WW International Inc (WW) 2008 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Weight Watchers International's second quarter 2008 earnings teleconference call.

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

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

As a reminder this conference call is being recorded today, July 31, 2008.

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

Please go ahead.

Thank you, and thank you to everyone, for joining us today, our WeightWatchers International second quarter earnings 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 of fiscal 2008.

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 WeightWatchers International's performance for the first quarter of 2008.

The second quarter despite increasingly difficult economic conditions in some of our major markets, largely delivered to our expectations and to the guidance we have provided on our last call.

Across our business units, NACO's Q2 volume results were at the lower end of our expectations and the UK and Continental Europe did somewhat better.

As awareness of the WeightWatchers online product grows, our WeightWatchers.com business shows continuing strength.

Total company Q2 revenues grew by 12%, with meeting fees up 11%, internet revenues up 28% and product sales and other revenues up 9%, Excluding foreign currency adjustments, total revenues were up 9%.

Global paid weeks for our meetings and WeightWatchers online offerings were up a combined 15%.

Global paid weeks on our meetings were up 9.5% while global attendances were down 2.6%.

As we discussed in the last call, Q2 benefitted from the timing of an earlier Easter.

We would estimate on a holiday adjusted basis, the Q2 attendances were down about 6% versus prior.

WeightWatchers.com had another outstanding quarter with internet revenues up 28% versus prior year in global end of period WeightWatchers online active subscribers up 27%.

Excluding the impact of the recent adverse UK VAT ruling, Q2 2008 EPS was $0.87 an increase of $0.14 over Q2 2007.

The recent UK VAT ruling which we disclosed in the press release we issued on June 30 had the effect of lowering our reported EPS for Q2 2008 by $0.28 from $0.87 to $0.59 per fully diluted share.

Of this $0.28 charge, $0.24 related to an additional reserve for the potential of owing higher UK VAT for the prior years, 2005 through 2007.

The remaining $0.04 charge in our second quarter results relate to the cumulative current year impact of Q1 and Q2 2008 of the higher UK VAT.

On a full year and ongoing basis, based on the current revenue run rate in the UK, this ruling will have the effect of reducing earnings by close to $0.02 per share on a quarterly basis or approximate $0.07 on an annual basis.

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

First, our North American meetings business.

Total second quarter NACO revenues were $226 million, an increase of 4% versus the same period in 2007.

Q2 paid weeks were up 6%versus prior year while Q2 attendances were down 4%.

Without the benefit of prior period acquisitions, NACO paid weeks were up 5% while attendances were down 5.6% versus prior.

The continued narrowing of the gap between paid weeks growth rate and attendances is of course reflects the attentuations of the incremental benefit of monthly pass as we are now approaching two years as of launch.

We started the second quarter with a marketing campaign that appear to be meeting or exceeding our early expectation and April was generally a strong month from a volume perspective.

However, with the rapid rise of gas prices in April and May, May proved to be a more difficult month in terms of recruitments.

While the trends moderated somewhat in June, the net effect was that the gains from a strong April were offset by a weak May.

We last saw this kind of impact on enrollment levels in the post hurricane Katrina environment when gas prices had a similar run up.

While WeightWatchers has a lower price level than many of our commercial competitors, we too have seen some evidence of consumers deferring their spending on weight loss efforts with us.

Feedback from our field organizations suggest that many consumers are struggling with their finances and we believe that this is starting to have some impact on our business results.

To the extent that the economy is having an impact on our business, it has primarily at the meeting enrollment level along with some slight softening of meeting member retention.

In contrast, as I will discuss later, we have not seen a similar impact on WeightWatchers online which is lower priced.

In response to all this, we will be increasingly focusing on the value that WeightWatchers brings to the weight loss effort.

Weight management is about much more than vanity, it is an important part of preventative health care.

Looking good might feel like an indulgence, but being healthy is never a luxury.

We will continue to emphasize that there is no better way to lose weight and keep it off sustainably than with WeightWatchers's meetings.

At three times the effectiveness of losing weight on your own, our program is a good value.

Appropriate for these difficult times, we are taking a different approach to our usual Fall promotion.

This year, we are introducing a new charitable campaign called Lose For Good.

The campaign will work on two levels.

One, for every pound lost, we will give money to charity to buy a pound of food for those who need it most up to $1 million.

And two, we will be encouraging grassroot local food drives for the needy conducted through our 820 WeightWatcher centers and 4,500 traveling locations throughout the US.

It is an opportunity for our members to help their own health and well being while helping someone else at the same time.

The campaign will have a focus on building participation and PR at the grassroots level and by actively driving the bring a friend promotion.

We don't know what kind of incremental business results will come from this, but from our point of view, it is the right thing for us to do particularly in this economy.

As we move into the second half of the year, we expect the consumer economy to continue to pose uncertainty in our meeting enrollment levels, particularly against the backdrop of no meaningful program innovation in close to four years.

Given this environment for the second half of 2008, we expect NACO to deliver flat to low single digit positive paid weeks in revenue growth and mid to high single digit negative attendances.

Now on to the international business units.

As is our usual practice, all the growth statistic I'm discussing will be provided on a constant currency basis.

For the second quarter, excluding the effect of the UK VAT ruling, UK revenues were up a strong 19% as we see the continuing benefit or last year's price increase as well as an increase in benefit from the Monthly Pass Commitment Plan.

The impact of Monthly Pass in this market is most clearly seen in paid weeks which were up 23% while attendances were up 2.3% versus prior.

Without the benefit of the early Easter, attendances would have been down about 3%.

As we noted earlier, the penetration of monthly pass in this market somewhat lags what we have seen both from the US and some of our other international markets, we see this as an opportunity.

In terms of enrollment challenges, the UK is seeing many of the same issues as NACO -- lack of a new program in an increasingly difficult consumer environment.

Like the US, the UK has the same issues with reduced credit availability, falling home values, as rising inflation having an increasing impact on the consumer.

Like the US, many of the consumer sectors in the UK economy are now experiencing a slow down.

