WW International Inc (WW) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Weight Watchers third quarter earnings for the 2002 conference call. All participants are placed in a listen-only mode. It is now my pleasure to turn the floor over to your host, Donna Stein. Ma'am, you may begin.

Thank you very much, Dan, and good morning, everyone. Thank you for joining us today. With us on the call are Linda Huett, President and Chief Executive Officer of Weight Watchers and Anne Sardini, the Chief Financial Officer.., At 7:30 A.M. this morning, the company issued a press release containing financial results for the third quarter. The purpose of this call is to provide investors with some further details regarding these results and a general update on the company's progress. However, if you need a copy of the press release or any other information about Weight Watchers International, you may call Brainerd communicators at (212) 986-6667. Before we begin, let me remind everyone this call will contain forward-looking statements. Investors should be aware that any forward-looking statement 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. And now with that, I will turn the call over to Ms. Hewitt. Please go ahead Linda.

Good morning. Good afternoon to those of you who may be listening in from Europe. I would like to welcome you all to our review of Weight Watchers international's performance during the third quarter ended September 28th, 2002. I will open today's call with an overview of the quarter, and will then review our financial results, and finally we will spend some time answering questions from the financial community.

Our third quarter performance was very strong with revenues increasing 31%, up from $144.1 million in last year's third quarter to $189.2 million this year. Growth in both attendance and product sales per attendance in each of our major markets drove our top line growth. Operating income was up an even stronger 51% to $74.4 million from last year's $49.1 million. Reported fully diluted earnings per share were 34 cents for the quarter compared to 14 cents for the prior year's third quarter.

As most of you have been following the company know, each quarter, we book any unrealized gains and losses associated with marking to market our foreign currency debt net of hedges. Excluding these unrealized gains and losses, fully diluted earnings per share for the quarter were 35 cents, compared to 18 cents for the prior year. Later in this call, Ann will take you through a more detailed discussion of our financial results.

Underlying these strong financial results is continued double-digit growth in worldwide company company-owned attendances. For the third quarter, attendance was up 18% to 12.8 million from 10.9 million in the third quarter of 2001. Our organic attendance growth, and by that, I mean excluding any benefit from the three franchises we acquired this year, was 13% growth.

Now looking at our individual geographies, in our North American company-owned operation or NACO, attendance was 7.2 million, up 29% from the prior year's third quarter. Of course, during the last 12 months as I mentioned, we acquired three additional U.S. franchises, including two during the third quarter. As a quick reminder, we acquired New Jersey franchise in January, the San Diego franchise in July, and eastern North Carolina early in September. Excluding any benefit from these acquisitions, our organic attendance growth in North America was up 20%.

Now keeping everything in context, I do want to remind you that last year's third quarter in NACO was affect bid the tragic events of September 11th. As you may recall, September 11 September 11th impacted our business by shifting a significant number of attendances from our third quarter into our fourth quarter. Our analysis indicates that approximately 200,000 attendances shifted from quarter 3 to quarter 4 in 2001. Now this shifting in normal attendance patterns in last year's numbers has the effect of overstating our NACO attendance growth in this year's third quarter by about four percentage points. And it will, of course, have the opposite effect when we report our quarter 4 attendances. Also in North America, we recently renewed our contract with our Celebrity spokesperson, Sarah Ferguson, the Duchess of York, through to the end of 2003.

Moving on to the U.K., our most mature market, we saw a very solid quarter with attendances of 2.7 million, up 3% over the prior year's third quarter. Just as we had anticipated and communicated in our earlier calls this year, our attendance in the U.K. has continued to strengthen as the year has progressed. This attendance growth combined with very strong increases in product sales per attendance drove a total revenue growth in local currency basis of 10%. Also as part of our normal innovation cycle, in January, we will be launching a new innovation to our U.K. points program. Therefore, I'll be saying more about our U.K. innovation early next year.

Now moving on to continental Europe, in August and September, we launched continental Europe's first innovation to the points plan. The program innovation has been very well received, and was supported with significant marketing and public relations efforts. And this innovation as expected has accelerated the growth rate in continental Europe, which posted attendances of 2 million, an increase of 9.1% over the prior year for the full quarter.

As in all of our markets, continued growth in product sales per attendance helped to drive revenue growth well ahead of attendance growth. In the third quarter, continental Europe experienced a 22% total revenue growth based on local currencies. Our other geographies which comprise Australia, New Zealand, had a very good third quarter with attendance growth of 8.1%, and a local currency revenue growth rate of 12%.

