Medifast, Inc. (NYSE:MED) Q3 2020 Results Earnings Conference Call November 2, 2020 4:30 PM ET

Company Participants

Scott Van Winkle – Investor Relations

Dan Chard – Chief Executive Officer

Jim Maloney – Chief Financial Officer

Conference Call Participants

Kara Anderson – B. Riley FBR

Sebastian Barbero – Jefferies

Linda Bolton Weiser – D.A. Davidson

Doug Lane – Lane Research

Operator

Good day. And welcome to the Medifast Third Quarter Fiscal 2020 Earnings Conference Call. All participants will be a listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Scott Van Winkle. Please go ahead.

Scott Van Winkle

Good afternoon, and welcome to Medifast’s third quarter 2020 earnings conference call. On the call with me today are Dan Chard, Chief Executive Officer, and Jim Maloney, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended September 30, 2020, that went out this afternoon at approximately 4:05 PM Eastern Time.

If you’ve 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 upon them. Actual results could differ materially from those projected in any forward-looking statements. Medifast assumes no obligation to update any forward-looking projections that may be made in today’s release or call. All the following statements contained herein speak only as of the date of this call.

And with that, I’d like to turn the call over to Medifast’s, Chief Executive Officer, Dan Chard.

Dan Chard

Thank you, Scott, and good afternoon to everyone joining us. Thanks for taking time to be with us today. On the call with me today is Jim Maloney, who is now a little more than three months into his role, as our Chief Financial Officer. After I’ve provided some updates on our business performance over the course of the last quarter, Jim will review the Q3 financial results in more detail. We’ll then open up the call to take your questions.

I’m pleased to say that despite the wider issues felt by the retail sector during the global pandemic, Medifast has seen strong acceleration in growth during the third quarter. Revenue increased 42.8% to $271.5 million, and earnings per diluted share increased 120.5% to $2.91. This growth was driven by significant year-over-year and sequential improvements in the number of active earning coaches, which grew to 42,100 independent OPTAVIA Coaches in the third quarter, a new record level.

Productivity per active earning coach also increased sequentially to a record level of $6,329, driven by an increase in both the number of clients supported by each coach, as well as an increase in average client spend versus Q2. This important shift forward in coach productivity comes as a direct consequence as our continued focus on building tools, programs and processes that allow coaches to be as efficient as possible, as well as the relevance of our health and wellness offer in an environment where consumers are looking for lasting solutions to their health and wellness needs.

While the COVID-19 pandemic continues to cause economic and social uncertainty for businesses, we feel confident in our ability to derive long-term sustainable growth to deliver on our mission to offer the world lifelong transformation, one healthy habit at a time.

Since the end of 2019, we have taken a number of important steps to accelerate the growth of our business. Coupled with some quick responses to the pandemic, these initiatives are now delivering meaningful progress, which is represented in the numbers we have announced today.

Importantly, we feel that the adjustment we’ve made to our business over the last two quarters has created some important learnings, which are now being used to further optimize our ability to deliver against our long-term growth vision.

The company’s focus continues to be on supporting our growing community of OPTAVIA Coaches, as they develop and focus on the four competencies that drive our business success, namely, attracting new clients, supporting clients on the Optimal Weight 5&1 Plan, sponsoring new coaches and developing coach leaders.

The specific adjustments we made to our business during the second and third quarters consisted of supporting coach-lead training, a compelling incentive structure and a refined approach to how our coaches are leveraging social media. With the new programming in place, our community of coach leaders drove sustainable gains in both new clients and new coaches.

A deep dive into this new cohort of clients shows us that we have tapped into a new group of consumers that may not have previously tried our products, but whose behavior is entirely consistent with our existing core client base, as measured by retention and lifetime value.

We’re also very encouraged to see that higher levels of coach conversion from this new client cohort. We are excited by these trends and are looking forward to build on their success in the coming months ahead.

The health and focus of our coaching client community remain strong, with our coaches highly engaged is enthusiastic about the opportunity that lies ahead for us all. We just returned from our Global Alignment Summit in Sundance, Utah, where we met with top leaders to discuss plans for the upcoming year. I believe that the company and the field is more aligned around our mission than at any point in our history. And I’m enthusiastic about the prospects of driving operational and transformational success in 2021.

