Medifast Inc (MED) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Medifast Incorporated, earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Brendan Connors, Medifast Vice President of Finance. Please proceed, sir.

Thank you. Good afternoon. My name is Brendan Connors, and I am Medifast VP of Finance. I am joined today by Mike McDevitt, our President and Chief Financial Officer. I would like to welcome you to Medifast third quarter conference call for the period ended September 30, 2006. Before we begin I would like to read the following statement.

Statements included in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks and uncertainties such as competitive factors, technological demand, market demand, and the Company's ability to accurately estimate revenues due to market factors beyond its control. The actual results may differ materially from any financial outlook stated herein. Further information on potential factors that could affect the Company's financial results can be found in the Company's reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission. Medifast shall have no obligation to update the information provided on this call to reflect subsequent events. Now I would like to go over the financial results.

For the three months ended September 30, 2006, Medifast reported revenue of $19.6 million versus $11 million for the same period in 2005. Representing an increase of 79%. The majority of the sales increase was a result of an approximate 156% increase in the direct marketing sales channel compared to the third quarter 2005. Take Shape for Life direct sales network had a 25% increase in sales year-over-year. Also the Corporate funding molds continues to evolve and in doing so realized an increase in sales as compared to the quarter ended September 30, 2005.

The Company has selling, general, and administrative expenses of $13 million as of September 30, 2006, which was an increase of $5.9 million from prior year. Increase in SG&A is primarily attributed to the increased advertising expenditures. We significantly increased our overall spend for the same time period last year resulting in the growth of the division. In the third quarter of 2006 the Company continued to expand its advertising market to print, radio, on-line and television venues. The advertising budget for full year of 2006 is expected to be approximately $14 million.

During Q3 we had additional expenses relating to the training and development of our outsource call center, as we prepare for expected increase of business during the first quarter of 2007. Additionally, the Company experienced loss of revenues and increased expenses due to failed implementation of the Take Shape for Life IT infrastructure. The field implementation caused an estimated $400,000 decrease in revenue compared to the second quarter of 2006 while costing an additional $200,000 in infrastructure expenses to manage the related issues. The Company's stabilized the system early in the fourth quarter and anticipates no additional loss of sales moving forward.

The Company reported net income of $1,490,000, or $0.12 per basic share, $0.11 per diluted share, versus $607,000, or $0.05 per basic share, $0.05 per diluted share in 2005. Net income was positively impacted by income tax refund receivable that decreased the provision for income taxes as of September 30, 2006. The Company utilizes a vertically integrated infrastructure which we own all of our buildings and machinery therefore allowing the Company to complete a cost segmentation analysis resulting in large federal tax refund. Third quarter 2006 representing the Company's 28th consecutive quarter of profitability.

For the nine months ended September 30, 2006, Medifast had revenue of $58.8 million representing a 97% increase compared to $29.9 million reported for the nine months ended September 30, 2005. The Company had selling, general, and administrative expenses of $36.9 million, as of September 30, 2006, which was an increase of $17.7 million, from $19.2 million for the first nine months of 2005. As a percentage of sales, SG&A has decreased from 64% for the nine months ended September 30, 2005 to 63% for the nine months ended September 30, 2006. The Company reported net income of $4.6 million for the first nine months of 2006, or $0.37 per basic share, $0.34 per diluted share, versus $1.6 million or $0.13 per basic share, $0.13 per diluted share, for the first nine months of 2005.

On the balance sheet the Company has stockholders equity of $27.2 million, and working capital of $13 million, at September 30, 2006, compared to $21.3 million and $9.6 million at September 30, 2005, respectively. At September 30, 2006, our cash balance of $1.1 million compared to $1.5 million at December 31, 2005. This decrease is due to increased cash outlays from manufacturing, distribution, information technology, infrastructure, and inventory build up for the first quarter of 2007 as well as timing as it relates to accounts payable.