I mentioned the program innovation we launched in continental Europe during the past quarter, and of our plans to introduce an innovation in the U.K. in January. And I'd like to take just a minute to explain the role of these program innovations in our overall strategy. As many of you know, it has generally been our practice to introduce a new program innovation in any given market every two years or so. And these innovations, which are the result of our constant research efforts, generally consist of new program features and are supported with a complete re packaging of our in-meeting program materials.

Now the purpose of these innovations is to improve the quality and efficacy of our program over time, and further help our members, obviously, to achieve and maintain their weight loss goals. In addition, these innovations also serve as a valuable marketing tool by giving us the ability to say something new, and this, in turn, supports our P.R. efforts and our very strong word of mouth, and it encourages former members to come back to us sooner to our meetings than they otherwise may have. And as a result of all of these factors, we find that the introduction of a program innovation in a market generally has the effect of accelerating growth in that market.

Now in late 2000 and early 2001, we had the unusual situation in which we launched innovations in every one of our major markets across the globe within a six-month period. Going forward, our strategy will be to smooth out these growth spurts by staggering our innovations across our diversified geographic regions. We are implementing this strategy currently with the innovation we launched in continental Europe in the fall of 2002, the launching of a new innovation in the U.K. this January 2003, to be followed by the introduction of a new innovation to our Winning Points program in North America in the fall of 2003.

Now moving on to other news, I'm excited that we are rolling out our new global logo. Following a major brand essence study which involved our people all around the world, we have developed a new brand logo that will replace all of the many local renditions that have been developed over the years. Continental Europe was the first to introduce this new logo, and the rest of the world will be following it early in 2003. We've also created a points icon which will be used on all materials, program materials and products that have been endorsed by Weight Watchers.

As I mentioned earlier, we completed three acquisitions in the U.S. in 2002, two of them during the third quarter. In July, we acquired San Diego franchise for $11 million in cash, and in September, we acquired our eastern North Carolina franchise for a purchase price of $10.6 million. As these were our fourth and fifth franchise acquisitions over the past two years, we've become quite adept at seamlessly integrating them into our NACO operations. In fact the integration of these two operations is already well underway and is proceeding smoothly.

Our licensee, Weight Watchers.com, continues to perform very well. Starting with the launch of its first subscription products in February 2001, Weight Watchers.com is now a profitable and rapidly growing business. It is a leader by a wide margin in Internet weight loss space. Whether one measures that leadership by page views, by number of paid subscribers, or by revenue. Clearly, as WeightWatchers.com has ramped up a world class website and the marketing of it, our core North American classroom business has reaped the benefits and significant benefits. And the growth in the traffic of the website has certainly contributed to the exceptional growth we have experienced over the past couple of years in North America.

It has now begun to make a significant investment in marketing our brand, which, of course, is incremental to our own spend. At the site, and I do suggest that you visit it, prospects can learn more about our services and how we may be able to help them. They can use the meeting finder feature to easily find a meeting that is convenient to them. For example, in September, over 1 million meeting inquiries were made on the website. This last summer, Weight Watchers.com began the international rollout of its products, launching two subscription products in the U.K. in July, and as well as two subscription products in Canada in September. We are hopeful that we will see the same sort of synergistic benefits between our core business and weightwatchers.com business that we have experienced already in the U.S.

Of course, we also derive a 10% royalty from our weightwatchers.com license and we own about 37% of the company on a fully diluted basis including all warrants and options. Now I would like to turn the discussion over to Ann Sardini.

Thank you, Linda, and good morning. As most of you know, our business has predictable seasonality. Revenues and operating expenses are typically highest in the first half of the year, with revenue in the fourth quarter typically being the lowest of the year. As Linda noted, last year was an exception to this typical seasonality, with a shifting of some revenue from the third quarter to the fourth quarter in the U.S. due to the events of September 11th. As a result, last year's fourth quarter revenues were higher than its third quarter.

To summarize our third quarter 2002 results, revenues in the third quarter are up 31% to $189.2 million from $144.1 million in the third quarter of 2001. This continues the trend that we saw in the first half of this year. The impact of last year's shift on third quarter 2001 revenue was the movement of approximately 3 to 4 million from 3rd to fourth quarter.

The key drivers of our third quarter 2002 performance were attendance growth across all geographies, 18% including acquisitions and 13% on an organic basis, and consistent strong growth in product sales per attendance throughout the system. Our 31% top-line growth yielded an increase of 33% in gross margin dollars. Our traditional variable cost operating model and our close monitoring of operating expenses maintained our growth margin percentage at 54.7% versus last year's 54.2%.

