Q2 2020 Medifast Inc Earnings Call
After today's presentation, there will be an opportunity to ask questions to ask a question May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like turn the conference over to Scott Van Winkle. Please go ahead.
Good afternoon, and welcome to Medifast second quarter 2020 earnings Conference call.
On the call with me today, or Dan Chard, Chief Executive Officer, and Jim Maloney, Chief Financial Officer.
By now everyone should have access to the earnings release for the period ended June Thirtyth 2020. They went out this afternoon at approximately four or five PM eastern time.
If you've not received the release, it's available on the Investor Relations portion of Medifast Web site.
Www Dot Medifast Inc. dotcom.
This call is being webcast a replay will be available in the company's website.
Before I begin we would like to remind everyone to prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions.
The words believe expect anticipate another similar expressions generally identify forward looking statements.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
Actual results could differ materially from those projected in any forward looking statements.
Medifast assumes no obligation to upload and update any forward looking projections there may be made on today's release or call.
All the following statements contained herein speak only as of the data this call and with that I'd like to turn the call over the Medifast Chief Executive Officer, Dan Chard.
Thank you Scott and good afternoon, everyone. Joining us. Thank you for taking the time to be with us today.
On the call with me today is Jim Maloney, who recently joined US as Chief Financial Officer.
Jim brings a medifast great experiences public company CFO as well as an international operating in food industry expertise.
It's your spend in businesses, including L. B Foster company first inside H.T.A.H. day highs and Ernst and young.
Jim will bring important insights and understanding to the business and I'm very pleased to introduce them today and we're all excited that he has joined the team.
After all provide us some updates on our business performance over the course of the last quarter, Jim will review the Q2 financial results in more detail well then open up the call to take your questions.
I'm pleased to say the Medifast had a strong second quarter as the trends we saw in April accelerated during the period.
Revenue increased 18% to 220 million.
Non-GAAP adjusted earnings per diluted share increased 12% to $1.96 cents.
This growth was driven by robust year over year and sequential improvements in the number of active earning coaches.
3000, 36500 coaches has the ended the quarter.
Which was a new record level.
Productivity per active earning coach also increased during the quarter to $5851.
Yes, it is substantial increase quarter over quarter and approaching all time record high levels.
The covert 19 pandemic has clearly been the dominant issue over the last three months impacting the working and personal lives of almost every single person across the world.
With this in mind, we commissioned the U.S. focus surveys to shine a light on behavioral changes as it relates to healthy habits among consumers during the health crisis.
The survey uncovered that 88% of Americans are currently experiencing stress and 82% are concerned about at least one aspect of their physical or mental health.
Reflect our understanding of this unique and broad based consumer health challenges, we've worked with our coaches to refine how we position and support our business for the balance of the year.
In Q2, we introduced a key initiative.
The combined coach skill development and incentives as well as product promotions for new clients.
This initiative ran from March through May and helped drive significant increases in two of our key growth metrics.
New client acquisition and coach sponsorship.
We're encouraged by the early results as it demonstrates the relevance of off the via even during this global pandemic as well as our ability to adapt quickly and successfully to a shifting business environment. Both in the context of the pandemic, but also related to changing the changing environment beyond the pandemic.
Our focus as we move in the third quarter remains on continuing to drive demand for our products and services, while providing an exceptional experience for our coaches and clients.
With new learning and insights about the current business environment with significantly modified our programs for the back half of the year.
Depend nemec led to the decisions to develop a digital first approach to the business with the production of a high profile virtual event called off the via together life.
Which was banned lives across the globe from July 24th through the 26.
He's not replaced our plan in person convention, which was due to be held in Atlanta, the same time.
Instead of our anticipated audience of 10000.
Of our OPTAVIA coaches at the Atlanta Convention OPTAVIA together alive.
Allowed us to attract more than 50000 unique registrations, including coaches clients and prospective clients.
Our reach was further magnified with over 40 140000 views on Facebook as coaches Hotel hosted watch parties and live events on social media.
Well, we're still analyzing the impact of event initial indications are incredibly positive.
Build effectiveness further we have added an incentive to promote leadership development within the ranks of our coaches. This incentive began on August threerd and will run through the end of the month.
This incentive will partially replaced the qualification program, we would typically run for the 2021 leadership and management trip, which has been canceled because of the ongoing uncertainties around travel environment.
As an organization, we continue to successfully manage our business operations in this new dynamic business environment.
All employees not engaged in manufacturing and does it and distribution continue working effectively remotely.