The corresponding path forward in the UK will focus on maximizing leverage from the new program in January 2009 while also introducing and supporting a new marketing campaign.

With all these factors in play, we are forecasting paid weeks growth of 20% - 25% for the third and fourth quarters.

On the attendance side, we are forecasting low negative single digit declines for the second half

Going forward, the recent VAT ruling will have the impact of reducing reported revenue versus prior year partially offsetting the revenues benefit of Monthly Pass.

Reflecting the increased reserve against our meeting fees subject to VAT in 2008, UK revenues for the remainder of the year will still be up low single digit positive versus 2007 which had a lower VAT reserve.

Continental Europe showed a similar trend to what we have seen in Q1, strength in country such as France, Belgium and Sweden was offset by some weakness in Germany.

Total revenues were up 11% on a currency adjusted basis and paid weeks were up 16%.

Overall, Q2 attendances were effectively flat to prior at -0.4% which translate to about -3% on an Easter timing adjusted basis.

Monthly Pass has contributed to the top line strength we have seen in PE as we continue to build on our strong start with Monthly Pass in Germany and the more recent launch of Monthly Pass in France.

The Monthly Pass model continues to demonstrate its applicability to a wide variety of markets.

While Continental Europe is being impacted by energy and food inflation, their consumer economic issues do not seem quite as severe as the US and UK.

Fueled by Monthly Pass for forecasting double digit revenue growth for the second half, but we expect the dependencies to remain somewhat anemic at low to mid single digit negative.

Moving on to WeightWatchers.com.

While the meetings business seems to be somewhat susceptible to the current economic factors impacting the consumer around the world, the WeightWatchers online product with its lower monthly fee has proved to be very resilient in the face of this economy.

As noted earlier total internet revenues were up a vibrant 28% and paid weeks for the online product were up 30% again, this growth is lacking a very strong Q2 in 2007 at which point, we were fully benefiting from the TV campaigns that were put in place beginning January 2007.

One strategy that has proved successful so far has been the introduction of advertising in non traditional months such as June.

We have continued to push the strategy and we have been on TV with WeightWatchers online ads in July as well.

Early results so far had been very strong.

While we remain conscious about the impacts of the economy on both sign ups and retention for WeightWatchers online, we believe that the lower price point combined with the opportunity to significantly increase awareness of this product will contribute to its continued growth.

We will be rolling out significant new improvements to the features and functionalities of this platform over the coming quarters that we believe will further enhance the value and experience to both our WeightWatchers online subscribers and Monthly Pass members.

For the second half of the year, we expect continued 20% plus growth and revenue on online paid weeks.

Now, I would like to turn the discussion over to Ann Sardini who will elaborate further on our Q2 performance.

Thanks, David.

Good afternoon, everyone.

Before getting into the ongoing business results, I'll just take a few minutes to recap the components of our reported second quarter 2008 earnings per share.

Our ongoing operations generated $0.87 of EPS in the quarter comparable to $0.73 last year and an increase of 19.3%.

There was however, a charge in the 2008 quarter which was not present in 2007 and which resulted in a reduction in 2008 Q2 EPS of $0.28 bringing our reported EPS to $0.59.

This charge is the consequence of adverse UK court ruling that we received in the quarter with respect to the introduction of value added tax or VAT.

The ruling which resulted in 100% of our UK meeting fees being subject to VAT starting in 2005 caused a charge for prior years which we recorded in the second quarter and which reduced our second quarter earnings per share by $0.24.

On a going forward basis, the 2008 annualized charges resulting from the ruling are now estimated to have the impact of reducing full year earnings per share by approximately $0.07.

$0.04 of which have been reflected in our second quarter earnings representing the first and second quarter announced.

Let me also remind you that beginning first quarter this year, our reported results include the impacts of our China joint venture start up for which we consolidated 100% of the results into our operating income in accordance with GAAP and back out to known 49% ownership on a minority interest line item below operating income.

Year to date, the joint venture has incurred $2.2 million of operating expenses, $1.4 million of which were in Q2.

In the second quarter, we recorded an operating loss to the venture of $0.6 million net of first cap tax benefit which is then reduced by the minority interest reduction to $0.3 million reduction to net income.

The impact to second quarter EPS is minimal, we now expect that the Chinese JV will reduce full year EPS by $0.02.

Consolidated company revenues in the second quarter were $400 million after $32.5 million of charges related to the UK VAT ruling.

On a comparable to last year basis, second quarter revenues of $432.5 million were up 12% with current dollars and 8.6% in constant currency.

Consolidated operating income for the quarter including the impact of the VAT settlements and the China JV was $101.3 million excluding these are operating income on a like to like basis was $135.2 million this year versus $123.3 million last year, an increase of 9.6%.

Net income was $46.6 million in the quarter.

In the review of operations that follows, I will omit the impact of both the VAT ruling and the China JV except when specifically noted.

Our 8.6% constant currency revenue growth was spurred by the ram up of Monthly Pass in the UK and Germany, launched in those countries in August of last year, and by online revenue which grew substantially, up 28.4%.

Second quarter global meeting fees was $257.4 million, the 10.6% increase over the prior year level, again, driven by Monthly Pass.

Lecture income per attendee increased 10.1% worldwide on a constant currency basis.

In addition to the US, we now have Monthly Pass in the UK and Germany as noted and in Australia and France.

Fueled by new product launches, second quarter in meeting product sales for attendees increased 9% in constant dollars over last year's Q2.

Total product sales in our meetings increased in all of our major geographies, up 6.2% constant currency in the quarter versus last year.

A few specific regarding our geography financial performance.

NACO second quarter meeting revenues including meeting product sales were $208.6 million, 4.4% growth over second quarter 2007.

While attendance has lagged to prior by 4%, paid weeks grows at 6% along with strong product sales per attendee with the revenue drivers.

The rates of growth of paid weeks and meeting fees for attendee are decelerating to a degree as the Monthly Pass install base is stabilizing.