With revived coach initiated training structure, robust level of client acquisition, strong trends and coach conversion, and new insights around how to leverage new incentive and promotional structure, I believe we’re well positioned to drive continued growth.

As we look to take advantage of the opportunities to scale over the next few years, it’s important that we continue to build our technology, our manufacturing and distribution operational platform in order to give us the infrastructure to power our growth. With that in mind, we began taking deliberate steps earlier this year to ensure that we have the necessary runway to continue expansion.

Like many similar businesses, we made some proactive moves at the start of the pandemic to ensure that we would be able to handle both changes in demand and changes in working practices. We prioritize production to our highest volume products, limiting our SKU assortment to ensure that we would be able to meet the product demand across the core items and mitigate the risk of disruption to our supply chain.

This approach resulted in uncharacteristic out of stocks in less prominent SKUs, while this created some headwinds to our client experience. This move also accelerated some of our long-term efforts to consolidate our Medifast brand and products to create deeper focus around our OPTAVIA brand.

And currently, we have been accelerating our long-term supply chain initiatives to ensure that we create the bandwidth to handle our anticipated growth over the next several years. Specifically, we have bolstered our management capabilities in the space with the addition of Lauren Walker, as our new Head of Global Supply Chain Operations. Lauren is a seasoned supply chain executive with critical experience and driving long-term sustainable growth, both direct sales and fast moving consumer goods businesses.

He most recently served as Chief Supply Chain Officer at Young Living Essential Oils, overseeing the company’s integrated supply chain, as well as Engineering, Enterprise Project Management and new market expansion. Prior to Young Living, she helped several roles with Amway Corporation, most recently serving as Vice President Manufacturing and Technical Support Organization. She also held various positions at industry leading companies, including Church & Dwight, Johnson & Johnson and Procter and Gamble. Lauren is an exciting addition to the team and we are already seeing meaningful benefits from her involvement within the first two months of her tenure.

Next, we have made intentional moves to increase our capacity in both powder and bar manufacturing as well as distribution. We have done this through relationships with an expanding network of coal manufacturers whose facilities have been qualified to manufacture our products. This new manufacturing capability came online in October, and will continue to scale as we move into the next year, ultimately, more than doubling our current manufacturing capacity by the end of 2021. We’re also scaling our distribution capability to match our manufacturing capacity.

In addition to our supply chain enhancements, we continue to focus on our technology investment and capability. At the beginning of the year, we announced the opening of our new technology center in Utah to further enhance our coaching clients support capabilities and strengthen our growth platform. We’ve now occupied the new space and our building out our capabilities amidst the challenges of the pandemic.

The key initiatives from our technology team have included the alpha testing of two new apps focused on coaches and clients. The first OPTAVIA Coach Connect is an app designed to further increase the productivity of our coaches, by giving them access to customize tools to manage their OPTAVIA coaching business. Testing is now complete, and we will launch the beta version of the app in the United States in the first quarter of 2021.

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The second is the OPTAVIA Client app, which is focused on creating easy access to meal planning tools to help improve the client experience on the Optimal Weight 5&1 Plan. Alpha testing is also complete, and we will launch the beta version of this app in the United States in the first quarter.

During the quarter, we also completed the deployment of a new cloud-based telephony system designed to allow us to quickly scale our call center capability around the world to support our growing community of coaches and clients. As a reminder, we currently contract with a partner to provide call center support through the call centers in the United States, the Philippines, and Colombia. Each of these recent technology enhancements followed the successful implementation of our new ERP system during the second quarter of this year.

Whether a supply chain, technology, programming, or people, we’re consistently investing in future growth, all while driving strong momentum and margin improvement despite the inherent challenges of the COVID-19 pandemic. Our team, including our loyal independent coaches and clients continue to successfully adapt to the ever-changing environment and we’re proud to be successfully helping clients achieve lifelong transformation, one healthy habit at a time during this unique period in society as a whole.

