Weight Watchers International Inc WTW
Q2 2011 Earnings Call Transcript
Transcript Call Date 08/05/2011

Operator: Good morning, ladies and gentlemen. Welcome to the Weight Watchers International Second Quarter 2011 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 call is being recorded today, August 5, 2011.

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

Sarika Sahni - Manager, IR: Thank you. Thank you to everyone for joining us today for Weight Watchers International's second quarter 2011 conference call. With us on the call are David Kirchhoff, President and Chief Executive Officer; and Ann Sardini, Chief Financial Officer.

At about 7.00 am Eastern Time today, the Company issued a press release reporting its financial results for the second quarter of fiscal 2011. 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 in this conference call to the most directly comparable GAAP financial measure 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 the 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 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.

David P. Kirchhoff - President and CEO: Good morning, and thank you for joining for us as we review Weight Watchers International's performance for the second quarter of fiscal 2011.

Weight Watchers continued to deliver excellent top and bottom line results in the second quarter driven by a strong performance in our North America, U.K. and WeightWatchers.com businesses.

Despite the impact of a late Easter and a tougher prior year comparable than in Q1, second quarter meeting enrollments in our NACO and U.K. markets remained strong benefiting from effective marketing and sustained consumer interest on the Weight Watchers' proposition.

In the second quarter, sign-ups for Weight Watchers Online products were once again at record levels. On a constant currency basis, Q2 2011 revenues grew 24% over the prior-year period as compared to 28% revenue growth we experienced in the first quarter of this year. Meeting fees were up 21% and Internet revenues grew 70%.

From a volume perspective, combined global online and meetings paid weeks grew by 40% in the second quarter of 2011 versus the prior-year period. This historically high growth rate was virtually identical to what we experienced in the first quarter.

Q2 2011 paid weeks for our global meetings business grew 21% versus the prior-year quarter. Paid weeks for our Weight Watchers Online product grew by 73% versus the same period last year.

Q2 2011 EPS was $1.17 compared to $0.73 for the same period in 2010, a growth rate of 60%. Favorable foreign currency drove $0.04 of this EPS gain.

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

First, our Northern American meetings business; total revenues in NACO, which includes the U.S. and Canada, were $241 million in Q2, 2011, up 23% on a constant currency basis versus the same period in 2010.

As expected, the growth rate moderated somewhat from the unprecedented 34% growth rate versus the prior-year period we experienced in Q1 as we began to lap the launch of our new marketing campaign featuring Jennifer Hudson last year.

NACO meeting fees grew by 29% in Q2 2011 versus the prior-year period, entirely driven by volume growth. In-meeting product sales grew by only 5% versus the prior-year quarter as we experienced softer results with our consumable products.

NACO Q2 2011 paid weeks grew 32% versus the prior-year period while attendances grew by 20%. As was the case in Q1, class sizes were up materially in our NACO meetings, with average meeting average growth excluding our At Work business of greater than 30%. Again, the value of these larger meetings is three-fold; more vibrant meetings, better compensation for service providers and higher gross margins.

As I noted earlier, Q2 of last year marked the launch of our new marketing strategy. Enrollment volumes in the second quarter of last year improved considerably versus the very weak trends we experienced in the first quarter of 2010. This year’s second quarter comparable was also made tougher as a result of this year's Spring Campaign starting three weeks later in April because of the timing of a later Easter.

Our recruitment levels for this year, therefore, started more slowly in April and then returned to stronger growth rates in May and June as our Spring Campaign hit its stride. Never-member enrollment growth remained strong in the second quarter.

We are now in a seasonally quiet time of the year. Though we've been running TV advertising in July, as was the case last year. Despite some of the negative macro factors affecting consumers such as the weakening economy and falling consumer confidence, we’ve continued to see solid enrollment growth during the first month of Q3.

As we look at the remainder of the year for NACO, we expect to see continued strong results. We have now (ramped up) production of our fall marketing creative and we feel good about our marketing promotion plans that will commence in late August.

Our biggest challenge will come in the fourth quarter, typically a seasonally low period, when we begin comping the soft launch of PointsPlus, which saw roughly 60% enrollment growth in December. While as a result we will see some deceleration in the growth between third and fourth quarters, nonetheless we’re forecasting attendance growth in the high single-digits to low double-digits and paid weeks growth of mid to high-teens for second half of this year.

Suffice to say, the NACO team is appropriately focused on driving growth as we enter 2012. We feel very confident in our ability to further build momentum in the NACO meetings business through a combination of; one, building momentum in our marketing campaigns with the use of compelling creative, effective media plans and strong PR; two, improving what we believe is the best student activity behavior modification program in the world by launching at the end of 2011 a new version release of PointsPlus which will include improvements and new features; and three, benefiting from the rollout of our new store formats and improved real estate locations.

Now, on to the international meetings business; the second quarter for the U.K. was marked by two very different periods. For the beginning of Q2 2011, enrollment levels were very soft versus the prior year as a result of the later Easter and interestingly, the timing of the Royal Wedding. As a result, the U.K. spring campaign did not start in earnest until the beginning of May, at which point enrollments began to strengthen nicely. The full effect of this was Q2 2011 U.K. revenue growth of 16% on a constant currency basis. Attendances grew 8%, while paid weeks grew 16%.

In May of this year, the U.K. announced a significant change in its operating model. In an effort to create an environment for even stronger levels of service and innovation, we moved in this important market from a model of our leaders being independent contractors to one where our leaders are now employees.

As a result of the change, we will now be able to further improve the quality of the member experience by increasing the support we can give our leaders through better training programs, more effective coaching and enhanced service innovation efforts.

The U.K. team has done an outstanding job, planning for and managing through this challenging transition with virtually no loss of key staff nor interruption to their business.

