Q2 2023 Medifast Inc Earnings Call
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Pardon me, ladies and gentlemen. This is your conference operator Your conference will begin in just a few minutes ago on your conference will begin in just a few minutes. Please continue to standby. Thank you.
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Good afternoon, and welcome to the Medifast second quarter 2023 earnings Conference call.
All participants will be in listen only mode.
After today's presentation there'll be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Steve Zenker Vice.
Vice President of Investor Relations. Please go ahead.
Noon and welcome to Medifast second quarter 2023 earnings conference call on.
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 quarter ended June 32023 that went out this afternoon at approximately four or 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.
It will also be available on the Companys website.
Before we begin we would like to remind everyone that todays prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions. The words believe expect anticipate and other similar expressions generally identify forward looking statements. These statements do not guarantee future.
Performance, and therefore undue reliance should not be placed on 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 statements 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.
I want to start by thanking you all for joining today's call with me today is Jim Maloney Medifast, Chief Financial Officer before I get into the specific dynamics of the second quarter I want to share how met a fast is evolving to create sustainable success in a changing marketplace.
As we have mentioned previously the market has experienced some significant shifts in the last year caused in part by changes in the macroeconomic and competitive environments.
In both areas shifts have impacted the nature of the demand and demand creation and cosmetic fast and other companies to reassess drivers for long term growth.
With that in mind, we've now embarked on an aggressive path to make meaningful investments to evolve our business model for growth in the new environment.
Going forward, we will use our coach guided habit spaced lifestyle program and products to extend beyond the $8 billion structured weight loss market, where we are a major player to be clear the traditional weight loss management sector will remain important and we will continue to implement plans designed to increase our share of the.
Dynamic segment, including extending our offer to better integrate with the emerging trends and medically supported weight loss and continuing to broaden our demographic focus to the Hispanic market, which will lay the groundwork for future expansion into Latin America.
However at the same time, we are also moving forward with some exciting new initiatives, which we expect will be drivers for future performance focused on monetizing multiple healthy habits.
I'll spend some time talking about those today.
What is not changing is our mission to offer the world lifelong transformation, one healthy habit at a time utilizing our sixth macro habits of health and our more than 53000 active earning coaches to help people achieve their health and wellness goals for.
For more than 20 years, these healthy habits and our coach led approach have encouraged millions to achieve a sustained healthier lifestyle as consumers increase their focus on personal health and wellness the desire for support in achieving their goals continues to be a trending topic within the space.
Science based solutions that empower transformation change have and will always remain at the heart of our offering underpinned by coach support products and tools that help customers achieve their goals.
Before I share more on how we intend to act on that principle going forward I want to turn my attention to the second quarter.
Customer.
Position in the second quarter was in line with our projections, but down year over year as we continue to execute on the three critical business drivers that will return the business to growth those drivers are programming coach training and our offer.
We were down by 35% of revenue in Q2 of 2023 year over year. The comparison quarter last year included the acquisition of a record number of new customers driven by our successful essential Star program, which made for a difficult difficult comparison.
Macro headwinds, including the rapidly shifting economy inflation changes in social media algorithms, along with the changing competitive environment with the growth of medically supported a weight loss all impacted our ability to drive customer acquisition to prior year levels.
New coach programs planned for the remainder of 2023 should aid in improving customer acquisition, particularly in conjunction with the new product line that we announced at our recent convention.
More on that in just a moment.
While we continue to see retention rates in line with our historical averages and conversion rates also in normal ranges new customer acquisition continues to be our most significant challenge.
We believe that the new product line will help energize, our coaches and allow our health transformation message to breakthrough a crowded marketplace driving customer acquisition and revenue going forward.
We also continue to place significant focus on broadening our coach and customer bases in the Hispanic community, where we see significant potential to build on our progress over the last few quarters.
This fast growing population segment provides us with significant room to grow as our current estimated Hispanic customer base is well below the 18% of the U S population that identifies as Hispanic.
Operating margin rose to 13, 1% from 10, 8% in the year ago quarter, reflecting less promotional activities in this year's second quarter compared to a year ago and continued progress on our fuel for the future cost savings initiatives.
