Operator: Ladies and gentlemen, welcome to Weight Watchers International Third Quarter 2010 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 09, 2010.
At this time, I would like to turn the call over to Ms. Sarika Sahni of Weight Watchers International. Please go ahead.
Sarika Sahni - IR: Thank you, and thank you to everyone for joining us today for Weight Watchers International's third quarter 2010 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 pm Eastern Time today, the Company issued a press release reporting its financial results for the third quarter of 2010. 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 on the Company's corporate website located at www.weightwatchersinternational.com.
Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are also available as part of the press release.
Before we begin, let me remind everyone 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. Please refer to these filings for a more detailed discussion of forward-looking statements and risks and uncertainties of such statements. All forward-looking statements are made as of today and except as required by law, the Company undertakes no obligations 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.
David Kirchhoff - President, CEO and Director: Good afternoon, and thank you for joining us as we review Weight Watchers International's performance for the third quarter of fiscal year 2010. Our business continued to show encouraging signs during the third quarter, particularly in our WeightWatchers.com and NACO meetings businesses.
Overall participation of our brand in our critical North American market significantly exceeded the levels of this time last year with solid growth in total paid weeks fueled by our Weight Watchers Online product and improving trends in our meeting business.
On a constant currency basis, Q3 revenues grew 3.5% over the prior year period with meeting fees up slightly at 1% in-meeting product sales up 1%, Internet revenues growing 22% and other revenues declining 9%. This overall increase in revenue was a slight improvement over the trend we saw in Q2.
From a volume perspective, combined global online and meetings paid weeks grew by 11% in the third quarter versus the prior year period. This 11% growth compares to 8% year-over-year growth in Q2 and 1% growth in Q1. The improvement in paid weeks trends is being driven by improvements in both our meetings and online businesses as we progress through the year.
Global paid weeks in our meetings were up 3% versus the prior year period in Q3 while paid weeks for Weight Watchers Online accelerated further to a robust 26%. Q3 2010 EPS was $0.59 compared to $0.68 for the same period in 2009. Included in the Q3 2010 result was a $0.05 reserve taken in the quarter for the pending settlement of a litigation in California. Without the impact of this reserve, Q3 EPS would have been $0.64.
I will now briefly review our results in our major geographies and business units. First, our North American meetings business. Total NACO revenues were $169 million in Q3, up 2% versus the same period in 2009. This is a slight improvement over the flat year-over-year trend we saw in Q2 and a substantial improvement over the 8% decline we experienced in Q1. NACO meeting fees grew 2% versus the prior year period, the first time we've seen positive trajectory in this trend this year, in-meeting product sales grew by 5%.
NACO Q3 2010 paid weeks grew 3% versus the prior year period, the first time we've seen growth in this metric this year, despite a one week delay to the start of our fall market campaign. As a result of this delay and the negative impact from the timing of July 4, Q3 attendances were down 4%. Without the impact of these two factors, we estimate Q3 attendances would have been down roughly 2%.
2010 continues to be a tale of two periods, Q1 and the rest of the year. As we've discussed on prior calls, the critical first quarter was a period in which we did not have news to fuel marketing, so our marketing was not punching its weight and we experienced difficult weather conditions beyond our historical norms.
Since the launch of our revamped marketing programs beginning on April 1 of this year, we've see stabilization of our volumes.
As was the case in Q2, third quarter enrollments were flat to slightly positive versus the prior year period. In addition, we continued to benefit from strong retention of members who purchased our Monthly Pass commitment plan. These two trends have allowed us to come close to rebuilding the membership base that was weakened by our soft first quarter recruitments.
We continue to see strong consumer response to our marketing campaigns featuring Jennifer Hudson including the launch of several new spots this fall. Marketing that authentically communicates the real successes that our members can achieve in adapting a healthier lifestyle with Weight Watchers clearly resonates with consumers. This much harder hitting marketing has allowed us to stay relatively strong despite consumers remaining cautious with their discretionary spending. Looking forward, we expect our volume trends in the fourth quarter to roughly mirror the third quarter with attendances slightly below prior year on paid weeks effectively flat with prior year.
As noted on the previous call, the NACO team has been working throughout the year to consolidate its base of meetings in order to focus our efforts on our strongest locations, time slots and leaders. Much of this work is now behind us as we finished the year with a much tighter meeting network.
As of the end of October, our U.S. meeting base is now about 13% smaller than it was this time last year. The beneficial effects of this have already become apparent. The average number of attendances per meeting in the third quarter was up 6% versus the prior year, a trend that should show further improvement in the fourth quarter.
The impact of higher attendances per meeting is; one, more vibrant and energetic meetings, an important ingredient to the motivational elements of a program; two, higher commissions to our service providers; and three, improved profitability for the Company. The NACO team is now in the home stretch preparing for its new program launch from November 27 leading into its traditional January marketing campaign.
As we've noted on previous calls, the scope and size of this program launch is substantial. This changeover affects virtually every single aspect of the operations of the business including training, supply chain, products, licensing and other areas. Roughly 20,000 of our North American service providers have had the opportunity to become new members on this new program for the past six weeks. The response has been tremendously positive, and they are eagerly awaiting the opportunity to share the new program with their members in December.
Now on to the international meetings business. The U.K. business continued to struggle in Q3 with the difficult consumer economy and without the benefit of program news or our new marketing approach implemented in NACO.
The U.K. 2010 Q3 meetings business revenues declined 6% versus the prior year period on a constant currency basis comparable to the trend in Q2. Third quarter, paid weeks were effectively flat at 0.5% while attendances declined 9%. Again, this trend was almost identical to our Q2 results.
