Medifast, Inc. (MED) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome back from lunch. Next up, we have Medifast. And here to present today is CEO, Dan Chard. [Presentation]

Good afternoon. It's great to be with you this afternoon. What you just saw was a reel of our PR campaigns that have taken place in the 12 -- in the past 12-plus months. Why this is important is not just because it's part of our brand-building campaign, but this is also what our coaches throughout the country and Asia are using to [ share ] the OPTAVIA message. So for those of you who are new to our story, I'll be sharing with you a little bit about who Medifast is, what we do, what we've been doing for the last 3 years, which is a period of time when we have changed our model, focused completely on coaches, and then lastly, talk about what our plans for growth are. So first of all, Medifast at a glance. So if you think about the company, historically, we've been a company that's focused on 4 different channels. At the beginning of 2017, we began to fold the company in on itself and focus on the coach model. So think about Medifast as the company behind one of the fastest-growing health and wellness communities, which we branded in 2017, OPTAVIA. We're a differentiated, direct-to-consumer business, which means that the way we communicate or -- is through a word-of-mouth campaign that's generated through our 32,200 coaches that initially started as clients. That's one of the unique aspects of the business. We're not out there hiring coaches of a certain background. These are people who began their health transformation with -- as a client first and they decided they wanted to pay it forward, and liked what they were doing and -- to become an OPTAVIA Coach. Another key difference for the company is that 100% of the products that we sell are shipped directly to the end user. So we're leaders in offering this personal coaching service. We started doing this almost 20 years ago, and it was very -- quite unique now. Now we have more people doing it. But the way we offer it is quite unique in terms of what I just mentioned, previously -- previous clients performing the coaching. But they're also, in terms of who our target is, is quite unique. Our coaches target specifically people who are disillusioned with dieting, which we define as people who have tried and failed on a diet, who are looking for a different way to achieve their health goals. Another interesting aspect of who we are is that as clients join, they go on plan, which means that 85% of our orders are subscription-based, meaning automatically reorder from month-to-month as clients continue to stay on plan to achieve their goals. Lastly, is the science behind our programs. In the last 10 years, we've had over 16 peer-reviewed articles that are focused on using our products and our method and our plans, and proving out about how this helps individuals achieve their goals. In terms of what we do, how we do it, we empower passionate and engaged communities of people committed to a healthier lifestyle. So they don't join because they're trying to find a new diet, they don't join because of an opportunity, they join because they have a passion and a focus on becoming healthier individuals. Our network of talented coaches are all focused on providing the encouragement and inspiration. This is one of the insights that allowed us to take and focus our business on the coaching model. And the essence, everything ties back to our mission, which is to offer the world Lifelong Transformation, One Healthy Habit at a Time. And we'll talk a little bit more about how that habit education ties back to the growth and the positive things that we're seeing for the company. I think there are 2 kind of misunderstandings about our business and our business model, which result in 2 questions. The questions are, tell us how you, as a company, are able to work through the changes and the fads in the diet season, and our answer is that we're not a diet company. And the other one is, tell us how you seem to be breaking the trends that are taking place in the direct selling industry. And our answer is that while we share some of the characteristics of a traditional direct seller, our model is quite different. So as you think about what we do, we're a health and wellness community. We don't have a selling network. The coaching service is offered as part of a program. We have clients and certified coaches. A traditional direct seller has distributors/sales agents and wholesale buyers. We are client service -- we provide client service and community building, long-term sustainable growth, holistic health and wellness programs, lifestyle transformation focus. And lastly, and this is an important one, our coaches do not buy inventory and they don't handle transactions. All of that operational element and all the products are shipped directly to the end consumer. So we know who they are, where they live, how much they purchase, which turns out to be a significant advantage for us, but also, as I mentioned, a key differentiator for us as a company. From an investment standpoint, we're an innovator that's differentiated, that is science-based and ties products and programs together. We're in a large growing market opportunity. If you go back and look and see whether the country is getting more healthy or less healthy, that number of people who are obese and overweight and who feel unhealthy continues to grow. Now over 2/3 of Americans are either obese or overweight. Scalable, coach-based, direct-to-consumer model. We're attractive and highly predictable business model, and we will talk about how we grow and how that happens. We generate significant free cash flow. And we have a very attractive capital allocation strategy, which means that we don't require a lot of capital to grow. And a demonstrated track record that shows that there's a lot of room for future growth. So just in terms of sharing a couple of metrics that support this. So if we look at the last 12 months, the running top line was around just under $700 million, $92 million in operating margin. That translates into a 60% topline compounded growth the last -- 60% in the last 12 months and 62% operating margin growth. Ties back to the variable nature of our cost model, 70% of our SG&A is variable. This has largely to do with how we acquire clients. This is a word-of-mouth business that's largely executed through social media. So we don't incur a cost of acquiring new clients, it's basically our coaches who do that through social media platforms. Roughly 2% capital -- CapEx investment as a percentage of revenue. Our -- the last 12 months free cash flow of $75 million. Our free cash flow conversion also very efficient, 93%. And return to shareholders over the last 12 months was $76 million. So if you look at this longer term, one of our big focuses is on making sure that we