Medifast, Inc. (MED) Q1 2015 Earnings Report, Transcript and Summary

Good day and welcome to the Medifast First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead.

Thank you. Good afternoon and welcome to Medifast first quarter 2015 earnings conference call. On the call with me today are Michael MacDonald, Chairman and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; and Timothy Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending March 31, 2015 that went out this afternoon at approximately 4:05 p.m. Eastern Time. If you’ve not received the release, it’s available on the Investor Relations portion of Medifast’s website at www.medifastnow.com. This call is being webcast and a replay will be available on the company’s website. Before we begin, we’d like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. The words believe, expect, anticipate and other similar expressions generally identify forward-looking statements. These do not guarantee future performance and therefore undue reliance should not be placed on them. Actual results could differ materially from those projected in any forward-looking statements. Medifast assumes no obligation to update any forward-looking projections that may be made in today’s release or on today’s call. All forward-looking statements contained herein speak only as of the date of this call. And with that, I’d like to turn the call over to Medifast’s Chairman and CEO, Michael MacDonald.

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. Today I will provide a brief recap of our first quarter performance, followed by an update on the progress we’re making on our key strategic initiatives for fiscal 2015. Tim will then review our financial results in greater details. After our prepared remarks, we will open up the call to take your questions. We are pleased with our first quarter results and our ability to exceed both the top and bottom line guidance we had shared. Revenue from continuing operations was $73.4 million, exceeding our guidance of $70 million to $73 million. Earnings from continuing operations was $0.36 per diluted share. When we excluded the extraordinary legal and advisory expenses resulting from recent 13D filings, earnings from continuing operations was $0.46 per diluted share, exceeding our guidance of $0.33 to $0.35 per diluted share. While total net revenues decreased 7% compared to the same period last year, we were pleased to see a sequential improvement from the double-digit year over year decrease in the fourth quarter of 2014. First quarter revenue was aided by our March 1 price increase, which when coupled with improved operational efficiencies enabled us to generate our strong earnings performance. I would now like to walk you through how we are progressing on each of our 2015 key focus areas. First, our team is committed to the growth and simplification of Take Shape For Life. In the first quarter, we placed increased emphasis on Health Coach sponsorship in order to drive new growth and our efforts have started to pay off. As announced on our last earnings call, February was our strongest Coach sponsorship month since mid-2013 and March followed with continued growth in strong Health Coach sponsorship numbers. As we work to provide simple tools in an easy to duplicate process for Health Coaches to successfully build our businesses, we target the initial sign-up process training and leadership development as areas of improvement. A good example of our efforts in this area is our newly launched incentive program called Each One, Reach One. This program motivates business coaches to sponsored new coaches with BeSlim Club orders and provide incentives for those new coaches to quickly achieve new ranks. Each One, Reach One reinforces the importance of sponsorship and rewards ranking achievement. In addition to the many successful super regional events that took place in key cities around the country in the first quarter, recently in April, we hosted our annual Go Global event, Arizona. Over 900 health coaches participated in our leadership development event and attended several training workshops and educational seminars to help them grow and further expand their businesses. In line with our strategies, we focused Go Global on two key areas. First, we emphasized the power of our business model to include not only the physical transformations we provide, but the financial transformations as well. Second, we focused on teaching the new duplication model, called the Preferred Path, which helps coaches better articulate the potential of the business opportunity to others, while staying true to our mission to help get America healthy. At the event, we were excited to launch our new Health Coach signup process. The new Health Coach signup process which historically can take up to 30 days to complete is now being condensed into a single step that can be completed online in approximately five minutes. Now, a Heath Coach can sign up and sponsor new client coach within hours. This allows our coaches to get to work right away and they are most excited and motivated to start making a difference. Our coaches were thrilled with these improvements and new tools and we are looking forward to seeing the positive benefits of this streamlined signup process. We also took the opportunity of Go Global to conduct strategic planning sessions with top field and corporate leaders to make sure we remain