Q2 2022 Medifast Inc Earnings Call
Yes.
Good afternoon, and welcome to the Medifast second quarter 2022.
This conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Reed Anderson.
D R.
Please go ahead.
Good afternoon, and welcome to Medifast second quarter 2022 earnings conference call on the call with me today are Dan <unk>, Our chairman and Chief Executive Officer, and Jim Maloney, Chief Financial Officer by now everyone should have access to the earnings release for the quarter ended June 32020.
Two went out this afternoon at approximately four O five P. M. Eastern time, if you've 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 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.
Upon 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 manifest 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 manifest Chairman and Chief Executive Officer, Dan Chard.
Thank you Reed.
And good afternoon, everyone.
Thank you for taking time to be with us.
On the call with me today is Jim Maloney, our Chief Financial Officer.
I'll start with an overview of the second quarter and the continued evolution of our business then Jim what we will run through our financial results in more detail.
Following our prepared remarks, we will open up the call to take your questions.
Second quarter results were strong with revenue up 15% to $453 million. Another company record driven by continued growth in the number of off the via coaches Act.
Active earning coach numbers reached 68000 in the second quarter at 14, 9% increase versus a year ago and up six 4% sequentially from the first quarter of 2022.
Revenue per active earning coach which is a measure of productivity of coaches supporting customers was $6667 slightly above levels in the prior year period and up 2% sequentially.
Moving to our financial results earnings per share of $3 87 on an adjusted basis were better than expected and just below the $3 96, we reported in the second quarter of 2021, reflecting the impact of some short term transitional factors on near term gross margins as discussed last quarter.
We've seen impressive results from our central start because customer acquisition program, which launched in March of 2022 and extended through May 10th.
The program was highly effective in attracting a new cohort of customers in the first and second quarters. We first leverage a program similar to this in April of 2020 at the height of the pandemic to both attract new customers to opt to be added to reactivate lapsed customers, who are interested in re engaging with the coach and the after.
A program.
The data and the warning we gathered from the original cohort provided valuable insights that were integrated into this year's program.
The benefit of programs such as these is that they create new and engaged customers a portion of whom become new coaches who go through the coach directed training program and they in turn extend their reach to additional new customers.
This creates a highly effective flywheel that drives the growth and rhythm of our business.
While we achieved our customer acquisition objectives during the quarter.
The macro environment has become more challenging for global businesses over the past several months largely reflecting the impact of rising inflation related factors, which is putting more pressure on consumer spending.
While we were while we remain confident in the long term strength of our business, we're not immune to these near term pressures.
In the latter part of the quarter, we saw some moderation in our customer retention curves that impacted our growth trends and our revenue outlook for the remainder of the year.
We are tracking these trends closely as we move through the third quarter and taken some intentional steps to mitigate the impacts. This includes the launch of a coach accelerated bonus program to promote new coach sponsoring and client acquisition.
This program is a variation on the business builder program. We have traditionally used during the second half of the year and we believe this initiative will be beneficial to customer retention as we move through the year.
Clearly the world has experienced a range of macroeconomic uncertainties that have impacted businesses, including ours over the last number of years generally speaking following these moments of disruption we've seen retention rates return to historical norms within two to three quarters early.
Early indications from the data in Q3 are that we are seeing a stabilization in retention rates and we're looking to drive a return to more normal levels as we move through the year.
Cost pressures related to raw materials and transportation are also impacting short term margins and we are reducing our full year of 2022 profit outlook accordingly.
The disrupted economic environment is unfolding rapidly and with the ongoing impact of rising inflation and waning consumer sentiment economic growth remains uncertain. However, the global health crisis remains a long standing issue, which continues to drive consumer focus and spending despite the challenges of the macroeconomic environment.
Matt.
We still expect to deliver growth and capture additional market share this year generating high levels of profitability and excess cash flow.
While the current environment is certainly turbulent and then suddenly for capital intensive businesses, our variable cost structure allows us to adapt quickly to the changing business environment with that in mind, we have already made adjustments to our manufacturing distribution and customer support infrastructure to reflect our revised outlook.
With these adjustments along with other profit improvement initiatives currently underway. We believe we will be able to effectively adjust to achieve our long term profitability goal of 15% operating margin.
Despite the short term pressures as a business.
And the leadership team, we remain confident in our ability to drive long term value.
The $100 million accelerated share repurchase program, we recently announced provide strong evidence of our confidence and in our commitment to continue the growth of the company and our steadfast belief in the strength of our strategy.
