WW International Inc (WW) 2004 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International's first-quarter 2004 earnings teleconference call.

During the presentation, all participants will be placed on a listen-only mode.

Afterwards, you will be invited to participate in a question-and-answer session, and instructions will be given at that time.

As a reminder, this conference call is being recorded today, Tuesday, May 11, 2004.

At this time I would now like to turn the call over to Mr. John Sweeney (ph) of Weight Watchers International.

Please go ahead, sir.

Thank you, Stephanie.

And thank you for everyone for joining our call with us today for the Weight Watchers International first-quarter conference call.

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

At about 4 PM Eastern time today, the Company issued a press release containing financial results for the first quarter of fiscal year 2004.

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.WeightWatchersInternational.com.

Before we begin, let us 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 or revise any forward-looking statements, whether as a 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.

Thank you for joining us as we review Weight Watchers International's performance for the quarter ended April 2nd, 2004.

I will begin by discussing how our business is performing in our various geographical markets, and update you on the status of several initiatives we have underway.

Ann will then review our financial results for the quarter, and finally we will answer questions from the financial community.

Our revenues for the quarter grew 12 percent to $281.4 million from $251.5 million in the previous year.

Total attendance at Company-owned operations during the quarter were 18 million, a 10.4 percent increase over last year's 16.3 million attendances.

Topline revenue grew 12 percent.

Our operating income growth lagged, at 3.5 percent, at 82.2 million, up from 79.4 million last year.

For the quarter, our fully-diluted earnings per share, excluding expenses related to early extinguishment of debt and the one-time non-cash charge related to the adoption of FIN46(R), was 47 cents, up 21 percent compared to 39 cents in last year's first quarter on a like-for-like basis, with lower interest expenses being the major contributor.

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

First, North America.

The first quarter saw a continuation of the challenges NACO had been facing since spring of last year.

While NACO had total attendance growth of 11.8 percent, removing the impact of franchise acquisitions, organic attendance declined 4 percent, as expected.

We did see a pickup in our business in January, during our Fast Track promotion, but our business during the back half of the quarter began to soften significantly.

At our last conference call, I mentioned that the consumer research we had conducted last year indicated that extreme low-carb, high-fat diets were not sustainable for the vast majority of dieters.

That is why we had anticipated a weakening of that fad.

This appears to be happening, as the proportion of the dieting population who are following extreme low-carb, high-fat regimes is down from where it was in the fourth quarter of last year.

Last fall, following a summer of uncritical press coverage on extreme low-carb diets, we launched our Truth About Carbs initiatives, which included briefing not only our members but also government officials, health experts and the media.

And I'm gratified to see that press coverage has become a lot more balanced and more questioning.

Our latest consumer research clearly shows that the bloom is off the rose.

However, on our last call, I also pointed out a new phenomenon that is now taking place with many of the food companies, including the majors, leveraging the popularity of these diets by launching hundreds of new low-carb products.

Others have also jumped on the bandwagon by simply marketing their existing product as low-carb.

Now, as a group, they have invested hundreds of millions of dollars on advertising over the past few months, fighting over who has the lowest net carbs.

Unfortunately, this explosion in low-carb products and the intensity of this campaign has created a perception among many that weight loss can be achieved by simply substituting some of what you normally eat and drink with low-carb equivalents.

For many, that thought is enticing -- I can lose weight without even dieting.

It's the equivalent of the magic bullet.

And the effect of this is that a large number of overweight people have moved away from structured, calorie-restricting weight loss programs, and are doing their own diet in an unstructured way, focusing on reducing carbs by eating low-carb foods.

According to a recent national survey of 1,000 consumers, 52 percent of Americans who identified themselves as trying to reduce their carbohydrate intake no longer believed that watching calories is important.

This is a sad situation, when you recognize that these people have little chance of achieving real weight loss, since they are simply replacing their normal foods and drink with premium-priced, low-carb versions of bread, pasta, chocolate, beer, often with the same caloric content.

In time, when they realize that their waistlines are not shrinking, they will be looking again for a proven, effective and livable weight loss programs, and no one has a high reputation for providing such a program than Weight Watchers.

Similar to what we are now seeing, with credible voices finally speaking out about the health concerns over the low-carb, high-fat diet, we are now starting to see early signs that credible consumer voices are beginning to question low-carb foods, as demonstrated by the June cover story of Consumer Reports, titled "The Truth About Low-carb Foods."

Several of you have asked if we plan to increase our marketing -- in other words, to fight back with additional marketing expenditure.

And while it would be quite easy for us to spend ourselves into lower profitability, I do not believe that we could make a significant dent in the hundreds of millions of dollars being spent by large food companies in support of their low-carb foods, drinks and snacks.

Instead, we can use this opportunity to come out as a stronger Company when this wave subsides.

So what are we doing to strengthen our business in North America?

Let me touch on three major initiatives.

One, we are improving the effectiveness of our marketing expenditure.

Second, we're concentrating on service quality.

And three, we are improving the appeal of our program.

On the first point, I believe that we can make our marketing dollars work much harder for us than we currently do.

The environment has changed, and we need to change our marketing message accordingly.

By reviewing the results of our marketing campaigns over the past year, and through extensive consumer research we have undertaken in recent months, we have developed new insights to improve our marketing effectiveness, beginning with our next marketing campaign in September.

The second point is simple.

Serving our members is priority number one.

We know from our surveys that both current and former members rate the quality of our service quite favorably.

We have been able to maintain the consistent quality of our service, while coping with the huge growth in the number of meetings and leaders we have experienced in the previous few years.

The current consolidation period is a great opportunity to take our service quality to even higher levels, and we have specific plans to accomplish that.

We know that better service leads to our members staying with us longer.

