WW International Inc (WW) 2004 Q4 法說會逐字稿

Welcome to Weight Watchers International’s Fourth Quarter and Full Year 2004 Earnings Teleconference Call. (OPERATOR INSTRUCTIONS).

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

Please go ahead.

Thank you Jason.

And thank you to everyone for joining us today for the Weight Watchers International Fourth Quarter and Full Year Conference Call.

With us on the call today 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 fourth quarter and full year 2004.

The purpose of this call is to provide investors with some further details regarding these results, and a general update in the Company’s progress.

The press release is available on our website, www.weightwatchersinternationa.com. http://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 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 Linda Huett.

Please go ahead Linda.

Thanks John.

Good afternoon, and thank you for joining us as we review Weight Watchers International’s performance for the quarter and full year ending January 1, 2005.

I will spend some time looking back on our 2004 performance, and give you an outlook for 2005.

Ann had to go to Boston, where her father is critically ill in hospital.

But I am glad that she’s been able to join us remotely.

And she will, as usual, review our financial results for the quarter and for the full year.

And we will finally 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 2004.

As a result, our financial reporting for financial reporting purposes, this is the third 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 $58.8m to our reported revenues, and $0.03 to our EPS in 2004.

As I mentioned in previous calls, despite this required accounting consolidation, we remain a minority owner of WeightWatchers.com.

And therefore, I will focus the rest of my comments on the operating results of Weight Watchers International, without the accounting impact of FIN 46R.

Our revenues for the full year 2004 increased 2.4% to $966.1m from $943.9m in the prior year.

Total attendance at Company owned operations in 2004 was $60m, a decrease of 1.5% versus ‘03.

Since our 2004 fiscal year includes 52 weeks versus 53 weeks in 2003, our full year and fourth quarter comparative results are disadvantaged because of one fewer week in this year’s fiscal period.

In a few minutes, Ann will provide further details on how this affected our financials.

For the year, our operating income decreased 8.3% to $289.9m, from $316.1m in ‘03.

As we have previously discussed, our operating income has been negatively affected by three items.

First, lower gross margins in our North American operations, primarily the results of lower average meeting attendance per meeting over the course of the year; two, an increase in G&A expenses; and three, somewhat higher marketing spend this year versus last.

Ann will give our margin in more detail.

Including debt refinancing expenses or excluding debt refinancing expenses in both years, our fully diluted earnings per share were $1.70, up 6.9% compared to $1.59 in ‘03.

Our bottom line benefitted from our ability to leverage our strong free cash flow, to refinance our debt at lower interest rates, and to actively buy back shares.

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

First, North America.

For the year, total NACO attendance was $32.3m, a 6.5% decline from prior year.

On an organic basis, ignoring the benefit of franchise acquisitions, and on a 52 versus 53 week basis, the decline was 12.1%.

Looking on a quarterly basis, as you may recall, in our second quarter 2004, we reported a year over year organic attendance decline of 16.7%, followed by a 13.9% decline in our third quarter.

In November, when we discussed our third quarter results, I had reported that we were seeing improvements in our recruitment, and that the double digit negative recruitment trends that had held for much of 2004 had turned positive.

I am happy to report that those initial encouraging trends continued through the remainder of the quarter.

As a result, our NACO organic attendance on a comparable 13 to 13 week basis declined only 8.7% in quarter four versus prior.

Our attendance continued to strengthen throughout the quarter.

And, by the end of the year, that is during the month of December, as we had projected on our last call, our attendances has improved to mid-single digit negative.

Looking back at the full year, 2004 was, by any measure, an extremely challenging year for our North American business.

We ended the year with the low carb craze buffeting us with gale force headwinds.

While we initially held our own last January, with our highly promotional Fast Track offer, our recruitments in the February through August period were significantly below prior year levels.

With our recruitments down, attendance in our meetings eroded, as we moved further into the year.

However, because our initial research was telling us that the low carb craze was a fad, and that it would fade, we made the strategic decision to keep the vast majority of our meetings open, at the cost of a few margin points.

During this period of lower recruitments, we have take the opportunity to rebuild and strengthen many of the aspects of our business.

In the past year alone, we have made significant changes to our program, strengthened our management team, taken steps to further enhance our service quality, and improved our marketing and PR efficiency.

In September, we launched the turnaround program, which, for the first time, offered our members the choice of two different food plans.

This innovation has been well received by both our members and our leaders, and is certainly one of the components which has contributed to the improving trends we are seeing.

Additionally, we have taken this opportunity to reaffirm our commitment to continually improving our service quality.

Even as our service levels continued to meet our high historical standards, we have heightened our focus on selecting and training our leaders.

Leader performance is a key determinant of our members’ satisfaction.

And we believe that, over time, this renewed focus will lead to even higher levels of member satisfaction and retention.

We have also taken a number of steps to improve our marketing effectiveness and execution.

On a previous call, I mentioned the establishment of a new position within the Company of Chief Brand Officer, and the hiring of Miriam Jordan Keane, a very experienced marketing executive, to fill that role.

Since joining us last October, Miriam has focused much of her energy on North America, helping to guide our new advertising agency selection process, and to develop new brand messages and strategies we will deploy going forward.

An additional recent hire is Donna Fontana, the head of our Public Relations activities in the U.S.

She has done a terrific job of executing and support of this current winter diet season.

We nearly doubled the PR impressions this January compared to last.

And we were able to drive more robust media mentions.