With that transition behind them, the U.K. team is now focused on further strengthening its marketing effectiveness and launching its own version upgrade to its highly successful ProPoints program. For the second half of this year, we're forecasting attendance growth in the low to mid-teens, and paid weeks growth approaching 20%.

Moving on to Continental Europe, without the benefit of an effective marketing program in 2011, we weathered another difficult quarter in our Continental European business. Overall, CE revenues contracted 15% on a constant currency basis versus the prior-year period, paid weeks for the second quarter declined 13%, while attendances declined 18%.

Summer is an extremely slow time of the year for Weight Watchers in Europe, so it is difficult to accurately read trends. Nonetheless, we believe we are seeing a stabilization of our CE business, particularly in our largest markets of France and Germany.

What we also believe to be an early indicator of improving business trends, we saw strong growth in our sale of Weight Watchers Online throughout Europe in the second quarter.

Our CE team is now energetically looking toward the future while it prepares for 2012. They’ve been emboldened by the success of their colleagues in the U.K., NACO and Australia. Our general managers in CE are actively working to apply the learnings that have been successfully developed in those other markets to inform the marketing strategy and innovation launches in their respective countries.

We’re working with the cadre of new, aggressive advertising agencies in this region and we’re looking forward to presenting a fully revitalized face for the brand as we enter 2012. This combined with the first upgrade to ProPoints since its launch two years ago sets us up well to reignite growth in this region in 2012.

While we’re optimistic we will begin to grow our CE business in 2012, for the remainder of 2011 we expect to see some improvements in the negative volume trends we’ve been experiencing in this region with the second half likely to report low double-digit attendance declines and mid single-digit paid weeks declines.

Moving onto WeightWatchers.com, after its record first quarter in 2011, we continue to see excellent sustained growth in our WeightWatchers.com business despite much tougher comparables from the second quarter last year.

Q2 Internet revenues were up 70% on a constant currency basis versus a prior-year period, similar to the growth rate we experienced in the first quarter. Paid weeks for the Weight Watchers Online product were up 73% for the second quarter of 2011 versus the prior-year quarter and end-of-period online subscribers were up 68%.

Growth was strong across all of our markets including continued robust growth in North America. It should be noted that Q2 2010 marked the beginning of a period of significant acceleration in our Weight Watchers Online product with end-of-period active subscriber growth of 26% in Q2 2010 versus Q2 2009. Therefore, the 68% growth rate we saw this Q2 was all the more encouraging.

As we noted on our last call, we began to meaningfully advertise to men for the first time in Weight Watchers history in the spring of this year. We ran a five-week advertising campaign featuring the Weight Watchers Online for men product in TV advertising.

During this period, we saw the men share of our U.S. sign-ups increase from 9% to 15% with year-over-year men sign-up growth of greater than 150%. Acquisition costs were somewhat more attractive than we had originally anticipated. So, we now expect a slightly less negative EPS impact to 2011 from this initiative.

To be specific, we expect our men's initiative will have a $0.09 negative EPS impacts in 2011 versus the $0.10 negative impact we experienced on our call last. Based on this success, we will be continuing this marketing effort in the fall.

It is now even more clear that we are within reach of fully transitioning Weight Watchers from a brand predominantly for women to a brand clearly for all.

On the product development front, we continued our pace of new platform launches most recently with the launch of our first iPad tracking application in the U.S., U.K, Australia, and Canada in late June of this year. Early feedback has been very positive.

Our technology team will continue its aggressive product release pace throughout this year. Most notably, we are now working toward extending a full suite of mobile applications to France and Germany in time for the winter advertising campaigns in early 2012.

For the second half of the year, we are forecasting paid weeks growth of 50% to 55% for Weight Watchers Online. Our forecast includes the anticipated impact of comping against the unprecedented soft launch volume associated with PointsPlus last December.

Now, I would like to turn the discussion over to Ann, who will elaborate further on our Q2, 2011 performance.

Ann M. Sardini - CFO: Thank you, David, and good morning, everyone. As David noted, the second quarter of 2011 delivered strong results with growth rates in our key revenue and profit metrics on par with the Q1 performance. This was despite the tougher comparable that resulted from the positive shift in last year's performance between the first and second quarters.

Our second quarter revenues of $486 million increased versus prior by 29%. Operating income of $155.3 million increased by 38.5% outpacing the revenue growth. Accordingly, margins increased from a combination of higher growth in the higher margin WeightWatchers.com business and operating leverage gains from higher attendances per meeting.

Further, our interest expense declined in the quarter by 23.3%, and as a result, the growth rate in net income exceeded the growth rate in operating income by 16 percentage points. Net income in the quarter was $87 million, up 54.4% or $30.7 million versus the second quarter 2010 level, and EPS of $1.17 compared to $0.73 last year.

Reviewing now some of the details of our operational results. As we noted in our last earnings call, we came into the first quarter of 2011 with a significantly higher customer base than at the beginning of 2010. Our recruitment in the first half of 2011 has been very strong. As a result, at the end of the second quarter, our Monthly Pass customer base had grown by 30.8% and our online end-of-period active subscribers had increased by 68.4% as compared to the end of the second quarter of last year.

Accordingly, our key revenue metric paid weeks increased by 40.4% globally in the quarter versus prior, on par in total and by business segment with the growth experienced in the first quarter of this year.

Second quarter meeting paid weeks were up 21.5%, and online paid weeks was 73.2% higher than the second quarter last year.

Global attendance increased by 10.6% in the second quarter versus prior, spurred by strong recruitment in NACO of both new and returning members. Despite the later Easter this year, which delayed the start of our spring ad campaign, NACO attendance was up 19.8%.

U.K. attendance lagged a bit, up 8.5% in the full quarter impacted by the Royal Wedding and surrounding holidays. As David noted though, post-Easter U.K’s attendance growth rates moved back up into the teens.

