Q4 2020 Medifast Inc Earnings Call
Good day, and welcome to the Medifast fourth quarter, and full year, 'twenty and 'twenty earnings Conference call.
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I would now like to turn the conference over to Reid Anderson. Please go ahead.
Good afternoon, and welcome to the Medifast fourth quarter 2020 earnings conference call on the call with me today are Dan Chard, Chairman and Chief Executive Officer, and Jim Maloney, Chief Financial Officer.
By now everyone should have access to the earnings release for the period ended December 31, 2020 went out this afternoon and approximately 405 P M. Eastern time, Inc.
You have not received the release and is available on the Investor Relations portion of Medifast website at Www Dot and Medifast, Inc. Dotcom.
This call is being webcast and a replay will be available on the company's website.
Before we begin we would 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 the.
Actual results could differ materially from those projected and any forward looking statements Medifast assumes no obligation to update any forward looking projections that may be made in today's release or call on.
All of the forward looking statements contained herein speak only as of the date of this call and with that I would like to turn the call over to the Medifast, Chairman and Chief Executive Officer, Dan Chard.
Thank you Reed and good afternoon to everyone and thank you for taking time to be with US today on the call with me today is Jim Maloney, our Chief Financial Officer.
After I've provided some updates on our business performance, Jim will review the Q4 financial results in more detail.
We will then open up the call to take your questions.
We closed the year on a strong note with accelerating topline growth over the third quarter revenue increased 55, 3% to $264 $9 million and the fourth quarter of 2020, and we continued to execute strongly across all areas of the business.
Earnings per diluted share for $2.36 of 42, 2% increase over the prior year period. However, due to the significant differences in tax rates between the periods. We believe the income from operations is a better gauge of how we performed from a profitability standpoint.
Jim will discuss our tax rates and more detail when he covers our financial results.
For the fourth quarter income from operations was $38 million and increase of 103% versus the same period last year.
Growth was driven by significant year over year and sequential improvements and the number of active earning at the Villa coaches, which grew to 44200 and in the fourth quarter another new record.
Additionally, productivity per active earning coach increased $13 four per cent to $5932 during the quarter compared to the prior year period.
Our client community remains strong and we finished 'twenty and 'twenty, even better than expected with successful incentives of coach programs and Q4, the position us well for 'twenty and 'twenty one.
The initiatives, we've implemented over the past one of two years are delivering consistent meaningful progress as evidenced by the results we announced today.
The company's focus continues to be supporting our growing community of of independent after the of coaches as they develop and focus on the for competencies the drive our business success, namely attracting new clients supporting clients on the optimal way to five and the one plan and supporting new coaches and developing the coach leaders.
There's an ever growing number of individuals' seeking greater health and wellness and we remain resolutely focused on targeting those for whom diets fulfilled and who desire a holistic approach to optimizing their overall health and well being.
The key insight supporting our sustained growth is the clients do better on their health and wellness journey when they have the support of of coach and <unk>.
<unk> model has been clinically proven to be more effective in this regard as such we have combined the most powerful aspects of the direct selling model and direct to consumer offerings and created a model that puts the after the of coach at the center of helping clients on their health transformation journey with the company providing the.
Fusion infrastructure the supply products directly to the end consumer.
We reach our target audience through the community of off the via coaches, who leveraged social media channels to relate their success with our proprietary habits of health transformation system and products.
Our vision is to achieve long term sustainable growth and the mid teens by penetrating the large and growing addressable market and the United States, continuing our expansion into Asia Pacific markets and developing other large markets throughout the world.
And we continue to grow at scale and both the coaches and clients. It's essential that we place sharp focus on building and operational foundation through investments related to organization technology digital products manufacturing and distribution and this will allow us to take full advantage of the long term growth opportunity.
Consistent with the business and brand strategy that we communicated last quarter. We are moving forward with the subset of our Medifast direct channel and Medifast branded products and anticipate this being complete by the end of the second quarter.
By focusing on building capabilities in the areas of the matter most to or at the B of coaches and clients centered model.
We will further enhance and solidify our competitive advantage and the health and wellness space and support of our long term growth and profit vision.
