MEDIFAST INC

Good afternoon and welcome to the Medifast fourth quarter and fiscal year 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 two. Please note, this event is being recorded. I would now like to turn the conference over to Reed Anderson with ICR. Please go ahead.

Good afternoon, and welcome to MetaFast's fourth 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 quarter ended December 31st, 2022 that went out this afternoon at approximately 4 or 5 p.m. Eastern Time. If you have not received the release, it is available on the investor relations portion of MetaFast's website at www.metafastinc.com. This call is being webcast and a replay will also be available on the company's website. Before we begin, we would like to remind everyone that today's 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. Action results could differ materially from those projected in any forward-looking statements. All of the forward-looking statements contained herein speak only as of the date of this call. MetaFast assumes no obligation to update any forward-looking statements that may be made in today's release or call. Additionally, in an effort to provide investors with additional information regarding results as determined by GAAP, this call will disclose various non-GAAP financial measures. Reconciliation of each of the non-GAAP financial measures to the most comparable GAAP financial measures is included in the earnings release for the quarter ended December 31st, 2022 is shared on the company's investor relations website. These non-GAAP financial measures are not intended to replace GAAP financial measures. And with that, I would like to turn the call over to Medifast's chairman and chief executive officer, Dan Chard.

Thanks, Reid, and welcome to the call, everyone. We're grateful that you're taking the time to be with us today. On the call with me is Jim Maloney, Medifast's chief financial officer. I'll provide some context on the fourth quarter and full year 2022, as well as some detail on how we are continuing to develop our business. Jim will then take you through the specifics of our financials in some more detail. Looking at the fourth quarter, there are many things to be encouraged by as we continue to recalibrate and adjust to the changing global macroeconomic environment and shifts in consumer behavior related to the fast-moving economic disruption that peaked in Q2 of 2022 and impacted our business dynamic. Revenue was a little ahead of expectations in large part driven by the enhanced stability that we have been able to bring to customer retention rates, which have now returned to and remain at historical levels. We continue to take steps to mitigate cost pressures, drive efficiency, and build financial resilience in our model. The 80 basis points of compression in adjusted gross margin we experienced in Q4 was largely driven by inflation and partially offset by pricing changes and the optimization of shipping costs. We expect the price increases to have an additional positive impact on margins throughout the course of 2023. We're closely managing our SG&A expenses, which decreased 420 basis points as a percentage of revenue on an adjusted basis. driven by developments in our internal labor and field operations related to both field compensation plan optimization, as well as field support automation. The number of active earning OPTAVIA coaches was down against Q3 of 2022, but up compared to the prior year period to 60,900. Coach productivity is down both sequentially and year over year. we expect to see continued pressure on productivity through 2023, particularly in the first half as the residual effects of the behavioral shifts from last year work their way through the annual business cycle. With customer retention levels having returned to normal and a continued focus on managing our cost structure, our full focus is on executing a more rigorous approach to customer acquisition, which continues to be pressured by changing customer purchasing behavior and changes to the social media platforms our coaches use to share the OPTAVIA programs with prospective customers. We are currently implementing and developing initiatives that will enable us to build on the momentum we have already seen in retention levels by accelerating customer acquisition and improving the existing tenure mix to return it to historical normal ranges. We know that both coaches and customers are more productive in the earlier stages of their OPTAVIA lifecycle which is why achieving an optimal tenure mix has been and remains an important part of our growth strategy. There are really three elements to our approach when considering customer acquisition and tenure. First, we work to implement programs that help coaches attract new audiences to the OPTAVIA program, bringing in new customers who are looking for lifelong transformation in their health and wellness journey. Secondly, our coaches work in partnership with these customers to ensure that they achieve their goals and to create a deep and enduring engagement with Optivia to ensure long-term retention. Finally, we work with our coaches to take a portion of those passionate new customers and convert them into coaches who build on their own enthusiasm to attract and engage new customers themselves. With historically seen solid results from this three-tiered approach, And while there are certainly external pressures impacting all of these areas at present, the team is