WW International Inc (WW) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Weight Watchers Second Quarter 2003 Earnings Conference Call.

At this time, all lines have been placed on a listen-only mode and the floor will be open for your questions following the presentation.

It is my pleasure to turn the floor over to your host, Donna Stein.

Ma'am, you may begin.

Thank you very much, Leandra (ph).

And thank you, everyone, for joining us this afternoon.

With us on the call today are Linda Huett, the President and Chief Executive Officer of Weight Watchers International, as well as Ann Sardini, the Chief Financial Officer.

After the market closed today, the company issued a press release containing financial results for the second quarter 2003 and the six months.

Copies of the earnings release have been sent to you for your information and referenced during this call, and is also available via Weight Watchers International's Web site at www.weightwatchersinternational.com.

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.

Before we begin, let me remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events.

These statements are subject to risks, uncertainties, assumptions, and other important factors.

Listeners are cautioned not to put undo reliance on such forward-looking statements because actual results may vary materially from those expressed or implied.

The reports filed by the company pursuant to United States securities laws contain discussions of these risks and uncertainties.

Weight Watchers International assumes no obligation to, and expressly disclaims any obligation to, update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

Listeners are advised to review our filings with the United States Securities and Exchange Commission, which are available from the SEC's EDGAR database at various SEC reference facilities in the United States and via the company's Web site.

Now, with that, I'd like to turn the call over to Linda.

Thank you, Donna.

Good afternoon, and good evening to those who are listening in from Europe.

Thank you for joining us as we review Weight Watchers International's performance for the second quarter ended June 28, 2003.

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

For the quarter, our revenues increased 19% to $258.9 million this year from $217.9 million in last year's second quarter.

Our global attendance at company-owned meetings increased 12% to 16.7 million, up from 15 million in prior.

Our operating income grew by 8% to $97.6 million from last year's $90.5 million.

Similar to our first quarter, our operating income growth lagged our top-line revenue growth as a result of our increased investments in marketing.

In certain of our continental European markets we have increased our marketing spend in order to improve our brand awareness and to accelerate our growth in those markets.

And, in addition, we have put incremental marketing in the U.S. to help support our ((aging)) Winning Points program, now in its third year, until the launch of our new program innovation, which we will be launching in a few weeks.

I will say more of our North American operations in a minute.

Our fully diluted earnings per share were 52 cents for the quarter, up 16%, compared to 45 cents for the prior year's second quarter.

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

Including these unrealized currency gains and losses, our fully diluted earnings per share were 49 cents, compared to 38 cents in the prior year, an increase of 30%.

I would now like to provide some additional color on each of our major geographies.

First, North America.

For the quarter, North American company-owned, or NACO, had attendance of 9.7 million, up 13% from the same quarter last year.

However, if I remove the impact of acquisitions, organic attendance declined 6%, a weaker performance than we had anticipated.

In looking at why this was the case, let me start by reminding you of some of the factors that had been impacting our U.S. business this year.

First, we spoke on our last call about how we expected the wall-to-wall coverage from Iraq during March and the loss of three weeks of our spring diet season due to the late Easter to negatively effect our second quarter comparisons.

More importantly, this January began our third year of the Winning Points program.

As I've mentioned in previous calls, this is unusual, as we would normally innovate our program in each market every two years.

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

As I have said before, we benefit from innovations in multiple ways.

First, these enhancements to our program give us something new to talk about, enhancing the effectiveness of our public relations and our marketing efforts, which helps to drive new members into our meetings.

Secondly, these program innovations give us something new to say to the millions of former Weight Watchers members, providing them for a reason to return to Weight Watchers sooner than they otherwise may.

And while we believe the decision to delay will be good for the company long term, the lack of what I call new news has heard our attendance growth in North America in the short term more than we anticipated.

While we saw a good pickup in our business post Easter, with the support of our spring marketing campaign, since that campaign finished towards the end of May, our business has slowed more than we had expected.

We believe that this is linked to the recent popularity of extreme low-carb, high-fat diets, which have been fed by an incredible amount of media coverage over the last few months.

Now during these always slow summer months of June, July and August, we typically rely almost exclusively on our strong word of mouth to drive new members into our meetings.

It appears that the buzz around these extreme low-carb, high-fat diets has coincided with a period of new news from Weight Watchers.

And, as a result, we have been hurt more than we otherwise would have been.

Certainly, throughout my career I have seen dozens of extreme diets, including low-carb regimes come and go, with none of them having any lasting impact on our business.

These diets prey on the average person's desire for a quick, easy, painless solution to her or his weight problem.

And many of these extreme diets can deliver fast weight loss in the short term, and for some really dedicated followers, some long-term weight loss.

But unfortunately, for the vast majority of dieters, the extreme nature of these regimes is so foreign to their normal life that they cannot sustain the prescribed eating behavior.

Research shows that once they get off the diet they revert to all of their old habits and they snap back to their old weight or they even gain additional weight.

Weight Watchers' approach is focused on long-term solutions that delivers support, behavior modification and the scientific supported healthy balanced plan that people can live on for the rest of their lives.

So how will we reaccelerate growth in our U.S. market?

Our answer will come in 12 days, with the August 17 launch of our latest program innovation in our southern region, followed a week later by the remainder of the United States.

Like the Winning Points program, our new program, Flex Points, is based on our proven Points weight loss system.

But with Flex Points, we have made it easier than ever to follow, and thus easier than ever to be successful.

Our in-meeting materials have been completely restructured and redesigned, and we've added new tools that make it easier than ever to determine your portion sizes and to keep track of your Points usage.

More importantly, we've enhanced the flexibility of the program to assist our members in dealing with the twists and turns of everyday life.