Net income for the third quarter 2002 was $36.8 million, up from $15.7 million in the comparable quarter last year. On a diluted per-share basis, this translates to 34 cents a share as compared to 14 cents in the third quarter 2001. Both years' third quarters were affected by unrealized currency translation losses net of hedges related to our foreign denominated debt. Ignoring the impact in both periods, our adjusted EPS for third quarter 2002 is 35 cents, nearly double last year's adjusted 18 cents. Now, having provided a snapshot of our results, I'll discuss in more detail the various factors that drove our solid performance.

In our North American company-owned operations, revenue rose to $115.8 million, up 34% from the $86.3 million level in last year's third quarter. Attendances increased 29% on an organic basis adjusting for acquisitions, attendance was up 20% in NACO. Meeting fee revenue grew 30% quarter over quarter, and products sales grew 47%, matching the very strong growth in this metric that we experienced in the first half of this year.

In our international operations, total revenue in U.S. dollars rose 24% to $61.1 million from 49.4 million. The weaker dollars over last added 10 percentage points to our international growth this quarter. On a local currency basis our international revenues grew 15% over last year's third quarter. This solid performance was fueled by attendance growth and strong product sales across all of our international markets, and the successful August-September launch of our first innovation to the points plan in continental Europe.

As a whole, international attendance was up 5.9% in third quarter 2002 over the 2001 level. Continental Europe's attendance grew 9.1% in the quarter, and its revenue was up 22% on a local currency basis. In the U.K., attendances were up 3%, and in our Australian operation, gained 8.1% over last year's third quarter attendance level. Total revenues in the U.K. and Australia were up 10% and 12% respectively on a local currency basis.

As to our other revenues, our franchises as a group continue to produce double-digit growth. Even though three of our franchises have been acquired since third quarter last year, our total franchise commissions still grew by 14% in the third quarter of 2002. And as Linda discussed, our weightwatchers.com licensee continues to perform well and the royalties payments that we receiveare beginning to become meaningful. As a reminder we use the equity method of accounting and we do not consolidate weightwatchers.com's financial results. Our revenues include only a 10% royalty on weightwatchers.com's net revenues. In this quarter, we received a royalty payment of approximately $1.2 million pursuant to our licensing agreement.

That royalty payment from weightwatchers.com, along with increases in international licensing and publishing revenues, accounted for most of the 186% increase in all other revenues. These grew from $1.6 million to $4.5 million. With regard to gross margin, I want to reiterate that we expect our gross margins to remain in the low to mid 50's on an annual basis, although individual quarters can vary based on seasonality. The third quarter of 2002 gross margin rose slightly to 54.7% of revenues this year, as against 54.2% last year.

Our other operating expenses are marketing and G and A. During the third quarter, we invested $14.4 million in marketing. An increase of 32% over third quarter last year, keeping marketing expenses flat as a percent of revenue at 7.6%. We invested more heavily in some target markets this quarter, in particular, to support the launch of the program innovation in continental Europe. For the quarter, G&A expenses were $14.8 million, as opposed to $18.1 million a year earlier..

Last year our G&A expenses included $2.5 million of goodwill amortization in 2002 in accordance with FAS 142, we no longer amortize goodwill but the company reviews goodwill annually for impairment. Even excluding this charge from last year's quarter, G&A expenses declined as a percentage of sales from 10.8% to 7.8%. Primarily as a result of our growing revenue base and a decrease in professional fees and other one-time expenses incurred last year.

Operating income for the quarter increased to $74.4 million, up 51% from 49.1 million in last year's third quarter. Operating margins as a percentage of revenues increased 520 basis points, from 34.1% in third quarter 2001 to 39.3% in this year's third quarter.

Net interest charges for the quarter were $10.6 million as against $14.6 million last year. On a year-over-year basis, we benefited from lower LIBOR rates on the variable portion of our debt and from the lower spreads we now pay on our bank debt as a result of the debt refinancing which was undertaken in December 2001.

Just a note, at the end of September, we used some of our excess cash to pay down an additional $20 million of principal on our bank debt that's beyond the scheduled payment requirements. At third quarter 2002 rates, this reduction in principal would result in $270,000 less quarterly interest expense.

On to other expenses, other expense net, the line below interest expense in our P & L was $3.5 million in third quarter 2002, as compared to $8.2 million a year ago. Net of hedges, this year's third quarter unrealized foreign currency loss related primarily to the marking to market at our quarter end of foreign currency denominated debt was $2.8 million. In third quarter 2001, the loss was $7.1 million.

As discussed in prior calls, we will likely continue to report unrealized foreign currency translation gains or losses on a quarterly basis that will impact our reported net income and earnings per share. For the most recent quarter, excluding these unrealized translation losses net of hedges, our third quarter earnings would have been 35 cents per share instead of 34 cents, and last year's EPS would have been 18 cents instead of the reported 14 cents.

