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Edited Transcript of NTRI earnings conference call or presentation 26-Feb-18 10:00pm GMT

Q4 2017 Nutrisystem Inc Earnings Call

FORT WASHINGTON Sep 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Nutrisystem Inc earnings conference call or presentation Monday, February 26, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dawn M. Zier

Nutrisystem, Inc. - President, CEO & Director

* John Mills

ICR, LLC - Partner

* Keira Krausz

Nutrisystem, Inc. - Executive VP & CMO

* Michael P. Monahan

Nutrisystem, Inc. - Executive VP of Administration & CFO

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Conference Call Participants

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* Alex Joseph Fuhrman

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Frank Anthony Camma

Sidoti & Company, LLC - Analyst

* Kara Lyn Anderson

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Matthew Ian Gall

Barrington Research Associates, Inc., Research Division - Former Senior VP & Senior Investment Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Nutrisystem Fourth Quarter and Full Year 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Mills, Investor Relations.

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John Mills, ICR, LLC - Partner [2]

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Good afternoon, everyone. Thank you, for joining us on Nutrisystem's Fourth Quarter and Full Year 2017 Conference Call.

Today, Dawn Zier, President and Chief Executive Officer, will provide an overview of the business; Mike Monahan, Chief Financial Officer, will review the fourth quarter and full year 2017 results and provide first quarter and full year of 2018 financial guidance; and Keira Krausz, Chief Marketing Officer, will review and provide insight into the company's marketing initiatives. We will then open up the call to take your questions.

Please note on today's call we would appreciate participants limiting themselves to 2 questions, and then rejoin the queue.

Before we begin, I would like to remind everyone that during this conference call Nutrisystem management will make certain forward-looking statements about its outlook for 2018 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions.

Forward-looking statements are protected by the safe harbor contained in the Private Securities Litigation Reform Act of 1995. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risk and changes of circumstance that are difficult to predict and many of which are outside the company's control.

Factors that could cause actual results to differ from expectations include, but on limited to, to those factors set forth in the Nutrisystem's filings with the SEC.

Nutrisystem is making these statements as of February 26, 2018, and assumes no obligation to publicly update or revise any of the forward-looking statements made during the call. In addition to the GAAP results, Nutrisystem will provide certain non-GAAP financial measures on this conference call.

Nutrisystem's earnings press release for the fourth quarter and full year 2017 can be found under the news release link on the Investor Relations page on the company's website at nutrisystem.com. Tables attached to that earnings press release include reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

With that, I will now turn the call over to Dawn Zier.

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [3]

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Thank you, John, and thanks to everyone who has joined. It's 2018, and everyone wants to be the healthiest version of themselves that they can be. So what does it mean to get healthy? Well, when Americans are asked this, the overwhelming response is to lose weight. Though the vernacular may be changing from dieting and losing weight to getting healthy, the end goal is largely unchanged. Over 85 million Americans at any given time are trying to lose weight to become more healthy. Look at each of the major players in our industry, and you'll see that our collective advertising and our collective messaging to consumers are all clearly focused on one thing, losing weight. Why? Because hands down, that is a single most important thing that the typical person can do to have a meaningful impact on his or her health.

We built our name as the expert in weight loss and importantly, over the past 18 months have made strong inroads at extending our expertise, helping people maintain their weight goals as well. We offer structured 28-day programs as well as the a la carte options, stand-on-track bundles and tune-up kits that help people succeed.

In addition, we have counselors and a wealth of continent tools that help people as they progress through their journey.

Nutrisystem is also widely recognized as a program that works and is easy to follow. No counting calories, no measuring, no guesswork. We're known for our convenience. We're the company that busy people are increasingly turning to when they realize that they are time compressed, don't have time to cook and need an easy convenient solution that teaches them about portion control, which is the #1 habit that healthy people who maintain their weight have mastered.

So let's talk about 2017, which was our fourth consecutive year of double-digit revenue growth and a fantastic year by all measures.

We increased full year revenue by 28% to $697 million, generated $109.4 million of EBITDA and increased earnings per share by 60%. We were able to deliver new customer growth, increased reactivation and drive engagement with a higher revenue per customer. And we've build a multibrand platform that now is home to 2 of the most effective weight-loss solutions available and this platform can have additional brands too.

Here are 4 noteworthy highlights from 2017. One, Nutrisystem Lean13 program and our Nutrisystem for Men's program had very strong consumer appeal as did our newly launched South Beach Diet.

