Medifast Inc (MED) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Medifast First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Katie Turner for opening remarks. Please go ahead.

Good afternoon. Welcome to Medifast first quarter 2018 earnings conference call. On the call with me today are Daniel Chard, Chief Executive Officer; and Timothy Robinson, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ending March 31, 2018, that went out this afternoon at approximately 4:05 p.m. Eastern time. If you've not received the release, it's available on the Investor Relations portion of Medifast website at www.medifastinc.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 of the forward-looking statements contained herein speak only as of the day of this call.

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

Thank you, Katie. Good afternoon, everyone. We are pleased to discuss our first quarter 2018 results with you today. I will provide a brief overview of our financial and operational business performance. Tim will then review our financial results in more detail and share our 2018 second quarter and full year guidance. We will then be available to answer any questions.

We started of the year with a strong first quarter as the momentum we build throughout 2017 continued to accelerate into the first quarter of 2018. Our corporate team and our field leaders are aligned behind our strategy to extend out unique offer to a growing client population throughout the United States, and soon, internationally. It is clear that our mission to offer the world life-long transformation, one healthy habit at a time is resonating in the U.S market. We ended the first quarter with a record of 16,700 active earning OPTAVIA Coaches to support their clients in achieving their health goals. The growth of our OPTAVIA Coach [base], along with improved revenue per active OPTAVIA Coach, combined to deliver financial results which exceeded our expectations for the first quarter. Quarterly year-over-year revenue growth accelerated from a 25% growth in the fourth quarter of 2017, to nearly 40% growth in the first quarter of 2018. This marked the fourth consecutive quarter of year-over-year growth and a fifth consecutive quarter of sequential revenue improvement. The first quarter was also the largest revenue and profit quarter in the history of the company.

Our team continues to focus on generating operating efficiencies to maximize profitability as we continue to grow. Gross margin expanded 100 basis points to 75.9%, an SG&A cost as a percentage of revenue decreased 170 basis points. These improvements contributed to a record operating margin of 14.9%. Combined, the acceleration in our revenue and our operating efficiencies drove first year -- first quarter diluted earnings per share of $1.01, ahead of our first quarter guidance of $0.84 to $0.87 diluted earnings per share. With this strong start to the year, we're raising our annual revenue and profit outlook, which Tim will discuss in just a minute.

To give you a feel of how our business is developing, let me share a few recent highlights to illustrate how corporate and field leaders are partnering to execute on key strategic initiatives. Just last month, we had the pleasure of hosting our Annual Go Global Leadership event in Florida. It was the largest Go Global event in the history of the company with approximately 1,400 OPTAVIA Coaches in attendance. This represented a 40% year-over-year increase. This event is for qualifying OPTAVIA Coaches who inspire to advance to become stronger leaders and mentors within the OPTAVIA Coach and client community.

In addition to a series of presentations in the workshops, the event provided our first opportunity to formally outline our international expansion plans to extend our business offer to Hong Kong and Singapore in the first half of 2019.

OPTAVIA Coaches heard from both field leaders and corporate executives on how to participate in our expansion and why it is important for them to join us at the upcoming training events planned for our July convention in St. Louis.

We also announced 2 new exciting OPTAVIA Fuelings, Caramel Macchiato and Silky Peanut Butter shakes at this event. These incremental products are designed to make healthy habit creation easier for OPTAVIA community of coaches and clients. Our product development and marketing team continue to work on new innovative product offers to support future categories in the delivery of our brand promise of creating healthy lifestyle tied to incorporating new healthy habits in their daily routines.

Our technology investments are focused on improving our enterprise and mobile technologies to support our business operations and enable our OPTAVIA Coaches as they support their clients and train their teams. A good example is the recently announced agreement with Gather Table for a perpetual license to their software, which will help our coaches and clients make healthy eating, second nature.

Operationally, we are preparing for the opening of our distribution center in the Nevada in June. We have partnered with a leading global logistics provider to open scalable operations designed to support our growing business here in the United States as well as our upcoming shipments to our new Asian markets.

Along with our company-owned East Coast distribution center in Marilyn, we are well prepared to support the growing needs of the company.

In summary, we are successfully executing our strategy of aligning our corporate and field leaders behind a repeatable business rhythm, capable of driving long-term sustainable growth. Our results have been in accelerating growth rate, improving operating efficiency and increasing fuel productivity. Our focus moving forward, will continue to be on delivering above-average returns to our shareholders by continuing to develop our U.S. business and expanding our offer into Asia through the opening of 2 key gateway markets in Hong Kong and Singapore. We are optimistic and excited about the future opportunities ahead of us.

