Medifast Inc (MED) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Medifast, Inc., first quarter 2010 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, Investor Relations, from Medifast, Inc. Thank you, Ms. Turner. You may now begin.

Thanks.

Good afternoon. And welcome to Medifast's first quarter 2010 conference call. On the call with me today are Michael McDevitt, Chief Executive Officer; and Brendan Connors, Vice President of Finance.

By now, everyone should have access to the first quarter earnings release for the period ending March 31st, 2010. This release went out at approximately 4 p.m. Eastern Time today. If you have not received the release, it's available on the Investor Relations portion of Medifast's website at www.choosemedifast.com.

This call is being webcast, and a replay will be available on the Company's website. Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements, and Management may make additional forward-looking statements in response to your questions.

The words believe, expect, anticipate, and other similar expressions are generally identifying forward-looking statements. These statements do not guarantee future performance and, therefore, undue reliance should not be placed on them.

Also, descriptions of Medifast's objectives, strategies, plans, goals, or targets contained herein are considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements. Medifast assumes no obligation to update any forward-looking projections that may be made in today's release or on the call posted to their website.

Medifast does not comment on issues or items currently or potentially in litigation with adversarial third-parties and/or under investigation by appropriate regulatory or law enforcement agencies of the state or federal government. All of the forward-looking statements contained herein speak only as of the date of today's call.

And with that, I'd like to turn the call over to Medifast's Chief Executive Officer, Michael McDevitt.

Thank you, Katie.

Good afternoon, everyone, and thank you for joining us. On today's call, I will provide highlights of our first quarter results, and then Brendan will review the financial results for the quarter in more detail. We will then open the call up for your questions.

In the first quarter of 2010, we delivered record sales and earnings. This performance represents our 42nd consecutive quarter of profitability. Revenue for the first quarter increased 75% to $60.6 million, due to strong growth in each of our three primary distribution channels, including Take Shape for Life, Direct Response, and our Medifast Weight Control Centers.

This strong top line performance drove our first quarter profitability as we leveraged fixed costs and expenses with our vertically integrated operations. The first quarter of 2010 provided a strong starting point for what we believe will be another successful year for Medifast. We attribute our success to Medifast's strategy of providing the best selection of quality, portion-controlled, weight loss products within a multi-platform program that allows Medifast to best meet the many different client support and education needs in their weight loss and weight maintenance.

Increasingly, the Take Shape for Life, Direct Response, and Medifast Weight Control Center channels provide a complimentary source of support for health coaches and clients to connect and share Medifast's clinically proven weight loss programs. Each of our sales channels provide clients with the differentiated level of support they desire to achieve their health and weight loss goals.

In the past 30 years, over 20,000 doctors have recommended our products to more than 1 million clients who have lost weight and maintained their weight. The credibility of our products and the results they produce continues to resonate extremely well with new and existing clients. This credibility, our strong team members, and our superior product offering create the foundation that supports every channel within the Medifast business model.

It is reflected in our Take Shape for Life sales channel through the personal testimonials and stories of our health coaches and health professionals that continue to use and recommend Medifast products. Growing awareness of strength of our brand has helped to increase our Take Shape for Life active health coaches 78% to over 7100 coaches, compared to 4,000 coaches last year.

In our Direct Response sales channel, our focus on clinical research and innovation has helped us to target more effective advertising, leading to 43% sales growth in this channel for the first quarter of 2010. On our planned 30% increased marketing and advertising spend, we generated a 2.8 to 1 revenue to spend ratio during the first quarter of 2010, compared to a 2.6 to 1 ratio in 2009. This led to strong improvements in operating income.

And of course, in our Medifast Weight Control Centers, the efficacy of our portion-controlled meal replacements and personalized support programs are the gold standard of weight loss. Personal counselors provide one-on-one support and develop an individual program for each and every client that walks through the doors. The focus on client service and support helped generate record clinic revenues.

Same store sales for clinics open greater than one year increased 30% year-over-year. In 2009, we expanded our clinic into a number of new markets and had 27 clinics in the comparable store base located in Florida, Maryland, Texas, compared to 21 clinics last year. We ended the first quarter of 2007 -- we ended the first quarter with 27 corporate and 18 franchise centers.

In today's competitive environment, we believe that Medifast's clinically tested, physician-recommended products that deliver significant weight loss results represent a significant value for consumers, demonstrated by our continued growth and financial results. We will continue to focus on the investment in innovation of our corporate infrastructure to reach even more consumers in new and existing markets through innovative sales and marketing strategies and new product introductions through the production and manufacturing capacity we have in place to support our future growth.

