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Edited Transcript of NTRI earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Nutrisystem Inc Earnings Call

FORT WASHINGTON May 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Nutrisystem Inc earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dawn M. Zier

Nutrisystem, Inc. - CEO, President and Director

* John Mills

ICR, LLC - Partner

* Keira Krausz

Nutrisystem, Inc. - CMO and EVP

* Michael P. Monahan

Nutrisystem, Inc. - CFO and EVP of Administration

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Conference Call Participants

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* Alex Joseph Fuhrman

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

* Christopher Walter Krueger

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Frank Anthony Camma

Sidoti & Company, LLC - Analyst

* Matthew Ian Gall

Barrington Research Associates, Inc., Research Division - SVP and Senior Investment Analyst

* Mitchell Brad Pinheiro

Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Nutrisystem First Quarter 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, Mr. John Mills, ICR for Nutrisystem. Thank you. You may begin.

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John Mills, ICR, LLC - Partner [2]

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Good afternoon, everyone, and thank you for joining us to discuss Nutrisystem's first quarter 2017 financial results. Today, Dawn Zier, President and Chief Executive Officer, will provide an overview of the business; Mike Monahan, Chief Financial Officer, will review the first quarter results and provide second quarter and updated full year 2017 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. (Operator Instructions)

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 2017 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 and Litigation Reform Act of 1995. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risk and changes in 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 are not limited to, those factors set forth in Nutrisystem's filings with the SEC. Nutrisystem is making these statements as of April 26, 2017, and assumes no obligation to publicly update or revise any of the forward-looking statements made during this 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 first quarter of 2017 can be found under the News Release link on the Investor Relations page of the company's website at nutrisystem.com. The 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. - CEO, President and Director [3]

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Thank you, John, and thanks to everyone who has joined. Today, I'm pleased to report our 15th consecutive quarter of year-over-year revenue growth based on strong Diet Season results. Revenues grew by 31% in the first quarter and earnings per share more than doubled. Our business continues to scale with improved gross margins, improved operating margins and disciplined approach to cost management. Overall results exceeded our first quarter expectations, and Mike will provide more details on our increased 2017 full year revenue and earnings per share guidance ranges.

As America's #1 home delivery weight loss program, we're continuing to make our mark in the addressable weight loss category, which is large and pegged at approximately $10 billion to $15 billion, and we're forging ahead with expanded offerings and brands that enable a greater range of consumers to successfully address their weight loss goals. More and more consumers are transacting online and opting to have food delivered directly to their homes. This is our sweet spot. We are a well-honed e-commerce company, and with 7 distribution centers strategically located throughout the U.S. with state-of-the-art pick-and-pack systems, we're well-positioned to cost efficiently take advantage of long-term online shopping and home delivery trends. We also remain committed to customization and personalization, hallmarks of modern e-commerce success and are constantly striving to provide consumers with an array of solutions because there is no such thing as a "one size fits all" approach to weight loss. This was one of the driving forces behind our acquisition of the South Beach Diet and it is why we regularly enhance and augment Nutrisystem.

We now have 2 distinct approaches to help people achieve their weight loss goals. Nutrisystem, which allows people to have portion-controlled servings of their favorite foods made healthy; and the South Beach Diet, which provides a low-sugar, low-carb, high-protein alternative. Additionally, we've layered in upsells and more flexible options as customers progress through their weight loss journey.

Drilling down a little further on some of the specifics, our first quarter success was driven by many factors, including the continued momentum and strength of the Nutrisystem brand, along with the official launch of the South Beach Diet.

First, Nutrisystem's Lean13 program, which we introduced in January with clinically supported results, is off to a fantastic start in 2017 and is attracting more new customers and reactivations alike.

Second, our Uniquely Yours plan, which allows customers to select from over 150 frozen and grab-and-go items, continues to expand. During the first quarter, the number of individuals choosing Uniquely Yours increased to over 60%.

Third, our a la carte add-ons and shakes, which we sell primarily to existing customers, also continues to increase. More of our customers are adding ancillary products to their order and their average spend is on the rise.