completely aligned with the important initiatives required to resume growth in Take Shape For Life. Moving on to our second area of focus, we continue to make headway optimizing on Medifast Direct response business. We launched three new television spots as part of "Your Whole World Gets Better" campaign and have instituted weekly optimization sessions to review the network, day part, unit lengths and creative executions that are working best to drive activity and conversions. Our advertising mix in Q1 included a shift to more television, continued strong presence in digital. We are pleased with the significant efficiency improvements we saw across many digital spending mediums. While Med Direct spending was slightly down in the first quarter, we were able to drive strong upward funnel activity resulting in increased website visitors over the prior year first quarter. We will continue to look at our most effective spend in television, search display and affiliate marketing as we head into the second quarter of 2015. We believe the effectiveness of our products and programs along with our efficient advertising strategy is working to create the necessary demand. Our Medifast Direct team continues to make progress on improving the customer online experience. Our success will be measured by our ability to increase our conversion rate of those increased visitors to our site. Improvements will come in a way of a new guided selling pathways, new offers, more targeted communications and new reactivation campaigns targeting the significant number of inactive customers in our database. We also just introduced new cart abandonment campaigns to help those customers with items still in their cart to complete the checkout process. The Medifast Advantage program launched last August continues to drive improved retention. First time auto ship orders often referred to as Advantage Starts reached approximately 60% of our total customer starts in Medifast Direct in quarter one, back to the levels we enjoyed in early 2012 and 2013. This is a much healthier mix as we know that auto ship customers outpace on demand customers at an average order value and lifetime value. Looking ahead to the second quarter, we expect advertising spending to be slightly down year over year, while our plans for the second half and full year reflect an increase in spending year over year. As we move into the second half, we will be positioned to leverage many of our website improvements. I discussed a moment ago our plans realize stronger conversion. We will continue the test and measure ecommerce improvements, implement website design changes and launch mobile experience enhancements to help improve the efficiency of our spending along the way. We are optimistic in the long term growth prospects of this channel as we emphasize these new programs. Our third area of focus is product and program innovation, both vital elements in differentiating Medifast as a leader in weight management solutions. At our Take Shape For Life Go Global event we launched our new Optimal Health three plus three plan that highlights the Optimal Health products we launched late in 2014. This new nutritionally balanced plan is easy to follow and consists of three balanced meals and three Optimal Health products each day to help individuals sustain their healthy weight. The new Optimal Health kit we launched at Go Global provides a 30 day product supply that supports an active lifestyle and offers our coaches a way to easily offer the new Optimal Health products within their businesses. This new program and product offering supports our focus on healthy living products within Take Shape for Life, so we continue to expand Health Coach reach beyond weight loss. As we watch consumers becoming increasingly interested in overall healthy lifestyle options, we look forward to meeting consumer needs and gaining market share in this space. As many of you know, 2014 was the biggest new product year in our history and we now have a full suite of products to satisfy current and prospective customers. Raising awareness of our many products and program offerings will continue to be an important priority for us as we pave the road for new offers and new kits and additional innovation in 2015 and beyond. I am pleased with the progress we made within each of our key areas focus, while we also continued to execute across our business with strong financial discipline. We are confident that the changes we are making now to grow and improve Take Shape For Life, optimize Med Direct revenues and deliver product and program innovation will leave Medifast a success in 2015 and beyond. Before I turn the call over to Tim, I want to briefly review some of the governance enhancements we recently announced. We have nominated five new directors for approval at the 2015 Annual Meeting, all of whom will add significant expertise and a fresh perspective to our board. In addition, we reduced the size of our board from 12 to nine directors with only one insider remaining on our board. Our entire team is unified around the value building objectives discussed today and we are committed to working collaboratively to advance our priorities while generating enhanced shareholder returns. With that, I’d like to turn the call over to our CFO, Tim Robinson, who will discuss our first quarter results in more detail and our outlook for Q2 and the full year 2015.

