NutriSystem Inc. (NTRI)

Q2 2010 Earnings Call

July 29, 2010 04:30 pm ET

Executives

Cindy Warner - IR

Joe Redling - CEO and Chairman of the Board

David Clark - CFO

Analysts

Greg Badishkanian - Citi Group

Colin Sebastian - Lazard

Mitchell Pinheiro - Janney Montgomery Scott

Bill Dezellem - Tieton Capital

Presentation

Operator

Good afternoon. My name is Latanya and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2010 Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

I will now hand the floor to Cindy Warner, Head of Investor Relations. Thank you, Ms. Warner, you may begin the conference.

Cindy Warner

Good afternoon, everyone and thank you for joining us to discuss Nutrisystem's second quarter 2010 financial results. With us today from management are Joe Redling, Chairman and Chief Executive Officer; and David Clark, Chief Financial Officer.

Before we begin, I'd like to remind everyone that this announcement contains forward-looking statements that involve risks and uncertainties. Such information includes statements about Nutrisystem's second quarter 2010 financial results, as well as statements that are preceded by, followed by or include the words believes, plan, intends, expects, anticipates or similar expressions.

Statements regarding Nutrisystem's plans and expectations for the third quarter of 2010 and the full year 2010 and similar statements that are not statements of historical facts constitute forward-looking statements. For such statements Nutrisystem claims protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The actual results may differ materially from the results predicted and the reported results should not be considered an indication of future performance. Factors that could cause actual results to differ from those contained in the forward-looking statements include, but are not limited to, those factors set forth in Nutrisystem's annual report on Form 10-K for the year ended December 31, 2009, which has been filed with the SEC.

Nutrisystem is making these statements as of July 29, 2010 and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement.

And with that, I would like to turn the call over to Joe Redling, our Chairman and Chief Executive Officer.

Joe Redling

Thank you, Cindy. Good afternoon and thank you for joining us on today's conference call. I will review the company's second quarter 2010 results provide some key performance highlights for the second quarter, an update trends we are seeing in Q3. David Clark will provide more details on the financials in a few minutes.

Second quarter revenues came in at $142 million up 8%, as compared to $131 million a year ago. New customer revenue was the primary contributor of growth in the quarter as we achieved 31% increase in new customers versus the second quarter of 2009. Gross margin for the second quarter of 2010 was 56.4% which represents a 180 basis point improvement from Q1 2010 as well as a 240 basis point improvement versus Q2 of last year. Our continued improvement in gross margin is a direct result of improved customer management, supply chain optimization in channel mix. David will go in to more detail on gross margin improvements in a few minutes.

Marketing, as a percentage of revenue was 26% in Q2. This has improved significantly from Q1 of this year, where we experienced pressure on media rates and had several one-time marketing related charges that impacted our overall efficiency. In Q2, 2010, we were able to invest both aggressively and efficiently immediate. Our results this year have fallen back in line with Q2, 2009, when market spend represented 27% of revenue in the quarter. Overall these are positive results in a challenging marketplace.

Recall that rates in 2009 were near historical lows, so the year-over-year comparison is tough and in the first part of this year, the random market was a challenge as overall inventory tightened up and non-traditional players entered the marketplace.

We have effectively managed our position in the random market in the second quarter, and we expect to remain key media periods ahead of us to be manageable.

Adjusted EBITDA for the quarter was $26 million representing a 57% increase versus the second quarter of 2009. This EBITDA growth was primarily driven by strong new customer performance across all of our brands; continued gross margin improvement and G&A expense management from last year's expense reduction initiatives.

We continue to debt free and had $89 million in cash, cash equivalent and marketable securities on hand at the end of the second quarter. We generated $35 million in cash from operations in the second quarter and took the opportunity to put our cash to work as we actively repurchased shares in June and July.

We also announced that we will be paying our quarterly dividend in August and Dave will provide more detail on the share repurchase and dividend during his financial review.

Let's spend a few minutes highlighting some key areas regarding Q2 performance. As stated earlier, new customer starts in a quarter are very encouraging as we experience a 31% improvement in new customer starts versus Q2 of 2009. Also encouraging was that while we saw continued contributions from Nutrisystem D, we also continued to improve the new customer trends of our core offerings for Women, Men and Silver.

As I mentioned on the last call, we did see a stronger seasonal demand shift in April driven by the Easter holiday. That seasonal demand coupled with new creative promotional offers and an effective media effort enabled us to build on the new customer growth we experienced in Q1 across all our program offerings. That momentum strengthened in May, as we applied additional promotional way to take advantage of the reviewed consumer interest and to optimize conversion rates over the phone and on the web. This is quite a contrast from a year ago when we saw little if any, seasonal demand in the market for surrounding the Easter period.

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