Good day, and welcome to the Medifast Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Katie Turner from ICR. Please go ahead.

Good afternoon, and welcome to Medifast Second Quarter 2018 Earnings Conference Call. On the call with me today are Daniel Chard, Chief Executive Officer; and Timothy Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended June 30, 2018, that went out this afternoon at approximately 4:05 p.m. Eastern Time. If you have not received the release, it's available on the Investor Relations portion of Medifast 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’d like to remind everyone that prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words believes, expects, anticipate and other similar expressions generally identifies 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. Medifast assumes no obligation to update any forward-looking projection that maybe made in today's release or on the call. All the forward-looking statements contained herein speak only as of the date of this call. And with that, I would like to turn the call over to Medifast’s Chief Executive Officer, Dan Chard.

Thank you, Katie. Good afternoon everyone. We're pleased to discuss our second quarter 2018 results with you today. I will provide a brief overview of our financial and operational business performance. Tim will then review our financial results in more detail and share our 2018 third quarter and full-year guidance. We will then be available to answer any questions. Our strong momentum for the beginning of the year accelerated in the second quarter, resulting in record quarterly sales and earnings, both of which exceeded our expectations. We are successfully executing our strategy of aligning our corporate and field leaders behind a repeatable business rhythm that will deliver long-term sustainable growth. Our quarterly results include an accelerated growth rate along with increases in both our total active earning coaches and our coach productivity. Our message of offering lifelong transformation, one healthy habit at a time, continues to resonate among our coaches as they acquire new clients and help their existing clients achieve and celebrate their incredible health transformations tied to our OPTAVIA plans. We ended the second quarter with a record 19,700 active earning coaches, who support their clients in achieving their health goals. The growth of our coach base, along with improved revenue per active coach, drove our strong second quarter financial results. Quarterly year-over-year revenue growth accelerated from 40% growth in the first quarter of 2018 to nearly 55% growth in the second quarter of 2018. This mark the fifth consecutive quarter of year-over-year revenue growth and the sixth consecutive quarter of sequential revenue improvement. The second quarter was also the largest revenue and profit quarter in the history of the company resulting in second quarter diluted earnings per share of $1.16, ahead of our second quarter guidance of $0.94 to $0.97. Additionally, we continue to focus on investing…

Thank you, Dan, and good afternoon, everyone. I will review our financial results for the second quarter ended June 30, 2018. Then I will provide our third quarter guidance and discuss our raised annual outlook. Revenue in the second quarter of 2018 exceeded our expectations, increasing 54.9% to a record $117.3 million from $75.7 million in the prior-year period. As Dan mentioned, we ended the quarter with a record 19,700 active earning coaches compared to 13,500 in the same period last year and 16,700 in the first quarter of 2018. Average revenue per active earning coach for the quarter increased 16.1% to $5,474 compared to $4,713 for the second quarter last year. The growth and productivity is very encouraging. And resulted in part from business initiatives accelerating new coach conversion and new client acquisition rates and the transition to higher priced OPTAVIA products. OPTAVIA branded products represented 64% of the total company consumable units sold in the second quarter compared to 30% in the prior-year period. Gross profit for the second quarter of 2018 increased 54.1% to $88.8 million compared to $57.6 million in the prior-year period. Gross profit margin as a percentage of net revenue decreased 40 basis points to 75.7% versus 76.1% in the second quarter of 2017. The decrease in gross profit margin percentage was a result of an increase in the proportion of new clients that typically receive a higher sales discount on their first order. Selling, general and administrative expenses for the second quarter of 2018 were $71.7 million versus $46.3 million for the second quarter of last year and flat as a percentage of revenues at 61.1%. The increase in SG&A dollars is primarily a result of higher OPTAVIA commissions expenses, resulting from higher product sales. Our effective tax rate was 19.8% compared to…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Linda Bolton Weiser of DA Davidson. Please go ahead.

Hi, congratulations on great growth and a great quarter. Can you just talk a little bit about this issue with the percentage of new clients and the mix, and how it have impacted the gross margin? Because what I'm thinking is if your growth continues to be so high, that this could be a perpetual thing where you have sort of a declining gross margin. So can you help us understand like when that phenomenon would stabilize? And when you would stop having gross margin decline from that kind of mix effect?

Sure, hi Linda. It’s Tim. So the discount we offer to clients comes only on the first order. And we – clients receive a number of free boxes with their first order, that is approximately about 20% to 25% of the discount. So when you have such a large percentage of your business come in from new customers and it was a pretty large percentage last quarter versus history, we can see that putting a little pressure on margins. The truth of matter is, if we would continue to have disproportion of new customers ongoing, then you would likely see the margin of that where you saw for the second quarter. So that's about a correct margin with this – at this level of growth.

Okay. So just a follow-on to that. I mean, what we would hope, I guess, is that you have increasing numbers of returning customers or extended length of stay such that other revenues incoming from just new first orders, that there's returning orders. Can you give some metric or something that might indicate if you're getting like an increased length of stay or something like that for the customers that you're gaining?

