WW International Inc (WW) 2006 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International’s First Quarter and 2006 Earnings Teleconference Call.

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

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

As a reminder, this conference call is being recorded today, May 9, 2006.

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

Please go ahead.

Thank you, Eduardo, and thank you, everyone, for joining us today for the Weight Watchers International First Quarter 2006 Conference Call.

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

At about 4 PM Eastern Time today, the Company issued a press release containing financial results for the first quarter of 2006.

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

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

Before we begin, let me remind everyone that this call will contain forward-looking statements.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from this 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 Ms. 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 ending April 1, 2006.

I will open today’s call with an overview of our first quarter performance.

Then Ann will take you through a more detailed review of our financial results for the quarter.

And, finally, we will spend some time answering your questions.

On a consolidated basis for the quarter, our revenues increased 3.6% to $342 million from $330 million in the prior year.

Revenue growth of 11.5% in NACO and strong growth in WeightWatchers.com were partially offset by weaker international revenues due to a poor performance in the U.K. and lower year-over-year exchange rates across our foreign markets.

Absent the negative impact of foreign exchange, revenues would have increased 6.6% in quarter one.

Total attendance at Company-owned operations during the quarter was 17.9 million, flat with 2005, as attendance growth in NACO and Continental Europe was counterbalanced by a decline in attendance in the U.K.

Our margins at both gross profit and operating income levels strengthened.

Our gross margin improved 120 basis points to 56.3%, primarily the results of our pricing actions, improved product margins, and the continued growth in our dot-com business and our high-margin licensing revenues.

Our operating income increased 16% to $104.1 million, from $90 million in 2005, as our operating margin improved from 27.3% last year to 30.4% this year.

The operating margin increase was driven by higher gross margins and lower marketing expenses, partially offset by higher G&A costs.

The year-over-year decline in marketing was primarily the result of timing differences in all of our markets that resulted from this year’s later Easter.

Our G&A expenses, excluding stock-based compensation expenses, were flat versus prior at 9.3% of revenue.

When stock-based compensation expenses are taken into consideration, G&A increased from 9.3% to 10.1% of revenue in first quarter 2006.

Excluding $0.02 per share in stock-based compensation expenses in this year’s quarter, our fully diluted earnings per share increased 18% to $0.58, as compared with a consolidated EPS of $0.49 in Q1 of ’05.

Including stock-based compensation expenses, we earned $0.56 per fully diluted share in the first quarter.

I would now like to address each of our major markets and our WeightWatchers.com subsidiary.

First, North America.

For the First quarter, NACO revenues increased 11.5%.

Revenues continued to grow ahead of attendances as we benefited from the growth in both our meeting fees and our product sales per attendance.

NACO attendance was 10.3 million, up from 9.8 million, or a 5.5% increase over prior year.

In the first quarter, our average NACO meeting fee per attendance increased 5.2% over prior.

A number of initiatives are driving this increase.

First, we continue to benefit from a year-over-year basis from the $1 increase in our standard weekly fee.

We took in 16% of the NACO markets last fall.

Plus, this January, we raised our meeting fee by $1 and an additional 11% of our NACO markets.

Secondly, we benefited from our new season pass, which we sold during late December and the first few weeks of January.

As you may recall from our last call, we reported that we were very pleased with our members’ reception to the season’s pass, which required them to commit to a season of weight loss, prepaying for meetings for a defined 17-week period, which ran from the beginning of January through to the end of April.

And while we priced the season’s pass to provide a member with about a 20% discount from our standard weekly fee if they attended all 17 weeks of meetings, it is typical that members will miss a meeting from time to time even if they remain active participants in the program.

This pricing plan contributed incremental revenue per member attendance in quarter one.

As I discussed in February, this spring, we raised the meeting fee an additional 10% of NACO by $1 per week.

With this latest increase, we have now successfully increased our standard weekly meeting fee at least $1 in about 70% of NACO markets since January ’05.

Given the success of our season’s pass during the winter diet season, we are currently selling a new season’s pass that will cover the 17-week period from early May through the end of August.

Our product sales in NACO are also doing well.

In-meeting product sales per attendance were up 4.2% in the quarter.

Our relaunched bars, which now include both one-point and two-point bars, are performing very well, as are our electronic products, which include new versions of our food scales and pedometer.

Looking forward, as I told you during our last call, in NACO, we expect to continue to see mid-single-digit attendance growth for the remainder of the year, with lower Q2 attendance growth due to the shorter spring diet season as a result of this year’s late Easter being followed by stronger growth the rest of the year.

Now, on to the U.K.

As expected, the U.K. had a weak first quarter.

The Q1 ’06 U.K. revenues were down 14% on a local currency basis as growth in our revenue from licensing and growth in product sales per attendance could only partially offset the decline in attendances.

As you know, we came into 2006 with double-digit negative attendance flow-through.

Also, Q1 was up against the launch of the Switch program at the beginning of 2005, which, backed by heavy marketing, produced exceptionally strong January and Q1 recruitments last year.

As a result for the quarter, our U.K. attendance declined by 17.2% to 3.3 million, down from 4 million in Q1 ’05.

As I discussed on our last call, we have taken steps to mitigate the problems we created with the launch of our overly complex [Dual] program innovation last year.

We are now seeing better in-meeting customer satisfaction compared to last year.

