WW International Inc (WW) 2008 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Weight Watchers International's third 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 that time.

As a reminder, this conference call is being recorded today, November 4, 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 for Weight Watchers International third 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 p.m.

Eastern Time today, the Company issued a press release reporting it's financial results for the third 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 everyone this call will contain forward-looking statements.

Investors should be aware 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 & 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.

Thank you for joining us as we review Weight Watchers International's performance for the third quarter of 2008.

In the third quarter we delivered a solid increase in earnings versus prior, even though as expected, our attendance volumes remained soft, as we were now completing several years without a meaningful program innovation in North America and the UK.

However, we are now facing what appears to be a deepening economic recession, which is putting increasing stress on consumers.

While we are not seeing any significant change in retention patterns across our businesses, we do see signs of some consumers are delaying the start of their weight loss efforts.

As a result, we have incorporated into our own internal planning, the assumption that this global recession will place headwinds on our meeting recruitments for the rest of 2008, and throughout 2009.

During the third quarter, NACO faced increasingly difficult conditions, and this was reflected in attendance results, which worsened somewhat as we proceeded through the quarter.

On the other hand, the UK remained relatively more stable, despite it's economy slipping into recession.

Continental Europe continued to perform consistent with what we have seen throughout this year, and Weight Watchers.com had another strong quarter, as a vibrant July and August more than compensated for a September, that was comping against an exceptionally strong September 2007.

Total Company Q3 revenues grew by 4.5%, with meeting fees up 4.3%, internet revenues up 24%, and product sales and other revenues down 2.8%.

Foreign currency had less impact on our total company results in Q3, versus what we have seen in prior quarters.

Excluding foreign currency adjustments, total revenues were up 4%.

Global paid weeks for our meetings and Weight Watchers online offerings were up a combined 13%.

Global paid weeks in our meetings were up 7.3%, while global attendances were down 5.7%.

Continued growth in meetings paid weeks was largely driven by the a adoption of Monthly Pass in the UK, Germany, France, and Australia.

For the Weight Watchers.com business unit, internet revenues were up 24%, which was somewhat slower than the growth rate we saw in Q2 but still very strong.

End of period Weight Watchers online active subscribers were up 24% versus the prior year.

Including the impact of the recent adverse UK VAT ruling, as well as our China joint venture, Q3 2008 EPS was $0.67, an increase of 8%, or $0.05 over Q3 2007.

Excluding the impact of the UK VAT ruling and our investment in the China JV, EPS was $0.70, an increase of 13% over the comparable period in 2007.

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

First, our North American meetings business.

Total third quarter NACO revenues were $187 million, a decrease of 1% versus the same period last year.

Q3 paid weeks were slightly positive at 1% versus prior, while Q3 attendances were down 6.3%.

Without the benefit of prior period acquisitions, NACO paid weeks were effectively flat, while attendances were down 8.5% versus prior, leading to a decline in in-meeting product sales.

Volumes in the first two months of the third quarter, were largely consistent with the trends we have been seeing in the second quarter.

However, the deterioration of consumer confidence, driven by worsening news in September, resulted in further softening of our enrollment trends.

This lower enrollment trend has been persistent throughout October, and was a clear stepdown from the levels we had seen in prior periods.

As we have said before, we believe that our enrollment levels have been challenged throughout 2008, due to a lack of meaningful program news.

We believe the weakening economy is also contributing to overall weakness in the weight management business.

Simply stated, when consumers are facing a sudden crisis over their savings, livelihood, and standard of living, the natural inclination is comforting, not to lose weight.

From a historical perspective we saw similar behavior in the aftermath of 9/11 and Hurricane Katrina.

The impact of those two events had on our business lasted about 6 and 3 weeks respectively, but we think this current crisis will last longer.

Of course we will continue to call attention to the fact, that the decision to invest in a healthier life is not a luxury, but a necessity.

One example of leveraging this message, was our Lose for Good promotional campaign that we announced on our last earnings call.

For six weeks in September and October, we encouraged our members to contribute food to their local food community banks, in levels that matched their own weight loss.

The idea was to help your own health, while helping a neighbor in need.

It was our first time organizing this grassroots effort, and we were thrilled with the results.

During the six weeks of the promotion our members lost over 4 million pounds.

We conducted over 2,000 food drives across the country, and our members personally donated and brought on our meetings over 1.5 million pounds of food.

In addition, we did a variant of a matching program by contributing $1 million to two hunger fighting organizations.

The local PR coverage alone from Lose for Good, has been beyond what we have seen from any initiative over the past ten years, and while not a near term enrollment driver, it clearly benefits our brand equity.

While enrollments were soft, we have not seen any further degradation of Monthly Pass or pay-as-you-go retention beyond the levels we discussed on our second quarter call.

We remain cautious about further retention, as further deterioration of consumer credit could increase credit card default rates, although we have seen no evidence of this so far.

We expect the Q4 attendance in paid week year-over-year growth rates to be similar to those in Q3.

Now onto the international business units.

As is our usual practice, all of the gross statistics I am discussing will be provided on a constant currency basis.

For the third quarter excluding the effects of the UK VAT ruling, UK revenues were up 11%, driven by the continuing benefit of the Monthly Pass plan.

Paid weeks were up a strong 22%, while attendances were down 3%.

This attendance trend is very similar to the Easter holiday adjusted trend we saw in Q2.