We're leveraging technology to ensure a strong productivity and business operations and we continue to invest in new technology to support our growing business.
Our new ERP system went live on May 1st with the support of the Lloyd.
We continue to work to optimize this important technology and anticipate driving new capability and enabling significant significant scalability as a result.
Our investments in supply chain, including the opening of our Hong Kong distribution Center early in the quarter went well and we continue to invest in the recent the resources to support our growth.
We also opened our new call center in the Philippines on Juice June 7th and we are scheduled to open an additional call center in Colombia on August 24th.
The restructuring of a call center operations is designed to improve service levels to our U.S. and Asia Pacific markets as well as optimize our overall cost structure.
Asia Pacific continues to be an important part of our mission and showed sequential quarterly growth as we continue to drive our coach and client base in the region through enriched service and support.
The opening of our Salt Lake City Technology Center to support our coach and client facing technologies remains on track for Q3.
This center is another example of the initiatives we have been putting in place over the last year to improve client experience and address the short term challenges created by a rapid growth in late 2019.
We continue to build on the operational improvements we saw earlier this year and our controls around financial payments are working effectively maintaining bad debt at historical levels.
Each of our business operations have continued operating without throughout the pandemic without any significant disruption.
Manufacturing and distribution centers have continued to operate without any major delays, while our consumer consumer supply chain continues to provide good service levels to our clients.
He on supporting our coaches and clients, we continue to support our community by maintaining partnerships with national and local nonprofits, no Kid hungry and living classroom Foundation.
Both of these organizations.
Our providing vital an increasingly relevant resources as the pandemic that continues.
We also recognize that racism and hatred continue to play our world and we must do better.
As a first step medifast plus $100000 to nonprofits that address social and justice and racial equity.
We are committed to do better wolf through monetary donations and through company diversity and inclusion programs.
As the impact to covert 19 continues to be felt we believe our health and wellness services and products are becoming increasingly important.
Our solution for physical health and mental wellness through lifelong transformation want healthy habit is side, along with our solution for financial health in the form a business opportunity for clients that choose to pursue coaching is perhaps more relevant today than ever.
The large addressable market and in an industry, leading product and service solutions, we are well positioned to drive long term sustainable growth.
We remain focused on driving shareholder value, leveraging our strong balance sheet and highly attractive and flexible operating model.
We're in an enviable position to weather continued challenges our financial strength resilient cash flow profile recurring revenue model, where 95% of our revenues are generated from subscription orders and a highly variable cost structure that allows us to quickly adapt to any economic challenges are important drivers to our business. We also remain calm.
Good to our dividend and have the capacity to utilize our share repurchase authorization to further drive shareholder value.
It is now my pleasure to introduce you to Jim Aloni, who will walk you through the financial results Jim.
Thank you Dan.
Good afternoon, everyone.
It's my pleasure to speak with you today.
I am honored to join this incredible team at Medifast.
As Dan mentioned, I'm still getting up to speed on the business.
What was so inspired by the Companys unique business model.
<unk> collaborative culture, and inspiring communities that they foster through their approach to the growing health and wellness market.
Additionally, I look forward to getting to know all of you in the coming weeks and months as I hit the ground running and work to propel this company into its next phase of growth.
With that.
Let me walk you through.
Through our financial results for the second quarter ending June Thirtyth.
2020.
Revenue in the second quarter of 2020 increased 17.6% to $220 million from $187.1 million in the second quarter of 2019.
As Dan highlighted.
We had another record of active earning coaches ending the quarter with 36500.
This represents 19.3% growth as compared to 30600 coaches in the same period last year and a 12% increase from the end of the first quarter.
Average revenue per active earning coach for the quarter was 5851 compared to 5863 for the second quarter last year.
We have now achieved two quarters of sequential growth with the second quarter representing 9.7%.
Improvement compared to 5333 average revenue per active earnings.
Coaches in the first quarter of 2020.
Also of note OPTAVIA branded products grew to 83% of our total company consumable units sold in the second quarter up from 75% in the prior year period.
Gross profit for the second quarter of 2020 increased 13.2% $259.3 million compared to $140.7 million in the prior year period.
Gross profit margin as a percent percentage of net revenue decreased 280 basis points to 72.4% versus 75.2% in the second quarter of 2019.
The decline in gross margin was anticipated in primarily the result of both increased promotional activity and higher production costs.
SG and aim for the second quarter of 2020 increased $17.8 million to $131.2 million compared to $113.4 million for the second quarter of 2019.
