Q3 2022 Medifast Inc Earnings Call
Okay.
Good day and welcome to the <unk> third quarter 2022 earnings Conference call.
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Now I'd like to turn the conference over to Reid Anderson with ICR. Please go ahead, good afternoon, and welcome to manifest third quarter 2022 earnings conference call on the call with me today are Dan Chard, Chairman and Chief Executive Officer, and Jim Malloy, Chief Financial Officer by now everyone should have access to the earnings release for the quarter.
Ended September 30th 2022, and went out this afternoon at approximately 405 P M Eastern time.
You have not received the release, it's 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 Companys 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 risk.
Lyons should not be placed upon them.
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.
Fast 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.
So were taking time to be with us today.
On the call with me is Jim Maloney, our Chief Financial Officer, I'll start with an overview of the third quarter and continuous and continued evolution of our business and then Jim will walk through our financial results in more detail.
Third quarter has been one of calibration on adjustment.
We were pleased to see a faster than expected recovery in customer retention, which is now back to historical norms. Following the disruption in Q2 due to consumer spending pressure from higher inflation and interest rates.
Customer satisfaction numbers remain at historical highs as our operating infrastructure continue to enable us to deliver a high quality customer experience that drives retention and brand ambassadorship.
Customer experience is one of the key differentiators that allows us to maintain our leadership position, which was recently underscored when you're a monitor and independent market research firm named after via its the top weight loss program in the U S by revenue for last year.
Revenue of $390 million in the third quarter was down less than 6% versus the prior year period, representing an improvement on the outlook. We provided earlier in the year of a mid teen double digit decline.
We're about to be a coaches increased eight 5% year over year to 66200, while revenue per active earning coach declined 12, 9% to $5897.
Gross margin of 72, 5% was down year over year, but improved 150 basis points sequentially. Additionally, we proactively manage our SG&A expenses, taking meaningful steps to bring costs in line with how our business is operating and we delivered a 110 basis point reduction on an adjusted basis versus last year. Despite.
Lower revenue.
We achieved earnings per share of $3 27, a decrease of eight 1% compared to the prior year and earnings per share of $3 32 on an adjusted basis compared to $3.56 in the prior year period.
As we move forward, we will continue to execute a disciplined capital allocation strategy and prioritize investments that will drive meaningful growth.
As we look back over the last few months there are several important learnings that will help us inform the way we plan and manage our business going forward in this new environment.
The programming we implemented in early 2020 to prove successful in attracting new customers confirming the continued demand for the after via offer.
The program attracted the largest new customer cohort in company history, our repeat rates were negatively impacted in the most price sensitive customers across all customer cohorts.
This means that all of our coaches have an incremental financial incentive to drive customer acquisition.
Second in partnership with our coach leaders, we identify the set of programming adjustments that reflect learnings from early 2022 to help drive customer acquisition and the new business environment through 20 twenty-three and beyond.
It's programming change will be implemented in the first quarter of 2023 and will focus on accelerating accelerating new customer acquisition.
Third we will implement a price increase across the entire product assortment there'll be effective in November the.
The increase is tied to a set of margin assurance in productivity initiatives that will have a positive impact on the P&L in queue for and provide further profitability support in 2023.
Price increase will be an average of 4.5% on our consumable products.
Concurrent with this price increase will increase shipping prices as well as adjust purchasing thresholds within our premier Laura loyalty program to further support productivity.
Fourth we have made minor changes to optimize the compensation plan and our G&A operating structure that will improve results and better align with our long term strategy.
And finally, leveraging our investment in technology and digital capabilities remains a key area of focus to drive deeper engagement and seamless connectivity across the ought to be a community of coaches and customers.
We continue to add capabilities and work closely with coaches to integrate these powerful tools to serve existing customers more efficiently and effectively as well as grow their businesses.
Consumer focus and awareness around health and wellness is not dissipated.
In a recent manifest survey, while the majority of U S. Adults said they have cut their spending in the last six months, 70% of U S. Adults say, they don't plan on letting their health and wellbeing falter and plan on implementing better lifestyle changes in the coming year.
Our unique positioning of a personalized transformation experienced remains a critical point of differentiation in this important sector and our programs and initiatives will help us drive further growth in energy and our business as we continue to scale.
Clearly there are near term challenges for consumer facing businesses as they adjust to the changing environment and met a fast we remain confident in our ability to navigate this shift and and the strength of our longterm growth strategy.
Our coaches and customers remain deeply engaged in satisfaction levels continue to be near all time highs.
We have a dominant position and a 7 billion dollar with weight loss industry with a model that is clearly differentiated and a plan that is clinically proven and consistently delivers positive outcomes for coaches and customers.
Over the years the ought to be a community has grown to millions of individuals working in partnership with after via coaches, who provide customize support and teach customers healthy habits that can lead to lifelong transformation.