And as this improvement translates to more positive word of mouth, we expect our attendance trends to be less negative in the second half of this year.

Moving on to Continental Europe, revenues in Continental Europe were up 5.9% on a local currency basis, slightly lower than the attendance growth of 6.3% in the first quarter as product sales were lapping an exceptional quarter-one ’05, which saw the introduction of a large number of new products.

The German market, which has the largest population of overweight women in Europe, continues to perform well.

I’m also very pleased with the progress our management team in France has made in improving the growth opportunities in that market.

I should note that while the year-over-year quarter-two attendance comparisons in all of our markets will be negatively impacted by this year’s later Easter, I expect Continental Europe will see the greatest impact due to the quirks of how this year’s shortened spring diet season interacts with the large number of national holidays celebrated during April and the May period in many of these countries.

Quarter-two impact on Europe will be further compounded by the World Cup, which is being hosted in Germany in June.

Moving on to WeightWatchers.com, dot-com continues to perform well.

In quarter one, revenues were up a strong 19% over prior.

This increase was driven primarily by a 17% increase in the active subscriber base to 659,000, up from 563,000 at the same point last year.

In the first quarter, dot-com’s revenues were $31.2 million, and they contributed $10.8 million to our consolidated operating income.

In late December, Australia became the fifth country to launch WeightWatchers.com’s subscription products.

We are pleased with the launch in Australia, and our active subscriber base there is building even faster than we had planned.

Our e-commerce store, which opened in December in the U.S. and sells our proprietary products exclusively to Weight Watchers’ online subscribers, is also performing well.

We expect to enable e-commerce in at least one additional market before year-end.

Overall, we are pleased with our performance of the WeightWatchers.com business.

We believe we have world-class websites, and we know from our surveys that the vast majority of our subscribers are generally very pleased with the current products and the value we provide.

Most recently, we introduced an improved plan manager.

We’ve enhanced tools for our subscribers following the core plan.

We have received very favorable feedback from these subscribers.

In going forward, we are continuing to make significant investments in our website and subscriber products.

As the year progresses, we will continue to upgrade our site features and enhance site functionality.

Moving on to other areas, our licensing and publishing businesses continue to deliver strong results.

Globally, our other revenues were up 30% from 12.8 million in Q1 2005 to 16.6 million in this year’s first quarter.

Our licensing revenues were up 37% in Q1.

That would have been 43% excluding the negative foreign exchange rate impact.

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

Thank you, Linda, and good afternoon, everyone.

I’ll begin my financial review with an overview of our first quarter 2006 results and then get into some of the details within our operations.

In the first quarter, consolidated Company revenues rose 3.6%, or 12 million, to 342 million.

Excluding the negative impact of foreign currency exchange, which lowered revenues by 9.8 million, net revenues rose 6.6% in the quarter.

Net income for the quarter reached 57 million this year, as compared to 51.6 million in 2005, an increase of 10.4%, or 5.4 million.

And first quarter earnings per fully diluted share rose 14.3% from the prior-year level to $0.56.

Earnings increased double digits in Q1 2006 on the strength of gross margin expansion and lower marketing as a percent of revenue and despite added interest expense resulting from the new WeightWatchers.com credit facility and expenses associated with non-cash stock-based compensation.

In the first quarter 2006, we adopted Financial Accounting Standards Board Interpretation Number 123R with respect to the expensing of non-cash stock-based compensation.

This adoption lowered our pretax operating income in the quarter by 2.8 million and has reduced our EPS by $0.02.

Excluding this item, first quarter 2006 EPS was $0.58, up 18% versus $0.49 a year ago.

Moving into more of an operational overview, worldwide revenues increased 6.6% on a constant currency basis, driven by North America and Continental Europe performance and by growth in WeightWatchers.com subscriber base, reduced by negative performance in the U.K.

Looking at first quarter volumes, both NACO and Continental Europe attendance rose in the quarter.

However, the impact of U.K.’s attendance decline resulted in no overall change from prior-year attendance volumes.

Worldwide attendance in the first quarter was 17.9 million in both 2006 and 2005.

WeightWatchers.com’s end-of-period subscribers were up 17.1% versus year ago to 659,000.

Our consolidated gross margin expanded 120 basis points in the first quarter 2006 to 56.3%, as compared to 55.1% in the first quarter 2005 through a combination of pricing actions, improvements in the product sales business, further scalability of the WeightWatchers.com business, and a favorable change in the sales mix.

The consolidated operating income margin was 30.4% in the first quarter, as compared to 27.3% in the year-earlier quarter, benefiting from lower marketing expense as a result of timing, as well as from the expansion of the gross margin.

Moving now to the first quarter financial highlights of our NACO operations, NACO’s attendance in the first quarter grew 5.5% to 10.3 million, and first quarter meeting revenues were up 10.7% to 168.8 million.

The average meeting fee per attendee rose 5.2% as a result of the $1 price rise in 27% of NACO, as well as from the positive impact of the season pass.

In-meeting product sales per attendee rose 4.2%, with the continued resurgence of our consumables business in NACO.

Total international attendance was 7.6 million in the first quarter, down 6.6% from prior as a result of the U.K.

Our international revenues were 118.5 million.

