WW International Inc (WW) 2005 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International fourth quarter and full year 2005 earnings conference call.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference call is being recorded today, Thursday, February 16, 2006.

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

Please go ahead.

Thank you, and thank you to everybody for joining us today for the Weight Watchers International fourth quarter and full year conference call.

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

At about 4:00 p.m. eastern time today, the Company issued a press release containing financial results for the fourth quarter and full year 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 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 than could cause actual results to differ materially from those discussed here today.

These factors are explained in detail on the Company's filings with the Securities and Exchange Commission.

The Company does not undertake any obligation to publicly update or revise any forward-looking statements , whether as a result of new information, future events, or otherwise.

I would now like to turn the call over to Linda Huett, please go ahead, Linda.

Thanks, John.

Good afternoon, and thank you for joining us as we review Weight Watchers International's performance, for the quarter and full year ending December 31, 2005.

I will spend some time looking back on our 2005 performance and accomplishments, and then give you our outlook for 2006.

And we will review your financial results for the quarter, and the full year, and finally, we will answer questions from the financial community.

In 2005, Weight Watchers made significant progress in many areas, on a consolidated basis, our revenues for the full year 2005 increased 12% to $1.15 billion, from just over $1 billion in the previous year.

With the demise of the low carb bubble, attendance growth returned to positive, with full year attendance at company owned operations of 60.9 million, an increase of 1.7% versus 2004.

For the year, our gross margin improved 230 basis points, to 54.8%.

This improvement was primarily driven by increases in meeting fees in several of our geographies over the past year, less product discounting, strong growth in our high margin licensing revenues, and gross margin expansion at WeightWatchers.com as we scale that business.

Our operating income, excluding transaction expenses related to the acquisition of WeightWatchers.com, increased 14% to $349 million from $306 million in '04.

Excluding the transaction expenses associated with the acquisition of WeightWatchers.com, our adjusted fully diluted earnings per share were $1.94 versus an adjusted EPS of $1.75 in 2004.

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

First, North America.

In 2005, we saw the return of NACO as a growth engine for the Company, with revenues increasing 10.5% over prior.

Our attendance at NACO turned positive in Q2, and has been positive since.

For the year total NACO attendance was 33.5 million, a 3.5% increase over prior year.

Revenues benefited not only from the attendance growth, but also from the increases we took in our meeting fees in almost 60% of NACO, and from the growth in our product sales per attendance.

On our last call, I said that we expected our attendance growth in NACO to remain in the lower single digits through the remainder of the year because of the Hurricane Katrina, and it's disruption to our marketing and recruitment during the important period of late August and September.

I'm happy to report that our volumes bounced back through the remainder of the fourth quarter, even more strongly than we expected.

Fueling NACO attendance growth of 6.5% in Q4.

Looking ahead to 2006, despite the lapping of the turn around innovation in the first half of the year, we expect NACO attendance growth--attendance to grow for Quarter 1 and the full year at rates comparable to our growth rate in Q4 '05.

On the pricing front, this January, we raised our meeting fees by $1.00 in an additional 10% of NACO, bringing all of our markets into the $11.00 to $14.00 per week range.

This spring, we will be raising the meeting fee in an additional 11% of NACO, by $1.00 to $12.00 per week.

Through our anticipated attendance growth, selective price actions, as well as continued growth in our product sales per attendance, I'm confident that NACO revenue growth rate in 2006 will exceed 2005's double digit growth rate.

I also want to spend a minute highlighting a company wide strategic push, which is being led by NACO to improve the retention of our members.

We know from our clinical research as well as from our 45 years of experience, that the longer members attend meetings, the more successful they are at losing weight, and keeping it off.

And since we know that the average enrolling member, depending on the market, will attend about 10 meetings before leaving us, if we could get each enrolling member to stay with us for an additional week, on average, we would not only increase our revenues by 10%, but we would also improve that overall success of our members.

Our strategy to tackle this objective is two-fold.

The first is to continue to improve the quality and consistency of our service delivery.

By further improving how we select and train our leaders, and service providers, we are better able to insure that each and every member experiences a motivating environment when they enter our meetings.

A place where they can get information, and the encouragement they need to succeed.

The second leg of our strategy to improve member retention is to provide our members with offerings that encourage them to increase their commitment to their weight loss efforts.

For example, our analysis indicates that members who choose a prepayment plan are likely to attend more meetings, stay on the program longer, and lose more weight.

During our Q3 call, I mentioned that we were studying new payment alternatives to encourage this deeper level of commitment and engagement from our members, and to move away from asking them to make a week to week decision.

As our first initiative, we offered a new season's pass for sale to our members across NACO during late December and the first few weeks of January.

Members who chose to buy the season's pass prepaid for meetings for a defined 17 week period, which runs from the beginning of January through to the end of April.

Season's pass is unlike our typical pricing whereby members pay each week as they attend, even having to pay for missed weeks.

At times, when they miss a week.

Season's pass is also quite different from our traditional prepayment plans whereby members typically buy a book of ten coupons, that enables them to attend ten meetings, at any time up to a year after the date of purchase.

