WW International Inc (WW) 2003 Q1 法說會逐字稿

Good afternoon, Ladies and Gentlemen.

Welcome to the Weight Watchers, fourth quarter 2003 earnings conference call.

All parties are placed on listen-only mode and the floor will be open for questions and comments at the presentation.

It is my measure to introduce your host, Donna Stein (ph).

Good afternoon, everyone.

Thanks for joining us.

With us on the call are Linda Huett, the president and chief executive officer of Weight Watchers as well as Ann Sardini the chief financial officer.

After the market closed, the company issued a press release containing financial results for the fourth quarter of 2003.

The purpose of this call is to provide investors can details recording the results and general update on the progress of the company.

If you need the press release or any information about weight watcher's international, you may call Brainard communicators, 212-986-6667.

Before we begin the call today, let me remind everyone that the call does contain forward-looking statements.

Investors should be aware that they are subject to risks and uncertainty that could cause actual results to differ materially from those discussed here today.

The 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 update or revise any forward looking statements whether as a result of new information, future events or otherwise.

Now, with that, I will turn the call over to Ms. Huett.

Go ahead, Linda.

Thank you, Donna.

Good afternoon and evening to those of you listening in from Europe.

Welcome to our review of Weight Watcher's International's performance for the fourth quarter ended March 29, 2003.

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

Our revenues increased 18% from 202.5 million in last year's first quarter to $251.5 million this year.

Our global attendance at company-owned meetings increased 8% to 16.3 million.

Our operating income also grew by 12% to 79.4 million from last year's $71.1 million.

Our operating income growth lagged our top-line revenue growth primarily as a result of our decision to make strategic marketing investments in certain of the international markets, in order to increase our brand awareness, and accelerate the growth in the markets and our decision to increase the marketing in the U.S. to you support the winning points program, now in its third year.

And to a lesser extent, we also make tactical marketing investments in the weather impacted markets.

Fully diluted earnings per share were 39 cents for the quarter, compared to 33 cents for the prior year's fourth quarter.

That's excluding in both periods the unrealized gains and losses associated with of marking to market the foreign currency denominated debt net of hedges.

Included these unrealized currency gains and losses our fully diluted earnings per share were 37 cents compared to 34 cents in the prior year.

Summarizing the quarter, growth in the North American classroom business moderated from the robust levels that we have seen since the launch of the winning points program in January of 2001.

For the quarter, our North American company-owned operations or NACO revenue was up 9%.

In contrast, in our international markets, where we have the benefit of recent program innovation as well as positive currency movement, we grew our revenues by a strong 37%.

Now, let me provide additional color on each of our major individual geographies.

First, North America.

This January was the third winter diet season we have had in North America under the winning points program.

As I have discussed in previous conference calls, this is unusual, as we normally innovate our program in each market every two years.

We benefit from these innovations in multiple ways.

First, these enhancements to our program give us something new to talk about, increasing the effectiveness of our public relations and marketing efforts.

That helps us drive new members into the classrooms.

Secondly, these program improvements give us something new to say to the millions of former weight watcher's members providing them with a reason to return to Weight Watchers sooner than they otherwise may.

We made this decision to delay what otherwise would have been a January 2003 launch of the next program innovation until the fall of 2003 in order to stagger the global innovation schedule.

While we believe the decision to delay will be good for the company long term, it does lower our growth in North America in the short term.

We budgeted an increase in our NACO marketing investment to mitigate some of this effect.

However, as I discussed on our last call, the severe weather we experienced during January and February in many of the Eastern U.S. markets forced us to close over four times as many meetings in the fourth quarter of this year due to weather as we did last year.

The severe weather also lowered attendance at the meetings that remained open in the affected areas.

While events like snowstorms occur, they -- when they occur, they impact not only the attendance and the recruitment in that single week, but the effect is magnified because every lost recruitment means about ten weeks of lost attendance.

And for certain members, the mere fact that they have been forced to miss their weekly meeting may derail their weight loss efforts.

For the first quarter, NACO had attendance of 8.9 million, up 7% from the same quarter last year.

