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Nutrisystem, Inc. (NASDAQ:NTRI)

Q1 2011 Earnings Call

April 27, 2011 4:30 pm ET

Executives

Joseph J. Crivelli – Senior Vice President

Joseph M. Redling – Chairman and Chief Executive Officer

David Clark – Chief Financial Officer.

Analysts

Alvin Concepcion – Citigroup

Mitchell Pinheiro – Janney Montgomery Scott

Gary Albanese – Capstone Investments

William Sutherland – Boenning & Scattergood

Kurt Frederick – Wedbush Securities

Ross Berner – Weintraub Capital

Operator

Good day and welcome to the Nutrisystem First Quarter 2011 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Joe Crivelli. Please go ahead, sir.

Joseph J. Crivelli

Thank you. Good afternoon, everyone. Thanks for joining us to discuss Nutrisystem’s first quarter 2011 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 during this conference call, Nutrisystem management will make certain forward-looking statements about its outlook for 2011 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. 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 27, 2011, and assumes no obligation to publicly update or revise any of the forward-looking information.

I’ll now turn the call over to Joe Redling, Nutrisystem’s Chairman and Chief Executive Officer.

Joseph M. Redling

Good afternoon and thank you for joining us on today’s call. I’ll review the company's first quarter 2011 results; provide some key performance highlights for Q1 and an update on trends we are currently seeing in Q2. Then, David will provide more detail on the financials.

As we stated in February during our review of our 2010 results, January got off to a slow start because of competitive pressure and our initial customer offer that under delivered on the key performance measures of responsible conversion. But the mitigation plan we put in place was extremely affected in turning the tide and results strengthened considerably in February and March.

After new customers start reactivation started the year down considerably in January, we saw good growth for the balance of the quarter. The key driver of our financial performance was extremely efficient marketing spend. As a result, while we still posted a loss for the quarter, the financial results were better than we expected across the board.

Revenues were down 15.5% and while we’re never happy with the revenue decrease, considering how tough January was, this was an impressive recovery. The revenue gap closed considerably in each successive month of the quarter, despite aggressive discounting in February and March. The Rollback promotion was successful in strengthening year-over-year new customer starts and reactivation trend over the course of the quarter.

As previously mentioned, January new customers starts were challenged and we ended the month down 28% versus prior year new customers starts. February and March benefited from the full Rollback impact across all media and activation channels and new customer starts were up year-over-year during this period resulting in a full quarter being down about 11%. Our reactivations narrowed this trend and David will give you a little more detail on this in a few minutes.

We expected the Rollback promotion to fatigue as the quarter progressed. But in fact, we maintained a high-level of performance throughout the quarter. Response in conversion rate increased immediately across our activation channel with the launch of this promotion and both February and March posted year-over-year increases in these key metrics on the web. The call center response trends improved with Rollback, but more importantly year-over-year conversion increased by double-digits by the end of the quarter.

In addition, we continued to activate the majority of our new and returning customers on our select fresh-frozen products. The initial results are yielding an 80% second order take rate for these customers. Over 10% improvement from our historical performance and thanks to our careful management of media spend, we expect that the customers we brought in during March will be 50% more profitable than those that we brought in last year.

In summary, we were able to more than offset decreases in year-over-year revenue per customer and gross margin, with improvement in our length of stay and marketing efficiency. In fact our marketing efficiency in March was the strongest we have experienced since April 2007.

I believe the turnaround in first quarter performance was a testimony to our team, our management systems and our business model. When our January launch underperformed, we were able to see the trend in real-time and deploy a cross functional team to brainstorm solutions. Within two weeks, Rollback was launched and every self channel and performance turned on a dawdling, while at the same time we executed a 10% reduction in force to significantly cut fixed expenses for the balance of 2011 and beyond.

The impact these efforts had on profitability was dramatic. At the end of January, EBITDA was negative $16 million. That’s a huge hull to climb out of. Yet, we finished the quarter with positive EBITDA of $1.1 million or nearly $3 million excluding one-time charges such as sever, that’s a $19 million swing in just two months.