This is all the more important, as scientific analysis of our members who have reached goal weight while attending meetings has proved that they keep weight off after two years and five years, dramatically more successfully than the well-known standard established by a previous government survey of dieters, those who had lost weight by other approaches.

We are confident that our plans will yield increases in service quality, which will lead to more member success and be a great long-term benefit to our business.

Finally, since there is so much speculation regarding program innovation, we are announcing on this call for the first time, and certainly for the first time to any outside shareholder or analyst, that we will be introducing a new program innovation this fall in North America.

FlexPoints has performed well in a very difficult environment.

We believe that new insights upon which the upcoming new innovation is built have the potential to appeal to a wider audience.

We also believe that it will be able to cut through the clutter in this crowded environment.

As always, due to the competitive nature of our market, it is not appropriate for me to go into details now of our new offering.

But rest assured, it is not a low-carb diet.

In the meantime, as this low-carb food phenomenon is playing out, we are seeing increased softness in NACO, and are now anticipating low teens decline in organic attendance growth through the summer.

I would now like to move onto our international operations, which are performing very well.

First, the UK.

With the first quarter of 2004, we are now lapping the successful time-to-eat innovation launched last January.

Under the leadership of our newly appointed Vice President of UK Operations, Melanie Stubbings (ph), the UK got off to a great start, with attendance increasing 6.5 percent during the quarter over prior year.

We expect to see some moderation in this growth, as we proceed further into this non-innovation year.

Continental Europe also had a very strong start this year, with attendance growth of 13.7 percent.

We are seeing good strength in many of our markets, and should be well positioned to continue to build our business in continental Europe with the added support of the new program innovation this fall.

The engine of our continental European growth is the large German market, and we are also very pleased with the progress of our fledgling markets in Denmark and Spain.

Now, onto other news.

We have continued to use our cash for the purchase of franchise territories, and I am pleased to announce that we acquired the Washington D.C. franchise last Sunday.

Ann will fill you in on the details.

Also of special note is our partnership with Applebee's, the largest casual dining concept in America, which on May 17th will introduce the new Weight Watchers menu in all 1,600 of its U.S. restaurants.

You might remember in November of last year, Applebee's conducted a 70-restaurant test, and the results exceeded their expectations.

They will be investing a considerable amount of resources in marketing their new Weight Watchers menu, and both companies are thrilled about the potential.

Having recently sampled the food, I can tell you that it is well worth a visit.

Our Internet licensee, WeightWatchers.com, continues to grow its business, and in January it launched a subscription site in Germany.

In our press release, we indicated that we have adopted the new regulation, FIN46(R), which requires us to consolidate 100 percent of WeightWatchers.com's financial results with our own, even though we only own 19.9 percent of that Company.

I would now like to turn the discussion over to Ann Sardini, who will cover this and our financial results in more detail.

Thank you, Linda, and good afternoon, everyone.

Before I begin the financial review of our results, I will spend a few minutes on an accounting matter related to the Financial Accounting Standards Board, FASB, Interpretation Number 46, known as FIN46.

This particular standard requires that under certain circumstances, separate businesses with some common ownership be consolidated for financial reporting purposes.

While we do hold a 19.9 percent minority ownership in WeightWatchers.com, under the original FIN46, we did not meet those circumstances, and we therefore did not consolidate WeightWatchers.com's results into ours.

In late December 2003, however, the FASB issued a revision to FIN46, now known as FIN46(R).

Based on the revisions in this regulation, we were required to reevaluate our accounting regarding WeightWatchers.com.

Before making the final determination to consolidate, we worked with our external auditors and other advisers to review and evaluate the complex provisions of FIN46(R).

We accepted the opinion of our external auditors to change our accounting, and we have adopted FIN46(R) in our financial statements as of the last day of the first quarter 2004.

We will consolidate WeightWatchers.com into our financial statements from that point forward.

In compliance with FIN46(R), in this first quarter of adoption, we have taken the one-time non-cash charge of 11.9 million, shown on our income statement as the cumulative effect of accounting change net of tax.

This charge records the cumulative prior activity of WeightWatchers.com as if it had been consolidated from its date of exception in September 1999.

In this quarter, in accordance with GAAP, our earnings per share are reported both with and without the impact of the accounting change.

As you can see from our financial statements, the impact of this change is an 11-cent reduction to EPS.

Beginning with the second quarter, we will consolidate 100 percent of WeightWatchers.com into our financial statements.

We will recognize 100 percent of WeightWatchers.com's profits until its cumulative losses are covered.

At that point, we will continue to consolidate, but we will reverse out the portion of the period profits that do not correspond to our percentage of ownership in the entity in the minority interest line item.

ON a going-forward basis, we will make every effort to present information in our filings that will enable our shareholders to continue to understand the actual business performance of Weight Watchers International.

Now, to our results for the first quarter of 2004.

First-quarter revenues increased 12 percent, to 281.4 million from 251.5 million in the first quarter of 2003.

Global attendance at Company-owned meetings increased 10 percent to 18 million.

Operating income in the quarter was 82.2 million, as compared to 79.4 million in the prior-year first quarter.

Growth in operating income of 3.5 percent lagged topline revenue growth, as we experienced some growth margin compression, as well as increases in G&A expenses.

I will review both of these factors later in this discussion.

Net income for the quarter before the cumulative effect of the accounting change was 48.7 million, as compared to 40.6 million for the first quarter last year, an increase of 20 percent.

A major contributor to the increase in net income was a reduction in interest expense.

This resulted largely from the retirement of most of our 13 percent senior subordinated notes, and the debt refinancing that we undertook in the third quarter of 2003 and, to a lesser extent, from the refinancing that we concluded in this year's first quarter.

