take questions.
Operator: Chris Ferrara, Bank of America / Merrill Lynch
Christopher Ferrara - Bank of America-Merrill Lynch: North American attendance, I think you said high teens attendance in Q1. First off, how much visibility do you have into that number at this point and how much or what do think the weather effect was in the first quarter, right, because it really was pretty nasty. I know the year ago comp weather was pretty nasty too but if you can just give a little insight into how much visibility you have on it and what the weather impact was that would be great?
David Kirchhoff - President, CEO and Director: First off the guidance for Q1 was high teens to low 20s. In terms of the visibility we have to that attendance forecast, we now have the benefits of six weeks of volume numbers kind of in our back pocket. So we feel very good about the visibility we have for the first quarter. To your point, January was a pretty rough weather situation with one summer in particular knocking out half of the country. Honestly we actually had enrollment growth in that week despite horrific weather conditions. So I mean it's indicative of the kind of quarter NACO is having right now.
Ann M. Sardini - CFO: It was the (weather) in the past and the prior year as well, but…
David Kirchhoff - President, CEO and Director: More into I was going to say, its more of the weather that we saw in 2010 was in February and so the weather story for Q1 was bad weather in 2011 in January, comping not much bad weather in the previous January and relatively better weather in February so far anyway. February of 2011 comping worst weather in February 2010.
Christopher Ferrara - Bank of America-Merrill Lynch: I guess in the U.K. the numbers, it looks like you are looking for a pretty big inflexion point and I understand, I guess what you are saying, what's going on in the business, but can you talk a little bit about, a little more color on why the U.K. will influx so much over the next quarter?
David Kirchhoff - President, CEO and Director: It's really the same story. One of the things coming out of, when we did the program launch in CE and having the benefit of our experience and our learning in that market is that we really did come to a conclusion that we needed to be much more aggressive, much louder, much more forceful about the combination of both injecting energy into the brand more aggressively and doing a better job of time that into the news of a significant program change and program improvement. So the U.K. really follow the same script as NACO and they did a really nice job in terms of using the grass roots to kind of build excitement about the new program during their soft launch. But then they came out with a really good and aggressive advertising message beginning in the New Year and what we've seen is therefore a response on enrollment activity and we believe that's going to be both in the form of rejoins as well as nevers.
Christopher Ferrara - Bank of America-Merrill Lynch: Then just on product sales also, I guess, is there any way to parse out how sustainable – obviously, a very big number this quarter for a lot of the products sales per attendee, like (I get why) within new innovation, is that going to continue the whole year through and then not to get too far ahead of ourselves, but how should we think about next year? I mean, this is going to be unusually high product sales per attendee year I suspect, right? Maybe that higher year-over-year trend moderates through the rest of the year, is that the right way to think about it?
David Kirchhoff - President, CEO and Director: The biggest pop that we got in product sales per attendance was frankly in Q4, and that's really where you're selling products both to people who are enrolling in the program in December, which was really good enrollment growth, but it's a relatively smaller number of people, given our seasonality, but also selling enrollment products to our existing member base, and so I think if there is an aspect of product sales that is specifically associated with the launch of the new program, it's most noticeable in Q4 of 2010. Really the enrollment growth that – the product sales growth that we are expecting to see throughout 2011 is more a direct function of our ability to drive enrollments, and so to the extent that we're able to be successful and continuing to build momentum and look to drive up enrollments again in 2012, our product sales would actually follow that.
Operator: Greg Badishkanian, Citigroup.
Gregory Badishkanian - Citigroup: You had great momentum with the new program, good success. I am just wondering maybe just a little color on when it first came out versus January, February, has that momentum continued excluding kind of the weather impacts? Like what type of trends have you seen there?
David Kirchhoff - President, CEO and Director: Honestly, when you look at the – if you compare December versus January and February, the thing that's interesting when you look at December is it's such a relatively low volume in absolute numbers in terms of enrollments that you are going to see, a little bit more volatility, but that being said even with whatever pops we saw and we did see after the soft launch principally in December – frankly if anything that momentum has continued just as strongly in January-February, because keeping in mind of January-February versus December we also have the benefit of all the advertising is now hitting in full force. We are operating with – we made the decision to significantly invest in marketing, media weights, and so we are up give or take 15% media weights in January, for example. We are seeing an immediate return on that marketing investment. So, really what we have working for us in January-February is basically the customer acquisition engine firing at all cylinders and so therefore we are seeing continued sustained momentum.