It's too early to tell. This rate of growth we haven't had for very many quarters. So when we look at traditionally at length of stay or lifetime value of customers, it's relatively stable. We see some slight expansion in that. So – but we measure that over years. And this level of growth, the 55% growth, is not even three months old. So maybe clarify my answer to your prior question, you're right, I think, as you grow and you build your base, the percentage of your business that comes from brand new customers should stabilize and possibly even decline as you build your base. My answer specifically, at this level of growth, it's likely that these margins will be similar, unless you had either offsetting savings. Where you get those savings from is in production. So in production, at these volumes, we're able to spread our fixed cost over greater volumes, and we'll see improvement in margin. And those two things, we think, will come close to offsetting. But in this particular quarter, we're feeling the impact of a significant growth in new customers.

Okay. And then, we – in attending the convention, we sensed the excitement of the coaches and the hydration product and how well received that was. But we did pick up on a little bit of maybe some examples of out of stocks of some of the fuelings, but the coaches indicated it didn't seem to be a big problem. Can you just comment on how you're managing the supply chain and your rapid growth? Are you adding suppliers? Or are your suppliers that are existing just increasing their capacity? Can you give a little color on that?

Sure. So we're doing both. We've increased production in our own manufacturing facility. We've increased the number of shifts and the number of days that we're running. We've added suppliers and we work with our existing large suppliers to make much larger future forecast for them to build production. So they purchase raw ingredients after our forecast. So they're prepared to produce when we place our orders, and we've taken those forecasts up significantly. So they are better prepared to handle this. Quite honestly, our forecast for them for this prior quarter was not sufficient. So we did run out of stock on a few products. To give you a perspective, most of our products are interchangeable. So when we say we ran out of product, we ran out of a particular flavor, and – but because they're interchangeable, and we let customers know that in advance they can switch to a different product. So it's not like we carry a backorder. We ship the product. We just may ship a different flavor or texture than what they originally ordered. So it doesn't really have an impact on our current revenues and it doesn't really have an impact currently on customers. And just to give you another perspective, we have now, I think, Dan mentioned, 71 OPTAVIA SKUs and you'll – currently, we're out of stock on one. So just to put in perspective, it's not a high percentage of our products we're out of stock on. There's – at any given point in time, it's been one to – probably one to four products. And that's improving every day.

Thank you. That’s very helpful. And then just in terms of the hydration product that will be available pretty soon in August here, do you have a sense or – I'm sure you have a projection, I don't know how much you want to share it, that the percentage of uptake by, say, new customers or existing customers that will take it, it strikes me that the coaches are very effective at selling the product line, should be able to be quite successful in getting a high uptake by the client base. Can you give a little color on that?

Yes, I think – this is Dan. Linda, we – this is the first time we have launched a new category that ties to a new healthy habit. So the – we're watching very closely to see what the uptake is. But we anticipate that it's going to be very positive. We – we're not sharing the numbers, but we have had a very positive response leading up to convention, where we exposed leaders during the development of the product, got their input and feedback. And then as you saw at convention, we had all of our leaders and new coaches there to try it. And so we've had a very positive response because it fits in with our healthy habit strategy. It's not a different or incremental story, it's added into what is there. So we're optimistic but we're also realistic about knowing that we're doing this for the first time. What we anticipate is that as we do this in – on ongoing years, that we will get – we, meaning, us internally as the execution corporate and the field will get better and better at incorporating these new products, and we'll continue to drive further expansion in our productivity. And that's really what we're looking for long-term. But we'll be – we'll – we see the results as we get through this quarter and into the next quarter.

Okay, thanks. I’ll turn it over to someone else now. Thank you.

Thanks Linda.

Our next question will come from Doug Lane of Lane Research. Please go ahead.

Hi, good afternoon everybody. I'd like to focus on the international. I know that there was some added programs that conventional international workshops, you mentioned the global health investor club and a incentive trip. So things are starting to percolate there and meanwhile, you're posting this outstanding growth that's surprising you. And I'm just wondering, how much of that growth is just organic, domestic excitement in OPTAVIA's normal course of business? And how much of that is the building of international and opening up those new markets next year?

Yes, I think what we believe is that it's not one thing, which means it's hard for us to kind of delineate which part is international versus the other things we've changed. Quite a few parts of our business in the last 12 to 18 months, we've introduced a new simple message. We have created a new alignment process that allows us to partner more effectively with the field. We've reduced the channel conflict that we have traditionally had with other places where we sold the same product with – improved the training process, largely initiated and driven by the field. We have launched a new brand and new products and we've announced international with, as you pointed out, these new programs. And so we've done a lot all of the same time concurrently, and I think we feel like virtually everything we're doing is having a positive impact. So certainly, the excitement behind international is having an impact but this convention was really the first time we gave them training or announced the program. So we think that, that impact really has yet to come. It's more an impact of the other things we've done that are driving the growth in the second quarter.

