WW International Inc (WW) 2006 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International second quarter 2006 earnings teleconference call.

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

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

As a reminder, this conference call is being recorded today August 1, 2006.

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

Please go ahead, sir.

Thank you, Jeanine, and thank you to everyone today for joining us today for the Weight Watchers International second 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 p.m.

EST time today, the Company issued a press release containing financial results for the second quarter of 2006.

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 everyone that this call will continue 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 material from those discussed here today.

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

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

I would now like to turn the call over to Miss 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 July 1, 2006.

I will open today's call with an overview of our second quarter performance as well as discuss some initiatives we are undertaking.

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, our revenues for the second quarter increased 2.7% to $321 million from $313 million in the prior year.

Revenue growth of 9.9% in NACO and 18% in WeightWatchers.com were partially offset by weaker international revenues.

Total attendance at Company-owned operations during the quarter was 15.9 million, down 3.8 percent versus the prior-year quarter as modest growth in our NACO was more than offset by declines in the U.K. and continental Europe.

Our year-over-year volumes were affected negatively across all of our markets by the late Easter, which shortened our Spring diet season by three weeks as well as by the continued softness in the U.K. and by the unfavorable timing of national holidays and the impact of the World Cup in Europe.

Our gross margin was 56.2% compared to 56.4% last year.

Our marketing spend was $41 million, an increase of 6.6%, growing from 12.3% to 12.7% of revenue.

Ignoring the WeightWatchers.com transaction expenses in last year's figures and excluding the non-cash stock-based compensation expenses this year, G&A expenses as a percentage of revenue fell 110 basis points versus prior to 9.7%.

Again, on a life-for-life basis, Q2 2006 operating income grew by 4.1%, and our operating margin increased 50 basis points to 33.8%.

On a GAAP basis, our fully diluted earnings per share increased from $0.33 last year to $0.58 this year.

However, on a comparable basis, excluding $0.25 in one-time transaction expenses related to the acquisition of the remainder of WeightWatchers.com in last year's second quarter and the $0.01 of early extinguishment charges related to the refinancing of our debt during the second quarter this year, EPS increase from $0.58 to in '05 to $0.59 this year, including a $0.02 charge in this year's quarter related to non-cash stock-based compensation expenses.

I would now like to address each of our major geographies.

First, North America.

For the second quarter, NACO revenues increased 9.9%.

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

NACO attendance was $9.1 million, up from $8.9 million in prior, a 1.7% increase over prior year, inline with our expectations.

In the second quarter, our average NACO meeting fee per attendant increased 6.6% over prior as we continued to benefit from price increases as well as the success of our Season Pass offering.

Our product sales continued to do well.

In-meeting product sales per attendant were up 8.3% in the quarter, driven by successful launch of a new points' calculator and the new points' pedometer.

Looking forward from a volume standpoint, we expect our NACO attendance trend to improve over the next two quarters, with mid single-digit attendance growth and double-digit revenue growth in the second half of the year.

As I've mentioned on prior calls, NACO is leading the charge in one of our key, Company-wide strategies -- improving the retention of our members and, as a result, increasing their weight-loss success.

While our traditional pay-as-you-go approach gives our members a great deal of flexibility, one of the issues it presents is that each week, our members have to decide whether to attend.

A key element of our strategy to improve member retention is to move away from the week-to-week decision making by providing our members with payment options that encourage them to increase their commitment to their weight-loss efforts.

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

We have been developing new payment plans that encourage a deeper commitment and engagement from our members.

Season Pass, which we introduced nationally this past January, was our initial offering, and we're encouraged by the positive reception it has received.

In fact, in each of the two diet seasons since that launch, over 25% of our members who were in the meetings during the Season Pass marketing period purchased it.

This strong reception demonstrates that there are a large number of members who are willing to make a commitment to their weight-loss efforts.

And as we expected, those who purchased the commitment plan, on average, come to more meetings, and as a result, achieve more weight-loss success than those who pay week to week.

Based on our [learnings] and extensive testing and taking advantage of the WeightWatchers.com acquisition, we have developed Monthly Pass, our most innovative and exciting commitment plan.

Monthly Pass is unlike any payment plan we have offered previously.

Instead of purchasing a discreet number of meetings -- either one meeting in the case of pay-as-you-go or 17 meetings in the case of Season Pass -- with Monthly Pass, the member signs up for a subscription plan that renews automatically on a monthly basis until it is canceled.

Priced at a discount relative to the standard weekly fee, Monthly Pass gives members unlimited access to meetings plus free access to eTools, the dot-com subscription product for meeting members.

We will be launching Monthly Pass throughout NACO later this month.

Our testing of this new commitment plan has indicated high levels of satisfaction and significantly longer retention.

Starting in late August, our NACO members will be able to subscribe to Monthly Pass for $39.95 per month.

This is in contrast to Season's Pass, where members pay an upfront fee of about $155, on average, for 17 weeks of meetings.

Unlike Season's Pass, which can only be bought in a narrow sales window at the beginning of each diet season, Monthly Pass will be available for purchase all 52 weeks of the year.

In addition, members will be able to sign up either at their meeting or on our website.

Monthly Pass will be charged automatically to the member's credit card on a monthly basis until the member elects to cancel.

Member's can cancel at any time with the cancellation becoming effective at the end of the month in which they notify us.

We believe Monthly Pass is a significant enhancement to our payment options.

With the free access to eTools, members who buy Monthly Pass will be able to stay connected with Weight Watchers, with online resources making it even easier for them to follow our program and track their weight loss success.

By making a monthly commitment, these members are less likely to drop off if they happen to miss a meeting.

We fully expect Monthly Pass to increase retention and, as a result, to increase the success of our members.

And while we're offering Monthly Pass at an attractive 20% discount to the typical standard weekly fee, like Season's Pass, we expect this new payment option will lead to increase in our revenue per member.

We firmly believe that Monthly Pass will be a big positive for both our members and our business.

For the average member who purchases Monthly Pass, the Monthly Pass option, we believe that we can increase the meeting fee revenue for that member from around $125 to over $200.

Let me illustrate Monthly Pass's financial benefit.

As you know, the average member who joins Weight Watchers attends about ten meetings.

Assuming an average fee of about $12.50 per week attended, we collect $125 in meeting fees from the average member over the course of their stay with us.

If that same member, instead, chooses to purchase a Monthly Pass, our testing indicates that, on average, they will stay with us anyway from five to six months, meaning we will collect between $200 and $240 in meeting fees.

And as a result of their increased meeting attendance, we will gain further benefits through incremental product sales.

And they will, on average, achieve a greater degree of weight-loss success.

Now, in order to focus our meeting leaders on this strategically important implementation and to encourage as many of our members as possible to adopt Monthly Pass, we have decided not to offer a Season Pass this fall, as we had originally planned.

This will give us the benefit of fully embedding this innovative new commitment plan in our meetings prior to the peak recruitment season starting in January and of carrying over into 2007 a significant volume of members who are purchasing Monthly Pass.

However, as Ann will explain, while launching Monthly Pass this year will have a positive impact on 2007 financial results, the decision not to offer a Season's Pass this fall will have a negative impact on our 2006 financial results relative to what we had planned.

Now, onto the U.K.

As we expected for the quarter, our U.K., attendance is down 11.6% to 3.1 million from 3.5 million in Q2 last year.

This marks a significant improvement in our trend from the negative 17.2% year-over-year decline that we reported in quarter one.

For the quarter, U.K. revenues were down 13% on a local currency basis due to the softness of our volume and our product sales per attendance.

The steps we have taken to simplify the program and boost our leader training are starting to bear fruit as evidenced by retention this year versus last year being better and our improving trends as we have moved further into the year.

By the end of Q2, our year-over-year attendance growth had further improved to only low single-digit negatives.

I expect our attendance trends to continue to be better and that we will once again be growing our U.K. business by the fourth quarter of this year.