The U.K. made the decision to pull back its media investment in the fall campaign and to focus its effort on its new program launch in November. Accordingly, Q3 and in October enrolment levels have been very soft. Similar to the U.S., the U.K. team has been deeply focused on the launch of its new program ProPoints, which went live in our meeting rooms this past Sunday, November 7. Like in NACO, the response from U.K. leaders who have been on the new program has been outstanding.
The U.K. continues to invest significant energy to ensure that this new program launch is executed in high quality manner. For the balance of the year, the U.K. team will remain focused on helping our existing members with the transition to the new program while simultaneously preparing for their January campaign drive.
Given the decision to pull back on marketing spend for the fall campaign we expect relatively soft volume trends in the seasonally less important fourth quarter. We're forecasting slightly negative paid weeks in high single to low double digits in tenants decline for the fourth quarter.
Moving on to Continental Europe. Overall, the CE Meetings business revenue grew 6% in Q3 versus the prior year period comparable to the Q2 trends. Paid weeks for the third quarter were up 4% and attendances were down slightly at negative 2%. While we're seeing varying levels of growth across most of our markets in Europe, the key exception to this is France.
In the third quarter, France was hit hard by a new fat diet referred to as the Dukan Diet. This diet is very similar to the low-carb Atkins diet that was extremely popular in the U.S. back in 2003 and 2004. We believe it is an extreme diet that results in short-term weight loss but will ultimately be rejected by the French consumer. Nonetheless, it is having an impact not similar to what the U.S. experience with Atkins seven years ago. As Atkins came in like a tidal wave, it seemed to recede almost as quickly we expect the same in France.
Notwithstanding short-term competitive issues in France, the European teams are hard at work writing the winter marketing campaigns. We believe our biggest opportunity in Europe next year is to develop marketing campaign that connect solidly with consumers, who have never been to Weight Watchers before. The segment we refer to is never members.
The ProPoints launch campaign in Europe, largely focus on reactivating lapsed members and somewhat ignore the triggers needed to bring in never members. This in turn has limited the total impact that this important new program has had in this region. The implications of this are twofold.
First, the European management teams are working hard on new campaigns that will be more effective for January. In general, we need to develop much more compelling marketing in Europe that cuts through the clutter and presents a modern and contemporary image of Weight Watchers that will appeal to never members.
Second, our U.K. and U.S. teams have incorporated the learnings of CE launch into the preparation for their respective program launches this year. Accordingly, we expect the U.S. and U.K. marketing campaigns to be much more effective in delivering the news of the new program to never members as we enter January.
The fourth quarter is a seasonally very slow time of the year for CE; it is therefore more volatile from the volume perspective. CE is being negatively impacted by two factors in Q4; one, the continued competitive issue in France, and two, lapping the soft launch of ProPoints last year. Therefore, we expect slightly negative paid weeks for Q4 and attendances to be down in the single-digits.
Moving on to WeightWatchers.com. The WeightWatchers.com business continues to surpass our expectations. In the face of a difficult consumer economy, this business reached new highs in the third quarter of this year. Q3 Internet revenues were up 22.5% on a constant currency basis versus the prior year period, an improvement over the plus 20% trend we experienced in Q2 and a substantial improvement over the plus 10% trend we saw in Q1. Paid weeks for the Weight Watchers Online product were up 26% for the third quarter versus the prior year period and end of period active subscribers were up 27%.
Growth in our Internet businesses was geographically strong across the board, particularly in the U.S., despite the fact that our U.S. Internet products has been available for much longer than in many of our newer international WeightWatchers.com markets. All of our evidence continues to show that the driver behind the acceleration in the growth rate for the online business has been marketing and word of mouth buzz. We've been able to continue to drive growth through a combination of compelling advertising, effective promotions, and increasing media weights.
Importantly, we've been able to increase marketing investment behind this product while experiencing lower cost per acquisition. We believe that the outstanding growth of the online business is also a reflection of the consumers' increasing receptivity to Weight Watchers. It's worth noting that we were able to maintain stable paid weeks in our North American meetings business while growing online paid weeks in the mid-20s. As a result, total combined paid weeks in our North American business were up 11% in the third quarter, a clear demonstration of the consumers' acceptance of our brand and approach.
For the fourth quarter, we're forecasting 25% to 30% online paid weeks' growth, an upward revision of our forecast from last quarter. We're now forecasting Interest revenue growth of greater than 20% for the year as this business is approaching the $250 million annual revenue mark. It is also worth noting that this high margin business will account to close to 25% of total Company operating income for the year.
On the product development front, we're preparing for several key releases in Q4 including the upgrade of the online product for the new programs. Our first iPad application launch, iPhone application launches in the U.K. and Australia, and new subscription sites for Belgium and Spain.
Now, I'd like to turn the discussion over to Ann who will elaborate further on our Q3 performance.
Ann M. Sardini - CFO: Thank you, David, and good afternoon everyone. Recapping our financial results for the third quarter, third quarter revenues of $330.6 million, increased 1.9% on an as reported basis, and were up 3.5% on a comparable constant currency basis. Constant currency revenues grew 0.4% in the meeting business and 22.5% in the WeightWatchers.com business. Net income of $44.4 million in the quarter was 15.5% or $8.1 million, below the Q3 2009 level.
For comparability, there is an adjustment to last year's third quarter expense which should be noted. The adjustment relates to the adverse court ruling we received with regard to leader self-employment status in the U.K. The ruling which resulted in a charge to last year's fourth quarter, $1.1 million of which related to the third quarter of last year, has a similar ongoing impact for each quarter going forward. After making this adjustment to the third quarter of 2009 for comparability, net income in the third quarter of 2010 declined by 14.3%.
