WW International Inc (WW) 2003 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Weight Watchers International fourth quarter and full year 2003 earnings teleconference call.

[Operator Instructions]

At this time, I would like to turn the call over to John Sweeney of Weight Watchers International.

Please go ahead.

Thank you, operator and thank you for everyone joining us today for the Weight Watchers International fourth quarter and full-year conference call.

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

At about 4.00 pm eastern time today, the company issued a press release containing financial results for the fourth quarter and full year 2003.

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.

The press release is available at www.weightwatchersdisinternational.com.

Before we begin, let me remind everyone that this call will contain forward-looking statements.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission.

The company does not undertake any obligation to publicly update, revise any forward-looking statements whether as the result of new information, future events or otherwise.

I would now like to turn the call over to Ms. Huett.

Please go ahead, Linda.

Thank you, John.

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 periods ending January 3, 2004.

I will spend some time looking back at our 2003 performance and give you an outlook for 2004.

And we'll review our financial results for the quarter and full year, and finally we will answer questions from the financial community.

Our revenues for the full year 2003 increased 17% to $943.9 million from 809.6 million the previous year.

Total attendance, the company owned operations for the year was 60.8 million, an increase of 10% over 2002.

Our operating income increased 7% to $316.1 million from $296.8 million in 2002.

As I've discussed in previous calls, operating income growth this past year has lagged our top-line revenue growth primarily due to our decision to implement major increases in marketing spend, especially in the US and Germany.

We expect our absolute level of marketing spend during 2004 to be roughly equivalent to what we spent during 2003.

With revenue growth in 2004, we should see marketing as a percentage of revenue dropped on a comparable basis as we progress through the year.

For the year, our fully diluted earnings per share excluding the third quarter expenses related to the early extinguishment of our high-yield debt was $1.59 compared to $1.31 in 2002.

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

First, North America; 2003 was a challenging year for NACO.

While NACO had attendance growth of 12%, removing the impact of franchise acquisitions, organic attendances declined 2.1% for the year.

Our growth in the first half of the year was slowed by winter weather, the war in Iraq and the late Easter.

Then starting in late spring, we saw the blossoming of low carb dieting into a major craze.

This was fueled by well-honed P.R. campaign based on two limited short-term medical research studies.

In September, we launched our FlexPoints innovation.

Despite our success in attracting our former members back to our meetings, we found it to be a difficult time to attract new members in a media environment saturated with positive mentions of low carb dieting.

As a result, we registered a decline of 3.1% in organic attendance growth in quarter four.

Low carb dieting has had and continues to have a negative impact on the growth in our North American business.

So the question I'm sure that many of you are asking is, how long can we expect this low carb-dieting phenomenon to last?

Well, let me start with my assessment, and then I will walk you through how I got there.

This low carb diet craze has now peaked and the seeds of its decline are in place.

Nevertheless, it's very difficult to predict the pace of that decline.

Unlike other extreme diets that are clearly perceived by people following them as something to do for a few weeks before I get back to normal, this craze is acting differently.

This is because of the pretense that these low carb lifestyles can also be a long-term solution to a weight problem.

Therefore, after the initial few weeks, despite the documented side effects and the difficulties most people have in sustaining the diet, many low carb dieters keep trying.

Our consumer studies suggest that it takes up to six months for many low carb dieters to recognize these diets are unsustainable, and that they will not maintain weight loss.

Using that six months as a guideline, we can establish that low carb dieting, which took off in May 2003, and probably peaked around October/November, would be expected to start declining in April/May of this year.

However, this inevitable decline might be somewhat postponed by the media-marketing blitz associated with the current explosion of low carb food products.

Now in effect, low carb dieting's lack of sustainability causes dieters to crave their favorite foods and snacks.

And this has created a great short-term profit opportunity for the food industry.

They've responded with a flood of premium-priced products and snacks such as low carb pasta, low carb bread, low carb chocolate bar even a new nutritional unit has been concocted, net carbs.

How many consumers yet know that the sugar taken out of their premium-priced low carb chocolate bar has been replaced with sugar alcohol, a carbohydrate which actually carries more calories per gram than sugar but has magically been blessed with a zero carb moniker.

It won't take too long before weight-conscious consumers eating unrestricted amounts of low carb packaged foods and snacks realize that their waistlines are actually expanding.

This is what happened 10 years ago, when consumers took the launch of low fat products such as cookies, as an easy dieting solution that allowed them to eat even greater amounts while ignoring caloric intake.

Until all of this plays out, we can expect it to continue having difficulty attracting new members.

Therefore, we expect organic attendance growth in the first quarter of 2004 to be similar to our fourth quarter performance, in the low single digit decline.

The good news is that we are beginning to see the media evolve from blindly fueling this craze to presenting a more balanced picture of low carb diets.

In addition, members of the medical community have begun to speak out against the pseudoscience promoted by the low carb advocates, and this more critical press coverage had been missing from the U.S. market.

It will help low carb refugees feel confident in blaming these extreme diets instead of themselves for their failure to maintain their initial weight losses.

In any event, we're not waiting passively for this to play out.

For example, we've identified a gap in our P.R. and marketing strategy.

As the industry leader whose business model is based on offering our members the most up to date, safe, and proven weight loss methodology, we have always spent considerable resources on research.

This research has been a central part of our program development and training processes.

It's also been an important investment in establishing our high standing within the medical and scientific communities.

However, we have done little to communicate the results of this research to the consumers.

Today's consumers who discuss the science of weight loss at the dinner table and at parties are eagerly searching for this type of scientific insight.

Now that the vacuum has made it easier for the low carb company's P.R. machine to twist a few limited short-term studies and make them appear as confirmation of a scientifically proven new weight loss paradigm.

We have developed our science of weight management initiative to integrate our medical research capabilities and our marketing and P.R. functions.

The goal is to expand the audience for our research and to help educate the public on the real science of weight loss.

Another area we have not focused enough on in the past is communicating our unique ability to help dieters successfully maintain weight loss.

At the same time as many dieters realize the difficulty of sustaining their initial weight loss on low carb diets, we plan to leverage scientific research to show them that with the weight watchers program, they can take weight off and keep it off, and we have the data to prove it.