We do expect to increase investment in our growth initiatives throughout the rest of the year, which should more than offset our savings in 2023.
But should help set the stage for a return to growth in the future.
During the quarter, we made the decision to exit Singapore, and Hong Kong effective July one.
To focus the company's resources and efforts on growth initiatives that we anticipate we will have the greatest impact on profitability in the next several years.
As we discussed previously our work in the region was impacted by COVID-19, and with the current dynamics in the Asia Pacific region being less than ideal for expansion. We believe there are more compelling geographic expansion opportunities elsewhere.
We developed important insights and learnings from our work in the region and these will be invaluable in pursuing new geographies in the future.
I want to move now to the specifics of our growth investment initiatives.
At our annual Convention 10 days ago, we announced the launch of our new product line after via active.
As part of our coach supported healthy motion program and is one of the six habits of health within our proprietary system.
After via active was born out of a desire from our field to offer more comprehensive and effective options than those offered in the marketplace in order to support an active lifestyle that includes exercise.
According to an internal survey more than 80% of after via coaches see the value of a healthy motion program and products.
The new line contains premium exercise supplements and products that are scientific leaders is designed to help people with a habit of healthy motion as part of their optimal health pursuits.
The initial products with others expected to be rolled out next year include after via essential amino acid blend and after via active whey protein.
Both products are also formulated to work within the after via nutrition plans to help people achieve their health and wellness goals, while incorporating exercise and supplements into their routine.
In addition to the new products, we have partnered with active a leading fitness app to provide on demand guided workout for a community of coaches and customers.
After the active products help activate more muscle protein synthesis support healthy muscle and reduced muscle soreness after exercise and of course with coaching central to all off the V initiatives customers interested in after via active will be guided by coach support.
Much like our mill replacement solutions. After via active is not just about the consumable products, but rather about the entire program that provides each customer with an easy guided way for them to practice the habit of healthy motion, whether it be walking running biking weightlifting etcetera.
Our products are now available exclusively for coaches with the after the active program and products launching to the public.
Through our coaches in September of 2023.
The total addressable market for sports nutrition, which includes exercise supplements is over three times the size of our current market opportunity and is expected to grow at a 9% CAGR over the next four years. According to the nutrition business journal, making it a very attractive market for us to pursue.
<unk>.
We expect these new products to attract new customers, both in the weight loss and fitness categories as well as those who have already reached a healthy weight with after via and are looking for support for the next phase of their health goals.
Another initiative, we announced the convention and that we are in the initial stages of exploring is medically supported weight loss solutions.
G L. P. One and other medications have of course been a hot topic in the media over recent months and we believe that this could be a potential area for growth.
<unk> was founded by doctors and our scientific and clinical heritage gives us the knowledge and credibility to evaluate and develop new products and partnerships that could further help customers in their health and wellness journeys.
Our in house scientific and clinical affairs team as well as our scientific Advisory Board of external scientific experts guide us in making informed decisions based on the latest scientific developments in health and wellness.
It is important to note that the weight loss medications are being prescribed to be used in conjunction with lifestyle changes.
And these are the same lifestyle behaviors that are exemplified in our six habits of health.
As such our science backed products and coaching model make after via a powerful solution alone or is the cornerstone of a program that includes weight loss medications.
What has been historically true is still true today.
Lifestyle change is the cornerstone of long term healthy living regardless of what solution people are using to effectuate short term weight loss.
We are exploring ways to offer a combination of our habits based coach guide a solution together with medically supported weight loss to serve those potential customers, who may be in need and are looking for different approaches.
We are simultaneously exploring strategic partnership opportunities. We are currently piloting relationships with several telehealth providers and we will take action to determine the right path forward for Medifast and after via.
We will certainly have more to say on this subject when we have some data and insights from the pilots that are currently underway.
These new initiatives are intended to be funded in part by our fuel for the future program, which is expected to result in a 200 to 300 basis point subset sustainable reduction in annualized cost savings by the end of 2025.
We are already ahead of our expectations and these cost reduction efforts and hope to realize a third of the savings in 2023, although as I mentioned earlier all savings. This year are expected to be reinvested in our growth initiatives.