We communicated on our fourth quarter call that we plan to initiate a number of events to provide opportunities for us to offer additional training for our existing health coaches, while continuing to attract new health coaches. As a reminder, historically, Medifast only hosted one annual convention each year.

In 2009, we increased our focus on the concept of weekly Super Saturdays. In a select number of cities, health coaches host a group event for potential clients to introduce them to the Medifast program. The event also provides existing health coaches the opportunity to offer additional program training.

Thanks to the outstanding work of our field leadership team, Super Saturdays continue to be a huge success. This year, we are launching a new series of quarterly hosted regional events called Super Regionals. These events can best be described as mini annual conventions, and will be held at different locations across the country.

In the first quarter, we hosted five Super Regional events, in Philadelphia, Atlanta, San Diego, Sarasota, and Salt Lake City. Results in each city were outstanding. We believe that as our base of health coaches continues to grow, the need for increased outreach and training will be critical to our success.

If these first quarter events are any indication, 2010 has the potential to be another strong year for Take Shape for Life. As a reminder, in the Take Shape for Life sales channel, approximately 99% of sales generated from Medifast products, and the remaining 1% is generated from the sale of our health coach starter kit, which is a non-commissionable item. Of the 99% of our sales relating to product, approximately 8% of the sales are to health coaches for their own personal consumption, and the remaining 91% are sales of Medifast products to end-using consumers of the health coaches.

In addition, although we have health coaches in every major US market, due to the viral marketing aspect of Take Shape for Life, approximately 60% of Take Shape for Life channel sales are generated from just seven geographic locations. As a result, we continue to be optimistic about Medifast's opportunity for future growth within those seven areas and as we expand in our current markets and enter new US markets.

In the Medifast Weight Control Center sales channel, we believe that there is a very strong consumer demand for the one-on-one accountability of MWCC and its supportive, consistent environment for many clients to meet their health and weight loss goals. We anticipate a robust future expansion plan, and throughout 2010 we will continue to expand the infrastructure necessary to manage the build-out process and requirements of this retail model.

We anticipate adding 13 to 15 clinics throughout 2010, an increase of approximately 48% to 57% from the number of corporate centers at the beginning of the first quarter. With this planned expansion, we will also maintain our focus on continued comparable same store sales growth.

Overall, the first quarter was very strong for Medifast, as we successfully increased net sales and leveraged our fixed costs and corporate expenses. Going forward, we are confident that our vertically integrated operations and increased capacity will allow us to continually improve the long-term leverage of our business model by expanding our margins and long-term profitability growth. We are excited to build upon our record achievements during the first quarter throughout 2010.

Now I would like to turn the call over to our Vice President of Finance, Brendan Connors, to review our financial results in more detail.

Thanks, Mike.

Revenue for the three months ended March 31st, 2010, increased 75% to $60.6 million, compared to $34.6 million in 2009. The Take Shape for Life sales channel accounted for 62% of total revenue, Direct Response accounted for 27%, and Medifast Weight Control Centers accounted for 11% of total revenue.

Focusing on our sales channels in more detail. Our direct sales channel, Take Shape for Life, experienced revenue growth of 94% to $37.6 million compared to the same period last year. This growth was driven by increased client product sales and increased revenue generated per health coach as a result of a record increase in the number of active health coaches. The number of active health coaches increased 78% to approximately 7100, compared to 4,000 in the first quarter of 2009.

Direct Response sales channel revenue increased 43% to $16.4 million, in part due to a 34% increase in advertising dollars spent as Medifast continues to experience a more effective advertising spend. As Mike mentioned earlier, we achieved a 2.8 to 1 revenue to spend ratio in the first quarter of 2010, as compared to a 2.6 to 1 ratio the same period last year.

This more effective advertising spend contributed to the increase in the overall operating profit. In addition, the Company recognized $2.1 million in revenue related to the freight billed to customers associated with the shipment of products sold in the quarter, compared to $925,000 in the first quarter of 2009.

Revenue in the Medifast Weight Control Center sales channel increased 75% to $6.6 million. This is due to a 30% increase in comparable store sales for units open greater than one year, as well as 27 corporate centers being opened in the first quarter of 2010, compared to 21 in the first quarter of 2009.