I can report that sales of the season pass were strong.

Members have embraced the idea of committing to a season of weight loss, and we believe we'll encourage them to stay longer and achieve more weight loss success.

The season pass was designed to encourage attendance, and while price to offer the member a good discount from the standard weekly fee, this program will have the overall impact of increasing average revenue per member.

NACO is also continuing to develop and test other programs that we believe have great potential to further enhance the commitment and retention of our members, and to drive additional growth in revenue and profitability.

And as we successfully introduce these programs in North America, we will be looking at how we can roll out similar programs in other markets.

Finally, in NACO, we continue to make progress on our Corporate Solutions initiative.

To date, we have signed 16 national accounts.

A number I expect will continue to grow, about half of these clients provide payroll deduction, or some form of subsidy for their employees who participate in our program.

Corporate America is concerned with the increasing cost of health care, and I believe as we work with these companies to market our products to their employees, both our client companies and Weight Watchers will see increasing benefit to our respective bottom lines.

Now, on to the UK.

UK revenues for 2005 increased 1.2% on a local currency basis, driven by our meeting fee price increase in January, and the growth in licensing, which were partially offset by a 3.2% decline in attendance to 12.6 million from 13 million in 2004.

On our last call, we stated that we expected the UK attendance in Quarter 4 to continue to decline.

Quarter 4 attendance was down 11.8% versus prior following a 9.8%decline in Quarter 3.

For those of you who may have missed our last few calls, the UK launched a new program innovation, Switch, at the beginning of the first quarter last year.

While it generated strong recruitments during the first few weeks following the launch, it became clear that certain aspects of the new program were adding complexity.

This made it difficult for both our leaders to execute in the meeting room, and for members to easily incorporate the program into their lives.

The resulting fall off in recruitment stayed with us through the rest of the year.

And since the spring, our UK team has been working on corrective actions.

But actions like modifying the meeting materials in handbooks could not be implemented before this January, and others, like our new training programs, and changes to the Getting Started session take time to build positive word of mouth.

Looking ahead, the UK will be facing difficult comps in the first half of this year.

The launch of our Switch innovation at the beginning of 2005, supported by aggressive marketing campaign, drove strong recruitments in January and Quarter 1 as a whole.

This year, we won't be able to benefit from the innovations strong start, and we are coming into a year with much weaker attendance flow-through.

Consequently, I expect our weak attendance trend to continue through the first half of the year with improvements only becoming apparent as we move into the third and fourth quarters of 2006.

Moving on to continental Europe, revenues were up 9.1%, excluding the impact of fluctuations in foreign currency rates.

Attendance grew 3.8% in 2005.

Since last August, continental Europe has been launching its well received flex point's innovation that had delivered 17% attendance growth in both the third and fourth quarters of 2004.

For Quarter 4, 2005, continental Europe posted attendances of 2.6 million, virtually flat with prior.

For full year 2006, we expect continental Europe to grow attendance in the mid-single digit range.

In evaluating the performance of our continental European markets, we see volatility in performance across our various markets from quarter to quarter.

While some of this volatility can be explained by the timing of innovations or the lack of maturity of a market, some of our continental European markets have lacked consistency in their operational and marketing execution.

We recognize that these--as these markets grow, we must continue to add depth and skill to our management team in Europe.

As part of this strategy, I'm very pleased that Mads Ryder (ph.), a very experienced manager who has been the CEO of Lego Land amusement parks worldwide has recently joined us to take responsibility for our continental European operations.

Mads reports to David Kirchhoff, who has taken on the additional responsibility for all of our international operations in addition to his role as CEO of our WeightWatchers.com subsidiary.

Moving on the WeightWatchers.com, 2005 was an eventful year with our dot com business achieving several significant mile stones, revenue crossed the $100 million threshold, only 4 years after the launch of its first subscription product.

WeightWatchers.com's business model proved to be as profitable as Weight Watchers meeting business with operating income margin exceeding 30% of revenue.

Global active subscribers surpassed the 500,000 mark.

In December, dot com launched a subscription site in Australia, which has gotten off to a great start.

In December, we also launched our first eCommerce store, with is currently focussed on online subscribers in the U.S. with early results exceeding our expectations.

And last, but certainly not least, on December 16th, WeightWatchers.com completed the redemption of all of its shares held by Artal making it a 100% owned subsidiary of Weight Watchers International.

For the year, WeightWatchers.com contributed $109.7 million to our consolidated revenues, and $44.1 million to our consolidated operating income.

For the fourth quarter, dot com's active subscriber base increased 19% to 535,000 from 451,000 at the same point last year.

In 2006, we expect WeightWatchers.com to continue to deliver revenue growth in excess of 20%.

Moving on to other news, our licensing and publishing businesses delivered excellent results in 2005.

Globally, these revenues doubled from $20 million in 2004, to $41 million in 2005.

We benefited from the strong performance of our existing licensees, the addition of new license partners in both the U.S. and in Europe, and from the licensees that reverted back to us from Heinz, beginning in the fourth quarter of 2004.

We expect continued strong growth in our licensing revenue, in 2006.