The increase was primarily a result of higher opt to via commissions expense.
Incremental professional services costs in connection with the schedule 13, the filing and increased expenses for coach incentive programs.
As DNA as a percentage of revenue decreased 100 basis points year over year to 59.6% of revenue.
Versus 60.6% in the second quarter of 2019.
Non-GAAP adjusted EPS, DNA increased $16.4 million to $129.8 million in the second quarter of 2020.
And as a percentage of revenue decreased 160 basis points year over year to 59%.
Non-GAAP adjusted EPS DNA excludes expenses in connection with the schedule 13D filing of $1.2 million.
And severance related costs of <unk> point $2 million.
Income.
From operations increased.
It's a $7 million to $28.1 million from $27.4 million in the prior year period as increase gross profit was prop partially offset by increased SGN a.
Income from operations as a percentage of revenue was 12.8% for the quarter a decrease of 180 basis points from the year ago period, non-GAAP adjusted income from operations, which excluded expenses in connection with the scheduled 13, the filing in severance real.
Weighted cost increased $2.2 million to $29.5 million non-GAAP adjusted income from operations as a percentage of revenue was 13.4% a decrease of 120 basis points from a year ago period.
Our effective tax rate was 22.1%.
The quarter.
For the second quarter of 2020 compared to 23% expense in the year ago period.
Net income in the second quarter of 2020 was $21.9 million or $1.86 per diluted share based on approximately 11.8 million shares outstanding.
Non-GAAP adjusted net income, which excludes expenses in connection with the scheduled thirteend filing and severance related costs was $23.1 million or $1.96 per diluted share.
This compares to net income of $21.4 million or $1.75 per diluted share based on approximately 12.2 million shares outstanding in the prior year.
Our balance sheet remains start strong with cash cash equivalents in investment securities as of June Thirtyth 2020 of $145.4 million compared to $92.7 million at December 30, Onest 2019.
The company remains free of interest bearing debt.
And is well positioned in this challenging near term macroeconomic environment.
Our board of directors declared a cat cash dividend in the second quarter of $13.4 million or a $1.13 per per share.
Which is payable on August six 2020.
This reflected a 50.7% increase in the quarterly dividend.
Over the prior year period and is a direct result of our strong financial.
Physician and attractive business model.
During the second quarter, the company repurchased 46075 common shares totaling $5 million, leaving approximately 2.323 million shares of common stock remaining under our stock repurchase program.
Consistent with last quarter and due to the ongoing uncertainties related to the Cobas 19 pandemic.
We're not providing guidance at this time.
We would however, like to provide you some insight into the first month of the third quarter in that July trends are performing consistent with or better than the trends we experienced in the second quarter.
We'll continue our focus on controlling our spending for the remainder of the year as previously mentioned during our call covering first quarter results.
As Dan mentioned earlier, our in person convention that was supposed to happen in July was replaced with the very successful opt to be up together live virtual event.
The OPTAVIA together live event was less expensive than in person convention.
Also as a reminder, we restructured our 2021 programming.
Which will not require an expense accrual in the second half of 2024, a 2021 incentive trip.
This expense accrual totaled $5.6 million in the back half of 2019.
For the 2020 incentive trip.
To close I would like to reiterate that it is my pleasure to have joined met the Medifast team.
I am excited about the opportunities that lie ahead, and I look forward to speaking with you over the coming weeks and months.
With that let me turn the call over for questions operator.
Thank you we will now begin the question answer session.
To ask a question you May press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
Our first question comes from Kara Anderson with B. Riley. Please go ahead.
Hi, good afternoon wide.
Hi, Kara.
And I didn't quite get kicked it off.
Two part question about trends just wondering if you talk a little bit more about business trends within the quarter.
Obviously indicated that April fall site.
That is in that same thing you can give us a little bit more color on what Joe box shift.
Past April and then second on within the quarter I'm. Just wondering if you thought any impact from former clients returning to make purchases.
The rest to start by many attend.
Sure I think so your first question is we were finishing April or as the which is basically the a the inside that we gave you in the last call that was reflective of the first month of our promotion so what we saw in.
As we as we move through the rest of the quarter was continued activity related to promotion. What you ran through may as well. So if you remember we started out with a training and Florida and health incentives in March added in April both of those together and then May had just the the.
Central start.
So it's kind of continue on so the the positive trends as we move through the quarter were really related to our coaches getting behind the program.
Was put in place which included those three those three elements.