From a marketing efficiency standpoint, at the end of January marketing expenses as a percent of sales was over 80% compared to approximately 40% for a typical January. More importantly, February’s and March’s marketing efficiency combined was just over 20%. This again demonstrates the team’s ability to leverage promotional capabilities while adjusting our media mix and spend level to maximize our overall results. We finished the quarter with marketing efficiency of 37%.

We have a well-known brand an accepted and efficacious weight loss system. Price incentives leverage this ingrained appeal and give dieting consumers a strong reason to act and buy. Providing a powerful price value incentive in our category clearly activates consumer response. This is now the second time that we’ve seen terrific response to our Rollback price promotion and we are encouraged at the response when we lower price.

In many ways, this is a sign of the tides. Consumers develop new bargain shopping habits during recession and this has continued during the recovery. They are constantly looking for values and lower pricing. The Nutrisystem brand and product offerings resonate deeply with the consumer and meet the need for an effective diet solution. When we put value in the marketplace, the customer responds.

Fortunately, we have a business model that is flexible, cost effective and adjustable in real time. Our model enables us to shift levers on price promotion and marketing spend to optimize our results. As I noted, our team immediately identified trends, identified an appropriate response and executed it.

As we entered the second quarter, we knew we had a challenging calendar with Easter and the unofficial launch of bathing suit season falling very late in the month of April. We expected to see softness in early April and we did. To compensate, we held back media spend and promotional offers until this week. We just recently ramped up the marketing efforts to support the normally higher Easter demand period and the early signs are encouraging with our first few days post-Easter showing strength.

We should also begin to realize the full impact from our first quarter cost reduction efforts in Q2, which we expect to improve the bottom line throughout the year. In a moment David will discuss our outlook for 2011 in more detail, but we have increased both the low and high end of our guidance range by $0.15. This reflects the higher customer response rates in February and March, higher take rates for successive months for customers who signed on during the Rollback promotion and the impact of our cost cutting efforts, partially offset by the effect of a late Easter in Q2.

As we’ve recently reported, Chris Terrill, our Chief Marketing Officer since mid 2009, is leaving the company to purse an entrepreneurial opportunity as CEO of an eCommerce company. We’re in a process of conducting a nationwide search for Chris’ replacement. Chris assembled the topnotch and talented team and I have complete confidence that the team will manage through this transition and not miss to be. In the interim, I’ll personally take on a more active role with the marketing department.

Now, David will provide his overview of the financial results.

David Clark

Thanks, Joe. For the first quarter of 2011, revenues were $132.7 million, down 16.5% from $158.8 million in last year’s first quarter. The main factors that impacted the revenue decline were the tough January described on our fourth quarter 2010 earnings call, pressured by a reduction in orders from lower second half 2010 new customers and lower year-over-year new customer starts and reactivations within the month, lower revenue per customer in February and March due to our low Rollback price promotion all partially offset by an increase in new customer starts and reactivation volumes in February and March as customers responded to our new offer.

Gross margin was 51.9%, down 270 basis points year-over-year. This was expected because of the Rollback price promotion and was in line with our plan for the quarter. Marketing efficiency or marketing spend as a percentage of sales was 37.1% in Q1, up slightly from 35.6% a year ago. That said and as Joe noted, February and March demonstrated material improvement in marketing efficiency from the unusually high January level as the Rollback promotion gained traction and the media mix optimized the performance.

The finance and marketing teams work closely together to carefully identify those media efforts and day parts we’re getting the best bank or advertising buck and to allow underperforming areas within our ad spend. The results were dramatic and while we didn’t complete the overcome of January hull, they improved materially versus our original forecast and this is one of the key reasons the bottom line was better than expected.