One story that received significant media coverage was the study published in the Annals of Internal Medicine.

This concluded that Weight Watchers is the only commercial weight loss program with credible scientific evidence to back up the efficacy of its program.

Additionally, our new science-focused book, Weight Loss That Lasts has garnered excellent attention from the major media outlets.

In our current 2005 diet season, we are building on what we started in our September marketing campaign.

Unlike last year, where we took a very promotional approach to our TV ads, with our Fast Track offer, this January we took a longer term, brand building approach, focusing our media marketing on the elements that set Weight Watchers apart.

While the Fast Track promotion last year was effective in driving recruitments in the first four weeks of the year, once the promotion ended, our recruitments weakened considerably.

We believe that the current strategy, whereby we are distinguishing Weight Watchers from other approaches, and in which one campaign can build upon the next, will serve us better in building the brand, creating positive word of mouth, and in driving more consistent recruitments throughout the year.

The early indications are that this strategy, combined with the continuing weakening trends in low carb, is having a positive impact in our business.

Recruitments in January roughly matched prior year’s levels.

That’s despite the aggressive promotional offer last year, and a price increase this year.

Since the beginning of February, our recruitments have been solidly positive versus prior.

But our volume will be negatively impacted in the last weeks of March, because of this year’s earlier Easter.

Therefore, when you offset our positive recruitment trends with this early Easter, and the fact that our attendance base slowing from December into January was mid single digit negative, for the full first quarter, I expect our organic attendance in North America to be low single digit negative versus prior.

Obviously our second quarter comparison will benefit from this year’s earlier Easter.

This holiday shift, combined with the continuation of the improved competitive environment, and the trends in our business, indicate that we should register positive organic attendance growth in North America in the second quarter, the quarters thereafter, and for the full year 2005.

Earlier I mentioned our price increase.

As many of you know, we don’t have uniform pricing across our NACO market.

Some of the differences arise from cost of living differences across regions, while other differences are the result of the fact that NACO often maintains the existing pricing when we acquire a franchise territory.

During 2004, just over 40% of NACO had a base rate of $9.95 per week, with the remaining areas charging a higher fee, primarily either $11 or $12 per week.

This January we raised our weekly fee in all of our $9.95 markets to $10.95 per week.

Now, moving on to the UK, in 2004, the second year following our highly successful launch of Time To Eat innovation, the UK reported attendance growth of 1.1%.

After a strong first quarter, growth in the UK flattened in Q2 and Q3, but picked up considerably in quarter four, with 13 week versus 13 week attendance up 9.9%.

In January, the UK launched Switch, the newest program innovation.

Weight Watchers’ approach to weight loss has always been based on four core elements -- support, behavior modification, diet and exercise.

The new switch program incorporates innovation in both the diet and the behavior modification elements.

Similar to the US turnaround program, Switch offers our members a choice of two food plans, a points-based plan, and the no counting plan.

In addition, Switch also includes significant behavior modification components, focused on the 10 Winning Habits.

The UK is the first market to introduce our Habit Swap system, which blends elements such as psychology, motivational interviewing, and the proven habits of successful diets, which we mined from our existing member database.

Two years of comprehensive research went into the creation of the Habit Swap system.

And all of our UK leaders have been trained in how to incorporate the principals underlying Habit Swap into their meeting and interactions with members.

The 10 Winning Habits helps our members to identify those habits they personally need to change in order to achieve long-term weight loss, and gives them the help they need to make these positive changes.

We are supporting the launch of Switch with significant PR, and with a fresh new marketing campaign, which features our visually arrested Be Who you Want to Be TV ad.

I am delighted to report that the reaction to the new program has been excellent.

And the positive recruitments we have seen in the initial weeks since the launch give me confidence that we will be able to deliver high single digit attendance growth in the UK in 2005.

Lastly, concurrent with the introduction of the new program, we have increased our standard meeting fee by 4.2% to four pounds ninety-five.

Now, moving on to Continental Europe.

Continental Europe had a strong year in 2004, with attendance growth of 11.4%.

Quarter four attendance was up 17.2% versus the comparable 13 week period in ‘03, as with the innovation we launched in August, helped to accelerate volume growth across our Continental European markets.

Now, given that our innovation had just been launched, we normally would expect to see continuation of robust growth in Continental Europe, at least through the first half of 2005.

However, the marketing execution of our Winter diet season campaign has been poor, with significant changes to our marketing mix relative to what we have done historically.

As a result, our recruitments have suffered in this critical period.

And, because of these marketing missteps, as well as the negative impact of the early Easter, I now expect our first quarter attendance in Continental Europe to be essentially flat with prior.

We have taken corrective action with the eye to impacting our post-Easter campaign.

And by quarter two, with a return to our more traditional marketing practices, we should see a return to our expected recruitment growth rate in Europe.

Moving on to other news, our licensing and publishing businesses delivered excellent results in 2004.

Globally, these revenues increased 25%, from $35m in ‘03 to $43.6m in ‘04.

Applebee’s continues to perform well.

As they announced in their call, they are very pleased with the results of our alliance, as are we.

And, as many of you may have seen, in the US we recently announced the introduction of a range of Weight Watchers branded products, including breads, cereals, chocolates, ice cream treats, muffins and snack cakes.

These great tasting products will fit well with our philosophy, and will offer all weight conscious consumers sensible food choices that can be part of a healthy, balanced diet.

The initial reception of these products has been extremely positive.