Third quarter net income was negatively impacted by a $6.5 million of pre-tax expense associated with the pending settlement of litigation in California and by $2.4 million pre-tax of incremental interest expense versus the prior year quarter, resulting from the debt extension that we undertook earlier this year. These items together accounts for 73% of the net income decline versus the prior year quarter.
Reported EPS was $0.59 versus $0.68 in last year's third quarter, a decline of $0.09. Adjusting the third quarter 2009 for the U.K. self-employment charge reduces Q3 '09 EPS by $0.01 to $0.67. Third quarter 2010 EPS of $0.59 is $0.08 behind the prior year adjusted level with $0.05 of the difference resulting from the charge taken in anticipation of settlement of the California litigation, $0.03 related to expenses associated with the upcoming program innovations in NACO in the U.K. and $0.02 related to higher interest expense.
I'll now review the financial results of operations. Our Q3, 2010 operating income was impacted by the $6.5 million charge related to the pending California litigation settlement and came in at $90.4 million, a 10.7% decrease versus the third quarter of last year on an as reported basis. In constant currency and after adjusting for the U.K. leader self-employment ruling previously discussed, operating income declined by 8.3%.
(Indiscernible) I'll discuss our operating performance on this currency neutral adjusted basis. On this basis, our operating income margin declined 350 basis points versus the third quarter of last year to 27.4%. The impact of this $6.5 million of expense in the quarter related to the pending settlement of California litigation which reduced the OI margin by 190 basis points.
With gross margin virtually flat versus prior despite costs associated with the new program launches, the remaining 160 basis points of decline was the result of higher marketing and to a lesser extent G&A as a percentage of revenues, all of which I'll review later in this report.
Summarizing global volume trends in the quarter, global paid weeks of $34.3 million grew by 10.7% versus the prior year quarter, improving on the second quarter's 7.7% growth level. Third quarter global attendance declined 4.8% as compared to the third quarter of 2009, roughly on par with the second quarter's 4.4% decline, but markedly ahead of Q1's 12% decline. Third quarter online end-of-period active subscriber growth continued the strong trend experienced in the second quarter, increasing by 27.4% in the third quarter versus prior year.
Looking now at the meeting business, paid weeks in the meeting business grew 2.6% globally in the quarter, driven by increases in NACO and Continental Europe. NACO's improving trend in recruitment and monthly pass retentions brought meeting paid weeks in this business to a positive 2.8% growth level versus last year's third quarter.
In Continental Europe, paid weeks grew by 4.1% in the quarter, spurred by the first half of the year's success of the innovation in driving recruitment and increasing monthly pass penetration. In terms of third quarter attendance versus prior year, NACO was down 3.8%, our Continental Europe attendance decreased by 2.1% and U.K. was down 9.4%.
Lecture income revenues of $190.6 million were 1.1% ahead of the prior year quarter. A change in revenue mix more towards value prices monthly pass, partially as a result of increased promotional activity resulted in a 1.4% decline in lecture income per paid week. Higher penetration of monthly pass however results ultimately in longer retention and increased revenue over the customer lifecycle versus the pay-as-you-go payment model.
In-meeting product sales were $52.2 million globally in the quarter, up 1.4% versus prior but up a strong 6.4% on a per attendee basis. NACO's product sales per attendee increased to 8.4% on the strength of promotions as we cleared inventory in advance of the upcoming innovation. Internationally, strength in Continental Europe products sales per attendee drove a 4.9% increase.
In the WeightWatchers.com business, third quarter paid weeks grew by 26%, driving 22.5% revenue growth to $60.5 million. The online business was strong across all major markets, a combination of strong retention and sign of growth.
Our other revenues comprised of licensing, franchise commissions and revenues from our publications declined 8.6% in the quarter to $20.2 million. Our licensing revenues of $14.4 million in the quarter decreased by 4.3%. Licensing continues to be impacted by the weak economy and changes in consumer discretionary spending habit. Franchise commissions, which totaled $2.8 million in the quarter, were down 0.7% with U.S. franchise commissions up 1%.
The third quarter gross margin was 54%, 60 basis points below the last year's third quarter adjusted level with all of the decline attributable to expense associated with the pending California litigation settlement, a portion of which is included in operating expenses. A combination of factor contributed to flat gross margin performance in the quarter versus the prior year levels.
On the positive side, consolidated gross margin benefited from WeightWatchers.com gross margin expansion as well as from the impact of higher meeting averages resulting from our meeting consolidation strategy in NACO and some of our Continental European countries.
These benefits were offset by the collective impact of significant expenses associated with the upcoming program innovation launches in NACO in U.K. as well as by the impact of lower product margins as we cleared inventory in anticipation of those launches. Q3 marketing expenses were $39.4 million, up 12.2%.
In the NACO and Continental European meeting businesses, incremental media and television production expenses resulted in higher marketing. In WeightWatchers.com, every year marketing expenses investment versus prior efficiently drove online sign-up. Marketing as a percent of revenues was 12% in the third quarter of 2010 as compared to 11% in the third quarter of last year.
Q3 G&A expenses were $48.6 million, a 20.1% increase over last year. Excluding expense associated with the pending settlement of the California litigation, a portion of which is included in G&A, G&A expenses rose 8.1%. This increase was primarily the result of investing in business consulting services to assess the future growth opportunities in NACO and higher technology expenses from increased depreciation and continued investment in the website.
As a percentage of revenues, G&A was 14.6% in the third quarter of 2010 versus 12.6% in Q3 2009. Interest expense in the third quarter 2010 was $19 million, up $2.4 million or 14.1% from the Q3 2009 level. The increase is a result of a higher portion of our debt being hedged as well as higher interest expense arising from our recent debt extension.
