WW International Inc (WW) 2005 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Weight Watchers International third quarter 2005 earnings teleconference call. (OPERATOR INSTRUCTIONS).

As a reminder, this conference call is being recorded today, Wednesday, November 2, 2005.

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

Please go ahead.

Thank you to everyone for joining us today for the Weight Watchers International third 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 third quarter of 2005.

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

The press release is available at www.WeightWatchersInternational.com.

Before we begin let we 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, ma'am.

Good afternoon, and thank you for joining us as we review Weight Watchers International's performance for the quarter ended October 1, 2005.

As you all know, on July 2 we exercised our warrants in WeightWatchers.com and acquired all equity interest in WeightWatchers.com, not held by Artal Luxembourg, bringing our ownership to 53%.

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

Since the merger took place at the end of our second quarter, and we have controlled WeightWatchers.com since then, as we indicated on our last call, we will focus our discussion today and in future quarterly calls on the financial results of Weight Watchers International with the consolidation of WeightWatchers.com.

On a consolidated basis our revenue for the third quarter 2005 increased 5% to 257.5 million, up from 245.9 million in the prior year.

For the quarter our gross margin improved significantly, up 430 basis points to 55.2% this year as we continue to benefit from the higher meeting fee revenue for attendance, less product discounting, and strong growth in our high margin licensing revenue.

Ann will provide more details in a few minutes.

Our operating income increased 15% to $84.7 million, up from 73.8 million in the prior year.

Our operating income margin increased 290 basis points from 30% in prior year to 32.9% this year.

Our fully diluted earnings per share in this year's third quarter were $0.47 versus $0.42 on a comparable basis in the third quarter of 2004.

As a reminder, last year's reported earnings per share were $0.47, and included a $0.05 gain from a onetime tax benefit.

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

First, North America.

In the third quarter NACO reported attendance growth of 2.5%.

Lecture income in quarter 3 increased 12% over prior, as we continued to benefit from the price increases we took in January and earlier this fall, as well as from our attendance growth.

Building on the strength of our second quarter, our recruitment in July and early August were running double-digit positive versus prior, and our attendance was strong during these seasonally slower months.

However, as we moved into our high recruitment portion of our fall diet season, a period that runs roughly from the third week of August through mid-October, our year-over-year recruitment trends turned negative.

When we had built our plan for the fall marketing campaign we obviously had not expected to match the tough comps from the early weeks of the TurnAround launch last year.

Instead, we planned for a gradual build in recruitment fueled by strong brand marketing in the initial weeks of the diet season.

Late August and September are important marketing and recruitment periods for the fall diet season.

It is a time when our target customers are returning from their summer vacations, are sending their children back to school, and are receptive to our message to do something for themselves and reengage in their weight loss efforts.

This year Hurricane Katrina hit during these important initial weeks of our marketing campaign, disrupting our plan.

The Katrina tragedy captivated the nation, dominated the media, and figured prominently in people's conversations and thoughts during these vital weeks.

This impacted the effectiveness of our marketing, and as a result had a negative impact on our volumes that went well beyond the hundreds of meetings we closed, and have kept closed, in the geographic geographical areas which were directly affected by the storm.

As I have explained in the past, our fourth quarter attendance is driven primarily by the flow through of our September enrollment.

And although we have seen continuous improvement in our year-over-year recruitment trends since September, I expect our attendance growth in NACO to remain in the low single digits throughout the remainder of the year.

While we are disappointed that our fall diet season was disrupted, and that we're not able to communicate our message as fully as we had hoped, we're looking forward to the start of our important winter diet season this coming January, when we have our strongest advertising level.

Now moving onto the UK.

As we had forecast on our last call, attendance in the third quarter was down 9.8% versus prior, and we anticipate that it will be similarly down in quarter 4.

Because of the price rise we took in January, the growth -- and the growth in our licensing, our local currency revenues in the UK declined at a lower rate of 5.1%.

Our UK team has made solid progress in implementing the changes required to reduce the complexity of their new program, and to reduce the resulting confusion amongst some of the members that has had a negative impact on the UK's performance.

As a reminder, some of the actions they have undertaken are to improve the leader training program, change the Getting Started session to make the programs rich content easier to understand, changing the weekly handouts that members are given and the content of the meeting guides which are used to frame the meeting discussions, and adding tabs to the member handbook to make it easier to use.

We expect their efforts will solve the problem we experienced, and that growth will return as we move through 2006.

Looking at Continental Europe, in quarter three Continental Europe is lapping its well received FlexPoints innovation that had delivered 17% attendance growth in both the third and fourth quarters of last year.

In quarter three 2005 Continental Europe posted attendances of 2.5 million, a 1% increase versus prior.