And I am delighted by the progress we have made not only in the US, but also globally on the licensing front.

We expect continued robust growth in licensing revenue in 2005, as our newly licensed products gain distribution.

We will also get a full year benefit of the economic rights on preexisting licenses, outside the high end core categories.

Our magazine business also continues to perform well.

In the US, our circulation is now at $1.1m, and the magazine marked its second year of profit contribution.

WeightWatchers.com has continued to strengthen its position as the leading online weight loss company in the world.

WeightWatchers.com is now more than twice the size of its nearest competitor, based on revenues.

And, unlike its nearest competitors, it is a very profitable company.

For the full year, WeightWatchers.com generated around $19m in revenue, and an operating margin approaching 20% after paying us our 10% royalty.

WeightWatchers.com continues to invest heavily in its technology platform, in improving the products it offers, and in building a global infrastructure.

In 2004, they successfully launched the subscription product in Germany, their fourth subscription market.

They also innovated their offering with the introduction of On the Go, a PDA application.

And they’ve set the stage for additional subscription site launches in 2005 and thereafter.

WeightWatchers.com’s royalty to Weight Watchers, International for the year was $8.2m, up 15.3% over prior year.

Equally important, WeightWatchers.com has continued to provide a strong online marketing presence for the brand.

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

Thank you Linda, and good afternoon everyone.

As Linda reminded you, at the end of the first fiscal quarter of 2004, we adopted Financial Accounting Standards Board Interpretation number 46R with respect to our affiliate and licensee, WeightWatchers.com.

Accordingly, as of the second quarter 2004, our financial statements include 100% (indiscernible) operations of WeightWatchers.com, in which we hold an approximate 20% ownership stake.

On this fully consolidated basis, Weight Watchers, International’s fourth quarter 2004 revenues were $232.8m.

And operating income was $62.9m.

Net income in the fourth quarter was $43.2m.

And EPS was $0.41.

The consolidation of WeightWatchers.com added $18.2m in revenues, $5.3m in operating income, and $0.09 to EPS in the quarter.

As it is our aim to present information about our business performance, I will address Weight Watchers, International’s business results on a standalone basis, and exclude all impact of the consolidation of WeightWatchers.com throughout the remainder of this financial review.

I’ll begin the review of standalone Weight Watchers by noting that 2003's fourth quarter included a 14 th week, versus only 13 weeks in the fourth quarter of 2004.

Accordingly, our reported results for the quarter are not comparable in the two years.

Throughout this review, I will provide attendance and revenue information, both on an as reported basis, and, where relevant, on a basis which compares the 13 weeks ended January 1, 2005, the last day of fiscal 2004, with the 13 weeks ended January 3, 2004, which is the last day of fiscal 2003.

As we reported, Weight Watchers, International’s fourth quarter revenues were $214.6m, as compared to $216.1m in the fourth quarter of 2003, a decrease of .7%.

However, adjusting for comparability by eliminating the extra week in 2003, revenues rose 9.3% in the 2004 quarter.

Global attendance at Company-owned meetings declined 6.8% on a reported basis, but rose 2.8% to $12.7m on a 13 week to 13 week basis.

Operating income was $57.6m for the 13 week fourth quarter of 2004, an 11.4% decrease as compared to $65m for the 14 week fourth quarter of 2003.

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

Net income for the quarter was $33.5m, down from $38.1m in the fourth quarter a year ago.

Earnings per fully diluted share on a standalone basis were $0.32 in this fourth quarter, as compared to $0.35 in the prior year quarter.

Now, moving to the performance of our NACO operations, for the fourth quarter, NACO’s attendance was $6.7m, 13.5% lower than last year’s.

Absent the extra week in 2003, NACO’s organic attendance, which excludes the impact of acquisitions, declined by 8.7% versus the prior year quarter.

While still behind the prior year level, this performance was better than Q2 and Q3, when we reported organic attendance down 16.7%, and 13.9%, respectively.

And it’s indicative of the improving trends that we have seen in the US market since September.

NACO’s fourth quarter revenues were $104.2m, a decline of 10.3% on a reported basis, and a decline of 1.1% versus $105.3m in fourth quarter ‘03, when adjusted for the extra week.

Q4 attendance in our international operations was $6m in the 2004 quarter, an increase of 12.3% on an adjusted 13 week to 13 week basis, or an increase of 2% on an as reported basis.

In local currency, unadjusted international revenues increased 5%.

In US dollars, unadjusted revenues from our international (indiscernible) from operations rose 14.5% to $81.6m from $71.3m last year.

On a comparable 13 week to 13 week basis, UK attendance grew nicely, up 9.9%, ahead of its innovation launch in January, 2005.

On an as reported basis, UK attendances, which totaled $2.6m in the quarter, were 1% behind last year, while local revenues rose marginally, up .5%.

Continental Europe, which launched its innovation in August, 2004, delivered $2.6m (indiscernible) fourth quarter, a growth of 17.2% versus last year on an adjusted basis, and 6.8% as reported.

In local currency, unadjusted revenues increased 12.3%, outpacing the reported growth in attendance, on the strength of product sales and less discounting this year versus last.

Now, moving to our other revenues, our franchise commissions were $3.6m in the quarter.

Commissions declined 24% from the prior year level, with nine points of this decline resulting from the Company’s acquisitions of its Dallas and New Mexico franchises during fourth quarter 2003, and the Washington, D.C. and Ft. Worth territories during 2004.

