WW International Inc (WW) 2007 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International second quarter 2007 earnings teleconference call.

(OPERATOR INSTRUCTIONS) As a reminder, the conference call is being recorded today, August the 1st, 2007.

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

Please go ahead.

Thank you, Lenny, and thank you to everyone for joining us today for the Weight Watchers International second quarter conference call.

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

At about 4:00 p.m., Eastern Time today the Company issued a press release reporting its financial results for the second quarter for the fiscal year 2007.

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

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

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

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today.

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

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

I would now like to turn the call over to Mr.

Kirchhoff.

Please go ahead, David.

Good afternoon and thank you for joining us as we review Weight Watchers International's performance for the second quarter of fiscal 2007.

Through the second quarter, we continued to see the benefit of our new membership payment model, the Monthly Pass, and we are beginning to see early progress in the key initiatives underpinning our strategy of increasing retention and relevance.

Looking at our financial results, revenues grew by 20% in the second quarter, compared with 17% growth in the first quarter.

We saw growth across all of our major revenue sources, including meeting fees up 24%, end meeting product sales up 15%, internet revenues up 14%, and licensing revenues up 36%.

Our Q2 results benefited from favorable foreign currency exchange rates, which added $9.6 million to our revenue.

On a constant currency basis, our Q2 revenues grew by 17%, compared with 13% growth in Q1.

In the second quarter, total paid weeks of worldwide meeting business were up a strong 27%, driven primarily by the impact of monthly pass adoption in North America and continuing contribution from our recent franchise acquisitions.

By comparison, paid weeks growth in Q1 was 17%.

We saw some improvements in attendance growth, up 7.1% in Q2 versus 4.4% growth in Q1, as we continued to benefit from strengthening retention, as well as some improvement in NACO enrollment trends towards the back half of the quarter.

Growth in total paid weeks for our Weight Watchers Online product remained strong at 22%, resulting from our continued efforts to increase product awareness via our spring Weight Watchers Online TV campaign in the U.S.

Operating income grew 17% in Q2 versus 11% in Q1, reflecting the combined impact of our revenue growth and gross margin expansion, offset by our increased investment in marketing and G&A.

Higher marketing spend in Q2 was primarily the result of one, our spring TV campaign for Weight Watchers Online; two, higher NACO TV production costs and investment in non-TV media, as well as market research; and three, currency effects under international marketing budgets.

Q2 marketing spend was 13.9% of total revenues versus 12.7% in 2006.

G&A expenses in Q2 were 11.1% of revenue versus 10.6% last year.

On the bottom line, we reported EPS of $0.73 for the second quarter, compared to $0.59 per fully diluted share, excluding one penny for early debt extinguishment in last year's second quarter, an increase of 24%.

I will now review our results in our major geographies and business units.

First, our North American meetings business.

Total second quarter NACO revenues were $217 million, an increase of 28% versus the same period in 2006.

In the second quarter, the beneficial impact of the Monthly Pass Commitment Plan continued to accelerate top line growth with meeting fees up 33% in NACO versus prior.

Without the benefit of acquisitions made in 2006, meeting fees were up a strong 22% as compared to Q1 growth of 11%.

Paid weeks in NACO, excluding recent franchise acquisitions, were up a robust 33% versus Q2 2006.

NACO attendances, excluding recent franchise acquisitions, were up 2.6% versus prior period, as compared to a negative 2.6% in Q1, as the higher retention of monthly pass subscribers more than offset the slow start to the spring diet season campaign.

As I have mentioned many times over the year, the Monthly Pass Commitment Plan is important to our business because it represents an overall better and more effective way for members to approach their weight loss effort.

Monthly Pass has allowed us to shift our relationship with our members away from week-to-week transactions towards holistically incorporating Weight Watchers into their lives.

In addition, the elimination of missed week fees, the lowest weekly meeting fee and the free inclusion of Weight Watchers eTools are all strong positives for our members.

It has been rewarding to see so many of our members availing themselves of the benefits of the free eTools access that they receive with their Monthly Pass subscription.

As I indicated on our last call, we continue to emphasize the clinical research result, suggesting that members who attend meetings and use eTools lose 30% more weight than those that only attend meetings.

Suffice it to say, we also continue to be very pleased with the financial impact of Monthly Pass on our business.

Comparable to the first quarter, Monthly Pass accounted for approximately half of our attendances in Q2.

All of our data so far continues to suggest a forecasted mean retention of about 8 months for Monthly Pass subscribers.

We expect Monthly Pass to continue providing a step function improvement to our NACO top line results throughout 2007.

Enrollment trends in NACO continue to be challenging, particularly during the critical first few weeks of the spring campaign.

As with the winter campaign, our advertising had reasonable share of voice, but our creative was not changing consumer mindsets in a meaningful way.

Our tracking study suggested that our celebrity spots had reasonable [cuff] room, but persuasion was still below advertising norms and certainly not where they need to be for our brand and our category.

However, we started to see an improvement in enrollment patterns as we moved into the second half of Q2, a period in which advertising was not playing as significant a role.

We have not seen any discernable effect from the launch of Alli.

As I've stated before, we have the benefit of a brand that is trusted and perceived as credible and effective.

However, we also have the opportunity to rejuvenate our brand by, one, correcting misconceptions and misapprehensions about our approach; two, better communicating the news in Weight Watchers, a potential example being Monthly Pass; and, three, more adequately differentiating our life style-based approach versus the strictly dieting approach espoused by many of our competitors.

In the second quarter we accomplished several important tasks in creating a new marketing platform for our NACO business.

As we indicated on our last call, we hired a new agency, McCann-Erickson, who officially started on our account in May.

We also completed several critical pieces of market research, most notably a comprehensive market segmentation study, which are yielding invaluable insights that will help drive and inform our new strategy and creative brief.

I am more confident than ever that we can systematically eliminate the barriers and reenergize our brand in the minds of weight loss interested consumers, particularly among those who have never been members of Weight Watchers.

If one challenge is to reframe the brand in the mind of consumers, another opportunity is to better convert those consumers who express an interest in us.

The success of NutriSystem in direct selling and customer conversion has illuminated the potential impact of this opportunity.