On the publishing front, our new book, Family Power, 5 Simple Rules To a Healthy Weight Home offers practical and easy to follow instructions to help parents tackle the ever growing issue of childhood obesity.

And while not a material revenue source for the Company, this book has been well received and has generated good PR placement for Weight Watchers this January.

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

Thank you, Linda, good afternoon, everyone.

I'll begin my remarks with a brief review of the financial progress that our operations made in 2005.

Revenues for the consolidated company increased 12.3% or $126.3 million, to $1.15 billion.

Volume growth across the meeting and WeightWatchers.com businesses accounted for about half of the increase.

Product sales, having lost ground in 2004, are on a positive trajectory, posting a growth of 3.9% worldwide for the 2005 year, and 5.8% in the fourth quarter.

Meeting seed price rises were taken successfully in 58% of NACO and in the UK, and the licensing business was also a significant revenue driver.

Our gross margin for the year was 54.8% up 230 basis points from the 2004 level.

EPS, excluding transaction related expense, and other non-recurring expenses from both years, rose 11% from $1.75 to $1.94 at the upper end of our guidance range of $1.91 to $1.95.

As a reminder, EPS guidance range that we provided excluded $0.27 of non-recurring expenses related to our acquisition of WeightWatchers.com.

Our reported EPS including these non-recurring expenses was $1.67.

Now, in 2004, there were four non-recurring items which when excluded moved EPS from the reported $1.71 to the adjusted $1.75.

There were two one time tax items, which added $10 million to 2004 EPS, a tax reserve reduction at the Weight Watchers International level, and the reversal of a tax valuation allowance at the dot com.

More than offsetting these 2004 tax benefits were an $0.11 charge for the cumulative effective accounting change related to the adoption of FIN46R with respect to WeightWatchers.com, and a $0.03 charge for early extinguishing of debt.

The sum of these four items explains the $0.04 difference between reported and adjusted EPS in 2004.

And finally, in the full year 2005, we generated cash from operations in excess of $296 million, a 17.6% increase over the 2004 level.

I'll move now to a more detailed review of our fourth quarter 2005 financial results.

Consolidated Weight Watchers International's fourth quarter 2005 revenues rose 8% to $251.2 million, from $232.7 million in the prior year quarter.

Fourth quarter net income was $38.9 million this year, as compared to $43.2 million in 2004.

Last year's fourth quarter net income included the reversal of a WeightWatchers.com tax valuation allowance which increased net income in the period by $5 million.

Earnings per fully delighted share were $0.38 in the 2005 quarter, as compared to $0.36 in 2004, excluding the aforementioned tax benefits.

From an operations overview perspective, global meeting attendance in the fourth quarter was 12.9 million, a 1.3% increase versus last year.

North America's attendance rose 6.5% to 7.2 million in the quarter.

However, the UK experienced a continuation of the softness that we saw in Q3, and continental Europe attendance, up against an innovation in the fall of 2004 was only slightly higher than prior year.

WeightWatchers.com posted strong volume growth in the quarter with end of period active subscribers up 19% versus prior year to 535,000.

Total revenue growth of 8% out paced volume growth as a result of a number of factors.

Among them, we benefited from pricing actions taken earlier in the year in NACO and UK meeting fees.

In meeting product sales per attendee rose 6% globally with NACO and UK as the largest contributors, and the product licensing business continues its positive trajectory, up 44% in the quarter, compared to prior year.

I want to point out that both the four quarter 2005 and fourth quarter 2004 are comparable with regard to the inclusion of revenues from licenses that reverted to us from HJ Heinz, our former parent, at the end of the third quarter of 2004.

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

NACO's attendance in the fourth quarter rebounded, increasing 6.5% to 7.2 million and surpassing our earlier expectations.

This growth, along with the impact of meeting seed price increases and higher product sales penetration, drove fourth quarter revenues in NACO up 12.5% to $117.1 million from $104.2 million in the 2004 quarter.

On the pricing front, 58% of NACO benefited from having raised the weekly meeting fee by $1.00.

On the product side, our per attendee product sale penetration has risen primarily as a result of refreshing our in meeting consumables and adding some new offerings.

Internationally, attendance volume was constrained by UK performance.

Total international attendance was 5.7 million in the quarter, down 4.5% from prior.

Our international revenues were $86.6 million.

On a local currency basis, revenues were up marginally, 0.8% versus prior year.

Strength in product sales and licensing offset the impact of the lower UK attendances.

In the UK, attendance fell off by 11.8% in the fourth quarter versus prior to 2.3 million attendances.

And revenues which benefited from the meeting seed price rise of approximately 4%, declined 6.7% on a local currency basis.

Continental Europe's attendance was 2.6 million in the four quarter, up 0.3%, cycling against the fall 2004 innovation, which was the catalyst for 17% growth in last year's fourth quarter.

Revenues which were $45 million in the quarter increased 4.5% on a local currency basis, driven by growth in in-meeting product sales and the expanding licensing business.

As Linda discussed, we completed the acquisition of WeightWatchers.com on December 16, 2005.

I'll review some transaction related items later, operationally though, WeightWatchers.com's revenues grew 20% in the fourth quarter, 2005 to $27.3 million.