Continental Europe, which was lapping a prior year program innovation and was without a marketing solution as yet, posted an 18% decline in attendance in the quarter. The online end-of-period active subscriber base was 1.8 million at the end of the second quarter.

I want to add a few additional comments about our online performance to provide some perspective both to the Q2 results and to what we can expect in this business for the rest of 2011.

Last year, we saw a significant acceleration and trend in online sign-ups beginning in Q2, coincident with the launch of our new marketing campaign strategy. The trend accelerated through the rest of 2010, culminating in the explosive sign-up growth that we saw in Q4 when we launched the new program in the U.S., U.K. and Australasia.

The impact on 2010 online paid weeks was growth versus prior, which accelerated from 22% in the second quarter 2010 to 26% in the third quarter 2010 to 33% in the fourth quarter.

2011 has seen tremendous growth in the online business so far this year and we expect that the business will continue to grow robustly, but the dynamic of comping against the strong and accelerating trend in the third and fourth quarters of last year will likely result in some moderation of the paid weeks rate of growth in the second half of this year as compared to the first half of this year.

As David noted, we expect online paid weeks to grow by 50% to 55% in 2H. This compares to 73% in the first half of this year.

One other note on the dotcom, over the past several months we’ve heard several questions about the relationship between our Weight Watchers Online volume trends and the traffic estimates provided by third-party services, most notably ComScore. In our experience, ComScore traffic data does not correlate well to our internal website CAGs or our sign-up volumes.

Turning back now to the overview of company operations and looking at the impact of strong second quarter volumes across the meetings in dotcom businesses. On a consolidated company basis as we previously noted, we have experienced overall Q2 revenue growth of 23.9% on a constant currency basis versus last year. By segment, revenues grew 16% in the meetings business and 69.8% in the WeightWatchers.com business.

In the discussion as follows, the growth percentages that I cite will be on a constant currency basis. Meeting fees and in-meeting products sales combined rose 15.9% in the second quarter to $342.2 million.

Meeting fees in the quarter grew a robust 20.8% versus last year to $269.6 million with NACO up 28.7% on paid weeks growth of 31.9%, and U.K.'s meeting fees up 23.9% with paid weeks growing 16.1%. These increases were partially offset by performance weakness in Continental Europe.

In-meeting product sales, however, increased only 0.6% globally to $72.6 million despite 10.6% attendance growth. Per attendance in-meeting product sales decreased 12.8% in NACO and 3.3% in the U.K.

Lower sales of consumable products were only partially offset by higher sales of enrollment products. But as we entered Q3 early product sales per attendance in NACO have rebounded.

In the WeightWatchers.com business revenues grew 69.8% in the second quarter to $105.7 million. Sign-up growth was particularly strong in our two largest WeightWatchers.com markets North America and the U.K. Continental Europe led by France also posted strong sign-up growth in the quarter.

Our other revenues which are comprised primarily of licensing and franchise royalty revenues, revenues from the sale of our products outside the meeting room and revenues from our publications were $38.2 million in the second quarter up $4.5 million or 8%. The increase was driven by benefits from the program innovation. For example, franchise commissions and sale of products to our franchisees were up a combined 30% or $1.7 million.

Our by mail product sales and revenues from our publications rose a combined 21.1% or $2.7 million over the prior year level. Licensing revenues, however, decreased by 6.3% in the second quarter versus prior. A 9.6% increase in U.K. licensing was more than offset by declines in the U.S. and the Continental Europe, driven partially by price resistance in a challenging economic environment.

Our gross margin increased by 290 basis points in the quarter from 56.2% last year to 59.1% this year. The improvement was the result of the scalable WeightWatchers.com business becoming a larger component of our revenue mix and from 13.2% growth in the average attendance per meeting.

On our last call, we mentioned that the men’s marketing initiative, which began with our spring campaign and spans the rest of the year, was a $0.10 net cost to 2011 EPS. It's now $0.09, $0.04 of which falls in the second half of the year.

In order to provide further clarity on our second half expectations, I thought it would be helpful to more explicitly lay out some of the other investments we’re making to benefit 2012. These totaled $0.09 of net cost to EPS in the second half, which to be clear, has been included in our guidance since the Q1 results call in May.

First, the NACO retail rollout of 400 centers results in a $0.02 net cost to EPS in the second half of the year, the full benefit of which will come in 2012. Second, we’ve taken undertaken a next wave of IT infrastructure investment with a focus on member data and business intelligence. This investment at a cost of $0.03 to 2H EPS will enable the reporting needed for the development of our B2B in healthcare businesses and will generally provide a better understanding of customers' behavior and need.

We’ve also included expense related to building our B2B healthcare team and consulting fees associated with business development. These total $0.02 of net cost to EPS in the second half.

On the marketing front, we’ve included incremental fourth quarter marketing in NACO at a cost 2011 2H EPS of $0.02.

Now, just to wrap up, marketing expenses for the second quarter of fiscal 2011 were $75.2 million, up 27.9% versus the second quarter of 2010. The increase included $6.8 million for the aforementioned men’s online marketing campaign.

Further, in the quarter, Weight Watchers was rated the Number One Weight-Loss Diet by U.S. News & World Report, and we increased our marketing spending in TV and other media to leverage that news.

Overall, excluding the men’s campaign, our marketing for customer acquisition was down 4% in the quarter versus Q2 of last year. Marketing expense as a percentage of revenues was 15.5% in the quarter, up 50 basis points as compared to 15% in the prior year quarter, but it was down 110 basis points if you exclude men’s marketing.

Selling, general and administrative expenses were $56.7 million for the second quarter of 2011, an increase of 26.5% versus the second quarter of 2010. The largest component of the increase was salary-related as we recorded higher bonus associated with our strong business performance.