Across our touch points with consumers from the website to the call center, we believe we can be much more effective in converting interest into action.

We now have two important building blocks in turning this opportunity into reality.

First, the launch of Monthly Pass gives us a product that can allow us to direct sell meetings in a much more compelling way.

Second, we began developing the organization capability to deliver more effective conversion in customer relationship management with the hire of a very talented direct marketing professional from American Express.

As we move from 2007 into 2008, we will be evaluating, testing, and implementing new approaches and partnerships.

As a side note, we were very interested and excited by the results of the recent New England Journal of Medicine study, The Spread of Obesity in a Large Social Network.

This study demonstrated that in a mutual friendship, if one becomes obese, the other has a 46% greater chance of also becoming obese.

The authors of this study have suggested that the opposite can also be true.

Based on our own observations of what we have seen in our meeting rooms, as well as our own research, we couldn't agree more.

For us, this study reflects the scientific basis of our approach.

Our ability to provide a forum in which people can successfully lose weight and become healthy together is truly unique.

Finally, in meeting product sales in NACO, we're up a vibrant 14% versus Q2 2006.

Moving forward, we expect strong second half top line growth in NACO driven by higher paid weeks, despite the fact that we began lapping the launch of Monthly Pass in August.

This phenomenon is simply the result of starting Q3 this year with a much larger installed base of customers than we had when we started Q3 last year.

In terms of attendance, we are looking for low single digit attendance growth, excluding acquisitions, in the second half.

Now, onto the U.K.

The U.K.

had a soft start to it's spring diet season, but was able to get enrollment trends back on track and increase revenue and attendance despite a tougher comparable in Q2 2006.

For the second quarter 2007, U.K.

revenues increased by 13% on a local currency basis, driven by a 2.2% increase in attendance and a nearly 30% increase in product sales versus the prior year period.

We believe the softness in the spring diet season was due to changes in creative execution.

In an effort to moderate some of the perceived controversial elements in its winter diet season ads, the U.K.

team made several changes to the creative for spring.

In the process of doing this, the advertising lost much of its customer appeal and enrollment trends reacted negatively.

Fortunately, the U.K.

team has a process for quickly tracking advertising effectiveness that allowed them to diagnose the issue and implement changes by the end of April.

Results began to normalize in May and June.

While the lost opportunity was regrettable, the learnings were invaluable and the U.K.

is looking forward to launching fresh TV spots in the fall.

Going into the fall diet season, the U.K.

will be launching Monthly Pass and, in parallel, will also be increasing its weekly pay as you go fee by 10%.

The combined effect of these actions should be increased lecture income per attendance to the second half of the year, although the financial benefit of Monthly Pass will not begin to be fully realized until 2008.

Moving to Continental Europe, consistent with Q1 results, Continental Europe continued to be dragged down by soft results in Germany.

For the second quarter 2007, total revenue growth was essentially flat at 0.6% versus a comparable prior year period on a constant currency basis, and attendance was down 7.5% versus the comparable period in 2006.

Financially, the weak attendance trend was offset by strength in product sales, licensing and increases in average meeting fees.

As I've indicated before, we believe that much of Germany's issues relates to marketing and that we are not capturing the true potential of the brand in our approach to weight management.

I'm happy to announce that we hired a very talented GM for the German market who started with us late June.

He comes to us from Unilever, where he demonstrated successes in energizing brands and we believe he brings exactly the skill set and profile necessary to turn this market around.

Germany will also shortly be announcing the selection of a new agency to help drive a new marketing strategy and campaign for 2008.

As we noted before, Germany is also launching Monthly Pass this fall.

Our strategy for improving the overall trends in Continental Europe starts with our focus on improving the strength and depth of our local management talent, as is demonstrated by the contrastingly strong results that we are seeing in our French market.

In this market several years ago we installed a very talented and capable country manager who has been able to systematically improve her business across all the operational dimensions each year.

France is now routinely generating strong top line and bottom line results.

The right template for course correcting Continental Europe is to put strong country managers and teams in place and the results inevitably follow.

Also in Continental Europe we can now announce that we have completed market testing of a new program innovation, details not yet to be revealed, that will be soft launched in November with an eye toward a hard launch in January 2008.

Moving on to WeightWatchers.com.

Based on the strong results of our January TV campaign promoting awareness of Weight Watchers on line, we elected to run the same campaign in the spring diet season.

As a result, Weight Watchers Online paid weeks were, again, up 22% versus the comparable prior year period.

We continue to see our TV advertising in the U.S.

drive profitable customer acquisitions.

Accordingly, while not part of our original plan, we are now planning to run the spot again during the fall diet season, even though it will reduce this year's EPS by approximately $0.02.

This is the result of marketing costs being booked up front, while the revenue and profit contribution is spread over the duration of the subscriptions.

As I noted on our last call, we launched a customized version of Weight Watchers Online for men in late March.

While the results are early, we are pleased that we have already seen some increase in the percent of our subscribers who are men.

This has come, despite effectively having little targeted marketing behind the launch.

As we continue to refine the experience we provide for men and solicit their feedback to further improve the product experience, we will continue evaluating increasing marketing behind this version of the Weight Watchers Online product.

Finally, our licensing business was up a robust 36% globally and 30% in the U.S.

The U.S.

licensing business saw strong results across categories, but our highly successful partnership with Wells' Dairy was particularly strong.

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

Thank you, David, and good afternoon everyone.

Our consolidated company second quarter revenues were $386.3 million, up 20.3%, or $65.2 million over the 2006 quarter.

Operating income also posted a significant gain, increasing 16.9% to $123.3 million.

Interest expense in the quarter jumped $17.6 million above the prior year level to $29 million, a result of the refinancing that we undertook earlier this year to fund our 19.1 million share buy back.

As a consequence of the higher interest expense, second quarter net income was on par with last year, at $58 million.

However, the share buy back had a significant favorable impact on EPS, which rose 23.7% in the quarter, to $0.73 versus $0.59 a year ago.

The year ago second quarter EPS excludes a $0.01 charge related to early extinguishment of debt.

Looking now at operations, as I indicated, our worldwide operations generated a $65.2 million, or 20.3% increase in revenues in the second quarter, largely driven by a 25.4% increase in global paid weeks.

