Medifast, Inc. (MED) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Medifast First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead.

Good afternoon. Welcome to Medifast's first quarter 2017 earnings conference call. On the call with me today are Daniel Chard, Chief Executive Officer; and Timothy Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending March 31, 2017 that went out this afternoon at approximately 4:05 P.M. Eastern Time. If you have 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 I begin, we would 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 statements 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 today's call. And with that, I would like to turn the call over to Medifast's CEO, Dan Chard.

Thank you, Katie. Good afternoon everyone. We are pleased to discuss our first quarter 2017 financial results with you today. I will provide a brief overview of our financial and operational business performance. Tim will then review our financial results in more detail and share our 2017 annual guidance. Finally, Tim and I will be available to answer your questions. We are pleased with our start to 2017. In the first quarter, we continue to make progress on our key strategic initiatives across our organization. We have taken steps to position Medifast for an accelerated rate of growth with sustainable improvement in profitability as we progress through the 2017 year and over the next several years. Revenue of $70.6 million was in line with our expectations. Gross profit margin expanded 140 basis points and we managed our expenses well to drive earnings of $0.51 per diluted share, which exceeded our guidance of $0.45 to $0.48 per share. We continue to make progress in preparing Medifast for a very promising future, which includes deeper penetration of our existing US market, as well as expansion into new markets. This month we will complete a companywide initiative focused on aligning our growth strategy, internal processes, and organization to improve our efficiency and execution capability. Our teams have already begun leveraging a broader set of resources to partner with and support our growing community of Health Coaches to achieve our growth goals. Now let me focus on our operational performance in greater detail. Take Shape For Life reported its sixth consecutive quarter of year-over-year growth, up 2%. We reported 13,000 active earning Health Coaches during the quarter, an increase of 3%. Our quarterly revenue growth rate to depth in the quarter consistent with our expectations given the slow sponsoring we had in Q4. We have addressed the issue and believe we're positioned to accelerate our sponsoring through the rest of the year. The continued rollout of our new OPTAVIA branded products and the transition of our Health Coaches to leverage the new brand identity and products is on track. The supply chain channels we encountered last year resulting from strong demand have been addressed, and we are all scheduled to deliver the balance of the product line in our national convention in July. The adoption of the OPTAVIA brand has been strong, and as we saw momentum build by mid-quarter putting us in the good place entering Q2. We anticipate that adoption and integration of the OPTAVIA brand into our Health Coach community will continue to progress resulting in the majority of our future product revenues coming from our premium priced OPTAVIA branded products. We recently hosted two events that demonstrated and celebrated the success we’re experiencing in our Health Coach community. Our Go Global event in the first quarter was the largest Go Global event in the history of the company. This event held in Atlanta during February was held for qualifying business coaches who aspire to advance to business leader status. The event featured training and collaboration forums to help business coaches learn the incremental skills required to help their Health Coaches advance to business coach status. Field leadership development resulted from the advancement from health coach to business coach and from business coach to business leaders and an important requirement to build sustainable growth in the coach community. So just a couple of weeks ago, we returned from our annual recognition trip in Costa Rica, where we celebrated the remarkable success of our top performing health coaches. I enjoyed spending the time getting to know many of coaches in an exciting and aspiring setting. The personal stories of lifelong transformation were amazing and the events should help ignite excitement through the health coach community as they share their experience with others on their return from a well-deserved remarkable trip. The second quarter will be a very important quarter for Take Shape For Life. We are regaining the momentum that slowed during the fourth quarter and our team is working very hard to prepare for the most important convention in our history. This convention will be a springboard for revenue growth in the back half of the year, as we introduced the balance of the OPTAVIA central line and launched the much anticipated new business support technology platforms for our coaches. We will also officially change the name of our health coach community from Take Shape For Life to OPTAVIA. Our internal teams are in full execution mode working side-by-side with our business leaders to ensure the event success. Early indications reflect a record attendance expected in Dallas, Texas in July for a content packed event featuring opportunities for coaches and clients alike to embrace the OPTAVIA message. The habits of health system and our business opportunities to deliver our promise of offering each new client lifelong transformation, one healthy habit at a time. Now let me move to Medifast Direct. We are very pleased to see the meaningful improvements in the trajectory of our direct response business. We have been working for quite some time to find the right balance in the advertising spend, placement, and messaging to ensure we have a sustainable model to acquire a growing number of customers that support our long-term profitable growth. While we still have work to do, we are encouraged by the improving trends and anticipate more progress in the second quarter. Our ability to acquire customers through digital sources at a reduced rate has now allowed us to begin testing our Medifast Direct platform as the clients and lead generation tool that will support our health coaches. We are still in the very early stages of development of this potential new opportunity, but reach or support the idea that if we assigned a health coach to a customer there is a much better outcome for everyone. This testing is an example of our focus to move and end-to-end integrated business model for the benefit of our health coach partners. We are optimistic that this alignment will enhance our long-term success and will serve as the springboard for the expansion into - for our expansion into other markets. Before I turn the time over to Tim, I would be remiss, if I didn't mention our recent recognition by Forbes. Medifast for the second consecutive year was rated as one of Forbes 100 most trustworthy companies in America. This is a significant accomplishment and we're very proud to be recognized on this list. Honesty and integrity are important components of our mission and this recognition further validates our company's commitment to financial ethics and corporate integrity. A special thanks especially to our finance and legal leadership for their hard work and commitment to excellence. In summary, we continue to make year-over-year progress and expect to see an acceleration of our growth rate in our upcoming quarters in 2017. We are approaching what will likely be our wired largest convention ever with the very significant set of deliverables. The health of our business, our significant cash generation and the strength of our balance sheet puts us in a position to continue enhancing stockholder value through improved results in addition to our existing dividend and share repurchases programs. With that, I would like to turn the call over to our CFO, Tim Robinson.