With that, I will turn the time over to our CFO, Tim Robinson.

Thank you, Dan, and good afternoon, everyone. Before I begin, I want to remind everyone that starting this quarter, we have changed how we report sales. Going forward, simplify and align with changes in the way we now manage the business, review operating performance and allocate resources.

We previously disclosed entity-wide disclosures for sales by channel for OPTAVIA, Medifast Direct, Franchise Medifast Weight Control Centers and Medifast Wholesale. Due to the interchangeability nature of the customers among sales channels, sales migration to OPTAVIA and realignment of internal operations, we will now be operating and reporting as a single sales channel. This change in our financial reporting structure is a testament to our success in transforming and restructuring the business and a reflection on how the business is managed today.

Secondly, I wanted to inform you about an important accounting change we made beginning January 1, 2018. As most of you are aware, the updated Financial Accounting Standards Board, revenue recognition standard requires companies to review the way they recognize revenue. As required, we have completed our review and adopted a new standard in 2018 on a modified retrospective basis. As a result, on a net basis, we recorded an after-tax transition adjustment to reduce retained earnings as of January 1, 2018, by $2 million. This is comprised of $5.6 million of revenue, offset by $3.6 million of inventory cost, commissions expense, shipping costs, credit card fees and related income taxes.

The adoption of this new accounting standard primarily impacts the timing of revenue recognition for product shipments. As product revenue will be recognized upon customer receipt and delivered at the time of shipment.

A reconciliation of this is contained within our press release issued this afternoon and in our Form 10-Q filed with the SEC.

I'll now like to review our financial results for the first quarter ended March 31, 2018. First quarter 2018 revenue exceeded our expectations, increasing 39.6% to $98.6 million from $70.6 million in the prior year period. As Dan mentioned, we ended the quarter with a record 16,700 active earning OPTAVIA Coaches compared to just 13,000 in the prior year and 15,000 in the fourth quarter of 2017.

Average revenue per active earning coach for the quarter increased 18.3% to $5,278 compared to $4,463 for the first quarter last year. The growth and productivity is very encouraging and resulted in part from improved field training initiatives and the accelerated rate of new productive OPTAVIA Coaches in the quarter.

The increase in the mix of higher priced OPTAVIA products also contribute to the increase in productivity of our coaches. OPTAVIA branded products represented 58% of our total company consumable units sold in the first quarter compared to 17% in the prior year period. Gross profit for the first quarter of 2018 increased 41.4% to $74.8 million compared to $52.9 million in the prior year period. Gross profit margin as a percentage of net revenue increased 100 basis points to 75.9% versus 74.9% in the first quarter of 2017. The increase in gross profit margin was a result of improved inventory management and shipping expenses. Selling, general and administrative expenses for the first quarter of 2018 were $60.1 million or 61% of revenues versus $44.3 million or 62.7% of revenues in the first quarter last year. The increase in SG&A was primarily a result of higher OPTAVIA commission expenses resulting from the growth and success of our OPTAVIA Coaches.

Our effective tax rate was 18.1% compared to 29.5% in the first quarter of 2017. This decrease in the rate is a result of a decrease in the federal statutory rate, pursuant to the Tax Cuts and Job Act as well as the discrete accounting for taxes associated with share-based compensation. Excluding the discrete accounting for taxes associated with share-based compensation, our effective tax rate would have been 23.1% for the first quarter of 2018. Net income in the first quarter of 2018 was $12.2 million or $1.01 per diluted share based on approximately 12.1 million shares outstanding.

First Quarter of 2017 net income was $6.1 million or $0.51 per diluted share based on approximately 12 million shares outstanding.

Our balance sheet remains very strong, the stockholder's equity of $113.6 million and a working capital of $92.9 million as of March 31, 2018.

Cash, cash equivalents and investment securities as of March 31, 2018, increased $10.4 million to $109.2 million compared to $98.8 million at December 31, 2017.

Our Board of Directors declared a quarterly cash dividend in the first quarter of $5.7 million or $0.48 per share payable on May 8. Our manage team and Board of Directors remain committed to enhancing value for our shareholders.

Now turning to our guidance. We expect second quarter revenue to be in the range of $99 million to $102 million, and earnings per diluted share to be in the range of $0.94 to $0.97 per diluted share. We are raising our previous guidance for the full year of 2018 and now expect revenue in the range of $385 million to $395 million, and earnings per diluted share to be in the range of $3.55 to $3.65 per diluted share.