Looking forward, the U.K. team is working on the introduction of a simpler improved version of the program for this coming January.

Moving to continental Europe.

Revenues in continental Europe were down 7.9% on a local currency basis as a result of lower attendance and lower product sales per attendant.

As I mentioned on the previous call, I expected Europe to be the most impacted geography in Q2, due to not only the shortened spring campaign as a result of this year's late Easter but also the unfavorable timing this year of the national holidays in May and the World Cup, which was hosted in Germany in June.

Although we expected Europe to be weak in quarter two, continental Europe is, in fact, running below our earlier expectations with attendance in quarter two of three million down a disappointing 7.2% versus prior.

Given the lengthy holiday vacations in Europe and our seasonally low recruitment volumes through the slower summer months, the next opportunity we have to rebuild our volumes is with our September campaign.

We are hopeful that Europe will rebuild as we go through the rest of the year, returning to positive year-over-year attendance in the fourth quarter.

We are continuing to strengthen our management team with recent hiring of new general managers in [Fenalux] and in Sweden.

Given the strong results for the Season's Pass in NACO, we will be introducing the Season Pass in Germany this fall.

We will look to rolling out our commitment plans in our other markets in the future.

Now, moving on.

WeightWatchers.com continues to perform well.

In quarter two, revenues were up a strong 18% over prior.

This increase was driven by a 19% increase in the active subscriber base to 674,000 from 564,000 at the same point last year.

In the second quarter, dot-com contributed $34 million and $15 million to our consolidated revenues and operating income, respectively.

With the launch of Monthly Pass in the U.S., which includes free eTools, we do expect a certain number of our eTool subscribers to convert to Monthly Pass.

That being said, eTools, as a separate paid-for product, only has a low single-digit percentage penetration rate amongst our meeting members.

By offering eTools for free as a promotional tool to encourage members to sign up for Monthly Pass, we believe that we will be -- that it will be utilized by a much larger audience.

We will create significantly more revenue for our Company since members who opt for the Monthly Pass have a higher retention.

We are continuing to invest heavily in dot-com's product and infrastructure in order to improve the subscriber experience and to allow us to more effectively expand our business to new demographics and geographies.

This fall, we will be launching a new fitness module for subscribers.

We are also updating the global architecture to make it easier for us to add new international subscription sites.

Moving along to other areas, globally, our other revenues, which include our licensing and publishing businesses, were up 13% from $15 million in '05 to $17 million in this years second quarter.

Our licensing revenues were up 14% in quarter two.

In fact, given the extraordinarily hot weather, I would recommend that anybody looking to beat the heat try our Giant Fudge Bar or Cookies and Cream Bar, which are now number two and number four items in the entire frozen novelty category in the U.S.

Our Weight Watchers Magazine continues to grow, with the upcoming September/October issue generating our highest level of advertising revenue since we reacquired the magazine back in 2000.

As Ann intimated on our last call, I'm delighted to announce that we recently acquired the franchise areas for most of the state of Indiana.

We paid approximately $25 million for this franchise, which, over the last 12 months, generated a little over 600,000 attendances and produced an adjusted operating profit of about $4 million.

We took over this business last weekend.

In addition, we have signed a definitive purchase agreement to acquire the largest franchise in Canada.

This franchise conducts Weight Watchers' meetings across the southern portion of the province of Ontario and throughout the provinces of Quebec, New Brunswick, Nova Scotia, Newfoundland and Prince Edward Island.

We expect to close the transaction before the end of our third quarter.

This franchise generated almost 2 million attendances and over $8 million in adjusted operating income over the past 12 months.

We will be paying approximately 6.5 times adjusted OI for this business.

We believe that franchise acquisitions are an excellent use of our free cash flow and can create excellent value for our shareholders.

So going forward, we expect we will continue to opportunistically acquire more franchises.

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

Thank you, Linda, and good afternoon, everyone.

I will begin my financial review with an overview of second quarter 2006 results, and then I'll get into some of the financial details within our operation.

In the second quarter, consolidated Company revenues were $321.1 million, an increase of $8.5 million or 2.7%, 3.1% on a constant currency basis, versus the 2005 quarter.

On a GAAP basis, net income for the quarter rose 67.8% or $23.4 million to $57.9 million this year as compared to $34.5 million in the second quarter of 2005.

And EPS rose 75.8% to $0.58 as compared to $0.33 last year.

The increases were primarily the result of the inclusion in the second quarter of 2005 of non-recurring expenses associated with our acquisition last year of WeighWatchers.com, which reduced EPS in the 2005 quarter by $0.25.

In the second quarter of this year, early extinguishment of debt expenses that were not present in the prior year quarter reduced EPS by $0.01.

Eliminating these items from both years, second quarter EPS for 2006 was $0.59 versus $0.58 in the year ago quarter.

There were two other 2006 expense items of significance affecting the comparability of EPS this quarter versus year ago.

First, the adoption earlier this year of financial accounting standards board interpretation number 123R with respect to expensing non-cash stock-based compensation lowered EPS in the 2006 quarter by $0.02.

And second, at the end of 2005 WeightWatchers.com put credit facilities of $215 million in place at the final stage of acquisition.

And the associated interest has reduced the 2006 second quarter EPS by $0.02 as well.

In summary, if all of these non-comparable items are adjusted out of both years, our EPS this year is $0.05 higher than second quarter last year.

Getting more into our operations -- as I mentioned, worldwide revenues increased 3.1% on a constant currency basis, as growth in North America’s meeting business and in WeightWatchers.com was reduced by negative performance in the U.K. and continental Europe.

Looking at second quarter volume NACO's attendance rose at the expected level in the quarter; however, U.K.’s expected attendance shortfalls combined with continental Europe’s weaker than anticipated performance, and this resulted in a worldwide attendance decline, down 3.8% in the quarter versus the prior year.

Global attendance was $15.9 million in Q2 '06 and $16.5 million in 2005.

WeightWatchers.com’s [inaudible] subscribers were up 19.5% versus a year ago to 674,000.

As discussed in our first quarter earnings call, with a three weeks later Easter this year versus last -- April 16 versus March 29 – our second quarter performance was negatively impacted versus prior year because the spring diet season was shortened by these three weeks.

The Easter impact was exacerbated in some of our European countries by its proximity to a number of national Monday holidays occurring in April and May and by the tremendous popularity of the World Cup, which is played once every four years and lasted for four weeks from June 9 to July 9.

I’ll get into some more detail regarding impact of these occurrences later in this report.

Our consolidated growth margin was 56.2% in the second quarter 2006 as compared to 56.4% in the second quarter 2005.

Benefits from pricing actions and margin accretion in WeightWatchers.com are offset by a lower meeting average also tied to the timing of Easter, and investments that we’re making to improve the member experience.

Our consolidated operating income margin was 32.8% in the second quarter and compared to a prior year operating income margin of 33.3% adjusted for transaction costs.

Margin compression resulted primarily from the impact of expensing non-cash stock-based compensation consistent with our January 2006 adoption of FAS 123R.

On a life for life basis our OI margin was up 50 basis points versus prior year.

Looking at NACO and [MOICA], NACO's attendance in the second quarter grew 1.7% to $9.1 million, while second quarter revenues were up 9.9% to $161.8 million.

This shows the strength of a 6.6% increase in the average meeting fee per paid attendee and an 8.3% rise in in-meeting product sales per attendee resulting from the continued resurgence of our consumables business as well as some new electronic products.

In addition to a $1 a meeting fee price rise taken in 38% of our NACO territories over the past year, the average second quarter meeting fee per attendee benefited from the impact of Season Pass.

As you may recall, Season Pass is sold for four weeks at the beginning of the diet season and expires at the end of that diet season.

It entitles the member to attend all 17 weeks of the diet season at a roughly 20% discounted price.