That was sort of my feeling as well. So it bakes the question. And I don't – we haven't talked – you haven't shared projections of 2019 yet, which is understandable. But what – with international move, sometimes they can be fairly robust as well and so you've got dual track here with domestic business that is getting some significant traction. And the potential on a bold case of the international also getting traction. So I guess, you begin to think about your international infrastructure and above and beyond, just the Nevada facility, but what leverage do you have to put in place to supply the Asian markets, as we get 6, 12, 18 months into that opening?

Yeah, so Doug we're taking a multiphased approach to this. The first phase of distribution will come from the United States to the consumers in those markets. We've made arrangements to be able to ship direct, until we have a better handle on the actual volumes and the growth rate. And then the Phase 2, which comes right behind it, is tied to particular volume threshold, where we will have distribution in country. Still initially for the first year or more, the products will be made in the same plant here in Maryland and from the same suppliers we get. But distributed initially straight from the U.S. to the consumer. And then Phase 2 will be from the U.S. to a second distribution point in country to the consumers. And all those plans are underway now. So that's the method of getting the products. And because so many of our customers, coaches and clients, I'll say both, are on a continuity program because they receive their food the same time every month, we can ship extra days in advance and still get the product to them on the day they expected it. So even though there is a little bit longer delivery time, we can still meet the expectation.

Okay, that is helpful, thanks a lot.

Our next question will come from Frank Camma of Sidoti. Please go ahead.

Good morning guys. Last year was obviously a good year as well and you had 2,000 net adds for active Health Coaches. And Dan, you explained a lot of reasons why you're accelerating, but you got 3,000 net Health Coach adds in the quarter. And obviously, you weren't expecting that back in May when you issued guidance. So – and I know you've done a lot and everything, but why the massive acceleration sort of in the last month here? I mean, because it doesn't include your convention obviously, which was absent in the quarter. So why would there be such a step-up, if you will, towards the end of the quarter?

I think what we are seeing, Frank, is that the more aligned we are with the field and the message and all the others things we're doing, the field is expanding and getting better at their training processes and aligning more effectively with what we're doing. So the better we are at partnering together and signaling to each other, how we're going to effectively work together for the year, the more efficient they are. And that's really what's driving. This is about partnership. At the end of 2016, we put our goals in place, which were to have – to double the size of the business. These were management goals. Double size of the business by 2019 and achieve the 30,000 coaches by the end of 2019. So the question early on was, how would that play out? And we said, it won't necessarily be a straight line. We should see an acceleration as we start to initiate the strategy. And that's what you're seeing.

So should we look at the business more from a net add basis through your Health Coaches versus sort of like a percentage growth, if you will, because I've always looked at sort of percentage growth but I'm just wondering, I mean, looking at back half of your outlook and obviously, you don't want to go wild on it but you have a lot less – if you use your current productivity of about 2,000 Health Coach add, if I did my math right, on the high-end, which is obviously a lot less, even though you had the convention then I would have thought typically – doesn't the convention typically give you a little bump?

That is the point of alignment for us. I mean, the way we're looking at it is, we're seeing healthy growth. At the same time, we're doing some new things. And so I think the international expansion and training is a big part of what we announced at this convention. I mean, we had made it public back in February, but this is the first time we've been together with all of the coaches to talk about what the plans are, what the incentive structure is and how to participate from the United States. So we expect that any time you do something new, there will be a – there's going to be a learning curve, so we anticipate that. But I think, the – between what's been – the good things that have been happening is there's greater alignment along with this – the learning curve that I just referenced. I think we expect healthy growth. We're still managing our expectations as we continue to learn just the best ways to work with coaches if we go to international. So I mean, a long way of saying that We expect to see good healthy growth. We don't know exactly what that's going to be, but we're – we remain focused on achieving that 30,000 goal in 2019 and by the end of 2019.

And, Dan, just – I know you're not giving guidance on international, but can you just say, since you're shipping it from the U.S., does that mean that we should expect maybe a slightly low margin on that product? Or will that be built into the product cost?

No, it's largely built into the products. We expect to see similar margins. The margins out of the gate might be slightly lower but not materially. It's actually incredible, the price that you can get to ship direct to consumer in those markets is much more competitive than what we expected, which – so what led us to this two phased process. Once we get very large, then scale would tell you, you just got to have the product right there on market. But we don't expect a very different margin in those markets than we have here.

Okay and the final question. Was there any investment in the quarter for the international? Or is that still more a second-half issue?

Yeah, so we spent about $700,000 during the quarter. And we have spent about $1.2 million year to date so far on our international.

Thanks guys.

Thanks Frank.

Thanks Frank.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Dan Chard for any closing remarks.

Thank you everyone for joining, and we appreciate everyone's continued interest in Medifast. We – Tim and I look forward to speaking with you again as we report our third quarter 2018 results. And wish you all a happy and productive evening.

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