We have approximately 800,000 active Monthly Pass members in the second quarter this year, up 11% versus Q2 prior year.

As a reminder, we are now approaching the second anniversary of the launch of Monthly Pass and NACO.

In total our international meeting revenues were $131.6 million, up 13.3% in local currency and a combination of 17.3% growth in paid weeks and a hefty 12.7% growth in meeting product sales per attendee.

In this year's second quarter, both UK and Continental Europe has introduced the Monthly Pass which was been noted, launched in these markets starting in mid-third quarter 2007 and also from strong in-meeting product sales.

And 11% meeting fee price rise for pay as you go members was taken in the UK, concurrent with the launch on monthly pass back August.

UK meeting revenues in the second quarter was $51.6 million on a comparable to prior year basis, excluding the impact of the recent VAT ruling.

An increase of 19.6% in local currency and a 2.3% increase in attendance.

Continental Europe's meeting revenue is $69 million in the quarter, a 12.2% increase versus the same period last year.

All of our major European countries have contributed to the revenue increase for a variety of reasons.

Product sales in meetings gained 13% overall with all countries benefiting from a successful strategy of regular new product launches.

In Germany, Monthly Pass which is ramping nicely was an important revenue and (inaudible) growth driver and successful marketing strategy for spurred growth in some of our smaller markets.

Other revenues which include franchise commissions, licensing and revenue from our publications was $27.9 million and grew 8.9% over the past year.

Franchise commissions were $4.5 million in the quarter up 0.4% but excluding the impact of acquisitions made after Q2 2007, commissions on the remaining franchises grew 6.8% versus prior year.

Licensing revenues in the second quarter increased 13.2% to $17.3 million led by our ice cream and yogurt licenses in the US, but with strong contributions across our other geographies as well.

Our consolidated gross margin in the second quarter was 56.1% as compared to 56.9% in last year second quarter.

A decline of 80 basis points.

The decline in gross margin percentage was primarily in the meetings business and came from three factors.

Lower product sales margin in NACO driven by product mix and higher transport cost, start up cost for the Monthly Pass commitment plan in Europe and smaller meeting averages in some of our countries.

These declines were partially offset by the continuing growth of the WeightWatchers.com business which carries a structurally higher gross margin.

Second quarter 2008 marketing spend was $69.4 million up 10.8% over prior year.

Foreign currency exchange added approximately 3.5% to the marketing spend.

As a percentage of revenues, Q2 marketing is slightly lower than last year at 13.7% versus 13.9% in 2007.

G&A Expenses in the second quarter 2008 was $48 million up 12.4% in the prior year level, with 3.8% of the increase coming from foreign currency exchange rates.

IT remains a significant driver of the year over year increase reflecting our continuing initiatives to invest in our system infrastructure.

Trend growth in this area is a combination of increased depreciation as we bring new systems online and higher maintenance related to new systems online and higher maintenance related to new systems online and higher maintenance related to new systems already put into service.

Excluding the increases from IT depreciation and currency, G&A rose 6.8% in the quarter.

As a percent of revenues, G&A is flat to prior 11.1%.

The Company's consolidated operating income margin was 31.3% as compared to 31.9% in the year over year quarter.

Margin compression was a result of the gross margin decline.

Interest expense in the second quarter of 2008 was $21.6 million, down $7.7 million or 25.7% versus second quarter 2007.

We reduced our average debt outstanding of $168.5 million below the second quarter 2007 level to $1.64 billion.

And in addition, our average effective interest rate is below last year's at 5.19% versus 6.38%.

This resulted from a combination of lower market rate and a step down in spread over LIBOR which took effect during the first quarter when our net debt to EBITDA dropped below 3.5 times.

The step down reduced the spread over LIBOR by 25 basis points across a large portion of our debt.

Now a few words about the tax rates, the reported tax rate in the second quarter was 41.9% primarily as a result of the additional UK expense related to the VAT ruling, in the third and fourth quarters, we anticipate a 38.9% rate ending the year with an average rate of 39.5%.

Our consolidated cash flow and balance sheet which I'll address briefly are consistent with expectation.

In the quarter, the Company generated $102.9 million of cash form operating activities excluding interest.

After capital expenditures, $95.4 million was available to service our capital structure

With our available cash, we made interest payment of $29 million and paid our quarterly dividend of $13.9 million.

Also during this quarter, we repurchased $1.2 million of our shares to approximately $53 million.

In addition, we acquired two small franchises.

Fluctuations in the balance sheet between Q2 '08 and year end '07 and not only reflect the normal seasonality of the seasonality of the business, notably, a reduction in inventory which is normal going from summer season.

Deferred revenue rose $27 million versus year end 2007 consistent with the ramp up of Monthly Pass.

The acquisition of three small franchises in the first half of 2008 resulted in a $39.5 million increase in franchise rates to prior.

And I'll turn it back to David.

Thank you, Ann

Like most consumer product and service companies, we are seeing some effects on our business from the difficult economic environment.

We don't have a crystal ball into the environment that lies before us but we believe that our operating stance should be to assume that conditions will stay and possibly get worse over the coming six to 12 months.

Our operating philosophy during this time will be to focus our messages and communications to reflect the same reality consumers are seeing.

We must continue to focus on the value and underlying efficacy of our approach and to convince consumers that staying healthy is not a luxury, but a necessity.

Our fall NACO promotion and our new program for January 2009 are very much in synch with this philosophy.

During this time, we will of course, prudently manage our cost base, we will continue to invest in marketing but we will focus behind those vehicles that have a proven ROI.

We will also seek opportunities to closely manage labor expense and related G&A.

Beyond all these basic tactics, our focus as an organization remains unchanged.

We are in the business of helping people lose weight and keep it off by adapting a healthier lifestyle.

That philosophy has never been more important and more relevant to the consumer of today and tomorrow.

When I assumed the role of CEO of WeightWatchers in January last year, I spoke of the need to increase the relevance and delivery of our products and services to a broader segment of the overweight population.