While the Season Pass holder attends more meetings than our average member, she typically does not attend all 17.

On average, our members do typically miss more than 20% of the meetings, and, therefore, Season Pass is accretive to revenue.

The economics of our new Monthly Pass have the potential to be even more accretive.

As with Season Pass, members have more skin in the game which we believe drives more attendance, more weight loss and, over time, more positive word of mouth.

This is the first time ever that we’ve applied a recurring billing model to the meeting business.

Like Season Pass, Monthly Pass will appeal to a sub-set, not all of our members.

We’ve modeled average Monthly Pass retention to be in the five to six month range, and our testing indicates the potential for the retention to be even longer.

Of course, given that Monthly Pass can be purchased at anytime during the year, unlike Season Pass -- which drives sales for four discreet weeks two times a year, the build of Monthly Pass will likely be more gradual.

The positive impact of Monthly Pass will be felt in 2007 and beyond, but the decision to offer Monthly Pass alone, without Season Pass, in the fall of this year will have a negative impact on our 2006 financial result relative to what we had originally planned.

By way of example -- if a member were to purchase a 17-week Season Pass on September 1, she would pay $159 up front.

We would have revenue, which we would recognize prorata over the remainder of the year.

On the other hand, the Monthly Pass purchase can be made at any time -- excuse me -- on the other hand, the Monthly Pass purchase can be made at any time during this same September through December period and can be cancelled at the end of any month, which will almost certainly create some attrition in each of the fourth months.

Accordingly, the combination of the more gradual build and monthly attrition will have the affect of producing less total meeting fee revenue in the last four months of this year than the Season Pass was generated.

However, by January, this initial reduction in revenue will have worked itself through because of Monthly Pass's higher retention, and the acceleration of the launch of Monthly Pass earlier in 2006 than planned will ensure positive contribution beginning in first quarter 2007.

By our estimate, the lost 2006 revenue will be more than fully made up in 2007.

In our guidance, we’ve assumed that the foregone 2006 meeting revenue equates to an approximately $0.05 decline in EPS.

At the start of 2007, we’ll re-introduce Season Pass for those who are not internet or credit card enabled or simply prefer that limited-life product.

By offering both, we believe that we can grow the universe of members who’ll move to a commitment plan approach to their weight loss, which will add to their success.

Moving on to our international businesses.

Total international attendance was $6.8 million in the second quarter, down 10.2% from the prior year quarter.

Our international revenues were $107.1 million.

On a local currency basis, revenues declined 10.2%, consistent with the attendance shortfall.

U.K. attendance, while still down versus prior year, has been steadily improving.

The second quarter attendance decline versus prior year of 11.6% compares to a 17.2% decline in quarter one of this year.

While attendance for the first few weeks of the quarter was directly impacted by the Easter holiday, since that time, attendances has begun to improve.

May and June attendance posted single-digit decline with the trend improving to low single-digit decline by the end of the quarter.

We expect the trend to continue with attendance moving with a positive territory for the fourth quarter of this year.

U.K.’s total attendance was a bit over 3.1 million in this year second quarter compared to 3.5 million in the second quarter of 2005.

Revenues for the second quarter were $39 million, a 13% decline on a constant currency basis versus a year ago, with a slight deterioration in product sales per attendee as U.K. revamps some of its consumable product offerings.

Continental Europe attendance shortfall versus prior year was deeper than expected at 7.2%, bringing attendances to 3 million in the quarter versus 3.3 million last year.

Unlike the U.K., continental Europe was not able to gain traction after Easter, partially because of the timing of other second-quarter holidays, Mondays in April and May, followed closely by the excitement of World Cup, which began on June 9th, hosted in Germany, our largest market.

Both Germany and France, our second-largest market, were strong contenders throughout the four-week World Cup, which proved to be quite distracting to our members.

Revenues in continental Europe, which were $55.8 in the quarter, decreased 7.9% on a local currency basis, driven by the attendance decline.

Product sales per attendee were also down, off 7.4% in continental Europe, comparing against an exceptional quarter last year with 22.9% growth in local currency.

In the WeightWatchers.com business, revenues grew 18.3% in the second quarter of 2006, from $28.4 million to $33.6 million, the result of a 19.5% increase in active and [just curious] subscribers from 564,000 in 2005 to 674,000.

Moving on to our other revenues, franchise commissions rose 6.7% in the quarter to $5.4 million, with foreign growth -- notably in Canada -- outpacing domestic franchise performance.

As Linda mentioned, we acquired the Weight Watchers of Greater Indiana franchise for $24.9 million, a 6.2 times multiple of operating income, which was $4 million on an annual basis.

This acquisition takes NACO to about 80% of U.S. attendances.

In addition, we're poised to acquire eastern Canada, which represents over 50% of Canadian attendances.

We've signed a definitive agreement for a price of 6.5 times annual operating income, which approximates $8 million US, and we expect to close this transaction by the end of the third quarter.

Our other revenues, licensing and our publications, were $16.7 million in the quarter, up 12.8% or $1.9 million over a year-ago level.

Licensing revenues across the world, when looked at in aggregate, were $11.2 million in the quarter, an increase of 14.7% on a constant currency basis.

Our U.S. licensing business grew by 23.6%, while international grew more modestly at 6%, depressed by a 5% decline in U.K. licensing business.

Marketing expense for the second quarter was $40.9 million, up $2.5 million or 6.6% from last year's level, a result of the timing of the post-Easter marketing campaign.

The [branch] test of offline marketing for WeightWatchers.com was executed with a lower spend than planned, and we continue to optimize marketing placements in the traditional online space, generating a 15% increase in sign-ups for the quarter despite the Easter holiday.

Marketing expenses in total, as a percent of revenues, increased 40 basis points versus prior in the second quarter, from 12.3% to 12.7%.

G&A expenses in the 2006 were $34.1 million, down 55.9% from the prior year level of $77.3 million which included transaction expenses.

Excluding the $43.6 million of WeightWatchers.com transaction cost in 2005, which we noted earlier and the impact of expensing non-cash stock-based compensation in 2006, G&A's actually down in the quarter by $2.5 million or 7.5%, and G&A on this adjusted basis is 9.7% of revenues this year versus 10.8% in the prior year second quarter.

Our reported consolidated operating income in the second quarter was $105.4 million, up 74.3% from $60.5 million in the prior year question.

Excluding the adjustments mentioned above, operating income is $108 million, $108.4 million, up 4.1% or $4.3 million above the prior year level.

The operating income margin on this same basis was up 50 basis points to 33.8%.

Our interest expense in the quarter increased significantly versus a year ago to $11.5 million, up from $4.4 million in the second quarter 2005.

Our interest expense increased partially as a result of market rate -- the liable rate was approximately 200 basis points higher in the second quarter 2006 than 2005 -- and partially as a result of the increase in the consolidated Company's total outstanding debt.

As mentioned, in mid-December 2005, WeightWatchers.com put credit facilities of $215 million in place as the final stake in the acquisition by Weight Watchers International .

As a result of that, the second quarter average consolidated Company debt outstanding was from $372.9 million in '05 to $709.8 million in '06.

The consolidated Company's average effective interest rate rose to 6.46% in the second quarter of this year from 4.65% in the prior year quarter, including the impact of the mid-quarter refinancing of Weight Watchers International standalone credit facility.

As we discussed on our last conference call, this free financing allowed us to upsize our $650 million credits facility at the Weight Watchers International stand-alone level to a new $850 million credit facility while at the same time reducing our average spread over LIBOR from 167 basis points to 87.5 basis points and also extending our debt maturity.

Now, moving to an overview of our consolidated Company cash flow.

The Company generated $168.7 million in cash from operating activity in the six months ended July 1, 2006.

After capital expenditures of $10.6 million, free cash flow was $168.1 million, well in excess of our net income for the period of $114.9 million.