In addition, the intensive consumer research that we've undertaken over the past eight months has given us new insights into how to expand our franchise.

The low carb craze has gotten a lot of new people interested in trying to do something about their weight.

We know that an increasing number of people entering the dieting arena is positive for Weight Watchers, as dieters generally start with a quick fix, a self-help diet, before ultimately graduating to Weight Watchers.

We are working hard to integrate our new insights into our program to be in an even better position to attract these millions of new people to Weight Watchers.

In summary, to suffer only low single digit attendance declines and still deliver on our financial results at the same time as the greatest diet fad is playing out is a measure of the strength of our brand and the resilience of our business, and it's an indication of the magnitude of our future U.S. growth.

Now, on to the U.K.

The U.K. had an extremely strong year in 2003 on the back of our successful innovation in January with a local currency revenue growth of 15% and attendance increase of 8.2% for the year.

We did see our growth begin to taper down in the second half of the year with fourth quarter attendance up 0.5%, albeit this was against a 15% growth in prior fourth quarter.

As you know, the U.K. is a matured market for us, and this type of volume growth is well above the 2% to 4% long-term expectations that we've set out for this market.

As a non-innovation year, we look to consolidate as much of that growth as possible in 2004.

In continental Europe, had a strong year in 2003 with local currency revenue growth of 14% and attendance growth of 9.1%.

We are pleased with the region's results and expect continued growth in this market throughout 2004.

Germany was an especially bright spot, as it continues to prove itself as a long-term growth engine for the company.

In 2004, continental Europe will also benefit from an innovation launch in the fall.

On to other news, with regard to licensing, we continue to make progress in developing our licensing and publishing businesses.

Globally these revenues increased 75% to 15 million, from 15 million in 2002 to 35 million in 2003.

Around the world, our licensing partners, are regularly exceeding their business plans, demonstrating the power of our brand in the marketplace and creating a strong demand from new partners to join the Weight Watchers family.

ConAIR has had a very successful launch of its scale line in the fall with retailer as well as consumer demand significantly exceeding expectations.

Also worth a special note is our partnership with Applebee's, the largest casual dining concept in America.

Weight Watchers and Applebee's have been working very closely on menu plan and design, and in November of last year, Applebee's launched a 70 restaurant test and the results exceeded their expectations.

Our teams are now developing detailed launch plans with the expectation of a national launch in all 1,600 Applebee's restaurants this summer.

Our magazine business continues to perform well.

In 2003, we exceeded our U.S. target circulation of 1 million, and also marked our first year of profit contribution from the magazine.

Our Internet licensee, weightwatchers.com, had a strong year in 2003.

Our revenues approached $80 million, an increase of 60% compared to 2002 and they laid in the groundwork in 2003 for the January '04 launch in Germany.

That's our fourth subscription market after the successful launches in the U.K. and Canada.

Looking back on the three years of weightwatchers.com's existence, it has been a remarkable performance.

From a standing start in 2000, we are the number one Internet provider of weight loss services in the world.

As many of you know, in late January, we announced that Tilo Samilbarro (ph) will be our new Chief Operating Officer for NACO operations, replacing Dick McStoreley (ph), who's retiring in June.

As President and CEO of www.weightwatchers.com, Tilo played a critical role in its startup and growth into a profitable business.

Prior to weightwatchers.com, Tilo was with past consulting group, and prior to that, Motorola.

We're extremely excited to have this talented executive to join the Weight Watchers team.

I would also like to personally thank Dick for his numerous contributions to the Weight Watchers family over the past 12 years.

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

Thank you, Linda and good afternoon, everyone.

Before I begin the review of our financial results, just a point of clarification regarding our fiscal year.

We end our fiscal year on the Saturday closest to December 31, and as a result, once every four years, we have a 53-week year. 2003 ended on January 3, and accordingly there were 53 weeks in the 2003 fiscal year and 14 weeks in the fourth quarter.

The impact on the quarter and the year for this extra week is minimal.

Many of our international geographies as a matter of course are closed down during the holiday period, and even though that are open, such as North America, operate with a scaled down number of meetings.

Of the approximately 350,000 global attendances during the last week of the year, 250,000 were in the U.S.

From a P&L perspective, the effect of the extra week was a net negative, as revenues in the week were limited, while costs including significant marketing expenses were accrued.

For the fourth quarter 2003, revenues increased 14% to 216.1 million from 190.1 million in the fourth quarter of 2002.

Global attendance at company-owned meetings increased 10% to 13.6 million, up from 12.4 million in the prior-year quarter.

Our operating income grew by 6.7% to 65 million from last year's 60.9 million.

While our gross profit margin was higher than prior, operating income growth lagged top-line revenue growth due to increased marketing expenses as a result of greater investments in certain markets as well as timing.

Net income for the fourth quarter 2003 was $38.1 million as compared to $28.4 million for the fourth quarter last year, an increase of 34%.

Lower interest expense, which resulted from the debt refinancing we undertook in the third quarter 2003 contributed to the increase in net income.

Earnings per fully diluted share were 35 cents in the fourth quarter as compared to 26 cents in the prior-year quarter.

A note on EPS comparability.

As most of you know, with the retirement in third quarter 2003 of most of our Euro-denominated senior subordinated notes, we no longer report any associated unrealized currency gains or losses.

Last year's fourth quarter, however, did include a 2-cent unrealized EPS loss.

Adjusting out this loss, fully diluted earnings per share in the fourth quarter 2002 were 28 cents.

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

For the quarter, NACO had attendances of 7.8 million, up 16.7% from the same quarter last year.

Excluding the impact of acquisitions and the benefit from the extra week in this year's quarter, organic attendance declined by 3.1%, roughly equivalent to our third quarter performance in this market.

NACO's fourth quarter revenues rose 13% to 116.1 million from 103.1 million.

Meeting fee revenues grew 18%, but product sales fell by 7.8%.

Product sales per attendee excluding the acquired WW group territories were down 12%.

The weakness in our fourth quarter product sales comparison is primarily attributable to soft sales of our food bars.

This was compounded by the fact that last year's fourth quarter food bar sales were unusually high because we pre-announced a 14% price increase that took effect in January of 2003.