We know we have a highly respected brand and a uniquely effective approach to helping consumers adopt a healthy lifestyle.

But we also know that if we are to build on our position as the leading global weight management company, we must attract new people to our brand and bring back past members by innovating in the areas of convenience and ease of use while further enhancing efficacy and sustainability.

Over the past 18 months, we have made substantial progress as an organization in rebuilding our pipeline in the areas of new program development and service innovation.

Across the organization, we are now actively researching and testing many new initiatives that we believe have the potential to significantly enhance our offering.

While many of these efforts are not yet apparent from the outside, I am confident that we are positioned to enhance the relevance of our offerings and to drive growth in our business for years to come.

I expect that I'll be able to discuss these initiatives in more detail in the near future.

On our last call, I provided full year guidance of $2.85 to $3.00 for fully diluted share excluding any impact from the China JV.

Based on our performance for the first half of this year, and recognizing the difficult economy, we are narrowing our guidance by reducing the top end by $0.04 giving us a new full year range of $2.85 to $2.96 per share.

Beginning this quarter, we are adjusting our guidance baseline to include the ongoing annual effect of the adverse UK VAT ruling which is approximately $0.07 per share as well as the full-year earnings effect of the China JV which is $0.03 per share.

As a result, our new restated annual guidance range of $2.75 to $2.86 per share which now includes the combined $0.10 cost from both the ongoing current year impact of the UK VAT ruling and the impact of the China JV.

For modelling purposes, if you think about the third and fourth quarter, keep in mind that Q4 this year will benefit from one, the soft launch in December of our new program and two, an incremental $0.02 from having a 53rd week in this fiscal year.

Finally, I'd like to take this opportunity to publicly thank my close friend Thilo Semmelbauer who is wrapping up his duties as COO this week.

Thilo has worked tirelessly for WeightWatchers for the better part of the decade, he helped build WeightWatchers.com as a start-up and while I understand his desire to seek his next entrepreneurial opportunity, he is not an easy person to replace.

More importantly, I will miss his company and his counsel.

As you know from the earlier public filing, we all right not retaining the role of COO.

Rather, we will split the job into three positions -- President of International, President of WeightWatchers.com, and President of NACO.

We have appointed Melanie Stubbing to the role of President of International.

Mel has been running the UK business for four years and has done an excellent job brining a new level of operating discipline to that country.

I look forward to her leading a relatively new international management team in driving against our strategy of increasing relevance and retention.

Mike Basone has assumed the role of President of WeightWatchers.com.

Mike joined us from CTO.com in 2002 and took on the additional responsibility as CTO for all of WeightWatchers international in 2005.

I can think of no one better suited to lead the WeightWatchers.com organization than Mike.

We are currently in the process of recruiting for the President of NACO.

At this point, I would like to answer any questions you may have.

We will now take questions from the telephone lines.

(OPERATOR INSTRUCTIONS).

The first question is from Greg Badishkanian from Citigroup.

Please go ahead.

Hi, actually, this is Alvin Concepcion in for Greg.

I just want to get your thoughts on how you are positioned from a pricing perspective on your Pay-as-you-go and Monthly Pass in light of the tough consumer environment?

We think that if you look at our price point for WeightWatchers compared to other commercial offerings, we have a advantageous price point, it is much less expensive to participate in WeightWatchers than other commercial weight loss programs.

Furthermore, with WeightWatchers, because you don't have to eat any WeightWatchers food, the consumer has the opportunity to continue to participate in retail and look for good values in their grocery store as part of maintaining and sustaining a healthy lifestyle.

And so in that context, from a competitive perspective, we think that we got a very good price position.

Certainly, our real job, if you think about it, is 80% by our own surveys, 80% of weight loss attempts happen on a self help basis.

People trying to do their own thing.

Clearly, the appeal of that in an economy like this is that doing your own program is technically speaking free, the issue is that for too many people, it doesn't work.

It's start the program on Monday and by Thursday, you quit.

WeightWatchers through basically, its ability to provide a much higher level of efficacy and remember through clinical study, people that participate with WeightWatchers lose three times more weight than people that do it their own, we think that we have a very meaningful way of convincing those sort of self help dieters that WeightWatchers is actually quite good value because it is the approach that is most reliably going to lead to good and sustained weight loss.

And those are exactly the types of messages that we think we really have to drive as we continue to sort of muscle through this economy.

Okay, great.

And how would you characterize the current ad market in terms of how ad rates are trending and how should we look at that going forward in light of the election?

Most of our advertising for North America, our television advertising, I should say is purchased in the upfront market.

We do have some direct response TV but the majority of our spend is in the upfront market which is already locked and loaded per se.

And so we are not seeing the likelihood of a significant impact on our advertising rates or dollar per GRP rate in the fall campaign, although obviously, in an election year, things can definitely get a little bit challenging.

We think that we have the right set up to manage our way through that.

Great.

And then sorry if I missed this, but was there an impact on the North American organic dependence trend from early Easter, did you quantify or for any color on that?

Yeah, give or take, it would be about another 2.5% to 3%.

And that was the benefit?

That was a benefit to us this quarter, so if you subtracted that 2.5%, you get to an apples to apples basis, but of course, when we provided guidance on the last call, we were factoring in Easter and so in that sense, if you are comparing what we said in the last conference of this call, that's what we were talking about, the mid single including the benefit of Easter.

Thank you.

Thank you.

The next question is from Michael Binetti from UBS.

Please go ahead.

Hi guy, congrats on a nice quarter.

Just a quick couple of modeling questions to help us out and then I have another follow up for you.

But I'm assuming you guys are expecting people to check in the $0.87 the first call for the quarter, but when -- a lot of us had to base our price targets on 2009 and the outyear, when you say there is probably $0.02 of VAT tax as a going forward number, is it fair to say 2Q '09, we are going to want to compare it to $0.85 with the $0.02 of the VAT tax in this quarter?

Yes.

Is that a good assumption?

Okay.

That is a good assumption.

I wouldn't sort of look at it as about $0.02 a quarter.