Our effective interest rate in the quarter was 5.06% as compared to 4.19% in the third quarter of last year. Our current projection for interest expense in 2010 is approximately $76 million for the full year. Our cash flow from operations in Q3 2010 was $108.6 million before interest payment.
After capital expenditures of $6.6 million, we had $102 million of free cash available. We returned cash to our shareholders through payment of our quarterly dividends of ($13.3) million and by repurchasing $48.6 million of our stock. In addition, we made interest payments of $18.1 million and reduced our debt by $17.8 million.
We ended the third quarter 2010 with $1.39 billion of debt as compared to $1.47 billion at the end of the third quarter 2009.
Now, I'll turn it back to David.
David Kirchhoff - President, CEO and Director: Thank you, Ann. As we begin to ramp up 2010, it has been a year of mixed results starting with a weak first quarter and then a stabilization and improvement of our NACO meetings businesses in Q2 and Q3 and an acceleration of our online business during the same period.
All of our research continues to show that the consumer is still under considerable stress and remains highly anxious about the economy and their ability to make ends meet. Accordingly, they continue to be incredibly cautious with discretionary spending across categories, including weight loss.
In that context, the improved trends of Q2 and Q3 have been heartening as we believe that they are a reflection of our improving level of execution in our business and a strong testimony to the inherent appeal of our online business. We began this year with a series of initiatives to transform our business over the next three to four years.
Step one; marketing. Our North American team did an excellent job in significantly improving the impact of our advertising campaigns with the launch of the Jennifer Hudson theme marketing for the meetings business, as well as our new Weight Watchers Online spots. This advertising taps into the power source of the Weight Watchers brand, our members, in a way that clearly communicates our uniqueness and relevance in dealing with weight and lifestyle issues.
We have numerous opportunities now to build on this success in the U.S. market and to make similar gains in our international businesses. This starts with the upcoming January campaigns.
Step two; transform our retail infrastructure. Beginning this year, the U.S. took a significant opportunity to change the face of Weight Watchers on the ground. There was a time that a hidden Weight Watchers made sense, when obesity affected 10% of the population. Obesity is now a main stream majority issue and it's time to address it in the bright light of day.
Accordingly, it's time for Weight Watchers retail presence to stand proudly out in more visible convenient locations with bright storefronts and more modern designs. We've now effectively completed the full conversion of our two pilot markets Tampa and St. Louis. I have been down to both of them before and after the transformation and I was struck by the significance of the shift in our street visible presentation.
Final touches and center launches were occurring throughout September and October, so it's still too early to get an acute read on results although preliminary data points are encouraging.
As of the end of this year, we will have renegotiated or moved approximately 90 leases or 12% of our total network. This work will continue over the next two years and will be largely complete by the end of 2012.
Step three; invest in technology. Technology has become an increasingly important part of our weight management offerings. For the past 10 years, we've invested steadily in new country launches for Weight Watchers Online and Monthly Pass, now available in eight countries with more to follow.
Our continued investment in product development, including social networking and mobility has been critical in improving the utility and appeal of our offerings, to both online subscribers and monthly pass members. We plan to continue and to accelerate the pace of product development going forward.
Step four; modernize the program. We launched a major program innovation in Continental Europe late last year. The learnings from this launch have been tremendous from a training, member service and marketing perspective. Armed with these learnings, we now look to introduce major program innovations in the U.S., U.K., Australia, and Canada.
They will be officially available beginning in November on a staggered basis with full marketing pushes during our traditional January marketing campaigns.
It is not our intention to use this earnings call to present the value proposition of these new programs to the public, so we're remaining circumspect on the specifics for each country until we have fully launched in all four markets
However, I can say that I believe that these new programs will set a new framework, which significantly transform the eating habits and choices that we all make in a healthier way.
This program will represent an even stronger platform from which we will build our education and behavior change efforts going forward. Suffice to say, I'm excited and optimistic about its long-term impact on our meeting members and online subscriber success.
Step five, innovate our offerings and open new channels. It is increasingly clear that obesity has become one of the most significant health issues affecting the U.S. and other industrialized countries around the world. By way of example, diabetes is currently $174 billion condition in the U.S. alone. Several weeks ago, the CDC estimated that the incidence of diabetes would triple to one out of every three Americans by the year 2050, creating a health condition that many say could bankrupt the healthcare system.
As we've noted on prior calls, Weight Watchers is uniquely positioned to play a significant role in addressing this issue as a result of our approach and model which is one, clinically demonstrated with over 60 clinical publications over the past 15 years; two, low cost at only $9.22 per week for monthly pass and $4.43 per week for online in the U.S.; three, scalable with almost 50,000 meetings per week globally addressing the needs of 1.4 million people in our meetings each week and another one million people online; four, oriented toward lifestyle based sustainable weight management.
Simply stated, Weight Watchers is the only at scale provider of education, behavior modification for weight management in the worlds. Our position uniquely situates us as a key player in addressing obesity from a healthcare prospective. By forming the right partnerships and relationships with various constituents in the healthcare system including doctors, payers and public health organization, we can open an entirely new channel of access to bringing members into our program.
To this end, we have recently entered into a partnership with Merck to collaborate, to educate doctors in the U.S. on the effectiveness of the Weight Watchers lifestyle approach. We expect to begin a major pilot of this collaboration this coming January. I expect to have more news on other initiatives supporting this business growth in upcoming calls and presentations. With all these initiatives, my team and I are excited and optimistic for the future.
While some will take time to fully bear fruit, we believe we're already seeing some of these benefits and they should become increasingly apparent as we fully roll out these initiatives over the next few years. Weight Watchers has a crucial role to play and being the first line of defense and offense in addressing the obesity epidemic.