Our focus continues to be on growing the number of individuals who are seeking greater health and wellness and providing a holistic approach to achieving greater health in our daily lives. We believe we can effectively and efficiently reach our target audience through community of OPTAVIA Coaches, who are increasingly leveraging social media channels to relate their success with the OPTAVIA Habits of Health System.

We benefit from an increased societal focus on the importance of health and wellness, and a powerful coach powered system that is clinically proven to drive improved results. Our growth vision is to achieve long-term sustainable growth in our revenue in the mid teens by penetrating the large addressable market in the United States, and then continuing our expansion in Asia Pacific markets, and ultimately developing other large markets throughout the world in the years to come.

Before I turn the call over to Jim, let me note that our commitment to lifelong transformation is not just in our work with coaches and clients, but also through our active support of the communities in which we live and work. We recently executed our week of service program, supporting living classrooms and their work to help young people achieve their full potential, and also continue to support No Kid Hungry, particularly through an initiative at our recent OPTAVIA Together Live event.

This is a business that is focused on changing the lives of the many, not the few. And I’m proud of the work that the company, our employees and our coach community are doing to create opportunities for people from all walks of life to deliver the best possible version of themselves in whatever way possible.

Let me now turn the call over to Jim Maloney, who will walk you through the financial results. Jim?

Jim Maloney

Thank you, Dan. Good afternoon, everyone. It’s been a pleasure getting to know many of you over the past few months. And I look forward to continuing this dialogue.

With that, let me walk you through our financial results for the third quarter ended September 30, 2020. Revenue in the third quarter of 2020 increased 42.8% to $271.5 million from $190.1 million in the third quarter of 2019. As Dan highlighted, we hit another record active earning coaches ending the quarter with 42,100. This represents 30.7% growth, as compared to 32,200 coaches in the same period last year, and a 15.3% increase from the end of the second quarter of 2020.

Average revenue per active earning coach for the quarter was $6,329 compared to $5,715 for the third quarter last year, and up from $5,851 in the second quarter of 2020. We have now achieved three consecutive quarters of sequential growth. Also of note, OPTAVIA branded products grew to 83% of our total company consumable units sold in the third quarter, up from 78% in the prior year period.

Gross profit for the third quarter of 2020 increased 42.7% to $204 million, compared to $142.9 million in the prior year period. Gross Profit as a percentage of revenue was 75.2%, consistent with the third quarter of 2019.

SG&A for the third quarter of 2020 increased $36.8 million to $159.5 million, compared to $122.7 million for the third quarter of 2019. The increase was primarily a result of higher OPTAVIA commissions expense, as a result of increased OPTAVIA sales and increase salaries and benefits related expenses, partially offset by a decrease in sales and marketing expenses. SG&A as a percentage of revenue decreased 580 basis points year-over-year to 58.7% versus 64.5% in the third quarter of 2019.

Income from operations increased $24.3 million to $44.6 million from $20.3 million in the prior year period, primarily as a result of increased gross profit, partially offset by increased SG&A expenses.

Income from operations as a percentage revenue was 16.4% for the quarter, an increase of 570 basis points from the year ago period. Our effective tax rate was 22.8% from the third quarter of 2020 compared to 22.7% in the year ago period.

Net income in the third quarter of 2020 was $34.5 million, or $2.91 per diluted share based on approximately 11.9 million shares outstanding. This compares to net income of $15.9 million, or $1.32 per diluted share, based on approximately 12.1 million shares outstanding in the prior period.

Our balance sheet remains very strong with cash, cash equivalents and investments securities of $169.9 million as of September 30, 2020, compared to $92.7 million at December 31, 2019. The company remains free of interest bearing debt and believes is well positioned in this challenging near term, macroeconomic environment.

Our Board of Directors declared a quarterly cash dividend in the third quarter of $13.4 million, or $1.13 per share, which is payable on November 6, 2020. This reflected a 50.7% increase in the quarterly dividend over the prior year period. It is a direct result of our strong financial position and attractive business model.