Our fiscal year 2018 guidance assumes a 21% to 22% effective tax rate.

Well, that concludes our operational and financial overview. We appreciate your interest in Medifast, and Dan and I are now available to take your questions. Operator?

(Operator Instructions) Our first question comes from Frank Camma of Sidoti.

Question on the guidance. By my model, it looks like really where you blew out the number was on the productivity and more importantly, you think that productivity is going to be sticky, which is great going forward. Can you explain like how you get the confidence in that, given, sort of the trend line historically and the fact that you know you're adding new people? So typically I would think they'd be little less productive?

Well I think, one of the things we're seeing, Frank, is that our field is starting to use some new training methods and systems to help them bring people on and what we're seeing is that, that training is been more effectively executed. So despite people being new, that doesn't seem to be issue -- it doesn't seem to be an issue. It's really a reflection of a better way to train and a lot of those things, we have a clear positioning now. We have a new exclusive brands creating some excitement as well with OPTAVIA. And...

Some part of it is that too, right? Because you're selling a higher mix of those higher-end products, therefore, obviously, the revenue was higher.

Yes, that's a piece of it as well.

Okay. So the second part of that question is just as you open -- as you announce the markets, obviously, and start recruiting sort of second half of the year, could you tell us sort to what that does to the algorithm of active Health Coaches in the U.S.? In other words, do you, though -- will you go out and recruit individuals that have -- people that have Hong Kong national experience, Singapore, et cetera. Like how do we think about that and how actually it grows your U.S. base prior to even opening up in '19 numbers?

So we just had a big meeting with all of our sales leaders and really what we communicated to them was that the strategy of who you -- or how you go about bringing people into the business as clients or sponsoring as coaches doesn't really change. This opens it up a little bit, I think as you're pointing out to creating some excitement around people who may have contacts in Hong Kong and Singapore. But we really anticipate that they'll continue to use -- continue -- probably a little bit excitement around it, confidence. But they won't be changing the strategy of how they bring people in, per se. But to your point, there are more people because of that additional component of people who might be -- have an interest in those Asian markets.

Okay. My last question and then I'll hop out is, will you have a summer conference as well like you normally have like a big one? Or is this -- is that different than the Orlando one you just had? Or is that -- how does that work?

Yes, we will. We'll have -- our annual convention will be held in July in St. Louis.

Okay. So that's different than the one that you just had with the sales leaders and typically, remind us, would you then add even more incremental products in the summer? Is that possible or, i mean, is that...

Yes. We will be announcing the 2 that we mentioned earlier. But one more line that will be reflective of our strategy to add the next healthy habit. So we haven't announced it in the field yet what that product is. But we anticipate that will build excitement going into and coming out of convention.

The next question is from Linda Bolton-Weiser of D.A. Davidson.

So you mentioned the opening of your new distribution center in Nevada. I guess, you said for June. So typically I've seen in these models, where when you open a new distribution center, it reduces shipping costs even further and helps your growth -- gross margin even more. So is that what we should expect after you open that?

Yes, Linda. We do expect that really in 2019. I think, this year, it's a little more neutral just because of some startup costs involved in 2018. Not material, but I think the flow through of the improvements we'll start to see more in 2019.

Okay. And then can you say how much -- I mean, obviously, there's a fix in the variable portion of SG&A. So the variable portion would have risen a lot to go along with your sales growth. But did the fixed portion of SG&A increase much? Can you quantify that? And also, how much of the $3 million to $5 million of incremental spending for the international expansion was recorded in the first quarter?

Yes. So I would say, a really a nominal amount of the spending was in the first quarter. I don't know the exact number but certainly less than $1 million. So majority of that you'll see hit in the second half of the year. I'm sorry, what was the first part of your question?

It was related to, like can you give a quantification of how much of the fixed SG&A portion increased?

Yes. Our fix is pretty, kind of, goes along the word fix, our fix is pretty stable. So I would say, really, when you look at our commissions expense, it's a significant portion of our SG&A, near 50% of our SG&A. So that piece is the piece that really moves. But things like manpower, other driving costs, rents, thing that are fixed are quite stable.

Okay. And then in terms of just keeping up with your high growth rate. Are you able to just keep expanding and sitting more in to your plant production that you have? That's your own plant? And then, I guess, you can work with outsourcers to expand that? But is there any risk that you're going to run into some, kind of, difficulty with being able to supply all the demand?