We believe that we're taking the right steps to allow us to increasingly capture this opportunity, fulfill our mission and generate shareholder value simultaneously. Regarding our EPS outlook for the year, we're providing a new range of $2.42 to $2.47 per fully diluted share. This new earnings guidance now includes a $0.05 charge for the pending settlement of a California lawsuit, which was not included in our prior guidance range of $2.35 to $2.50 per fully diluted share.
At this time operator, we would like to take questions.
Operator: Bob Craig, Stifel Nicolaus.
Robert Craig - Stifel Nicolaus: I guess couple questions on monthly pass to start out. I wonder if you could update penetration rates by geography and also comment on any disengagements that you've been experiencing there?
Ann M. Sardini - CFO: In terms of the penetration rates, they've gone up kind of across the world. If I am looking at NACO, it's gone from about 65% to about 70% of our attendances monthly pass, U.K. has gone up about five points and kind of rest of world as well. If we are looking at the U.K. we're in around the 65% range and if you are looking at the major European countries, you are about 80% penetration of attendances for monthly pass. We haven't seen any decline in retention at all. It's actually been doing well.
Robert Craig - Stifel Nicolaus: Would you expect that 80% level that you've achieved in Continental Europe, is that a pretty good target for your other geographies or is there some limiting factor to some of the other geographies that may not exist there?
David Kirchhoff - President, CEO and Director: As we've always said, the theoretical limiting factors on monthly pass is one, Internet access, and two, the willingness to use the credit card on a recur-billing model. I think each year what we've seen is, it's a varying different level, increasing penetration rates, with the U.S. being as high as it is right now and frankly with a lot of European countries being at similar and sometimes higher ranges, we feel pretty good about the penetration we are achieving, but we've always frankly surprised ourselves a little bit with the fact that the penetration seems to keep pushing itself up. So on one hand, it's difficult for me to imagine obviously 100% penetration given some of the aforementioned constraints that I just mentioned, but I don't have any specific data that would necessarily put an absolute feeling on this above and beyond say, I don't know 90% or 95%. How long it takes to get there I think is to be determined.
Robert Craig - Stifel Nicolaus: I know you don't want to divulge a lot of information about the innovations but I was – certainly been on the U.K. website looking at the ProPoints information there. Is there a more accurate way or an accurate way of describing what you might be doing here? It really revolves around the more accurate way to assess points, values based on food characteristics and how the body processes foods. Is that the general gist of what you are going to be doing in terms of the innovations?
David Kirchhoff - President, CEO and Director: I appreciate and understand the desire for additional clarity behind it. I think that it's very important to us that we make our first priority to get the launch as strong as we possibly can and to get messages out in the best way possible, and given that this is a public forum, that's why we really don't want to use this as a way of talking about the value propositions of the innovation. So, I apologize terribly with the fact that I can't go into greater detail in terms of what I see as sort of the underlying oomph behind this, but we're not too many weeks away from that.
Robert Craig - Stifel Nicolaus: Last one and I'll turn it over. Could you give some sort of guidance here as to what your plan is in terms of marketing spend, at least as a percentage of revenue as we head into the launch here in the fourth quarter?
Ann M. Sardini - CFO: Yeah, we're looking at a higher percentage of revenues of course than what we've seen in third quarter and it will exceed also what we spent last year in the fourth quarter. So, I think you're probably looking at somewhere in the range of what we did in the second quarter, a little bit less than that as a percentage of revenues.
Operator: Chris Ferrara, Bank of America.
Christopher Ferrara - Bank of America-Merrill Lynch: I guess could can we start off with pricing. I know there is – there is couple of things going on I guess affecting product sales per attendee and one of them seems like it's the monthly pass right and another one is just promotion and pricing, and I know – I think Ann you mentioned something about in the mix that more of your mix is moving toward monthly pass, and we know it's a little less expensive. There is a discount on it but you also I think mentioned something about promotion on it. So, how do I think about that and how do I think about modeling that going forward and as monthly pass hit sort of a high penetration rate and stays there, will you then have sort of a negative pricing effect from there or will that be the end of the positive pricing per meeting that we've been seeing or -- I guess I'll leave it and let you guys talk, but I am just trying to think about how I think about (meeting fees) per attendance going forward?
Ann M. Sardini - CFO: Separating the products sales piece apart from the monthly pass fees. I think there is of course a difference in price from pay as you go, but overall, you get the much longer retention which of course adds to customer value, but there is also – we have not raised the price of monthly pass in any market to this point, in any of our major markets to this point and so there is always a component potentially of pricing there as well. In terms of the product sales, what we're seeing a lot in the third quarter is high product sales per attendee as a result of promotions to clear out inventory. So, that's really affecting what you are seeing in terms of the growth in product sales per attendee in NACO and U.K., and some of the other markets. So, that will come down a bit as you go into the next quarter as we finish that process and start selling the innovation products.
David Kirchhoff - President, CEO and Director: Chris, a couple of points I would just add on top is that, a number of the promotions that we have been running in NACO as well as Europe have been oriented around increasing penetration of monthly pass as well as driving an overall lift in enrolment levels. As a result of that, what you sometimes see is a sort of short-term degradation of price per paid week if you will. But over the life of a subscription, as Ann noted earlier in her remarks, it is absolutely accretive if you want to think of it that way on a pricing point of view versus a pay-as-you-go model. So you could look at price realization for attendance or price realization per paid week. Price realization per paid week in a world with greater monthly pass penetration will by definition be lower than it is versus, say, pay-as-you-go, because by definition it's value priced. But the flip side is that you have such longer retention over a base of attendances that your price per attendance actually expands. So my view is that we're doing a better job capturing value in each enrolment cycle, and so if one looks really at sort of pricing, sort of value achieved per enrolment cycle and revenue accretion, I think we're doing much better.
