Medifast Inc (MED) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Medifast Incorporated fourth-quarter and full-year 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Turner, for opening remarks. Thank you Ms. Turner, you may begin.

Good afternoon, and welcome to Medifast's fourth-quarter and fiscal-year 2012 earnings conference call. On the call with me today are Michael MacDonald, Chairman of the Board and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; and Timothy Robinson, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ending December 31, 2012 that went out this afternoon at approximately 4.05 PM Eastern Time. If you have not received the release, it is 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 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 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 statement.

Medifast assumes no obligation to update forward-looking projections that may be made in today's release or on the call posted on its website. Medifast does not comment on issues or items currently or potentially in litigation with adversarial third parties and/or under investigation by regulatory or law enforcement agencies of a state or federal government. All 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 Chairman and CEO, Michael MacDonald.

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. On today's call, I will provide you with an update on our business initiatives, including areas of the business where we are seeing momentum, and discuss the areas we're increasing efficiencies to improve Medifast's future growth and profitability long term. Tim will review the financial results for the fourth quarter in more detail, and discuss the first-quarter and full-year 2013 revenue and EPS outlook. I will then provide closing remarks, and we will open up the call to take your questions.

This time last year, we communicated to you our renewed focus on driving operational excellence throughout our Take Shape for Life, Medifast Direct, Medifast Weight Control Center, and wholesale physicians sales channels, as well as our internal support apartments to better position our business for maximum profitability long term.

I am pleased to say that in 2012, our executive team worked diligently to review and enhance our overall cost structure to further leverage of our sales momentum, improve our margins and deliver improved earning results, while continuing to focus on enhancing the customer experience at each of our sales channels. In 2012, our net revenue increased approximately 20% to $356.7 million, from net revenue of $298.2 million in 2011, with each of the Company's three primary sales channels contributing to this year-over-year revenue increase.

Net income for the fiscal year 2012 increased $3.1 million to $21.6 million or $1.57 per diluted share, excluding two non-recurring items, including an FTC settlement recorded in the second quarter of $3.7 million or $0.27 per diluted share, and a sales tax accrual of $2 million net of tax or $0.14 per diluted share in the fourth quarter of 2012, which Tim will discuss in more detail in a few minutes. This compares to a net income of $18.5 million or $1.31 per diluted share for the comparable period last year. Tim will provide details on the sales tax accrual in a few minutes.

Now, I will discuss each of three primary sales channels in more detail. First, I will focus on Take Shape for Life. The number of active health coaches increased to 10,200 at the end of 2012. On a sequential basis, active health coach count decreased, as we've seen historically, as health coaches are less likely to grow their businesses during the holiday season.

Throughout the year, we worked on improving our health coach and client acquisition and retention. Our average revenue per health coach per month ended the year at $1,635 as compared to $1,555 in 2011. We are pleased with our health coach productivity, as we really started to see positive results from our efforts to improve our overall Take Shape for Life performance in 2012.

We successfully hosted nine Take Shape for Life health coaches events, with over 6,500 attendees, or over 60% of our health coaches, attending one or more events in 2012. This also includes record-breaking attendance at our Take Shape for Life annual convention in Washington, DC, where we celebrated 10 years of helping America get healthy.

[The] year we focused on simplifying the opportunity for our health coaches to acquire clients and develop their businesses. Specifically, we are continuing to invest in dedicated resources to support our field leadership team through an emphasis on training, new market development, events and incentives.

It was great to see many of you at our analyst day in Maryland in December. You may remember we talked about the Success From Home magazine as our latest acquisition tool. In less than three weeks, we sold two-thirds of our inventory. This amazing third-party publication is a strong tool to support our coaches in the promotion of their businesses in their communities.

To start 2013, we kicked off January with two of our largest West Coast events that attracted over 3,000 health coaches and clients. At these two events, we introduced live stream technology, which allowed over 1,000 additional clients and coaches to attend the kick-off events virtually. The West Coast continues to be a strong market for us, and we are very pleased with the enthusiasm of our health coaches at these events.

