Medifast Inc (MED) 2010 Q2 法說會逐字稿

Greetings, and welcome to the Medifast Incorporated Second 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, Miss Katie Turner, Investor Relations for Medifast, Incorporated. Thank you, Miss Turner, you may begin.

Thank you. Good morning, and welcome to Medifast Second Quarter 2010 Earnings Conference Call. On the call with me today are Michael McDevitt, Chief Executive Officer and Brendan Connors, Chief Financial Officer.

By now, everyone should have access to the second quarter earnings release for the period ending June 30, 2010, which went out this morning approximately 6 am Eastern Time. If you have not received the release, it is available on 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 would 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 identify forward-looking statements.

These statements do not guarantee future performance, and therefore undue reliance should not be placed on them. Actual results could differ materially from those projected in any forward-looking statements. Medifast assumes no obligation to update any forward-looking projections that maybe made in today's release or on the call posted on 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 only speak as of the date of today's call.

And with that, I would like to turn the call over to Medifast's CEO, Michael McDevitt.

Thank you, Katie. Good morning, everyone, and thank you for joining us. On today's call I will provide highlights of our second 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.

Following a strong performance in the first quarter of 2010, we were able to generate a second quarter net revenue increase of 60% to $66.7 million due to the 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, combined with a continued increase in the gross profit margins, and improved leverage of selling, general administrative expenses, resulted in a 90% increase in earnings per diluted share to $0.38 in the second quarter, compared to $0.20 in the second quarter last year.

We continue to enjoy a positive response from our existing and new clients to our business model 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 clients support and education needs in their weight loss and weight maintenance.

Our positive sales results were broad-based, with each of our distribution channels growing at a rate above 40%. Increasingly, the Take Shape for Life direct response and the Medifast Weight Control Center channels provided a complimentary source of personalized support for clients to connect and share Medifast clinically-proven weight loss programs.

We are continuing to realize increased Medifast brand synergies from our multi-platform distribution model. The growing awareness and strength of our clinically-tested, physician-recommended Medifast products, and the efforts of our leadership and health coaches in the field, has resulted in a 72% increase in 8,000 coaches in Take Shape for Life compared to 4,650 last year.

In our Direct Response sales channel, our focus on Medifast clinical research and innovation has helped us to generate more effective advertising leading to 43% sales growth for the second quarter of 2010. Even with our 38% increase in marketing and advertising spend, we generated 2.8 to 1 revenue to spend ratio during the second quarter of 2010, compared to a 2.7 to 1 ratio in 2009. This led to strong improvements in operating income for the quarter.

In our Medifast Weight Control Centers the efficacy of our brands, portion-controlled meal replacements and personalized support programs continue to meet the needs of clients seeking additional support and accountability. Our focus on client service and support helped to generate record second quarter clinic revenues.

Same-store sales for clinics opened greater than one year, increased 25% year-over-year. We opened two new corporate clinics in the second quarter in Annapolis and Gaithersburg, Maryland, and ending the quarter with 29 corporate and 20 franchise centers.

Today, our 29 corporate clinics are located only in three states; Maryland, Florida and Texas. Combined with our franchise locations, we are only in seven states. Based on the current success and client satisfaction of the Medifast Weight Control Centers, we believe we have a tremendous opportunity for growth in both new and existing markets.

In an increasingly competitive environment we believe that Medifast clinically-tested, physician-recommended products represent a significant value for consumers looking to achieve weight loss and weight maintenance, demonstrated by our continued growth and financial results.

We will continue to focus on the invested and innovation of our corporate infrastructure to reach even more consumers and new and existing markets through innovative sales support and market strategies, and launching new product introductions throughout the production of manufacturing capacity we have in place to support our future growth.

In the second quarter we announced the grand opening of our 50,000 square foot Texas Distribution Center, which a few of you may have had the opportunity to visit in July. The facility will support Medifast shipping west of the Mississippi River, from Medifast Direct, Take Shape for Life and the Medifast Weight Control Centers. Currently, the center is actively shipping to over 50% of its destination states, and is increasing shipping to additional states on a weekly basis.

The Dallas distribution center will be fully functional by mid-September, and this distribution center is expected to reduce client product transit times considerably to those clients located west of the Mississippi River. We also wanted to provide you with an update on our strategy to continue to initiate a number of the events to provide opportunities for us to offer additional training for 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 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 receive additional program training. Thanks to the outstanding work of our field leadership team, these weekly health coach and client-training events continue to be a huge success.

At the beginning of 2010, we launched 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 second quarter, we hosted only one Super Regional event in Chicago and the results were very strong.

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. 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 sales are generated from just seven geographic locations. As a result, we continue to be optimistic about Medifast opportunity both for future growth within those seven areas, and as we expand throughout additional US markets.