The primary reason for the actual softness in our fourth quarter bar sales was the fact that in September, we introduced numerous new bar flavors into the meeting room, a number of which have not been well received.

We're in the process of developing replacements to these products that we expect to introduce in the near future.

And finally, we also know that we have seen some slow down in our unit bar sales per attendee since the 14% price increase was implemented earlier in 2003.

So we are also evaluating and testing various strategies to optimize the sales and profitability of our bar products.

Internationally fourth quarter revenue from our cash from operation rose 19% to 71.3 million from 60 million last year.

In local currency, the increase was 3%.

Now by geography, we indicated in the last earnings call that the U.K. faced difficult comps in the fourth quarter, given that the fall 2002 diet season posted growth of over 15% compared to its prior year level.

As expected, the UK's year-over-year attendance growth in the fourth quarter flattened 2.5%.

Fourth quarter UK attendances were 2.6 million and revenues rose 2% on a local currency basis.

Continental Europe delivered 2.5 million attendances in the fourth quarter, attendance growth of 5.2%, despite having lagged the 2002 launch of its most recent program innovation.

As Linda noted during our third quarter conference call, continental Europe will launch its next innovation in August 2004.

Fourth quarter 2003 local currency revenues for this geography increased 4% versus the prior-year quarter.

Now in regard to our other revenues, the franchise commissions totaled 4.7 million this quarter, a decline of 18% from last year's fourth quarter level.

The decline in commissions is the result of the company acquiring franchise territories and bringing their operations in-house.

Acquisitions made during 2003 included the WW group, Dallas, and New Mexico.

Excluding these territories from fourth quarter 2002, worldwide franchise commissions increased 2% in this year's fourth quarter.

As we continue to acquire franchises, revenue from the associated commissions will, of course, continue to decline, but the overall net impact on the business of making these acquisitions is significantly accretive.

Other revenues, which totaled $11.5 million in the quarter, posted a 55% gain versus the prior-year quarter.

The main drivers were magazine advertising revenues and publishing royalties, which rose a combined 2.9 million, nearly double last year's fourth quarter level, and licensing revenues, which increased 1.2 million or 43%.

Royalties received from our WeightWatchers.com licensee were 1.8 million this quarter, up 38% from the year-earlier quarter.

Moving to gross margin, in the fourth quarter, gross margin as a percentage of revenues was 52%, up from 51.3% in the comparable period last year.

The low growth margin or marketing and G&A.

Marketing expense in the fourth quarter 2003 was 28.1 million.

This is an increase of 38% from the 20.4 million level of 2002.

Marketing as a percent of revenues was 13% as compared to 10.7% in the prior-year quarter.

In the fourth quarter, we continued the accelerated level of investment in some of our key markets that you've seen throughout 2003.

G&A expenses were 19.3 million in the fourth quarter, up 3.1 million or 19% versus the last year.

The combination of currency translation and the addition of the WW group added 10% to our year-over-year expenses.

And as with many other companies, the key drivers of the remaining increase in G&A were significantly higher insurance rates, expenses associated with the additional regulatory and compliance requirements that we're facing, and higher legal fees.

G&A expenses were 8.9% of revenues in the 2003 fourth quarter, as compared to 8.5% in the year-earlier quarter.

Operating income was 65 million in the fourth quarter, up 4.1 million or 6.7% versus prior.

Our operating income margin was 30.1%, as compared to 32% in the comparable period a year ago.

While our gross profit margin was higher than prior, operating income growth lagged top-line revenue growth due to the increase in marketing expenses.

One of the benefits of the repurchase and retirement of most of our 13% senior subordinated notes and the refinancing of our debt, which took place in the third quarter is an ongoing savings in interest expenses.

Net interest charges were down 5.7 million in the fourth quarter to 4.8 million, from 10.5 million a year ago.

Our effective interest rate moved from 9.02% in Q4 last year to 3.68% this year.

In the first quarter of 2004, on January 21, we entered into another refinancing to move a large portion of our debt to revolver from fixed term loans.

This has provided us with a greater degree of flexibility and the ability to more efficiently managed cash.

Under the refinancing, our term loans have been reduced from 454.2 million to 150 million, and our revolver capacity has increased from 45 million to 350 million.

To complete the refinancing, we drew down 310 million of the revolver.

Our affected interest rate has dropped further from 3.68 in the last quarter to 3.33% today.

Other income and expense net on our income statement was 0.4 million of income in the fourth quarter 2003.

This compares to 3.3 million of expense in the year-earlier quarter, largely for unrealized currency losses related to the marking to market of the then outstanding 150 million of high yield euro denominated notes in other hedging.

Now recapping in brief the 2003 full-year financial results, revenues increased 17% to 943.9 million on attendance growth of 10.1%.

North American attendances were off 2.1% on an organic basis for the year, but rose 12% including acquisitions.

UK and continental Europe attendances gained 8.2% and 9.1% respectively on a full-year basis.

The gross margin for the year was 53.3% as compared to 54.3%, the year earlier.

Marketing expenses were 12% of revenue versus 10% the year earlier, and the operating income margin slid as a result to 33.5% from 36.7%.

We incurred 48.7 million of expense in 2003 related to the early extinguishment of our 13% senior subordinated notes and the refinancing of our debt, and we, thereby, reduced our interest expenses for the latter part of 2003 and forward.

Also, we received the first $5 million loan repayment from weightwatchers.com.

EPS excluding expenses associated with the early extinguishment of debt was $1.69 as compared to $1.31 in 2002.

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

In terms of cash, we ended 2002 with $57.5 million.

During the 2003-year, we generated cash flow from operating activities of 233.1 million as compared to 164.9 million for the year 2002, an increase of 68 million or 41%.

We ended the fourth quarter with 23.4 million in cash.

Therefore, cash realization in 2003 was 267 million, and it can be summarized in four major categories.

First, franchise acquisition.

At the beginning of the second quarter, we acquired the WW group franchise territories, and funded 96 million of the 181.5 million-acquisition costs with cash.

In addition, in the fourth quarter of 2003, we acquired the Dallas and New Mexico territories for 27.2 million of cash.