Removing the impact of acquisitions our damek (ph) attendance growth was in line with the expectations I expressed in the year-end conference call with growth of 4%.

We did increase the marketing investment beyond budgeted amounts towards the end of the quarter to rebuild weather affected attendances and enter the second quarter with a stronger flow-through.

This was offset by the wall to wall news coverage from Iraq in the last weeks of quarter one a the first few weeks of quarter two.

This had a dampening effect on recruitment during the weeks.

And while this had a marginal impact on quarter one, it will have a more meaningful impact on quarter two.

In addition the late timing of Easter this year has in effect shortened our spring diet season.

We always kick off our spring diet season just after Easter.

This year we had a very late Easter Sunday, April 20, versus March 31 last year.

In other words, we have three fewer weeks of what we call our spring diet season in the plan this year compared to last year.

Therefore, in NACO, while we expect continued good revenue growth in the second quarter, I anticipate we will see little, if any, organic attendance growth in quarter two.

With a better third quarter as we begin to benefit from the September introduction of the new program innovation, followed by a more robust quarter four.

Moving on to the U.K., as I explained in the last call, the U.K. was also impacted in January by extreme weather.

This occurred during the critical January period and did negatively impact attendances.

On the other hand, we were benefiting from additional marketing opportunities we identified, and more importantly our excellent program innovation.

Therefore, despite the terrible weather conditions in January and the 5% price increase, the U.K., our most highly penetrated market, delivered attendance growth at 5% with the business accelerating nicely after the severe weather in the early part of the quarter.

Fueling this growing momentum in the U.K. market is the January introduction of our latest innovation, the Time To Eat Program.

While still being based on the points system, the program has been completely repackaged and for the first time in any market is being supported by 52 weeks of seasonally appropriate meeting material.

In past programs, the material our members received at any given meeting was dependent on how many weeks that member had been on the program.

The Time To Eat Program allows every member, whether they have just registered or have been attending for 20 weeks, say, to receive the same piece of topical material.

This allows us to integrate the topic into the meeting discussion.

It's significantly enhances the staff's ability to maximize the involvement of the group and increase the support, and that is the hallmark of Weight Watchers.

I'm pleased to report that members' reaction to the new program has been excellent.

And this gives me confidence that we will continue to build upon this momentum as the year progresses.

Moving on to revenues, local currency revenues in the U.K. increased 15%, resulting from our 5% attendance growth, our 5% price increase, and a 13% increase in product sales per attendance.

The U.K. team is on track in 2003 to deliver yet another year of double digit local currency revenue growth.

Now, moving on to continental Europe, it delivered solid volume performance with attendance of 2.8 million, up 10% over prior year.

Local currency revenue growth was up an even stronger 24% driven by attendance growth and average price increase of 4% as well as 38% increase in total product sales.

With regard to our marketing strategy in 2003, we plan -- the plan -- we decided to make significant increases in marketing investment in continental Europe, particularly in the low penetrated countries.

While this increases our marketing spending as a percentage of revenue in the short term, we believe that it will have substantial payoff in the long term.

The most important example of this strategy is Germany.

We have recently complete a series of extremely exciting market research projects on overweight women in this market.

I personally attended some of these qualitative sessions.

This research shows that despite our sub 2% penetration, our current and former members overall reaction to weight watch watcher's program and service in Germany are on par with the U.K.

On the on the other hand, although satisfaction with the service in Germany is at least equal to the U.K., Germans who have not personally been familiar with weight watcher's meetings display a considerable lack of knowledge of our service.

This creates a significant hurdle to joining us.

Therefore, we have decided to invest in Germany well above what tactical calculations would indicate.

This is an investment in the awareness of Weight Watcher's brand and in the understanding of the Weight Watcher's service in Germany.

I can report that the initial response to the high levels of marketing has been very positive.

With local currency revenue growth of over 50% in the first quarter.

Looking at the rest of 2003, I expect Europe will continue its strong volume performance, and that we will continue to invest with the view towards our long term penetration targets in these markets.

Our other geographies which comprise Australia and new Zealand had attendance growth of 10%.

