WW International Inc (WW) 2005 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Weight Watchers International second 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, August 11, 2005.

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

Please go ahead.

Thank you, Alan [ph], and thank you to everyone for joining us today for the Weight Watchers International second 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 4:00 p.m.

Eastern Time today, the Company issued a press release containing financial results the second quarter 2005.

The purpose of the call is to provide investors with some further details regarding those 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 everybody 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 for our review of Weight Watchers International's performance for the quarter ending July 2, 2005.

As you know, on June 13, we announced agreements for Weight Watchers International to take control of WeightWatchers.com.

On July 2, we exercised our warrants, merged the two companies, and acquired all equity interest in WeightWatchers.com not held by Artal Luxembourg, bringing our current ownership of WeightWatchers.com to 53%.

We expect WeightWatchers.com to complete by year-end the redemption of its shares held by Artal, which will bring our ownership to 100% .

Since the merger did not take place until the end of our second quarter, we will focus our discussions today on the financial results of Weight Watchers International on a stand-alone basis, without the consolidation of WeightWatchers.com.

Beginning with our third quarter call, the first financial period after our taking control, we will transition our discussion to the fully consolidated financial results of Weight Watchers International.

So on a standalone basis, our revenue for the second quarter 2005 increased 17% to $286.9 million from $244.9 million in prior year.

Total attendance at Company-owned operations was 16.5 million, up 6.4% versus last year's second quarter.

For the quarter, our gross margin improved 260 basis points to 55%.

Our gross margin benefited from higher meeting fee revenue per attendance and strong growth in high margin licensing revenue.

Our operating income increased 15% to $94.8 million from $82.5 million in prior year.

Excluding expenses related to the merger of WeightWatchers.com, operating income was $97.3 million, and increase of 18%, and our operating income margin was 33.9%.

This is an increase of 20 basis points, from 33.7 in the prior year quarter.

Our higher gross margin was largely 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 second quarter were $0.58, up $0.26 compared to $0.46 in the second quarter of '04.

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

First, North America.

I'm pleased to report that we're continuing to see strengthening in the U.S. meeting business.

In the second quarter, NACo crossed solidly into positive territory with organic attendance growth of 5.3%, as stronger recruiting trends continued over time to translate into higher weekly attendances.

Total NACo attendance, including the benefits of acquisitions, was up 8.3%.

Lecture income per attendance also increased in quarter 2, up 7.2% over prior.

As I discussed in our last call, we are realizing the benefit from the January price rise increase in over 40% of our NACo markets, as well as other prudent moves towards lower discounting during promotional periods.

This fall, as we will be implementing a $1 per week price increase in an additional 15% of NACo.

Now let's look forward to the second half of 2005.

As you can see it, with the continued demise of the low-carb craze, and as a result of the initiatives we have undertaken to improve our business, our volumes are growing.

Our Corporate Solutions program continues to gain traction.

We now have a growing list of diverse national accounts on board, including leading employers, such as Wal-Mart, UPS, and Kaiser Permanente.

These will be ramping up and should contribute meaningfully to our volumes beginning in 2006.

In addition, we will be launching a strong new advertising campaign in the U.S. this fall.

As a result of these factors, and despite the more challenging comps, as we lap the launch of turnaround, we expect our organic attendance to continue to accelerate throughout the remainder of the year, with high single-digit organic attendance growth in the fourth quarter.

Now moving on to the UK.

The UK had a disappointing second quarter.

After a strong start to the year, driven by the excitement our marketing created around the launch of our new program Switch, attendance in the second quarter was down 1.3% versus prior.

As you may remember from previous conference calls, the Switch innovation introduced two very significant changes to the UK program.

The first is the "habit swap" concept, which targets the behavioral change component of our program.

The second is the introduction, along with our Proven Points Plan, of a No Counting Plan, similar to the Core Plan introduced in the U.S. in the fall of '04.

The UK had originally developed and built its January '05 innovation around "habit swap" alone, with no planned change to the diet component.

However, with the demise of low carb, there is a growing pool of former low carb dieters who are starting to reengage with their weight loss efforts, and who are beginning to search for a more healthful and sustainable approach.

Many of these former low carb dieters prefer to diet by focusing their eating on certain foods without the need to count.

Seeing the positive reaction to the dual food plans coming out of the U.S. research, we elected to introduce both innovations simultaneously in the UK this January, rather than wait until a subsequent innovation cycle to introduce our No Counting Plan.

We felt that launching No Count now would allow us to have a plan in the market which would appeal to former low carb dieters at a time when they would be most receptive.

In retrospect, introducing both innovations simultaneously as part of the Switch program was a mistake.

By introducing both of these major program changes at the same time, we have added an overwhelming amount of complexity to the crucial first weeks of a member's weight loss efforts.

This complexity has created confusion for some of our members, and has had an impact on the ease with which they can incorporate our program into their lives.

