MEDIFAST INC

Greetings. Welcome to the MediFast third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Stephen Zenker, Vice President of Investing Relations. You may begin.

Good afternoon, and welcome to MediFast third quarter 2023 earnings earnings conference call. On the call with me today are Dan Charge, 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 September 30, 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 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. And with that, I would like to turn the call over to MetaFast Chairman and Chief Executive Officer, Dan Chard.

Thanks, Steve, and thanks to all of you for joining us on the call. With me today is Jim Maloney, Medifast's Chief Financial Officer. I'll take a few minutes to share some insights from Medifast's journey over the last 12 months and then provide you with some context for where we're taking the business. I'll then turn the call to Jim, who will take you through the Q3 financials. There are two key takeaways from our latest results. First, our financial position remains very strong. and we continue to deliver solid profitability despite continued top-line headwinds. Second, we are making steady progress on several initiatives to expand our offering into the broader health and wellness market and drive sustainable long-term growth. Our recent entry into the sports nutrition market with our new Optivia Active Line is one example. Weight loss medications are another major opportunity for us as the surging awareness and popularity of these products has prompted a huge change in the way that consumers think about weight loss and lifestyle modification solutions in general. As a result, earlier this year we commissioned an extensive independent market research study to understand consumer sentiment in regards to the medications and our coach-based, habit-centered lifestyle program within this evolving business environment. What was immediately clear is that our addressable market is split relatively evenly regarding weight loss medications. Around half of those looking for weight loss solutions are accepting of medication-based therapies, and around half of them reject the idea of using GLP-1 medications like Wegovy to support weight loss. The research clearly demonstrates that most of those who are interested in medical weight loss medications are also looking for support beyond a prescription that includes clarity on how they should incorporate healthy eating and exercise into their lifestyle while using these medical solutions. Additionally, they generally do not see weight loss medications as a lifelong commitment, but rather something that when paired with lifestyle modification can help them to make a long-lasting change. So with this in mind, we're focused on developing an approach that will enable us to make this new business environment our sustainable growth environment. We recently launched a pilot initiative with three different telehealth companies to explore how we might incorporate weight loss medication into our coach-centered business model. These pilots have given us some good insights around positioning and approach. What particularly appears to resonate with customers who are interested in medically supported weight loss is a compelling three-way partnership between customer, clinician, and coach. Importantly, the efficacy claim of GLP-1 medications for weight loss is based specifically on their incorporation with lifestyle changes that include a reduced calorie diet and increased physical activity. As a result, under Medifast's offering, Weight loss medications become one important element in an overall tailored lifestyle plan that also includes coaching, community support, healthy habit development, and nutritionally balanced meals, along with exercise. This holistic approach we are piloting is collaborative between the customer, coach, and clinician, focusing on helping customers achieve lasting health and wellness as they learn to make a healthy lifestyle second nature. As part of the telehealth pilot program I mentioned, we have been working closely with a set of select coaches to bring them up to speed on the benefits of the OPTAVIA solution for those who are currently using or are considering using GLP-1 or other weight loss medications. Initial feedback suggests that most coaches involved in the pilot are optimistic about having another tool at their disposal for use with customers and that the partnership between clinician and coach is productive for customers who want an approach that fits their own unique needs. This pilot program has provided us with some important data and understanding, and we'll use this information to inform our thinking now that we have shifted into the second phase of our pilot program. During the second phase, We are measuring key metrics associated with Optivea customers who are combining prescribed medical weight loss medicines with our Optivea program. We believe there is significant potential to maintain our market share and growth position by tapping into this important new market, whether that's through a partnership, acquisition, investment, or an organically developed solution. And we expect to provide more details on our approach in the coming months. Of course, for all those people who are not interested in weight loss medications, OPTAVIA continues to offer a compelling lifestyle modification opportunity with our clinically proven coach-led model that is built on the six macro habits of health, providing the cornerstone of reaching a sustainable, healthy lifestyle. Customers benefit from the support of an OPTAVIA coach who understands the challenges one faces when looking to improve their overall health and wellness. with most coaches having started as customers themselves. The active role the coach takes, as well as the support of thousands of like-minded individuals in the OPTAVIA community who are also on their own health and wellness journeys, is what continues to make our solution so effective. What is clear to the Medifast leadership team is that medical weight loss solutions have to sit within an overall health and wellness ecosystem. Medications alone are not a long-term solution, and only by helping drive holistic lifestyle shifts can we help customers achieve lifelong transformation. Exercise is one important element of that, which is why we're excited by our entrance into the sports nutrition market that took place in mid-September with the launch of our new Optivia Active product line. The initial products in our new OPTAVIA Active line consists of essential amino acids, whey protein powders, and a digital exercise program offered through a partnership with Aptiv. The products are aligned with the habits of healthy motion, one of the six macro habits that underpin our business health model, and can be used by individuals actively looking to move forward along the health spectrum. by adding exercise to their health routine, whether as part of a medication supported or non-medication supported approach. The products include two flavors of essential amino acids or EAAs as well as two flavors of whey protein and are developed to help support healthy muscle maintenance in conjunction with both exercise and everyday activity. Aging and weight loss are two common causes of reduced muscle mass. which is why it is important to have a diet that is inclusive of EAAs and quality protein and is nutritionally balanced. The objectives of this launch are threefold. First, we believe these products expand our addressable market, allowing our coaches to attract a new