WW International Inc (WW) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Weight Watchers fourth quarter and full year 2002 results teleconference.

At this time all participants have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. John Buckley of Brainerd Communicators.

Sir, the floor is yours.

Thank you, operator, and thank you, everyone, for joining us today.

With us on the call are are Linda Huett, President and Chief Executive Officer and Ann Sardini, Chief Financial Officer.

After the market closed today, the company issued a press release containing financial results for the fourth quarter and full year 2002.

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.

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 you, 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 companies filings with the Securities and Exchange Commission.

The company does not take any buildings to publicly update or revise any forward-looking statements, whether a result of new information, future events or otherwise.

Now with that I'll turn the call over to Linda Huett.

Please go ahead, Linda.

Thank you, and good afternoon.

Good evening 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 for the fourth quarter and the full year ended December 28th, 2002.

I will open today's call with an overview and will then review our financial results and finally, we will spend some time answering questions from the financial community.

Our fourth quarter performance was very strong with revenues increasing 31% from $145.5 million in last year's fourth quarter, to $190.1 million this year.

Operating income was up an even stronger 53% to $60.9 million from last year's $39.8 million.

Fully diluted earnings per share were 26 cents for the quarter compared to 18 cents for the prior year's fourth quarter, excluding last year's nonrecurring items.

As most of you have been you who have been following our company know, each quarter we also report any unrealized gains and losses associated with marking to market our foreign currency denominated debt net of hedges.

Excluding these unrealized gains and losses in both quarters, as well as the non re-occurring items in last year's fourth quarter, fully diluted earnings per share for the quarter were 28 cents compared to 16 cents in the prior year.

Looking at our performance for the full year of 2002, we had another year of extremely strong growth with revenues increasing 30% to $809.6 million.

This performance was driven by organic attendance growth of 13% and product sales growth of 39%.

Acquisitions contributed an additional 5% to the growth rate.

In addition during 2002 we increased our operating income margins by 550 basis points to 36.7%, up 31.2% in prior.

This is achieved primarily by leveraging our marketing and our G&A costs over a larger revenue base.

Our variable cost business model maintained our mid-50s gross margin percentage.

This revenue increase, combined with our expanding margins, delivered 2002 operating income of $296.8 million, up 52% from $194.8 million in 2001.

Later in this call Ann will take you through a more detailed discussion of our financial results.

Now looking at our individual geographies, North America had another strong quarter, with revenue growth of 27%, primarily driven by organic attendance growth of 13% in our North American company-owned operations.

The total attendance growth including acquisitions was 22% and our growth in product sales was 38%.

As I discussed on our last conference call, the events of September 11th had the effect of pushing approximately 200,000 attendances from the third quarter to the fourth quarter in 2001 and this shift had the effect of overstating this year's third quarter attendance growth by approximately four percentage points and understating quarter four attendance growth by a similar amount.

For the full year, North America meeting revenue grew 34%.

Attendance was up 31%, and product sales were up 47%.

Adjusting for the impact to the acquisitions, the attendance growth in NACO was 22% for the full year.

This organic attendance growth of 22% was composed of exceptional 27% growth in the first half of the year and 17% growth in the second half of 2002.

Looking at 2003, we typically launch an innovation in a region's program every two years and this provides added public relations opportunities and is a call to action for our former members, therefore, we would normally have launched an innovation in North American program in January 2003.

As I discussed in our last conference call, we instead elected to launch the innovation in September in order to stagger the timing of our innovation launches across our major geographies.

Previously, starting in September 2000, within a four-month period we had launched innovations in Continental Europe, the U.K. and in North America.

Now we have staggered the launch of our innovations across the longer time frame, with Continental Europe in September 2002, the U.K. in January of '03, and the U.S. will come in September of 2003.

The deferral of our innovation, combined with the fact that we are up against the extraordinary 27% organic attendance growth in the comparable first half of 2002 would normally lead me to expect NACO to deliver high single-digit attendance growth in the first part of 2003 with an acceleration after the launch of the innovation in September.

However, the severity of winter weather in recent weeks, particularly along the East Coast, has impacted our growth in those markets.

For example, last week's severe weather storm which I'm told was the worst in the last seven years hit at a crucial time in our seasonal pattern, forcing us to cancel over 1,000 meetings, as well as reducing the attendances in the meetings that we were able to keep open in the affected areas.

Moreover, we know from experience that when we lose attendance in a single week due to an external event, it will also impact attendance in the following weeks.

Members who have missed their meeting are more likely to get derailed from their weight loss efforts and therefore to end their attendance cycle prematurely.

To put this year's weather into perspective, during the first eight weeks of this year, we had to close almost 2,000 meetings in NACO compared to 550 in the same period of last year.