Most of the cash flow in excess of net income arose from the increase in deferred revenue associated with the sale of Season Pass and from permanent differences between book and cash taxes.

We continue to use our free cash flow to enhance shareholder value through opportunistic franchise acquisitions, as you saw, which will amount to just under $80 million, through share repurchases of $120.1 million in the six months, of which $113.3 million was in the second quarter, and through payment of quarterly dividends., which amounted to $17.6 million through the end of Q2, with an additional $17.2 million being paid on July 14th.

Our debt remained roughly flat -- $745 million versus $746.1 million at year-end 2005, and our cash balance has increased by $23.3 million.

In addition to debt and cash as noted above, the balance sheet categories of not are liabilities, which increased to $49.1 million excluding debt, just for the recording of our dividends payable and deferred revenue, and shareholder's deficit, which increased $29 million as the first half of 2006 net income was more than offset by declared dividends and stock repurchases.

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

Thank you, Ann.

Our objective as a Company is to improve the consistency of our execution across all of our operating businesses in order to accelerate our growth rate.

I assure you that this is what we are focused on.

At the core of Weight Watchers' success is our ability to consistently deliver a high-quality program and service to our members, packaging in a way that motivates our members and keeps them in the program long enough to generate successful weight loss.

There is nothing more important to our long-term success as a business than our ability to continue to increase the number of successful members we generate.

It is that positive word of mouth combined with effective advertising and public relations effort that drives our business.

While the U.S. business is still running below its long-term growth potential, we are seeing signs of improvement.

And with Monthly Pass, we are launching a new payment option that has the potential to drive not only volume but also a significant growth in our revenue per member.

In the U.K., after a couple of rough years, we are optimistic that we will be returning to a growth track.

In continental Europe, while the performance has been inconsistent, I am confident that our leadership, headed by Dave [Kerkoff], our COO of International Operations, and [Mads Rider], our SVP of Continental Europe, is building a strong team that will ensure consistency of execution.

Our remaining businesses, which include licensing and WeightWatchers.com, continue to perform well quarter after quarter.

During our last conference call, I provided 2006 EPS guidance of $2.10 to $2.20 per fully diluted share, including stock-based compensation expenses but without the expense associated with our debt refinancing.

Although the U.K. continues to perform as we thought, given the weaker than expected performance in Europe and the impact of not offering a fall Season Pass in NACO, we feel it is prudent to revise our EPS guidance for 2006 to a new range of $2.04 to $2.12 per fully diluted share.

Jeanine, we are now ready to open for questions.

[OPERATOR INSTRUCTIONS]

Your first question is coming from Mr. Greg Cappelli with Credit Suisse.

Please go ahead, sir.

Hi, guys.

It's Greg [and Kresh].

Hi, Greg.

Linda.

A couple questions.

The first one is -- in Europe, understanding that, obviously, we had World Cup and holidays and what not, do you think you actually lost market share to anyone else there?

And also, I know that [inaudible] only recently got approved.

But it's been talked about in Europe for quite some time.

Do you think that that has had some impact over in Europe as well, already?

Obviously, Greg -- hi, Greg -- we believe that the biggest impact was the combination of the late Easter and then, because of those holidays -- both religious and state holidays that come at the end of April and through May -- it disrupts our marketing with the late Easter to a large degree.

And then, of course, when you host your World Cup in one of our markets -- and this happens to be our biggest market in Europe -- it does have an effect.

We saw the effect of Australia hosting the Olympics when they did it.

But this has the wider effect in Europe because everybody's on the same time zone.

So if I'm looking at it, I think the biggest impact on quarter two really was a combination of all those events, and we had underestimated their impact.

Of course, I would have liked our marketing to, maybe, work a little bit harder for us.

But in looking at our major markets, I don't see a big change in our competitive set. [Inaudible] now, of course, has been improved in the EC, and its first market is going to be the U.K., not one of the continental European countries.

And that was really a July event as opposed to a quarter-two event.

Whether there's pent-up demand for a drug, I wouldn't believe it.

I mean, dieting is a very immediate thing when you decide to do something about it.

So I really think that if we're looking at the second quarter, which, of course, was up against a strong quarter last year -- last year, we had 14% growth in that second quarter --we were disappointed.

It was lower than our expectations.

But I think it was a combination of the events that I've outlined as opposed to the anticipation of the new drug coming on the market.

We've heard about this drug now for so long.

Okay, that helps.

And then, just to follow onto that, in the U.K., it seems like you're seeing some pretty significant improvement there, up to the recent weeks.

Just to clarify, you mentioned, obviously, improvement for management and also simplification of the program.

Is the majority of that -- can you explain, maybe give an example of simplifying the program?

I mean, is the majority of that improvement getting the word out that the program has been simplified and that your customers are now aware of that?

Right.

The big simplification will come in January.

As I tried to explain in call, the real simplification that we've been able to do since its launch was in terms of its navigation.

We improved the navigation of the switch handbook.

We certainly improved the new member orientation, significantly, since it was launched.

We significantly improved integration into the meeting topics and how we helped the leaders to explain things within the meeting topics.

So it was very, very focused, really, on our leaders' deliver as opposed to the real simplification of the program.

That is what will be coming in January with the new version of the program.

So I think everything that we've been doing right now has seen a solidification and a return to previous levels of retention in our U.K. market, so that is very, very good news.

I think that to really to get that word of mouth working very powerfully for us again, we'll have to wait until that new program is back in the market, when we're able to market against that.

Okay, final quick question, just on the licensing front, gross load there from the mid-20's where it had been growing to a mid-teens.

I'm just wondering if you are still kind of looking at the same outlook.

Are there licensing deals in the pipeline to look forward here?

And have your expectations changed at all for how quickly that line ought to be growing?

Yeah, as Ann said in her section, it was patchy if you're looking at a major geography.

What pulled it down really was the U.K. that was minus.

I think that was driven by several things.

If we're looking at NACO, we were up 24%.

If we're looking at continental Europe we were up 23%.

Obviously that's not at historic highs, but it is still really good strong growth.

The U.K., several things are impacting it this quarter.

Partly it is just driven by the lower volume that we have in our meetings because we know that our meeting members purchase these products to a greater degree than the public at large.

But it's also because the retail environment in the U.K. has been a little bit patchy of late, as well as the fact that this is probably our most mature roster of licensed products.

They got off the starting block much earlier than the U.S., and continental Europe.

So obviously it's not going to have that same growth going forward as the bigger markets are.

If we're looking at it going forward, I certainly do not expect 14% to be where we're now going to be.

I think it will bounce back and improve and be more in that stronger 20% plus, plus that we are seeing in our bigger markets.

Okay.

Thank you, both.

Okay, your next question's coming from Mr. Chris Ferrara with Merrill Lynch.

Please go ahead.

Hi, guys.

Can you talk about NACO attendance a little bit?

I think you're saying, mid single-digits in the second half.

Can you talk about, with the quarter this low as given the easy comp that you guys had talked about related to storms in Q3, I would expected maybe that quarter could be high singles.

And then are acquisitions baked into the guidance you're giving right now?

Acquisitions -- the easy answer is acquisitions are not baked in at this point.

I think by the time you get to EPS, the acquisitions obviously don't have a material impact on 2006, Chris; 2007 onwards, yes.

If you're looking at the whole question of quarter three, I think the big thing we always have to keep in mind is that quarter three only contains one robust month, and that is September, because our marketing campaigns, post-summer vacations and the long summer holidays in Europe really kick in in the U.S. at the end of August, but in the rest of the world, not really until September.

So we are anticipating not having a Katrina-effect, obviously, in the United States.

We're hoping that we won't have a Katrina-effect, and that will help our attendances.

We're obviously counting on the fact that we'll have robust marketing campaigns that aren't interrupted by things like the Easter lay-down and the holiday lay-downs.

But the big impact of those September campaigns is really in quarter four.

