WW International Inc (WW) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Weight Watchers Third Quarter 2004 Earnings Conference Call.

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

It is now my pleasure to hand the floor over to your host, John Sweeney.

Sir, the floor is yours.

Thank you, Matt.

And thank you to everyone for joining us today for the Weight Watchers International third quarter conference call.

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

At about 4:00 p.m.

Eastern Time today, the Company issued a press release containing financial results for the third 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 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 risks factors are explained in detail in the Company's filings with the Securities and Exchange Commission.

The Company does not undertake any obligations 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 Linda Huett.

Please go ahead, Linda.

Thank you, John.

Good afternoon and thank you for joining us as we review Weight Watcher International's performance for the quarter ended October 2, 2004.

I will open with an overview of our business performance during the quarter and discuss our operational performance in our various geographical markets.

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

Let me start by reminding you that we adopted the accounting standard FIN 46R at the end of the first quarter of this year.

As a result for financial reporting purposes, this is the second quarter in which we are consolidating the results of our affiliate and licensee, WeightWatchers.com, Inc. with our own.

The consolidation of WeightWatchers.com due to the adoption of FIN 46R contributed $20.6 million to our reported revenues and $0.02 to our EPS this quarter.

As I mentioned on our previous calls, despite this required accounting consolidation, we remain a minority owner of WeightWatchers.com, and therefore, I will focus my comments on the operating results of Weight Watchers International without the accounting impact of FIN 46R.

Total revenues for the quarter were $225.3 million, a modest increase of 3.6% from the 217.5 million the previous year.

Total attendance at Company-owned operations during the quarter was 13.8 million, a 3.3% decrease from last year.

Our third quarter operating income was 67.6 million, an 8.7% decline versus prior.

Our operating margins declined from last year's 34% to 30% this year.

Ann will be explaining the factors behind this margin compression.

For the quarter, our fully diluted earnings pr share were $0.45, which compares with $0.38 in the prior year.

These results exclude charges in both years related to the early retirement of our high yield notes.

As of the end of this quarter, all of our high-yield notes have been retired.

In addition, this quarter's EPS results include a 5-cent benefit from an adjustment to our accrued tax liabilities.

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

First, North America.

In this year's third quarter, total NACO attendance declined 10.2% to 7.4 million from 8.3 million last year.

On an organic basis, the decline was 13.9%, an improvement over the second quarter, thanks to the strengthening of our recruitment trends following the introduction of the TurnAround program on August 22.

I hope you've had a chance to stop by a meeting and to learn about the TurnAround program in person.

This program is the product of extensive research.

The research showed that there's a distinct psychometric segmentation between dieters who are well suited to control their calories by counting what they eat, and dieters who prefer to focus their consumption on certain foods without the requirement to count.

Turnaround addresses both of these audiences by offering our members a choice of following either our well-loved point plan or our new Core Plan.

The first no counting food plan in Weight Watcher's history.

With the Core Plan, we have developed a no counting approach to controlling calories that embraces all of the food groups.

Both plans are true to Weight Watchers' principles of delivering healthy nutrition, effective calorie control and livability.

The Core Plan works by focusing food choices on wholesome nutritious foods that provide eating satisfaction without empty calories.

This plan also fosters sustainability by allowing for 35 points per week for use on non-core foods.

Our strategy in introducing the Core Plan is to provide an equally effective and healthy alternative to our points-based counting plan.

We know that in the past, we've had difficulty in attracting that segment of the population, which is not inclined to follow a counting plan.

In fact, even when we've been successful in enrolling members from this segment, they often haven't stayed once they realized that counting wasn't for them.

After testing the new plan with over 10,000 members, we know that both the Flex and Core Plans in combination with all of our other educational and support elements of our program, deliver the same effective and sustainable weight loss that has been synonymous with Weight Watchers throughout our 43-year history.

We are confident that the Core Plan -- with the Core Plan, we will be able to reach new psychographic segments.

At the same time, our research shows that the point platform remains highly regarded and relevant for the larger portion of current and potential members.

In launching the TurnAround program, we knew that it was important to avoid over hyping the newness and no counting aspects of the program, so that we did not risk confusing or even alienating our committed points users.

Knowing that we have so many current and former members who are happy and successful with points, we have chosen to take a cautious approach to the TV marketing of the launch of TurnAround.

As opposed to past innovation campaigns where we heavily emphasized the newness of the plan, this launch focuses more on the higher order benefits of Weight Watchers.

Foremost of which is sustainability, which leverages our long-term competitive advantages versus the fad diets.

In contrast, our direct mail format, which targets our former members, allows us to more fully articulate the positive dual-food plan positioning.