There are approximately 2,323,000 million shares of common stock remaining under our stock repurchase program. Consistent with last quarter, and due to the ongoing uncertainties related to COVID-19 pandemic, we are not providing guidance at this time. We would however, like to provide you with some insight into the first month of the fourth quarter in that October’s top line year-over-year growth trends are performing consistent with the year-over-year trends we experienced in the third quarter.

As Dan mentioned earlier, in Q4 2020, we intend to further invest in our supply chain, technology and coach incentive programming, which will affect our operating margins in Q4, but will enable our long-term growth and operating income objectives.

To close, we are prouder to report another strong quarter, especially in such a time of uncertainty and challenges. We believe the company is well positioned in a significant position of financial strength, and we are excited about the opportunities ahead.

With that, let me turn the call over for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kara Anderson from B. Riley FBR. Please go ahead.

Kara Anderson

Hi, good afternoon.

Dan Chard

Hi, Kara.

Jim Maloney

Hi.

Kara Anderson

So I just wanted to start by talking about the out of stocks. And you mentioned a little bit of a headwind to the client experience. Just wondering if you can talk about how that compares to maybe some of the disruption you saw last year in the supply chain? And then whether or not we saw any impacts from that disruption to the client experience in the quarter or that’s something we would expect to impact future quarters?

Dan Chard

Sure. Yeah, very different versus what happened last year, last year was an operational disruption, meaning that we were switching out the structure of our pick [ph] lines. This year, as we as we entered into the second and third quarter, and recognized that growth was happening more quickly. We’re growing at an accelerated rate. We deliberately to ensure that we could effectively supply with our top SKUs pulled about 36 is the count right now of our SKUs and held on them being produced to allow us to be more efficient in producing our topic selling SKUs.

So we can say that, that none of our top selling SKUs, ever went out of stock and no one was without fuelings during the quarter. We’ve now – we started in the second quarter and came online in October, with several new co-manufacturer relationships, that effectively takes our manufacturing capacity up. And by the end of the next fiscal year 2021, our capacity will be roughly double, so accelerating as we move through the year. So we don’t anticipate to having manufacturing via a headwind as we move forward.

Kara Anderson

Okay, great. And then, you know, clearly the promotion you ran in April and May and then the subsequent maybe incentives worked in your favor. Just wondering if you can discuss any plans of running some more promotions in the future, what that might look like?

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Dan Chard

Yeah, we feel like we learned a lot through these promotions. They were obviously a reaction to the pandemic environment. But as it turns out, we were able to attract a new group of clients, who probably wouldn’t have – probably wouldn’t have tried OPTAVIA previously. So it had to do with both training program that was in place in the field, a specific offer that was both for coach incentive, as well as a client promotion, and then a very specific social media strategy.

So we brought in a large cohort of clients that came in the second quarter. Our big question, as you remember, last quarter was would they act like a traditional client both in terms of their retention, lifetime value, and then our coach conversion. So we were pleased, now that we have almost six months behind us for that first cohort to see that they are acting almost identically, in some cases even a little bit better than those that came in from through traditional means.

So to answer your second question, yeah, we do anticipate using the similar type of promotion, as we head into the next year. We think our coaches are – it helps them perform at a different level, driving up our productivity per active earning coach, to a new historical high. And as well as being highly efficient from a cost standpoint. During the month that it takes place, it’s a – it has a little bit pressure on gross margin, but subsequent months, it comes back as reflected by our significant increases in our operating margin this quarter.

Kara Anderson

Got it. And then on, I guess, as we approach the holidays, and we’re seeing a rise in COVID cases, like how should we think about coach growth over the next quarter or two? Is there any seasonality or otherwise disruption we should consider when we think about building out our models?

Dan Chard

Yeah, we don’t – you know, it’s hard for us to project what the impact of wave two or wave three is going to be, so I mean, that’s the reason we’re not providing guidance. We believe we’re well positioned to work through the fourth quarter. In the past, we’ve been able to lap or be able to add sequential improvement from quarter-to-quarter. We’re not sure if that will be the case this time around, because of the changes in promotions, but we feel highly confident, as Jim stated, what we saw in October was very encouraging in terms of what we expect to see through the last quarter of the year.

