WW International Inc (WW) 2007 Q3 法說會逐字稿

Ladies and gentlemen welcome to the Weight Watchers International third-quarter 2007 earnings teleconference.

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

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

As a reminder this conference call is being recorded today November 6 2007.

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

Please go ahead.

Thank you, Tina and thank you to everyone for joining us today.

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

At about 4 PM Eastern Time today the Company issued a press release reporting its financial results of the third 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, may I remind everyone that this call will contain forward-looking statements and 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 statement 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 performance for the third quarter fiscal 2007.

In Q3 as has been the case throughout the year, the Weight Watchers business generated solid financial results.

Consistent with the prior two quarters our strong topline growth has been driven by the structural improvement of the business model, which has resulted from the introduction of Monthly Pass in the US as well as from continued robust subscriber growth in our Internet business and growth in our licensing business.

Looking at our financial results, revenue grew by 18.5% in the third quarter with strong growth in meeting fees up 23%, in meeting product sales up 13%, Internet revenues up 17% and licensing revenues up 19%.

Our Q3 results benefited from favorable foreign currency exchange rates which added $8.5 million to our revenue.

On a constant currency basis, our Q3 revenues grew by 16%.

Operating income grew 15% in Q3 with an operating profit margin of 31.6% versus 32.4% in the same period last year.

The slight decline in operating margin was primarily the result of the inclusion of a fall TV campaign for Weight Watchers Online in the US, higher marketing spend on our international businesses and higher G&A resulting primarily from increased IT investment.

On the bottom line we reported EPS of $0.62 for the third quarter compared to $0.52 per fully diluted share in last year's third quarter, an increase of 19%.

With respect to volumes in our meetings business the third quarter, total paid weeks worldwide were up 29% primarily driven by the impact of Monthly Pass adoption in North America and contribution from franchise acquisitions completed within the last 12 months.

However, overall meetings attendance growth was up 0.3% and down 4% without the benefit of acquisitions.

The softness in attendances was primarily the result of weak recruitments across our geographies reflecting the fact that among other things we're now in our third year without a significant program innovation in our major markets.

Growth in total paid weeks for our Weight Watchers Online product was up a strong 22% for the third quarter with end of period active subscribers up an even stronger 25%.

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

First, our North American meetings business.

Total third quarter and NACO revenues were $189 million, an increase of 28% versus the same period in 2006.

In the third quarter Monthly Pass continued to contribute significantly to topline growth in our NACO business despite lapping its mid-August launch last year.

In Q3, NACO meeting fees were up a robust 32% versus prior.

Without the benefit of acquisitions, meeting fees were up 25%.

With the full twelve month benefit from the Monthly Pass model, the year-on-year growth in paid weeks peaked in Q3 as expected at 46%.

This peak reflected one, the fact that this year we entered the seasonally low attendance months of July and August with a much higher customer base driven by Monthly Pass and two, the cumulative effect of a long retention tail from the Monthly Pass subscription model.

NACO attendances were up 7.2% and were flat to prior without the benefit of acquisitions.

On balance, NACO Q3 attendance volumes were a bit softer than our expectation of low single digit organic attendance growth reflecting a somewhat lackluster tactical fall advertising execution and likely some marginal impact from the significant number of Alli trials at the launch of their campaign.

With our marketing team and our new agency focused on our upcoming innovation in new high impact campaign launch this coming January we decided to bridge this fall's campaign by putting about half of our media weight on the same ads we have been running throughout this year and the other 50% on a tactical advertising execution focused on Monthly Pass.

While helpful in increasing awareness of Monthly Pass, the Monthly Pass has lacked the promotional elements necessary to close the sale as sufficiently as we expected.

As I articulated when I became CEO this past January, one of the two planks for growth of our business is the need to increase the relevance of Weight Watchers in the minds of our target consumers.

I'm happy to announce that as of January 2008 we will be launching an entirely new advertising campaign designed to present Weight Watchers in a unique light and that we believe has the ability to begin truly differentiating consumer perception of Weight Watchers versus alternative approaches.

Feedback to the new campaign of market research along the way has been very encouraging.

While we recognize that campaigns such as this take time to fully penetrate the public consciousness, we believe this campaign also has the ability to cut through and effectively communicate near-term product news.

On the program development front, we will be launching the Kick Start add-on in January.