Okay, that's helpful.

Thank you.

Around the $0.07.

Okay, and then you guys mentioned the -- your attendance, NACO attendance for the second half -- I'm guessing there's going to be some volatility in there, is there anyway you can help us break that down between the quarters, and you also mentioned that gas prices are showing some kind of a correlation and I'm wondering what the high gas prices that started up the quarter with here, even though we are coming down now, is that more of a back weighted guidance on the mid to high single digits?

Well, I think that the volume guidance that we did between Q3 and Q4 also reflected the fact that again, NACO has the benefit, typically, when we do a soft launch of a new innovation, we often see a little pop from the volume point of view through December?

And we would assume that we are getting some benefit from that, and then of course, this 53rd week which happens every four years is happening this year and there's a little bit of benefit there.

So if you are going to be waiting between Q3 and Q4, Q4, on a relative versus prior basis, is going to look a bit stronger than Q3.

But the overall guidance that I gave was for the full second half and so then, you can just proportion between the two quarters based on that feedback.

Okay, and then just a bit broader of a question, I guess it seems like there is pretty clearly, a trade out from consumers to self dieting -- I guess over the last few years has been certainly -- comes into focus in terms of a more difficult economy, but I'm wondering, you know how sustainable it is to have 20% type online growth with negative meeting trends supporting what you have been doing and double digit EPS growth.

In the US, and is the answer -- and I'm just looking at the profit dollars, it looks like more that 100% of the profit dollar growth in the first half of the year has come from the online business and I guess the answer is the new diet coming up, and I don't know if you guys ever tested them, I'm wondering what your confidence, what kind of data points you can give us around that gives you the confidence in that innovation and perhaps why you wouldn't be able to bring it out earlier than even December if it is a fairly strong innovation?

There's a bunch of questions in there and I'll try to work through them in a reliable way, but if I miss anything, please do remind me.

Okay, first off, I've seen conflicting data about whether or not the consumers propensity to do weight loss efforts on their own is actually increasing or not increasing.

From some of the other data we've seen, we have not seen a significant change from year to year, I know that there is some MPD data, but I believe that's where it came from that suggest that maybe it is increasing, but we have seen data from other places that has suggested the contrary.

Because it's effectively been fairly stable.

We would hypothesize that during times like this, that maybe the likelihood that somebody's going to try to lose weight on their own might in fact be somewhat higher during a tough economy.

But I would also suggest to you that those people - that many of those people, when they try to do that, are not going to be met with success ultimately and are still going to be in a position of having to deal with a weight issue as we come out of the economy.

And kind of anecdotally, some of the feedback - when we do hear feedback from the field, their location, like, you know, my family is just having a really hard time right now, I just don't feel like I could spend the money, but I promise you I'm coming back as soon as things loosen up -- which is why we believe that some of the activity we're seeing is effectively a deferral, if you will.

In terms of the long-range trend with meetings, I think that, you know, our point of view is that there's nothing structurally wrong with the fundamental premise of delivering weight management through the supporting committee.

I don't believe that there's anything out there that would suggest that somehow, in this new age, it's becoming less relevant or less important in people's success.

My starting point in asserting that is the simple fact that again, we just - we know from clinical research that people that go through Weight Watchers meetings are doing better than people that do their own thing.

And therefore, my starting premise is that consumers are ultimately going to go with what works.

The other point I would make is that if I look at the meetings - for example, I was just in a - I was in a focus group last week on a different topic, but there was a number of Weight Watchers members both current and last.

And the focus group moderator went through the ranks and asked then, you know, what was the thing about Weight Watchers that works and was important to their success.

And very consistently, what they were talking about was the support that they got in the process.

I believe, though, that if you look over the past two years -- and this is what we've been talking about for the past two years -- is that for Weight Watchers to remain relevant both to bringing new people into the fold but frankly also going back to those people that were doing Weight Watchers in '99 and 2000 and 2001 who might have since left the fold, that our ability to drive meaningful innovation that can significantly improve the likelihood of success or the ease of participating, that as we're able to develop those types of innovations we now have an opportunity to attract in a new group of people, and we also have an opportunity to go back to those people who we haven't seen in four or five or six or seven years and bring them back into the fold by saying there's something new and exciting at Weight Watchers.

And fundamentally, that innovation is going to be, I believe, critical to driving long-term growth in the Core Meetings business.

Now, if you look over the past two years, the funnel that leads to those good innovations flowing out into the market, quite honestly, as we've been discussing, was fairly dry.

We had to go through a process, to basically go back to the drawing board and do the research, do all the fundamental work to do a better job of identifying and articulating what is the weight loss problem that we are trying to solve for our members and for consumers.

A lot of that work has been done on the research side.

And frankly, the activity in 2008 has therefore, as a result of that, been able to shift a lot more towards testing and piloting and doing a lot of the preliminary work.

And from that point of view, yes, I have a new program that's coming in January of next year, but I can also tell you I have program ideas in the pipeline right behind it and that that's going to be an ongoing thing.

I can also tell you that we have service innovation ideas that we're working through, none of which I can talk about right now but some of which, we believe, over time have a good chance of bearing significant fruit in terms of significantly enhancing and improving the fundamental Weight Watchers value proposition.

So I absolutely believe that we're going to be in a position particularly as we continue to work through this economy and come out the other side.

We're going to have a stronger business than we've ever had before, and we're going to have more good ideas in terms of how to sort of once and for all get the Core Meetings business back on the right track in trying to drive good, organic enrollment growth in that business.

And when we do that, the good news is that business now has much more leverage than we've ever had before.

So for example, enrollment is now worth considerably more to us today than it was four or five years ago.

For example, committed plans such as Monthly Pass have been instrumental in helping us create a much stronger opportunity in gross margin that as we start doing a better job of driving enrollments and refilling our meeting rooms, it's going to have the additional effect of providing leverage on the gross margin line as well.