Fourth, in retail, we continue to expect modest growth this year and have selectively expanded into the grocery channel. As a reminder, although retail is a relatively small part of our total business, we believe it provides a halo effect to our direct business and is attractive as an alternative sales channel for some of our products. And last, but certainly not least, the South Beach Diet, which we officially launched in January, is meeting our expectations. Early results show that this new brand has strong customer appeal, and we believe it will drive meaningful long-term growth. We're in the first inning with South Beach and are actively incorporating customer feedback into our ongoing development and refinement of the program as we gear up for 2018.

Throughout the year, you'll see us fine-tuning the products, the messaging and the offerings as we do what we have done so well with Nutrisystem, which is iterating to drive success. Think of it as Nutrisystem 2.0. South Beach is bringing in a differentiated set of customers, and we're excited about this new leg of growth for the company. Keira will elaborate more on this in a few moments.

As we enter the second quarter of 2017, we believe the Nutrisystem brand is stronger than ever, and it's not one thing that's working right, it's many things. The energy and momentum around the brand is palpable, and it is increasingly becoming the go-to option for people who are looking for a structured program to help them achieve their weight loss goals. We expect our direct-to-consumer business to continue to be a major driver of growth in 2017 and beyond. In addition, we're poised for additive growth through the South Beach Diet, and through more flexible options, including a la carte and shakes, coupled with state-of-the-art marketing and engagement tools and sophisticated supply chain capabilities, we'll continue to extend our relationship with customers and drive additional customer lifetime value.

I'll now turn the call over to Mike, who will walk through our 2017 first quarter financial results and discuss our second quarter and full year 2017 guidance. After that, Keira will add more insight on our breakout performance for Diet Season, the strength of our brands and our continued expectations for growth.

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [4]

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Thanks, Dawn. Good afternoon, everyone. We had a strong first quarter. Revenue increased 31% to $212.7 million compared to $162.1 million in the same quarter last year. This year-over-year growth was primarily driven by 3 factors: successfully acquiring both new and reactivated customers in the direct to consumer channel with the Nutrisystem brand; the launch of the South Beach Diet; and favorable timing of retail shipments.

Gross margin in the quarter increased 230 basis points to 53.8%. Marketing spend increased 37.6%, further expanding our customer reach profitably. And marketing as a percentage of revenue was 38.4%. Adjusted EBITDA and earnings per share increased 94% and 178% year-over-year for the quarter, respectively.

In addition to our improved operating results, our year-over-year EPS growth also includes a lower-than-normal effective tax rate resulting from new accounting guidance that took place in the first quarter.

For the first quarter of 2017, the effective tax rate was 20.6% versus 32.4% in the same quarter of 2016.

As a result of our strong performance in the first quarter, we are increasing our 2017 full year guidance for both the top and bottom line. For the full year 2017, we are now projecting revenue to be in the range of $650 million to $665 million, adjusted EBITDA of $100 million to $104.5 million, and consolidated earnings per share of $1.65 to $1.75. We expect our full year effective tax rate to be approximately 33.1%.

Capital expenditures are projected to be $12 million to $14 million for the full year.

For the second quarter of 2017, we are projecting revenue to be in the range of $178 million to $183 million, adjusted EBITDA in the range of $34 million to $36 million and earnings per share of $0.58 to $0.63. We expect the second quarter effective tax rate to be approximately 35.1%.

We remain excited about our multibrand approach to meet customer demand and capture a larger portion of the weight loss market. As we said on our last call, the Nutrisystem brand continues to resonate with consumers and is driving the largest portion of our growth while the South Beach Diet remains on track to deliver roughly $20 million to $25 million in revenue this year. With the South Beach Diet brand, we are early on in what we believe will be long-term growth driver.

With each of our brands, we are focused on and investing behind 4 core principles to support long-term growth: One, attracting more customers. Revenues from customers in their initial diet cycle were up over 35% year-over-year in the first quarter of 2017, primarily driven by increased Nutrisystem customer starts, the launch of the South Beach Diet, improved product mix and increased upsell in a la carte sales. Our brand awareness and relevance continues to grow. Our marketing campaigns and product improvements are resonating with consumers. Reactivation revenue remains strong as a result of increased customer counts and improved reactivation yield. We delivered nearly $49 million of reactivation revenue in the first quarter of 2017, up over 20% from a year ago. We expect reactivation revenue to continue to be a double-digit growth driver in 2017.