Christopher Ferrara - Bank of America-Merrill Lynch: Are you guys promoting – it sounds like I guess you just said that, you're promoting more around increasing penetration for monthly pass. Do you think also, I guess promo a tool that you guys haven't used a lot in years past? Is it sort of a new tool you're using and should we expect more of those promotional price points on monthly pass around the innovation in November as well, is that a good way to think about it?
David Kirchhoff - President, CEO and Director: I think it's a really a stood observation that on some sense, we've always had a promotion in our toolkit, our marketing toolkit if you will, typically in the form of free registration, but what has been important to us and one of our Holy Grail goals is to find a way of advertising more consistently over the course of the year. And what we find is that increasingly we've come to the view that there is dimension of our business which is very similar to our classic retail model, in which if you're going to put advertisement out and marketing out, it's substantially more effective one combined with a good clever promotional tag to drive action. By way of example, we were able to actually advertise for NACO meeting business this July, continuity advertising in a period that we traditionally have not been successful on advertising in. We're able to do it because we're able to come out with a good promotional, in that case it was join for a $1. So one of the things we're doing is, we're doing more promotion of some level that in a way that will allow us to stay on there longer and to keep our message out there longer because people are trying to lose weight all the time and so therefore one of our objectives is to always be there whenever they had the impulse to take start of the weight management effort and it's therefore very necessary that we have some promotional hub present. That said, we're very careful in making sure that any promotion we do provides width and access of any discount given and so all of our promotions are going to be absolutely revenue accretive and margin accretive ultimately over the duration of each enrollment cycle. So I give our marketing teams a lot of credit for really getting a lot, lot better integrating smart effective promotional strategies combined with harder hitting and more compelling about the line advertising and so this is sort of an increasing level of competence and capability, I would therefore say in the marketing efforts.
Christopher Ferrara - Bank of America-Merrill Lynch: I guess one of them on the dot com. This question probably becomes more and more relevant as you watch paid weeks and dot com creep above NACO paid weeks, I think you might have mentioned a little earlier. But, how do you think now about cannibalization because I think in the past it wasn't big enough to get in matter as much as now? It's going to be very real concern right that that it's going to be hard to grow meeting attendance and meeting paid weeks in North America with dot com doing as well as it had and I think you kind of said that it was good that you kept it flat despite the dot com growth. How are you thinking that going forward, can both of these aspects of the business grow at a robust rate?
David Kirchhoff - President, CEO and Director: Call me a glass seven/eight full kind of guy, but anytime I have close to $250 million business units that's growing 20% a year with really high margins that generally makes me pretty happy, so that's kind of my starting point. With the specific question as to whether or not dot com is cannibalizing the meeting business, this continues to be our view. We have segmented the weight concerned consumer a 100 different ways to kingdom come, and what we find consistently is that the relevant dimension of understanding different types of consumers is that different people need different thing to make it obvious point. What we find is that there are those consumers out there that are interested in the benefit of a structured program like Weight Watcher, who want access to the tools and things that will help them lose weight, but generally are looking for a less intensive form of health and these are people who otherwise wouldn't have been in the Weight Watchers franchise at all if you will and these are the people that largely we believe are bringing in to the Weight Watchers on line business, whereas what we find consistently is that people that are interested in a more intensive form of health, that has the benefit of the accountability of an in-person weighing, personal support by a person who is best they can see and the support and education that comes from the community experience that those people continue to gravitate toward meetings. Now, I look at the NACO results in the following way. First off, if I think about the lengths of the recession, the dot com product, the online product has a relatively lower price point of $17.95 per month. Therefore, those consumers that were predisposed to the dot com product, it was more of an incidental purchase for that segment of consumers than say for example monthly pass, which is $39.95 per month would be for the one that we're predisposed toward meetings. So therefore, it's our believe that the recession had a disproportionately harsh impact on the meetings business, but the fact that the online business within its segment is growing at the rate it is in the phase of the difficult economy, we view as tremendously good news. Our strong belief based on everything we've seen continues to be the Weight Watchers Online is substantially incremental and I take some comfort in that assertion because again, Weight Watchers Online in the U.S. really started to fly off the shelf on April 1, which is the same time we also saw an immediate positive shift in the enrolment trend for the NACO meeting business. In other words, they both shifted up at the same time. So the fact that we're having unprecedented growth in the online business over the past two quarters, while, actually making some positive traction which we believe we can continue to push forward as we go on to the coming years with our fixed product, the meetings business, we think is a good example of how these two businesses ultimately reinforce themselves to build the case even further. What the growth of the online business has allowed us to do is increase marketing investment to get that product which has allowed us to significantly increase overall marketing spend in the North America which has accrued overall benefit to the brand. So, therefore, as a result if you look at North America, total participation in the brand, if you define it as a number of paid weeks, which is effectively a proxy if you will of the membership base, is up 11% versus the prior year period which I think is a really good result. As I look forward, particularly with the meeting business and I think about the role that it has to play, the fact that the face-to-face experience works as a behavior modification vehicle, clinically speaking. Particularly as I think about tying into the healthcare system, I think that the role of our face-to-face product, meetings is going to play an increasingly important role. I don't see that going away. I think both products have their own appeal to their own different segments.
Christopher Ferrara - Bank of America-Merrill Lynch: I appreciate all that color. I guess just one last one, when does the – the incremental expenses around launch in the cost of goods sold for the quarter, when do we see that cycle through if at all, because it seems like, just the dot com mix alone should have contributed like 50 basis points to gross margin this quarter I would imagine and certainly the higher attendances per meeting would have probably done something similar. So, it looks like a pretty sizable number to me. Can you quantify it and just talk about what the timeframe of this is?
