Medifast Inc (MED) 2015 Q2 法說會逐字稿

Welcome to the Medifast second quarter 2015 earnings call. All participants will be in listen-only mode. (Operator Instructions). Please note this call is being recorded.

I would now like to turn the conference over to Katie Turner. Ms. Turner, please go ahead.

Thank you. Good afternoon, and welcome to Medifast's second quarter 2015 earnings conference call. On the call with me today are Michael MacDonald, Chairman 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 June 30, 2015, that went out this afternoon at approximately 4:05 p.m. Eastern time. If you have not received the release, it's available on the Investor Relations portion of Medifast's website at www.medifastnow.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 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 may be made in today's release or on today's call. All the forward-looking statements contained herein speak only as of the date of this 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. In a moment, I will share an overview of our second quarter performance, along with a progress update on our key areas of focus in 2015. Tim will then review the financial results in detail. We will open up the call to take your questions.

I'm pleased to report that both our revenue and earnings per share were in line with our guidance for the second quarter. Revenue from continuing operations was $72.2 million, as compared to our guidance of $72 million to $74 million. Earnings per share from continuing operations ended the quarter at $0.48.

When we exclude the extraordinary legal and advisory expenses resulting from 13D filings, earnings from continuing operations was $0.50 per diluted share, which was at the high end of the guidance of $0.47 to $0.50.

Second quarter revenue was down 3% versus the same period last year, but, importantly, this result marked another quarter of improvement in the rate of the decline as we work diligently to position Medifast for return to consolidated top-line growth.

This sequential improvement in the rate of decline was achieved despite the closure of eight franchise Medifast weight control centers in the second quarter. Additionally, we were pleased to see the successful consumer adoption of the price increase we implemented on March 1, as well as our very strong inventory and cash management, as demonstrated in the second quarter results. Our team continues to efficiently manage our business to maximize our profitability.

Early in the year, I shared our top 2015 focus areas. I'd like to take a few minutes now to share the progress we've made on these focus areas in the second quarter.

Our top objective is to advance the growth and simplification of Take Shape For Life, with a focus on growing the number of health coaches in the business. As I mentioned on the quarter one call, we are focusing on an easy-to-follow duplication process for health coaches to grow their businesses.

We introduced several of these concepts at our Go Global conference in Tucson, Arizona, in April, including an increased emphasis on the full Trilogy of Optimal Health to highlight the financial transformations we see along with the physical transformations. We also communicated an easy-to-follow preferred path that helps coaches showcase the business opportunity, and a streamlined sign-up process to help them get started faster.

At Go Global, we also introduced a new 3 plus 3 plan for those that have reached their goal weight or for those who simply seek a sustainable, nutritious eating program to complement their active lifestyle. And we introduced a new product kit featuring our Optimal Health bars and shakes to go with it.

By reaching more people along their journey to optimal health, we can impact more individuals and open up additional growth potential for Take Shape For Life. We continued the Each One, Reach One incentive program through the second quarter, which rewarded coaches for sponsoring new coaches who have corresponding BeSlim club orders.

Much of the second quarter was spent planning for our national convention in Orlando, Florida, held July 9th through July 12th, where this year's theme was Awaken, Connect and Transform. Nearly 2700 health coaches, clients and guests heard the inspiring stories of top health coaches and field leaders, chose from 24 training seminars and workshops to gain the tools and knowledge to grow their businesses, and celebrated the rank advancements of many successful coaches in attendance.

As always, national convention represented a time of key launches, and this year we introduced brand new business-building and client-attraction collateral materials, new 30-day product kits and a special upsell offer for BeSlim club members who place orders over a certain threshold.

We also unveiled a revamped Take Shape For Life website, mobile site enhancements and a host of exciting new training tools, all with the goal to unify our messaging and simplify the coach and client experience.

Additionally, we introduced our new Take Shape For Life Field First department, constructed to provide concierge-level support for health coaches with business-related questions. The concept development for these tools and initiatives was led by a dedicated task force of corporate and field leadership working together to ensure seamless, well-integrated efforts.