Now taking a look backat the first nine months of 2002 and assessing our results, we have performed well on all of the key metrics. Worldwide attendance was 42.9 million across the first three quarters of 2002, up 18%. On an organic basis, worldwide attendance was up 13%. Product sales grew 40% over the prior year comparable period. All revenues totaled $619.6 million, up 30%. Gross margin was 55.2% versus 55% last year.

Marketing expenses as a percent of sales declined from 10.8% to 9.8%. Our operating income margin grew 52% to $236 million. Our net interest expenses have fallen from $42 million last year to $31.8 million this year. And our net income totaled $115.1 million, or $1.05 per fully diluted share, up 79% from $64.3 million or 58 cents per share for the first nine months of last year. Now turning our attention to the balance sheet and cash flow, during the first 9 months of 2002 we generated cash flow from operating activities after interest and taxes of $166.4 million. This allowed us to do several things. First to fully fund three franchise acquisitions in New Jersey, San Diego and South Carolina, at a combined cost of $68.1 million. To redeem all $25 million of preferred stock that had been held behind; to finance our capital expenditures of $3.4 million for the nine months; to make scheduled payments of $11.7 million on our bank debt; and to use excess cash to retire an additional $20 million of our bank debt. All this while increasing our cash by $38.6 million to $61.9 million.

With regard to our debt level, our total debt level decreased from $471 million at the end of last year, to $452 million at the end of the third quarter. Our senior debt pay down of $31.7 million was partially offset by the strengthening of the Euro, and the resulted increase in the dollar value of our $100 million Euro note from $88.4 million at year end 2001 to $98.1 million at the end of the third quarter of 2002.

I wanted to address a question that I get from time to time regarding what some people refer to as the high leverage ratio of the company. Let me just walk you through a few numbers. Net of our cash, our debt level is now $390.2 million. Our trailing 12 months EBITDA is $257.9 million. This gives us a debt to EBITDA ratio of only 1.5 times. To complete our balance sheet over-view our current asset and liabilities accounts during this period have moved in a manner consistent with the growth in the business as well as with normal seasonality and with the timing of payments. We are going to be filing our 10Q later today and of course the report has been prepared consistent with our past practices. These are compliant with foreign banks offerings and the SEC’s proposals. Linda and I have certified this report with the new requirements. The certification form is part of our 10Q. Now turning back to Linda.

Thank you, Ann. As this is our first conference call after our September secondary offering and we're likely to have a number of new listeners on the call, I thought it would be worthwhile for me to reiterate the basis for Weight Watchers' historical success and for our confidence in the future. First we're addressing a large and growing global market. The problem of overweight and obesity is now recognized as a serious problem currently afflicting over 50% of adults in many developed countries. With the United States being the high water mark at over 64%, and this trend continues to increase at an alarming rate, even in developing countries.

Second, we are the dominant global player in group education weight loss with operations in 30 countries, and we believe we're well-positioned to serve this growing population. Our dominant position is protected by formidable barriers to entry including the power of the weight watchers brand, the recurring relationship we have with millions of members and former members, and most importantly, our network of over 14,000 leaders around the world who have all successfully lost weight with Weight Watchers.

The result of this is that we benefit and should continue to benefit from both the diversification of our existing business and the large portfolio of future growth opportunities we have in front of us. So why does geographic diversification help us? Well, as we know from experience that while our growth performance in any particular quarter in any particular geography may vary as a result of factors that are within our control, like the timing of our innovations or our specific marketing programs, or even outside of our control such as a snowstorm in New York or a flood in Europe or obviously events like September 11th.

Over the entirety of our geographic base, these factors have, over time, averaged out to deliver sustained growth across our enterprise. And because of the highly variable nature of our cost structure, we have been able to sustain strong margins in any given geography despite the seasonality of our business. Going forward, we will continue to focus on growing our top line by increasing our penetration in our existing markets again using the highly developed U.K. market for group weight loss education as a benchmark of what is possible. We will also grow our product sales within our meetings by continuing to develop proprietary value-added products which truly support our members in achieving their weight loss objectives.

Outside of our classrooms, we will reach an increasing number of people as we further develop alternative channels such the Internet or our by-mail products or our publications. And over time, we also hope to improve our ability to serve the market for overweight men, and finally, in the years to come, we will continue to expand our geographic reach as we enter new markets.