No, we don't think we have our problems there. We've done a really good at planning, we have a really good planning and inventory control group, procurement group that works with third parties to pick up overflow when we need it. So we have relief valves. As the business grows, we can produce some of those products in-house or we can produce them outside without a material change in our margins. So we're working very closely with our suppliers to be able to pick up additional line right now. We've also been building inventory for the Nevada warehouse. So we will operate for a short period of time with 3 distribution centers as we transition. So we've been building up inventory for that, kind of, June launch. And so that's the, kind of, indication that we were able to flex with -- in pretty short amount of time. So we're comfortable of our ability to produce and deliver products and meet the demands.

Okay. And then, Dan, I think, when you were speaking, you alluded to some announcement or something about another, kind of, product that would address another element of the optimal path to life, I guess. So are you talking about, like, another category, like a near-neighbor category to weight management? And I know you don't want to say what it is, but you are talking about something that's like a new category entry, right?

Correct. I mean, they're -- it's a category that we already participate in. They'll be participating in a different way. And it will tie to one of the healthy habits that we communicate. I mean, with this -- what we currently do is healthy eating, the other ones are sleep, hydration and exercise. So it's not that it's supersecret, it's just that we haven't announced it yet. But we anticipate it will generate some excitement moving into the convention and coming out.

Okay. And then do you happen to have an operating cash flow number for the quarter and CapEx for the quarter?

Yes, our CapEx for the quarter was about $1.3 million for the first quarter and free cash flow before dividends was about $16.5 million.

So that's operating cash flow minus the CapEx?

Yes.

Okay. And then -- so with this high growth and strong balance sheet and cash flows, I'm a little surprised that you haven't gone back to doing some share repurchase. Because I think you did do some a few years ago. Is that something that you're thinking about? Or is there a reason why you wouldn't pursue that right now? Or...

Yes, that's been something we've been discussing with the -- at the board level for -- have been in the past and will continue to do so. So we don't really have anything to announce at this point. But certainly, we see that -- I mean, we're confident in our future. So we'll determine here very soon whether we use part of our cash for repurchasing our stock.

The next question is from Doug Lane of Lane Research.

You're talking about the OPTAVIA commissions. You mentioned almost 50% of the SG&A line, and now that you're for all intents and purposes are PurePlay direct seller. Is there any thought to breaking that out in future P&Ls?

That's something we definitely consider. It's not something -- it's something we've talked about on a regular basis as far as commission as a rate of percentage of sales is extremely stable. It's been stable for a number of years. So traditionally, our commission expense is somewhere around 42% of OPTAVIA sales and very stable. So we can definitely consider breaking that out. It's not something we mind disclosing.

No, I mean, it's sort of -- I know you've evolved at this point, but certainly other direct sellers break it out discreetly and be able to separate the fixed part from commissions, which are 2, obviously, entirely different animals. Was the commission expense around 42% in the first quarter?

Yes. It's been stable for quite some time.

Okay. And then, Dan, stepping back here with this kind of acceleration and growth that we've seen over the past 4 quarters. You mentioned several drivers, you've got, obviously, a lot of new product activity. You've got systems and tools for your coaches that you've implemented. You've got a new brand name, rebranding the whole thing. And then the opportunity for your international exposure, I'm sure, is generating excitement as well. Can you rank those? I mean, is there any way to rank those as far as what's generating the accelerated growth and the increased activity among your coaches?

Yes. We've talked about that. It's hard to quantify, I think. I think certainly, the training model that our field is using would be in the top 2. And then, I think, we have really completely eliminated some of the cross-channel friction (inaudible) new brand that's very on-trend. So that's -- those 2, kind of go together, meaning clear positioning and new exclusive brand. And then, I think, kind of the capstone would be confidence in the future. We are doing a better job of partnering, of supporting and of projecting where we're going as we go forward. And that helps our coach community be more effective in what they do so already.

Yes, I mean, it all goes together. Makes a lot of sense. And the -- on the international expansion, are we -- are you already starting to see some movement towards moving building a business ahead of that? In other words, people that are looking to participate in Hong Kong and Singapore, or does that sort of build as we get closer over the rest of the year?

I think it builds as we get closer to the rest of the year. There's not a lot they can do other than build locally prior to our opening of the markets. But there's certainly a lot of excitement and people are starting to think about who they know who might have contacts in those markets. So there's a motivation to kind of think more broadly than they have in the past. And I think that'll have a positive impact, but no real activity at this point.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

I'd like to thank all of you for your interest in Medifast, and a particular thanks to our community of OPTAVIA Coaches across the country for everything they did to make this quarter a successful one. We appreciate all of your participation in today's call. And Tim and I look forward to speaking with you again when we report our second quarter 2018 financial results. Have a nice evening.

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