Last year, we initiatives and important project to rationalize our skus, enabling us to place greater focus on the most populous popular and profitable products and our portfolio and placed a more consistent emphasis on or off the via Brad.
Continue to enhance our supply chain capabilities to meet product amount of cross core items.
While also important powering and further operational.
Optimization across all aspects of the manufacturing and the distribution network.
The strategic value of having a strong supply chain has never been more important and we continue to prioritize these investments focusing on expanding capacity as well as driving operational excellence.
We remain on track to support of 2 billion dollar revenue business by the end of 2021.
Creating ample headroom for several years, depending on the trajectory of future growth.
We're scaling up.
New and existing co manufacturers, which mitigates the risk through the diversification, while also adding capacity.
We're also working closely with our third party logistics partners to leverage their capacity as well as adding distribution assets to our facility and the Maryland area.
Technology remains another key area of focus for Medifast, We opened a new technology center, and Utah, roughly a year ago to become our pioneering digital lab for developing tools the create efficiencies for coaches and drive engagement for our clients.
Our ought to be of coaches continue to refine their use of technology, and social media and attracting new clients and broadening the reach of <unk>.
Overall, the new coach directed training regimen and technology support systems are increasingly effective and supporting more clients than it has been historically possible.
Deeper digital expertise will also allow us to further leverage the competitive advantages of the coach model.
During the first half of 'twenty 'twenty, one we will launch the beta version of the off the via coach connect up the <unk>.
Full productivity tool aimed at helping coaches manage clients we.
We'll also launch the beta version of the off the beach.
And which focuses on meal planning on the after the wait five and a one plan.
Our team and Utah continues to work on a range of other tools to drive digital engagement with the field and we're excited about the opportunities that lie ahead and this space.
In 'twenty and 'twenty, our revenue growth rate was roughly two times, our long term growth rate essentially pulling forward and entire year.
Our current business remains strong and I've never been more confident and the direction of the company and our ability to drive consistent and sustainable growth by delivering on our mission of lifelong transformation, one healthy habit of the time.
For current stockholders and prospective investors the manifest story remains compelling for several reasons.
First our addressable market is large and growing.
The U S weight loss market. It is core to off the <unk> business has been growing at about 6% per annum.
And it's worth $20 billion today.
Roughly 70 per cent of the U S population is overweight or obese and this segment is growing at two per cent per annum, which highlights the importance of of proven health and wellness solution like the one we offer for all.
Earlier this year, we commissioned an independent survey the showed that the pandemic has only heightened consumer focus on health and wellness.
63 per cent of Americans report, but they are adopted new positive health routines since March of 'twenty, and 'twenty and of those 96% planned to continue embracing of healthy habits for this year.
COVID-19 is causing people to put their personal health and wellness higher up and their priorities and this presents a significant opportunity for our company.
Second our holistic coach center approach and supported by proprietary tools and the vibrant community. The provides a clear competitive advantage and the health and wellness space again, it is clinically proven and the people who want to lose weight do better when they have the support of of coach and the community and that principle.
And the very hard the off the via offer.
Third.
We have of dynamic and agile organization so the debt.
And quickly to changes in the marketplace, even one of those changes come and unexpected and rapid pace such as what we saw last year.
As a result of COVID-19.
That makes us more nimble.
And the better place to take advantage of tactical opportunities as they emerge.
Finally, we have a strong financial position the fish.
And business and disciplined strategy for allocating capital for prioritizing organic growth opportunities, while returning a significant amount of value to stockholders through dividends and share repurchases.
Before I turn the time over the gym.
Let me note that our commitment to lifelong transformation is not just in our work with the coaches and clients, but also through our active support of the communities and which we live and work.
And this challenging time, our commitment to these groups remains a priority as well.
For example, and the fourth quarter Medifast behavioral health specialists and the registered dietitian nutritionist and partnered with select off the via coaches to lead remote classes and activities for the second and fifth graders the living classroom Foundation and Baltimore.
For children and the pandemic has brought about increased feelings of stress and anxiety and these classes were designed to promote the habits of healthy mind and to empower children and to better handle stress.
Proud of the work for the company our employees and our coach community are doing to create opportunities for people from all walks of life to deliver the best possible version of of themselves and whatever way possible.
