MEDIFAST INC

Good afternoon and welcome to Medifast's second quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Reed Anderson of ICR. Please go ahead.

Good afternoon and welcome to MediFast's second quarter 2021 earnings conference call. 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 period ended June 30, 2021 that went out this afternoon at approximately 4.05 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Medifast's website at www.medifastinc.com. This call is being webcast and a replay will be available on the company's 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 reliance should not be placed on them. Actual results could differ materially from those projected in any forward-looking statements. METAFAST assumes no obligation to update any forward-looking projections that may be made in today's release or call. All of the forward-looking statements contained herein speak only as of the date of this call. And with that, I would like to turn the call over to METAFAST's Chairman and Chief Executive Officer, Dan Chard.

Thank you, Reid, and good afternoon to everyone who's joined. Thanks for taking time to be with us today. On the call with me today is Jim Maloney, our Chief Financial Officer. I'm going to provide a brief overview of the second quarter, then Jim will run through our financial results in more detail. Following our prepared remarks, we will open up the call to take your questions. Our second quarter results were very strong, building on the momentum we experienced in the first quarter. The results reflected our strong performance in attracting and retaining coaches and empowering them with a unique infrastructure and education helped them be as effective and productive as possible in attracting and supporting clients. Revenue increased 79% to $394 million in the quarter, driven by growth in the number of independent Optivea coaches coupled with further improvements in coach productivity. The number of active earning Optivea coaches reached approximately 59,200 at the end of the second quarter, a record high that is 62% above the same quarter last year, and up nearly 13% sequentially. Revenue per active earning OPTAVIA coach was $6,662, another new record, up nearly 14% versus last year and 3% sequentially. The continued productivity gains we are seeing has been fueled by the development of infrastructure and education that help coaches learn how to support a greater number of clients than has historically been possible. This field-led training approach leverages social media and communication technology platforms to engage clients and support and train coaches. We've been investing substantially in technology and digital processes with an emphasis on creating unique infrastructure and education to help OPTAVIA coaches leverage their time and talents to efficiently serve clients. While it's still very early, we can already see the benefits from these efforts based on the strong trends in coach-level productivity, Our digital product teams have been developing two apps. The first is the OPTAVIA app, which primarily targets clients and features lean and green recipes, self-service options related to OPTAVIA premier orders and returns, and other key information to stay engaged. The OPTAVIA app went live in April for coaches and in July for clients. The second is the Connect app, which is for coaches on the go who need data and insights to help them manage their business efficiently. The beta version of the Connect app went live in April and is currently being utilized by nearly a third of coaches with a broader rollout expected over the balance of the year. In addition to our proprietary apps, Optivea coaches continue to refine their social media and other communication platforms to manage their business and drive deeper connections to serve existing customers and attract new clients. It's clear that interest in health and wellness across the board continues to be extremely strong. A recent study of consumer health priorities and motivators commissioned by Medifast found that 93% of US adults have health and wellness goals and 84% are actively working towards achieving them. Two-thirds of Americans say the