Q1 2022 Medifast Inc Earnings Call
Good afternoon, and welcome to Medifast first quarter 2022 earnings conference call on the call with me today are Dan Chard, Chairman and Chief Executive Officer, Jim Maloney, Chief Financial Officer.
By now everyone should have access to the earnings release for the period ended March 31, 2022 went out this afternoon at approximately 405 P M Eastern time.
Have not received the release, it's available on the Investor Relations portion of Medifast website at Www Dot better fast Inc. Dot Com. This call is being webcast 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 management may make additional.
All forward looking statements in response to your question. The words believe expect anticipate and other similar expressions generally identify forward looking statements.
These statements do not guarantee future performance and therefore undue reliance should not be placed on them actual results could differ materially from those projected in any forward looking statements.
All of the forward looking statements contained herein speak only as of the date of this call Medifast assumes no obligation to update any forward looking projections that may be made in today's release or 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, everyone.
Thank you for taking time to be with us today.
On the call with me today is Jim Maloney, our Chief Financial Officer.
I'll start with an overview of the first quarter and the continued evolution of our business and 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.
The key takeaway from our latest results is that manifests continues to achieve significant growth in all of our key underlying metrics driven by demand for our off the via branded products and services as well as the strength of our business model.
Our proven approach connect customers with after via coaches, who support them and learning and maintaining healthy habits focused on eating exercise hydration and sleep, helping customers achieve lifelong transformation one healthy habit at a time.
We continue to expand our health and wellness platform to support our future growth expectations and are leveraging proprietary tools and technologies to enhance productivity across the organization.
Our first quarter results were outstanding once again, putting us in a strong position for the balance of 2022 and beyond.
Revenue increased 22, 6% to $417 $6 million in the first quarter, a new record for us fueled by a 21, 7% year over year increase in the number of independent active earning after via coaches.
Two 6% or 3900, another all time record.
Importantly, the number of ought to be a coaches increased sharply by six 9% on a sequential basis compared to the previous quarter, reflecting the growing precision of the programming was implemented and continue to refine over the last several quarters.
Coach productivity was similarly strong reaching $6536 per active earning after via coach up one 3% on a year over year basis, and three 4% sequentially.
Earnings per diluted share were $3.59 or three 8% increase versus last year as we continued to balance near term investments and navigate the inflationary environment.
With strong performance in the quarter and a clear vision to deliver on our strategy and vision throughout the rest of 2022 and beyond we have today increased our annual revenue and EPS guidance.
The continued transformation of our business over the past five years led to tremendous growth in catapulted us to the number one revenue share position among publicly traded companies and a weight management industry in the United States.
However, we believe that our full potential is much greater as we continue to build on the proven success of our differentiated model and its ability to expand into the broader health and wellness market with off the vehicles. After the coach at the Fulcrum up every customers health and wellness journey.
Each year, we continue to optimize our successful customer focused business development cadence and the results of this were evident in the first quarter.
In March we initiated an enhanced customer acquisition program building on the success. It has a similar program we initiated in March of 2020 at the height of the pandemic uncertainty.
This approach has been at the heart of our sustained growth over the last two years and we continue to fine tune. The program based on the learnings that have to align it with our long term growth strategy.
Customers are the focal point of our business model.
Is there a guided by their own after via coach to learn healthy habits.
This helps integrate them into the after via community and enables them to leverage our habits of health education system, and our products to achieve transformative outcomes.
We are already seeing the impact of our latest program in Q1, and Q2 as a new cohort of ought to be a customers have enrolled in the after via program. However, we anticipate the biggest impact of the program will be seen in the first half of 2023 as this new cohort of customers integrates into.
Our growing after the community through.
Through the follow up coach directed training program a portion of these customers will become new coaches and support the growth rhythm of our business extending our reach to more prospective customers looking for a new approach to health and wellness.
In addition, we are testing a new element of the program that focuses on managing our long term customer relationships with the objective of driving coach productivity.
By leveraging the entire ought to be a community whether they are currently active or not.
We have a significant opportunity to increase the lifetime value of past customers through re engagement.
This is something we've described before and believe will be a core AD as an outcome of our customer acquisition and coach productivity initiatives as we move into the future.
Unlike initiatives by some companies. This type of customer acquisition program is not short term promotion designed to prop up volume through product discounting.
In contrast is designed to focus the activity of our entire <unk> coach community on executing a word of mouth advertising campaign over social media to attract new customers to ought to be.
Yeah.