Gregory Badishkanian - Citigroup: I think you mentioned that marketing spend would be pretty consistent as a percentage of sales in 2011 and if you increase that you think you would get even greater return or is it just conservative to keep the marketing spending as a percentage of sales?
David Kirchhoff - President, CEO and Director: I think if you think about the revenue forecast we gave a 15% to 20% for the year and marketing staying consistent as a percentage of sales minutes, that's a pretty sizeable step up in marketing investment. What we are doing is we are staying pretty focused and disciplined about making sure that we are spending marketing in a smart way that drives response and pays back, against the standards that we've historically kept as a company that prides itself on being good and disciplined in a way it approaches direct response marketing. To the extent, we can find new ways of profitably investing in marketing. We'll always look for those opportunities. You saw that a little bit at the end of 2010, where we made the decision even though we knew it was going to be a profit hit for 2010, we made the decision to step it up a bit toward the end of December because we knew it would pay back and in fact it did.
Gregory Badishkanian - Citigroup: Just in terms of the incremental profitability for each new customer that you sign on, you don't have to necessarily open up a new – set up a new meeting for that member. So how do you think about the incremental profitability in contribution from those new customers?
David Kirchhoff - President, CEO and Director: There is a very different way of looking at incremental profitability, although they lead to the same result for Weight Watchers Online product versus meetings. But as you know there is a variable cost component to Weight Watchers meeting which would be principally the acquisition cost of the customer as well as variable expense related to compensating our service providers et cetera. The contribution after that then works across a largely much more fixed cost base, which is rent for the meeting location, fixed overheads, fuel management costs and things like that. So yes, in fact, that's why Ann was guiding 200 basis point improvement for the year in gross margin percentage to reflect those scale economics. In addition, reflecting on the fact that the way to think about the incremental contribution of the Weight Watchers Online product is you have revenue expected for the subscription cycle less acquisition costs then goes to cover our largely fixed cost base of our software development company that's internal to us. So, on one hand, we're looking to step up the pace of product innovation and technology investment, but whatever we step that up doesn't even come close to the fact that those incremental customers we're going to be brining into Weight Watchers online are going to be highly profitable to us.
Operator: Jerry Herman, Stifel, Nicolaus.
Jerry Herman - Stifel, Nicolaus: First question is with regard to never members, and I was hoping David that you could perhaps quantify what sort of influence they had in anyway you choose. Whether you talk about their contribution to paid weeks or attendances or some other metric that will help us frame that influence.
David Kirchhoff - President, CEO and Director: Let me speak toward first conceptually, because again that is a very different story for example, than what we saw in CE. Never members, when you are getting those, the first thing is that it is indicative of effectively bulk of tapping around the brand. And for example, I was in a meeting in Baltimore yesterday, Weight Watchers' meeting and I met a women who had never been to Weight Watchers before but she had seen Jennifer Hudson on opera and she was just so blown away by her story and the story of her family, all doing Weight Watchers that she came in and she since lost nice amount of weight and now she has gotten a number of her friends to join with her. And so when you start seeing more and more of those stories anecdotally, to me it's a good indication of the fact that Weight Watchers is just being discussed a lot. Another indication I can give is that, when we first launched this program in late November, the sheer number of calls I was getting from just random people I knew who are asking me about the new program, the fact that we got front page coverage in The New York Times and everything else, it all goes back to the fact that Weight Watchers has a lot of buzz and noise and the best way I can kind of characterize our launch so far is that, in a manner of speaking the new program and the brand kind of went viral. So to us that's a good indication of the momentum and sort of energy level coming behind it. In terms of the specific metrics around mix and everything else, and nevers versus rejoins, I think the most important thing for me to convey is that the growth rate on nevers was very high and it was certainly higher than anything we've seen in many, many years. What I want to say is that, it's still relatively early days into the New Year, as much as we have six weeks behind us it's still going to take us a while to sort through data and impact and everything else but all indications are quite positive right now.
Jerry Herman - Stifel, Nicolaus: When you look at your guidance for volume growth in the first part of the year and for the full year, is it in fact fair to say that predominance of that growth is from never members?