biggest motivator for staying consistent with health and wellness goals is feeling good mentally and physically, defined by having more energy and reducing stress and anxiety. OPTAVIA's unique model has proven effectiveness in helping people achieve their individual goals around health and wellness, and the resonance of this model is demonstrated clearly in the results we've announced today. As we drive further demand through a growing number of coaches, it's important that we continue to develop our supply chain capabilities to be able to meet the needs of the field. We achieved our $2 billion manufacturing capacity target in the second quarter, six months ahead of the original goal through the expansion of relationships with co-manufacturers. Given our growth trajectory and outlook for the future, this additional capacity is crucial to meeting the needs of our coaches and clients as well as continuing to deliver strong returns for shareholders. Scaling our fulfillment capacity to an equivalent level is also in process with an expected completion date in the third quarter of this year, three months ahead of the original goal. We added an internally managed There were no promotions in the quarter as the strength of our coach-based model and field-led training continued to drive strong engagement and activation. Importantly, since we were lapping the Essential Start promotion from last year's second quarter, The absence of promotion provided a nice lift to gross margins, which improved by 210 basis points in the same quarter last year. This underscores a key differentiator with our model versus other direct selling models. That is that we focus on empowering coaches to serve clients by educating them on the habits of health system, using a holistic community-based approach to help them transform their lives one healthy habit at a time. Looking at the third quarter, we will repeat our Business Builder program and expect this to further grow the number of OPTAVIA coaches helping our business as we move ahead into 2022. Last week, we concluded our biggest ever annual convention, which was held in the new hybrid format and saw more than 15,000 global registrants. Recall that the 2020 event was modified to be virtual only due to the global pandemic. While partnering with the Georgia World Congress Center in Atlanta and following statewide COVID-19 safety regulations for the in-person experience, we also offered a livestream component for attendees who participated from home. Attendees experienced valuable coach-led educational sessions, panel discussions, and company updates, along with celebrations of their success in transforming lives around the world. This year's event also placed an increased focus on community engagement and team building following the 2020 virtual event. We believe OPTAVIA's unique offer complete with the support of a coach community, habits of health transformation system and our clinically proven plans and scientifically developed OPTAVIA brand nutritional products provides a holistic solution consumers need to make their health goals a reality. Before turning the call over to Jim, I want to share some comments on corporate social responsibility. We continue to join forces with the OPTAVIA community to support our philanthropic initiative, Healthy Habits for All, which empowers generations through education and access to healthy habits. As part of 2021 convention registration and outside donation opportunities, the OPTAVIA community gave back through the company's philanthropic initiative, Healthy Habits for All. This coach-led fundraising initiative raised over $100,000 for worthy nonprofits and advanced the company's mission providing children with education and access to resources that support healthy habits. To date, alongside with our OPTAVIA community, the company has funded up to 8 million nutritious meals for children facing hunger. METAFAST's commitment to lifelong transformation is not just the result of the work our OPTAVIA coaches do, but also a result of our active support of the communities in which we live and work. Let me now turn the call over to Jim Maloney, will walk us through the financial results. Jim?

Thank you, Dan. Good afternoon, everyone. Revenue in the second quarter of 2021 increased 79.2% to $394.2 million from $220 million in the second quarter of 2020, reflecting continued growth in the number of active earning OPTAVIA coaches and higher per coach productivity which resulted in more clients participating in our optimal weight five-in-one plan. We achieved another record for active earning OPTAVIA coaches ending the quarter with approximately 59,200 generating sequential growth of 12.8% compared to Q1 and an increase of 62.2% from last year's second quarter. Average revenue per active earning Optivea Coach for the second quarter was $6,662, setting another record and up 3.2% from the prior high that just last quarter. Versus a year ago, revenue per active earning Optivea Coach was up 13.9%, Gains in productivity per active earning OPTAVIA coach for the quarter continue to be driven by an increase in both the number of clients supported by each coach as well as an increase in average client spend. The growth we're seeing in new coaches and in per coach productivity is closely related to our approach that better leverages field-led coach training and social media and communication tactics. technology platforms. Gross profit for the second quarter of 2021 increased 84.4% to $293.7 million compared to $159.3 million in the prior year period. Gross profit as a percentage of revenue was 74.5% up 210 basis points compared to 72.4% in the second quarter of 2020. We did not offer any promotions during the second quarter as we lapped the Essential Start promotion from last year and that was the primary factor that drove the year over year improvement in gross margin. With the anticipated acceleration in demand of OPTAVIA branded products, we expect pressure on gross profit margin through the remainder of 2021 due to the planned higher level of use of co-manufacturers. Additionally, we are seeing higher levels of inflation in raw ingredients, freight, and labor costs that will add pressure to our gross profit margin for the second half of 2021. To protect our overall profit margins in the short term, we will continue to focus and manage our costs. while investing in supply chain and technology for our long-term growth objectives. We believe gross profit margin as a percentage of revenue will improve in the longer term as we develop pricing strategies, enhance our distribution network, reduce freight costs by shortening shipping lanes, and gain productivity improvements in our supply chain processes as we scale our business. SG&A for the second quarter of 2021 increased 77% to $232.3 million compared to $131.2 million for the second quarter of 2020. The increase was primarily due to higher OPTAVIA commissions, increased salary and benefit related expenses for employees, increased consulting costs related to technology projects and increased credit card fees resulting from higher sales. SG&A as a percentage of revenue decreased 70 basis points year over year to 58.9% versus 59.6% in the second quarter of 2020. Income from operations increased $33.3 million to $61.4 million from $28.1 million in the prior year period, reflecting significant improvement in gross profit margin coupled with leverage of SG&A expenses. Income from operations as a percentage of revenue was 15.6% for the quarter, an increase of 280 basis points from the year-ago period. The effective tax rate was 23.4% for the second quarter of 2021 compared to 22.1% in last year's second quarter. Net income in the second quarter of 2021 was $47 million or $3.96 per diluted share based on approximately 11.9 million shares of common stock outstanding. This compares to net income of $21.9 million or $1.86 per diluted share based on approximately 11.8 million shares of common stock outstanding in last year's second quarter. Our balance sheet remains very strong with cash, cash equivalents and investment securities of $197.4 million as of June 30th, 2021 compared to $174.5 million at December 31st, 2020. The company remains free of interest bearing debt and believes it is well positioned to execute its growth strategy. On the first quarter call, I provided additional detail around our capital allocation priorities and discussed that we expect higher levels of capital expenditures over the next 24 months to expand our technology and supply chain capabilities. Additionally, we expect that stock repurchase was going to increase relative to our dividend. To that end, during the second quarter, we repurchased $12.2 million of stock, which is up from $7.5 million of repurchase activity in the first quarter, bringing our year to date total to $19.7 million through the first half of 2021. Given our strong financial condition, expectations for future cash flow growth, and the relative valuation of our stock, we anticipate continuing to prioritize buybacks as a means of adding value for shareholders in the foreseeable future. Finally, in June 2021, our board of directors declared a quarterly cash dividend of $16.9 million, or $1.42 per share. which is payable on August 6th. Turning to our guidance, which we reinstated last quarter, for the full year 2021, we expect revenue in the range of 1.425 billion to $1.525 billion and diluted EPS to be in the range of $12.70 to 14.17 cents Our guidance also assumes a 23.25% to 24.25% effective tax rate. As discussed, we are expecting pressure on gross profit margin in the second half of 2021 due to the increased levels of use of co-manufacturers in the coming months to meet the accelerated demand in OPTAVIA branded products and due to inflation factors. In Q3 this year, we successfully returned to an in-person convention that will increase SG&A expenses in Q3. Finally, in Q3, we will be repeating our business builder program and expect this to further grow the number of independent OPTAVIA coaches and help our business as we head into 2022. The business builder will be recorded in SG&A expenses in Q3. In closing, second quarter results were strong and we remain confident in our business model and are well positioned to capitalize on the opportunities that lie ahead. 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 star then 1 on your telephone keypad. If you are 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Chris Neomanis with Jefferies. Please go ahead.

