Medifast, Inc.
Q3 2012 Earnings Call Transcript

Published: 6 Nov 2012

[Operator:]

Greetings, and welcome to the Medifast Inc. Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Turner for opening remarks. Thank you, Ms. Turner, you may begin.

[Katie Turner:]

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

[Michael 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 where we are seeing momentum and discuss the areas where we’re increasing efficiencies to improve Medifast future growth and profitability long-term. Brendan will review the financial results for the third quarter in more detail, and discuss the fourth quarter 2012 revenue and EPS outlook. I will then provide closing remarks. And we will open up the call to take your questions. Before we begin, I would like to take a moment to comment on Hurricane Sandy. While Medifast’s corporate offices manufacturing and distribution centers were able to make it through the storm without any damage, we know many of our employees and many of you on this call may have been tremendously impacted. Our thoughts and prayers are with everyone and their families for a safe recovery. Now let’s focus on our results. In the third quarter, we realized increased sales momentum across each of our primary distribution channels. Take Shape for Life, Direct Response Marketing, Medifast’s Weight Control Centers and Wholesale Physicians. Our strong sales performance combined with improved operating efficiencies enabled us to report strong earnings growth ahead of our expectations in the third quarter. Even if you back out the tax benefit of approximately $1.4 million, we still realized earnings per diluted share of $0.42 above our expectations for earnings per share in the range of $0.37 to $0.40 for the third quarter. I am very pleased with our team’s ability to work together to optimize our overall cost structure while continuing to focus on enhancing the customer experience in each of our sales channel. Now we will provide an overview of our third quarter results. The number of active health coaches increased sequentially to 10,800 from 10,200 in the second quarter of 2012. In the third quarter, we continued to work on improving our health coach client acquisition and retention. Even with our growth in health coaches, we were able to see an increase in the average revenue per health coach per month at $1,634 as compared to $1,585 in the third quarter of 2011, an increase of 3%. We’re pleased with this acceleration in health coach productivity in the quarter, as we begin to see positive results from our efforts to improve our overall performance in Take Shape for Life. As we mentioned to you when we reported in the second quarter, our team hosted the Take Shape for Life Annual Convention in late July. The final numbers are in and our TSFL Annual Convention marked record breaking attendance of 2,400 health coaches. This was the first convention where the field and the corporate team collaborated together on training. Our focus at the convention was having a leadership development and health coach sponsoring which marked another first for us in the progress of Take Shape for Life. At the convention we launched SMASH Technology, allowing us the live stream certain segments of the event to create energy for those unable to attend in person. . The convention was a tremendous success, as our team leaders, Meg Sheetz and Michelle Jones, continue to work diligently to provide our health coaches with the necessary education, tools and support to generate business outside of their circle of influence or warm [ph] market, which often includes families and friends and their community. At these events, leaders are taught skills and techniques to help further develop their own team of health coaches that they mentor. In the third quarter we also hosted a super regional event in San Francisco with again record breaking attendance with over 1,000 coaches from the surrounding areas. The Northwest region of the U.S. continues to be a strong market for us and we’re very pleased with the enthusiasm of our health coaches at this event. In the quarter, our incentives continued to drive energy around client acquisition, specifically we are creating high impact learning experiences in every event we host for health coaches as well as creating a full year of calendar incentives to drive client and health coach acquisitions. In September, we launched the much anticipated back-office upgrade which will allow our field greater insight and to key analytics that will enable them to identify more opportunities across the business to drive growth. This program will also simplify the activation process for new health coaches. As our leaders continue to develop their training and mentoring skills, we’ll be able to more effectively recruit new health coaches. In addition, we launched our testimonial viral video share via YouTube and Facebook to further support and enhance client and coach acquisitions. While these are strong steps in the right direction for the Take Shape for Life sales channel, our team is continuing to invest in dedicated resources to support our corporate and field leadership through an emphasis on simplifying the opportunity, training, new market development, events and incentives. We believe these events, along with all of our other exciting Take Shape for Life initiatives, should provide us with a positive start to 2013, and place Take Shape for Life in a position to experience increased momentum and health coaches and revenues long-term. I will now spend a few minutes discussing our Direct Response Marketing channel. Our team continues to effectively manage this business and strategically spend the marketing and advertising to drive sales. In the quarter, Direct Response revenue increased 10% to $21.2 million and we achieved a 3.2