While we have achieved our objectives in attracting past members back to try our new program, our overall recruitment levels fell short of our September goals as our TV communication took place in the media environment still cluttered with marketing of low-carb products by the food companies.

One of the advantages of having chosen to introduce our program in September rather than January was to give our leaders an opportunity to learn how to effectively teach two different food plans in the same meeting, without being overwhelmed by the seasonally higher numbers of new members we see in January.

From an operational standpoint, I'm happy to report that the rollout of the TurnAround program has gone smoothly.

And the dual food plans have been well accepted by our field staff.

They report that our members are pleased with the new program.

Indeed, recruitment trends in the more recent weeks have been encouraging.

We have seen the double-digit negative recruitment trends that had held for much of the last 12 months turn positive, a testimony to the growing consumer response to our new program.

However, because quarter four is our seasonally lowest recruitment quarter, accounting for less than 15% of the annual total, quarter four attendance is driven primarily by the September flow-through.

In our last call, I had anticipated that NACO would end this year with attendance levels running above prior.

However, with the weaker than anticipated recruitment in September and given the lag effect between enrollment and attendance trends, I now expect our attendance at the end of the year to be mid-single-digit negative.

And as a result, our organic attendance will continue to improve, but for the full fourth quarter, will only be slightly better than what we reported this quarter.

Looking forward to 2005 winter diet season, we plan to build on our September marketing campaign by continuing to focus our media marketing on the unique higher-level benefits of Weight Watchers, while strengthening our no counting message.

The millions of dieters who went on low-carb diets are now realizing that these diets are neither sustainable nor healthy.

Our positive empowering message of sustainability and health, together with our new program that provides a no counting feature that attracted them to low-carbs will allow us to gradually convert many of them.

In January through our direct mail, we will be marketing a kit similar to last year's fast track as an early bird offer.

In addition in the winter diet season, we will be having a double-pronged PR strategy.

As she has done in the past, the Duchess of York will be actively participating in media events during this important season.

In parallel, Wiley will be publishing a new science focused book, "Weight Loss That Lasts," which will be available at retail in January. "Weight Loss That Lasts" is co-authored by Weight Watchers and Dr. James Rippe, a Harvard trained cardiologist, a leading authority on health and fitness, and the founder of the Rippe Lifestyle Institute.

This book is intended to highlight the solid science on which all Weight Watchers programs are built, while at the same time addressing head-on consumer confusion and dieting myth.

Now moving on to our international operations.

The UK continues to lap the successful Time To Eat innovation, which was introduced in January of 2003.

As anticipated, we had attendance of 3 million in quarter three, down 2% versus prior.

The fourth quarter will be roughly flat with prior.

As I reported in previous calls, we expect minimal volume growth in the UK market during non-innovation years, but we're looking forward to significant growth next year with the January launch of the UK's next major innovation.

Now to Continental Europe.

In August, we launched our new program innovation in our European market.

This innovation introduced the 52 weeks of program material that was a successful element of the UK's Time to Eat innovation, plus it incorporated additional elements of personalization.

Our Continental Europe innovation has been well received, and as we anticipated, it has accelerated growth in volumes to the double-digit level.

Quarter three attendance was strong at 2.5 million, an increase of 17.2% versus prior.

Looking forward to quarter four, we expect to see a continuation of good double-digit growth.

Moving on to other news.

On our last call, I announced that we had signed an agreement to acquire the Fort Worth franchise.

This franchise acquisition closed on August 22nd, and the integration has gone well.

I would now like to take the opportunity to update you on our licensing business, which continues to show excellent growth.

Our global licensing revenues, excluding royalties from WeightWatchers.com more than doubled to $3.9 million this quarter.

On the packaged food front, the economic rights that Heinz had retained for five years on the pre-existing licenses outside of their core categories reverted to us at the end of September.

And as I mentioned on the last call, we estimate that these new royalty streams will exceed $6 million on an annualized basis.

Let me for a moment highlight a few of our more recent US packaged goods licenses.

First, our snack, cakes and muffins under the Weight Watchers brand have continued to sell extremely well.

So well in fact that our licensee has had to delay the full national rollout of these products until additional capacity can be added.

Our new breakfast cereal line under the Weight Watchers brand is just entering the market.

These are great tasting cereals; in fact, the almond crisp is one of the best tasting cereals I've ever had.

In addition, we also have recently signed a new license with Weston Bakery for bread, English muffins and bagels.

Weston has been our licensee in Canada for several years, and based on their success with our brand in that market we awarded them the US rights.

They expect to begin national distribution of these products by the end of this year.

Finally, our new ice cream licensee, Wells Dairy is achieving good success in placing its products in several leading supermarket chains.

Our affiliate and licensee WeightWatchers.com continued to perform well in quarter three.

Its quarterly gross revenues were in excess of $23 million.

WeightWatchers.com's royalty to Weight Watchers International for the quarter was $2.2 million, up 18% from prior.

Equally important, WeightWatchers.com sustained a strong online marketing presence for the brand and delivered on average of over 20,000 weekly meeting finders searchers in quarter three in the US alone.

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

Thank you, Linda.

Good afternoon, everyone.

I'll begin by reminding you that our financial statements now include the consolidation of 100% of the results of operations of our affiliate and licensee WeightWatchers.com in which we hold a 19.9% stake.

As you will recall, we adopted the Financial Accounting Standards for interpretation number 46-R with respect to weightwatchers.com at the end of our first fiscal quarter this year, and we began consolidating in the second quarter.

In terms of a financial reporting, on a fully consolidated basis, Weight Watchers International's third quarter 2004 revenues were 245.9 million, including 20.6 million resulting from the consolidation.

And operating income was 73.8 million including 6.2 million added in consolidation.

Net income on a consolidated basis was 50.2 million and EPS was $0.47.

The consolidation of WeightWatchers.com added 2 cents to EPS in the third quarter.

In our continued effort to present information on our conference calls and in our filings that will enable our shareholders to understand the business performance of Weight Watchers International on a standalone basis, the remainder of this financial discussion will address our business results, excluding any impact from the consolidation.

On a standalone basis, Weight Watcher International's third quarter revenues were 225.3 million as compared to 217.5 million in the third quarter of 2003, an increase of 3.6% including the favorable impact of foreign currency translation rates this year.

Global attendance at company-owned meetings decreased 3.3% to 13.8 million.

Operating income declined 8.6% in the quarter to 67.6 million, as compared to 74 million a year earlier.

The decline in operating income resulted from some compression in our gross margin related to lower attendances per meeting in the US, and from higher marketing and G&A expenses.

Net income for the quarter increased to 47.8 million from 11.5 million in the third quarter a year ago.

Earnings per fully diluted share for Weight Watchers International on a standalone basis were $0.45 this quarter as compared to $0.10 in the prior year quarter.

Included in these results for both years are charges associated with the tender repurchase and retirement of our 13% senior subordinated note.

These charges reduced EPS by $0.28 in the third quarter of 2003 when the majority of the notes were retired, and by about $0.01 this year.

Third quarter 2004 EPS also enjoys a benefit of $0.05 from the release of tax reserves, which had been associated with the buyout of the Company from Heinz in September 1999 and which are no longer needed.

Excluding all of these items, EPS on a comparable basis was $0.40 in the third quarter 2004 and $0.38 in the third quarter of 2003.

Moving now to the performance of our NACO operation, for third quarter, NACO's attendances were 7.4 million, 10.2% lower than last year's.

Organic attendance, excluding the impact of acquisition fell 13.9%, a somewhat better performance than last year's -- than last quarter's 16.7% decline.

As Linda discussed, we are seeing overall improvements in the trends in the US market.

Our year-on-year recruitment trends have moved from negative double digits in the weeks leading into the innovation, to positive in the most recent five-week period.

NACO's third quarter revenues declined at a lesser rate than the attendance decline, off 7.6% to 113.5 million from 122.9 million the year earlier.

Third quarter has benefited from stronger product sales per attendee in our meeting room, up 7.2% -- a combination of higher penetration of enrollment products, and the effect of the realignment of our consumable product offerings, which we've mentioned in our last few calls.

As I mentioned earlier, the Company's gross margin decline, resulted from some factors in NACO.

These factors include attendances per meeting performing below prior year levels, as well as the innovation related impact on write-up of the program materials and products and on revenues for discounting of certain products in advance of the innovation.

Internationally, third quarter was strong.

Revenues from our classroom operations rose 23% to 84.3 million from 68.5 million last year.

In local currency, the revenue increase was 12%.

Attendances in our international operations grew 6.2% to 6.3 million.

Continental Europe delivered 17.2% attendance growth in the third quarter. 2.5 million attendances having launched innovation in August.

The increases in -- the increase in local revenues was 22%, outpacing the attendance growth on the strength of product sales and lower discounts.

UK delivered 3 million attendances, a 2% decline from the third quarter last year, which had posted 14% attendance growth over 2002.

UK revenues for the third quarter declined 1.5% on a local currency basis in line with the attendance performance.

This coming January, UK will be launching an innovation.

Now moving to our other revenues.

Franchise commissions were 4.3 million in the quarter.

Commissions declined 19% from the prior year level with 9% of the decline resulting from the company's acquisitions of Dallas, New Mexico, Washington, DC and Fort Worth's franchise territories, which took place after the third quarter 2003.

The impact of making these and other franchise acquisitions net of loss commission is accretive to the company.

