WW International Inc (WW) 2005 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International's First Quarter 2005 Earnings Teleconference Call.

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

Afterward you will be invited to participate in the question and answer session and instructions will be given at that time.

As a reminder, this conference call is being recorded today, Thursday, May 5, 2005.

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

Please go ahead.

Thank you, Anthony.

And thank you everyone for joining us today for the Weight Watchers International first quarter 2005 conference call.

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

At about 4 PM Eastern Time today, the company issued a press release containing financial results for the first quarter of 2005.

The purpose of this call is to provide investors with some future details -- 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 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.

Thank you, John.

Good afternoon.

Thank you for joining us for our review of Weight Watchers International's performance for the quarter ending April 2, 2005.

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

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

This quarter including the consolidation of WeightWatchers.com, our revenue was $330 million and net income was 51.6 million.

As I have discussed on previous calls, despite this required accounting consolidation, we remain a minority owner of WeightWatchers.com.

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 first quarter of '05 increased 8.9% to $306.4 million from 281.4 million in the prior year.

Total attendance at company-owned operations was 17.9 million, essentially flat versus last year's first quarter.

For the quarter, our gross margins improved 50 basis points to 53.9% this year.

Our gross margins benefited from higher meeting fee revenue per attendance and strong license revenue.

Our operating income increased 3.2% to $84.8 million from 82.2 million in prior year.

Operating margins contracted to 27.7% this year versus 29.2% in prior year.

This was a result of the fact that our higher gross margins were more than offset by higher marketing and G&A expenses.

Ann will go through these expense categories in more detail in a few minutes.

Our reported fully diluted earnings per share in this year's first quarter were $0.53, up 17% compared to $0.45 in the first quarter of 2004.

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

First, North America;

I am pleased to report that we are continuing to see improving trends in NACO.

From the peak impact of the low carb fad last summer, when we reported in quarter two, '04, organic attendance decline of 16.7%, we have seen this trend improve to negative 13.9% in the third quarter and to an 8.7% decline in the fourth quarter.

For the first quarter of 2005, organic attendance was down 5.1%.

Total NACO attendance including the benefit of acquisitions was down 1.6% for the quarter.

As I have discussed in the past, the actual meeting attendance for any given period is generally a function of two factors, the number of active members in the system going into the period, combined with our level of new recruits during the period.

The period since the launch of our new Turnaround program last fall, we have seen positive recruitment of members into our meeting.

With this positive recruitment picture, our pool of active members is growing, driving improved attendance trends.

Although, during the first quarter, our attendance had not yet reached the previous year's level, I am happy to report that, as expected, our attendance versus prior had turned positive in April.

Looking forward, we expect NACO attendance to remain positive for the rest of the year.

For the second quarter, we project our organic attendance growth to be low single digit positive.

Now that North America business has begun to return to its role as a major growth driver in our business, I want to touch on a few of the initiatives which are currently or will be enhancing our near-term business and financial results.

As I discussed on last quarter's call, we implemented a price increase in January.

We raised the standard weekly fee to $10.95 in just over 40% of NACO markets that had been at 9.95.

We also took other decisions where prudent, to move away from some discount driven promotional offers.

Together these pricing actions have positively impacted meeting fee revenue per attendance, with we believe only a small impact on our volume.

We're also beginning to see improvement in product sales.

Our new line of baked snacks and our recently reformulated snack bars have been well received, and sales of our cookbooks have been strong.

In the first quarter, as a result of these initiatives, our NACO meeting fees per attendance are up 9.6%, and our total product sales for attendance are up 7.4%.

I would also like to touch on our Corporate Solutions initiative.

As many of you know, last year we began to place an increased focus on corporations and other large organizations as clients of our services including our At Work meetings.

These organizations have become increasingly focused on healthcare costs and more specifically, on the impact of obesity on those costs.

We have launched our Corporate Solutions initiative to deepen our partnership with these organizations and to develop solutions that are more customized to their needs.

We have put in place a dedicated national team to focus on this opportunity and our early success is confirming our belief that this will be an increasing growth driver for our business.

Our Corporate Solutions team has spent a lot of time meeting with and talking to various Fortune 500 companies to better understand their needs.

With our proven program and excellent reputation, we believe, that we are an ideal partner for many of these companies.

Our year-to-date corporate results are significantly above a year ago, and we're beginning to gain traction with large national accounts, including corporations, HMOs, insurers, schools, and the government.

We recently signed several national deals with large organizations who will be offering our products to their employees and in some cases their customers.

These national accounts will be ramping up during 2005, and we expect they will start to make a meaningful contribution to our financials in 2006.

Now, moving on to the UK.

The UK had a strong first quarter with attendance of 4 million, up 6.1% over prior years first quarter.

Our newest program innovation called Switch got off to a strong start and we expect solid attendance growth for the rest of the year.

On a local currency basis, total UK revenue grew by 9.2% during the quarter, aided by meeting fee increase to 4.95 pounds, which we introduced in January.

Now, for Continental Europe.

As I projected on the last call, our first quarter attendance of 3.2 million came in flat to prior.

However, our local currency in meeting revenues rose 6.1% due to stronger product sales and less discounting.

And our total revenues in local currency grew 4.6%.

As I also mentioned on our last call for the spring campaign, we've taken steps to return to our more traditional marketing practices.