We expect to start to see the benefit of these actions in 2024 and beyond which is also where we would expect to see the revenue impact from the new growth initiatives.
By the end of 2025, we are targeting a sustainable 15% revenue growth rate and 15% operating margin.
We are continuing to make remarkable headway.
Under the education pillars, with our healthy habits for all curriculum, which is modeled after the company's habits of health system and is now impacted nearly 90000 students since it launched in the summer of 2022.
Lesson plans will remain available free of cost to millions of educators nationwide through our partnership with we are teachers for the 2023 'twenty 'twenty four school year.
We were glad to continue supporting teachers and equipping their students with the skills knowledge and confidence needed to build healthy habits from a young age.
We've also increased access to nutritious foods through our continued partnership with the nonprofit no Kid hungry to date the company along with our independent coaches.
It provided nearly 14 million nutritious meals to kids in need.
As we look forward to the second half of the year, we are continuing our relationship with nonprofit partners to pair health education with greater access to critical resources. So children can make healthy choices a reality regardless of their socioeconomic background.
Finally, before I turn it over to Jim I wanted to give you a few more thoughts from the after via Convention I mentioned, a few moments ago.
The convention focused on training and building energy as we launch new programs introduced new products and make other enhancements to our offer.
The coach base is enthusiastically embraced our new line of motion products and are very excited about using this new tool to help people on their journeys to a healthier lifestyle.
They also understand the critical role the lifestyle solutions play as a complement to medically supported weight loss.
Our coaches realize that health is a continuum and that every single customer is on a journey they.
They understand that as we think about our continued expansion in pursuit of our mission, we are committed to reaching and activating a wider variety of health solutions to meet our customers' needs and that wherever they are on their journey after via will be there for them with.
With that I'll turn it over to Jim to go over the specifics of the quarter.
Thank you Dan good afternoon, everyone.
Second quarter 2023 results were ahead of our guidance as we continued to advance key initiatives aimed at optimizing profitability and reenergizing growth.
Revenue of $296 $2 million exceeded the upper end of our guidance range of $250 million to $270 million, but decreased 34, 7% versus the year earlier period.
Primarily driven by a decline in the number of active earning off the vehicle which is <unk>.
And lower productivity per active earning coach.
Customer acquisition continues to be pressured by less prospects being identified by coaches impacted by competition from G. L. P. One drugs inflationary pressures and social media algorithm changes.
We ended the quarter with approximately 53100 active earning after via coaches a decrease of 21, 9% from the second quarter of 2022.
Average revenue per active earning octavia coach for the second quarter was $5578 a year over year decline of 16.3%, reflecting the continued headwinds to customer acquisition, partially offset by a price increase we implemented in.
In November last year.
Profit decreased 34, 5% year over year to $210.7 million driven by lower revenue, while gross profit margin improved 10 basis points to 71, 1%.
SG&A expense was down 36.9% year over year $272 million and decreased 210 basis points as a percent of revenue, primarily reflecting lower compensation expenses due to lower volumes and fewer active earning coach.
<unk> as well as the absence of charitable donations that we did in the prior year period.
The other significant factor that favorably impacted SG&A this quarter versus second quarter of 2022 was our continued progress on several cost reduction and optimization.
Initiatives.
Income from operations was $38 $7 million in the second quarter of 2023 down 21% versus the year earlier period, driven by lower gross profit, partially offset by lower SG&A.
As a percentage of revenue income from operations was 13, 1% in the second quarter, a 230 basis point improvement versus the year earlier level well. We initially expected the operating margin to be below last year's second quarter level.
It actually was significantly above our expectations due to timing benefits from a program that was run earlier in the quarter than forecast and from certain expenses that were pushed out until later in the year as well as greater than expected savings from our fuel for the future cost.
<unk> initiative, we continue to be very encouraged by the result of our efforts to take 200 to 300 basis points of annualized expenses out of our cost structure by 2025, which is running ahead of our expectations as Dan said earlier, we expect to use the savings this year.
Year to help fund, our strategic growth initiatives and customer acquisition efforts.