While not a major innovation Kick Start builds on our (technical difficulty) about the importance of getting a good start to a weight loss effort.

Kick Start represents a new methodology for getting our members more quickly engaged in the program to ensure strong first two weeks.

Research has demonstrated that a strong start is significantly predictive of long-term weight loss as early successes are critical to building members' confidence in their ability to permanently change their lifestyle.

We have had this new kick start methodology in market tests and the consistency back from our service providers and members have been very enthusiastic.

Now onto the UK.

For the third quarter currency adjusted UK revenues were up 7% driven by the August price increase and continued strength in product sales.

UK Q3 attendances were down 4% versus prior.

The UK fall advertising campaign was somewhat disappointing although results again improved toward the back half of the campaign.

On the positive side the UK successfully launched Monthly Pass in August.

While as expected the takeup is somewhat below NACO's penetration at a comparable point in time it has been strong and ahead of our expectations for this market.

Member and service provider response has been almost uniformly positive.

We expect to see the financial benefits of this launch increase as we move through 2008.

Moving to Continental Europe.

For the third quarter currency adjusted revenues were down 4% versus the same period in 2006.

Attendances were down 12%.

As was the case in Q2, Continental Europe continues to struggle due to softness in our German market.

The new German team is now mostly in place with the new managing director, marketing director and advertising agency.

They're now working hard to create and execute the plan to revitalize this market.

This new team along with the rest of their peers in Continental Europe will have very useful material to work with for the upcoming January campaign.

For the first time and over three years, CE will be launching a significant program innovation this December.

This new program builds on the success of POINTS by creating a range of new features that makes it even easier to fit into the members life.

Continental Europe conducted an exhaustive market test and the results were very favorable.

In a market that has lacked meaningful product news for too long, this is an important step in getting this region back on track.

The success of this innovation will help inform its potential adaption for our other markets around the world.

In Q3, Germany launched Monthly Pass with success comparable to the UK.

This will provide valuable structural improvement in the financial results in 2008 while the team continues to undertake the effort to improve the fundamentals of this business.

Moving onto WeightWatchers.com.

Weight Watchers.com continued its track record of volume growth driven by our continued efforts to expand awareness of this offering.

Based on the successes of the winter and spring campaigns we decided to run a fall TV campaign in the US.

The success of this was even stronger than the first two.

While overall paid weeks were up 22% in Q3 versus prior, end of period active subscribers were up 25%.

This reflects the fact that volume trends accelerated in September resulting from the advertising.

All of this success from the US online business has further encouraged the team to find ways of bringing similar levels of success in our international online markets.

To this end, we will be launching the online product this December in our fifth international market and third in Europe -- France.

Among other things the launch of this site will also enable us to launch Monthly Pass in France in the future.

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

Thank you, David, and good afternoon everyone.

Our consolidated Company third-quarter financial results were strong.

Revenues were up 18.5% to $337.5 million, a $52.7 million increase over the 2006 third quarter level.

We gained 100 basis points in gross margin which rose to 55.7% this year versus 54.7% a year ago.

Our operating income posted a significant third quarter year-over-year gain increasing 15.4% to $106.5 million.

I'll review the key operational drivers underlying these results later in this report.

Third quarter net income was 2.2% below last year at $49.5 million in 2007 versus $50.6 million in 2006.

Earnings per fully diluted share on the other hand rose 19.2% in the quarter to $0.62 versus $0.52 a year ago.

The divergence in the quarter between net income and EPS growth is a result of the refinancing that we undertook earlier this year to fund our 19.1 million share buyback.

As a consequence, net income in the quarter versus prior was reduced because of the resulting increase in interest expense, $15.1 million or 115% while EPS benefited from the now lower number of shares outstanding.

Before moving to the discussion of drivers in our operations, I just want to point out this quarter's $0.62 EPS includes a $0.02 benefit from favorable foreign currency exchange rates.

Moving on to our operational drivers.

As David mentioned revenue from all major sources posted strong gains in the quarter.

Our worldwide operations generated revenue growth of $52.7 million or 18.5%, 15.4% in constant currency in the third quarter.

The most significant driver was a 26.7% increase in total Company paid weeks.

Moreover, product sales and licensing were also strong contributors.

Paid weeks in the meeting business totaled 19.7 million and global meeting attendance was 13.9 million in the quarter consistent with a year ago.