Earnings per fully-diluted share, before the cumulative effect of the accounting change associated with the adoption of FIN46(R), were 45 cents in the first quarter, as compared to 37 cents in the prior-year quarter.

This year's first quarter included a two-cent reduction in EPS, as a result of 3.3 million of expense associated with early extinguishment of debt.

Last year's first quarter included a two-cent unrealized foreign currency loss related to marking to market of our Euro-denominated senior subordinated notes.

Adjusting out these items from both years, fully-diluted earnings per share in the first quarter of 2004 were 47 cents, as compared to 39 cents in the first quarter of 2003.

EPS growth of 21 percent.

I will begin the review by geography with a summary of the results of our NACO operations.

For the first quarter, NACO had attendances of 9.9 million, up 11.8 percent from the same quarter last year, driven by the performance of acquisitions which were not owned in the first quarter last year.

The WW Group was acquired in Q2 2003, and Dallas and New Mexico franchises were acquired in the fourth quarter last year.

Excluding the impact of these acquisitions, organic attendance declined by 4 percent.

Including the franchise acquisitions, NACO's first-quarter revenues rose 7 percent, to 141.9 million from 132.9 million.

Meeting fee revenues grew 12 percent, but product sales were down 9.7 percent in the quarter.

As we noted in our last call, we have experienced a slowdown in the sale of consumable products in our meetings.

And in addition, product sales have been impacted by the lower number of enrollees.

New enrollees tend to purchase more of our higher-priced, one-time products than continuing members.

As we also mentioned in our last call, we are realigning our consumable product offerings in the meeting room, a process that will be concluded by summer's end.

As part of that process, we are reducing the number of SKUs in the meeting rooms, going back to our successful formula, and we are bringing back our all-time favorite bar flavors.

In addition, we will be introducing some new products later this year.

Internationally, first-quarter revenues from our classroom operations rose 28 percent, to 108.9 million from 85 million last year.

In local currency, the revenue increase was 10 percent.

Attendances in our international operations grew 8.8 percent to 8 million.

In UK, the strength continues, more than a full year after its last program innovation -- delivered 3.8 million attendances, a 6.5 percent increase over the first quarter of last year.

UK's revenues rose 5 percent on a local currency basis.

Continental Europe delivered 3.2 million attendances in the first quarter -- attendance growth of 13.7 percent, despite being more than 18 months past the August 2002 launch of its most recent program innovation.

Germany continues as the growth leader in continental Europe.

Europe first-quarter revenues increased 10 percent in local currency versus the prior year quarter.

Now, moving to our other revenues.

Franchise commissions of 6.2 million this quarter were down 30 percent from the prior-year quarter.

The decline in commissions is primarily 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.

As we continue to acquire franchises, commission revenues will continue to decline, but the overall net impact of making these acquisitions is accretive.

If we exclude the acquired territories from the quarter-to-quarter comparisons, worldwide franchise commissions declined 7 percent in this year's first quarter, including 12 percent growth in international.

Domestic franchise commissions from the remaining franchises suffered the impact of some of the same issues that Linda mentioned in her discussion of NACO's performance.

Other revenues were 8.3 million this quarter, an increase of 1.1 million or 15 percent versus the prior-year quarter.

Royalties received from our WeightWatchers.com licensees were 2 million, an increase of 21 percent from prior year.

The royalty payment represents 10 percent of WeightWatchers.com's net revenues.

Moving now to gross margins, in the first quarter, gross margin as a percentage of revenues was 53.5 percent, down from 55 percent in the comparable period last year.

Our gross margins, while still within an acceptable range, have declined as NACO's margins have eroded slightly, due to increased promotional activity and somewhat lower attendance per meeting.

Below the gross margin, we have marketing and G&A.

Marketing expense in the first quarter of 2004 was 46.5 million, an increase of 5 million or 12 percent in US dollars.

The increase in marketing is largely the result of currency translation and some additional marketing required for the nearly acquired territories, WW Group and Dallas and New Mexico.

Marketing as a percentage of revenues was flat, at 16.5 percent compared to the prior-year quarter.

G&A expenses were 21.7 million in the first quarter, up 4.4 million or 25 percent versus last year.

The combination of currency translation and the addition of the WW Group accounts for approximately half of the increase.

As with many other companies, the key drivers of the remaining increase in G&A were significantly higher insurance rates, expenses associated with additional regulatory and compliance requirements and higher legal fees.

G&A expenses were 7.7 percent of revenues in the 2004 first quarter, as compared to 6.9 percent in the year-earlier quarter.

Operating income was 82.2 million in the first quarter, up 2.8 million or 3.5 percent versus prior.

Our operating income margin was 29.2 percent in the quarter, as compared to 31.6 percent in the comparable period a year ago.

As a benefit of the repurchase and retirement of most of our 13 percent senior subordinated notes in the third quarter of last year, and the resultant refinancing on our debt, net interest charges in the first quarter of 2004 were reduced by more than half, to 4.4 million from 10.1 million a year earlier.

Our effective interest rate moved from 9.1 percent in Q1 last year to 3.4 percent this year.

Only a small part of the interest expense savings resulted from the debt refinancing we entered into in January 2004.

The primary purpose of this refinancing was 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 manage cash.

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

There was a charge of 3.3 million in the first quarter for fees associated with the restructuring of this debt.

Other income expense net on our income statement was 3.7 million of income in the first quarter of 2004, primarily the result of the scheduled loan payment from WeightWatchers.com.

This compares to 3.1 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 net of hedges.

During the first quarter of 2004, we accumulated cash flow from operating activities of 85.2 million, as compared to 101.5 million for the first quarter of 2003.

This decrease of 16.3 million in 2004 is entirely the result of the shift in working capital toward significantly lower accrued liabilities.