On balance, the UK business has seemed to be somewhat more resilient than the US business, even though both countries are experiencing similar economic challenges.

Based on our observed results through October, we expect similar attendance in paid week trends in Q4.

Continental Europe results were also on a similar trend compared to what we had seen in Q2.

Revenues were up 8% driven by Monthly Pass penetration in Germany and France, as well as continued rapid growth in Belgium.

Overall CE paid weeks were up a very strong 28%, compared to 16% growth in Q2, attendances were a little softer at minus 4.9% versus the Easter adjusted minus 3% we saw in Q2.

France and Belgium continue to be sources of volume strength in continental Europe, while Germany remains the greatest challenge.

Now armed with the results of a comprehensive business analysis and market research effort, the new German team is beginning the hard work of returning the business to it's prior strength as we move through 2009.

Continental Europe is seeing many of the economic issues that have been plaguing the US and UK, and we expect attendance trends to worsen somewhat at minus 7% for Q4.

However Monthly Pass will provide continuing revenue benefits to this region, and we are forecasting paid weeks growth rates between 20 and 25% for the fourth quarter.

Moving on to Weight Watchers.com, as I referenced earlier, we had a very strong July and August, fueled by continued investment in continuity TV advertising.

However in September this year, we were comping against a very strong September 2007, which benefited from last year's Monthly Pass meeting advertising.

That Monthly Pass advertising heavily featured Weight Watchers eTools, which had the effect of further driving awareness of Weight Watchers online, leading to exceptional growth that month last year.

Despite the relative September softness, the overall Weight Watchers.com business remained very strong for the quarter versus the prior year period, with internet revenue growth of 24%, Weight Watchers online paid weeks growth of 27%, and end of period active subscriber growth of 24%.

Throughout the second half of 2008, we have had a very busy product development schedule.

This summer we launched our first Smartphone browser compatible versions of Weight Watchers online for the iPhone, BlackBerry, and Windows Mobile.

In the fourth quarter we plan to beta launch a major upgrade to our online community, with the introduction of Facebook-like social networking functionality.

We believe that the combination of these new features, plus other product improvements planned for 2009 and beyond, will provide us new ways to keep our subscribers motivated, and to improve usage and satisfaction with our internet products.

Importantly these improvements will benefit both our online and Monthly Pass subscribers.

For the fourth quarter, we expect online paid weeks growth of 15 to 20%, capping off an outstanding year for our internet business.

Now I would like to turn the discussion over to Ann Sardini, who will elaborate further on our Q3 performance.

Thanks, David.

Good afternoon, everyone.

Our reported third quarter revenues were $352.6 million, an increase of 4.5% versus last year.

Excluding 1.8 million of charges related to a ruling this year, which increased our Value Added tax, or VAT, on UK revenues, our revenues increased 5%.

The currency translation impact on revenue in the quarter, added 50 basis points to the revenue increase.

In addition to the impact of UK VAT, the quarter also included 1.7 million of operating expenses associated with our joint venture in China.

As you will recall, we partnered with Groupe DANONE, which owns 49% of the venture.

Therefore 49% of the China operating expenses after tax, are reversed in the minority interest line below net income.

Reported net income in the quarter was $52.7 million, or $0.67 per fully diluted share.

However excluding these noncomparable items EPS was $0.70.

This compares to $0.62 in the prior year, an increase of $0.08, or 12.9%.

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

Beginning with the meeting business, Global Meeting revenues, a combination of meeting fees and in-meeting product sales were $273.6 million, a 3.2% increase versus third quarter last year.

The average meetings per attendee rose 11.5% on the strength of Monthly Pass in our international markets, but a 5.7% decline in global attendance in the quarter, reduced that impact to 5% growth in total meeting fees.

Additionally, while product sales per meeting attendee increased by 2.4%, total in-meeting product sales declined by 3.4% and lower attendance.

Weight Watchers.com reported $47.7 million of revenue in the third quarter, an increase of 23.6%, from 38.6 million last year.

Weight Watchers.com paid weeks grew 26.5%.

Across the total company, paid weeks rose 12.7%, to $30.9 million.

In the North America meeting business, attendance has declined by 6.3% to 8.1 million.

Excluding the impact of acquisitions, attendances were 8.5% behind prior.

NACO's third quarter meeting revenues including in-meeting product sales were $173.9 million, a decline of 2.8 million, or 1.6% versus last year, driven by a 10.2% decline in in-meeting product sales.

A negative change in product mix, away from higher priced one-time purchases, including starter kits, electronics, and cookbooks drove the decline, caused primarily by weak enrollments, and likely exacerbated by economic conditions.

NACO's meeting fees were flat to prior, on paid week's growth of 1%.

The deceleration in paid week's growth in NACO, is the result of stabilization in the Monthly Pass installed base.

In the International meeting business, third quarter meeting revenues including in-meeting product sales were $99 million, up 12% on a reported basis, and 9.9%, or 8.7 million in constant currency.

International meeting fees were robust, up 13.7% in local currency, directly attributable to Monthly Pass, as illustrated by paid week's growth of 23.5%.

Monthly Pass is now in the UK, and two of our continental European countries.

International in-meeting product sales rose 2% on a local currency basis.

Sensitive to the 4.8% decline in attendance, but still posting 7.2% growth on a per attendee basis.

