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Edited Transcript of MED earnings conference call or presentation 9-Mar-17 9:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Medifast Inc Earnings Call

OWINGS MILLS Mar 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Medifast Inc earnings conference call or presentation Thursday, March 9, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katie Turner

ICR - Managing Director

* Daniel Chard

Medifast, Inc. - CEO

* Timothy Robinson

Medifast, Inc. - CFO

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Conference Call Participants

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* Frank Camma

Sidoti & Company - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Medifast fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead.

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Katie Turner, ICR - Managing Director [2]

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Good afternoon. Welcome to Medifast's fourth-quarter and FY16 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 December 31, 2016 that went out this afternoon at approximately 4:05 PM 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 statement.

Medifast assumes no obligation to update any forward-looking projections that may be made in today's release or on today's call. All forward-looking statements contained herein speak only as of the date of today's call. With that, I'd like to turn the call over to Medifast CEO, Dan Chard.

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Daniel Chard, Medifast, Inc. - CEO [3]

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Thank you, Katie. Good afternoon, everyone. We are pleased to be with you today to discuss our fourth-quarter and full-year 2016 financial results. I will provide a brief overview of our financial results, discuss our recent business performance and provide an update on my first few months at Medifast.

Tim will then review our financial results in more detail and share our guidance for the first-quarter and full-year of 2017. Finally, Tim and I will be available to answer your questions.

I've spent much of the past several months getting to know our talented field and corporate teams. I'm excited about the Company's future direction, and believe that we have a significant opportunity to grow our business domestically and expand internationally.

In 2016 we made solid progress on our key initiatives and also began setting the stage for accelerated growth in 2017 and beyond. We're pleased to report a return to growth on both top and bottom line in 2016.

Revenue of $274.5 million was in line with our expectations. Income from continuing operations was $1.49 per share, while adjusted earnings from continuing operations was $1.89 per share, which is at the high end of our expectations for the year. In line with this performance we announced a 28% increase in our quarterly dividend last December.

Going forward, our focus will be to accelerate our top-line revenue growth with continued improvement and profitability. The Company is in the fortunate position of being surrounded by powerful macro trends that we believe will support our long-term growth.

We have a large addressable market in the US and internationally, as people increasingly focus on adopting healthier lifestyles including, but not limited to, weight management. We have responded to these trends by creating a compelling highly effective product portfolio. Our products are, in turn, supported by programs that include one-on-one client support from our dedicated community of health coaches who help their clients achieve their healthy weight and adopt and incorporate healthy habits into their lives.

I'm very excited and confident about the future of Medifast. Our product innovation and our focus on supporting healthy habits has resulted in some of the best weight management and wellbeing solutions in the industry. We believe we have a clear path to build our brand by focusing our message, expanding our product offer, strengthening our partnerships, and penetrating existing and new markets. This work will support the next level of accelerated revenue, profit growth, and total shareholder return.

Now let me focus on our operational performance in greater detail. Take Shape for Life reported its fifth consecutive quarter of year-over-year growth, up 8% for the fourth quarter. Our health coach community continues to get stronger, as demonstrated by both the growth in Q4 active earning coaches and coach productivity year over year. Tim will review these numbers in more detail during his financial review.

On a sequential basis from the third quarter to the fourth quarter our growth slowed beyond our seasonal expectations. This was reflected in both new coach acquisition and in coach productivity. This period followed the introduction of our new lifestyle brand, Optavia, and the associated products and programs.

While we saw high adoption rate for the first 13 exclusive Optavia Select products, which launched at our Take Shape for Life 2016 Annual Convention in July, the demand outpaced our production and we were quickly faced with supply challenges, causing us to remove the most popular items from our product offering for a few months. This contributed to our slow momentum as we moved into the fourth quarter.

We have since taken steps to make sure that we can fully support the demand for the next 20 new products, which were introduced in our Go Global event last month in Atlanta. As a result you will notice that our year-end balance sheet reflects a higher inventory position as we prepare for the anticipated strong adoption rate for our newly introduced Optavia Essential line of products.

Additionally, we are ensuring all existing Medifast branded products continue to be available to clients and health coaches in order to provide continuity where desired. By avoiding distractions, this will offer us a smooth transition for clients and coaches, most of whom we expect will transition this year from the Medifast branded products to our Optavia Select and Essential lines.

For clarity, we now have our Medifast Classic line as well as 20 new Optavia Essential products which feature our most popular forms and flavors. We will add approximately 27 new SKUs to this line by August of this year. All Optavia Essential products are formulated without artificial flavors, colors, or sweeteners, plus they contain additional Vitamin D and the GanedenBC30 probiotics for digestive and immune health.