We continue to be well position for the long term growth and.
And remained committed to target a 15% average annual revenue growth and 15% operating margin our.
Our investments in technology and infrastructure provided an efficient pathway insignificant with a capacity for growth as we continue to expand our international footprint as well as move into the broader 230 billion dollar health and wellness market in the future.
Manifest has a bold mission to transform lives one healthy habit at this time.
We are achieving that in the field with coaches and customers who are achieving change that they previously thought impossible.
We're also helping drive change in the classroom.
With a healthy habits for all curriculum that is helping schoolchildren make healthy choices regardless of socioeconomic background.
And we're doing it through our partnership with no Kid hungry, which is provided up to 10 million nutritious meals to children facing hunger.
Our mission motivates us to continue the work we're doing every day for.
For profit generating activities.
To corporate social responsibility initiatives.
It's important work that drives us to be better everyday to overcome obstacles and to work as a team to drive better outcomes for everybody for clients to coaches to employees to investors.
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 third quarter of 2022 decreased 5.6% to $394 million from $413.4 million in the third quarter of 2021.
We ended the quarter with approximately 66200 active earning ought to be a coaches an increase of 8.5%.
From the third quarter of 2021.
Average revenue per act.
Act of earning ought to be a coach from the third quarter was $5897 a decline of 12.9% driven by a decrease in the number of customers supported by each coach.
Gross profit for the third quarter of 2022 decreased 7.9% to $282.8 million compared to $307.1 million in the prior year period, reflecting lower coach productivity.
Gross profit was 72.5%.
In the third quarter of 2022 versus 74.3% in the comparable prior year period.
180 basis point decline in gross profit margin was mainly due to inflationary economic conditions that are driving higher raw ingredients shipping and labor costs.
SG&A expenses for the third quarter of 2022.
Decreased 6.8% to $234.7 million compared to $251.9 million for the third quarter of 2021.
SG&A as a percentage of revenue decreased 80 basis points year over year to 60.1% versus 60.9% in the third quarter of 2021.
non-GAAP adjusted SG&A decreased 7.3% to $233.6 million and non-GAAP adjusted SG&A.
As a percentage of revenue decreased 110 basis points a year over year, 259.8%.
Decrease in non-GAAP SG&A was primarily due to lower ought to be a coach compensation expense.
non-GAAP adjusted SG&A excludes expenses related to donations made to the support that.
The Ukrainian relief effort.
Income from operations decreased 12.7% compared to the prior year period for $7 million to $48 $2 million.
Primarily as a result of decreased gross profit, partially offset by decreased SG&A.
Income from operations as a percentage of revenue was 12.3% for the third quarter of 2022 compared to 13.3% in the same period in 2021.
non-GAAP adjusted income from operation, which excludes the Ukrainian donation decreased $5.9 million to $49.2 million non-GAAP adjusted income from operation as a percentage of revenue was 12.6% a decrease of 70 basis points from the year ago Pier.
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The effective tax rate was 24.5%.
The third quarter of 2022 compared to 23.9% in the prior year's third quarter.
The increase in the effective tax rate was primarily driven by an increase in state income taxes.
Partially offset by increased tax benefits for donations made in the quarter and research and development tax credits.
The non-GAAP effective tax rate was 24.9%.
As compared to 23.9% in the prior year period.
Net income in the third quarter of 2022 was $36.2 million or $3.27 per diluted share compared to net income of $42 million or $3.56 per diluted share in the prior year's third quarter.
A non-GAAP adjusted net income was $36.8 million or $3.32 per diluted share.
Additionally on September 8th the company's board of directors declared a quarterly cash dividend of $18.2 million or $1.64 per share, which is payable on November 8th 2022 to the stockholders of record as of September 20th 2022.
This represents a 15.5% per share increase compared to the third quarter of the prior year.
Turning to the balance sheet and cash flows.
We believe our financial position remains strong with $69.7 million in cash cash equivalents and no interest bearing debt as of September 30th 2022.
During the nine months ended September 30th 2022 are net cash flow from operating activities was $142.8 million, an increase of 40% from the year ago period.
As cash flows have improved over the past five years, we have returned excess cash to stock holders in the form of dividends in stock buybacks.
2017 by more than 240% and.
The dividend yield is 5.6% as of October 31, 20 twenty-two.
We have additionally increased.
Right of stock buybacks over the last several years, including the 100 million dollar accelerated stock repurchase program that was completed in Q3 2022.
We have continually increase the return to stockholders in the form of dividends.
In stock buybacks, because we are confident in our long term growth strategy.
I will now turn to our guidance for the full year 2022.
As Dan discussed the macro economic environment as remain challenging over.
Over the past several months.
While our retention rates have returned to historical norms.
There is a residual impact on new customer acquisition.