Now, moving on to other news, as you are aware, at the beginning of April, we purchased most of the territories of our largest franchisee, the Weight Watchers Group for a cash purchase price of $181 million.

The territories included portions of New England and areas across a number of Midwestern states in the U.S.

Major metropolitan areas included in this acquisition are Boston, Cleveland, Cincinnati, Pittsburgh, and St. Louis.

The weight watcher's group will retain ownership and continue to operate the remaining franchises across portions of Michigan and the province of Ontario, Canada.

The areas that we acquired generated revenues of approximately $76 million in 2002 and had adjusted operating income of approximately 24 million.

The purchase price therefore represents a multiple of 7.4 times 0 I, somewhat higher than our benchmark five to six times OI which we have paid in the past.

We believe the premium was justified because of the scale of the transaction and the opportunity to increase NACO's coverage of the United States to over 70%.

In addition, we expect this acquisition to -- will be significantly accretive, adding 6 cents to 2003's EPS and at least 10 cents to 2004.

That being said, I would expect future franchise acquisitions, if any, to be made at prices in line with our benchmark multiples.

Our first objective with this franchise acquisition, like all of the previous franchise acquisitions is to smoothly transition it into our NACO operations.

While the size of this operation and the fact that it is being caved out of an ongoing franchise operation does create some complexity, our team has tremendous experience integrating franchise acquisitions and it is my expectation that we will have it fully integrated into our NACO operations by the end of this year.

Once we have the majority of the integration behind us, we will focus our energies on steadily increasing penetration in these markets along with the rest of NACO and in increasing product sales per attendance to NACO standards.

Currently product sales per attendance in these newly acquired territories under half of NACO's average.

On another topic, the internet licensee, weight watcher's.com continues to perform well.

I will share just a few statistics.

According to Neilson Net Ratings, Weight Watcher's.com averaged 2.7 million unique visitors a month during the fourth quarter.

This is up 64% from the same period a year ago.

For the quarter, weight watcher's.com had revenues of over 17 million, essentially made up of subscription fees.

This is more than double last year's first quarter.

And despite ongoing investments in international developments, the company is profitable and generating positive cash flows.

Just to remind everybody, we owe 19.9% of weightwatchers.com on issued and outstanding basis and 37% of the company on a fully diluted basis including all warrants around options.

And while we do not consolidate their financial results with ours, we do derive a 10% royalty payment from weightwatchers'.com on the net revenues through the licensing arrangement.

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

Thank you, Linda.

Good afternoon, everyone.

I'll begin by summarizing the financial results and I'll move into additional detail by geography, followed by a review of cash flow and balance sheet.

Revenues in the fourth quarter of 2003 were up 18%.

To $251.5 million, from $212.5 million in the first quarter of 2002.

Net income for the fourth quarter of 2003 was 40.6 million or 37 cents per fully diluted share as compared to 37 million or $34 cents per fully diluted share in the comparable quarter last year.

Both years' first quarters were affected by the impact of unrealized foreign currencies translation fluctuations net of hedges, primarily related to our euro denominated debt.

Excluding the impact from both periods, fully diluted earnings per share this quarter was 39 cents as compared to 33 cents in the fourth quarter 2002.

Now moving on to our review by geography.

I'll go first to the results in our North America company-owned operations.

In NACO, revenue rose to $132.9 million, up 9% from $121.6 million in last year's fourth quarter.

As you learned from Linda, the planned decision to delay the new program innovation until September, an unusually prolonged bad weather in certain NACO markets reduced attendance growth from recent trends to 7%, 4% organic.

NACO meeting fee-revenues grew 6% quarter over quarter and product sales rose 18%, 10% on the per attendee basis.

Now turning to the international classroom operations.

Total revenue in U.S. dollars rose 37%, to 93.7 million, from 68.5 million.

On a local currency basis, the international revenues grew 18%.

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

As we mentioned in last quarter's conference call, the launch of the first innovation to the Points Plan in continental Europe in September of last year was walk successful and the momentum has continued in the first quarter of this year.

As Linda noted, the U.K.'s innovation, Time To Eat, has been very well received.