Over the next several years, we plan to move aggressively to leverage our platform to capture a much larger share of the broader health and wellness market, which is estimated to be over $230 billion in United States significantly greater than the $7 billion weight management space. We currently operate with them.
Our emphasis on lifelong transformation, one healthy habit at a time with knowledgeable coaches as gods has much broader application across the health and wellness sector due to its proven effectiveness and changing the lives for the better.
Powerful network effect has been essential to our business transformation over the past five years and will remain a driving force for our expansion.
With almost 64000 active earning coaches serving over 1 million customers. Each year. We believe we are merely at the beginning of a journey towards realizing our long term potential.
We continue to see tremendous opportunity in the United States market and believes the global potential as easily several times that large.
Our core focus will continue to be on growing the number of customers seeking greater health and wellness targeting those who have failed on diets and want a holistic approach to achieving greater health and wellness in their lives.
We'll also be rolling out future initiatives to deepen and widen our engagement with current and potential customers in support of our overall mission.
Technology remains at the core of our strategy and.
And we will continue to leverage proprietary tools, including digital labs, as well as data to improve the efficiency of our coach and our customer community.
We ought to be apps drive deeper and more consistent engagement and are central to our long term strategy of seamlessly connect in after via coaches and customers within the ought to be a community.
Let me share some additional stats that show our continued progress in this area.
The after via App, which is designed to support customers on their health transformation journey had 140000 downloads in the first quarter, increasing nearly 57% on a quarter over quarter net basis total users are now approximately 232000 and up nearly net of 59%.
For over quarter with new user growth accounting for 54%.
In the first quarter, our new weight tracker feature went live and we continued to expand our lean ingredient recipe catalog, while also improving our self service capabilities, making the app the go to place for customer support.
The connect App, which supports after via coaches as they work with their customers at over 22007 hundred downloads in its first full quarter importantly engagement levels are high and coaches are actively using the app, which bodes well for the future growth and productivity.
We also continue to invest in technology, including our pioneering digital innovation center in Utah, where our team of product managers and engineers develop our digital apps and a rapidly expanding our David data capabilities.
We expect our investment in technology will continue to drive productivity in our coach community.
Since we first launched after the 2017 revenue per active earning coach is up more than 50% and we believe that we're still just getting started.
We've built a strong foundation to support significant future growth and will continue to make critical investments to strengthen our operations and solidify our competitive advantage.
Our new distribution center in Fort Worth, Texas, which we are developing in partnership with a third party logistics company is on track for completion by the second half of 2022.
This facility with enhanced automation will help us achieve our supply chain capacity goal of being able to support over $2 $5 billion in revenue by the end of 2022.
This represents a 500 million dollar increase in manufacturing and fulfillment capacity beyond where we finished in 2021.
We continue to aim for mid teens revenue growth and 15% operating margin, our expanding addressable market Korea substantial headroom for our core weight management business as well as new products and solutions targeting the broader health and wellness arena.
Over the long term, we expect margins to benefit from increasing scale and operational efficiencies, including further gains in coach productivity near.
Near term like many companies, we will continue to see some margin pressure stemming from inflation and other external factors as well as from the timing of our investments in technology and supply chain infrastructure.
In addition to our commitment to lifelong transformation for our coaches and customers Medisoft is equally committed to our corporate values and positively impacting the lives of people, who live and work in our communities the.
The unfortunate events in Ukraine.
Have created much suffering and tragedy and we are mindful of the tremendous impact. This situation is having on millions of people globally.
In an effort to help as this crisis continues we plan to donate after via fueling two cranial refugees in the second quarter to help with their nutritional needs.
I'll close my remarks, with an update on our initiatives around corporate social responsibility, which is a key priority for the entire Medifast organization and closely aligned with our overall mission.
Our corporate social responsibility initiative healthy habits for all advances our mission by providing children in underserved communities with the education and resources necessary to create healthy habits.
Through partnerships with nonprofits, we can help break the generational change or poor health and gift children and families in at risk communities, the ability to transform their health and wellness destination.
The need for nutritious food escalated at the start of the pandemic and remains a challenge for many school aged children with this in mind, we expanded our partnership network to include four community gardens organizations around the country.
Community Gardens, our collective network of growers school systems and communities and city leaders working together to build urban gardens and farms and they educate students on how to grow their own healthy food and give them access to fresh produce through local farms and gardens.
To date through the healthy habits for all initiative, which provided up to 10 million meals to children facing hunger and we're excited to grow our mission with this new community gardens partnerships and ultimately make an even bigger impact this year.
So 2022 is off to a strong start in.
And we're making steady progress against all our strategic growth initiatives.