Ann M. Sardini - CFO: It's about $4 million in the quarter and it ends in the quarter actually. So, it's self contained in the third quarter.
David Kirchhoff - President, CEO and Director: Chris, to build on Ann's point, if you go back to the gross margin of the meeting business, there were three what I'll call sort of one-time things that had a negative impact in comparing gross margin for Q3 of the meetings business versus Q3 last year. Obviously, there is the $4 million that Ann referenced of the program innovation, but there was also as you heard her mention, there was some impact from the legal settlement as well as a comparability issue due to last year with the U.K. self-employed change of status. So, if you take those things out, gross margin in the meeting business was effectively flat year-on-year, and then if you further look at gross margin within the meeting business, on the plus side you have the meeting average going up which is accreting gross margin. On the downside, you have product sales margin in Q3 was down, but a lot of that had to do with clearing inventory again in preparation for the upcoming innovation.
Christopher Ferrara - Bank of America-Merrill Lynch: I guess you guys don't want to give the breakout of the legal settlement by SG&A versus COGS?
David Kirchhoff - President, CEO and Director: Not at this point.
Operator: Ken Goldman, JPMorgan.
Kenneth Goldman - JPMorgan: WeightWatchers.com, I am going to play devil's advocate not having a particular opinion on it, but I am going to play the negative side of it. What bites us there, right? If there is –obviously, it's doing great and you mentioned that it's doing better than you expect. What's causing it to do better than you expect and we're seeing great growth right now, what would cause that growth to slow down in the near-term or in the long-term? Obviously, there's a law of large numbers, but just thinking about what's driving that growth and what may stop that growth from moving up unless you guys put some more marketing support behind it?
David Kirchhoff - President, CEO and Director: I think it's a great question, and in terms of – you look at these growth rates and you say, geez, that's pretty impressive. What do you do for an encore if you will? You know, certainly there's going to continue to be an opportunity to continue to press against marketing, both in terms of making it more effective as well as where we can get the right kind of efficiency to increase and continue increasing weight against it. My starting point is, I always go back to the fact that the sheer population; 135 million people in this country have a weight issue. So, even as excited as I'm by how big this 1 million global subscriber base is, in so many ways I feel like we're still just scratching the surface in terms of the kind of impact that we can both in our online in the short-term but also frankly in our meetings business going forward. I think for us to stay on our game, what we're going to find if that the online space in theory is a – you could argue it's a more competitive space. A little bit the way I look at that is a little bit different because it's not like other people haven't made a play for the online space. They generally haven't been successful because frankly they don't really have a program and they don't really have a brand that has a lot of credibility with consumers. The biggest thing that I've always had going for us with Weight Watchers Online is the Weight Watchers name. People come to our website on their own. It's a significant part of our traffic. It's traffic that we don't have to go out and buy which has allowed us to maintain fairly cost effective cost per acquisition which somebody who was trying to do dietsareus.com would have a much harder time with. So, with that, what that's always allowed us to do is to invest money back into product development which we continue to do with gusto, and what that's allowed us to do is to continue to push ourselves to both stay with trend, and I think increasingly, stay ahead of trend in terms of continuing to press an aggressive product development agenda. The best examples of this is that, yeah everybody has got an iPhone application but we designed it in my perspective our iPhone application the right way. It's an application that from day one was designed with cohesion and synchronicity with the website in mind, so everything is perfectly synchronized in the way that I think really creates a compelling value proposition particularly because I can't tell you how many subscribers and members in our meetings have met, who now tell me that they are more regularly tracking the points because of the ease and convenience of having a great mobile application. That statement is 10 times more powerful I would argue when it's anchored in a respected clinically proven program and in the case of monthly pass surrounded by face-to-face group support system, I think that our product development efforts have that much more power and impact, but to be clear the onus is on us that we have to stay with or in front of what's going on out there or somebody is going to sneak in. So that's one the reasons why you are going to continue hearing us talk about increasing investments both in marketing and product development with the online business, which by the way also could benefit to the meeting business because monthly pass gets so much of that same functionality that you see it online.
Kenneth Goldman - JPMorgan: One more for you and then one quick one for Ann if I can. There is lot in your plate right now and that's a good thing, right. You are rejuvenating the centers, you are closing some other centers down, you are introducing the new ProPoints plan, and you are moving it from overseas when we hatch all of it. But are you comfortable that that's all okay to do at once or do you feel that there may be more people that need to be brought in on the management level, it's hard for us to tell on the outside exactly how smoothly some of those transitions are going. So if you can give us some idea of how you feel your capabilities are not as you as an individual but as Weight Watchers as a whole of handling all that, that would be helpful?
David Kirchhoff - President, CEO and Director: My general preference would be to talk about how wonderful I'm and how much I am making all this happened by myself, but exactly it's not the case. Honestly, we really have an incredible and talented management team that makes us all look good. We've got a great team in international that's making a lot of amazing things happen. They have been a serious source of innovation for us as an organization. As you rightly pointed out, they made a major leap in the program which we're now accepting to successfully build on in our English speaking markets. I've got a fantastic team running North America, we hired Dave Burwick out of PepsiCo is now leading North America for us. He's got a great team. He is a fantastic leader. Melanie Stubbing is a great leader for International. Mike Basone is a great leader for dot com, it feels like an Oscar's acceptance speech. But I guess my point is that we really do have the strongest management bench that we've ever had and that's not just with those folks and the people who are running corporate, but it goes now where is down. So I feel that this is definitely an organization, it's pretty stretched in terms of the number of initiatives that it's doing, but I also feel that it's an organization that's smart about knowing where to add resources in places that can drive investment and performance in our business, so that we can maintain a grip in our cost structure while still making sure that we're capturing all of our opportunities.