Related to this the second question, Yeah, I mean, I think we we don't give that kind of level of detail, but those who are kind of coming to make purchases were primarily new clients. The promotion also provide applied to.
Clients, who would have been.
Who hadn't made a purchase within the previous 12 months, but the majority of those clients who came back and participated in the program were.
Clients, who are new to OPTAVIA.
Okay, and that kind of a follow up to that promotions.
As you ran a is there any impact that rolls forward beyond the second quarter that we should consider what model now how much margin.
I think the biggest the biggest question thing was the we're watching very carefully is to understand how way clients who comes in on the promotion acts in month to month, three and what we've seen so far is that the retention rate or repeat rate on the first.
Month and for those who purchased in April the second month is a very similar so not much difference to a typical clients. So we view that as very positive, but that is something that we're watching very closely.
We have not put any of those promote we don't have any of the the for the third quarter.
We don't have any plan promotion, that's similar to that we do however have.
What I mentioned earlier in the a in the script.
Business builder promotion, which essentially focuses on a different part of our leadership structure and the coaches, which which is meant to.
Motivate and incentivize training.
New coaches, who were previously clients.
Got it and then just one housekeeping question, then I'll jump back into queue and can you tell us what the commission paid within all seen a were within the quarter four percentage points.
Yes.
Yes, Hello, Jim Esa answer that one yes, so the the.
Commission paid.
Within SGN a is approximately.
70% of the S. Tina.
Thank you very much.
Yeah, but this is just to be yeah, as a percentage of us today, but to be clear that the are.
Commission as a percentage of total is robust slightly elevated bye.
Approximately a 1.3 per se, but but so within that and a 42.5% range.
Understood. Thank you very much guys congrats on great quarter.
Thank you thanks.
Our next question comes from Doug Lane with Lean Research. Please go ahead.
Yes, hi, good evening, everybody and so just a follow up on that we say 70% of SGN a is that the gas DNA or the adjusted as gene a onetime items.
That would be.
The non gap piece.
Okay. Thank you.
And then Dan at the end of February you were looking for low to mid single digit growth. This year and here we are through the into June and you're up 13%. So what change between the ended February ended June that turn so positive so quickly.
Yeah, I think that's a great question, Doug I think what are what we saw.
Early in the year, where the challenges of starting the year with.
With a.
Lower percentage of the new clients and ER and new coaches.
As we put in place the programming, which was really a result of looking at the business in a very different way as we are all facing the.
The reality is of what a global plant pandemic looks like.
We put in place the the program that we described.
And found essentially that one.
Our coaches, we're able to breakthrough in a period that we've assumed that they would not be able to and that new clients were far I'll say far more ready than we anticipated to a two to take on this health and transformation journey that that.
Our coach has talked about so.
You know stepping back I'd say that our message was relevant during this period of time despite the challenges.
The offer we put together for our coaches to help them breakthrough was relevant for them and the consumer side of the the promotion.
Was motivating to a new clients, who are coming in so those three things kind of brought together.
You know what turned out to be very strong quarter for us.
Mm.
Thanks, the I didn't know Thats fair and then looking shifting gears to your your Asia strategy here any change in thinking given the geopolitics said are underway currently.
No we see.
It's hard to.
Kind of.
Pull apart was having a bigger I've impacts a joke politics or the pandemic or the two combined but we we still view or our two markets in the southeast and Asia Pacific region as an important part of our future each time, we we add.
New elements to it to support those markets as a good and positive impact on coaching client experience. So you can hear from you could hear from my earlier comments that.
We're making investments and call center as well as.
Continuing to put together programs that it has our training there as well.
Okay. That's great just one last thing what I realize it's just a couple of weeks ago, but what are the learnings from the virtual convention this year and how do you envision that event changing in oppose cobot environment.
Yeah, I mean, so certainly the the event off to be together live was a reaction to the travel restrictions, we fully anticipated being together.
In Atlanta for a for what is our traditional in person convention.
What we learned was one I mean huge credit to.
Our team internally, who reprogram the entire back half of the year.
So we found that we were able to quickly pivot work through the a whole new dynamic of event planning on what we saw from our coach community in client community was a very strong uptick obviously.
Having.
The a far greater number of registrants.
Sign up with over 50000, and a and then seeing in the after a a significant number 140000 shares and so what we saw beyond that as a lot of watch parties. So even those numbers that we're we're talking about we're probably.
Larger than than the numbers that I, just shared but in terms of what we've learned so far greater reach more efficient spend and ER will receive had nothing but positive comments from.