[Brendan Connors:]

Thanks, Mike. Net revenue for the three-months ended September 30, 2012, increased 20% to $91 million from net revenue of $76.1 million in the third quarter of the prior year. Our reported net revenue for the quarter was at the high end of our guidance of $88 million to $91 million. The Take Shape for Life sales channel accounted for 61.1% of total revenue. Medifast Direct accounted for 23.3%. Medifast Weight Control Centers and Wholesale Physicians accounted for 15.6% of total revenue. Focusing on our sales channel in more detail. Our Direct Sales channel, Take Shape for Life, experienced revenue growth of 20% to $55.6 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 and an increase in the monthly revenue per active health coach. The number of active health coaches at the end of the third quarter of 2012 increased to 10,800 and the average revenue per health coach per month increased to $1,634 from $1,585 in the third quarter of 2011, an increase of 3%. The Medifast Direct Sales division revenue increased 10% to $21.2 million as compared with $19.2 million in the third 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 3.2

[Michael MacDonald:]

Thanks, Brendan. In closing, we continue to be pleased by the progress we’re making to better physician Medifast for long-term growth. In just a few quarters, we’ve delivered improved results and we will continue to work to enhance our overall efficiencies to drive profitability and increase our cash flow generation to enhance shareholder value. Our entire team is gearing up for the start to the weight loss season in January to position the company better than ever before to capitalize on our opportunities for growth. We’re excited about our business outlook and plan to share our five-year business plan with all of you at our Analyst Day on Tuesday, December 18, at our headquarters in Owings Mills, Maryland. We welcome the opportunity for you to meet and interact with our entire executive management team and tour our manufacturing facilities. We believe you’ll truly be able to see why we are so optimistic about our long-term growth prospects and the individuals that will help us achieve our goals. Now Brendan, Meg and I are available to take your questions. Operator?

[Operator:]

Thank you. We will now be conducting the question and answer session. (Operator Instructions) One moment please while we poll for questions. Thank you. Our first question comes from the line of Scott Van Winkle with Canaccord Genuity. Please proceed with your questions.

[Scott Van Winkle:]

Hi, thanks. Congrats. Nice job on the growth and profit performance, guys.

[Michael MacDonald:]

Thank you very much.

[Brendan Connors:]

Thank you very much.

[Scott Van Winkle:]

So a few questions, the number that popped out to me is the advertising spend against direct response, I mean if it was more productive, why didn’t you spend more. Normally you kind of spend until it stops being really productive, here it looks like it was really productive and you kind of slowed the spending, what was the thought there?

[Michael MacDonald:]

Yes, I think Scott what we were trying to do is really just balance our cost base effectively and the other thing we had looked at, we have seen a lot of spending going on with some of our competitors in the market that hasn’t been predictably – productive and we’re really trying to make sure we understand what vehicles are working more effectively. We have been putting more into the whole web-based areas around the company and changing our media mix somewhat. So we’re going to open up spending more as we go into the weight loss season, but we just thought, we wanted to make sure we got the optimum return, we could as we are trying to improve the company’s profitability.

[Meg Sheetz:]

And Scott one other thing we did as well is we reduced the discounts in September and so we wanted to also be very cautious about the spend related to the discount removal.

[Scott Van Winkle:]

So basically your advertising kind of a less favorable deal and you got better performance out of the ad spend?

[Meg Sheetz:]

Yes, we did.

[Michael MacDonald:]

Yes, we did.