Commissions from our remaining domestic franchises declined, in keeping with the marketplace issues that NACO has been facing, as well as, as a result of the extra week in 2003.

Four franchise commissions were down 10%, also due to the extra week in 2003.

Other revenues, combined, were $14.1m in the quarter, an increase of $2.6m, or 22% over a year ago.

In addition to growth in our new licenses, our licensing revenues included for the first time in the fourth quarter of 2004 royalties from third party licenses, which had previously been paid to H.J. Heinz.

Our royalty from WeightWatchers.com was $1.9m in the quarter, up 10% versus prior.

The gross margin in the fourth quarter of this year was 50.3%, as compared to 52% in the fourth quarter of 2003.

Whereas lower attendances per meeting in NACO depressed gross margin this entire year, this trend is now moving in the right direction.

As a result of this, and of pricing increases in NACO and elsewhere, I expect that our gross margin will begin to improve as we progress into 2005.

Marketing expense for the quarter was $26.2m this year, compared to $28.1m in Q4 last year, a decrease of 6.8%.

Marketing expenses declined as a percent of revenue as well, to 12.2% from 13% in the year ago quarter, mostly due to timing.

G&A in the quarter rose as a percent of revenue, from 8.9% in the prior year, to 11.3% in 2004.

G&A expense was $24.2m, as compared to $19.3m in the year earlier quarter.

Expenses were driven up by professional fees and expenses related to compliance with Sarbanes-Oxley, as well as by a strengthening of our management team, and an increase in our head count, to drive future growth of the business.

In addition, fourth quarter 2003 expenses were lowered by one-time credits associated with medical insurance and settled liabilities.

Operating income was $57.6m in the fourth quarter, down $7.4m, or 11.4% versus year ago.

The operating income margin was 26.8% versus 30.1% in the same period a year ago.

Our net interest expense dropped by 27% in the fourth quarter 2004, to $3.5m, as compared to $4.8m a year earlier.

This is a combined result of our retiring the remaining balance, approximately $15m of our 13% senior subordinated notes last August, the debt refinancing that we undertook in January, 2004 and improved cash management.

Our effective interest rate was 3.69 in the fourth quarter 2004, as compared to 4.23 in the prior year quarter.

The tax rate in the fourth quarter 2004 was 38.9% versus 37.1% in the prior year quarter.

Now, moving to an overview of our cash flow and balance sheet activity, we generated cash from operating activity to $30m in the fourth quarter, and $234m during the full year 2004.

We utilized the cash for share repurchase, $177.1m, and for acquisition of our Ft. Worth and Washington, D.C. franchises for $60.5m.

In comparison, in 2003 we generated $233.1m of cash from operations.

We utilized $208.8m to acquire WW Group, and the Dallas/New Mexico franchises, and $28.8m for share repurchases.

We ended 2004 with a cash balance of $18.7m, and $177m available under our revolver facility.

On the Weight Watchers standalone balance sheet, our total debt at the end of both years was similar -- $469.1m at year-end 2004, and $469.9m at year end 2003.

The increase in shareholder’s equity on the balance sheet reflects the increase in retained earnings, offset by the impact of our share buyback program.

Our other fluctuations in the balance sheet reflect the timing of year-end in each year, and more efficient management of our inventories.

Now I will turn the discussion back to Linda.

Thank you Ann.

I am optimistic that Weight Watchers is returning to a more normal growth mode after weathering an unprecedented low carb craze in North America.

But just as the negative impact of this craze was not instantaneous, neither will be our recovery.

I often use the swimming pool as a metaphor for our business.

If you think about a pool, with a faucet at the top, pouring new and rejoining members into the pool, and a drain at the bottom when members leave us, the level of the pool represents our attendance base of current members.

Since retention has remained constant, what determines the level of our pool is how hard the faucet runs.

What governs how hard the faucet runs at any point in time includes factors such as the effectiveness of our marketing, and the strength of our positive word of mouth, and occasionally an outside force will come along and interfere with our flow of new and rejoining members.

These forces range from short-term occurrences, such as winter storms, to broad pressure, such as the low carb craze.

In the last year, as our faucet slowed, the level of our pool receded to a point in the second quarter of 2004 where our North America attendance was 16.7% lower than the level of the prior year.

Since this past September, the level of the pool has been rising, as we have seen this low carb craze fade, as our marketing has improved, and as our positive word of mouth has been building around our turnaround program.

And with this positive trend we are seeing, it gives me confidence that we will see positive attendance growth in the second quarter, and for the full year 2005 in North America.

I can report that our teams across the globe are putting a lot of hard work into driving a bright picture for Weight Watchers in 2005 and beyond, which brings me to our guidance for 2005.

We expect to deliver fully diluted EPS between $1.85 and $1.95 per share.

This excludes the impact of FIN 46R, and it is before any stock-based compensation expenses which, for us, like most other companies, will begin to have an impact on our P&L at the start of our third quarter.

We estimate for the full year 2005 we will incur stock-based compensation expenses in the order of two to three cents per fully diluted share.

That’s two to three cents per fully diluted share.

In terms of our quarterly EPS, due to an early Easter that impacts the last two weeks of March, we expect our first quarter to be somewhat softer than it would otherwise have been.

But our second quarter will benefit from the Spring campaign, which will launch earlier, and last longer.

The second half of the year should follow our normal seasonal patterns.

That being said Jason, we would like to open for questions, if anyone has any.

(OPERATOR INSTRUCTIONS).