Two, we saw continued growth in our shakes and a la carte sales. Many customers are adding a la carte products to their program and migrating to more flexible options as they achieve their initial goals and move into the maintenance phase of their weight-loss journey. And more of our on-program customers added ancillary products to their orders as well in 2017, which also increased revenue per customer.

Three, at retail, we achieved double-digit growth due to strengthened Walmart and our expansion into the grocery channel. This continues to be a small but important part of our overall business because of its ability to extend reach to a broader set of consumers.

Based on initial commitments from grocery and Walmart, we believe we will achieve another year of growth in this channel for 2018.

And four, we've learned a lot about the South Beach Diet in 2017 and its longer-term potential. South Beach is enabling us to broaden our reach and onboard new consumers onto our platform as well as attract brand (technical difficulty)

The low sugar, low carb and protein at South Beach Diet is extremely relevant and on trend. We believe this is a significant growth area for us as we move forward.

Turning to 2018. After 4 years of double-digit revenue growth, our Nutrisystem brand had a slower than anticipated start to diet season and how we failed to attract more new customers to the brand than we did in 2017. We believe this is a temporary setback as we've identified the root causes and are in the process of rectifying them.

So what happened? First, our winning formula for TV created fatigue. We had a creative approach that worked extraordinarily well for 4 years but got tired as we increased the earnings. In a cluttered Q1 environment, our 2018 campaign failed to break through and convey enough newness and excitement about our program. We're working on a creative revamp of our advertising designed to refresh the look, more clearly articulate our brand strengths and focus more on the new program elements that we have.

As leaders in the direct-to-consumer advertising space, this is something we have the expertise to correct.

A second related point is that we underestimated the dealership shift away from certain news stations in a post-inauguration January and February timeframe. We also came in a little heavy in some of our upfront buys having expected creative to hold.

As a result, we did not just spend and optimize our media mix as quickly as we could have. Eyeballs shifted to other stations then that data wasn't readily apparent until the last week or so. We are rebalancing. Keira will address it in more detail in her section.

However, it's really important to note that all other fundamental business metrics are sound and continue to grow. We have solid initiatives in place to improve gross margins, grow length of stay and drive higher reactivation revenues in both 2018 and 2019. And just like we did in 2017, we will leverage our database and customer touchpoints to meaningfully drive revenue per customer as we build out the experience along each phase of the customer journey.

Additionally, the South Beach Diet is off to a fantastic start in 2018. We expect revenues to grow more than 150% year-over-year from $27 million to approximately $70 million. The strength of the program coupled with a strong advertising campaign is allowing us to expand media and lean into acquisition to drive new customers to the brand. This paves the road for reactivation revenues to become meaningful in 2019. It's exciting because we're just getting started here.

As a company, we are nimble and able to quickly adapt. We have a proven track record as operators and our disciplined approach to problem solving has worked time and time again.

We believe that we will be able to return to meaningful growth in 2019 by: one, revamping our Nutrisystem ads; two, further monetizing the customer journey with a focus on both weight loss and weight management; three, continuing to grow the South Beach Diet brand; and four, having a multiyear product pipeline, including a new program for Nutrisystem that we are looking forward to launching next diet season.

And importantly, our multibrand platform also allows us to add more brands to the right opportunities and timing present themselves.

I'll now turn the call over to Mike, who will walk through our 2017 fourth quarter and full year financial results, and discuss our 2018 guidance as well as our plans to increase our dividend.

After that, Keira will add more insight into the factors that drove our 2017 success and why we have confidence going forward.

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Michael P. Monahan, Nutrisystem, Inc. - Executive VP of Administration & CFO [4]

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Thanks, Dawn. Good afternoon, everyone. 2017 was a strong year as you can see from the details of our press release.

Revenue in the fourth quarter came in at $131.2 million, up 20% year-over-year. Adjusted EBITDA in the fourth quarter was $23.7 million with earnings per share of $0.36, representing year-over-year increases of 27% and 24%, respectively. Included in our fourth quarter EPS was a charge of $0.06, driven by the tax law changes that occurred late in the quarter.

Revenue for the full year 2017 increased nearly 28% to $697 million compared to $545.5 million in the prior year. The key drivers were new and reactivated customer-acquisition growth combined with continued improvements to the customer experience and our economics.

The South Beach Diet brand contributed $27 million to our top line revenue. Adjusted EBITDA and earnings per share increased 46% and 60% year-over-year for the full year, respectively.

Our full year 2017 EPS of $1.90 per share includes a fourth quarter write-off of $0.06 due to the tax law changes mentioned above.