Net reactivation revenue for the quarter was $34.7 million, down 5% from Q1 of 2010. Similar to our new customer trend during the quarter, reactivations increased significantly after the launch of the Rollback promotion. In January, net reactivation revenue was down 10% versus prior year and March ended the quarter essentially flat versus prior year. We continue to expect that net reactivation revenue will be in the mid 20% range of our consolidated revenue for the year.

General and administrative expense was $21.8 million for the quarter, which included $2.7 million of severance and other expenses related to our February 2011 workforce reduction. FAS G&A expense was $18.5 million, an increase of $1.4 million or 7.9% compared to the first quarter of 2010 and included $1.8 million in cash severance related charges. We expect to see benefit of our cost reduction efforts in the remaining quarters of the year.

Q1 2010 operating loss from continuing operations was $5.2 million compared to an operating profit of $7.8 million in last year’s first quarter. And we remain EBITDA positive for the quarter with $1.1 million of adjusted EBITDA. A definition of adjusted EBITDA as well as a reconciliation to GAAP is included in the tables of our press release.

Depreciation and amortization was $3 million and our non-cash employee stock compensation totaled $3.3 million. We had an income tax benefit of $2.1 million during the quarter bringing the net loss to $3.4 million or $0.12 loss per share. Our original forecast for the quarter was for a $0.30 to $0.35 per share loss.

It should be noted that approximately $0.08 of the difference between our actuals and our forecast for the quarter was due to the timing of the recognition of tax benefit for the first quarter operating loss. We originally expected to realize this tax benefit in the second quarter, but it is being recognized in the first quarter. We expect this to be neutral to our full-year guidance.

In addition, one-time severance expenses negatively impacted earnings by $0.06 in the first quarter. The balance of the difference between the first quarter forecast and the actual results were due to strong customer response to our Rollback promotion, the absence of any fatigue to Rollback promotion as the quarter progressed, higher second order take rates for customers who signed on during Rollback, slightly higher gross margins and the gross margin expected and better marketing efficiency than expected.

The only debt on our balance sheet is a $30 million draw under our $200 million credit facility, which is committed through November 2012. This draw is currently locked in at a very favorable interest rate and in fact $20 million of this debt is fixed at an interest rate of 1.5%. Our all-in borrowing rate at 1.33%. With the very favorable banking market environment, we are evaluating our refinancing opportunities for this facility.

From a liquidity standpoint on March 31 of 2011, we had $48.1 million of cash, cash equivalents and marketable securities, compared with $41.2 million at year-end 2010. Even with the challenging environment, we continue to generate positive cash flow with operating cash flow of $13.3 million during the quarter.

In spite of a net loss, we increased cash balances while still paying out $4.9 million in dividends, advancing $15.3 million to secure frozen inventory to meet anticipated demand and incurring $1.4 million of capital expenditures in line with our forecast of $6 million of CapEx for the full year.

We are pleased that our Board of Directors has authorized payment of a quarterly dividend of $0.175 per share payable May 19 of 2011 for the holders of record on May 9, 2011, reflecting confidence in our full-year expected cash flow. We are adjusting our forecast for the year reflecting the outperformance in the first quarter.

We now expect 2011 EPS to be between $0.55 and $0.65, up from our original forecast of $0.40 to $0.50 per share. Second quarter earning per share is expected to be in the range of $0.25 to $0.30 per share. This reflects better than expected first quarter performance combined with another $0.05 of upside for the balance of the year after adjusting for timing differences related to tax saving recognition.

While we’re optimistic the business would stabilize since early January, we continue to see a very price sensitive consumer and may use price promotion selectively further demand in coming quarters. We will also carefully manage customer acquisition costs during these promotions. Lastly, we’ll get into our forecast an expectation of food price inflation and increased shipping cost due to fuel prices.

Thank you and I’ll now turn it back over to Joe.