One of the many reasons for our confidence is the clear differentiation of our model, we do not offer a one size fits all approach, but instead are also via coaches provide customized support to customers who want to transform their health.
First of all coaching is offered within the setting of a supportive community and is underpinned by clinically proven plans that help support lifelong change.
This is the special sauce that makes after being such a powerful force for transformational change.
And our initiatives in the field to underpin that.
We believe that there is a significant opportunity increase the productivity and reach of our coaches and we are currently working on a number of initiatives designed to enhance that effort.
Since the launch of our new business model through after that they ought to be a brand in 2017 productivity as measured by revenue per active earning coach has increased over 50%.
Our ought to be a coaches have leveraged our powerful customer facing brand and reform reformulated product line to support their coaching services.
They have use social media and video conferencing to share of the after the message.
Business coaches in turn recruit and train new coaches, who use our data and technology platforms to support their customer bases.
Our expanded supply chain capacity and capabilities bring deeper consistency to customer service and give coaches the confidence they need to continue focusing on building their businesses efficiently and effectively.
Digital capabilities continue to be a high priority for the business, helping to drive deeper engagement and seamless connectivity across our ought to be a community of coaches and customers.
We ought to be up which supports customers on their health transformation journey continuing to show strong momentum in the second quarter with downloads, increasing 13% sequentially to 158000.
Number of users was up 24% over the same period, reaching 288000 with a number of new users increasing by 10%.
The new mill tracking feature went live in the second quarter, and we continued to expand our lean and Green catalogue to include 170 unique recipes.
Coaches continue to increase their usage of the after via connect up in the second quarter as we rolled out several new features to enhance their ability to serve and engage with our customers. We now have over 25% of our coaches leveraging the app to support their business.
This app acts as a complement to the desktop app.
The majority of our coaches us to efficiently manage their customers over time, we anticipate these two complementary technology platforms will be increasingly effective in supporting the continued productivity of our coaches.
The impact of our growth was visibly demonstrated last month at our annual after the convention in Atlanta.
Attendance was outstanding with over 17000 attendees participating in person and virtually.
We ought to be a convention features keynote addresses from company executives and independent after via coach leaders as well as field led education sessions and panel discussions.
For the second consecutive year. The company offered a coach led education session in Spanish as we continue to expand into the Hispanic centric segments inside the United States.
We were able to more than double the participation in that session versus last year. This was an important benchmark in our expansion strategy, which focuses on building out the Hispanic segment in the United States in anticipation of future International expansion supported by U S based social leadership and Spanish speaking support infrastructure.
As previously communicated our customer support call Center network now has a global footprint with support infrastructure is providing multilingual support from the United States Guatemala, Colombia.
And the Philippines.
With the continued expansion of our coach support infrastructure and the potential future expansion into other international markets, including Spanish speaking markets, there's clearly huge potential outside of the U S domestic market for many years to come.
We're proud of what we've already achieved over the course of the past few years rising to become the current leader in revenue and a $7 billion weight management category.
As a testament to the strength and effectiveness of our model and galvanizing people and their determination to achieve their health goals.
However, we continue to set significantly greater goals for ourselves.
We're expanding our efforts to the broader health and wellness arena and leveraging our current market leadership position to drive further growth.
We recently made several key additions to our scientific advisory board that will be instrumental in targeting important segments within the 200 thrilled 30 billion dollar health and wellness industry.
Three new individuals' that joined our scientific Advisory Board brings significant expertise in health focus technology and behavior health areas that are closely aligned with our growth initiatives around digital engagement.
Our investments in technology and infrastructure continue to position us for consistent growth.
This includes our new distribution center in Fort Worth, Texas that is on track for completion in automation by the end of this year, we anticipate that our push on manufacturing and fulfillment capacity will achieve our goal of supporting a $2 5 billion dollar annual revenue business by the end of the year.
We remain confident in our long term mid teens revenue growth and 15% operating margin targets to deliver those results. We will continue to focus on attracting and supporting customers with our personalized habits of health coaching model, coupled with incremental gains from entering new demographic segments and penetrating the broader health and wellness.
Market as well as through international expansion.
I'll conclude my remarks, with an update on corporate social responsibility activities.
I'm proud to say that manifest along with our coach community.
It's hit a new milestone providing up to an equivalent of 11 million nutritious meals to kids in need through our partnership with no Kid hungry.
At the same time the unfortunate events in the Ukraine have continued to have an impact on millions of people globally to.