Last year in the first quarter, we carried 9 million more of accrued semi-annual interest payables on our 13 percent senior subordinated notes, which are now largely retired.

In addition, because of the timing shift of when our fiscal quarter ends this year, we are carrying one less week of payroll accrual and lower accruals for advertising.

Net of adjusting items, our cash flow from operations was up approximately 4 million this year.

Regarding other changes to the Weight Watchers International stand-alone balance sheet, as compared to the year-end 2003 balance sheet, the fluctuation in assets and liabilities reflects the timing issues that we spoke of earlier, as well as normal seasonality of the business.

And finally, as Linda mentioned, this last Sunday, we acquired our Washington D.C. franchise, our eighth franchise acquisition since 2001, for a purchase price of 30.5 million.

Adjusted 2003 operating income for this franchise was 5.2 million, and annual attendances were approximately 500,000.

Now, I will turn the discussion back to Linda.

Thank you, Ann.

As we look at the current state of our business, we see a dichotomy.

Our international operations are performing strongly, with solid top- and bottom-line growth.

At the same time, our large and important North American operation is feeling the headwinds created by the onslaught of low-carb food advertising.

As extreme low-carb dieting began to wane, the food companies have stepped in to take advantage of the natural tendency of people to seek an easy solution to their weight problem and still eat the foods they enjoy, in this case by promoting the false idea that eating these new, low-carb foods without watching calories will generate weight loss.

This, of course, is a false idea.

As I discussed earlier, we are working hard to improve our consumer communications, and to help them understand the benefits of the Weight Watchers approach.

Our efforts to further improve the quality of our meeting experience will pay long-term dividends.

These efforts, in combination with our fall innovation, will strengthen our North American business and allow us to exit this fiscal year with more momentum than we started with this year, irrespective of how fast the low-carb food wave declines.

Taking current trends in NACO into account, we are reducing our full-year estimates, and expect to report fully diluted earnings per share this year between $1.70 and $1.80.

This guidance excludes the one-time loss for consolidation of WeightWatchers.com in the first quarter, the positive impact of the consolidation of WeightWatchers.com for the rest of the year, and the charges associated with the early extinguishment of debt.

Stephanie, we would be happy to answer questions now, if they have any.

(OPERATOR INSTRUCTIONS).

Greg Badishkanian, Smith Barney.

I just have a few quick questions.

The first one is with respect to the other income that was 3.8 million, a 2 cent benefit.

That was not excluded, was it?

No, it was not.

And the second question -- I believe you provided about down 3.2 percent guidance for the first quarter.

And I think you said the trends were pretty good in January.

You had easier comparisons, I believe, in March and April; you had the start of the war in March and down 6 percent in Q2.

Just wondering if you could sort of talk about trends in March and April.

And I think you said guidance of low teen attendance, if I'm not mistaken, through the summer?

If we are looking at the guidance that I confirmed in the call that we had at the end of the year, reporting on quarter four and the full year, which took place in February, we confirmed the guidance of $1.90 to $2.

At the time that we had that call, we had just come off a very strong January campaign with our Fast Track promotion, which I'm sure many of you saw.

Then, following that promotion, we started to see a significant weakening of the North American picture.

But it's not really until -- you know how our seasons, I'm sure, are laid out.

We have three major dieting seasons, and the second major dieting season starts with the post-Easter campaign at around Easter time.

And it really was when we saw the softness of our post-Easter results in North America that we had to look at quarter two, and the rest of the summer, where we were going to be into low teens negative on an organic basis on attendances in North America.

That is, obviously, what the new guidance is based on.

Good.

And do you think it was just due to the new low-carb products being introduced and just greater awareness, which -- do you think that that's the cause of that?

Well, I think we had predicted -- we all knew -- I'm sure you read the same sort of things I read.

We knew that there was going to be a glut of low-carb products hitting the marketplace in the new year, and we obviously saw that.

We probably saw it with a lot more intensity than any of us could have anticipated, and the proliferation of those products was very great.

I think what has happened, which is what can impact a structured, committed approach to weight loss like the Weight Watchers, is this sort of mistaken believe that is being established right now that you can lose weight and control your weight merely by eating low-carb products.

I think that really is quite a different phenomenon from just having low-carb products out there in the marketplace.

So when do you think we will have peaked, in terms of the low-carb diet cycle?

Obviously, we have never actually predicted, in any case, when we thought that a peak will happen.

But we did say, if you're looking at the extreme low-carb, high-fat diet, which is obviously what started last spring and started all of this, it has peaked.

And we do believe that the there are a lot of reports out there, a lot of surveys out there and a lot of statistics that support the fact that the extreme diets themselves are losing their popularity.

I think what we are now seeing is a more -- it's just a pervasive belief, because of all this marketing, that you do not have to go onto a diet; you can lose weight by merely replacing your normal foods with these low-carb versions.

But unfortunately, the low-carb versions often don't have less calories; they have equal calories.

So eventually, the population is smart enough -- they always do wake up to the fact that they are not losing weight.

And I think when that happens, they will be looking for a more sustainable, sensible, long-term but also livable weight loss solution.

One of the things that we -- and the reason that we could predict on the extreme low-carb diets was that all of our research proved to us that it was unsustainable.

You just cannot stay on these diets for a long period of time.

And I think that the products that we're seeing right now are a manifestation of exactly that characteristic, that the people are craving, needing, wanting these carbohydrate foods.

These are what make life sometimes more interesting, but certainly more bearable.

So they are getting a large number of substitute products, but they won't help them with their weight loss.

I think that the consumer report was very, very good.