Looking first at meeting fee revenues, globally, meeting fees grew 24.3% to $232.7 million.

Attendance growth of 7.1% was compounded by a 13.4% increase in the average meeting fee per attendee on a constant currency basis, primarily reflecting expansion in paid weeks and makeover brought about by Monthly Pass.

And meeting products were also an important source of revenue growth around the world, up 12.7% on a constant currency basis and 5.3% per attendee.

We continue to experience strong sell for consumables and our newly designed enrollment products have had strong appeal to both new and returning members.

In current dollars, the meeting product sales were 16.9% over last year's level.

In terms of meeting volume metrics, global meeting attendance reached 17 million in the quarter versus 16.9 million in the year ago quarter.

As noted, paid weeks in the meeting business exceeded attendances across the world, totaling $22.4 million, as compared to $17.7 million in the prior year, an increase of 26.7%.

WeightWatchers.com revenues grew 14.9% in the quarter with paid weeks in the online business increasing 21.9% to $7.9 million.

Now, we'll get into more specifics regarding our financial performance, first in the meetings business by major geography and then looking at our WeightWatchers.com operation.

So, beginning with North American, NACO's second quarter meeting revenues grew 28.9% to $199.9 million, including $16.5 million in new acquisitions.

While attendance has increased by 14.3% compared to last year, paid weeks rose 43% in the quarter.

NACO attendances, excluding acquisitions, moved back into positive territory in the quarter, growing 2.6%.

Because of the impact of Monthly Pass, the average meeting fee for attendance rose 18.5% in the quarter.

As a reminder, Monthly Pass exerts leverage on the average fee, despite its discounted weekly price, because Monthly Pass members were attending more often than pay as you go members and not required to attend every week.

In meeting product sales growth in NACO, excluding acquisitions, also outpaced attendance growth, up 6.8% positing a 4.1% up tick in product sales per attendee in the quarter.

Internationally, second quarter revenues were $121.3 million, up 13.2% in current dollars, 4.7% on a constant currency basis.

Attendance has lost ground in the quarter, off 2.6% from the prior year's second quarter level.

However, the negative volume impact did not translate into a revenue shortfall.

Price was increased in a few of our countries and increased product sales penetration was pervasive.

International and meeting product sales per attendee increased 14.5% in local currency.

U.K.'s enrollment and attendance performance decelerated during the first half of the second quarter, resulting in full quarter attendance growth of 2.2%.

Revenues were $47.9 million, up 13.2% on local currency basis.

And meeting product sales were especially strong, surpassing expectations, up 30.4% in local currency, driven by the launch of several new consumable products.

Continental Europe's total Q2 revenues of $60 million were up marginally from the prior year quarter on a constant currency basis, increasing 0.6%.

Performance was mixed in the quarter.

Overall Continental Europe's second quarter attendance of 2.8 million was 7.5% behind the prior year.

Solid performance in some of our countries, notably France and Switzerland, was more than offset by weakness in Germany.

The revenue offset to the attendance volume declined in Continental Europe came primarily from two areas.

As with other geographies, meeting room products continued to be very well received by our European members, generating 10.3% gross per attendee in local currency in the quarter.

Meeting fees per attendee also uptakes volume as a result of price rises taken in some countries over the past year.

Now, moving from the meeting business to WeightWatchers.com.

In total, WeightWatchers.com second quarter revenues increased 14.9% to $39.1 million, from $34 million last year.

Revenue growth at the dot.com level was depressed by a reduction in paid eTool subscribers.

As we've noted in past communications, eTools are internet products for meeting members is now given free with Monthly Pass.

Revenue gains in NACO from Monthly Pass have far surpassed the impacts of lower paid eTool subscriptions at the dot.com level.

Online end of period active subscribers were at 22.4% in the quarter, 613,000, with associated revenue growth in line.

In the spring we again invested in national TV advertising and experienced even better success than we had in the winter.

And the payoff for these marketing investments continues, as these incremental subscribers move through the year and into 2008.

Looking at our other revenues, as expected, given the recent franchise acquisitions, franchise commissions declined in the quarter by 17.2%.

During the second half of last year, we acquired four franchises, Indiana, Suffolk County, New York, Western Michigan and Eastern Canada.

Excluding the impact of these recent acquisitions, franchise commissions grew by 15% in the quarter to $4.5 million.

Our other revenues posted strong gains in the quarter.

Global licensing revenues increased 36% over last year's second quarter level to $15.3 million, with all geographies contributing.

NACO and U.K.

were especially strong in both existing and new licenses.

In total, licensing, combined with revenues from our publications, were $21.1 million in the quarter, up 26.5%.

Our consolidated gross margin was 56.9% in the second quarter 2007, 70 basis points above the 56.2% delivered in the second quarter of last year.

The margin expansion derived primarily from higher lecture income per attendee, Monthly Pass in NACO and pricing in a few European markets, and from growth in the licensing business.

Our second quarter marketing investment increased 30.9% to $53.6 million, $12.7 million above last year's level.

WeightWatchers.com and NACO accounted for most of the increase.

Higher marketing spend at WeightWatchers.com was primarily the result of the national TV campaign, while NACO upped its spend in several areas, including the celebrity spokespeople, TV production, print ads and research.

Marketing was 13.9% of revenue in Q2 '07 versus 12.7% in '06.

G&A expenses in the second quarter were $42.7 million, up 25.2% from the prior year level.

Absent the impact on G&A of recent franchise acquisitions and foreign exchange, G&A increased 18.3%.

As noted last quarter, there will be a continuing impact to G&A resulting from our ongoing technology investments and upgrading our systems, both back office and meeting room.

The combination of higher IT expense and depreciation was one of the, was the single largest contributor to the G&A increase versus last year's Q2.

The remaining increase is largely employment-related, in particular for continuing to build the Continental Europe and marketing infrastructures.

As a percentage of revenue, G&A was 11.1% in the quarter versus 10.6% a year ago.

The Company's consolidated operating income in the second quarter was $123.3 million, up 16.9% from $105.4 million in the prior year quarter.

Our consolidated operating income margin was 31.9%, as compared to 32.8% the year earlier.