I'd now like to talk about financial guidance. 2006 full year guidance is remaining unchanged. The Company still expects to generate revenue of 70 to 472 million for the year with an after tax profit of $0.38 to $0.40 per diluted share. Now I would like to turn the call over to Mike to go over first quarter highlights.

Thank you, Brendan, for the financial summary. I would like to start out by stating that the Company was pleased with our results for the third quarter of 2006. There were multiple factors supporting the revenue and profit growth which many included the continued success of our direct to consumer advertising initiative. As we expanded into several new advertising venues. These venues were largely television, however also included print media, web, direct mail, and radio. Although the cost to acquire for the quarter increased to $170, up from $150 in the second quarter. The Company is pleased with the results from the expansion into these new advertising venues.

The increase in cost to acquire was largely due to an ineffective media buying in the TV format during the month of July which caused an estimated monthly cost to acquire of $200. The Company successfully decreased this amount throughout the remainder of the quarter. It is also important to note that our direct to consumer business is an estimated 65% of overall business. However, our direct to consumer advertising has a branding impact on all other sales divisions. We are seeing a significant amount of leads in other divisions as a result of our advertising, yet not shown in our current cat calculations.

Starting in 2007, we believe tracking this umbrella effect o advertising will be more actively involved in a different level of our cat calculation. Additionally, the Company is also researching options in obtaining a higher quality of media placement including more cost effective media buying, a higher quality advertisement, and improved closing rates in both call center and web as we prepare to increase our advertising budget for 2007. The Company believes these initiatives will allow us to maintain a [Inaudible] in the range of $150 through the year 2007. We are also very pleased to announce that we have filled the position of Vice President of marketing by contracting a seasoned direct response marketer. He is in-house full time with Medifast and we look forward to updating you on our progress in the marketing arena as we move into the all important 2007 diet season.

Our Take Shape for Life division experienced sales growth of approximately 25% as compared to the third quarter of 2005. This sales growth can largely be attributed to beginning stage of expansion of these sales networks into additional cities as well as the increased activity in already established cities. The business of Take Shape for Life saw a decrease in sales in the third quarter as compared to the second quarter of 2006. This was largely due to a failed implementation of a new IT platform at the beginning of the quarter. The IT platform for Take Shape for Life has been stabilized and sales at the end of the third quarter were continuously approaching the daily levels achieved in the second quarter 2006.

We must give thanks to our TSFL style skill leaders for their continued commitment and increased level of leadership and communication during what was a difficult time in our business. The Company feels that having the now stable platform and the recently launched training materials, known as the Business in a Box and Take Shape for LIfe is in a position to recognize significant growth in the acquisition of Health Advisor leading to growth in revenue in the early part of 2007. Our clinic model has continued to evolve with the most exciting news in the division being the rollout of now nine Medifast weight control centers in Dallas and Orlando markets. Formerly these clinics were under the business name of Hi-Energy Weight Control. The initiative had an immediate revenue impact on the clinic business model as the brand awareness of the Medifast name is believed to be a major reason for the recent increase in revenue run rate of these clinics.

The clinic business strategy is a medical model which provides the oversight of nurse practitioners as well as a part-time doctor responsible for medical monitoring, improved personal counseling sessions, optional programs that utilize appetite suppressant drugs and many other value-added components and resources. This medical model is more costly to operate as a result of salary requirements for the medical practitioners. Because of this, along with expenses associate with the start up business, the overall clinic operation was break-even for the third quarter. This model was initiated and is believed that it will benefit greatly with the anticipated launch of several new appetite suppressant medications and the advertising campaigns associated with them in early 2007, making these clinics not only Medifast destinations but also a distribution point for the considerable anticipated demand for the new appetite suppressant medications from the pharmaceutical company.

The drug protocol segment of the business is yet to recognize large revenues as the new medication from the pharma company has been delayed to market. However, the public anticipates their release in early 2007, allowing each clinic to boost revenues by an anticipated 25% with minimal addition to cost allowing for an estimated 20% pretax margin on these clinics. The Company plans on targeting experienced franchise area developers for future growth of this medical clinic model. The overall Medifast business had two education and support tools that launched in the second quarter and continued the help our customers and potential customers obtain greater success with reaching their goals no matter which distribution channel of Medifast one should choose.