Two, improving customer satisfaction and economic contribution. The average customer profit contribution continues to expand as we introduce new product offerings and manage our cost of goods. Increased upsell rates, pricing and overall product enhancements, along with an improved customer experience, has resulted in meaningful increases in revenue per customer over the past few years. Consolidated gross margins in the first quarter were 53.8%, up 230 basis points from the first quarter of 2016. The year-over-year gross margin improvement in Q1 2017 is primarily driven by improvements in average selling price within the direct channel, effective management of food and distribution costs within our product portfolio and supply chain and normalized retail margins. As a reminder, the first quarter of 2016 had a one-time retail promotion that pressured margins last year.

Three, extending our marketing reach and brand awareness. Total marketing expense for the first quarter of 2017, including the South Beach Diet, was $81.7 million or 38.4% of revenue compared to $59.4 million for the first quarter of 2016. Marketing as a percentage of revenue in 2017 is expected to increase year-over-year due to 2 drivers: one, media investments to support the South Beach Diet; and two, improved lifetime value of Nutrisystem customers enabling us to reinvest dollars to expand our media reach while still improving our operating margins. Retail revenue in the first quarter of 2017 was $12.2 million, representing a 59% increase over the first quarter of 2016. A large portion of this growth was due to timing of shipments. We are pleased with the continued performance of our products in Walmart and continue to show early progress at select grocers. We expect the retail channel to grow in 2017 and reach approximately $35 million in revenue for the full year.

Four, investing in the business to support future growth. Just this week, we began shipping from our newly opened fourth frozen warehouse to support increased volumes and reduce shipping time to the end consumer. We continue to strengthen our infrastructure and invest in areas to enhance our operations and the customer experience. We are also investing in our digital experience and tools. Our tracker apps and content sites for both brands serve as engagement points with our customers that continue to gain traction.

Finally, we are focused on the South Beach Diet brand and positioning it for meaningful top and bottom line growth in 2018 and beyond. Over the last 12 months, we've returned over $20 million of cash to shareholders through our dividend, which has been consistently in place since mid-2008. Our business model remains capital efficient, enabling us to both return capital to shareholders and invest in strategic growth initiatives to drive shareholder value.

The Board of Directors has declared a dividend of $0.175 per share payable May 18, 2017, to stockholders of record as of May 8, 2017. I'll now turn the call over to Keira.

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Keira Krausz, Nutrisystem, Inc. - CMO and EVP [5]

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Thanks, Mike. We've often spoken about product innovation and data-driven marketing prowess as the underpinnings of Nutrisystem's growth. Certainly, as I'll review shortly, that remains true. In addition, we believe Nutrisystem has reached a new level of brand power. With our media spend on television, our profitable expansion across digital and social media channels, our presence at some of America's largest retailers and our strategic PR efforts that earned us billions of impressions we're telling our consistent brand story of safe, effective, science-backed weight loss. Brand strength is a meaningful business advantage.

The Nutrisystem direct business is off to a great start in 2017. Q1 was a perfect example of what happens when multiple levers are managed effectively and simultaneously. First, new customer acquisition accelerated, fueled by product innovation and our continued ability to increase consumer reach. Lean13 and Nutrisystem for men supported expansion across television, digital display, social media, print and more. We generated far more traffic and leads. We're able to engage with far more people and profitably converted more new customers.

Second, revenue per customer is higher, thanks to a number of advances. Our program mix is advantageous for average selling price, customer satisfaction and length of stay. Our shake take rates at sign-up are up. Engagement in usage for new meat and our contents are way up, and our a la carte sales are up as a result. Higher revenue per customer allows us to continue to expand our reach.

Third, reactivation is a success story. Customers are more engaged with the brand as our content keeps our relationships going longer. We now have a wider range of programs to offer customers as they transition from a fully structured 28-day program. By employing data-driven segmentation techniques, we can offer each customer the program she needs. As a result, our reactivation rates are increasing. Reactivation signals the strength of the brand and is highly profitable business.