To support those affected by the crisis, we committed to donating after via fueling to assist the humanitarian efforts caused by the Ukrainian conflict through our nonprofit partners such as good 360.
360 works with many large corporations to mobilize donations to qualify the recipients affected by disasters around the world.
Our thoughts go out to the people affected by this crisis, we are working with our nonprofit partners to determine the amount of additional donations of off the good feelings in the second half of 2022.
We've also made substantial progress on the healthy habits for all curriculum modeled after the habits of health and developed in partnership with former educators.
That's subject matter experts in July the curriculum launched to a network of teachers nationwide, providing lesson plans that help teach kindergarten through fifth grade or students how to create healthy habits.
Teachers can have a profound impact on the trajectory of their students' lives with a healthy habits for all curriculum.
With teachers with an important tool and in turn given future generations life-changing knowledge, coupled this with greater access to critical resources children will be better prepared to make healthy choices of reality, regardless of their socioeconomic background.
Our hope is that students will continue to be inspired to share what they have learned with their family friends and neighbors, creating a ripple effect that will transform in a rich lives and ultimately create healthier communities one healthy habit at a time.
In conclusion, the second quarter was another step towards our long term goals.
We remain focused on our mission of transforming People's lives for the better helping them be successful in achieving and maintaining their healthy weight and alerting other healthy habits setting the stage for significant expansion into the broader $230 billion health and wellness market.
Our compelling business model continues to be supported by an experienced leadership team in Denver have dedicated employees and 68000 passionate after via coaches focus on enhancing lives one healthy habit at a time.
With a strong balance sheet and a robust capital allocation strategy, we believe that we're well positioned to drive value for stockholders and confidence in the future.
With that let me 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 second quarter of 2022 increased 15% to $453 $3 million from $394 $2 million in the second quarter of 2021.
We ended the quarter with approximately 68000 active earning ought to be a coaches an increase of 14, 9% from the second quarter of 2021.
Average revenue per active earning ought to be at coach for the second quarter was $6667 slightly above year earlier levels and up.
2% sequentially.
Coach growth and productivity continue to rise in the quarter driven by successful customer acquisition program and growth in the number of customers supported by each coach.
Gross profit for the second quarter of 2022 increased nine 5% to $321 $7 million compared to $293 $7 million in the prior year period, reflecting strong revenue growth, partially offset by increased cost of sales.
Gross profit margin was 71% in the second quarter of 2022 versus <unk> 74, 5% in the comparable prior year period.
The 350 basis point decline in gross profit margin.
What's attributable to customer acquisition program running in the quarter.
Andy.
Elevated product and labor expenses as a result of continued inflationary pressures.
SG&A expenses for the second quarter of 2022 increased 17, 4% to $272 $7 million compared to $232.3 million for the second quarter of 2021.
SG&A as a percentage of revenue increased 124 basis points year over year to 62% versus 58, 9% in the second quarter of 2021.
non-GAAP adjusted SG&A increased $31 million to $263 $3 million and non-GAAP adjusted SG&A as a percent of revenue decreased to 84 basis points year over year to 58, 1%.
The increase in non-GAAP SG&A was primarily due to higher ought to be a coach.
Compensation expense incremental costs related to the continued investment in information technology and distribution and increased credit card fees, resulting from higher sales.
Income from operations decreased 23% compared to the prior year period or $12 $5 million to $49 million, primarily as a result of increased SG&A expenses, partially offset by increased gross profit.
Income from operations as a percentage of revenue was 10, 8% for the second quarter of 2022 compared to 15, 6% in the same period in 2021.
non-GAAP adjusted income from operations, which excludes the Ukrainian donation decreased $3 million to $58 $4 million.
non-GAAP adjusted income from operations as a percentage of revenue was 12, 9% a decrease of 270 basis points from the year ago period.
The effective tax rate was 19, 8% for the second quarter of 2022 compared to 23, 4% in the prior year's second quarter.
The decrease in the effective tax rate was primarily driven by a tax benefit for donations in the quarter, partially offset by minimal increase in various other items. The non-GAAP effective tax rate was 23, 9% as compared to 23, 4% in the prior year period.
Net income in the second quarter of 2022.
Was $39 $1 million or $3 42 per diluted share compared to net income of $47 million or $3.96 per diluted share in the prior year's second quarter. The non-GAAP adjusted net income was $44.3 million or $3 in <unk>.
87 cents per diluted share.