As I mentioned in my opening remarks, interest expense in the quarter increased from $11 million last year to $29 million this year, while the average effective interest rates decreased slightly to 6.38% from 6.46% a year earlier.

Average consolidated debt outstanding increased by over $1 billion this year to $1.76 billion.

We raised our debt level in the first quarter 2007 to fund the repurchase of 19.1 million of our shares.

Since then, we've paid down $99 million of debt.

Now moving to an overview of consolidated company cash flow and the balance sheet.

The Company generated significant free cash flow in the quarter.

Cash from operating activities, excluding interest, was $86.3 million.

After capital expenditures, we had $78.8 million available to service our capital structure.

We deployed $9.1 million for interest payments and $53.7 million to pay down debt.

Typically, as is the case in this quarter, our cash flow exceeds net income.

This is primarily because of our negative working capital.

In recent quarters, our working capital has been favorably impacted by higher deferred revenue arising from monthly tax commitment plans and by increasing permanent differences between book and cash taxes, partially arising from goodwill associated with our franchise acquisition.

Fluctuations in the balance sheet at the end of Q2 '07 versus year end 2006 reflect normal seasonalities to business, as well as significant increases versus year end in our debt balance, up $915 million, and deferred revenue, up $28.9 million, and in the franchise rights acquired, up $23.8 million.

With that, I'll turn the discussion back to David.

Thank you, Ann.

As you can see, much of our strong Q2 results can be attributed to the positive impacts of Monthly Pass in NACO, product sales around the world and our Weight Watchers Online product.

We're continuing to take meaningful steps to begin the process of reenergizing our brand with more effective and differentiated marketing.

We believe this will allow us to continue our growth well into 2008 and beyond.

Beyond these activities, we continue to make progress on our retention initiatives.

Two examples of this are, one, all of our major markets have introduced the retention score tool in their respective field organizations and they have identified specific milestones for progress in 2007.

While this will be an ongoing process for many years, we've committed ourselves to making meaningful progress this year.

To this end NACO has already begun the process of allocating meetings to our stronger leaders.

Two, we launched Monthly Pass in Australia two weeks ago and we're on track to have it launched in the U.K.

and Germany by the end of August.

We continue to opportunistically acquire franchisees.

During the second quarter, we closed on the acquisition of our franchisee in British Columbia, Canada, adding over 400,000 annual attendances to our company-owned operations.

Regarding guidance.

Based on the results that we've seen for Q2, we are narrowing our guidance range by raising the bottom end.

We are now revising guidance for the full year 2007 to between $2.38 and $2.49 per fully diluted share, excluding a $0.02 charge related to early extinguishment of debt expense.

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

Thank you.

(OPERATOR INSTRUCTIONS) Your first question is coming from Scott Mushkin, Bank of America Securities.

Hey, guys.

Hey, Scott.

Hey, Scott.

Hi.

Nice work in North America.

I was wondering if you could give us some insight.

Two of the last things you touched on, David, about how you're increasing relevance, maybe elaborate on it more.

And the process that you're going through in North America to kind of weed out the meetings.

Is it, are you analyzing it by a meeting basis, or is it coming through --?

In other words, if I'm a strong, most classroom leaders have a number of meetings.

Right.

And are you looking at like, if they have six strong meetings and one that's weak, do you pull it from them?

Or how are you going about that process?

And I guess, with the marketing budget not being as robust in the second half, I was surprised to see the strength came in the second half of the second quarter.

Maybe you can talk a little bit to that.

Sure.

Let me, let me see what order.

Maybe three questions, I'll hit question number two first, which is leader retention and leader performance management.

It's a great question you raised, which is do you maximize retention on the basis of allocating meetings to hire retention leaders or do you focus on a meeting-by-meeting basis?

And the example you raise is a good one.

I mean, to be clear, we have some leaders who are across the board strong in all their meetings and those are the leaders who we're encouraging to take more meetings.

We have a few leaders who might be struggling across the range of their meetings and in some cases that make sense for us to consider other opportunities for them and also whether or not this is a good fit.

But we also have some in the middle.

So, I think the example you raise is a good one.

And I've met some of these leaders in my travels, which is there would be a leader who I met who had six very strong meetings and she had one meeting with a retention score that was below our benchmark.

The way we would look at that is basically to say she looks like a strong leader, perhaps there's something else happening in the meeting with softer retention.

Sometimes it can be a fit issue.

It could be that her style and her personality are well geared to a certain type of member, perhaps a demographic group.

But in other cases, there could be something else that's happening.

And what we're working with our field management to do is to work with them to get better at diagnosing retention issues, because simply, if we're having a hard time getting members to come back to a meeting, to us it illustrates that there's a problem that needs to be fixed.

Many times it is because there's a potential misfit because of the leader, but sometimes that's not the case.

And what we want our territory managers to be is more effective problem solvers and they're taking that charge on very well.

So, most importantly, to answer your question, meetings are the thing that really matter at the end of the day.

To hit your first question, which is how are we driving relevance.

As I've said before, if you look at the challenge that's in front of us, I think in the face of some consumers I'm always a little bit surprised with never members.

I'll give you an example.

I as in a focus group in Atlanta and I listened to a member talk about the fact that she likes Weight Watchers quite a bit, she's thought about it.

In fact, she had been considering joining Weight Watchers now for the past four years, which is a really long consideration period.

I think that the point is that, when we asked her, well, what's taking so long or what's holding you back, she was absolutely of the impression, which was first off when she went to a meeting, somebody was going to call out her weight in public.

And second of all, she was going to have to stand up in her first meeting and tell her whole story as though it were an AA meeting.

And I'm not criticizing AA.

I think they're incredible for what they do, but it's a different application.

The fact of the matter is both of the misapprehensions that she had weren't the case.

And it's surprising to me the extent to which those misperceptions, those misapprehensions still exist.

So, therefore, one challenge is helping people get past these types of barriers.

The other opportunity is that we have customers who say that well, geez, I know Weight Watchers and I think I know everything about them, so maybe I should look for something that's new.

And I think, again, that's a little bit our fault because we don't always do a very good job of communicating the fact that there is a lot of newness and there is a lot of innovation within Weight Watchers.

And so, having marketing activities that do a better job of talking about the meaningful benefits that consumers can get from Weight Watchers and the newness of it I think is a critical thing for us to accomplish.