Before I open up to question, let me finish by discussing our earnings guidance for the rest of this year and for 2003. As you may recall in August, we raised our 2002 guidance to 128 to 130 per fully diluted share. Based on the strength of our third quarter results and our current trends in our business, we are confirming our full year 2002 guidance at the upper end of that range at $1.30 per share. Of course this is excluding any future unrealized currency gains and losses associated with our foreign currency denominated debt net of hedges.

Now looking to the full 2003, we know that the current universe of sell side analysts who follow us have pegged us in a range of 154 to 165 per share, and I'm very comfortable with our ability to deliver earnings within that range. Of course, by the time of our next earnings call, we will be past our important January campaigns, and I expect to then further refine our guidance. Dan, at this time, I'd like to open to questions.

Thank you. The floor is now open for questions. If you do have a question, you may press the numbers 1 followed by 4 on your touchtone phone at this time. If at any point your question is answered, you may remove yourself by pressing the pound key. We do request while posing your question that you please pick up your hand set to prevent any background noise. Once again, ladies and gentlemen, that's 1 followed by 4 to ask a question at this time. Our first question is coming from Greg Capelliof Credit Suisse First Boston. Please proceed with your question.

Good morning, Linda and Ann.

Good morning, Greg.

Good morning, Greg.

I wondered if I could just ask if you have any additional color perhaps on the trend sort of within the third quarter that you talked about, if attendance growth acted as you thought it would throughout the quarter, and then perhaps if it's tracking as expected so far in the fourth quarter.

Greg, I think that if you're looking at our worldwide picture, it has trended as we had anticipated. We sort of started the year by telling you that we thought that the U.K. would improve and strengthen as the year went on. That is exactly the picture that we're seeing, and we're very confident that obviously that will continue for the rest of the year.

We said that continental Europe obviously had lacked their introduction of the point system and we knew that when we put in the innovation to that, that we would see a growth in their attendance, which is exactly what we've seen. We came from very low, less than 2% growth, obviously, last quarter to the more than 9% growth that we're seeing this quarter.

And, of course, we've always said that when you're looking at the U.S., you have to say that the U.S. picture has strengthened and strengthened. If you look at last year, the first half of the year, we had very strong growth picture obviously, but the second half of the year was more than anybody could have expected. So to see this organic growth in the U.S. of 20% on top of the 30% growth that we saw last year in the third quarter, I think is indicative of what we've all said. I think also you're seeing that our other geographies have made a recovery from their sort of slightly rocky start of the marketing campaign at the beginning on their year, and we're very confident, obviously, that they'll end the year exactly where we thought they would.

Okay. And then I just wanted to confirm, on NACO, that with 9/11, there was a shift of about 200,000. Can you clarify that?

Yeah we estimate if you remember last year, during the problems in September, we dipped in our attendances. That was true. And then we recovered. We recovered very quickly from 9/11. But more importantly, we did shift some of our marketing from the September month into the October month, and that meant that some of the recruitment that we would have expected in September was shifted into October and, therefore, attendances that grew out of that recruitment were in the fourth quarter rather than the third.

We estimate that there are about 200,000 of those attendances that shifted from their normal pattern into this unusual pattern due to the September 11th.

Okay. Just one final question on the marketing expense line, it was below our expectation, and I'm wondering if we should expect to see a pick-up in that in the fourth quarter. I know seasonally this is a slow quarter. Do you intend to pick up that in the fourth quarter?

Yes. Obviously we did invest considerably in the third quarter in our marketing, and we will continue to invest, I think as a percentage of revenue. Is this that what you mean it was lower than you anticipated?

Yes, right.

I think it was because the revenue was so strong. Obviously in real terms, in dollars, we invested more than 30%, so I think it was a very strong investment on our behalf.

Okay. Thank you very much.

Greg, can I just go back, you know when I said those 200,000 attendances, I said in the call that to us, they represented about four percentage points, so if you're looking at that 20% organic growth, it would net down to about 16% if we hadn't had that shift in attendances. Does that help you?

Yeah, that makes sense.

Great.

Thanks a lot.

Our next question is coming from Carol Wilke of Merrill Lynch. Please proceed with your question.

Good morning, Carol.

Thanks. Good morning. Just a few minutes ago, you were talking about how thrilled you were about the U.S. business, particularly the strength that you've seen, and then, you know, given the strength of a year ago. As you look into 2003 and I realize it's early, you know not region on apples to apples excluding acquisitions, et cetera, continues to grow, you know, at quite a bit higher of a rate than sort of your target long-term double digit attendance growth. When you look into 03, especially I realize not until the fall but the U.S. upgrades, what is the feeling as far as, you know, North American attendance growth for next year?