We look forward to building further on our leadership position in the weight management industry, and expanding our business to new segments, and the broader health and wellness market.
Our powerful business model supported by a strong balance sheet and experienced leadership team a talented employee base and nearly 64000 after via coaches who are passionate about our mission.
As a result, it's no surprise that we remain highly confident about our future.
We now turn the call over to Jim Maloney, who will walk you through the financial results Jim.
Thank you Dan good afternoon, everyone.
Revenue in the first quarter of 2022 increased <unk>.
22, 6% to $417 6 million from $347 million in the first quarter of 2021.
We ended the quarter with approximately 63900 active earning <unk> coaches an increase of 21, 7% from the first quarter of 2021.
Average revenue per active earning after via coach for the first quarter was 6536 up one 3% from the prior year period.
We were pleased with coach growth and productivity gains in the quarter driven by continued growth in both the number of customers supported by each coach as well as an increase in average customer spend.
Gross profit for the first quarter of 2022 increased 21, 6%.
Two of the $302 $3 million compared to $248 $5 million in the prior year period.
Collecting strong revenue growth, partially offset by increased cost of sales.
Gross profit margin was 72.
4% in the first quarter of 2022 versus 73% in the comparable prior year period.
The 60 basis point decline in gross margin was attributable to continued inflationary pressures in raw ingredient cost and freight and labor costs as well as the impact of the new customer acquisition program that Dan mentioned.
Yeah.
SG&A expenses for the first quarter of 2022 increased 26, 3% to $247.2 million compared to $195 7 million for the first quarter of 2021.
SG&A as a percentage of revenue increased 170 basis points year over year to 59, 2% versus 57, 5% in the first quarter of 2021.
The increase was primarily due to higher ought to be a revenue.
<unk> expense increased salaries and benefits related expenses for employees incremental costs related to continued investment in information technology and distribution and increased credit card fees, resulting from higher sales.
Income from operations increased four 3% compared to the prior year period, or $2 3 million to 55 $1 million as a result of higher gross profit.
The offset by increased SG&A expenses income from operations as a percentage of revenue was 13, 2% for the first quarter of 2022 compared to 15, 5% in the same period of two.
In 2021.
The effective tax rate was 24% for the first quarter of 2022 compared to 22, 3% in the prior year's first quarter the.
The increase in the effective tax rate was primarily driven by a decrease in the tax benefit of stock compensation and other items as well as the increase in the state income tax rate.
Net income in the first quarter of 2022 was $41 8 million or $3 59 per diluted share compared to net income of $41 1 million or $3 46.
Per diluted share in the prior year's first quarter.
Turning to our balance sheet.
We believe our financial position remains strong with no interest bearing debt and approximately 122.
$1 million of cash cash equivalents and investment securities at the end of the first quarter compared to $109 $5 million at December 31, 2021.
During the first quarter of 2022, the company repurchased $10 million worth of common stock.
There are approximately 2 million shares remaining under the company's stock repurchase program as of March 31 2022.
We continue to believe share repurchases enhance stockholder value.
Driven by our long term growth plans.
Yeah.
Additionally, on March 17th 2022 <unk>.
The company's board of directors declared a quarterly cash dividend of $19 1 million or $1 64 per share.
Which is payable on May nine 2022.
To the stockholders of record as of March 29, 2022.
This represents a 15, 5% per share increase compared to the first quarter.
The prior year.
Further demonstrating our confidence in our outlook.
I will now turn to our guidance for the full year 2022.
The ongoing success of our model gives us a high degree of confidence in the future.
And we have increased our 2022 outlook accordingly.
We expect revenue in the range of $1 seven $8 billion to $1 eight 4 billion and diluted EPS to be in the range of $14 60.
$216 in <unk>.
We are raising our guidance above the previously announced 2022 revenue target range.
$172 billion two.
$1 $79 billion and we believe.
We will be able to achieve 15% operating margin in the long term. Despite the short term margin pressures. This year from continued investment in technology and supply chain infrastructure along with inflation.
Our guidance assumes a 20, 425% to 20, 525% effective tax rate.
Our guidance excludes the onetime donation to the Ukrainian refugees that Dan discussed.
In closing we are proud of our strong start in 2022 and remain confident in our business model as we set the stage for long term growth.
We are focused on building a foundation to support significant sustainable future growth, while driving value for stockholders.
We believe that our business model continued to generate results as we expand into the broader health and wellness market.
Helping our customers on their journeys to lifelong transformation, one healthy habit at a time.
With that.
Let me turn the call over for questions operator.