With Flex Points, we have removed banking and introduced the weekly Flex Points tool.

We've replaced our journal with the new Quick Track Checkbook system and Quick Track Express.

We've created new materials for quick identification of the appropriate portion sizes.

We've introduced fabulous new books on exercise, which focus on the abs, the arms and the legs.

And we've added valuable new pieces on nutrition and health, which will help our members to make sense of the low-carb debate.

Over the past few months, we have been training our entire organization on the new program.

I've attended many of these training sessions in all parts of the country over the summer, and I have never seen our organization as excited about an innovation as they are about this one.

Our marketing support will be fresh and new, our new television commercials are quite a bit harder hitting than you may have seen from Weight Watchers in recent years.

Active media marketing for this new program will begin in earnest Labor Day weekend.

Looking ahead in North America, we believe the launch of Flex Points will be a catalyst to renew growth in our important North American market.

But I know that many of you think about quarters.

Keeping in mind our third quarter will only contain one month post innovation, and thus we expect our year-over-year organic attendance growth in our third quarter to continue to be negative, at a similar level to what we saw in quarter two.

Conversely, on the back of our innovation, we expect our fourth quarter to return to double-digit attendance growth, which will put us into a great position going into 2004.

Moving on, our U.K. business demonstrates how innovations successfully stimulate growth in our markets.

In January, we launched our latest innovation, the Time to Eat Program, replacing the Pure Points program, which had been launched two years prior.

In 2002, preceding the launch of Time to Eat, our U.K. attendance growth was 2.3%, a respectable growth for our highly penetrated U.K. market in the second year of a program.

During our last quarterly call, we reported that Time to Eat Program had effectively stimulated the market.

And despite some unusual winter weather in January and a 5% price increase, our first quarter attendance in the U.K. was up 5%.

This positive momentum has continued to build as the year has progressed, with second quarter attendance up 13% over prior year, and this despite the tremendous amount of publicity in the U.K. and media that has also been given to low-carb, high-fat diet fad.

To summarize the results to date of our most recent U.K. innovation then, we saw 2% (ph) attendance growth in the year preceding our innovation.

That accelerated to 5% and 13% respectively for each of the first two quarters following the innovation launch.

That attendance growth, combined with our price increase, drove total revenue growth in local currency of over 20% for quarter two.

Our business in continental Europe is also well, following - doing well, following the launch in the fall of its innovation, Points Plus.

It delivered solid volume performance, with attendance of 2.6 million, up 13% over prior.

Local currency revenue growth was up an even stronger 18%, driven by attendance growth and average price increase of 3%, as well as 19% growth in total product sales.

As I've previously mentioned over the last several quarters, we have significantly increased our marketing investment in continental Europe, particularly in low penetration countries, like Germany.

Our research indicates that member satisfaction in these markets is high and that the awareness and understanding of what our service can offer is still low, meaning that for most Weight Watchers is not top of mind consideration when they are contemplating diet alternatives.

Though these additional marketing investments - through them we are making progress in increasing our awareness, and we're pleased with our results to date.

And while this strategy has increased marketing spend as a percentage of revenue in the short term, we believe that the accelerated revenue growth in these markets will have substantial payoff in the long term.

Moving on to other news, as you're aware, at the beginning of the second quarter we purchased most of the territories of our largest franchisee, the WW Group (ph), for a cash purchase price of about $101 million.

These territories include 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 WW Group (ph) retained ownership and will continue to operate their remaining franchises across portions of Michigan and the province of Ontario, Canada.

Now, since April, our team has been working diligently to transition smoothly this new acquisition into our NACO operations.

And while the size of the operation and the fact that it had to be carved out of an ongoing franchise operation created a bit more complexity than most of our past acquisitions, our team has executed brilliantly.

And we expect to have this acquisition fully integrated by the end of this month.

That's a full four months ahead of our original schedule.

Now that the majority of the integration is behind us, we will begin to focus our near-term energies on increasing product sales per attendance to NACO's higher standard.

Another rapidly growing area for the company involves our licensing and publishing operations.

Year to date, our revenues for these activities have more than doubled versus last year to $16.6 million, up $8.5 million over the prior year.

And while our rapidly growing royalty stream from our Internet licensee contributed $1.8 million to this increase, we've experienced very strong growth in both our advertising revenues and in other licensing revenues, particularly in Europe, where we have selectively entered into a number of food licensing agreements.

In North American market, we recently announced a new licensing relationship with Applebee's, the world's largest casual dining concept.

We will jointly develop a line of appetizers, entrees and desserts, which will be offered as a part of a Weight Watchers branded section of the Applebee's menu.

Following testing in selected markets later this year, we expect to see these items begin to roll out during 2004 to over 1,500 Applebee's restaurants throughout the U.S. and Canada.

And while we do not expect this relationship to deliver any substantial licensing revenue to us before the latter part of next year, we are enthusiastic about this partnership.

We think it will be very helpful for weight-conscious consumers to understand that with Weight Watchers you can eat foods that both taste great and are consistent with achieving your weight loss objectives.

Another new North America license agreement is our exclusive arrangement recently signed with Conair Corporation, a large manufacturer and distributor of personal care products.

They are creating and marketing a line of highly accurate bathroom scales under the Weight Watcher's brand.

Next month the initial line of eight scales will start to be sold at retail locations throughout the U.S. and Canada.

I am told that the retail reception to the line has been excellent and we will begin to accrue licensing royalties under this agreement later this year.

Our Internet licensee, WeightWatchers.com, continues to perform well.

For the quarter, they had revenues of $20 million, largely made up of subscription fees from self-help dieters who are not attending meetings.