Accordingly, attendances grew 8% internationally as a whole, despite certain price rises and weather related issues.

And products sales were strong, exhibiting 25% sales growth on a local currency basis.

By geography, U.K.'s attendances were up 5% and revenues rose 15% on a local currency basis.

Continental Europe's attendances grew a strong 10% in the quarter led by Germany, and revenue was up an impressive 24% in local currency.

Our other international geographies gained 10% in attendances over last year's first quarter levels.

Now, as to the other revenues.

Franchise commissions this quarter were 8.8 million, 7% lower than last year's reflecting the impact of the three franchises that we acquired during 2002, New Jersey San Diego and North Carolina.

Organic growth in the category, that is excluding from Q1, 2002 commissions from the acquired franchises and a one-time retroactive payment was 5%.

As Linda highlighted, our WeightWatcher's.com licensee continues to perform well.

Our revenues this quarter included the 10% royalty on weight watcher's.com's net revenues.

This amounted to 1.6 million, and was more than double last year's Q1 level of 700,000.

The royalty payment from weight watcher's.com combined with the strengthening of international licensing and advertising in various publications resulted in the 126% year on year increase in other revenues from 3.2 million in Q1 '02 to 7.2 million this year.

Now, looking at gross margins, in the first quarter, 2003, gross margin dollars increased 19% in line with the 18% increase in revenues.

Gross margin as a percentage of revenues remained stable at 55% as against 54.8% in the comparable period last year.

As most of you know, we expect our gross margins to remain in the mid 50's on an annual basis although individual quarters vary based on seasonality.

Our operating expenses below the gross margin level are marketing and G & A. As to marketing, during the first quarter we invested heavily in marketing, 41.5 million as compared to 29.3 million in the first quarter of last year.

This is an increase of 41% in U.S. dollars, or 32%, if I eliminate the effect of year over year changes in foreign currencies.

As a percentage of revenue, marketing increased to 16.5% in the quarter, versus 13.8% in the first quarter of last year.

As Linda discussed in some detail, we increased the marketing investment in certain international geographies to spur brand recognition and growth with good results.

In NACO, in addition to the planned increases to support winning points for a third year, we extended our media campaign to counter some of the impact of the bad weather.

G & A as a percentage of revenues declined to 6.9% from 7.6% in last year's first quarter.

G&A expenses are up 7.4% in the first quarter to 17.3 million as a result of normal increases for salaries and expenses, and some growth in staff to support the company's growth.

And like all public companies, we are having to face increased expenses associated with additional regulatory and compliance requirements.

Even with the heavier marketing investment this year, our operating income grew 11.8% to 79.4 million.

Our operating income margin was 31.6 % in the first quarter this year, as compared to 33.4% in the comparable period a year ago.

The two major categories below operating income are interest expense, and other expenses income net.

Net interest charges for the quarter were 10.1 million, down 6.7% from last year's first quarter.

Namely the result of a lower level of bank debt and lower LIBOR rates.

The effective interest rate in the first quarter was 9.14%, with bank debt at 4.09%.

Other expense net, the line below interest expense on our P & L was 3.1 million of net expense for the first quarter 2003, as compared to 6.6 million of income a year ago.

In the fourth quarter this year, we incurred 3.1 million of unrealized foreign currency losses net of hedges related to the market to market at the end of the quarter of our million high yield euro denominated debt.

In 2002's first quarter, the marking to market resulted in a gain of 1.5 million.

As a reminder, the first call date on the high yield debt is October, 2004.

When we call the high yield notes.

We will avoid any future currency translation issues and significantly lower the interest costs since the notes carry a 13% coupon.

Based on today's rates, this would increase the EPS by 12 cents.

Now turning our attention to cash flow and balance sheets.

During first quarter 2003, we generated cash flow from operating activities after interest and taxes of 101 million, up 73 million -- up from 73 million during last year's first quarter.

This is an increase of 28 million.

After financing activities in capital expenditures totaling 5.5 million, the net cash generated was 95.5 million.

Cash at the end of the quarter rose to 153 million.