Overall, the energy level, excitement and engagement from the field was outstanding and united all in attendance around this year's powerful event theme. All of these initiatives are focused on growing the number of health coaches.

The continued optimization of our Medifast Direct Response business is another key priority. While new customer acquisition still proved to be a challenge in the quarter, we have improved our retention metrics, increased the average order value and regrew the percentage of customers who signed up for our Medifast Advantage auto-replenishment option.

Numbers were down 10% in the second quarter as compared to the same period last year, but this represented a continued improvement in the year-over-year rate of decline for Medifast Direct. Our team is focused on improving our performance as the year progresses through a number of initiatives.

We recently completed a customer survey, representing nearly 1100 Medifast Direct customers who had purchased more than once and more than $250 over the past 24 months. Here are just a few examples of the results -- 92% customers surveyed said Medifast foods were convenient, 85% said the plan fit their lifestyle, 78% said the plan was effective for them, and the list goes on. We will be sharing these results in marketing and creative assets throughout the back half of the year.

We continue with our website testing and improvements and implemented a new selective system landing page, where customers can choose among our two-week and four-week options. We also made progress on our customer journey path project. We are evaluating and updating all transactional and marketing email communication and targeting the content appropriately to each unique customer segment. And we advanced our work on new kits and offers so that we can test different price points and upsells as the year progresses.

We will stay true to our test and measure approach in everything that we do. That goes for our advertising approach as well. Second quarter Medifast Direct advertising spending was down 20% versus the same period last year, and the ratio of spending to net sales in Med Direct in the quarter was 30%.

We continued our weekly optimization of networks, day parts and unit lengths, and created executions for the Your Whole World Gets Better television campaign during the April and May flights.

Digital advertising spending was consistent throughout the quarter, and we have brought on partner specialists, and we strive for continuing efficiency improvement in brand and general search engine marketing, digital display marketing and affiliate marketing. Looking ahead to the third and fourth quarter, we expect total back half 2015 advertising spend to be at similar levels to last year.

Product and program innovation represents our third focused area. Our teams have been focused on fully leveraging the new products and categories launched in 2014, the largest new product introduction year in our history. We also have been working on our plans for the back half and into 2016.

We recently launched two new snack items -- Rosemary Sea Salt and Multigrain Crackers, both of which are low in fat, low in cholesterol, no trans-fat added, kosher and only 40 calories. We have watched consumers become increasingly interested in an overall healthy lifestyle, clean label options, performance nutrition, and are hard at work on projects that will meet customer needs in these areas.

Additionally, we have updated the merchandising of our product imagery and implemented new product icons that allow us to promote the positives and highlight the absence of negatives when it comes to the ingredients in our vast product offerings.

In addition to the focus on our top three initiatives, I also wanted to note that we are advancing our plans to continue building strong core competencies across our direct-selling, direct-response and wholesale business units to provide the means for each unit to perform at its highest levels. We will leverage the research findings of our Attitude Awareness and Usage study along with great learning gains in our product concept test research and (inaudible) field survey to fuel our go-forward strategies and tactics, which will include expansion of our target customer demographics. More to come on that as we get further along.

I continue to be proud of the recognition our Company has received. In the second quarter, Take Shape For Life was named to the Direct Selling News Global 100 and North American 50 list and was also recognized under the Direct Selling Association top 20 list. Medifast was also named today as a gold winner in the Company of the Year category in Best in Biz Awards 2015 International.

I'm pleased to have achieved our second quarter revenue and earnings guidance, and we are confident that we have the financial flexibility, people and operational plans in place to execute on our strategic goals.

On behalf of the Board of Directors and Management Team, we look forward to executing on our opportunities for growth while enhancing shareholder returns.

With that, I'd like to turn the call over to our CFO, Tim Robinson, who will discuss our second quarter results in more detail and our outlook for quarter three and full-year 2015.