Average monthly unique visitors were up 41 percent during the quarter and it has now-it now has successful subscription businesses in three countries, the U.S., the UK and Canada, and is planning to enter two new countries by the end of the year.

Despite this ongoing investment in international development, WeightWatchers.com is increasingly profitable, is generating strong, positive cash flows and is beginning to accumulate cash.

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

Thank you, Linda, and good afternoon everyone.

I'll begin my discussion by summarizing our financial results in some detail, and then I'll follow with a review of our cash flow and our balance sheet.

Revenues in the second quarter of 2003 were up 18.8 percent to $258.9 million, from $217.9 million in the second quarter of 2002.

Net income for the quarter was $53.8 million as compared to $41.2 million for the second quarter 2002, an increase of 30.5 percent.

There are a few items I'd like to summarize before we review our operational results in more detail.

First, we incurred a three cent EPS loss in the quarter resulting from the impact of unrealized foreign currency translation fluctuations net of hedges, primarily related to our euro denominated debt.

Last year in the second quarter the loss was six cents.

Also, we received $5 million this quarter from WeightWatchers.com as the first repayment toward our outstanding loan to them of $34.5 million.

This repayment and all of the future repayments of principle on this loan will result in income because the loan was fully written off in 2001, and this is the first quarter of our ownership of the WW Group franchises acquired on March 30th, 2003.

Accordingly, we've consolidated the group's second quarter financial results into our Naco (ph) reporting.

So earnings per diluted share were 49 cents this quarter, including all of the items I just mentioned, as compared to 38 cents in the second quarter of last year.

If we ignore the impact of unrealized foreign currency translation losses net of hedges in both periods, fully diluted earnings per share this quarter were 52 cents as compared to 45 cents in the second quarter 2002.

Now I'll begin our review by geography with a summary of the results of our Naco operations.

In Naco revenue rose to $145.3 million, up 13.5 percent from last year's second quarter, primarily as a result of the addition of the WW Group franchise acquisition to Naco's results.

As Linda discussed, Naco's overall attendance growth was 12.8 percent so that on an organic basis, excluding the three franchises which were acquired after the second quarter of last year, attendances were off six percent from the prior year level.

Meeting fee revenue growth overall matched the 13 percent growth in attendances, while product sales were up 16 percent.

Excluding the WW Group, product sales per attendance grew 11 percent.

Now turning to our international class (ph) from operations.

Revenues rose 33 percent to $89.6 million, from $67.3 million.

On a local currency basis, our international revenues grew 13.8 percent.

The UK and continental Europe posted strong gains in both meeting fees and product sales.

As you know, both of these geographies continue to trend up as a direct result of their recent innovations last fall in continental Europe, and January in the UK.

In the second quarter, UK attendances were up 13 percent and revenue growth 17.4 percent on a local currency basis.

Continental Europe attendances also grew 13 percent in the quarter and revenue was up 17.7 percent in local currency.

In Germany, where we have invested heavily in marketing this year, local currency revenues were up over 50 percent.

Now we move to our other revenues.

Our franchise commission totaled $6.1 million this quarter, a decline of 28 percent from last year's second quarter level.

As we acquire more of our franchise territories and bring their operations in-house, revenue from franchise commissions will continue to decline, but the overall impact on net income of making these acquisitions is significantly accretive.

Since the second half of last year we've acquired three franchises, San Diego, North Carolina and just recently, most of the WW Group territories.

On an organic basis, excluding the impact of acquisitions, worldwide franchise commissions declined four percent, with North America franchises following business trends similar to Naco.

Our other revenues are a composite of WeightWatchers.com royalties, advertising and sponsorship revenues related to our publications, and other licensing revenues, and they account for four percent of our total revenues in the second quarter of this year as compared to two percent last year.

This equates to $9.3 million of revenue, a $4.4 million, or 90 percent increase, versus the prior year quarter of $4.9 million.

Now with regard to our license fee WeightWatchers.com, just to remind everyone, we own 19.9 percent of WeightWatchers.com on an issued and outstanding basis and about 38 percent of the company on a fully diluted basis, including all warrants and options.

While we don't consolidate their financial results with ours, we do derive a 10 percent royalty payment from WeightWatchers.com on their net revenues through our licensing arrangement.

For the second quarter those royalty payments amounted to $1.9 million, an increase of $.9 million, or almost double last year's second quarter.

With the success of their business, I'm happy to report, as I mentioned earlier, that WeightWatchers.com has begun to repay the $35 million outstanding loan due to us, making a $5 million voluntary principle repayment during the quarter.

This payment is recognized in the other expense income line below operating income on our income statement.

Our other licensing revenues nearly quadrupled in the quarter, up $1.6 million, and advertising and royalties from our publications, notably "Weight Watchers" magazine, contributed the remaining $2 million of the increase in our other revenues quarter over quarter.

Now looking at our gross margins.

In the second quarter our gross margin as a percentage of revenues was 55.1 percent, as against 55.9 percent in the comparable period last year.

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

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

In the second quarter we again elected to invest heavily in marketing.

We spent $25.8 million, up $8.7 million from the second quarter of last year, with about 25 percent of the increase strictly related to currency.

The spend was focused on building brand recognition and growth internationally, particularly in continental Europe, and on providing additional support to Naco well into the third year of the Winning Points program.

As a percentage of revenues, marketing increased to 10 percent in the quarter versus 7.9 percent in the second quarter of last year.

While we will continue healthy investments in marketing on a year-over-year basis for the remainder of this year, we do expect our marketing expenditures as a percentage of revenue to decline next year.

G&A as a percentage of revenues increased to 7.4 percent from 6.5 percent in last year's second quarter.