And getting that right is, frankly, the harder part of this.

The way we approach it is, as I mentioned in the earlier part of this call, one of the things that we're doing is making sure that we have the right consumer insight first.

And the reason is that, if we obviously, if we have the right consumer insights and we can really understand the benefits that are most meaningful, we can do a much better job of converting, you know, maybe skeptical consumers into potential true believers.

And so, we start with insight.

And insight then informs marketing strategy and marketing strategy informs creative brief, which becomes creative execution, which allows us to come out with marketing programs that are much more effective and more directly identify the opportunities to do a better job of convincing people to come into the fold.

In terms of what was driving our activity as we moved through the second quarter, I think that the reason I took some heart, in particular, during the second half of the second quarter was that effectively I looked at the demand we were seeing is almost purely organic.

And the fact that Weight Watchers seemed to be in pretty good stead on average in the mind of consumers and that we seem to be in a reasonably good place versus prior year, I view it as a good thing.

And I think that it made us feel better about our platform as we continue this year.

But it's also a good reminder for us that fundamentally we're working with something very strong in the brand and, really, the challenge is bringing that extra something to make it a more compelling value proposition to bring people into the fold.

And so, in summary, that's the way that we're looking at relevance primarily, notwithstanding other initiatives we've talked about, which are more medium to long term, which is reaching out to new market segments, such as Hispanic men, et cetera.

Perfect.

That's it for me.

Thanks.

Thanks.

Your next question is coming from Amy Chasen of Goldman Sachs and Company.

Thank you.

I just wanted to know, you mentioned that you expect meeting fee growth in North America to continue strong in the second half, even though you're lapping the August launch of Monthly Pass.

Do you still expect that it would be up double digit in the teens, 20% kind of -- can you give us some idea of how strong it would be and whether that strength would continue into '08, or whether it would slow?

I think the way to look at it, Amy, is to realize that we, every quarter that we enter we have more and more Monthly Pass subscribers.

And so, the lecture income per attendee will show the double digit growth that it's been showing for the second half of the year, in our view.

And we're avoiding the temptation to speculate too much on 2008, because obviously we would want to see how the fall campaign goes.

When you say lecture income per attendee, that's different than meeting fee.

No, that's --

It's the same.

Okay, sorry.

These terminologies sometimes confuse me.

Okay.

Absolutely.

Great.

That's it.

Thank you.

Thanks, Amy.

Thanks, Amy.

Your next question comes from Mary Resotco of Keybanc Capital Markets.

Hi, Mary.

Hi, Mary.

Hi, how are you guys?

I apologize.

Jeff is out today.

I think he may be listening on the call, but I think he had to hop in late.

Just a couple of quick questions.

First, if you could kind of just give us maybe a little bit of a better insight in terms of recruitment trends.

I know you kind of talked about enrollment trends a little bit, but maybe a little bit more in terms, little more granularity in terms of how this was sequentially and on a year-over-year basis?

Well, for whatever it's worth, we speak in generalities about our recruitment and enrollment trends, but it's not data that we routinely provide.

Okay.

I think what we have indicated is that we had a little bit of rough sledding from a recruitment point of view through the first quarter and then going into the beginning of the second quarter, but we saw some moderation of that as we got to the second half of the second quarter.

And we have not speculated on what we think that the third and fourth quarter will bring because, obviously, we have a significant marketing campaign that's coming up and time will tell.

Do you, I mean, what do you attribute to that second half?

I know, I think it was Scott had kind of touched on how come the second half of the quarter was a little bit stronger.

I mean, anything that you guys could point to that could help continue that momentum?

I don't know if I can identify any one particular thing that we've done to drive it up.

Okay.

We have had some continuity marketing with magazines for example in NACO and it's possible that that was driving some of the activity toward the back half of the second quarter.

And I think also what happens when you get into the slower periods of the year is that you tend to have a lot less advertising by everybody else and effectively less noise in the market.

And so, with Weight Watchers being kind of the leader in terms of unaided awareness and everything else, arguably perhaps we're coming more top of mind more quickly.

Okay.

And then just two other questions.

First, in regards to Weight Watchers for men, maybe if you could expand just a little bit more on how this is going.

It actually sounded like maybe it wasn't going as well as you had anticipated.

You sounded a little bit hesitant in terms of your comments.

And then, is it possible to break out the paid weeks between regular WeightWatchers.com and the men's?

And then, secondly, in terms of advertising costs, how you expect those to continue, how we should kind of think about those going forward for the next couple of quarters?

Well, I'll grab the topic on men and then I'll turn the advertising costs over to Ann.

In terms of men, perhaps my style is just naturally conservative.

I actually was quite pleased with the results we had for men.

I think it's important to consider the fact that the way that we approach these things when we launch a new product for a new market is our first objective is to make sure we're getting the product experience right and we're delivering against the consumer's expectations and doing a good job.

Once we know that we have something that is properly optimized and strong, that is usually when we consider our options to be more aggressive in marketing it.

And so, my point was that, was more than, despite the fact we hadn't done a lot of marketing behind men, we had actually seen an increase in men as a percentage of our total market.

So, said differently, if the overall online business was up 22%, the growth in men's was up quite a bit above that.

We didn't get into specific details, to answer the second part of that question, because we're not breaking out men versus women subscribers at this point.

But I think that we've been pretty pleased with the early results of men, but I think we're also being recognizing the fact that it will take us some time to continue to work through and identify the proper levers to build that part of the business.

Okay.

Thank you.

Just one other quick question.

In terms of the timing of the roll out of the Monthly Pass in Europe, you guys did say the fall.

Is there any more color in terms of, is that going to fall, is that going to be in next quarter than or the beginning of the quarter?

I'm sorry.

Monthly Pass launched in Australia two weeks ago and it is launching in Germany and the U.K.

by the end of August, this month.

Okay perfect.

Thank you.

And you had a second question on advertising spend in the second half?

Let me just answer the question even though I think she's probably not connected anymore.

In terms of the marketing, there's a couple of ways to look at it.

If you look at it as a percentage of revenue, typically the third quarter, the summer, is obviously less a percentage of revenue allocated to marketing.

So, you'll see it dip a little bit.