In addition to having a great Diet Season for Nutrisystem, we have an exciting launch of the South Beach Diet. People clearly respond to this brand, its relevance and on-trend nutritional principles and our creative approaches. We had a solid quarter of acquisition, building brand awareness and testing expansion opportunities.

Throughout the rest of the year, we'll be disciplined and methodical about balancing reach and achieving a profitable acquisition cost per customer. Earlier this month, we welcomed Jessie James Decker as a brand ambassador. Jessie represents the South Beach lifestyle well. She's a busy wife and mother with a successful business who nonetheless makes it a priority to stay fit and healthy. She's engaged in social media and has millions of supportive followers. Jessie is helping to tell this brand's story via Instagram, Facebook, short form television, our sites and content marketing. Thus far, this approach seems to be working.

With the customer acquisition engine up and running, we are porting the quick and highly iterative approach to maximizing revenue per customer from Nutrisystem where, by example, we grew the percentage of customers taking Uniquely Yours to over 60%, increased prices consistently on our basic core and Uniquely Yours program without lowering demand, built the a la carte and shakes cross-sell businesses and launched transition programs tailored to customer needs.

So far, in the first quarter, we began to ship South Beach program mix to support length of stay and average selling price. We recently introduced the South Beach shakeup sell and saw a higher-than-anticipated take rate. We also introduced a number of grab-and-go items which helps with freezer space and watch as some of those items have become our most popular.

In the next month, we'll be testing different program configurations and pricing tactics and our food development team will continue to develop and add menu items, just like they do with Nutrisystem. Our direct access to customer feedback and our ability to delve into data, gather insights and put them into action are the hallmarks of our Nutrisystem success, and we are bringing these advantages to South Beach.

In summary, 2017 is a year in which Nutrisystem is firing on all cylinders with plenty of gas in the tank. We are confident in the South Beach Diet's ability to attract new customers and our ability to optimize lifetime value and in the long-term potential of the South Beach Diet. We look forward to helping more women and men lose weight and live healthier, happier lives.

Now I'll turn the call back over to Dawn for some closing remarks.

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

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Thanks, Keira, and thanks to everyone on the call today for your interest in Nutrisystem. You can tell by our strong Diet Season and overall first quarter results that the Nutrisystem brand has momentum and our multibrand strategy is beginning to take hold. As we look to the future, we're operating from a position of strength having not 1, but 2 powerhouse brands to help us extend our reach to new consumers and capture more of the large addressable weight loss market.

In closing, I'd like to reiterate confidence in our guidance to a fourth year of double-digit revenue growth. We've outlined 4 areas of focus to fuel this: One, continuing to deliver sustainable growth under the Nutrisystem brand by focusing on innovation, marketing, customer care and supply chain logistics; two, capitalizing on the South Beach opportunity to attract new customers to our portfolio; three, expanding a la carte and shake options for both brands to increase revenue per customer and provide the options and flexibility that our customers demand; and four, running a very disciplined business that is focused on top line growth through product and marketing innovation while not taking our eyes off costs. We're confident that by focusing on these priorities and executing well against them, we will continue to drive meaningful shareholder value.

As always, we'd like to thank our shareholders for their continued support and confidence. I would like to thank the Nutrisystem team for their hard work and dedication. Now we will open the call up 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 Mitch Pinheiro from Wunderlich Securities.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [2]

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So I guess what -- the first question out of my 2 questions is just regarding South Beach. Could you talk about the revenue contribution in the quarter? And are you still comfortable with your $20 million to $25 million revenue guidance for the year?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [3]

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Sure. So South Beach contributed approximately $8 million to the first quarter. As we mentioned on the call, we'll continue to make adjustments and gain learnings throughout the year, and our goal is really to position the brand for growth in 2018. And we guided towards the $20 million to $25 million for the year, as we talked about in the last call.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [4]

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Okay. And also just as a sort of follow up there. Is -- was it a consistent build? And how do you -- as your plans for the rest of the year progress, is it going to be a build? Or will it follow a little bit the sort of season -- the seasonality that you have in your core business?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [5]