G&A expenses of $19.3 million were up $5.1 million in the quarter as a result of currency translation, normal increases for salaries and expenses, higher legal fees and insurance rates, expenses related to our acquisitions and some increases in staff to support our growth.

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

Operating income increased $7.1 million in the quarter to $97.6 million, up 7.9 percent from last year's second quarter.

The increase is primarily the result of strength in our international operations and our ancillary businesses which offset the decline in Naco.

In addition, we benefited from the inclusion of the WW Group in our results.

Our operating income margin was 37.7 percent in the second quarter this year as compared to 41.5 percent in the comparable period a year ago.

Again, our increase in marketing was the primary cause of this increase.

Now before we discuss the lines below operating income on our income statement, interest expense and other expenses net, I'd like to take you-to update you on our current refinancing efforts.

As most of you know, during the last two weeks we've initiated a tender and refinancing of our 13 percent senior subordinated note comprised of $150 million U.S. and 100 million euro.

Now first, as to our rationale for doing this.

We've previously stated our intention to call these high yield notes at the first opportunity, which would have been October 2004.

But given the strength that we've been seeing in the credit markets, we made the decision to act now, taking advantage of the lower interest rates and lower spreads today across all of our debt.

Refinancing now avoids any risks related to the health of the credit markets that we might encounter a year from now.

Now as to the numbers.

As I noted, we tendered for $150 million U.S. and 100 million euro and we will also refinance our existing bank debt to take advantage of the lower spreads.

If we are 100 percent successful in this tender, the financial case will be as follows: we will require funding of approximately $520 million; this will cover $264 million for retirement of the note, $205 million for repayment of our existing term loan, BTLC&D (ph), transaction fees of about $2.5 million, and the tender premium of approximately $47 million.

The premium is equal to the present value of the 13 percent interest payments that we would have made through September '04 and of the 6.5 percent premium that we would have paid at October '04, discounted back at the rate of Treasury plus 100 basis points.

We will fund with a new term loan V (ph) facility of approximately $460 million at LIBOR plus 225 and $60 million of cash.

Again, in this scenario, where 100 percent of the bonds are tendered and the refinancing is completed, lower interest rates will result in the EPS accretion of approximately three cents per quarter, or 12 cents annually.

If something less than 100 percent of the bonds are tendered, the accretion will reduce proportionately.

Also in conjunction with this refinancing, we will incur certain one-time expenses on our third quarter income statement totaling approximately $52 million pre-tax.

These include the tender premium of $47 million that I mentioned earlier and the write-off of the remaining $4.8 million of deferred financing fees incurred at the time we took on the high yield note.

These combined expenses will appear as a separate line item on our third quarter income statement, expenses associated with the early extinguishments of debt.

The tender period will close on August 18th and we expect to close the transaction shortly thereafter.

Now returning to our income statement for the second quarter.

Net interest charges were $10.8 million, up 3.8 percent from last year's second quarter, mainly the result of a higher level of bank debt associated with the recent borrowing for the WW Group acquisition, offset by lower LIBOR rates.

Our effective interest rate in the second quarter was 8.22 percent.

Once the tender is completed and the refinancing is in place, our effective interest rate will drop to 3.43 percent based on current LIBOR rates.

Now following after net interest, the other expense income net line was $.9 million of net income for the second quarter of 2003 as compared to $12.8 million of expense a year earlier.

The two major items recorded here in the 2003 quarter were the $5 million of income from the loan repayment made by WeightWatchers.com and a partially offsetting $4.7 million of unrealized foreign currency losses net of hedges related to the marking to market at the end of the quarter of our 100 million high yield euro note.

In last year's second quarter, this marking to market of the euro note resulted in an expense of 11.5 million.

Once the tender and refinancing of the high yield euro notes are completed, I am very happy to say that we will no longer incur or record or report associated unrealized currency gains or losses.

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

We began 2003 with cash of $57.5 million.

During the first six months of 2003, we accumulated cash flow from operating activities of $138.6 million and we ended the second quarter with $52.2 million.

During the six months, we acquired the WW Group franchise territories for $181.5 million, with a combination of nearly $96 million cash and additional borrowings of $85milion.

And during the six months we paid down $47 million of debt principle, $40 million of it voluntary and unscheduled.

So on the balance sheet our total debt at the end of June 2003 was $502.3 million, up $47.6 million as compared to $454.7 million at the end of last year.

The increase is the result of the additional borrowing of $85 million for the WW Group and a nearly 10 million revaluing up of the euro denominated debt.

These are partially offset by the $47 million of payments discussed earlier.

Once the current refinancing is completed, assuming 100 percent of the senior subordinated notes are tendered, our debt will total approximately $493 million, about $9 million less than at the end of June, and our free cash flow will increase.

Now just to complete our balance sheet overview, the change that we see in assets is largely the result of the increase in goodwill associated with the acquisition of WW Group and the change in liabilities over and above the debt is a reflection of the normal timing of second quarter tax and other payments.

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

Thank you, Ann.

Our second quarter results are a disappointment to me; while our international operations performed above our expectations, our U.S. businesses underperformed.

But in just 12 days, we will be launching our North American program innovation.

The entire North American Weight Watchers organization is 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 this discussion to questions, I would like to discuss guidance.

During our last conference call I provided fully diluted EPS guidance for 2003 of 163 to 171 before any additional impact of unrealized gains or losses due to the marking to market of our foreign currency denominated debt.

Looking at the current volumes in our meetings, our international businesses are performing very well but our attendance in the U.S. this summer is below what we had planned for.

As we think about the rest of the year, it is important that I note to you that the August period is traditionally the lowest volume period of the year other than the end of year holidays.