Of course, I expect the NACO areas not affected by weather to continue to perform normally.

Now moving on to the U.K., the U.K. had an excellent fourth quarter.

With local currency revenue growth up 27% versus prior year, this revenue growth was primarily driven by an increase in attendances of 15% from 2.3 million to 2.6 million and increased local currency product sales of 26%.

In assessing the U.K.'s performance during this quarter, you should consider that unlike the U.S., where the events of September 11th pushed attendance from the third quarter into the fourth quarter, in the U.K. we were not able to reschedule our cancelled marketing activities and therefore, this fourth quarter is against a very weak fourth quarter in 2001.

In the full year 2002, it went as we predicted.

The U.K. started with weaker performance due to the difficult prior year comparables and strengthened in the second half, and I'm very pleased with the local currency revenue growth for the full year of 11% in what is our most penetrated group education weight loss market.

Our U.K. team effectively leveraged a 2.3% attendance growth into a double-digit revenue growth through our portfolio of growth drivers.

In January 2003, the U.K. launched the "Time To Eat" program.

That's the latest U.K. innovation of our points platform.

This was concurrent with a 25 pence increase to 4.75 in our weekly fee.

Our members and our leaders have responded very well to this innovation.

The unique feature of this new program is the use of seasonally appropriate program material.

What that means is, that we now have 52 weeks of program material, which is coordinated with important events and holidays and eating occasions in that season.

With "Time To Eat," during each meeting all of the members will receive the same program material and it forms the focal point for the group discussion.

This is in contrast to the prior points program where each member only received new program material during his or her first 10 weeks of attendance.

Like the U.S.

East Coast, the U.K. was negatively impacted by extreme weather situations.

As any of you have ever lived in the U.K. know, it's extremely rare to have two major snowstorms affecting most of the country in any winter as we've just had this January.

And as I look towards our performance in the first quarter of 2003, I believe that we will experience attendance growth in the U.K. at lower levels than I was expecting based upon the strength of our innovation and our marketing program because of this weather.

In the full year 2003, I believe the U.K. will continue to deliver solid revenue growth primarily driven by moderate attendance growth, increases in product sales per attendance and the 5% weekly meeting fee price rise.

Now, moving on to Continental Europe, in August and September you will remember that we launched Continental's first innovation to the points plan.

This program innovation has been well received and was supported by significant marketing and public relations efforts.

In quarter 4, Continental Europe had strong local currency revenue growth of 24%, driven by attendance growth of 13% to 2.3 million and an increase in product sales of over 30%.

For the full year, Continental Europe had a local currency revenue growth of 15% with a strong acceleration of volume growth in the second half of the year following the launch of the points plus program.

Looking towards 2003, I expect continued growth in Europe, driven by increases in both attendance and product sales.

Our other geographies which are comprised by Australia and New Zealand had attendance growth of 4.7% in the quarter and 6.1% for the full year.

Looking forward, the Austral/Asian team made significant revamping of our marketing strategy in 2003 and I expect this region to deliver strong revenue and volume growth in the upcoming year.

Now moving on to other news, our San Diego franchise we acquired in June and our Eastern North Carolina franchise we acquired in September have been seamlessly integrated into our NACO operations.

We have now completed five acquisitions since our separation from Heinz and therefore NACO has increased its share of the U.S. attendances from just over 40% to over 60%.

I would also like to touch on the performance of our Weight Watchers magazine in the U.S.

As most of you know, we relaunched the Weight Watchers magazine in 2000 after we reacquired the rights from southern progress, and I'm pleased to report that from a standing start with our first issue of the April/May 2000 and our first issue on the newsstand in January 2001, we have now reached a circulation of one million and we continue to experience sell-through rates at the newsstand well above industry norms.

Another interesting aspect of our magazine is that its readership per copy of 8.8 is one of the highest readerships per copy measured by Media Mark Research.

We are very pleased with the way consumers have embraced its content and we believe it plays an important role in reinforcing our brand message and as a marketing vehicle.

As to the internet marketing channel, our licensee weightwatchers.com continues to perform exceptionally well.

I'll just give you a few statistics.

According to Nielsen net ratings, weightwatchers.com averaged 1.7 million unique visitors per month during the fourth quarter.

This is up over 100% from the same period a year ago.

Entering the fourth quarter, which is the slowest quarter of course in our meeting business, over 90,000 unique visitors per week used our meeting finder feature on the website.

Also during 2002, weightwatchers.com has proved itself to be both a rapidly growing and a financially successful company.

For the year, it had revenues essentially made up of subscription fees of over $40 million, up from just over $11 million in last year.

Also during 2002, it generated positive cash flow in each of its four quarters and had positive operating profits in each quarter starting with the second quarter in 2002.