David Kirchhoff - President, CEO and Director: Let the year unfold a little bit, and give you a little more specificity around that particularly as we present our full Q1 results, but what I would say is absolutely the volume that we're showing is heavily influence by nevers but it also reflects a nice degree of rejoin enrollment growth. The other point I would make about momentum in the business is that nevers we bring in this year are going to help us build our ability to bring in even more rejoins in subsequent years. So bringing in never members is sort of the gift that keeps giving, both for 2011 but frankly for 2012 and beyond.
Jerry Herman - Stifel, Nicolaus: The answer here might be related to the question just discussed, but in particularly it's for online and the huge acceleration there and I'm wondering if you can give us some additional color in term of what's driving that? I mean it's always been a growth business but now it's growing faster than ever from a larger base?
David Kirchhoff - President, CEO and Director: Yeah, and it's been terrific to watch. I think that the first thing I would say overall is that if you look at what's really been great to see is that our books rising. So it's been terrific to see just really sort of vibrant strong enrollment growth in meetings, combined with even faster growth in the online business. So I mean everything is sort of relative but it's kind of both of those businesses are sort of pushing forward very nicely for the first six weeks of this year and to me the sort of interest in volume around both of those lines of business is a reflection of the vitality around the brand itself from the fact that, there has never been a time in which I can remember with more people signing up to do the Weight Watchers program in January than what we're seeing right now. So from that point of view we feel very good about it. Now the fact that its growing even at a faster pace against what was already a big business is terrific. I will point out the fact that if you look at Q1 of 2010, our volume growth for that quarter versus the prior year was 10%. Weight Watchers Online does start having kind of somewhat tougher comps as it goes into Q2, Q3 and Q4, but nonetheless we still see very good growth prospects to that business over the course of the year.
Jerry Herman - Stifel, Nicolaus: Is there a greater propensity of nevers to enroll online?
David Kirchhoff - President, CEO and Director: We're seeing great never participating both in Meetings and with Online.
Jerry Herman - Stifel, Nicolaus: Then a clarification on your comments about the revamped retail centers; I just want to be clear and so much as you said that the attendance or the volume trends increased 15% to 20% in those revamped centers, did I hear that right?
David Kirchhoff - President, CEO and Director: That's correct.
Jerry Herman - Stifel, Nicolaus: Just last final question I'll turn it over, can you give us an update on some of the corporate relationships either for meetings delivered through corporate relationships or may be a little bit more color on Merck and CVS?
David Kirchhoff - President, CEO and Director: Yeah, let me talk first about our corporate business. First off, I have mentioned the fact that our At Work business which had also benefit soft in terms of getting new At Work meeting started in 2009 and early 2010 is off to a great start this year. So we are seeing a very high level of interest by folks who are interested in bringing Weight Watchers into the work site. We have a nascent, but we think very important new organization being built within NACO, which is going to be our healthcare organization that really focuses against this opportunity. We've got a couple of very strong executives that are leading the charge there and I think as you heard Ann mention, some of the increases that we are forecasting, for example, in G&A, while we're expecting a lot of skill benefit in our cost structure, we will be reinvesting some of that, for example in G&A, back into additional selling resources, so that we can really start to scale that business up. In terms of Merck, as I mentioned we started a pilot the beginning of this year that covers a relative smaller percentage of the country in which people from their sales organization are now actively calling on doctors and talking to them about first off, how to talk to their patients about obesity and specifically the role that Weight Watchers can play in the clinical evidence and everything else around Weight Watchers. Doctors have always been very responsive to the uniqueness of the Weight Watchers approach, which is based on education, behavior modification with the compliance mechanism in the form of weigh-ins, confidential weigh-ins and so that model has always had a lot of appeal to doctors, but I think giving them the clinical data or sharing with them the information, giving them then something they can turnaround and hand to a patient, the initial receptivity that we're hearing is quite strong. So, we're very excited about the start of this and the notion is that as we continue to see the evidence of this first phase unfold, it creates the option to take this program national coming into the fall. I think that the specifics around the press release that went out, I think it was yesterday around CVS Caremark, I think is a reflection of the fact that we see just so many different opportunities to work with different players in the healthcare space, to find different ways of collectively having an impact that they want to see and that we want to see in terms of having a measurable push against obesity as a health issue in this country. We think there are numerous opportunities like that to partner up and to work with other people toward this great event.
Operator: Thank you. There are no further questions registered at this time, I'd like to turn the meeting back over to Mr. Kirchhoff.
David Kirchhoff - President, CEO and Director: Thank you for joining us today and I look forward to speaking with you at our next quarterly earnings release.
Operator: Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.