Gross margin for the year increased 100 basis points to 53.9%, driven by improvements in our supply chain, pricing and disciplined cost management. Marketing as a percentage of revenue was 28.5%. We were able to increase our marketing spend for the year by 30.6%, which allowed us to profitably reach new audiences and grow our customer base.

We finished 2017 with an effective tax rate of 30.7%. We invested $13 million of capital expenditures into the business during 2017 and finished the year with $72 million of cash, cash equivalents and short-term investments on hand.

For the full year 2018, we're projecting consolidated revenue to be in the range of $685 million to $705 million, adjusted EBITDA of $106 million to $110 million and earnings per share of $1.99 to $2.09.

The South Beach Diet is expected to contribute roughly $70 million of revenue, growing more than 150% year-over-year. Retail revenue is projected to be approximately $40 million.

Capital expenditures are expected to be $10 million to $12 million and our effective tax rate is projected to be 23% for the full year.

For the first quarter of 2018, we're projecting consolidated revenue to be in the range of $204 million to $209 million, adjusted EBITDA of $6.7 million to $8.2 million and earnings per share of $0.03 to $0.08.

As Dawn addressed in her opening remarks, the 2018 diet season had a slower than expected start due to new customer acquisition challenges for the Nutrisystem brand in the direct channel.

While the growth of the South Beach Diet and many of our core metrics for the Nutrisystem brand are positive contributors such as average selling price, revenue per customer, length of stay on program and reactivation revenue, new customer revenue in Q1 2018 is projected to be down year-over-year. This softness in new customer acquisition for Nutrisystem was primarily driven by a lower than expected response to our 2018 marketing campaign further pressured by lower viewership on historically well-performing television stations.

The team is in the midst of refreshing of our current 2018 marketing campaign and adjusting our core media allocation.

Seasonally, new customer onboarding has the largest impact on Q1 and Q2. As a result, our topline guidance assumes year-over-year pressure in the first half of the year and single-digit growth in the back half of the year as new customer acquisition declines lessen and are offset by favorable trends in revenue per customer and reactivation revenue.

Our EPS begins to grow year-over-year in the second quarter as adjustments in our media allocation take it back. Reactivation revenue is projected to grow mid-single digit year-over-year.

In addition to reactivation revenue from the Nutrisystem brand, we expect reactivation revenue to begin to contribute late in the year for the South Beach Diet brand.

While it will likely be a small percentage of the brand's revenue stream this year, reactivation revenue from South Beach is expected to be a driver of top and bottom line growth in 2019 and beyond as we grow the brand's customer base.

In 2018, our free cash flow is projected to grow roughly 20% year-over-year, enabling us to continue to invest in our business to drive growth and return capital to shareholders.

This year, we have allocated dollars to continue to invest in our e-commerce platform, product development and deploy media towards driving growth and awareness behind our new South Beach Diet brand.

During 2017, we returned over $20 million of cash to shareholders through our dividend and repurchased $5 million of stock. We are forecasting increased cash flow in 2018.

As a result of the capital efficiency of our business coupled with our reduced tax obligation, the Board of Directors have approved a 43% increase of our dividend from $0.70 per share to $1 per share annually.

Additionally, we have a $47.5 million remaining on our $50 million share repurchase authorization expiring November 2019.

For Q4 2017, the Board of Directors has declared a dividend of $0.25 per share, increased from $0.175 per share payable March 19, 2018, to stockholders of record as of March 8, 2018.

I'll now turn the call over to Keira.

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Keira Krausz, Nutrisystem, Inc. - Executive VP & CMO [5]

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Thanks, Mike. Today, I'm going to start with Nutrisystem. I'll touch on what drove 2017 success and what we experienced at the beginning of this year.

Next, I'll provide details into how we are leveraging our strength and revamping to build momentum.

I'll then spend some time sharing good news about the South Beach Diet, which is growing fast.

2017 was a year in which we improved across all steps of the customer journey at Nutrisystem. We attracted far more new customers, we welcomed more former customers back and we increased engagements and the breadth of options, offer customers so customer stayed with us longer and spent more.

We attracted more new customers throughout 2017, because of 3 factors: factor one, media expansion. At the start of the year, we leveraged opportunities in television and media as viewership of news surged during January and February, before, during and directly after the inauguration.

In the second half of 2017, despite facing a tough comp due to viewership spikes in 2016 from the conventions through the presidential election, we were able to continue to reach new customers via syndication, network and digital expansion to grow year-over-year.