We have our first question coming from Greg Cappelli at CSFB.

I wondered if I could start by asking, just with our expectation of reaching positive NACO attendance growth in Q2, does that mean you’re actually seeing, is each week actually getting a little bit stronger since the beginning of the year?

Yes.

As I said, we entered the year, if you’re looking at, again, that flow from 2004 into 2005, we were at low single digit negative.

Then in the January period, we roughly matched the recruitment that we saw last year.

Now that was despite the fact that last year we had a very promotional campaign out there.

And we, of course, increased our prices this year.

And since that January period stopped, we have seen an increase, a strengthening year over year.

And that has continued since then.

But of course, we’ve discussed in past years how Easter, and where Easter falls in the year impacts quarter one and quarter two.

This year it’s an early Easter.

That means that it has a negative impact on recruitment and attendances in March.

But, of course, it will have a positive impact on quarter two.

So, everything being given, we expect to see still the negative picture in terms of organic attendances in quarter one, but turning to a positive picture in quarter two.

And then Linda, can you tell clearly that the improvement you’re seeing, is that mostly being driven by the new turnaround program?

Or is it a combination of – ?

Obviously low carb has been dying down.

So is Flex Points holding its own as well?

Oh, absolutely.

It’s a combination of a lot of things Greg.

You know that, I know you’ve been in our meetings.

You know that people are very, very happy with the points system.

What we’ve identified in our research was a segment that were interested in a more no counting methodology.

And that’s why we put in the core program, so that we feel we cover both types of desire in what they want to do to follow a healthy program.

So we feel that it’s the robustness of our offering actually that is giving us this strength.

And obviously we’re doing that at a time when the low carb craze is fading.

Great.

Just two more quick ones.

I was just wondering, are you aware of, or are there any NACO centers or franchisees running promotions, where they’re actually discounting or refunding meeting fees to members, based on an achievement of their goals or weight loss?

And if so, is that a change in philosophy going forward?

Well, my goodness, if you found that in NACO, can you be sure to tell me?

I do know, obviously, in some of our at work environments, that the company itself might make a decision to either supplement the weekly fees of the staff, their staff and their employees that are attending Weight Watchers meetings.

And I have heard of some at work environments where the employee might refund their weekly fees once they’ve achieved a healthy weight.

But if you’re looking at the NACO system, which is obviously the system that I am responsible for, then we don’t give back money for achieving success.

Okay.

That’s helpful.

And then just the final one is just a clarification.

SO is all of NACO now at the same price level?

No.

What we did was just over 40% were at $9.95.

All of those markets have moved up to the $10.95 price point.

But we already had some markets that were at $12.

Some were at $13.

Okay.

And could we see additional?

If you think about the system globally, will we see any more price increases this year?

Are you talking North America here?

No.

The Weight Watchers system globally, so either Europe or the UK?

As always, we take that on a market by market basis.

I never preclude price rises.

But obviously I don’t forecast them.

We don’t have them scheduled in.

What we do is we look at the market at the appropriate time, and say is this a good time and a right time for us to take a price increase?

We took a price increase, as you know, in the UK, this January.

We had, with the last innovation.

And obviously it was successful then.

And everything I am seeing right now says that that’s successful as well.

Great.

Very helpful.

Thanks a lot.

Thank you.

We have our next question coming from [Scott Mushkin].

A couple things.

I wondered if you could give us a quick update on the test in the Australian market of the Weight Watchers for men.

You’ve seen our website, have you?

I have.

Did you like it?

I did.

Yeah.

You know, we have been doing testing of more male specific products.

And here I use products, because obviously we would love to get more men into our meetings.

We have a real success rate with men once they get into our meetings.

So they’re incredibly successful.

We’d love to get more men into our meetings.

But one of the things I said a few years ago, after -- you know, we’ve done a lot of research on men.

And there’s reluctance in a lot of men to go into a sort of group environment, where you’re discussing issues.

So we have been working on, in our foreign markets, a product that is more aimed at men, that is more a self-help product than it is based on the meetings.

And that’s what you’re seeing on the web site.

It researched very well.

It obviously hasn’t been there very long so far.

But we’ve been pleased with the response to what we’re doing in terms of positioning to the male market.

We will continue to evolve and to develop, and to develop a product that is more suitable for the male market in time.

I mean I have been delighted that we have like almost 10% of our attendances in North America are men.

And you won’t see that in every meeting.

But if you go into meetings where there are men, you will see that they are benefitting from the Weight Watchers meeting equally to the women.

And I’d love to get more of them joining the meetings as well.

As a second question, I guess more strategic in nature, is you guys look like you’ve kind of taken a more scientific focus or promoting more science.

What else is going on?

You have the book that came out.

You were in the Annals of Internal Medicine.

What else is on that?

It’s ironic that you say we’re taking a more scientific focus.

Actually, Weight Watchers has always been the only one with science.

And what we learned, and what we were talking about on prior calls, when this sort of low carb craze went out, it was rather galling for us, who actually had really robust research, scientific support, of our methodology, going back, including all of our lifetime member studies, which we’ve done for more than 14 years, to support the efficacy of the Weight Watchers (indiscernible) just putting it out there in the marketplace, blowing our own horn.

It was something that we just took for granted, because we’ve been doing it for 40 years, that everybody knew that we were science based.

So you’re absolutely right.

We’ve done a lot more in terms of scientific briefings.

We’ve done a lot more in terms of what we present to our membership.