In the UK, total meeting revenues in local currency increased 10% on a comparable to prior year basis.

On the reported basis, meeting revenues of $37.6 million, were up 4.8%, negatively impacted by a ruling that increased the VAT on our meeting fees.

In this Monthly Pass market, paid weeks rose 22.2% to 3.4 million, and meeting fees excluding that negative adjustment rose 14.3%.

This despite a 3% decline in attendance, attesting to the acceptance of Monthly Pass in the market.

In continental Europe, which now has two Monthly Pass countries, meeting revenues rose 10.9% in local currency, versus the same period last year.

Paid weeks reached 2.7 million, while attendances were 2 million, 4.9% down from the prior year period.

In Germany Monthly Pass reached it's first anniversary with ongoing momentum, and in France Monthly Pass, which launched in Q2 of this year, is ramping nicely.

In-meeting product sales of $15.2 million in continental Europe, represent a 2.5% gain over prior year in constant currency.

Our Other revenues, which include franchise commissions, licensing, and revenues from our publications were $23.1 million, and grew 3.9% over the past year.

Licensing revenues in the third quarter were strong, up 10.6% to 16.2 million, with particular strength from our dairy product licensing in the US.

Franchise commissions were $3.3 million in the quarter, down 12.3%, but if you exclude the impact of acquisitions made after the third quarter 2007, commissions on the remaining franchises declined 5.2% versus prior year.

Our consolidated Company gross margin in the third quarter was 55.4%, down 30 basis points from 55.7% in last year's third quarter.

Margin compression was driven by the meeting business, where we incurred ramp-up costs for Monthly Pass in Europe, and where we experienced pressure in the products business from higher raw materials and transport costs.

Weight Watchers.com margins expanded in this highly scalable business, which carries a structurally higher gross margin margin.

Third quarter 2008 marketing spend of $39.6 million was virtually flat with prior year in constant dollars.

Q3 marketing as a percent of revenues was slightly lower than last year at 11.2%, versus 11.6% in 2007.

G&A expenses in the third quarter 2008 were $45.3 million, excluding 1.3 million of expenses associated with the China project, an increase of 7.4% above the prior year.

Foreign currency exchange is responsible for 1.1% of the increase.

IT remains the significant driver of the year-over-year increase, a result of ongoing upgrades to our systems infrastructure.

Expense growth in this area added approximately 5% to G&A expense in this year's third quarter, and reflects the combined impact of increased depreciation for new systems brought online, and higher maintenance related to new systems already put into service.

As a percentage of revenues G&A excluding China expenses increased slightly to 12.8%, versus 12.5% in the prior year quarter.

On a comparable to prior year basis the Company's consolidated operating income margin was 31.4%, a slight decrease versus 31.6% in the year earlier quarter.

Including the impact of that and China expenses, the operating income margin was 30.6% in the third quarter 2008.

Interest expense in the third quarter was $21.3 million, down 7 million, or 24.6% versus third quarter 2007.

Our average debt outstanding in the third quarter of 2008 was $1.64 billion, 111.3 million below the third quarter 2007 level.

In addition to the positive impact of debt paydown, we benefited from a 128 basis point reduction in our average effective interest rate, down from 6.38 in third quarter last year, to 5.10 in this year's third quarter.

This resulted from a combination of lower market rates, and a step-down in spread over LIBOR, which took effect during the first quarter of this year.

Our consolidated cash flow and balance sheet, which I will address briefly are consistent with expectations.

In the quarter the Company continued to generate robust cash.

Cash from operating activities, excluding interest was 78.5 million, accordingly after capital expenditures, 69 million was available to service our capital structure.

With our available cash, we made interest payments of 21.3 million, and paid our quarterly dividend of 13.7 million.

Also during the quarter we repurchased 1.6 million of our shares for approximately 62.5 million.

Fluctuations in the balance sheet between third quarter '08 and year end '07, primarily reflect the seasonality of the business.

Current assets are higher than December as expected, a combination of higher cash balance and prepaid taxes.

The acquisition of three small franchises in the first half of 2008 results in a 33.9 million increase in franchise rights acquired.

Current liabilities reflects 96.3 million of our debt moving into the current category, due next year.

Deferred revenue rose 23.9 million versus year end 2007, consistent with seasonality and Monthly Pass.

Now I will turn it back to David.

Thank you, Ann.

As we complete 2008 and get ready for 2009, there is little doubt that economic conditions have deteriorated, and had have done so, in a way that will fundamentally affect consumer behavior.

Consumers around the world and in the US in particular, will likely adopt at least in the near term, a more frugal lifestyle, and will be more discerning in the spending choices they make.

However, we also believe that Weight Watchers has the right offering for the consumer of today and tomorrow, and represents a compelling value.

All of our research suggests that consumers are continuing to seek long-term solutions to weight loss issues, through lifestyle related changes.

We believe that Weight Watchers has a central role to serve in helping consumers get there, as we are the only major weight loss company focused on lifestyle change through education and behavior modification, delivered in a supportive environment.

We believe that our marketing programs have worked hard to help firm and shape our differentiated position as a weight management company, and we enter 2009 with a firm brand platform from which to build.

The challenge for us now is to give the consumer a very tangible reason to join immediately, rather than at some indeterminate time in the future.

We believe the best way to create this kind of call to action, is with tangible product innovations and service news.

Next month we will be launching a new program in all of our major markets, except the continental European countries.