I should note, this is despite investing heavily in building its global infrastructure.

Internationally it launched subscription sites in the U.K. and Canada during the third quarter of 2002 and plans to launch subscription sites in additional countries in 2003.

Now I would like to turn the discussion over to Ann Sardini.

Thank you, Linda.

Good afternoon, everyone.

As we heard from Linda at the beginning of her discussion, 2002 was another year of extremely strong growth for Weight Watchers.

I'll focus my review on the financial components of that growth for both fourth quarter and full year 2002.

First, to summarize the fourth quarter.

Revenues in the quarter were up 31% to $190.1 million from $145.5 million in the fourth quarter 2001, concluding a year of exceptional growth on a high note.

The key drivers of our strong performance, fourth quarter 2002 revenue performance were attendance growth across all geographies, 17% including acquisitions and 13% on an organic basis; and consistent growth in product sales throughout the system.

Net income for the fourth quarter 2002 was $28.4 million as compared to $81.4 million in the comparable quarter last year.

On the fully diluted per-share basis, this translates to 26 cents a share as compared to 75 cents in the fourth quarter 2001.

As you heard, last year's fourth quarter results included several nonrecurring, non operational expenses and benefits.

In addition, both year's fourth quarters were affected by the impact of unrealized foreign currency translation fluctuations net of hedges, primarily related to our Euro-denominated debt.

If we ignore the impact of nonrecurring items in Q4 2001 and adjust out unrealized gains and losses from both periods, our adjusted EPS for fourth quarter 2002 is 28 cents and compares to an adjusted16 cents for the fourth quarter 2001.

I'll now provide some detail regarding these comparability adjustments and their individual impact on EPS.

First, the impact of the unrealized foreign currency fluctuations, net of hedges, was a 2 cent loss per fully diluted share in Q4 2002, and a 2-cent EPS gain in Q4 2001.

Also, in order to provide a like-for-like comparison with this year's fourth quarter, let me remind you of the four nonrecurring items that we reported for fourth quarter 2001.

First and largest of these was the reversal in 2001 of the $71.9 million tax valuation allowance that had been set up at the time of the sale of the company by Heinz.

Adjusting out this benefit reduced Q4 2001 EPS by 66 cents.

Adjustments related to the other three nonrecurring items add back 9 cents to Q4 2001 earnings per fully diluted share, one cent is for the elimination of goodwill amortization in 2001.

Beginning in 2002, in accordance with FAS 142, the company no longer amortizes goodwill.

A 5 cent adjustment is to reverse out the Q4 2001 write off of the final portion of our loan to weight watchers.com and a 3-cent adjustment eliminates the one-time expense associated with early extinguishment of debt due to our December 2001 refinancing.

Now, having provided an overview of our results, I'll discuss in some more detail the various factors that drove our solid performance.

In our North American company-owned operations, revenue rose to $103.1 million, up 27% from $81.4 million in last year's fourth quarter.

Attendance has increased 22% and meeting revenue grew 21% quarter over quarter.

On an organic basis, adjusting for acquisitions, attendance was up 20% in NACO and NACO product sales grew 38%.

In our international operations, total revenue in U.S. dollars rose 35% to $66.6 million from $49.2 million.

The weaker dollar this year over last added 13 percentage points to our international revenue growth this quarter.

On a local currency basis, our international revenues grew 22% over last year's fourth quarter, led by the U.K. where attendances grew 15% and revenues grew 27% on the local currency basis.

As Linda noted, this quarter the U.K. does benefit from a comparison to a very weak fourth quarter of last year.

But overall, across all of our international markets, we have performed well in this quarter.

Attendances grew 13%, and product sales were strong, exhibiting 34% growth compared to the fourth quarter of last year.

The launch of our first innovations to points plan in Continental Europe was successful.

By geography as I mentioned, U.K. attendances were up 15%, Continental Europe's attendances grew 14% in the quarter and its revenue was up 24% on a local currency basis and our other international geographies gained 5% over last year's fourth quarter attendance levels.

Moving to our other revenues.

A franchise commissions this quarter were $5.7 million, 5% lower than last year's, reflecting the impact of the three franchises that we acquired during 2002: New Jersey, San Diego, and North Carolina.

Also as Linda discussed, our weightwatchers.com licensee continues to perform well and the royalty payments we receive are becoming meaningful.

Just as a reminder, we own just under 20% of weightwatchers.com on an unissued outstanding basis and about 37% on a fully diluted basis including all warrants and options.

Accordingly, we used the equity method of accounting and did not consolidate weightwatchers.com's financial results.

Our revenues do include the 10% royalty on weightwatchers,com's net revenues pursuant to our licensing cement.