The secret is out, Medifast. What physicians have known about weight loss. Is the title of the newly released book. The book provides a simple and clear guide on how to overcome the emotional challenges of dieting to successfully lose weight by addressing the internal, external, physical, and emotional components of maintaining a healthy lifestyle. The book is available through Medifast channels as well as Amazon.com.

The other initiative that also launched in the second quarter was the on-line customized weight loss community called My-Medifast available to free for all Medifast customers My-Medifast offers an interactive community where dieters can seek support by participating in a wide variety of interfaces including on-line meal planning, chats with nutritionists and chats with other members on specialized topics covering nutrition and exercise. The response from the customers continues to be tremendous as they utilize each other for support and motivation. The Company continues to enhance and improve this tool largely based on the customer recommendations that are posted on the site daily.

The first nine months of 2006 have been historic ones for Medifast. The Company feels it has not only had tremendous success in growing the business from where it was at this time last year but we have also placed the business in a position to recognize significant potential sales growth beginning in the first quarter of 2007. We plan on sparking this growth with an increased and redefined advertising campaign. Supporting this growth with an improved and advanced vertically integrated infrastructure and enhancing the customer's experience with continuous focus on bettering the customer's experience with multiple options, more support, and better education.

Everyone on the Medifast team has made a significant contribution in order to support the financial results that we are speaking on today and prepare us for what we believe can be a move into the near future. I would like to thank everyone on the team for their hard work and dedication. Now I would like to open up the call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Greg Badishkanian with Citigroup.

Thanks. You guys had a few questions here. You guys had really strong revenue growth. I missed by division. Could you just go through the growth rates, direct and take shape?

We can look at that from the quarter of last year to this year. I think that the direct was 156%. Take Shape was about 25%. And the doctors and clinics maintained from 5 to 4%.

In terms of growth rate. Got it. And moving over to -- moving over to [CAC], you mentioned that July was a pretty tough month. You advertised on some TV. You did some test marketing. I'm assuming you did some test marketing throughout the quarter. How much of your overall advertising was sort of testing and what -- what are you seeing that would give you comfort that maybe you'll be able to achieve 150 next year in CAC?

Really it's not the testing that we're focused on. It's more of the expansion of different venues that we went towards. We know that moving forward that television is going to be a major piece associated with the Medifast direct response advertising campaign. Our advertising breakout we did increase the overall expenditure in television, of which we found we have from July to August to September we found major areas for improvement, which we continue to enforce throughout the quarter. I feel that by increasing our television spend in 2007 on a much more effective television spend, that being better media placement, now having experts in house that we have, as well as improving both closing rates as well as the quality of the ads we're going to see a rather significant decrease in the CAC moving forward.

In terms of maybe quarter to date is that running around the 150 level or a little bit higher? Because I know fourth quarter, seasonally is a tough quarter.

I think we have turned down the advertising budget for the fourth quarter to come in around that $14 million piece. We have been very happy thus far with the advertising spend we've seen in the fourth quarter.

Okay. Good. And in terms of the CMO, are you able to disclose a little bit more information on his or her background?

Of course. The individual has had about 15 years of experience in direct response, mainly in direct TV response. Always been associated with self improvement products, that of very similar to the weight loss industry, the vitamin industry. Very excited to see what we can do in the Medifast advertising venue, the whole market department. Moving into the first quarter having that direct response expertise in-house.

Great. And just sort of moving over to Take Shape for Life, if you could sort of just give us a little bit of color. I think you had some extra expenses, and growth was a little bit lower than you had been trending, and sort of where you see it over the next -- where you see that business going over the next year.