In 2013, we are increasingly focused on expanding our Take Shape for Life health coach presence in all 50 states to help more clients achieve optimal health. We believe these events, along with all of our other exciting Take Shape for Life initiatives, should increasingly place Take Shape for Life in a position to experience increased momentum in health coaches and revenues long term.

As a reminder, the vast majority of our health coaches are currently or were formally clients using our products for their own weight loss or weight maintenance needs. Approximately 94% of our Take Shape for Life product sales are shipped directly to and personally consumed by our clients, while the remaining 6% of our Take Shape for Life product sales are shipped to and consumed by our health coaches.

Many of our health coaches still use our products to help in their weight maintenance, but it's important to remember our health coaches do not receive a discount for their own product orders, nor do they receive commission on Medifast products purchased for their own personal consumption.

I will now spend a few moments discussing our Medifast direct sales channel. Our team continues to effectively manage this business, and strategically spend on marketing and advertising to drive sales. In 2012, Medifast Direct revenue increased 16% to $84.4 million, and we achieved a 3-to-1 revenue-to-spend ratio. This is the highest full-year revenue-to-spend ratio we have achieved, and illustrates the strength of our marketing team and their efforts to drive greater efficiencies in this sales channel.

We continue to generate more targeted effective advertising of Medifast 5 & 1 Plan and portion-controlled meal replacements. Medifast Direct realized significant year-over-year increases in Google search clicks, site visitors, number of buyers, total orders, average order value, and the number of clients in our Medifast Advantage auto-ship program in 2012.

Our team capitalized on learning from our web analytics tool and our content management monitoring technologies, to drive more optimized site performance. To this point, we have introduced web technology that allows us to test and deliver targeted content to different web visitors, to create a more personalized customer experience, as well to improve our lifetime value per customer.

We have also expanded our One Medifast message to share our multiple-channel options with new customers, so they can choose the support option that best serves their weight-loss or weight-management goals and needs. We have done this by developing distinct, creative messages to highlight each channel, the key differentiating elements of each, and continuing to focus on the wonderful success stories we have from real people, our Medifast customers.

In the fourth quarter, we launched our renewed MyMedifast and MyTSFL online communities, that offer clients the ability to track their Medifast meals, Lean & Green meals and water consumption throughout the day, as well as weight measurements, exercise routines and more. Clients can view and share graphs and reports that track their progress, as they continue in their journey towards optimal health. More importantly, clients and customers can interact directly with other people in the program via a robust social community.

To go hand-in-hand with the online community, we also launched a new mobile application available for download on the Apple App Store for the iPhone, iPad, and the Google Play for Android. We believe our investment in advanced training and technology will continually enhance our online presence, grow site traffic, and to continue to improve order conversion long-term.

We continue to invest in a fully integrated advertising campaign across television, print and radio, highlighted by a very strong focus on digital, as we have continued to be very efficient in our spend. As many of you remember, we had our first-ever national sponsorship of Notre Dame in football in 2012. This is very exciting for us, and we are very pleased with the results across the digital, television and radio assets from this partnership, which will continue in 2013.

To kick off January 2013, we took our marketing approach to a new level and unveiled our first-ever national television campaign, called Conversations with Yourself, that features three real Medifast clients, and has been featured not only in the New York Times, but also in Adweek and on Mashable, touted as a fresh approach to weight-loss advertising.

We have a strong mix of direct response and call to action-oriented messaging, along with powerful and emotionally compelling brand-building content that will help grow overall brand awareness across a broad spectrum of mediums. We believe the drive to build our brand is a very important investment in our future, and look forward to continuing to improve and enhance our overall marketing effectiveness to drive sales in the future.

Finally today, I'd like to spend some time discussing our Medifast Weight Control Centers and Medifast wholesale physician sales channel. We continue to increase our same-store sales in this channel, with a 12% increase for the year versus 13% in 2011. We ended the year with 68 corporate centers and a comparable store base, versus 40 last year.