On the balance sheet, our total debt at the end of March, 2003, was 454.4 million, as compared to 454.7 million at the end of last year.

Our debt net of cash at the end of the quarter was 301.4 million.

As against 451.2 million at the end of the first quarter last year.

Our senior debt pay-down in the quarter of 3.7 million was offset by the strengthening of the euro and the resulting revaluing of the 100 million euro note from 104.4 million at the end of last year to 107.8 million at the end of this first quarter.

And to complete the balance sheet overview, the change in assets is largely the result of the increase in cash, and normal fluctuations in our other accounts.

And the increase in liabilities is primarily the result of the normal timing of first quarter interest and tax accruals and payments.

One last item.

Early in second quarter, we closed on the purchase of the eight franchises from the WW group and funded this 181 million acquisition with 96 million in cash, and 85 million in additional borrowings.

That concludes my remarks and I'll turn the discussion back to Linda.

Thank you, Ann.

We are pleased with our fourth quarter results, and we believe that they demonstrate how the geographic diversity of the business contributes to our ability to drive continuous growth.

While we know that the macro trends in obesity rates as well as our ability to increase penetration in the markets bode well for the future, growth in any single market will never be a straight line.

It is inherent in our business that the timing of our program innovations, political events, when holidays fall or even the weather can cause fluctuation in attendance growth in the short term in any single market.

However, with the benefit of the international scope of our operations, combined with our ability to grow non-meeting fee revenues, such as our products sales, publishing and licensing revenues, we will continue to deliver strong growth in our top and bottom lines.

While we know that pushing our North American innovations from January to September would impact our U.S. growth in the first half of this year, several other events, which I spoke about earlier did conspire to slow us even further than we anticipated.

On the other hand, growth in our international markets is accelerating and taking up the slack.

We will be introducing the North American program, innovation in September and the entirely North American Weight Watchers organization is extremely excited about this launch, and we fully expect to have an acceleration of growth in the U.S. market at that time.

Now, before I open the discussion to questions, I'd like to review our guidance.

During our last conference call, I provided fully diluted EPS guidance for 2003 of $1.59 to $1.67.

Before any impact of unrealized gains or losses due to our marking to market of foreign currency denominated debt.

Updating this guidance for the two cents of unrealized currency lost in the fourth quarter, and adding 6 cents, of 2003 accretion from the acquisition of the Weight Watchers group that, makes the range $1.63 to $1.71.

Again, without any further impact from marking to market of foreign currency denominated debt in future quarters.

I remain comfortable with this range.

J.T., at this time, we would like to open to questions.

Thank you.

Ladies and Gentlemen, the floor is now open for questions and comments.

If you do have a question or comment at this time, please press the numbers one, followed by four on your telephone key keypad.

Questions will be taken in the order they are received.

We do ask that before asking the question, you pick up the handset for sound quality.

If you wish to withdraw your question from the queue, please press the pound key.

Please hold while I poll for questions.

Thank you.

The first question is from Carol Wilke with Merrill Lynch.

Your line is live.

Hi.

Excuse me voice.

I'll try to be clear on this.

I had two questions.

First, relating to North America and when you talk about the attendance growth, given these events that have gone on in the war, et cetera, and from a visibility stand it point at your comfort level, how comfortable do you feel about how the trends are going to go through the course of the year, and, you know, clearly, your sticking with your original guidance for the full year, so, is it that the international business is so much better than you expected?

Obviously, as I said, we were slightly disappointed.

I think I indicated in the first call of this year in February that we would have anticipated high single digit growth in the U.S. in anticipation of the innovation obviously that had been moved to September and acceleration after that.

We're looking at an organic growth of 4%.

We trust that it is these external events because we can map where weather hits us.

We can see the impact on that week.

It's clear to us.

It's very visible.

If we are looking at areas of the country that have not been impacted by the weather, then they were performing in those weeks as we have expected.

Obviously, the war disrupted some of our marketing activity and therefore slowed down some of the recruitment that we would have expected from the additional marketing activity that we put in.

If I'm looking at the whole year though, we knew it was going to be a year of two halves.

We knew that the first half we moved in innovation from January to September.