In the Medifast Weight Control Centers sales channel, we believe that there is a very strong consumer demand for the one-on-one accountability and support, consistent environment for clients to meet their health and weight loss goals that the centers provide. Based on our past and recent success, we anticipate a robust future expansion plan for the clinic division. And throughout 2010, we will continue to expand the infrastructure necessary to allow scalability of the requirements of this retail model.

We anticipate opening ten to 12 clinics in the second half of 2010, which would equate to an increase of approximately 48% to 57% from the number of corporate centers at the beginning of the year. With this planned expansion, we will also maintain our focus on continued comparable same-store sales growth.

Overall, the second quarter was very strong for Medifast, and we believe we have entered the second half of the year with positive momentum. At the beginning of the third quarter, we hosted our Take Shape for Life Annual Convention.

The event was extremely successful, as the Company's credibility, the results of our products and programs and the unique business model of Take Shape for Life continue to resonate well with new and existing health coaches and clients. This credibility, our strong team members and our superior product offering create the foundation that supports current and future increased health coach growth.

We realized a 62% increase in attendance to 2,100 compared to 1,300 last year. In addition, we continue to demonstrate the importance of new product innovations with the launch of two pancake flavors, original and chocolate chip, as well as four soft serve flavors including chocolate mint, coffee, mango and peanut butter.

We are extremely please with our financial performance to-date, and 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.

Now, I would like to turn the call over to our Chief Financial Officer, Brendan Connors, to review our financial results in more detail.

Thanks, Mike. Revenue from the three months ended June 30, 2010 increased 60% to $66.7 million, compared to $41.7 million in 2009. The Take Shape for Life sales channel accounted for 63% of total revenue, direct response accounted for 26%, Medifast Weight Control Centers accounted for 10%, and doctors accounted for 1% of total revenue.

Focusing on our sales channels in more detail, our direct sales channel Take Shape for Life experienced revenue growth of 71% to $42 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 strong increase in the number of active health coaches. The number of active health coaches increased 72% to approximately 8,000 compared to 4,650 in the second quarter of 2009.

The direct response sales channel, revenue increased 43% to $17.3 million, in part due to 38% 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 second quarter of 2010, as compared to a 2.7 to 1 ratio the same period last year. This more effective advertising spend contributed to the increase in the overall operating profit. Revenue in the Medifast Weight Control Centers sales channel increased 60% to $6.7 million. This is due to a 25% increase in comparable store sales for units opened greater than one year, as well our 29 corporate centers being opened in the second quarter of 2010 compared to 24 in the first quarter of 2009.

Gross profit for the second quarter of 2010 increased 61% to $49.5 million, compared to $30.8 million in the second quarter of the prior year. The Company's gross profit margin increased 30 basis points to 74.2% in the second quarter, versus 73.9% in the second 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, partially offset by short-term increased cost in April, associated with shipment of products to clients, as a result of the need to expedite shipments due to a delay in outbound shipping verifications. By the end of April 2010, all shipping verifications were restored and cost resumed a normalized level for the remainder of the second quarter of 2010.

Selling, general and administrative expenses increased $14.2 million or 55% to $40.2 million in the second quarter of 2010. As a percent of net sales, selling, general and administrative expenses decreased 210 basis points to 60.3%, compared to 62.4% in the second quarter of 2009.

The largest increases in SG&A expense were related to higher variable expenses such as Take Shape for Life commission expense that's directly related to product sales, and personal expense. Take Shape for Life commission expense increased $7.8 million in the second quarter of 2010, due to the 71% increase in sales.

Salaries and benefits increased by approximately $3 million, as compared to the second quarter of 2009. The increase includes the hiring of additional expertise in critical areas such as Take Shape for Life, Medifast Weight Control Centers, Manufacturing, Distribution and IT Support, in order to support the growth in 2010 and beyond.

Operating income for the second quarter of 2010 increased 93% to $9.3 million, compared to $4.8 million in the same period a year ago. Operating margin expanded 240 basis points to 13.9% from 11.5% for the same period last year. This improvement was due to strong net revenue growth that helped drive improved gross margins, increased leverage of sales and marketing expenses, and the overall strength of the Medifast business model.

Second quarter net income increased 85% to $5.6 million or $0.38 per diluted share, compared to $3 million or $0.20 per diluted share for the second quarter of 2009. Net increase in cash and cash equivalents for the six months of 2010 was $13.6 million or 10.7% of sales, compared to $9.3 million in the same period last year.

Our balance sheet remains strong with stockholders equity of $61.9 million and working capital of $38.2 million as of June 30, 2010. The first six months of 2010, cash, cash equivalents and investment securities increased 91% from $14.8 million to $31.2 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. The Company anticipates the full year of 2010 advertising spend to increase by 25% to 30% with a revenue to spend ratio of 2.8 to 1.