[Scott Van Winkle:]

Okay, that’s good problem to have. So and then on the clinics, Mike if you said it and I apologize but did you give us an idea of how many commitments for franchised openings were made?

[Michael MacDonald:]

Yes, we got a commitment for around 40 from our three top franchisees and that would be San Diego expanding north, one is in Minneapolis expanding out to Seattle and then more going into the Florida panhandle from our franchisee in Louisiana, Alabama, Mississippi area. So we feel very, very good about their enthusiasm to expand because they’re all successful and all have pretty good scale.

[Scott Van Winkle:]

Great. And then turning over to Take Shape for Life, which – that health coach was number was excellent. Obviously you had an event, it was very successful. Is that the catalyst we should point to for kind of the resurgence in growth sequentially in the number of coaches?

[Michael MacDonald:]

I think there is a lot of factors there, Scott. I think that Dr. Andersen and Dan Bell are leaders of our network, I think we’ve created a much closer linkage and better relationship between the company and our network. I think that’s better. I think we’re providing better support, more professional staff, I think a lot of the work Michelle Jones has done has helped us. By the way we just recently hired another top executive out of Avon under Michelle. So I think we’re building a stronger more professional organization to help to field leverage their competencies and we feel very, very good about the work that our field leadership team is doing driving the business. And they are working too very hard on what’s the field’s plan to be in lockstep with our five-year plan and I think we’ve got a lot of positive momentum going from both parts of the organization.

[Scott Van Winkle:]

Excellent. And then Brendan a quicky, I am having trouble kind of getting to a 33% tax rate for the year. What should be the implied tax rate for Q4?

[Brendan Connors:]

I’d use for Q4 around 34%, Scott.

[Scott Van Winkle:]

34%, great. And then Mike last question, you are focusing on clinic growth and franchises. You don’t really have any capital needs, your cash is building, what’s the plan here? Is there any chance of dividend in the near future or your share buyback activities picking up?

[Michael MacDonald:]

Yes, we have an authorization from the Board I think to buyback up to 1.1 million shares I believe, right Brendan?

[Brendan Connors:]

That’s correct. Yes.

[Michael MacDonald:]

I think that’s correct. So we do have an authorization there to do that. We also area looking at areas for potential M&A opportunities that we’re going to pursue. So they’d be the two major areas Scott that we look at. We’re trying to really strengthen ourselves as being a more vertically integrated company. And as I said to you before, we want to really become a world-class manufacturer of meal replacement products and a distributor to where we can participate in those higher margins and the intention is to make Medifast a much more profitable company.

[Scott Van Winkle:]

Thank you very much and great job guys.

[Michael MacDonald:]

Thank you.

[Meg Sheetz:]

Thanks.

[Brendan Connors:]

Thank you, Scott.

[Operator:]

(Operator Instructions) One moment please while we re-poll for any additional questions. Thank you. Our next question comes from the line of Kurt Frederick with Wedbush. Please proceed with your question.

[Kurt Frederick:]

Hi good afternoon, good quarter.

[Michael MacDonald:]

Thank you, Kurt.

[Kurt Frederick:]

I just had a question on the ad spend. I was just wondering how much of that was impacted by the Notre Dame radio agreement?

[Michael MacDonald:]

Very little of that. The Notre Dame agreement was a very good deal from a economic standpoint. It was really spent for branding, Kurt, there is a basically a 140 stations will cover us now. It goes out to about 12 million listeners through the Notre Dame network. So that was really the focus on the Notre Dame spend but that spend was very inexpensive.

[Kurt Frederick:]

Okay. And then on, I guess the Medix, the 30 centers. Do you know the timing of when those will start to be opened?

[Michael MacDonald:]

The Medix, they are going to start – I am actually flying to Mexico November 15, to talk to hundreds of doctors, they are having their first major meeting. They’ll start with their 6,000 physicians network first and then their plan is to open their mega clinic in Mexico City. I don’t know exactly what the timing of that is. We’re going to be finalizing that when I go to Mexico at the end of November, but I’ll be able to have more data on that as we go into our investor meeting on the 18th of December, but they’ve already given us significant order and they paid us and things are working well with Medix.

