Medifast Inc (MED) 2008 Q1 法說會逐字稿

Greetings and welcome to the Medifast Inc. first-quarter 2008 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, Mr. Brendan Connors, Vice President of Finance for Medifast Inc. Thank you, Mr. Connors. You may begin.

Thank you very much. Good morning. My name is Brendan Connors and I am Medifast's VP of Finance. I am joined today by Michael McDevitt, our CEO and CFO. I would like to welcome you to Medifast's first-quarter call for the period ended March 31, 2008.

Before we begin, I would like to read the following statement. The Company invokes the protections of the Private Securities Litigation Reform Act of 1995 regarding any statements made during this call and memorialized in any or all transcriptions thereof that maybe forward-looking statements. The Company specifically disclaims the authenticity of any transcriptions other than the transcription created by its conference call vendor.

The words believe, expects, anticipate and other similar expressions generally identify forward-looking statements. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

Similarly, descriptions of Medifast's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. Medifast believes this release should be read in conjunction with all of its filings with the United States Securities and Exchange Commission and cautions its readers that these forward-looking statements are subject to certain events, risks, uncertainties and other factors.

Some of these factors include, among other things, Medifast's inability to attract and retain independent associates and members, stability in the pricing of print, TV and direct mail marketing initiatives affecting the cost to acquire customers, increases in competition, litigation, regulatory changes and its planned growth into new domestic and international markets and new channels of distribution.

Although Medifast believes that the expectations, statements and assumptions reflected in these forward-looking statements are reasonable and cautions readers to always consider all the risk factors and any other cautionary statements carefully in evaluating each forward-looking statement in this release, as well as those set forth in its latest annual report on Form 10-K and quarterly report on Form 10-Q and other filings filed with the United States Securities and Exchange Commission, including its current reports on Form 8-K. All of the forward-looking statements contained herein speak only as of the date of this release.

Now, I would like to go over the financial results. For the three months ended March 31, 2008, Medifast reported revenue of $25.2 million versus $20.1 million for the same period in 2007, representing an increase of 25%. The direct marketing sales channel accounted for 51% of total revenue, Take Shape for Life 39%, Doctors 3% and Medifast Weight Control Centers 7%.

As compared to the first quarter of 2007, the direct marketing sales channel revenues increased by 6%. Take Shape for Life sales, which are fueled by person-to-person recruiting and support, increased by 63% compared to the first three months of 2007. The company's Medifast Weight Control Center division increased sales by 75% as compared to the first quarter of 2007.

The Company had selling, general and administrative expenses of $17 million in the first quarter of 2008, which was an increase of $3.9 million for the same period in prior years. The largest increases in SG&A expense were attributed to increased advertising, increased Take Shape for Life commission expense that directly relates to sales, as well as personnel expense.

Advertising expense for the first quarter of 2008 was approximately $5.2 million compared to $4.3 million for the same period last year, an increase of $900,000. Take Shape for Life commission expense, which is directly related to sales growth, increased by $1.9 million compared to the first quarter of 2007 due to the 63% increase in sales.

Salaries and benefits increased by approximately $300,000 as compared to the first quarter of 2007. The increase includes the hiring of additional expertise in critical areas such as Take Shape for Life and Medifast Weight Control Centers in the second half of 2007, which have greatly impacted the revenue growth in the first quarter of 2008.

Also, additional personnel were hired in the call center during the first quarter of 2008 as the Company works to bring the outsourced Take Shape for Life call center in-house in the second quarter of 2008. The opening of four new corporately-owned clinics in Houston, Texas market also required the hiring of additional center managers and support staff. The Company believes the investment in personnel will lead to revenue growth, cost savings and additional profitability in the near future.

In the first quarter of 2008, the Company experienced an improvement in its gross margin as a percentage of sales from 74.8% in the first quarter of 2007 to 75.8% in the first quarter of 2008. The Company experienced benefits and cost of goods sold from efficiencies gained from new machinery. Also, the Company introduced new shipping rules in the beginning of 2008 that resulted in additional shipping revenue collected from its customers.

At this time, the Company is monitoring closely the cost of the raw materials as prices have been increasing on many commodities, including the ingredients in our products. Management is working on ways to gain efficiencies and all manufacturing processes in order to absorb the raw material cost increases and is prepared to pass a percentage of commodity cost increases onto the consumer.

In the first quarter of 2008, the Company reported net income of $1.4 million or $0.10 per basic share, $0.10 per diluted share compared to $1.4 million or $0.11 per basic share, $0.10 per diluted share for the first quarter of 2007.

The first quarter of 2008 represented the Company's 34th consecutive quarter of profitability. The Company's balance sheet remains strong with stockholders' equity of $33.7 million and working capital of $9.8 million at March 31, 2008 compared to $29.3 million and $10.3 million at March 31, 2007. Now, I would like to turn the call over to Medifast's CEO, Michael McDevitt.

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 first quarter of 2008 and we are very happy with the position the Company has placed itself in for both the near and long-term future, a position which we believe will allow Medifast to continue to experience growth in sales and profits throughout the remainder of 2008 and beyond.

There were multiple factors supporting the revenue growth, which occurred during the first quarter, which mainly consisted of increased sales and recruiting growth in our Take Shape for Life division, which is the direct sales division of Medifast, an increased number of corporate clinics, as well as an increased revenue per corporate clinic in the Medifast Weight control Center division and an increase in the direct-to-consumer advertising, which has proven to both increase revenue for the Direct Response division, as well as increase overall awareness of the Medifast brand, which strongly supports -- which strongly helps support the growth we are witnessing in each of the Medifast distribution channels.

Our direct sales model, Take Shape for Life, which currently represents over 39% of our total revenue, is a physician-led network of health coaches, that provide client support, as well as an opportunity for clients to become revenue-producing health coaches.

On the 2007 year-end conference call, we spoke on the increased recruiting rates of health coaches in the second half of 2007 and the positive trending we were experiencing following the national convention last July. We are pleased to say that this increase in recruiting was directly shown in the first-quarter revenue growth in Take Shape for Life, which was up over 63% from the first quarter of the prior year.

I believe the recruiting rates to be a very strong indicator of the future revenue growth in this business and throughout the first quarter of 2008, Take Shape for Life experienced 63% year-over-year growth in health coach recruiting. Current trending leads us to believe that the recruiting growth should continue to be strong throughout the remainder of this year.

To help ensure this trend does continue, the Company will continue to launch many new tools and services to the health coach field throughout the year of 2008. These additional tools will focus largely on the technology and recognition aspects of the business to include a newly updated website and shopping cart experience for the clients, an updated back-office software platform to assist the health coaches' management of their business and multiple event and incentive launches to promote the building of health coach and client acquisition.

A major event for the Take Shape for Life will be the 2008 annual convention. History has shown that depending on attendance levels, this event can be a major business driver and cause an uptick in recruiting and sales growth in the second half of the year. The conference will be held in late July in Orlando, Florida and we are expecting record attendance, which will be up over 50% from attendance at the 2007 conference.

The Medifast Weight Control Centers, which represent approximately of the Company's overall revenues, closed the quarter operating in 14 locations in Dallas, Orlando and the newly opened Houston market. In the first quarter of 2008, this division of the Company experienced revenue growth of 75% versus the prior year. This was done with a mixture of increasing the number of open clinic locations and increasing the average monthly revenue per location. The increase in average monthly revenue was done by continuing to improve the advertising efficiency and with a heavy focus on improving the daily operations of the business. The average monthly revenue per clinic grew from $29,000 to $39,000, representing a growth of 35% compared to the first quarter of 2007.

In the first quarter of 2008, the Company successfully opened four new clinic locations in the Houston market and plans to continue to expand this market to eight locations by the close of the year. Successfully breaking into the Houston market with clinics that have proven to produce substantial revenue amounts in a relatively short period of time is a very large accomplishment for this business model as the Houston market was the first territory we have entered that did not have a pre-existing footprint of a clinic model selling Medifast product, which had been done in Orlando and Dallas with the high-energy, private-label clinic model.

This shows us that the Medifast Weight Control Center division is a sound business model with strong duplication potential via corporate and franchisee locations. We believe that the proven success of the Houston market will cause for a strong demand moving forward for the franchise opportunity of the Medifast Weight Control Centers.

In the first quarter of 2008, we sold the first franchised territory rights to the Baltimore market. This was an important development in the growth of our business and presents an exciting growth opportunity for potential franchisees. We anticipate adding an additional six to eight corporate clinical locations in the remainder of 2008, as well as strong growth in the number of franchisee clinic locations in the near and long-term future.

Throughout the first quarter of 2008, the Medifast Direct Response division increased revenues by 6% compared to the same period last year. The engine that drives revenues in this business is advertising spend and the effectiveness of the advertising dollars spent. The basis that we used to monitor our advertising effectiveness is the revenue dollars generated from the advertising dollars spent. In the full year of 2007, the average return to spend was an estimated 2.5 to 1, which was positively impacted by the high return to spend that occurs in the fourth quarter of the year due to a low ad spend and heavy spillover revenue from prior quarters.

This year, in the first quarter of 2008, we witnessed an estimated return to spend of 2.5 to 1. The first-quarter ad spend in 2008 was equally as effective as the full-year ad spend in 2007 and that is without the benefit of the high-return fourth quarter. However, what I believe is more important is the knowledge obtained on the breakout of advertising venue effectiveness and how the environment has significantly changed from the first quarter last year. It is because of this knowledge gained, along with the current trending, that we are very confident that we will continue to improve our advertising return to spend throughout the remainder of 2008.