Revenues were up 3.4%, without the impact of fluctuations in the foreign exchange rate.

As we look at the fourth quarter, we expect low single digit attendance growth to continue.

One of our key initiatives in our International operation has been to strengthen our management team.

To this end, I am pleased to announce that David Kirchhoff, CEO of WeightWatchers.com, has taken on the additional responsibility of managing our International operations.

David will oversee the UK, Continental Europe and Australasian, as well continue his oversight of WeightWatchers.com.

David is a very talented executive who will help us realize the full potential of these markets.

Moving onto WeightWatchers.com.

It continues to perform well.

In the third quarter .com contributed 27.7 million to our consolidated revenues, and 10.4 million to our consolidated operating income.

In quarter three revenues were up a strong 22% over prior.

This increase was driven primarily by a 13% increase in the active subscriber base to 547,000, up from 485,000 at the same point last year, as well as a price rise for the Weight Watchers Online product in the U.S. market during the third quarter of last year.

Since the merger, we have relocated the .com staff into Weight Watchers International's new corporate headquarters in Manhattan.

The integration has been seamless and the two teams are working extremely well together.

We are excited about the initiatives we are working on, the first of which will be the launch in the next couple of months of our e-commerce store that will focus on our online subscribers.

This will be the first time that our online subscribers here in the U.S. will have the opportunity to purchase many of the proprietary Weight Watchers products.

Another ongoing initiatives we have is to leverage the .com's learning, proven subscription model, and technical expertise to investigate alternative payment models for the meetings business.

Our meetings business is very effective at driving recruitment.

Over 5 million people started the Weight Watchers program last year.

This is a level of enrollment that dwarves all other weight loss -- all others in the weight loss industry.

But with our pay-as-you-go model, we are asking our members to recommit week after week after week.

And we even make it quite hard for them to come back if they missed a week or two.

Independent clinical research has proven that people who go to meetings are far more likely to lose weight than somebody who tries to lose weight on their own.

Our data shows that the more meetings somebody attends, the more successful they are likely to be in their weight loss effort.

Finally, we know that people who make a higher commitment to Weight Watchers, currently through the purchases of prepaid multiweek packages, on average attend significantly more meetings and lose more weight than people who pay each week.

By introducing new payment alternatives that move away from the week to week decision, we have the potential to get more meaningful commitment and engagement from our members, therefore increasing attendances and as a result driving greater weight loss success for them.

We are in the testing phase of this opportunity.

And given the strong initial results in terms of retention and revenue per member, I anticipate that we will be rolling it out in NACO during 2006.

We will measure our success by our ability to increase the number of weeks an average member stays engaged with our program.

If we are successful, we will significantly increase both the success of the average member and the amount of revenue we earn.

Before I hand over to Ann, I would like to mention the increasing success of our licensing business.

In quarter three we saw a tremendous 136% increase in our licensing revenues, which were up from 3.9 million in Q3 last year to 9.2 million in this year's quarter.

Our licensing revenue growth was driven by the continued growth of our licensees all around the world, and benefited from the third-party license royalties that reverted to us at the end of September in 2004.

Of course, our success reflects the success of our licensees with our brand.

Our snacks, cakes and muffin licensee, Dawn Food, is having great success in the U.S. in rolling out its product across the country, following a very strong launch at Wal-Mart.

Their points of distribution increased 40% from Q2 to Q3.

And I'm told that sales have exceeded expectations in every retailer they have entered.

Wells' Dairy, the largest private dairy in the U.S., and our licensee for frozen novelty, has done an outstanding job.

In its first year it looks like they are on track to match the highest annual revenues ever achieved by our previous novelty licensee.

Sales per point of distribution of our branded product in the most recent period were over 50% higher than any other Good for You brand in the category.

We recently entered into a new license with Wells for the yogurt category, and these products should begin to show up in supermarkets later this winter.

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

Good afternoon everyone.

As a reminder, we began consolidating WeightWatchers.com in the second quarter of 2004, a year before we acquired the controlling interest in the business, in accordance with our adoption of FIN 46R.

So accordingly our fully consolidated results for the third quarter 2005 are comparable to prior year with respect to the inclusion of WeightWatchers.com.

The consolidated Company's third quarter 2005 revenues were 257.5 million, up 4.7%, or 11.6 million, versus the third quarter of last year.

Net income was 49.5 million this year.

Last year's third quarter's net income of 50.2 million, included a 5.5 million tax reserve reversal, which had been established at the time of our separation from Heinz, and which was no longer needed.

Excluding that favorable impact to 2004, net income has increased 4.8 million in third quarter 2005, and earnings per fully diluted share rose 13% to $0.47 this year.