Okay, but I mean -- I mean, it's still mid singles for the whole back half of the year.

Right?

Yes.

I mean, so -- I mean on an easy storm comp in September, right, and is that what you guys had thought the whole way through?

Because I really had thought that you thought sort of mid single-digits for the year, and this quarter was going to be weak.

And then it would recover to a little bit better than that, and I thought that's what you had communicated.

Maybe I was wrong.

Chris, one of the things that will have an impact is the introduction of the Monthly Pass that's replacing the Season Pass in the quarter.

And if you look at that, the Monthly Pass is a product that can be purchased at any time from September through December, so there's no tremendous sense of urgency to buy it in the first four weeks of when you would normally be selling Season Pass.

So the number of attendances that we would derive in the fourth quarter might, in fact, be lower.

Although, both the attendances and the revenue, we believe will be made up into the first quarter 2007 as the timing kind of correct itself, and we have much -- anticipated much longer retention for the folks who take up the Monthly Pass, so that has an impact.

Got it, and that gets actually to the next question.

Why, if Season Pass is going so well, why yank it in Q4, take a hit on earnings top line to introduce a new plan that you just know about their test marketing, only to, if I understood you right, reintroduce it again in Q1?

I guess, can you --?

Yes, we truly believe that it would be too confusing for our service providers to get a handle on the Monthly Pass at the same time their selling a Season's Pass, in other words, with them simultaneously when it's just being launched.

We believe, as we go forward, that we will be in that position and will be comfortable in that position.

So originally we had intended to put a Season Pass in at the front-end, and then later, in the fall diet season, to introduce Monthly Pass.

But because of the results that we had in the test and the longer retentions, and because we felt, when thinking it through more completely, that if you've already bought a Season's Pass, you were very unlikely to be available to buy a Monthly Pass in the same diet season -- in other words, the Monthly Pass purchaser would have bought the 17 weeks, and therefore, the traction that this new payment plan had would have been lessoned by the fact that we had already sold in a Season's Pass.

And because NACO will be introducing an improved version of the turnaround program in January, we wanted to get this all done and bedded in before we enter our biggest and our busiest diet season, which is obviously the January, February, March period.

I mean, was something surprisingly -- I guess, did something surprise you on the downside on Season Pass?

And I guess why then did you have to sort of attach a free eTools to the Monthly Pass to make that --?

The Monthly Pass has always had free e-tools.

We've been testing it with that.

The beauty of the testing is obviously you see the real power of the product not while you're initially selling it, but a year later when you're watching the tail and the number of people that are still in the system and paying it.

So obviously, as the months have gone on, we've had a more and more robust picture of what Monthly Pass is capable of doing, and therefore, we want to get it in.

We want to get it bedded.

The reason we will have both of those commitment in place is we go recognize that not everybody is Internet-enabled, and the way that Monthly Pass works is you have to be Internet-enabled for your credit card to be in a re-occurring billing model and for those eTools to be, obviously, valuable to you.

But I think, too, Chris, this fundamental point is that what we believe is that 2007 is going to be significantly stronger because these two products will live in the meeting room, and they together will expand the universe of people that will purchase this kind of a continuity program.

And so at the end of the day, we believe that not only are we going to make up the revenue that you're seeing as a shortfall in September and fourth quarter 2006, but do much better with both products.

Got it.

So are you offering guidance on attendance revenues for '07 at this point?

Not yet.

Not yet.

Thank you.

Thank you.

Your next question is coming from Mr. Scott Mushkin from Bank of America.

Please go ahead.

Okay, thank you.

And guys, I just want to say thank for all the detail you provided for the quarter.

It was very helpful.

Thanks, Scott.

I wanted to get into this -- get a little clarity.

Can you go any -- can you go to as many meetings as you want with this Monthly Pass?

Or can you only go to one a week.

No.

A member currently, any member, can go to as many meetings as they want after they've paid only weekly fee.

Obviously, the majority of our members do attend one meeting.

But with the Monthly Pass they can attend as many meetings as they choose within that month.

Okay, and I'm actually going to get back Monthly Pass [inaudible], but just to understand the guidance.

You said it's going to cost you about $0.05, I believe?

Correct.

And so my math is so the rest of the shortfall, which is about $0.01 to $0.03, is attributed to continental Europe?

Yes, we're saying about $0.02 for continental --

$0.02 for continental Europe.

Okay, so I have actually talked to people that have been testing this, and [it's been my account] they say it's really positive.

I guess the one question I had, and I'm not trying to give anyone a hard time by asking this -- I just wanted to see -- last year at this time, we were very focused in on corporate solutions, and we were really Positive about it, what it was going to do for ‘06, and it didn't really materialize.

So if you could differentiate what you maybe have learned from that.

Why this may be different.

If you could also give us a time-line of how this was conceived and the whole process you went through, I think that would be really helpful.

Yeah, I mean, first of all, let’s just say there is quite a big difference.

The Monthly Pass and everything that we’ve worked on on the Monthly Pass comes out of our ability to test – and we have been testing in live meetings, and we started that test well over a year ago.

And you found some of those people so that you do know how long the retention is.

Now, if we are looking at the recurring billing model, obviously since we started with watching dot-com, and the long retention that we see on a dot-com subscriber and an eTools subscriber, we do know that the recurring billing model keeps you engaged in Weight Watchers.

In other words, what we’re trying to do fundamentally here is change people’s relationship with Weight Watchers from a temporary diet into an ongoing attempt to institute healthy lifestyle that’s going to control their weight and sustain their weight loss.

Because that ultimately is the only thing that makes us successful as a Company.

All of the research that the Company has done over so many years -- and it's been well publicized -- proves that Weight Watchers is one of the only programs that has that kind of a solid third-party, substantial, scientific research that says, "This works if you stick to it, and if you stay within the meetings, and if you attend those meetings."

So our aim has been to try to come up with ways to take away this weekly decision -- this temporary nature of their effort -- and put them into more of a long-term relationship with us and taking that as a long term commitment to your efforts to be healthier, to lose weight and to maintain that weight-loss.

So, this has been a consistent strategy for the last few years.

We’re just building more and more planks that support that strategy.

So, we have got the commitment plan.

We’ve obviously tested Season Pass before we put it in nationally.

It proved out nationally the same as it had done when we were doing it only on a regional basis.

We have been testing Monthly Pass.

We are now putting it in nationally, and we have confidence that it will also test out on a national basis and perform the way it has in those test classes.

So this it tested tested, tested.

And, of course, we’ve got the dot com model that has been functioning since the middle of 2001 now to show that that long-term sustainability is of both the retention while they're on it and that they still come back and re-sign up at a later date in their life.

So we believe that we’re building all of these planks.

In contrast, we have our Corporate Solutions, which was built on something that was tried and tested, and that's called our At Work meeting.

With our At Work meetings, we're a ground-up delivery method, if you like, of the meeting.

It was just changing the location and bringing it as a convenience into the workplace.

But each meeting was laid in and sold in on a one-by-one basis.

We really felt that we had the opportunity on Corporate Solutions, to use a company's own communications channels to market Weight Watchers to their entire workforce in a much more efficient way.

And that's what we did when we built our Corporate Solutions initiative.

Now I have to say, we've learned a tremendous amount since we launched that initiative.

And if I can give you some of those learnings, if you can bear with me a second.

It is things like that--we can get it into corporations.

Corporations are interested in helping the health of their workforce.

But getting it into a company alone does not make it successful.

There are two really key elements that we've discovered make it successful.

One is just that company's ability to communicate with effectively their own workforce.

In other words, if we have something to leverage.

The second thing is, we are much successful when the company itself supports the effort--the marketing effort through either subsidies or through enablement, like putting it as part of their health plan, putting it as a payroll deduction, so that they are supporting the commitment of their workforce.