The fourth quarter you'll see it come back up, primarily because of more typical fall campaigns, but also because we're launching, soft launching the innovation in Europe and Monthly Pass in a couple of markets, et cetera.

So, if you were to look at it as a variance to prior, you'd see the third quarter roughly in line with the earlier part of the year and the fourth quarter coming up a bit.

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

Hey, guys.

Hey, Chris.

Hi, Chris.

Hey, I was wondering, I mean, obviously you're seeing better retention for Monthly Pass or better duration.

I just want to get this, you know, get a little color on what you're seeing with respect to like meetings per month.

I mean, are Monthly Passers going to more meetings per month than they did before they signed up for Monthly Pass, or than people who are not on Monthly Pass right now?

Well, the way we characterize it is as follows.

What we, and what we've said on previous calls, as well, is that if you follow a Monthly Pass versus the pay as you go to customers and you follow them a long time, sorry, over time, what you'll see is that the retention patterns are fairly similar, for example, in the first two months.

The difference is that the pay as you go customer becomes increasingly likely to attrit from the cohort that he came in with, whereas the Monthly Passer has a relationship that extends all the way out to 8 months, on average or mean, I guess.

And if you look at it from that point of view, therefore, that Monthly Pass subscriber, for example in month five, is still going to be having a reasonably good probability of attending a meeting in any given week.

Whereas, the pay as you go customer on average would have fallen out of the system long before they had gotten to that point.

Does that help?

It does help and I would actually sort of like to follow up.

I mean, if you go to say month three, right, is the cumulative number of meetings that the Monthly Passer has attended, you know, similar to what the pay as you go person has attended as well?

Yes, roughly.

I mean, the average, what we've said is that, prior to the existence of Monthly Pass, the average pay as you go customer attended 10 to 11, attended 10 to 11 meetings, over the course of their enrollment cycle.

And so, if that's occurring over a 3-month period of time, I think roughly we would expect that a Monthly Passer would look comparable.

Okay.

Okay.

So, that would -- so, obviously, as we see your meeting fee for attendee expand, that's just the result of that, that's a similar number of meetings, except the Monthly Passers paying for more than the pay as you go person.

Is that essentially the right way to think about it?

Well, yes.

I mean, the Monthly Passers actually, during the period when they're going to all their meetings, are getting a really nice discount.

So, during the first month of their subscription, when they're going to all their meetings, we would actually be getting less revenue from them if they had gone pay as you go, where strictly from a revenue point of view, where they would be contributing more would be, say, out in months four, five, six and seven.

And I think that what we're hearing again and again in our market research is that consumers are telling us that they like the idea that they can stay engaged with Weight Watchers this way and continue having the option to go back and attend meetings and participate, without feeling that the only way to do Weight Watchers is that you have to go to every single week sequentially or you're off the program.

And that to them this seems like a more flexible, kind of open and modern approach to how they would approach a weight loss effort.

And so, do the pay as you go attendee, generally, in their first month of enrollment attend all four meetings in the month or all five meetings in month?

And if so, how long does that, like how long does that initial period last where they go to basically all their meetings?

Well, almost by definition, they're attending the majority of their meetings while they're still with us.

Because what would happen if they didn't, for example, if they missed say three meetings in a row, there's a pretty high probability that they would make the decision that they weren't going to go to say that fourth week, because they knew they had to pay missed week fees.

And so, what we see is that while they're with us, they are pretty much going to the significant majority of their meetings, but then what happens, when life gets in the way, they're not attending, then they drop off.

I mean, they don't, I'm not going to say they go to every single one.

So, if the average is 10 to 11, I would guess maybe then on average, that's over 13 to 14 weeks, but you get the general idea.

Yes, absolutely.

And just on a different note.

I mean you definitely, you called out NutriSystem's, and I think you've done it before, in talking about their direct marketing prowess and how you're looking in that direction.

Can you just give a little more color on what you were referring to, obviously, without -- I know you're not going to give specifics, but I just wanted to get a little more color on that, if possible.

Yes, I mean, the way we look at it is it is absolutely the case that when anybody raises their hand in the general vicinity of NutriSystem they do a really good job of convincing that person to actively engage.

I'm not saying that we would do things exactly the way they do things.

Not because the way they do it is somehow wrong, but just because what we sell is a little bit different by definition.

But if I look at the touch points we have on the web and if I look at what happens in the call center, it's pretty clear to me that there absolutely are things that we can do to do a much better job of converting a hand raiser into a member.

And it's not hard to imagine.

I'll give you a simple example of how we currently do things, is that right now if you call Weight Watchers call center, and you can do it for fun, to find out where a local meeting is, you will pretty much get exactly that information back.

And that's it.

Which begs the question, well, you know, we could have perhaps sent them information.

We could have perhaps tried to see if we could get them engaged in transaction.

You could let your imagination wander in terms of the different ways you could treat that customer contact.

And so, without getting into your point to specifics on exactly what we're going to do, I think it's safe to say, if you look at what we currently do, which is to take a fairly passive approach to people that raise their hands, I certainly feel like there's a lot of opportunity in front of us to increase our conversion rate.

Got it.

That's helpful.

Thanks a lot.

Your next question comes from Greg Badishkanian of Citigroup.

Yes, great.

Hey, just two quick ones.

Just in terms of the Monthly Pass, can you talk a little bit, just maybe a little bit more color on some of the demographics of those customers.

And also, I may have missed this, but when you get to month five, six, seven, you know, and you get to month eight, are they basically the last few months?

Are they sort of very infrequently attending meetings similar to if you go to a gym, you don't sort of go to the gym the last few months and then you just sort of drop off, but not right away?

Well, first I would absolutely encourage you to go to your gym as often as possible.

Okay.

Sorry.

To answer your question, we haven't broken out a usage rate by month into the subscription cycle.

I think that it's safe to say that the propensity to attend a meeting is much greater during the first month than it would be in the ninth month, stands to reason.

I would say that the propensity to attend, as I've said in previous calls, if anything we've been a little bit pleasantly surprised in that we thought that there might be a potential that people wouldn't be going at all, but that's not actually what we're seeing.

And so, we think that the attendance propensity that we're seeing across the subscription process is what we would want or expect.

