Medifast, Inc.
Q2 2012 Earnings Call Transcript

Published: 27 Jul 2012

[Operator:]

Greetings, and welcome to the Medifast Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Katie Turner for opening remarks.

[Katie M. Turner:]

Thank you. Good afternoon, and welcome to Medifast's Second Quarter Fiscal 2012 Earnings Conference Call. On the call with me today are Michael MacDonald, Executive Chairman of the Board of Directors and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; as well as Brendan Connors, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending June 30, 2012, that went out this afternoon at approximately 4

[Michael C. MacDonald:]

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. On today's call, I will provide you with an update on our business initiatives. I will also provide more color on areas of the business we are seeing improvement and discuss the areas that we plan to address to best position Medifast for future growth and profitability. Brendan will review the financial results for the second quarter in more detail, and discuss the second quarter 2012 revenue and EPS outlook. I will then provide some closing remarks. We will open up the call to take your questions. I'm pleased to report we realized strong sales momentum across each of our primary distribution channels

[Brendan N. Connors:]

Thanks, Mike. Net revenue for the 3 months ended June 30, 2012, increased 20% to $93.6 million from net revenue of $78.3 million in the second quarter of the prior year. The Take Shape for Life sales channel accounted for 60% of the total revenue. Medifast Direct accounted for 24%. Medifast Weight Control Centers and Wholesale Physicians accounted for 16% of total revenue. Focusing on our sales channels in more detail. Our direct sales channel, Take Shape for Life, experienced revenue growth of 13% to $55.7 million compared to the same period last year. Take Shape for Life growth was driven by increased customer product sales as a result of an increase in active health coaches. The number of active health coaches at the end of the second quarter of 2010 -- of 2012 was 10,200, and the average revenue per health coach per month increased to $1,683 from $1,615 in the second quarter of 2011, an increase of 4%. The Medifast Direct sales division revenue increased 17% to $22.5 million as compared with $19.3 million in the second quarter of 2011. Due to a more effective advertising message, more targeted advertising through extensive analytical analysis, additional public relations' success in large national publications and reducing product discounts, the company experienced a 2.8

[Michael C. MacDonald:]

Thanks, Brendan. In closing, while we are pleased with our improved financial performance for the second quarter, our executive team remains focused on continuing to increase our operating efficiencies and effectiveness across each of our sales channels to improve profitability and increase shareholder value long-term. We believe Medifast is still in the early innings of its business evolution. We're excited about the future growth opportunities and look forward to sharing our future progress with you. Now Brendan, Meg and I are available to take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question is coming from the line of Mr. John San Marco with Janney Capital Markets.

[John P. San Marco:]

With regard to the FTC agreement, how long -- when do you expect to hear back from them? And -- or I guess, when would you expect the $3.7 million offer to become effective?

[Michael C. MacDonald:]

John, I think we should hear back from them in 3 to 4 weeks. But basically, it has to be approved by the commissioners of the FTC, and we should hear back in that timeframe.

[John P. San Marco:]

Okay. And then just last question on that topic. Can you explain the relationship between that payment and this disclosure today and the 1992 agreement? What's the relevancy of that 1992 consent order?

[Michael C. MacDonald:]

Well, we had a 1992 consent order and basically, what they've said is, because of some of our claims, they believe we violated the 1992 consent order. And we are basically agreeing to disagree, but we just feel that, as a company -- and I'm trying to make sure that I clean up any issues and get the company to move forward in the proper way. And we just felt rather than having protracted litigation that I felt would have cost us equally as much, if not more, if we did that, that this is the best option because now we've worked out -- I believe, it's a 15-year agreement that we will have guidelines that we feel are ones that we will conform to and take us into the future.