With that let me now turn the time over to Jim Maloney, who will walk you through the financial results Jim.
Thank you Dan.
Good afternoon, everyone.
Revenue in the fourth quarter of 2020 increased 55.3 and keep the.
$164 $9 million from on.
Third and $76 million and the fourth quarter of 2019.
As Dan highlighted we achieved another record quarter of active earning coaches ending the quarter with 44200.
This represents 39% growth as compared to 31800 coaches in the same period last year and a 5% increase from the end of the third quarter of 2020.
Average revenue per active earning coach for the quarter was 5932.
Compared to 5000.
229.
For the fourth quarter of 2019.
And down $6329 in the third quarter of 2020.
Mainly due to timing of promotional activity from one quarter to another.
The fourth quarter 2020.
What was the second highest level of revenue per active earning coach and our history and we are very pleased with the strong result.
Programming in the quarter was largely unchanged from last year's December dash other than timing.
Indicating the strength of the underlying fundamental of our model.
At the V of branded products grew to 87, 2%.
Of our total company consumable units sold and the fourth quarter.
Up from 79% and the prior year period.
Gross profit for the fourth quarter of 2020 increased 55, 6% $299 $2 million compared $228 $1 million in the prior year period.
Gross profit as a percentage of revenue.
Was 75, 2% and.
Slight increase compared to $75 one per cent.
In the fourth quarter of 2019.
SG&A for the fourth quarter of 2020 increased $51 $9 million to $161.3 million compared to $109 $4 million for the fourth quarter of 2019.
The increase was primarily due to higher off the VA commissions expense.
As a result of growth of ought to be of sales.
And as well as increased salaries and benefits related expenses.
The offset by a decrease in sales and marketing expenses.
SG&A as a percentage of revenue decreased 320 basis points year over year to 69% versus $64.
And 1% in the fourth quarter of 2019.
Income from operations increased $19 $3 million to $38 million from $18 $7 million in the prior year period.
Primarily as a result of increased gross profit, partially offset increased SG&A expenses.
Income from operations as a percentage of revenue was $14 three per cent for the quarter and increase of 340 basis points from the year ago period.
The effective tax rate was 26% for the fourth quarter of 2020 compared to $22 four per cent for the September 30th 2020 year to date and compared to a tax benefit of four 7% and the year ago period.
During the fourth quarter of 2020.
The tax rate increased three eight per cent, which reduced earnings per diluted share by 12 cents.
Due to a discrete tax reserve recorded during the period.
For the full year of 2020 earnings per diluted share was negatively impacted by 12 cents due to this discrete tax reserve.
The fourth quarter of 2019 tax benefit.
For reflected the impact of federal tax benefits from share based compensation.
Partially offset by increases in the effective state tax rate of 2%.
Net income and the fourth quarter of 2020 was $28 million or $2.36 per diluted share based on approximately 11 9 million shares outstanding.
This compares to net income of $19 $9 million or of $1 66 per diluted share based on approximately 11 9 million shares outstanding in the prior year.
Our balance sheet remains very strong with cash cash equivalents and investment securities of $174 $5 million as of December 31, 2020, compared to $92 $7 million at December 31, 2019.
The company remains free of interest bearing debt and believes it is well positioned in this challenging near term macroeconomic environment.
Our board of.
Directors declared a quarterly cash dividend in the fourth quarter of $13 $4 million or of $1 13.
For sure.
It was paid on February 5th 2021.
There was there are 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 COVID-19, and that Mike we are not providing guidance at this time.
We would however, like supervise you with some insight into the first month of the first quarter and that January is topline year over year growth trends are performing consistent with or better than the trends we experienced in the fourth quarter.
If you were attempting to develop the financial model for 2021 I.
I will remind you that Q2 through Q4 2020.
Have much harder comparable.
And Q1 2020 from a top line basis.
As Dan discussed and 2021 and intend to Sunset, our Medifast direct channel and met of Medifast branded products and further invest in our supply chain and technology.
We've also budgeted for a return or in person convention if safety measures permit.
These decisions and investments will have an impact on our operating margins during 2021.