Commissions from our remaining domestic franchises declined in keeping with the marketplace issues that NACO has been facing.

Foreign franchise commissions were up 4%.

Other revenues were 10.4 million in the third quarter 2004, an increase of 3.5 million or 51% over year ago.

Licensing revenues were up 130% as a result of new licenses both domestic and international.

Beginning in the fourth quarter, our licensing revenues will include royalties from third party licenses that had previously been paid to HJ Heinz our former parent.

Globally, these will add in excess of 6 million to our revenues on an annualized basis.

Royalties received in the third quarter from our WeightWatchers.com licensee increased by 18% to 2.2 million representing 10% of that entity's net revenues.

Gross margin in the third quarter of this year was 49.4% as compared to 50.7% in the third quarter of 2003.

This was primarily driven by the issues that I raised in NACO.

Marketing expense of 21.3 million this year compares to 18.2 million in Q3 last year, an increase of 17%. 11% on a local currency basis.

Marketing expenses rose to 9.5% of revenues from 8.4% a year ago, supporting the launches this year of innovations in both NACO and Continental Europe.

G&A expenses in the quarter were 22.4 million, up 24% versus last year.

Professional fees and other expenses related to regulatory compliance, as well as higher legal fees, drove up the expenses in the quarter.

Currency translation was also a factor.

G&A was 9.9% of revenues in the 2004 third quarter as compared to 8.3% in the year earlier quarter.

Operating income was 67.6 million in the third quarter, down 6.4 million or 8.6% versus year ago.

The operating income margin was 30% versus 34% in the same period last year.

Gross margins were responsible for 120 basis points of the decline, marketing for 110 basis points and G&A for 170 basis points.

Now regarding our debt service expenses.

On August 21 of last year, we completed the purchase and retirement of most of our 13% senior subordinated notes and the accompanying refinancing of our debt, which significantly lowered our interest charges going forward.

Accordingly, our effective interest rate moved from a blended 6.4% in the third quarter last year to 3.6% this year.

And our net interest expense dropped by 55% to 3.6 million as compared to 8 million a year earlier.

In conjunction with the retirement of these notes, we incurred an early extinguishment of debt charge in the third quarter last year of 47.4 million.

At the end of the third quarter this year, we redeemed the remaining portion of the 13% notes at a premium of 6.5% and we incurred a 1 million early extinguishment charge.

Other income and expense net on our income statement was 5.1 million of income in this year's third quarter, as compared to 0.9 million of expense in the year earlier quarter.

WeightWatchers.com began its semi-annual loan repayment schedule this year and we received the second payment of 4.9 million as scheduled in this quarter.

The 0.9 million of expense last year in the quarter resulted from the unwinding of swaps and hedges.

We accumulated cash flow from operating activities of 204 million during the first nine months of 2004, as compared to 210.2 million for the first nine months of 2003.

Our free cash utilization in the nine months of 2004 consisted of the repurchase of 3.2 million shares of our stock for 121 million, and the acquisitions of our Washington DC and Fort Worth franchises for 60.5 million.

These investments totaled 182 million.

We ended the nine months of 2004 with a cash balance of 33.8 million, having paid down a net 13 million of debt.

The refinancing that we took -- we undertook in January which moved a large portion of our term loans to revolving credit has enabled us to be much more efficient in our management of cash and interest charges.

On the balance sheet, our total debt at the end of September 2004 was 456.9 million, a 13 million decrease from 469.9 million at yearend 2003.

On October 19, 2004, we increased our net borrowing capacity by adding a new term loan in the amount of 150 million.

This incremental capacity will provide us with additional financial flexibility to make franchise acquisitions, buy back shares, or we can use it for other corporate purposes, which create value for our shareholders.

Currently, we've used these funds to reduce borrowings under the revolver and we haven't increased our net borrowing.

Regarding other fluctuations in the Weight Watcher International standalone balance sheet, when comparing third quarter end 2004 to yearend 2003, movements in the assets and liabilities reflect the normal seasonality of the business, in addition to goodwill from the Washington, DC and Fort Worth franchise acquisitions.

We closed Fort Worth acquisition on August 22.

Now, I'll turn it back to Linda.

Thank you, Ann.

Before we move on to questions, I'd like to review our guidance.

While our international operations have continued to perform according to expectations, given the lower than expected NACO September flow-through and its impact on quarter four attendance, we now anticipate reporting full year 2004 EPS of $1.69 to $1.71, excluding the effect of the consolidation of WeightWatchers.com, and charges related to the early extinguishment of debt, but including the 5 cent tax benefit realized in quarter three.

Looking forward to 2005, I'm optimistic that Weight Watchers will return to a more normal growth mode.

We have clearly been impacted in the last six to seven quarters by the low carb craze.

