Q2 2021 Medifast Inc Earnings Call
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Good afternoon, and welcome to Medifast second quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be in the.
<unk> opportunity to ask questions to ask a question you May Press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Reid Anderson of ICR. Please go ahead.
Good afternoon, and welcome to Medifast second quarter 2021 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 June 30th 2021.
That went out this afternoon at approximately 4 O 5 P. M. Eastern time, if you have not received the release. It is available on the Investor Relations portion of Medifast website at Www Dot Medifast, Inc. Dot Com. This call is being webcast and a replay will be available on the company's website before we begin we'd like to.
Mind, everyone that the prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions. The <unk>.
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 call.
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 Medifast, Chairman and Chief Executive Officer, Dan Chard.
Thank you Reed and good afternoon to everyone, who has joined thank you for taking time to be with US today on the call with me today is Jim Maloney, our Chief Financial Officer.
Moving to provide a brief overview of the second quarter, then Jim will run through our financial results in more detail. Following our prepared remarks, we will open up the call to take your questions.
Our second quarter results were very strong building on the momentum we experienced in the first quarter.
<unk> reflected our strong performance in attracting and retaining coaches and empowering them with the unique infrastructure and education help them via the effective and productive as possible the attracting and supporting clients.
Revenue increased 79% to $394 million in the quarter driven by growth in the number of independent of the via coaches coupled with further improvements of coach productivity the.
The number of active earning off of the vehicle, which has reached approximately 59200 at the end of the second quarter a record high of 62% above the same quarter last year and up nearly 13% sequentially.
Revenue per active range after via coach was $6662, another new record up nearly 14% versus last year and 3% sequentially. The.
Continued productivity gains we are seeing has been fueled by the development of infrastructure and education the Hell.
<unk> coaches learn how to support a greater number of clients that has historically been possible. This field led training approach leverages of social media and communication technology platforms to engage clients the support and train coaches.
We've been investing substantially in technology and digital processes with an emphasis on creating unique infrastructure and education to help after the of coaches leverage their time and talent efficiently serve clients.
While it's still very early we can already see the benefits from these efforts based on the strong trends in coach level of productivity.
Our digital product teams have been developing 2 apps. The first is the after via App, which primarily targets clients and features lean and green recipes self service options related to after the a premier of orders and returns and other key information to stay engaged the off the via the App went live in April for coaches and in July for clients.
The second is the connect App, which is for coaches on the go who need of data and insights to help them manage their business efficiently.
The beta version of the connect App went live in April and is currently being utilized by nearly a third of coaches with broader a broader rollout expected over the balance of the year. In addition to our proprietary apps off the via coaches continue to refine the social media and other communication platform to manage their business to drive deeper connections.
The serve existing customers attract new clients.
It is clear the interest in health and wellness across the board continues to be extremely strong.
A recent study of consumer health priorities and Motivators Commission by Medifast down the 93% of U S. Adults of health and wellness goals and 84% are actively working towards achieving them 2.
2 thirds of Americans say, the biggest motivator for staying consistent with health and wellness goals is feeling good the mentally and physically defined by having more energy and reducing stress and anxiety.
After the <unk> unique model has proven effectiveness in helping people achieve their individual goals around health and wellness and the residents of this model has demonstrated clearly and the results of announced today.
As we drive further demand through a growing number of coaches. It's important that we continue to develop our supply chain capabilities to be able to meet the needs of the field.
We achieved our $2 billion manufacturing capacity target in the second quarter 6 months ahead of the original goal through the expansion of our relationships with co manufacturers.
Given our growth trajectory of an outlook for the future. This additional capacity is crucial to meeting the needs of our coaches and clients as well as continuing to deliver strong returns for shareholders.
Securing the scaling our fulfillment.
The capacity to an equivalent level is also in process with an expected completion date in the third quarter of this year 3 months ahead of the original goal.
Out of an internally managed fulfillment center in April of 2021.
The partnerships with <unk> companies to ensure that we're able to efficiently move everything through our supply chain network.
There were no promotions in the quarter is the strength of our coach based model and field led training continued to drive strong engagement and activation.
Accordingly, since we were lapping the of central start promotion from last year's second quarter. The absence of promotion provided a nice lift of gross margins, which improved by 210 basis points from the same quarter last year.
This underscores a key differentiator with our model versus other direct selling models.
That is that we focus on empowering coaches the serve clients buy and educating them on the habits of health system using a holistic community based approach to help them transform their lives 1 healthy habit of at this time.
Looking at the third quarter, we will repeat our business builder program and expect this to further grow the number of off the vehicle, which is helping our business as we move ahead into 2022.