Revenues from meetings fees looking out across the product lines, revenues from meeting fees grew 22.6% globally to $204.5 million on the strength of a 28.9% increase in paid weeks.

This largely reflects NACO's ongoing benefit from Monthly Pass subscription retention.

On a global basis, the average meeting fee per paid week in this year's third quarter declined 7.1% in constant dollars from the prior year level.

This is due to the rollout and ramp up in NACO, our largest market, of Monthly Pass which is offered at a discounted weekly price.

Products in our meetings were also an important source of revenue growth in the quarter up 12.9%, 8.8% constant currency over last year's level.

New consumable product launches as well as strong sellthrough of electronics pushed In Meeting Products sales per [10D] up 8.3% over the Q3 2006 level.

The strategy of refreshing and rotating our product offerings throughout the year has proved successful.

On a 2007 year-to-date basis, product sales per attendee are up 7.8% versus the same period last year.

WeightWatchers.com revenues grew 16.6% in the quarter to $39.1 million.

Now looking at our financial performance across our major geographies beginning with North America.

NACO's third quarter meeting revenues including In Meeting Product sales were $176.8 million, 28.7% growth compared to last year.

NACO's paid weeks growth was 51.2% in the quarter outpacing both revenue and the 7.2% increase in attendances.

Monthly Pass and its free access to eTools enabled us to keep members engaged bridging the summer season when many members might otherwise have lapsed.

NACO's average fee per paid week declined by 12.4% this quarter versus prior as Monthly Pass was offered to our members at the equivalent of a 24% weekly discount in NACO.

Included in NACO's third quarter results is $11.3 million of revenue from acquisitions made in late 2006.

All of the attendance growth in the quarter is attributable to these acquisitions.

Organic NACO attendance was 7.8 million in the quarter.

In Meeting Product sales excluding these acquisitions is 7.5% per attendee over the prior year quarter.

Internationally, third quarter revenues were $101.7 million up 7.4% versus the third quarter 2006 concurrent dollars and down 0.8% on a constant currency basis.

International attendances were off 9.3% from the prior year level.

The offset to the volume related revenue decline came from meeting fee pricing actions taken since last year in some of our countries, most notably in the UK, and from the impact of increased product sales penetration in most of our countries.

International In Meeting Product sales per attendee increased 13.7% in local currency on the strength of new product introductions.

Moving now from the meeting room business to Weight Watchers.com, third-quarter revenues increased 16.6% to $39.1 million last year from $33.5 million last year.

Online end of period active subscribers rose 24.5% in the quarter to 609,000 with associated revenue growth in line.

Revenue growth at the dot com level was depressed by the ongoing reduction in paid eTools subscribers precipitated by Monthly Pass.

eTools, our online product for meeting members is now provided free as part of the Monthly Pass offering.

Lost revenue in Weight Watchers.com however is more than made up for by revenue growth in NACO's Monthly Pass.

In third quarter, we again invested in national TV advertising for Weight Watchers.com which is ongoing and compounding benefits to the online business.

The online end of period active subscriber base grew 21.3% versus prior in Q1, 22.4% in Q2 and 24.5% in this quarter.

Looking at our other revenue, first franchise, franchise commissions were reduced by 10% in the quarter versus last year, a combination of declines resulting from (inaudible) franchises partially offset by underlying revenue growth across our remaining franchises.

Excluding the impact of acquisitions, franchise commissions grew 10.2% in the quarter to $3.8 million as domestic franchises benefited from our switch this year to national TV advertising in the US.

Our other revenues grew 13.9% in the third quarter to $18.4 million.

Licensing revenues the largest component of other revenues, were also the lion's share of the growth increasing 18.6% to $14.6 million.

All geographies contributed demonstrating growth in both new and existing licensors.

Our consolidated gross margin was 55.7% in the third quarter 2007, 100 basis points above the 54.7% delivered in the third quarter of last year.

Margin expansion resulted primarily from higher (inaudible) income driven by Monthly Pass and NACO.

Third-quarter marketing investment increased $8.5 million or 27.8% above last year's levels to $39.2 million.

Higher marketing expense at WeightWatchers.com drove 40% of the increase primarily as a result of its national TV campaign in the US.

Internationally, in addition to the impact of currency exchange which added $1.5 million to our spend, higher media spend and TV production costs in some countries drove marketing expense up.