From an operation's perspective, global meeting attendance in the third quarter was 13.6 million, a 1.1% decline versus last year.

End of period WeightWatchers.com active subscribers rose 13% to 547,000.

As Linda discussed, our North America fall marketing campaign was disrupted by Hurricane Katrina and its aftermath, which had an adverse impact on our meeting attendance.

In addition this year there were no fall innovations in our major geographies.

In the third quarter of 2004 both North America and Continental Europe launched innovations which spurred enrollment, attendance and online subscriber growth from end of August into September of that year.

Our revenue grew 4.7% as a result of a number of factors.

We benefited from pricing actions taken on our NACO and UK meeting fees, and on our online subscriber fees.

Our product licensing business continues on its positive trajectory of 136% in total, and double last year's level excluding the impact of licenses that reverted to us from Heinz, our former parent.

Product sales per attendee however, declined 6.5% versus last year, in line with the pattern we see when lapping an innovation.

It is typical to see the kind of spike that we saw last year in product sales during an innovation.

Existing members were already attending our meetings and rejoiners, prompted by innovation related updates to some of our product who often repurchase companion books and other one time joining products.

In fourth quarter of 2005 we have launched a number of new consumables in NACO, which had been very well received, and we believe will drive good product sales growth into the fourth quarter.

Now looking at some of the details of these results within our businesses.

NACO's total attendance in the third quarter increased by 2.5% to 7.6 million, below our expectations due to the impact of Hurricane Katrina.

Revenues in third quarter NACO were 121.2 million, up 6.8% over last year's 113.5 million, outpacing the growth in attendances through a combination of price increases, which were taken in 58% of NACO, and higher sales of prepayment plans.

Internationally, attendance was 6 million this year, a decrease of 5.3% versus prior.

Revenues from our international classroom operations declined 3% to 81.4 million.

As expected, UK was responsible for the decrease in international attendance in the quarter, posting a 9.8% decline to 2.7 million attendances.

Revenue declined 5.1% on a local currency basis.

The price increase taken in January and continued growth in the licensing business partially mitigated the impact on revenue of the attendance decline.

Continental Europe's attendance growth cycling against a strong prior year innovation was 1%.

Continental Europe delivered 2.5 million attendances in the quarter.

And its revenues increased 3.4% on a local currency basis, driven by its growing licensing business.

WeightWatchers.com's revenues grew 22% to 27.7 million from 22.8 million in the prior year quarter.

This growth was the result of a 13% increase in active end of period subscribers, coupled with the price increase taken in July 2004 from 59.95 to $65 for a three-month prepay, and from 14.95 to 16.95 for a monthly fee thereafter.

The price increase continues to have a positive impact since then current subscribers were grandfathered with the old pricing.

Moving onto our other revenue.

Franchise commissions totaled 4.6 million in the quarter, an increase of 7.8%.

Both domestic and foreign commissions grew at similar rates in the quarter.

Our other revenues, which are comprised primarily of licensing and our publications, were 12.7 million in the quarter, up 55% or 4.5 million over the year ago level.

Licensing revenues comprised about three-quarters of our other revenues at 9.2 million, and accounted for all of the year-over-year increase.

This business is growing strongly in all of our geographies.

Our gross margin in the third quarter 2005 was 55.2%, up 430 basis points from 50.9% in the prior year.

Price increases in the U.S. and UK meeting business and in online were partially responsible.

In addition, unlike last year, there were no direct innovation-related expenses in the quarter.

Operationally, we benefited from better inventory management and fast growth of the WeightWatchers.com business.

The scalability of the .com business model drives margin expansion as revenue grows.

Marketing expense for the third quarter was 27.9 million this year, up 5.3% from 26.4 million last year.

The increase is primarily from our UK business, where we increased spending on research to better understand our members' response to the Habit Swap innovation, while still holding our media spend to maintain our share of voice in the market.

Marketing expense as a percent of revenue were 10.8% in both years.

G&A in the 2005 quarter, excluding expenses related to the WeightWatchers.com acquisition, was 28.1 million, an increase of 11% versus prior year, driven by the full year effect of the strengthening of our management team, particularly in the U.S. and Continental Europe.

There are two items related to the .com transaction affecting third quarter 2005 G&A, our compensation expense related to restricted stock units issued to WeightWatchers.com employees as redemption for unvested options, and expenses associated with the relocation of WeightWatchers.com's headquarters.

In total, G&A was 29.7 million in the quarter, an 18.5% increase, and grew from 10.2% of revenues in the third quarter 2004 to 11.5% of revenues in the third quarter of 2005.

Our consolidated operating income rose 14.7%, or 10.8 million in the quarter, to 84.7 million.

Operating income margin in the third quarter improved 290 basis points to 32.9% from 30% a year ago.