At this point, it is also clear that this phenomena has peaked and is now in decline.

The glut of low-carb food products, while still contributing to consumer confusion has made these products unprofitable for food companies, witness the Atkins nutritional financial problems and we doubt that the packaged food industry will allocate anything near the 2004 marketing spend level when they prepare their 2005 budgets.

This fact, in combination with the positive feedback about our new turnaround program, gives me confidence that we will continue to see improvements in our North American results next year.

I do expect the improvements to be gradual, as word of mouth spreads.

And while the bulk of our discussions have been around the challenges of our North American meeting business, this should not hide the fact that most other pillars of our business have remained strong.

The consistent growth of these other businesses combined with bringing our North American business back on track will drive a bright picture for Weight Watchers in 2005 and beyond.

I'm looking forward to sharing with you our 2005 guidance when we report on our full-year 2004 results.

Matt, I think we'd now like to open for questions.

Thank you.

The floor is now open for questions.

If you would like to ask a question, please press "star", followed by "one" on your touch-tone phone.

If at any point your question has been answered, you may remove yourself from the queue by pressing the "pound" key.

We ask that while you pose your question, please pick up your handset to ensure the best possible sound quality.

Once again, ladies and gentlemen if you do have a question, please press "star" followed by "one" on your touch-tone phone at this time.

Our first question is coming from Greg Cappelli with Credit Suisse First Boston.

Hi, Greg.

Hi, Linda and Ann.

How are you?

Just fine.

Thank you.

Good.

Good.

I just wanted to ask a quick one on the statistic you guys gave out.

It sounded like for the recent five weeks that you're really seeing some improvement in NACO.

I'm assuming you meant organic attendance growth was trending positive?

What we were referring to there was our recruitment, Greg.

If you remember last year, when we introduced Flex plan -- FlexPoint program, there was an initial take up that was quite strong and then it declined.

We're seeing a stronger picture this year.

As I said, we have now come to a position where our acquisition of members is positive.

Obviously, there's always a lag in attendances.

OK, so recruitment is the difference in attendances.

Yes.

OK.

Got it.

And then I just wanted -- again, if you could just touch on this, I wasn't --I didn't quite understand.

You mentioned that you're not -- you didn't originally put, as much money as you might have before into the advertising of the TurnAround program, but it sounds like you'll come back in January and go at a higher level there on the advertising front?

I'm sorry, I didn't mean to imply, that we didn't put money behind our advertising in September we did back it.

I think, that we took a different strategy in terms of the messages contained in that advertising, particularly in our broadcast advertising because that is aimed primarily at people who've never been to Weight Watchers.

And that's where, we wanted to emphasize that higher order of benefits of Weight Watchers versus the fat diets and the other diets that are all crowding into the market there.

So, we had changed our strategy in terms of the message.

We didn't emphasize just a new program as we might have done in the past.

We emphasized these higher benefits, and then we also obviously wanted to balance out very carefully, the newness of the no counting message, so that we didn't alienate any of our very, very happy and successful point users and there are millions of those in the country, with this new program that had the dual approach.

Got it.

OK.

Just two more quick ones on the advertising front, if there was some words that you guys might that be looking for a new advertising agency.

I was wondering, if you could comment on that.

Yes, if you've read the press and in the media press, you will know that, we are pitching for a new agency right now.

We have had a very, very good response.

We're still in that pitch process and we're not in a position yet to announce, who our new agency is.

OK.

Would that be something that wouldn't have an impact on January then?

It would be some time after.

You shouldn't think it as a January, no.

It's obviously a long-term strategy to strengthen our marketing.

Got it.

OK.

Final one.

Is the 169 to 171 guidance for '04, does that include the 5-cent benefit from tax?

Yes.

Not the other things, not the dot-com, not the extinguishing of debt, but the 5 cents is in it.

OK.

Thanks very much.

Thank you.

Our next question is coming from Chris Ferrara with Merrill Lynch.

Hi.

I just wanted to get a little...

Hi, Chris.

Hi, how are you?

Good, thank you.

I just wanted to get a little more clarity.

I thought you had said that -- and maybe this is wrong.

I thought you had implied that you ended up pulling back a little bit of media.

I know you just said you changed the strategy on the media, but is that something you did sort of in process or is that something that you had planned on from prior to launch?

No, we felt, that we wanted to obviously, put money behind this launch, as we always do behind a launch.

Obviously, we were up against a launch last year.

So, we were looking at a sort of like for like situation.

I'm sure though that, you recognized that it was a slightly unusual media market.

Our first week of the launch was the second week of the Olympics, which did constrain a little bit the programs that were available to us at -- at a viable cost.

And then of course it's been rather crowded with the election on top of all the normal advertising in our space, but we did put money behind it.