Joseph M. Redling

Thanks, David. It was a very challenging first quarter. While we were very disappointed by our January start and year-over-year quarterly financial results, we did make critical course corrections in the quarter that clearly improved both our Q1 operating performance and our outlook for the full year. There are also several encouraging signs that we believe reinforce the sustainability and growth opportunities that remain ahead for the Nutrisystem business.

One, the Nutrisystem brands still resonate with consumers in a big way. Our product offering remains relevant and with the right promotional incentives in place we are seeing strong interest in purchase behavior. As we have said many times before, the levers we have to response to real-time market dynamics are unique and provide us true advantages to compete efficiently in the marketplace even in the phase of major competitive new product launches.

The response to our new Select program featuring our frozen food entrée has also been very positive with the majority of our Q1 orders containing our highest quality frozen meal option. As I mentioned, we are already seeing the length of stay improvements with our new select customers.

Looking ahead to 2012, we plan to continue to accelerate our product development process including new marketing programming and a refresh of our core product line-up. That includes the development of new frozen menu items from our recently formed culinary council as we continue to enhance the nutritional components of our offerings, as well as the standard segments we serve.

We are also investigating the feasibility of other areas such as the potential for self-complimentary branded products at retail and development of a complementary medical channel as an expansion of our business. We expect it to be a thoughtful process, such that if we go down this path, it does not cannibalize our core direct-to-consumer business. We will continue to provide updates on these initiatives on future calls.

With that operator, we would like to open it up for some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Greg Badishkanian with Citigroup.

Alvin Concepcion – Citigroup

Hi, good afternoon. This is Alvin Concepcion in for Greg. Just a question, I mean, you mentioned customers started to improve as the quarter progressed and April was being impacted by a late Easter, if you were to sort of exclude the Easter impact with the strong momentum you saw in February and March have continued in April, I know they were tough comparison there too, so if you could provide us any color on those kinds of experience in Easter, that’d be helpful.

Joseph M. Redling

As we said, we saw continued strength from when we launched the Rollback promotion in really late January, we actually built and continued to gain strength all the way through the quarter and March was a very strong performance month for us. And obviously we are only three or four days in right now to the Easter program, but the signs are top, we’re seeing pretty nice response to the programming we had in the marketplace. So it’s a little early, three days does not trend make, but we’re encouraged by what we’re seeing so far.

Alvin Concepcion – Citigroup

Okay, great. And then given the improved results and the marketing efficiency that you’ve been seeing, do you feel you need major product innovations in 2011 or is the focus more on innovative marketing?

Joseph M. Redling

We’ve been fortunate to be able to really mix marketing efficiency with price promotion. Typically, it’s very difficult when you’re giving up gross margin to maintain profitability and as I mentioned in my prepared statements, the customers we brought in March were actually 50% more profitable than the new customers we brought in last year and that’s because our marketing efficiencies have proved to such a degree it really compensated and actually provided a gain versus lower revenue per customer. So we think we have a pretty good calendar ahead of us promotionally. We don’t anticipate any major product introductions for 2011. But we are, as I mentioned, accelerating development in 2012. We think it’s pretty critical for us to have new products as we enter 2012.

Alvin Concepcion – Citigroup

Okay, great. And then just one more on the current length of stay I think was improving, can you give us any color around that, how does it compare to last year, and where do you expect that to go?

Joseph M. Redling

I think the key economic driver for our customer profitability is second month take rate. We track that very carefully. It’s something we really increased pretty significantly over the last couple of years and we’ve kind of been holding at about 70% on that second month take rate. And for the first time we’re breaking 80% of the customers making it to the second month who were choosing our Select program.

We think that’s combination of two things. We think it’s that lower price, but we also think it’s the quality of the food. Obviously, we have now a lot of data behind that. We have a couple of months of data on that. We hope that will continue and we think that’s a great indication for not only very satisfied customers because length of stay here not only relates to profitability for us, but it relates to customer success. And the longer people stay on, the more successful they are with their weight loss, which also turns into a more qualified pool for reactivation later on. So we’re pretty encouraged by that. That’s a pretty tough number to get about 80% and we’re encouraged to see it hit that level.