Thank you, Mike. I’d now like to review our performance for the quarter ended March 31, 2015 in more detail. Please note that the financial information I reference today will focus on our results from continuing operations. For the first quarter of 2015, income from discontinued operations net of tax was $28,000. In the first quarter, net revenue decreased 7% to $73.4 million from net revenue of $79.2 million in the first quarter of the prior year. The Take Shape For Life sales channel accounted for approximately 71% of revenue, the Medifast Direct channel accounted for 20%, the Franchise Medifast Weight Control Centers accounted for 6%, and the Medifast Wholesale channel accounted for 3% of revenue. Focusing on our sales channels in more detail, revenue in our direct sales channel, Take Shape For Life, decreased approximately 9% to $52.1 million. The decrease in revenue for this channel was primarily driven by a decrease in the number of health coaches, along with a decline in revenue per health coach. We ended the first quarter with approximately 10,500 active health coaches based on our [Star] calculation and the average revenue per health coach per month during the quarter was $1,564. In order to provide a more accurate depiction of the number of health coaches contributing to Take Shape For Life revenues, we will be changing the way we report active health coaches and average revenue per health coach going forward. The health coach count will now be reported as the number of earning coaches each quarter instead of the number of earning coaches in the last month of the quarter. The average revenue per Health Coach will now be calculated on a quarterly basis instead of an average month within the quarter. These new quarterly measurements provide a more consistent metric for quarterly comparison. The total number of active Health Coaches in the first quarter was 12,100 as compared to 12,700 in the first quarter of 2014. The average revenue per active earning Health Coach for the quarter was $4,316 as compared to $4,488 in the first quarter of 2014. We will provide a historical perspective on these new measurements in our 10-Q to be filed in the next few days. Our Medifast Direct segment revenue decreased 16% to $14.4 million, as compared to $17.1 million in the first quarter of 2014. While still a decline, this marks the third consecutive quarterly improvement in the rate of decline and results were in line with our expectations as we continued to focus on efficiently managing the investment of marketing dollars. Revenue in the Franchise Medifast Weight Control Centers channel increased to $4.7 million in the first quarter from $3.6 million, or an increase of 31% as compared to the same period last year. The increase was driven by the conversion of corporate centers to franchise centers, partially offset by franchise center closures as well as a decrease in sales of franchise centers open greater than one year. We ended the quarter with 70 franchise centers in operation compared to 49 centers at the end of the same period last year. Wholesale channel revenue which comprised of revenues from physicians and other wholesale partners increased to $2.2 million, compared to $1.5 million last year. This increase was primarily driven by an increase in activity within a few specific accounts for the quarter. Gross profit for the first quarter of 2015 was $53.8 million, compared to $57.9 million in the first quarter of the prior year. Our gross profit margin increased 20 basis points to 73.3% versus 73.1% in the first quarter of 2014. This consistency is a result of a combination of price increase and the outstanding work of our supply chain team in managing product costs. Selling, general and administrative expenses in the first quarter of 2015 were $47.3 million versus $48.3 million in the first quarter last year, a decrease of $1 million. As a percentage of net revenue, selling, general and administrative expenses were 64.4%, up from 61% in the first quarter of 2014. First quarter 2015 selling, general and administrative expenses include $1.8 million in extraordinary legal and advisory expenses, resulting from recent 13D filings. Excluding these items, SG&A as a percentage of sales would have been 61.9% in the first quarter of 2015. We do not expect any material expenses for the remainder of the year resulting from 13D filings. Sales and marketing expense decreased $200,000 in the first quarter of 2015 as compared to the first quarter of 2014. This was primarily driven by a decrease in Take Shape For Life event expense, partially offset by an increase in advertising production expense. First quarter operating income from continuing operations before tax was $6.8 million, or 9.3% of net revenue, compared to $9.9 million or 12.5% of net revenue in the first quarter of 2014. First quarter income from continuing operations net of tax was $4.4 million, or $0.36 per diluted share, based on approximately 12.2 million shares outstanding, compared to $6.5 million, or $0.49 per diluted share, for the comparable quarter last year based on approximately 13.2 million shares outstanding. Excluding expenses associated with extraordinary legal and advisory expenses resulting from recent 13D filings income from continuing operations would have been $5.6 million, or $0.46 per diluted share. Our effective tax rate was 35% compared to 34.1% in the first quarter of 2014, a slight increase primarily related to the changes in the allowable domestic manufacturing deduction year over year. Our balance sheet remains strong with stockholders’ equity of $84.8 million and working capital of $59.5 million as of March 31, 2015. Cash, cash equivalents, and investment securities for the first quarter of 2015 increased to $61.4 million compared to $52.6 million at December 31, 2014. We currently have 1.2 million shares authorized to repurchase as of March 31, 2015. Turning to our guidance, we expect second quarter net revenues from continuing operations to be in the range of $72 to $74 million and earnings per diluted share from continuing operations to be in the range of $0.47 to $0.50 per diluted share. Our revenue and earnings guidance for the full year remains unchanged. That concludes our financial review. Now, I’d like to turn the call back over to our Chairman and CEO, Mike MacDonald.

