MEDIFAST INC

Good afternoon and welcome to Medifast's first quarter 2022 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 March 31st, 2022. It 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.medifast.com. This call is being webcast and a replay will be available on the company's website. Before we begin, we'd 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. After results could differ materially from those projected in any forward-looking statements. All the forward-looking statements contained herein speak only as of the date of this call. Medifast assumes no obligation to update any forward-looking projections that may be made in today's release or call. And with that, I would like to turn the call over to Medifast's Chairman and Chief Executive Officer, Dan Chard.

Thank you, Reid, and good afternoon, everyone. Thank you for taking time to be with us today. On the call with me today is Jim Maloney, our Chief Financial Officer. I'll start with an overview of the first quarter and the continued evolution of our business. Then Jim will run through our financial results in more detail. Following our prepared remarks, we'll open up the call to take your questions. The key takeaway from our latest results is that Medifast continues to achieve significant growth in all of our key underlying metrics, driven by demand for our OPTAVIA branded products and services, as well as the strength of our business model. Our proven approach connects customers with OPTAVIA coaches who support them in learning and maintaining healthy habits focused on eating, exercise, hydration, and sleep, helping customers achieve lifelong transformation, one healthy habit at a time. We continue to expand our health and wellness platform to support our future growth expectations and are leveraging proprietary tools and technologies to enhance productivity across the organization. Our first quarter results were outstanding once again, putting us in a strong position for the balance of 2022 and beyond. Revenue increased 22.6% to $417.6 million in the first quarter, a new record for us, fueled by a 21.7% year-over-year increase in the number of independent active earning OPTAVIA coaches to 63,900, another all-time record. Importantly, the number of OPTAVIA coaches increased sharply by 6.9% on a sequential basis compared to the previous quarter, reflecting the growing precision of the programming we've implemented and continue to refine over the last several quarters. Coach productivity was similarly strong, reaching $6,536 per active earning OPTAVIA coach, up 1.3% on a year-over-year basis, and 3.4% sequentially. Earnings per diluted share were $3.59, a 3.8% increase versus last year as we continue to balance near-term investments and navigate the inflationary environment. With strong performance in the quarter and a clear vision to deliver on our strategy and vision throughout the rest of 2022 and beyond, we have today increased our annual revenue and EPS guidance. The continued transformation of our business over the past five years has led to tremendous growth and catapulted us to the number one revenue share position among publicly traded companies in the weight management industry in the United States. However, we believe that our full potential is much greater as we continue to build on the proven success of our differentiated model and its ability to expand into the broader health and wellness market with Optivia Coach at the fulcrum of every customer's health and wellness journey. Each year we continue to optimize our successful customer-focused business development cadence, and the results of this were evident in the first quarter. In March, we initiated an enhanced customer acquisition program, building on the success of a similar program we initiated in March of 2020 at the height of the pandemic uncertainty. This approach has been at the heart of our sustained growth over the last two years, and we continue to fine-tune the program based on the learnings and to align it with our long-term growth strategy. Customers are the focal point of our business model as they are guided by their own OPTAVIA coach to learn healthy habits. This helps integrate them into the OPTAVIA community and enables them to leverage our Habits of Health education system and our products to achieve transformative outcomes. We are already seeing the impact of our latest program in Q1 and Q2 as a new cohort of OPTAVIA customers have enrolled in the OPTAVIA program. However, we anticipate the biggest impact of the program will be seen in the first half of 2023 as this new cohort of customers integrates into our growing OPTAVIA community. Through the follow-up coach directed training program, a portion of these customers will become new coaches and support the growth rhythm of our business, extending our reach to more prospective customers looking for a new approach to health and wellness. In addition, we are testing a new element of the program that focuses on managing our long-term customer relationships with the objective of driving coach productivity. By leveraging the entire OPTAVIA community, whether they are currently active or not, we have a significant opportunity to increase the lifetime value of past customers through re-engagement. This is something we've described before and believe will be a core add as an outcome of our customer acquisition and coach productivity initiatives as we move into the future. Unlike initiatives by some companies, this type of customer acquisition program is not short-term promotion designed to prop up volume through product discounting. In contrast, it's designed to focus the activity of our entire OPTAVIA's coach community on executing a word of mouth advertising campaign over social media to attract new customers to OPTAVIA. Over the next several years, we plan to move aggressively to leverage our platform to capture a much larger share of the broader health and wellness market, which is estimated to be over $230 billion in the United States, significantly greater than the $7 billion weight management space we currently operate within. Our emphasis on lifelong transformation, one healthy habit at a time, with knowledgeable coaches as guides has much broader application across the health and wellness sector due to its proven effectiveness and changing the lives for the better. This powerful network effect has been essential to our business transformation over