Good afternoon, and welcome to Medifast’s Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Katie Turner with ICR. Please go ahead.

Good afternoon, and welcome to Medifast Fourth Quarter and Full Year 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 December 31, 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’s 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 the 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 projections 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 CEO, Dan Chard.

Thank you, Katie. Good afternoon everyone. We are pleased to discuss our fourth quarter and full year 2018 results with you today. I will provide a brief overview of our business performance. In addition, I will share the progress our team has made against the objectives that we’ve set out to accomplish two years ago and provide a clear perspective of what we plan to do moving forward as we continue our growth in 2019 and beyond. Tim will then review our financial results in more detail and share our 2019 first quarter and full year guidance. We will then be available to answer any questions. We are very pleased with our fourth quarter and full year 2018 results to reflect the unified and aligned execution by both our corporate and field leaders against the plan we began to focus on two years ago allowing us to achieve over $500 million in annual revenue, an increase of 66% year-over-year, a tremendous corporate milestone for Medifast. This success can be attributed to our efforts to align the organization and our field leadership behind a repeatable business rhythm focused on our long-term mission to offer the world lifelong transformation, one healthy habit design. Importantly, we generated these results while elevating a level of strategic investment to support our long-term growth plans to build our brand platform and operations as we continue to improve scalability of our business. We believe we are building a trusted, transparent and effective direct sales health and wellness community through our integrated coach model. This leverage is nearly 40 years of insights focused on how to deliver the best-in-class service and product experiences for clients who are engaged in their health and wellness journey. Our success in creating the OPTAVIA Coach community and achieving the desired results for…

Thank you, Dan and good afternoon everyone. I will review our financial results for fourth quarter and full year ended December 31, 2018. Then I’ll provide our first quarter guidance and discuss our 2019 outlook. As Dan commented, revenue in the fourth quarter of 2018 exceeded our expectations increasing 87% to a record $145.8 million from $78 million in the prior year period. We ended the quarter with a record 24,100 active earning coaches compared to just 15,000 in the same period last year and 22,600 in the third quarter of 2018. Average revenue per active earnings coach for the quarter increased 26.2% to $5,756 compared to $4,562 for the fourth quarter last year. The growth and productivity results in part from business initiatives accelerated new coach conversion and new client acquisition rates aided by the ongoing transition to higher price OPTAVIA products. OPTAVIA branded products represented 72% of our total company consumable units sold in the fourth quarter, compared to 51% in the prior year period. Gross profit for the fourth quarter of 2018 increased 84.5% to $109.1 million, compared to $59.1 million in the prior year period. Gross profit margin as a percentage of net revenue decreased 100 basis points to 74.8% versus 75.8% in the fourth quarter of 2017. The decrease in gross margin percentage was driven by increased inventory reserves for a select group of products as well as higher freight cost resulting in strong year-end consumer demand. Selling, general, and administrative expenses for the fourth quarter of 2018 increased $39.6 million to $89.3 million compared to $49.6 million in the fourth quarter of 2017, primarily as a result of higher OPTAVIA commission's expense and consulting cost related to IT projects to support our future growth. SG&A as a percentage of sales decreased 240 basis points…

[Operator Instructions] The first question comes from Frank Camma with Sidoti. Please go ahead.

Good afternoon guys. Thanks for taking the questions. So, just a question on the guidance. Tim, you said you don’t expect material amount of revenue this year from international. So, obviously, still domestic and just doing the packing into the math here on the guidance, it looks like you are still forecasting pretty strong growth on the active health Coach count. So, can you talk about sort of the cadence about that? And how you – what sort of conviction you have given that you are not going into new markets. From my math, it looks like the first quarter growth is somewhat muted relative to the rest of the year, because it looks like you have to get beyond your 30,000 health Coach count by the end of the year to hit those numbers.

Yes, so, Frank, I think, on the international front, kind of the rhythm our business starts with gaining customers and those customers – a portion of those customers become health coaches, that’s kind of how our business works. So the expectations early on will be accumulating customers and then as they convert to coaches that will start to grow at a more rapid race. That’s why we – our expectations are kind of modest for 2019 in the second half. From a coach count perspective, we didn’t really provide any guidance on the number of coaches. What we said was that our original goals were to reach 30,000 by the end of 2019 and we expect to be able to meet or exceed that number. So we haven’t provided any specific guidance on the number of coaches for the year.

No, I understand that. But just doing the math and the productivity you would have to, I mean, it seems like you would have to exceed that number to get into your guidance range and you are not…

Yes, we would give you that.

Okay. But – so, then, that leads me to other question on international. So you are saying that when you launch into these international markets, how coach will actually be based in the U.S. and actually reach the customer in Singapore and Hong Kong?

No, we are saying, is that we’ll leverage our leadership of health coaches in the United States to reach out through their contacts into the new markets of Hong Kong and Singapore to both attract new clients and also develop those new clients into coaches. So, there will be both clients and coaches based in Singapore and Hong Kong, but it all starts with our leadership in the United States. In other words, the company doesn’t play a role in going out and actually bringing in clients other than helping through the messaging and the infrastructure, really is our coaches in the U.S. through their contacts of that mechanism starts to occur.