working to enhance each element to maximize effectiveness as we move forward. Customer acquisition has been more challenging in recent months, with an upward shift in the amount of time that coaches take to acquire each new customer. Coaches continue to spend the same amount of time on this important activity, but the adjusted acquisition rate means that coaches are reaching and subscribing fewer new customers per coach to the OPTAVIA health and wellness plan. We attribute these changes to a shift in customer behavior related to the evolving macro environment, as well as to shifts in the algorithmic technology of social media platforms, which have altered the visibility of coach messages among prospective customers. Social reach is a constantly changing target. And it's critical that we are working in deep partnership with the field to help coaches optimize their effectiveness in this space. Our teams are developing highly customized training programs that provide best practice insights into each of the key platforms and offering updates, tips, and emerging trends as we see changes take place in the technology. By working with the field to empower our coaches to succeed, we'll continue to help our message cut through the noise and reach more people. Separately, we also need to continue to take advantage of our own technology platforms, such as our apps, where we control the platform and we are able to build an unfiltered direct connection with our customers. We are also working on enhanced customer acquisition programs that can help us return acquisition rates to traditional levels. Our most recent work began with our Commit to Health business program, which started on December 26th and ran through the end of January. This is an important driver focusing on fostering alignment of our entire coach network around customer acquisition through the creation of attractive price points for both first and second food orders. The aim is not just to encourage first time off to via customers to sign up, but also to reactivate last customers who have already had a positive experience with the brand. It's still too early to fully interpret the results of the Commit to Health program, which we anticipate will play out over the next few quarters. We have certainly seen a significant lift in customer acquisition and we are encouraged by the number of customers discovering the OPTAVIA program for the first time. We'll also continue to take tactical opportunities to build new permanent customer acquisition incentives as we see opportunities in the field. An example would be the accelerator for all compensation plan bonus that we put in place at the end of last year to offer an incentive for coaches to bring new customers into the OPTAVIA family. This bonus is now part of the 2023 new compensation structure, reflecting our ongoing focus on new customer acquisition in addition to other important business building initiatives. We believe that there are green shoots beginning to emerge in the customer tenure mix as a result of these initiatives, but it will take some more time for any shift to play out fully in our numbers. Once we have successfully attracted a customer, we use personalized coaching, enhanced health and wellness education, and effective digital tools to drive engagement. Keeping customers engaged for longer and ensuring that OptiView becomes part of each customer's everyday life is a primary focus for the team as the catalyst for reestablishing our customer and coach tenure and enhancing future revenue growth. Optimizing our technology is a vital component of this work. We continue to work to ensure that coach messages cut through social media noise, and we use our own platforms, particularly OPTAVIA's own apps, to enable us to have a direct path to customers, both existing and future. The work coming out of our technology center in Utah continues to move the bar on our work in this area, and as we continue to engage and communicate with coaches and customers through these platforms, we will reduce the impact of changes in the algorithms on social platforms. Customers who join the OPTAVIA program today form future coach cohorts, and these cohorts in turn drive optimization of the customer and coach tenure mix and enable associated improvements in efficiency and productivity. We currently have a number of coach development initiatives in the pipeline to incentivize existing coaches to help newer customers on their own coaching journey. and expect to see some of these programs come online in the first half of the year, as well as throughout the rest of 2023. Optimizing incentives and compensation plan remains an important tool in our arsenal to drive growth, retention, and engagement. And we will continue to adapt and experiment over the upcoming months as we look to expand our reach. We are investing substantial time and resources and carefully learning from our existing and prospective customers, listening to what our coaches are hearing, and finding efficient solutions to challenges, as well as building programs that deliver connection, engagement, and retention. We're consistently adapting and focusing our efforts on where we believe they will have the most impact, whether that's in new technology, pricing changes, optimizing the efforts of coaches, or other initiatives. All of this is work aimed at building the important momentum in both acquisition and tenure, and the programs that we are putting in place in the