In addition, the quarter includes expense related to growth initiatives. As I noted previously, we’ve been adding to staff and consulting fees to build our business, and we’ve upped the technology-related investment.

Selling, general and administrative expenses as the percentage of revenues for the second quarter were 11.6% as compared to 11.4% in the second quarter last year.

In summary, our operating income margin grew 220 basis points in the quarter to 32% versus 29.8% last year.

Moving now to interest expense, which was $15 million in the second quarter, down $4.6 million or 23.3%. Our effective interest rates decreased by 56 basis points from the second quarter 2010 level, which was 5.03% to 4.47% in the second quarter of this year. During the quarter, we reduced our debt by $88.2 million, bringing our balance to $1.16 billion and our trailing 12-month net debt to EBITDA is now 2.17 times.

Our cash flow from operations in the second quarter 2011 was $84.7 million before interest payments. After capital expenditures of $13.5 million, we had $71.2 million of free cash available to service our capital structure and return cash to our shareholders. We paid our quarterly dividend of $12.9 million and in addition, we made interest payments of $13.8 million and reduced our debt by $88.2 million.

Finally, a few words on share count. In the second quarter of 2011, we have fully diluted shares outstanding of 74.4 million, 2.5 million lower than the second quarter of last year. This decrease is mainly a result of the share buybacks that took place in 2010 and the first quarter of 2011, which reduced the number of shares outstanding. Partially offsetting this decrease was an increase in the share count resulting from more of our previously granted options having strike prices that are now below the current stock price. For the remainder of 2011, we expect our fully diluted share count to be similar to the second quarter.

Now, I’ll turn it back to David.

David P. Kirchhoff - President and CEO: Thank you, Ann. We continue to be very pleased with the strength of our business in 2011 despite a still uncertain economy, growing in a pace of these headwinds as a testament to consumers' interest in the Weight Watchers offerings and to the responsiveness to our strengthening marketing investments.

It is clear that our formula of combining products and service innovation with compelling marketing is a winning recipe that we can carry forward as we move into 2012 and beyond.

Growth across our meetings and Internet offerings in 2012 will largely be driven by continued strengthening of our proposition to consumers. We see significant upside from improving marketing execution in our international markets and we fully believe that we can build upon and exceed the impact of our highly successful North American marketing efforts this year.

We're very encouraged by the early work being done in all of our upcoming marketing campaigns for January 2012 around the world. On the innovation front, we're looking forward to improving upon our highly successful upgrades of our points program, ProPoints and PointsPlus.

All of our markets are planning meaningful version upgrade designed to further improve what is already becoming a most popular program ever. We will build upon this by continuing to pursue an aggressive strategy of technology innovation to further improve the livability and modernity of our offering.

The second driver for volume growth in 2012 will be the NACO retail upgrade. Throughout the first half of 2011, we've continued to see our two test markets, St. Louis and Tampa, outperform their control markets with 15% to 20% incremental enrollment growth.

The NACO team has made excellent strides in further improving the store design for 2011 versus a design for 2010 and they are still on track to have 400 centers or more than half of our U.S. fixed center network upgraded by the end of this year.

This new retail footprint offers a benefit of immediate enrollment growth as well as providing a much fresher image for our brand.

While growth in 2012 will come from our efforts to enhance our value proposition for consumers, we continue to believe that much of our longer term growth will be driven by more fully integrating Weight Watchers into the healthcare system.

Our nearest term opportunity in this area continues to be large employers who have the greatest incentive to address obesity in their workforce. To this end, our NACO team has made significant progress on multiple fronts including revamping and further building our sales organization, creating a corporate version of our Monthly Pass commitment plan and creating a data reporting system necessary to properly service this channel.

We firmly believe that it is our destiny to be the service provider of choice for weight management solutions to this market. We also recognize that we need to provide an outstanding level of service and support to these accounts. Therefore, our efforts in 2011 continue to be focused on building and strengthening our foundation of people, systems and products, so that we can be properly positioned to begin selling aggressively in 2012.

Guidance, we continue to look for investment opportunities to help position us for growth in 2012 including our investment in men’s marketing, retail infrastructure and system investments in the second quarter of this year. However, even after absorbing these investments, given the strength of our financial results for the first half of the year, we’re raising both the low and high ends of our previous guidance range and providing a new guidance range of $3.85 to $4.05 for fully diluted shares for the full year 2011. Of course, this guidance assumes no meaningful deterioration of the economy and consumer sentiment.

At this time operator, we would like to take questions.

Transcript Call Date 08/05/2011

Operator: Chris Ferrara, Bank of America Merrill Lynch.

Chris Ferrara - Bank of America Merrill Lynch: Can you guys talk about retention rates of never members, right? I mean you guys obviously consistently have been saying, I think, 8.5 months for the meeting business, 9 plus for the online business. So, can you just talk about the retention rates for the new people, not just the existing, but the new people, and on both an online basis and for the meeting business?

David P. Kirchhoff - President and CEO: Well, let me express it this way. First off, what we often see is brand new people who are coming to Weight Watchers are often coming with an extremely high level of enthusiasm that often translates into very good results. So, historically, we generally do not see a significant degradation of retention performance on never versus rejoins, if you will. What I can also tell is that never as a percentage of our total mix has been higher this year in the first half compared to the first half last year, yet retention has been effectively spot on this year versus last year. So, if we look at sort of aggregate performance, we haven’t seen any significant change in retention.

Chris Ferrara - Bank of America Merrill Lynch: That’s for the meeting business and the online business?

David P. Kirchhoff - President and CEO: Correct.