are both generating and returning capital to our investors. Between 2014 and third quarter of 2019, we returned over $185 million, which is roughly 84% of our cumulative cash flow. If you look at our balance sheet, also very solid. We're debt free. Have $97 million in cash. And have consistently, since we initiated our dividend, increased that on an annual basis. Now stands at a quarterly dividend of $1.13. So we feel like we're fairly unique in both returning cash in the form of dividend and also a significant amount of share buyback. Over the past 3 years, as we've transitioned to our new model, we've added a significant number -- significant amount of talent. So this represents my management team. Represents -- reflects both a lot of experience in traditional direct selling that's tied back to technology, but also some representatives from [ indiscernible ] for some significantly sized businesses. So we feel like we have the talent and the capacity to leverage that talent to continue to operate well into the future as our business becomes more complex. And also, as we continue to expand internationally, we also have that experience. So let me talk just for a few minutes about where we are as a company in terms of our current performance. Our model was started on 2 really simple insights. One is that for the end consumer to win, they are much more likely to achieve their goal if 2 things happen. One, they're connected to a coach that provides support and tied into a community of people who are going the same -- through the same thing that they are. And secondly, it's not that you can -- not only give them support, but teach them a set of new habits that we call healthy habits, so that they don't have this yo-yo impact of becoming healthy and then not healthy. So we actually try to embed those habits into their lives. From there, it starts with a coach. The clients are introduced to the success of the program by a coach. A portion of those clients who go on program and achieve their healthy weight ask or are asked if they would like to pursue a career or a part-time position in coaching. A certain portion of those clients accept that opportunity, and that circle repeats itself. So coaches attract clients, service clients. A portion of those clients become coaches who then attract clients and the cycle repeats itself over and over again. Our business strategy is also simple and tied back to that. It's a scalable business model, and we say it's scalable because it's -- the capacity is basically tied to that 2/3 of Americans or large portions of the world who would like to be more healthy. They tie into our clinical plans or clinical proven plans and use our scientifically developed products to achieve their long-term health goals through the encouragement of their coaches. Our growth areas, or, in other words, where we're focusing our investment dollars and where we think we can be better, tie back to operational effectiveness. We'll talk a little bit about -- more about how that's playing out. We had a little bit of a bump as we announced our third quarter earnings, but we are confident in where we are today. Creating an enhanced experience for both clients and coaches, continuing to innovate behind our programs, which goes beyond just -- not just innovating behind products but also how we communicate, how we support, how we make our coaches more efficient in executing this model that I mentioned. Our technology, we've replaced virtually every one of our systems, and we'll replace the last system in this upcoming -- the end of the -- the beginning of the third quarter as we continue to make investments in technology to make it much easier to be a coach and the experience better for the end client. And lastly is expansion. And we view expansion in 2 ways. One is how we continue to penetrate the United States, but also how we continue the expansion beyond the United States. We opened up in 2 markets, Hong Kong and Singapore, this past July and view those as gateway markets into the rest of Asia Pacific. We've been asked a lot in the past, how does this business build? I mean, what gives you confidence that it can grow long term. And so we're adding a few metrics to this year's investment deck to help you understand how we are looking at the business. This reflects a new partnership with Nielsen, the consumer products tracker, and reflects some of the key dynamics that we see in our business as we look at it relative to other consumer brands. So our repeat rate is roughly 2x the consumer product benchmarks that we look at. So the benchmark brands that we're looking at are those brands that are in the health and wellness food space. So things like Lean Cuisine or meal replacements like CLIF BARs. Our spend per consumer or per client is roughly 20x what the average consumer product is. And that's because of that dynamic that I mentioned earlier. They're becoming part of a plan, which we talk about as helping them start living that, the first habit of healthy eating, which means that while they're on plan, we feed them 80% of their meals. We feed them 5 meals. Those are our prepackaged meals. And then the last meal, we teach them how to make, which we refer to as a Lean & Green meal. We have an 86% retention rate, which means that during a 52-week period, any consumer who tries our product will repeat again. And 50% of consumers who use our products will repeat 4x or more. This is another chart that we're sharing for the first time. It's reflective of how we look at our markets. If you think about -- if you look at the left, this is a snapshot of our coach distribution in the end of fiscal year 2016. Darker colors representing states where we had more than 1,000 coaches, with the lighter colors being less concentration in coaches. You can see Alaska and Hawaii at the bottom. And as you move from left to right to the end of fiscal '19, you can see that our penetration or our distribution of coaches is increasing, for the most part, across all of the states. Most of them moving from one range into the next. And this is reflective of the relevance of our offer to the broader population in the U.S. To the bottom, you can see Alaska and Hawaii. And now to the right, the added markets of Hong Kong and Singapore. So what we anticipate over the coming years is for those -- all those states to turn -- start turning darker colors. And then at some point, we'll start transitioning and changing the scale. But again, our focus is on penetrating the populations across the United States and in our new markets. What that looks like, as you translate it into the active-earning coaches, is significant growth. The green area to the right of 2017 represents a period during which we changed from our old model focused on 4 different channels to our coach model. And the purple squares represent the productivity per active-earning coaches. So those 2 metrics: number of active-earning coaches, the bars; and productivity per active-earning coaches, [ improved ] coach, those small purple squares inside the bars, are the core -- make up the core of what we consider our economic engine. So you saw -- you can see the growth that started in 2017 accelerated in 2018. We had a stated goal of doubling the number of coaches by the end of 2019. We achieved that goal early in the second quarter of 2019. And for the last reported quarter, reported 32,000 coaches and increased our coach productivity by a little bit more than 20% over that same period in time. One last point here. We also have a stated goal to achieve $1 billion in top line revenue, which ties to about 50,000 coach number, which is a 2021 target. If you translate that, those same numbers into revenue, you can see the same growth [ trend ] happening, for the end of 2016, growing 27 -- 10% to 2017, to $302 million; achieving our first goal, which was $500 million in 2018; and projected, based on our guidance for 2019, to be between $700 million and $710 million, which is a 40% growth over last year. Our compound -- long-term compounded growth rate to get the 2021 target, the 50,000 coaches and the $1 billion, is roughly 20% [ beyond ] that. You can also see the leverage that we're getting on the operating income side and the diluted EPS growing consistent with those -- with that growth. So what are our plans for growth as we look forward. Five very specific areas. One is optimizing our operational efficiencies, meaning building a structure that allows us to grow and achieve our goals long-term without creating any disruptions in our business. Second is to enhance the overall coach experience. Third, utilize technology to maximize performance. Fourth, driving performance in both development and innovation of our programs. And lastly, to continue the expansion, which I'll describe momentarily. So let's first talk about achieving these -- the operational effective. First of all, it's around the creation of the organization, and that includes both the processes and the systems that will be capable of supporting that continued growth. We're also maximizing the efficiency of these operational areas. So when we reported our Q3 earnings, we talked about a couple of different challenges in the areas of payment systems, in the areas of -- in the area of supply chain and, lastly, in technology. So this is all reflective of putting in place a solid foundation for that. We also want to make sure that these operations are scalable across the geographies that we're going to. So a quick revisit to how we're doing. What we committed to do in the final quarter of the year, the fourth quarter of 2019, was to initiate a number of fixes to our operational areas that would allow us to get back on track so we'd start 2020 on solid footing. So happy to report that we're able to successfully execute that plan. Our bad debt related to credit -- the credit card scheme that was -- was what had affected that in the third quarter. Our bad debt is normalized and we don't foresee any continued carrying forward problems with the credit card challenges that we had that we reported last year. The other metrics that we look at are comprised of both in-process measures and qualitative measures that we look at as we move forward in our business. So product returns as a percentage of sales have trended in the right direction and are normalizing. All of our call center metrics, in terms of how many calls we get related to lack of performance to standard service levels, have returned to normal. Our consumer metric which we look at, which is a consumer Net Promoter Score, is where we would expect it to be. And our monthly client retention levels were also -- have also returned and trending towards the normal levels. So we feel like we're starting out the first quarter of 2020 having resolved, for the most part, those challenges that we talked about. And I say for the most part only because we have just a couple of weeks of trends that everything is moving in the right direction. Second area is enhancing our overall coach and client experience. So we've put in place in our call center a new CRM system, which allows us to more quickly and more completely resolve issues that our clients have and that our coaches have. Supply chain and support enhancements are complete. We still have some CapEx improvements that we'll be making to continue to increase our overall production capacity as we start to look at the out-years, but we have exactly what we need to execute in 2020. We're now starting to focus not on just having our technology doing what we said it's supposed to do, but now we're improving the user interfaces and the experiences that coaches and clients have as they're using our technology. We have also reformulated any one of our products that we have tested that doesn't meet a standard benchmark for the hedonic scores that we use to measure liking of our products. Third area is around technology. We've, as I mentioned earlier, replaced all key mission-critical systems, including a new coach business suite, which allows our coaches to understand, measure in real-time how their business is doing. So think of this as how our coaches track and support their clients, gives them deep visibility into their organization and allows them to make adjustments about where they focus their time and efforts. We put in a new e-commerce system that now is what we believe is stable and operating effectively, and we've put in place new social tools that helps our clients achieve -- our coaches achieve what they need to in terms of sharing and attracting new clients. And we're developing -- we just engaged a new partnership to roll out a new cloud-based learning management system, which we believe will improve and help with the productivity of our coaches as they continue to train other coaches. To the right, you can see -- and we've talked for a little while about our mobile app. We delayed that to allow us to address the operational improvement initiatives. But it's now planned to launch in the second half of this year first into our 2 Asian markets of Hong Kong and Singapore. The fourth area relates to our drive to our drive to improve our -- both our programs and our education systems all around these healthy habits of nutrition, hydration, sleep, movement and aging. And then the last area of improvement is about market penetration, which includes both how we penetrate our existing markets, both regionally, generationally, increasing our diversity, but also how we expand internationally. So in summary, we believe we have reestablished our -- where we are from a business rhythm standpoint, and that 2020 will be a great, solid year for us as we continue to focus on our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time. Thank you. We'll be available in our breakout sessions for questions.