On a local currency basis, revenues declined less than attendance, down 3.3% versus prior year, bolstered by strong growth in licensing royalties and increased penetration of in-meeting product sales in some of our countries.

As we mentioned, Continental Europe experienced good attendance growth in this first quarter, up 6.3% to 3.4 million.

Revenues, which were 60.9 million in the quarter, increased 5.9% on a local currency basis, driven by growth in attendances and the expanding licensing business, particularly in Germany and Switzerland.

Product sales per attendee were down 3.1% in Europe in the first quarter this year as we comped against 14% growth last year on the strength of several new product introductions.

U.K. attendance fell to 3.3 million attendances in the first quarter, off by 17.2% from 4 million attendances in the prior-year quarter, which exhibited strong initial growth with the launch of the Switch innovation.

U.K.’s first quarter 2006 revenues declined at a lesser rate than volumes, down 14.2% on a local currency basis, with some gains in product sales per attendee and licensing offsetting a portion of the impact of the attendance decline.

In the WeightWatchers.com business, revenues grew 19% in the first quarter 2006 from 26.3 million to 31.2 million, the result of a 17.1% increase in active end-of-period subscribers from 563,000 in 2005 to 659,000 in 2006.

Gross margin improved by 50 basis points year over year in this highly scalable business to 74.8%.

Moving now to our other revenues --

Franchise commissions rose 5.2% in the quarter to 6.2 million, with domestic's commissions up 7%, outpacing foreign commissions in the quarter and following a similar trajectory to NACO.

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

Our other revenues, which are comprised primarily of licensing and our publications, were 16.6 million in the quarter, up 30%, or 3.8 million, over the year-ago level.

Licensing revenues across the world, when looked at in aggregate, were 12.3 million in the quarter, exhibiting strong growth, 43% on a constant currency basis.

Marketing expense for the first quarter was 53.9 million, down 7.2 million, or 12%, from last year’s level, a result of the timing of the post-Easter marketing campaign and because U.K.’s marketing expense was more front-loaded last year for the launch of the Switch innovation.

Marketing expenses as a percent of revenues declined 280 basis points versus prior in the first quarter to 15.8%.

Q1 marketing expense was reduced as a result of the late Easter, April 16 this year versus March 27 last year.

The offset to this will be that marketing expense will be higher in Q2, which will bear the full weight of spring diet season expense.

One other item to note with Easter occurring later this year, our second quarter performance will also be negatively impacted versus prior year because the spring diet season will be shortened by three weeks.

This impact will be exacerbated in some of our European countries because of the proximity of Easter to a large number of national holidays occurring in April and May.

G&A expense in the 2006 first quarter was 34.5 million, up 12.2%, or 3.7 million, over the prior-year level, including 2.8 million of non-cash, stock-based compensation expense resulting from the recent adoption of FAS 123R, as mentioned above.

Excluding this expense, G&A was up 3% versus the prior year and represented 9.3% of revenues, flat with the prior-year first quarter.

Our consolidated operating income in the first quarter was 104.1 million, up 15.6%, or 14.1 million, over the prior-year quarter.

The operating income margin increased 310 basis points to 30.4%, even with the inclusion of compensation expenses associated with the adoption of FAS 123R.

The lower operating income is our interest expense, which increased significantly in the first quarter, up from 4.7 million a year ago to 11.3 million.

Our interest increased partially as a result of market rates -- the LIBOR rate was 200 basis points higher in the first quarter 2006 than 2005 -- and partially as a result of the increase in the consolidated Company’s total outstanding debt.

In mid-December 2005, WeightWatchers.com put credit facilities of 215 million in place as the final stage in its acquisition by Weight Watchers International.

As a result of these two factors, the consolidated Company’s average effective interest rate rose to 6.37% in the first quarter this year from 4.27% in the prior-year quarter, and the average consolidated Company debt outstanding rose from 431.9 million in Q1 ’05 to 703.5 million in Q1 ’06.

I’m pleased to announce that yesterday we completed the refinancing of our Weight Watchers International standalone debt.

That is excluding the WeightWatchers.com credit facilities, which remain in place.

The refinanced borrowings bear interest at a rate of LIBOR plus 87.5 basis points per annum, compared to 167 basis points averaged spread over LIBOR prior to the refinancing.

This refinancing not only allows us to reduce our effective interest rate and unused revolver commitment fees but also increases our borrowing capacity and extends our debt maturity.

We’ve upsized our $650 million credit facility at the Weight Watchers International standalone level to a new $850 million credit facility consisting of a 350 million term loan and a $500 million revolving credit facility, of which 372.8 million is unused.

Associated with this refinancing, we’ll be writing off 2.1 million of capitalized transaction expenses in Q2 associated with prior refinancing.

While yesterday’s refinancing does not directly affect WeightWatchers.com’s credit facilities, the increased borrowing capacity will enable us to retire this higher-priced debt as a significantly more favorable interest rate in early 2007.

We haven’t changed our strategy with regard to uses of cash.

We’ll continue to use our cash generated and additional borrowing capacity as needed to enhance shareholder value through opportunistic franchise acquisitions, share repurchases, which were 6.8 million in the quarter, and payment of quarterly dividends, first, 17.6 million, or $0.175 per share, of which was paid on April 7 of this year.

We’re currently in ongoing negotiations with multiple franchisees, and we expect to reach agreement on some of these acquisitions during this year.