The effective tax rate of 22, 6% was higher than 19.8% recorded in the prior year's second quarter due to a decrease in the tax benefit for inventory donations when compared to last year.
Net income in the second quarter of 2023 was $33 million or $2.77 per diluted share compared to $39 $1 million or $3.42 per diluted share in the year earlier period aided by a 4.5% D.
Kris in diluted shares outstanding.
Turning to our balance sheet and cash flow.
Our financial position remains strong with $147.4 million in cash cash equivalents and no interest bearing debt as of June 30th 2023 cash flow from operations continues to be strong at 43 point.
$1 million during the second quarter relatively in line with the year ago period cash flow from operations for the six months ended June 30th 2023 was $107 $2 million outpacing last year's comparable period by 22, 6%.
Turning to our guidance, while our second quarter results were ahead of our guidance the operating environment remains challenging and we continue to expect that programming changes compensation dynamics and future growth initiatives will take time to gain traction and deliver meaningful results for the third quarter of 'twenty two.
'twenty three we are estimating revenue in the range of $220 million to $240 million and diluted EPS in the range of 71 cents to $1 32, our guidance assumes a 23% to 25% effective tax rate.
In summary, we remain convinced that.
Our strong financial position, coupled with the numerous exciting growth opportunities discussed by Dan will enable us to evolve our business.
We have successfully done in the past and allow us to continue to generate significant cash flow and strong returns on capital in the years ahead.
With that.
Let me turn the call to the operator for questions.
Thank you we will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
Youre using a speakerphone 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 tail at this time, we will pause momentarily to assemble a roster.
Our first question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yes Hello.
So I guess I would just like to ask about.
Your coach decline sequentially in the quarter I think was about 10% if I calculated right and that was quite a bit bigger than in the first quarter, where the decline was 4%.
Sequentially.
So I'm just curious about.
What to expect there I know you don't want to get into giving guidance, but what's.
We think this is.
Worse.
Trough point in terms of.
Sequential decline of coaches or do you think it's.
I'm going to get worse.
Is there something you can tell us about the cadence of the progress on that.
<unk> front. Thank you.
Sure. Thanks Linda.
The coach active earning coach number is highly influenced as you know by clients coming in.
We're 95% of our our clients of our coaches were clients previously so it all comes back to that.
Wind that we continue to experience around client acquisition.
So what we believe is that the three things that we've talked about specifically.
The launch of the active line that took place at convention and expands our addressable market and brings in a new type of customer we're looking for.
Exercise as part of their health journey.
Along with.
Moving from exploring.
Monitoring.
The medically supported weight loss segment, that's creating a lot of noise and then as well as the continued progress we're making in Spanish segment, all have the potential of increasing that overall client acquisition number and as our client acquisition number improves what we know.
Is that are.
Conversion rate, meaning the percentage of those.
Customers, who become coaches has remained at historical norms. So at this stage, we continue to focus.
Really on that last metric that is.
Been disrupted.
Focusing on those three different areas and feel confident that as we improve our client acquisition number that the active earning coach number will start to improve as well as the productivity per active earning coach.
Okay.
Also can you can you comment on the wide range for EPS guidance for the second quarter.
It seems unusually wide.
Whereas the revenue guidance or not.
Typical so I'm just wondering what is it the dictating that wide range and what would have to happen to get to the bottom end of the range versus the top end in the second quarter. Thanks.
Yes.
This is Jim Linda.
So the range of.
EPS guidance.
Is.
Two fold one is.
Is.
The.
As we see if we hit if we actually hit the bottom end of the range of revenue.
We start losing leverage on our fixed cost, which will impact operating income.
The second thing is.
The difference between <unk>.
And that causes EPS too.
Be at that lower range. So it's really those two factors.
The cause of that is still is the loss of leverage on fixed costs.
And the tax rate.
At the higher rate.
Okay. I mean, you really don't have any international operations anymore. So I'm just curious what what dictates the wide range of tax rate.
Yes, the wide range of tax rate.
<unk>.
As dictated actually.
Okay.
U S.
At the at the lower.
Operating income levels.
It doesn't.
Our tax rate works.
It will go it will climb to a higher rate.
So typically our rate over the last.