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I would expect a seasonal quarterly cadence to build -- a seasonal quarterly cadence throughout the year on the revenue line.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [6]

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Okay. And then when you look at your marketing spend, still very, very efficient marketing spend, although higher as a percentage of sales. How do you look at marketing as through the remainder of the year. Will it be your typical seasonal pattern? Or do you see that changing at all with South Beach?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [7]

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So South Beach is a little bit different than Nutrisystem as we're investing in building the brand. And as we said, we're really kind of positioning it for 2018 and beyond so I wouldn't expect the marketing to follow the same seasonal pattern as Nutrisystem. We're really -- as we spend marketing dollars throughout the year, we're really looking to primarily position it for 2018.

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Operator [8]

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Our next question comes from Alex Fuhrman from Craig-Hallum Capital Group.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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Congratulations on really an incredible start to the year. I'd like to ask about what you guys are seeing in terms of media costs. I know that's something that you had called out a few times prior, around the time of the election and the inauguration as really having helped you being able to -- the networks that you advertised on really getting huge ratings there. Can you comment a little bit on how that has trended since the last conference call? Are the networks that you advertise on still getting those types of ratings? And then as you look potentially towards the back half of the year where it's going to be really hard for them to put up numbers similar to what they had last year with the election, I mean, is that a concern of yours? Or do you think that you could just potentially replicate those ad spots, which is more perhaps less expensive ads going forward?

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Keira Krausz, Nutrisystem, Inc. - CMO and EVP [10]

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Yes, this is Keira. Thanks. One aspect of this business is that there's constant fluctuations. And luckily, the way that we buy, we shift with the viewership, and so we are not particularly concerned. And I think first quarter, we saw pretty good results. So we think we'll be able to shift the spend should it move. And our omnichannel marketing tactics kind of mean that we always have a diversified channel mix. We've been able to expand the reach this -- early this year and I think that we'll be able to do so for the rest of the year as well.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Great. That's really helpful. And then just a couple of questions around just a la carte offering. It sounds like that is something that has been called out as really outperforming for several quarters in a row now. Can you give us a sense of how big today the a la carte offerings are relative to your overall business and where that could go? And then just generally speaking, I mean, does that tend to be new customers to the brand that might not have been interested in kind of going for the full $300 price point upfront? Or is it more maybe extending the length of stay you get from customers more? Would be curious to really who that a la carte customer is. And then anything you could say about perhaps the a la carte adoption at South Beach Diet would be helpful as well.

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Keira Krausz, Nutrisystem, Inc. - CMO and EVP [12]

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Sure. This is Keira. And I'm going to say, I'm going to answer the latter part of your question, then I'm going to turn it over to Mike for the numbers part. So the a la carte business specifically means we're doing 2 things: We are selling to people who are on program, so they're on a 28-day program, and then they're adding a la carte items as they're on that initial cycle. And then yes, we are also using it as one of our transition programs so that as people are reaching their weight loss goals and are transitioning away from that weight loss, the full structure that they still have something that they're buying from us. And we tend not -- I would say that we tend not to offer that as an upfront sale. And if we do, it's in a very small and highly segmented way. Mike?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [13]

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Yes. I guess this -- the first part of your question I'll just kind of frame out in terms of our overall growth projections for this year. Non-program sales are contributing about 3 to 4 percentage points of our full year growth, if that helps kind of frame it out.

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Operator [14]

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(Operator Instructions) And our next question comes from Matthew Gall from Barrington Research.

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Matthew Ian Gall, Barrington Research Associates, Inc., Research Division - SVP and Senior Investment Analyst [15]

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Congrats on the quarter. One thing I just wanted to follow-up on, which maybe you had mentioned on the last call regarding primarily the South Beach Diet was some of the shipments that maybe had been delayed or some storage constraints with consumers. And I just want to see if, obviously, pretty good quarter given the cadence of what you're expecting for the year from South Beach contribution, what kind of -- what steps have been taken to kind of address those concerns?