As a reminder, our new corporate center openings were weighted towards the first half of 2012, with 19 new centers, 5 of which were in new designated market areas for us -- Virginia and North Carolina, including Raleigh-Durham, North Carolina; Hampton Roads, Virginia; Richmond, Virginia and others. We are improving our lifetime value per customer in our corporate centers through training, counseling, and standardization of processes.

We continue to balance evaluating ways to provide superior customer service, and support the needs of our clients seeking additional accountability in their weight loss and weight maintenance, while driving greater profitability through the sales channel. Improvement in profitability is an ongoing effort, but we did see a profit improvement of $2.1 million to a $0.6 million loss in 2012, from a loss of $2.7 million in 2011.

In addition, the fourth quarter was our third consecutive quarter of profitability in the Medifast Weight Control Center and wholesale sales channel. While we are still ahead of where we thought we would be from a profitability standpoint in this channel for the year, we remain focused on driving future improvements.

In 2013, our franchise partners intend to expand into additional new markets with limited Medifast presence, currently. As a reminder, our franchises plan to open approximately 40 centers total over the next three to four years. And in fact, in 2012 five new franchise centers opened, three in Sacramento, one in Minneapolis, and one in Eau Claire, Wisconsin. This demonstrates the strengths of the Medifast Weight Control Center business model, and the positive relations we have forged with our franchise partners.

Going forward, we will focus on delivering technology and systems to enable franchise centers to be more efficient and effective, as we work to grow the franchise model further, both with existing partners and new franchises.

I also want to provide everyone with a brief update on our strategic partnership with Medix. As a reminder, Medix is a leader in pharmaceutical obesity products in Mexico. We are pleased to report that in the fourth quarter, we officially launched our Medix products in Mexico with Medix's physicians network.

In January, Medifast and Medix announced plans to increase distribution of Medifast meal replacement products and programs across Latin America, to include Argentina, Bolivia, Chile, Columbia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, Venezuela and Uruguay. We believe Medix's distribution and Medifast's clinically proven meal replacement options will help us address and reduce obesity in key countries outside the US.

Medix plans to work with its extensive physicians network, while it also opens approximately 30 weight control centers over the next several years, including the first center in the first half of 2013, and I expect five to six centers in 2013. Our partnership with Medix is a great example of how our Executive Team is expanding the Medix products and programs internationally, through new complementary distribution channels. Going forward, we will continue to explore ways to grow the Medifast brand to help fight obesity on a global basis, with an emphasis on entering new markets with a low capital investment and a focus on increased profitability.

With that overview, I would like to conclude by welcoming Tim Robinson, our Chief Financial Officer, to Medifast. Tim joins us with over 25 years of diverse management experience in finance, accounting and business operations. Most recently, he held the position of Vice President, Business Operations, for Canon Business Solutions Inc., where he served as a key member of the Executive Team for this national office products subsidiary of Canon USA.

We are excited to have Tim on the team, and believe his ability to develop and implement new financial processes and systems will create the financial platform needed to support our future growth initiatives across our multi-channel business. With that, I will turn the call over to Tim to review our financial results in more detail.

Thanks, Mike. I'm excited to be a new part of the Medifast team. For those of you I have not yet had the chance to meet, I look forward to seeing you in the coming weeks and months. So now, focusing on the results for the fourth quarter of 2012. Net revenue increased 20% to $83.2 million from net revenue of $69.6 million in the fourth quarter of the prior year. As Mike mentioned, our reported net revenue for the quarter was at the high end of our guidance of $82 billion to $84 million. The Take Shape for Life sales channel accounted for 62.2% of total revenue. Medifast Direct accounted for 21.8%, and Medifast Weight Control Centers and wholesale physicians accounted for 16% of total revenue.

Focusing on our sales channels in more detail, our direct sales channel Take Shape for Life experienced revenue growth of 20% to $51.8 million compared to the same period last year. Take Shape for Life growth was driven by an increase in customer product sales, as a result of an increase in active health coaches and an increase in the monthly revenue per active health coach.