If you noticed, in it they sort of said if you're just following even the second phase of some of these extreme diets, where you're maybe taking in 40 grams of carbohydrates, when they showed you, if you took all 40 grams in in these low-carb products, you might be taking 1,000 or 2,000 extra calories on top of the other foods that you are eating in your normal course of the day.

So I really think that we have seen the peak of the extreme diets.

Now we have another phenomenon out there, which is just giving people the mistaken belief that they don't have to do anything more than eat low-carb foods in order to control a weight problem.

And that is just a fallacy, and they will wake up to that.

Could I just ask one more follow-up question?

What does your earnings guidance imply for the back half of the year, in terms of North American organic attendance growth?

Greg, the bottom of our range assumes that the current negative trends are not going to turn around, and we have very conservative assumptions about the impact of the U.S. innovation.

So we're feeling very comfortable about the bottom end of the range.

Low teen?

Continuation of low teen, or does it include improvement?

(multiple speakers) we have said the low teens going through the summer, and then some pickup with the innovation, but (multiple speakers) moderate.

Could you put sort of our range on that, or is it too early to do that?

No, we're not prepared to do that.

Jerry Herman, Legg Mason.

Linda, I'm wondering if you can address the low-carb phenomenon in a worldwide perspective.

And, given the fact that the attendance in the international operations was pretty strong, if they are not being impacted or is there impact, and what is allowing them to sort of swim upstream, if you will?

Well, I have certainly pointed out before, Jerry, that one of our large markets, the UK, has certainly had the low-carb, high-fat diets available to them, and a lot of people are reported to have gone on them.

I think what is different in that market, which is what I pointed out as early as last summer, is that the whole population had this phenomenon framed for them in a much different way because of the press over there.

The media were much more questioning.

They questioned the validity of the diet, they certainly questioned, in a very big way, the health of the diet.

Even the Times in London, in the summer heat wave, had a headline that said, "Do Not Follow Atkins in This Heat Wave.

It's dangerous."

So we saw a much more balanced media, and therefore I think it created more skepticism within the general population.

So, although it's there, it's certainly popular -- Atkins has introduced, now, their food products this past quarter into the UK market.

I think that you're just seeing a lot more balance.

That's what we were missing here in the United States.

The Atkins and the South Beach and the other -- I think now there is such a proliferation of books that you don't even have to name the diet; you can just make of them as extreme low-carb, high-fat diets.

Those books are in many, many markets.

I think our European markets take a much more serious view of healthy eating and proper eating, and they would almost find some of the tenets in these regimes -- well, they will find him heretical.

They certainly would not find them supportable.

And obviously, in our Australian and New Zealand markets, they have the same sort of effect that we have in the UK and everything.

These things travel around the world.

So I really think that it's in America, where we did not have that balance in media presentation, where fads, I think, do sort of catch on in a wide way.

And when they are not being questioned by the media, but actively supported by the media, I suppose it's not surprising that so many people took them up.

A question about the innovation and the marketing expenditures, I guess, in North America, with an innovation again happening this year, I'm assuming that your marketing expenditure assumptions have also changed.

I think last time, you were hoping to have flat expenditures there this year.

Is that true, and is that part of the guidance?

Obviously, last year and in the autumn, we did launch FlexPoints, so we do anticipate that this year, we will be having a similar sort of plan.

Of course, the cost of media this year could be higher, considering the environment that it will be taking place in.

I think, too, we noted when I discussed the first-quarter margin that we are having higher exchange rates right now around the marketing expenses.

But if you look at it as a percent of revenue, marketing was flat in the first quarter and we will, I guess, absorb whatever media increase, as an increase, at least regarding the current situation, that it's flat.

And Ann, just one quick one for you, while you're talking there.

Just priorities on use of cash -- any share repurchase in the quarter?

And then, maybe put the ability to exercise the warrant on the WeightWatchers.com in perspective relative to priorities of use of cash?

With regard to the share repurchase program, we purchased 1.1 million shares in the quarter, for $42 million.

And I think you know that we had purchased about 800,000 in the fourth quarter of last year, as well.

I don't think we're commenting right now on the warrant.

Our cash -- I think we said that the priorities for our cash are really two planks.

One is the share repurchase, and the other is the acquisition of franchises.

Greg Cappelli, Credit Suisse First Boston.

I had a couple quick questions.

Fast Track in January, from the classes we attended, really seemed to be accepted well from some of the members.

And it seemed like there was a nice pickup from that.

I wondered if you could just review sort of why you went that direction.

It seemed like a part of that was to offer your members a choice of two paths, and one of them had a lower-carb option.

What would be -- since that was successful, would there be a reason why you would not want to have a choice, going forward, of at least allowing a Weight Watchers member to take that path if that's what they really wanted?

Could you just review that?

Yes.

Greg, I understand exactly where you're coming from.

As I pointed out when I was describing Fast Track, we currently have within our program material the higher-carb and the lower-carb approaches spelled out for our members.

And we have actually had that available to our members since Winning Points went in, so I'm talking about over three years ago.

So I think the same thing is available to our members.

That was a marketing plan that we feel was very appropriate for January, where people coming off of Christmas and coming off of seasonal dieting are looking for something that is really going to grab them and really going to put them into control.

It also was a piece of material that included a CD and some other things.

So it's not an inexpensive, obviously, offering for us to be offering all of our existing members, but we were very pleased with it.

We feel that we are still offering the same kind of dieting information to all of our members that was included in Fast Track now with our current material.

Just one more sort of strategic question.

Is it possible, going forward, that you guys might -- it seems like every year and a half or two years, you will need to continue to put new innovations in.

And I'm sure you have been dealing with this for years and years, but just battling sort of what will be the next Atkins and the next new diet plan that comes out or the next new fad.