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Keira Krausz, Nutrisystem, Inc. - CMO and EVP [16]

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Yes, we've taken some steps, like we have introduced more grab-and-go items, things that don't need to go into the freezer. So -- and we'll be continuing to introduce more and more of those items as the year goes on, which is sort of a normal thing that we do in Nutrisystem as well is to introduce foods along the year. So we've seen that, that's helping more -- and those are becoming customer favorites. And so that's a good sign that they like them and that they're ordering more of them, so we think that, that will help. And we'll be taking some other measures as we go through the year. But that's the main one so far.

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Dawn M. Zier, Nutrisystem, Inc. - CEO, President and Director [17]

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Yes, so we're making good progress.

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Matthew Ian Gall, Barrington Research Associates, Inc., Research Division - SVP and Senior Investment Analyst [18]

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Great, great. And then I guess, my second question, just kind of going back to the marketing spend, but kind of as it pertains as well to the improvements that you've seen on gross margin. As you look at the quarters, Q1 has historically been a little bit lower with more of maybe an aggressive or promotional period to grab customers in Q1. This quarter was the highest in quite a few quarters -- not -- or a couple few years. So as that gross margin with a number of the factors that you're dealing with the upsell on the average revenue per customer, can that help to go towards some higher marketing spend as you kind of get some leverage on that gross margin line?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [19]

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So one of the ways we're deploying marketing spend kind of going forward is we are reinvesting some of the profits we're getting from our increases in customer lifetime value and the overall customer contribution, which is being helped by the gross margin line. And so we're really taking that money and making investments back into acquiring more customers, and that's helping drive some of the volume.

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Dawn M. Zier, Nutrisystem, Inc. - CEO, President and Director [20]

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And drives profits, too.

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Matthew Ian Gall, Barrington Research Associates, Inc., Research Division - SVP and Senior Investment Analyst [21]

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Okay, great. And then just one last quick one. Mike, you had mentioned the contribution from South Beach in the quarter. Can you provide the direct -- and you also, I think, mentioned retail contribution. What was the direct channel as a consolidated revenue line?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [22]

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The total direct channel in terms of our total revenue. Is that your question?

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Matthew Ian Gall, Barrington Research Associates, Inc., Research Division - SVP and Senior Investment Analyst [23]

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Yes. I think in the past, you've broken out the retail. What was the -- have you broken out the direct channel? Yes.

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [24]

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Yes, so for this quarter, the direct channel contributed a little under $186 million of our total revenue.

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Operator [25]

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Our next question comes from Greg Badishkanian from Citi.

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Unidentified Analyst [26]

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This is actually Fred on for Greg. I think last quarter, you'd called out plans for incremental marketing spend in the second quarter. Is that still the plan? And how should we think about that relative to the year-over-year increase that we saw this quarter?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [27]

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Yes. So our plan is still to continue to invest. We're seeing traction in our campaign programs that -- when we launched at the beginning of the year. So we'll continue to invest in the second quarter.

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Unidentified Analyst [28]

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Great. And then just looking at that frozen warehouse that you guys just opened up, is that impacting utilization rates or costs at existing facilities? And as that scales, is there an opportunity for improvement?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [29]

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So our investments in our supply chain are really helping drive some of the improvements we're seeing in the gross margin line. It's getting us closer to the customer, and we're able to see some better cost out of that. So yes, as we continue to invest in the infrastructure, we expect to see some benefits from that.

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Unidentified Analyst [30]

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Great. And then just the last one, the -- for that tax benefit in the quarter, the $1.4 million, is that really just a 1Q occurrence? Or should we see some lingering impacts into 2Q and beyond?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [31]

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We primarily are going to see the lion's share of that, we believe, in the first quarter. So the accounting rule change actually is driven by noncash comp, and a lot of our noncash comp impacts the first quarter more than the rest of the year.

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

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And you've got the specifics around Q2 and full year.