This has reduced satisfaction, retention, and most importantly, word-of-mouth referrals.

While I can assure you that our UK team is working hard to correct these issues, their actions will take time to have a meaningful impact on the attendance trends we are currently seeing.

Moreover, the recent terrorist attacks in London have unsettled the UK, and added another element of uncertainty to the market.

As a result, looking ahead to the third and fourth quarters, I expect a negative recruitment trends to continue and translate into high single-digit, or low double-digit negative attendance before we begin to see the full value of our corrective actions at the start of 2006.

Looking at continental Europe, we had a strong second quarter, quickly recovering from a slow start this year.

After seeing the impact of the marketing changes we made in January, we returned to our traditional marketing practices in our post-Easter campaigns, and have seen an immediate strengthening of our business.

In fact, for quarter 2 continental Europe posted attendances of 3.3 million, a 14% increase over last year.

This region will begin lapping the launch of its FlexPoints innovation last August.

Nevertheless, with the strong momentum and low penetration, I'm confident we will continue to see solid growth in this region in quarter 3 and beyond.

Now on to other news.

We continue to have tremendous growth in our licensing business, with revenue of $9.9 million, up from $3.3 million in last year's second quarter.

One new license I would like to highlight is an innovative partnership that we launched this spring in Europe.

Co-op is a leading supermarket chain in Switzerland, with over 40% share of grocery market in that country.

They have committed to converting their entire healthy food range to the Weight Watchers brand, and will be actively promoting our meetings in their stores and through their direct marketing activities.

While Switzerland is a small country, this license is a good example of how we're tailoring our licensing strategy from market to market.

We intend to continue to build this profitable revenue source and to use licensing as a vehicle to increase the exposure of our brand and our core business.

Finally, WeightWatchers.com In the second quarter, our royalty revenue from WeightWatchers.com was $2.7 million, an increase of 30% over prior year.

As I mentioned previously, the dot com continues its strategy of investing heavily in its technology and product platforms to ensure the highest levels of customer satisfaction and retention.

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

WeightWatchers.com stand-alone revenues were $29.2 million for the second quarter, an increase of 6.4 million, or 28% over prior.

This increase was driven primarily by a 21% increase in the active subscriber base to 564,000 at the end of June '05, versus 467,000 at the same period last year, as well as the price rise for Weight Watchers Online in the U.S. during the third quarter of 2004.

Operating income for the quarter, excluding transaction related expenses, grew 51% year-over-year to $6.8 million.

In addition, WeightWatcher.com continues to deliver an excellent online marketing presence for the Weight Watchers brand and meetings around the world.

As you know, we're extremely excited about the merger and the growth opportunities we together have in front of us.

While the dot com's performance to date certainly reflects excellent execution, it also demonstrates the built-in receptivity of the large, self-help weight loss market to the Weight Watchers brand and programs.

I believe this self-help market is an opportunity we are only just beginning to tap, and is incremental to the growth in our meeting business.

Now are like to turn the discussion over to Ann Sardini.

Thanks Linda, and good afternoon everyone.

Before I move into a fuller discussion of the financial results of Weight Watchers on a stand-alone basis, I will highlight a few things from our consolidated second quarter results.

Included in the consolidation is the impact of our newly acquired subsidiary, WeightWatcher.com, which we began consolidating in the second quarter of 2004 under the accounting rule FIN 46R.

Our second quarter 2005 consolidated operating results, which are comparable to prior year, with respect to the inclusion of WeightWatcher.com, have improved significantly.

Consolidated revenues for the second quarter were $312.6 million, up 18%, or $47.7 million versus the second quarter a year ago.

Our combined net income was 60.4 million, excluding certain transaction related expenses, which I will review with you later.

This 60.4 million compares to 52.9 million in last year, an increase of 14.2%.

EPS, adjusted for the same expenses, was $0.58 in the quarter versus $0.49 in the prior year period, also an increase of 18%.

Now turning to Weight Watchers International business results on a stand-alone basis, excluding the impact of the consolidation of WeightWatcher.com.

On a quarter-over-quarter basis, the results of stand-alone Weight Watchers are also markedly improved.

Revenue in total and per attendee, gross profit, operating income and net income are all up versus last year.

Second quarter revenues of the stand-alone business increased 17.1% to 286.9 million, from to 244.9 million in the second quarter last year.

Gross and global attendance at company-owned meetings accelerated, from virtually flat with prior year during the first quarter, to up 6.4% in the second quarter, bringing the total to 16.5 million attendances.

The strong momentum that we saw in the first quarter in product sales per attendee and product licensing and royalty revenue continued during the second quarter, and we continued to benefit from meeting fee price rises taken in January, 2005 in both North America and the UK.

Our stand-alone operating income rose 14.9% in the second quarter to 94.8 million, from 82.5 million in the second quarter, 2004.