Now, just a note on the tax rate before moving to an overview of cash flow and balance sheet.

The consolidated Company income tax rate in the first quarter 2006 dropped marginally from 39% in last year’s first quarter to 38.6%.

Moving now to an overview of our consolidated Company cash flow, the Company generated 101.1 million in cash from operating activities in the first quarter.

After capital expenditures of 4.3 million, free cash flow was 96.9 million, well in excess of our net income for the period of 57 million.

Most of the cash flow in excess of net income arises from the timing of tax payments and recognition of deferred revenue, which are typically somewhat exaggerated in our first quarter.

The remainder results from non-cash expenses, permanent differences between book and cash taxes, and normal working capital fluctuations inherent in our business model.

As I noted, during the quarter, we invested 6.8 million for share repurchases.

In addition, we reduced our debt by 73.7 million from 746.1 million at year-end 2005 to 672.5 million at the end of the first quarter.

Our cash balance has increased by 21.4 million.

In addition to debt and cash as noted above, other balance sheet categories of note are liabilities, which increased by 55.5 million, excluding debt, for the recording of our dividend payable, income taxes payable, and deferred revenue, and the decrease in shareholders’ deficit on our balance sheet of 38.7 million, resulting from our first quarter net income, offset by declared dividends.

Now, I’ll turn the discussion back to Linda.

Thank you, Ann.

During our last conference call, I provided fully diluted EPS guidance for 2006 of $2.18 to $2.28 before stock-based compensation expenses.

This translates to a $2.10 to $2.20 EPS per fully diluted share, including stock-based compensation expenses but without the expenses associated with our debt refinancing that Ann described.

Based on our performance in quarter one, I remain comfortable with this EPS range of $2.10 to $2.20 per fully diluted share.

Eduardo, we will now be happy to answer any questions at this time.

[OPERATOR INSTRUCTIONS]

Chris Ferrara, Merrill Lynch.

Was the U.K. -- I mean, obviously, it decelerated, and now you’re saying that it’s still going to be down in the second half even though I guess it looks like the comps are down 10 and down 12, and you’ve already overlapped the launch.

Could you just talk a little bit more about what’s going on currently in that market?

Well, obviously, we were in a situation where our innovation, which, as I’ve explained, was a rather complex innovation that put together two innovations, both the habit side of the program plus the two dual food plans into the U.K. market simultaneously.

And this resulted in a lot of complication within the meeting itself.

Now, we’ve put a lot of things in place during the last year, including the retraining of all of our leaders in that market.

We’ve simplified our Getting Started session.

We’ve simplified the navigation of the program material itself, and the material that people get on a weekly basis is being simplified.

So we’ve spent an awful lot of time improving the experience within the meeting, and we are seeing that -- as we’re talking now, we’re seeing that resulting in greater in-meeting satisfaction, which we do expect is going to strengthen our word of mouth.

Now, obviously, last year, we had a very, very strong recruitment off the back of that innovation, which, unfortunately, caused negative word of mouth, and it does take time for the actions that we’ve put in in the last year to start taking that negative word of mouth into a more positive place, and that’s what we’re expecting to see throughout this year, that movement into the positive.

Moving into the -- but you do expect it to be down year over year in the second half of the year, right, just down less?

Did I hear that right?

Yes.

We’re expecting an improvement in our negative trend.

Had you expected a negative comp in the second half like three months ago, or is it any worse than you’d anticipated?

Well, I think, obviously, a 17% decline is disappointing by anybody’s terms, and it is against higher comps if you’re looking at it on a year-over year basis.

I think it’s in the realms of what we expected, but as I said, what we’re encouraged by is the improvement in the satisfaction within the membership that we’re seeing now, and we expect that to be translating into stronger trends and less negative as we move through this year.

I’m just trying to get if there’s anything else.

I mean is that 17.5 down or whatever it is, I mean that’s equivalent in magnitude to your worst NACO quarter in the height of the low-carb storm.

I mean that’s a big number, right?

I mean is there any more color at all on, I guess, whether anything is getting better there, like recruitment trends?

Well, remember when you’re looking at it, you’re looking at it at a big and sudden shift.

Last year, if you’re looking at the first quarter, we had big marketing against the innovation.

We had strong recruitment.

I mean I said it at the end of the first quarter call how strong our recruitment was.

Unfortunately, when all those people came into our meetings, we disappointed them because our service providers weren’t capable of handling both the volume of people, as well as the complexity of all the changes that we have put into that market.

So as we came into this year, we didn’t put, obviously, as much marketing -- our marketing is going to be stronger at the second half of the year because we believe that that’s a good place to put it with our improvements in the service, with our improvements in the experience that is happening with the meetings that we’re seeing -- within the meetings that we’re seeing now.

So it isn’t really comparable to the picture that we saw in the U.S. for completely different reasons.

Obviously, it is a negative situation.

No one is pleased about that, but we are seeing improvements, and we’re doing the long-term fixing that will get our word of mouth back positive.

And then can you just talk a little bit about the marketing shift into Q2 and how significantly marketing might be off as a percentage of sales in the second quarter, just to get an idea how to model this out?

I think you can look for the lion’s share of the shift to go -- the decline that came in first quarter to move into second quarter.

Some of the U.K. will be later in the year, but the lion’s share, that 7 million, will move into second quarter.