Third quarter marketing was 11.6% of revenues in 2007 versus 10.8% in 2006.

G&A expenses in the third quarter were $42.2 million up 28.9% than the prior year level.

IT is the primary driver of G&A growth accounting for about half of the increase.

When we merged with Weight Watchers.com in mid-2005, we began a multi-year investment initiative led by the highly proficient Weight Watchers.com technical team and geared to addressing elongated upgrades and adding new functionality to our system.

We're in the midst of implementing these projects.

Higher IT expenses in the quarter (inaudible) from a combination of increased depreciation arising from last year's capitalized spend and higher maintenance of new systems already put in service.

The remainder of the G&A increase results from management infrastructure upgrades, foreign currency and ordinary operational increases.

G&A was 12.5% of revenues in the quarter versus 11.5% a year ago.

The Company's consolidated operating income in the third quarter was $106.5 million, up 15.4% from $92.3 million in the prior year quarter.

Our consolidated operating income margin was 31.6% compared to 32.4% a year earlier.

The 100 basis point gross margin expansion in the quarter was more than offset by the impact of investments in marketing and G&A as noted above.

As I mentioned in my opening remarks, interest expense in the quarter increased from $13.2 million last year to $28.3 million this year.

However, our average effective interest rates decreased slightly to 6.38% from 6.53% in the third quarter of last year.

Average debt outstanding in the quarter was $1.75 billion versus $812 million in the year earlier quarter.

Since the first quarter of this year when we raised our debt level to fund the repurchase of 19.1 million shares, we've paid down $177 million in debt.

Moving now to the overview of consolidated Company cash flow and balance sheet.

The Company again generated significant free cash flow this quarter.

Cash from operating activities excluding interest was $86.2 million.

After capital expenditures, we had $79.2 million available to service our capital structure.

Including the use of existing free cash, we were able to make interest payments of $30.3 million, reduce our debt by $78.1 million and pay our quarterly dividend of $1.3 million.

Typically as is the case in this quarter, our cash flow exceeds net income primarily because of our negative working capital.

In recent quarters, our working capital has been favorably impacted by the higher deferred revenue that arises from our Monthly Pass commitment plans and higher permanent differences between [book and cash] taxes that arise from increases in balance sheet (inaudible) as a result of our franchise acquisition.

Fluctuations in the balance sheet that occur when preparing end of quarter (inaudible) 2007 and year-end 2006 primarily reflects the increase in our debt balance of $837 million last year end and the normal seasonality of the business as well.

In addition, deferred revenue on the balance sheet is up $28.3 million and franchise rights acquired increased by $30.7 million.

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

Thank you, Ann.

As we move into 2008 we will continue to benefit from a structurally improved business.

Each enrollee that participates with Monthly Pass can expect a stronger Weight Watchers experience and we in turn will benefit from significantly higher revenue per enrollment.

This combined with our successful harnessing of the Internet has greatly strengthened our foundation and market position going forward.

As I have shared on prior calls everyone in our business remains focused on driving progress on our strategic planks of improving retention and relevance.

Regarding retention, all of our major markets are making measurable progress in strengthening field management teams, increasing the allocation of meetings to stronger leaders and identifying new ways to improve the presentation of our service in the meeting room.

As these actions are being implemented we're beginning to see measurable improvements in retention.

Over time this improving retention trend will result in improvements in the average weight loss among our members which of course drives overall satisfaction and the all-important positive word of mouth.

Regarding relevance, we have two major objectives.

First, we need to continue to innovate our programs in order to further improve overall efficacy and to broaden our appeal to ever-increasing segments of the weight concerned population.

We need to make our programs easier to get started on and easier to fit into everyone's lifestyle.

On a purely tactical level, innovations give our former members reason to come back to us sooner and can strengthen our appeal to never-members.

We're making progress in building our pipeline to future program innovations.

Second, we need to improve the effectiveness of how we communicate the unique benefits of Weight Watchers.

During 2007 we have been very focused on putting in place the organizational building blocks and learnings we need to better convey our relevance to the marketplace going forward.

We have taken significant steps this year across our geography to strengthen our internal marketing teams as well as bring in new agency relationships that we believe will improve the effectiveness of every marketing dollar we spend.

Now with these building blocks in place, we're looking forward to a 2008 when we will begin to launch more program news delivered more impactful advertising.

Regarding guidance.

based on the results that we've seen for Q3, we are again narrowing our guidance range.