And we started going that, obviously, way back with the truth about carbs, if you remember, in our meetings.

We’ve done that through this book that we’ve just published with Dr. Rippe.

We’ve done it through PR that we’ve put out there.

The Annals, of course, did that analysis ten of the commercial weight loss.

And we were the only ones that came up.

And very, very shortly, we’ll be launching a new section on our website called the science center.

So we’re continuing to just put our science to the fore, because we’ve always done it.

We’ll continue to do it.

And obviously that has been a foundation of our programs forever.

We’re just trying to present it more effectively.

And then one, again this is a, just to make sure I understand.

Sometimes I’m a little slow here.

So if I am looking at your guidance, is it 182 to 193, including the stock compensation?

Is that the way I interpret that?

Yeah.

Obviously if you include the stock compensation, which by law all of us are going to have to start including in the second half of this year.

But we wanted to give you a comparable to comparable, so that you can see it compared to 2004.

On a like for like, you’re looking at 185 to 195.

But we are going to have to expense our stock and option-based compensation from the second half.

And that will run through G&A?

And then that will be from then on.

Obviously that will be a permanent expense that all companies will have to reflect in their accounting.

Right.

And that’s through G&A.

Right?

Ann, is that where it falls?

Or does it have its own little place?

No.

It will fall through G&A.

Yeah.

Well, thanks very much guys.

And Ann, I hope your father feels better.

Thank you so much.

Thank you.

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

Good evening everybody.

Hi Linda.

And best wishes too.

First question is on pricing, and specifically the registration fees.

I know you guys are running some promotions on those.

What sort of duration will be applied to that program?

In other words, how long will you offer free registration?

And how that might compare to what you typically do when you offer such a program?

We’ve offered free registration during major promotion periods for a considerable period of time now, actually since the early 90s.

So it is a standard offer for us.

We also have other offers at different times, join for $15, half price, first meeting fee discounted.

There are just a number of offers out there.

But I think if Ann did the analysis, she would tell you that we’re not discounting more weeks than we normally do.

This is a pattern that is quite consistent year after year.

Okay great.

Just a real quick housekeeping one.

This may not matter.

But the NACO organic growth, unadjusted for the 13 versus 13, what might that number be?

Unadjusted.

Let me see.

17.5 minus unadjusted for the 13.

Great.

Thanks Linda.

And this question is regarding marketing spend.

I guess the fourth quarter certainly came in well below what we had mentioned.

Ann, you mentioned timing issues.

I guess maybe if you folks could supply a little bit more color on that, that might be helpful.

I would assume that those numbers would start to ramp, for reasons other than just timing and related to the innovations.

Do you want me to take that Linda?

Sure.

Go ahead Ann.

Well, in terms of the timing, it really had to do with things like when we drop our mailings and so forth at the end of the year going into the winter diet season.

So that’s the piece that was reflected in ‘04 versus ‘03.

If you look at ‘05, we’re building in low double digit increases in North America for marketing.

But, with our anticipated increase in the revenues, we’re expecting that marketing, as a percentage of revenue in North America, will essentially be flat, that there will be an increase in absolute dollars.

Okay great.

Thanks very much.

And then the last question, for Linda.

Linda, you talked a bit about the first quarter (indiscernible), indicating that they would be a little bit less than normal, I guess.

Does that imply, or would you like to offer if that implies negative comparisons in the first quarter?

In first quarter, we expect that NACO organic attendances will still be negative.

And, as I said, that’s because of the two things that are impacting it, that sort of counteract, if you like, the positive recruitment trends that we’re seeing since the start of February.

That is the entry into, which was low single digit negative coming into the year.

And then we’ve got the impact on March of the early Easter, which means that we’re going to come in, again, at low single digit negative organic attendance growth in North America for the first quarter.

But please remember that there will be a compensating positive in the second quarter.

So the second quarter would be stronger than normal, because of this shift in where Easter is compared to the prior year.

And then on the EPS front, that would be likewise?

Well, on the EPS, it affects how the EPS lays down between those two quarters.

It doesn’t affect the EPS for the two quarters as whole.

Right.

Right.

So likely negative EPS comparison in the first quarter, made up for in the second quarter?

North America only?

No.

Total company.

I think you also have to take a look at the UK as a big piece of this, with its new innovation, and how its doing.

Okay.

Thanks.

Thank you.

Our next question is coming from Andrew Mcquilling of UBS.

In terms of your full year guidance, I guess the 185 to 195, can I think about NACO organic attendance for the full year as low single as a decent starting place for that range of guidance?

Or something better?

You can look at positive loading at single digits for NACO.

Okay.

Terrific.

And a question about, I guess, recovery from different fads that you guys have experienced over the years, whether it was Fen-Phen in the 90s, or even the Cambridge Diet in the 80s, Linda, typically how long does it take to kind of get, let’s say the cobwebs off the prior fad?

How long does it take for the business to kind of build back to normal?

Is there any kind of historical that you could point to?

Well, I think that there isn’t sort of a life expectancy of anything that is set and fixed.

What we are seeing is we saw it come in, in a rush.

It was unprecedented.

I don’t even think that you could put something like, was it Herbalife you mentioned earlier?

Oh no, just the Fen-Phen stuff in the early 90s.

Yeah, Fen-Phen in the 90s was obviously very, very popular.

And that took a very large chunk of dieters.

It faded incredibly fast, because of the withdrawing the drug from the market.

So it was an artificial, if you see what I mean, situation to it.