Alvin Concepcion – Citigroup

Thank you very much.

Operator

We’ll take our next question from Mitchell Pinheiro with Janney Montgomery Scott.

Mitchell Pinheiro – Janney Montgomery Scott

Good afternoon.

Joseph M. Redling

Good afternoon.

Mitchell Pinheiro – Janney Montgomery Scott

Joe, so February 24th, you reported the fourth quarter, and so it’s late in February, is it suggesting the fact that February and March were both stronger that March – you just killed it, March and February was maybe slightly up, were you just a little gun-shy on February 24th and February was up nicely as well?

Joseph M. Redling

We were running pretty well in February. We expected the promotion to lose esteem literally that following week. We had typically seen a pretty short duration for the power of these promotions, they typically don’t last ten weeks. So we thought we were concerned about moving a lot of customers up into February because of the strong price promotion and then typically would have seen the response in that campaign fatigue and you’d start seeing the trends drop and we weren’t sure how fast they were. What really surprised us was the sustainability of that offer, that not only did it not fatigue, it actually gained strength and ran very strong for about 11 weeks. So that’s the first time we’ve seen that sort of duration in that type of promotion.

Mitchell Pinheiro – Janney Montgomery Scott

So Weight Watchers clearly pressured during January. So did you begin to take share from Weight Watchers in February and March or is your sense that you weren’t touching the Weight Watcher customer where the Weight Watcher, if you could talk around how maybe the competitive dynamics were, were Weight Watcher customers on for the month of January, didn’t lose the weight they thought and then switch to the next program or how do that play out?

Joseph M. Redling

I would like to thank people who’d switch that fast, but I am not sure that’s exactly what happened. You were in the first quarter, Mitch, right, so you got a large pool of diving consumers who are making decisions on their options everyday. And I think what happened in January, we just didn’t have a compelling offer that kept us in the game and we lost share, there is no doubt that those type of declines we absolutely lost share.

And we did gain share. Who we took share from? It’s hard for us to determine. The way we think about it is, if we’re growing new customers, we’re gaining share in the market place during that period. There is a lot of undecided in weight loss, when you go into the first quarter, when you have a look at sort of people’s commitment to making choices for weight loss options, literally half to 70% of the market is uncommitted.

So you’re always out there in that real-time battle for share of mind. And I think what happen when we put those offers out there, we really push the levers to more benefiting Nutrisystem, and we really never know in that environment to be honest with you that is it about price, because sometimes you can put a lower price in the market but the momentum is still against you. You end up just discounting the product and not gaining volumes. And I think what we were really happy about is not only that we gained the volume but the level of efficiency of our marketing because the message was so strong. It allows us to really drive the profitability side.

Mitchell Pinheiro – Janney Montgomery Scott

I mean Joe, you talked to just before that you know really, if all you’re doing in Nutrisystem is just trying to take share from another diet program. It's really, that’s not what you’re trying to do, that’s not going to work for the long-term health and Nutrisystem. I mean are you getting the sense at all, I mean did Weight Watchers at all expand the commercial dieter or have you been able to track that anyway or is it nearly a zero-sum game among the major participant?

Joseph M. Redling

Now what we track and it's a great question Mitch, I mean we’re seeing, I may have mentioned before and in the passed calls that we saw a contraction of the commercial weight loss category. So in 2009, and in 2010 the percentage of people actively popping into commercial weight loss was declining. We’ve seen that stabilize in 2011. And so and even grow a little bit.

So we do think that more people are coming into the category but we’re still below where we were in 2008. So I think it's still an economic question and I do think that the more new products that we can put into the marketplace as a category, the more people we can attract. I think all the competitors in the category will do that.