The results of a 19% increase in active end of period subscribers. 2004's four quarter revenue was reduced by $2.7 million as a result of a consolidation timing adjustment.

Moving now to our other revenues, franchise commissions rose 5.6% in the quarter to $3.8 million with domestic commissions slightly out pacing foreign commissions in the quarter.

About 22% of the U.S. remains franchised.

Our other revenues, which are comprised primarily of licensing and our publications, were $15.4 million in the quarter, up 26% or $3.2 million over the year ago level.

Licensing revenues across the world, when looked at in aggregate, were $10 million in the quarter, exhibiting strong growth, $3.1 million or 44% over the prior year level with North America and continental Europe as the largest contributors.

Fourth quarter 2005 gross margins for the overall consolidated business was 51.9%, essentially flat to the year ago quarter, due to a number of factors.

It was a shift in the timing of our major NACO fall field staff meetings which took place one quarter earlier in 2004.

The UK business experienced fewer members per meeting, and we had a lower product sales margin due to mix.

In last year's fourth quarter, because of the NACO innovation, we sold a higher proportion of enrollment products which are higher margin.

Turning to marketing, marketing expense for the fourth quarter was $30.9 million, up 4.2% from $29.6 million last year.

Marketing expenses as a percentage of revenue declined 40 basis points versus prior to 12.3%.

G&A expenses in the 2005 quarter were $32.1 million, up 15.5% from the prior year level.

In reporting our 2005 financials, we've identified the non-recurring transaction expenses related to the acquisition of WeightWatchers.com, and adjusted accordingly for comparability.

As a point of information, certain ongoing transaction related expenses remain in those adjusted numbers, these include amortization related to purchase accounting and compensation expense for restricted stock units, granted to WeightWatchers.com employees in exchange for unvested WeightWatchers.com options.

While these expenses will be ongoing for the next few years, they will decline from $2.5 million in the second half of 2005, which was an impact of 1.7% in EPS and $3.5 million in the full year 2006 to $1.9 million in 2007, and negligible amounts in 2008 and 2009.

If we exclude these expenses from the fourth quarter, the remaining G&A of $30.7 million is up 10.7% versus the prior year.

Primarily the impact of strengthening our management team and higher performance bonuses.

As a percentage of revenue, G&A was 12.8% in total in the 2005 quarter.

On a comparable basis, G&A was 12.1% of revenue, up slightly from 11.9% in 2004.

Our consolidated operating income rose 7.1% or $4.4 million in the quarter, to $67.3 million.

Operating income margin in the fourth quarter declined slightly, 20 basis points, to 26.8, from 27% a year ago.

Primarily, as a result of the compression in our gross margin explained earlier.

Below operating income, we have interest expense and other income expense net.

Our net interest expense rose by 59.3% in the fourth quarter 2005 to $6.5 million as compared to $4.1 million a year earlier.

As a result of the increase in market interest rates, and the acquisition of WeightWatchers.com, the consolidated companies affected interest rate net of swath rose to 5.67% in the fourth quarter 2005, from 3.69% in the prior year quarter giving rise to approximately $2.3 million of additional interest expense.

WeightWatchers.com put in place credits facilities of 215 million in the middle of December, in order to complete the purchase of the remainder of its shares.

This added $0.7 million of interest expense and moved the affected interest rate up marginally.

The consolidated company income tax rate in the fourth quarter 2005 was 35.8% as we recalibrated our rate to an average of 37.6% for the year.

This compares to a tax rate of 27.8% in the fourth quarter 2004, which as I mentioned earlier benefited from the 5 million reversal of a deferred tax valuation allowance at the WeightWatchers.com level which largely eliminated its income tax spent in that quarter.

Moving now to an overview of our consolidated company cash flow and balance sheet, as I mentioned earlier the Company generated $296.8 million in cash, from operating activity, in the full year ended December 31, 2005.

After capital expenditures, free cash flow was $279 million, well in excess of our net income for the period of $202 million, as adjusted to add back non-recurring transaction expenses.

While roughly 50% of the cash flow in excess of net income is comprised of tax benefits arising from noncash compensation, the other 50% results from normal working capital inherent in our business model, and from the structural differences between our book and cash taxes.

During the year, we invested $556 million, including $380.8 million net to bring our ownership of WeightWatchers.com to 100% and $176 million for share repurchases.

We funded these with cash in debt, borrowing a net amount of $277 million, comprised of $215 million of WeightWatchers.com new debt, and the remaining $62 million from our revolving credit facility.

In comparison, in the full year 2004, we generated $252.4 million of cash from operations, and $245.7 million in free cash flow.

The primary uses in our free cash flow in 2004 were $177.1 million for share repurchases, and $60.5 million for acquisition of our Washington, DC, and Fort Worth franchises.

On the balance sheet, our total debt at the end of the year, 2005, was $746.1 million, up $277 million from $469.1 million at year end 2004.

Liabilities, excluding debt, are $19 million higher, mainly as a result of increased deferred revenue.

The decrease in shareholder's equity in our balance sheet of $277.1 million results from the redemption of our tiled shares of WeightWatchers.com, and the impact of our share buy back program.

On the asset side, the balance sheet includes $23 million of additional goodwill, namely related to the WeightWatchers.com transaction.

Before I turn the discussion back to Linda, to give you guidance on 2006, just for those of you who build models, you should take into account that Easter's two weeks later, in 2006 versus 2005, thus shortening the spring diet season by two weeks, the negative effect of this shift impacts the second quarter of 2006.

Now, back to Linda.

Thank you, Ann.

As Ann discussed, in 2005, we generated free cash flow again well in excess of net income.

In fact, because of our unique business model, which doesn't require cash to grow, cash flow should continue to exceed net income for years to come.

Over the last five years, we've generated more than $1 billion in free cash flow, which we have used for franchise acquisitions, stock buy-backs, and the strategic acquisition of WeightWatchers.com.

Now, with the completion of the dot com transaction, I'm pleased to announce that our board has approved the initiation of a quarterly cash dividend, allowing us to use another tool to deliver value to our shareholders.

As of April 7, 2006, we will pay quarterly an annualized dividend of $0.70 per share.

This dividend represents less than 30% of our free cash flow on an annual basis.

We will use the remaining cash flow which continues to grow to increase shareholder value by continuing to make prudent franchise acquisitions to continue to buy back stock, and to pay down debt.

In 2005, we delivered meaningful growth in revenues, earnings, and free cash flow for our shareholders, I'm optimistic that the opportunities in front of us in 2006 and beyond, and on a consolidated basis, I fully expect that we will see stronger attendance growth this year than we did last year, stronger revenue growth, and by more effectively leveraging our marketing and G&A spending, stronger operating income growth.

Year-over-year, NACO will drive robust revenue and margin growth through increasing attendance, and revenue per member.

The UK management team is taking the necessary steps to turn that market around, and we expect to see improvements in our results in the second half of the year.

With its relatively low penetration, continental Europe continues to hold high growth potential for us, potential which we believe our strengthened management team will harvest over time.

Across all of our markets, we expect to see strong growth in our licensing business, in the coming year.

Finally, our WeightWatchers.com subsidiary is well positioned for yet another great year in 2006, and beyond.

Which brings me to our guidance for 2006.

After accounting for our weakness in the UK market, we expect to deliver fully diluted EPS between $2.18, and $2.28 per share, this is before any stock based compensation expenses, which for us like most other companies, will begin having an impact on our P&L beginning with our first quarter results.

We estimate that for the full year, 2006, we will incur stock based compensation expenses, of $0.08 to $0.09 per fully diluted share.

So at this time, we would like to answer any questions you may have.

[OPERATOR INSTRUCTIONS]

Thank you, our first question is coming from Greg Cappelli of Credit Suisse.

Please go ahead.

Hi, Linda and Ann, how are you?

Good, how are you?

Good, thank you.

I just have a couple of questions, the first one, I just wanted to clarify so that the $1.00 a week increase, what portion of the country is that actually covering?

Okay, there are two increases that I mentioned in 2006.

One we put in in January on 10% of the country, and we are putting a further 11% of the country up $1.00 in April.

And so, and these are areas that are going back over what you already increased a couple years ago?

Yes, well, probably the most recent price increase in any of these new priced areas would have been about 15 months ago.

Got you, okay, and does that include areas where you are offering the season pass now?

Yes, remember, the season's pass was put in for a short selling period at the end of December, the beginning of January.

So they are buying out that season, if you like, through to the end of April.

So some of the markets obviously will have a price rise while people are still using their season pass purchase.

Okay now just assuming that the season pass is going to continue to be offered?

Uh-huh.

It seems like in the areas we've been doing, it's been well thought of, and successful.

That certainly has been our experience, yes.

And then, could I just ask on that, when I think about the season's pass versus what a typical member would normally do in terms of retention, what does it end up being in terms of price, what kind of a discount in price does it ends up being?

Well, we have four different price points, depending on what the weekly fee is in any given market, so the season's pass is currently priced according to the price point in that market.

But if you are just looking at it broadly, it's around a 20% discount, if you attended every single meeting.

Got it.

Okay, great.

And then I wonder if I could just ask you a little bit of a bigger picture question here.

With the low carb, sort of well in the rear view mirror, what do you think is the most significant, I don't know, call it competitive threat at this point, or what you are dealing with the most in the industry at this point.

Well, I mean, obviously, dieting is a very lively environment, and it always has been.

I think one of the things that we took out of the low carb craze was just the whole impact obviously that a fad can have, and one of the things that we've been trying to do on a strategic level is to focus our marketing more on, less on promotion, less on sort of the instantaneous joining, but more on the value of the brand and of the service that we offer, in that long-term weight loss, and that's more sensible, long term approach.

I think that when you are--one of the lessons we took out that too, was if we focused on our service and on keeping people in the meeting, as I said, I think we are tackling this in two ways, Greg, you've been to a lot of our meetings, I know, helping our service providers to make the right environment, the encouraging and motivating environment is very important to us, as well as coming up with these commitment plans, or this ability for the individual member to make a savings for that commitment, but also to make the commitment, so they are not trying to decide on a weekly basis, should I go?

Shouldn't I go?

They have already paid for it.

So that will encourage them to go along, we know if we can keep them in the meetings they will be more successful at weight loss.

So we honestly believe that the knock on effect of that is more people will be losing more weight, which means we will have more positive word of mouth about the success of our program, so we are trying to take a much more intrinsic view of what the value of Weight Watchers is rather than going head to head with whatever fad happens to be out there, or whatever happens to be the hot thing of the moment.

I think there will always be fads, there will always be hot things.

Now, of course, there are medical interventions, and we all know about that, we know there's been a big growth in gastric bypass surgery, but of course, the interesting thing for us is that even the surgeons are realizing now that they do have to help their patients with long-term behavior modification in order for people to keep that weight off, that's very encouraging to us, and they have come to us obviously to discuss that.

Then we can look at drug therapies, there hasn't been a drug therapy yet, that's been developed that didn't require a sensible eating plan and behavior modification.

So although all of these things are in this arena that we function in, and we have been functioning in for 45 years, I think we are doing everything to build a sustainable, strong business, so it's not just that we want sustainable weight loss, we want sustainable growth.

And that's what everything is aimed for.

Okay, and I'm just assuming you are treating Accomplia , the new drug that's being talked about sort of in the same vein, where you've seen this before.

Yes, I mean obviously, it's a new one coming in.

Do I think people will try it?

A certain number of people will, but when you're looking at any drug therapy, and this one is a permanent drug therapy, it's a drug that you have to obviously continue to take, I think just as we saw with Xenical, with its side effects, and very onerous side effects, some of the side effects coming with Accomplia are not that attractive, something like depression, a lot of people have a weight issue, are already dealing with depression.

If the drug adds to that depression, I think that will be sort of limiting in terms of its attractiveness, so although the drug therapies will continue to be developed, because it is that of a problem, and that big an issue, I do believe that for most people, they recognize that they have to also do something to their life style, and of course, this is our territory.

Great.

Just one quick final one for Ann.

Embedded in the guidance, if we are in the sort of 265, 275, $275 million range for free cash flow for the year, does that sound reasonable?

It's definitely in the ballpark, yeah, you may be a little bit high on that, but that's approximately where we'll be I think.

Okay, thank you, guys.

Thank you.

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

Please go ahead.

Hi, Chris.

Just wanted to ask you about the dividend a little bit.

Does that, I think it's good you're paying a dividend, does it at all signal anything about your view on the prospects of further franchise acquisitions from here?

Not at all, we don't believe that this is in place of either stock buy-backs or franchise acquisitions.

I think, Chris, I mentioned in my remarks that we have about 22% of the country--of the U.S. still franchised, and some countries outside the U.S.

We have picked up, we spent a great deal over the past five years on franchise acquisitions and we picked up the big ones, the really big ones, but there still are franchises out there that we feel are very attractive and that's still part of our plan going forward, I think that how we should look at this dividend is just another tool to bring shareholder value, and it will just be part of the portfolio that we will use.

Got it.

And was continental Europe attendance, and I apologize if you answered some of these already, I got in a little bit late, but was continental Europe attendance disappointing to you this quarter?

It was definitely flat, Chris, but we were cycling up against 17% growth, and with the innovation behind it, it, it was, it was where we expected, so it was matching a very, very strong growth of last year, just above that in fact.

Do I think it can do better?

Absolutely.

And then, I just wanted to ask you, and again I apologize if you said it, I know you said NACO in the end, next year, in '06, will grow faster than it did in '05.

But when I think about the run rate in Q4, is there any reason not to think that the run rate in '04, in Q4 of '05, sorry, is relevant for 2006?

Yes.

I think if you look at the year, we ended the year in NACO at 3.5% as we said.

That's a mixture of starting at a negative in the first quarter, and moving to a positive, and we were very pleased obviously with the results of Quarter 4.

We are, I was setting the expectation that we would see a similar rate of growth in Quarter 1, and then for the full year.

And already mentioned that Quarter 2 is affected by a later Easter obviously.

Right, so just to be clear, you expect Q1, I'm sorry again, you expect Q1 to be a similar rate at least to Q4, and you expect the full year to be the same?

Yes.

Got it, thank you very much.

Thank you.

Our next question is coming from Bob Craig of Stifel Nicolaus.

It's Steve Fulton.

Hi, Linda and Ann, how are you?

Couple of questions for you, you were kind enough in terms of updating the number of corporate relationships that you have.

Any way of measuring the level of participation in those programs?

Well, obviously, we have to look at this over time, signing up a company means that we've entered into a relationship with that company, and then after that sign up, then we go through a process, obviously, of marketing our products and services that that company has signed up to, to the individual employees within that company's environment, so what is really attractive to us about Corporate Solutions is obviously it gives us a marketing channel to reach those employees, and hopefully, in many instances, to bring our services either to the workplace or in a much more convenient way.

That's why something like putting it on a payroll deduction, or having a company actually support it by a subsidy is very important to signal to an individual employee that this is something that they might want to consider doing for themselves and to improve their health and their fitness and their weight.

We have found, because obviously some of our early adopters, we have found that we have to work very, very closely and carefully with these companies to get this marketing to their employee base established to get it consistent, to get it continuous, because without that, then obviously, it still is an individual choice of an employee to sign up for a program, no one can put a gun to your head and say lose weight, so we are working very closely.

I have great optimism that this will continue to be a meaningful contributor as the years move forward, and I think that we will continue to sign up more and more of these companies.

They tend to be very big organizations, and of course, you don't roll out something across a big organization immediately or simultaneously.

That's helpful.

Could you refresh me as to the timing of the next series of innovations by geography?

Well, we never actually give specific information ahead of time on when an innovation might be going in.

But we had Australia and New Zealand just put in an innovation this January, and obviously, if you are just working on a sort of 2, 2.5, to 3 year cycle which is our norm, you would be expecting continental Europe and the U.S. to have an innovation at some time in the next year, year and a half.

Okay.

At the time of the decision to buy in WeightWatchers.com, you had indicated at that point that you expected that to be about $0.03 to $0.05 a share accretive in '06, and potentially $0.10 to $0.15 in '07, is that still valid based on the ramp in that business?

I think--I'm just looking at Ann, I'm afraid looking up another figure.

We did make an estimate that it would be $0.03 accretive in 2006, the dot com purchase, and then it would ramp up, after that.

And I think Ann is comfortable.

Comfortable within that range, yeah.

Okay, that's still valid.

Last question, and I'll turn it over, within your guidance, I notice certainly over the course of '05 in marketing spending as a percent of revenue was relatively flat and it was even down in the fourth quarter.

Are you assuming a continuation of that trend essentially flatter the percent of revenue on into '06?

Yeah, marketing in total is, I think, we are looking at flat as a percentage of revenue to this year.

It will grow to about the same rate as revenue, but I think what we are seeing is probably a little higher proportion of our expenditure in the dot com, and perhaps in the meeting business of it coming down a little bit, so net-net, I think we're going to be flat.

One last real quick one, tax rate, Ann, for '06?

Hang on a sec.

Just while Ann's looking up, I'll just make a quick clarification, this is to Chris Ferrara's question earlier.

When we were talking about the run rate in Q4, and that it's going to be a similar run rate in Q1, and for the full year of 2005, or 2006, we were talking about attendance growth rate.

I want to make sure everybody understands that.

Thanks, John.

The tax rate for 2006 estimated, is 38.4%.

Thank you.

Sir, does that complete your question?

Yes, we'll take the next question, please.

Thank you.

Our next question is coming from Jeff Stein of KeyBanc Capital Markets.

Please go ahead.

Hi, guys, two questions on Corporate Solutions.

You mentioned that roughly half of the companies that offered subsidies, is there any different uptake?

It was half of them offered either payroll deduction, which of course isn't a subsidy necessarily, but it does, it's convenient to the employee, because they are paying straight out of their paycheck over time as opposed to an up front payment for the service or the product, and then a portion of those, that half was also subsidizing in some form, either by rebating after somebody has successfully lost weight, or paying a portion of the fees up front.

Okay, great, so has there been any different up take between those and the other 8 that haven't offered any type of benefit or easier option?

Well, we do encourage this, because obviously the convenience factor and the subsidy does actually increase the uptake, so it's something that we are trying to encourage companies to consider, and will continue to do that.

But it's really very, very early for us to analyze the actual results of these companies because as you know, this is a new initiative we've just been starting and as I said before, rolling them out into large corporations does take time.

Okay, last question, in the NACO attendance, what are the embedded expectations from Corporate Solutions then?

If you're saying you're going to grow at 6% or 6.5% have you broken that down as to how much it's going to come from the corporations?

No, we don't share that on a line by line basis.

Thanks.

Thank you, our next question is coming from Greg Badishkanian of Citigroup.

Please go ahead.

Hi, good evening.

Two questions, one on the UK do you think there's something in the competitive landscape or is it just merely sort of execution on that program, and you talked about some of the steps you're taking to improve that?

Well, Greg, as you know, we've discussed it in the past, the UK is a very, very competitive and very, very crowded market.

We have a very buoyant group weight loss market there, we still dominate it, we have about a 50% market share of our sector and then of course, we have all the various dieting methods that you see everywhere else in the world, including the U.S. so it is a very, very active market and a very dynamic market.

I don't think that I could look at the UK and say that I think what's happening to our service business is primarily a result of the competitive landscape.

Okay, good, and with respect to the--I missed that, it was 35.7 I think that's the rate this quarter and for '06--

Was this the tax rate?

Yeah the tax rate.

38.4 is the estimated for '06.

Okay, any reason for the bump up in the tax rate next year?

It's a mix issue.

Okay, all right, good, and actually I want one final one.

Given that you didn't cut attendance meeting during--meetings during when attendance was pretty poor during the low-carb era which is over and you're seeing improving attendance.

Would you expect increasing utilization per meeting or are you going to add new meetings?

How is that going to work?

Greg, we're doing a little bit of both depending on which market you're looking at.

We do have virgin territories in a lot of continental Europe and in some places in the United States and we've been very successfully putting new meetings into those places and therefore growing obviously our attendances.

I think where we're very mindful is when we're already well penetrated with meetings to make sure that we don't to aggressively grow the meeting base ahead of what we think is that market's expectation in attendance growth.

So it really is a combination of continuing to grow, but probably a little bit more in line with our attendance growth and over time, yes, I would love to continue to increase the utilization of our meeting.

Okay, great, thank you.

Thank you.

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

Please go ahead.

Hey, guys.

Hey, Scott.

How are you doing?

Good.

Just one of the more significant thing you guys said today was the management change that was happening overseas and with that, obviously, overweight and obesity is not relegated to the United States and the UK.

Should we look forward and is any of this in your guidance for additional country entrances and more growth out of there.

The person you put in charge has a pretty good reputation in (inaudible).com

I think as we go forward, certainly, more geographies are in our future.

I think that right now a lot of what Dave and Mads who's just joined him, what the team is looking at is the existing countries that we're in and getting a better maximization and optimization of the opportunities that we have there.

So if you're looking at our 2006 guidance, I don't think that we can see it as that including new countries.

If that's the basic question you're asking me.

Obviously though, Ann did mention that there are international markets that are still in franchise hands and I'm not discounting the fact that we might at some point purchase a foreign country as part of our franchise acquisition.

Can you remind us what foreign countries are in hand?

The big ones, you don't have to go to the small one's?

Are there any big potential?

In France--well, all of Canada, Ireland, Italy--

So there are decent opportunities there.

Continue on the overseas thing, I think one of the things, and you can comment on this, that benefited you here in North America is the ad campaign.

I've had a lot of people comment that it's just phenomenal.

I don't know if you think it's helping your attendance this year, but it also it's my understanding, you're not using the same ad campaign overseas yet, or are you?

Well, we are actually, or a similar version of it, or an adapted version of it in quite a few of our markets right now.

But, yes, I think that what you're hearing is certainly what we're hearing and what our research is telling us.

We made quite a strategic shift in our marketing, away from promotional advertising to something that is more of an emotional connection, a potential customer.

Our research has told us that our advertising is succeeding in making that connection.

Obviously it's a different kind of advertising than promotional advertising is.

Now, do you feel like you're getting incremental, like new people that are just weren't participating in Weight Watchers, I know that was one of the goals of the ad campaign?

We certainly know that from our research, that people are looking at Weight Watchers differently.

I think that this will play out over time.

Then, sorry, I had one final one and it goes back to the Accomplia question a little bit.

I think one of the things I think we're all trying to figure out is kind of what the look is when this drug hits.

The one thing that I don't think people talk about is that it could give people that have been discouraged the opportunity to get back in the program and give them a little bit of a life line.

A little head start.

What do you make of that type of argument?

Do you think that when you look back on Phen-fen or maybe even Ephedra, for people that are pretty substantially overweight, do you think they could actually almost be--

We have a very open door policy in terms of people who have decided with their doctor that they want the added help of a drug.

The drug can't replace the motivation and the behavior of the individual.

I think with Phen-fen, an awful lot of people thought that all they had to do was take the drug, as opposed to making the modifications to both their diet and their lifestyle that all of the people who are marketing weight loss drugs now accept and support in their literature and encourage the people on those medications to do.

So I think that as opposed to being incompatible with what we offer, I think that we actually offer that additional support that your doctor or the drug manufacturer obviously is never going to be able to provide for you.

So, we want to be welcoming within our environment of anybody and if they're tackling a severe weight problem, we just--we are so pleased that they're doing that and if they feel they need the additional help of a drug then that's fine, that's a choice between them.

Would you guys ever consider upping your marketing to doctors in conjunction with this release of this drug?

Well, we have increased our marketing to doctors quite a bit over the last couple of years and I think we'll continue to do that, so are you saying are we already doing?

We already are doing it and we will continue to do it and try to do it even more effectively than we have in the past.

Fantastic, thank you for entertaining the question.

Thank you, and we have time for one more question.

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

Please go ahead.

Hi, and good evening.

Hi, Howard.

This question is for Ann, what are you budgeting for interest expense in '06?

Well, I guess the best way to look at it is to look at our current debt load and the rate that we've given you, which when you look at the combined rate, including the WeightWatchers.com loan, it's about 6.5, a little bit higher than that with the dot com loan fully embedded in.

Okay, and also I'd like to just clarify one thing, you said the free cash flow for '05 was 279 and I believe you had indicated that the level for '06 should be a little bit less than that.

Yes.

So what's driving that?

It's just a very small differential and it just has to do with the tax benefits associated with stock based compensation.

It's not a big number, it's a very small differential.

All right, thank you very much.

As you know, we get a tax benefit from that.

All right, thank you.

Thank you, I'll now turn the floor back over to management.

Well, if there are no more questions, thank you very much, thank you for joining us today and I look forward to updating you on our progress on our next call.

Good-night.

Good-night.

This concludes today's Weight Watchers International's fourth quarter and full year 2005 earnings teleconference call.