Hey, everyone. First off, congrats on another strong growth quarter. I just wanted to hit on the guide here. Just looking at the high end of the guide on revenue would imply sort of a flash level of sales relative to this quarter. I'm wondering if you could help us think about what the sort of So, Chris, thanks for your question.

you know when you look at the guide itself on the top line you know when you look at the top line end of it we raised it 50 million for the year you know as as we mentioned in our you know our notes we mentioned that that you know we're looking solid regarding our supply chain. So, you know, Dan mentioned that, you know, we hit the $2 billion mark or target for manufacturing and, you know, which was six months ahead of schedule. And in Q3, you know, which is three months earlier, we should be able to do the same thing in fulfillment. So we're not seeing any constraints and I think we're on the path of having no disruption in those means.

Great. And then my second one would just be on productivity per coach. Obviously extremely strong in the quarter but with kind of the re-implementation of the business builder program should we expect that to maybe trend down or remain kind of slightly flattish through the back end of the year? I'm just thinking kind of the inherent drag from a mix of bringing on newer coaches that would obviously have less clients.

Yeah, Chris, this is Dan. As you know, we don't give guidance around the productivity number, but we do talk about what our philosophy is. Our focus is on building tools and programs that enhance the productivity of our coaches, allowing them to support an increasing number of clients. That's what's driven the productivity number over the last several years. So we don't anticipate that anything we're doing would cause a diminished productivity per coach, including the business builder promotion.

that's great thank you and then my last one I'll hop back in the queue maybe I'm just wondering about kind of the puts and takes around the retroactive implementation of the business builder program maybe if you could tell us why you thought it was important to backdate the start of it to July 1 sure this is the third year we've run the business builder promotion and so we ran it 2019 last year in the same period and now again this year

Each year we focus on taking the learnings from the prior year and in some cases enhancing or adjusting to reflect new learning. So in this case, we felt like there was some ways to make it more effective and more efficient by pulling in coaches who were new coaches in the July period. Again, anticipating that we can make it into an even more meaningful part of the overall program as we go forward. This is one of those repeatable promotions that we have been using to enhance the back half of our year. The whole focus is taking the period of August, September, and October and rewarding the client attraction activity that takes place with our coaches as well as Thank you for joining us today. over the previous two years and finding ways to continuously improve.

That's great. Thank you and congrats again. Thank you.

Again, if you have a question, please press star then 1. The next question comes from Doug Lane with Lane Research. Please go ahead.

Yes, hi. Good afternoon, everybody. Jim, staying on the guidance here, it's safe to say that $25 to $50 million increase on your revenue range was mostly due to 2Q upside, whereas the EPS range staying very close to what it was is due to increased gross margin pressures that you've seen since you last gave your guidance back in May.

Yeah, I mean, we did have a very strong quarter. you know we believe you know the growth will continue over the coming quarters you know we raised the guidance you know you know if you look at the midpoint we raised it about 37 million in the top end we raised it 50 million we also raised the guidance for EPS but not to the same degree as you mentioned and it really comes down to you know Looking at the accelerated growth we've had over the months, the use of co-manufacturers and the inflation that we're seeing has not provided as much leverage to our P&L as you would think. Also, when you look at the back half of the year, The convention costs are going to be recorded in Q3. And then also the business builder, as you mentioned, will be recorded in Q3.

And in years past, you had the leadership, the ILAT trip. Do we have an update on whether you'll be accruing for that for next year or is that, have you moved on from that?

Yeah, I mean, we're, you know, we're about we evaluate those types of things each and every year there hasn't been a decision made on that at this point but you know we're always looking to see if we can make enhancements to add to coach productivity so we're always looking at programs

and making determinations but as of this as of right now we haven't made a determination okay fair enough and then um on inventories they were up um pretty substantially sequentially up about 50 percent and i just wanted to put that into some sort of context um given that you had such a rapid increase in demand and you had supply chain

constraints if you will is this inventory build a step towards alleviating some of these constraints uh yes so so our inventory days uh since March increased about 25 percent and it's really you know you know if you can if you can recall back uh last October uh November time frame we were talking about uh intentionally stocking out certain SKUs the lower volume SKUs and and the increase we've always had a plan to increase the number of inventory days so we so we can reduce the amount of stock outs in the future so that's what you're seeing in our balance sheet okay that makes sense and just lastly

Dan, we talked about the increased coach and coach productivity and that you're obviously seeing good interest in becoming coaches among your newer cohorts here, but can you just give us sort of a qualitative assessment on how the leadership ranks are filling out? Are they moving up in leadership ranks at a normal kind of pace?

Yeah, they are. The progression through leadership ranks has been very healthy. and what we're seeing from a productivity standpoint is a reflection of the continued improvement in how our coaches are using social media and other communication platforms in the technology space to extend their reach. We've also, as I mentioned in the earnings script earlier, have launched two new apps. to help them as well. So all of our investments as we look at them, we look through the lens of how do we make our coaches more efficient and more effective at attracting, supporting new clients and also sponsoring and training new coaches. So those are kind of the four competencies. And as we help support those four activities, The outcome of that is improved coach productivity. We keep finding new and effective ways to help support and make that happen, which is what you're seeing with that number increasing. Okay, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Dan Chard. for any closing remarks.

I'd like to thank everybody for joining. In particular, any Optivia coaches who have joined, let them know how much we appreciate their efforts to deliver this strong quarter, as well as all of our investor base. We look forward to speaking with all of you again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.