[John P. San Marco:]

Okay. That's helpful. And then switching subjects to health coach growth. How do I -- how should we think about the way you guys balance your short-term incentives and promotional programs that you -- it seems like you've been using more of recently to boost health coach growth, versus simply improving the everyday terms of the compensation structure? What are the pros and cons to the approach it seems like you've taken this year. And correct me if I'm wrong, it seems like you've taken an approach this year to use more promotions and, sort of, create some short-term excitement.

[Michael C. MacDonald:]

By the way, we have not changed -- our compensation plan has stayed the same. So we have a very good compensation plan that I think is perceived very favorably by our Take Shape for Life health coaches. And basically, a lot of the incentives are small things that get people motivated like an iPad you could win, or this or that. But, Meg, why don't you comment?

[Margaret E. MacDonald-Sheetz:]

Yes. And the incentives that we've been driving, like, the last 2 months to get this to the convention that was just last week, we drove small incentives where people would enjoy luggage [ph] for and it could have been anything from new client acquisition to bringing a certain percentage of their team to convention. So we've -- the positive things for us is that the incentives are driving multiple actions within our field, and we don't feel like those incentives are driving the current behavior. They're existing and kind of motivating people in the actions. But they're not -- if we stopped incentives tomorrow, we wouldn't see a change. We feel like the things we've implemented along with the current comp plan is incentivizing folks correctly.

[Operator:]

Our next question is coming from the line of Mr. Michael Halen with Sidoti.

[Michael Halen:]

I just have a couple quick questions. I guess one is just a modeling question. At the Investor Day, you mentioned that the corporate Weight Control Center expansion was finished. But were there any opened in July?

[Brendan N. Connors:]

There was just one additional center opened in July, so we had 88 open at the end of Q2, one additional in July and that will finish up the year -- so we'll finish the year with 89 corporate centers, Mike.

[Michael C. MacDonald:]

And the other thing to clarify, Mike, the ones that Medix opens in Mexico are really Medifast-branded by their company. They're really not franchises. They're Medix opening with Medifast as a name. But they're a company owned by Medix and we'll make the money on those.

[Michael Halen:]

Okay. So they'll work like a franchise but technically, they're not called a franchise.

[Michael C. MacDonald:]

Yes, they're not...

[Brendan N. Connors:]

It's not a franchise agreement with them.

[Michael Halen:]

Okay. Also, I'd like to back out the one-time expense. Would you be able to give me the exact figure of the FTC charge or is $3.7 million, is that exact?

[Michael C. MacDonald:]

Until it's approved by the commission of the FTC, we can't really -- $3.7 million is what's in the agreement that we signed and sent back to them. But the commissioners could change that if they felt that was appropriate, but we feel fairly comfortable that we've had good honest negotiations with them and are hoping that it stays in that range.

[Michael Halen:]

Okay, great. And last one. Can you just talk a little bit about the radio and TV ad spending? And what kind of increase you're going to look at in terms of the back half of this year?

[Michael C. MacDonald:]

Yes, we've -- one of the things we're trying -- I think we've had pretty consistent -- we're spending quite a lot of money and have increased our spending by probably 15% in the marketing areas. One of the things we're trying is starting in September, we are going to go national in Notre Dame radio to 12 million viewers on about 140-something stations through a deal with Notre Dame as a partner with Westwood One. So we'll have 4 Medifast ads, 2 30-second spots and 2 15-second spots. And I think that's the first time we've done something that comprehensive to get our name out at a national level.

[Operator:]

[Operator Instructions] Our next question is coming from the line of Mr. Kurt Frederick with Wedbush Securities.

[Kurt M. Frederick:]

I've got a question on the shift over to the franchise centers. Do you have an idea as far as growth in the franchise centers over, I guess, the remainder of 2012 and then into 2013?

[Michael C. MacDonald:]

Yes, Kurt, so far, we feel a terrific opportunity. We have some of our bigger franchise owners already committing to look at over 40 units over the next 3 years just from 3 individuals. So we see a great opportunity here as we go out and recruit more potential franchise operators. And I think what we want to try to do is create people -- create potential partners who want to do 4, 5 or 6. We don't want to do "one at a time" type of things. So we're going to work hard on that. But we feel very, very confident that if you look at Mexico and if you look at what some of our own franchise operators are going to do that we can make this a very, very positive movement for us as a company.