And will enable long term growth and operating income of objectives.
Again, if you are developing a bunch of financial model for 2021. These initiatives the increased costs in.
In closing 2020, it's been a very robust growth in the face of a very challenging and uncertain environment.
We remain confident and our business model and are well positioned to capitalize on opportunities. The lie ahead.
With that.
Let me turn the call over for questions operator.
Yeah.
We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question comes from Doug Lane with Lane Research. Please go ahead.
Yes, hi, and good evening, everybody can I start with the operating margin and I know you had a very strong margin and the third quarter when I was the.
And wondering if you could help me understand why the operating margin was down 210 basis points sequentially, what changed and the fourth quarter on the expense line that wasn't there and the third quarter.
And so Doug this is Jim.
I don't know if you remember.
I don't I don't know if you remember on a.
The Q3 call.
We mentioned that we were going to.
Begin more heavily investing in supply chain and technology and that reach.
<unk> was.
The reason behind that those investments are really the reason why the.
The.
The margins of the operating margins.
The decline.
In Q4.
Okay, and we tried to highlight that in the call last time.
So and that's.
That is generally the reason behind it.
Okay and are these the same sort of the investments you expect the carry into this year.
As some of the more you know.
Additionally, the supply chain and the technology investments will continue.
We're also.
The decision too.
To sunset.
The the met of fast.
Direct channel.
That will also have.
Somewhat of a impact on.
Operating income on a.
Percentage.
Because as you can imagine.
On the direct channel doesn't have commissions with the even though it's a smaller subset of our business.
The sunsetting that will help the.
The margin impact.
And from a gross margin basis, but on an operating income basis.
Okay got it and then when you talk about the discrete 12 cent tax item I take that to mean that there's no real structural change and your expected tax rate going forward.
More or less of non repeatable kind of of that.
That is correct.
It's a one time charge and you know at this at this point.
We're currently not anticipating any additional.
Tax reserves.
Going into 2021.
Okay. That's helpful and then.
Stepping back here and your top line numbers have been very impressed with your coach growth, it's been very impressive and.
Obviously not sustainable at these rates, but still it feels like the business is very strong and I was wondering with these kind of growth rates have you taken a look at perhaps changing your capital allocation strategy and maybe take on some leverage and accelerate your stock buyback here.
Yeah, the on the on the capital allocation front.
For first prioritizing.
You know organic growth with with.
First looking at our Capex spend and.
And you know we're not at least as of right now we're not anticipating any acquisitions in 2021.
So with with that.
You know the the decisions to.
Two to pay dividends and Oh.
Or you know of share repurchases.
Those discussions are have held at the board level.
So.
And that's really pretty much on you know all I can really say about that.
Okay.
Okay. Thank you.
The next question comes from Sebastian Barbero with Jefferies. Please go ahead.
Hi team congrats on the quarter and I just wanted to start the first Jim just hang on until the last question from Doug do you have a capex guidance for the year.
And now we're not really providing that guidance.
All I can really tell you that.
The you know there are going to be additional investments in.
Technology and and the supply chain.
So that's also going to be in our capital.
Capital spend.
And it's also going to be in the operating.
Our operating income.
So it will hit the P&L, so there will be additional.
The projects that will happen in 2021 that all of it.
Okay and then.
Was wondering if you could talk a little bit more about your progress on the manufacturing from them and it's been a very limited amount of SK use out of stock last time, I checked this morning, which points to improve capacity considering.
The momentum of of the business and and early 'twenty and 'twenty, one and what is your manufacturing capacity today in terms of.
Our annual sales and then how should we think about of that ramping through the year should we expect you to hit that.
And the capacity to be able to support 2 billion of sales by the end of 'twenty 'twenty, one or early on that.
Yes. So this is Dan.
We we we started adding the capacity and the AR and the fourth quarter.
And.
A little bit earlier in the form of.
Increased number of co manufacturing partners.
And the that's continued on through.
And as continuing on through the first quarter, it's not exactly of linear line, so will of but by the end of the year, we will achieve the $2 billion, but right now as we.
As we discussed and the last quarterly earnings call of R.
Our focus as I've taken the opportunity.