We expect that the steps we have taken will generate improvement in Continental Europe, and for the second quarter, we expect to deliver mid-to-high-single-digit positive attendance growth.

Moving along to other news.

In the first quarter, our royalty revenue from WeightWatchers.com was $2.6 million, an increase of 35% over prior year.

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

In the first quarter, they experienced strong subscriber growth in all of their subscription markets; the US, Canada, the UK and Germany.

Dot com continues its strategy of investing heavily in its technology and product platforms to ensure the highest level of customer satisfaction and retention.

Even with these investments, their margins and profitability have improved strongly.

WeightWatchers.com has also continued to invest in delivering an excellent online marketing presence for the Weight Watchers brand and meetings.

A recent example is the March launch of the Weight Watchers Science Center.

The Science Center is part of our strategy to educate the public on the science of weight loss and to more clearly communicate the sound science underpinning all of the Weight Watchers program.

We are seeing tremendous growth in our licensing and publishing businesses with revenues up 165% from $3.7 million in last year's first quarter to 8.9 million this quarter.

I'm happy to report that these businesses are growing strongly all round the world.

These products sold at retail are not only strong profit drivers, but also broaden the appeal and the presence of the Weight Watchers brand.

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

Thank you, Linda.

Good afternoon, everyone.

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

At that time, we recorded an $11.9 million after-tax charge for the cumulative effect of that accounting change, as if WeightWatchers.com had been consolidated from its inception.

In the second quarter of last year and forward, our consolidated financial statements have included 100% of the results of operations of WeightWatchers.com, even though our ownership stake is approximately 20%.

Now, I'll discuss a further change to our financial statement that will occur once WeightWatchers.com cumulative retained earnings since inception turn positive, which could happen some time this year.

At that time, Weight Watchers International's consolidated financial statements will include a minority interest line below operating income, reflecting the reversal of the portion of WeightWatchers.com's profit that are ascribed to shareholders other than Weight Watchers, currently approximately 80%.

At the same time, as a standalone company before consolidation, we will begin to recognize as an addition to our net income 20% of WeightWatchers.com's net income.

Now moving to our first quarter results.

Consolidated Weight Watchers International revenues were 330 million and operating income was 90 million.

Net income in the quarter was 51.6 million and EPS was $0.49 The consolidation of WeightWatchers.com added 23.6 million in revenues and 5.2 million in operating income.

For the remainder of my review, I will address the Weight Watchers International's business results and performance on a standalone basis, and I'll exclude all impact of the consolidation of WeightWatchers.com.

On a quarter-over-quarter basis, for standalone Weight Watchers revenues, gross profit, operating income, and net income are all up this year versus last.

First quarter revenues were 306.4 million, an increase of 8.9% from 281.4 million in the first quarter last year.

The drivers were broad based, including price rises in North America and UK, less discounting, higher product sales per attendee, particularly in North America and higher product licensing in royalty revenue around the world.

Global attendance at company-owned meetings was 17.9 million in the quarter, virtually on par with last year, down less than one-tenth of a percentage point.

Operating income rose 3.2% to 84.8 million for the first quarter of 2005, from 82.2 million in the first quarter of 2004.

The first quarter net income was 55 million, up from 48.7 million in the first quarter a year ago.

Earnings per fully diluted share rose $0.08 to $0.53 this first quarter as compared to $0.45 in the prior year quarter.

During the first quarter 2005, we benefited by $0.03 a share from WeightWatchers.com's decision to make a voluntary loan prepayment of 4.9 million in addition to their scheduled loan payment.

Last year's first quarter included a $0.02 per share charge related to early extinguishment of debt expenses.

Moving now to the performance of NACO.

For the first quarter, NACO's total attendance was 9.8 million, 1.6% lower than last year's level.

Organic attendance, which excludes the impact of acquisitions made during the year - during the last year declined by 5.1%.

NACO's first quarter revenues were 152.7 million, up 7.6% over last year's 141.9 million.

Both product sales per attendee and the average meeting fee rose versus prior year.

This quarter confirms the trends in the US market are continuing to improve.

First quarter attendance in our international operations was 8.2 million this year, an increase of 1.8% versus prior.

Revenues from our international classroom operations rose 9.1% in the quarter, 5.1% on a local currency basis to $118.8 million, up from 108.9 million last year.

As you heard, the UK had a strong launch of the Switch innovation this January, propelling the attendance growth of 6.1% to 4 million attendances for the quarter.

Local revenues rose 9.2%, supported by our price increase.

Continental Europe delivered 3.2 million attendances in the first quarter of both years.

Local currency revenues rose 6.1% on stronger product sales, and less discounting this year versus last.

Moving now to our other revenues, the franchise commissions were 5.9 million in the quarter, up 5% on a comparable basis, but down 4% in total, a result of foregone commissions related to our acquisition of two franchises during the second and third quarters of 2004, our Washington DC and Fort Worth territories.

Other revenues combined were 15.4 million in the quarter, an increase of 7.1 million or 86% over a year ago.

As Linda mentioned, we're seeing tremendous growth in our licensing and publishing businesses.

Our licensing revenues at 9 million in the quarter were more than triple last year's first quarter.

Even excluding the impact of third-party licensing royalties, which recently reverted to us from HJ Heinz, our licensing business grew more than 200% in the quarter on the strength of both new and existing food licenses around the world.