[Kurt M. Frederick:]

Okay. So is a lot of it going to pick up, then, probably next year?

[Michael C. MacDonald:]

Yes. We will start to implement more franchises and we'll give more guidance on that as we get towards the end of the year, but we expect franchise units to open next year, yes.

[Kurt M. Frederick:]

Okay. And then, just quickly on the profitability of your existing centers. Pretty big swing from last quarter to this order to get profitable as far -- what's profitability going to look like going forward?

[Michael C. MacDonald:]

We -- I expect to make continued progress in profitability. I am focused on really optimizing our profitability and trying to make sure Medifast becomes not only a revenue producer, as I talked to you about before, but that we consistently improve our productivity. So we're looking at all areas of the company. In fact, right now, we're working on a 5-year plan for the company where we're talking about how we consistently improve our cost productivity and how we've got to consistently improve our ability to drive revenues. So we're going to continually look at that, and I expect our clinic profitability to continue to improve.

[Operator:]

Ladies, and gentlemen, our next question is coming from the line of Mr. Scott Van Winkle with Canaccord Genuity.

[Scott Van Winkle:]

So I joined the call late, I apologize if I repeat anything. But so at Take Shape for Life, the metrics look good with the exception of kind of flattish health coach figures. When you're giving guidance for Q3 -- you don't have to give me a number, I'm not expecting a guidance to a health coach number, but are you kind of assuming or embedding in that forecast kind of a flattish type of health coach number, net quarter-to-quarter?

[Margaret E. MacDonald-Sheetz:]

Yes. We don't for -- what we talked about before is by the next earnings call, we would actually like to be able to give more data around Take Shape for Life to give you a bit bigger and better picture of what the future of Take Shape for Life looks like. We are very excited that we have quite a bit of new clients coming on board, which actually is the key -- one of the key indicators in how many health coaches we'll end up with. We feel confident on the health coach number will move, so the plan is not to have flat quarter-over-quarter. We do feel like dropping the training in the middle of the second quarter. It's just taking time to slow that training through, but we are seeing progress, and we've launched even more materials at convention to drive that progress further.

[Michael C. MacDonald:]

Let me put it this way. From my standpoint, I've been in business for over 40 years in big companies, I thought that was one of the best events I've been to and I complimented our management team on the execution. And that's really where we want to go to. We want to go to being a company that executes better than other people, and that's really what our focus is on.

[Scott Van Winkle:]

Yes. So speaking with that, Meg, at the end of that convention, I'm sure you had a thousand conversations. What was the 1 or 2 things that health coaches kind of mentioned was the big takeaway from the event?

[Margaret E. MacDonald-Sheetz:]

Yes. Number one thing that I've heard of, without a doubt, is that -- in previous calls I've mentioned that Take Shape for Life is really missing some of the how-to resources for coaches to walk away and understand how to do something. We did a lot of talking at people's, at convention this year. Our leaders provided how they actually did it to our other health coaches, and that was what the health coaches themselves told me that they took away was

[Michael C. MacDonald:]

And Scott, I also think Tony Geary and Robin Sharma did a good job as outside people coming in and really talking about things that can help a health coach. And I thought that was extremely positive.

[Margaret E. MacDonald-Sheetz:]

And we did get some good kudos in the fall, and you heard at the convention, we are launching the back office in an app format and upgrades to the back office, which will be tremendous to helping people look at their businesses more effectively. And we're also launching a new -- like My TSFL community along with stuff like meal tracking and all related to the TSFL side of the business. So that was another -- they're excited for that to come this fall.

[Scott Van Winkle:]

And the profitability of Take Shape for Life, I would assume it went up. Did it go up commensurate with sales or at a faster rate to sales? And I wonder what that margin looks like in Take Shape for Life.