For the full year 2007 we expect to report between $2.43 in and $2.48 per fully diluted share excluding the first quarter's $0.02 charge related to early extinguishment of debt expense.

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

(OPERATOR INSTRUCTIONS) Greg Badishkanian, Citigroup.

Just a few questions here.

Just with respect to maybe what your outlook is for the fourth quarter, I may have missed this, but the guidance in terms of maybe NACO growth or organic or NACO paid weeks now that you have lapped the Monthly Pass?

I think in terms of general trends that you're seeing particularly with respect to attendance you can expect similar results in Q4 that we have seen in Q3 if that helps.

Yes, it does definitely.

And just in terms of looking at Alli a little bit here.

Your business is mainly reactivation so I'm assuming that protects you, insulates you from Alli.

What portion would you say of your business is reactivations?

We haven't split that up in the past.

I would say that never-enrollments reflect a fairly sizable part of our business as well.

I think we have a nice balance between the two.

I think that if you look at -- if you take a step back and look at Alli specifically and its impact on our business, when we talked about Alli at the end of the last quarter call we had said at the time we had not seen any discernible impact from Alli.

I think in particular if we looked at some of the scan data of Alli and we looked and we sort of slotted that up against some of our own enrollments trends for similar weeks, we didn't see any direct relationships between those two things.

I think that being said our feeling was as (inaudible) mentioned with two million activations it was hard to imagine that it couldn't have had any marginal impact.

But we just were never able to make a discernible in definitive link between the two.

I think the other thing I would point out about Alli as I have been saying all along is that I believe that the basis of our approach is more what insulates us from the impact of pharmacological solutions such as Alli, Weight Watchers being based on the principle of changing lifestyle, I think tends to naturally attract a certain type of consumer.

Now that being said, it's interesting to note that no doubt there's plenty of Weight Watchers members who are also taking advantage of Alli and we're fully supportive of them in that effort.

What I would is that people who are taking medicine as more kind of a quick fix for the entirety of their weight loss effort I think the impact of that would be largely built on people that have somewhat different approach to Weight Watchers.

I think our lifestyle approach is what naturally tends to get us consumers that tend to think about the world a little bit differently and maybe are more interested in long-term sustainable weight loss.

So therefore in that context, we continue to believe that products like Alli are more likely complements as opposed to substitutes.

That's helpful.

Just looking at the Continental Europe.

You are lapping easier comparisons this quarter.

You have made a number of management changes, initiatives.

Can you talk a little bit about maybe what their, give a little color on what they're going to do out there?

And what targets have you set for your Continental Europe management team and if that would include Germany as well?

Continental Europe -- and when we're talking about Continental Europe you rightly point out that Continental Europe is not one country, it's a bunch of countries.

We have some countries in Continental Europe that continue to perform quite well for us.

As I mentioned on the last call, France has been a perennially strong performer over the past couple of years and that certainly is a trend that's been continuing on.

I think specifically in Continental Europe the issue we've been dealing with was primarily the issue in our German market which is the largest component of the Continental Europe piece.

Now with the new team in place effectively they're doing what you would want any new team to do which is to basically go into that market and do a comprehensive diagnosis on the issues that are facing the market and based on that diagnoses to develop a plan.

And that the timing of a plan is something that certainly we would hold that management team accounted accountable to and that they would expect to be held accountable to.

If you look at the types of things that they're going to be focused on in some respects they look similar to what you would expect to see in any market which is in Germany in particular focusing on reenergizing marketing which I believe in that market has been a particular point of weakness over the past few years.

I think in some cases, we had a situation in which, perhaps in Germany which has grown so rapidly over the years that its growth overtook the infrastructure.

So they've been making an effort to basically build up the fundamentals of their business in terms of how they operate.

I think most importantly Germany's been operating as has frankly been the case for most of CE without a significant program innovation now in excess of three years.

So on that basis, that's one of the reasons why it was so very important for the German market as well as for the rest of the continent that they now have an innovation that is a fairly significant innovation that is coming into the market this January.

So for that reason we are cautiously optimistic that that combined with the right team working on the right things that we can now begin the process of getting that business back on track.

One final question with respect to your franchisees.

What is your strategy towards acquiring the franchisees?

In the past they have been quite accretive.

How aggressive do you plan to be and what type of multiples are you willing to pay in this type of environment?