The number of active health coaches at end of the fourth quarter of 2012 was approximately 10,200, and the average revenue per health coach per month increased to $1,571 from $1,452 in the first quarter of 2011, which is an increase of 8%.

Revenue for the Medifast Direct division increased 17% to $18.2 million, as compared to $15.6 million in the fourth quarter of 2011. Due to a more effective advertising message, more targeted advertising online and in local radio spots, and by highlighting customer successes in large national publications and on television, the Company experienced a 3.2 to 1 revenue spend ratio in the fourth quarter of 2012 compared to 2.8 to 1 in the same period last year.

In the fourth quarter, revenue for the Medifast Weight Control Centers and wholesale physicians channel increased 24% to $13.3 million, due to growth from the opening of new corporate and franchise centers throughout the year, and a year-over-year improvement in comparable store sales of 4% for centers open greater than one year. We had 68 Medifast Weight Control Centers in the comparable store base at December 31, 2012, and we had a total of 87 corporate and 35 franchise centers in the fourth quarter of 2012.

Gross profit for the fourth quarter of 2012 increased 20% to $62.8 million, compared to $52.3 million in the fourth quarter of the prior year. Our gross profit margin increased 30 basis points to 75.5%, versus 75.2% in the fourth quarter of 2011. Margin improvement during the quarter resulted from reducing discounts across the Company's sales channels, and a slight improve in the overhead as a percentage of sales.

Reported selling, general and administrative expenses include the non-recurring sales tax accrual. The focus on sales tax on Internet-based remote sellers has gained momentum in many states. Because of this trend, combined with the desire of the Company to create symmetry amongst all sales channels, we have realigned our positions to be more consistent with other major internet remote sellers, and will now be collecting and remitting sales tax in all states that impose sales or use tax. In order to mitigate the financial impact on any prior-year activity, the Company is taking advantage of voluntary disclosure agreements with various states.

The total amount of sales tax liability in 2012 related to such disclosure agreements is approximately $3.3 million before income tax, and $2 million after income tax. As a result, reported selling, general and administrative expenses increased $8.4 million to 52 -- $59.2 million in the fourth quarter of 2012, versus $50.8 million in the fourth quarter last year. As a percentage of net revenue, selling, general and administrative expenses decreased to 71.1% from 73% in the fourth quarter of 2011.

Selling, general and administrative expenses, excluding the non-recurring sales tax of $2 million after tax or $0.14 per diluted share in the fourth quarter of 2012, increased $5.2 million to $56 million versus $50.8 million in the fourth quarter last year. As a percentage of net revenue, selling, general and administrative expenses decreased to 67.2% from 73% in the fourth quarter of 2011.

Take Shape for Life's commissions expense, which is variable based on product sales, increased by approximately $3.6 million, as Take Shape for Life sales grew a healthy 20% compared to the fourth quarter of 2011. As Mike mentioned, health coaches do not need to purchase products themselves to receive commissions, and health coaches are not compensated for their own orders, nor for recruitment of clients or health coaches.

Importantly, commissions are not paid out on the sales of enrollment kits, business-building tools or event registration. So essentially, we don't pay commissions on non-consumable items. Finally, clients pay the exact same price for products sold through Take Shape for Life as do individuals who elect to do the program without a coach through our Medifast Direct division.

Salary and benefits increased by $800,000 for the fourth quarter of 2012 as compared to last year. The increase in salaries and benefits is due to the hiring of employees in our information technology, finance, Take Shape for Life, legal and marketing departments, to support our growth. Sales and marketing expenses decreased by $900,000 in the fourth quarter of 2012, as compared to the fourth quarter last year, and as a percentage of net revenue was 9% as compared to 12% in the fourth quarter of 2011.

Operating income, excluding the $2 million sales tax accrual previously mentioned, was $6.9 million, or 8.2% as a percentage of net revenue. That compares to $1.5 million or 2.2% as a percentage of net revenue in the fourth quarter of 2011. Operating income as reported was $3.6 million.