We believe that it is going to function exactly as we anticipated, and if we're looking at Europe, I think that gives us good indication that it will.

The U.K., which is still our most penetrated and most competitive market, their attendance growth was depressed by the weather in January, and they still turned in a very, very solid 5% attendance growth and as I indicated, we have seen that accelerate since the bad weather was there.

So, I really do have confidence that we're going to see the U.S. come in.

Our international operations, our over delivering, our expectations, and obviously right now, we are helped by a very weak dollar.

If I can just ask one other question, could you comment on pricing in north versus continental Europe and the U.K.

It seems like you had decent positive pricing in those regions, but with North America it looked like for the first time in a while, your meeting fee revenue was actually slower than your attendance growth?

Yeah.

We put in a price rise in the U.K. of about 5%.

And we did that with the innovation.

It was following price rise with the innovation in 2001.

And we feel that that was the right thing to do for that local market.

Across Europe, we took it on a market by market basis, which is the way we do approach pricing.

If you are looking at the U.S., we have an innovation in September, which is the smaller diet season, and already have a variety of prices, if I'm looking across the whole NACO operation from our sort of benchmark 9.95 weekly fee all the way up to, say, the $12, and $13 in some markets.

We will take a decision in the U.S. solely by what we see happening to the U.S. market at the time.

Thanks very much.

The weekly fee itself in the U.S. did go down because, as Ann explained, we did extend the number of weeks primarily driven by the number of weeks that we had a free registration offer in place.

As you know when we market and go on television, we have to have an offer connected with that.

We had more weeks this year of free registration than we normally do or that we had last year.

So, as the year goes on, would you expect it to get back to more than normal relations?

Yes.

I would expect us to be back more to a normal of promoted weeks.

Thanks very much.

Thank you.

Our next question is come being from Andrew McQuilling with UBS.

Hi, Linda.

Thanks very much.

Can you talk about the level spending increase on the marketing line in the U.S. for the March quarter?

What you plan for full year in terms incremental marketing support.

The marketing increase was in two categories.

One was the strategic marketing increases, which were in our lower penetrate penetrated areas.

We had already taken when we were planning out 2003 the decision to increase our marketing in the fourth quarter in the U.S. because we knew we were going out with the winning points program for the third January season.

So, we felt that that was the right strategy to take.

We then increased obviously a bit more marketing to counteract some of the bad weather impact in some of those markets.

So, if you are looking at the increase in dollars that we spent, the 12.9 million, 12.8 million that we increased the marketing spent, it was 50-50 between international and the U.S.

Driven by those two different criteria.

Linda, do those increases do it feel like this is the run rate for the full year -- run rate for the full year how the fourth quarter went?

No, I think if you are looking at it Andrew, you should look at the strategic investments in Germany as something we are doing right now.

We believe it will pay off in the medium and long term.

But as we start building this awareness and increasing our awareness in Germany, I believe we'll be able to cut back and pull back on the marketing investment.

Certainly as a percentage of revenue, it will decline.

Even if it doesn't necessarily decline as absolute dollar figure.

If you're looking at the U.S., we did this quite deliberately because of the third year of the existing program.

Now, that's unusual.

We don't expect to be back in that position again.

Understood.

Maybe last one if you could.

Product he sales per attendance the WW group.

It's exciting they're less than 6% in NACO.

That's right.

In the other acquired territories.

How long has it taken for you to increase product sales to bring the acquired product sales per attendance to mar normal NACO levels.

How long a process?

It's steadily builds, usually Andrew.

If we look at New Jersey, and obviously we pointed out that New Jersey was unusual because they had next to no product sales.

We ramped up the product sales during 2002 quite well.

If we are looking maybe at a more typical, it -- you're looking at Waco.

They have now achieved comparable levels to other NACO areas.

Obviously, that took us about three years to achieve.

Terrific.

Thank you very much.

Thank you.

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

Your line line is live.

On the second quarter, some of the numbers that you gave and sticking with the U.S. for a second, I want to sure that I heard up.

You said there would not be attendance growth in the U.S. in the second quarter, is that correct?

I said I didn't expect much, if any, attendance growth.