So it’s very hard to sort of say this is what is typical.

I think that what we are seeing, and what’s reassuring to me, is that our research identified that this was a fad.

It identified that it was unsustainable to follow these programs.

It identified that these products that were flooding the market wasn’t actually going to help the diet.

I mean all of those things were there.

So to us it was a question of time.

And then, of course, I think that the publicity started getting more balanced.

And that, I think, has been good for us as well.

Now the big thing we have to all understand is that somebody doesn’t sit there on a diet one day and say on my goodness, I don’t like this diet anymore, and then the next day they start another diet.

There always is a dieting cycle, before you get yourself back geared up.

It’s happening now.

Our recruitments are up, as I said.

January, despite the fact that last year was very promotional, our TV ad was nothing but a promotional offer, and despite the fact that we’ve got a price rise in there, we almost matched last year.

I mean we roughly were in line with a very good January.

Then, since then, we have been consistently above prior year on our recruitment.

So to me, it’s happening right now.

You have to look at this total picture.

I understand.

Low to mid singles for the full year is wonderful.

I think it is.

I guess a question about service levels.

Understanding that the numbers you were putting up in terms of attendance in ‘01 and ‘02 in NACO were so big, how much did service levels deteriorate ?

And is it really the low carb?

Or were service levels a real part of the slow down in ‘03 and ‘04?

Andrew, I can honestly say, when I am looking at, and we do regular research, obviously, on customer satisfaction, both with former members and with current members.

And we didn’t see an impact on our service.

Our service is held in high regard.

We just, obviously, feel that we can do more and more.

And that’s what we’re aiming to do.

But no, I truly did not see it.

And our retention throughout this period has not been an issue.

Understood.

And maybe one last one.

Maybe one detail.

In terms of gross margins, are you willing to set out some targets, gross margins, since you’re looking for a recovery from the fourth quarter?

Not a specific number.

But understand that, as we’re seeing more attendances coming through, that’s more attendances per meeting, which is going to bolster our gross margin.

That’s the biggest contributing factor.

And then of course there’s also the price increase, both in UK and in US.

So there will be, as we go through the year, increases in our gross margin relative to 2004.

Terrific.

And just since it’s up there on the First Call machine, $0.51 in the March quarter, are you comfortable with it?

Or should we all rethink?

I think the reason I have belabored Easter, is that everybody should look at the lay down of the first half of the year and take Easter into consideration.

And I can remember a couple of years ago we had to go through this, because people often forget the shift at Easter.

It’s not that we don’t have Easter every year.

Of course we do.

And in real terms, Easter is beneficial to us.

It just means that it’s a change from the previous year.

And therefore it impacts the volumes during that March/April period.

I understand.

And therefore, you’d have to look at what you’re projecting with that in mind.

I understand.

Easter kills my diet every year also.

So Ann, also, our thoughts and wishes are with you and the family.

And thank you for the answers.

Thank you.

Thank you.

Our next question is coming from Jeff Stein of Keybanc Capital.

A question about retention.

I am just kind of curious.

I would have thought that perhaps your retention rates might have improved a little bit, because the no point -- one of the reasons why a lot of members drop out is they don’t like to count points.

If you’re adding no point counting, wouldn’t that tend to boost your retention?

Because obviously there’s two ways to drive your attendance.

One is to bring more new people in.

The other is to hold on to more people who are already in the program.

Yes.

You’re absolutely right.

And maybe over time we will see a shift.

But our attendances are -- this mean average, when I am talking about the average number of weeks somebody attends, obviously that isn’t what the typical person attends.

That’s just mean averages.

So shifts here and there can take place.

But, generally speaking, throughout this period, our retention has held solid, which I think is a very, very positive point.

We’re doing everything we can, as always, to improve that retention.

I mean I go back 21 years in this Company.

And I can tell you that over the last few decades we have certainly improved our retention compared to where it was in the 80s and the early 90s.

So I am with you.

The more we can give to our members something that fits their lives, that suits them, and the more comprehensive we can make our program, and the more we can make aware to our members that they have a chance to shop around to find the leader that suits them best, I mean all of these things we’re trying to make much more apparent to our members, so that they can settle in and stay with us for the long term, because we know that’s how you successfully lose weight.

But, we also pride ourselves on the fact that we aren’t locking people in to huge annual contracts at great expense.

And that’s been something that has been unique to Weight Watchers over the years.

So we intend to see and to keep working on an improvement.

Certainly at this point in the program’s life, I can’t tell you that we’re seeing it.

Okay.

And a question for Ann.

Ann, on the share count, can you tell us how many shares we should be using, assuming no additional share repurchases for the 2005 year-end?

How many shares you actually bought back to incur that 170 plus million buyback in 2004?

We bought back 4.7 million shares.

And how many shares were outstanding at the end of the year?

Shares out at the end of the year were –

104.5 I am told.

Yeah.

104.5.

And that would be basic?

Yeah.

That’s fully diluted.

Okay.

So 104.5 diluted shares at the end of the year.

Yes.

By the end of the year.

Yes.

Okay.

So assuming no buyback in 2005, we can use the 104.5?

That’s your starting point at 2005.

Right.

Okay.

Very good.

You’re assuming we don’t buy a single one back.

Okay.

Very good.

Thank you.

Thank you.

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

I am a little bit confused in terms of the January/February attendance trends.

Recruitment was basically flat in January.

I think it was positive in February.

Is attendance actually flat in February or maybe positive?