Is it possible Weight Watchers, given the global brand name, could elevate themselves sort of one step ahead of that or one level above, by becoming more of a lifestyles company, where you include fitness and stress reduction and perhaps lengthen a year membership?

Is that something that the Company would consider or has thought about?

You know, the company is always looking at different ways that we can make ourselves more helpful to the consumer who is trying to lose weight, and control their weight on an ongoing basis.

And I think if you look at the whole Weight Watchers approach, we are one of the few that take an absolutely comprehensive approach to weight loss.

In other words, most of the dieting methodologies that you see out there are looking at just that one teeny little chink of a weight problem, which is what do I put in my mouth, what do I eat?

If you're looking at the whole Weight Watchers approach, we do encourage exercise.

And we have a lot of activity and exercise and movement and get yourself going information as well as videos, obviously, that we have within our meetings.

And the Fast Track had a little 10-minute introduction to activity in it.

So we think that, since Pep Step in the '70s, we have been actively promoting more activity and exercise.

And we do that on our Website as well, on the Weight Watchers promotional Website, which is obviously a marketing site for us.

Just two more very quick ones.

I remember last quarter, you mentioning that there was a problem with some of the bars that you introduced.

I think you had mentioned during the quarter you would be replacing those.

Is that something that did happen?

Well, we said we would be starting the work obviously, to be repositioning.

That was what Ann was talking about when she talked about the process that we're going through.

We're testing and we're bringing back and we're reformulating bars at the moment.

We're cutting down on our SKUs, so that we don't have quite such a proliferation of bars, because we think that was part of our problem at the end of last year.

We're doing that as we speak, and the new bars are getting ready.

We're going back to some of our tried and true all-time favorite flavors.

So I have every faith that by the end of the summer, we will be able to restage our bars in a meaningful way.

And are you satisfied that you're getting feedback back quick enough, just as you look at results and data that comes in?

Or do you need additional systems or updated systems to do that?

Well, we're always looking at our systems.

But we do get data back very, very quickly from our markets.

So I think that we have visibility on this business of ours, and also we do talk to consumers on such a regular basis; we get a lot of qualitative feedback from our customers, as well, on an absolute ongoing basis.

That's not to say that we are not looking at ways that we can get information back, particularly from our centers, in an electronic way or a much faster way.

I just didn't know whether you felt like you needed to update your systems or whatnot to get where you need to be.

It doesn't sound like that's the case.

One last thing on the consolidation for, I guess, Ann.

You receive semi-annual principal loan payments of 5 million, right, from the dot.com business.

They record the payments as other income.

Does the payment go away because of the consolidation?

Well, in terms of how we will present the information, we will present it both consolidated and then stand-alone, as well.

But just remember that the operations of international and the operations of dot.com are not changing at all.

This is really an accounting change that you're seeing.

So we will continue to do business in exactly the way we have been, as will they.

And we will, as I said in my remarks earlier, do everything that we can to make sure that Weight Watchers' performance -- Weight Watchers International's performance is very clear to our shareholders.

Andrew McQuilling, UBS.

A question on your new budget.

Can you talk about ad spending as a percentage of sales?

Is the new guidance flat, versus the old on ads spent as a percentage of sales?

Well, yes.

Obviously, if we're looking at the first quarter, we were absolutely flat.

And when Ann and I were characterizing 2004 for you all, we did anticipate that because our absolute dollars in local currencies were staying relatively static, just covering a bit of inflation and a bit of production increases, that we expected, as a percentage of revenue over the whole year, for our marketing to come down as a percentage of revenue.

And is the DC franchisee acquisition -- is that baked into your guidance?

It is not yet.

It is not yet baked in.

Oh, I'm sorry.

The DC -- you mean going forward?

(multiple speakers) but of course it's baked into our (multiple speakers).

(multiple speakers) guidance I gave you today, it is.

Baked into the rest of the year.

And these new repo (ph) factored into your guidance beyond what's been done in the first quarter?

It's minimal, yes.

Minimal.

Low-carb research -- you mentioned that had been doing some studies of low-carb dieters over the past year?

Yes, quite a few of them.

And you mentioned that low-carb dieters typically cycle through these diets for about six months before they get frustrated with the regimen?

That's what I said on the last call, yes.

Can you talk about the timing from when those low-carb refugees finish their low-carb cycle, how long before it takes you to see them in the classroom?

Well, obviously, we started seeing low-carb refugees, what I called low-carb refugees, as early as last fall.

And we expect to see them growing within our meetings.

I think that it's a complicated thing, in terms of how long can somebody stay on a particular regime, is one question.

And I think that all of the studies that we have seen have sort of definitively said that these diets are very, very difficult to stay on for any length of time.

I certainly think that was true of the BBC diet trials, which we talked about earlier, and all of the other ones that were publicly done by independent researchers.

But that is different, also, from saying, well, when you finish that or when you stop doing that or when you give up on that, how soon would you start another dieting program?

And that, obviously, is a much more individual choice and a much more individual decision.

But we predicted from the our research that the dieting craze was going to peak, and we think it has.

Of course, now we have a second wave of a new phenomenon, which is this whole food and the low-carb food, which is quite different because they are not following, necessarily, this structured approach, as they were with the extreme diets.

They are following a more do-it-yourself, I've made up a program or I've made up a diet.

And that is just waylaying people from going to any structured approach, including us.

Understood.

And I guess your experience, or maybe even your franchisees' experience in the early 1990s with low-fat, when the low-fat products started to become more available -- is there any pattern that you can see from how long that would have taken to work through?

Well, I am sure you are all starting to realize that our franchisees' businesses don't behave exactly as ours do.

When we were growing very, very strongly, they were growing at different levels, but not to the same level that we were.