We expect full year revenue in the range of $1.51 billion to $1.59 billion and diluted non-GAAP E. P. S to be in the range of $11.61 to $13.05 or guidance assumes a 24 per.
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Twenty-five percent effective tax rate.
Finally, we.
We believe that along with our 66000 coaches.
We'll be able to navigate the new business environment in the coming quarters. So we're confident in our longterm, 15% growth and 15% operating income targets.
With that let me turn the call back to Dan.
Thanks, Jim and closing we're confident in the power of our coach based model and the habits of health transformation system to change lives for the better.
It is our unique model backed by an incredible coach community.
That is highly adept and engaging and nurturing relationships.
We have a strong management team with a proven track record of running and scaling businesses.
And talented and nimble groups of employees with a passion for what we do.
More than that we have a unique powerful business model that is scientifically proven to be effective.
That is changing lives every single day.
The core of this business is strong and we haven't invested appropriately over the recent years to create a foundation that we can build on for many years to come.
There's more work to be done.
Must always fine tune, our operations processes and initiatives to reflect market conditions reality is that the environment. Today is one of constant change and that means developing a resilient and strong business capable of succeeding whatever the circumstances, we feel confident that our initiatives and longterm strategy set.
This up well to deliver our growth and financial objectives for 2023 and beyond.
With that let me turn the call over to the operator for questions.
Thank you we will now begin the question and answer session.
Could I ask a question you might approach starve and one on your Touchtone phone.
They're usually the speaker phone, we ask you please pick up your handset before perfectly fees to.
The charge a question please press starving too.
And our first question comes from Christina Shah <unk>. Please go ahead.
Hi, everyone. This is Kristina <unk>. So firstly, we haven't really happy to hear that that definitely cashing. My is now back on track a couple of questions. Firstly.
Do you mind calm right now I'm at all about do you expect the coaches can be awkward down sequentially in the fourth quarter I think for the third quarter, we we <unk> quite out of a corner, but we went down and that also <unk>. So I just want to get some opinions on that's it.
Fourth quarter.
Yeah of course, you know this is Dan I'll I'll give you a little bit of color around that let Jim asked the specific specific detail that you talked about or that that's a question about related to coaches. So it's important to kind of go back and understand where we've been to kind of give some context and some.
Rounding for where we're going did you know how we finished 2021 strong growing 60%. We finished our supply chain build out initiatives, which allows us to grow in the future and we initiated a 3.5% price increase to counter some of the inflationary pressures. So that's where we ended last year, because we started 2022.
Sure. We have strong start we focused on bringing a new clients and executed a similar program to what we'd executed in 2022 excuse me in 2020.
And importantly, what we saw was that we were able to bring in the highest number of new customers in the history of the company just under a quarter of a million new customers came in.
Equally important is that our coach productivity was the highest in company history. So those coaches who were acquiring and this was during an inflationary period, we're able to do so.
A higher rate the channels, we ran into in the latter half of Q2 was you know was that our client retention was disrupted or another way of thinking about that is Ah repeat rates were disrupted. So we lost approximately 15% of our active clients across all cohorts, that's true regardless of whether they joined in.
2028, 2021 or more recently.
And what we know as after surveying those customers is that a primary reason for leaving was inflation as well as uncertainty around what economic future, where it's going to bring with them. So as we entered the Q3, we executed several new programs, which are the <unk>.
Earlier with a supported actor Bernie coaches of 66000 for the for the for the quarter and also brought in a new cohort of clients.
The positive thing what you just highlighted is that client retention rates or client repeat repeat rates.
Have rapidly return to stormed those historical norms, so they're back to where they were prior to Q2.
What is is remained however is client acquisition rates that <unk> are feeling president we still feel pressure from those in there roughly 85% of historical norms. In Q3. So as we think about Q for the outlook has been adjusted to reflect that new environment. So I think.
An obvious question around this is what's the plan for the return of growth. So we won't provide outlook. This call. We will I'm Gonna repeat report fourth quarter earnings, but we've learned a lot about how to make our new environment our growth environment. We ran through earlier the the pro.
Rams, we plan to put in place and the programs that were executed in Q3 and will carry on through to four we are implementing a 4.5% price increase to offset some of the inflationary pressure and we're also making some optimizing adjustments or compensation plan to help keep our coaches focus on client acquisition.
As it relates to how regarding four Q for.
Q for is a conservative number assumes the macro headwinds remain constant.
Terms of what we've seen.
We also are.
And it's in a in a state where our coach and client tenure remains a challenge in other words as we would normally bring in a large cohort that would build through the year and have younger clients and younger coaches that is not the case, which is <unk>, which is reflected in the lower.
Productivity per coaches, if you remember our productivity four per coaches revenue as before it was measured by revenue proactive, earning coaches up over 50% versus what it was in 2016. So we'll continue to see some pressure there and as we move into the last two months of the year November December this typically is.