Factor two, programs with strong consumer appeal coupled with compelling creative. We have 2 main programs, the new Lean13 and relaunched Nutrisystem for Men. To promote them, we developed creative that followed our proven formula. In the latter part of the year, we saw particular momentum for the men's business and the appeal of Nutrisystem for Men in turn helped us expand network media faster.

Factor 3, revenue per customer. We increased customer engagement through NuMi, our content cycle leads and our counselors. This helped us anticipate and meet customer needs to sell more to people on their journey.

Our shakes were more popular than ever. Our a la carte sales to people in programs surged and our length of stay increased.

The increase in revenue per customer then allowed us to profitably invest more to attract customers by supporting our media expansion throughout the year.

As we prepare for 2018, we were confident about Turbo 13 with turbo boosters, which have researched and tested favorably. But just like an Olympic gold medal winner in snowboarding, not all runs go perfectly. We stumbled out of the gate this diet season for Nutrisystem. Now we're back on our boards adjusting and ready to win.

So what happened? We have analyzed, synthesized and looked quickly for root causes and here's what we believe: first, our creative approach for television's fatigued. As I mentioned, in 2017, our tried-and-true methods worked extraordinarily well. We believe that we could develop similar commercials for 2018 and yield similar results.

But our commercials did not effectively articulate the new elements of the programs for our unique advantages enough. We did not drive the brand impressions by traffic and calls we expected. Successful creative is built on several elements that work together and thanks to the testing and analysis we've been doing, we have visibility into what we should alter. I will say more about how we will be rebuild creative in a minute.

Second, we did not optimize media well enough and that increased our customer acquisition cost. We are normally very fast to adjust to meet consumers wherever they are. At the start of this year, a couple of short-term occurrences hampered us. We were surprised by decreases in viewership coupled with higher rates on a couple of top news stations. Based on 2017 trends, we reasonably expected these stations to continue to perform well. Their rates were higher in the first 2 months of this year compared to 2017.

Since in the past, higher rates have correlated to higher viewership, we concluded that viewership was there and we should just tweak our creative. Changing the way we present the claims, changing the name of the program, changing the orders and messaging in the commercials. And doing so would improve response to support the spend. Consequently, we did not adjust spend as much as we could have.

However, after the January viewership figures came out, we learned that some of these stations were down double digits and we should have pulled back on them.

In addition, again, based on 2017 learnings, we had committed to some upfront buys. This made us less able than we will be in Q2 and beyond to move spend from one source to another.

These 2 causes combined with a very high 2017 comp for the start of the year meant we just did not attract customers the way we'd expected. For a team that has had as many wins over the years and is as strong as our teams is, we are certainly not okay with this side season run.

Of note, at the same time, the rest of our Nutrisystem business model strengthened. Our conversion rates and our contact centers rose. Our e-commerce conversion rates held steady despite continued shift to mobile from desktop.

Our average selling prices were higher, our shakes take rates were up year-over-year, our a la carte sales per customer increased and our length of stay was longer.

We have a solid model and will now rebound and recalibrate to bring in more customers.

The market trends are in our favor. The number one action people say they want to take to improve their health is to lose some weight.

Television viewership for our target market remains high. These folks watch television for more hours every day that they consume video online.

Of course, digital usage and e-commerce is growing. And as an e-commerce provider of programs, services and support, we are well positioned to leverage that trend. And people are busier than ever. We believe we are the most convenient and simple solutions to getting results in a safe and effective way.

So how are we going to attract more customers? Now that we understand what needs to get done, we are also confident about our ability to execute against the focused improvement plan. As you have seen over the past few years, this is something the team does with excellence. We are moving quickly to change the course of the remainder of the year. We believe that we will return to meaningful growth in 2019 and beyond.

Our approach has 2 parts: number one, we started by pulling levers in the short term. One such lever is media management. We spoke a minute about ago about how we were surprised by couple of tried and true stations and assumed that we could regain response with some minor tweaks. At the same time, in January, we did see some opportunities. Some traditional media and some digital that have room for expansion. In past years, we've been quite adaptive following the eyeballs. Now, we are shifting media spend as quickly as possible to optimize and manage efficiency. We expect these efforts to yield results.

Another lever we are pulling is database management. This is helping us attract new and returning customers with minimal spend. We can also drive response in the shorter term by varying our offers. Direct response creative has several elements that affect response. No doubt, some have noted, some amounts have offered variety on television, even our recent President's Day sale. We are using offers judiciously to boost response and conversions while we work to evolve our approach overall.