Thank you, Mike. I'd like now to turn -- to review our performance for the quarter ended June 30, 2015, in more detail. Please note that the financial information I reference today will focus on our results from continuing operations.

For the second quarter of 2015, income from discontinued operations net of tax was $400,000. In the second quarter, net revenue decreased 3.3% to $72.2 million from a net revenue of $74.7 million in the second quarter of last year. The Take Shape For Life sales channel accounted for approximately 72.4% of revenues, the Medifast Direct channel accounted for 19%, the franchised Medifast Weight Control Centers accounted for 6.5%, and the Medifast wholesale channel accounted for 2.1% of net revenue.

Focusing on our sales channels in more detail, revenue in our direct sales channel Take Shape for Life decreased approximately 3.1% to $52.3 million compared to the same period last year. The decrease in revenue for this channel was primarily driven by a decrease in the number of health coaches as compared with the second quarter of the prior year and offset by an increase in the average revenue per health coach.

This revenue result, however, marked the second consecutive quarterly improvement in the rate of decline, on our way to resuming growth. We ended the second quarter with approximately 11,800 active health coaches, and the average revenue per health coach per quarter was $4,423. While this marks a slight decline from the first quarter's active health coach count, we continue to be very encouraged by the improvement in newly sponsored coaches so far this year. Our improved coach sign-up process and our increased focus on business building are having a positive impact.

Our Medifast Direct segment revenue decreased 10% to $13.7 million, as compared to $15.2 million in the second quarter of 2014. While still a decline, this marks the fourth consecutive quarterly improvement in the rate of decline, and results were in line with our expectations.

Revenue in the franchise Medifast Weight Control Center channel increased to $4.7 million in the second quarter from $3.8 million, or an increase of 22.3% as compared to the same period last year. The increase is driven by the conversion of corporate centers to franchise centers, partially offset by franchise center closures and as a decrease in the sale a franchise centers open greater than one year.

We ended the quarter with 62 franchise centers in operation, compared to 73 centers at the end of the same period last year. Wholesale channel revenues, which is comprised of revenues from physicians and other wholesale partners, decreased to $1.5 million compared to $1.7 million last year. This decrease was fueled by the loss of two large accounts, resulting from Medifast enforcement of business partner compliance requirements.

Gross profit for the second quarter of 2015 was $53.2 million, compared to $55.6 million in the second quarter of the prior year. Our gross profit margin decreased 70 basis points to 73.7%, versus 74.4% in the second quarter of 2014 for the increase from 73.3% in the first quarter of this year.

The decrease in the prior year was primarily the result of an increase in costs for certain raw ingredients, higher manufacturing variance due to reduced volumes and an increase in obsolescence for a single product due to expiration dates. These cost increases were partially offset by price increases initiated at the end of the first quarter.

Selling, general and administrative expenses in the second quarter of 2015 were $44.5 million versus $45.7 million in the second quarter last year, a decrease of $1.2 million. As a percent of net revenue, selling, general and administrative expenses were 61.7%, up from 61.2% in the second quarter of 2014.

Our second quarter of 2015 selling, general and administrative expenses included $300,000 in extraordinary legal and advisory expenses resulting from recent 13D filings. Excluding these items, selling, general and administrative expenses as a percentage of sales would have been 61.3% in the second quarter of 2015, which is consistent with the prior year.

Sales and marketing expenses decreased by $800,000 in the second quarter of 2015 as compared to the second quarter of 2014. This was primarily driven by a decrease advertising spending partially offset by new Take Shape for Life event convention incentives earned during the quarter.

Second quarter operating income from continuing operations before tax was $8.0 million, or 12.2% of net revenue, compared to $10.1 million, or 13.5% of net revenue, in the second quarter of 2014. Second quarter income from continuing operations net of tax was $5.8 million, or $0.48 per diluted share based on approximately 12.2 million shares outstanding, compared to $6.6 million, or $0.50 per diluted share, for the comparable quarter last year based on approximately 13.1 million shares outstanding.