Net income was 60.8 million, up from 49.2 million in second quarter a year ago, and fully diluted EPS rose $0.12 to $0.58 in the second quarter, after $0.02 of transaction related expenses.

This compares to $0.46 in the prior year quarter.

During the second quarter, 2005 we benefited by $0.06 a share from WeightWatcher.com's decision to make voluntary loan repayments of 9.8 million.

There were no loan repayments in the second quarter of last year.

Excluding both the transaction expense and these loan repayments, our EPS in the quarter was $0.54.

Moving now to the performance of our NACo operation.

For the second quarter, NACo's total attendance increased by 8.3% to 8.9 million.

Organic attendance grew by 5.3%.

As expected, we're continuing to see sequential quarter-on-quarter improvement in NACo's organic attendance growth.

NACo's revenues in the second quarter were 143 million, up 15.6% over last year's 123.7 million, outpacing the growth in attendances.

The average meeting fee increased, primarily as a result of the price increase in just over 40% of the NACo territories.

Product sales per attendee rose 5.3% in the quarter, with the success of some of our new and revamped product offerings.

Second quarter attendance in our international operations was 7.6 million this year, an increase of 4.3% versus prior.

Revenues from our international classroom operations rose 15.4% in the quarter, 10.6% on a local currency basis, to $108.1 million, up from 93.7 million last year.

As Linda mentioned, the UK is facing some challenges.

Coming off 6.1% growth versus prior year in the first quarter, attendance dropped off sharply in Q2, posting a 1.3% decline versus prior, to 3.5 million attendances.

The price increase and growth in the licensing business, however, more than offset the impact on revenue of the attendance decline.

On a local currency basis, revenue grew by 3.8%.

Continental Europe delivered 3.3 million attendances in the second quarter 2005, a 14.1% increase compared to 2.9 million in the prior year's second quarter.

Local currency revenues rose 22.5% and they were driven by stronger product sales, lower discounting, and of course, licensing.

The growth was fueled by Germany and France, our two largest markets in continental Europe.

Moving now to our other revenues.

On a reported basis, franchise commissions were up 6.9%.

On a comparable basis, excluding the acquisition of our Washington DC, and Fort Worth territories during 2004, commissions rose $5.1 million in the quarter, a 13% increase, consistent with the strength in our NACo business.

Other revenues combined were 17.5 million in the quarter, an increase of 6.7 million, or 62% above a year ago.

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

Licensing revenues were 9.9 million in the quarter.

Even excluding the impact of third-party licensing royalties, which recently reverted to us from H.J.

Heinz, our licensing business grew more than 100% in the quarter, on the strength of both new and existing licenses around the world.

Our royalties from WeightWatchers.com were to 2.7 million in the quarter, up 29.9%.

Later on in this discussion, I'll provide some of the details of our acquisition of WeightWatchers.com.

The gross margin in the second quarter 2005 was 55%, up 260 basis points from 52.4% in the prior year, on the strength of price increases in U.S. and U.K., lower discounting on product sales in many of our markets and growth of our higher margin global licensing business.

NACo gross margin improvement in the second quarter was also driven by higher meeting averages.

Balance of the year, we expect NACo attendance growth to continue to outpace meeting growth and to support continued gross margin improvement.

Marketing expense for the second quarter was 33 million this year, compared to 26.2 million last year, an increase of 26%.

The increase is partially the result of our continued significant investments in some of our European countries to drive growth, consistent with the strategy that we followed in Germany with such strong results.

The quarter was also affected by a timing shift in our second quarter spend this year versus last.

Marketing expenses, as a percent of revenues, rose from 10.7% in last year's second quarter to 11.5% this year, and we expect a similar percentage for the second half of 2005.

As I mentioned on our last call, over the last three years we've increased our marketing as a percentage of revenues by approximately 300 basis points in total.

A portion of this increase is structural, reflecting a change in our approach to PR, as we've strengthened our ability in our key markets to react to the competitive environment.

We've also increased the scope and amount of our advertising, and consistent with that we've put in place a stronger ad agency infrastructure to support our strategic marketing goals.

Going forward, we believe that we have the organization we need to support our global growth.

We'll begin to see marketing decline as a percent of sales as our revenue grows and we move into next year and beyond.

G&A was 29.8 million in the quarter as compared to 19.5 million a year ago, a 53% increase.

G&A as a percent of revenue moved from 7.9% in the second quarter 2004 to 10.4% in the second quarter 2005.

There are several anomalies affecting second quarter G&A in both years.

When these are excluded the year-over-year increase in G&A drops to 17%.

First, I'll enumerate the anomalies.

In second quarter 2005, in conjunction with the WeightWatchers.com acquisition, we've taken a 2.4 million transaction related compensation charge, representing our purchase of WeightWatchers.com shares from our employees, who are option holders.

In addition, consistent with the improved performance of the business, 2005 second quarter's salary [inaudible] includes bonus accruals for Management and staff, while none were accrued in 2004.