Number 2, at the same time that we're pulling levers, we are revamping creative. This is fully within our wheelhouse as we originally invented the formula that led to years of creative success. We plan to have a quite different approach on air leader in Q2 and expect to have solved the creative issue for the second half of 2018.

We are designing a new campaign to better articulate Nutrisystem's advantages, introduce new elements and embrace the macro trends about body image, food preferences and the ultimate reasons for losing weight.

And we are fixing Nutrisystem customer acquisition in 2018, we will continue to improve the customer experience to drive revenue per customer.

This year, NuMi and our content cycle leads are growing. NuMi users are up 35% and our sessions on the leads are up 36%.

Our customer in leads are more engaged and more connected with us than ever, and a large portion of our customers interact with a counselor. These are elements of what we do that do not necessarily show up in television commercials and which we have been relatively quiet about, that has deepened the relationship with our customers over the last couple of years.

In past years, we have raised revenue per customer by improving the options available to them. The past 2 years saw huge growth in our Uniquely Yours program. We will be introducing other configurations that we believe will boost customer satisfaction and revenue per customer.

Our shakes business, now a material part of the business, started with a simple promotion within the sales funnel. Now we have a thriving cross-sale business with a la carte items. In the next month, we'll be introducing additional lines to upsell and cross-sell and believe this will increase revenue per customer.

Meanwhile, we are now preparing our new program for 2019 and are very excited for its launch. We feel confident in the team's ability to do what needs to be done to return Nutrisystem to gold.

Now let's discuss the South Beach Diet. As I mentioned earlier, is growing fast. The South Beach Diet was breakthrough when Dr. Agatston developed it, and with its focus on a lifetime and healthy eating is even more on trend today.

Because we provide a simple and convenient way to help busy people get started to lose weight, following the South Beach Diet while simultaneously getting on a lifelong path to healthy eating, we've been able to expand Beach dramatically and attract customers.

When we launched South Beach last year, we were enthusiastic from the start because we saw the promising response. Over 2017, we started with our intention to take the best practices we developed for Nutrisystem to grow revenue per customer. It's essential tenet of our multibrand strategy that we can move those best practices from one brand to another, which means we have competitive advantages in acquiring or building new businesses. We are, therefore, pleased to share that this approach is working, and revenue per customer at South Beach did increase.

For example, new customers are downloading and using the new South Beach Diet app at a faster rate than we anticipated. The Palm, our content site is sharing content to help customers put the South Beach principles into action and readership is growing even faster than our customer base is. We launched South Beach complete shakes and the take rate is healthy. We started offering a la carte items to South Beach customers and sales are increasing. Still a small base but growing rapidly.

Finally, it appears that the many adjustments to product made in 2017 are yielding longer length of stay. We have many more plans in the works to present different program configuration, offer relevant cross-sells and encouraged longer length of stay via more program enhancements over 2018. But we are more than pleased with the steps taken thus far and the path we are on.

Our multibrand strategy is now operational. We are segmenting the market to reach new customers with our second brand. We believe that our addressable market includes not only those people who have used a meal delivery weight loss program in the past but also extends to those people who have tried losing weight on their own or by some means that requires sense of plan, make or buy their food meal by meal.

For millions of people, planning or cooking meal by meal is just not feasible given their busy lives or it takes time away from the people and interests that they are most passionate about. We offer effective solutions with the most convenience and we show them how to eat healthy for life. We look forward to helping people choose the right weight loss solution for them so they can live healthier, happier lives.

I will now turn the call back over to Dawn.

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [6]

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Thanks, Keira. Let me summarize the key takeaways from today's call.

One, we had a fantastic 2017 by any measure.

Two, our multibrand strategy is working. And importantly, our platform allows us to add more brands to the right opportunities and timing present themselves.

Three, South Beach is off to a great start in 2018 and is expected to grow more than 150% this year and is still in its infancy.

Four, customer economics continue to improve across both brands. In 2018, revenue per customer is up, length of stay is up, average selling price is up and we're selling, cross-selling and cross-selling more products to our customers along all phases of their customer journey.

And five, our supply chain continues to strengthen. We have 4 frozen warehouses up and running efficiently, 3 ready-to-go facilities, strategically placed throughout the United States and we're achieving scale with both brands and gross margin should continue to expand. All of these are strong positives that will fuel long-term growth.

We had an issue this diet season in that the Nutrisystem campaign did not resonate as we expected it to. This was due to 2 reasons, which are very fixable, the temporary setback.

One, our winning formula fatigue. And two, viewership pattern shifted. We are reacting to both of these issues, are well equipped to fix them and are already seeing progress.