In terms of the expense categories below operating income, our net interest expense rose by 21% in the third quarter 2005 to 5.3 million as compared to 4.4 million a year earlier.

Our level of debt actually decreased versus last year's Q3, despite the outlay required to raise our ownership in WeightWatchers.com.

However, with the increase in market interest rates our effective interest rate, including swaps and hedges, rose to 5.22%, up from 3.6% in the prior year quarter.

Consolidated Company income tax rate in the third quarter 2005 was 37.6%.

This compares to 26.8% in the third quarter of 2004.

As as was mentioned earlier, last year's third quarter benefited from the 5.5 million reversal of an income tax reserve recorded at the Weight Watchers International level.

In addition, last year's rate was also favorably impacted by the reversal of an evaluation allowance at the WeightWatchers.com level, which largely eliminated its income tax expense in the quarter.

Now just a few notes on the WeightWatchers.com transaction.

As we indicated in our last call, Weight Watchers' ownership of WeightWatchers.com will increase to 100% as a result of the redemption by .com of Artal's 47% outstanding interest for 304.8 million.

Transaction fees on this portion of the acquisition are estimated at 4 million.

The redemption, which is planned for December of this year, will be funded at the WeightWatchers.com level through a new credit facility totaling 220 million, and WeightWatchers.com cash on hand of approximately 90 million.

WeightWatchers.com received a credit rating today of BA3/B1 from Moody's.

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

In the nine months ended October 1, 2005 the consolidated Company generated cash from operating activities of 252 million.

A net 72.2 million was used for the acquisition of increased ownership of .com.

In addition, we spent 42.6 million on share repurchases in the first nine months of the year, and paid down over 100 million of our revolving credit facility.

In comparison in the first nine months of 2004 we generated 215 million of cash from operations, and utilized 199.5 million, of which 121 million went to share repurchases, 12.8 million to pay down debt, and 60.5 million was used for the Washington D.C. and Fort Worth franchise acquisition.

On the balance sheet, our total debt at the end of third quarter 2005 was 361.9 million, down 107.2 million from 469.1 million at year-end 2004.

Note that we have still 283 million available under our current revolving credit facility.

Our balance sheet currently includes a liability of 304.8 million and corresponding reduction in equity for the redemption of our trial (ph) shares of WeightWatchers.com.

Once the redemption occurs the liability will be reversed.

The increase in shareholders equity of 119.6 million, excluding the reduction for the redemption of Artal's WeightWatchers.com shares, reflects the increase in retained earnings, offset by the impact of share buyback program.

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

And now I will turn the discussion back to Linda.

Thank you.

Before we take your questions, I would like to take a moment to discuss guidance.

In our last call we provided fully diluted consolidated EPS guidance of $1.91 to $1.98, excluding onetime expenses related to our acquisition of WeightWatchers.com.

Taking into account the weaker than previously expected performance of NACO this fall, we're narrowing the range of our previously provided EPS guidance for the full year to 1.91 to 1.95.

As we are now finalizing our plans for 2006, I can tell you that I am optimistic about the opportunities in front of us.

I fully expect that we will see stronger attendance growth next year than we did this year, with NACO continuing to strengthen as we move forward into the next year, and our corporate solutions initiative contributing more meaningfully to our success.

Our UK management team is taking the necessary steps to move that important market back onto a growth track.

With its relatively low penetration, Continental Europe continues to hold high growth potential for us.

And our WeightWatchers.com subsidiary is still early in its long-term penetration growth story.

In addition in 2006 we will have launched our e-commerce site.

And we have other Internet initiatives underway, including the launch of Weight Watchers Online subscription products in a new country next month.

Overall, I'm confident that in 2006 we will build on the 10% revenue growth we expect to deliver for the full year 2005.

I am looking forward to sharing more details on our 2006 plans, including 2006 guidance, when we report our full year 2005 results.

At this time we would be pleased to answer questions.

(OPERATOR INSTRUCTIONS).

Greg Cappelli of CSFB.

It is actually Colin filling in for Greg.

Obviously attendance in North America was a bit weaker than expected.

Could you talk just a little bit more about how much you think that had to do with the hurricane relative to your last introduction being about a year old and potentially losing some steam there?

Obviously, we have a pattern of every other year innovation, so that is not an unusual picture for us to have an innovation year followed by a non innovation year.

If you're looking at the exact launch and the marketing campaign that launched it, then we know that the innovation will give us this spike that is very difficult for a non innovation year to climb.

That is why I said when we were planning our 2005 marketing plans for the fall diet season and we had already taken that into consideration.

And when we were looking at the summer picture, which is obviously the last time we spoke, we were looking at that summer picture.

We were in a very strong position.