As Dan mentioned, a minute ago, the company announced an accelerated share repurchase agreement on June 1st to repurchase $100 million of the company's outstanding common stock with approximately 480000 shares repurchased as of June 30th 2022 and the final settlement.
Expected no later than October 2022.
Additionally on June 16th the company's board of directors declared a quarterly cash dividend of $18 $6 million or $1 64 per share which is payable on August eight 2022 to stockholders of record on June 28th 2022.
This represents a $15 five per cent per share increase compared to the second quarter of the prior year.
Turning to our balance sheet.
We believe our financial position remains strong with $61 $1 million in cash cash equivalents and investment securities and $27 million in debt as of June 30th 2022, compared to $109 $5 million in cash cash equivalents and investment securities.
No debt at December 31st 2021.
The change in net cash is largely attributable to execution of the accelerated stock repurchase program announced on June 1st.
I will now turn to our guidance for the full year 2022.
Dan discussed the macro economic environment.
Has it become challenging over the past several months.
And we have recently experienced some.
Moderation in customer retention and accordingly have decreased our second half of the year outlook.
We expect full year revenue in the range of 1.58 billion to $1.66 billion and diluted non-GAAP EPS to be in the range of $12 70.
$2014.10.
Again, we believe that we along with our 68000 coaches, who will be able to navigate the macro economic environment in the coming quarters.
So we are confident in our long term growth targets in the mid teens. We also believe we will be able to achieve 15% operating margin in the long term. Despite short term margin pressures. This year from continued investment in technology and supply chain infrastructure along with inflation.
Our guidance assumes a 24.25% to 20, 525% effective tax rate if.
If you are attempting to develop a financial model for the remainder of 2022 from a top line basis. We believe Q3 2022 we'll have a mid teen double digit decline year over year because of the moderation in customer retention, we expect expect slight growth in Q4.
As we start to build momentum for 2023.
Finally, as a reminder, several weeks ago.
The ought to be a convention was held and will increase SG&A expenses in Q3 2022.
In closing we remain confident in the strength of our model.
To drive consistent growth and profitability and are well positioned to capitalize on the significant opportunities that lie ahead.
As we look to the future.
We focus on building long term value for stockholders as evidenced by our recent capital allocation activities further demonstrating our confidence in our outlook while enhancing lives.
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 ask a question you May press.
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Our first question comes from Stephanie.
At Jefferies. Please go ahead.
Everyone. It's Chris name on this offer for stuff thanks for taking the questions.
I just want to take a look at kind of second stepping off the second quarter. Obviously, you just mentioned.
Jim that the guidance calls for double digit declines in the third quarter.
Help us reconcile how that works and maybe a little more color in terms of the step change following a pretty strong 15% growth quarter. So maybe just talk about the trends you saw in kind of that.
Pretty big step function down.
Yes, so thanks for the question Chris.
The.
The.
The reason, we're calling out a odd.
On double digit decline in Q3.
It's because we you know when we look at the <unk>.
Uh huh.
You know the history of macro events.
We we've seen you know when you think about the pandemic, we saw that our retention rates.
Of customers dropped at the beginning of the pandemic and it took.
You know I'll call it six months to recover fully but but through that time, we saw.
There was a deeper.
Issue in the early months and then it got better over time, so even though this is a different than the than the pandemic.
We do have.
Some data points early on in Q3.
That you know retention rates are stabilizing and that's a good sign that we can build back to a more normal level of retention rates later on this year.
Chris maybe even a.
Slightly it's kind of a different way of looking at it but but consistent with what Jim just said.
As you know R. R.
Our model depends on bringing in a healthy number of new clients.
That happened in Q1, and Q2, which was reflected by our our guide up after Q1 and as we went through Q2, we saw the demand for the product continue to increase the step function down was really related to what we talked about earlier, which is a I'll say a little bit of a shock to the.
System as.
Consumers began to feel the effect of the inflation what that what that did was that those those customers who had been brought in a disproportionate number.
Didn't repeat them after they the first month, but not only did that happen there was a group even in those previous cohorts of customers who also.
Did not repeat when we would have expected they would so it basically creates a significant downward pressure on the productivity per active earning coach because there are fewer clients or customers in the system and so that's that that that change them to overcome that change.
We need to reestablish the cadence of the business, which.
Starts over again that are attracting clients and bringing them and that's the that's the program that we have in place now is motivating coaches to cover their coaches.