Chris Ferrara - Bank of America Merrill Lynch: That’s obviously been an important factor in driving growth going forward, right? I get that it's been that way so far, but there is nothing – I mean, how do you think about it? Is that one of the most important factors that you watch, right? Because this is a word of mouth momentum business. I mean you need that number to hold over the longer term, not just at initiative reaction into the business but you need these never members to be repeat members and maintain that retention rate, right, not to belabor this point, right, but I imagine it's something you watch closely and you’re trying to predict going forward as well?

David P. Kirchhoff - President and CEO: Absolutely, and in fact, it is one of the things that we have absolutely going forward as go into 2012 is we have built a significant new installed base of member who are coming into Weight Watchers for the first time. Historic pattern shows that when we do that, we then get the benefit of them coming back to us as rejoining members, either meetings or online going into the next year. So recency, in other words, tends to be a strong predictor of our ability to enroll rejoining members and returning online subscribers. So we view that as an upside to our business as we go into 2012. Everything we’re seeing from their experience with the program, I mean when we look at the experience that never members are having, for example, on our meetings with PointsPlus and ProPoints, without a doubt we’re seeing some of our highest satisfaction rates with those folks. So, based on that what we’re seeing is an incredibly positive response to the offering for the people that are coming into Weight Watchers for the first time. I agree with you, it is important and I would note that it is one of the things that we will look to capitalize on as we continue building the business next year.

Chris Ferrara - Bank of America Merrill Lynch: Can you give us a sense of what that mix is between never members and rejoins? Then also that rejoin rate, I know it's really early, but do you have any sense of what the rejoin rate is going to be? I know historically you said 75%. If you could just give a little color on that?

David P. Kirchhoff - President and CEO: Well, a couple points of clarity. So the split between nevers and rejoins, obviously, is going to vary in the meetings business from country-to-country and it also varies – it’s also going to be different in the online business, which has many more new people coming into the brand for the first time. So, with the online business, you will tend to see nevers being a higher percentage of total mix and it will be a little bit lower in the meetings business and the mix is up. I think historically we haven’t provided breakdowns by geography. In terms of returning rates, the point I would make is that 75% statistic was for people who had already returned at least once, the probability of them returning a second time, and I would also point out that that statistic was also in a pre-Monthly Pass world, where you often had rapid rejoin rates in the enrollment cycles. So those dynamics have changed. It hasn’t changed sort of the underlying likelihood of people returning to the brand, but some of the exact percentages, would therefore be a little bit different given the shift of mix between meetings and online and also given the shift from pay-as-you-go to Monthly Pass.

Ann M. Sardini - CFO: I would just add one other thing, there has been such an incredible surge of returning members as well given the brand new program that that's a factor as well. So, when you kind of look at what proportion is our brand new to proportion of returning when you have something like this tremendous growth in this new program, that's going to have an impact as well.

Chris Ferrara - Bank of America Merrill Lynch: Is that what makes the lap so difficult as you move into next quarter, right – or sorry Q1 of next year that the fact you had such a large percentage of your total installed base of meeting members that are in now and that number can’t possibly be as high as it is when you get into – when you start lapping Q1, is that kind of the way to think about it?

David P. Kirchhoff - President and CEO: No. I wouldn't characterize it that way at all. Let me put it this way, when I look at the first quarter of next year and I look at the things that we’re going to be – that we're now working on doing is what we launched in the first quarter of this year was a significant new platform that we think substantially improved the quality of behavior modification we provide for our members by focusing not just on the energy equation but also focusing on more satisfying, more nutritious choices, and everything else and we believe that it is without a doubt the single greatest behavior modification program that has ever existed on the Planet Earth for the purposes of weight management. We’re now going to take that program and make it even a little bit better, and if you ask me, if I think that that is a recipe for growth going into next year, that is our starting proposition.

Ann M. Sardini - CFO: I mean, you have to also realize, we have a great membership base, but we’ve only scratched the surface of total dieters out there. So, there is a lot of opportunity.

David P. Kirchhoff - President and CEO: Finally, I think the other thing that is also important to keep in mind, and this is also a shift, I mean for people that have been following the Company for a long time, five, seven years ago, when it was mostly a pay-as-you-go business, the membership base itself fluctuated quite a bit, because when people would sort of stop attending and stop paying their $10 each week, they would effectively sort of fall off the math, if you will, and were no longer officially members. With Monthly Pass, what we see is a significant smoothing of the membership base and so, that actually improves our kind of retention of our membership base as we proceed throughout the course of the year. If you take that dynamic plus the surge of enrollments, it would lead you to the conclusion that we should be ending this year with a stronger membership base than was the case last year, say, when we were sitting in October, November, which gives us more to build from.

Chris Ferrara - Bank of America Merrill Lynch: Actually along those lines, I guess, the dotcom, right, so when I think about your guidance of 50% to 55% for the rest of the year, right, if I am simplistic about it and the paid weeks have generally mapped with the average period subscribers, right; I mean, if you do that and you look at the fact that you come into Q3 at 1.7 million or so, and you just look at your growth rate and what it implies where what your average attendance would be or average enrollment would be, and then where you might end and your guidance suggests that you’re going lose couple of hundred, 200,000, 300,000 online members, right? I'm just trying to understand how you think about that math. Because it’s a pretty simplistic way of looking at it, but that guidance does suggest that you're going to lose sequentially in online members.