Thank you, Dan, and good afternoon everybody. In the first quarter, revenue was $70.6 million was in line with our expectations. Take Shape For Life accounted for approximately 82% of revenue. Medifast Direct accounted for 12.7%. Franchise Medifast Weight Control Centers accounted for 4.9%, and Medifast Wholesale accounted for 0.4% of net revenue. Revenue in Take Shape For Life increased 2.3% to $58 million from $56.7 million in the first quarter of the prior year. As Dan mentioned, there were approximately 13,000 active health coaches in the first quarter, compared to 12,600 in the same period last year and 12,500 in the fourth quarter of 2016. Average revenue per active earning health coach for the quarter decreased slightly to $4,463 as compared to $4,490 in first quarter of last year. Our Medifast Direct revenues decreased 18.3% to $8.9 million, as compared to $10.9 million in the first quarter of 2016. Total Medifast direct advertising in the quarter decreased 44% to $2.3 million from $4.1 million in the first quarter of 2016. This decrease is a result of our ongoing initiatives to optimize our advertising spend to acquire growing number of customers that support long-term profitable growth. Going forward, our strategy is to gradually shift our emphasis to an integrated business model driving online customers into our coaching model of gaining a higher lifetime value and minimizing any remaining conflict between our current business units. Revenue in the franchise Medifast Weight Control Centers decreased to 3.5 million from 4.2 million in the same period last year. The decrease in revenue is primarily driven by fewer franchise centers in operation during the period. We ended the quarter with 37 franchise centers in operation, across 19 reseller locations, compared to 58 centers at the end of the same period last year. Medifast Wholesale revenue, which is mostly comprised of revenues from healthcare providers decreased to $261,000, compared to $497,000 in the prior year period. Lower revenue was consistent with our previously communicated strategic decisions to reduce emphasis on the area of our business based on a significant number of healthcare providers in our Take Shape For Life coach community and our enforcement of our business partner compliance distribution requirements. Gross profit for the first quarter of 2017 decreased modestly to $52.9 million, compared to $53.2 million in the prior period. We were pleased to see our gross profit margin as a percentage of net revenue expand by 140 basis points, 74.9% versus 73.5% in the first quarter of 2016. The increase was driven primarily by price increases, and efficiencies in our supply chain operation. Selling, general and administrative expenses in the first quarter of 2017 were $44.3 million or 62.7% of revenues versus $46.9 million or 64.9% of revenues in the first quarter of last year. The first quarter of 2016 included a $1.2 million of restructuring costs and excluding these costs SG&A decreased 1$.4 million year-over-year. Adjusted selling, general, and administrative expenses as a percentage of net revenue decreased 60 basis points from 63.3% in the first quarter last year, compared to 62.7% for the first quarter of 2017. The decrease in SG&A was primarily a result of reduced and more effective advertising spend in Medifast brand. Sales and marketing expense decreased $1.4 million in the first quarter of 2017, as compared to the first quarter of 2016. Net income in the first quarter of 2017 was $6.1 million or $0.51 per share, based on approximately 12 million shares outstanding. First quarter of 2016 net income was $4.3 million or $0.36 per diluted share, based on approximately 11.9 million shares outstanding. Excluding $800,000 of restructuring cost, net of taxes, net income in the first quarter of 2016 would have been $5 million or $0.42 per diluted share. Our effective tax rate was 29.5%, compared to 33% in the first quarter of 2016 decreasing the effective tax rate was due to the change in accounting for taxes associated with share-based compensation. Our balance sheet remains very strong with shareholders equity of $99.2 million, and working capital of $80.5 million as of March 31, 2017. Cash, cash equivalents and investment securities as of March 31, 2017 increased $2.2 million to $79 million, compared to $76.8 million at December 31, 2016. We continue to have approximately 850,000 shares remaining in our repurchase authorization as of March 31, 2017. Our board of directors declared a $0.32 quarterly dividend during the quarter payable on May 9. Turning to our guidance. We expect second quarter revenue to be in the range of $72 million to $75 million, and earnings per diluted share to be in the range of $0.51 to $0.54 per diluted share. We are reiterating our 2017 full-year guidance. We expect full-year revenue to be in the range of $290 million to $300 million and full-year earnings per diluted share to be in the range of $2 and $2.10 per diluted share. Our fiscal year 2017 guidance assumes a 33% to 34% effective tax rate. That concludes our operational and financial review. We appreciate your interest in Medifast and Dan and I are now available to take your questions. Operator?