We will be marketing our program under a new program name in each of our various markets.

It will be the first in a serious of innovations and offerings to reach our markets over the next few years.

This new program was developed by observing the habits of our most successful members, as well as understanding why our less successful members were struggling.

For competitive reasons, I will not be going into any details, to describe exactly how the new program works, other than to say it builds on the best elements from both the POINTS and the core food plans, in a unique and compelling way.

I can share with you the consumer response to the new program in our test areas has been very encouraging.

The benefits of the new program are resonating resonating with never members, as well as former members, who might believe they know everything there is to know about the POINTS program.

We will now be giving all those members who have used the POINTS program since it was first launched in 1996, compelling reasons to come back to us.

As we plan for 2009, we know that demand for our services and products will be impacted by competing forces.

On the positive, for the first time in four years, we will be launching a compelling new program, historically an event that has been important to driving growth in our business.

On the negative, we will be launching into a difficult and potentially deep recession.

In addition, the recent strengthening of the dollar, if it holds, will have the effect of reducing the revenues and profits generated by our international business units.

We are in the process of finalizing our 2009 full year operating plans, and appropriately are taking a hard look across all of our cost centers.

As is our normal course of action, we will be providing full year guidance for 2009, when we announce Q4 results in February.

With regard to our China venture, I am happy to report that we have now opened our first two centers in Shanghai, and are pleased with what we are seeing.

We will be opening additional centers as we move through 2009.

With respect to 2008 full year guidance, including the impact of the UK VAT ruling and the China joint venture, we are providing a new range of 2.75 to $2.78 per fully diluted share.

This new range which narrows our previous range of 2.75 to $2.86, includes about $0.03 of negative impact on our fourth quarter results from the recent decline in the value of the Euro, British pound, and Australian dollar.

As a final note, I would like to take this opportunity to welcome our new President of NACO, Steve McCormick.

Steve comes to us having most recently been President of Odwalla, a subsidiary of the Coca-Cola Company.

I have been thoroughly impressed by Steve, both as a leader and as an operator.

His deep experience in operations and general management, will bring valuable leadership to the NACO organization.

His experience in healthy products is an added plus.

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

Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS).

The first question is from Michael Binetti from UBS.

Please go ahead.

Thanks, guys, and congratulations on a nice quarter there.

Maybe just a quick question on the fourth quarter guidance.

Would you mind telling me, or I guess I am curious, if you guys if there is any hedging of the currencies we should think about that you just mentioned, David?

No, there isn't.

And then does that bake in any kind of impact from I think what you guys called a soft launch of the new diet in December for attendance purposes?

I think that we do usually see a little bit of positive benefit from a soft launch, and recognizing that there won't be any really marketing activities at all prior to Christmas.

Sometimes we see a little bit of lift, but I think what I would point out is that the enrollment levels are so low in the month of December traditionally, that even if there is a little bit of lift on a percentage basis, it tends to to be fairly immaterial on an attendance basis.

Just one quick follow-up.

I understand you guys are reticent to talk about the details of the new diet for competitive reasons.

It seems like there is a lot of noise for those of us trying to figure out the fourth quarter in '09.

How do you think about the realistic outcomes for attendance with the products that you tested, but you haven't given us a lot of details about, particularly considering the current economic environment?

Thank you.

You clipped in a little bit on and off, but I think I understood the gist of your question, which is given that we haven't described the innovation we are launching in January of 2009, how do you think about it with respect to our performance in 2009, is that right?

Actually it was saying how do you think about the realistic bands of outcome for attendance with a product you tested, but not yet given us any detail about in the economic environment?

I got it.

That's kind of the trick as we think about starting to think about 2009, and obviously we are going to be providing a lot more details when we provide guidance in February.

The reason just for context, the reason we traditionally provide guidance in February, is because January has such a significant impact on volumes for the business.

We just have always done it that way.

That said, if we look at historical program innovations, we would suggest that an innovation of sort of this size and scope, would historically be good for about maybe 5 to 10% of plus on attendance growth rates.

Now what is a little bit unknown is exactly how the interplay between that innovation is going to be with the economy, specifically that we are going to be dealing with as we go into January, and so that is going to be what is on our mind, but as you can sort of tell those things will be potentially working against each other a little bit.

That is kind of our thought process on that right now.

Thank you.

The next question is from Bob Craig from Stifel Nicolaus.

Please go ahead.

Good afternoon, everybody.

Hi.

Just wanted to follow-up I think on the first question that was asked.

You mentioned that in September with you saw some further softness, and that persisted in October, and yet your thinking is that attendance rates and even paid weeks should be relatively similar quarter to quarter, 3Q versus 4Q, and I guess I was wondering why wouldn't that fall off, if indeed the activity in those two months happened to go down?

Well, it is not going to fall off for a few reasons.

First off, I think that a lot of Q4 if you think about it, with so many of the enrollments that impact Q4 have already been baked if you will, from enrollment activity in September and October that drive attendances into Q4, as I mentioned a little bit earlier, we do think there is a possibility for some lift in December with the new program launch, and due to the vagaries of our calendar timing, we are going to have the benefit of a couple of extra days at the end of this year that we didn't have last year, that will give a little bit of lift on top of that for Q4 attendances.

That is the so-called 53rd week that we referenced on the last two calls.

If you put all of those things together, that is how we come out with that forecast.