Commencing this month, we have realigned our advertising spend between the different media types. In the first quarter of 2008, we assessed the return to spend on each advertising medium, which has changed since the prior year. We have made adjustments to the allocation of our advertising dollars between print, TV and Web and believe we will see the benefits of these changes in the coming quarters of 2008.

We'll do this by allocating a larger percentage of the advertising spend to venues that proved themselves in this year's first quarter. Additionally, we will continue to generate revenue by our ever-expanding client base through remarketing efforts such as direct mail and e-mail campaigns.

The solutions that we provide to consumers dedicated to improving their quality of life have proven to be effective and we are dedicated to delivering our value proposition to the market in the most efficient and cost-effective manner possible.

Throughout the first quarter of 2008, the Company has significantly improved its abilities to understand and improve on our key performance metrics. We were able to take this increased knowledge and awareness and focus on improving the building blocks of the major drivers of the Company's revenue and profit.

These drivers include the future Direct Response advertising campaigns, the development of the direct sales team, the expansion of the medical clinic model and overall infrastructure enhancements to better support these initiatives.

We believe that the most exciting aspect of our business strategy is the diversified opportunity our extensive business platform presents. We are experiencing growth in all aspects of our business and are continuously improving marketing efforts and the growing brand awareness that it is producing impacts all channels of our business.

It is due to the strength of our business model, our strong medical and clinical history, the knowledge which we have acquired for improving the effectiveness of the advertising spend and most importantly, the positive trending we witnessed in the first quarter of 2008 and we believe we will continue to see throughout the remainder of the year that we are reiterating our guidance of revenue growth of 8% to 10% and diluted earnings per share growth of 30% to 35% for the full year ended December 31, 2008. And now I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Scott Van Winkle, Canaccord.

Thanks, how are you guys doing? I have got a lot of questions, but you mentioned $29,000 to $39,000 average volume per clinic. Was that quarterly revenue over last year's quarterly revenue? I'm sorry I missed that.

Monthly sales.

Okay, and can you go a little more specific? That is a big number.

That is a big number. I think we have been very effective at increasing the effectiveness of our advertising spend, which is generating larger leads per dollar in the clinic division, as well as really the improving on the closing rates. The clinic division is a two-part sale. The first lead being coming in from the call into the clinic. We are experience roughly about a 75% closure rate on those calls to drive the individuals into the clinic location for consultation and roughly about 75% close of those individuals once they are inside the clinic location. So overall closed percentage has grown to about 50% in that clinic model, which is just really helping to push the bottom line for that piece.

And are you finding that -- is there anything like the duration of stay -- do people just come in one time or -- I am not quite sure I understand exactly how that works.

That model is based upon the sale of a program to the individual on the day one. It is a personalized program with average lifetime value of a consumer in that business model of roughly $1100. The revenue in that model is a split about 50/50 down the middle between food sales and program sales. So if an individual comes in and purchases that program, it is most likely going to be with us for about a 36-week average.

So it is kind of a weekly thing they come in?

Yes, it is really up to the consumer how many times they wish to come in. The program has different levels of purchasing. On average, most consumers come in one time per week. They are paying for that program, which gives them weekly check-ins, but it is also really the accountability that is associated with that clinic model that really drives its success.

Got you. You were talking about how different things look this year than last year on the direct side, direct-to-consumer side and I know you mentioned a few things. Can you kind of step back, what do you think is the real difference today versus a year ago for the broader market, not just for Medifast, but the broader weight loss market, particularly direct-to-consumer?

I would say the broader market of weight loss in direct-to-consumer has had a large influx of competition over the last course of about 18 months, as well as the -- I am sure the economic outlook for the country has had this weighing on the consumer's mind when they are looking to pick a program, which one is going to best fit themselves. So increased competition and economic outlook is probably the two biggest factors.

Medifast itself, being a small spend in the relatively very large business of advertising spend and Direct Response weight loss, we are at a much better point where we can really shift our advertising spend to what we find being most effective at that given time, which we learned a lot about over the first quarter of this past year and really how that environment had changed from last year and we believe that that trending will continue throughout the course of this year. So we have got a very good view of how we think we can most effectively spend our advertising dollars for the remainder of 2008.

When you can't close someone who calls in on the direct side, what is the biggest impediment to them jumping on the system?

When you hear it from the consumer, the biggest pieces are always going to be price point. I am a firm believer that we, being a food, are very pretty much cost absorbed from the consumer. But in seeing that average sale of what is now roughly coming in at around $275, it is a different mindset for consumer to buy their full month of food upfront. Really easing their concerns on that piece by showing that Medifast per day is going to cost you less than it would probably to eat in a grocery store or at a restaurant given today's commodity prices. So it is really going to be the price points, as well as just understanding if they are ready to commit to a weight loss program.