Second, in the fourth quarter 2003, in keeping with the stock repurchase program that we announced in October, the company repurchased 784,000 shares of its stock for 28.8 million.

Third, we paid down 58 million of debt principal and last, the debt refinancing.

During the third quarter, we made cash payments of 60.3 million for expenses associated with the tender and repurchase of our 13% senior subordinated notes and concurrent refinancing of our credit facility.

With our interest rates at a lower level, cash flow will increase further.

We will continue to be opportunistic in acquiring franchises and in the repurchase of additional shares of the company's stock with the goal of further value creation for our shareholders.

On the balance sheet, our total debt at the end of December 2003 was 469.9 million.

This compares with 476.7 million at the beginning of the fourth quarter, and 454.7 million at the end of 2002.

The increase in debt over the December 2002 level is the result of debt financing, a portion of the WW group acquisition.

Our net debt to EBITDA ratio is conservative at 1.4 times.

Completing our balance sheet overview, the major change in assets is the result of an increase in franchise acquisition rights associated with the acquisition of the group, Dallas and New Mexico.

The change in liabilities over and above the debt is a reflection of the normal timing of fourth quarter tax and other payments.

Now I'll turn it back to Linda.

Thank you, Ann. 2003 was a challenging year for Weight Watchers, but also one that I believe shows the breadth of our opportunities.

We are blessed with a powerful set of assets.

The most trusted brand in our industry, the most dedicated and passionate service providers that I believe exist in any industry, and a business model with infinite marginal return on capital.

Therefore, even though 2003 saw the rise of the low carb craze, I'm proud to say we delivered meaningful growth in earnings and free cash flow for our shareholders.

Certainly the low carb craze, we have experienced over the past 8 to 10 months has slowed us down and we continue to feel its head winds in our North American operations.

Since last spring, we have spent a considerable amount of resources dissecting these low carb-dieting approaches.

How consumers view them?

How consumers use them?

And ultimately, how consumers leave them?

The bottom line is simple.

They work for a few highly disciplined people, but they will not work in a sustainable way for the vast majority of people.

And though I believe consumers are beginning to figure out that these diets are not sustainable, our financial models and guidance do not count on this way of subsiding to any great degree during 2004.

Based on that outlook, we expect 2004 to deliver fully diluted EPS between $1.90 and $2 per share.

In terms of the lay down for the year, I expect improving attendance trends towards the back half of the year as our North American initiatives take hold and we launch our continental European innovation.

Operator at this time, we would like to answer questions.

Certainly.

[Operator Instructions]

Our first question comes from Greg Cappelli from First Boston.

Your line is live.

Good afternoon.

It's Eric Filling (ph) in for Greg.

Hi, Eric.

How are you?

Good, thank you.

Can you discuss what the attendance trends have been in North America on a monthly basis so far in 2004?

We don't break down obviously the current quarter that we're in.

We don't actually break down the quarter that we're reporting in a monthly fashion.

As I indicated in my section, we are expecting attendance growth to be relatively inline with what we experienced in the fourth quarter.

So I think you can use that as our guidance.

OK.

And are you finding to offer more promotions in 1Q than in the past to combat the low carb message?

Obviously we do use tactical promotions to drive enrollments during critical periods through the year.

I think our pattern of promotions is very similar to what we experience in most years.

OK.

We have promotions on a regular basis.

OK.

Thank you.

Thank you.

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

Your line is live.

Hi.

A couple things.

First of all, you know, just on this U.S. low carb thing, I'm sure you're going to get a lot of questions on this, but I'm a little bit confused about what you guys are doing to combat this.

I know, Linda, you talked a little bit about some of this P.R. stuff, but it sounds very similar to what you discussed on the prior conference call.

Is there anything that's evolved over the past three months that's different than what you talked about last time?

And can you also talk about what you're actually doing in the meetings?

Last time you talked about, you know, your truth about carbs campaign, you didn't mention that this time.

And then as a part of that, can you also walk us through what your full year North American attendance expectation is in 2004, and the quarterly flow?

Right.

Well, let's take it in sections, Amy.

Hi.

How are you doing?

Let's look at the low carb sort of issues that you raised first, if that's OK.

You're right, we put in a bit - we started our action, really, in the autumn.

We put our FlexPoints innovation in, and in October, we added to that a piece of program material that we've been distributing to all of our members, and we're continuing to distribute to our members even now as people join Weight Watchers, and that was our truth about carbs leaflet.

This is also a leaflet that we've put into the marketplace.

We're trying to obviously help educate the public in terms of the essential nature of carbohydrates.

One of the really damaging things that this craze has done is to, you know, damn all carbohydrates to treat them all as if they are an enemy.

And, of course, they're not.

Some carbohydrates are absolutely essential to good health.

And that is what our message is all about.

We've put that leaflet in our meetings, and as I said, we're continuing to push that message home to everybody who comes in our meetings.

But obviously not everybody is there.

So we've had that widely publicized on places like the MS home page, which I mentioned at the last quarterly call.

Right now we've got that leaflet going out in connection to the "welcome back."

I don't know if you've seen our ad, but we have an ad out at the moment called" welcome back, "and it's very powerfully saying that you have to include carbohydrates within a sensible diet, both for sustainability as well as for health.

And we have tie-ins in certain supermarkets and certain places that are getting that carb message out.

What I said that was new this call was our whole science of weight loss, which is a completely different coordinated approach that we're taking that integrates, if you like, the research and science that we've been very good on for years and years and years, and coupling them with our marketing and our P.R. efforts so that we're taking them as a whole, and we really believe that this, over time, will do us as much good in the public arena as our science has done us with the scientific and medical communities.

We are incredibly well thought of because of our science, and because of the very large studies that Weight Watchers and Weight Watchers alone has participated in over so many years.

So I think if you're looking at some of our initiatives, they really are a part of an evolution of the same thing, but going into quite concrete and specific actions that we're taking that we do expect to have an impact on what we're doing.

I said that we had science and data to support the sustainability of the Weight Watchers program.

I really was excited by the latest study on the weight maintenance of people who have successfully completed the Weight Watchers program.

Now, this is going to be published.

It was done by a university obviously.

This is going to be published.

It is going to be talked about.