We've also added a million of legal reserves, and foreign currency translation has had a small negative impact in 2005.

Now with regard to the 17% increase in G&A on a comparable basis, as we've discussed in the past, we're continuing to strengthen our Management team, particularly in the U.S. and continental Europe, and this is already reaping dividends.

The growth in the global licensing business and the strong positioning of our upcoming U.S.

Corporate Solutions business are two examples of the impact of these decisions.

We've also brought in experienced marketing talent in support of the increased emphasis on marketing and PR that I outlined earlier.

Operating income was 94.8 million in the second quarter, up 12.3 million, or 14.9% versus a year ago.

Excluding 2.5 million in transaction expenses related to the acquisition of WeightWatchers.com, operating income was 97.3 million, up 17.9% to prior year.

Operating income margin in the second quarter, excluding the transaction expenses, improved 20 basis points to 33.9%, and 33.7% a year ago, as most of the gross margin improvement was reinvested in marketing and G&A.

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

Below operating income, our net interest expense rose by 35.8% in the second quarter 2005, to 4.2 million, as compared to 3.1 million a year earlier.

With the increase in market interest rates, our effective interest rate rose to 4.65% in the second quarter 2005, as compared to 3.45 in the prior-year quarter.

Other income expense net on our income statement was 8.9 million of income in the second quarter this year, as compared to .2 million of expense in the prior-year quarter.

This year, other income consists primarily of two loan payments from WeightWatchers.com totaling 9.8 million, versus no payment in the second quarter last year.

WeightWatchers.com has now fully repaid its $34.5 million loan from WWI.

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

Now I have a few notes on the WeightWatchers.com transaction.

As we previously announced, at the end of the second quarter 2005, we increased our ownership stake in WeightWatchers.com from 20% to 53% and acquired operating control.

We did this by exercising our outstanding warrants to purchase WeightWatchers.com stock and by acquiring all of the remaining equity interest in WeightWatchers.com that was not owned by Artal.

In terms of the accounting, we're now consolidating WeightWatchers.com under the traditional rules of consolidation, rather than under the provisions of FIN 46R.

The impact on our consolidated financial statements is the same in that we consolidate 100% of the results of the dot com.

The total cash outlay by WWI for this transaction was approximately 141 million, including fees, 58 million remains in the consolidated company, and the remainder buys out non-Artal share and option holders.

From an income statement perspective, we recorded transaction related expenses, pre-tax, of 43.6 million, primarily related to compensation.

The fully consolidated income statement, which includes these expenses, posts net income in the second quarter of 34.5 million, and diluted EPS of $0.33.

On our balance sheet, we recorded 27 million of goodwill from this transaction.

WeightWatchers.com has also entered into an agreement to redeem Artal's WeightWatchers.com shares, planned for year end, at the same share price as the second quarter transaction.

Therefore, the balance sheet also includes a current liability for the Artal redemption of 304.8 million and a corresponding reduction in equity in anticipation of that upcoming transaction.

Now moving to an overview of our cash flow and the remainder of the balance sheet from the consolidated Company perspective.

In the six months ended July 2, 2005, we generated cash from the consolidated operating activity of 181.4 million, including 20.3 million provided by WeightWatchers.com.

As indicated above, a net 58.2 million was used for the acquisition of increased ownership of WeightWatchers.com.

In addition, we spent 33.7 million on share repurchases in the first six months of this year.

We ended the second quarter 2005 with a cash balance of 134.3 million, most of which is at the dot com level, and we have 161.3 million available under our revolving credit facility.

In comparison, in the first six months of 2004, we generated 146.2 million of cash from operations and utilized 136.5 million, of which 65.5 million went to share repurchases, 36.9 million to pay down debt, and 30.5 million was used for the Washington DC franchise acquisition.

On the balance sheet, our total debt at the end of the first quarter 2005 was 483.6 million, up 14.5 million, from 469.1 million at year-end 2004.

The increase in shareholder's equity, excluding the reduction for the redemption of Artal's WeightWatchers.com shares, reflects the increase in retained earnings offset by the impact of our share buyback programs.

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

Now I'll turn the discussion back to Linda.

Thank you, Ann.

Before we take your questions, I'd like to take a few moments to talk to you about the drivers that will sustain our growth.

Weight management is a growing market in both the developed and the developing worlds, and by all accounts will continue to grow for many years to come.

With the low-carb phenomena fading there is growing realization of the importance of a healthy, balanced diet and lifestyle, which Weight Watchers brand represents.

Within this growing market, there is a tremendous potential to increase our traditional meeting penetration.

In places like Germany, France, and the U.S., we see substantial head room to increase meeting volumes.

Over time, the superior effectiveness of our service, combined with improvements to our marketing, communications, and programs, will drive increasing penetration in these underdeveloped markets.