And obviously, today, Ann gave you some figures that, by deduction, you would assume that they are in a weaker position than we are.

And of course, there are so many of them with varying sizes that it would be very difficult for us to characterize what an individual franchisee is doing at any given time, as what the system might be doing. (multiple speakers).

I can only really focus, therefore, on what NACO and Company-owned has been doing.

If you're looking at low-fat, low-fat was a slightly different phenomenon, although I think it was just the same kind of con, in a way, because it led people to believe that all you had to do was watch your fat, and therefore you would lose weight.

And the problem with the low-fat was that, because people felt that they were safe with these foods, they ate a lot more of them.

But removing the fat actually did, in a lot of cases, lower the calories.

I think what we're seeing with these low-carb foods is that in a lot of cases, they are not lowering the calories at all.

All they are doing is substituting normal carbohydrates with these artificially constructed products that are made out of other things, particularly sugar alcohol, which obviously does have calories in it.

So, we're in quite a different situation, even though both of them are a con, if you like, because both of them led people to believe that you only had to focus on one thing, and calories didn't count.

The truth is calories count.

Now, with Weight Watchers, you don't have to count calories, of course.

We have done all the hard work for our members.

The magic of POINTS is that you don't have to think calories.

It does all that for you, but even something like the extreme low-carb, high-fat diets actually controlled your calories.

That's what made you lose weight, because you were cutting all of these foods out.

The mere fact that you were cutting all those carbs out is what gave you the lower calories and therefore the weight loss.

Now people are adding all these artificial products that do contain calories, and weight loss is just not going to be the result of this.

So eventually -- and none of us can predict exactly when an individual will wake up to that fact, but eventually they will.

They have a lot of common sense.

They know that there are health issues with weight, they know that they have to do something that is long-term and sensible.

And there is nobody more long-term and sensible, and therefore nobody better positioned to take advantage, when people wake up to this phenomenon, than Weight Watchers.

Understood.

Maybe just one more question.

You mentioned that your new guidance excludes any beneficial impact of the dot.com, rolling into the dot.com business.

Obviously, in the first quarter, as Ann explained, there was a -11 cents.

But going forward, it is a profitable business, so it will add to our bottom line.

Terrific, but that's not part of the guidance?

No, it's not part of the guidance.

They are not part of the Company.

This is just an accounting change.

And then maybe thoughts on free cash flow for 2004?

Ann, can you update us on any kind of plan?

Just in the absolute amount, would it be similar to the '03 number, or any real difference?

In terms of the actual free cash flow, probably not significantly different.

If you're asking about usage, you have just seen that we have acquired a franchise, and will continue to deploy our cash with franchise acquisitions, and share repurchase as appropriate.

Amy Chasen, Goldman Sachs.

I just wanted to know whether you have given any thought to -- and I guess somebody asked this earlier, but I am not clear on what the answer was.

I thought that you guys said that this really peaked, or that you expected, based on prior fads that this low-carb thing would peak around May.

And it just sounds to me like, given the massive deterioration that you saw at the end of the first quarter, that if anything it's accelerating.

And I understand that it is being driven by the food companies, but it is what it is.

It's accelerating.

So any update on when you think this might peak, and also just the longevity of it, how long you think it might last?

Amy, in the last call, I said that we thought that, from the our research, that the low-carb dieting craze had peaked, but that there was this new element coming into the market where a lot of low-carb foods were being introduced and we didn't know -- I think my exact words were we did not know how long that would prolong the effect of the original dieting craze, if you like.

Some we are looking at two different phenomena.

Now, the one of them took dieters and put them into a different dieting method.

Obviously, it's a low-carb, extreme diet.

From looking at what is happening right now, our analysis is that people are moving away from structured programs, because they have the mistaken belief -- from all of this marketing and all of this intense campaign promoting the low-carb foods, there is this mistaken belief that all you have to do is eat low-carb foods in order to lose weight.

So, Linda -- I'm sorry to interrupt, but can you maybe just -- because I heard all of that;

I think you are very clear about that, and it was very helpful.

Maybe you can give us some idea of when you think this notion of unstructured programs would peak, kind of the frenzy surrounding that, if you will?

Well, there two very positive things I can point out.

So maybe we can assume that it would be shorter than the diet craze itself.

The two positive things are I think that we're starting to see questioning in the media already about the products.

Now, when we were looking at the craze, we spent the whole of the summer saying why isn't anybody speaking up?

But we are starting to see that now.

We also believe that if I'm sitting back and reading what I am reading, that the profits of the food companies are not necessarily as solid as they would have expected.

So we don't know what the support of these particular products, or even the proliferation of them, is going to be going forward.

When somebody had the only products, obviously, then you had an age.

Right now, I don't think anybody has the edge, because these products are just absolutely everywhere.

Also, when you were following the diet craze at the beginning, at the front end of it, you actually lost weight.

So people saw results, and that meant that they would stay in it and they would keep going.

That's where the sort of six months fatigue came in, that it took a while before you realized that you were not continuing, that this is not sustainable, that there was going to be a weight snapback.

I think on these foods, if the low-fat thing is anything to go by, they are going to eat these foods, they are going to eat them in large quantities, they are not going to be cutting back on their calories, and they are not going to be losing weight right from the start.

So I suppose, from all of that, we can assume it won't take as long as the diet craze itself.

Let me just ask, on the marketing spend in the U.S., it sounds like you think it is going to be flat as a percent of sales this year.

I'm just curious because it sounds to me like this new innovation that you're doing in the fall is going to be much more significant than the one you did last fall.

The won last fall was not a whole new program; it sounds like this is a whole new program, as opposed to sort of a new product introductions, if you will.

I don't know; is that a fair characterization?

Well, we do put the same -- we consider these innovations innovations.