All of our coaches and clients. So we think it will be very positive and certainly some things we can learn and continue to to leverage on a go forward basis, even beyond the pandemic, which was the catalyst for doing it online in the first list.
But it doesn't sound like you want to abandon the in person has happened so I mean, they're important as well one day.
Yes, no absolutely. This was a this certainly replaced our convention but.
It does it doesn't in the long term it replaced it out of necessity.
Conventions are.
Very effective for the in person training, allowing the difference coach teams to get together and have that interaction.
This was a allowed us to address a much larger market more efficiently. So I'd say that a into your question Uh huh.
Most likely work together in the future.
Thanks, Dan.
On.
Our next question comes from Stephanie Wissink with Jefferies. Please go ahead.
Hi, This is said Barbara for Steph Wissink.
Few questions number one gross margins were down 280 basis points in the quarter.
Reflective of product production costs.
Probably almost no longer pressing Q3 should spike gross margin to normalize to whats the 75% plus in the back half of the.
Yes so.
We would we would.
I expect that.
Without promotions to get to a more historical.
Level in the next quarter so.
A significant portion.
No.
The decline in the margin.
Was due to the essential start promotion in Q2.
So as Dan was mentioning.
We're not going to be promoting.
In Q3, we should expect that to get back to normal levels.
Got it.
Inventory was down 20% payables were up 30% any additional color that you could provide us with you.
Yes.
Inventory.
Being down is really a reflection of the strong uptake on the promotion so we had.
Historically carry a little bit more inventory than.
We currently are in the so it's really a reflection of a stronger than anticipated promotion, we would expect those inventories who to move up.
Most of the historic levels and your second question was around what was around payroll on payables, yes. Some.
Payables is really just a function of the timing of.
Payments this quarter.
Versus comparable periods, there really isn't anything unusual it just.
That the the the timing of the payments occurred.
[music].
You know are occurring a little bit later.
Yes, I guess in August most of those payments will be made.
Okay.
And lastly.
On the buyback client.
Yes pretty muted this quarter.
Cash balance at 125 million could and should we expect a more active stance in the back half would be.
Yes, I think we've answered this question pretty consistently the same way, which is that a in as it relates to a capital allocation will continue to us to review.
On a on an active basis, how to best return value to our shareholders.
It will be had a combination of dividends.
Share buyback and.
Primarily those two things and I think Seth will be looking at.
Whether that continues which of those makes us that's in the past we will buy when where there are opportunities to do share repurchase and we remain committed to.
A strong dividend.
Thank you.
Our next question comes from Bill Baker with GARP Research. Please go ahead. Please.
Oh, yes, oh and by the way.
I've got.
Got it conference was pretty bad I enjoy.
Factories presentation.
Thank you, but I guess what yeah.
The that's it.
That's what we're encouraged to see quarter was the.
Okay.
This is happening even before.
You're starting this drives to increase the coaches in Q3.
ER and the productivity was pretty high.
Mark.
I'd expect that.
Okay.
And.
Lock down.
People nothing better to do.
No.
What happened.
Yes, Bill Bill you broke up a little bit, but I think you are asking the question about what drove.
Improved coach productivity and the answer.
To that as you're right I mean, we are back up to the historic high levels that we saw at the end of 2018, beginning of 2019, I think it's a reflection again of of our coaches being very active having a a highly relevant message.
And having a lot of of potential prospects out there who during the the loss down period.
Have become either more aware or more.
Having a greater need for what the OPTAVIA coaches offer. So I think we look at it is a very positive sign.
Of where the business is going and.
Continue to watch it closely.
Right.
[music].
Okay. Thanks, a lot I appreciate that.
[noise]. This concludes our question and answer session I would like to turn the conference back over to Dan Chard for any closing remarks.
Thank you I think we'd like to first of all think I think all of you for participating. We appreciate you taking the time I think in closing I'd just make a couple of comments we.
We feel like the second quarter was a reflection of.
Our continued ability to to support as fast.
Fast growing health and wellness community.
Across our markets. It's a supported by very large addressable market of both clients and coaches. We we remain diligent and focused on leveraging our strong flows financials I think as we.
Mentioned earlier, we have 95% of a revenue coming from recurring orders, we remain focused on investing to support our long term growth by strengthening our operating infrastructure you heard several examples of that and with that we feel like we are.
Ready now to continue to move through the the rest of the year understanding how to make additional adjustments in this continuously changing environment.
We feel like we're well positioned to capitalize on the significant opportunities ahead. So thank you for joining.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].