We had every belief that as we went past that initial launch of the TurnAround program that we will we would be back to a stronger picture.

Now unfortunately Katrina had quite a widespread impact, as I am sure you can realize, not just in the number of meetings we lost throughout that area, but also just in terms of the distraction that people were experiencing at that time when we were trying to get through quite a very strong and a very different brand message with our advertising.

Our advertising programs are always front loaded, so I am afraid they just literally collided at exactly the same time.

Yes, the impact is far wider than just the number of meetings we lost.

And unfortunately for a good part of that area our meetings are still closed, and will be closed for the rest of the year.

Any guesses as to putting a dollar figure on that impact or --?

I think you can see that in terms of our attendances we came in in the mid single digits -- into lower half of the single digits, which was not necessarily where I expected us to come in.

But if you're looking at our revenues, I still think we're in very, very strong double-digit revenue growth.

And I think this is the strength of the picture that we're looking at.

All through the world right now you're saying much stronger revenue growth than are connected to the attendances alone.

And as I said, we certainly expect the year to end up at 10% revenue growth on the current trajectory.

I don't think that I quantified the impact on the Katrina effect, if you like, on our revenue.

But do remember that it impacts the whole fall diet season.

We have three diet seasons a year.

And our next diet season, which is the natural place for people to say, okay, I'm going to get started again, is in January.

And that is of course the biggest diet season.

The September one is our smallest one of the year.

Chris Ferrara of Merrill Lynch.

Can you talk about what happened to your ad program through the hurricane season?

And was there -- you didn't pull back on any of your marketing, did you?

No, we didn't.

We had -- we did our placements.

In fact, one of the things about our placements is that we can't react absolutely on a dime and pull or turnaround.

So our ads ran as intended.

I think what we were talking about was more just the distraction that people were feeling so that we didn't have the same cut through and our message didn't get through in the same way.

I don't know if you have seen our ad this autumn.

But if you have seen it, or if you had even visited our message boards you'll know that we have a much stronger brand message out there that is really talking about the core attributes of what you get when you go to a Weight Watchers Meetings.

We had already anticipated that we needed to get across this message, because it was less promotional in its nature then we normally do, which is the news of the innovation and an offer.

This was much more brand focused.

We have to conclude that it just didn't have the ability to cut through the distraction that people were feeling during those first weeks of September.

I saw the ads, and I didn't think it was very good.

What I have a harder time understanding is whether someone in New York or California or anywhere in the middle of the country, not south, would really truly have been distracted by Katrina, and then Rita.

I mean can you convince me of that?

Because that is what I'm having a harder time getting my arms around.

The only thing that convinced me was when we did the analysis and saw that the further North we went, like Canada, we didn't see the same impact.

I think we experienced the same sort of thing with 9/11.

The impact of 9/11 was far wider than the New York area.

It is just an emotional thing and an engagement thing, if you like, that sort of just distracts people from taking this very proactive step of going into a Weight Watchers Meetings, or joining a Weight Watchers meeting.

So I don't know if I can convince you, but certainly the analysis that I saw convinced me that we were saying a widespread Katrina effect across the United States.

And as I said, we closed hundreds, hundreds and hundreds of meetings in the area affected and the weeks affected.

And almost 200 of those meetings are still closed now, and will remain closed for the rest of the year.

I just wanted to ask about product sales too.

I know you were talking about a profit you got last year, but your product sales per attendee were still significantly lower than where they were two years ago, or three years ago too.

Can you just add a little color to that as to what is going on?

I will let Ann actually look that up, because you are sort of testing my memory if you're saying that they are considerably lower on a per member basis than they were a couple of years ago.

Of course, when you're looking at our dollar product sales per attendance, you're looking at the impact of better exchange rates and worse exchange rates.

And right now we're not having the benefit of the weaker dollar against the pound or the euro that we had been experiencing certainly in the last two years.

If Ann wants to come back and answer that more directly, she will try to find the figures for you.

I'm sorry -- it was just North America I was looking at, and I would looking at --.

I thought you were looking at us in global terms.

Yes, sorry.

I am just looking at Q3 product sales per attendee numbers over the last few years.

Right.

Remember, in the last three years two of them had innovations out of the three.

Right.

Which is why I went back to even --.

So you went back four years?

To '02.

Right. '02, of course, was our bumper year, if you're looking at the hyper growth that we were experiencing then.

I think that one of the big effects too that is hard to explain, but I will try to do it.

We have bought in since 2002 quite a few of the franchise territories.

And when we buy in a franchise territory, particularly a big one like we did the WW Group, because their product sales per attendee are about half of NACO's average, when they first come onboard they actually have the effect of depressing our product sales per attendance.

And then as we build up those sales, obviously, they do catch up and regularize.