Last week, we concluded our biggest ever annual convention, which was held in the new hybrid format and saw more than 15000 global registrants.
Recall that the 2020 event was modified to be virtual only due to the global pandemic.
While partnering with the Georgia World Congress Center in Atlanta, and following statewide COVID-19 safety regulations for the in person. The experience. We also offered a livestream components for attendees who participated from home.
That is experienced valuable coach led the educational sessions panel discussions and company updates along with celebrations of their success in transforming lives around the world.
This year's event also placed an increased focus on community engagement and team building following the 2020 virtual events.
We believe off of his unique offer complete with the support of the coach community habits of health transformation system, and our clinically proven plans of scientifically developed after the O'brien nutritional products provides a holistic solution.
<unk> needs to make their health goals of reality.
Before turning the call over to Jim I want to share some comments on corporate social responsibility.
We continue the joined forces with the off the via community to support our philanthropic initiative healthy habits for all of which empowers generations through education and access to healthy habits.
As part of 2021 convention registration in the outside donation opportunities. The also the community gave back through the Companys philanthropic initiative healthy habits for all.
This coach led fundraising initiative raised over $100000.
The non profits and advance the company's mission of providing children with education and access to resources that support healthy habits.
To date alongside with our off the via community. The company is funded up to 8 million nutritious meals for children of facing hunger.
Medifast commitment to lifelong transformation is not just the result of the work our off the vehicles do but also the result of our active support of the communities in which we live and work.
Let me now turn the call over to Jim Maloney will walk us through the financial results Jim.
Thank you Dan good afternoon, everyone.
Revenue in the second quarter of 2021 increased 79, 2% to $394.2 million from $220 million in the second quarter of 2020.
The reflecting continued growth in the number of active earning at the via coaches and higher per coach productivity.
Which resulted in more clients participating in our optimal weight <unk> 1 plan.
We achieved another record for active earning at the Villa coaches ending the quarter with approximately 59200 <unk>.
<unk> generated sequential growth of 12, 8% compared to Q1 and an increase of 62, 2% from last year's second quarter.
Average revenue per active earning ought to be of coach.
For the second quarter was $6662 setting another record and up 3.2% from the prior high.
That's just the last quarter.
Versus a year ago.
Revenue per active earning off the via coach was up 13, 9%.
Gains in productivity per active earning after the coach for the quarter continued to be driven by an increase in both the number of clients supported by each coach as well as an increase in average client spend.
The growth, we're seeing in new coaches and in per coach productivity is closely related to our approach the better Leverages field led coach training and social media and communications technology.
The platforms.
Gross profit for the second quarter of 2021 increased 84, 4% to $293.7 million compared to $159.3 million in the prior year period.
Gross profit as a percentage of revenue was 74, 5% up 210 basis points compared to 72, 4% in the second quarter of 2020.
We did not offer any promotions during the second quarter as we lap the central start promotion from last year and that was the primary factor that drove the year over year improvement in gross margin.
With the anticipated acceleration in demand of off the via branded products. We expect pressure on gross profit margin through the remainder of 2021 due to the planned higher level of use of co manufacturers. Additionally.
Additionally, we are seeing higher levels of inflation in raw ingredients freight and labor costs.
That will add pressure to our gross profit margin for the second half of 2021.
To protect our overall profit margins in the short term, we will continue to focus and manage our costs, while investing in supply chain and technology for our long term growth objectives.
We believe gross profit margin as a percentage of revenue will improve in the longer term as.
As we develop pricing strategies enhance our distribution network reduce freight costs by shortening shipping lanes and gain productivity improvements in our supply chain processes as we scale of our business.
SG&A for the second quarter of 2021 increased 77% to $232.3 million compared to $131.2 million for the second quarter of 2020.
The increase was primarily due to higher off the VA commissions.
Increased salary and benefit related expenses for employees.
Increased consulting costs related to technology projects and increased credit card fees, resulting from higher sales.
SG&A as a percentage of revenue decreased 70 basis points year over year to 58, 9%.
Versus 59, 6% in the second quarter of 2020.
Income from operations increased $33.3 million to $61.4 million from $28.1 million in the prior year period, reflecting significant improvement in gross profit margin coupled with leverage of SG&A expenses.
Income from operations as a percentage of revenue was 15, 6% for the quarter, an increase of 280 basis points from the year ago period.
The effective tax rate was 23.
4% for the second quarter of 2021 compared to 22, 1% in last year's second quarter.
Net income in.
In the second quarter of 2021 was $47 million or $3.96.