We will now begin the question and answer session to.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question is from Chris <unk> with Jefferies. Please go ahead.
Hey, Jim and Dan I'll first say congrats on another impressive quarter and all the color on ongoing initiatives.
Could you maybe just walk us through the trends you saw in the business made between February and today through April .
Obviously momentum accelerated nicely. So could you maybe help us think about what's been driving that since you provided the initial outlook and on that customer acquisition program is that something new for 2022.
So just maybe any more color on that program and how it trended versus your expectations.
Sure Chris good to hear from you and.
The trends we've been seeing are reflective of what we will be discussing and yes. It's driven by this our customer acquisition program, which started on March 21, and will run through May 9th.
And this is essentially with a few modifications a program that's very similar to what we ran in March of 2020.
Just after the pandemic hit its designed specifically to focus all of our coaches on.
New client acquisition the modification this year versus what we did in 2020.
It was essentially providing a.
A.
Package and product package that did not that that does not include.
Some of the material so it made it a little bit less expensive, specifically $288, but still have roughly a $90 savings.
And that was done specifically to continue our testing and understanding of how we might.
Attract.
More lapsed users so those who have been after via customers previously, but may not have been with our coach for some time and we have.
I've seen that that's been a very successful initiative. So we're feeling very positive about that so.
Like I said with the.
When we did this in 2020.
We saw both significant improvement in the year that we executed it but because of the dynamic of our business.
We saw the biggest benefit is taking place in Q1 and Q2 of the following year. So we believe that that will be the case.
With this initiative too so we ran it.
For the first time in March we did a version of it in the fourth quarter of this just this past year in 2021 and this program most closely resembles the other program that we ran in the March of 'twenty 'twenty.
That's very helpful. And then Jim maybe for you on the guidance at the midpoint you took up the top line higher.
Then earnings so anything to think about there from a cost perspective that maybe changed since the prior update.
Yeah, I mean, there's a there's a few things.
We took the took the guidance.
On the topline from 1.75 billion to the midpoint of 1.811 billion.
Our EPS we.
We took up slightly.
To some degree so.
As Dan just mentioned the <unk>.
The customer acquisition program.
Even though it was <unk>.
<unk> in the.
In the previous guidance the program is running better than we thought.
And that that investment in that program.
Is going to have some pressure in our Q2.
Margins.
So if you look back in 2020.
Youll see that.
Margins.
<unk>.
In that year, and we're expecting something similar.
This year in Q2 of 2020, the gross margin.
Decreased about 300 to 350 basis points and we're expecting that same thing to happen. This year. So it's an investment.
That's occurring in.
Uh huh.
2022 four.
Mainly as Dan mentioned for 2023, we're also seeing.
Like other companies are.
You know the.
Inflation hitting.
We're seeing that now we have more visibility to the latter part of the year.
And we're seeing that fuel charges.
Is one of the elements.
That is.
Increasing due to energy prices just to give you an example.
So hopefully that helps you.
No that's very helpful.
So maybe it's the all of that goes into the gross margin line right. So is there any way to think about the split.
Or maybe the drag the split between inflation and the sales program. Thank.
Thank you.
Yeah.
Yeah, I mean, so when you look at.
Q1.
The the customer acquisition program.
It was about a 90 basis point.
Uh huh.
Charged to the P&L.
Our pricing.
Did offset set some of that.
I'll call it about 30 basis points and then the rest of it.
In Q1.
Basically took care of the inflation that we were seeing.
We're expecting that the customer acquisition program in Q2 will be I'll call. It 300 to 350 basis points.
And we do believe that inflation, the pricing will offset inflation like we talked about on our last call, but when you get later on in the year.
Now that we have more visibility we are seeing.
Some inflation I'll call it.
50 basis points in the in the out year out quarters.
So that's the way I would look at those those few items.
And to help you with your modeling.
That's very helpful I'll pass it on thanks.
The next question is from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yes. Thank you.
Can you sort of.
Explain.
With this customer acquisition program.
You know it it seems that in what I've heard is that.
How would you start talking to clients fairly soon in there.
And their journey about potentially becoming a couch if they think that's appropriate.
So if that occurs maybe within just a few months of maybe when the person becomes a client why wouldn't you say the benefit for this type of program wouldn't occur for a year and the future why wouldn't the benefits people sooner.
Thanks Linda.
Yes, there are benefits both in.
In the immediate term so reflective of our strong coach growth in the quarter.
Also strong new client growth.
Point was that the bigger part of the return takes place as that large.
New client cohort move through the year and develops further.