Or is that just recruiting that you were referring to?

I was referring to recruiting.

Okay.

And is it --?

Do you, I mean is it – ?

I mean if you look at the indices, and I am sure that you do know our business well, we have obviously our recruitment, and we have our retention.

And our attendance is our key indices, because that’s obviously how we generate our revenue.

So if you come into the year with a negative single digit in attendances, and then you’re flat in the recruitment for the January period, then obviously you are not going to be into the positive in attendances when you come out of that January, if you understand what I mean.

Yeah.

Okay.

And let’s see, so Continental Europe, could you just maybe give a few examples, or some color on things that didn’t go so well, and things that you’re doing going forward?

Yeah.

Well, the things that obviously we’ve put corrective action in, is primarily in the marketing field.

They have an early Easter, the same as other markets.

So their first quarter is impacted by that, and would be, regardless of what their marketing in January had been.

And of course I do have to sort of say our European markets are not an exact replica of the US.

They are more impacted by holidays and the timing of holidays and things of that nature.

So when I am looking at the things that we have certainly identified, and we have put corrective action in, it’s more to do with our marketing execution in terms of our marketing mix, in terms of putting in our traditional direct mail activity, the same level as we normally do, the mix of media that we’re using, and everything, to make sure that we’ve got the tried and true marketing profile in April campaign that I know works so well.

And we’ve put that in place.

And I think that obviously will put us back on track.

Great.

Thank you.

Thank you.

We have our next question coming from [Lorrie Sharowin] of Goldman Sachs.

Linda, you talked a little bit about your normalized growth mode.

And I am hoping you can flesh that out and talk about your long-term goals, and what you now think is doable on a sustainable basis.

I think you used to target 20-25% EPS growth.

It wasn’t reached in ‘04.

And the guidance doesn’t assume it for ‘05.

So I am curious if you have any plans to revisit those figures, or if you still think those are the right targets.

I think if you’re looking long-term, and the more medium long-term, then getting back to our growth targets I think is certainly possible.

We’ve always talked about a 10-12% revenue growth.

And that obviously is still where I believe that we can get to.

If you’re looking at the improvement of our EPS growth from sort of high single digits this year, if you look at that, what we put down as our guidance, you can see that we’re back into the teens.

We are certainly moving back into that direction.

Ann has already indicated that she anticipates some margin improvement as we go forward over the next few years.

I think that you’ll see some solidifying of our gross margin.

We’ve always said the gross margin is sustainable between 50% up to sort of the mid-50s.

And Ann and I are still comfortable that that’s where the Company can be.

And we’ll see some operating margin improvements.

So that EPS growth of 20% plus is still not unachievable for the Company.

It’s just that we won’t get there in one fell swoop.

We also talked about in the earlier days, in terms of our debt, of eliminating our debt, which at the rate we’re going right now, it doesn’t make much sense.

So it sounds like you’re almost backing off from that a little bit.

No.

I don’t want you to read that actually [Lorrie].

What I am trying to say is that it might not be next year.

But you asked me whether in the mid-term, in the long-term, I was backing off of it.

In the mid-term, and the mid to long-term, I am absolutely not backing off of it.

Okay.

And similarly, with the US organic attendance growth, it seems like this year you’re looking for low to mid single digits.

Is that the right run rate to use on a sustainable basis?

Or are you still looking for something higher than that, longer term?

Ann, did you catch that?

I am sorry [Lorrie].

I had a bid of a hiccup there.

I didn’t hear that question.

Could you?

Yeah.

Just to try to get a better sense of what you’re really thinking about, what US organic attendance can do on a sustainable basis.

This year you are looking for low to mid singles.

And obviously you’re in recovery mode.

Do you still think that number should be something closer to 6-8% in the out years?

Yes.

I guess how do you think about it though with low carb hitting you this year?  A couple years ago low-fat, a couple years before that Fen-Phen.

Yeah, but a couple of years ago low-fat didn’t cause us a problem.

A few years before that, we had the food combining, which was the rage all over the place.

It didn’t affect us.

We cannot see low carb as just a normal competitor, that came along, and we should expect a new one next year.

I do think it was a unique circumstances.

We have always had competition.

We will always have competition.

I think that we will be nimbler.

We will be more focused in terms of how we approach these things.

Don’t get me wrong.

We have learned things from the past couple of years.

But I truly believe that competition is something that is normal to our life.

We have had competition for 40 years.

We will continue to have it.

What we need to be focusing on is making people aware of what they get from Weight Watchers that they can’t get from anything else.

Anything else out there that they try.

Okay.

And just lastly, do you have an updated US penetration number?

For last year?

No, I am sorry I don’t.

I don’t have that.

Could I go back though to your question on the growth of our EPS?

Because if I am looking at next year, if you look at that range that we have given you, it’s in the sort of mid-teens as an EPS growth.

But if you could knock quarter one out, and you were just looking at quarter two, three and four, then you’d probably be seeing us back into that 20% category.

So I am not trying to justify.

I am not trying to be defensive.

I am just trying to say that I truly believe there is no reason for us not to get back to it.

Okay.

Thank you.

Thank you.

Our next question is coming from [Olivia Tong] of Merrill Lynch.

Hi.

My questions have actually been answered.

Thank you.

Okay.

Thank you.

There are no further questions at this time.

Great.

Well, I want to thank you all for joining us today.

I am really looking forward to updating you on our progress on our next conference call.

Thank you, and good night.