But I can only expect that part of what you're looking on, if you're looking at it 2002 compared to right now on quarter three only, that you're looking at a combination of the two innovations in the two intervening years, and the effect of us having bought so many franchise territory since 2002.

Ann is nodding vigorously.

So she is looking at those figures now.

I'm not trying to nitpick.

And I wasn't specifically looking at those two.

I'm just trying to understand whether this really is just a comp issue, because I have a hard time viewing the previous periods as real, real difficult comps.

But anyway, I will let you explain.

Even if you can center it just on what is going on today as opposed to in the past anyway.

If you look at the differing quarters you would see a different picture obviously.

You're looking at quarter three.

And as I said, that one had the two innovations in it.

If you're looking at -- next quarter, quarter four, we expect to see a positive picture again, but (multiple speakers).

For the year?

Positive in quarter two.

And it was positive in quarter two.

So we really think that the innovation did have a pretty strong impact there with the change in the program materials, and people rebuying who had already bought, for example, a companion.

If the program changes while they are a member they buy another one, that kind of thing.

We really are seeing it.

And based on the results we see both in Q2 and what we're anticipating in Q4, we're feeling comfortable.

So you think Q4 will be up per attendee year-over-year?

Yes, we do.

Just one other.

The licensing, it was down sequentially a little bit.

Does that mean anything?

How sequential or seasonal are your licensing fees?

I think it was 9.9 last year quarter and 9.2 this quarter.

And obviously the year-over-year growth is pretty significant, but I'm just trying to understand sequentially how to think about.

There is some seasonality to weight loss and to attention to weight loss.

So I think you can kind of look at it --.

And obviously, different -- each licensee almost has different seasons where they are strongest.

It is sometimes to do with the mix.

I think if I'm looking at the total portfolio of licensees and licensed products we're very, very pleased with the progress they are making.

So we don't --.

I wouldn't read that as a signal event.

I wouldn't read it as a signal, no.

(OPERATOR INSTRUCTIONS).

Bob Craig of Legg Mason.

A question surrounding something that I think has been touched upon a couple of times here.

There's been a lot of concern about a general slowdown in consumer spending.

And you used the term distraction a couple of times here, which I can understand.

But I guess I just want to get your thoughts on that versus just overall consumer retrenchment.

And especially just relating that to when you have your next major marketing campaign in early January, a lot of people are likely to be facing higher energy bills.

How do you expect that to impact your business?

Are you really concerned about it?

I think you're right.

There might be some sort of sticker shock going on in the marketplace at the moment.

When we have looked at our business compared to just general recession, we don't see a correlation.

Our business doesn't go with the normal cycles.

But obviously, what we might be looking at right now is just these individual components of somebody's budget being so extremely inflationary, such as their gas prices or their heating bills which will come.

Although we don't think generally we have a sensitivity to the economy and the general recession, we don't actually know if our members have been a bit affected in terms of whether they want to get in their cars and drive somewhere, or whether they are a little bit nervous about their discretionary spending right now.

But in most of these cases we usually find that once you get over the shock of the new price level, it doesn't take that long before people sort of settle down and that becomes the norm, and then they reorder their lives.

Obviously, it could be having an effect on us, but I don't think in our planning that we are expecting it to have a huge impact on us.

That's helpful.

Could you do me a favor and provide a little bit more detail on the alternative payment plan, how that actually is going to work?

As I described, right now the vast majority of the people who join Weight Watchers -- and they have for the whole 44 years that we have been having meetings -- are on a pay-as-you-go basis.

They are paying each week, and therefore each week they have the ability to make the decision, do I go to my Weight Watchers meeting this week or not.

And in some senses if they miss a few weeks, it becomes a disincentive, because if you have ever read our rules you will know that we often charge for missed weeks.

Which means if you have missed a few weeks you can make yourself think, oh, my goodness, should I go back?

I'm going to have to pay for the weeks that I missed.

Maybe I'll wait and start after the holidays or whenever the next obviously point would be for you.

We noted in our prepaid plans, where we're selling packages that 10 or 12 weeks long, so that people have already paid for that number of meetings, that they stay in the system better.

That they attend more of those meetings.

That they have better weight losses.

In other words, it increases their commitment, and they can then bridge any of these little disruptions that come along and mean that they attend for a period of time.

In looking at the .com folks, obviously we have got a new model there where we have people who are still not making one of those huge annual commitments.

Where we're charging them, whether they are using it or want it or not.

We're still in a situation where people can stop Weight Watchers at any time that they decide to.

But it is quite a different model to go to a place where you have automatically paid, if you like, for a group of meetings, a period of time.

And therefore you're not making this week by week commitment decision.

And this is what we have been testing.