We've received a royalty payment of approximately $1.3 million for this quarter.

The royalty payment from weightwatchers.com, along with strengthening of international licensing, magazine advertising, and sponsorship revenues resulted in most of the more than three times growth in other revenues, two million in last year's fourth quarter to $7.4 million in Q4 2002.

Our 31% total top line growth yielded an equivalent percentage increase in gross margin dollars, demonstrating once again the value of our variable cost operating model.

Fourth quarter 2002 gross margin as a percentage of revenues rose slightly to 51.3% as against 51% last year.

With regard to our gross margin percentage, I want to reiterate that we expect our gross margins to remain in the low to mid-50s on an annual basis, although individual quarters to vary based on seasonality.

Fourth quarter gross margins are generally at the lower end of the range.

Our operating income margin increased to 32% in the fourth quarter 2002 from 27.3% in last year's fourth quarter.

Excluding the impact of goodwill amortization which occurred only in 2001, fourth quarter 2001 operating income margin was 28.6%.

Our operating expenses below the gross margin level are marketing and G&A.

As to marketing, during the fourth quarter we invested $20.4 million in marketing, an increase of 12% over fourth quarter last year, but a decrease as a percentage of sales from 12.5% last year in the quarter to 10.7% this year.

General and administrative expenses are flat year to year in the quarter at $16.2 million.

Adjusting 2001 to eliminate goodwill amortization results in a 19% increase in G&A in this year's fourth quarter.

With this adjustment, G&A as a percentage of sales declined about a percentage point in the quarter, from 9.4% to 8.5%.

And now looking back on the full year 2002, we've performed exceptionally in all of our key metrics and would continue to pursue our core strategy, focusing on our variable cost business model, growing our meeting infrastructure as we build attendance, growing our products to our members and, finally, acquiring franchises opportunistically.

Net income for the year was $143.7 million, on worldwide revenues of more than $809 million.

Our fully diluted EPS increased 51% from the adjusted 2001 results to $1.31 per share in 2002.

Worldwide attendances grew by 17% to 55.3 million.

NACO attendances reached over 30 million in 2002, up 31% and NACO organic attendances grew on top of 29% organic growth in 2001.

To recap other key measurements on a full year basis, total revenues of $809.6 million were up 30%.

Product sales rose 39% over the prior year, and we maintained our gross margin at 54.3% compared to 54.1% last year before cost declined as a percent of revenue.

Marketing expenses were 10% of revenues in 2002 versus 11.2% in 2001 and 12% in 2000.

With regard to G&A, G&A expenses declined in absolute dollars in 2002 versus reported 2001.

However, after adjusting 2001 to eliminate nonrecurring items, comparable G&A expenses increased by $4 million, or 7% year over year.

As a percent of sales, G&A expenses also declined to 7.6% in 2002 versus an adjusted 9.2% in 2001.

Our operating income grew 53% to $296.9 million.

Our operating income margin was 36.7% for the year 2002 as compared to 31.2%, or 33.8% as adjusted for the year 2001.

Now, moving to the two major categories below operating income.

Net interest charges for the year were $42.3 million as against $54.5 million last year.

In 2002, our bank debt interest rates have fluctuated at around 4-5%.

Other expense net, the line below interest expense on our P&L was $19 million of expense for the year 2002 as compared to $13.2 million of expense a year ago.

During this year, we incurred $17.1 million of unrealized foreign currency lost, net of hedges, relating to the marking-to-market at the end of each quarter of our foreign currency denominated debt.

In 2001 this marking-to-market resulted in a gain of $5.4 million.

In 2001 the other expense category also included a $17.3 million write off for the final portion of our loan to weight watchers.com.

As discussed in prior calls, we will continue to report unrealized foreign currency translation gains or losses on a quarterly and annual basis that will impact our reported net income and earnings per fully diluted share.

The majority of these currency gains and losses results from the fact that we must mark-to-market our $100 million high yield Euro debt each quarter.

It is worth noting that the first call on our high yield debt is October 2004.

Were we to call our high-yield notes on that date, we would, of course, avoid future currency translation issues as well as significantly lower our interest cost since these notes carry a 13% coupon.

Now turning our attention to cash flow and the balance sheet.

During 2002, we generated cash flow from operating activities after interest and taxes of $165 million.

This allowed us to fully fund three franchise acquisitions: New Jersey, San Diego, and North Carolina, at a combined cost of $68.1 million, to redeem all 25 million of preferred stock that had been held by Heinz, to finance our capital expenditures of $4.9 million, to make scheduled payments of $15.3 million on our bank debt. and to use excess cash to retire an additional $20 million of our bank debt.

At the end of the year our cash balance was $57.5 million.