I did expect obviously still revenue growth.

Okay.

That's because of the product sales.

Yes.

And I also put the qualifier in of organic.

We had just purchased the WW group.

That will contribute not just to our EPS in the rest of 2002, but their attendance is flowing through in the second quarter.

The guidance that the not much attendance growth that's on an organic basis.

Yes.

Okay.

Now, along the same lines, is that lowered number, you know, relative to what we have seen even in the fourth quarter, is that -- I was unclear if that's because of the change in timing of Easter, or because of the war or both?

Well, we would have planned for the southeaster -- Easter is actually -- the movement of Easter is one of the big things that we build into our plans every year.

We knew where Easter was going to fall.

That was built into the plan.

But we would have anticipated a stronger first half than we are going to achieve.

We feel that the two big external events that impacting that, really, are the weather followed by the war.

The weather disrupted obviously the flow-flew from quarter one into quarter two.

And then when we put additional marketing and tried to recover some of that lost volume, we were just impacted by the war because it hit at exactly the same time that we were making that investment and we were trying to increase our marketing.

So, it is a flow-through effect.

That's compounded obviously by the late Easter which we had obviously built in.

I'm saying that you have to look at the first half of the year at one thing and the second half of the year in the U.S. as another thing?

I wanted to know if Easter had already been built in and you answered that question.

In our forecasting, it's definitely built in.

Great.

Just a completely separate question.

Maybe for Ann, which is why don't you just give guidance including the unrealized gains and losses, seeing that as pretty much every quarter that's something in there for it?

Wouldn't it be easier for everyone to be on the same page and have one number that you report every quarter?

I think it's about clairvoyance, Amy.

I think none of us can really predict what the currency is going to look like.

Rather than muddy the waters by making a prediction and then having to end up correcting it, we're better off, all of us, to let that flow as it flows and give the guidance before that.

It affects the bottom line.

Okay.

Last but not least, can you quantify or have you tried to quantify the weather impact in the quarter in North America?

No.

The quantification as we gave you is really to do with the number of meetings that we had to close.

And we were looking at more than four times what would have been a typical winter.

Obviously every winter there is weather and severe weather in some particular part of the country as big as the United States.

But we were looking at extreme weather here in the United States.

So -

So, just as a ballpark, I mean, do you think that hurt you by five points or -- I'm just trying to get some idea of ballpark.

I suppose that the guidance that I have already given you is that I said we would have expected high single digits in the organic attendance growth as we came in at 4%.

So, I would imagine you can read into that what you think -- what we think the impact is.

Okay.

Thank you.

The next question is coming from Greg Capelli with CSFB.

Your line is live.

Hi, Linda, hi, Ann.

First question going back to the North American attendance, did you guys actually see things, Linda, in one Q going into 2Q, did it deteriorate, and if so, has attendance actually stabilized.

I'm trying to get a sense if it's on a onward trend or stabilized at this point?

I think that you have to look at, we pointed out, I think several times that last year, 2002 was a year of two halves.

We had an almighty growth figure in the first half of two 2002 at 27% attendance growth.

Right.

And then we knew that that would moderate.

I think all of us knew that it would moderate from those levels and we -- the second half attendance growth rate of 17%.

I think if you looked at the organic, and in quarter three, it was 13%, buts, again, year over year, we knew some of that was impacted by the previous years, September 11 events.

It's very hard to see absolutely clear like for like in any of these years.

But we are coming up obviously this year against a very, very strong first half of course so our comparables were tougher in the first half.

We knew that, and we also knew, which is unusual for us we were going into this major diet season.

For the third year with the same program.

Winning points.

So, we had already made those decisions.

So, that's why we were anticipating, and that's why I indicated that we were anticipating high single digits.

But the weather came along, and impacted that.

Obviously severely, which is why we put is in our conference call when we were only halfway through the quarter.

Sure.

Anything on the competitive -

We believe, though, that the attendance has stabilize, if that's what's underlying your -

Yeah, it was, actually.

That's helpful.

Anything on the competitive front that you can give us an update on of what you are seeing?