Although as I've also said before, we're going to continue to look for ways to increase the likelihood of somebody going.

And by the way, even if they're not actually attending a meeting, it's also important to know that this is a completely different way for them thinking about Weight Watchers.

So, for example, when you're a Monthly Pass subscriber, you're getting access to basically everything we have.

So, you're getting access to go to meetings when you need to go to meetings and you're getting access to eTools when you want to take advantage of eTools.

So, you could have somebody who might for a month be really focusing on using their online tools, or their eTools, and maybe not going to meetings, but they might find that when they get off track that that's a good time for them to start going to meetings and having the benefit of the weigh in and everything else.

In terms of the demographics, we haven't put anything out and we haven't studied it in great depth, although I think that if you look at the prototypical person who is using Monthly Pass, you know certain things about them.

You know that they're willing to give their credit card on line.

You know that they're willing to get comfortable with a recurring billing model.

And you know that they have access to the internet.

And so you can make your own assumptions about that.

But I'll tell you an interesting anecdote.

As I was in a meeting west of Atlanta, in fact it was as close to Alabama as it was to Atlanta, and I was sitting in the meeting and I literally watched a great grandmother explaining to a younger member how to get access to eTools.

So, it just goes to show that I think some of the sort of, the old views of who actually uses the internet, it's amazing how much that's changing.

That's helpful.

And just a follow up.

Do you have any way to track sort of the views of the customers after they've been off the diet?

They're on the Monthly Pass, they're on it for eight months, maybe the last month or two or three they go only a few times.

Are they more satisfied than the pay as you go, because maybe they've lost more weight or are they less enthusiastic, less willing to join again because they figured they were on it for a few months at the end and didn't get the value, because they just didn't attend the meetings but were paying?

Right.

We haven't done that particular study, I think partially because I think the real surge of Monthly Pass people were the folks that were coming in January.

Now, that being said, as opposed to the early adopters who came last September, that being said, what I can share with you though is perhaps what is a parallel experience, which is when I was working at WeightWatchers.com, as you know with the Weight Watchers online product, we have an average retention of nine months.

And during those first couple of years, we were a little bit nervous.

We said, well, if people are in their eighth month, because we had never seen this kind of duration of engagement with Weight Watchers before, are they going to cancel and be really upset and say, well, jeez, I'm never going to sign up for that again, either with themselves or with us.

And therefore, one of the decisions we made is to be, to make it incredibly easy for people to cancel, to be very explicit about the fact they have a relationship with us.

And what we found when we did satisfaction studies of people say in their sixth or seventh month and we compared them to people that were in their first or second month, we did not see a very significant difference.

And in fact, we saw pretty good return rates with the Weight Watchers online product.

In other words, we saw pretty good and have seen pretty good repeat rates over the duration of that product.

And so, on that basis, I'm not as concerned.

And I think, if anything, the fact that we've gotten ourselves out of this situation with those customers anyway in the missed week fees, I think that it creates an opportunity to get rid of what had been kind of a sour taste.

So, I could argue that the average pay as you go person who quits because they've missed a bunch of weeks or they're confronted with the fact that they have to pay for missed weeks might actually leave with a less positive perception than the Monthly Passer who was able to make that decision for herself.

That's interesting.

I appreciate the insight.

Thank you.

Your next question comes from Vivian Ma of CIBC World Markets.

Thank you.

Good afternoon.

Just a few questions here.

On the comment regarding the North American organic attendance growth, how much of that relates to improved involvement?

You know, somebody commented that involvement did improve, right?

I think most of the growth relates to, as I mentioned, the retention benefit of those members that were on Monthly Pass.

Okay.

I think the fact that the enrollment trends moderated toward the second half of the quarter was, on margin, beneficial.

Okay.

And the retention benefit is being the diet cycle of the member has lengthened.

That's exactly right.

So, in other words, if you have what, because for the first time we might have members who might be in their sixth and seventh month and still attending some meetings, that's really how Monthly Pass benefits attendance.

Okay.

And when you talk about the retention period lengthening to eight months, does that mean the Monthly Pass is renewed eight times?

If it's eight months and the first month they purchased it would be seven renewals.

Okay.

All right.

Okay.

On average.

I do think it's important to note that when we say average, when you look at any kind of recurring billing model like this, you also need to figure that probability as it's not a normal curve, if you see what I mean.

In other words, with recurring billing models, you can tend to expect a fairly long tail to the right.

Okay.

And this retention period, has it improved from last quarter?

It's similar to what we talked about in our Q1 results.

And here's, this is the way I should characterize it.

The art of estimating retention is looking at all your observed data in terms of rollover cancellation rates with each passing month.

And then trying to forecast out what you think that the rollover the retention rates are going to be in future months.

So, it inevitably means that you're trying to make a mean estimation based on a relatively limited data set.

That data set gets more and more full over time, but our ability to predict retention is going to continue to improve as time elapses.

But based on our forecasts or our estimation that we provided in the last call and this call, we haven't changed it.

Okay.

And then what about the people who, I guess the oldest group of people who signed up on the Monthly Pass last August?

What was the actual length of their diet cycle on the, first time on the Monthly Pass scheme?

We haven't broken it out, other than to say that I think that because I mentioned that there's this long tail, I can tell you that there are people that signed up in September that are still with us to this day, even though they're approaching a year.

Okay.

And then my last question is the organic attendance projections for the second half is low single digit, right, you mentioned.

What about in total?

Oh, including franchises?

Right.

I'm going to turn that one over to Ann.

It's always a little tricky because of the timing of when different acquisitions came on and everything else.

But just bear with us.

The growth from the franchise acquisitions will moderate toward the end of the year, because, as you know, we acquired the franchises some at the end of third quarter and some in fourth quarter.

So, you'll see less of a spread between the two.

As you saw, the 2.6 was 14.3 in the second quarter.

You can expect to see that going down in the third and fourth quarter.

Okay.

So, it will be a much closer number.

Yes.

So, overall for the whole year, your attendance growth forecast is, what, like mid to high single digits?

Including franchise acquisitions?

Including franchise, right.

Right.

From an organic point of view, if you look at where we are right now, the first half is effectively flat or zero.