Moving to the balance sheet, with regard to our debt levels, our total debt at the end of December 2002 was $454.7 million as compared to $474 million at the end of last year.

Our senior debt paydown of $35.3 million was partially offset by the strengthening of the Euro and the result of reevaluating our $100 million Euro note from $88.4 million at the end of last year to $104.4 million at this year end.

With 2002 EBITDA of $300 million and our debt net of cash at $397 million, our debt-to-EBITDA ratio is now 1.3 times versus 2.4 times just a year ago.

And to complete our balance sheet overview, the increase in our assets over last year of $127 million is split about equally between current and long-term assets.

Our cash and inventory in prepaids has moved in a manner consistent with the growth in the business.

Franchise acquisitions in 2002 increased goodwill by almost $70 million.

Absent the debt, the change in our other liabilities is also consistent with normal seasonality and the company equity is now $46.5 million at the end of 2002 versus a deficit of $113.5 million at the end of last year.

And now I'll turn the discussion back to Linda.

Thank you, Ann.

We are very pleased with the strong results we delivered during 2002 and we remain confident in our ability of our business to continue to deliver double-digit revenue growth during 2003 and beyond.

First we will continue to grow the attendance in our meeting.

The problem of overweight and obesity continues to impact increasing proportion of the population in most societies, increasing the pool of prospective members.

More importantly, because we are the market leader and because our program truly helps our members, we will continue over time to increase our penetration of our target population.

In addition, it is important to recognize that our diverse revenue sources and geographic diversity give us multiple levers to pull to drive continuous growth.

Let me use 2002 as an example.

As we have just reported, we grew our top line revenue by 30%.

About 13% of this growth was directly attributable to organic attendance growth, leaving more than half of our growth, or 17% of the 30%. attributable to other drivers.

Of that 17%, about 5% came from our acquisitions.

Another 5% came directly attributable to our increase in product sales per attendee. 4% was driven by the price increase in foreign exchange, and another 3% was derived from increases in our other revenue sources such as franchise fees and licensing revenues.

Going forward I expect our revenue growth to continue to run well ahead of our attendance growth.

Now, finally before we open up to questions, let me finish by discussing guidance.

First let me note that all of our tactical and strategic planning, as well as our management compensation plans are based on annual results, not on quarterly results.

So, while I believe we will continue to show strong progress on a quarterly basis, it is our intent to continue our policy of providing annual guidance.

As in the past, we will continue to update that guidance on a quarterly basis as we progress through the year.

So for the full year 2003, despite the negative impacts early this year from the difficult weather patterns in the U.S. and in the U.K., we expect to deliver double-digit organic, top line growth and fully diluted earnings per share in line with the analyst range of $1.59 to $1.67.

Of course this excludes unrealized currency gains and losses associated with our foreign currency denominated debt, net of hedges.

So, now at this time we would like to open to questions.

Mikhaila, would you like to ask for questions?

Absolutely.

The floor is now open for questions.

If you do have a question or a comment, please press the numbers 1, followed by 4 on your touch-tone telephone.

We do ask that if on a speaker phone to please utilize your handset to provide optimum sound quality.

Once again, to ask a question, please press the numbers 1, followed by 4 on your touch-tone telephone.

Our first question is coming from Carol Wilke of Merrill Lynch.

Please pose your question.

Thanks.

So a question of further follow-up on the weather issue.

In the past when you've experienced this sort of impact from bad weather, how long does it usually take for attendance to recover to the pretty bad weather levels?

Hi, Carol.

Hi.

Yes, if we're looking at it, I mentioned that this was the worst storm that the Eastern Coast has had for about seven years and if we're looking at the U.K., this is also a rare occurrence.

So it's not something that on an annual basis we obviously have figured that would support it.

There are three impacts, if you like.

First, there's just the impact of the number of meetings we've closed, but there is a further impact on the week of the bad weather and that is in terms of a certain number of our members can't get to the meetings even though we can keep them open.

And then we do have this ongoing impact that can happen because people have either not come back to the meeting because they just, you know, slipped off the program or decided that they would come back at a later date and they discontinue their attendance.

So the impact actually is in those three buckets.

The only thing we know at the moment is obviously that we have cancelled 1,000 meetings in the U.S. from that severe storm last week, and we would expect that the attendance would be impacted by both the other two things.

And just a couple of follow-ups on that.

Even though, you know, you've had this impact, you know, your expectations for the year is actually for a higher, you know, higher earnings than the last time you gave guidance in November.

So what is it that gives you so much confidence that you can actually do better than what you were guiding to last November even though you were going to have a period of time this quarter where the attendance is lower?