Okay.

I was wondering are you expecting any benefit, versus what you had earlier budgeted for, in terms of marketing costs to support the new innovations with what we are certainly hearing from some companies softening in ad rates, and I know you do a lot of forward purchasing there, but any guidance on what marketing spend as a percent of revenue will likely look like?

First off in terms of ad rates, the ad rates, your point is well taken which is we participate heavily in the up front market in our advertising purchasing, and so our rates for the winter diet season have been locked for some time, and by all accounts from what we are hearing from our media agency, those rates at least for January seem to be holding.

Now what exactly happens with media rates as we go through the course of 2009 is anybody's guess, and I think that there is just obviously a lot of speculation, and you may know better than we do, but we are certainly not assuming a precipitous drop in advertising dollars per GRP.

In terms of providing specific guidance in terms of marketing spend versus last year, without getting into all the details of guidance, which we will go into more detail in February, I guess what I would say is that we think that we can adequately support the innovation going into January, without any kind of a material change, in terms of just total media weight.

Okay.

Can you give penetration rates by geography of Monthly Pass?

We have not provided the specifics of Monthly Pass penetration by geographies.

I guess what I can tell you is this, is that we have a couple of countries, the countries are actually fairly well clustered around each other, in terms of just penetration of Monthly Pass across markets.

We think there is some markets, we referenced the UK in our last call, of having a penetration rate that is a little bit lower than what we are seeing in some of our other markets including the US, and that we saw that as an opportunity, and I think that we are already seeing some lift there, so I don't know that there is a massive difference.

The UK is still certainly a leading country in terms of overall penetration.

I think also at least as importantly what we are seeing in some of our overseas markets is a very high propensity to attend.

In other words, the people who are Monthly Pass subscribers are showing a very high likelihood of attending meetings at rates that are at least a high as the US, and we think that is an important part of members success.

I guess in summary as we look at our Month Pass metrics from country to country, and compare to the US, we have been pretty pleased about the consistency that we have seen.

Okay.

One more question, and I will move on.

Where do you stand on the Applebee's license agreement, and could you potentially discuss the pipeline in the licensing area?

We have not provided any additional news on the Applebee's contract, other than to say that we love them as a partner, and we think they are doing some great things.

In terms of the licensing pipeline, we have a couple of things that recently have been announced.

We recently announced a licensing agreement on popcorn, which may not sound like a big thing, but popcorn is a remarkably popular snack for anybody who is living the healthy lifestyle.

We now have a license with Schreiber Foods, which is pushing out Weight Watchers branded cheeses, and we have been very encouraged by the initial results of that.

That is part of what Ann referenced in her remarks product sales about dairy products doing well, and finally we recently announced the licensing agreement with a company called Greencore.

It is interesting.

Greencore is a large food company based out of the UK If you know anything about the UK grocery business, they have a very high penetration of chilled prepared entrees, which has historically not been a big staple within the US market, and arguably the US has lagged a little bit there.

We are partnering with Greencore to come out with a line of Weight Watchers licensed chilled foods, which we look forward to starting to get into the market as we go into 2009, and it is a licensing launch that we are very excited about.

Great.

I appreciate it, David, thank you.

Thank you.

The next question is from Greg Badishkanian from Citi.

Please go ahead.

This is Alvin stepping in for Greg.

Just a question on your, there is a tough consumer environment that is affecting results.

Do you have any promotions or initiatives in the pipeline, that will help you create demand over the coming year?

I think the biggest thing that we have in the face of a difficult consumer environment, is a program that we believe is going to deliver long-term lifestyle benefits, and I think this is an important point, because the decision to invest in a weight management program becomes much more interesting, when you believe it can be sustainable, and can really help you tackle some real problems that have prevented you from having long-term success, so in that respect having a new program that really hits some important benefits to be revealed in the near future, I think is the best weapon against the difficult economy, and that is where we are placing our bets.

Now of course as we talked about our program as we go through 2000, and our offerings as we go through 2009, we are going to continue to emphasize the value of our approach, the fact that with Weight Watchers you can consume and eat regular everyday food that you can get at your grocery store, that there are ways to live a healthy lifestyle, and absolutely stay within a budget, and that if you think about it, Weight Watchers offers a program that really allows people, to both adopt a healthy lifestyle, but do it in a very economical value-rich way.

So that is mostly where we place our bets.

The specifics around particular promotions, and things like that, we are going to evolve as we go through the year, but we think that the most important value, part of the value equation for us to hit, is around the new program, and the messaging around that.

Great.

And then in terms of your thoughts on how you are positioned from a pricing perspective on the pay-as-you-go plan or Monthly Pass, any updated thoughts on pricing?

Given the environment we felt pretty strongly we didn't want to have to sort of throw price increases on top of our consumers that were already dealing with a lot of tough times, and we just felt that the right thing to do was hold prices where they were.

That has been our stance so far.

We haven't made any other announcements in terms of pricing, where that might go in the future, but our feeling is right this red hot second, with the consumer being hit the way that they are, that the right thing to do is try to hold our prices where they are.

And then do you have an update on sort of the economics of the Monthly Pass, maybe dollars per enrollment cycle, versus the pay-as-you-go, and any changes in that?

The only thing that would have changed that would have been a sudden shift to retention, and we referenced a couple of calls ago, or I think the last call we referenced that we saw a little bit of softening, as we were getting into sort of May/June, but we haven't seen any softening since, and so the retention on Monthly Pass has actually been holding up quite nicely so far.