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Operator [33]

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Our next question comes from Frank Camma from Sidoti & Company.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [34]

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Hey, congratulations. It's hard to be critical of such results, but I'm going to try anyway. Just on your guidance, actually. I mean, I -- with -- I understand you don't want to go out there too far, but given the size of the revenue this quarter and increasing the second quarter, you're obviously not really touching the second half. I mean, can you just kind of give us a sense, without putting numbers on it, like how much of that is really being conservative versus, obviously, you had a good benefit from the elections and such, or -- and/or is it because Diet Season second half is kind of hard to really -- it's harder to push the needle on that part given its seasonality?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [35]

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So on a year-over-year basis, there's 2 reasons why the growth is a bit heavier in the front half of the year. The first is the timing of the retail and QVC revenues. Again, 2017 revenues from retail and QVC channels are more front-loaded due to the timing of the shipments and the QVC shows. And the second reason is in the back half of 2016, we were able to deploy higher-than-normal media dollars to attract customers. This was due to the increased viewership as a result of the presidential election. So our 2017 forecast assumes we'll return to more normalized media deployment in the back half of the year.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [36]

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Okay. All right. And my second question is a little deeper dive on the gross margins since there was such a huge improvement, I mean, from what I have seen in the past. And you did call out the specifics there with ASP, the food costs and normalized retail margins. Is that the order of sort of the priority of what impacted the gross margin? In other words, is that sort of like -- if you had to layer them out from a quantitative -- that sort of impact?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [37]

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Yes. The 2 main reasons are we're benefiting from the investments in our supply chain because we opened up a warehouse last year, later in Q1, and we also implemented a number of average selling price and cost initiatives in Q2 and Q3 of last year, that you're seeing the benefit in Q1. And then the second piece of it is really around the retail margins that you mentioned in Q1. They included an expense for promotion that was largely expensed in the first quarter of 2016.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [38]

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Okay. The reason why I asked is because I thought even though it's small, so far, relatively small, I thought that food costs for South Beach, just overall food costs would be higher, at least initially. Is that still an accurate statement? I mean, given -- or have you been able to manage through that?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [39]

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So South Beach gross margins in Q1 were lower than Nutrisystem, but didn't materially impact the overall percentage.

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Operator [40]

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(Operator Instructions) And our next question comes from Chris Krueger from Lake Street Capital Markets.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [41]

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Nice quarter. I need to get to -- I need you guys to refresh my memory on the frozen tests you're doing at Walmart. I think you talked about it last summer. I can't remember if that was still in place or what happened there. Can you give us an update?

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Dawn M. Zier, Nutrisystem, Inc. - CEO, President and Director [42]

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Sure. It's the test that never seems to end on Walmart's front. So we're in there through September, and then they'll be looking at go-forward plans, but so far, it's doing fine.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [43]

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The same...

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Dawn M. Zier, Nutrisystem, Inc. - CEO, President and Director [44]

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It's a couple of products. So we have a couple of products in there right now.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [45]

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Okay. And then as far as just testing Nutrisystem products in general, do other retailers kind of go through that process with your products where they have a select number of stores, try it out before they potentially roll out in a bigger way? And if so, are any doing that right now?

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Dawn M. Zier, Nutrisystem, Inc. - CEO, President and Director [46]

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Yes. I mean, it depends. I would say Walmart does that mostly, but we've introduced into a couple of retailers this Diet Season some more products. But again, you have to remember with retail why we say modest growth as we go forward is because shelf space is really competitive on the retail front and there's only so much room for products that already have full shel. So we're doing some -- we have some products in there. We're pleased with where we're going, but we guided some modest growth.

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Operator [47]

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And the last question is a follow-up question from Mitch Pinheiro from Wunderlich Securities.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [48]

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Yes. Hey, I may have missed it, but did you give the retail revenue in the quarter and the QVC revenue?

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Michael P. Monahan, Nutrisystem, Inc. - CFO and EVP of Administration [49]

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Sure. I can give you that. So the retail revenue was $12.1 million and QVC was a little under $6.4 million.

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Operator [50]

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Thank you. This does conclude the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

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Dawn M. Zier, Nutrisystem, Inc. - CEO, President and Director [51]

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Great. Thank you, everyone, for your time this afternoon. As always, we thank our shareholders for their ongoing support and confidence. We look forward to sharing an update on our business and outcomes at upcoming investor conferences and on future conference calls. Have a great afternoon.

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Operator [52]

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