And so, based on my confidence that we can actually deliver this innovation plan while continuing to build on the successes that we've already been seeing in terms of building a better brand platform through our marketing campaigns and continuing to make sure that we're giving - we're putting the right leaders in the right meetings, that all those things will start to work together in a place where we are going to start driving top and bottom line growth.

Well, let me just clarify one thing going back to what you said earlier.

I just - while we don't break out the operating incomes in Meeting business versus .com business, those businesses experienced profit increases in the quarter and in the first half.

So, you weren't exactly on target with that one.

Okay.

Okay.

Thank you.

That was a really long answer.

So hopefully, I covered everything.

Thank you.

The next question is from Karen Howland from Lehman.

Please go ahead.

Good evening.

Hello.

Well, I was wondering if you could talk a little bit - I know you're not giving a lot of details as far as the new program that'll be launched this upcoming winter.

But you did indicate that your at the stage now are you're running pilot programs and you're testing the program.

Can you give some additional color just because you obviously sound very confident about the new program, the launch, but to give out the little bit of comfort that you're seeing the right trends that this can really drive, you know, further attendance to your meetings?

The way I look at the new program, and it's beyond testing right now.

We're literally in the process of putting the finishing touches in the program and being ready to send it out for printing.

So it's going into production as we speak.

And as I've been saying before, all the research and feedback we've been getting on it has been very positive both in terms of we think there's a real opportunity for us to enhance both simplicity and efficacy in ways that we haven't done before.

My confidence in terms of the potential for this to be a significant plus for next year comes from what I've already observed in our advertising front.

Let me talk about what I mean.

Because one of the questions I get is that if we believe that this advertising campaign Stop Driving, Start Living, is a good campaign to NACO, you know, why aren't we seeing more benefits from it on the enrollment line and the NACO business?

And my view of that has been that the first thing we need to do in terms of getting this brand to a place it deserves to be is to create a foundation of differentiated brand equity by letting the country and the world know that what we offer is different from what everybody else offers and what we offer is sustainable and built around building a healthier lifestyle and that everything we hear is that those are exactly the messages that consumers want to hear and those are the messages that are resonating.

And the scores that we're now seeing on that and brand attribute scores are bearing that out.

Now, that kind of brand equity work is great in terms of positioning the overall brand.

But it doesn't necessarily drive a sense of urgency to participate because it still is, you know, what's new, what is going to lead me to believe that I'm going to have more success.

So maybe, they're branding all the things that we're arguing are true about ourselves, but they're still looking for that thing that's going to grab them and give them a reason to get started in a weight loss effort with us.

What we've seen with this brand if I take the example of Weight Watchers Online is that when we have meaningful news that consumers care about, that they're incredible responsive for our advertising in a way that has a one-to-one relationship between enrollments.

And so the Weight Watchers Online, every time we turn that advertising on, we see a pickup in Weight Watchers Online sign-up.

So our hope is that as we now go into January with an advertising campaign built around this new program, that the kind of news that we're talking about in this program and the benefits that we're going to be talking about are going to be motivating for consumers to get them to now start more actively engaging with us.

You know, I'm always quick to caution that I don't want this program to be viewed as the panacea for all the things we need to do.

I think that it is an important step but it's also the first major effort that's coming out of the innovations funnel.

And what I can tell you is that there's going to be other things that are going to follow it.

It's the cumulative effect of all those things over time that's going to ultimately be the thing that drives home some growth.

The other thing I would point out with innovation -- and this is absolutely our experience, for example, when we lost points -- not that this innovation is on that level or scale, but when we lost points, it actually took up to two to three years to really drive to see all the growth and organic growth come out of that innovation.

The reason is that - I always go back to the fact that, you know, roughly 70%, or 2/3, of our enrollments are coming on the recommendation of a friend or family member -- in other words, word of mouth -- and that with a new program, it takes a while to build word of mouth.

And so it's one of these things where you put it out there but it's going to take time for it to build over time.

But I do believe that we can get some short-term drive as we go on to December and January.

So when you were testing the program, I think you had some select customer markets that you were trying it out in.

Do you do - run long enough that you could actually tell people were enthusiastic about it, driving additional people to the meetings, or is that just a sense you get from chatting with...

No.

..

- talking with their members?

No, it was a pilot.

And I tested some of that research myself.

And it was a pilot where we had never members, we had last members.

Those actually who were recruited in were doing the program and we track them over - I believe it was four or five weeks.

And at each point, there was a check-in where they would come back and sort of talk through their experiences, and that feedback in that particular pilot was important, one in terms of helping us to refine some key elements of the program; and two, confirming that some of the concepts that we're starting to push through were having a significant impact in how people thought about their weight loss process.

And ultimately, the way I judge an innovation is that if it provides meaningful help to someone who's going through a weight loss process - in other words, if an additional light bulb goes over our member's head because they have an epiphany or a revelation about how they can adopt a healthier lifestyle, if it causes them to refrain the way they think about food and the relationship of food and activity, then if we're able to do those things, that fundamentally those are the types of things that are going to drive more success, and that ultimately is what's going to drive long-term enrollments.

Okay, thanks for that additional color.

A question about your marketing spend this quarter.

I think, if I remember correctly, you shifter about $6 million or $7 million from the second quarter to the first quarter of marketing spend because at the time it's Easter.

That's right.

I was a little surprised to see the acceleration, is that it was added back.

Was there anything specific about the marketing spend this quarter?

I know you --

Yeah.

There's two things.

First of all, we had - we got a big hit from FX, which is in the neighborhood of 3.5%, I think it was.

Secondly, we did some extended advertising.

We did some continuity advertising over periods that we don't always advertise.

We extended TV in France and Germany.

And we did some radio advertising in some of our markets and that was pretty successful.

We also - as David I think mentioned, we also extended our advertising, our TV advertising in weightwatchers.com which obviously has been very successful as well.

But those are the big pieces of what we added.

Okay, great.

And I - then just one quick follow-up, I - to make sure I heard you right.

You said that the guidance previously was $2.85 to $3.

That didn't include the VAT or the JV for China.