[Brendan N. Connors:]

Right now, Scott, we speak on the overall segment, the Medifast segment, which includes both Direct Response and the Take Shape for Life business. That overall segment did about 11.8% pretax profit in the second quarter.

[Margaret E. MacDonald-Sheetz:]

And obviously, my goal within Take Shape for Life is to increase the profit. I always work on the profit of that business division, and every business division we have. So we'll continue to see improvements there.

[Scott Van Winkle:]

Yes. Some of your peers in the publicly-traded direct sellers are generating contribution margins well in excess of what I think Take Shape for Life is doing. So I'm just -- I'm wondering if volume is -- particularly with volume for our health coach rising, I would've assumed that the profitability margin would have gone up. So Brendan, you gave a number, but that was up year-over-year. I haven't seen all the numbers, so I'm...

[Brendan N. Connors:]

That was just for the quarter, 11.8%, yes. And the answer is yes, Scott. I mean with additional volume, the profitability in Take Shape for Life saw a slight incremental uptick.

[Michael C. MacDonald:]

Yes. And by the way, I see that as a big opportunity Scott, going forward. I think I have a great margin opportunity in Take Shape for Life, which I'm very excited about.

[Scott Van Winkle:]

And then on clinics, you took the big, kind of, restructuring the clinic division that's beginning of the quarter, end of last quarter. And you're talking about profits and improving in the clinics division. What drives that from here? Is it just volume? Forget the shift to franchise, that is obviously better for margin. But at this point, what drives incremental profitability of the company on clinics, is it just volume or is it more change likely coming?

[Michael C. MacDonald:]

I would say, it's a accommodation of both. I think one of the things we're going to get is we're going to get more volume of sales from the clinics as some of them mature. Because as an example, we have clinics in Texas 2 years ago that weren't that profitable and this year, their performance is very, very good. And as they're out there longer, they mature and they get better, and we're going to make sure we're looking at that and continuing to try to be effective with our balance between personnel, marketing, looking at the cost structure. And I think the professionalism of the management now that we have in there is going to give us someone who has a very good understanding of how to make money out of this business, and that's what we're going to do.

[Scott Van Winkle:]

And then last question on the FTC. If I were to look at a print ad 6 months from now versus 6 months ago for Medifast, what would be the difference that I'd see in that message as a result of this change?

[Michael C. MacDonald:]

The difference in the message, in my mind, would be of -- not a whole lot, very minimal change. It's just a few small areas. And I think the issue here, I think, is it creates a highway for us in the future that just makes it much easier for us to operate. And we'll be descriptive in the message, more descriptive to say exactly, make the necessary adjustments. But there's nothing here that our marketing group would say is really going to be a difficult thing for Medifast to deal with. So I feel very good about it, Scott. One of the things I'm trying to do coming into the company is, as we try to create a company that can grow to $1 billion in the future, I want to make sure I'm dealing with all the issues of the past that we need to clean up and do the right thing to make this the kind of company our shareholders would be proud of.

[Scott Van Winkle:]

And just to keep on that, I saw the "up to" commentary in the press release. What about the 20,000 doctors? Did that change? Is your -- your focus on that kind of medical heritage, does that change at all?

[Michael C. MacDonald:]

It's largely going to be the same in the doctor area. I mean, you could debate how many of those doctors have died over the years, because we had 20,000 from the beginning. But it depends on how you want to look at that. But the doctor claim will basically be very similar to what it is today.

[Operator:]

[Operator Instructions] It appears there are no more questions at this time. I would like to turn the floor back over to Mr. Michael MacDonald for any closing comments.

[Michael C. MacDonald:]

We appreciate your participation today, and we look forward to speaking with many of you while we're on the road and in investor meetings, and we really appreciate, overall, your coverage in Medifast. Thank you very much.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful evening.