Several years has been about anywhere between.
22% and 24%, but it could climb to.
25%.
At the lower.
Amounts.
Operating income.
And thats, what causes that rate decline.
Okay Gotcha.
And then.
Yeah.
Sort of interesting when you listen to other weight loss company like for example, Herbalife is another direct seller of some weight loss products.
I'd say the DLP, one guys are really not affecting their business.
Yeah.
So I'm curious.
Why you think it would be affecting your business more do you think you are relative.
Cost of the program Youre selling a.
$400 per month program, whereas herbalife is selling.
Something that's less expensive or even individual skus more so maybe there is maybe their client base is different in terms of.
Demographic or what do you think accounts for the difference on the business between yourself and somebody like Herbalife.
It's hard to comment on.
Herbalife business, but.
Certainly can can help clarify what we're seeing.
There are three things that affect us affected us in the <unk>.
Last last year in Europe .
Very well very well aware of this one is the macro economic environment, which primarily took place last year took out a portion of our clients, who typically would have added significant value even moving into this year. The second one is changes in social.
Media.
Rhythms and then the third one is the one that we're talking about now.
Which.
We didn't see.
During the <unk>.
Say until late last year and at that point, we started looking at to try to understand exactly what the impact was so here's here's what we know we know that.
That.
Roughly across the country over the over the last several years.
10%.
<unk>.
Americans are people in the United States.
Have used the.
Some kind of medically prescribed drug.
And that's inclusive of the ones that are considered the <unk>, one drugs as well as any other prescribed drug and that currently about 3% or more.
Interesting part for us and we've done some quantitative research to better understand this.
Is it among our target consumer.
44%.
Don't want medically medically supported weight loss or the medicines to be part of their health.
Health journey or their weight loss journey, however, 41% of our target customers do want.
Medicine as part of their weight loss program or their health journey. So that's a significant portion of our target group. The good news related to that is that.
We.
Tie back to what we launched at convention as well as the pilots that we're engaged in.
Have.
The.
Yes.
That's a good fit in several areas first.
<unk> medications.
Work in conjunction with <unk>.
Life style.
Thank you.
As you know.
Both a diet some dietary changes with restrictions or caloric restrictions as well as increased exercise so.
Our entry into the.
With our active wine into the habit of healthy motion ties back to increasing our overall addressable market, but it also puts us in a good position to be a solution for those who are on the.
The drugs.
Second thing.
It is.
Positive for us is that.
Individuals' core going while these rocks and this comes from our quantitative research as well they are looking for guidance.
And specifically guidance from someone who understands where they are.
Having gone through something similar in terms of a weight loss journey, and we believe that positions us very well with our coaches having the majority having been.
On a weight loss journey or a health journey themselves. So we think all of those elements are helpful.
For us in terms of reaching the other side of this.
Just a question of how we participate and how we use what's happening.
And the medical support of weight loss space stays to leverage our client acquisition rates and move into the future with a broader offering thats more of a it's even more relevant than it has been in years past.
Okay.
And then finally you mentioned in your in your comments that certain expenses I think it was the SG&A line certain expenses were pushed out to later in the year can you comment on the nature of those expenses and quantify how much were pushed out to later in the year.
Yes so.
In those expenses.
We're looking at and we mentioned mentioned this also in the prepared remarks about.
Investments that are going to hit the P&L.
During the third quarter.
No.
We're looking at about.
In total this includes the convention Linda but not.
Which was planned for the third quarter so.
But in total when you look at.
Our total spend.
Initiatives that.
Really didn't occur other than the convention in.
2022 in Q3, it's about 565 basis points. So there is additional initiatives that.
Sure.
Some of it was thought too.
Occurred that would have occurred more in Q2 that got pushed out into <unk>.
The July August and September timeframe.
So.
The convention, obviously that was planned for Q3.
One of the bigger impacts to Q3.
Which is included in that number.
Okay, alright, thanks, a lot that's it for me.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Dan Chard for any closing remarks.
Wed like to thank everyone for joining today and we look forward to speaking to you next quarter and hope to see many of you at the Wells Fargo Consumer conference in Southern California in late September .
Have a nice evening.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.