We will continue to follow the same strategy that's been successful for us kind of all along which is to opportunistically purchase franchises as they come to us and are ready to sell.

I don't see any major change coming in our multiple.

We're paying -- in sort of the six times range right now and I don't anticipate it getting any higher.

In terms of capacity are there any constraints in terms of debt and are you willing to take more on or not?

I don't think so.

We paid down $177 million of debt in this quarter because we did not have an acquisition in this quarter.

That cash is available to us.

Do you find that's a better use of cash than buying back shares or is it more accretive to make franchise acquisitions?

Well franchise acquisitions are quite accretive for us.

In terms of the share buyback, we still have about 219 million left in our share buyback program.

Right now, we are interested in paying down some of the debt so that we can get to the point where we step down the interest rate which is at 3.5 times net debt to EBITDA.

We just want to get our capital structure a little more in line with where we would like to be.

You know that said, we could change our minds that any point.

But I think when a franchise acquisition comes to us to and they're really ready to sell, we are always interested.

Bob Craig, Stifel Nicolaus.

I was wondering if we could get some updated statistics on Monthly Pass.

I mean, certain measurements like utilization, retention, disengagement.

Any seasonal trends that you've seen there in the North American market?

I think the retention statistic that we have been sharing was about eight months and we haven't changed that metric for this call.

I think that the penetration rates that we're seeing with Monthly Pass in the market have been roughly in line with what we have been seeing in prior quarters maybe a little bit better.

I think in terms of the attendance patterns and those types of things all the trends that we're seeing are fairly consistent.

Interestingly and not surprisingly as you can sort of see in the divergences as Ann referenced between paid weeks and attendances you can expect people on Monthly Pass while still attending meetings during summer months to be less likely to attend meetings during summer months as you would of guessed.

And that in fact was the case.

I think importantly though we saw people who had Monthly Pass subscriptions coming back to meetings post Labor Day, which to us I think was a really important indication of what we have always believed was the underlying strength of Monthly Pass, which was that you can stay engaged with Weight Watchers over a long period of time.

In the past you would have quit because you didn't want to pay missed weeks and then you would've had to go through sort of a psychological process of rejoining and feeling like oh, I quit and now I have to rejoin.

Now with Monthly Pass you stay engaged the whole time.

You use it at perhaps a lower level of intensity but you still feel like you're engaged with your Weight Watchers program.

Then the fall comes around and you can say wow, I definitely did pick up a few pounds over vacation so I'm going to get reengaged.

Then you show up to meetings again.

The fact that we saw that I think was an important indication of what we always believed would be the case with Monthly Pass which was simply that it's a better way for people to approach Weight Watchers.

Okay during summer though they basically didn't attend as many meetings but they didn't disengage from paying the monthly fee?

That's right.

You mentioned some of the metrics at least the initial reaction to the Monthly Pass in foreign markets, takeup slightly less than NACO etcetera.

Are there any metrics that you can share on the foreign markets from the standpoint of Monthly Pass in terms of beta tests that you've run?

How should that compare to what's occurred here in the states?

We haven't released the penetration levels on a per country level at that level because that tends to get us into a level of detail because it's specific countries within Europe that we have not historically gotten into.

But you know that's something we could revisit on future calls.

What I would say is this though -- if you look at the relative penetration of Monthly Pass for example in the UK and Germany, we expected -- we never thought that it would rise as quickly to the penetration rates that we've seen in NACO for the following reasons.

One, I think that if you look at the US consumer first off, their use of the Internet versus what you would see in the UK and Germany is going to still continue to be little bit more, a little bit higher.

And I think you can also expect this concept of having your membership paid on a recur bill billing basis is a behavior that's more baked in now to the American psyche than you would expect to see in a lot of European markets.

Now that being said, frankly then the penetration rates (inaudible) NACO rates were in excess of what we thought we would actually do.

So we're very pleased with the result.

And I think that those sort of structural limitations that I referenced in terms of Internet penetration as well as comfort with a recurring billing model is something that we have every reason to expect to see temper over time in Europe.

And so therefore we have every reason to believe that we can drive penetration rates of Monthly Pass higher.

Today there's no disappointment with those launches?

No.

In fact we were pleased.

Last question.

I will turn it over.

Any expected price changes to either Monthly Pass or PayGo as we go through the next few months?