Essentially.
To the point that you're making.
And of those clients will become coaches, who will go on and get clients so that that effect.
But becomes more because of that.
That effect becomes more pronounced.
In the.
The first part of next year is that that cohort is fully developed so there is a short term benefit and impact, but the larger benefit.
Both financially and.
Well from a profitability standpoint, because you've already made the investment as well as from a revenue standpoint, because it's fully mature takes place in the following year.
Okay.
And then can.
Can you kind of remind us are you planning on it.
In person convention this summer in July .
Yes, we are in the the tickets have already gone. So believes at this point. The event is sold out we anticipate roughly 15000 coaches to be in Atlanta with us in July .
Okay.
Okay.
And I was just curious if you had what was the operating cash flow in the quarter.
Yeah, the operating cash flow.
<unk>.
Was let me kind of exactly.
For the quarter was.
$44 million.
For Q1.
Okay.
And then.
When you Dan when you talk about this larger.
Our addressable market.
Let's see I think you said 230 billion to help a lot with market in the U S.
How specifically are you going to be changing your offering such that you addressed this bigger market versus the smaller 7 billion dollar weight management.
What assumptions do we need to have happened in order to be able to to address that bigger market.
Sure part of it is it's it's coming out.
As a result of of providing greater support which will continue to rollout in the form of our digital apps, which will help.
Be more let's say experiential or kind of on demand for the habits of health.
Transformation system.
Uh huh.
Part of it will come about as we develop and launch products that are specifically tied to helping.
Customers go through and develop other healthy habits. So those want similar to those once that I described that are already being taught but now would be monetize so think of that as exercise sleep hydration. In addition to <unk>.
Continuing to develop the <unk>.
The habit of healthy eating.
Okay. Thank you very much.
Again, if you have a question. Please press Star then one.
The next question is from Doug Lane with Lane Research. Please go ahead.
Yes, hi, good afternoon, everybody, Jim with the inflation being as persistent as it is is there any discussion of taking additional pricing initiatives.
In the latter half of the year.
Yes, I mean, we look at pricing are routinely we have a rhythm that.
We look at that throughout the year.
And as.
That's something that we try to keep.
Close guarded so I can't really.
I tell you you know exactly what we're thinking but all I can say is we.
We have been thinking about it and.
You know, we we would we would want to announce that all at one time to our investors and to our customers all at the same time.
Okay that makes sense and in conjunction with the July convention should we expect some.
New product announcements activity anything significant there just directionally.
Yeah, we don't.
Typically our announced their pre announce our new products.
Prior to the convention.
So.
We're going to we're going to stick with that.
That tradition I guess.
Okay.
Can we at least expect some new product activity in the broader health and wellness since you've been talking about that.
So much in the last two or three or four quarterly conference calls it sounds like something is percolating there.
I will say in the so so.
We have continued to launch.
New fueling so you're probably aware of that.
<unk> focus in terms of I mean, we look at we look at the business in two ways. One is those products that support the healthy habits.
Think of those as mill replacements and fueling.
We also.
Look at the.
<unk>.
Products and services that support.
Coaches and clients as they develop those healthy habits.
The biggest area of focus for this upcoming convention as what you heard us talk about in the form of the <unk>.
The after via App, which is the opposite.
<unk> clients.
The after the connect App. So those are the biggest.
I will say, both investments and changes to the program for this upcoming convention.
Okay, I got it and just help us out here.
I know that you've got a good healthy new cohort of customers.
And obviously the big win is to move to mainly being earning coaches and then building a team of earning coaches, but really how many opt to be a customers typically move into being coaches is it 10% to 50%, 80% I mean, just how how big a percentage currently.
Do your customers moving to being coaches.
Yeah, I think it's a great question, it's relatively a small percentage without giving you the exact number it's it's lower than.
The numbers that you were stating and that's really to be expected. It takes.
A lot I mean, the majority of our of our revenue.
Over 95% comes from those who are just clients and to your point a portion of those.
Become coaches, but it's a small.
Percentage, Doug and that's that's what our model is kind of upside. This is kind of tied to we don't need a large percentage of those.
Those clients, becoming coaches, but we.
I've seen that number would be very constant and steady over the years.
Okay. That's helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Dan Chard for any closing remarks.
I'll close by thanking all of you for your interest in Medifast and also recognize the efforts of our after the coaches as well as the meaningful journey that are after.
Our clients are on we appreciate your participation in today's call and look forward to speaking with you again next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Okay.
Yes.
Okay.
Sure.
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Okay.
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Yeah.
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