Lastly, our 13 Optavia Select products which were launched in the third-quarter of last year, have the same attributes offered in the Essential line plus the addition of unique flavors and ingredients from around the world in a non-GMO designation. We have been pleased to see the trends that suggest strong adoption of our Optavia products from both new clients, existing clients, and health coaches.

I referenced earlier our February, Go Global event in Atlanta. This event was for our qualifying business coaches who are aspiring to advance to business leader status.

I am pleased to report that it was the largest Go Global event in the Company's history, with over 1,000 attendees. This is a good barometer for the health of our coach community. The excitement of the event was inspiring, and the agenda included leadership workshops, opportunities to learn from and collaborate with other successful business coaches, and presentations from both field and corporate leaders that highlighted our vision and strategy for the future.

All of this activity will culminate in what we believe will be the largest and most significant national convention in our Company's history. The convention is in Dallas in July and will conclude the one-year transition of the Optavia brand and from that point forward Take Shape for Life will be officially known as Optavia.

Now let me move to our Medifast Direct business. Our team has been working for quite some time to refine our approach while also significantly reducing the cost of new customer acquisition. While we expected a decline in this business year over year, we expected the decline to slow by the fourth-quarter of 2016 and as a result of our second-half actions. Although the decline has continued at a similar level throughout the full year of 2016, we now are beginning to see some improvements in this business in the first two months of 2017 and expect that to continue as we implement several initiatives throughout the remainder of the year.

As we have shared on past calls, our ongoing focus over the past two years has been returning Take Shape for Life to growth. As it represents 80% of our total revenue, this has included making strategic decisions that have clearly impacted the performance of Medifast Direct.

For example, we made the strategic decision to limit Medifast Direct's ability to offer discounts and other typically attractive promotions in order to prevent competition with our Take Shape for Life channel where customers have a significantly higher lifetime value. The impact of these initiatives led to a $2.5 million year-over-year decline in revenue for the fourth quarter in Medifast Direct.

On a positive note, our ability to acquire online customers at a reduced rate is allowing us to begin testing our Medifast Direct online customer acquisition platform as a client and lead generation tool for our health coach community. Our research shows that when we assign a health coach to a customer there is a much better outcome for everyone.

The additional lifetime value, along with the potential to gain an additional health coach over time, is a very compelling financial model that could not have been accomplished with our historical customer acquisition cost. This testing is an example of our focus to move to an integrated business model for the benefit of our Take Shape for Life coach community. We are optimistic that this alignment will boost our long-term success.

Lastly, our team continues to work closely with our franchise Medifast Weight Control Center partners to continue to deliver a compelling offering. Also notably, during the third and fourth quarters we worked with several of our franchise partners to convert franchise locations to authorized reseller locations. This strategic shift enables them to leverage their current locations to offer a broader set of products and services while retaining the ability to offer Medifast products and programs under a similar economic model.

Overall we're pleased with our operational and financial performance in 2016. Our team has accomplished a tremendous amount during the year, and returned the total Company to growth.

Our strong disciplined approach to the business has served the Company well and will provide us with the necessary foundation to embark on our next stage of growth for 2017 and beyond. I've been impressed with the dedication of our health coaches, our partners and our employees as we provide a path for lifelong transformation toward better health and wellbeing for our customers and clients.

When I joined last October, our Board of Directors sent a strong message of confidence when they challenged us with a very aggressive long-term goal to reward shareholders. We have aligned all of our senior executive goals and long-term incentives around the same three-year objectives.

This objective is to achieve an annual total shareholder return over the next three years of no less than 15% and upwards of 35%. Of course, we're aiming for the top end of that range, and in order to achieve the goal we are challenging our field and corporate leaders to double the size of our health coach community over the next three years. The alignment of our management team objectives is an important step as we drive forward as one integrated team with a single common goal.

In summary, our team remains committed to delivering value to stockholders. The health of our business, our significant cash generation and the strength of our balance sheet puts us in a position to continue enhancing stockholder value through both our existing dividends and share repurchase programs. Our first quarter dividend, a 28% increase year over year, will be paid on May 9.

As of December 31, 2016, we have over $76 million of cash, cash equivalents and investment securities on the balance sheet with no debt and approximately 850,000 shares of common stock available to buy back under our existing repurchase program. We're very pleased with our achievements and our 2016 financial performance, and we are very optimistic about the opportunities ahead. With that, I would like to turn the call over to our CFO, Tim Robinson.

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Timothy Robinson, Medifast, Inc. - CFO [4]

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Thank you Dan, and good afternoon everyone. 2016 was a pivotal year for us as we have returned to revenue and profitability growth and positioned the Company for future growth. Before I go through the details, I just want to remind everybody that the financial information I share here today will reference our results from continuing operations.