Based on that the economics of Monthly Pass that we have been chair with you in the past hasn't really changed materially.

Great.

Thank you.

Sure.

Thank you.

The next question is from Chris Ferrara from Merrill Lynch.

Please go ahead.

Hey, Chris.

Hey, how are you?

Good.

Just wanted to ask, I know you are a guy who appreciates data and research, and I am trying to understand, I guess what kind of a look back in your numbers do you have to the '90/'91 timeframe, or any slowdown for that matter, just to help you with, for any kind of instruction book as to what you might see with respect to enrollment trends, and I know this environment might be a little different than past ones, but I guess anything would be helpful.

Of course we have looked at that.

To a certain extent I think part of the problem if you look at our business, versus say a traditional retail business, and a traditional retail business, their ability to I understand kind of match sales within specific categories, and things like that, to really try to queue into how changes in consumer confidence and other macroeconomic data might impact specific changes, in terms of business performance, is a luxury that we don't have.

There tends to be a lot of other sort of significant exogenous factors that drive changes in our business, such as a low carb competitor, or packaged foods, or a hot new program that we have, and so we find ourselves in a situation where we, for example as I referenced in the past, you look at 2000 recession, 2001/2002, and that might suggest that if you looked at our growth rates it was fantastic, we were doing great, but we also had a hot program.

You go back to '91 and '92, we might look at business trends, but there was also a lot of competitive and sort of unusual competitive activity, and we were trying to also do some things and playing with the business model, so it is very hard to distinguish between the specific effect that a recession has on our business, because there are usually a lot of other big changes happening at the same time, which has made is a little bit difficult for us to anticipate prior to getting a few months under our belt with this current recession, exactly the impact that it might have on our business.

That is helpful.

I guess this may be a silly question, but do current enrollment trends mean anything ahead of a big program launch?

For that matter I guess it gives you a little hint of what is going on, but those trends probably become moot pretty quickly after you launch a new program.

Is that the right way to think about it?

I think the way I would think about it is kind of the way I was trying to express it in my prepared remarks, which is that all things being equal, if we did not have the economic conditions we had, so if you go back to what we were talking about say early this year, when we were talking about the fact that we believe that our business was a little bit down, in sort of the low single digits on attendances, because we were in that fourth year of not having a program.

And then we saw kind of a stepped impact, first with the gas price surge in May, then leading into the events of September and October, that that was pushing the attendance rates down, so if you look at that, you might say without the economy being the way it is and now I am just going to speculate a little bit, but this is a little bit the way we look at it, without the economy being the way it is, the launch of a new program, we would argue would probably have had the potential to push our attendances back into sort of that plus 5 to 10% range, certainly versus prior.

Now with the economy pulling it back down in the opposite direction, if the economy is pulling it down potentially minus 5 to 10% in the other direction, it is a little bit kind of how we are trying to anticipate it, and it is a little bit difficult for us to anticipate exactly how the economy is going to play out with our business going into 2009, because it is a bit of an unknown, other than to say that we certainly haven't seen anything, and you research this stuff, probably even more than we do, but we certainly haven't seen anything that suggests that the consumer is going to have an easier time in 2009, than they have had in 2008.

That is helpful.

One final one.

I know you referenced some early returns from consumers on the new program.

Can you just describe to what extent any consumers or leaders have seen the new program, and just sort of talk a little bit about any kind of statistically significant test you have run, to get an idea just how successful it is?

I know you are not going to describe the program, maybe giving us a better view what test you are looking at, and what lends you are looking at it would help?

We look at it, and I can't get into specific research results, but I can tell that you we looked at both consumers doing the program, and getting feedback in terms of what was working working and what wasn't, and that response was very positive, in pilot tests we have been running.

We looked at consumer response to sort of rough advertising stimuli, in terms of how we would present the benefits of the new program, and that has been very compelling, and finally of course we are starting to get some feedback from our staff, that is seeing it in some of our markets for the first time, and that has also been very positive, so all the indications we are getting across the board by talking to employees, by talking to customers using the program, as well as by talking to consumers where we were presenting the idea of the program, has been universally positive.

We don't have a specific consumer test, for example, like basis or something like that, where we run it through a concept test, and we can say within X percentage of precision it will have exactly Y amount of lift, because those types of models tend not to work as well in terms of forecasting our business.

It is more just the cumulative effect of the research suggests that this is a good program, and frankly, I think it is a good program, because it wasn't designed to be a marketing gimmick.

It wasn't designed to be something to give us something to advertise.

Rather, it really was designed to focus on addressing fundamental opportunities to help members have more successful weight loss, and that was kind of the starting principle when we were building it, and we held to our guns on that, and really stayed focused with that as our critical success measure.

The belief of which is that if we could actually deliver a better experience, we would have the opportunity to market it in all sorts of different ways, and I think that, we believed that that is going to pay off for us in the future.

The other point I will continue to point out about innovations, is that good innovations take time to build.

I go back to the most successful innovation we ever had was a huge platform shift nonetheless but it was POINTS, and POINTS was delivering organic growth from 1998 through 2002, and the reason as opposed to just getting a single huge step function increase at trial, the reason it was working well was because it had very good word of mouth.