From a macro perspective, there are 3 major points to make: one, the market is big. The majority of Americans are either trying to lose or maintain their weight.

Two, people are busy and don't have time to consistently cook healthy for themselves. They need time-saving solutions to get them on track.

And three, the mind shift that weight loss has been increasingly about health and not vanity is important from a business perspective because as I have often said, it increases the consumer's permission to spend on themselves.

As Americans, we want to lead healthier lives, and we know that the top thing many folks say, time and time again, is that the first step to getting healthy is to lose a little weight. The need for healthy weight loss solutions is great and we have 2 powerhouse brands to help consumers become healthier versions of themselves. We're experts in helping people achieve their weight-loss goals and we offer services and products to help them to maintain their weight.

In closing, I believe, we will return to double-digit growth as we look forward. We are pleased to return cash to our shareholders by raising our full year dividend from $0.70 to $1 per share. We thank our shareholders for their continued confidence and support and thank our Nutrisystem team to dedication and effort.

We'll now open up the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alex Fuhrman, Craig Hallum.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Wanted to ask about your TV spending and your ad buys for diet season. I guess, first of all, it sounds like you guys prebought a lot of advertising ahead of diet season, probably too much. Can you give us a sense of how much of your advertising for diet season this year was prebought ahead of time? And what was the logic behind the decision to make that investment upfront before diet season started? And then, if I may, it sounds like sounds like there was a combination of higher cost and lower viewerships on some of the networks you advertise on, is it correct to assume? You're probably talking about the news network CNN and Fox News that you advertise on a lot? And then, as you adjust going forward, is the plan to shift to different networks or renegotiate lower rates with those networks to match the ratings that you talked about? And when would we expect to see this shift?

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Keira Krausz, Nutrisystem, Inc. - Executive VP & CMO [3]

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Sure. And this is Keira. So first off, I'll talk about the upfront buy, it was about $7 million of our January spend. So it was a chunk in that, includes syndication network and infomercials. And that's up from last year. And the reason that it was up from last year is because that they said -- I mean back half of last year, we started to expand this network and syndication in particular, and we saw very promising results. So based on that, we thought was a good idea to commit to the upfront buy to ensure that we would air. As we move through the year, we're obviously reducing those channels and shifting to wherever it works. I think the second part of your question was the Fox and CNN question. Yes, those were some of the stations where we saw lower viewership and that was -- and coupled with higher rates. We are always negotiating rates, it's actually an hourly bidding process. So yes, we will be trying to negotiate rates down. But equally, and I think, more importantly is our team is pretty adept once they understand the eyeballs have shifted -- to shift somewhere else, we just didn't know at the time that they had shifted. So because if you look at how Fox viewership was reported. Overall, in 2017, it was still very strong and up year-over-year. So we actually thought it was more on us that the box was a little -- performing a little less well. And we didn't shift it. Now that we know what the situation is, we can very easily shift to other places.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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That's helpful, Keira. Thanks. And can you just give us a sense of how much media you have prebought from here until the end of the year? And then, just more broadly, on the concept of television advertising, you also mentioned addition to the issue of the viewership and the spend that some of the creatives might have gotten, perhaps a little bit stale or fallen behind the time. And you mentioned, it sounds like Keira, and you as well, Dawn, in the prepared remarks just to talk a lot of other companies kind of talking more about healthy as opposed weight loss. Do you feel that, that's a messaging that Nutrisystem needs to join as well? Or should we expect the new campaign just to have a similarly hard-hitting approach?

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [5]

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Well, I think Alex, and I'll let Keira answer in a second. But I haven't really seen the messaging of weight loss companies change to consumers to healthy. It's still very much about weight loss. But I think the way that we're thinking of communicating it, it's going to change and Keira is going to be talking -- can talk to you a little bit more about that. Keira?

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Keira Krausz, Nutrisystem, Inc. - Executive VP & CMO [6]

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All right. So I think we're still going to be leaning into weight loss that's basically how we help people get more healthy. We've actually talked in our creative about how this is the best way to improve your health. But there are several elements to any successful creative. I just think we got a little stale on a few of them. So for example, we've been using basically the same offer construction of bars and shakes for years. Again, it looks great in 2017. We saw very strong results. But it -- we believe that, that -- times have changed. And if you look at -- there's about 7 elements that we need to look at and consider, and that's what we're doing right now. Your first question actually there was how much do we have locked going forward? And the answer is, we don't have things locked going forward. So we're able to back out of things that we normally be locked into and we basically have returned to our usual amount of flexibility going forward. So we're in a good place.