I think right now what our biggest challenge is, is getting people out of self-directed dieting and getting people to understand the value of using a prudent commercial weight-loss solution even in tough economic times. And I think with consumer confidence still in the 60 plus percent range, you’re still in that environment and that’s being clearly supported by our pricing. When we see lower prices, the response we’re getting is pretty strong. So there are people that are still very concerned about the state of the economy and looking for value.

Mitchell Pinheiro – Janney Montgomery Scott

And then, I guess just one more question as it relates to the same topic. So, clearly Nutrisystem, your price points, is not the absolute, it’s higher than whether Weight Watchers sort of uses as their introductory price. And so not just Weight Watchers but couldn't any competitor every January come out with some very low introductory price and just take the steam out of the higher priced offerings such as Nutrisystem. I know, I understand the value per deal. But I mean just on an absolute basis it’s a big number. Can't they always sort of trump something like that every January and then you’re always fighting the rest of the year to get back. Where, how do you guys think about that especially as you try to protect your business heading into next year?

Joseph M. Redling

Yes. I think what gives us the advantage is our model, and we are the value player. Even though we have a high price point we provide tremendous value. There’s two things that you need when you’re in this environment, in this category, you need to scale, you need marketing scale, and you need to be able to spend money to communicate that message. And that's why there is really only two or three key players in this category, because, you have to have the scale to be able to do that.

And because we have a direct-to-consumer model and we see realtime, it's very difficult for other companies to come in with low prices when they also have to add a lot of market. It's just very difficult for them to get real time feedback on whether that’s a profitable pursuit for them. So we really don't see that as an issue, we see it as a great level for us to put in the marketplace when it makes sense.

Obviously, we don't want to become a year around brand on sale. We are in that environment, right now and we think that the offset of that is really new product moves. And I think new product wins or will be discounting and that's something that we really have to get focused on and we are.

Mitchell Pinheiro – Janney Montgomery Scott

All right. It’s helpful. Thank you.

Joseph M. Redling

Thanks, Mitch.

Operator

We’ll take our next question from Gary Albanese with Capstone Investments.

Gary Albanese – Capstone Investments

Hi, good afternoon guys.

Joseph M. Redling

Hi.

Gary Albanese – Capstone Investments

Can you just address what kind of demand, how demand is coming after the price Rollbacks came off, what kind of – are you seeing customer demands staying with you where you expect it to be?

Joseph M. Redling

Yes. I think what's hard to really gauge Gary is, we have this wacky calendar this year. I mean this is the latest Easter that’s fallen since 2003. And so we knew that, that would be a real issue for us to get aggressive in April. So we kind of walked into April very soft with marketing. You always expect when you’re ending up big sales to have a load, which, that was in our forecast going forward. So April kind of performed about where we thought it would, given those parameters. And we were planning to give it off with a big push, come this past weekend and that’s what we did. And so far we like what we see. So but you’re right that when you end a promotion in March 31, you typically do see a bit of a falloff on the following week or two and we expected that.

Gary Albanese – Capstone Investments

Okay. And excuse me, I saw you guys, Costco is promoting gift cards.

Joseph M. Redling

Yes.

Gary Albanese – Capstone Investments

For Nutrisystems product, is that going to be a continued push for you guys?

Joseph M. Redling

Yes. We’ve been in Costco since 2009. So they were great partner of ours. They pretty much launched us in there in December. We were in those stores through May. We are only been inline with them. So currently as we sit here today, they are our only partner really when it comes to prepaid cards.

Gary Albanese – Capstone Investments

Okay. And considering the marketing research, when can we expect, there were some news on that would that be rather in later.

Joseph M. Redling

Yes. Obviously it’s a pretty big priority. It’s nice to put my CMO hat on again. But, we’re accelerating that. I would think 60 days we should add some news on that.

Gary Albanese – Capstone Investments

Okay. It’s great. Thanks, guys.

Joseph M. Redling

Thanks.

Operator

We’ll take our next question from Bill Sutherland with Boenning & Scattergood.

William Sutherland – Boenning & Scattergood

Hey, guys. So I was just curious how new system did through this period?