[Operator Instructions] The first question comes from Frank Camma of Sidoti. Please go ahead.

Hi good afternoon guys.

Hi Frank.

Hi Frank.

Can you talk about the guidance for Q2; I know you're not changing the full year. I think we [indiscernible] strongest last year your SG&A did pretty aggressively in Q2 as a percent of revenue, can you remind us why that was and it doesn't look like obviously you're not expecting that again this quarter, so just kind of wondering what went on last year?

Yes, so it is a little bit last year, little bit this year. So last year you may recall in the first quarter we did some restructuring. So, we took out a decent amount of expense from the first quarter into the second quarter, so you saw the drop there. All the restructuring cost was forced into the first quarter. So you had a pretty good drop in the second quarter. So that’s kind of the shift last year. This year you have - there is an upcoming convention; especially it is a really big deal for us. It is a big event. And unlike even prior years we have made investments in systems, investments in the story behind our Take Shape For Life soon to be up to being a group. So we put - we have a decent amount of cost in the second quarter of this year that we didn't have last year, but preparing really for, really big transformation here in July. And that’s really the catalyst that will drive the increased revenue growth in second half.

Got it, okay. Second question is just the health coach productivity continues to be very strong, especially in light of like how much growth you had in total account, can you just explain like, do I have a right thought that at some point just because of the way your model works, it seems like you kind of almost tap out on the ability to improve that productivity or am I wrong about that? Like is it really like a natural limit, I guess is what I'm saying per health coach?

Hi, I think, this is Dan Frank. I think what I have to say is, the number goes up and down slightly depending on what’s happening and related to sponsoring, but in general it’s fairly stable as you have said. We don't foresee it dropping significantly and lightly as we continue to roll out OPTAVIA and come out of the convention. We’d expect that sponsoring increases in the back half of the year that we’d also see productivity potentially just up slightly, but it’s a reflection largely of the way our coaches work with their clients. Most of them have, multiple clients they work with the [indiscernible] which why it is a fairly stable number for us.

I guess the dip in Q4 was some of that was kind of one-time right, because of certain product products weren't available, is that correct when it went down it was around 41 on that level?

Yes, it is the combination of things that are very related. So, we had, as you know in the fourth quarter we had some supply challenges, some of our brand-new products. And that had an impact on - some impact on revenue, but more have been impacted on sponsoring on new coaches and so the combination of those two things put downward pressure on the productivity. And then we typically though in the fourth quarter, historically at least in the fourth quarter to holidays, a little bit different productivity anyway.

Sure. All right, my last question is just on advertising spend on Medifast Direct, I mean I thought you drove surprisingly strong revenue there given the spend level, can you talk it all about like what percentage of your revenue roughly is as members coming back on the program or previous customers once again trying the program in the New Year, do you have sort of a feel for that?

I don't have a number for you. I think we have a feel for, what I can tell you is that we don't have a very robust effort to go back after last customer. So we do some email campaigns for last customers, and the way we track customers in our system is that once a customer gets an account with us, we measure them as a customer and not a - if they come back six months from now, they are still the same customer. They don't get recorded with the new customer. So we have some kind of add other information I think that says, I think it is a relatively smaller percentage of our customers in the, my guess would be, somewhere in the 10% to 15% range, but the way we track our customers where we track lifetime value, all those things is once we attach an ID to you, you are a customer. So like a metrics, that metric that we look that closely at our metric that we report. From an advertising perspective, I think we are actually pleased with the quarter and we are pleased with what we have already seen in April, and we have been trying for long time as you know to find that right mix be able to acquire a customer at a very efficient cost. So that, as we go forward we could afford to attach that customer to a coach, which we know is a better outcome for the customer as far the hang on program, we know it is a better outcome for us, it is more profitable outcome for us. So, if we had maintained our previous spend, it would never financially make sense to attach a coach and pay a coach for coaching a customer and also pay for the acquisition. So we are really pleased with what we saw on the first quarter is we had a very good acquisition cost. We have seen it come through in April as well and you are starting to see that trajectory of revenue growth in Med Direct, you are starting to see that the rebound. We expect to see more of that in the second quarter.

It must be a good thing for the coach too obviously, since they get some free leads, but so how do you determine like who gets what, is it all sort of random by geography, I mean how will you do that?

We are developing, I will call it an algorithm, but it is tied to performance. So those coaches were performing at the right levels, who didn’t know, in essence will provide the best kind of support are those who we see believe and we are at the very beginning stages of this right now, and a big part of this is making sure that our coaches understand that we are working with them to make this potential drivers for their success so there can be - and it can be a big difference maker and kind of accelerated growth in our coach models we do it. So, I think more to come, but I think what we are seeing and what we are understanding about the possibilities are very encouraging.

Great. Thanks guys.

Thanks Frank.

This concludes our question-and-answer session. I would now like to turn the conference back over to Dan Chard for any closing remarks.

Well, I would like to thank all of you for your interest in Medifast and for your participation in today's call. We look forward to speaking with you again when we report our second quarter 2017 financial results and we wish all of you a pleasant evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.