But certainly from what I saw, it is incredible powerful in terms of saying that all weight loss is not equal.

With Weight Watchers, you have the ability to sustain that weight loss, and we're obviously encouraging, therefore, people to come to Weight Watchers and to stay the course.

That is something that we've not done before, even though these studies have been done, I think they've been done over the past 12 to 14 years.

So we will certainly be publicizing the current one in a much different way than we ever felt that we did in the past.

And as I said, we've got a lot of insight during the past eight months.

We have been talking to consumers more intensely probably during the past year than we ever have, and that insight is being incorporated into our thinking and into our development and being incorporated into our program, and obviously that, you can trust that we'll discuss with you as soon as we are in a position to do so.

And so then just on the your expectation for full-year North America attendance growth ex-acquisitions?

Yeah, if you look at our range, the bottom end of the range, we're anticipating low single digit growth for North America, which would rise to high single digit organic growth at the high end of our range.

OK.

And then just lastly on Europe, can you just talk about whether when I say Europe, I'm talking about the U.K. as well, whether you're seeing any negative impact from low carbs over there yet, and also Linda, you made a comment about in 2004, the U.K. would consolidate, and I didn't know what you meant.

Well, obviously in the U.K., when we have relatively low growth expectation for this very mature market, we get higher growth in the years that we innovate and we get a lower growth in the years that we don't, so consolidation merely means that we will hold on to that growth before the next growth comes with the innovation obviously that is not in this planned in this year.

If we're looking at Europe and the U.K., we're really looking at two completely different pictures.

The U.K. definitely has had the low carb phenomenon.

You know, Atkins is widely used over there.

What I've said in the previous calls is really true.

We're looking at a much more balanced media presentation of the different dieting methods.

You're looking at the media, which has not just taken the low carb craze at face value but is obviously presenting that balanced picture that questions its long-term efficacy, that questions the long-term health impact on it, and done that in quite a loud voice.

If you go back to the start of last year, I know I reported on the BBC diet trials, which you might remember included both Atkins and Weight Watchers, and that was a big clinical study, a six-month clinical study, and obviously it was very positive because although people, of course, initially lost weight on Weight Watchers sorry on Atkins as well as on Weight Watchers, by the end of it, 50% more people dropped out of the study using Atkins than they did Weight Watchers.

And at the end of that study, they asked the control group, you know, listening to everything that you've heard for the past six months, which of these programs would you like to try, and Weight Watchers was the preferred choice by far.

So, you know, it's not as if Atkins and low carbs have not reached the U.K.

I think it's the balance of the media particularly and the balance within that media that has allowed us to have that 8%-plus growth there this year.

Now in continental Europe, although the book is being published in various places, I think that there's just more of skepticism about any extreme what they would consider fanatical approach.

I'm sure if you told a Frenchman that you were going to take bread away, you'd probably have a riot in the street.

Just to end that one obviously, I do want to point out that we are pleased that the U.S. media is starting now to put a little bit more balance into the picture.

And I think that's part of what is going to change this whole picture in the U.S.

OK.

Thank you.

OK, Amy.

Thank you.

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

I was curious, Linda, on the last call when you were talking about, you know, the talent of attracting new people, et cetera, you had talked that you had started to see an increase in what you were calling low carb refugees sort of picking up since mid September, but then for the December quarter with a decline in NACO versus flat.

I'm just wondering what happened over the course of the quarter that was different than what you had maybe been thinking or seeing in early October or your last conference call, and then as you look into the first half as we're still you're trying to figure out when the peak is going to decline, how does that impact, I mean, the visibility on the NACO core growth just seems to be really tough over the past eight months, and granted there's been a lot going on, but I know that's sort of a two-part, but I'm just sort of curious, it seems to be a moving target even, you know, over the course of a month and a half.

Carol, I think you have to look at what I've said quarter by quarter about the makeup of each of those quarters.

I know when we were talking about quarter two, I pointed out to everybody that in our early spring advertising and everything, we did well, I mean, we were doing what we expected to do obviously in view of the fact that our innovation hadn't come in until the autumn.

But then we had the summer, and it was the summer, which was literally only one month of that period that had caused us to go into a minus six situation.

That's why I was giving advice on the third quarter and saying even though we have the innovation, we have got two months of this trough that we're seeing in the summer, and we've got one month of innovation.

So I have to say that to come in that half of the negative that we saw in the second quarter was actually a plus, and I think it showed that that early strength in terms of recruiting back our former members.

Now, obviously new members, people who haven't been to Weight Watchers before, they are the ones that are really most susceptible to all of this buzz and noise and chatter and everything that's going on in the marketplace because obviously they're looking for what am I going to do next.

And I think the fact that we did not see that balance in reporting, we did not see that buzz start to go down as early as we expected it to, we really just expected some things to kick in earlier than they did.

I think now, right now, we're seeing a lot more of a balanced approach, a lot more negative information has come out, a lot more questioning has come out.

This is the kind of thing that I would have expected the American market maybe to have started earlier in the fall.

Of course the good news is it's now here.

I think we have to see innovation as still something that is very, very positive.

You know, with all of these buzz, with all of this noise, we are down on an organic basis just a very, very low single digit level.

The U.K.'s innovation, obviously even with the low curbs, has gone up, and we are seeing an ever-increasing number of these low carb refugees coming into our meetings.

I just think that we have to see this as a positive movement.

Timing the exact movement because it's not in our hands is a little bit harder for us to pinpoint precisely.

And if I could just ask one follow-up, given that you said you're starting to see now, you know, a little more negative publicity on the Atkins and you're seeing an increase in, you know, the newer people coming in, why wouldn't you expect the sequential pick-up in attendance then for the first quarter?

Or are you just being conservative given that there's a lot going on and it's still early to call it one way or the other?

Yeah.

Of course the one thing that is has sort of changed things a little bit in this environment and has really started to take a grip is just all of the low carb foods that have now jumped on the bandwagon and are really flooding the market.

So I suppose in some senses, even though we're seeing the negative publicity about the diets, which I think is very welcome, we are also seeing a tremendous amount of noise about the low carb food products that are out there.

So it's sustaining, if you like, an interest in this thing.