Thus, our third quarter results are highly dependent on our level of recruitment in June in July, while our fourth quarter is primarily dependent on September and October recruitment.

While we believe that our fourth quarter results will be in line with our earlier expectations and will set us up to go into next year with a lot of positive momentum, our weaker than expected summer volumes will negatively impact our third quarter.

As a result of our second quarter results and our expected third quarter underperformance, we are revising our full year guidance to 1.55 to 1.60 per fully diluted share.

Assuming the successful completion of our tender for all of our high yield debt but excluding the related one-time expenses, we would expect to report earnings for the year of $1.59 to $1.64 per fully diluted share.

Leandra, we would now like to answer any questions.

Thank you.

Our first question is coming from Amy Chasen of Goldman Sachs & Co.

Hi, Amy.

How are you?

Fine, Thank you.

How are you?

Good thanks.

Two questions.

First time - first of all, this is the first time that I've heard you mention the low-carb diets as having an impact on your business and I'm just curious because this is a fad that I've been hearing about for quite a while, at least a year.

So, why, all of a sudden, is this, you know, becoming an issue for you?

I think the fact that two things have really happened and I think you're right, Amy, that about a year ago there were reported a couple of very small studies that seemed to indicate that the negative health impacts of this extreme low-carb type regime maybe wasn't as great as people had anticipated or thought it would be.

And those studies started to get some coverage and that coverage, obviously, has been building this year.

I think most recently though, these regimes have been promoted and have got a lot of publicity from certain celebrity endorsements.

Those celebrities obviously are quite high profile and therefore it's created a bubble just recently.

If we're looking at our business, we think that it's a shame that, you know, some really very short-term and small studies got the coverage in the popular press that they did because we really believe that there's been a, sort of, widespread misinterpretation by customers of the results of those studies and they really believe that maybe these kind of regimes have been given a clean bill of health or even that they are good for you.

But these studies really don't state that.

In fact, the studies state significant reservations about this approach.

But the coverage of these studies in the popular press, I think, has led some people to try them that maybe would have hesitated before when there was such a health cloud over them.

Linda, can you give sense - you mentioned in your comments that in the U.K. there's a similar fad going on, do you think that that fad is as pronounced in the U.K. as it is in the U.S.?

Well, I think if you're talking to the meat producers in Britain, they certainly have seen an upsurge in meat consumption.

Obviously, that indicates that a number of people are following the low-carb, high-fat diet regime.

But I think over there, we're seeing, sort of, a similar thing to the United States but maybe in - because they have such effective national press over there, we are seeing some very active articles coming out that are really putting the whole health issue in a better context for the population.

You know, The Mail has come out, The Sun has come out in their dieting section very strongly to say that you really have to question the health impacts of these particular regimes.

Here in the United States we've certainly seen some of that.

The American Heart Association came out and questioned the validity of this kind of approach which obviously severely limits your carbohydrate intake.

Also the American College of Preventive Medicine has recently come out very strongly against these extreme regimes.

I think the CNN recently covered this kind of phenomena and raised questions.

And I think if you're looking at this kind of low-carb, high-fat regime it's asking you to essentially cut out things like fruit and there really are no reputable medical organizations, there's no nutritional or health body in the whole world that is encouraging you to cut this out.

In fact, they're doing the opposite.

They're encouraging us to increase our consumption of fruit and vegetables.

If you look at some of the other health impacts, obviously they're asking you to cut out milk and yogurt and to concentrate your dairy on things like cheeses and therefore you're getting less calcium and you're increasing saturated fat.

And such a concentration of protein, we know, really puts a strain on certain organs such as the kidneys.

And I think these organizations are starting to have a voice and are starting to raise these concerns.

But it's just not as easy to get the national coverage of these concerns that has been achieved in the U.K. in the U.S.

But I think it's coming and I think people will start to listen to it.

OK.

I'm sorry, one last question which is, I missed the comments that you made about pricing in the U.S., like can you just repeat those?

I didn't make any comments on pricing but it's good that you asked me, Amy.

You know, we've said that it's not a given that we would raise our prices with the flexpoint program in September.

We have made the decision not to raise our prices this September and obviously we're looking at whether we will raise our prices in January.

And is that because of the attendance slowdown?

Well, I think if you're looking at what we had expected in last quarter's call, we really were anticipating and we were on track for the U.S. to report a flat organic attendance picture.

We have reported a minus six on our organic attendances and that's really why I said this is really impacted us most recently.

We only saw this impact in its full force during the Summer.

OK.

Wonderful.

Thanks a lot.

Thank you.

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

Hi, Linda and Ann.

Hi, Greg.

Hi, Greg.

Just to clarify, I guess you mentioned North America attendance in the third quarter, I guess you said similar so I guess we can expect that down, or at least your best guess is around 6 percent right now?

Well, we said it would certainly continue negative in the same region as it was in the second quarter.

Remember, of course, that in the third quarter we've got two months of this lower attendance impact and we've only got one month following the introduction of the new program.

OK.

And was there a, you know, increased deceleration as you, sort of, went into the first couple of months?

I'm just trying to get a sense if a lot depends on September to, kind of, pick that up just to get it to the same level as 2Q in North America.

I think that what you can surmise from Q2 is that when we had our first quarter call we were obviously in quarter two and at that time we were trending and indicating that we were going to be flat.

We - I think my exact expression was, low if any organic attendance growth.

Right.

Now, we have just reported, obviously, a 6 percent decline in attendances for that quarter.

So, you know, it's obviously that you should surmise that it was an end of the period picture that turned that around.

During this quiet period, as I said, you know, the June, July, August period for us is not a promoted period.