Now the consolidates all of our volume to the off the via brand I mean.
The discontinuing the Medifast, France, and the using all of our capacity to focus on on off of yet, but but but what we're providing right. Now is is that our inside about.
Moving towards the $2 billion, but we have adequate capacity to supply our fueling throughout the year.
Got it okay, and and perhaps you can talk a little bit about the international business, how is that probably seen relative to your expectations.
And you mentioned and your initial remarks, you know the opportunity to look at all of the large markets and throw out the world I was wondering if you can give a little more details for that where that could be something like Canada or something like like Europe.
Yeah Yeah.
Absolutely.
And.
As you know, we we expanded a little over a year ago into the Hong Kong and Singapore, we characterize those as gateway markets into.
The Asia Pacific regions.
We have continued to add Bob.
<unk> infrastructure and.
And.
The ability to deliver the same kind of quality of experience that we have and the United States.
We said, we with the established a distribution center and.
The Hong Kong as well as call centers and the Philippines.
And Colombia, the Philippines, specifically provide.
Providing Chinese.
Chinese support for our Hong Kong and Singapore.
We have continue to build.
And Asia Pacific and a way that's reflective of what we.
We expect meaning that the we're seeing the growth we don't report on the actual volume and.
And with until it becomes material, which would be fine as 10% of our overall revenue and.
Terms of the second part of your question.
It was.
We are we believe and we tested.
Before launching and Asia Pacific are the <unk>.
Concepts are in Europe.
And.
South America.
And and we believe that the there is opportunity for us and and those markets for.
For the long term so we see this as a continued opportunity to add to our overall addressable market.
And that's that's as far as.
That's as much detail as we're we're giving right now in terms of what are our for their expansion efforts are.
Okay. Thank you.
As a reminder, if you have a question. Please press star then one to be joined us in the queue.
The next question comes from Kara Anderson with B Riley FBR. Please go ahead.
Hey, guys. Thanks for taking it and then my question and the kind of just wanted to jump back to the first question on operating margin and.
And can you discuss I guess with all of the changes that are happening in 'twenty and 'twenty, one and I'm from the Sun setting of Medifast brand and how you feel about that 15 per se on operating margin target on the 1 billion dollar of revenue target.
Yeah. So yeah, you know since we're not providing guidance, that's that's a little bit.
Challenging too.
And just.
Give you are feeling on that so I would say that you know just a couple of things to keep in mind you know.
<unk>.
Some of the item and you should consider as you're developing your model.
Things like the in person convention that we budgeted.
For.
And if safety permits.
That's probably a 70 basis point investments.
The the manifest direct and sunsetting, the the classic brand and again, that's probably an additional 70.
Basis point.
The <unk> impact to our operating.
Income margins and then investments.
In.
Technology and supply chain.
That actually will hit the P&L I would say, that's probably close to a 100 basis points of investment.
So hopefully that helps you directionally.
Okay got it. Thank you and then and you begin to think about promotional plans are for the year and kind of what you did in April and May of last year and can you give us the peak to anything that might look similar this year.
Sure at this point.
We have what was seen as and as Jim indicated earlier in his remarks is that the the.
The.
Are the trends that we saw in the fourth quarter of continued roughly at the same or better as we move the first quarter.
With that in mind, we're still evaluating we haven't made the final decision on what the promotional structure will look like.
So that's the that's we know that we have the the ability and.
To promote and of the response.
And as you're as you saw in 'twenty.
'twenty was very positive.
We were also very focused on.
And the thing the natural business cadence that allows us to sell our products.
And.
The structure of that we've already kind of put together.
Okay, great. Thank you that day for me.
Thanks Kara.
This concludes our question and answer session.
I would now like to turn the conference back over to Dan Chard for any closing remarks.
Thank you and want to thank everybody who's on the call, including any of our off of the of coaches who may have joined.
As you can hear from our from our results and the fourth quarter. We are we remain confident and.
And our business structure, and our business concept as well as all of our addressable market and we believe that our our mission to offer the world of lifelong learning.
Lifelong transformation, one healthy habit of the time remains even more relevant as we move throughout this new year and look for to reporting our first quarter results.
And several months thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
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