Great. Thank you.

(OPERATOR INSTRUCTIONS). Laura Richardson, BB&T.

Thanks. Hi, guys. I was hoping you could talk me through that guidance a little more carefully. Because it is two quarters in a row now where we have seen the sales growth a lot ahead of that 8% to 10% you are talking about for this year, but the bottom-line growth is slower than the 30% to 35%. So what are you expecting is going to change over the next three quarters to get you to that guidance that you reiterated today?

Of course, I'd love to kind of walk you through the thought process. What we are looking at really is the tell tale for our guidance this year is going to be the shakeout of the second and third quarters and the advertising spend during those quarters and the effectiveness of that advertising spend.

Last year, you saw revenue growth occur in the second and third quarter as compared to the first quarter; however, profits were actually decreased because our advertising effectiveness decreased over that time period.

This year, we are seeing very positive trending and growth from the three subdivisions. That being Take Shape for Life, clinics and doctors maintaining flat basically and the Direct Response division pretty much maintaining flat in its revenue growth. However, the effectiveness of that advertising spend looking to maintain that at about that 2.5 to 2.6 level throughout the remainder of the year. It's going to be really the tell tale sign about that earnings per share dropping in where we wish them to to get to that 30% to 35% growth.

Okay. So the total ad dollars should be about what this year?

Walking through kind of the subdivisions, we are looking at -- we had anticipated growth in the Take Shape for Life division of roughly about 30% this year. In the Medifast Weight Control Center, again, about 30% this year.

Mike, can I interrupt you there for a second? Is that -- the 30% growth, is that in the number of advisers or per-adviser revenue and what was that number in the quarter anyway, number of advisers? If you said it, I missed it.

I was speaking strictly to the revenue growth of that division and the number of advisers at the end of the quarter --?

We had approximately 2200 at the end of this quarter compared to about 1350 last year this quarter. So it is about 63% growth in year-over-year recruitment.

Okay. So that growth is mostly number of advisers then, what you saw in the first quarter?

Yes, it was pretty much exactly parallel. The growth in coaches equated to the exact amount in growth in revenue quarter-over --. The Medifast Direct Response business, we are looking to spend at about that roughly $18 million to $18.5 million figure this year, which goes directly in line with what we spent last year around that $18.5 million figure, but again we are looking to have that revenue to spend creep from what was 2.5 to 1 last year to an estimated 2.6 to 1 this year.

Coming in for the first quarter, 2.5 gives us a very positive outlook for the remainder of the year as the trending maintains to continue very strong and we know that we have that fourth quarter, which has a very high return to spend in the history because of the fact we ramp down advertising spend in the fourth quarter and have a very heavy remarketing and reoccurrence of revenue from the prior quarters.

So we are on pace to really do exactly what we thought we were going to this year with increasing the advertising effectiveness by about that 0.1, which that 0.1 increase in advertising effectiveness on an $18 million spend feeds right down to that bottom line that really gets you that 30% to 35% bottom-line growth.

Okay, but you said heaviest in the second and third quarters you think in terms of the growth in EPS?

Growth in EPS compared to last year will be heaviest in the second and third quarters, yes.

Okay, and then you were talking about the media mix, finding that it could be a little -- that the effectiveness is a little different right now than a year ago. Didn't a year ago you start switching to more Internet advertising as a percentage of the mix and does that mean you are going away from that now?

It is actually just the opposite. We did find that Internet was very effective last year. What we're finding this year is again that it is even more effective, so we are continuing to do more of what we had done last year.

Okay. And then you said all the revenue growth by channel -- Mike, I missed it a second ago -- you said Take Shape for Life up 30% for the year and you said clinics the same.

For the forecasted estimates, we had assumed that Take Shape for Life and the clinics up about 30% for the year. We are going to be increasing the number of clinics throughout the year, but since they don't really start to recognize revenue until they are up and live, it is very different. In the Medifast direct business, we are looking for roughly about flat to about a 5% to 6% increase throughout the year, but doing so on a more effective advertising spend, either assuming less or having more revenue come in from equal spend.

Okay, and then you haven't mentioned doctors I don't think. Should that be down a little like it was Q4?

I would say that is a good assumption for the entire full year. We are really opening up territories, which used to be for doctors for the opportunity for franchisees. So of course, we're keeping our very strong credible individuals out there for doctors and we are going to be moving a lot of the doctors business to a franchisee model, which can produce revenue, as well as the franchise fees.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS). It appears there are no further questions at this time. I would like to turn the floor back over Mr. McDevitt for closing comments.

Thank you. We appreciate you taking the time to hear us share our vision for the Company. We are excited by where we are today and the opportunities for the future. We thank you for your continued support and look forward to speaking with you to when we announce our second-quarter numbers in August. Have a good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.