Okay, so 7 million --

It’s basically the Easter campaign shifting because in 2005, we began the Easter campaign in first quarter because we had an earlier Easter.

This year, we’re beginning in the second quarter.

Got it.

Thank you.

Greg Cappelli, Credit Suisse.

Sorry if this got asked.

I got cut off and had to dial back in, but I wanted to just, first off, see if you’d given any more data on how the second time around with your season pass is trending early on here and if you were pleased with the initial response you got as you were in December and January for the other one?

Yes, we’ve been very pleased with our response this time, as we were with the last time.

Okay.

And remind us how many of those do you think you would actually do in a year because I remember you said the timing could be dependent on certain things.

Well, obviously, we’ve not made any commitment in terms of when we’re doing them, but if you look at it logically, you’re buying out a season, and we have three major dieting seasons in any given calendar year.

Okay, so those would be the logical [inaudible] times of that.

And just thinking of those three seasons, are there any plans that you can talk about when you’re thinking the next program innovation in the US might be?

I know you’d already said there won’t be one in the fall, but could we see one in January or perhaps will it be longer than that?

Well, obviously, we don’t talk about it ahead of time, Greg, as you know, and as I said on the last call and I’ve been saying recently in talking to investors, we really are concentrating this year on our commitment plans, on getting people to stay one they’ve joined Weight Watchers.

I said before one of the things that the low-carb fad, if you like, taught us was that once somebody joins Weight Watchers, we want to put a lot of effort into keeping them there.

And so that has been the focus of our operations this year, to keep people there.

And the innovations are worked on, as you know, all the time.

So I’m not saying there won’t be one.

I just said there wouldn’t be one this calendar year.

Okay, so it just will not be on your normal -- well, it won’t be on a two-year period here.

It will be --

Well, we haven’t exactly had what you’d call a normal pattern in NACO for at least the last five years.

If you remember, the Turnaround program came only a year after the Flex plan because we had this insight that came out of our research in the low-carb era, and that gave us the core plan.

So we introduced that only a year after the previous innovation.

So we’ve never been on an absolute two-year fixed plan.

We’ve always said it is in the region of two years.

Okay.

One other, just what you mentioned earlier in the call, about 2Q, obviously, being impacted by Easter.

If you think about NACO, are you looking at any specific indicators right now that give you the confidence?

You know, you mentioned the back half, 3Q and 4Q, we should see reacceleation after the slowdown.

Um-hmm.

Anything specific there that gives you that confidence, or are you just expecting the trend to go that way given we’ll be through the holidays?

Well, that’s the way, obviously, we’ve planned the year, and the year is coming in as we have planned it.

I mean one of the things that you’ve already mentioned is the season’s pass.

We put another season pass in.

We’ve been very pleased with the uptake of that.

You might recall that last September, we introduced more brand advertising.

It was very, very strong in terms of what the essence of Weight Watchers is about.

We were attempting to make a real emotional connection with our potential customer, and I think from our research, we believe that that advertising did it.

Now, that advertising is naturally evolving into a more -- with a little bit more promotional elements in it now that we’ve established that emotional connection and we’re building on that emotional connection.

So I would anticipate that we will see that as we progress through our campaigns in the year as well.

So everything is in place, and everything is behaving the way I would have expected to see it in order to have -- obviously, quarter two will be down in every market because of the late Easter on attendances on a year-over-year basis, but we expect the second half of the year to be stronger.

Not negative.

I’m not saying negative attendance growth in NACO.

Okay.

I’m merely saying not the mid-single-digit that I said the whole year will produce.

Okay.

I’ve got you.

And then just last quick one.

On the licensing front, not sure whether you mentioned this or not, but did you -- and I know you don’t announce every single one, but did you actually sign any new deals in the quarter on the licensing front?

We don’t usually announce -- if there had been a major signing, probably I would have mentioned it, but we do have smaller signings that take place throughout the world in every quarter.

Okay.

Good enough.

Thanks a lot, guys.

We do, of course, have some new product out there if you are -- if you look in the supermarket, you will see some really new and interesting products.

It is now onstream, and it’s in wider distribution than there was, say, a year ago.

Okay.

Thank you.

Scott Mushkin, Banc of America Securities.

A couple quick questions.

Just an update on Weight Watchers at Work.

I know we didn’t -- it was a big -- it was thought of as a big driver of growth here in ’06 and wonder if you could give us a little color on that?

Yes.

Weight Watchers at Work, obviously, is, from our perspective, divided into two different categories.

We’ve got our ongoing Weight Watchers at Work business or place that we hold meetings, which we’ve had for a number of years.

And then we have the more newly introduced corporate solution marketing initiative, which involves some national accounts.

And these national accounts, the difference between those two is the national accounts we’re trying to sell obviously down from a corporate umbrella level to the individual employees, whereas on an at-work -- our traditional at-work, we are selling in each location to those employees as a one-off exercise.

So we have been pleased with the uptake.

We had 16.

We now have 17 people who have taken up our corporate solutions program in the national account category.

So we look at this, and each one of these companies is in a different place.

First of all, each company offers a different mix of products and offerings.

If you like, within this corporate solution marketing, you’ve got the at-work meetings, which are held at locations.

You’ve got meeting vouchers that allow the employee to attend any Weight Watchers meeting.