It is quite new for us.

We have had very positive response, even some people on the website have been hearing about it and asking for it.

We feel that offering different alternatives to the pay-as-you-go, the week by week, will be very, very powerful for our members and help their success, therefore help the word-of-mouth, as well as obviously help us in terms of revenue.

So we are working on that.

You mentioned, Linda, the pilot program.

Do you have any quantification of what the impact has been on items like retention?

Not that I am willing to share.

But I can assure you, we're testing it.

The e-commerce initiative, will you also sell licensed products over that as well?

We're looking at -- we haven't finalized the range of products.

And we're looking at Weight Watchers branded products obviously, but we could obviously offer other products as well.

And these will be available to our online subscribers in our e-commerce store.

So we're really excited about that.

Jeff Stein of KeyBanc Capital Markets.

A couple of questions.

Corporate solutions, I didn't hear any comments regarding the status of it.

How it is going, if you have added any major accounts during the quarter.

Could you bring us up-to-date?

Yes, and we have added major accounts during the quarter, and we've got quite a few more that are pending for January that hopefully we will be successful in signing.

It is not going to be our practice to name every single client that signs up for us.

Obviously, that is not something that we'll do, unless they decide to publicize it.

But we have been very, very pleased.

I know that you know that last time I just mentioned a few of them so that you could get the scope and the type of corporation that is looking at these kind of wellness programs, including Weight Watchers in it.

One of the big ones that the got everybody's attention obviously was Wal-Mart, because many people have said to me afterwards, my goodness, they have got millions of employees.

So I wanted to point out to you that this is still a voluntary thing that the individual employee chooses to do.

And that each corporate client decides which service and product that they're going to offer to their employees.

And if we're taking Wal-Mart, for instance, they're offering their employees their vouchers that take them into the local meetings.

They're offering online, and they're offering our at home service.

Each one is slightly different and configured slightly differently.

But I can assure you, we have had more sign up, and there are more in the pipeline.

I have really high hopes that this is going to be very, very meaningful part of our business as we move forward.

And often these are 26 week to 52 week programs.

So it is not a stop/start like our normal at work program used to be.

Is there anyway at this point to measure penetration in these various new corporate solutions accounts?

For example, at what point would you expect to get a reading as to whether or not you're having success with Wal-Mart?

And have you set any predetermined goals going into the program?

I would imagine that working with the clients our salesforce and our team have worked out goals, not ones that they have necessarily shared with me in detail, or that I would even presume to share with the outside world.

When clients decided to put benefits in for their employees that is their program.

We just happened to be the person that they have chosen.

And I'm very glad that they did.

But it is not something obviously that is for us to disclose.

If you are asking in terms of our back office capability, we are -- we will be able to tell how many employees from any given company has signed up, and what they bought.

And we will be reporting back to the companies on results.

How are these -- I presume that these numbers, whatever the numbers are, are just merged into your reported North American attendance?

Yes, as I said the ones that we have signed up this year will not have a meaningful impact on 2005.

They will start to roll through and their impact will start to be felt in 2006.

And they will be in our online numbers as well.

Yes, they will be in our online numbers.

They will be in our meetings numbers obviously.

Linda, I think you mentioned that you've got about 200 meetings that are going to be lost as a result of, I guess, ongoing issues relating to the hurricane.

And I am wondering are those 200 meetings locations or 200 actual meetings that take place?

They are 200 actual meetings for the four month period.

Final question is with regard to price increases, is the slowdown that you're currently seeing relative to expectations in North America going to dissuade you from any other price increases that perhaps you would have planned to initiate?

No, as you know, we put in 40% of the U.S. market went up $1.00 from 9.95 to 10.95 last January.

As we reported at that time, we didn't see an impact on our business.

We were very comfortable that we have the ability to increase our prices, and that this is a great value for money.

We then put another 15% of the country up $1.00 this September.

Nothing that is in our world right now tells us that we don't have the ability over time to continue looking at pricing as one of our opportunities.

(indiscernible) of Citigroup.

I just had a quick question, just to clear up on the guidance for North America attendance.

You mentioned low single digits.

Is that for fourth quarter or is that the year-end number?

That was for fourth quarter.

And then I just wanted to see if you had any updated views regarding WeightWatchers.com guidance.

I think in your previous comments you mentioned it would be $0.03 to $0.05 accretive in '06, and $0.10 to $0.15 accretive in '07.

Do you have any updates on that?

We're actually not giving separate guidance on the .com.

One of the things -- we just wanted you to know that as it brought in that it is actually going to contribute, because it well.

One of the things I said at a time of the acquisition was that we're starting to amalgamate and function in many areas as a single Company, and we're very pleased to be doing that.