It's just that January, February, March, our first diet season is always our biggest marketing event.

If I'm looking at North American marketing in absolute terms, we put a 17% increase year-over-year, into this campaign.

That was to support obviously, our new franchisees, as well as, the ongoing operations.

Got it.

And can you talk a little bit more about the trends you saw relative to the launch?

I know you said the last five-week period was stronger.

I mean, I'm getting the sense that it started out a little weak and got stronger.

But I mean, was there an up period and then a subsequent down period and then a strengthening or is that the way?

No, Chris I think your first characterization of it was closest to the situation.

Obviously, as I said last year, those first few weeks after the launch of FlexPoints were quite strong.

They were very strong.

But it didn't hold.

It then -- we used the word, I think even fizzled.

Not what we had wanted or what we had expected.

Whereas, we knew those first few weeks were going -- to be an almighty mountain for us to climb this year.

Especially, considering the trough that we were in during in the summer on recruitment.

So, what we saw this time was, we had a really good uplift from where we were in this summer.

Didn't quite obviously, meet our expectations, but maybe we were a little bit over-optimistic in terms of what we thought, we could do in terms of attracting brand new members in.

And then we didn't see that fizzle.

We've seen it strengthen since then.

We've moved into positive ...

And, we've moved into positive as Ann says.

So the last five -- five weeks have been a positive year-over-year picture on our recruitment.

And just one of the quick one, so the number that flows into the guidance of 169 through 171 for the quarter is 45 cents for Q3, is that right?

That's correct.

Great.

Thank you very much.

Thank you.

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

Hi, Amy.

Hi, how are you?

Good, thank you.

OK.

My first one is quick and I'm so sorry to ask this, but I'm so confused.

Sure.

Your guidance, for fourth quarter US organic attendance is what?

Is a slight improvement on what we've reported this quarter.

And that is driven by the fact that we have a flow-through from the September campaign that is weaker than we had anticipated.

Obviously, on our last call, I thought we would catch up.

What do you mean the flow-through?

You keep saying that recruitment is up.

And I understand the difference between recruitment and attendance?

What I said was the recruitment is up for the last five weeks.

Now the recruitment in September, which is where the bulk of the enrollment comes in this diet season wasn't as strong.

So, I know that there's always a lag between recruitment and attendances.

And when you're looking at our weaker seasons, I mean right now, even though we're up, it's a quieter time for recruitment and therefore the size of that influx of members isn't great enough to compensate for the shortfall in September.

OK.

I thought, I heard you say that fourth quarter attendance would be down, mid-single digits that include acquisitions?

Right.

OK.

What I was trying to paint a new picture of is, I said last time not the whole quarter, would be level with last year, but by the time we got to the end of the fourth quarter, we would be level and above prior year.

Now I'm saying that the whole quarter will come in a bit better than this quarter.

But by the end of that quarter, we will be in mid-single digit negative.

In other words, we won't stay -- we'll be building through the quarter.

Got it.

So, meaning that in October, you'll probably be down - well, you said slight improvement from the third quarter, so down something less than 13%, but definitely, down --

That's right.

What we are seeing is a quarter-by-quarter improvement.

OK.

In our NACO performance.

Got it.

OK.

Can you just comment on the resignation of Eliot Glazer?

Yes.

That's also been reported in the marketing press.

I think that it's a time when we have been reviewing, obviously, all of our marketing, and Eliot has been just a great team member and an instrumental part of our development over the last five years.

But it also is a natural time when we're looking at new agencies, when we're looking at a different strategy for somebody to think through what they wanted to do.

And I respect Eliot very much for him taking this decision at this juncture that he wanted to pursue new opportunities.

So, we do have in place, as I told you earlier, a brand -- a chief brand officer, Miriam Jordan Keane is a very experienced marketer.

She is on board, and she is going to be standing in and assuming Eliot's responsibilities in North America while we secure a new VP of marketing.

OK.

I'm sorry.

One last question, you know, obviously you guys are guiding down for the fourth quarter...

Yes.

As you look at the third quarter, excluding the tax benefits, you would have made your estimates.

Yes.

That's right.

OK.

So, I'm not clear on what's -- I guess, kind of getting worse relative to the third quarter.

And within that, I mean, you could answer this about the US -- sorry about Europe.

Europe's really strong, do you expect that strength to continue into the fourth quarter?

Yes.

OK.

And the first part of the question?

OK.

Let's go to the first part of the question.

Why would this lower than anticipated attendance level in quarter four have such an impact on our EPS?

I think that's the first part of your question.

And then we'll look at the component part, and unfortunately Europe is a smaller volume part of our business, growing and will continue to grow.

But right now it's the US, the UK and continental Europe.