You’ve got online.

And you’ve got At Home kits.

That’s the program being sent through the mail.

Now, different companies have taken different mixes of those products and those service offerings.

Now, the signing of the contract is obviously the first step.

We then work closely with the companies to communicate the introduction of this program to their employees, and then we have an ongoing communication effort with that company in order to keep employees aware of it and to encourage them to sign up for what the company has agreed to promote.

So each of these clients is at very different stages along that process.

We, of course, in the meantime, have been building the back office side so that we can support the informational side for these major employers, and we’re doing that as we speak.

A lot of that building has been done.

So I’d say that the progress has been relatively good.

Like anything else, the marketing takes a lot of work, and we will be continuing to do that as we move forward.

All right.

Two other quick questions here.

I thought, Ann, and maybe I was wrong, but I thought you mentioned that part of the financing maneuvers were to make some acquisitions this year.

And I was wondering, is that reflected in guidance for the year, number one?

And, number two, where do you kind of -- where do you think that will be directed, here in the U.S. or internationally?

And then the second part of the question, is there a lot of free cash flow produced this quarter?

Any idea where it’s going to come in for the year?

Yes, first of all, just to clarify, we didn’t increase our debt capacity to do franchise acquisitions.

We actually generate, as you know, a fair amount of free cash flow every year, and we will continue to use that free cash flow for that purpose.

In terms of the franchise acquisitions, I’m talking to several franchisees, both domestic and outside the U.S.

And as I said, I hope to conclude on a couple of those soon.

You’re going to move -- is it in the guidance, or is it -- would that be extra?

It is not in the guidance.

Great.

And free cash flow?

Free cash flow last year was about 290 million.

It’ll be in that range, my expectation.

We had a little bit of additional tax benefit in 2005 that we won’t have in 2006, but it’s in that same range.

Perfect.

Thanks, guys.

Jerry Herman, Stifel, Nicolaus.

I was wondering if you maybe could give us a read on perhaps some external issues that you see going on in the marketplace?

Aside from maybe the Easter issue, are you seeing anything with regard to maybe a switching between the meetings and dot-com, gas prices, and any other sort of competitive issues that might be going on in the marketplace?

Well, obviously, we are pleased with the growth of our dot-com business.

We believe that our dot-com is aimed at the self-help dieter, and therefore, we’re in a marketplace where we’re competing with a lot of other self-help offerings.

And we think that we’re doing that, obviously, in a very efficacious way and a very sensible way.

We don’t believe that we are switching people from one service to another.

We have nothing to lead us to believe that that is the case.

There are things happening in the marketplace, I think, that not all of us can quantify.

We’ve never felt that sort of the general economy has a big impact on our business, but right now, we just don’t know what the price of gas is actually doing to the average consumer.

There is a sort of continuous level of sticker shock, I think, that people are going through.

We obviously believe that our service is very good value for money.

With our distribution of the meetings, we’re trying to make it as convenient as possible, as close to home as possible.

We believe that the price of gas gives us a good opportunity, obviously, to increase our at-work meetings so that obviously we’re right there at the place of work and people don’t have to make that extra trip.

But I don’t think that we can quantify that the price of gas has had a specific impact on our meetings at this point.

Okay.

And then I wanted to just maybe hone a little bit in on the guidance, the attendance guidance.

I mean based on what you said, it would appear that the second quarter attendance is sort of flattish or, I guess, maybe an outside possibility of being down?

Yes, you have to parse it out by different markets.

Obviously, I said that the U.S. for the whole year is going to be mid-single digits.

That’s where it came in in the first quarter.

The second quarter will not be mid-single digits.

It will be less than that, but it certainly won’t be negative.

And then the second half of the year will make up for that so that the whole year ends up in that mid-single digit.

Continental Europe, of course, is impacted by this [indiscernible], which hits up against these may bank -- what I call the May bank holidays.

Anybody who’s worked over in Europe understands that we’ve got a multitude of holidays that hit us, and when Easter is late, as it was this year, it just disrupts our marketing campaigns for that post-Easter season.

And, of course, there are football fanatics in Europe, and we’ve got -- every four years, we’ve got the World Cup.

The World Cup is being hosted by one of our big countries, obviously, in Germany.

I jokingly say but my friends in the U.K. don’t like it when I say it, you know, our star -- one of our star players in the U.K. has been injured, so maybe the U.K. will be knocked out earlier than I anticipated, sort of.

But we have these distractions happening, and they’re up against it.

Continental Europe is up again very strong second quarter.

Now, the U.K. has got this negative picture.

We know that that will continue in the second quarter and improve in the second half.

But we won’t see that improvement at all in the second quarter.

So if you’re looking at it, you have to sort of say which part of the world are you looking at.

You put that all together, and you can surmise, yes, that attendances will be depressed in the second quarter and then build in the second half.

And I was wondering if I could just hone in again on the marketing shift, the $7 million.

Should we look at that as being marketing expenditures being flat as a percent of revenue year over year and then adding the incremental 7 million into that figure?

Is that the way we should look at it?

Did you get that, or do you want me to --

Can you run that one by me one more time?

The $7 million shift, if it weren’t for that, would marketing expenses be roughly flat year over year in the second quarter?

In second quarter?