It's not a period where we put our advertising behind our markets and it's obviously - it was an opportunity that we didn't have to create any new news with our program innovation and at the same time we were getting a tremendous amount of coverage of this low-carb phenomenon.

And I'm just - I'm sorry if I missed this, does the new - I know you talked a little bit about the new innovation, does that include anything - any portion of it include low-carbs or is it really not inclusive of that?

Well, obviously Weight Watchers is incredibly supportive of a healthy diet.

That is the hallmark of every program that Weight Watchers has had in the market place for the last 40 years.

I think if you look at carbs, one of the things that we certainly are seeing is that people are very confused about carbs.

This is just a debate that is not very well informed.

If you look at carbs, of course you have that end of carbs that encompasses things like cakes and cookies and, you know, all those things that most of us would say that in a sensible healthy diet we have to limit to some degree.

Now, obviously on these extreme regimes they are saying you cannot have any of these.

We believe that that kind of depravation actually drives people to eat more of them when they go off a program so we actually allow people and say to people, if that's what you need on the occasional basis, for goodness sakes have them.

Then you've got all of those carbs in the middle which are the complex carbohydrates that most people who have any concern with nutrition that the body needs.

This is your whole grains.

Again, these extreme regimes are telling you to have next to none of them, if any.

Then you have what we consider absolutely the healthy end of carbs which are the fruit and the vegetables and the whole grains and we are saying to people that you should actively include these into your program.

So if you're saying, are we going to get on the low-carb bandwagon, then I have to say, absolutely not.

One of the things though that we're helping and we have been helping for a period of time our members to realize is that it's completely up to the individual to put the right carbohydrate versus protein balance within their points usage in any given day or in any given week.

And we do have specific program material showing our members how they can have a higher carbohydrate if they happen to find pastas the most satisfying component of the program, how they can do that or how they can increase their protein, still including obviously the healthy carbs, if they find the proteins more satisfying.

So we are continuing to do that and, yes, there's even more of that available in the flexpoints program.

So I'm hoping that we will be able to help with our new program material, our members make more sense out of this, you know, low-carb debate because low-carb, high-fat is something that you just have to be educated on.

OK.

And we want to help - we want to help educate the general public but we certainly want to help educate our members.

OK.

I guess one final one, it sounds like, you know, not only the press release but on this call you mentioned a return to double-digit organic growth in North America in 4Q, is there anything specifically that gives you the confidence in that?

Is there, if you look back at the last 10 or 15 innovations or is there any other evidence?

You sound pretty confident in that number and I'm just wondering why that it.

I've said before, Greg, I mean it.

We have never had a situation where an innovation didn't give us an uptick in our business.

I think one of the reasons why I, sort of, went into more detail on the U.K. was to show that this growth is there even if there are other things happening within our market.

Obviously in - with our quarter three anticipated results, we're going to be starting the U.S. from a lower base than we would have anticipated or we would have been had there not been a low-carb buzz out there.

The fact is there is a low-carb buzz and that is something that's in our marketplace.

And when does your advertising actually begin on this?

We actually begin at the - on the 24th of August but the big impact, particularly of our broadcast advertising, starts Labor Day Weekend.

Right.

Thank you very much.

Thank you.

Our next question is coming from Andrew McQuilling of UBS.

Thanks very much.

Linda, in your time with Weight Watchers you've probably seen a couple of cycles on this low-carb fad, can you give us a sense for how long it takes for something like this to peter out if people can only put up with this type of diet for, you know, let's say three months?

How long does it take to run through a cycle; is it a year, is it six months?

Andrew, I must admit I'd be surprised if most people could stay on it for a full three months.

You can stay on these regimes obviously for a limited period of time and I think that's what a lot of people who are testing it and trialing it right now will find.

That because it's so alien to their normal, you know, eating pattern they can cut these things out and deprive themselves of the things they really like, I mean, if you think of it, you know, you guys are depriving yourselves of beer.

You know, you're depriving yourselves of pasta.

You know, for a lot of people, surprisingly fruit is something that they actually want to eat especially when you look at all the good fruit that's available, you know, in the Summer season.

So, you know, that kind of depravation, that extreme depravation you can only put up with for a short period of time.

And I think what you'll find is a lot of people then start adapting it to, you know, to their needs.

And, of course, as they adapt it, it means it affects the weight loss.

The initial quick weight loss is really delivered because they are cutting your calorie intake down dramatically by cutting out one of the three, you know, nutrition groups.

You know, with that kind of extremity you can't stay on it very long.

But I think that people do experience this initial weight loss success.

We saw that in the BBC diet trials that were recently shown.

They put Weight Watchers up against Atkins, up against SlimFast and one - one diet regime that's local to the U.K. and in that trial you saw a quicker weight loss in the initial period from Atkins compared to the others and that obviously is a low-carb, high-fat regime.

But, I think the interesting thing in that six month trial, because six months is a good long trial, is that it showed that at the end of the period - at the end of the six months, for the people who stayed on the program, the weight loss on Weight Watchers and Atkins was actually equal.

In other words, Atkins didn't maintain a headstart.

But even more importantly, more people stayed on Weight Watchers than on Atkins and then at the end of the six month trial they asked everybody who was in the control group looking at what these people had done and what they've all said about it and what they've all achieved, which program, which diet would you like to go on?

And they overwhelmingly chose Weight Watchers.

So I really think that, you know, it's hard to say how long will this get publicity and how long will it take the media in the U.S. to really publicize what the health institutions like the American Heart Association or the American College of Preventive Medicines, I think they're just a couple of the voices that are going to come out and have come out very strongly.