David P. Kirchhoff - President and CEO: No. I think what the mathematical exercise you just laid out suggests that there are seasonal patterns to help people sign up for Weight Watchers Online throughout the course of the year or you have more people signing up in the beginning of the year as opposed to the end of the year, which has always been the case for Weight Watchers. So, given those dynamics, you would expect the membership base, the online subscriber base to change throughout the course of the year. Typically, what we’ve seen with online and this business has been around since 2001, typically what we see with online is that the subscriber base tends to peak, call it, in say April-May. It dips in summer, because not as many people are signing up, so it’s an inventory model, right, so you have fewer people signing up but you still have the expected level of a retention churn. It pops up a little bit in fall and then it drops a bit in November and December, and so all that is kind of very typical math. I think it’s important to understand is that the guidance that we gave of 50% to 55% for the second half, first off, as Ann pointed out, then it’s comping 25% to 30% versus the previous year. So, last time I checked sort of like knocking up 50% to 55% over 25% to 30% is actually fairly nice growth. The second thing I would tell you is that what’s behind those forecasts is expected strong sign-up growth throughout the course of the year despite lapping what was truly kind of a crazy, crazy, crazy December is that with all those things in play, we still see an online business that remains growing at a incredibly nice pace and looking very vibrant.

Operator: Ken Goldman, JPMorgan.

Ken Goldman - JPMorgan: Can you talk a little bit about your preparations, how difficult it is and what you’re doing maybe given that we don’t really know what’s going to happen with the economy? I mean how do you prepare for perhaps a recovery and perhaps another recession at the same time? The reason I'm asking is by your own admission you got a little bit caught off guard as a lot of companies did a couple of years ago with the depth of the recession then. How do you think about that now and doing perhaps a little bit of different job than maybe you did a couple of years ago?

David P. Kirchhoff - President and CEO: Well, I would say two things. First off, in terms of what's happening with the economy right now and obviously, it's on all of our minds given all those sort of super news of yesterday with what happened to the market. But I would point out that from a consumer perspective, this notion that we were somehow in recovery might have resonated with folks on Wall Street, but I'm not convinced that it was ever particularly a germane point what's the people on Main Street. Unemployment has remained high, consumer sentiment has remained low, consumer confidence has remained low. So, perhaps, the sort of the unsettling of what's happening in the financial markets worldwide could further reduce that sentiment. But I guess I point we would make is it’s not like the sort of average middle class consumer was ever feeling particularly bullish about how things were going. In terms of us and how we can be in this environment, I would agree with you that with the opportunity that came to us, frankly, from living through the recession was what you saw with a lot of companies that had been able to come out stronger is that we raised our game. The best way I know to deal with a difficult economy is not to hide under a rock, but rather to increase the pace of innovation to become more aggressive in marketing to look for opportunities to win in more different places and recognize that consumers haven’t stopped spending, but they have tended to be willing to give a much bigger share of the market to high value-added products, products that are being constantly innovated kind of products that are – where companies were constantly adding value to their products, to us that is a recipe for how you win. So, if I look at the competencies of the Weight Watchers organization today versus what was the case even two or three years ago, we took what was already a good company and we made the decision to take ourselves to a different level by becoming much more aggressive in our pace of innovation and much more aggressive in the way that we approach marketing our brand. Furthermore, we continue to believe that the oddity of this recession is that it has also created opportunities for us over the past couple of years in the real estate front. It seems that that will continue to be the case, so that would be an opportunity for us going forward. So, we believe that doing things like taking advantage of the softer economy as a cost advantage way of rolling out our new retail network, for example, North America is an opportunity where we as a company can kind of double down and invest in a tough economy, add value to the brand, add value to the experience by going in a more convenient locations, create opportunities by being open more hours to provide a high level of service for our members and that those investments end up becoming very high ROI while creating newer growth opportunity.

Ken Goldman - JPMorgan: Then one more on men’s marketing. It seems like from what you are saying, you’ve done a better than expected job with that. I know it's really. What do you think some of the some of the challenges are that you are facing in terms of being in a company that really hasn’t marketed to that demographic yet? What have you learned so far and where do you think in specific terms that level of marketing will go? Is it something that you have spokes people for, where are you in that process? I guess I am asking a lot of general questions. Just to know more about the process there?

David P. Kirchhoff - President and CEO: The biggest thing I’ve learned is that we should have started sooner. When we look at men, I found myself at a conference this past summer where I was almost tackled by a guy who had just joined Weight Watchers Online. He said, his wife has been pushing to do something about his weight and he just made the decision to join that he was absolutely loving the product and it's just – I share that story because it hasn’t just a one-time that I have experienced that it's actually been a lot of times. His experience is that, he literally was just could not stop talking about how much he was loving doing Weight Watchers Points. It totally made sense to him and this is fairly well reflected in what we’ve been seeing for some time for our Weight Watchers Online for men online product is that our satisfaction scores were at least as high with men if not higher than what we are seeing even with women. So, what we kept saying is, I think our assumption was, well gosh, maybe men are so much inclined to believe that Weight Watchers is a brand for women that we’re going to have to somehow climb over some unclimbable mountain in terms of sort of overcoming their perceptions, but that actually hasn’t been the case. What we are seeing based on the sort of first round of experience is that men are incredibly receptive to the idea of a Weight Watchers program designed for them that they are willing to sign up for it. Now, we are in a position where we are looking at what is purely an awareness prospect. If you’re a marketer, and what you have is a great product in which when you expose people to the existences of that product they’ll respond to it, and you just need to let them know, i.e., increase awareness that is the best of all opportunities, because there is a very straightforward equation in terms of solving. So, as we look at it for that reason, that’s why we are continuing to push (in fall) and I think anybody could reasonably infer from that that we’re not going to stop.

Operator: Jerry Herman, Stifel Nicolaus.

Jerry Herman - Stifel Nicolaus: First question is about online. Can you talk a little bit about the sources of subscriber acquisition there as you mentioned the acquisition cost were pretty favorable? You talked about the role of men, but can you also talk in the dimension of mobility and what impact mobility has had on that business, mobile devices and perhaps percentages that are either substantially or exclusively accessing with such devices?