Our royalties from WeightWatchers.com were 2.6 million in the quarter, up 35% versus prior.

The gross margin in the first quarter of this year was 53.9%, up 50 basis points from the first quarter 2004, on the strength of growth in revenues per attendee in our meetings and our licensing business.

With North America's attendances moving into positive territory for the remainder of the year, our gross margin is expected to show further improvement versus prior year.

Marketing expense for the quarter was 53.4 million this year compared to 46.5 million in Q1 of last year, an increase of 14.8%.

The marketing increase in the quarter includes higher spending in the UK to support the January launch of their new program innovation, as well as some unfavorable foreign currency exchange.

Marketing expenses as a percent of revenue were 17.4% in this year's first quarter compared to 16.5% in the year-ago quarter, an increase of 90 basis points over prior year.

Over the past 3 years we've increase our marketing by over 300 basis points in total, A bit less than a third of this increase is linked to a structural increase in our PR spend, as we have beefed up our ability to react, especially in the US, to the competitive environment.

The other two-thirds represent increases in the level of advertising and in our ad agency support.

For example, over the last 12 months, we have moved Europe from a single small agency approach centered in the UK and covering all of Europe, to a more localized approach with individual agencies appointed in each of our large European markets.

Also, we recently moved to larger full service agencies in the US and the UK.

Going forward, we believe that we have now put in place the infrastructure and organization we need to support our global growth over the next few years.

Now that these fixed costs are in place, as our revenue grows, we will begin to see marketing decline as a percent of sales.

G&A rose 24% in the quarter to 26.9 million, and as a percent of revenue moved from 7.7% in the first quarter 2004, to 8.8% in the first quarter 2005.

The growth in G&A is a combination of some expenses which are non-recurring or non comparable, and some which reflect structural changes designed to drive for growth in the business.

The quarter includes higher legal related expenses and we accrued for higher staff bonuses in the last year, given the stronger performance of the business.

Structurally, over the last year we've taken the opportunity to strengthen and upgrade some of our management team, and this investment will reap dividends.

Linda mentioned one example; the creation of our US National Corporate Solutions team focused on growing that business.

We've also bolstered our licensing department around the world to support that strong growth business, and we've brought in experienced marketing talent in Continental Europe and elsewhere.

Operating income was 84.8 million in the first quarter, up 2.6 million or 3.2% versus the year ago.

The operating income margin in the first quarter declined 150 basis points to 27.7% from 29.2% a year ago.

As our revenues continue to rebound over the next quarters, we anticipate that our operating income margin on a full-year basis will be at or above last year's level.

Moving to interest.

Our net interest expense dropped by 4.3% in the first quarter 2005 to 4.2 million as compared to 4.4 million a year earlier.

This is the combined result of our retiring the remaining balance of about $15 million of our 13% senior subordinated notes in the third quarter of last year, and our ability to more efficiently manage cash against the larger revolving credit facility.

In the quarter, we paid down 77 million of revolver bonds.

Our effective interest rate include -- including swaps from hedges, rose to 4.28% in the first quarter 2005 as compared to 3.38% in the prior year quarter.

Other income and expense net on our income statement was 9.3 million of income in the first quarter this year, as compared to 3.7 million of income in the prior year quarter.

In both years, our income consists -- other income consists primarily of loan repayments from WeightWatchers.com of 9.8 million in Q1 this year for the 2 payments, versus one payment in the first quarter last year.

Regarding this year's loan repayment, note that in the consolidated financials, the 9.8 million benefit is eliminated from consolidated results as an inter-company transaction.

The income tax rate in the first quarter 2005 was 38.9%, higher than last year's 37.8%, as a result of the change in the mix of pre-tax income.

And one further note before we move on to cash flow and the balance sheet; we're now planning to delay expensing our options in keeping with the revision of FAS 123, which moved the required adoption date out 6 months into 2006.

Now moving on to our cash flow and balance sheet activity still on a standalone basis.

We generated cash from operating activities of 99.1 million in the first quarter 2005, as compared to 85.2 million in the first quarter last year.

This year, we utilized 15 million for share repurchases in the quarter and 77.8 million for debt pay-down.

We ended first quarter 2005 with a cash balance of 35.5 million, and with 255 million available under our revolving credit facility.

On the balance sheet, our total debt at the end of first quarter 2005 was 391.4 million, down 77.8 million from 469.1 million at year-end 2004.

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

Other fluctuations in the balance sheet reflect the normal seasonality is of the business and the timing of some payments and more efficient management of inventory.

And now will turn the discussion back to Linda.

Thank you, Ann.

Overall, I'm pleased with our first quarter results and I believe that they signal that the company is returning to its more traditional growth trajectory.

Supported by a return to organic attendance growth in North America, the benefit of price increases, and a growing revenue stream from our licensing businesses, we expect to see double-digit top line growth and improving margins for the remainder of this year.

With regard to 2005 guidance, our business is where we thought it would be.

After adding the $0.03 pickup from our additional unscheduled WeightWatchers.com loan payment we received in the first quarter, which was not part of our original guidance, we expect to deliver fully diluted earnings per share of 1.88 to 1.98, excluding the impact of FIN 46R.

Anthony, at this time we would like to open for questions.

Thank you.

(Operator Instructions).

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

Hi Greg.

Hi, Greg.

Hi.