Also going into quarter from quarter four into the first quarter, our flow-through was obviously a little bit lower than I would have expected when I was talking to you last call.

OK.

Thanks very much.

Thank you.

Our next question is coming from Jerry Herman with Legg Mason.

Your line is live.

Thanks.

Good afternoon, everybody.

Hi, Jerry.

Both a near term and longer term question with regard to attendance, and sort of dovetails off the last one, but Linda, could maybe you mention some of the gives and takes in this quarter, that the factors of influence in this quarter that might impact attendance beyond maybe the low carb craze?

Because as I recall, the comps are at least made slightly easier by what was going on a year ago with regard to weather and the war.

I know weather hasn't been great this particular quarter or in the first quarter thus far, but are there other factors

You're in the same part of the country I am obviously.

And obviously some of our new acquisitions were in that area of the country as well.

Yes, we've had very unusually two hard winters following each other, which is, you know, not our normal weather pattern.

I think that in describing the outlook for 2004, Ann had sort of given you the parameters of what our guidance actually means in that growth, and I have given the guidance that I really think that we're going to see a second half improvement versus a first half improvement.

I've also indicated that we should see a similar organic, and I keep using this word obviously, only because historically for the past few years with some really big major in acquisitions, we had this organic concept versus the smaller acquisitions which just meld in.

We are going to see on an organic basis the North American company-owned operations put in a similar performance to the fourth quarter in 2004.

But, of course, when you look at the reported figures, you're going to see a growth picture because part of our growth in North America is the fact that we have the ability to buy acquisitions and to benefit from that business.

So I can only repeat what I said.

The first quarter is roughly the same in terms of our organic attendance growth in company-owned North America.

OK.

And then with those, sort of the longer-term question.

Are you completely confident that the market has not grown tired of the point system generally?

I know your innovations generally still maintain the basis of a point system and then separately with regard to the products' performance in the most recent quarter, is there any lesser degree of enthusiasm with regard to what you can do on the product side?

Jerry, I mean, I have to say, if you look at the U.K., which has had points longer than anybody else, to have a tremendous 8.1% growth in that mature market this year even despite all the noise in that market about low carbs and the number of people that they claim over there on low carbs, for us to produce that, I don't think that anything could say and certainly our research with consumers does not indicate that the points system has lost a following or credibility or popularity.

I think that as I said, one of our issues is with attracting new members in when there is so much noise for what seems to be a sort of new science, new dieting, new, this whole thing that we saw last year based on those two very small, short tests, which I think just attracted an awful lot of people to try it before they come to something that obviously takes a much bigger commitment, like Weight Watchers, because of our meetings, because of our support, because it's a more long-term approach.

So I think we're seeing playing out exactly how you would expect this kind of fad and this kind of buzz coming.

Now, obviously we are always testing new program features and new concepts to improve our program, and that has not changed.

I mean, that is happening, you know, that is happening as we speak.

Just one last one.

I got a hundred questions about WeightWatchers.com but I'll just ask this one.

Is there any cannibalization effect?

I mean, that's gotten to be a pretty big business, but is that in any way that absorbing potential attendees?

No, I honestly, don't believe that it is.

I believe that, you know, dot-com is a much more a self-help methodology.

We believe that it's probably the best self-help approach that you could possibly have.

We believe that the best combination would be go to a meeting and use something like the tools that we have on that fabulous site because, therefore, you can be active and you can be engaged, you know, 24/7 as they say in that world.

But no, I don't think it's cannibalizing our core business.

Great.

Thanks very much.

Thank you.

Our next question is coming from Andrew Mcquilling from UBS.

Your line is live.

Hi Andrew.

Thank you very much.

Hi Linda, hi Ann.

Linda, could you discuss some of your research on the low carb dieters?

You know, in terms of total, are there more than 15 million low carb dieters in the US right now?

Oh, gosh.

I haven't, I didn't do the research to try to quantify how many people are on it.

I think all the food companies, everybody under the sun is quantifying it for you right now, so, you know, you go out and read their research just as well as ours.

What we were trying to get an understanding of, what we spent our time doing, is finding out how dieters use something, what they feel about it, what their expectations are, whether they can sustain it, which is why I'm saying, you know, categorically, we know that when people approach these low carb diets, even though if you look at an Atkins, you look at a south beach, you look at all of them, they're saying for the first couple of weeks, this is what you do, and then you go on to, and then they spell out their next phase.

Well, our research tells us that people don't go on to a next phase.

They try to stay on this two-week, three-week front end of the program.

That's what gives them that weight loss.

And then, because they can't sustain it, they inevitably start modifying it themselves, they start playing around with it, they start eating the things that they're just missing so desperately.

That's why I know, I absolutely know, from our research that all of these carb products are going to be eaten in huge quantities.

The trouble is, those carb products are not minus calories.

They are full of calories.

So if you think of it, you're following an eat all you want of fat and protein and now you're going to have this thought in your head that you can eat all you want of these low carb products, that I'm afraid are stuffed with calories.

So the mechanism that is controlling your calories intake and, therefore, giving you a weight loss, will automatically be destroyed.

So as they do this, they are going to stop losing weight.

I mean, that is, and if probably they're going to gain weight.

Look at what happened with the low fat craze, if you like, in the 90's.

We were in exactly the same situation.

Everybody was focused on fat as if that was the only thing.

My example is like ice cream.

If you ask somebody, and we did in our research, in the 90's, what do you think of ice cream, they'd say, "oh, it's stuffed with fat.

I want a low fat version or I won't touch it".

Now if you ask somebody, they say, "oh, it's stuffed with carbohydrates".

Well, the truth is, it's stuffed with both.

You know?

And, you know, we are going to see this play out.

Our research has told us a tremendous amount about how they're using these programs, what they're getting out of these programs, and it truly has given us new insights, not in terms of low fat, I'm sorry, low carbohydrate and how this is the new science.

That is not the insight it has given us.

It has given us new insight into the behavior of people and what they're looking for.

And that's what we're working on.

Linda, I guess you mentioned a six-month window for the low carb dieter.

I guess what percentage can actually work through six months?

We weren't saying they could stay on the thing for six months.

No, that would be very extreme and unusual.