Joseph M. Redling

Well, it’s kind of performed well, its contribution, its kind of runoff across-the-board. So what we saw in April and May, obviously this price point was provided across all our program segment. So we saw a kind of a across-the-board improvements in women, men and diabetic as the price promotion took hold.

William Sutherland – Boenning & Scattergood

And how did Costco fair this year?

Joseph M. Redling

We actually, there the performance of Costco was lower than last year and it was predominantly because of slotting in stores. We literally were not in stores until Christmas week. And last year we were in stores right after Thanks Giving and that’s just became one of their slotting plans where they were really pushing pre-Christmas products and diet program pre-Christmas was not something that they wanted to do. And so we really can't control when we saw them in those stores. So we lost a lot of free awareness with CostCo, so we came down a bit still very profitable, it’s still a good channel for us, but we did see lower results than we saw last year.

William Sutherland – Boenning & Scattergood

So what you're saying is that once the season got underway, you were able to kind of match?

Joseph M. Redling

We didn’t match, because I think we lost all of that early promotion of people coming in those stores. It's very hard with CostCo, just imagine how many people go to CostCo in December.

William Sutherland – Boenning & Scattergood

I don't want to think about it.

Joseph M. Redling

Yeah and so we literally never picked that back up again. So it's a little tough with that.

William Sutherland – Boenning & Scattergood

Okay.

Joseph M. Redling

To get that back, but we still love the partnership, still they’ve been a good business for us.

William Sutherland – Boenning & Scattergood

And I've noticed as you get going again for the new promotion, it’s a 50% off right?

Joseph M. Redling

Yeah.

William Sutherland – Boenning & Scattergood

Is what you're running. And if you get that take rate, since it’s two-month deal, I mean that’s going to drive that second order right?

Joseph M. Redling

We’re hoping. And it’s interesting, we’re testing a lot of different expressions at these discount, 50% off is really on your first month. Rollback was for as long as you are on our programs. So the economics, I mean the offer sounds much more aggressive, but the economics are actually more in our favor because it’s really our first, really aggressive trial offer and we tested that and we saw that, we had a lot of appeal. So obviously the second month take rate is going to be pretty critical on that. But the key to that offer is again managing and marketing efficiency. We feel we did that with Rollback, we think we can do it again with this offer as we move into May.

William Sutherland – Boenning & Scattergood

A couple of things I think I missed, if you don’t mind, the Select customer length of stay, did you?

Joseph M. Redling

Yeah, we're seeing our Select customers length of stay, we really focused on the second month take rate, if that’s about all we have right now and it’s jumped up to 80%.

William Sutherland – Boenning & Scattergood

Okay. So that's for Select, is 80, Joe?

Joseph M. Redling

Yeah.

William Sutherland – Boenning & Scattergood

It’s not across the board?

Joseph M. Redling

Not across the board, we’re typically in the 70% range for our ready-to-go program.

William Sutherland – Boenning & Scattergood

And then did you say how many of the orders were Select as opposed to just basic?

Joseph M. Redling

We didn’t give the number, but it’s the majority of our orders in the first quarter, so within the 60% range.

William Sutherland – Boenning & Scattergood

It's interesting. That's a real jump, isn’t it?

Joseph M. Redling

Yeah. I think we’re like five now.

William Sutherland – Boenning & Scattergood

That's great.

Joseph M. Redling

And again our premise there is we knew how good the food was. And when only 5% your of your customers are taking part of that and you are seeing a strong length of stay, we needed to get that program in the hands of more of our customers and that seems to be paying off for us.

William Sutherland – Boenning & Scattergood

Okay. And then last one, Dave, I think you said when you were mapping up the second half, how is it going to play out, you put in the logic about shipping and food costs.

David Clark

Yeah, we built in some inflation for both food and fuel.

William Sutherland – Boenning & Scattergood

Okay, okay. Thanks guys.

David Clark

Thanks, Bill.