Kara Anderson

Okay. And just housekeeping question from me. What was the commission rate in the quarter?

Jim Maloney

Yeah, this is Jim. It was approximately 42%. Which is pretty consistent with last year.

Kara Anderson

Yes. I see that. And then what was G&A and stock-based compensation?

Jim Maloney

So the…

Kara Anderson

Depreciation, no amortization?

Jim Maloney

Yeah. So the – hold on for one second. So the – for the quarter, it was one second.

Kara Anderson

You gave the first three quarters to…

Jim Maloney

Yeah. So for the first three quarters it was $5.3 million, and the share-based compensation for the first three quarters was $4.2 million.

Kara Anderson

Awesome. Thank you so much. That’s all for me.

Jim Maloney

Thanks.

Dan Chard

Thanks, Kara.

Operator

The next question comes from Sebastian Barbero from Jefferies. Please go ahead.

Sebastian Barbero

Hi, Jim. Congrats on a good quarter. I had a few questions. Number one, I was wondering if you could talk to the growth cadence through Q3? [indiscernible] quarter or did you see really a big boost coming out of its promotion this side of the quarter?

Dan Chard

Yeah, you were a little distorted, but I think you asked Sebastian, what are – what’s the growth – what we saw in Q2, Q3 from a growth cadence standpoint?

Sebastian Barbero

From Q3 specifically, that you see upmarket stability through the quarter?

Dan Chard

Yeah, so what we saw in Q3 was a retention rate, consistent with what we would see historically. So think about that large cohort of new clients that came in, in the second quarter, went on to repeat the way our typical cohort of clients would. We also saw a slight improvement on coach conversion. So as you know, we ran what we described as a business builder promotion in August, that ran all the way through October. And so we saw not only that this new cohort repeated the same rate, but they actually converted to coaches at a slightly higher rate, which is why you saw a larger than what would be typical acceleration in our active earning coaches in the quarter.

Sebastian Barbero

Got it. And you mentioned a higher spend decline. Can you give us a little more details on that end, please?

Dan Chard

Yeah, so the promotion that we ran in the second quarter was the offer. So there was training and offer and then a social media strategy, the offer was for any new client, who was – or any client who hadn’t purchased in the last 12 months, could come in and purchase the essential start kit, which is basically one month’s worth of food at a discounted rate.

And so in the in the second quarter, which – where we had an active earning productivity per active earning coach of roughly $5800, that number reflected a price discount. And so as those same clients repeated in the third quarter, they were repeating at a full price. So that was the upside benefit, each of those clients was spending more on a non-promoted basis than they did when the price was promoted. And so they went on to repeat and, and have the same kind of depth of repeat that we typically would see.

Additionally, because of the promotion, and some of the other things that we’ve been – that we’ve applied to help coaches be more productive, each client or each coach was also able to support a higher client count.

Sebastian Barbero

Got it. Okay. And then talking specifically the stock outs, is there any risk to the remaining 80% of so product as that you’re focused on, is there any risk of them, any of them going out of stock?

Dan Chard

No, as I said earlier, the – we managed the out of stock risk by holding production on our slowest moving SKUs. And so none of our high moving SKUs ever went out of stock, nor do we believe that there is a risk of them going out of stock. So that’s how we managed the operational risks during the pandemic and a time of accelerated growth.

So in October, we began to add back manufacturing capacity, tied to new relationships with co-manufacturers. And so its beginning last month, we should start to see those slower swings – slower turning SKUs, go back into a stock in basis. And as we move into next year, we have more than adequate manufacturing capacity to supply the growth we anticipate next year.

Sebastian Barbero

So those SKUs that are currently out of stock until 2021, should we expect them to come back January 1, or later in the month?

Dan Chard

Some of them will never come back. I mean, part of our strategy is to consolidate our brands to just OPTAVIA. And so at the slowest turning SKUs, will likely not return, roughly think of that as 17 SKUs that won’t – they won’t return. But we don’t believe that that will have any type of volume impact, because essentially, we have for the most part, duplicate SKUs in the OPTAVIA line. So we’ve been running since we transitioned and introduced the OPTAVIA line, basically to kind of twin lines of products. So this is a reflection of us moving away from the OPTAVIA product, excuse me, from the Medifast branded products, and consolidating down to one line.