Obviously when we do our projections and we give our guidance, we're looking at a total mixture of things. Attendances are very important to our growth and our growth in revenue, of course they are, but if you're looking at this whole year, you'll see how more important the other drivers of our revenue growth are because our revenue growth has far exceeded our attendance growth quarter after quarter after quarter.

So we are looking at obviously a position of not -- it would be imprudent of us to predict that this incredibly strong growth in the United States is going to continue year in and year out, but we are seeing a continuation of a very, very strong double-digit growth, so we're probably looking at a situation where this half of the year will come in organically in the mid teens, and I think, you know, if you use that as your benchmark, then you're probably doing a similar exercise to us.

So yes, we are in a moderation, but we're certainly not going down to our long-term expectations. Our long-term expectations obviously are more in single digits, and we don't expect to suddenly come into that field.

That's very helpful. And just one other quick question. In terms of the staggering of the innovations, can you just give us some ideas about -- maybe it's too early, but just what sort of innovations on the U.S. upgrade for the fall?

Carol, I'd love to but I really would not like to signal details of an innovation nine months before it's going to go into the market. I know we don't have any direct competitors, but, you know, we can assure you that it is -- it's meaningful, it's very exciting, we're working on it, it's going to be an improvement to the program. And certainly everybody who's been working on it is very excited about that. But I'd rather wait until a little bit close inventory launch before I give, you know, the details of the plan itself.

Okay. Can I just ask one other question? I appreciate that. I think before the staggering plan, the U.S. and U.K. were going to come out in early 03. Is the choice to do the U.K. first rather than NACO because NACO's business has been so strong on its own?

Yes, if you look at the U.K., it's our most mature market. If you just look at the whole universe, probably our lowest growth expectations, although we continue to expect it to grow, so, therefore, having its normal cycle of innovations to support that business, we think is very important. So the U.K. is going in January 2003.

Now last time, obviously, the U.K. and the U.S. went together at the same time in 2001, but we feel that the strength of the U.S. market certainly gives us the ability to shift the U.S. to the autumn so that continental Europe obviously innovated this autumn they won't have one in 2003, that will be a minor marketing innovation, so the U.S. will be our big geography that's going with an innovation in the autumn of 2003. And this just gives us the ability to smooth out, as I said, so that our mix of geographies are all working very well in tandem.

That's great. Thank you very much.

Our next question is coming from Mr. Cary Callahan of Goldman Sachs.

Hi, Cary.

Good morning Linda and Ann. A couple questions, if I could. First on effective pricing, if we take your meeting fee per attendee in the first quarter, for North America, about $10.88, and then for the third quarter, it would work out to about $11.63, and I know you have the ability to influence that through discounting, et cetera, but that's up about 7%, so I guess the question is, is that due to seasonal discounting or is there any plotting of discounting over time, and where do you think pricing can go in 2003?

Cary, you've actually put your finger on it. Obviously there are variances from quarter to quarter depending on what kind of offer we have in place, when it is in place during that particular quarter, and we know that some of these have slight shifts from place to place. Also remember now we've got -- with our acquisitions starting with NACO at the beginning of 2001. We do have a variety of weekly fees out there, and there are a variety of offers at different times, so you will see some shift in what the average fee is at any given time. We've said in the past that our pricing is more tied to our innovation strategy, and obviously we are not doing an innovation in the U.S. until the autumn.

So should we as you roll out the innovations worldwide, should we start to think about some ability to price concurrent with those innovation launches?

We are putting a price right in the U.K. in conjunction with that program innovation. We have not taken a decision on whether to put a price rise in the U.S. in September with a new innovation. The U.K. is going up 25 pents.

25 pents?

On a weekly fee.

Can you remind us what the basis is?

4 pounds 50 up to 4.75.

Then secondly, I guess there was a piece in this paper today about twin labs saying that they were going to withdraw Ephedra from the market next year. Can you just remind us where drug therapy ranks in terms of weight loss alternatives and to what extent you think that kind of move or other moves in drug development will impact your business in 03?

Obviously I hadn't read that, but that's always interesting to us so see what's happening in that. I have never actually seen a worldwide market share in terms of what percentage of dieters are going to drugs on a worldwide basis. As we know and we're looking at our chart, we're probably looking at about a 7 to 10% that go to the medical solution and the majority of the medical solutions are probably using some kind of drug therapy or some gastric surgery that is invasive obviously.

I think that the drugs are really aimed at people who are obese and in severe danger to their health. Their weight is obviously cause causing them a problem F you look at the Weight Watchers' universe, we really are aimed at that mass of people who are continuing to gain wait, are already in the overweight status, and we want to try to help them to prevent themselves going into the obese category. Obviously we do have a wide range of people who are helping us. I think that drugs will be there, they will continue to try to find effective drugs. At the moment, unless they find that silver bullet, I see no signs that they're going to, I can't see that it will affect our business any more than it has in the past.