the past five years and will remain a driving force for our expansion. With almost 64,000 active earning coaches serving over 1 million customers each year, we believe we are merely at the beginning of a journey towards realizing our long-term potential. We continue to see tremendous opportunity in the United States market and believe the global potential is easily several times that large. Our core focus will continue to be on growing the number of customers seeking greater health and wellness, targeting those who have failed on diets and want a holistic approach to achieving greater health and wellness in their lives. We will also be rolling out future initiatives to deepen and widen our engagement with current and potential customers in support of our overall mission. Technology remains at the core of our strategy. and we will continue to leverage proprietary tools including digital apps as well as data to improve the efficiency of our coach and our customer community. The OPTAVIA apps drive deeper and more consistent engagement and are central to our long-term strategy of seamlessly connecting OPTAVIA coaches and customers within the OPTAVIA community. Let me share some additional stats that show our continued progress in this area. The OPTAVIA app, which is designed to support customers on their health transformation journey, had 140,000 downloads in the first quarter, increasing nearly 57% on a quarter-over-quarter net basis. Total users are now approximately 232,000, up nearly net of 59% quarter-over-quarter, with new user growth accounting for 54%. In the first quarter, our new weight tracker feature went live, and we continue to expand our lean and green recipe catalog while also improving our self-service capabilities, making the app the go-to place for customer support. The Connect app, which supports OPTAVIA coaches as they work with their customers, had over 22,700 downloads in its first full quarter. Importantly, engagement levels are high and coaches are actively using the app, which bodes well for the future growth and productivity. We also continue to invest in technology, including our pioneering digital innovation center in Utah, where our team of product managers and engineers develop our digital apps and are rapidly expanding our data capabilities. We expect our investment in technology will continue to drive productivity in our coach community. Since we first launched OPTAVIA in 2017, revenue per active earning coach is up more than 50%, and we believe that we're still just getting started. We've built a strong foundation to support significant future growth and will continue to make critical investments to strengthen our operations and solidify our competitive advantage. Our new distribution center in Fort Worth, Texas, which we are developing in partnership with a third-party logistics company, is on track for completion by the second half of 2022. This facility with enhanced automation will help us achieve our supply chain capacity goal of being able to support over $2.5 billion in revenue by the end of 2022. This represents a $500 million increase in manufacturing and fulfillment capacity beyond where we finished in 2021. We continue to aim for mid-teens revenue growth and 15% operating margin. Our expanding addressable market creates substantial headroom for our core weight management business as well as new products and solutions targeting the broader health and wellness arena. Over the long term, we expect margins to benefit from increasing scale and operational efficiencies, including further gains in coach productivity. Near term, like many companies, we will continue to see some margin pressure stemming from inflation and other external factors, as well as from the timing of our investments in technology and supply chain infrastructure. In addition to our commitment to lifelong transformation for our coaches and customers, Metafast is equally committed to our corporate values and positively impacting the lives of people who live and work in our communities. The unfortunate events in Ukraine have created much suffering and tragedy, and we are mindful of the tremendous impact this situation is having on millions of people globally. In an effort to help as this crisis continues, we plan to donate Optivia fuelings to Ukrainian refugees in the second quarter to help with their nutritional needs. I'll close my remarks with an update on our initiatives around corporate social responsibility, which is a key priority for the entire Medifast organization and closely aligned with our overall mission. Our corporate social responsibility initiative, Healthy Habits for All, advances our mission by providing children in underserved communities with the education and resources necessary to create healthy habits. Through partnerships with nonprofits, We can help break the generational chains of poor health and give children and families in at-risk communities the ability to transform their health and wellness destinies. The need for nutritious food escalated at the start of the pandemic and remains a challenge for many school-aged children. With this in mind, we expanded our partnership network to include four community garden organizations around the country. Community gardens are a collective network of growers, school systems, and communities and city leaders working together to build urban gardens and farms. And they educate students on how to grow their own healthy food and give them access to fresh produce through local farms and gardens. To date, through the Healthy Habits for All initiative, we've provided up to 10 million meals to children facing hunger. And we're excited to grow our mission with this new community gardens partnership and ultimately make an even bigger impact this year. So 2022 is off to a strong start, and we're making steady progress against all our strategic growth initiatives. We look forward to building further on our leadership position in the weight management industry and expanding our business to new segments in the broader health and wellness market. Our powerful business model is supported by a strong balance sheet, an experienced leadership team, a talented employee base, and nearly 64,000 OPTAVIA coaches who are passionate about our mission As a result, it's no surprise that we remain highly confident about our future. Let me now turn the call over to Jim Maloney, who will walk you through the financial results.