We're sort of saying because they're still dabbling with it, you know, when at they start doing their own adaptation, they consider themselves still on it, so we are saying it takes them on average about six months before they realize, "oh, my goodness, this isn't sustainable".

Then they start the yo-yoing and everything.

Maybe one more just about -- it seems like there's a lot more attention, media and otherwise, on the dieting.

In 1990, it seemed like there was a good jump in the absolute number of dieters because of the low fat phenomenon.

Are you getting any sense that there might be some type of silver lining to this?

Oh, absolutely.

The mere fact that they're driving so many new dieters, brand new dieters into the market can do nothing but stand Weight Watchers in good stead.

We really are the one that everybody ultimately trusts.

Our research has said whether you've been to Weight Watchers before or you've never been to Weight Watchers and you're asked which diet do you think is the best at delivering long-term weight loss and all those values, Weight Watchers comes out tops.

So, you know, people don't rush to a program that takes the kind of commitment and long-term view that ours does, but they eventually wake up to the fact that they want to solve a long-term weight issue.

Therefore, they will be looking for a long-term solution, and we're the best in the business.

And maybe just one more, if I could.

The January fast track program, it seemed like it had come out to a decent start, and that seemed like there was some -- you know, can you follow a low carbo or normal regime up front to accelerate your weight loss.

How did that kind of offer to the membership play out, and is that something you may try again?

Obviously Fast Track was just one of our tactical marketing promotions in the diet season.

If you're looking at that sort of presentation of here is a higher carbohydrate approach, you can use it, here is a lower carbohydrate approach, you can use it that has been included in Weight Watchers' program material in the U.S. since the start of winning points in a meaningful way.

So we are talking about four years that we've had that kind of approach available to our members.

So Fast Track was a new way of showing people in a really simple, fast, quick way, sort of like a Chinese menu, I don't know if you saw it, but if you picked it up in our meetings, you'll see that it's sort of a very simple, quick, easy.

What we were trying to do is say; you can get off to a fast start.

Here is a CD or DVD, whatever that thing was, on exercise.

I don't have, by the way, a DVD so I'm always confused by those things.

You know, and here is a simple menu plan that gives you a really easy fast way to get into your New Year's resolution and the program.

So no, it worked -- obviously we use tactical marketing offers, just as we go through the year.

And maybe one more, if I could, for Ann.

Sure.

Ann, free cash flow was 233 million in 2003?

Right.

That's a very big number.

Any thoughts on 2004?

Well, there aren't significant differences that would certainly bring that down for '04.

Part of it is coming from, of course, lower interest rates, which are very beneficial to us.

We have $10 million, as you know, of payments from dot-com coming through, and our taxes are a bit lower.

So generally speaking, I would have to say I don't see any reason for it to come down.

Terrific.

And maybe just one more.

The repo program, very modest at least to start.

Any thoughts on increasing your repo program?

We are in the market, we have been in the market since the program began, which was in October, so we didn't have the benefit of the entire fourth quarter, and we are continuing to buy opportunistically when we think it's the right time, so we are there.

All right.

Terrific.

Thank you.

Thank you.

Our next question is coming from Gregory Baskannion (ph) from Smith Barney.

Your line is live.

Thank you.

First question, in your comments to another question, you mentioned that you've been gathering the insights on consumers and would implement that in your program.

Can you just talk about how, you know, if could you talk a little bit more about that, you know, how you're going to implement that into your program?

We do continuous research.

We do continuous testing, you know, we analyze what to do to improve our programs in all of our markets on a regular basis.

So obviously I'm not prepared to comment on any details at this time, but I can assure you, we're certainly working on it.

It sounds like you're holding a little bit back there.

Is there something that could be maybe introduced in the back half of the year?

You know, we're always testing, as I said, and, you know, whereas we normally do our innovations every two years, we are not locked into a two-year cycle.

We can delay it as we did with the introduction of FlexPoints, we can pull things forward if that's what we deem is the best thing for us to do.

I'm just not prepared to comment on any details at this time.

OK.

Well, we've been hearing from some group leaders that -- and some other trade sources that, you know, you may be leveraging your brand and infrastructure to capitalize on the low carb trend by offering, you know, a new type of program -

OK.

Gregory, I really want to address that one.

And we do testings.

Of course we test them, we test them in meetings and we test them with service providers, but let me just say, as categorically as I can, that if we were going to abandon our beliefs and launch a low carb program, we would have done it six months ago.

It would have been the easiest thing in the world for us to incorporate that kind of approach into our FlexPoints.

You know, we believe that carbs are an essential part of a healthy diet, and we believe eliminating a whole food group such as the low carb movement is doing is neither healthy nor sustainable.

So therefore, I can say as clearly as I can that we will not develop a low carb diet.

I wasn't saying low, I was saying maybe lower or some other type of innovation.

If you're using lower, I mean, I've already used it with Fast Track.

I said you can see right at the top of that menu plan, here is a lower carb approach.

It's a world of difference between that and low carb.

OK.

Good.

Could you share some more details on the study in terms of, you know, maybe, you know, some of the effects of Atkins type of diet or, you know, in terms of their being able to follow it, and what type of, you know, plans do you have in terms of getting that in the mainstream Mead media?

Could that sounds like -- I mean, that's what's really driven this whole phenomenon, and if you can have negative studies now out there in the media, that's what would actually lead to a decline in low carb.

You know, I think I've said this, you know, again and again, really.

I mean, our research really says that these are unsustainable, people cannot last on them for a long time, that they start to modify them.

But, you know, our research is proprietary.

We will always keep it that way.

It's for our development.

And obviously we use that to our best advantage.

OK.

No plans to share that with the media?

No, no, what we wanted was more of the media itself to start questioning some of these things.

We wanted medical, you know, people and scientists to and that is what we're starting to see happen.

You know, we get all the media, of course, so you might not see it in the same detail that we do, but believe me, this kind of questioning is now starting to pop up on a regular basis across all different types of media.

And thank goodness it is.

I mean, people are truly starting to question the science, the sustainability, the very, very, you know, low number of people in these studies, the lack of long-term research.

And I think consumers are going to start to figure it out, and they will figure it out.

Good.

And just finally, we've come across some of your bread that's in the northeast.