Kenneth Goldman - JPMorgan: Quick one. I know it's maybe a little early, but can you give us some sense of cash used to pay down debt next year. I think there is a little bit more coming due in 2011 and 2010, maybe just some parameters or some guidelines for that will be helpful?
Ann M. Sardini - CFO: Our kind of required pay down next year is about $166 million.
Kenneth Goldman - JPMorgan: Do you expect to pay that plus or is that what you are thinking will be the number?
Ann M. Sardini - CFO: As this is kind of always the case, we weigh that the pay down against other opportunities that might come along, franchise acquisitions are always a question for us, share buyback program you know about. So we weigh our cash flow opportunities against those three things. So I am not ready to say it.
Operator: Greg Badishkanian, Citigroup.
Greg Badishkanian - Citigroup: Just wondering maybe if you could give us a little color on the trends that you've been seeing in October, early November if you can versus third quarter trend?
David Kirchhoff - President, CEO and Director: First off, great to hear from you Greg. It is November 9 I think so it would be a little bit crazy for me to talk too much about (November 12), but excellent try. I think that's the October trends in the forecast that we gave for Q4 for each of the respected geographies, we're really done with the October trends in mind. So what we're seeing in NACO through October is very similar to what we were seeing through the third quarter and that's what gave us some comfort in making that prognosis, same with dot com, same with U.K., same with the CE. Frankly, what is unknown is the potential impact that those up launches going to have as we put these programs out and start going into December. Now that said, percentages could look like interesting, but the enrolment levels in December are just so low in our business that it would be nice to see some extra path forward, but I think it's sort of more appropriate for us to remain prudent as we look at our forecast for the duration of the year.
Greg Badishkanian - Citigroup: Just kind of on that, not to put you in the spot, but maybe what kind of benefits would you see from the program in 2011 and if you don't have maybe a forecast for that, maybe as you look back over the last number of years, typically when you have an innovation at this level, what type of bump up would you see in business trends?
David Kirchhoff - President, CEO and Director: I think one of the reasons why it's always – as you know the practice we have in terms of providing trends and forecast for the following year is that the Q4 call is usually a pretty important and interesting call I think for the investment community, less obviously because of Q4 results and more frankly because it's our opportunity to give you a sense of how things are going because at that point we have January under our belt. In January, it's such a high impact month that a lot of the year sort of ends up hanging on it, not completely, but a lot. So for that reason, I could tell that program innovations like this absolutely provide lift. One could look at the CE first quarter, albeit it was somewhat impacted by bad weather and you could look at different analogs if you go back in time. I really think that the best advice I could give you is to let's wait for that Q4 call when we can give you a good read on what's going on because at that point we'll have much better data that will allow us to guide you in terms of how to shape out the rest of 2011.
Greg Badishkanian - Citigroup: Just on the competitive landscape, any major change in what you're seeing on that landscape in the U.S., U.K., Europe, maybe kind of similar to – I'm assuming in France with the low carb. I'm assuming there is nothing kind of major going on in the other markets like in France, right?
David Kirchhoff - President, CEO and Director: You know France has been a really interesting experience, I'll say interesting. I think for the French team it's not been very interesting. It hasn't been that much fun for them, although they're doing a great job of dealing and responding with it and soldiering their way through. But it's been interesting for me because I feel like I've seen in a lot of different countries that there will be a big fad diet, almost always a low carb diet, it comes and takes the country by storm and then goes away and then we tend not to see it get replaced by anything else. That was certainly the case with Atkins. We saw something similar for example in the Netherlands of all places and we've seen this pop up in a number of different countries. What I would tell you is that, knock wood, we have never seen a competitive treat in the U.S. in terms of direct impact on our business that rivals what low carb through Atkins and South Beach, the impact that had in 2003 and 2004, because ultimately the underlying methodology, although it was presented with scientific credence was ultimately rejected by the scientific community and certainly it was ultimately rejected by consumers because it asked them to cut out entire food groups from their life forever. So, what you found was that Americans were unwilling to do without bread and pasta and fruit for the rest of their life, so they ultimately rejected extreme low carb diets. My guess is you're going to see something similar in France, but France, they never had their Atkins. So, I think that's what's going on in that country. We really have seen very little impact of that particular low carb diet outside of the country, and in fact, if you look at a lot of these sort of hot fad diets, most of them are spread by kind of PR and word of mouth. In PR and word of mouth particularly in Europe from Dr. Dukan is going to be in the French language. So you can imagine it doesn't convey that well over borders. So outside of France, I have to say knock word, it's been pretty quiet. Certainly, in the U.S. if anything, it seems that there has been kind of a serial knocking down of obesity medications over the past couple of months. So if anything that kind of feels like we're even more sort of left standing out there is the primary solution to addressing obesity.
Greg Badishkanian - Citigroup: It's interesting because as you were saying that I was looking at my model and we're covering back in '03 and '04 there you had about eight quarters of negative attendance – organic attendance growth and then it turned positive again in Continental Europe actually never really felt the impact from Atkins, that's why it's a little bit surprised particularly in France just I think given their culture that that would have taken hold at this point.
David Kirchhoff - President, CEO and Director: Yes. I agree with you.
Operator: Thank you. This concludes today's question session. I would now like to turn the meeting back over to Mr. David Kirchhoff.
David Kirchhoff - President, CEO and Director: Thank you for joining us today and I look forward to speaking with you again at our next quarterly earnings release.
Operator: Thank you. The conference has now ended. Please disconnect your line at this time. We thank you for your participation.