We do have a small portion of the US go up a little bit in pay as you go in the next couple of months.

But as far as Monthly Pass we don't have any plans right now.

That being said as we mentioned during the opening remarks, the UK did go through a fairly significant price increase that they put into effect this August; roughly about 10% that they put across through the system.

So we continue to be fairly aggressive in terms of continuing to take price up where we think it makes sense.

Scott Mushkin, Banc of America.

It sounds like you guys have a lot planned for the beginning of '08 -- new ad campaign, Kick Start here I guess in the US and then a new rollout in Europe in December.

So how should we look at marketing spend as we go into 2008?

That's one.

The second question is when we look at Monthly Pass, how much of the Monthly Pass -- it's obviously billed recurring bill.

How much is it done to debit cards and how much is to credit cards?

And then I will turn it over.

Those are my two questions.

Interesting.

(multiple speakers) I have to say I don't know the answer to that.

Because I think the concept of debit card in the US is sort of -- it's a little bit odd because it tends to go through Visa and MasterCard anyway so it's kind of hard to break out.

We haven't done that break outside the US other than to say that we make those things -- we support a variety of different payment mechanisms.

I would say in terms of marketing as a percentage of revenue I think that we're not getting into as you can imagine guidance at all for 2008 other than to say that I think our general feeling is that the marketing spend as a percentage of revenue we think that we're seeing this year is roughly the right level.

Perfect.

Just quickly, what's was the -- maybe you mentioned it and I missed it -- the other income line -- not the other income line -- but the offset to interest income?

I guess it was like $2.3 million or $2.6 million -- what was that?

That is actually income and it is the result of the fact that we are now doing business in Canada.

And as you know the Canadian dollar has really been strong and so that it's really taking our intercompanies and other things and translating them.

So was that the $0.02 you were talking about or that was in addition (multiple speakers) to that $0.02?

That's part of the $0.02 because if you net that to aftertax it doesn't account for the entire $0.02.

When you give us currency is that incremental or is that just what happened this quarter?

In other words, did currency help you or hurt you last -- year ago?

If that question makes sense.

Last year currency was pretty balanced as I recall.

I think we saw the second half benefit and the first half was down a little bit.

This -- the $0.02 -- I was simply pointing out that our $0.62 included $0.02 of currency gain.

So absent that we were $0.60.

(OPERATOR INSTRUCTIONS) Amy Chasen, Goldman Sachs.

Two questions.

The marketing spending in the quarter -- you spoke about it but I think you actually said that it was up.

It was actually as a percent of sales well below the first half and well below my expectations.

Was that just because you -- because the programs weren't going as well so you pulled back or can you give us a little bit of color on that?

First off Amy, congratulations.

Thank you.

On your new gig.

Secondly, third-quarter -- so you're talking about Q3 marketing as a percentage of revenue, right?

It's typically lower percentage of revenue in the third quarter.

Keep in mind that third quarter includes July and August and we're not doing a lot of advertising in July and August.

In fact we're pretty dark.

So Q3 as a percentage of revenues is going to tend to be the lower.

I think that's even more the case when you have Monthly Pass driving a lot of revenue through the system.

But to be fair, Q3 marketing as a percent of revenue was greater than prior year marketing as a percentage of revenue.

So no, we didn't make any explicit decisions to pull back marketing based on programs working or not working.

(multiple speakers) It was in line with your expectations because it was below mine?

So maybe my model was just wrong, which is possible?

It was in line with our expectations.

And some of our fall marketing falls into October as well.

True.

Good point.

I think somebody asked a question about fourth quarter NACO expectations for attendance and you said it's in line with the third quarter.

Can you run through the other regions and give us some idea of how you're expecting attendance to play out in the fourth quarter?

I should've been more clear.

I would literally take the attendance trend for all the geographies in Q3 and extend them into Q4.

I think the only thing that you might consider is that there might be -- you might begin to see some of the benefit of Monthly Pass in the UK and Germany on the revenue side as we go into some of the dips that are normally associated with late November and December.

But that'll help revenue but not necessarily attendance?

That's true but at this point we're in a paid weeks world so attendance has become less the focus than revenue and paid weeks.

We have no further questions at this time.

Are there any closing remarks?

Thank you for joining us today and I look forward to speaking with you at our next earnings call.

Ladies and gentlemen this does conclude today's teleconference.

You may all disconnect.