<unk> per diluted share based on approximately 11.9 million shares of common stock outstanding.
This compares to net income of $21.9 million or of $1.86 per diluted share based on approximately 11.8 million shares of common stock outstanding in last year's second quarter.
Our balance sheet remains very strong with cash cash equivalents and investment securities of $197.4 million.
As of June 32021, compared to $174.5 million at December 31, 2020.
The company remains free of interest bearing debt and believes it is well positioned to execute its growth strategy.
On the first quarter call I provided.
Additional detail around our capital allocation priorities and discussed that we expect higher levels of capital expenditures over the next 24 months to expand our technology and supply chain capabilities.
Additionally, we expect.
That's stock repurchase was going to increase relative to our dividend to that end during the second quarter, we repurchased.
<unk> $2 million of stock, which is up from $7.5 million of.
<unk> purchase activity in the first quarter, bringing our year to date total to $19.7 million through the first half of 2021.
Given our strong financial condition expectations for future cash flow growth and the relative valuation of our stock we anticipate continuing to prioritize buybacks as a means of adding value for shareholders in the foreseeable future.
Finally in June 2021, our board of directors declared a quarterly cash dividend of $16.9 million or of $1.42.
Cents per <unk> per share, which is payable on August 6th.
Turning to our guidance, which we reinstated last quarter.
For the full year 2021, we expect revenue in the range of 1 point.
<unk> 5 billion to 1.5 dollars to $5 billion and diluted EPS to be in the range of $12.70.
2014.17.
Our guidance also assumes a 20.325 percentage to 24.
2.5% effective tax rate.
As discussed.
We are expecting pressure on gross profit margin in the second half of 2021 due to the increased levels of use of co manufacturers in the coming months to meet the accelerated demand in off the via branded products and due to inflation factors.
In Q3 this year we.
We successfully returned to an in person convention that will increase SG&A expenses in Q3.
Finally in Q3, we will be repeating our business builder program and expect this to further grow the number of independent of the vehicle and help our business as we head into 2020 to the.
The business builder.
The program will be recorded in SG&A expenses in Q3.
In closing second quarter results.
We're strong in.
And we remain confident in our business model.
And are well positioned to capitalize on the opportunities that lie ahead.
With that let me turn the call over for questions operator.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad.
If you are using a speaker phone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Chris <unk> with Jefferies. Please go ahead.
Hey, everyone first off congrats on another strong growth quarter, just wanted to hit on the guide here.
Looking at the high end of the guide on revenue would imply sort of a flattish level of sales relative to this quarter.
The thing if you could help us think about what the sort of a.
Hold up maybe isn't keeping the quarter over quarter of momentum going on the top line and why the guide doesn't call for a continued step up is it just kind of really the seasonality or conservatism or is there a near term supply constraint that we should be considering relative to the strong demand.
Yeah, So Chris Thanks for your question.
The.
When you look at the the guide itself on the top line. When you look at the top line end of it.
We raised it $50 million for the year.
As as we mentioned in our.
Our notes we mentioned that.
That we're.
We're looking.
Solid regarding our supply chain.
So Dan mentioned that we hit the $2 billion Mark our target for manufacturing.
And which was 6 months ahead.
Of schedule and in.
In Q3.
Which is 3 months earlier, we should be able to do the same thing in fulfillment.
So we're not seeing any current constraints.
I think we're on the path.
Of having.
No disruption in the in those days.
Yes.
Great and then my second 1 would just be on productivity per coach obviously extremely strong in the quarter.
But with kind of the re implementation of the business build their program should we expect that maybe trend down or remain kind of slightly flattish through the back end of the year.
I'm, just thinking kind of of the inherent drag from.
Our mix of of bringing on newer coaches that would obviously have less clients.
Yes, Chris this is Dan.
As you know, we don't we don't give guidance around.
The productivity number, but we do talk about what our philosophy is so.
All of our focus is on building.
<unk> and programs that enhance the productivity of our coaches, allowing them to support.
An increasing number of clients and Thats whats driven the productivity number over the last several years. So we don't anticipate that anything we're doing.
Would cause a diminished.
Productivity per coach.
Including the.
The business buildup of promotion.
That's great. Thank you and then my last 1 I'll hop back in the queue and maybe I'm just wondering about kind of the puts and takes the round the.
Retroactive implementation of the business builder program, maybe if you could tell US why you thought it was important to back the the start of it the July 1.
Sure. This is the third year, we'll run the business build of promotion and so we ran at 2019 last year.
In the same period and now again this year.
Each year, we focus on taking the learnings from the.