David P. Kirchhoff - President and CEO: Well, first off, in terms of where online subscribers are coming from is you rightly pointed out, we had a period of time in which one source of this subscriber was men. But obviously, we have been seeing pretty huge growth rates even before that. What I'll tell you is that, it was coming from lots of different places. If you look at Google search trends which anybody can look up, for the Weight Watchers brand, it’s been up pretty significantly throughout the course of this year. So, in other words, a lot of people have been looking for us generally. Our online advertising, our advertising – TV advertising campaign for Weight Watchers Online has been highly effective, and we’ve continued to look for opportunities to either increase way for or find new weeks to advertise on. So, we’re more consistently on air, consistently out there raising awareness of the product. We’ve always been very aggressive in terms of employing the latest technology in terms of online advertising techniques. Again, we’ve been doing it since 2001. So, we’ve got a team that has gotten very good at it that they do a terrific job in terms of leveraging Internet advertising to bring people in. Then finally, if you look at social networking and everything else, which has become sort of the buzz de jure. Weight Watchers has been engaged with an online community for a long time. We already have, I think, 800,000 likes on our U.S. Facebook page. We’re developing a good following on Twitter. If you just generally look at kind of buzz and social noise around Weight Watchers, it swamps any other weight management program out there by multiple magnitudes. In terms of mobility, mobility is another example of us looking for opportunities to make game-changing ships and deliverability and usefulness of Weight Watchers. What I mean by that was that we didn’t develop an iPhone/Android/now iPad application because everybody was doing it or we thought that we had to. We did it because what we recognized is that the more ubiquitous we can make Weight Watchers, the easier we can make it to anywhere you are, immediately finding out what's in a different food, how much you get for a different activity, making it easier to track what you’re doing on an ongoing basis. So those things will add value and convenience to the experience that will improve adherence. In fact, things like the iPhone application, we’ve already seen a significant pickup in the amount of tracking that happens through that device. I do not have a statistic about how people are using them exclusively one versus the other. I think what we tend to see because everything we do is fully synchronized. In other words, if I track something on my iPhone or iPad, it shows up on the website as we've created kind of a technology ecosystem where people can access Weight Watchers anywhere, anytime and that's exactly what they tend to do. So, there might be some people out there that exclusively track or access the program via the iPhone app or the iPad app, but I think there is many more people who use a combination of the above, because different technology platforms tend to be suited for different occasions and different applications for someone who is following the program.

Jerry Herman - Stifel Nicolaus: The question about PointsPlus. Obviously, it's been well-received. Can you talk about its efficacy? What kind of results you're getting or the users are getting out of that program relative to prior products?

David P. Kirchhoff - President and CEO: Yeah, I mean the thing about the – the interesting thing for us about the efficacy of PointsPlus was determining how to define efficacy, and what we were attempting to do with PointsPlus was to increase the average weekly weight loss because we strongly encourage our members to make sure that they are managing their weight loss so that they are averaging one to two pounds not more weight loss per week, and we’re already seeing that. So, therefore, for us what was in many respects more important in terms of the new program was not just the amount of weight loss in any given weeks somebody was following it, but rather were they shifting choices. What I mean by that, were they shifting away from empty calories towards choices that were more nutrient dense and choices that were more satisfying. That's a more difficult thing to measure analytically, which isn't to say that we’re not going to look to do that, but rather what I would say is, anecdotally, we absolutely see evidence all over the place. It suggests that people who are following this new program are doing things like, for example, eating more non-processed foods, fruits, vegetables things like that and those behavior shifts we think are going to be absolutely critical as a long-term path towards addressing obesity in a more sustainable way.

Operator: Greg Badishkanian, Citigroup.

Gregory Badishkanian - Citigroup: You guys spoke about some of the drivers for 2012, is there one big one by far? Then also for, as you to kind of next year, do you think word of mouth will help you at the start of the diet season next year or if it works like you’ve been talking about and do they join throughout the year as word of mouth gets out? Or is it kind just – is it more lumped in at more mid January, February timeframe?

David P. Kirchhoff - President and CEO: Let me make sure I understand your question which is, does word of mouth – do we see the benefit of it throughout the course of the year? Does it tend to come primarily focused in particular months of the year? Was that the question?

Gregory Badishkanian - Citigroup: Yeah. Exactly.

David P. Kirchhoff - President and CEO: I think word of mouth is a very organic thing obviously, because that’s just people having conversations. So, people are having conversations all the time and they’ll be having conversation. So, if I am losing weight and people are seeing me lose weight, they are going to ask me, 'Well, you look great. What have you been doing?' and that’s when I talk about the fact that I am doing Weight Watchers. So, weight loss experience is happening throughout the course of the year, so therefore you would reliably expect word of mouth to happen throughout the course of the year. So, there is always going to be a certain level of it, right. Now, in terms of conversation, are there certain times that people, in general, are more likely to be talking about doing something about their weight than others. Of course, they are. So, you will tend to see lots of people chattering about weight come January. You will see people chattering about weight coming off of their summer vacations. So, what I would say is that word of mouth and just kind of general social noise will tend to pop up more in seasonally high periods.

Gregory Badishkanian - Citigroup: For next year is there one big factor do you think that kind of overshadows the rest in terms of drivers that we should be looking for for next year?

David P. Kirchhoff - President and CEO: I think in terms of next year, in general what we would expect and want to see with any kind of major new resurgence or program or anything else would be word of mouth building over time and it is something it does tend to build over time. In terms of how you think about next year, I'm struggling in terms of specific guidance to give you other than to say that we’re of course going to be doing things that are going to, for example, embracing social networking and technology and sort of either on our website or via Facebook or whatever might be the case to try to encourage them, looking at opportunities to build marketing campaigns that around bring a friend or things that sort of nudge people to get others engaged in the process, and so that’s always part of it. But I think word of mouth is, at the same time, when you look at it, give or take historically about 70% of the people, for example, that are enrolling in a Weight Watchers meeting or doing so on the recommendation of a friend or family members. So, I mean, is such an endemic part of who we are and why people come to us that it’s kind of an always present thing.