We know if we can get companies that have both the ability to communicate well with their employees or their consumer base, or if they--and if they are willing to put skin in the game themselves by enabling it, then we have a good chance of Corporate Solutions doing what we thought it was going to do.

Merely signing up and saying, oh, great, now we're a great company, we're supporting the health of our workforce, doesn't alone give us the benefit that we were hoping for.

So although you can't see it in our [figures], believe me, Corporate Solutions on a year-over-year basis has tremendous growth.

It's just not a meaningful enough part of our business yet for you to be able to see that in the whole.

So we are changing how we're approaching companies.

We're not trying to just sell in.

We're trying to sell in to well-qualified companies.

We're trying to make sure, obviously, that we can communicate well and that they allow us to communicate well with their workforce.

And we're also trying to get them to see the added benefit to them and their healthcare costs if they subsidize it or support it by enablement either through payroll deduction or through their health plan's deductibles.

So we've learned a tremendous amount in the past year that obviously we weren't able to do until we'd actually put it in and that's why there is such a difference between Season Pass, which we had tested widely before we put it in nationally, Monthly Pass, which we have tested before we're putting it in nationally.

So we believe that they're really quite different in terms of what they can do for the business.

That's great.

I have a--I hate to do this--actually a follow-up to what you said.

That's okay.

The one is to the--one follow-up is to the Corporate Solutions and the rest is to the Monthly Pass.

Have you used a guinea pig in a sense of a company where you--because the ROI of a lot of these wellness programs is huge.

And we've seen that demonstrated.

Have you gone to a company and said, hey, we'll give you a discount, but you let us be your guinea pig.

We're going to prove to you this is ROI-positive and you're going to save a lot of money if we get this much compliance in our program.

Scott, you must have been sitting in our board room not too long ago.

Those are the kinds of things we're looking at.

We've got some inadvertent guinea pigs, if you like.

We've got two insurance companies.

And the difference between the penetration at those insurance companies is really quite indicative of and illustrative of what I've been saying.

One insurance company - we found out after we got them - doesn't even have a means of communicating with their client base.

Needless to say, our penetration of that client base is miniscule.

The other one not only has a good communication with their client base, as well as their employees, but the product is at a price that is very attractive to their client base and to their employees.

And therefore, our penetration is one of the highest in the system.

That one that's supporting it, by the way, is also one of our longest term corporate clients.

So I think it bodes well for us going forward.

If we can get more people to replicate that, and not waste--sorry, I don't mean waste our time.

We're still trying to help those others.

But if they don't have an effective way of communicating with their universe, then there is no point in us trying to go into these companies.

So we're doing a lot more due diligence.

I'm sure they're looking at us very hard as well.

But we are--we're looking for companies that can actually deliver, as well as us being able to deliver.

So we're taking all of these learnings and applying them.

And yes, we are contemplating taking on some guinea pigs where we take the subsidy to start with on the condition that, if it then proves successful, they will then take up that subsidy after a period of time.

[Indiscernible.] Okay.

Then getting back to Monthly Pass.

And sorry to take up so much time here.

But I wanted to explore why you decided to discount it 20% given the eTools.

It seems to be a very compelling product and I was wondering what drove that decision and how that affects the returns as you look at them.

Second, again, giving our channel checks to say [inaudible] could it be better than you guys are thinking?

Could you see a lot more sign-ups than you're anticipating?

And then, finally, do you think there's going to be any disappointment you're not offering Season Pass as you get into the fall?

Oh, let's just take it one sort of section at a time.

First, we have a very low penetration, as we said, of our paid-for eTools, if you're looking at the entire meeting membership.

And we believe that offering it free as part of the Monthly Pass will increase the universe of people who are using those tools.

I mean, we're looking in the region of 3% of our attendance base paying for eTools.

And obviously, if you're looking at Season Pass, as I said, we had a 25% take-up.

So we believe, obviously, that we have the ability to get many more people involved with the Monthly Pass, and therefore, eTools.

And we have been able to by paying for it separately.

I just have to say from a consumer perspective, too, from the time that we launched it, a tremendous amount of the feedback that we got was that they're paying their weekly fees, they really don't believe that they should be paying an additional fee while they're attending their meetings for their eTools.

So, if you like, we're reflecting customer sentiments by including them in the Monthly Pass.

Now we also believe, obviously, that this is part [indiscernible] promotional element of having eTools included in the price will maybe overcome some of the natural reluctance that some people have to enter recurring billing model anyway.

And we feel that this is all a great package when you put it together.

The 20% is consistent with the discount that we're offering on Season Pass right now.

Great.

And thank you for taking all of that time.

I appreciate it.

Thank you.

Your next question is coming from Mr. Bob Craig with Stifel Nicolaus.

Please go ahead.

Hi, Linda and Ann.

Hi, Bob.

Hi, Bob.

Believe it or not, I still have a couple of questions for you.

I just wanted to clarify what will you be offering in terms of advance purchase options then in January?

Both the Monthly Pass, Season Pass, anything else?

Well, if you're looking at North America, we will have one prepayment plan, which is just out there, which is the normal one that we're hoping over time we will discount completely--I'm sorry, discontinue complete.

We will have the short selling period, as we did last year, of the Season Pass, and then it will be over.

And then, we will have 52 weeks out of the year the availability of signing up for the Monthly Pass.

Okay.

And given the fact that you will restart the Season Pass, do you have any metrics on that program in terms of the renewal rate?

I know you threw out a metric--I think 25% of the attendees in both periods actually signed up for that.

But in terms of the renewal rate or cannibalization impact or impact on overall length of stay, do you have any of those metrics?

Bob, I wouldn't call it cannibalization.

I mean it's only logical that our most faithful members, the ones that are going to be there for a whole year, say, because they have a sizeable amount of weight to lose.

It's only logical that they will be attracted to and to take up these kind of options where they can get a good discount.

But the whole point of offering them is to change the behavior of the person who might not have stayed all of that period of time.

And obviously, if you're looking at the portion of people that are purchasing Season Pass so far, the vast majority of them are not those people that would've been there anyway.

Okay.

And in terms of renewal rates on those programs or impact on overall length of stay?

Are you--?

--Well, obviously, we've only offered it--it's increased the length of stay.

And obviously, we've only offered it for two seasons so far.

Right.

On a national basis.

Okay.

Yes.

You can see that from the increase in our [election comfort].

Right.

Yes.

Okay.

Linda, why not offer the Season Pass into the U.K.?

I think you mentioned you were going to offer it into Germany?

The U.K. is starting it in January.

Okay.

So you'll start it there, too?

Yes.

It was more an administrative thing.

Germany is starting it this fall.

Okay.

And the U.K. will be starting it in January.

Okay.

And I know we've asked this question before in terms of the timing of the next innovation.

Is it fair to say that the focus of the Company is going to be on these retention tools and programs versus changes to the actual program, at least over the near to intermediate term here?

The changes to the program and the reason why I'm characterizing these as improvements to the program and simplifications of the program are happening in our markets and throughout our markets.

And as I just mentioned in the call, the U.K. in January, the U.S. in January.

Since I'm disclosing so much to you, I might as well throw in Continental Europe in January.

Okay?

Okay.

So they will all be putting simplified programs in--.

--You got it out of her, Bob.

Yes, you got it out of me.

But the--if you're looking at a change in program--and this is where the language becomes confusing.

If you're looking at a change in program, meaning a new platform - in other words, points have gone and something else replaces it, or core is a different platform in the U.S., then, no.

These improvements and these simplifications and these improvements to the program that are coming along are not the introduction of a new platform.

Okay, that's helpful.

Does that--yes?

But we do believe the simplification of our program will be beneficial to our members.

And we believe the biggest opportunity we have is to get the people who walk through our door to stay longer and to be more successful.

Because, obviously, as a weight loss, we're only as successful as they are in weight loss.