And then organically, as we indicated, looking for low single digits in the second half.

And then I think you can make an estimation based on the information Ann's given you on franchisees and make your own estimation from an attendance point of view.

Okay.

Okay, great.

Thanks very much.

Sure.

The final question is coming from Michael Lasser of Lehman Brothers.

Thanks for taking my question.

I appreciate it and hopefully I saved the best for last.

Hi, Michael.

First, can you talk about the EPS impact from FX during the quarter?

Sure.

It was about one cent.

One cent.

And you said that recruitment trends, recruitment in new members moderated in the second half of the quarter.

Was it still down for the whole quarter year-over-year?

We haven't said, other than to say that it moderated from where it was.

As I've mentioned before, it's not as illuminating as you would think in looking at sort of raw enrollment numbers year-over-year because you get vagaries, such as things like with Monthly Pass we have rejoins, people that would have been rejoins before are not rejoins now.

And so you have a bunch of different things that end up in the mix.

But so what we're looking at primarily are the trends and the trend we saw toward the second half was better than the trend that we saw in the first half.

Okay.

And leading into the important question I want to ask, with regard to the rejoins, could it be that you'll become a victim of your own success next year and beyond where historically you talked about people coming in to meetings, going out of meetings, because of the fees they would have to pay, the missed meeting fees, and now they're staying on eight months.

Perhaps, people are giving it their best college try and the repeat rate next year and beyond will be, will not be as favorable, you won't get the mix shift from the Monthly Pass benefiting the meeting fees.

So, 2008 could be, unless combined with the fact that you've been recruiting fewer people to meetings at least in the first couple of quarters of this year, 2008 could be a challenging year.

I wouldn't, I understand why you're asking the question, but I wouldn't at all expect to see that.

Let me tell you more specifically the issue that you're mentioning with rejoins is there is a behavior that has historically existed where somebody might go to meetings for ten weeks then, because of missed weeks or whatever, they're not attending meetings.

And then three months later they rejoin at the next free registration offer.

And so, effectively, if you track that customer over the year, they're enrolled, then they're not, then they are, then they're not and they're sort of jumping on and off.

Whereas with Monthly Pass they have one sustained period of engagement.

And we would offer that that consumer is going to be happier as a result, because they have a more normalized relationship and they know what they're getting with Weight Watchers.

I think that by virtue of the fact that we are able to offer what we believe is going to be a more successful experience.

So, for example, if you have somebody who's going to meetings and using eTools and if they're like the people in the clinical trial and they're losing 30% more weight, what I would tell you very definitively about this business, the one thing we know for sure is that success breeds success.

If that member has great success with us, then they cancel their Monthly Pass subscription because they're done and they're no longer getting any benefit from it, we have absolutely no doubt that if life gets in the way and they find themselves slipping off their healthy lifestyle into a less healthy lifestyle, that they will absolutely know where to come back and that they'll come back to us.

This is why I mentioned that if the effect you're describing was true we would have seen it a long time ago with the Weight Watchers online business and we never have seen it with that business and we have no reason to expect to see it with this business.

In fact, if anything, we believe that we're offering a better weight loss proposition and I continue to believe that that is ultimately going to drive better referrals and better return rates.

Okay.

But all things being equal, well I guess the second, another question is this is the second quarter in a row that Monthly Pass was at 50% of the overall membership.

Do you expect that this is where structurally it will be?

And will there be a possibility that you'll only go to a Monthly Pass payment plan?

The way I look at the Monthly Pass penetration is as follows.

It's an interesting question.

The way I look at it is as follows.

In theory, Monthly Pass makes sense on some level for everybody because of the discount and the fact that you get so much more stuff and it basically, it's a really nice value proposition from a member, particularly when you go in with an expectation that this is going to be a program you take seriously and you're going to be going to lots of meetings and we hope people do.

The reason you might not feel comfortable subscribing to Monthly Pass, and the reasons that frankly are cited to us when members don't do it, would tend to be because, one, they don't have internet access, so it's sort of a moot point, because the way you sign up for Monthly Pass is through the internet.

Two, they're not comfortable with the idea of having recur bill credit card transactions.

Those are really the primary two things that we see.

Now, if you look at internet penetration rates and if you look at ecommerce penetration rates, what you would expect is that at a moment in time that would suggest that there's a natural level of penetration for Monthly Pass.

But you would also expect, as we've seen very consistently over the past ten years, is that internet and broadband penetration continues to increase and what you also see is that ecommerce penetration also continues to increase.

And on the basis of that alone, I would expect that as time goes on, we're going to have more and more opportunities to get more people engaged on Monthly Pass.

Now, that being said, right now if I looked at it, there's absolutely no way I would go to a strictly Monthly Pass only, because we have a lot of members who are looking for success who just aren't right now comfortable with this approach.

And I think it's valuable that we give members a choice.

I think one of the things that's very important to us is that the new way, and I think the more modern way, of approaching this is to be flexible and to recognize that not everybody's wired the same way, regardless of what financial considerations we might have.

But rather to make sure that the member always has the choice to go pay as you go versus Monthly Pass.

And whatever is most comfortable for them is what we want them to do.

Okay.

And last question, for the second quarter, about a third of the paid weeks were paid for but not used, the difference between paid weeks and attendances.

Are you seeing folks having any economic sensitivity saying, shucks, I'm not using this so the cancellation rates are higher in the summer months?

We haven't speculated on the impact of seasonality on cancellation rates.

It's certainly a reasonable question.

And I think that partially what we're trying to do is to make sure that we give ourselves enough time to accumulate a good data set and better understand that dynamic.

But I wouldn't say that we've seen any sort of radical fluctuation.

Okay.

And I'm sorry, one last housekeeping question.

The acquisition that was done during the quarter, when did that occur and how much was paid for it and what did it add to attendances in the quarter?

It occurred in June, so it doesn't have any material impact on the quarter in terms of attendance.

But on an annual basis it adds over 400,000 and it cost us $15.6 million.

Okay.

Thank you very much.

Thanks, Michael.

At this time, I would like to turn the conference over to management.

Thank you for joining us today.

I look forward to speaking with you at our next earnings release call.

Thanks very much.

This concludes today's Weight Watchers teleconference call.

You may now disconnect.