Yes. What occurred in Take Shape for Life in the third quarter was that we went live with an IT implementation that would allow for better management of the health advisors in their back office. That actually hiccuped when it went live which probably cost us, revenue wise, probably about $400,000, and expense wise and infrastructure, probably about $200,000 of additional expenses. What we've seen is that now we've been able to stabilize the system, we're now seeing the daily rates up to where they were in the second quarter 2006. With the Business in a Box training the now stabilized see platform, and the super Saturday trainings which have been putting in city to city throughout the third quarter we are very excited to see what Take Shape for Life can do with our Health Advisor acquisition coming in the diet season in the first quarter. It is very unfortunate to have that occur but it couldn't have occurred at a better time in the sense of the summertime, which is why we chose that time because IT implementations often have these hiccups. But we're glad to be on track with them now and look forward to 2007.

Appreciate the time.

Our next question comes from the line of Mark Rupe with Ryan Beck. Please proceed.

Thanks, guys. Good afternoon. It's actually [Para Ostlen] in for Mark. Good quarter. Just got a couple of questions, kind of following on to what Greg was asking about. On the Take Shape for Life, did you see any counselor attrition as a result of the IT issue? I know that the new tools were kind of designed to enhance the attrition levels. Did you see it go the other way as a result of the hiccup at all?

Again, I will definitely -- time frame when it wasn't tough business to get going. We did not see a decrease in the attrition -- in the Health Advisor acquired.

Excellent. Question on the revenue guidance for you. Based on what you guys have done in the first three-quarters, which is pretty fantastic, actually, it would seem that the implied amount of revenue that you're looking for here in the fourth quarter would be a little bit of a steeper drop maybe from Q3 to Q4 than what you historically see. Is that -- are you seeing anything there that you can speak to at all?

The advertising budget was decreased a bit. We're more focused on the remarketing the customers in the fourth quarter. Due to the decrease in advertising spend as well as the--.

Ladies and gentlemen, please stand by. Gentlemen, please unmute your line.

We have been happy with every dollar we have spent in the fourth quarter in advertising, although we have decreased the advertising budget from third to fourth quarter pretty significantly.

Okay. And then I guess just kind of a final very general question. As it pertains to diet season then, do you feel pretty much as prepared as you can be as far as product offering, your marketing message, personnel capacity, basically all of those things in general?

I think that we have taken every step possible as far as the manufacturing we are prepared with new equipment that has been installed this past month. It will be up and running, putting us at high revenue run rate possibility. Shipping will be prepared there. The call center, we did see some additional expenses. Those reps will be ready as well in case there is a spike which we do hope for in the first quarter of 2007. Again we're very happy with the advertising campaign. Having that open position filled meant a lot for us. We think the marketing department has a got a great future in front of them in 2007 first quarter. What we anticipate to be a very highly [Inaudible] first quarter in the diet season.

Perfect. Thanks, guys. Congratulations.

Our next question comes from the line of [Diedrich Ash] with Canaccord Adams. Please proceed.

Hi, guys. Just wondering if you could comment on your tax rate for the fourth quarter.

Fourth quarter or the past quarter?

The fourth quarter.

I'd expect the tax rate to be smooth over the year about 34%. Per year.

Is that also for '07?

No, '07, I'd assume 37, 39% in '07. One-time tax benefit we had this past quarter.

Okay. Thanks. And where are you guys as far as rebranding the Hi-Energy clinics to the Medifast brand? Are you seeing any difference in traffic from the rebranded clinics?

Yes, we now currently have all the corporate clinics moved over to the Medifast weight loss control centers. What we have seen is an uptick of walk-ins by 25 to 40% so just the Medifast name alone has done a great job for driving revenue into those clinics. We are very excited about with the increased advertising campaign in 2007 what that will do. That's kind of our high, and then we talked on this CAC number, which has become quite a focus point, that number of those walk-ins is not really associated with our CAC numbers. So that overall umbrella of effective branding we're doing inside Medifast is benefiting all our distribution channels, even Take Shape for Life, driving business leads as well as Health Advisor leads.

Great. Did you give any -- I might have missed it, but did you give any information on the blended lifetime value of subscriber for the third quarter?