We are in the enviable position of having a robust portfolio of opportunities to leverage our brand, our methodologies, and our channels beyond the traditional meeting business.

Initiatives such as Corporate Solutions, licensing and publishing, and WeightWatchers.com will accelerate our growth and profitability.

We also have a business that does not require cash to grow.

We will continue to use our tremendous free cash flow to increase shareholder value by making prudent franchise acquisitions, by buying back stock, and by paying down debt.

Now let's turn to our 2005 guidance.

As you know, up until now, all of our earnings guidance have been focused on a stand-alone Weight Watchers International business.

While we have been required to consolidate our financial results with those of WeightWatchers.com since the second quarter of 2004, our ownership of WeightWatchers.com was limited to 20%.

Now that we have both the majority ownership and operating control, the earnings guidance we will provide will be for the consolidated Company, including the full year results for WeightWatchers.com.

At an investors conference on June 14, I provided for the first time EPS guidance for the consolidated Company of $1.88 to $1.98.

Now, after taking into account the good performance we're seeing across most of our businesses, including NACo, continental Europe, licensing and WeightWatchers.com, as well as weaker than previously expected performance in the UK, we are raising the lower end of our fully diluted consolidated EPS guidance to $1.91, while maintaining the upper end at $1.98.

This guidance excludes the $0.25 of one-time transaction related expenses from our acquisition of WeightWatchers.com.

So Alan, at this time we would like to open up for questions .

Thank you.

The floor is now open for questions. [ OPERATOR INSTRUCTIONS ] Our first question comes from Greg Capelli of CSFB.

Hi, Greg.

Hi, Linda, Ann.

It's actually Steve on for Greg today.

Oh, hi, Steve.

How are you?

Thanks for taking my question.

I guess I just want to touch a little bit on the attendance front.

Seems like things are going fairly well in NACo, just wondering if you could comment, are you hearing anything in particular coming out of the meetings?

Have you seen a boost, more recently, with the press related to the bankruptcy of Atkin?

Obviously, we've had some very, very positive press since the beginning of the year.

We started with the Penn report that obviously highlighted that Weight Watchers was the only commercial diet program that had any efficacy that was proven by research.

Then we had a leading consumer magazine reporting that Weight Watchers, again, was top in terms of its analysis of effectiveness and research to support that effectiveness.

So, I think, if you're looking at Weight Watchers, you're looking at what we've been describing for the last few quarters, a continual improvement, and we expect to see that improvement continue to strengthen as we move further into this year.

Okay, great, thanks.

Also to touch, maybe if you could contrast a little bit, the markets in Europe, it seems like the market in continental Europe bounced back fairly quickly, yet you're expecting the market in the UK to take a little bit longer.

Yes.

The things that we did in continental Europe that gave us a less than stellar first quarter were more marketing related.

They were more to do with the timing of our activity and the type of activity we put in.

So that is a immediately correctable, as I said on our call then.

And we put that in for our April campaign, our post-Easter campaign and as you can see the results were immediately visible.

We went from flat in the first quarter to plus 14% in attendances in this quarter.

The issues that we have in the UK right now are a little bit more complex in terms of being able to solve them, and to improve them, but that doesn't mean that the UK isn't working hard on doing just that.

And they have identified what the issues are, but it just takes more time to simplify and to make the program innovation simpler for our members to understand.

And the biggest improvement, and that will, obviously, come towards the end of the year, when we put in a more navigable and easier to digest hand book into the UK.

Although, obviously, there is all that rich material and we're not going to take away from the richness of the innovation, we just want to simplify the delivery of that information so people can take it very gradually, and therefore, get on to the program with a lot more ease.

So we're putting all those in place, but it's not quite as immediate as changing your marketing.

Okay, so you still see the potential for keeping both of those, the innovations in place in the UK?

Yes.

Okay, great, thank you very much .

Our next question comes from Amy Chasen of Goldman Sachs.

Hi, Amy.

Hi, how're you.

Just fine, thank you.

I guess I just wanted a little more color on this UK issue and what you're doing.

What exactly is this handbook?

And given that you still have these two new things, how are you going to simplify it for people so that it's not really confusing?

Okay, well one of the first things that we're doing right now, and we're working on, obviously, is simplifying our presentation of the program within the meeting itself.

We have a training program in place so our new member orientation has been redone and is focusing our members more on the eating component, because I'm sure you can understand that when most people walk through the door the first thing they have to understand is what am I going to eat tomorrow?

So we've put that in place.

We've put some new material, or we are in the process of putting some new material into our weekly hand out to our members, which we think presented in a simpler way and an easier to digest way.

We have also -- and this is what will take a little bit more time, we've put some improvements into the handbook itself.

The handbook is like the program material.

It's quite a sizable book that they currently get in Week 1, and for January we've put in a new one, and we're in the process of creating that right now, as I speak.

So there are a lot of different levels of changes, both at the meeting room level, at our training level, with our service providers.

Obviously, this was a lot for our members to take in, but I have to admit it was also a lot for our service providers to take in, and I think they're getting better able with each passing month to implement the program.

And to help our members, obviously, with their weight loss.

Okay, I guess my only other question is just on the corporate initiatives.

It's, obviously, gone well.

Relative to your expectations, is it in line, or better than you thought?

We've taken a very gradual approach to this.

I'm sure you understand we're setting up the back room systems to support our Corporate Solution initiative.

We have had "At Work" meetings for a long time, as I've explained before.

The "At Work" meetings, though, are one-off events.

In other words, we will go into a company and we'll run a closed-ended course for their employees, and then at the end of that period, we might renew, they might ask us to come right back in, they might take a break, they might not renew, and we won't have a course.

If you're looking at the way we're approaching Corporate Solutions, this is the more ongoing service that we're providing corporate clients, and we're selling it in more across their infrastructure than on a one location at a time opportunity.

So this is quite a big shift and because we needed to put, and are putting infrastructures in to support this initiative, we have taken a gradual approach.

We are very, very pleased with the quality and the number of early adopters of this program.

It's going ahead.

I'm sure you can imagine when somebody has signed a contract there is a delay before the components of the Corporate Solution, whatever components they've taken up, because each client takes up what they decide to take up.

It's a multi-pronged initiative, obviously, they decide what to take and then there's a period of time between the signing of that contract, getting it publicized within their workforce, a lot of these people, obviously, are putting it on their health plans and there's a sign up period, usually on a annual basis, for those health plans, which is why I'm saying that we're going to see the benefit of it in 2006 as far as our volumes and revenues are concerned.

But, no, we're very pleased with it so far.

Lastly, just for Ann, can you tell us the debt rate for your new term loan?

Our current term loan, you mean?

The acquisition?

Oh, no, we don't have that information.

When will you have that?

We did not take -- let me just clarify, we did not take out a new term loan for the acquisition that we just completed, to go from the 19% to the 53%.

So we're just using our revolver and they're at LIBOR plus 155.

Okay, thank you.

Our next question comes from Chris Ferrara with Merrill Lynch.

Hi.

Hi Chris.

Can you just talk a little bit about the price increase?

The additional one in NACo, and, I guess, you said 15% of the business --

Yes, these are additional territories, obviously, in the 43-plus%, we were taking our $9.95 areas up to $10.95, primarily that was that move.

Now we're taking selected areas that are already at a higher price and moving them $1 higher.

So your testing the waters on $11.95?

Yes, we already have $11.95 markets.

Remember we go all the way up to $13 markets, so we have a mix of prices across different places.

Can you talk a little bit about the potential to push more than just 15% of your market's upward from here?

Well, remember we're adding the 15% on top of the 40-plus% that we just moved.

Right, but is there opportunity to -- because the 40% you just moved up was going up to $10.95, right, so, I guess, another way to say it is what time frame would you set, generally, to push other prices up?

Generally speaking, obviously, we look at our pricing.

We look at it every year, obviously, but we often connect it with an innovation, so it isn't necessarily at as an annual event.

It would be highly unlikely for us to take the decision to move a price up more than once in one market in a year, or in any short period of time.

Ok, and then just some SG & A. I want to understand a little bit more what led to the year-over-year and the change, I guess I'm not quite getting how the change on an apples-to-apples basis is 17%.

Can you talk about what's non-recurring in this year versus last year?

I guess the bonus accrual, is that something that wouldn't be non-recurring because performance is better so you'd expect that every year?

Obviously, last year we took it out, because our performance last year was the anomaly, in other words, because we took it out.

Normally, we would have a bonus accrual in our account throughout the year until we knew what exactly we'd be paying because of our results.

So I guess your question is, in 2006, will there be a bonus accrual similar to what there is in 2005, and the answer is yes.

No, it's more than that.

Obviously, you went up 200 and something basis points as a percentage of sales, and part of that I get is one time on the employee option holders for the deal, and you said the legal reserve was picked up a little bit and it was small effects, but is there anything else big in there that you would expect, reasonably expect to not have any kind of similar increase in year-over-year basis going forward?

Going forward, the transaction expenses, the legal -- I don't know what will happen with FX, obviously.

So those are the sort of the non-recurring going forward.

Looking back, there are those items as well as the bonus accrual piece, which is significant because we had none in the second quarter of last year, the way things were going, then this year, you know, we have accrued bonus so.

And as we've said on previous calls, Chris, we have established new departments in a lot of places like our Corporate Solutions department that hadn't lapped yet a whole year, and we've put in licensing functions within our European markets.

I mean, we were really talking about it, as we've said on many calls, that we're strengthening our management and strengthening our ability to generate this revenue.

And on some of these we just hadn't lapped a year yet, which is why you're seeing the impact still on quarter 2 of those initiatives.

In terms of the rest of the year, you'll see similar increases, although slightly declining to that 17%.

Going into next year, we expect that our G&A is not going to grow at the same rate that our revenue grows, and accordingly, you'll see some benefit to the operating income margin.

Thank you .

Thank you. [ OPERATOR INSTRUCTIONS ] Our next question comes from Gregory Badishkanian of Smith Barney.

Hi Greg.

Hi, just have a question on Corporate Solutions.

You got some pretty big contracts, Wal-Mart, UPS, Kaiser.

I think worldwide attendance, or worldwide employees it's like 2.2 million, maybe 1.5 million in the U.S.?

Corporate Solutions is a U.S. initiative.

Right.

So maybe the employees will be less than the 2.2 million worldwide employees that those three companies have, in terms of their employees?

It's a lot of employees, and I'm just wondering have you done some analysis on the potential increase, and maybe incremental Weight Watchers members when you get a new Corporate Solutions account?

So, for example, of those 1.5 million U.S. employees, how much -- how many new, as this gets ramped up on a run rate, how many new Weight Watchers members do you think you can get from that?

Obviously, as we go forward, we do believe our Corporate Solutions and our "At Work" meetings, which come out of Corporate Solutions, will grow at a much faster pace than our traditional growth will.

Right now we've said it's about 10% of the NACo meeting business.

That will grow.

I think one of the benefits of the Corporate Solutions approach is that we tailor it to each individual employer, so some of the things they're using to help their employees to a healthier weight are things like coupon books to go into the traditional meetings and some of it, of course, is online and things of that nature.

So it's a mixture of things and we are taking a very careful approach to growing this up so we can make sure we can not only support it as far as our infrastructure and our information to these employers are concerned, but also so we can handle the growth.

So it will be very incremental.

Right.

So maybe, to look at it another way, sometimes when you advertise in a region, just by newspapers or some other type of advertisement, you might have a certain type of rate of people that you get into your meetings.

This would, obviously, be a higher quality because it's from a better source, it's discounted, et cetera.

Well, I think what you have to look at is this is just another way of putting in front of potential dieters the fact that Weight Watchers is there, we're there to help.

No employer can make an employee do anything.

This is something that I think good employers that are trying to help their employees to have a healthier lifestyle are thinking of putting into their program.

Also, obviously, employers are facing ever increasing health-care costs, so it's in their interest to have healthier work forces.

But there still is a huge element when it comes to controlling your weight where you have to make the individual decision to do that.

So I can't see that the employer population would be any more targeted than if you put an ad in a newspaper, or if you put something on the television.

What we will be able to benefit from, of course, is the fact that the companies themselves will be marketing it to their employees, be making it available to their employees and they will let their employees know that it's available.

So it's really a benefit, in terms of marketing, I think, going forward, rather than these people, for some reason, would be more inclined, if you see what I mean?

Yes, no, absolutely.

And you're discussing health care costs, any color on targeting insurance companies?

Well, obviously, Kaiser --

Okay, so -- is that an area do you think has much potential as the employers?

The reason I gave three examples of such differing types of companies was to, sort of, give you the breadth of whom we're talking to.

It's not probably going to be my habit of letting you know on a quarterly basis who has signed up and that, it's just that I wanted you to know that the quality of the kinds of people we're signing up.

Gotcha, great.

Okay, thank you very much.

Thank you, our next question comes from Jeff Stein of Keybanc.

Hi, Jeff.

First, a question for Ann.

Ann, I was wondering if the guidance change that you made, does that reflect just an improving attendance trend, or does that have anything to do with the accelerated debt repayments from WeightWatchers.com?

We really actually haven't changed our guidance per se.

What we've done is what we usually do.

When we get to this point in the year is we close our books for the second quarter, we have better visibility, of course, on the year, and we usually narrow our range and we've done that.

But, I don't know, Linda you may want to talk a little bit about the U.S., UK.

Obviously, what I said in my comments on why we brought up the bottom end was because we're seeing strong performance, as I said, in NACo, in licensing, in dot.com, in continental Europe, but that is offset by the UK.

I can't say the UK hasn't hurt us.

So in looking at that, and as Ann said, it's our habit, or our tradition up until now at this time of year to narrow the range, bring it down from the $0.10 range that we had and to narrow it.

So that's exactly what we've done.

Okay, well the unscheduled debt repayments from the dot.com business, that did boost the quarter by $0.04.

Now, is that borrowed from subsequent quarters?

Yes, the third quarter had a scheduled payment in at.

You know, Jeff, when we consolidate the companies, that actually goes away, so it really has no impact on our guidance for the full year.

Got it.

And just kind of curious, have you seen any effect that you can discuss from the price increases you've announced since January?

Any push back from customers?

No push back that we're seeing, no.

Obviously, it has increased our revenue per attendance, which is why our revenue is going ahead of our attendance growth.