And we’re able to do that now because as of last quarter, we have – we discontinued our franchise structure, so we no longer had a legal obligation to supply those Medifast SKUs. So while we do still sell Medifast SKUs through our OPTAVIA Coaches, that number and that proportion has been declining significantly. And, you know, ultimately, as we said, we’ll also transition the direct marketing portion of our business to be a client acquisition, a digital client acquisition engine for our coaches. So at that point, we won’t have any need for the Medifast brand.

Operator

The next question comes from Linda Bolton Weiser from D.A. Davidson. Please go ahead.

Linda Bolton Weiser

Hi. Could you give us an update on your international business? And I guess it’s been more than a year now since you’ve launched it? What is the year-over-year growth rate of international? Is it very high growth? Or is it just modest? Or can you give us a little bit of color on that?

Dan Chard

Yeah. How you doing, Linda? And as we said before, we don’t plan to report specifically on international, I will give you a couple of highlights. We said once it achieves a meaningful part of our business. So Asia Pacific continues to grow at a consistent rate. It has been impacted we think by both the pandemic, but probably even more so in Hong Kong, the political unrest.

But we continue to add additional support for the business, including native language support in the form of the Philippines call center and difference additional, other support in terms of translated materials. So we’re confident that this is going to be a meaningful part of our business long-term, but at this point is not above the 10% level.

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Linda Bolton Weiser

Thanks. And I seem to recall that there were some pretty big trip expenses related to your incentive trip in the second half of last year, if I’m remembering correctly, and that you’ve benefited from not having those in the second half of this year. How much of the benefit was that in the third quarter? And then what would be the number that would be in the prior year period for the fourth quarter?

Jim Maloney

Yeah, so you know, as I mentioned, our sales and marketing expenses were lower this year versus last year in Q3. Overall, for the full six month period, if you look at the second half of the year, we’re talking about $5.6 million, I would say most of it was accrued in Q3, and that’s why you’re seeing some of the benefit in Q3.

Linda Bolton Weiser

Okay. And can you just – you know, one of the questions that we frequently get from investors is trying to gauge the ultimate potential of the number of coaches in the US. Would you suggest we look at other direct sellers, even if they sell other products, like an Avon or a Tupperware or Nu Skin and kind of gauge your potential in the US for the number of coaches, as being comparable to those companies? Or why would that be or not be a good idea to do that sort of thing?

Dan Chard

Yeah, I think there’s some pretty significant differences between a coach and a distributor. So I think it’s – it would be difficult to compare. We did do both work on addressable market for the business, as well as the interest in coaches, I mean, people who were interested in being coaches for the concept as we described it, so we did that last quarter. And what we found was at our – within our growth vision, which was stated as 15% growth rate that we had, now this was all done pre-COVID. But we don’t think this is necessarily changed that we had, what we believe is 10 years worth of growth, if we just did exactly what we’re doing today.

Our intention is to make coaching more and more attractive. And you heard that a little bit, tied to what kinds of tools we offer in the form of mobile apps and other tools to make coaching more attractive. So I think when you add that together, we believe we have roughly a decade worth of growth, with what we have been doing and ability to expand beyond that as we continue to modify our offer to coaches and make the coaching business more attractive.

Linda Bolton Weiser

Great, thanks. And then finally, can you just talk about, if you think you’re getting benefits from the pandemic, in terms of people wanting the ease of having the delivery of the food products, and also just weight gain during the pandemic? Do you think you’re benefiting from that?

Dan Chard

Yeah, we, we did some modelling. We actually hired an outside firm to kind of help us understand that, included both quantitative analysis and also a qualitative survey. What we believe is a very small benefit tied to the pandemic that has to do with what you stated earlier, maybe some weight gain, and also a higher level of, I’ll say, awareness, and concern about health. We did another survey that suggested that well, over 80% of Americans are concerned about their health during the pandemic. So that’s – you know, so those are some of the quantifiable pieces.