I think this is what I was trying to point out, Carol, when I was sort of going through the make-up of the revenue growth in 2002, so that you could see very clearly that there are so many elements, not just attendances that make up our bottom line and our EPS growth.

And obviously we are confident that we will be able to deliver.

And do you expect North America and U.K. attendance to be up in the first quarter?

Well, if I'm looking at what my expectations normally would have been, as I said, we would have expected a reversal this year of last year's.

We would have expected high single digits in the first half of the year in North America and then we would have seen an acceleration after the innovation was put in.

Obviously the snow has impacted that.

If I'm looking at the regions that weren't impacted by the snow, then they are behaving exactly as I expected.

If we're looking at the U.K., the last time we put an innovation in, you might remember, you know, that we had high single-digit growth in the first half of the year.

So you can see that the first half we didn't end the year.

We ended the year at a very strong for the U.K., 5% growth in that year.

So, you know, you have to moderate your expectations when we've been hit by bad weather like this.

Thanks.

Thank you.

Our next question is coming from Andrew McQuilling of UBS Warburg.

Hi, Linda.

Thank you very much.

Two questions.

You mentioned you lost 1,000 meetings last week because of weather.

Did you say something about likely 2000 meetings lost in the March quarter in total?

No, I was just trying to put into perspective.

So I took a look at the U.S. for eight weeks.

That would be the January-February period because obviously it's winter every year and I just wanted to put it into perspective for you.

So, if I'm taking the U.S. company-owned system for that two-month period, we lost around 2,000 meetings this year.

That was compared to about 550 last year.

That was just to give you the scope of the difference of the weather impact.

That's very helpful.

Also in terms of, you know, the amount of meetings overall that, you know, that you held in the March quarter of '02, what's the meeting total roughly?

Because it looks like about, you know, a 1% impact, you know, on that 1,000 meetings lost.

I don't want to take that off the top of my head, Andrew.

We'll just look at what the quarterly.

Okay.

Yeah, I think that I'm sort of being pointed out here and I think it's absolutely true that it's not just the impact of losing those meetings, as I said.

It's -- there is an ongoing impact in terms of the people that we can get back and that we can get back into the system.

If you look at it, we lost about 7% in that week of our infrastructure.

In that week affected, 7%?

Yeah, in that week that was affected poorly.

If I'm looking at -- you were asking about the first quarter in --

Total number of meetings I guess for -- you know, March '02, total number of meetings held.

15,000, I think, was our weekly.

Weekly average?

Weekly average.

And, Linda, is it fair that about 7% of our infrastructure is kind of Northeast weather-affected?

Is that fair?

Yeah, the 1,000 came, remember, from that one storm, but I put it into perspective because obviously winter is winter.

Yeah, understood.

And in any time we do lose a certain number of meetings in individual geographies just from winter.

Understood.

And I guess you really don't feel like, you know, giving a rough idea for --

Yeah, the Northeast is about 25% of company-owned if you are sort of trying to put it into proportion, on attendances.

Terrific.

And, Linda, I guess you really don't want to give any kind of exact guidance for March '03?

We will be having our first quarter conference call before you know it.

Yeah, I know.

I understand.

All right.

Thank you very much.

Thank you.

Our next question is coming from Amy Chasen of Goldman Sachs.

Hi, Amy.

Hi, how are you?

Fine, thank you.

Great.

Two things.

First of all, can you give us some idea in the U.K., if you look at the regions that were not hit by bad weather, if there are any, of how attendance is growing just so we can get a sense for how this new points innovation is doing.

Amy, that's the problem with the U.K. the reason I mentioned that we actually were hit in two different weeks in January by snow that covered the country, obviously they are very used to snow in Scotland and the Yorkshire moors.

Luckily we hardly run any meetings there anyway but what hits our business in a place like the U.K. at Southeast and the South, places that just aren't used to it, you know, it does affect that country when we have this widespread snow, and that's what we had, both in two weeks, two different weeks in the U.K..

So let me --

That's very unusual.

Let me ask another question then.

Since you've launched the innovations, do you have any kind of metrics that say how the innovation is going?

There must be some way that you sort of strip out the weather and say, okay, we're happy with the implementation or --

That's what I said.

I think we're very happy with the way that the program was received from looking at the weeks that weren't affected, we were very happy with the way the program was received.

So we were very happy with the way the staff received it.

There is nothing top indicate to us that -- whether, you know, -- that weather wasn't our significant difference.

Okay.

And then just one more on the debt.

I believe that you had a plan to pay down most of the debt by the end of '04.

Is that still the plan?

Well, obviously we've said many times, there are only two uses for our cash.

The first and foremost is obviously to pay down debt, absolutely.

The second one is just -- and you can tell because we've made five of them, that opportunistically when the opportunity comes our way, we look at any franchise acquisitions and that is the only other use for our cash.