The blended lifetime -- I can talk in lifetime values for the quarter but I haven't given information on blended. Not sure what you mean.

Either the direct to consumer or Take Shape for Life, the revenue per customer in those channels.

Take Shape for Life has maintained around a $750 level as far as lifetime value. Lifetime value for the Medifast direct business is, as the year goes on the quarter that they're acquired in, the deeper in the year it is, the lower that lifetime value is going to be. Which makes sense because it's less of a diet season they aer going to be associated with. We have seen in the first quarter that lifetime value as we do more research now is above $600 in that first quarter. Probably dropping to about 550 in the second quarter, to be determined in the third quarter. We've only seen three months, but we're looking at an overall average of probably right around that 530 to 550 per year 2006. As we increase the television campaign we think that initially that lifetime value might drop as a lifetime value of television advertising is a little bit less than the print. Probably due to education as well as spontaneous buyers. As we continue to increase the My-Medifast, as well as the remarketing campaign, we think we can drive that back up to around hope between 550 to 575 for the year.

Last question. Any change in any of your major metrics, pricing, or new product offerings coming up?

In the first quarter we'll be looking at some additional products to be launched, probably two to four new products, as well as a change in pricing. We are currently looking at a possible price increase from the first quarter of which we have to make the final decision on.

Thanks, guys.

Thank you.

Our next question comes from the line of Don Herzog with Bluegrass Growth Fund. Please proceed.

Good afternoon, gentlemen, and congratulations on a solid quarter. Is it safe for me to assume that based on what you said earlier to another caller that we're going to see the CAC trend reverse and be lower next quarter?

For the fourth quarter?

Yes.

I would assume the CAC would drop in the fourth quarter, yes. Because -- we were able to drop the CAC throughout the month in the third quarter, so fourth quarter we're very happy with every dollar we've spent thus far.

Is there a way I can get some kind of reasonable idea what a reasonable CAC number should be there?

We're looking at for the year 2007 to maintain that $150 level. That's about where we were at the end of the third quarter. We went from 200 down to 150 through the quarter, so I think that's a safe estimate for Medifast moving forward.

Okay. Thanks.

Thank you.

Our next question comes from the line of [Richard Tamey with Petrie Capital]. Please proceed.

Thank you very much for taking my question. I have a question about CAC. I know we have addressed it a number of times here, but it looks to me as if in the cheapest quarter of the year for advertisement you became somewhat less efficient and effective in the advertising. If you have financial guidance here for 2006 implies that you expect your fourth quarter to be softer given that you beat on revenue and EPS this quarter. My concern is that going into fiscal '07 as it appears you're getting less effective, going from, according to my numbers on CAC, $125, in Q1 to 150 and now 170, in a period where advertising rates are cheapest. Can you help me understand better what is changing here that you're throwing out this 150 number for CAC going forward?

Yes, of course. I think what you really have to do is separate just the overall direct response business from that of the weight loss business. In the first quarter, although advertising might cost a little bit more there's many more customers out there looking for weight loss products which makes many more attracted to the Medifast advertisement. In the first quarter we also usually tend to have our highest PR hit, which is third party PR completely independent of our advertising but does drive customers to come to Medifast for technically what is for free. As the year goes on and [Inaudible] become less attractive to the media out there you see that decrease. I think that we're very -- we're a young company in the sense of our direct response, been doing that for five years. And every year we learn more going into the first quarter. I think moving into next year we've learned a lot this past year, both television spend as well as closing rates, as well as print and radio buying, that makes us very confident that moving into '07 we can be extremely effective throughout the entire year.

Okay. We shall see. Thank you very much.

Thank you.

That does conclude the time that we have for question and answers today. I would now like to turn the call back over to Mr. Connors for any closing remarks. Please proceed, sir.

We appreciate you taking the time to hear us share our vision of the Company. We're excited about where we are today and the opportunities for the future. We thank you for your continued support and look forward to speaking to you when we announce our 2007 full-year guidance in the early part of the first quarter 2007. Good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect.