MEDIFAST INC

Good afternoon and welcome to the Medifast first quarter 2023 earnings conference call. All participants will be in listen-only mode. 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 Steve Zanker, Medifast's Vice President of Investor Relations. Please go ahead.

Good afternoon and welcome to Medifast's first quarter 2023 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 March 31st, 2023 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 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. Actual 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 statements 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.

Thanks, Steve. For those of you who missed the announcement in March, Steve Zanker joined the company earlier in the year as our new Vice President of Investor Relations. Sharing the Medifast story with investors is a key priority for us, and we're very happy to have Steve on the team to help us elevate our investor relations efforts and investment community interactions. Let me start by thanking you for joining us on the call today. We appreciate your time and interest in Medifast. With me today is Jim Maloney, Medifast's Chief Financial Officer. I'll start the call today with some color and context on the first quarter of 2023 and our continued progress against our mission and strategy. Following that, Jim will walk you through the financials. As a business, we continue to adjust to the challenging dynamics of the market caused by shifts in the global macroeconomic environment, changes in social media algorithms, the changing competitive landscape, and the resulting impact on consumer spending and behavior. Revenue was ahead of our expectations for the quarter as we continue to place significant operational focus on returning coach and customer metrics to historical levels. Revenue was positively impacted by a policy change around revenue recognition that Jim will discuss in detail, but even excluding the impact of this change, our results fared better than expected. Both EPS and operating income were well ahead of expectations. Our Q4 price increase, commission plan optimization measures, and cost control actions had a positive impact on our operating margin, helping offset inflationary pressures on our gross margin. The number of active earning OPTAVIA coaches in the quarter was down both sequentially and compared to the prior year period. Coach productivity was also down compared to the prior year, but up versus the prior quarter. We expect that the pressure on active earning OPTAVIA coaches and their productivity will continue in the short term as we transition our strategy and adapt our programs to reestablish our growth rhythm in this changed environment. Accelerating customer acquisition remains a major focus for the business right now, as we develop and test new ways to introduce the brand and program to new audiences, as well as further leverage our data infrastructure to support our coaches in reactivating former customers. This is the central part of our 15 by 25 initiative that we launched internally earlier this year. As the name indicates, the focus of 15 by 25 is to reestablish growth to our long-term sustainable target metric of 15% annualized revenue growth and a 15% sustainable operating margin by the year 2025. The business environment for our model changed significantly beginning in Q2 of last year, first when customer retention was impacted and then subsequently with increasing pressure on customer acquisition. While customer retention levels have returned to historical norms, customer acquisition in the current environment remains challenging, with coaches taking more time to engage new customers. We believe this is due to changes in customer spending, changes in the ways that social media algorithms make coaches' messages visible to prospective customers, and more recently, a changing competitive landscape that includes new technologies and medical interventions. To counter these environmental factors, we are particularly focused on further developing three areas of our business to allow us to be more competitive in the new environment. These areas are coach-led training, programming composition and cadence, and our unique offer and positioning. All are central to our success and differentiation. I'll take a few moments to outline our work in each of these spaces. Coach-led training is a critical element of our field partnership, and new training programs have been accelerated to support coach leaders. This is to ensure that new coaches have the tools to help them navigate the algorithmic shifts on social media platforms and in the wider competitive environment. By sharing best practices across our base of almost 60,000 active earning coaches, they are able to take advantage of the positive variances seen by their peers and apply it to their businesses. This includes a return to some tried and true pre-pandemic practices, including more face-to-face meetings with potential customers. For our program composition and cadence, we are leveraging analytics to help us design more effective customer acquisition initiatives through programs that incentivize coaches to achieve further success. Our Commit to Health business program in January helped create deep alignment of our coach network around customer acquisition through the creation of incentives around not just the first customer order, but the second one too, in order to support strong retention. The program is part of our ongoing work to optimize coach and customer tenure and produce some encouraging learnings for all of us to build on in the future. We've been encouraged by the initial impact of the program and have gained a number of key insights that will be useful as we develop programs for the future. While there is still more work to be done to solve the continued pressure on customer acquisition, we believe the actions we are taking will improve customer acquisition as we move through the year. Our latest program focused on supporting new and reactivated customers, which launched in March and will remain active through May. It is funded in large part by our cost-saving efforts and a recent product price increase. In this cycle, we are incentivizing coaches to bring in three new customers with a higher bonus for those who sign up five. It's still too soon to determine the effectiveness of this current active initiative, but we expect to be able to share more details on our Q2 earnings call in August. Customer incentives and an optimized compensation structure for our coaches are important elements of our effort to drive growth, retention, engagement, and reach. We take a data-driven view of each of these additions to the customer acquisition mix to help us further adapt the programs and determine whether they will become part of our acquisition efforts on a longer-term basis. In terms of our unique offer and positioning, personalized coaching remains at the center of our value proposition. Our coaches consider the unique nature of each individual to guide them on their health transformation journey rather than offering a one-size-fits-all approach. This personalized service keeps customer engagement for longer and helps ensure that OPTAVIA is an important part of their health and wellness journey. We have worked hard over recent years to optimize our technology as part of this effort, and OPTAVIA's app plays an important role by providing a direct path to current and future customers. The team in our Utah-based Digital Innovation Center has been working hard to enhance the customer app functionality. and we are currently testing new features and functions to support lifestyle changes, particularly with habit trackers such as meal tracking and hydration tracking. Usage and engagement of these apps continues to grow. We've now exceeded more than three-quarters of a