And unless we changed the whole system, which obviously we have not done for a little while, we would put the same kind of marketing spending behind it.

We're looking at the marketing effort as comparable to both of these programs.

So this is more of an enhancement, it's not -- you're not doing away with POINTS?

Obviously, I did say that I just cannot -- we're in a competitive market, and I can't give you details.

I will, though, say that our research says that POINTS is a very, very valuable tool for people to lose weight, and it is incredibly popular.

But it's fair to look at it in the same light as FlexPoints last year, an ongoing innovation --

I'd rather that you did not try to characterize it until we're ready to sort of divulge more details.

I have said -- and I said it, I think, on the last call -- that we really do have new insights from the research that we have been doing in the past year.

And we have built the new innovation on those insights.

So obviously, we're excited about that, and what it gives us.

Chris Ferrara, Merrill Lynch.

I just wanted to ask you, given the number of people that we see who are sort of on unstructured low-carb diets -- not necessarily Atkins, not necessarily LA Weight Loss -- is it possible that we're sort of seeing a structural change in diet markets towards more self-help, and that is something that is going to be impactful going forward?

Well, I am sure for most of you who have seen my presentations over the last 4.5 years now, you'll know that the vast majority of dieting attempts are in the self-help arena.

I don't think that has changed, and I think that has stayed over time.

And when you are looking at that self-help arena, they really are talking about everybody from the person who says I am going to cut back on something -- whether that happens to be sugar or that happens to be booze or that happens to be fat -- all the way to following a book or following something where they are not in a program or under medical or external help or buying a product to do it.

So I don't think that has shifted.

I just think right now we're in an unusual situation, with hundreds and hundreds and hundreds of new products, and they have come into the market very suddenly, that are focused on just one food element.

And also -- I know you have said that attendance got better in North America in the April/May timeframe.

I was just wondering, is the improvement sort of -- you're still calling for down low teens through the summer.

Does that mean I can assume --

No;

I think you must have misunderstood me, if that's what your takeout was.

I said that on an organic basis this quarter, we were -4.

But going forward, because we have continued -- in fact, the softening has continued and strengthened -- we expect low double-digit -- in other words, low teens -- decline in organic attendances.

So that means for the periods going forward?

For the summer.

I said, through the summer.

So you really must assume that that is starting with quarter two, going through the summer.

Right.

So things have gotten worse, in other words?

Yes.

Our April campaign -- our Easter, post-Easter campaign has continued that softening.

I'm sorry if I didn't make that clear.

No; that's probably my fault.

And also, can you talk about the level of accretion assumed for the DC acquisition?

As you can see, it's for three quarters rather than the full year.

And the January quarter is not included, so we have not assumed a very large accretion from it.

And also one other, just on the UK market.

I think -- and maybe I misunderstood.

I think you said that you expected the strong attendance growth to moderate a little bit --

Yes.

-- and I was wondering, given that you have already comped last year's launch, why would you expect that to moderate in the quarters going forward?

Well, if you remember, the second quarter and the third quarter for the UK, we were up against 13 percent growth.

I think that for us to not moderate would be -- well, this is a non innovation year in our most mature market.

I just think that we obviously are always looking at these things realistically.

And one last one.

Have you given the acquisition costs?

Yes.

They cost us 30.5 million for the current acquisition of DC, and that is within our normal range of multiple.

Jeff Stein, Key McDonald (ph).

A couple of questions.

First of all, Ann, did you state what the revenues of the Washington franchisee were?

The annual revenues?

I simply gave the purchase price, the operating income and the attendances.

Would you like me to repeat those?

Could you possibly give us the annual revenues?

No, I can't.

Sorry.

With regard to the consolidation of the dot.com business, is it your intent to present it both ways for the balance of the year?

And if so, can you tell us approximately how accretive it would be if it is included for the balance of the year?

What you'll see with WeightWatchers.com is you won't see it included in our guidance, I think, as we said.

It's a private Company, and accordingly, you will see its performance, but you'll see it retrospectively.

We will not be providing forward-looking estimates for dot.com.

Would this -- strategically, would this --?

(multiple speakers).

As Ann said, we will be making every effort so that you can follow our business, Weight Watchers International's business, on an ongoing basis.

Right.

But if you are forced to consolidate it, would this change your thinking, in terms of possibly wanting to buy this business, particularly if it would be accretive to earnings, as it is presented?

Jeff, it really does not affect our ownership position at all.

It is truly just an accounting change, and I think we should see it as that.

Okay.

Final question.

You have alluded to one of the three initiatives that you're intending to roll out later this year to address the current attendance, as trying to improve the quality of service.

I'm wondering if you might be more specific about what measures you're going to take to improve service quality?

Obviously, we have been working very, very closely with our North American field management, in terms of implementing some programs that we feel will have an impact on the level of service.

It's not the kind of thing that I disclose in detail, but I can assure you that we have had very, very good meetings going through the details of the plan.

And we have tremendous training programs in place, and we have continued to strengthen them to bring in new training programs this year.

We have done some very strong training at the beginning of this year.

We're doing more in the summer, we're doing more in the autumn.

So we really feel that the things that we have put in place are going to continue to improve that, and bring it to that next level of service.

We recognize these services -- when you are asking for the commitment that we ask from our members to come to a weekly meeting, that we want to focus on that service, and we always have been committed to service.

Thank you.

That does conclude the question-and-answer session of today's teleconference.

I would like to turn the call back over to management for any closing comments.

Thank you, Stephanie, and thank you all for joining us today.

Despite the challenges of the current environment in North America, we really are confident that our global business will continue to grow.

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

Thank you very much, and goodnight.

Thank you for your participation.

That does conclude this evening's teleconference.

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

Thank you.