So let's again look at the impact of the September shortfall in recruitment on the attendances in quarter four.

First, we have this flow-through.

As you know, you join Weight Watchers and on average you stay week after week after week.

So the attendances in any period are not a direct result of this week's recruitment or last week's recruitment, but the period prior to that.

We're entering quarter four lower than we had anticipated.

And as we go through the quarter, we anticipated that we were going to catch up with last year.

We will not be able to do that because of this lower flow-through.

Now, the reality of the company is the fourth quarter is our smallest quarter.

We still have all of our overheads; we have all of our costs, so that lower attendance volume just means that it has a disproportionate effect on our net income, and on our EPS.

Great.

That's very helpful.

Thank you very much.

Thank you.

Our next question is coming from Jeff Stein with KeyBanc Capital.

A question, Linda, with regard to TurnAround; can you talk about the effect on customer retention, and as far as recruiting new members, how many of them are at what percent roughly would be adopting TurnAround, your Core Plan versus the Flex plan?

yes.

Hi Jeff.

Very good questions.

If I'm looking at retention, in fact, I just was looking at early results of a retention picture on the people who are following Core, the people who are following the Flex plan and of course we have people who switch.

This is one of the beauties of this new approach is that you have the ability not only to follow the plan that, you know, you temperamentally are most suited to, but you also have the ability to switch plans as circumstances change or if you hit a plateau, or for any reason you need to be reinvigorated, then you've got a plan at Weight Watchers.

And a lot of people switch back and forth and use it situationally rather than segment-wise or temperamentally.

So, we looked at both the switchers, the people who are Core and the people who were Flex plan, and there was no real difference in retention.

So I'm very, very confident that what supports retention is the fact that you will follow the plan that suits you as an individual best.

And of course the better you can find a plan to suit you, the more livable it is, the more sustainable it is and the longer you'll be on it.

Theoretically, if you're offering more options to your members, the retention rate should increase over time, should it not, because you should get more satisfied members?

I agree with you.

And obviously, we have just launched this.

So it's early days for me to be telling you that that is the case.

I'm just giving you the information that we do have from our early surveys.

If you're also looking at it, I think you have to understand that at the moment, of course, we are still more successful, as we have been since the year started.

We are still more successful, right now, in attracting former members, and quite a few of them of course had dallied with low carbs but they're coming back us to.

They know Weight Watchers, so it's an easier thing for them to come back to something that's safe and sensible that they already know about.

So, we have just been this year less successful at getting the brand new members in.

So our mix is probably changing a bit.

It's too early for us to know because our database analysis; it's too early for us to do the database analysis to know what the split is in terms of new versus rejoins exactly in this campaign.

And we are seeing a good hardcore of members choosing the Core Plan, and we expect that to shift in time as more and more people who would never have come to Weight Watchers because we're known for our counting of points, we expect that to grow over time.

Linda, last question real quickly.

Your product sales in North America dropped less than your meeting fees, and I'm just curious as to whether some of the re-launches of your products are having more of a favorable impact, and will the mix between Core and Flex members have any effect, do you suspect, on product sales?

I'll let Ann answer that.

Yes.

In terms of the products sales, we have done better in North America, and this is the result in part of this realignment of our consumables.

We realized early on this year, actually at the end of last year that we really need to do something about our consumables product offerings, and we've done that.

And we've rolled out the new offerings and they're doing well.

And we still have some products that haven't rolled out entirely, some newer products.

In addition, we have the enrollment products, which have done well as well into this new program.

So it's a combination of both.

Jeff, one of the wonderful products we've got with this launch is a cookbook that gives, obviously, both recipes for the Core Plan as well as recipes for the Flex Plan.

And that has been very popular.

Got it.

Thank you very much.

Thank you.

Our next question is coming from Gregory Badishkanian with Smith Barney.

Hi Greg.

Hi.

Good evening.

Just to be really clear, I guess, it's $0.31 to $0.33 next quarter, fourth quarter, is that what the EPS comes out to be or?

I think you just have to take 5 cents off the 169 to get your starting point.

OK.

All right.

So in the $4.9 million in the payment from WeightWatchers.com, I believe, was that part of guidance?

Did you give that guidance out last quarter?

Yes.

That's always been included in our guidance.

As we said last year, we have scheduled two payments a year for the next few years.

So obviously we have built that into our expectations.

As I think most people have.

Good.

And the tax rate that was 29% that's part of the 5 cents reversal, right?

Yes.

Baked into that, yes.

OK.

Good.

And also, can you just update us on the complaint filed by the Weight Watchers employees in California and also if there's any exposure of this type of labor dispute going system wide?

Yes.

For people who aren't aware of this, a lawsuit was recently brought in California by a law firm representing a few of our California employees in a wage and hour action.