Excluding expenses associated with the extraordinary legal and advisory expenses resulting from the 13D filings, income from continuing operations would have been $6.0 million, or $0.50 per diluted share.

Our effective tax rate was 33.8%, compared to 34.4% in the second quarter of 2014. This decrease is largely due to an increase in (inaudible) differences, which were primarily driven by higher tax-exempt interest income partially offset by an increase in state income taxes. Our balance sheet remains strong with stockholders' equity of $88.2 million and working capital of $63.3 million as of June 30, 2015.

Cash, cash equivalents and investment securities for the second quarter of 2015 increased to $65 million, compared to $61.4 million at March 31, 2015. We repurchased approximately 100,000 shares during the second quarter, and we currently have a 1.1 million share authorization for repurchase as of June 30, 2015.

Now, turning to our guidance, we expect the third quarter net revenues from continuing operations to be in the range of $65 million to $68 million and earnings per diluted share from continuing operations to be in the range of $0.40 to $0.43 per diluted share. We now project full-year revenue from continuing operations to be in the range of $270 million to $280 million and full-year earnings per diluted share from continuing operations to be in the range of $1.70 to $1.80.

Our revised full-year guidance reflects a decrease in the revenue forecasted from our Medifast Direct channel, in part due to the delayed timing of several e-commerce initiatives that are now expected to launch in the late third quarter.

Additionally, the unexpected closure of eight Medifast franchise weight control centers is factored into our second half projections, as well as the impact of our enforcement of business partner compliance requirements within the wholesale business. It's important to note, however, that we continue to be optimistic regarding the improvements expected in Take Shape For Life in the second half.

Fiscal year guidance excludes expenses resulting from 13D filings. We do not anticipate any additional expenses resulting from 13D filings for the balance of the year.

So that concludes our financial overview. I'd now like to turn the call back over to our Chairman and CEO, Mike MacDonald.

Thanks, Tim. In summary, we continue to expect that our strategic initiatives will help us generate improved results and that the actions we have taken will drive performance across each of our business units. We appreciate your interest and support of Medifast, and with that business review, Tim, Meg and I are available to take your questions. Operator?

We will now begin the question-and-answer session. (Operator Instructions). Scott Van Winkle, Canaccord Genuity.

First question -- can we talk a little bit more about Take Shape For Life? Earlier this year, there was a lot of success with the initiatives. The Each One, Reach One program continued into Q2, and I guess I had hoped for maybe some sequential stability or even a little bit of growth on the health coach number from Q1 to Q2. I realize Q1 is kind of the diet season, but a lot of diet companies get some strength in Q2 as well. Can we talk about the health coach number a little further?

Sure, Scott. This is Meg. So overall, we feel very confident in the growth of coaches, so from a sponsoring perspective, the number is -- the outlook is very positive. So as far as going into details --

Scott, as you know, we have -- the coach count is active health coach counts for coaches that earned income during the quarter. There are a segment of coaches, of course, that come in and out of earning income and not earning income. What we're seeing is some really positive trends as far as new sign-ups. New sign-ups are growing.

At the end of the quarter, however, the percentage of people that were inactive was a little higher than what we expected, so when we look at the overall health coach counts, we're seeing positive trends, but we trended down a little bit as far as the percent of the active coaches at the end of the quarter.

Sponsorship was really a positive thing for us, very positive for us at the end of the first quarter and continued to be positive in the second quarter.

Great. And is there anything kind of specific on sponsorship that's different than the Each One, Reach One program in the back half of the year? Obviously, you had a lot of things come out of convention. I'm wondering if there's anything incremental that's specific to the sponsorship side of the business.

Yes, so we have a new commission trip and incentive trip that was launched at convention. That does have many different components that will, in one part, really promote the addition of the Each One, Reach One, which is really making sure we bring on coaches with active clients and active coaches as well.

So that initiative, although launched at convention, the criteria went live July 1, so people right now are actively earning towards that trip, and they earn through January.