Now it's $2.85 to $2.96.

And that does include the $.10 hit from the VAT in China?

No, it's - think of it as a two-step process.

Step 1 is we lowered - we took the $2.85 to $3, you're correct.

That did not include the VAT or the China JV.

We took that range and we lowered the top end by $.04.

So that takes us from $2.85 to $2.96.

Step 2 is we now recalibrated to reflect the VAT and the China JV which we had not been including in previous guidance.

And that had the effects of reducing both by $0.10.

And so effectively, we just re-expressed guidance and now will include both of those things which before we have said explicitly were not included.

Does that make sense?

And so if you include them, is it $2.75 to $2.86 or...

Yup, you got it.

Yes.

Beautiful.

Okay, that's all I needed.

Thank you so much.

Thank you.

The next question is from Chris Ferrara from Merrill Lynch.

Please go ahead.

Hey, guys.

Yeah.

Just first on the guidance that - you just included - the $2.75 to $2.86, that includes the ongoing $.07 but excludes everything like the - whatever it is, the $0.20 - it excludes $0.24 out of the $0.28 that you guys recorded that you guys reported today, correct?

Yes, that's right.

Okay.

Okay, great.

Now, just - David, I'm just hearing a lot of commentary around the economy from you guys and from everywhere else, I guess.

Does it mean anything for the winter launch -- like had you anticipated taking pricing around the new program?

And like it change at all how you think about that new program, if you the consumers are going to be especially cash-strapped that they're seeing their heating bills?

No, not in terms of - we were never planning on taking pricing or - I haven't actually thought about it, but we weren't really thinking about taking pricing up with the new program.

So it's not like that was part of our plan.

So our intention is to continue to hold price where it is.

You know, of course, as you go into the next year, you know, one can only speculate, well, on one hand, our heating bill are likely to increase.

So that's a good point.

But, you know, maybe at the same time, we're going to continue to see some declines in gas prices.

And so you're having different things working against each other and it's sort of hard to predict what the consumer wallet size is going to be as we go into January, as well as, you know, getting a better sense of when credit is going to start loosening up and everything else.

And so, frankly, your guess is probably better than mine but probably subject to all the other uncertainties that you might have.

You know, nonetheless, I think that if you come out with a new program in the winter, the primary point of - in communicating the new program is all the ways we think it's going to help people be more successful and that those are the types of messages that directly speak to value and efficacy in having something that works And the better job that we do with that, the more likely the consumer is going to increasingly say that Weight Watchers is the value and that maybe I shouldn't be thinking about it as something I should defer but actually something I should be excited about getting involved in right now.

And also, I mean, something on the same kind of tone, I mean, does Monthly Pass make you more cyclical than you would have been on Pay-As-You-Go?

No, it's actually the opposite because Pay-As-You-Go - keep in mind that the rhythm of Pay-As-You-Go, particularly from a seasonal point of view, is that you will get this rash of enrollments and sort of rapid rejoin that would come around free registration periods.

But then, say after, you know, 10 to 14 weeks, those people would disappear from the system again.

They'd still be doing Weight Watchers, by the way, by pulling out their books and everything else.

But Weight Watchers, I mean, Monthly Pass has the effect of resulting in a more continuous period of engagement.

And so, I'm not sure that that's going to have any - I think, if anything, it helps reduce volatility at least from the top line of our business.

But maybe I'm not catching the exact gist of your question.

Well, I guess I couldn't really make it much more simple.

I mean, so I'm just assuming you guys still have not seen, you know, I'm sure you have some degree of attrition on Monthly Pass.

It's certainly small, but it hasn't accelerated at all from what you can see?

Well no.

What I said in my prepared remarks is that we have seen some light softening.

Not major enough significance, but we've seen a little slight softening of Monthly Pass retention rate in May, June and going into - I'm sorry, April, May, June because July isn't quite over yet.

We've a little bit of softening.

And, of course, that's something we're watching closely.

Frankly, my view is that if the recession was going to be really bad, that was one of the things that we were more concerned about that we would have seen a greater degree of softening.

But we haven't actually seen that kind of an impact.

Again, the place where we - if there's a place that we really, you know, a bite on the economy, it's been much more in the enrollment side.

Got it.

I could - I misunderstood.

I heard you say that retention - softening or retention.

I didn't hear you say that it was Monthly Pass-related retention.

Well, that's about 60% of our revenue nowadays.

So it's sort of - it's - I didn't explicitly say Monthly Pass, but that's the majority of the revenue share these days in NACO.

Got it.

Understood.

Hey, just one final one.

I mean, did you guys - did you end up pulling some planned advertising in the spring campaign over the environment that you started to see in May?

Nope.

Okay, for...

In fact, if anything, you know, we - as I mentioned before, I mean, we were back on TV in July with Weight Watchers Online based on the good success we saw on June.

You know, our view on advertising is what I was - what we were saying in our remarks, is that if we have advertising that we know is paying out a good ROI, we're going to keep spending because we know that that's plus MPV.

I think as we go into the second half of the year, we have an opportunity to be more circumspect in terms of there might be something that would have been nice to have but sort of less proved.

I'll give you an example of that.

When we launched the Stop Dieting, Start Living campaign, we spent quite a bit of money doing an outdoor advertising campaign in December and January of last year which was quite good for creating buzz and interest in some preliminary - it was a nice way to kick off the campaign.

But when we look back at the results of that particular advertising, it was clear to us that it wasn't necessarily delivering enrollment.

And so as we think about the second half of the year, that would the kind of advertising that we would not be interested in pursuing in this kind of an economy because we just don't think it's prudent given the potential softness in demand.

But on the other hand, all the things that have been delivering for us, which has been TV, has been, you know, print and particularly online advertising, if we think that we're at the right levels, we're going to hold those.

Okay, great.

Thanks a lot.

I appreciate the time.

Sure.

Thank you.

The final question is from Jerry Herman from Stifel Nicolaus.

Please go ahead.

Okay.

Thanks.

Good afternoon, everybody.