Are low lowest seasonality is people are thinking about how to enjoy the holidays, which usually involves eating and many clients choose to hold off or prospective customers or clients choose the hold off joining the ought to be a program until the start of the new year. So we're well <unk>.
You need to focus on client acquisition, but the real.
Work in progress around client acquisition will be made in the first quarter of 2023 without I'll turn it back to Jim let him ask the question and answer the question about sequential coach growth and year over year coach Grove.
Yeah, So so christina.
You know as Dan mentioned, the you know the guidance, we provided assumes the macro headwinds and as Dan mentioned, we believe it's conservative guidance and you know.
The good news is retention.
Is recovered.
In Q3, which is really good news however, the carry forward impact from two two of the.
Retention issues <unk>.
Left us with a sub optimal coaching customer tenure.
Put pressure on that will put pressure on queue for <unk> in Q3, and beginning in queue for what we're seeing is lower than anticipated customer acquisition.
Which we expect will will impact the productivity in queue for some productivity, we're expecting to be lower.
And we will have a more modest headwind in coach count in Q4.
So.
You know that as Dan mentioned.
You know the good news is will be heading right into.
January which is the best time for a client customer acquisition for our company.
That will help with the tenure mix with coaches and customers.
Okay Uhm that makes sense. Thank you for that Sir with regard to the <unk> I think you mentioned there it's gonna be another price increase properly started in November if I remember correctly. So I Wanna what are your thoughts on how do you expect.
Your clients to react on the latest price increase quite a b S.
Issue for me Tasha late again.
Yeah, we we approached pricing very thoughtfully and took some extra time to compliment contemplated and actually learn from what we had seen versus last year and also through.
Through the year is what looked at how we can optimize our acquisition offer.
So the 4.5% reflects what I would describe as a modest increase that we believe.
Will be easily absorbed by new clients and it's being coupled with some initiatives to make our.
Acquisition kits more easily.
Affordable for new clients. So I think you know a good way to think about this as as the client acquisition kit and the pricing in price point is is the most important is what we have seen as once a client we'll see success on the program.
The food and like the <unk> likes the coach that's what ultimately drives the the repeat Rachel retention rates. So we feel confident that we can.
Increase the the the <unk>, we can we can execute the 4.5% across.
All of our consumer.
Consumable products without creating a <unk>.
A significant headwind from a pricing standpoint that will cause any further.
Impact on client acquisition.
And and I'll add Christina that you know when you look at 2023.
We have have and in the longer term to get to our objective of 15% operating income margin. So looking at the long term, we have more than enough margin assurance initiatives.
Dan mentioned the price increase but we also have increased our capabilities over the last 12 months in our procurement organization.
Which have a significant amount of cost saving <unk> savings opportunities that we'll start seeing in 2023 and and it will continue into 2024, we also have.
Value engineering initiatives.
That not only will reduced overall cost it will also increase customer satisfaction.
And then finally.
We are.
Looking at optimizing our coach.
Compensation and G&A cost to support.
Our growth.
And help us adjust in these new business storms.
Okay. So a follow up on the price increase is it applicable to all customers or is that only apply to your customers.
To all customers.
Okay, maybe last questions on me so what do you expect your clients you react.
Wait actually maybe and I'm, sorry, you're not the one to you how can you, possibly like have a rough idea and French quarter to 923, we won't see a positive you know my account balance.
Would you be able to comment on that.
Yeah. So so yeah, we don't really we're not providing guidance for 2023.
And you know so it's a difficult to answer that question you know, but all we really can say is we haven't.
Gone off our longterm objectives.
15% growth in the long term.
On an annual basis consistently.
So that that's our objective as a company and we're building out.
It <unk>.
Capacity and technology.
L G capabilities and we're not we're not slowing down with those investments.
Cause we we know that are offering.
Is is well needed as Dan mentioned about the that consumers.
Still need our offerings.
So even though they're adjusting their spend.
Ah Hell.
Health and wellness as as one of the one of the spends that we believe they're going to continue with.
Okay I think that's all the questions for me. Thank you.
Great. Thank you for your questions and for taking time to join us today.
The last three years has been interesting for businesses of all shapes and sizes to navigate first the global Covid pandemic up ended many of the practices, we held to be true and now we're in a period of sustained inflation interest rate rises and possibly a recession.
I can say that a metaphase, we're committed to delivering shareholder value for the long term regardless of the macro conditions. This means driving for consistent growth not just today, but in years to come so our job to adjust learn and continue to build and that's exactly what we plan to do.
Thank you as always for your interest in <unk> and we look forward to speaking with you again next quarter.
Thank you <unk>. Thank you all for time information presentation.
<unk> have a wonderful day.