In the fourth quarter, net revenue increased approximately 2% to $62.5 million from net revenue of $61.3 million in the fourth quarter last year. The Take Shape for Life business unit accounted for approximately 82.8% of revenue.

The Medifast Direct business unit accounted for 10.9%. Franchise Medifast Weight Control Center business unit accounted for 5.8%, and the Medifast wholesale business unit accounted for 0.5% of net revenue.

Revenue in Take Shape for Life increased 8% to $51.8 million from $48 million in the first quarter of the prior year. We were pleased to have our fifth consecutive quarter positive year-over-year revenue growth in Take Shape for Life.

There were approximately 12,500 active health coaches in the fourth quarter compared to 11,900 health coaches in the same period last year. Average revenue per active earning health coach for the quarter increased to $4,150. That is compared to $4,039 in the fourth quarter of last year. We believe that our increased emphasis on key Take Shape for Life strategies, the increase in engagement level of our field leaders, and the operational improvements in the health coach experience, and lastly the increased resources that Take Shape for Life team are have been a cumulative impact that translated into momentum and will in turn drive sustainable growth.

Our Medifast Direct business unit revenues decreased 27% to $6.8 million as compared to $9.3 million in the fourth-quarter of 2015. Dan articulated the challenges in this business unit and a little about the future vision, which exemplifies our strategy to shift our emphasis to an integrated business model driving online customers into our coaching model, thus gaining incremental lifetime value and diminishing any remaining conflict between our current business units. Total Medifast Direct advertising in the quarter decreased 28% to $1.6 million from $2.2 million in the fourth-quarter of 2015.

Revenue in the franchise Medifast Weight Control Center business unit decreased slightly to $3.6 million from $3.7 million in the same period last year. The decrease in revenue was primarily driven by fewer franchise centers in operation during the period.

We ended the quarter with 37 franchise centers in operation and 19 reseller locations compared to 61 centers at the same time last year. As a reminder, a resale location is a designation for a prior franchise center who we have authorized to sell Medifast products without the brand restrictions associated with the franchise model.

The reseller locations may also offer additional products and services beyond our franchise model. The economics for Medifast and the reseller are similar to our franchise model.

Medifast wholesale revenue, which is mostly comprised of revenue from healthcare providers, was flat compared to the prior-year period at $300,000. We are currently not focused on expanding this area of our business, as we have a significant number of healthcare providers buyers in our Take Shape for Life coach community. Additionally, in order to increase focus on the largest part of our business, we recently discontinued efforts to market our sports nutrition products to colleges and universities and have shifted our efforts to leverage the formulations for future introductions in our Take Shape for Life business.

Gross profit for the fourth-quarter of 2016 increased 4.1% to $47.1 million compared to the prior-year period. We're pleased to see our gross profit margin as a percentage of net revenue expand by 160 basis points to 75.4% versus 73.8% in the fourth-quarter of 2015. The increase was driven primarily by price increases and improvements in our supply chain operations such as shipping efficiencies.

Selling, general and administrative expense in the fourth-quarter of 2016 were $40.5 million, or 64.8% of revenues, versus $39.7 million, or 64.7% of revenues in the fourth-quarter last year. The increase in SG&A was a result of higher Take Shape for Life commission expense, which is in line with the 8% sales growth Take Shape for Life experienced in Q4 compared to the same period of prior year. Sales and marketing expense decreased $1.1 million in the fourth-quarter of 2016 as compared to the fourth-quarter of 2015.

Fourth-quarter operating income from continued operations before tax was $6.7 million, or 10.7% of net revenue, compared to income from continuing operations before tax of $5.9 million, or 9.7% of net revenue in the fourth-quarter of 2015. Income from continuing operations in fourth=quarter of 2016 was $4.1 million, or $0.34 per diluted share based on approximately 12 million shares outstanding. Fourth-quarter 2015 income from continuing operations was $3.9 million, or $0.33 per diluted share based on approximately 11.9 million shares outstanding.

Our effective tax rate was 38.2% compared to 34.3% in the fourth-quarter of 2015. The increase in the effective tax rate was due to an increase in the effective state tax rate and a reduction in research and development credits.

Our balance sheet remains strong, with stockholders' equity of $96 million and working capital of $76.9 million as of December 31, 2016. Cash, cash equivalents, and investment securities as of December 31, 2016, increased $9.7 million to $76.8 million compared to $67.1 million at December 31, 2015. We continue to have approximately 850,000 shares remaining on our repurchase authorization as of December 31, 2016.

Now turning to our guidance. We expect first-quarter net revenue from continuing operations to be in the range of $69 million to $73 million and earnings per diluted share from continued operations to be in the range of $0.45 to $0.48 per diluted share. We expect 2017 full-year revenue from continuing operations to be in the range of $290 million to $300 million and full-year earnings per diluted share from continuing operation to be in the range of $2 to $2.10 per diluted share. The FY17 guidance assumes a 34% to 35% effective tax rate.