But getting that well publicized, obviously, is not in our hands, it's in other hands and I think the faster that's done the quicker this bubble will burst.

Linda, for the record, I never deprive myself of beer.

Well, then you have never been on Atkins or any of the low-carb, high-fat regimes, Andrew.

Of course, knowing you, I don't think you need to either but it's a big sacrifice.

I'm sorry, these diets are attractive obviously because they're simple.

They may be particularly attractive to men because they're allowing you to eat things you like.

A lot of men, obviously, are big meat eaters.

It's a very attractive concept that you can have all the bacon you want.

But, you know, long-term, I don't think that they'll be able to live with those negative effects.

I mean, the bad breath is horrific.

The constipation is a problem.

I mean, these are just real side-effects.

Linda, I guess, how long do you think we're into the cycle?

I guess, obviously it's been a bigger impact in the last couple of months, but has it been - you know, is some of this Atkins buzz been affecting the whole first half; is that fair?

I mean, Atkins has been out there.

Do I think we would have had higher growth had Atkins not been there, the answer to that must be yes.

Do I think that our new innovation will spur our growth?

Absolutely.

And maybe one more and I'll let somebody else.

Is it fair to think then September '03 if that's the - you know, the real worst - you know, worst quarter for in terms of advertising pick up and attendance drag, is it - is it right to think about that quarter as something similar to last year?

Is that the type of guidance?

Well, remember when we were saying that the thing you have to remember in framing quarter three is that we have two months of this low Summer volume that has obviously been hurt by this low-carb buzz and we have one month of our advertising and our recruitment on the new program.

And obviously, anytime you look at - if you look at the U.K., you know, we had that 5 percent build up to 13 percent.

Now, obviously, the 5 percent was a bit lower than we would have anticipated because of the snow, but if it hadn't had that snow, you know, we would have still seen this build from the attendances because the attendance build is always after the recruitment build.

The recruitment build will start when this new program goes in and quarter four will benefit most from the new program this year and obviously set us up for, you know, 2004 where this will be a very new program when we get our January advertising out there.

Terrific.

Thank you.

Thank you.

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

Thank you.

One bigger picture question; given that there certainly is a lot of competition out - knowing that there has been for a while but that it maybe is getting more press, celebrity endorsements, do you think it's possible that you may need to do innovations in - particularly in (inaudible) more often than every two years?

Carol, I wouldn't anticipate such.

I think that what we're seeing just at the moment was this - this releasing of some people's reticence to try something that is so extreme and I think that really was generated by something that - you know, that's a little bit unique.

There were these two very small studies.

I think they got coverage in the popular press that didn't actually spell out the true results and the true complexity of the health issue and I just think an awful lot of people really misinterpreted that as a clean bill of health.

I think that's quite an unusual circumstance.

And then, of course, you do have these celebrities that have said they've been on it.

We could increase our frequency if we wanted to but I don't honestly think that sitting from where we're sitting right now that we would need to do that just because we happen to have this particular bubble right now.

And just in terms of with the increased marketing spend in conjunction with the launch of the innovation, are you expecting that the relationship in terms of growth between topline and operating income will stay instead of having operating growth faster than topline and topline (inaudible) or at least for the next several quarter?

Well, I think, Carol, I'll pass you over to Ann because she did mention our marketing expenditure and she mentioned what she thought would happen, you know, in future years.

So maybe she can recover that for you.

OK.

I just probably didn't hear what she said about '04.

Actually we didn't - we didn't get into '04 ...

I'm thinking of longer-term relationship to the model?

... other than to say - other than to say it's our expectation that while we are pumping a lot of marketing into this year, we will see - see a relationship between marketing and sales go down.

We will see lower marketing per sales dollar.

And the $5 million payment that you got, is that going to be every quarter until they're done repaying their principal?

No.

Actually, it's not quite scheduled that way.

The way that it's going to be scheduled into the future is two payments per year in March and in September through '06.

This particular payment that was made now was because their business is doing as well as it is, they were able to make a voluntary payment this year which they did do.

So they're not obligated until next year to do the two?

That's correct.

OK.

Thanks a lot.

And our last question for this afternoon is coming from Jerry Herman from Legg Mason.

Good evening.

This is actually Bob Craig.

Just a couple of questions.

Hi, Bob.

How are you guys.

We're doing fine.

Great.

First question is;

Linda you've seen a number of innovations, I guess the question is, how does the flexpoint program rate versus other modifications to the points based system in terms of the magnitude of alterations or changes?

Just trying to gauge the perspective consumer response and a second part of that question would be, does it have any features that you can or would incorporate in other geographic areas, either immediately or through other innovations when they - when they're introduced?

Yeah, Bob, very good question.

Yes.

I've been involved in about 15 innovations in one way or another over my time.

So that's a lot of innovations.

I think that the one thing we should understand and I think you can see that from the differences that I've just explained when I gave some details of our flexpoints here in the United States which we're just putting in and if you compare that to my description in our last call of the time to eat program, you'll see that those - that the improvements to the points platform were quite different in those two markets.

And we really do take a, sort of, market by market approach to our program platform improvements.

In other words, the way that points is actually delivered.

I think this one is a particularly exciting one for the U.S. and I really have seen a lot of this.

I've been on the road every single weekend for the past five weeks around the country with a lot of our service providers and a lot of our managers - field managers, obviously to gauge how they're reacting to it but also to give them my messages about this new program.

And they're so excited because some of the improvements which I've just given you, sort of, the names of them but you have to get an understanding of what they actually mean.

When I say that we've removed banking, banking was a wonderful facility that allowed you to take some of your points that were available from one day and put them into the next day and everything.