Gross profit for the first quarter of 2010 increased 78.6% to $45.8 million, compared to $25.6 million in the first quarter of the prior year. The Company's gross profit margin increased 140 basis points to 75.5% in the first quarter, versus 74.1% in the first quarter of 2009. Overall, the gross profit margin improvement was primarily due to improved pricing on raw materials and packaging, as well as increased manufacturing efficiencies.

In addition, due to the growth of the business, shipping revenue has increased and is now recognized in the Company's consolidated revenue. Previously, shipping revenue was netted against shipping expense in the Company's cost of sales.

Selling, general, and administrative expenses increased $15.9 million or 74% to $37.6 million in the first quarter of 2010. As a percent of net sales, selling, general, and administrative expenses decreased 40 basis points to 62%, compared to 62.4% in the first quarter of 2009.

The largest increases in SG&A expense were related to higher variable expenses, such as Take Shape for Life commission expense as directly related to product sales and personnel expense. Take Shape for Life commission expense increased $8.4 million in the first quarter of 2009 due to the 94% increase in sales.

Salaries and benefits increased by approximately $3.3 million as compared to the first quarter of 2009. The increase includes the hiring of additional expertise in critical areas such as Take Shape for Life, Medifast Weight Control Centers, and IT to support the strong growth in 2010 and beyond.

In addition, salaries and benefits includes items such as personnel expense due to accrued 2010 bonuses for the corporate bonus pool based on strong first quarter 2010 results. Personnel expense also included a one-time accelerated vesting of an executive deferred compensation plan to meet the payout obligation of the plan. The plan is fully funded, and the Company has no additional liability.

Operating income for the first quarter of 2010 was $8.2 million, compared to $4 million in the same period a year ago. Operating margin expanded 190 basis points to 13.5% from 11.6% for the same period last year. This improvement was due to strong net revenue growth that helped drive improved gross margin, increased leverage of sales and marketing expenses, and the overall strength of the Medifast business model.

First quarter net income increased 94% to $4.9 million or $0.33 per diluted share, compared to $2.5 million or $0.17 per diluted share for the first quarter of 2009. Operating cash flow increased to $14.2 million for the first quarter of 2010, compared to $5.3 million in the same period last year.

Our balance sheet remains strong, with stockholders' equity of $55.3 million and working capital of $33.1 million as of March 31st, 2010. Cash, cash equivalents, and investment securities increased 72% or $11.7 million to $28 million as a result of improved operating cash flows.

Now focusing on a few items as it relates to our financial outlook for the balance of 2010. We continue to expect gross profit margin improvement in the range of 50 to 100 basis points in 2010 as compared to the prior year, due to a decrease in the cost of each unit sold and continued manufacturing efficiencies.

We also continue to anticipate the full-year 2010 advertising spend to increase by 15% to 20% compared to last year. Our full-year tax rate is expected to be in the range of 39% to 40%, and full-year diluted shares outstanding of 14.8 million to 15 million shares.

In 2010, we plan to open 13 to 15 new Medifast Weight Control Centers. That concludes our financial overview.

Now I'd like to turn the call over to our CEO, Michael McDevitt.

Thank you, Brendan.

I would like to conclude by thanking our employees, health coaches, franchise partners, board of directors, and our valued clients for their continued support. We are very excited about our future, and look forward to delivering great results in the second quarter and remainder of 2010.

We would now like to open the call to your questions. Operator?

Thank you. We'll now be conducting a question-and-answer session.

(Operator Instructions.)

Our first question comes from Scott Van Winkle from Canaccord Adams.

Hi, guys. Congratulations.

Thank you very much, Scott.

So the first question of two. The first question is, didn't you end February with -- what was it? -- 6600 or 6650 distributors? That would assume -- that would imply, if I'm right there, that it was a very big March. Is that true? And what drove that, or are we just seeing that acceleration throughout the quarter?

It is true that from a month-over-month standpoint in the first quarter we did see the number of health coaches continue to grow, which is very common when you're dealing with this kind of compound growth that we're seeing inside the health coaches.

So March was a very strong month. March is commonly one of the stronger months in the weight loss period. A lot of people always assume that January is. But sometimes it takes a little bit of time for consumers to make the decision of what they want to choose in the weight loss industry before they actually put that purchase in.

So you are correct in your assumption. March was very strong. And I think that leads to strong assumptions on what we can continue to do for the remainder of the year.