If they walk through our door and don't stay and don't succeed, then all we've done is obviously put people through the door, taken a short revenue op, but we haven't increased this pool of people that are out there talking about Weight Watchers and increasing this long-term longevity.

The reason we're not a fad is because this is what we're focused on as opposed to just short-term driving of temporary volume.

That's helpful, Linda.

Any further price increases planned?

[NACO] just put, as you know, in March--.

--Right--.

--We put another I think it was around 11% of NACO went up.

There is going to be a further price rise of just 10%-ish of NACO still coming.

And then, France put in a price rise this year, and Germany is looking at a price rise as we go forward.

Okay.

The NACO increase in the fall or January?

This is in the fall.

In the fall.

Okay.

Yes.

Great.

And then, a couple of quick ones.

The revenues of the acquisitions - Ann, do you have that?

I--.

--The revenue of the acquisitions?

Yes.

Yes.

I've got it.

If you wait one second.

The 12-month--remember this is just a trailing 12-month--.

--Right--.

--Reported revenue.

Indiana is about 8 million, and Wal-Mart, which is the Canadian franchise, is about 20.

About 20 million?

29.

29?

Okay, great.

And the last one.

The revenue impact of the monthly plan.

You mentioned I think the UPS impact of a nickel.

Is that about 25 million or so in a revenue impact?

No, it's less.

Less?

Okay, great.

Thanks a lot.

Thank you.

Your next question is coming from Mr. Michael Lasser with Lehman Brothers.

Please go ahead.

Hi, guys.

Thanks for taking my question.

Is Indiana included in the guidance because it closed this week?

We took over the operation of Indiana last weekend, yes.

So it is--.

--Two days ago.

So those I think you said 400,000 [indiscernible] are included in--?

--No.

Remember, Indiana is 600,000 for a whole year.

Yes.

So 150,000 for each quarter.

Well, remember, our quarters are not equal.

You have to sort of apply--.

--With some seasonality--.

--Our seasonality model--.

--Yes.

Okay.

But those are included in the single-digit attendance figures--?

--They are not included in the attendance figures.

But they're not--it's not a large number relative to the [indiscernible] of NACO.

Okay.

If you're looking at the size of NACO and you're looking at how many months we have left of the year.

Yes, so--.

It's not--.

--So they are included, but they're not--.

--Are not included.

Okay.

But it won't change the picture dramatically is what I'm trying to say.

Okay.

Any reason for you not including it even though it's--you've closed on it?

Well, remember, mid single-digits is a range, not a specific number of attendances.

Yes.

Okay.

And then, if I kind of--if I do the math with the $0.05 and assume the $0.05 from not offering Season Pass over the second half of the year.

And then, kind of back into a revenue number and then I see what that might imply for attendances, it seems like it couldn't result in 500 to 600,000 fewer attendances per quarter.

Is that--?

--No.

It doesn't work quite that way.

It doesn't work that way.

So it's the last--.

--It's really--it's--you've got a couple of things going on.

You've got a slightly lower price, which you have to bear in mind.

Yes. [Inaudible.]

Right.

And we do have some difference in the timing of when people sign up.

But Monthly Pass also has a stronger retention.

So it's more complicated than simply--.

--A stronger retention over the life of its sign-up.

More attendances per month.

Well, that was what I was trying to kind of get at.

What might have--is it assuming, okay, it's not 500, maybe it's 300,000 or 400,000 attendances.

What might have contributed in the first and second quarter of incremental attendances?

Is the 300,000 to 400,000--.

--I think your focus should be probably more on the revenue side rather than the attendance side because even though there is a timing--there is somewhat of a timing differential given that people can sign up over the longer period of time, you do have a tendency for people to begin their dieting at the beginning of a diet season.

So it will be somewhat front-loaded.

So I think that looking at the revenue differential--the revenue rate differential is probably a better way to calculate the $0.05 than to focus entirely on a shortfall in attendance.

Okay.

And then, when you have modeled out the Monthly Pass, you said that you--the assumption was the average length will be five to six months.

Yes.

Have you done some sensitivities around that?

Where would the breakeven be?

What would happen--what would occur if it was four months and--or if someone spent only a couple of months on it?

Well, that five to six months assumes that some people are going to cancel.

This is a different--I think the one thing where we're going to try to--although they're both commitment plans, the way they work is completely different between a Monthly Pass model and the Season Pass just because of the way it functions.

As Ann said, when you sign up for Monthly Pass, you can cancel at any time.

If you buy a Season Pass, you are locked into those 17 weeks.

You paid for it.

It's done.

You just attend as many meetings as you can during that period.

And as Ann pointed out, because our revenue per attendance actually goes up, and it's not hard to work out where our breakeven is on number of attendances when we give that 20% discount, you can see that they don't attend more than 20% of the available meetings.

Now on a Monthly Pass, the reason why it's so powerful is this keeps them engaged and keeps them paying for months at a time.

But that still is an average.

It's--some people do cancel early on and only take it for a month or two.

Some people are still there 10 months in.

But we're talking here average.

So if you said, if the bulk of everybody only attended two or four, then we would be on the call telling you that it didn't behave the way the test did.

And--but we have nothing to lead us to believe that that will be the case.

Yes.

And so, just a very simple way to maybe think about it is you buy four months--if you buy a Monthly Pass, you buy four meetings and you really get one for free.

And so, if someone stays on it for five months, obviously, you're making up that increment, assuming that they don't attend all the meetings?

The Monthly--I think probably the simplest way to look at it is to say if you purchase--a member purchases a Monthly Pass, it's just $159.

If a member stays for five months with--sorry, $159 per Season Pass.

If a member stays for five months, a Monthly Pass is $200.

It's 240 if they stay for six months.

So the revenue differential is the difference between 159 and 200 to 240.

That's really the simplest way to look at it.

Okay.

And then--.

--And remember, all of these have to be compared to the Pay-As-You-Go, not to each other.

They're both commitment plans.

And we know with Season Pass that they attend more meetings than the Pay-As-You-Go member, but they miss more than 20% of the possible meetings that they've paid for.

Which is why we have the higher lecture--.

--Which is why we have the higher lecture--.

--I think the main point to think about is that if you go into the first quarter of 2007 when we're--when we are offering both of the programs, we expect the universe of people who take these up to increase, which means our overall retention will increase markedly based on the individuals who take up the price.

Now, not everybody will.

But we think that we will have more people taking them up than we did, for example, on the Season Pass alone.

Okay.

Two quick questions.

Is there any way that you can quantify the Season Pass as far as a customer attraction tool?

It sounds like it's been fairly successful as a--to improve customer retention.

But what about bringing in new folks into the business?

And just trying to extrapolate that--.

--We haven't actually marketed it outside of the meeting room, so it's when the member attends the meeting that they learn about the product.

So we haven't done that step yet.

We market it in our direct mail piece, obviously, to former members.

Okay.

Because they understand the value of the meeting in the first place.

To somebody who is just contemplating Weight Watchers, obviously, we want to get them to understand the value of coming to a meeting in the first place, as opposed to be driven by a payment plan.

Got it.

Last question.

Can you offer a little more color on the outlook for the capital structure, given what interest rates are doing?

It seems like as rates rise it would be more prudent to take care of some of the debt.

And perhaps you can offer a bit more guidance on--.

--Sure, there's a couple of things.

We did upsize our standalone credit facility because beginning in the first quarter of 2007 we will be able to pay down our weightwatchers.com debt, which is our more expensive debt.

So that's one thing that we are currently looking forward to do.

The other piece is that I think that when you look at our debt relative to our cash flow, there--we could pay down our debt actually very quickly at any given time, if we chose to allocate all of our free cash to that.

So we have a lot of flexibility in that way.

Plus, a lot of our debt is in revolver, which means that if we manage our cash efficiently, and we hope we're doing that, that we can keep our interest rates in check as well.

So--.