Our non-GAAP financial measures includes adjusted income from continuing operations and adjusted earnings per diluted share from continuing operations. Please refer to the tables in today's press release for a reconciliation of all non-GAAP financial measures.

That concludes our operational and financial review. We appreciate your interest in Medifast. Dan and I are now available to take your questions. Operator?

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Questions and Answers

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Timothy Robinson, Medifast, Inc. - CFO [1]

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(Operator Instructions)

Frank Camma, Sidoti.

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Frank Camma, Sidoti & Company - Analyst [2]

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Good afternoon, guys.

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Daniel Chard, Medifast, Inc. - CEO [3]

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Hi, Frank.

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Frank Camma, Sidoti & Company - Analyst [4]

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You did call out, Dan, a couple of issues with the end of the quarter -- or during the quarter that -- one of the things I've always thought was surprising about Medifast is that your business is a lot less seasonal than some of the other commercial weight loss providers. Granted, the Direct's not a big piece of the business any more. But my point is, obviously looks like it's become more seasonal, but you said some of the items you weren't able to ship.

I'm just wondering if you could talk about that a little bit more. Did you see a catch-up later? Like you built the inventory at the end of the quarter, so did you then ship those in Q1 of this year? I'm just trying to figure that out.

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Daniel Chard, Medifast, Inc. - CEO [5]

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No, Frank, those were related to the new products that we launched. We were not out of stock of all the products but what really was happening, we built up a lot of energy around the launch of the Optavia 13 products, the 13 products we launched at the convention last year.

The demand was higher than anticipated, and very quickly we ran out of stock. A lot of the purchasing was incremental during that period of time, so it did not come back once we had those products back in stock but it did dampen some of the excitement that we built up to it.

Since then, as I mentioned, we've re-looked at how we calculate the enthusiasm and demand that is coming out for these new products. We have just launched 20 more a couple of weeks ago in Atlanta. We've made those adjustments.

It didn't come back, but we've the adjustments to make sure that we don't have that kind of operational slowdown again.

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Frank Camma, Sidoti & Company - Analyst [6]

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Okay. Can you talk about the average sales per health coach since it was really strong all year long? Is that related to that issue too, where you had a build up and then the excitement tapered off, or is that a totally separate issue? Just trying to figure out that. When you look at it on a sequential basis.

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Daniel Chard, Medifast, Inc. - CEO [7]

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On a sequential basis, we were -- what were we up?

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Timothy Robinson, Medifast, Inc. - CFO [8]

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Sequentially we were up 6.5% in productivity per health coach in the third quarter. We were up just shy of 2% in the fourth quarter. It definitely has some impact on productivity. It had an impact on our sponsoring rate of bringing in new coaches. Dan mentioned, I think the excitement build up from convention that we had a lot of momentum coming out of there, we just had a little bit on the damper on the momentum when we could not deliver the new products that were really what we centered all the excitement around.

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Frank Camma, Sidoti & Company - Analyst [9]

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Then did you, I don't know if you mentioned this, but did you see productivity then pick back up in Q1 as you would expect this year? Are you able to talk about that?

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Daniel Chard, Medifast, Inc. - CEO [10]

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Yes, give you a little insight to that. Coming out of the end of the year, that slowdown continued a little bit into January. What we can say is that we're seeing that reverse.

After Go Global, which just happened in February, we launched these 20 new products. We have plenty of inventory, but also the event was a really good event and we are seeing pretty sharp uplift in sponsorship and new coaches.

We're seeing a pretty sharp uptick now in revenues starting the third week of February. We think those corrections we put in place, we are clearly noticing a change.

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Frank Camma, Sidoti & Company - Analyst [11]

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Okay. My last question relates to Take Shape for Life business model. Since you mentioned your goal longer term is to double over the next three years, and I understand that's just a goal, but when we look at the build this year should we rely more on growth in active health coach versus productivity? Is that the way, when you did your guidance, is that how you looked at it?

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Daniel Chard, Medifast, Inc. - CEO [12]

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Yes. That is the way we are looking at it. We're focused on doing -- continuing to maintain our improved productivity, but our focus is on building -- transitioning -- increasing our sponsoring rate, transitioning our new health coaches to business coaches and then to business leaders. So we're looking for both the growth in the number of health coaches but also progression in our overall leadership pipeline.

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Frank Camma, Sidoti & Company - Analyst [13]

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Great. Thank you.

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Operator [14]

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

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Daniel Chard, Medifast, Inc. - CEO [15]

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Thanks for your questions and participating in today's call. We look forward to speaking with you again when we report our first-quarter 2017 financial results. Have a nice evening.

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Operator [16]

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