Yes, and should we start there and then --

You’re basically asking whether that 7 million should be built just on last year’s second quarter figure?

As a percent of revenue, correct.

Oh, as a percent of revenue.

Okay.

Ann’s just --

On a full-year basis, which I think we said this in our last call, that our expectation is that we would have similar marketing as a percent of revenue --

Okay.

-- as we did in 2005.

If we’re looking just at the second quarter --

Going to be up.

It is going to be up.

It will be up because we were down, as you know, 280 basis points in the first quarter and most of that marketing expenditure is going to shift into Q2.

So you can look at it from that perspective and then look at the rest of the year, impute kind of the rest of the year from that.

Okay, great.

Thanks very much.

Jeff Stein, KeyBanc Capital Markets.

Question with respect to the retention rate.

You indicated that one of your objectives this year is to hold on to your customers, and I’m wondering if you’ve made any progress during the first quarter?

Yes, I think we believe that we are.

As I said, we’re looking at a U.K. situation where we know our in-meeting satisfaction is greater, and that’s reflected in stronger retention.

You know, last year, I told you that we had the problem that we had recruited all of these people in, and then when they got there, we disappointed them.

So we were losing them faster.

And we’ve seen an improvement in that situation.

And we certainly know that in NACO, about half of the improvement in the increase in the cents, dollars per -- the 5.2% increase in our revenue per attendee is coming from the season’s pass.

So we do know that that is strengthening the NACO business.

Okay.

Can you tell us what the penetration rate on recruitment is for the season pass?

We haven’t disclosed how many people are on it.

And that’s probably not something that going forward we would be sharing.

We are very pleased, obviously, with the people who are taking this up.

This is a commitment plan, and we’ve had in place, obviously, for a considerable period of time, prepayment plan.

Okay.

Two other questions real quickly.

First of all, in addition to the $7 million shift in marketing, how much is the three weeks worth in terms of a shorter diet season in the second quarter?

Any way to quantify that, Ann?

Let me just think about that for a second.

Jeff, it’s just -- as she’s sort of trying to figure out a way of quantifying it for you, the thing we have to remember about our spring diet season is summer starts at the same time every year regardless of where Easter falls.

Right.

So you have to sort of look at it in terms if the volume comes in with the post-Easter campaign and then we get attendances out at that volume but we [inaudible] when summer holidays start, you know, because primarily our membership is women.

Primarily, they’re working women and often mothers.

So we have a naturally quieter period during the summer vacation -- school vacation.

And that starts at the same time every year regardless of when Easter fell.

Right.

The reason for the question was just again for modeling purposes.

The other question I had, while Ann is looking for that, WeightWatchers.com, you mentioned that the operating income was about 10.8 million in the first quarter last -- this year.

Can you tell us what that number was a year ago?

Sorry, the operating income?

Yes.

Yes, I certainly said that they made a contribution to Weight Watchers International of that 10 million.

And a year ago, what would that number have been?

Ten point eight (10.8) million this year.

We’re just getting -- you know, with the ins and outs, they’re just --

It’s 7.2.

Seven point two (7.2) million?

Yes.

All right.

Okay.

You know, in terms of the Easter question, if you look, for example, at NACO, it does have an impact.

It does depress the attendance somewhat.

But it is not -- it’s not a huge impact.

The impact that Linda cited around Europe is --

[Inaudible].

Yeah, yeah, is stronger because of the fact that there are these many holidays that now coincide with the launch of the campaign and with the continuation of the Easter [inaudible].

So I think you can kind of temper your model in terms of -- particularly of NACO, and I wouldn’t be too drastic in my reduction of NACO.

Okay.

Fair enough.

Thank you.

Michael Lasser, Lehman Brothers.

Do you have a sense of whether changes in -- any changes in the competitive environment may have impacted NACO results?

Well, obviously, there are competitors out there that are aggressively marketing.

We know that.

We know that Xenical is moving to an over-the-counter position in some of our markets, including the U.S.

I think that we’ve always had a competitive environment that we’ve been working in, and I think that there’s nothing that we can say we think that that is having a particularly great impact on our business.

Great.

And digging down in the season pass a little deeper, when you look at the customers who purchased this package, did you do any examination of their attendance history to get a sense for whether they were -- whether it benefited them because they had historically been regular attendees, or was this more drawing folks who had only attended on a periodic basis to make them attend more?

Yes, that’s a very good question, Michael.

And one of the things that we’ve been so pleased about is we are putting technology back in some of our meetings, and we’re doing that in NACO in our centers.

So we have what we call these champ centers, where we electronically capture the behavior of individual members so that we can do analytics.

Now, you have to understand that the first season pass was just sold at the end of December/beginning of January, and the whole period on which they could use it just ended at the end of April.

And we’ve just -- we’re just in the midst of the selling session for the second season’s pass.

So the kind of analytics that you’re talking about is something that we’ll be very interested in, and we’ll be doing exactly the same thing.

Now, my expectation would be at the very beginning that people who are committed would see this as a great way of getting that commitment solidified, of getting a lower price, so they will take advantage of it, obviously.

Ultimately, what we want to do is get a deeper and deeper penetration of our membership taking up the commitment plans so that we are changing the behavior of somebody who would have been [inaudible] more short-term, less committed, or they would have been more erratic in their attendances to take this up so that we can help them be more committed.