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 would like to turn the call over to Mike, our CEO.

Thank you, Brendan. I would like to conclude by thanking our employees, health coaches, franchise partners, and our valued clients for their continued support. We are very excited about our outlook, and look forward to delivering strong results in the third quarter and remainder of 2010.

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

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session.

(Operator Instructions)

Our first question is coming from Scott Van Winkle of Canaccord Adams. Please, proceed with your question.

Good morning, guys. Congrats, on the momentum.

Thank you.

A couple questions -- first on the convention in the beginning of the Q3, do all those expenses fall into Q3 or did some of them come into the Q2?

We actually allocate those according to the -- throughout the entire year, so they're equally taken through the course of year.

Okay. And last year you had a huge jump in health coaches in that third quarter, I assume, connective with the convention. Do you expect the same type of event this year, or did -- we maybe see some of that qualification happening in the second quarter?

I would say that the event this year at the national convention was, by far, our best convention to-date. The excitement of the health coaches leaving the convention was very high, and I would anticipate seeing strong trending moving forward for the second half of the year. In fact, I don't believe that any of the wind was shown in the second quarter for what the convention will do for the remainder of the year.

Okay, great. And on the ad spend, on the director consumer side of the business -- consistent with the year-over-year growth that's consistent to what you saw in the first quarter, and kind of ratcheting up your full year, how are you --. Is it something that's happening throughout the quarter, is a little more opportunistic? Is it a function of what you see the first month as far as your revenue to spend that causes you to kind of turn it on harder or turn it on softer?

That's really exactly it, it's kind of looked at as a month-to-month basis and with the large percentage of our ad spend being on the Web, it's actually got more of a week-to-week basis than it is month-to-month.

We just continue to see awareness acceptance from the consumer-base on the Medifast brand, and we are able to ramp up that ad spend on a week-by-week basis. So we were able to see a rise of 38% of ad spend this year versus last year on the second quarter, and we do anticipate a strong ability to continue to see growth throughout the course of the year.

Okay, and the new product launch at the convention, any change in the margin structure of those?

No change to those margin structures.

And for Brendan, I assume we see the gross margin kind of snap back in Q3, maybe to Q1 levels after -- the pressure in April?

Yes, you'll see us back on track to the 50 to 100 basis point improvement year-over-year third quarter We just had a one-time event with additional shipping costs in the second quarter. That's exactly correct, Scott.

Okay. And final question - seasonality. So if I look back at 2009, there was kind of a -- an unusual drop from Q2 to Q3 where normally you're kind of flattish from Q2 to Q3 in revenue and earnings levels. Was there something last year that caused that? Or, is this the new seasonality because the Take Shape for Life is a larger percentage of the revenue?

I think you're really hitting on something there. The Take Shape for Life, now over 60% of total revenue, that business model is able to really kind of buck that trending of regular seasonality in the weight loss business.

I'm also looking for some strong backend numbers from Medifast Weight Control Centers with having those additional ten to 12 new centers put up and running in the second half of the year. Of course, they won't be up to full revenue speed right out of the gates, but having that new brand awareness in those local markets should also help with the direct response where those clinics are being placed.

Great, thank you very much.

Thank you.

Thank you. Our next question is coming from Chris Krueger, of Northland Capital Markets. Please, proceed with your question.

Hi, good morning. Nice quarter.

Thank you very much.

Thank you.

In your Take Shape for Life division, you consistently have talked about how seven markets represent roughly 60% of total sales. Are there any other new markets that are starting to emerge that could potentially tap into that or be kind of into that group?

It's a great question, and again, seven markets do consist of about 60% of sales. The two points I like to make when that point is brought up is that we do have health coaches in basically every major city across the United States, so we are starting to see large growth in other cities.

The reason why those seven markets continue to represent about 60% is those seven markets are continually growing at an actually faster rates than the business as a whole. So it's not that you're not seeing growth elsewhere, it's that we have a re-saturation in those seven markets.

So I do see tremendous potential for additional sales growth in those non-seven markets, but we are yet to see that tapped out in the current one's we are in right now.

Okay. And in that division, with all the health coaches you've signed up, how are the trends? If you looked at the typical health coach -- three months, six months, 12 months into it; are they able -- ramping up at faster levels than they used to a few years ago as far as sales growth, or how is that working?

That's a great question. I'll answer that both from a sales growth perspective as well as from the ranking of the health coaches' perspective. For the first six months of 2010 the average revenue per health coach has actually grown to $1,760 versus last year's $1,725.