Okay. Great. Thank you.

Our next question is coming from Wendy Nicholson of Salomon Smith Barney. Please proceed with your question.

Hi, good morning.

Good morning, Wendy.

Two questions. First, the innovation that we've seen particularly in the last quarter in continental Europe, I think you said that that serves to generally increase attendance growth, but did you say for how long? In other words, should we expect continental Europe to see kind of double-digit attendance growth until we anniversary the invasion in the second half of next year, or is it shorter-term than that?

Well, it all depends on a market-by-market basis, Wendy, but we do see that an innovation usually has the biggest effect obviously in that first year of launch, and it has a big effect obviously closer to the start of that innovation when people are first coming in, when we first advertise it.

Of course in some of our continental European markets, we're looking at a slower picture of getting word of mouth out there. We don't have the same brand recognition in some of those countries that we do in the U.S., and, of course, when you have a smaller base of members and former members, word of mouth isn't working in the same way. So I wouldn't say that every one of our markets reacts exactly the same way in terms of an innovation.

I think that what you'll see is that we're looking at a 9.1% growth this quarter that wasn't obviously with the innovation in place for the full quarter, so next quarter we would anticipate that we will be able to tell you that we are into the -- you know, the double-digit, and that is very good on top of the growth that they experienced after their introduction of points.

Definitely. Would you say the same thing in terms of your internal expectations for the U.K.? I mean, that's obviously such a difficult market, but do you have the same expectations of accelerating the attendance growth that much or are we really looking from a flat growth business more into the mid single digits?

Right, as you know, our expectations for the U.K. are always in what I call the low single digits, and whenever we see a picture where the U.K. is in high single digits or above that, we are looking at an extraordinary picture, and we had very strong, as you might recall, in the first half of 2001, we had very strong 9% growth, 8, 9% growth in that market following the introduction of pure points.

So I think that what we are confident is, is that it will do what it does in all of our markets, strengthen our growth picture. And we're already seeing strengthening obviously ahead of that this year because, you know, we had a negative first quarter and now we've got a very positive picture there.

Okay. Then I have just the last question, and I'm sorry if I've missed it, but for the fourth quarter, it sounds like you're comfortable with basically the consensus earnings estimate, but with so many moving pieces, did you say really what your top line guidance is for the fourth quarter just overall sales growth for the company?

No, we've never actually given that kind of add advanced guidance. We have traditional stuck to and continue to stick to just in terms of our EPS guidance.

Okay. Fine. Thank you so much.

Our next question is coming from Andrew of UBS Warburg. Please proceed with your question.

Thanks very much.

Good morning, Andrew.

Good morning. How are you?

Good.

If you could talk about the number of meetings that you've offered in North America in the third quarter, both organic and reported, and if you can talk about the growth of meetings that you've been able to offer to the newly acquired territories and how you see that in the fourth quarter?

Yes, obviously one of the things that we can do when we purchase a franchise territory is we can look at their meeting distribution, we can look at their penetration, we can look at their marketing plans, and we do that very quickly and usually it gives us a very good opportunity to grow.

One of the things that has been supporting these remarkable figures in the U.S. is the fact that in WACO, we were able to put in more aggressive marketing plans and to increase their distribution, so we believe that our franchise purchases will be all supportive of those efforts. If we're looking at our meeting growth in North America, and we're looking at the change in the quarter, we're up about 24% in meetings. That obviously is in total U.S. meetings. I think that this strong growth is part and parcel of what's driving the growth in the U.S. but also it's obviously just to cope with the growth because we do want to keep our meeting averages, the number of people in each individual meeting, to a reasonable level. The reported growth obviously was 32%, which included those acquisitions.

Terrific. And can you talk about, I guess, the penetration rates of your two most recent acquisitions? And how they compare to the overall North American business?

No, we don't actually give the penetration rates of individual markets, youknow, but general generally speaking, they are lower in penetration. That wasn't necessarily true of New Jersey. I think I said this in up with of our previous calls. New Jersey actually was quite well-penetrated. It's part, obviously, of this big New York metropolitan area had a big overspill of our marketing and a lot of the things that we were driving at.

So we don't identify ourpenetration on a market-by-market basis. If you take the whole thing, obviously we're still looking at the United States at only around 10%, which is about half of what we think it's capable of, you know, over the long term, the medium term.

Terrific. And one last one just a housekeeping. In 2001, the full-year calendar, what was the translation loss on FX movements due to your Euro loan?