Yes. So my guess would be that April was good, given the trend. But now you have the Chicago event going on in May. Can you talk a little bit about what you've seen? Because I think the advertising's already started, hasn't it?

The advertising has started from a minimal basis. The event is towards the end of May, so we're going to be ramping up that advertising over the course of the month. We're very excited about what we continue to see in trending for the Take Shape for Life health coach recruiting business.

This May event is something (technical difficulty) for what this will do -- we're very confident it's going to be a builder for the business -- as it's a test of going into a new market. We talk on how we have those seven geographic areas that generate roughly 60% of sales for Take Shape for Life. We've got a lot of Medifast Direct Response consumers who are unaware of what the Take Shape for Life offer is. And we're going to do our best to really make that Take Shape for Life opportunity both available and make their awareness grow inside the Chicago market.

So anxious to have this first test out there. Expectations are always low on an initial test. But we're going to learn a lot and, hopefully, have many more of these in the future.

Okay. And Brendan, if I could, real quick. What -- if you gave them, I apologize. I wasn't writing everything down. The shipping income or the shipping revenue in the quarter, did you give the dollar amount? And I'm wondering what was the offset in shipping expense, just so I can (technical difficulty). I apparently missed that change. I don't know if that came out in your K or something. I didn't catch it.

Sure. The revenue from shipping in the first quarter 2010 was $2.1 million. Last year it was $925K.

And the expense was just included in our cost of sales figure.

Okay. I'll let somebody else get in. Thank you.

Thank you, Scott.

Thank you. Our next question comes from Tom Kaplan from East Shore Partners.

Thank you so much for taking the question, and congratulations on a good quarter.

Brendan, if you want to do this offline at some other time, that's fine. But I just -- I'm writing very quickly and typing numbers in, and I'm a little behind and haven't updated my spread in a while. But just looking at the press release versus the 10-Q -- and excuse me, I'm a few quarters out of the loop -- but can you just explain to me why the revenue was restated in the press release and the cost of sales changed versus the 10-Q from Q1 '09?

Sure. Yes. Year-over-year is included in both Q1 '09 and Q1 2010. The shipping revenue is now included. That is just because now it is material enough, because of our growth, per GAAP revenue recognition policy.

So those deltas are just the offset, the shipping revenue and the shipping expense?

Yes.

Right. Okay. And here's the second part of the revenue question, and I'll use this as my follow-up. If the $60.58 million in the quarter is the revenue number, and the Take Shape for Life was $37.6 million, $16.4 million for direct marketing, and bricks and mortar $6.6 million, that adds up to slightly greater.

What does that imply about the sales from the doctor channel, if anything?

We have -- moving forward, we're going to be including the doctor sales included in the franchisee sales. The physicians that we attract now are more so weight loss clinic type of physicians to the wholesale model, which is a very similar model to our franchisees. So the -- moving forward, all future doctor wholesale accounts will be included in our franchisee figure. So they're actually included in that clinic figure that we spoke to.

Oh, okay, all right. Thank you so much. Appreciate the help. Thank you.

Thank you. Our next question comes -- is a follow-up from Scott Van Winkle from Canaccord Adams.

Brendan, so were there any kind of one-time in nature expenses in that first quarter? I mean, you had some litigation, you had an auditor change. It looks like you spent some time evaluating a second kind of auditor change after the acquisition of your original one.

I'm wondering if there was anything kind of one-time in that first quarter that bumped up the SG&A.

The one piece that you'll be able to see inside the balance sheet aspect that did have a one-time effect to the SG&A was we did have an accelerated aspect to a vesting schedule for deferred compensation of roughly about $500,000, due to the schedule. That is a one-time impact and will be -- looking forward, that will not be occurring again.

Okay, okay. So and that's a non-comp expense. It's just buried in SG&A. And what's that total number for non-comp expense in the quarter, if you have it?

-- speak on the change year-over-year in compensation expense. There was about a $3.3 million change year-over-year in compensation expense. Included in that is about a $500,000 one-time impact that Mike just spoke on.

Okay, okay. I was wondering how much of that was non-cash.

That was all a cash aspect --

It was all cash.

Oh, okay, great. Thanks.

Thank you.

Thank you. At this time, we have no further questions. I'd like to turn the call back over to the speakers for any closing comments.

Thank you very much for your participation today. We look forward to sharing our progress with you next quarter. And as a reminder, we will be visiting with investors in the coming weeks and attending a number of investor conferences, and we hope to see you there. Thank you very much.

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