[Kurt Frederick:]

Okay. And is that the same for the franchise site as far as the new centers, the 40, is that going to be – give like a timetable for that or is that still...

[Michael MacDonald:]

Yes, we have a timetable for that, I think there is going to be I believe something like nine will go in this year, I mean the 2013. There will be nine of the 40 I believe go in the first year and then a lot in the second and third. So they are going to be ramping up those centers. And by the way, that’s doesn’t count other franchisees we’re going to sign up. That’s just existing ones that have already committed. So if you look at it between the 88 we had today and the 30, plus an incremental 40 plus Mexico, our goal is to get over 300 of them and we feel we can do that pretty rapidly.

[Kurt Frederick:]

Okay and you’re still looking at other international opportunities?

[Michael MacDonald:]

Yes. We’re working now to try and get our products approved in Canada. We have efforts going on there, and also talking about expanding in other parts of South America.

[Kurt Frederick:]

Okay. That’s all I have. Thank you.

[Meg Sheetz:]

Thanks.

[Operator:]

(Operator Instructions) Our next question comes from the line of Michael Halen with Sidoti. Please proceed with your question.

[Michael Halen:]

Good afternoon and congrats on a good quarter.

[Michael MacDonald:]

Well thank you very much Michael, we appreciate it.

[Michael Halen:]

Sure. I got on a little bit late so excuse me if this was already covered, but can you just talk about in direct response, how come the marketing spend in advertising worked down year-over-year. And I guess can you let us know if some of that spending will get shifted into the fourth quarter of this year?

[Michael MacDonald:]

No, basically Michael, we really were trying to get a better balance and figure out the best advertising mix and we got very high returns in our marketing spend, but as I said earlier, we had some competitors who spend a lot of money on marketing didn’t get great returns and we really decided to say let’s experiment with the mix and we were really doing some things, looking at different approaches and TV, radio and we’ll spend more but we’re probably pour more into the first quarter.

[Michael Halen:]

Okay.

[Michael MacDonald:]

When we really go into the peak season for the diet business. But we were very pleased with the returns we got from our spending and I think we really got better profitability in the way we approached it. So it really was an area where we’re trying to improve profitability of the company and doing – by the way our revenue didn’t get hurt at all, as you saw we had very, very strong revenue performance.

[Michael Halen:]

Great. And do you expect to be able to maintain this revenue-to-spend ratio moving forward?

[Michael MacDonald:]

I think it’ll probably go down a little bit, I’d say in the fourth quarter because of the cycle of our business but we expect to see continued improvements in our efficiency.

[Michael Halen:]

Yes.

[Michael MacDonald:]

I am going to be pushing very hard in the organization to get better results. I am not big ones that are saying three to one is going to be our model forever. We want to get better and better as we move forward.

[Michael Halen:]

Okay. And last one, can you talk about health coach conversion rates?

[Meg Sheetz:]

Yes, health coach conversion rates, we typically just speak to the number of health coaches that we’ve been bringing on that are active health coaches. We certainly have one lot with our field leadership to increase the training around how to better acquire new coaches out of your client base because a lot of our clients who are coaches, our clients become coaches. So we feel pretty confident in the partnership we have with our fields and what they want to do in order to keep increasing that health coach number.

[Michael Halen:]

Okay, great. Thank you very much.

[Operator:]

Mr. MacDonald, it appears that we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

[Michael MacDonald:]

Okay. We appreciate your participation today. And I look forward and our team looks forward to hosting many of you at our Analyst Day on December 18, and look forward to speaking with you over the coming months at investor conferences. We appreciate your support and appreciate all of your companies following us and we’re going to work very, very hard to continue to drive shareholder value for the shareholders of Medifast and thank you very much.

[Operator:]

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