But, like a lot of people when they're dealing with money, they got themselves in trouble because they were overdrawn maybe for a good part of the week even through they were supposed to be earning extra points and saving extra points ahead of actually eating the points value.

With our flex-points tool, at the start of every week, everybody has these 35 flexible point values that they can just use at any time during that week on anything they want.

So it makes this whole concept of coping with special occasions, of coping with a, sort of, unexpected pizza delivery or whatever happened to you, it gives you that flexibility to be able to cope with it.

And our staff and people who have followed the program, obviously a lot of our managers have been on this new program for a considerable period now, they say that this is just a fabulous feature and having a set target per day has made everything so much simpler.

We are obviously aiming to make this as easy as possible for people.

Then you look at our tracking system.

We previously had, obviously, our journal.

We had used that journal for many, many years and we hadn't made any major modifications to it.

Now, this new journal is incredibly easy to use.

You just, you know, enter your foods as you eat them.

You're counting down from your daily target -- points target.

You're counting down, you're adding any exercise or additional activity points that you've earned and it just tells you at a glance what you have left for the day.

It is so easy, I can't tell you.

The only people that I've encountered that don't really find this the easiest thing they've ever seen are the people that never touch their checkbook register either.

So, you know, we have added so many features on this.

The exercise that we have included in this particular program is so strong.

Obviously, we've always been proponents of exercise.

We really believe that exercise is part of a healthy lifestyle.

You'll see that not only have we got a whole book on activity points and how you can earn those activity points, but we've got separate pieces of material giving you the most fabulous little mini workouts on your abs, your arms and your legs and anyone will tell you that when you're losing weight, those are key areas of the body, I can assure you.

So, I mean, we're really excited that, you know, these pieces of program material are added to the new exercise videos that we just brought into our meetings in April.

I mean, if you put it all together as well as our - I mean, all of the booklets, our nutritional information is different and is stronger.

I think we've just given a tremendous amount of information plus a lot of separate material that is just for certain categories of people.

There's a wonderful fact sheet for people going through the menopause.

There's a fact sheet for our big weight losers.

Obviously, it's a completely different exercise if you have to lose 100 or 200 pounds compared to if you have to lose 20 or 30.

We've got a fact sheet on just those last few pounds which a lot of people struggle with.

I mean, there's just a tremendous amount of additional information and material in this.

And as we do always, everyone around the world looks at what the other people are doing.

Everywhere around the world is sharing it as it's being developed.

We - you know, we pick the best from everyone and put it into everybody's innovations.

But we generally speaking do not put exactly the same innovation into our European markets, our U.K. markets and our U.S. markets because they are so big, they're so different.

The dietary and nutritional community have such different focuses and we have such cultural differences within those markets that we want to reflect in our program.

That's very helpful.

Will there be an inordinate number of, for any reason, an inordinate number of SKU changes associated with this innovation from the product side?

Well, we do obviously have some new products that are specific to flexpoints.

We are coming out with great new books for eating out, for dining out and for, you know, branded foods with more restaurants than ever.

More branded foods included than ever.

More generic foods included than ever.

So I think they're very helpful.

They'll be new, you know, in September.

We have a new calculator that - I'm not sure I'm supposed to be telling you all the details, I'm just so excited about this.

I have a feeling my marketing people will probably hang me by the time I finish here.

We do have a range of new products but, as I've said in many calls, our product innovation is not dependent on a program innovation.

We bring in new bars throughout the year.

We bring in new cookbooks throughout the year.

We innovate those products on a regular basis but, yes, the answer - the simple answer is, yes, there are some great new products specifically designed for flexpoints that are being brought in in September.

OK.

But, Bob, if you're asking whether we're going to increase our SKU's inordinately, the answer is no.

We're trading our SKU's.

OK.

Ann, does guidance assume any further loan repayments of the www.com loan?

Not for this year, Bob.

Not for this year?

OK.

And I was just hoping, you did so in the first quarter, if you could reconcile the guidance change quarter to quarter?

I mean, assuming the 1.59 to 1.64, let's add in the four cents, you know, from the accretion from the - from the refinancing, that would detract then eight to 11 cents which would be a combination of both currency and North America under-performing; is that - do I have that basically ...

Yes.

The four cents accretion is actually in the 1.59 guidance.

It's in the 1.59 and the 1.64 but you're absolutely right.

It's not in the 1.55 to the 1.60 that I mentioned earlier ...

Right.

I was just ...

... when I was covering it.

Right.

I was just going from the 1.63 to the 1.71 down to the 1.59 to 1.64, you would add four cents from the accretion, you would detract eight to 11 cents from a combination of currency and North American under-performance?

Oh, right.

Yes.

Yes.

It's about five cents for currency.

We've never actually given our quarterly guidance.

All we've tried to do is frame the quarters.

So that obviously you could make a more educated approach in your own models to the quarters.

OK.

And, Ann, I missed what you said.

You said three cents from currency?

It's actually five cents from currency.

Five cents currency.

For the two quarters.

OK.

Great.

Yeah, for the two past quarters.

Right.

We don't ...

The two past quarters that are already gone.

We don't project into the future.

Right.

OK.

Thanks.

But, of course, we're all hoping that this is a successful tender and that we won't have to report on an ongoing basis our unrealized currency gains and losses due to mark to market of our Euro debt or (inaudible) net of hedging.

(inaudible).

OK.

Great.

Thank you.

OK.

OK.

Are there any more questions?

At this time, I'd like to turn the call back over to Linda Huett for any closing remarks.

Well, thank you very much for joining us today.

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

Thank you.

Thank you all for your participation.

That will conclude your teleconference.

You may disconnect your lines at this time.

Have a great evening.