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Operator [7]

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Our next question comes from Linda Bolton-Weiser, D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [8]

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I guess, one thought, or one question here, is just thinking about maybe just the Nutrisystem franchise in and of itself and thinking about what the sized potential is for that long term. I know, you've never really set any long-term goal, but what if it's just that, that brand is kind of maxed out. That this is the maximum size we're going to get. And you can try to kind of tweak things and adjust things and strategize things but that you've really had a lot of strong growth for several years and that this is the size. So how do we think about the potential of that brand? And then, do you think that South Beach is cannibalizing Nutrisystem?

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [9]

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Linda, this is Dawn. So first off, we believe that the market is big. And again, we have a multibrand platform that we've proven. We do believe that what happened with Nutrisystem this quarter, in January, February, is temporary. We think that the campaign needs to be revamped and we basically know how we're going to do that. And I don't see -- again, I think the company will return to double-digit revenue growth as we go forward. South Beach is doing incredibly well. It's strong and we -- and again, I think, it's in fact, in its early innings. I think Nutrisystem itself will continue to grow as we go forward. So I don't see a ceiling as I'm looking forward on these brands. Again, I think both will continue to grow. I think we had a little issue in Jan, Feb, and we're fixing it.

Your second question was about cannibalization from South Beach. And we don't believe that South Beach is really cannibalizing Nutrisystem. As we ramped up South Beach, we've seen no increase in the percentage of overlap between the 2 brands. And the former Nutrisystem customers that are coming back onto South Beach tend to be older customers on the file that we've not been able to historically reactivate for Nutrisystem. So again, not seeing that as a major issue. So we're very optimistic as we go forward. We had a rough start to this diet season but as we're progressing, we seeing things begin to improve. I think Keira has a very strong action plan in place for what she's looking to do and we believe that -- again, we're going to start to grow again in the second half, and we're going to accelerate after that.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [10]

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And can you talk about the decisions to raise the dividend versus new share repurchase? And kind of what the thought was behind that?

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Michael P. Monahan, Nutrisystem, Inc. - Executive VP of Administration & CFO [11]

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Sure, Linda. This is Mike. So we're looking for ways to enhance shareholder value and our goal has always been to have a balanced approach. So as we looked out at our free cash flow projections for the year, we feel that, first, we're looking to invest in the business to drive growth. But in addition to that, we have cash available to return to shareholders. So we're looking to balance that between deploying it via a dividend, and then we're going opportunistically look to leverage our share buyback authorization going forward if it makes sense.

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Operator [12]

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Our next question comes from Kara Anderson, B. Riley FBR.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [13]

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With respect to the reception you are seeing with the creative and with the Nutrisystem brand itself this year versus the success of the South Beach Diet. Does that cause you to be more aggressive with your M&A strategy and look to further expand your multibrand strategy?

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [14]

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We're always looking -- one of the good things about our company, one of the many good things is that we have cash on hand and our balance sheet is very strong. So we're always looking at different opportunities. But I don't think that how Nutrisystem and South Beach are doing determines our acquisition strategy as we go forward. Again, you know our strategy is always to invest in our organic growth with South Beach and Nutrisystem. And again, there's lots of opportunities that cross our plate and we take a look at them. And if we see something that we are interested in, we'll inform the Street at the appropriate time.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [15]

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Okay. And then second, when I look at South Beach Diet and the $70 million you're targeting this year. Can you comment on how that stacks up against maybe your internal expectations when you acquired the brand 2 years ago or a year or so ago?

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [16]

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We're actually really pleased with the growth. We think that 150% increase from our launch last year is very strong, grow from $27 million to $70 million, I think it's great performance. And again, we feel that it's very early for the brand. So the growth is -- I think the growth is strong and will continue to grow as we go forward.

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Operator [17]

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Our next question comes from Frank Camma, Sidoti.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [18]

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Can you just give us some little detail on some of the key metrics like the average selling price? I think you said it went up during the quarter. Maybe also just some color around -- because I think it sounds like the maintenance and transitional products that are becoming more important here. I was just wondering if you talk a little bit more about that, do you think that's important over time?

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Michael P. Monahan, Nutrisystem, Inc. - Executive VP of Administration & CFO [19]

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Sure, this is Mike, Frank. As you look at the growth projections that we have, the key drivers to it are program pricing in the first quarter, we expected to drive couple of points of growth. The other areas that are growing are shakes and a la carte business we talked about that's growing approximately a point, and then we have South Beach as well. So between program pricing and then length of stay is a contributor as well. All those metrics are moving in the right direction, even early on in the year, they're being offset by the volume declines that we saw earlier in the quarter. So as you look forward...