First question is just with your visibility now into 2Q so far and it sounds like things are moving into positive territory, can you just give us an idea if you have the data to let you know if it is being driven more from the Turnaround program or POINTS or combination of both?

Okay.

If you are separating out the Turnaround program from POINTS, obviously from our perspective the Turnaround program includes both the POINTS, food plan, and our new core food plan.

So to me, the Turnaround program is a combination of those 2, and as you because I know you have been in our meetings, the members have the choice to choose one or the other of those food plans, and they have the choice to switch food plans at any time that they want to.

So I think that we're certainly seeing an improvement in our position and we believe it is driven in part by our new program, which we introduced last fall.

Okay.

That is helpful.

And then your mentioned the licensing fees continue to become a bigger piece of the pie.

Can you just give us more color on what is driving this?

It sounds like this could actually become a much bigger part of the company as you sign more deals.

I'm wondering if you could give us a little bit more color on that and maybe what the future until there?

We always said that we thought that licensing was a great opportunity and then we'd see much stronger growth in that category.

Obviously, it started out relatively small.

So the percentages are very big compared to the total pie.

Last call, I listed some of the new products that were going into retail here in the United States.

That was things like our new national license on bread products, which includes bagels and English muffins.

Then we have our snack cakes and our snack muffins, which had national distribution now.

And are really going very, very well.

You all know that we have switched our ice-cream novelties licensee to the Wells' Dairy and they have reported very, very good selling of their new ice cream novelties.

We also have new candies out in the market from Russell Stover.

There's a whole range of very, very attractive and good tasting chocolates, which you probably are seeing propping up in many places.

We have cereals, and those cereals have now moved into the national distribution.

There are 5 of them.

Some of them I think are now even moving into places like the discount warehouses so they will get wide coverage, and of course we have the Applebee's license, which is not even completed its first year.

And we are very pleased with that license.

So, that's just the US picture.

We have got growth as Ann said in her review, that we've growth in our licensing and strong growth in our licensing throughout the world in all of our major geographies.

Okay.

Thank you.

That's helpful and just one final thing for Ann.

I just wanted to make sure I heard this right.

So I know you have moved around from advertising contracts and hired a new firm in the US.

I'm wondering, it sounds like you said that we're going to see greater leverage off of the advertising line as we go forward?

I'm wondering if you increased advertising, I'm sorry if I missed this, as you were driving towards positive territory in 2Q, and now we are going to start to see up the leverage after that, as we get further on here?

Was that the message?

In terms of leveraging I was really talking more about '06.

As we're lapping, I guess you'd say, the infrastructure changes that we have made.

So in '06 will begin to see that is the revenues increase will begin to see it.

Greg, we have moved to larger, full-service advertising agencies in the US and in the UK as well as moving the Continental European major markets on to their own advertising agencies as opposed to doing it all centrally out of a small shop in the UK.

So, these are structural changes that we've made that we have not completed a whole year of seeing the impact of those changes yet.

I think, just to clarify a little bit -- the 90 basis points that you are seeing now is what we are anticipating for the full year.

It's the improvement that you won't see until -- the further improvement that you won't see until next year.

Great.

Thank you very much.

Thank you.

Our next question is coming from Scott Mushkin of Lehman Brothers.

Hi Scott.

Hi guys, how are you doing?

Good.

Just wanted to kind of take a further look at this margin picture as we go out.

And you guys are talking about leverage but just on a broad sense, the company is operating right about 30% level.

I mean as you look out in '06 and '07, do you guys have a kind of an area, where you would like to drive the company?

I think if you're looking at what we have said historically, Scott nothing has changed about that.

We truly believe that we're capable of having their operating income margins in the mid '30s.

We recognize that last year we went down to 30, which is not where we would anticipate us being on an ongoing basis.

Ann mentioned that we've already seen a strengthening of our gross margins, and she expects and we expect to see that throughout the year and further improvements on top of quarter one, but we also said obviously that our marketing for this year is going to stay in the same place that we were talking about in quarter one.

So, we won't see that improvement this year.

We do expect to see it going forward now that we have put the infrastructure in place.

When you look at the Corporate Solutions that you I think, guys mentioned it's going to meaningfully impact things in 2006, I mean are you investing a lot of money in that right now to get that set up?

How should we kind of frame that and what's the potential leverage as we go into '06?

We're not investing a lot of money because it's not something that you market in terms of broadcast or anything like that.

The marketing of it is done on a -- more on a point of sale and with our sales team.

The biggest move that we made was to move it from a decentralized regional structure, where we were more selling in company by company if you can see what I mean on a localized basis.

We have now moved to a national team, so we've invested in those people, absolutely.

And they're new to the operation.

And we're -- this is going to pay dividends as we go forward, but you will see the impact of these national accounts more next year than you will see them this year.

And then just one final question on following up on Continental Europe, I mean do feel like you've turned a corner there?

I mean, are you giving a look there for 2Q now, any further comments.

Yes.

As I said we're going to be moving into the high single digits, mid-to-high single digit attendance growth again.

So, you could see that this quarter was more of the marketing missteps that I discussed in the last call.

So, you are very pleased in what you're seeing so far coming out in 2Q?

Obviously, I am pleased that we're back to that growth.

That I anticipated we would be.

It's fantastic.

Thank you so much for your time and nice quarter.

Thank you.

Thank you.

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

Hi.

It's actually Lori Scherwin.

Hi, Lori.