Good programs over time, what they will do is as members are having more success, they are telling more members.

I always come back to the fact that the majority of the people who come to us, are coming on the recommendation of a friend or family member, so that as people have success with the new program, we believe that there is an opportunity to continue building on this over time.

I will also point out that this isn't a one-shot deal.

We are working on a pipeline of innovations, both program and service related that over time and over the coming 1, 2, 3 years and beyond, we are going to look to sort of systematically innovate and improve the Weight Watchers offering, and that the cumulative effect of all of those things on top of each other, is going to significantly improve member efficacy, and member appeal, and that is going to be the thing that really drives long-term growth in our business.

Got it.

Thanks.

That is really helpful.

Just one last one as a follow-up.

Is it a fair statement that you can't really compare what you have done, with respect to testing this new program to any testing you did prior to POINTS launch, or prior to core launch, stuff like that, is that is that right?

No, not really because it is sort of apples and oranges, and furthermore, if I were to compare the scope of this innovation to past innovations, the one that is probably the closest in terms of sheer size and scope I would argue is probably the turnaround program which introduced the core food plan.

The thing with the turnaround program is that the way we market it, we never really put a full court press in driving awareness of the new program, and we weren't single-minded in our advertising, and I think that was a real learning for us, and so I would argue we never really kind of got the boost out of that program, that it has potential to deliver, so suffice to say that is not going to be the case as we go into this January.

Thanks so much.

I appreciate the time.

Sure.

Thank you.

(OPERATOR INSTRUCTIONS).

The next question is from Karen Howland from Barclays Capital.

Please go ahead.

Thanks very much.

Just following up on that last comment you were making, I was looking at the growth you had in core, ex core, after core was launched excluding any acquisitions, and it was nowhere near that attendance growth of that 5 to 10% area.

How far back do you actually have to go to, as far as program innovations and program launches, to get to see some place where you saw that 5 to 10% growth that you are expecting in a more stable environment?

POINTS is the most obvious version, which was massive organic growth for three to four years compounding.

If you go beyond POINTS, or beyond the launch of POINTS, Winning POINTS actually which got into I think 2002 if memory serves, Winning POINTS was not a very impactful or significant innovation but it was well marketed, and it did drive some actually pretty good volume, in terms of attendances.

How much of that was just a continuation of the POINTS trend, I don't know.

I think that the issue again with turnaround is that if you launch a new program, but don't really tell anybody about it in a significant way, we should not have been surprised to not see the attendances show up, and so I think that I continue to view the turnaround launches as a lost opportunity, and I felt that way for many years, which is why I felt so strongly with the launch of this particular program, that we really be single minded in our advertising and our focus, around really just simply driving awareness of the new program.

Now the thing that I also always come back to, it is a little bit different, but I think it is analogous and instructive, which is every time, if I take the example Weight Watchers online, which is simply an innovation in itself, which is a new way of doing Weight Watchers in a different environment, every time we turn on advertising with Weight Watchers online, we are seeing a response in terms of sign-up rates.

My point with that is that when we are providing news of something new, and the benefits of that news are clear, what we are seeing over and over again in the case of online is that consumers are very responsive to that message, so therefore we have every reason to be optimistic that as we launch a new program that has good benefits, and as we market behind it, it is going to be beneficial in terms of driving enrollments.

Thank you for that.

Thinking about the internet, I notice that sequentially the number of members fell off a little bit.

Obviously the growth year-over-year is still quite strong, but it fell off a little bit more even than it did between the second and third quarter last year.

I was just wondering if you were seeing any change, as far as the duration and people are signing up for, the number of new people who are joining online, or any change in that program?

No, not in terms of that.

What we were seeing really was an unanticipated effect in our advertising last September, and I will try to do a better job of describing it, which is we tried an advertising spot last September that really focused on creating awareness of the Monthly Pass offering.

If you looked at that advertisement, it really heavily featured eTools, because it was sort of now you can get the best of meetings, plus the online stuff in eTools, and it really spent most of the time talking about eTools, so what we saw when we launched the spot, even before we launched our advertising spots for Weight Watchers online, this was like the last week of August in 2007, was that the online business started to surge.

And so effectively what we were running was two different advertising campaigns at one point in September, both of which were driving interest in Weight Watchers online, and as a result our sign-up volume in September was almost as surreally high growth rates, and so effectively what we had to deal with in Q3 was that September this year, which if I compare it to 2006, was a very strong month, but it was having to comp against sort of an exceptional unusual sort of one-time September 2007, all of which has the effect of allowing us not to maintain that same growth rate that we were seeing, and that there is effectively now there was a little bit of a trail on effective, as we go into the fourth quarter in terms of paid weeks.

Okay.

So given that the fourth quarter again even a more difficult comparison, would expect to at least perhaps growth to slow a little bit from the current rate?

That was the guidance we gave of 15 to 20%.

And can you give an update as far as the opportunity in China, timing as far as the rollout goes, when you expect to actually get some sort of financial contribution flowing through?

Great question.

The way I look at China, and we will providing more details as he get into 2009, but as you can currently see, China was absolutely in early start up investment mode in 2008.

I would expect it as we look for opportunities to open up new centers, at a somewhat more aggressive pace in 2009, from a modeling point of view, I would think of China as continuing to be in investment mode.