I think going forward we will be looking at Weight Watchers International on a consolidated basis.

And that is easiest way, and then we will give color on each of the component parts, including .com.

Our last question is coming from Scott Mushkin of Banc of America Securities.

A lot of my questions have been answered, but I was wanting to get into this Katrina thing a little bit.

Because it seems like to me it would have a couple of impacts.

Number one is on just how wide of an impact it had on the Southeast, not just the area -- in southeastern Texas not just the area where it hit.

And any color, any more color that you guys could give on the number -- I know you said about a couple of hundred meetings kind of on an ongoing basis.

But how many meetings in the first week or two do you think were really disrupted?

And what percentage of your business is down there in the Southeast, in Texas and southeastern Texas?

Obviously, there were the meetings that we actually lost, and they're a greater than that.

And we actually -- we will call it Katrina, but we were looking at multiple storms.

It has been quite a time for the poor folks who actually live down there.

We have double impact, obviously, for something like this.

We have the impact on the meetings that can't be held.

And as I said, because of the situation in New Orleans and some of the areas, the meetings are suspended really for the rest of the year.

And we have been working very, very hard to reopen as many of them as we can in preparation for January.

But we do have the other impact, which is more of a distraction thing or a getting ready for the impact of a storm.

Which just means that not everybody who would have showed up at a meeting actually leaves their house and goes.

This is what we call that CNN effect where people are just sort of -- the news takes over their lives to a far greater degree.

And therefore we can see a lower attendance in our meetings during this sort of period of tragedy, or this period of crisis.

Or for a large part of that area it was an actual danger that they felt they might be in, or that they were being evacuated and then coming back in.

So I think that the impact for the wider world was the CNN effect.

And the impact of actually being displaced, coming back home, having your whole pattern disrupted was in quite a great area.

I know that at one point I was in Great Britain when Katrina was hitting, or had just hit.

And on the British news they were bringing home to those people how big this is by saying that the area affected by Katrina was the same size as all of Great Britain.

It is a big impact.

And it is the largest part of our southern region.

Do you know how many meetings -- because Rita was also a big impact.

And of course all of Houston was evacuated for about four or five days.

Do you have any --?

And that is what I mean about it, when I'm talking about these hundreds of meetings that are suspended for the rest of the diet season, I'm really talking about from all the storms.

But we saw the impact of Rita.

We saw the impact of -- every time people have been displaced, we have seen the impact on the meetings locally of people just not obviously -- it is the last thing on their mind, going to their Weight Watchers meeting when they're nailing down their home and sitting in seven-hour queues to get out of town.

So the 200 was the total or is the ongoing?

Just to make sure I understand.

That is more the ongoing.

Then the second thing is getting to this -- you changed your ads.

I think you talked about that a little bit.

But they were much more emotional, I think, was the idea.

I think I saw a couple of them, but I'm going on my memory.

I know this is very hard to quantify, but that is a tough ad to run when there's a whole crisis going on.

Maybe that is kind of a silly thing to say, but how much do you think that had an impact on driving new membership into --?

Because if I look at it, and I know someone talked about this on the product sales, it does seem to indicate that maybe you weren't getting a lot of new people in the door.

And I don't know if you have quantified that at all.

I think that we have done probably more research on this particular TV ad that we put into the market than we have on any ad in my 22 years of history.

It was certainly very, very powerful in that emotional message.

And I agree with you, it is emotional.

And it is aimed at our core market.

It is aimed at women who want to lose weight.

And on a very real basis it is showing them the benefits that you get from coming to a Weight Watchers meeting.

We know from that research, and it was quantitative as well as qualitative.

And we haven't done quant research in a long time.

So I'm really very confident that the message really resonated, if people had the attention to be watching it and to be listening for that message.

So I agree with you.

It is a combination of the kind of message we were out there with, what was happening, and the distraction that was in the marketplace at the same time.

But I don't -- I do think that the direction of that message is absolutely spot on in terms of what we should be communicating to the never number, so that they can change their mind about whether they want to try Weight Watchers.

The research really said that this advert has the ability to make people reconsider whether they shouldn't go to a Weight Watchers meeting.

We just want to have the opportunity to play it obviously when there isn't a great distraction out there to build up this brand building that we're in the process of doing.

Do you think that that led to lower new people coming in?

I haven't got an analysis of the database, so I don't want to tell you something that I statistically don't know yet.

But I think your assumption is that a lot of new people might not be focused on their weight when they are so wrapped up.

And even if it is a tragedy happening to other people, they do get wrapped up in it.

There seems to be no further questions at this time.

I would now like to turn the floor back over to Ms. Linda Huett.

Thank you very much for joining us today.

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

Goodnight.

This does conclude today's teleconference.

You may now disconnect.