Hi.

How are you?

I want to talk a little more about the corporate account initiative.

Two things, one, I want to make sure we understand how the math works with that goes into attendance figures or somewhere else on the P&L?

And then second, to try to better understand how bigger than opportunity this could be?

So maybe, if you could tell us, you know, what percent of your members currently come from the corporate side now and where that could be longer term?

Let's just look at what the services and products that Corporate Solutions offered is just as a starting point.

Obviously, a big part is that is our At Work meetings where we run meetings on the premises of employers.

But there is also in addition to that our on-line offering, which is obviously through our dot-com licensee.

We have vouchers that employers are offering their employees to use within the normal meetings within our traditional infrastructure.

And we have our At Home kit, which is a self-help distance learning kit of the weight watchers program.

So those have started the component part of the Corporate Solutions offering that we're giving to corporations.

When you're looking at the meeting, the At Work meetings then the attendances at those meetings are included in our attendance figure and always have been.

What percent...

And we started it about 20 years ago.

What percent of your members or attendees come from the corporate side currently?

That's less than 10% certainly come from that side of the business now.

And where do you think that that can go with this bigger push on this initiative?

Obviously, we believe that it will grow.

We've never split it out and we've never talked about that in detail.

But I believe that with the convenience factor, and with the fact the corporations are becoming so focused on helping their employees become healthier. that they will become a bigger portion of our attendance base as we move forward.

Is it bigger than you previously thought because you're making a more concentrated effort on that now?

We're certainly putting a more concentrated effort absolutely.

We think corporate America as the government has, have just grown up to the fact that this is a big health issue and the health cost is something that they picked up.

So their seeing the real benefit in trying to help their employees to get healthier lifestyles and to control obviously their weight.

I'm sorry, are you guys experiencing an echo?

Not on our side.

Great.

Okay.

And I guess, just to talk a little more about something near term US attendance obviously, seems like it's on track with what you were expecting for the second quarter on doing single digit.

Can you see that building through the year?

How long do you think it takes you to get back to what you've always said that the right rate of growth of 6 to 8%?

Well, what we've said is that we believe that the rest of the quarters of this year will be in positive territory.

We're still in a recovery mode.

So it will take us a bit of time before we get up to that 6 to 8% attendance growth -- consistent attendance growth that we were talking about before.

By the time, we get to the fourth quarter (indiscernible) should be there.

Right.

And just -- I do not know if you've said if you're planning on taking pricing into the other regions of the country where you haven't already.

I think you've taken it and maybe 30% or 40% of the business.

Well, what we did with this price increase in January was moved the 9.95 territories, which was about really a bit over 40% of the country, to 10.95.

And obviously in selected markets such as Manhattan, we moved them up $1 or so as well.

So we're taking very selective price increases where we think that it's appropriate in the US.

We're not planning to move all of the US across the board with one single price increase because we go from what used to be 9.95 all the way up to 13, $14 in some parts of the United States.

Thank you.

UK also moved in January, as we said.

Great.

Thank you.

Thank you.

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

Hi, Chris.

Hi, Chris.

How are you?

Good.

Thank you.

Just wanted to ask you, how are you determining what your volume or attendance loss is?

I think you said only slight volume or attendance loss in connection with pricing moves, how are you making that determination?

Yes.

Obviously, Chris, we do have areas that didn't move.

So we're just doing a sort of comparison of the price increase territories compared to the non price increase territories.

Ann is very comfortable, her team does a lot and it's very negligible.

Isn't it Ann?

Yes.

And could you also talk a little bit about, I mean, this year obviously, trends look good, they look much better.

You're coming out of 2 straight years of new product launches and the comps are really easy when you are on to this year.

What happens when you get out to next year when the comps get a little bit tougher?

And do you think you'll wait another year and also resume your schedule of an innovation every 2 years and I would say do you think there'll be a reason to perhaps go with another one or somehow freshen it up a year from now?

Hi.

Our normal picture is that two years, as you know, I think this year was unusual one where we went with the Turnaround program only a year after FlexPoints was launched.

So, I wouldn't read into that that we've changed our pattern and our model.

Yes.

I didn't think so, I just mean in terms of any -- are you concerned at all that even coming off a very easy base and having 2 consecutive years of new products in the States that it kind of churns back a little when you get to next year and now you don't have a new products or the comps?

I think, you have to see our product, our program, we continue to improve it, of course we do, but that's part is what drives our attendance growth.

We also have the ability to increase our penetration just by getting that message out there, by getting that message out there more effectively.

I mean you've seen it a switch, a change, an evolution if you like of our marketing message over the past year or so where we move from very promotional marketing messages into much more the essence of Weight Watchers and what differentiates Weight Watchers from other dieting methods.

I think that if you're looking at those kinds of shifts, you're going to see more of it.

We just recently had a promotion where we just invited people in to have a free trial of Weight Watchers if you like, with no obligation to join at the end of the meeting, so that we can have brand new people who have never been to Weight Watchers and might have some concerned about whether it's going to suit them to just come in, take a look, see and we believe obviously, because if you talked to our former members and our current members, they really do value what Weight Watchers has to give them.

What we need to get is the people who have never been there to be more aware of what those benefits are once you've been into a Weight Watchers meeting and experience what that ongoing support and motivation and inspiration if you like can give you.

Got it.