You've been running at an interest expense rate of about $11, $11.5 million for the first couple of quarters.

Is that a reasonable expectation over the next couple of quarters?

Yes, until we get into the first quarter of '07.

Yes.

Okay.

Thanks, guys.

You're welcome.

Thank you.

Your next question is coming from Lori Scherwin with Goldman Sachs.

Please go ahead.

Hi.

I know it's running late, so I'll try to keep this quick.

But, Linda, in response to someone's question earlier, I think I heard you say something about an improved turnaround program for NACO in January.

Yes.

Can you elaborate on that to the best that you can given that--I guess only the summer now.

But are you doing something major here or just tweaking the program?

Well, I tried to explain that we're not changing the system - the underlying platform.

I really would rather not share details this early.

We are in a competitive world and it's a little bit hard to share details with you all before we've even shared them with the vast majority of Weight Watchers people.

So I think that we've worked very hard on this.

We've done a lot of testing of it.

We believe that consumer reaction has been very positive to it.

Everything we're doing is to try to help people follow a program, making it easier to follow, easier to understand, easier to live with.

Easier is just a word that I'll use again and again.

And we're doing that all around the world.

Okay.

So perhaps next quarter, we'll get more details?

Perhaps next quarter you will.

Okay.

And then, just to follow-up again on someone else's question because I didn't quite understand the answer.

Just on renewal on Season Pass, if 25% of your members were using it or uptaking it in each of the sessions that this was offered, were those the same customers or different members using it?

No.

No, of course, they're not exactly the same because the average stay is about 10 weeks, as you know.

They're only for sale during a short selling period.

And the next selling period is obviously 17 weeks after the previous selling period.

I don't feel that we want to yet in this early days of Season Pass--as I've said, we've only had two diet seasons where it's been available nationally.

We don't want to break out for you yet that sort of detail to say how many of them had previously bought it in the previous diet season, et cetera, et cetera.

I think we just said very clearly for the first time that of the people that were available in the meeting during that four-week period, 25% of them purchased it.

And I think that that is a very high purchase rate for a product that's an upfront payment of $155-plus and shows that we have an appetite within our membership of people making the kind of commitment that we're allowing them to make.

And obviously, it's a great deal for them because if they attend all of those meetings they get a good discount.

If they attend all of those meetings, we get a double benefit of having more product sales because they're in the meetings--in more meetings, and a greater weight loss, which means word of mouth is strengthened.

So on this one, we really can't lose.

Okay.

And just two quick housekeeping--I apologize if I missed these.

But Ann, can you just tell us what the tax rate in the quarter was, excluding the one-time items?

And then, what you--it looked like it was a little lower than the first quarter--and what the outlook is there?

Yes.

The tax rate was 37.9 in the quarter.

There weren't one-time items.

Pardon me?

Just the early extinguishment of debt, but that wouldn't affect the tax.

Oh, I thought she was talking about the tax.

Sorry.

Were you talking about the tax or were you talking about the one-offs?

The one-off was the $0.01 early extinguishment of debt.

Right.

If we're excluding that from our model, would that have any implications on the tax rate?

No.

Okay--.

--It would reduce the cap.

But not the rate.

But not the rate.

So do you expect the rate to then be at that level for the rest of the year, or back to sort of 38.5 [inaudible]--?

--Well, it could go up a bit for the remainder of the year.

It really does depend on the mix of our revenue.

Some of our countries have very high tax rates, if their revenue is higher.

Germany, for example, is one that our tax rate goes up.

So it really is kind of a--.

But we're always kind of in the 38 to 38.5 kind of range, as you know.

Okay.

And then, just lastly, did you break out our could you break out eCommerce sales in the quarter, since it's now included in product sales?

Actually, we don't break that out.

We don't.

No.

I think you gave it last quarter.

I don't think so.

No, I don't think so.

All right.

I'll follow-up offline.

Okay.

Thanks.

Thank you.

Your next question is coming from Mr. Greg Badishkanian with Citigroup.

Please go ahead.

Great.

Thanks.

Hi, Greg.

Hi, Greg.

Hey.

Just real quick.

Do you think that Continental Europe, maybe some of the weakness there could have just been because you were up against a really tough prior comparable of 14%?

Did that have anything to do with that?

Yes, of course.

It was our biggest comparable and therefore we didn't have high expectations with all of the other things that were happening in the quarter.

It was just a bit more disappointing or a bit softer than we had anticipated.

I think particularly with the new laid--it was just a different lay down of the national holidays and the religious holidays during May.

And then, of course, the World Cup really--and we can't understand the fanaticism over here.

But it really is a huge event.

And when we've got it on the same time zone, it is all of our European and our U.K. markets.

And so many of those teams were doing well this year.

Right.

It's just a combination of all of those things.

And we were up against an all-mighty quarter.

And the fourth quarter you expect it to be positive again, right?

Yes.

Absolutely.

That's what we're expecting.

Good.

Thank you.

Your next question is coming from Dara Mohsenian with JP Morgan.

Please go ahead.

Hi, Dara.

Hi, guys.

Ann, I just wanted to review your marketing line for a minute.

I think you indicated previously that most of the decline from Q1 would shift into Q2.

It looks like that didn't materialize to the extent you expected.

So did you pull back on marketing at all?

And what was the reasoning there?

And also, can you just give us your plans for the back half of the year in terms of marketing spending?

A couple of things in terms of that movement.

Some of the money absolutely did move into Q2.

The dotcom, as I indicated, spent less than we had anticipated, that they would spend just because of efficiencies that they were able to garner.

And we did pull back a little bit in Continental Europe on some things.

So it was kind of a combination of all of those things.

In terms of the back half of the year--.

--And generally speaking, we're looking at a greater increase--percentage increase in the back half than we saw in the first half.

Yes.

It would be a greater percentage increase and probably a bit greater, if you look at the whole second half, in terms of marketing as a percentage of revenue than we saw in the first half.

Okay.

And does that mean year-over-year, so the back half of this year versus last year as a percent of sales?

Year-over-year we're slightly--we're projecting slightly lower.

Okay.

As a percentage of sales--.

--As a percentage--.

--But as a spend, it's going to be higher.

Okay.

That's helpful.

Thanks.

Thank you.

Your final question is coming from Mr. Howard Choe with Standard and Poor's.

Please go ahead.

Hi.

Good evening.

Hi, Howard.

Just two questions.

Given the advantages that you see for the Monthly Pass, why wouldn't you introduce that in Europe?

Well, the Monthly Pass we have to have the technical ability to deliver it via the Web.

And obviously, we've been building that out and that is what we're going to do in the lead market, which is the U.S.

That doesn't preclude us, of course, from introducing it to other markets that already have a subscription site next year or the year after.

Okay.

The second question is, in your studies, what percentage of your attendants did you find would not be qualified for the Monthly Pass program?

You mean what kind of--mass penetration is there in various--I mean our--?

--No, no.

I'm just referring to the percentage of attendants that perhaps do not have a credit card or don't have Internet access.

I think our--Internet access, you can find the kind of penetration of Internet access by market and by parts of the nation.

We're no different I think from the general population in terms of Internet access.

In the U.S., over the past few years, say four years, the amount of pay by credit card has dramatically increased in the meetings.

So I think that most of our members are probably credit card holders.

The Web-enabled I don't think we're ready to talk about.

Okay.

But was that--but is that a requirement for the Monthly Pass program or can someone just--?

--No.

You have to be Web-enabled for us to have recurring billing.

Okay.

All right.

Thank you very much.

Okay.

Thank you.

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

[Jean], thank you.

And thank you all for joining us today.

I'm sorry we kept you later on this hot night.

But we are looking forward to updating you on our third quarter on our next conference call.

Thank you.

This does conclude this evening's Weight Watcher's International conference call.

You may now disconnect your lines at this time.

And have a wonderful evening.