So then specifically whether it hits breakeven in 2010, or exactly when that happens we can get into that in future discussions, but I think for modeling reasons, I would think of 2009 as continuation of the investment mode, and we will be providing a little bit more guidance around that, but generally I would assume obviously to make an obvious point I guess, particularly since we did not make much of an investment in Q1 and Q2, I would certainly assume a higher level of investment in 2009, than I had in 2008.

So we are really rolling out that business.

The reaction in China has been positive presumably?

Yes.

We have paying customers.

That is always a good sign.

Always a good sign.

We have two beautiful centers.

We have successfully trained leaders, who have gone through the program who are running those meetings.

We are thrilled with them.

We have got a fantastic management team that is, a Chinese management team on the ground in Shanghai, doing a great job for us.

If they are on listening to the call, we love them to death, but overall we have been very happy with the results, and most importantly what we have been most happy with, is that the people who are coming to us are losing weight, and my view has always been, if we can have an offering where people are having success and they are happy about it, that is a business we can grow, and I think that is what we see in China right now.

Thank you very much.

Yes.

The next question is from Michael Binetti from UBS.

Please go ahead.

Thanks for taking a second question here.

Sure.

I have to read the transcript but sounds like you mentioned the gut was that the kind of the current macro environment could be as much as 5 to 10 point drag on attendances in North America?

I was speaking a little bit hypothetically.

Okay.

It may not be a million miles off.

Okay.

I am assuming you have an ongoing market test in the new innovation, and I am curious what kind of impact you saw from the test group, as you moved from August into September and October, when we really saw the consumer seize up with all of the different macro effects, it seemed like they would weigh on a consumer of yours like the gas prices going up, and unemployment starting to accelerate?

Let me describe the testing a little bit more.

The testing was really getting people both current, or I should say lapsed, and people that have never been with us before, getting them actually using the program, and really focusing on whether or not the program was delivering against our expectations, and seemed to be doing an even better job than the existing program was doing, and that that was the feedback that we were getting.

It is hard to know, it is difficult to use that as a data set for predicting what consumer response is going to be given the economy, because I think it is also important to consider that once people are in Weight Watchers, what we are seeing because retention is holding up, like once they're actually in Weight Watchers, we are holding onto them, and they are doing just fine, and retention is holding up.

I think our challenge is on recruitment, so the specific pilot test we are running wouldn't necessarily be illustrative of that.

I think what is potentially a little bit more illustrative is when sharing with people again advertising stimuli around the benefits of the new program, that they have been very responsive to that, and now translating that into an exact forecast on future volume benefits from the new program, is a little bit difficult to get from here to there mathematically, other than to say that it feels like we have something very real.

Thank you.

Thank you.

The next question is from Brian Carson from Atlantic Investments.

Please go ahead.

Hi.

Thanks very much for taking my call.

I believe that you had the comment that in the fourth quarter there would be $0.03 drag from foreign exchange.

Was that correct?

That is correct.

And assuming that the current levels of foreign exchange hold, is that sort of what you are anticipating in the fourth quarter?

Yes.

I am sorry, that is what we meant in our prepared remarks was that assuming that the current foreign exchange rates hold, roughly where they are now, that that would create a $0.03 EPS impact in the fourth quarter.

Okay.

And I just hope that you might be able to help me.

It seems like if I then assume that again next year that foreign exchange rates hold, that it might have something like, maybe a modestly bigger impact in the first half, but for the total year sort of three quarters at $0.03, something like a $0.12 impact on 2009, would that be fair?

We are not getting into the specific breakdowns around guidance, but I think that the point is that if the foreign currency exchange had a significant impact on us on 4Q this year, and those exchange rates were to continue as we were going through Q1, Q2, and Q3 next year, we would certainly expect that to have an impact on both top and bottom line, in terms of our overseas operations.

Okay.

And then just a question on competition.

In an environment where consumers seem to be drawn more towards strong brands, do you see that you have an opportunity to pull consumers away from other sort of commercial weight loss programs, and how would that compare versus, consumers maybe making the decision to sort of diet on their own?

I think that we obviously are interested in both types of consumers.

We are actually, if you think about it we're interested in three types of consumers.

We are interested in one type, which is people that have used Weight Watchers in the past, when they left us we left on great terms, but we now with the new program, we have an opportunity to get them back into the fold, and that is a very big installed base of consumers, and we think that is an important opportunity for us in 2009.

If we then move beyond and think of other competitors, obviously if we compared ourselves versus prepared meals, and things like that, we think if you look at our value proposition, and the fact you can eat everyday food at your grocery store, and don't have to, not having to buy premium branded or premium priced products at the grocery store, is a competitive advantage.

But frankly, if I think of people who have never been to Weight Watchers in the past, I think that the biggest opportunity is those folks who would otherwise try to lose weight on their own, continuing to make the point to them that when they come to us, they have 3 times more success than when they try to do it on their own, and we continue to view the self help dieter, the go-on-your-own dieter as a very important opportunity for us, as we look for ways to grow our business in the future.

I think if I get back to your FX question maybe more explicitly, if you think about 2009, since we already have $0.03 in Q4, it probably wouldn't be crazy to think of potentially $0.08 to $0.10 in 2009, an incremental impact, versus what we are seeing in '08.

Okay.

If current rates hold, and who knows, but that is maybe not a bad way of modeling it.

Thanks very much.

Thank you.

This concludes the Q&A session.

I would like to turn the meeting back 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.