Thanks, Tim. In summary, we continue to expect that our strategic initiatives and the restructuring of our business operations will help us to generate improved results. The actions we’ve taken including the additions we made to our management team and board of directors set a strong foundation for Medifast in the future. We appreciate the efforts of our team at all levels, and expect that with their help and the actions we’ve taken, we will drive performance across our Take Shape For Life, Medifast Direct, Franchise Weight Control Centers and Medifast Wholesale channels. We appreciate your interest and support of Medifast. With that business review, Tim, Meg and I are available to take your questions. Operator?

[Operator Instructions] And our first question will come from Frank Camma of Sidoti.

A couple of questions. Just first on clarifications. The EPS guidance for the year that you’re giving, they’re staying the same, $1.85 to $1.95, I’m assuming that does exclude the $0.10, did I have that right?

Excludes the cost resulting from 13D filings, yes.

So just $0.46 for this quarter then, correct?

That is correct.

The other thing is your typical cadence of revenue in the direct side, at least, is the first quarter would historically be your highest revenue quarter. I’m assuming there was nothing unusual this year that would change that. Do I have that right?

You’re referring to Direct response or Direct selling?

Direct response, sorry, Medifast Direct.

For Direct response, we spent a little down this quarter, first quarter versus last year’s first quarter and we have a lot of things coming out later in the year that we’re excited to spend more. But I think we’re going to keep it pretty even field spend this year. That was our goal, to be more consistent in our spend than in previous years.

Just the one that I was getting at is, I mean, typically like if I’m looking at your competitor [Nature System] they typically have and you have in the past, I guess, at least for the last couple of years?

We [indiscernible] in the first quarter that we now...

Right, and that will benefit your revenue.

Yeah, we’re a little different though than the company that you mentioned in the timing of our spend. They are more front end loaded than we are. So they are a little bit more seasonal that we are, so to speak.

Frank, we’re not as big like – if you looked at our revenues historically, we’ve probably done 52% in the first half, 48% in the second half. There hasn’t been a huge...

Yeah, that’s fair. It’s obviously a smaller component of your business. So then turning to the most significant part of your business, Take Shape For Life, the only question I really had there or a couple of things, you mentioned price increase, could you just tell us what that was in percentage terms?

Yeah, we did a price increase different for our Direct response channel, our Medifast Direct channel. So the overall...

And it was product specific as well.

Right. So the overall...

The range – those products that did drop in price, the price increase ranged in the [indiscernible] range for just those products. So most of our newly launched product didn’t change, mostly our traditional products.

And the final question I have is just on the – you had mentioned that you used to take up to a month to sign people up and it sounds pretty relevant that you’re getting on a shorter timeframe. But I was just wondering why did it take so long before?

Yeah, I mean, I think the other thing was that when someone came on board, we haven’t fill out all of their paperwork. That was our goal. We want all the information we need to be able to pay you a check, we wanted right away, including when you’re signed up we would then send you your replicated site information. So what we’ve done is did everything in that process up. So initially when you go to sign up, you no longer have to fill out all the financial information that the company will need to pay you a check. You have 30 days to do that, it doesn’t prohibit you from signing up a new client and coach. And that’s what was happening in the past. Until you filled out those forms, you weren’t able to get your replicate, you weren’t able to get clients to sign up on their replicated site. And that was not the best process, so that was the update we did. We still have some of the information obviously to pay people their check, but now the second they sign up its very quick, easy forms, there is no test that anyone needs to take immediately, all those are behind it. So you can literally sit with someone and within five minutes you see the replicated site and sign someone up on your replicated site within 10 minutes. So that is a significant difference. And some people would probably do it in two to three days, who are really, really excited. But others would take 30 days and that was, as Mike alluded to, when people are motivated and ready to go, we need them to go [indiscernible].

And at this time, we will conclude the question-and-answer session. I’d like to turn the conference back to management for any closing remarks.

I’d like to thank everybody for your interest in Medifast and your participation in today’s call. We look forward to providing you with an update on the business when we report results for the second quarter. Thank you and have a great evening.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.