million downloads of our customer app since we went live in 2021. Optivea coaches also have a dedicated app. with its own roadmap to help coaches better manage and optimize their businesses. New CRM features are continually being tested, including a recent tool that allows coaches to assess the performance of their customers across their health journey. We believe that the investment in growth initiatives, such as our digital technology, is a critical component in our long-term success. We are fortunate that our financial strength, with no debt, and a highly variable cost structure gives us the flexibility to invest in key projects that can help us both reestablish our repeatable core business rhythm and also fund new initiatives that can expand our addressable market and diversify our revenue streams. With that in mind, we recently launched our Fuel for the Future program, which optimizes our spending across the business, freeing up the capital necessary to invest in growth initiatives while also raising our margins. As part of that important work, we're providing our procurement organization with the tools to negotiate important savings, as well as looking for ways in which deeper automation can help processes that involve support operations such as call centers and customer service. At the same time, we also see important value engineering opportunities that can improve customer experience while also reducing costs and our environmental impact. Packaging is one example. Through a recent change that was positively received by customer testing, we were able to utilize smaller cartons for some of our products, which we estimate can save more than 900,000 pounds of paper per year. We also anticipate that this result will result in a projected annualized cost savings of $5 million beginning next year. Overall, we're targeting 200 to 300 basis points of sustainable gross margin savings by 2025, enabling us to utilize these savings to fuel the actions we are taking to grow in the years ahead. We believe that funding our growth this way can help mitigate negative impacts on our margins and will allow us to make future progress towards our 15 by 25 goals. I'd like to talk a little bit more about the growth initiatives that we are currently undertaking. We have already established share leadership in the weight loss market, but with more than 200 million people in the United States alone looking at weight management as part of their broader effort to achieve their health and wellness goals, it's clear that we have only just scratched the surface of what is possible. While our business growth rhythm has been disrupted, our core business remains strong, and we continue to be highly confident in our coaches' ability to expand their reach and engagement with our current offerings. At the same time, our model gives us the ability to explore other revenue generating opportunities as we continue to nurture that core business. In particular, we see potential to cultivate new markets and new demographics through product adjacencies, new geographies, and partnerships. We have seen encouraging growth in the Hispanic market already, with new Hispanic coach enrollments up 30% year over year. To build on this growth, we recently launched a beta version of our US Spanish website. In addition, most of our foundational marketing and support materials have now been translated into Spanish. We anticipate that by tapping into that demographic segment, we'll further open up the Latin American market opportunity for our business. We continue to believe there is a significant potential for OPTAVIA outside the United States. and will leverage our work in the domestic market to further our international expansion efforts in the years ahead. We're also looking at ways to utilize our coach network to add products adjacent to our current offerings, which help customers with their health and wellness journeys. We have products under development that we plan to announce at our annual convention at the State Farm Arena in Atlanta later this year and to the investment community during our Q2 earnings call. We are always looking for ways and emerging trends in our space to ensure that our lifestyle and habit development approach to health and wellness remains relevant and complimentary. The new generation of weight loss drugs are receiving a lot of press attention right now. While weight loss drugs have certainly been around for a long time, there's been heightened recent demand for the class of drugs known as GLP-1s, which have been shown to contribute to significant weight loss. and in some cases have now been approved by the FDA for the treatment of patients with specific BMIs and risk factors. As a result, there has been a rapid expansion in how these drugs are prescribed and in the provision of related healthcare providers to support patients using these drugs to aid weight loss. The market is surely interesting, and as a company, we're continuing to assess the role that this new class of drugs can play in lifelong health transformation. What is very clear to us, though, is that sole reliance on weight loss drugs does not address the fundamental lifestyle factors or behaviors we believe are needed to achieve optimal health. We understand that long-term efficacy in weight management is reliant on people either staying on these drugs for a lifetime or learning and incorporating nutritional and behavioral lifestyle habits. in order to maintain health and wellness goals. Our clinically proven plans, scientifically designed products, and coaching model help provide that, making Optivia a powerful solution alone or as a complement to medications. Coaching remains our secret sauce. Our success in helping customers achieve their transformational goals obviously encourages competitors to mirror our approach. While many of our peers now offer some level of coaching support, they do not offer the holistic proposition that OPTAVIA coaches provide. In short, coaches are central to all that we do, rather than an optional add-on to a one-size-fits-all app or model. Our programs resonate with people across the United States and beyond because they work, and we remain confident that our clear differentiation can make OPTAVIA increasingly central to the health journeys of many more people around the world. Our mission to transform lives one healthy habit at a time is not limited to our OPTAVIA coaches and customers. Our corporate social responsibility initiative, Healthy Habits for All, advances our mission by providing children in under-resourced communities with the education and access necessary to build healthy habits. Our Healthy Habits for All curriculum has now impacted nearly 80,000 students, more than double since our last earnings call. 98% of teachers who used the lesson plans said they believe students will feel empowered to make good decisions and build healthy habits as a result. Research shows that kids who have access to healthy food boost their academic performance, increase concentration, improve classroom behavior, and reduce absenteeism. We also continue our relationship with nonprofit partners such as No Kid Hungry and Living Classroom Foundation, as well as with the community gardens in Atlanta, Baltimore, and Utah to help ensure children have resources to implement healthy eating habits. We have a strong and effective team and a strategy in place to help deliver long-term growth. We already have made substantial progress in making the current landscape an environment in which we can deliver sustainable growth. and we have exciting initiatives in place that can help us continue that work. We are determined to build further momentum as we move through this year and into 2024, and I'm excited by what we can achieve as a company. With that, I'll hand the call over to Medifast's Chief Financial Officer, Jim Maloney.