first half of 23 will be important drivers to reestablish our repeatable business rhythm. We will continue to ensure that we maintain operational effectiveness across all areas of the business while leveraging our investments and flexible scale to deliver high rates of profitability, even in an inflationary environment, The strength of our operational platform now enables us to focus on creating efficiencies in several areas, including procurement, value engineering, manufacturing, and GNA. We are already seeing P&L impact from this work, and we expect more meaningful support in future periods. Over the course of more than six years, we have developed OPTAVIA into a powerful transformational force that engages customers and helps people change their lives for good. We have consistently shown an ability to adapt to changing circumstances and opportunities, and we have become stronger and more efficient and effective as a result. We demonstrated this when we changed our business model in 2017, and when we adapted during the course of the global COVID pandemic since 2020. We are building a business that we believe will be capable of thriving in any economic environment. And while there may be bumps in the road on that journey, It's a goal that continues to motivate and drive us as a team. Our highly personalized and unique approach to holistic health transformation remains markedly differentiated in the marketplace. We have clinically proven plans that consistently deliver materially positive outcomes along with unprecedented levels of customer satisfaction. We recognize we don't control every single variable and that the future environment could change just as quickly as we saw in Q2 of 2022, However, we have a clear grasp on the factors and triggers that we can influence, and we are continuing to deploy them in a way that can help us navigate through any business turbulence. We continue to build a company that can thrive in all macroeconomic conditions, not just the world as it is today. That is how we drive long-term growth for all of our stakeholders. As we have emerged from the global pandemic, there is a greater focus than ever on issues related to health and wellness. and obesity continues to be at the core of that. A recent survey commissioned by Medifast and conducted by an independent research company found that 70% of U.S. adults are determined not to let their health and well-being falter in 2023, with the majority already prioritizing it over other areas of their lives, including career and education. 57% of U.S. adults specifically cited that they would spend more time on their health and wellbeing in 2023. With a receptive market and a highly effective business model in place, we remain confident in our ability to drive engagement and make OPTAVIA increasingly central to the health journeys of more people around the world. Part of our commitment to our mission to transform lives one healthy habit at a time involves ensuring that we reach into the communities in which we live and work to drive change regardless of socioeconomic background of those involved. I'm proud of the impact we have made to date through our corporate social responsibility initiative, Healthy Habits for All, which advances our mission by providing children in under-resourced communities with the education and access necessary to create healthy habits. We hit an important educational milestone with the Healthy Habits for All curriculum, which has now been downloaded by educators in all 50 states and Washington, D.C., and which has impacted more than 30,000 students since its launch this past fall. Model F, the company's proprietary habits of health system, the lessons equip students with the skills, knowledge, and confidence needed to build healthy habits from a young age. We also increased access to nutritious food through a continued partnership with a national nonprofit No Kid Hungry. We provided the equivalent of nearly 13 million healthy meals to deserving kids. This year, we widened our reach and supported a community and educational garden near our MetaFast Digital Innovation Center in Utah that not only shows students how to grow their own healthy food, but also gives them access to farms and local gardens. Of course, there's still more to be done, both in education and in food access. Through both our corporate and philanthropic efforts, we are working to help break the generational chains of poor health and give people the ability to transform their health and wellness destinies. That's important work, and I am proud of the impact we are having. Delivering against our mission remains at the heart of all that we do, and we have a strong management team and employee base that help us to ensure we continue to make progress against our important goals. We have consistently shown our ability to achieve positive outcomes in challenging environments, and the work we have done over the course of the past six months in a difficult macroeconomic landscape is proof of that. There is a great deal of work to be done, and we need to work as a team to ensure that we will build heightened momentum as we move through 2023 and into 2024. At the same time, the fundamental building blocks of long-term growth are in place. I'm confident in our strategy and our ability to execute and look forward to sharing more of our progress with you on future calls. With that, I'll hand the call over to Medifast's Chief Financial Officer, Jim Maloney.