And finally, Ann, what you said obviously gross margin was good in the quarter and I think you said you expect further improvement from here.

Does that mean that we will see a greater year-over-year improvement as the quarters of this year progress?

Yes.

We expect to see - to continue to see year-over-year improvement in gross margin as the year progresses.

But incremental -- over and above the 50 basis points we saw in Q1?

Yes.

By the end of the year we should be above the 50 basis point improvement we've seen in quarter one.

Got it.

Thank you.

Thank you.

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

Hi, Greg.

Hi.

Thank you.

In April, you benefited from an early Easter.

And on your last year's conference call you mentioned that post-Easter season really dropped off, which implies very easy comparisons.

Can you give us the growth rate in April besides just positive?

We believe that we moved to a positive situation, a trend if you're just looking at the trend.

April is positive, is that right?

April is positive, as we expected, but we expect the whole quarter is going to be positive.

It is not an April event, not just because of the movement of Easter.

It is because we have moved into positive territory.

As I said, cumulatively, our enrollment since the launch of the new program has been positive.

And the attendance -- what is the attendance growth in April then?

We never give a month-by-month attendance growth.

But it's like what you said positive you expect to Q2 to be low single-digits and maybe around though I guess low single digits?

Yes.

The two figures I have given and I gave was minus on organic minus 5.1 in quarter one and a positive low single-digits in quarter two.

So obviously...

And April ...

...see the map.

April you had positive attendance but you're not going to specify?

No.

Okay.

That's right.

So, and just to -- follow-up to a last question your two-year NACO organic attendance run rate is still negative when you look at it on a two year average basis, and that's despite the fact that your low carb has subsided significantly, you had a new program, again, you know, an additional one, and you had positive media coverage at the beginning of the season.

What you think the longer-term two-year average NACO attendance expectation should be?

I think you have to frame it, Greg, in terms of people don't bounce from one diet to the next diet, to the next diet in a matter of weeks.

There's usually a sort of breathing space in between.

Obviously, low carb went the way we predicted that it would.

We're very happy about that, of course.

And we feel that as we move forward, as we get our message out there, we will be able to benefit from the dieters that are coming back into the arena when they want to lose weight.

We are gaining momentum.

But is low carb -- I mean, basically, low carb peaked 6, 7, 8 quarters ago.

You're going up against...

No.

I don't think it did peak that long ago at all.

Okay.

If you're looking at -- we haven't published any statistics ourselves, obviously, on what percentage of the population has entered the low carb diet.

But I think a lot of other people have published different figures.

So, if you're looking at where it peaked, as the number of people out there in the market, you're probably looking at quarter three or four of last year as the peak.

Okay.

...of numbers of people, because new entries are different in number of people, just like it is for us.

I talk about two things;

I talk about new entries and I talk about the number of people.

And that's an effect of both the ongoing number that you're carrying forward from one period to the next, and the new people that are coming in.

Okay.

It's declining.

Clearly, it's declining this year.

You're going up against the down 17% roughly in the second quarter.

How come it's only low single digit organic attendance, I mean why wouldn't it be stronger, you have the new program, positive press, everything is sort of working for you?

We are incredibly positive about our trend.

Okay.

We believe that word of mouth will continue to build.

That's certainly what we're seeing.

All of our consumer research tells us that it's very positive and that it will continue to grow.

So --.

Okay.

That's fair.

And also with the potential of Accomplia and other weight-loss drugs coming to the market in '06, can you just help us, maybe give us some data on attendance growth rates in '96 and '97 when Phen-Fen gained major traction?

Yes.

I think the biggest thing we've got to remember that Phen-Fen was not an approved drug.

Phen-Fen was 2 drugs that had received approval for something completely different, that were put together and were sold almost like an over-the-counter solution.

I mean doctors were literally going from place to place selling these drugs to customers.

And the crash of that particular -- and the dangers that came out and the whole thing that happened, I think, has changed the drug arena tremendously since then.

I mean we know that only 2 drugs have been approved since the Phen-Fen collapsed and since all of those health concerns came to the floor.

The 2 drugs that have been approved went through very rigorous testing as we know, any future drugs, including Accomplia, will do.

If you're looking at those drugs, we also know that each of them requires and needs and asks their patient to go on some kind of behavior modification program in order to support the drug therapy.

So, I think that people have moved away from thinking that drugs alone are going to be the golden bullet, or the silver bullet, if you like, that will solve the problem alone to the fact that drugs will aid people, particularly the people that are morbidly obese, the people who have a huge issue.

It will help them to make the behavior modifications that are necessary in the long term to support a weight loss and to keep that weight off.

I think that Accomplia is no different than the other drugs in the sense that it will need behavior modification.

There's nobody better at behavior modification -- that there is nobody out there on behavior modification the way Weight Watchers is.

And we do not have -- philosophically, we do not have anything against patients getting extra help if that's what they think they require in order to keep this resolve and to keep this effort going, because it's in their benefit when they have a weight issue of that size.

What were the growth rates in '96 and '97?

Well, in '96 and '97, remember, if you looked at our filings at the very early time when we separated from Heinz, Weight Watchers were making some very big structural changes to Weight Watchers itself, by offering the prepackaged food option within our meetings.

That is more like what I call the Nutri-System, Jenny Craig, et cetera, model.

So, it would be very, very difficult to separate out what Phen-Fen was doing to Weight Watchers compared to--.