Jim? Thank you, Dan. Good afternoon, everyone. Revenue in the first quarter of 2022 increased 22.6% to $417.6 million from $340.7 million in the first quarter of 2021. We ended the quarter with approximately 63,900 active earning OPTAVIA coaches, an increase of 21.7% from the first quarter of 2021. Average revenue per active earning OPTAVIA coach for the first quarter was 6,536, up 1.3% from the prior year period. We were pleased with coach growth and productivity gains in the quarter driven by continued growth in both the number of customers supported by each coach as well as an increase in average customer spend. Gross profit for the first quarter of 2022 increased 21.6% to $302.3 million compared to $248.5 million in the prior year period reflecting strong revenue growth partially offset by increased cost of sales. Gross profit margin was 72.4% in the first quarter of 2022 versus 73% in the comparable prior year period. The 60 basis point decline in gross margin was attributable to continued inflationary pressures in raw ingredient cost and freight and labor costs. as well as the impact of the new customer acquisition program that Dan mentioned. SG&A expenses for the first quarter of 2022 increased 26.3% to $247.2 million compared to $195.7 million for the first quarter of 2021. SG&A as a percentage of revenue increased 170 basis points year over year to 59.2% versus 57.5% in the first quarter of 2021. The increase was primarily due to higher OPTAVIA revenue compensation expense, increased salaries and benefits related expenses for employees, incremental costs related to continued investment in information technology and distribution, and increased credit card fees resulting from higher sales. income from operations increased 4.3 percent compared to the prior year period or 2.3 million dollars to 55.1 million dollars as a result of higher gross profit partially offset by increased SG&A expenses income from operations as a percentage of revenue was 13.2 percent for the first quarter of 2022 compared to 15.5 percent in the same period of in 2021. The effective tax rate was 24% for the first quarter of 2022 compared to 22.3% in the prior year's first quarter. The increase in the effective tax rate was primarily driven by a decrease in the tax benefit of stock compensation and other items as well as the increase in the state income tax rate. Net income in the first quarter of 2022 was $41.8 million or $3.59 per diluted share compared to net income of $41.1 million or $3.46 per diluted share in the prior year's first quarter. Turning to our balance sheet, we believe our financial position remains strong with no interest bearing debt and approximately $122 .1 million dollars of cash, cash equivalents and investment securities at the end of the first quarter compared to 109.5 million dollars at December 31st, 2021. During the first quarter of 2022, the company repurchased 10 million dollars worth of common stock. There are approximately 2 million shares remaining under the company's stock repurchase program as of March 31st, 2022. We continue to believe share repurchases enhance stockholder value driven by our long-term growth plans. Additionally, on March 17, 2022, the company's board of directors declared a quarterly cash dividend of $19.1 million, or $1.64 per share, which is payable on May 9, 2022, to the stockholders of record as of March 29, 2022. This represents a 15.5% per share increase compared to the first quarter of the prior year, further demonstrating our confidence in our outlook. I will now turn to our guidance for the full year 2022. The ongoing success of our model gives us a high degree of confidence in the future. and we have increased our 2022 outlook accordingly. We expect revenue in the range of $1.78 billion to $1.84 billion and diluted EPS to be in the range of $14.60 to $16.05. We are raising our guidance above the previously announced 2022 revenue target range of 1.72 billion dollars to 1.79 billion dollars and we believe we will be able to achieve 15 operating margin in the long term despite the short-term margin pressures this year from continued investment in technology and supply chain infrastructure along with inflation our guidance assumes a 24.25 percent to 25.25 percent Our guidance excludes the one-time donation to the Ukrainian refugees that Dan discussed. In closing, we are proud of our strong start in 2022 and remain confident in our business model as we set the stage for long-term growth. We are focused on building a foundation to support significant sustainable future growth while driving value for stockholders. We believe that our business model will continue to generate results as we expand into the broader health and wellness market while helping our customers on their journeys to lifelong transformation, one healthy habit at a time. With that, let me turn the call over for questions. Operator?