Gotcha. Okay. And then on the direct response side of the business, you're obviously happy with the moderating declines year over year. I'm wondering what's the expectation for that business. Is it at this point something you want to grow or you're looking to stabilize? What should we expect over maybe the back half of the year or certainly going into the next diet season the first half of the year on direct response?

Clearly, Scott, one thing we have done in direct response -- and you've probably noticed it -- we're actually charging a higher price on our direct response website than we're charging in Take Shape For Life. One of the things we're trying to do is make sure that we're causing less conflict in the system, so we rebuilt the Take Shape For Life business, which is most critical, but we're still spending 30% on advertising to drive in that direct business.

And we're going to get more aggressive with Med Direct as we go into that September timeframe, but we haven't had the systems completed, as we talked about. As soon as the systems get done, you'll see us move towards rested position in the Med Direct space to start to improve that. But the reality is with us being 70%-something multi-level, we want to clearly try to expand that business as our core business. We're going to balance that steady. We're not going to be out there trying to compete with the Nutrisystem, who's spending $140 million on their brand.

And I think it's important, too -- there are a couple of projects, as mentioned in the script, that we have moved to Q3 and Q4 on the purpose, so that we can focus some of our launches for convention. And now that those are over, we have a full (inaudible) on some of the major initiatives that will help drive some great testing for the end of this year to lead us into the diet season 2016, so we feel like we have a good plan in place.

Okay. And then I missed the end of the call and your commentary around share repurchase. I think you talked about the authorization. Was there any other color on what the plans are on the share repurchase?

The issue on share repurchase is -- our strategy is we'll do share repurchase if we feel the stock is undervalued, and we'll work closely with our Board in those discussions to do that. We bought back, I think -- what, it was 100 --

One-hundred thousand shares.

One-hundred thousand shares, and we still have an authorization, Scott, for 1 million-plus going forward, but it's really looked at saying -- we'll buy the shares if we feel the shares are undervalued.

Great. Thank you very much.

Mitch Pinheiro, Imperial Capital.

So imbedded in this forecast for the second half here, are we looking for health coach to sort of flatten out here on a year-over-year basis? Is that kind of implied, or do you still think it leaks down a little bit?

Yes, we're expecting it to be flat year over year, so that would return us to where we want to be.

Okay. And then does anything change in the Med Direct channel in the second half, I mean, sort of like growth rate-wise?

Well, the only thing that changes -- if you follow the trajectory of Med Direct over the past four or five quarters, you'll see a marked improvement quarter over quarter as far as rate of decline. I think the low point was probably a 29% decline. This quarter, it was 10%. It was in the teens the prior quarter.

And what we were projecting in our original guidance is that we would return pretty early in the second half, hopefully, to flat and then possibly to growth, but it was based on a number of initiatives, the timing of some initiatives, which we originally expected to go live in June, and so it's really just a delay.

So I think we came to the first half -- quite honestly, we met our expectations about where we thought that channel would be, and we were pleased with that, but the kind of resumption of the growth is going to be delayed a little bit, we believe. So if we can come out of the year, I think towards the end of the year, and get that channel back to flat in the fourth quarter, I think we would think that would be somewhat successful. And we assumed that that would have happened sooner in our original plan.

Yes, and I think with the systems that we're working on, that we'll be able to have much more aggressive offers in that September, October timeframe, which we have not been able to do, so we've been really reducing the rate of decline with keeping prices relatively high and very limited offers, so we feel we'll be able to get more aggressive as we --

More flexibility.

More flexibility in our systems to make us more competitive in that space.

And the things that we were able to do in that channel worked, so we (inaudible) marked improvements in customer retention, average order value, the percentage of customers that are on our auto-ship program, who we know have a much higher lifetime value. So those are the initiatives we completed, and each one of them really have worked. The customer acquisition strategy, which is really where we're struggling currently -- those initiatives did not go live, and so I think that's what we're hoping will really make a big difference and start to flow through in the fourth quarter.