Our effective tax rate was 49.6%, compared to 19% in the fourth quarter of 2011. Our effective tax rate for the full year of 2012 was 35.1%. Excluding the recording of sales tax accrual of $2 million recorded in the fourth quarter, and the FTC settlement in the second quarter, our full-year effective tax rate would have been 29.4%. The Company anticipates a tax rate of approximately 33% in the first quarter of 2013.

Fourth-quarter net income, excluding the sales tax accrual, would have been $3.9 million or $0.28 per diluted share, based on approximately 13.8 million shares outstanding, compared to net income of $1.2 million or $0.08 per diluted share for the comparable quarter last year. Reported net income in the fourth quarter of 2012 was $1.9 million or $0.13 per diluted share.

The Company's balance sheet remains strong, with stockholder equity of $90.8 million and working capital of $59.8 million as of December 31, 2012. Cash, cash equivalents and investment securities for the fourth quarter of 2012 increased 26 -- by $26.2 million to $60 million, compared to $33.8 million at December 31, 2011.

So now focusing on a few items that relate to our financial outlook for 2013. We expect net revenue for the first quarter of 2013 to increase by 4.6% to 6.8%, resulting in revenues in the range of $93 million to $95 million, and earnings per diluted share are expected to be the range of $0.32 to $0.35. The first quarter of 2013 is a bit unique from a calendar perspective, in terms of how the holidays and our shipping days fall. The last three days of the quarter fall over the Easter holiday weekend, when the Company will be closed.

Additionally, we are pleased with early results of our first-ever national brand advertising campaign, as we continue to focus on messaging that drives conversion, client acquisition and client retention across each channel, while we also tap the One Medifast multiple support option message, and we build our overall brand awareness.

We've planned a slightly more conservative marketing spend in the first quarter of 2013, as we balance our response and brand-building approach, and gauge both customer sentiment and the competitive arena. We remain optimistic for the full year of 2013, and will now share an outlook for the full-year, in addition to our quarterly revenue and earnings guidance I just provided. We expect full-year of 2013 net revenue to increase 7.9% to 12.1%, or in the range of $385 million to $400 million, and earnings per diluted share are expected to be in the range of $1.70 to $1.80.

Expansions in new markets, and continued growth in our conversion and brand awareness, will contribute to our net revenue increases, while an ongoing focus on increasing our operational efficiencies, and ensuring the right pricing and discount mix to drive client acquisition or retention, will help deliver our earnings per diluted share improvements. Well, that concludes our financial overview. Now, I'd like to turn the call back over to our Chairman and CEO, Michael MacDonald.

Thanks, Tim. The evolution of the Medifast business model has allowed us to realize strong top- and bottom-line growth, as well as strong cash flow generation. We believe the improvements we've made in our overall management team, and also in our multi-channel weight-loss and weight-management business model, allows us to benefit from cross-channel synergies and an overall more diversified go-to-market approach.

We are excited about our future growth prospects in each of our three sales channels, and we will consistently work to make the necessary adjustments to improve our operational efficiencies and overall effectiveness across our distribution channels in 2013. In addition, we continue to believe that our vertically integrated operations and our increased capacity will allow us to continue to improve the long-term leverage of our business model for increased margin expansion and long-term profitable growth.

In closing, we've come a long way in just a year. We believe this illustrates that we are taking the right steps to best position Medifast for increased earnings and strong cash flow generation, to enhance shareholder value long term. We are pleased with our start to 2013. We are optimistic about our long-term growth prospects, and the team in place to help us achieve our goals. Now Tim, Meg and I are available to take your questions.

We will now be conducting a question-and-answer session.

(Operator Instructions)

Kurt Frederick, Wedbush Securities.

I was just wondering on the $8 million ad campaign that you are running, what -- how does the timing of that fall into the quarters?

On the ad campaign, Kurt, we spend more money in the beginning of the year, in the first two quarters, but it's not that different across the year. We spend a little bit more in the first two quarters. The one change we've made is that about $8 million is going into the brand portion of the campaign, which is the Conversations campaign. And by the way, that drives all four channels, and we are seeing a lot more activity on the websites, and from that, we are continuing to try to focus on improving our conversion rate.