How about just the attendance, and maybe we can...

Our attendances were declining.

By how much?

If you go back in our filings, you will be able to see the --.

I couldn't, and I have actually asked your office.

So I'm just -- I mean you can post something, I just couldn't find it myself.

Okay.

I will get back to you on this.

Okay.

John will get back to you.

But as I said, if you go to or early -- when we first came out into the marketplace as Weight Watchers, we did show charts that showed NACO attendances over the 90.

You will see a decline in our attendances.

As we said, when people were talking about, why is Weight -- why is NACO growing so strongly, you know, a few years ago, I kept referring to the fact that we were in a catch-up mode.

We were getting back to the levels that we were pre these decisions of Weight Watchers.

Okay.

Yes, I couldn't find it in the prospectus, but I'll follow-up.

I think that you can take some comfort from the fact that Meridia came in the market, geniCAL came in the market, and we didn't feel that it had a big impact on us anywhere in the world.

And they weren't just the US base; they were in all of our markets.

I think one of them had an issue with diarrhea.

All right.

Thank you.

Thank you.

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

Hi Jeff.

Hi.

How is everybody?

Couple of questions here, first of all, going back to your Corporate Solutions plan, do you offer discounts in those circumstances?

And wouldn't that have a -- and if so, wouldn't that have a depressing effect on your meetings?

No.

We don't offer discounts, you shouldn't see this as a discounted service, in fact, it's an enhanced service.

What we do is we work with our clients to bring Weight Watchers to them, and we tried to tailor our offerings to suit their needs.

So, we recognize that at times the employers themselves decide to subsidize their employees.

So for an individual person, it might be discounting compared to what they'd pay if they went as an individual to a Weight Watchers meeting outside of their At Work meeting.

When you offer this to a corporation, are you selling it as an employee benefit and encouraging the corporation to subsidize the cost?

We are encouraging them to subsidize it in a lot of ways, by promoting it to the employees, making it available, and by making the time available for these employees, so that they can attend Weight Watchers meeting, so they have access to Weight Watchers online or vouchers or At Home kits or whatever it is that they have chosen as a mix of offering to their employees.

So, we certainly, are encouraging employers to support it.

Now it is up to the individual employer whether they want to subsidize the actual cost of those elements.

Do you know, for example, Linda, what percentage of the corporate plans you sell are corporate subsidized plans?

No, I don't.

But I can remember and if it's any -- I can remember in the -- earlier when we were doing At Work meetings and some employers decided to subsidize the entire cost.

We discourage that actually because with no financial commitment that all by the employee, you know, they did not seem to take it as seriously, go to the meetings as often and have a successful weight-loss.

And we actually believe that both the employee has to have a commitment to it as well as the employer.

And we would never want it to be offered as -- we want the people that are taking Weight Watcher's help and support to have made the personal commitment to do that, because if you just think that your employer is telling you should lose weight, that isn't how you get successful weight loss.

Okay.

Then final question, with the price increases having been raised back in January in roughly 40% of your markets, and it appears to me that there is no price resistance, wouldn't it make sense and do you have any plans to raise prices in other markets?

We always look at pricing as I've always said on a market-by-market basis.

If you're talking about other markets with in the US, we have taken some price rises we never say never, we also don't say in advance what we're planning to do on pricing.

Thank you very much.

Thank you.

Our next question is coming from Bob Craig from Legg Mason.

Hi, Linda and Ann.

Hi, Bob.

Hi, Bob.

Just a couple of questions.

I'm sorry to focus so much attention on the corporate accounts initiatives but just following up on the last question...

I wish I could tell you some of the names, but unfortunately we can't.

Do you expect there to be a trend evolving where those accounts would potentially offer brakes on health care insurance to members as some motivating factor to participating in this program?

Can you say that again?

Yes.

I was just wondering in terms of, incentives for employees to participate, would you expect over time some of these corporate accounts to offer discounts on employee health care insurance for their -- at least their payments, in terms of, covering their health care insurance as really a reward for participating in this program?

The health care insurance cost of the company may well go down.

That is one of the things that that we believe can happen if employees begin to...

...and we believe obviously, all employees will benefit from that.

It's not beyond the realm that some of that would get passed on to the employees.

Great.

Is there an end-market focus to initial marketing efforts in the corporate side?

Have you noted more success in certain areas than others?

We've certainly noticed in the last year a real wakeup with large employers.

No, one is facing-- I mean, every company, I think, has faced this increase in healthcare cost.

And I think that some of them have done their own research in terms of segmenting their workforce into people that are at a healthy BMI and people who are not at a healthy BMI, and they have done the work themselves -- to prove to themselves that, that weight is an issue on their healthcare costs.

And that's why they're much more amenable right now to look at offering benefits, not forcing their employees, but offering benefits to their employees that will help them to have a healthier lifestyle.

And I think this is why they are turning more to Weight Watchers and why they're more interested in what Weight Watchers has to say, and because we are healthy and we are long-term.

And that is what our reputation has been built on for the last 40 years.

So, we're seeing a real awakening of interest, yes, both in us and in the whole issue of helping people and their employees become healthier.

Linda you mentioned that, obviously, indicated by your results are doing very well on the licensing side.

Could you characterize the strength of the potential pipeline on that side of the business?

Well --.

New licensing arrangements that we might see as the year evolves?