And by the way, our customer acquisition in Take Shape For Life has improved considerably, so we feel very, very good about the new customer growth that we're seeing over the last 45 days coming out of Take Shape For Life, so that's a very positive indicator. We have not seen that for a while, so that's a good thing for us going forward.

Okay. And then, lastly, what was the reason for the franchise closures?

So we had eight centers that closed, and all eight of those centers were part of the June 2014 acquisition by a franchisee, and after one -- approximately a year of trying to make that business more profitable, they made the decision to close those locations, which were all located in Virginia.

Correct. They're keeping the other half in the Maryland locations open.

Gotcha. Okay. Thank you very much.

(Operator Instructions). Frank Camma, Sidoti.

Just clarification on the active health coach count. When you said you expect it to be relatively flat for the second half, did you mean over the Q3 and Q4 of last year, or do you mean from a count level?

If you look at Q4 last year, we had a pretty good dip, and I don't think we necessarily expect that to happen again, so I think that from where we are today, a slight improvement or flat. That gives an upside there, but I think, built into our estimates, that's what we assume.

Sure. Okay. And on the Direct side, I know it's smaller for you, but are you noticing any kind of like a change in the competitive landscape? I mean, Nutrisystem is apparently doing pretty well with their new marketing campaign, or revised marketing campaign. I'm just wondering if you could comment on that at all.

I think, Frank, I give credit to Nutrisystem. I think they've had -- done some very good stuff, and from our standpoint, I think one of our limitations has been our systems and not the ability to make the offers that are required, and I think we're going to have a chance in the fourth quarter to do that, and as we start improving, I think we'll be more competitive.

But as I said before, that's a small business for us. That is their core business, and with us having 42% brand awareness versus their 95%, we can never spend enough money to compete with that in a direct -- we want to be more of a direct response business, make offers and get people to buy our products versus, say, direct marketing, so we've got to be very specific in offers and get people to buy, and that's how we're trying to move the business. But I think -- yes, I compliment Nutrisystem on what they've done.

Okay. And just a final question, on the commodity costs going up. Is this something you expect kind of longer term? Will we see that pull back a little? I was wondering if you could give a little color on that.

So this particular product, we don't know if it's specific event driven that caused this particular raw ingredient to go up, and it's a little hard for us to forecast whether that will -- whether that'll be a month, three months or six months, but it is a specific ingredient. It won't be permanent, but it's a little hard for us to forecast right now.

Got it. Got it. Okay. And obviously, like it's also -- I think you said it's also a volume issue as well, right?

Yes, but we've done a really good job, I think. Our supply chain folks have done, I think, an excellent job in reformulating products, finding new vendors and all those kinds of things to keep our margins intact. But there's a little bit of a lag effect, where you have certain fixed costs associated with manufacturing that you can't -- you don't necessarily adjust or you can't adjust quickly.

So when you take the absorption of your fixed costs over a reduced manufacturing volume, your standard cost goes up a little bit, and that's kind of what we saw in the past quarter. We'll get that under control. I don't expect that we'll see margins lower than we had this quarter. The obsolescence piece that we had was one specific product, and we don't anticipate -- we have pretty good control over this. We don't anticipate that reoccurring next quarter, so I'm pretty comfortable with the margins.

The one thing, Frank, I think that was very positive when you looked at the first half -- it's one of our best EPS halves in the history of Medifast, and it was one of the strongest cash generation halves that we've ever had, so on those sides, I think we're in pretty good shape. Our issue is just reinvigorating the revenue, and that's really what we're focused on, and we're seeing sequential improvement, though we've got to accelerate that, especially in the Take Shape For Life world, because that's where the biggest opportunity is.

Clearly. Okay, thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Chairman and Chief Executive Officer, Mike MacDonald, for any closing remarks.

Thank you for your interest in Medifast and participation on today's call. In closing, our team is focused on returning the Company to growth. Initiatives we have in place are starting to work. We expect to continue to see improvements in each quarter as they take hold. We look forward to providing an update on our business when we report results for the third quarter of 2015. Thank you, and have a nice evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.