So it’s a very good question, but I can’t say that the analysis -- we’ve had a long enough period of time for us to be able to see that picture.

But we certainly have the capabilities in our electronic centers to do that kind of analysis, and we have our -- obviously, we will be doing that for ourselves.

And the answer may be the same, but also, be curious to know if it’s been useful as a customer acquisition tool as well or if it’s more so being used with existing customers?

You know, I think if you’ve ever had to go on a diet yourself, you don’t sort of look at a 17-week period.

You know, you’re really talking about what am I going to do tomorrow and can I get started and should I do this.

So I wouldn’t think of this as an acquisition tool.

I would think of it more as something that once you are in the meeting, you have the ability to commit to this exercise that you’ve made the first step by walking through the door on and will, therefore, be more successful because, as I said last time, the whole thing of what we’re trying to do is increase success.

We know that the more meetings you attend, the more successful you are.

We’re trying to get people more engaged once they come into that meeting, and we’re doing a lot to model how we can do that.

That’s why this year our whole emphasis has been on increasing the likelihood that somebody will stay within the system once they’ve joined us.

And I think our brand advertising increases that as well.

You’re less likely -- you’re more likely to be more committed when you walk through our door if you’ve responded to our brand advertising than if you’ve just taken up a promotional offer that you’re not actually sure of whether this is a methodology that you want to try.

So we will be modeling.

We will be looking at it.

We believe that it’s going to change behavior and it will change behavior over time.

That makes sense.

Last question, and this is related to all the [moving] parts with the debt.

Could you offer any more insight into how to model interest expense for the remainder of the year?

Sure.

Sorry to make you have to look through the book again.

Do I sound like I just don’t want to look through the book again?

I’m thrilled to look through the book.

I mean, obviously, as you know, the dot-com debt stays for the rest of the year.

The dot-com debt is -- remains, and that’s about 215, 212 million at this point, and that’s spread over LIBOR at about 275.

Okay.

Okay, so that debt is in place, and it declines at a very slow rate.

It’s not a revolving facility.

So it’s just paying down bits and pieces as we go.

The rest of the debt is significantly lower.

From our perspective, we’re looking at about a 3 -- about a $4 million annualized savings on interest expense and about 2, 2 and change, 2.5, let’s say, for the balance of this year, assuming that we do some debt pay-down, some revolver pay down over the year as well.

Okay.

So it will go down from the first quarter but still be up year over year for the remaining two quarters?

Yes, this is right.

And then --

[Inaudible] first quarter of 2007, we would be free to take out the existing dot-com debt and replace it with debt from this facility, which, as you know, is significantly less expensive.

Got it.

Thanks for answering my question.

You’re welcome.

Chris Ferrara, Merrill Lynch.

I just want to ask about a little more color on NACO in regard to what you’re seeing, I guess, because you did 5.5 or 5.1% or 5.5% this quarter --

[Inaudible] attendances, yes.

Right.

So you saw a slight deceleration from Q4.

You’re going to see, obviously, Easter-related, but you’ll see another deceleration in the June quarter.

Why would you, after seeing deceleration from, I guess, December quarter to March quarter see an acceleration in September?

I guess what are you seeing there that gives you that confidence?

Well, as I said, I think one of the things that we are seeing is a strengthening of the marketing position, which we started to establish last September.

And as we evolve it -- and it is naturally evolving.

If you look at the September ad, which was an emotional brand essence, the closest representation of our brand essence I’ve ever seen, and we made that connection, then we’ve been building on that connection with each of our campaigns since then to be a little bit more direct response, a little bit more promotional without losing that brand focus.

So I would expect this evolution, obviously, to continue to pay off, and I think that what I’m seeing leads me to believe that that’s the case.

And remember, right now, in January, we were still cycling against the second diet season of the Turnaround innovation, and the second diet season has the biggest money behind it.

So by the time we get into the second half of the year, obviously, we will be lapping that, and we’ll be in a more normalized situation as far as that is concerned.

So I am confident, I think, that NACO is going to behave as we’ve described.

And that implies that the second half of the year is stronger than the first quarter because the second quarter, because of the Easter alone, is going to be a bit lower [inaudible].

Full year is going to come in at mid-single digits.

Got it.

And then just to finally confirm again, you did say, right, that acquisitions would be additive to that mid-single digits growth projection, NACO, right?

I mean that’s organic, that part?

We have never built in an acquisition before we had it into our EPS estimates.

Because obviously you know, until we sign, this is why Ann is being very careful in not identifying or not where we might be talking at the moment.

Until we sign, it isn’t built in.

Right.

It’s also unusual that you’re even talking about it at all, actually.

Is there any reason for that?

Yes, [inaudible] a little bit.

I mean any reason for that, why you’re giving that color that you might be acquiring this year?

No, we just wanted to make sure that one recognized that we had enough money capacity to continue to pay a dividend, to opportunistically make purchases, and to buy back shares when the value was there.

And we haven’t done one in a while given the dot-com acquisition --

Dot-com was our big one last year.

We tried to reintroduce the possibility to the market.

Got it.

Thank you very much.

Great.

Well, so if there are no more questions, I just want to thank you for joining us today.

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

Good evening.

Thank you.

This concludes today’s Weight Watchers International’s First Quarter and 2006 Earnings Conference Call.

You may now disconnect.