But so do you expect to pay down all the debt by the end of '04?

It just looks like there is still a lot to go.

I think that we have said that we intended to tackle the high yield because obviously that's at the 13%.

Okay.

And then what about the rest?

We basically said -- Amy, this is Ann.

We basically said that end of '04 into the early part of '05, without any acquisitions, would be basically when we would be payed down.

Without future acquisitions?

Yeah.

If there were no other future acquisitions.

Okay.

Thank you.

Thank you.

Our next question is coming from Greg Cappelli of Credit Suisse First Boston.

Hi, Greg.

Oh hi, how are you?

Good, thank you.

I just wanted to, first question back on the fourth quarter guidance, on the high single-digit growth you were originally expecting.

Was that an organic number you were originally expecting and then I know you cycled through New Jersey I think for the most part, I think you still have San Diego and Carolina in that count.

Yeah, remember if you are looking at the size of our acquisitions, we had New Jersey was a sizable acquisition compared to the North Carolina and the San Diego.

If I'm looking at in number of attendances that we bought, I said that in previous calls, in New Jersey we bought about 1.3 million attendances from the year prior to our purchase whereas in San Diego we only bought less than 400,000, and in North Carolina less than -- well, around a quarter of a million attendances.

So you can see the scope of it.

Okay.

And then just on that note of those previously acquired franchises, I'm assuming that's why the franchise commissions were done on the quarter, that you had bought the three back and I guess that's --

Can I just confirm, though, Greg, that the single digit, high single digit was organic growth.

We weren't -- that was organic, yes.

Okay.

I understand.

I just wanted to follow up on that and then I'm assuming that's why the franchise commissions were down actually in the quarter year over year?

That's correct.

Because of those you brought back in.

Yes.

And then just in terms of the product sales, would you, I guess, begin to expect those to normalize now?

We sort of modeled them to track the growth of attendance.

Obviously it's certainly done better than that but I guess we could expect those to moderate here in the first and second quarters perhaps?

Well, we have --

For the growth?

We have tried to, over time, discuss both our product sales as a total figure obviously and as an increase per attendee because, you know, if we grow our attendances, you could assume we would grow our product sales if we just sold the same amount to each person.

But what we have achieved over year after year after year in recent history was to increase both the product sales per attendee so we get the double benefit of the sales per attendee plus the growth in attendances.

So that really is what is supporting it and, you know, we have just seen this.

Of course, every year is not absolutely the same.

It does go up and down, but you are looking at incredibly strong product growth, sales growth per attendance across all of our geographies year in and year out.

And has the number of products changed much in the past quarter?

We continually introduce new products, and we continually introduce new flavors of our very popular consumables.

Those are our buyers obviously and our little fruit gums and things like that.

So it's a constantly refreshed range of products, but we are not expanding it beyond the number that we said.

You might remember our strategy was to just get, you know, between 20 and 25 highly necessary, very desirable products in each of our markets and then to keep refreshing those so that our sales force, our workers don't -- our leaders don't turn into workers and a sales force.

They are there to truly help the members and the members actually are the ones who are most successful in selling our products because they just tell each other about them.

Okay.

That's what I was trying to get at actually.

And then just one final question and this kind of gets into the product flow-through as well.

You know, we've come across some of your franchises that are charging as much as $12 and $14 per meeting in the U.S. and was wondering, you know, why, you know, NACO wouldn't implement a dollar price increase sometime in '03.

Is that just a function of the elasticity there of what you feel you'll be losing on the product sales or is there something more to it?

Well, we do obviously look at our pricing and we look at it absolutely market by market.

We have no fixed concept of when we should absolutely raise our prices.

But I think that we should look at our weekly fee.

If you look at our product sales, they are obviously considerably higher than the system, and if you look at it in terms of, we want as many people as possible to walk through the door and then we have the opportunity on an optional basis to sell them those products, we wouldn't ever want to raise our weekly fee to the point where somebody just couldn't attend Weight Watchers because it was an economic barrier for them to go to our meetings.

So, we're really quite comfortable with the way that we're managing our pricing, and remember, even in NACO we have a wide range of weekly fees right now.

Okay.

Thanks very much.

Thank you.

Our next question is coming from Kathy Imm of Salomon Smith Barney.

Hi, Kathy.

Hi.

Maybe it's obvious but can you help me understand why people would drop off the program after missing one class due to bad weather?

I would think that retention and loyalty would actually bring people back after --

Kathy, have you ever been on a program?

No.

Okay.

The reason is because, you know, every week you have to motivate yourself to keep going, and of course, when you first start anything, this is certainly true of me when I start exercise.