Obviously January is an extremely active period.

As you can imagine, in this very very popular weight loss arena.

So, there's a lot of noise out there.

We haven't seen anything different.

There was a lot of noise out there this first quarter.

If we're looking at our competition, we always look at all of the research that we do in terms of how do people perceive the methodology, where in the U.S. we have no competition in that methodology.

Compared to other methodologies.

Our research just continues to support our contention that our methodology, when you are looking at long term weight loss and serious solutions to a weight problem as opposed to a crash diet or something that's going to crash the weight off in a short period of time, we stand head over heels above everybody else.

I think that we don't see anything that would change our mind on that.

There have been negative drug publicity in the fourth quarter of this year.

I I'm sure that you all read about Ephedrine.

Yes.

And it had very damaging P.R. in terms of the health effects or more seriously damaging than people expected.

The results from the new obesity drug from Regenron (ph) were disappointing.

We're not seeing anything that's causing us to say there's something new on the horizon that will change our belief that we will maintain our leadership and continue our penetration growth well into the future.

Okay.

One more quick one.

I -- I believe historically when you have put in the new innovations that come with the pricing increase, I wasn't clear should we expect that as well?

Or is that still newspaper the air at this point?

Well, as I said, I think we're in slightly different circumstances in the U.S. right now than we were last time.

Last time, you might remember if you looked at the chart, we took a very cautious approach to the price rise.

We did it in three trench ace cross the country during the year before we put the program in, just to make sure that there was nothing that was going to dampen our strong growth picture at the time.

I think right now, obviously, we are looking at it.

We will assess it closer to the time and make the best judgment call we did.

The fact that we have been impacted by weather and by the war, et cetera, I mean, I think that you shouldn't take it as a given that we will always in every market raise our prices in -- at the same time that a new program goes in.

Okay.

Thanks very much.

Thank you.

Once again, Ladies and Gentlemen, if you have a question or comment at this time please press the numbers one, followed by four.

On your telephone keypad.

Our next is coming from Cathy Imm with Smith Barney, the line is live.

Will you remind me again what the total attendance is from the franchises from the WW group.

If you are -

If you are looking at the attendances that we have bought, they were around 5 million.

And we have not -- we bought portion of theirs and ours is 5 million.

5 million, okay.

Then secondly, just in terms of thinking about overall product sales growth, I think historically, you know, the way that we usually looked at it is it was four 0 five points above attendance growth rates, including the acquired franchises, should we expect total product sales for the company to be lower than overall attendance growth, given that the new franchises haven't -- in terms of the overall product sales have not been ramped up probably until next year?

I think if we are look being total picture, the international picture of product sales per attendance, they are running well ahead of the attendance growth, if you are looking at the U.K. for an example, we had more than 13% growth in local currency.

Obviously with the benefit of the weaker dollar, it was greater, but we had 5% attendance growth, more than 13% product sales per attendance growth.

We saw similar per attendance growth in continental Europe.

We do expect generally speaking our product sales per attendance to continue to grow.

And then you can add the multiplier of whatever attendance growth is actually there.

You have the two parts to our product sales growth.

Okay.

That's helpful.

Then lastly, can you comment on the attrition rate that you saw between the new and existing members during the quarter for NACO.

I'm just trying to understand in terms of the increased marketing and promotional spending.

Did that bring in new members or just brought back the previous members to the program?

I haven't actually even seen a breakdown of quarter one.

We obviously don't get that on an immediate basis.

We look at it usually annually.

As I reported self-times in different places, you know, more than half of our attendance --enrollments come from brand new people in North America, and that's been stable for the last few years.

Okay.

So, that's probably the same dynamic that you saw in the quarter?

I have nothing to lead me to believe that it would be different.

Okay.

Thank you.

Thank you.

At this time, there appear to be no further audio questions.

Will turn it back to the management for closing comments.

Thank you all for joining us.

Despite the near term challenges in the first half of the year in our U.S. market, I believe that 2003 will be another excellent year for the company.

I'm looking forward to updating you on our progress in the next conference call.

Thank you very much.

Thank you, Ladies and Gentlemen.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.