Okay. And you said, I think I heard, the direct marketing piece, you are going to pull back a little bit in Q1?

Direct marketing, we've taken direct marketing down a little bit and put that into the Conversations campaign overall, but it's not significant. It's a few million dollars.

And we will use -- we will gauge the customer responses to those ads, and decide what the future investment will be throughout the rest of the year as well.

Okay. And then do you have the -- what is average revenue at the Company-owned Weight Control Centers?

You mean per location?

Right.

I would say about $650,000.

Okay.

And franchises would be around $1.1 million, Kurt.

$1.1 million, okay. Then one more on -- I think the last call you had talked about the back office stuff that you are putting in, and you talked a little bit about improved analytics and then simplified health coach activation. I was wondering if you could discuss maybe some of the learnings from that upgrade, and then what specifically the additional data is, that it's now available to you?

Meg, why don't you take that one?

Yes, we've got two phases. We've made some incremental adjustments and changes to the way we run our back office for our coaches, but there's a bigger project still in the pipeline for this coming year into the next year to deliver a very new [phase]. So some of the changes that you are talking about, all this wait -- are just easier reporting, look and feel, but the bigger changes will come later this year. But certainly, the training aspect and the coaching, helping coach our coaches to mentor others better, is all up on the -- the coach connection sites have been improved. The way our website is functioning, that's been improved dramatically and changed. We've actually created a new MyTSFL portal, which is a great place for coaches to keep track of -- and clients to keep track of their weight loss. So those are the bigger functionalities, right now, that tied into that. The [optimization of] back office reporting will be later in the year.

Okay. All right. Thank you.

(Operator Instructions)

Michael Halen, Sidoti & Company.

Just a couple of quick ones. Can you give us any color in terms of tax rate for the full year?

Mike, we expect our tax rate for 2013 to be around 33%.

Okay, great. Thanks. I know you had mentioned 40 centers in the next two or three years by some current franchisees. I was curious if any other franchisees have joined or -- are there any other franchisees from outside the (multiple speakers) --?

Yes, right now, Michael, we've been working on completing a process called Developing Franchise in a Box, where we develop the tools to go out and market to new franchisees. Those tools will be available in the next 30 days or so, and then we will start that marketing process. So all of the franchises that we are moving on so far are ones -- some current people. Now we are going to go out and start marketing nationally over the next 30 days, as we complete the deliverables. But I want to be very sure that we have the right tools, so as we engage people we can teach them to get up the learning curve very, very quickly.

Okay, great. Thanks. Then I guess one more. Can you talk when you -- the timing of the new franchise centers, and when you think they might open throughout the year? Is this going to be something we are looking at in the back half or --?

Yes, as we look at this year, we are looking at anywhere from 8 to 15 that we see already committed to in the US, and clearly, as I mentioned, the 5 to 6 in Mexico. But as we start to market this, it doesn't take that long to do these. We will have additional centers as we get people to sign up, so that's the initial thing. We think we have anywhere from 12 to 20 already, and then we will see what happens after we go out to market.

Okay. Do you expect them to be open in the first half or --?

I think most of those will be open in the second half. That's one of the reasons as we do this transition, there's a major transition going from Company-owned to franchises. That's where you saw us be a little conservative on the revenue side, because of that transition. We want to make sure we are not -- we want to make sure we have the right things in place so we create a good, long-term, sustainable business, rather than move too quickly and do what we did when we were building the Company-owned ones, and make that same mistake again.

Yes, that make sense. All right. Thank you very much.

(Operator Instructions)

Thank you. I would now like to turn the call back over to management for closing comments.

Well, what I want to do is just say thank you very much. I appreciate everybody participating on the call, and I -- if anyone has any other follow-up questions, we would absolutely be happy to answer those over the next few days, but we thank you for your support of Medifast, and we look forward to creating greater shareholder value in the future. Thanks very much.

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