The part that’s been helpful for our coaches, is that people are far more available. I think people are less busy because they’re working from home, not traveling as much, not going out as much, and so they have more time to be coached, and to focus on their health.

So I think in some, I’d say we were growing in a very healthy way prior to the pandemic. We’ve been able to figure out some ways to operate very effectively. And that way it will help us, not only during the pandemic, but after the pandemic. And that health in general is of higher concern with Americans and really with people all around the world. So we think that there’s a long term benefit that will help us as well.

Linda Bolton Weiser

Thanks. And then finally, can I just ask you about your thoughts on use of cash flow either to raise your dividend, usually in December you announced your dividend increase, it was very large 50% or so last time around? Are you still leaning heavily toward high dividend? Or would you think about switching a little bit more towards share repurchase? Thanks.

Dan Chard

Yeah, so all those discussions are being had at the Board level. So as we get more board input over the next quarter or so, that those – you’ll see that those decisions being made. We really don’t go into much detail on the capital allocation until we actually make a decision.

Linda Bolton Weiser

Okay, thank you very much.

Dan Chard

Thanks.

Jim Maloney

Thanks, Linda.

Operator

The next question comes from Doug Lane from Lane Research. Please go ahead.

Doug Lane

Yes. Hi, good afternoon, everybody.

Dan Chard

Hi, Doug.

Doug Lane

Hey, Dan. The coach numbers you mentioned was pretty impressive. Certainly ahead what we were looking for. So to your point, that’s good evidence that whatever you’re putting in place is been working in developing your new cohort, down the line, if you will, into coaching and hopefully into leadership positions.

So thinking out, hopefully in 2021, but whenever we get to back to a more normal consumer mobility environment, what learnings have you gathered this year that changes how you go to market once we return to some sort of normalcy?

Dan Chard

Yeah, we have – I think our primary learning was that there’s a group of potential clients who with the right offer and the right message on social media are attracted to our OPTAVIA program. And those – that the training, the offer, and the social media program allowed us to attract them in a way that we haven’t been able to before.

So we anticipate repeating a refined version, that ties back to our learnings from this year. And our coaches as well, coach leaders are very – and now that they understand how to optimize the promotion, we anticipate that this will be an important part of our business rhythm as we go forward.

So I think we’re very optimistic about what we’ve learned, and its ability to really kind of add to the way we partner with our coaches to penetrate and to accelerate our growth vision moving forward.

Doug Lane

Well, no, that makes sense. But there’s no plan to abandon the in-person events, the global conventions, the leadership trips, what have you there. So, you know, going from top line to margins, the 16% kind of operating margins, that we’ve already mentioned that it’s probably not going to be that in the fourth quarter, but we should even probably extrapolate that out into 2021 and beyond where margins will come back to maybe not where they were before, but certainly not stay at the 16% levels, as you begin to reinvest in these in-person events?

Dan Chard

Yeah, what we’ve said, and I think, what we’ve said in the past is that we believe our business will support a 15% operating margin, as we move forward, and that we plan to achieve that around the same time we achieve a $1 billion in revenue. And so we think that at that stage, it will allow us to invest – invest back in the business for the programs that you are describing.

And at the same time, support the dividend that we pay and the operations of the business and allow us to invest and continue to support a growing infrastructure to support the business.

Doug Lane

Right. I remember those goals and I think that also included 50,000 active coaches. Have you updated the timetable for that?

Dan Chard

No, we decided at the end of last year that we focus really on the long-term sustainable growth rate of – in the mid teens that we’ve described. And that, you know, we’re kind of confident enough in the cadence of the business that we can project that out without trying to tie it to make those specific goals time bound.

Doug Lane

Okay. Thanks, Dan.

Dan Chard

Thank you, Doug.

Operator

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Dan Chard for any closing remarks.

Dan Chard

Yes, just like to say thank you for all of your participation in this conference call. And we appreciate your interest in Medifast and also appreciate you joining us this evening. And look forward to providing you an update in – on our upcoming quarter. And as I said, appreciate all of our – all of your interest and big shout out to all of our coaches across the world at this stage. Thank you again. Bye-bye.

Operator

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



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