Operator

We will go next to Kurt Frederick with Wedbush Securities.

Kurt Frederick – Wedbush Securities

Hey, good afternoon.

Joseph M. Redling

Good afternoon.

Kurt Frederick – Wedbush Securities

I just had one question. I was just wondering what your expectations were for our marketing spend until the remainder of 2011?

Joseph M. Redling

Yeah, I mean, we kind of view that on a weekly basis based on response. So our marketing efficiency is going to be kind of managed at mid-20 range.

David Clark

Mid-20% range is kind of implied in our guidance.

Joseph M. Redling

In terms of marketing spend as a percentage of revenue.

Kurt Frederick – Wedbush Securities

Okay, that’s it for me. Thank you.

Joseph M. Redling

Great.

Operator

(Operator Instructions). We will go next to Ross Berner with Weintraub Capital.

Ross Berner – Weintraub Capital

Hey, guys. Thanks for taking the call. Your marketing officer left in the middle of the quarter and you clearly had some success improving your marketing efficiency post his departure. Can you maybe just publish reconcile that a little bit and do you plan to replace him at this point given the success I guess it seems like you are having.

Joseph M. Redling

Yes, I plan to replace him. I think we have a great marketing team as I said in the prepared remarks. We are pretty deep. Our CMO had an opportunity to be a CEO in an eCommerce company and we had obviously delved into this trend in late January. So he was involved as we were course-correcting and changing our programming and getting things in the market, I mean all of us were very involved in that process.

So I’m going to step in the interim, but clearly it’s a big role with a lot of reasonability and we think we have an opportunity where our brand is, with our opportunities in the market to really attract some strong talent to fill that role.

Ross Berner – Weintraub Capital

And just to understand the definition of efficient marketing, it basically means your media, you paid less for it, you got more banks for your dollar, that’s basically what you are saying?

Joseph M. Redling

Yeah, I mean it’s both paying less and also driving more volume on the same dollar.

David Clark

(Inaudible) because of the way our pricing component. When you look for in marketing efficiency is high response, high conversion. And there is lots of situations where you can have high response and low conversion or low response high conversion, you try to get both going at the same time and that’s where we were able to do in February, March to get really strong response to our advertising and get very high conversion of those calls and did it for sale to purchase and to make sure marketing dollars were much further.

Ross Berner – Weintraub Capital

Okay. And one last question, what was the highest second month take rate you’ve ever had, you said you just broke 80 here, is that the highest you’ve ever had?

Joseph M. Redling

Yeah.

Ross Berner – Weintraub Capital

It is the highest, okay.

Joseph M. Redling

Couple of years ago when David and I first started the second month take rate was in the 50s, low 50% range, so we with a lot of the things we’ve done with the product we moved that up to 70% and this is the first time we’ve seen any of our programming get to 80%. So that’s our Select customers skew, the people buying our program, that includes our frozen food are consistently coming in at 80% or above.

Ross Berner – Weintraub Capital

Got it. And can you give us any kind of metric or sensitivity on profitability swings to each 100 basis points of improvement and second month take rate?

Joseph M. Redling

Yeah, I’ll let David try to tackle that, but what we look at is think about it is 10% improvement in take rates, it’s 10% improvement in revenue and maybe half of that falls to EBITDA or much shy.

David Clark

Yeah, that’s accurate. I mean because obviously you incur the marketing cost at the initial start of a customer.

Ross Berner – Weintraub Capital

Okay, Joe and David, thank you very much.

Joseph M. Redling

Thanks, Ross.

Operator

And there are no other questions at this time. I’d like to turn the conference over to Joe Redling for additional or closing remarks.

Joseph M. Redling

Or Joe?

Joseph J. Crivelli

Thanks everybody for joining us today. We look forward to catching up with you over the next couple of months and we’ll see you after the second quarter. Thanks.

Joseph M. Redling

Thank you.

Operator

That concludes today’s conference call. We thank you for your participation.

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