You have a bread line.

And how has this line been selling?

Any plans to roll it out?

And also maybe is there - are there other products in the supermarket, you know, I guess now and also after the Heinz relationship in September, that is partially eliminated.

What are your plans there?

Well, we're very happy.

Obviously since we separated from Heinz, we said the fact that --aside from their core categories, we have all the other categories to license, gives us great opportunity, and I think that's why Ann and I both reported today such huge growth in our licensing revenues.

And I think that will continue.

Yeah, the bread is very good.

I hope you tried it.

It was good.

Great.

Thank you.

Thank you.

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

Your line is live.

Hi, Dina.

Hi.

My first question, I'm trying to understand consumer behavior, so on the Atkins, after they've been trying variations for about six months, I am now six months forward, and they decide Atkins is no longer for them.

So do they just give up on dieting and how long do they give up on dieting if that's the route they take, or do they try different alternatives immediately, and if this they do try either, there's a delayed approach or they try it immediately, what exactly is Weight Watchers doing to make sure that the next choice they make after Atkins is to try Weight Watchers, not to do the go it alone or just stop immediately?

Having a struggle with a weight problem all my life, I can give you some assurance that people who have a problem don't usually give up.

You always want to be healthy.

I think that's something that, you know, if you find that you have a weight problem, you are seeking.

So we shouldn't think of people as trying something.

They tried it once, it didn't work, and they disappear and never try another approach or another diet.

I would love many of you to see our current advertising, 'cause if you're sort of saying what are we trying to do to attract people who have, you know, run out of steam on that particular kind of approach, I think you only have to see our "welcome back" commercial to see, you know, a fabulous presentation of why you should come to Weight Watchers as opposed to attempting these kind of regimes.

It's very clear and it's very powerful.

OK.

So after the six months of them trying some alternative on Atkins, their own version of Atkins or low carb or whatever you would like to call it, immediately they try afterwards something else?

Well, I'm not going to say immediately.

Obviously, you know, everybody is an individual.

But eventually they do search for a long-term solution.

And I think the more we can convince them that science is on our side, and results are on our side, that's why I am really excited that the latest analysis of our lifetime members, those are people obviously who have successfully completed the Weight Watchers program, is so powerful, and we're going to do everything we can to publicize that to the consumer, not just to the medical community and the scientific community which would have been our previous approach.

OK.

So if there was a time, it probably would be another month or so, a couple weeks, then the consumer will get a little energized to try something else, see Weight Watchers, and that idea appeals to them to try that.

It wouldn't be like another three months before they try someone else?

Dina, if you know anyone in Europe as who started toying, can you just push them along to trying something sensible sooner rather than later.

That's really is how it works.

Just on the product sales in NACO, in the first quarter, I guess, and then for the full year, would the sales -- the product sales actually be down more than attendance in the first quarter, and then for the full year where they actually start to be coming in above attendance growth on the organic side on the products, what's the outlook there?

Well, obviously on product sales, we did have some execution issues, and I think we just - you know, we weren't as focused in the latter half of 2003 on our product sales as we normally are, and not surprising, I suppose, with everything else that was going on in the marketplace.

And there were some real execution issues, and as Ann said, you know, we're taking some very concrete steps to correct them and address that issue, but, you know, I have to say that we're taking them now, so I think that as you're looking at the first quarter, you shouldn't assume that they're all taken and that they're all finished and that they're all done.

OK.

So -- but in the second half of the year, perhaps, would it start outpacing attendance growth again or -

Yes, I think that's a very, very fair assumption, certainly the one I'm going on.

OK, great.

And then my last question, very quick, on marketing expense, I just want to make sure that I heard correctly that the marketing expense in absolute dollars should be flat year-over-year, so around $114 million?

Well, we said relatively in line, yeah.

I mean, we're going to be putting a few percentage points in to cover inflation and things like that, but we're looking at it as a relatively flat investment.

You can expect it will go down as a percent of revenues.

OK, got it.

Thank you.

Thank you.

And our final question for this evening is coming from Will Wallstad from (inaudible).

Yes, this is Will Wallstad.

Linda, you had such high expectations fort FlexPoints launch, and I'd like to hear more about your thoughts on the performance about the success of that rollout, and can you quantify what effect that specifically had on your attendance and your profitability since the launch in September?

Well, I think I tried to cover it obviously earlier in the questioning.

If you're looking at it as a quarter-by-quarter basis, obviously everybody now accepts and knows that the summer was a pretty low period for us.

It turned, you know, a plus situation into a minus 6% in attendance growth, and that was after our spring marketing, which was obviously just a small part of it.

When we, therefore, were talking to you about the third quarter, we were very clear.

We said, look, you know, even with a successful launch of FlexPoints, we're looking at a comparable month.

I said that in the call.

I said we expect to still be down a comparable level because obviously in our third quarter, we only had one month of FlexPoints and the other two months were in the summer period.

As it turned out, we had half of that.

I mean, we had an improvement to two to 3% decline in that quarter.

So you can't read anything out of that except that the launch of FlexPoints got off to a very good start, and we attracted in, and now I'm saying to you that who we attracted in was primarily our former members, as opposed to the new members that normally in innovation would give us a lot more word of mouth buzz about our innovation.

Now that was up against this tidal wave of P.R. and buzz and chatter around the water cooler about the low carb dieting phenomena.

So I think in real terms, we can see exactly what happened to this.

Innovations work.

We saw it work in North America in this very unusual climate.

So you think it was successful for what the goals were given the environment?

Absolutely.

OK.

And just noticed about the shares outstanding, you had a repo of 780,000 for the quarter but the shares outstanding actually didn't decline by that much.

What was going on there?

The shares outstanding that you see are the average for the quarter and since we didn't start buying until mid-quarter and it was more heavily weighted towards the end of the quarter, you wouldn't see the full impact in fourth quarter.

You'll see that impact, of course, in Q1.

OK.

All right.

Thanks a lot.

Thank you.

At this time, I'd like to turn the floor back over to management for any further comments.

Thank you, J.C.

I'd like to thank everybody for joining us today.

We look forward to updating you on our progress in our next conference call.

Thank you very much, and goodnight to those of you in Europe.