Good afternoon everyone, and welcome to the Medifast Third Quarter 2018 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note that today’s event is being recorded. At this time I would now like to turn the conference call over to Ms. Katie Turner. Ma’am please go ahead.

Good afternoon, and welcome to Medifast Third Quarter 2018 Earnings Conference Call. On the call with me today are Dan Chard, Chief Executive Officer; and Tim Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended September 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 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. Medifast assumes no obligation to update any forward-looking projection that maybe made in today's release or on today's 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 third 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 fourth quarter and full-year guidance. We will then be available to answer any questions. For the third quarter, we continue to successfully align our corporate and field leader activities behind a repeatable business rhythm focused on our long-term purpose and mission to offer the world lifelong transformation, one healthy habit at this time. To do this we continue to invest in and develop our integrated coach model which leverages nearly 40 years of insights focused on how to deliver the best service and product experience for customers who are engaged in their health and wellness journey. These efforts from our entire organization continue to generate an accelerated quarterly growth rate in 2018. As a result third quarter revenue and profitability exceeded our expectations and we're pleased to raise our full-year guidance, which Tim will review. As we move forward with our strategic initiatives both domestically and internationally. We believe we remain well-positioned to deliver long-term sustainable growth and value for our shareholders meaningful improvements to the lives of our customers as they learn new healthy habit and the strong business opportunity for OPTA via coaches and business leaders as they focus on our purpose and mission. We ended the third quarter with a record 22,600 active earning coaches, who actively support their clients in achieving their health and wellness goals. The growth of our coach base along with improved revenue per active coach, drove our strong third quarter financial results. Quarterly year-over-year revenue growth accelerated from 40% in the first quarter and nearly 55% in…

Thank you, Dan. And good afternoon everyone. I will review our financial results for third quarter ended September 30, 2018. Now I’ll provide our fourth quarter guidance and discuss our raised annual outlook. Revenue in the third quarter of 2018 exceeded our expectations increasing 80.3% to a record $139.2 million from $77.2 million in the prior year period. As Dan mentioned, we ended the quarter with a record 22,600 active earning coaches compared to 14,200 in the same period last year and 19,700 in the second quarter of 2018. Average revenue per active earnings coach for the quarter increased 23.2% to $5,781 compared to $4,693 for the third quarter last year. Growth and productivity is very encouraging and results in part from business initiatives accelerating new coach conversion and new client acquisition rates. This of course is aided by a continuing transition to higher price OPTAVIA products. OPTAVIA branded products represented 70% of our total company consumable units sold in the third quarter compared to just 43% in the prior year period. Gross profit for the third quarter 2018 increased 84.2% to $107.2 million compared to $58.2 million in the prior year period. Gross profit as a percentage of net revenue increased 160 basis points to 77% versus 75.4% in the third quarter of 2017. The increase in gross margin percentage was driven by higher production volumes yielding favorable manufacturing absorption as we increase inventory to meet expected consumer demand. We expect this absorption benefit to be temporary and gross margins are expected to return to normalized levels as inventory levels normalize. In addition the increase in the gross profit margin percentage resulted in part from reduced inventory obsolescence and lower shipping expense. Selling general administrative expenses for the third quarter of 2018 increased $41.7 million to $89.7 million compared…

[Operator Instructions] First question today comes from Doug Lane from Lane Research. Please go ahead with your question.

I just want to talk about the disconnect at least with my numbers between the top line upside which was impressive versus EPS upside which was less so in other words based in your guidance you showed $14 million upside to sales in the high end of the range, which with your contribution margin and tax rate according to my math should be something like translating in something more a $0.25 of upside but it only really showed $0.04 upside versus your previous guidance and I wondered if there was a component of that SG&A discretionary spending that came down the pipe whether it was the upcoming leadership advancement trip or if there is something else on the discretionary side at SG&A that that wasn't in your original outlook a quarter ago.

It's Tim, we made a decision to kind of invest some of the growth that we're seeing. The growth started coming stronger than what we expected it to be. So in the third quarter as you know always have some pressure on convention expenses, convention expense is a little bit higher than what we expect because of the size of attendants. The ILAT trip investment is larger than what we originally intended to do. So some learnings we got out of convention and our Sundance events, the ILAT trip is the international leadership advancement trip is really designed to drive more momentum but include more people than what we originally intended. We think that's the right thing for the long term and get us off to a really good start next year. So there is a big things that's fairly substantial costs associated with that event. So from an extra patience perspective I think going in with our guidance we knew we were a little tighter on EPS than we were on revenue and we took the opportunity to make an investment going forward, when we saw the revenue coming in higher than what we expected.

Those investments sound like they make a lot of sense and obviously you're not it's very early days you're not really seeing a return on the ILAT that you talked about and really will we even see anything in the fourth quarter won't that mostly be 2019 benefit?

It’ll be both, so you're right. The expense is hitting now in the third quarter which I would say virtually little but -- little or no benefit to the third quarter. The benefits should start happening in the fourth quarter as people qualify towards the end of the year qualification ends at the end of the year. But what it does is it builds up your energy for the first quarter and second quarter of next year. So the true benefit would be expected next year. So it's a little mismatch in expense and revenue benefit but there is some benefit this year, but I would agree the majority that you expect to see improved coach count productivity going into next year.

No, I mean that makes sense. You've got obviously high hurdle to anniversary next year and you've got a lot of momentum and you've got the international opening so certainly the investments you're talking about makes sense. I think it just was a little bit caught people little bit by surprise. But you know obviously you need to what you need to do to grow the business. And it sounds like the business is got every bit as much traction as you expected going into this quarter. So I get that. Okay, thank you.