demographic to Optivea. Second, they're expected to extend the lifetime value of Optivea customers by extending their time with Optivea as they learn to live the habits of healthy motion during and after achieving their healthy weight. And lastly, they extend our offering by adding exercise to the lifestyle program, making it ideal for those who are interested in using lifestyle modifications along with the support of medical weight loss. All the products are designed to be used in conjunction with our existing OPTAVIA plans. The new Optivia active product line expands the breadth of our overall addressable market in an important way. The business opportunity within the sports nutrition market is substantial, with a total addressable market that is over three times the size of the structured weight management market in which our products operated exclusively in the past. We expect to add further active products to the line next year. The work with weight loss medications and the entry into the sports nutrition market are really just the first steps in Medifast's work to transform into a total lifestyle company, helping our customers make a healthy lifestyle second nature. Regardless of whether a customer wants to explore weight loss with or without a medical solution, Medifest has a compelling option for them. Long-term success is driven by the adoption of a healthier lifestyle built on nutrition, exercise, and other lifestyle habits. Our scientifically developed products are effective in achieving weight loss when following our clinically proven plans, including the support of our independent coaches. In a clinical study, it was shown that those on the optimal weight five-in-one program who had the support of a coach lost 10 times more weight than the self-directed group. Our approach is flexible and inclusive, and we're excited by the opportunities that lie ahead. Turning to the third quarter numbers, our revenues for the quarter were at the high end of our guidance. though down year-over-year by 39.6%, as challenges faced earlier in the year continued as expected. We continue to believe that the efforts we are taking to expand our product offerings, incorporate medical weight loss into our programs, and diversify our customer base will aid in improving these trends. However, we would not expect to see this improvement until 2024. The operating margin for the quarter of 10.8% was ahead of our expectations as cost reduction actions taken as part of our Fuel for the Future initiative continue to generate savings ahead of schedule. Operating margin is down approximately 150 basis points compared to last year as investments in customer acquisition and the loss of leverage of fixed costs due to lower revenues year over year had a negative impact on the margin. As a reminder, 70% to 75% of our expenses are typically variable in nature, which speaks to the adaptability and resiliency of our business model. As we move into the fourth quarter, we continue to focus on a number of growth initiatives using our strong debt-free balance sheet and our Fuel for the Future expense reduction initiatives to help fund them. As mentioned earlier, In addition to our new Optivia active product line and the medically supported weight loss opportunities we are assessing, we are also pursuing the expansion of our customer base by focusing on demographic groups in the U.S. where we are underrepresented. Specifically, we have been taking steps to further penetrate the Hispanic market, and we have made great strides in translating our main materials and website into Spanish to better connect with this group. We have now translated more than 70% of our core materials into Spanish and expect to be completed by the end of the year. In October, in conjunction with the National Hispanic Heritage Month, we executed on our first ever OPTAVIA Spanish language social and digital pilot, targeting the U.S. Hispanic market. It was intended to begin building the OPTAVIA brand awareness and measure the effectiveness of our efforts to learn how to best market our clinically proven health benefits and scientifically developed products, plans, coaches, and community to this growing demographic. It also enabled us to test and learn how to most effectively match Spanish-speaking coaches with U.S. Hispanic customers. The goal is to leverage the learning from the social and digital pilot as we anticipate launching a larger, more comprehensive media effort to the U.S. Hispanic market in 2024. We believe that advancing our business in the U.S. Hispanic demographic will help us set the stage for future expansion into Latin America. Also, we continue to evaluate the effectiveness of our customer acquisition initiatives, including our recent limited testing of company-led digital marketing, which we conducted over a three-month period to generate prospects. We are conducting attribution, analytics, and path-to-purchase optimization, which should all result in more efficient advertising spend and scalability. As a company that has a history of marketing directly to consumers, we understand the benefits of corporate advertising to generate prospects for our coaches. It allows our coaches to better optimize their time and focus more of their energy on supporting their customers. We just have to ensure that the return we are getting on these expenditures is commensurate with the costs. We also continue to grow our efforts around our corporate social responsibility initiative, Healthy Habits for All. At our OPTAVIA convention in July, our coach community raised funds for our nonprofit partners, No Kid Hungry and Living Classroom Foundation. Together with our coaches, we assembled over 6,000 kits for local Metro Atlanta kids. As kids headed back to school, our curriculum reached a new milestone, impacting an estimated 100,000 plus students in thousands of schools across the nation, free of cost since it launched last fall. And in September, we officially opened a new kitchen at the facility of our local partners, Living Classroom Foundation. Medifast provided capital funds to renovate the kitchen. Previously, instructors were teaching healthy cooking classes on hot plates. By welcoming kids into the kitchen and inviting them to experiment with healthy ingredients from a young age, we can cultivate a habit in them that can last a lifetime. So, to summarize. Backed by a strong balance sheet with no debt, we are building out a new approach that better reflects the new realities of the weight loss and health and wellness marketplace, and which plays to the competitive strengths of our existing offering. We continue to seek to broaden our offerings to integrate medical weight loss, expand our addressable market, and extend our demographic and geographic reach, along with optimizing our coach compensation and increasing corporate advertising to bring in new customers. These efforts are expected to aid in turning around the recent decline in new customers and coaches we have experienced over the past year. We do not expect to start seeing a meaningful impact from these efforts until 2024, and our guidance for our fourth quarter, which Jim will cover in just a minute, reflects the continued short-term challenges we face in customer acquisition in what is seasonally a weaker quarter. However, we do expect our highly variable cost structure and expense reduction efforts under our Fuel for the Future initiative to continue to shore up our profit as we mitigate some of the revenue weaknesses in the quarter. With that, I'll turn it over to Jim to go over the specifics of the quarter.