Current coaches to sponsor new coaches and they bring in that new client base and that that downward pressure in Q3 is reflective up beginning to reset that productivity that was lost as a result of that macro disruption to our retention curves. Yeah. So so Chris you know, we you know what.
When you think of our customer acquisition program that occurred in March through May.
We actually saw better than anticipated results.
During that timeframe so we.
We can conclude that it's really not a demand thing that health and wellness.
<unk> is still a need for <unk>.
Consumers and it's really the macro environment that is that is causing this.
Moderation in retention rates.
So hopefully that's helpful.
That is I, just guess I'm, especially in Sri just given kind of previous commentary around the acquisition program being so strong and repeat order rates holding up in line with historical but I think you're saying that there was in fact, a deviation from kind of that high 70% mid 70% repeat order rates, but I guess I'm looking for.
Forward right to the back half of the year into 'twenty three what gives you confidence that these kind of repeat order rates will improve if kind of the underpinning reason as the macro you know I think about if we move into a kind of a prolonged period of a tougher macro what gives you confidence that you and the coach base can kind of overcome this.
I think the Best example, we have of a going through a macro event like this as the pandemic that happened two years ago. What we saw in those initial months were an adjustment to I'll say consumer sentiment as they face something that hadn't faced before we think.
That's our that's what we're saying now we saw in the early phases or the early months into Q1, and that's the first part of the second quarter. Our retention curves held just like they normally would in a N a.
Normal year, it wasn't until the new startups getting bad and they start feeling I think probably the simplest way of thinking about it is.
You know that the effect when you put gas in your tank or when you go buy groceries. So what what we believe is is that there'll be some adjustments made.
Including decisions on how you are and how and what the consumer spend on and that just as before the the like me it was kind of cute.
Q2 shock if you will around inflation that are spending on things related to health and wellness.
<unk> will be prioritized higher again, and that's what will bring it back and bring back our product or service.
And ER and our ability to grow.
Back into focus.
Okay last one for me just on the guidance, but could you give us a little more color on how you ultimately arrive to the numbers I'm just curious about what it assumes in terms of.
The trends from July , which I think you suggested things were stable. So should we take away that the guidance just takes July trends in run rates through the back half of the year, but the right way to think about it.
Yeah. So the guide is is taking.
Taking into account.
What we saw in the latter part of <unk>.
Uh huh.
Q2 a.
Because we don't have enough data points for Q3 to extrapolate that through the rest of the year at this point, but we you know as Dan mentioned we are.
You know confident that there will be a normalization are getting back to normal levels of retention.
You know.
Taking into consideration the.
We are you know what we've seen before with macro events.
Just one other point.
Point this important that we're watching closely and it's reflected in the programming as well typically in these kinds of environments.
The attractiveness of a coaching business becomes enhanced then we believe that will be because it would be the case here as well so we're watching very closely.
How are conversion rates.
Translate in this environment and the program that we have running currently is reflective of that belief and helping move that along so that's.
Well it says we're not sitting back waiting to see what happens.
With seen the adjustments are in people spending.
And we're making the adjustments as we have in the past, whether it's through a macro disruption or in some cases.
Disruption through some of our our own operational initiatives and are making the adjustments that will allow the business to kind of.
Go back into a normalized state so that the confidence you're hearing about the return is the trends that we're watching and also the historical success, we've had with making any adjustments to the business.
And bringing the businesses and bringing the cadence of the attraction of the ability to support clients on plan the conversion of the coaches and in developing the business consistently.
<unk> been able to accomplish in the past.
This concludes our question and answer session I will now.
I will turn the conference back over to Dan Chard for any closing remarks.
I'd like to thank all those who have been able to join them, including employees coaches and ought to be a clients.
Just wanted to end with a few closing comments as we move through the current quarter.
During the quarter, we quickly made the adjustments to reflect the new market dynamics, we have.
So we have a stated mission to expand our business and the broader $230 billion of health and wellness segment by leveraging the habits of health transformation system. When we believe that our outsized share and share leadership in the United States.
In the weight management category and segment is reflective in our citizens are assessing and expanding beyond those who simply.
Simply want to lose weight and we're actively building new segments in the United States with a particular focus on the Hispanic segment and we view this as preparation for future steps on international expansion and lastly, we continue to invest in technology that we believe will support our long term the long term productivity of our coaches. So we look forward to sharing.
The results of our current quarter and our progress against our long term goals.
We.
Move through this quarter and and have our next.
Earnings release, Thank you everyone for joining.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.