And you’ll you see that pressure on SG&A, just going to see that in third and fourth quarter. You know that expense happens just on those two quarters. And as you go into next year in January you know in the first quarter the second quarter expense is not there.

And you should see some top line benefit. Right?

Absolutely. Yeah.

Yeah, okay.

We also inside of that we mentioned we are getting leverage on our fixed costs so these the net. you see there is a what about a 2.3% increase in total operating expenses. Part of that is just the sheer revenue size of OPTAVIA which is commissionable revenue is growing as a percentage of the business so it's a good growth but it does take the percentage level up a little bit and then that's offset by some of the efficiency we’re getting just for the sheer revenue growth. We're getting some leverage off of our fixed costs.

Okay, thank you.

[Operator instructions]. Our next question comes from Linda Bolton Weiser from D.A. Davidson. Please go ahead with your question. Q – Linda Weiser: Thanks. So can I just drill down a little bit more on this SG&A expense. Can you give the commission dollar figure for the quarter, I know you usually put it in your 10-Q I believe?

Its 40.5% of the revenue so the revenue was 139 times 0.4 or 0.5 so 56.3 million. Q – Linda Weiser: Well okay, but all of your revenue is not even at this point direct selling revenue right. The vast majority is?

Yes, the reason why we quoted that number Linda is that historically what we said is that OPTAVIA commissions is about 42.5% of sales that is still true today. But because OPTAVIA is a larger percentage of total sales it's important to understanding why the commission expense in relation to total consolidated sales is going up it’s the mix that’s changing. So we quoted that rate to 40.5% to total sales because we no longer we no longer disclose the different channel revenue. So we want to give you that number so you can see how that’s growing from approximately 36% last year to 40.5 it's not that the rate is growing fast it’s that the mix is changing. So more of our revenues are commissionable in total than they used to be, that’s a good thing, it just distorts the percentage.

So if it was 56 million and you subtract that from the SG&A of 90 million, I mean the rest of the SG&A like doubled from like 19 million to 34 million. So I guess that’s the fixed portion of your SG&A doubled. So what is that expenses, they have the trip expenses in there or.

It’s a combination of things, there are some new variable expenses know whether that is call center distribution cost, shipping cost all those things go up if revenues go up. That we continue to invest in international, so international spends on a year-over-year basis is total incremental that spend was about $1.2 million in the quarter. And then we’re investing technology as we mentioned. So on a year-over-year basis we continue to implement new technology initiatives that will benefit us now and in the future. The rest of our SG&A we're getting leverage on. So not going up the proportion of the sale it's not rising at the same rate as sales. So there the real big difference is the incentive program for ILAT, convention hitting in the quarter, biggest convention in our history and commissions rising as a rate of total sales because of the sales mix.

Okay and then can you just clarify this trip related to international, is that part of the original 3 million to 5 million investment that you said would be related to international or is it something above and beyond that.

No, when we quoted that now we’re going to spend between 3 million to 5 million international that is discrete spending in those markets or for preparation for those markets. It does not include other spend that we may be doing in the US to attract Asian Americans it does not include technology spending that going to be benefited in the US as well. So like new technology platforms that we’re putting in place it's just discrete spending is those markets clearly we’re making other investments to our platforms to make them multilingual and multicurrency that is not a discrete benefit, just for that sole markets its not captured in that the international spend I mentioned the 1.2 million in the third quarter. That's just a very specific spending in market. But this international leadership trip is not part of the international spending number we quoted.

Okay got you. And just in terms of the number of couches in the quarter, I mean it was up very, very strong and it was higher than we expected but the sequential growth of health coaches did decelerate a little bit. Would you view this sequential growth rate of about 15% as of steady state type of situation or do you think it can fluctuate in terms of how many you add each quarter?

Linda, this is Dan, what we see is there're going to be some small variations from quarter-to-quarter but I think there’re going to be a few things that are will impact us longer term. Just to go back on the question of this the international leadership advancement trip this trip is – we combined what used to be called the go global trip with this international this advancement trip and its tied to building the leadership base which in turn will drive the active earning coach number up. So that’s one thing that we think will continue to spur continued growth in the future. The other thing that we continue to focus on is the international expansion, so as we grow internationally, we’ll essentially have a broader organization structure that we’ll build and we anticipate that number will start to accelerate as we develop those markets. So it's I mean the active earning coach number is a function of how we build leadership beyond just the active coach range, so those who just support clients as well as our expansion initiatives which is tied to the international expansion in Asia Pacific.

Okay and then the coach productivity was very very strong, I mean it was very very good, so what – I mean did the sales of purposeful hydration affect that or what is exactly going on with the very high productivity?

A number of things, I think as we’ve discussed in previous calls, what productivity – how productivity would react to the strong growth initiatives was a question last year and which is what prompted us to put in place and work with our leadership in the markets or in the US to put in place both training initiatives also product initiatives which include purposeful hydration as well as other flavor launches and then also dramatically simplify our message. So, well it's tempting to try to say this one thing is what pushed it over, whereas what's pushing it ahead the reality is our coach leaders are getting better at training, they are getting better at leveraging social media, we’re getting better at being consistent with our message and alignment with them as well as the reduction overall in any channel conflict, so it’s a combination of multiple things, that’s making them more efficient and more effective in what they do.

Okay, thank you.

Thank you.

Ladies and gentlemen at this time, I am showing no additional questions, I like to turn the conference call back to management for any closing remarks.

Well like to thank all of you for your interest in Medifast and appreciate your participation in today’s call. Tim and I look forward to speaking with you again as we report our fourth quarter 2018 financial results. And have a good evening.

Ladies and gentlemen that does conclude today’s conference call, we do thank you for joining today’s presentation. You may now disconnect your lines.