So not only are we bringing on more coaches, we are actually seeing more revenue per coach with this increase, which is very different than your regular retail store. When you add on more boxes, usually you see a bit of a saturation of boxes, and you see average revenue per store drop, we are seeing just the opposite inside Take Shape for Life. And I give a lot of that credit to the additional training we are giving the coaches on how to better teach the Medifast products and program.

In addition to the product sales for coaches we are actually seeing our coaches advance in rank at faster rates than they had in the past. I'll give complete credit to this, to the field and their additional training on how not to just teach the Medifast products and programs, but how to be a better health coach and also how to be a better business coach in showing the opportunity that exists inside Take Shape for Life to their client base.

So even though the numbers are continuing to grow, we are seeing growth in the revenue for health coach, as well as in the effectiveness and the speed of health coaches to -- get it ramped up.

Okay. And, last question, any update on potential, like, non-English initiatives? I think there's been talk about the call center potentially being added in Texas to go after the, kind of, Latin American speaking market.

Very true. From the call center place perspective, we are opening -- the call center is opened in Dallas and we are looking for additional training in the Latin American speaking, so we will have the ability to have bilingual reps much more there. And I'm also excited to say that we have launched our Take Shape for Life career-building kits in Spanish, so the sales of those Spanish tapes have continued to rise month-over-month with the awareness and the training going towards them.

So, I think we've got a lot of potential in the non-English speaking aspects of America with the launch of that Take Shape for Life career-builder kit, as well as all of our starter kits in Spanish as well.

All right. Thanks a lot. That's all I've got.

Thank you.

Thank you. Our next question is coming from Barry Haimes of Sage Asset Management. Please, proceed with your question.

Hi, everyone; great quarter. Two quick questions -- one is the 49 total weight control centers, what was that number a year ago -- it was a comparative number? And then secondly, I just wanted to be sure I heard correctly, that the seven key markets outgrew this 71% Take Shape for Life revenue in the quarter. Is that correct? Thanks.

First answer would 29 corporate centers versus --

24 in prior year.

-- 24 in prior year. So the total number of clinics did increase by five, year-over-year. In regards to the question on the health coaches in the seven geographic markets, when you look at how Take Shape for Life is in fact a very viral type of a business market, it makes sense that the more boots you have on the ground in a general geographic area, the more awareness you're going to have and the faster that will grow. So, you did hear correctly.

Those seven geographic markets that make up for 60% did outpace the overall Take Shape for Life growth rates, when a market just gets up and started, and is new, one of those non-seven markets, it takes a bit more time for them to really get their momentum swing to it, and then they catch up to that 70% rate. So, we are very excited by the fact that those seven markets are still outpacing the overall Take Shape for Life growth.

Is there -- just one quick follow up. Is there a general pattern, where, if you take a market and you map the length of time you're in it, there's a curve that has an inflection point that's similar -- when you hit your two, you hit your three, you hit your four? Or, are the markets sufficiently different that you can't model it quite like that?

It's not your typical bell curve because, again, those are -- those major markets are still rising as far as in their growth rates. It wouldn't be as much a timing impact, as it would be the level of health coaches. Once a certain number of real leadership starts to emerge inside a given market, that's when you start to see the growth rates accelerate at much faster rates.

Great, thanks very much.

Thank you.

(Operator Instructions)

Our next question is coming from Tim Hasara of Kennedy Capital. Please proceed with your question.

Yes, good morning. You mentioned the Super Regional Chicago and I've been up in Chicago recently and seen a number of ads including, sort of a sports talk show host talking about being on Medifast. Are you targeting that particular market as a new market? And I guess, conversely, are you also going to target other markets next year and the year beyond that, like a Chicago market?

That's a great question, Tim, it's actually a two-part answer. We are targeting Chicago market both from the Direct Response business for more of a regional type of advertising campaign inside the Chicago markets, but also, Chicago is not one of the seven geographic areas that Take Shape for Life is generating 60% of revenue.

That was our first real Super Regional that was done outside of one of those major areas. So not only was it very successful, but it proved the fact that can host Super Regionals in non-major Take Shape for Life markets and see some great success. So, we do anticipate expanding the number of markets that we target in the second half of 2010 and well beyond that.

And one other question; any current plans or internationally, or thoughts with respect to that?

As far as preparing ourselves for international expansion that is something we are exploring right now from a strategic level. However we do believe, as I mentioned earlier in the call, only really being in 13 or 14 cities with the majority of the Take Shape for Life and Medifast Weight Control Centers growth. Our focus right now is on the United States, and we know this where the obesity epidemic is at its worst, and we've got a lot of work to do inside the US before we turn our focus elsewhere.

Okay, thank you.

Ladies and gentlemen, we are showing no further questions at this time. I would like to turn the floor back over to management for any additional or closing comments.

I would like to thank you for your participation today. We look forward to sharing our progress with you on our third quarter conference call. 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.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.