Gregory Badishkanian - Citigroup: I guess that question was more towards all of your initiatives, not necessarily just word of mouth, is it kind of the renovations of your store fronts and all inclusive in terms of what do you think the biggest driver for 2012 will be?

David P. Kirchhoff - President and CEO: Certainly, as you look at it, I mean, honestly, I think it's going to be kind of a combination of all the above, particularly on the consumer side, particularly in the beginning of the year. Those are going to be the most right now opportunities are going to be the things that we’re doing via marketing, the things that we’re going to be doing with the version upgrades on the program. Certainly, we expect to begin getting some traction from the retail efforts as we go on to next year. In terms of the healthcare opportunity, the so-called the B2B space, if you will, and bringing in new accounts. Again, 2011 is very heavily focused on foundation building to make sure that we can do a good job in serving those accounts. So aggressive selling is really likely to pick up steam beginning in 2012. So I think more reasonably you would expect that to build over the course of the year.

Ann M. Sardini - CFO: Just in support of what David think, we’re not relying on any one thing for 2012. We have a combination of a lot of things, which we’ll work together and that's our strategy.

Gregory Badishkanian - Citigroup: Just two other questions. I'm assuming that based on your guidance that the strong momentum that you saw in NACO attendance and just your overall kind of number of dieters that are on your program now, that momentum is going to continue into July, you haven’t seen any type of material drop off or anything it's been pretty strong and steady?

David P. Kirchhoff - President and CEO: I think what we’ve said in our prepared remarks was that July is kind of – summer is sort of a tough time to predict just because with everybody going on vacation everything else, it is a seasonally low period. So, it can sometimes feel a little bit like reading tea leaves. We usually get a much better bead on what's happening in the business, well, more in kind of major marketing campaigns, but certainly, if we look at, as you heard us saying in our remarks, certainly, for example, as we look at NACO over the course of the summer, we saw sort of good, solid, nice enrollment trends throughout July in terms of positive growth.

Gregory Badishkanian - Citigroup: Finally, just on plans for maybe taking pricing in NACO during 2012?

David P. Kirchhoff - President and CEO: We're always looking at pricing year in and year out, as all good responsible organizations do. Certainly, the nature of the economy where the consumer is has made us be somewhat hesitant to do too much with pricing although we do take pricing in 2010 on our U.S. Weight Watchers Online product. In terms of long term, we absolutely see headroom for pricing growth and particularly as we look for more and more ways to continue adding value to the experience for both meeting members as well as online subscribers. So we see opportunities to do that in front of us, but we certainly haven’t announced anything for 2012.

Operator: Gary Albanese, Capstone Investments.

Gary Albanese - Capstone Investments: I was wondering if you can talk about the gross margins. I mean, obviously, they went up pretty sizably in the quarter. Can you talk about the sustainability of those levels and how you see it trending through the rest of the year?

Ann M. Sardini - CFO: The gross margin in the second quarter, obviously, was nice and robust and we saw growth. The slight aberration was in the first quarter where we invested pretty heavily and making sure that our program in the meeting room was fully supported and that we had sufficient staff to deal with both new members and members who were – who had been there before. But going forward for the rest of the year I think the second quarter is a good benchmark for what we will see in terms of gross margins.

Gary Albanese - Capstone Investments: Looking (revenue) overseas, how are you guys hedged in your overseas operations?

Ann M. Sardini - CFO: You mean, in terms of currency hedging, we're not?

Gary Albanese - Capstone Investments: Yes. Yes.

Ann M. Sardini - CFO: We’re not.

Gary Albanese - Capstone Investments: Not to try to I guess let the secrets out of the bag, but with the product that you are talking about for 2012, the tweaks, are these going to tweaks to the existing offering or is it going to be sort of add-ons to what you have?

David P. Kirchhoff - President and CEO: I am afraid to say that that would in fact be letting the secrets out of the bag. So, what I would tell you is that, we’re looking and we believe we’ve identified a variety of different ways to add value to the products and services that we have; Weight Watchers Online or meetings of the program. What is our typical pattern is as we get closer to the actual launch, so call it around November, we feel a little bit more comfortable talking about exactly what we’re doing, but for competitive reasons we stay pretty quiet at this point of the year in terms of very specific things that we're doing.

Ann M. Sardini - CFO: I just want to make one point of clarification. I want to make sure that I made it clear that, when I was talking about gross margin, the level will fluctuate over the next two quarters because the second quarter is seasonally high. The growth in gross margin or expansion in gross margin will be similar across the rest of the year.

Operator: Ken Goldman, JPMorgan.

Ken Goldman - JPMorgan: Ann, you just answered my question, but I’ll ask one more instead. Can you talk a little bit more about the U.K. employee change, whether that leads you to thinking about doing that anywhere else in the world or whether that's strictly in the U.K.?

David P. Kirchhoff - President and CEO: Every country has its own unique circumstances in terms of the labor market, labor laws, labor rules, different flexibility, we have with different models and different approaches, as well different characteristics in terms of the nature of our leader force in those respective countries. So, we truly treat each country on a case-by-case basis. What works in the U.S. might be very different from what works in Belgium and versus the U.K. So, the U.K., I would say, was not necessarily part of some overall trend, but rather a reflection of what we believe made the most sense for that particular country.

Operator: Thank you. I'd like to turn the meeting back to Mr. David Kirchhoff.

David P. Kirchhoff - President and CEO: Thank you for joining us today. I look forward to speaking with you again at our next quarterly earnings release.

Operator: Thank you. The conference call has now concluded. Please disconnect your lines at this time. We thank you for your participation.