You know, I'm very enthusiastic, I'm very into it, and then as time goes on you have to actually put more effort into keeping your motivation high and to keeping yourself going.

So, that if after a time you have any reason or anything that comes along and just disrupts your attendance, then you can sometimes find that that can just, you know, you might eat in compensation for the fact that you've been shoveling so much or whatever you've been doing and then it just puts you into a different frame of mind and it's sometimes harder to re-motivate yourself to get going.

So, we just know that this is the reality of long-term programs, and obviously ours in a long-term program.

It takes commitment on the part of members.

We recognize that.

But would you change perhaps your marketing or promotional activity to try and recoup?

Well, actually we have invested more in marketing and if I'm looking at this period that we're in right now, we have increased our marketing spend here in the United States to compensate for the fact that we had some bad weather, and coming up in March we have something that we've never done before.

We sent out a press release earlier last week to explain and to announce that we have teamed up with the American Cancer Society in terms of creating an annual event called "The Great American Weigh-in" which is going to take place in March on Wednesday, the 5th of March, and this is the first time obviously, that the Cancer Society has ever teamed up with anybody to try to publicize the fact that cancer -- that overweight is an actual precursor to cancer as well as it is to heart disease and diabetes and so many other illnesses.

So we are opening all of our centers on that day to offer a free weigh-in to anybody who wants to go into a Weight Watchers center so that they can discover what their body mass index is.

This hopefully will get some publicity.

It's being very strongly supported in Congress and in the Senate, in Washington, and, you know, we're hoping that these kind of events obviously will mean that more people will recognize that they should come back to their meeting and stay in the program and stay with their weight loss efforts, as well as, of course, attract new ones that have never been to us.

And are you also going to change your promotional programs where perhaps in the back half of this year, you'll offer more your actual registration fee will be waived or any changes to that?

Well, we normally, in company-owned operations do that in our September-October main campaigns anyway.

That would just be normal.

Yes.

Okay.

Thanks.

Thank you.

And once again just as a reminder if you do have a question or comment, please press the numbers 1, followed by 4 on your touch-tone telephone.

Our next question is coming from Dina D Amore of J.P. Morgan.

Hi Dena, how are you?

Good, thank you.

I have three quick questions.

The first is, how many meetings were cancelled in the U.K. owing to adverse weather?

In the U.K. the impact was probably a couple of hundred.

That would be, you know, a bit over 200 compared to none last year.

Okay.

And then my second question is, what does management foresee would need to happen for the company to hit the high end of the range in 2003?

I think basically when we give our guidance, we are giving a range, we are confirming that range, and we don't tighten that range until we get further into the year.

Okay.

So probably more toward mid-year you would be able to firm up that range?

With each quarterly call, historically, not that we have a long history but historically I have tightened that range.

Okay.

And then the last question is, I know that the company uses cash to pay down debt and for the acquisition of franchisees, but would the company consider paying a dividend?

Well, not obviously while we still have the debt outstanding but there will come a time when this is a very high cash flow company, will have a lot of cash and we'll have to make a decision whether to pay a dividend or buy back stock or whatever the board decides to do.

Okay.

Great.

Thank you.

Thank you.

And our final question is coming from Jeff Cooley of Essex Investments.

Hi, Jeff.

Hello.

A couple of questions about weightwatchers.com and its impact on the revenue lines just to make sure I understand correctly.

You said that it accounted for most of the increase in the all other revenue line. is that correct?

Well, it accounted for about four-plus million of it, yes.

And that is from sales of the magazine?

No.

That comes -- weightwatchers.com has an agreement with us where they pay us 10% of their net revenue as a royalty for obviously using the weight watchers name.

They are a licensee.

Okay.

And then $1.2 million from royalty fees from their -- I guess they would call it meeting fees, ended up in the franchise fee line.

Well, their revenue is almost entirely driven by their subscription fees because nobody in the dot-com world, I think, is getting revenues off advertising.

Just to clarify, Jeff, the $4 million is a full year number.

Okay.

$1.3 million in the fourth quarter.

Okay.

And do you know the portion of male versus female customers on dot-com and is it any different than in your meetings?

No, I'm sorry, I don't have that statistic to hand.

Okay.

Thank you.

Pleasure.

Thank you.

That will conclude our question-and-answer session.

Is there any closing comments?

Yes.

I would just like to thank everybody very much for participating today and for their continued interest in Weight Watchers.

I obviously believe that 2003 will be another excellent year for the company as we continue to execute against our diverse set of growth opportunities, and I'm looking forward to updating you on our progress at our next conference call.

So good night and thank you for joining us.

Thank you all for your participation.

That does conclude your teleconference.

You may disconnect your lines at this time.

Have a great evening.