And we've seen an improvement in product sales per attendance, so I don't think there's an issue in terms of people not valuing the service and being willing to pay it.

Okay, and just a final question, on the growth in product sales per attendance, could you shed any light on that?

Are there any new products out there that are being, perhaps, better received than they were a year ago at this time when you were rolling out new products?

Any comments on that?

Yes, well Ann has mentioned in previous calls that we've brought out some really good new bars.

They've been very popular.

We've got some savory snacks that are rolling out and going out.

They've been popular.

We're just continuing to improve our range across the whole product range.

And we've donet a lot of work on it in the past year and we're starting to see the benefits.

A lot of taste testing on our part, as well. [LAUGHTER]

Okay, thank you.

Thank you.

Our next question comes from Jerry Herman of Legg Mason.

Good afternoon, everybody.

I'm going to stick with that thought if I can.

I think at your investor day you guys mentioned that you had signed eight licensing agreements, and then the one you just mentioned, I guess, makes it nine.

Is there any way to quantify how many --

Can you take me back to that?

What are you talking about in terms of eight licensing agreements?

You guys went through a summary of the licensing agreements that you signed over the course of the roughly --.

I think your confusing Corporate Solutions with licensing agreements.

We have multiple, multiple licensing agreements around the world.

Yes, I know, these are the new ones that you itemized at your investor day, Don Foods, Wells Dairy, Whitman, Tropicana.

Oh, sorry, the eight in the U.S. Sorry.

Okay, I didn't mention any new licensing agreements in the U.S.

The only I mentioned was one in Switzerland.

Okay, I guess the question is is there a way to quantify the number of items that are actually comprised in these licensing agreements that you've added since you embarked upon this initiative?

Well, obviously, we know how big the range is of every license we have.

But that's not the kind of minute detail that we give out.

If I give you an example of the Co-op one, they initially launched it with about 70 items and they're going up to 100 in the first stages.

So we're talking about sizable ranges are growing around the world.

So is that hundreds?

Is it thousands?

You know, Jerry, it varies by contract.

It varies according to what the product lines are that the manufacturers have, whether we're in a restaurant or are in a supermarket relationship, like Co-op, ice cream, bakery goods, so it's not a question that we can really answer or that we really should answer.

Okay, a question about the Corporate Solutions then.

This one is about Corporate Solutions.

Is there any way to quantify how many attendees might be currently attending in sort of those one-off meetings at a corporate location that could potentially be replaced by a more formal agreement with a corporation?

I agree with you, Jerry, some of the people that would be working for these employers would already be in the Weight Watchers system, so I don't really see it as a replacement.

I just think that now in the corporate environment we will get additional attendances.

But if somebody is already successfully losing weight with Weight Watchers in attending a meeting, I don't think that they would necessarily change their behavior.

They would still be part of our attendances, if you see what I mean.

Okay, I guess I'm trying to offset the Corporate Solutions opportunity with the cannibalization, if you will, that might take place.

I would think that there would be some, but I wouldn't think it would be meaningful cannibalization.

Okay, great.

And, Ann, maybe with regards, clarification on the margin trends, I think you indicated that the gross margins should continue to improve, that the marketing expenses would, as a percent of sales, or revenues, be comparable in the second half of the year and then trend down in '06?

Are those two statements relatively accurate?

Yes, they are.

And with regard to SG&A, there's maybe two things are, quote, unquote, non-recurring.

That's the transaction related cost and, maybe, the litigation reserve and, I guess, the derivative question is what is the litigation reserve for?

We have a few small pieces of litigation going on right now and that's what we're reserving against.

There's nothing major.

Okay, great, thanks, ladies, I appreciate it.

Thank you.

Thank you, we have our final question coming from Howard Choe of Standard & Poor's.

Hi, good afternoon.

Hi, Howard.

I have two questions.

What are your expectations for cash flow from operations and CapEx for the year?

Our expectation is that we will have cash flow that's similar, maybe higher than it was, than it has generally been, which is around the $200 million plus mark, and that's not counting the dot.com, which is, of course, now incremental to the WWI cash flow.

Okay, and I'm sorry, CapEx?

Oh, CapEx, it tends to run around 5 million, 6, 7 million a year, depends, this year, of course, we're doing some background work, back-office work on the Corporate Solutions, so we'll be spending some money on that, and dot.com will have some CapEx, as well.

Okay, and my second question is where does the revenue from Corporate Solutions appear?

Is it on the other revenues line?

Yes, it would appear in our regular meeting fees line, when we're talking about "At Work" meetings.

It would appear in our other products line when we're talking about an at home product, a dot.com product, or just depending.

It would flow into our regular P&L lines, we're looking at across all the lines of business.

Okay, thank you.

Thank you.

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

Thank you, and thank you for joining us today.

I'm looking forward to updating you on our next conference call and to let you know what our progress has been.

Thank you.

Thank you.

This does conclude today's conference.

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