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [20]

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Yes, okay. So you have a -- sharp drop off in new customers, is that what you're saying in the first quarter?

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Michael P. Monahan, Nutrisystem, Inc. - Executive VP of Administration & CFO [21]

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Exactly. The pressure we saw around customer acquisition is offsetting some of the positive lifetime value metrics we're seeing in the business. But they're all moving in the right direction. So you look at pricing, length of stay, a la carte and up-sell, and certainly, the South Beach Diet. So as we look to the rest of the year for the forecast as we optimize the media and adjust some of the creative that Kiera talked about, that customer year-over-year customer pressure lessens and becomes more offset as we return to growth in the back half of the year, per our model.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [22]

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Okay. And my second question, I just ask general. With the a la carte, is that putting pressure on your gross margin given, I guess, the order sizes are smaller? Or is that really -- are you somehow able to offset that?

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Michael P. Monahan, Nutrisystem, Inc. - Executive VP of Administration & CFO [23]

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We have favorable gross margins on the a la carte business. So we price it accordingly. So it's not dilutive to our overall margins.

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Operator [24]

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Our final question comes from Matthew Gall, Barrington Research.

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Matthew Ian Gall, Barrington Research Associates, Inc., Research Division - Former Senior VP & Senior Investment Analyst [25]

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Just based on the outlook for South Beach Diet to be up [100%]. Reactivation revenue up mid-single digits. I guess, just kind of the new activations, new customer activations -- expectations for the year was meant to be a little bit soft in the quarter. What gives you confidence that, that can be corrected because that's kind of growing again. Is there anything from South Beach Diet which obviously is affecting the customers being that it's only a year old?

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [26]

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I think, that as we're looking at going to going forward, I think, Keira's articulated what we think the 2 major reasons were to why the mix that we had is really isolated to diet season. And she's in the process and we're all in the process of revamping the creative. And again, going where the eyeballs are, as we often like to say. So one of the things we can do with our business is, we spend accordingly to where we are profitable and we're going to continue to do that. And as we get the advertising message to where it needs to be, we'll be able to lean in more. And as we're getting there, we're being a little more cautious. And that's what this plan reflects.

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Matthew Ian Gall, Barrington Research Associates, Inc., Research Division - Former Senior VP & Senior Investment Analyst [27]

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All right. And then on the reactivation side. Knowing that, that -- you don't have to have the upfront cost associated with that, the reactivations to be more profitable. With the growth that you had in new customer activation over the past couple of years, is mid-single digit -- are there any strengths what you could do on the reactivation side in certainly getting that as a bigger contributor as more of a trailing of indication of past customers that you've acquired? And then, just a quick question from Mike. I just want to make sure I have the effective tax rate for the year was 23%?

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Keira Krausz, Nutrisystem, Inc. - Executive VP & CMO [28]

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I'll take the first, and then I'll turn it over to you, Mike. Okay. So this is Keira. On the steps to bring in former customers, we have the benefit of being able to leverage our database. So what you see is, that direct mail and e-mail, and just a certain amount of organic returning from prior customers since the program worked for them once. And they -- when they're ready, they just come back. So that is one reason why reacts are stronger than new customers. And TV -- some of the same pressures that affect the new customers affect reactivations. But it's a lot less, so TV influences a lot smaller portion of reactivation than it does new customers, obviously.

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Matthew Ian Gall, Barrington Research Associates, Inc., Research Division - Former Senior VP & Senior Investment Analyst [29]

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All right.

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Michael P. Monahan, Nutrisystem, Inc. - Executive VP of Administration & CFO [30]

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And then for the effective tax rate. Yes, For the full year, we're expect it to be -- we're forecasting 23%. We would point out that we have tax credit -- are in a tax credit position for Q1, Matt. So you're seeing it -- actually getting a credit in the first quarter and then it rising a little bit above the 23% for Q2 to Q4 to give us a blended rate of 23% for the full year.

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Operator [31]

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Ladies and gentlemen. We have reached the end of the question-and-answer session, and I would like to turn the call back to Dawn Zier for closing remarks.

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Dawn M. Zier, Nutrisystem, Inc. - President, CEO & Director [32]

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Thank you, for your time this afternoon. As always, thank you to our shareholders for their ongoing support and confidence. And we look forward to our next call and future meetings where we will discuss our first quarter results and revamp creative marketing as well as our new initiatives.

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Operator [33]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.