Obviously, a lot of the licensing that I mentioned in the last call, in the US particularly are brand new licenses.

So, as they get distribution, as they rollout the product, you can surmise that the initial response has been very favorable.

So, therefore, our growth year-over-year should continue to increase.

As Ann, said we wanted to separate out what you know, we inherited from Heinz, at the end of that five-year -- there we inherited some third party licenses.

And we're seeing though that 200% growth worldwide on our existing Weight Watchers generated licenses that we have created off our own back.

So, we can see nothing but strong, solid growth in this particular category going-forward.

And we have some people who are very focused on that.

We have individual teams in every market...

Okay.

Great.

...that are focused on that.

But we're still doing it in a very typical way.

I mean this is not a rush to put our brand on anything that moves.

We truly want to -- I don't think we can talk about individual ones there in the pipeline, do you know what I mean, because they -- it is not just our brand obviously, when we're talking about things in the pipeline, it is other people's business, as well.

So that's why we are not -- at liberty to talk about it as I said, I am itching to tell you who are national accounts are, but I am not at liberty to do that.

But we know that we have got big interest.

We know that people who have taken up Weight Watchers licenses have been very pleased with their, with the response, with the initial take up, with the initial sales.

So, we know that more of those licenses will come forward.

We're doing it in a very careful, cautious way because we're choosing good partners.

This is not a rush to put our name on brands -- our brand name in the short-term.

It is so that we can build long-term partnerships going forward.

And we believe that we're doing that in a very sensible way with great partners.

And we will continue to do that.

That's great.

Helpful.

Last question could you prioritize the use of cash and cash flow, especially in light of rising interest rates?

Obviously, this quarter was a pretty big one from a debt pay down perspective, but I take it if acquisitions were still available you will be making those also?

Yes.

Acquisitions are still very high on our list for use of cash.

We're managing the interest rates by managing our cash more efficiently, now that we have been much larger revolving credit facility that enables us to do that.

Stock repurchase -- obviously our board is considering another program for stock repurchase.

We haven't -- I do not know the answer to the question yet, but being considered and dividends could be a possibility, as well.

So it's really the same things that we've been saying and of course, we're watching the interest rates very carefully, as well.

Ann could you remind me how much is left in the current program?

29 million.

29 million.

Thanks.

Great.

Thank you.

At the end of first quarter.

Thank you.

Your final question is coming from Howard Choe from Standard & Poor's.

Good evening.

Hi, Howard.

How are you doing?

Good thanks.

Just a question on the UK, that was a pretty decent growth.

And I was just wondering, what's driving the growth there?

What is it about the Switch program?

Well, the Switch program is really a great innovation in the sense that it includes the 2 food plans as we have in the US, the Turnaround they have food POINTS program, obviously, which is incredibly strong all around the world, and we have the new alternative which is a no counting type approach.

But also, in addition to that, the whole focus of the Switch program is on the behavior modification that Weight Watchers alone is offering.

And it is taking a much more holistic approach to that behavior modification, through a lot of research over the last 2.5 years.

We have identified the 10 winning habits this make a difference to weight-loss success and weight maintenance success.

And so we are helping our members to identify how strongly they have those habits already, and giving them a lot of strategies and tactics in terms of introducing those 10 habits into their lives.

Now one of those habits obviously, is making wise food choices.

And that's where the 2 food plans come in.

Right.

And in Continental Europe, are you running a similar program or not?

Continental Europe had their innovation last September, and that one is their Flex Plan they are calling it Flexi plan, Eat and Enjoy, depending on what market you're in.

That one is more reflective of what the UK program was before the switch program, which is 52 weeks of program material or we're more closely integrating the program material with the weekly topics so there's that connection between the talk and the material that you're getting.

It has monthly books, so it's much more relevant on a seasonal basis.

And it does have personalized points, now both the UK plans and Continental Europe have personalized points.

So again, we're personalizing the number of point you have available to you according to what you've told us about yourself.

So there are elements of a lot of different things in our program since we go around the world.

Are you satisfied with the progress of that program of the Continental Europe?

Continental Europe did get off to a good start last September.

So, I think the innovation did increase the relevance of our marketing and our marketing message.

In Continental Europe, when you look at it, one of our big opportunities obviously, is to increase penetration and awareness, because there are less mature market then we have in the US or the UK.

So, there a lot of our efforts is not necessarily program driven, it's more getting our message out there.

And part of the way we do that is having program innovations but not solely.

A tremendous amount of what we're doing worldwide really has to do with PR and getting the message out there, in terms of what separates out Weight Watchers from the rest of the pack, if you like.

There are a lot of diets, always have been a lot of diets, that are available to people.

You might have noticed that today Consumer Reports came out with a survey on diets and this is very similar to what we saw in January with the Penn (ph) study.

They looked at 11 different diet offerings, and Weight Watchers came out top in terms of compliance, in terms of stickability, in terms of the science behind it.

I mean I think that this is the effort that we're putting in all around the world to get the message across in terms of what makes Weight Watchers different.

We are not just another diet.

Okay.

Great.

Thank you.

Okay.

Thank you.

At this time, I would like to turn the floor back over to management for closing remarks.

Great.

Thank you Anthony.

And I'd like to thank everyone for joining us today.

Obviously we're looking forward to updating you on our progress on our next conference call.

So, I'll say good night.

Thank you and thank you callers.

That does conclude today's conference.

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