Obviously, we believe that our current compensation structure, which is commission-based, is very beneficial to our service providers.

Therefore, we have retained California counsel and we're vigorously defending this action.

It's very early.

It hasn't been classified and I don't think that we can comment on I.

OK.

And so it's your -- going to be negative mid-single digit organic trending towards the end of the quarter, if I heard you right?

Yes.

That's correct.

That's the trend towards instead of positive?

Yes.

You're going to be slightly better than -- slightly better next quarter in terms of the guidance in terms of the guidance?

Do you have any '05 type of guidance?

Are you going to get to positive?

We give guidance in our next call.

Next call.

OK.

Just to clarify if I can because I was looking at something else when you asked the question about the guidance, the fourth quarter is between $0.31 and $0.33.

It is.

OK.

Thank you.

Thanks for clarifying that.

Appreciate it.

Thank you.

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

Thanks.

Good evening, everybody.

Just one -- the one last clarification on the last point.

The slightly better performance in the fourth quarter relative to the third quarter that is in growth rate or absolute attendee figures?

That's in the growth rate, but of course we're looking at negative.

I'm sorry.

I'm sorry.

It's like an improvement in the negative situations.

So we have an improvement this quarter.

We expect to see a slight improvement next quarter as NACO continues to strengthen.

And then exiting the year at mid-single --

Yes.

Exiting the year at mid-single.

Appreciate that.

And a follow-up with Jeff's question with regard to sort of the types of attendees, especially in the Core program.

Did I understand it correctly that it's still early to tell if the attendees in the Core program are the mix between new and returning attendees?

It's too early to tell that mix?

It's bit early for us to do that, but certainly in the test we were -- we had people that were current members and former Weight Watchers members who were choosing Core.

We have disability to switch -- we have this ability to switch between.

We do believe that there is this psychographic segmentation out there that's different.

That's what we identified and that's what we have spent so much time developing this -- you know, this core food plan approach to answer and to address the needs of that segment.

So we feel that as we move into 2005, attracting more of those never member, the people who have never been to Weight Watchers before and have probably been using the low carb methodology because that is also one that requires very little or no counting.

We believe that we'll be in a strong position to recruit them into our methodology which is obviously we think such an improvement on anything they have experienced in the last year or two.

Is there any way to give us a feel for the current mix on that, new versus never -- or returning versus returning on Core?

No.

It's too early days for us to be able to do that kind of analysis.

OK.

And this could be -- just a technical question.

The timing of the quarter was slightly different.

Is there anything that impacts the fourth quarter in terms of either number of weeks or number of days?

Last year in the fourth quarter we had 14 weeks.

This year we have 13 weeks.

OK.

And the quarter last year's quarter ended on the third of January, which meant that you had a couple of days in there that were -- for the winter diet season, the new diet season whereas this year it ends on January 1.

Got it.

Ann, while we've got you there, just a clarification, looks like you bought about 1.5 million in the quarter for about 37 bucks a sahre.

Is that -- I know you gave year-to-date numbers.

Yes.

Yes, in the quarter, 1456, actually.

At about 37 bucks then?

A little more than that.

OK.

And then just one final -- could you give us an update on Applebee's?

Applebee's has been doing well.

We have been very pleased with it.

Throughout the summer, our staffs has been going to tastings, and are very, very positive about the fact that they can go into a family restaurant and be able to make such good choices.

It's very good food; it's also from Applebee's perspective, they have told me anecdotally that it's bringing a lot of people that aren't Weight Watchers members to try our section of the menu.

So we feel very positive about it.

It's fully rolled out at this point, correct?

It's in all 1,600 restaurants now, yes.

Thank you very much.

Thank you.

Our next question is coming from Krista Zuber with UBS.

Hi Kris.

Hi.

Good evening.

Just a follow-up.

Last year at this time you confirmed guidance for the forward year -- full year EPS consensus.

Just wondering if you cared to comment on whether you're comfortable with the current range?

I'm sorry.

Could you say that again?

Last year at this time on a third quarter 2003 earnings release you confirmed your confidence in the current consensus for the forward year.

Yes.

You know, any comment on the current range for 2005?

I don't think that -- I don't think that we did in the quarter three call for 2005.

I think what we did was tighten the range for 2004, as we have done today.

We will be giving guidance as we have done since we became public on the first call of the year for the 2005 year.

OK.

And the tax rate we should be carrying for the December quarter?

Going back to the 37, 38% rate.

OK.

Great.

Thank you.

Thank you.

At this time, I'm showing no further questions.

I would now like to hand the floor back to management for further comments.

Thank you for joining us today.

We are really looking forward to updating you on our progress on our next conference call.

So goodnight.

Thank you.

This does conclude today's teleconference.

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