Ann is just looking it up right now.

Full-year basis is a gain of about 5.4 million. I'm going to verify that number, though, and I'll call you after the call to make sure that it's correct.

Terrific. Thank you very much.

Our next question is coming from Denise Fraser of Morgan Stanley. Please proceed with your question.

Good morning. Thank you.

Good morning, Denise.

Good morning. Can you just give us an update as to some of your activities in your low penetration and your new markets like Spain, Denmark? Are there any milestones that we should be aware of in terms of meeting infrastructure and brand awareness activities?

Well, we are building that meeting infrastructure, as you know, and this is a time-consuming exercise. We've said that it takes us probably about five years to build a truly national proper infrastructure in any new market that we go into, and Spain and Denmark are no exceptions to those kind of time scales.

We also have the challenge, and this is a challenge always for us, you know, we recruit our leaders from our successful members, so obviously we look into our meetings to generate the new leaders that are going to put more meetings into place throughout the country. It is a challenge for us always to find the right people and people who are capable of delivering this. Right now we've got a new initiative going on in Spain to help us with the training of those leaders, so I expect that to pay dividends for us next year as we continue to develop, and we are slowly building our awareness. When you're starting from no awareness, obviously that does take time.

Thank you.

Our next question is a follow-up coming from Andrew of UBS Warburg.

Thanks very much. Linda, since I don't get to talk to you that much, I figure I'd come back.

Oh, Andrew, you can talk to me. You know that.

Can you tell us something about the German market and how growth and attendance is going there, any plans in 03?

Yes. Andrew, we actually put in a considerable marketing investment into our German market with the introduction of the innovation on the points plan, the points plan plus when that went in. We do know that in our German market, we have now just reached the point where our infrastructure is great enough for us to have effective national advertising. In other words, we don't want to have national advertising. in market where if it drives somebody to the phone to say we where's my local meeting, we have to tell them there isn't one.

Sonow that we've got that infrastructure in Germany up, we put considerable investments into a national television campaign, and we have obviously continued to grow that infrastructure, which we will be doing, you know, year in and year out as we increase our penetration of that market. We've also obviously been working on our PR efforts, which are very important in terms of raising brand awareness and getting people to be aware of what our offering is. Certainly our research says that we need to do work in Germany just in terms of getting people to understand what the weight watchers offer something and how Weight Watchers works, so we are putting a lot of efforts into that right now. We haven't got any new market share data or awareness day data that I can share with you that I can tell you how successful it is but we certainly have benchmarked it.

I can assume that German attendance growth is similar to the overall continental Europe trends or --

Yes, it is.

Andrew let me confirm for you the gain for 2001 on currency pretax, 5.4 million.

Terrific Thank you.

Our next question is a follow-up coming from Greg Capelli of Credit Suisse First Boston.

Two more quick ones.

Sure, Greg.

Can you give us an idea of the penetration rate? I know you were at about 9% I think at the beginning of the year. Are you planning on giving that out quarterly?

It's not even a figure that we calculate on a quarterly basis. It is -- the penetration figure is sort of a metric that we use, a measure that we use to sort of give us relativity obviously, and we're taking our total enrollments for any given market, and as a percentage, what the government or reputable bodies give us as the target population, and again, that target population is just something that we've chosen.

It happens tobe overweight women between the ages of 25 and 64 who have -- in other words, they have a B.M.I. over 25, so this is just a calculation that we do at the end of every year to see what last year's enrollment did to that penetration of this target market.

Now, as you've seen in the U.S., the U.S. just published new figures, the percentage of overweight has gone up from 61% to 63%, so this is -- 64%, sorry, so this is a growing market as well as us growing our penetration. So we do that about every year, and you'll see those figures when we've done them.

Okay. Just one more quick one. I might have missed this. Did you give -- can we get the revenue size of the dot com business at this point?

No, we didn't, but I suppose in some senses you can extrapolate out, we got about $1.2 million in royalties from them. We get a 10% royalty.

Okay. Still 10%. Okay. Thank you.

Our next question is coming from Ali of Merrill Lynch.

Good morning, Ali.

I didn't request a question. I'm sorry. How are you?

We're doing fine. How are you?

Very well, thank you.

Nice talking with you.

Our next question is coming from Cliff Greenberg of barren capital.

Actually my question has been answered. Thank you.

We're showing no further questions at this time. I would like to turn the floor back over to Linda for any closing comments you might have.

Thank you. 2002 continues to be an excellent year for the company as we build upon our leadership position by executing against our growth opportunities, and I would just like to thank you for joining us today and for your continued interest in Weight Watchers.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.