The prior year.
The.
<unk>.
In some cases enhancing or adjusting.
To reflect new learning so in this case.
We felt like there was a there are some ways to make it more effective and more efficient by pulling in.
Coaches, who were new coaches in the the July period again, anticipating that we can make it into.
And to an even more meaningful part of the overall program as we go forward. This is 1 of those.
The repeatable from a repeatable promotions that we have.
Ben using 2 and half the back half of our year of the full focus is taking the period of August September and October and rewarding.
The the client.
Attraction activities that take place what takes place with our with our coaches as well as.
Rewarding the training of new coaches as we head into the.
The the holiday period.
I think as you pointed out important for us to make sure that our mix of new clients, new coaches and tenure.
As optimal as we had in the fourth quarter because of that.
The tailwind if you will as we head into the first quarter. So those were all of the objectives trying to again reflect on what we learn over the previous 2 years and finding ways to.
Continuously improve.
That's great. Thank you and congrats again.
Thank you.
Again, if you have a question. Please press Star then 1.
The next question comes from Doug Lane with Lane Research. Please go ahead.
Yes, hi, good afternoon everybody.
Jim staying on the guidance here.
And safe to say that the $25 million to $50 million increase on your revenue range.
It was mostly due to the <unk> upside, whereas the EPS range staying very close to what it was is due to increased increased gross margin pressures that you've seen since you last gave your guidance back in may.
Yes, I mean, we.
<unk>.
We did have a very strong quarter.
We believe.
The growth will continue over the coming quarters, we raised the the guidance.
If you look at the midpoint, we raised it about $37 million and the top end we raised at 50.
$50 million.
We also raised the guidance for EPS, but not to the same degree as you mentioned and it really comes down to.
Looking at the accelerated growth we've had over the months.
The use of of co manufacturers.
And the inflation that we're seeing.
Has.
Not provided as much leverage.
Through our P&L as you would think.
Also revenue.
When you when you look at the back half of the year.
The convention costs are going to be recorded in Q3, and then also of the business builder, we mentioned will be reported in Q3.
And in years past you had the leadership of the ILEC.
Do we have an update on whether youll be accruing for that for next year or is that have you moved on from that.
Yes, I mean, we are.
Yeah.
We're about we evaluate those types of things each and every.
The year.
There hasnt been a decision made on that at this point.
But we're always looking to see.
If we can make enhancements to add too.
So which coach productivity. So we're always looking at programs.
And the making determinations, but as of this as of right now we haven't made a determination.
Okay Fair enough and then.
On the inventories they were up.
Pretty substantially sequentially up about 50% and I just wanted to put that into some sort of context, given that you had such a rapid increase in demand and you've had supply chain.
Strange if you will is this inventory build a step towards alleviating some of these constraints.
Yes, so so our inventory days.
Since March increased about 25%.
And it's really you know.
If you can if you can recall back.
Last October.
November timeframe, we were talking about.
Intentionally stocking out certain skus, the lower volume Skus.
And the.
The increase we've always had a plan to increase the number of inventory days. So we so we can reduce the amount of stock outs in the future. So that's what you're seeing in our balance sheet.
Okay that makes sense and just lastly, Dan we were talking we talked about the the increased coach and coach productivity in that you're obviously seeing good interest in becoming coaches among your newer cohorts here, but can you just kind of sort of sort of a qualitative assessment on.
How the leadership ranks are filling out are they moving up in leadership ranks at a normal kind of pace.
Yes, they are the the <unk>.
Progression through leadership ranks has been very healthy.
And the.
And of what we're what we're seeing from a productivity standpoint is a reflection of the.
The continued improvement and how.
Our coaches are using social media and other communication platforms in the other.
The <unk> technology space too.
And there rich.
We've also as I mentioned in the the.
The earnings script earlier.
We have launched 2 new apps to help them as well. So every all of our investments as we look at them. All look of the look through the you look through the lens of how do we make our.
Our coaches more efficient and more effective at attracting.
Supporting.
The appliance and also sponsoring and training new coaches. So those are kind of the 4 competencies and as we as we help support those 4 activities.
That's what the outcome of that is improved coach productivity.
There is a.
We keep finding new and effective ways to help support to make that happen, which is what youre, what youre, saying that the number of increasing.
Okay. Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Dan Chard for any closing remarks.
I'd like to thank everybody for joining in particular.
What's the any.
After the of coaches, who have joined the let US know let them know how much. We appreciate their efforts to deliver the strong quarter and as well as all of our Investor base.
And we look forward to speaking with all of you again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Sure.
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