Hi.

Do you - the end of the quarter, Monthly Pass subscriber at 800,000 is down sequentially.

Does that effectively reflect what you just said about some softening in retention, or are there other seasonal issues that come into play?

And is there a penetration rate you can offer?

Oh, sorry.

That reflects - I just -- It's normal seasonality.

It doesn't reflect anything in particular.

How about penetration rates at this point?

Penetration rates have been a little bit up this year, although not massively.

Okay.

And do you guys have any evidence of switching among users between seminars and online?

I think so.

You know, we think online is really going after a different market segment.

And in fact, with online, you know, there's a part of it where the world is [our answer].

You come back to the fact then that the statistic I was referring to that 80% of weight loss efforts are done on a self-help basis.

That is the market that online is explicitly going after, you know?

But you mentioned that, and there's actually an interesting example that I want to bring up with online which speaks to directly what I just mentioned.

We recently - we do satisfaction studies all the time for online where we do - we send out, you know, quantitatively, statistically valid survey to existing online subscribers and we measure their satisfaction on a large battery of different questions including some basic ones like to the product meet your expectations, is it a good value, would you recommend it to a friend.

We recently started cutting that by age group, and we've explicitly started looking at satisfaction scores.

For example, for women who are 20 to 35 versus 35 to 45 or 45-plus or 50-plus.

I can't remember the exact cutoffs at the other end, but what was striking about that is that the satisfaction scores for young women -- in other words, women in their 20s or low 30s -- were frankly through the roof.

Now, if you think about it, that makes sense because Weight Watchers Online, if you think about that age demographic, this are the customers that are very comfortable doing things online, software is very intuitive to them.

And the scores we're getting are tremendous.

From our point of view, this is kind of exciting because for the better part of 40-some odd years, Weight Watchers has frankly struggled with creating a product that has great appeal to women in their 20s, in the low 30s.

In other words, this particular demographic would kind of have some cycle through sort of all the crazy fad-diets and then they would eventually come to us in the 30s.

And Weight Watchers would typically proceed as a brand that was best suited for women as they hit 35-plus.

What we're seeing with Weight Watchers Online is that for the very first time, we have an ability now to reach into a much younger demographic with a very compelling value proposition in a way that we had never done before.

We've never marketed to college women.

We've never explicitly marketed to woman that were 20 to 30.

And it's a whole new area for us.

So to me, it's a great reflection of the strength of this particular growth vehicle with Online if there is an opportunity for us to bring in new people into the fold.

And again, by the way, the Number 1 people, when they do quit Online, the Number 1 answer usually given is to start going to meetings.

In other words, it's a fantastic gateway into the brand.

In terms of switching, we have not seen - I haven't seen any analysis that would suggest that that's going on right now even in this economy despite the fact that Weight Watchers Online is a lower priced product than, for example, Meetings and Monthly Pass.

A question about the upcoming innovation.

I know you're not going to talk much about what it will be or what it is.

But maybe you can touch on some key aspects of how it will be different from those of the past.

The good thing about this innovation is that the key benefit it's attempting to deliver are the big ideas behind it.

So therefore, if I talk about specifically the problem it's addressing, it's sort of a testament to telling you what the innovation is.

So I apologize for my continued diligence and being mysterious about it but, you know, I - when we do talk about it, I think it'll make more intuitive sense, but I'm not quite ready to tip my hat in terms of exactly what it is.

I will - with that said, I will call attention to the fact the things that we're aspiring to improve in our program and our service are elements - obviously efficacy, we're also trying to improve simplicity, and a number of those different things.

And I do believe that the research we've done has given us a pretty clear guidance that the benefits we're going after in these new program innovations are significant and meaningful benefits.

And that's why I take some comfort in thinking that this particular innovation is going to be a good source for improved member satisfaction.

If I can just pull ahead with a last big-picture question?

Can you just talk about how you're thinking about the business and any desires or motivations to move beyond the seminar business?

Well, first off, the meeting business for me is a business that - again, I believe the meeting business has a significant growth opportunity in front of us.

We've seen this before.

I mean, if you go back to the 90s, the Weight Watcher Meeting business in the mid-90s -- if you look at our attendance basis scores -- was - went through a period of decline.

One could have looked at that at the time -- in fact, some people did, including some of the people that elected not to acquire Weight Watchers from (inaudible) -- looked at them and say, look, it must be going through some sort of sectoral decline.

But in fact, when Weight Watchers POINTS was launched, there was a resurgence and there was significant organic growth from '98 through 2003 in enrollments and attendances, which to me suggests that the underlying value proposition remained strong, you just have to have the right combination of good service delivered with program and service innovation to drive long-term growth.

So therefore, I don't think it's necessary for us to say that the core business doesn't have the fundamental potential to be a significant growth vehicle in its own right

What I would say, though, to your point is that what you're describing is exactly what we've been doing.

I mean, we've been growing the heck out of Weight Watchers Online for the past couple of years now.

And frankly, if you look at Weight Watchers Online as an Internet business compared to any other Internet business in terms of both top and bottom line delivery and the growth rates we're seeing in everything else, it is a business that in its own right would receive a substantial valuation in terms of the financials that it's been delivering at the growth rates with which it's been delivering.

And so we look at that as a good example of extending successfully the Weight Watchers brand into new places.

And we think that that's going to - we're going to continue through that in areas like licensing and everything else that we have room for growth.

And let's not forget the fact that we're still in the midst of building a joint venture and building a business in China.

And while we're being circumspect about what that is, we believe that emerging markets are going to represent an important source of long-term growth for us as well.

And so when I look out into the world, I'm not seeing any shortage of places where we can look to grow the business.

In fact, if anything, I think the challenge for us as management is to pick the ones that are going to be the highest return, make those our priority, and drive like heck against them.

Great.

Thanks very much.

Thank you.

There are no further questions registered at this time.

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

Kirchhoff.

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

Thank you.

The conference has now ended.

Please disconnect your lines at this time.

Thank you for your participation.