And has that already begun?

We have – I think, as we have talked about previously, we have two programs that start to create the incentive for our coaches to start communicating. But we are not actively signing up coaches in Hong Kong and Singapore. But the activity is starting to reach out and build those relationships has begun.

Okay. My only other question was sort of on the gross profit, you did explain it as increased inventory reserves and some shipping costs. Can you just give us a level of magnitude of how much was related to essentially writing down expired inventories? Is that what it is and versus the freight cost?

Yes, I would say, three quarters it was probably the inventory write-down. It was product either expired or about to expire. And then the other portion of which is just freight cost kind of year end hurried to get across to customers on a condensed period of time.

Okay. And was that product mostly Medifast branded products? Or is it OPTAVIA branded products or mix?

It was a mix of products.

Okay, okay. Okay, great. Thanks guys.

Okay. The next question comes from Linda Bolton Weiser with DA Davidson. Please go ahead.

Yes, hi.

Hi, Linda.

Hi, Linda.

So – hi. So, just another question on the gross margin. I think in the past, you have talked about when there is very high coach growth and recruitment going on that you have sort of free offer when new clients were signing up. And so, a very high top-line growth can result in some gross margins impacts from those free offers. Is that something we should kind of expect going forward in 2019 being that your growth is still so high and just wondering some of the puts and takes as we think about gross margin for the whole year of 2019. How should we think about it? Thanks.

Sure. Yes, I think we are very confident in our gross margin. I think what you saw in the fourth quarter is two very discrete items that we don’t expect to repeat themselves. So, we call those out specifically, but as you are seeing our gross margin, it continues to slightly expand and we would expect that to continue. To be clear, we don’t expect it to go up from 76% to 80% or something like that. But some small margin improvement we do expect throughout the year. When we do offer – we have a big influx of new customers in high growth phase as you mentioned, the new customers do get an offer and that offer is a discount on the order. So, you are right. In high growth period it puts pressure on the margin percentage because a larger percentage of your shipments are going out of the discounted price. But that’s a good thing. That brings in new customers to continue purchase thereafter.

Thanks. And just in thinking about your high revenue per coach growth, I mean, it continues to be extremely strong, right. How should we think about that? As some of that’s starting to be the hydration products that’s being sold to your customers as they sign up and that’s boosting productivity? Or what is exactly driving that high productivity?

I think, as we’ve talked about in the past, it’s not any one thing. I think it started out by – with the launch of the OPTAVIA brand and creating very simple narrative that resonates. So that allows our coaches to be more effective at attracting clients. There is an improved partnership with the company and alignments with us. So love the programs and put together I think drives the right kind of activity. And then, I think the most important part of this is, we’ve started to build the – all of this – some really important insights which are that when coaches involve that the results some of these health drinks are far more effective. And so, I think, more and more people are recognizing that and I think there is some benefit of social media platforms being part of how that’s shared and communicated. So, the program works extremely well and the coaches with the program are highly effective at helping people know what they are doing to get the results they are looking for. And I think the other part of this is, we are seeing more and more of the – the people aren’t – people are focused and interested on their health, not just on weight loss. And so our program has been highly effective at hitting that sweet spot of going beyond just helping people lose weight. But really helping them achieve a healthy way than using now to the catalyst for greater change in their lives. So that’s – the message is really resonating. So I think it’s all of those things kind of in combination probably with a few other things that are more minor, but it’s all those things together and we anticipate that that should continue on. We don’t know how high it could go. So, certainly there is a limit to that. But so far we are seeing very positive results from those things.

And then, just in terms of potential in the categories you’ve alluded to, could we expect to potentially hear about another new category entry in the convention time in July?

What we anticipate and are thinking about are for July is that, we will continue to reinforce the launch of purposeful hydration. So that’s the last healthy habit we introduced. So we will continue to drive that and we will also begin focusing in creating more emphasis on the second – the part of our health program that the 5&1 which is the lean and green meal. So, we have technology to help create that healthy eating habits and making that move where we talked about is making healthy eating second nature. So, it’s those two things together that reinforce the overall program that again, tie back into what coaches do as far as teaching those new healthy habits.

Okay. Thank you very much.

Thanks, Linda.

Okay. The next question comes from Doug Lane with Lane Research. Please go ahead.

Yes, hi. Good afternoon everybody. I think on the hydration product, so I think the fourth quarter was the first full quarter where you actually had it for sale. Can you give us an idea just generally how it performed versus expectations?

We – the expectations going in were that, we are doing couple of things. One, introducing the next healthy habit in a product form and then also to bring the OPTAVIA brand into a category. We have a Medifast segment that includes products. So we just talked about its flavor and fuser. So, starting to transition in the same way we did with our Fuelings transition over to the new brand. So, it’s been effective at bringing people over the new brand, but it hasn’t been a core driver in what we have seen in terms of revenue per active earning coach. It’s just part of the overall story of one healthy habit at a time.

And there will be more news on that front this year and getting back to the question about the convection, will most of the new product activity announcements if you will, be centered around convention or it will be anything between now and then?

Yes, we have a few other launches. But the other launches are really in those cases, they are either new flavors or flavor improvements to our current line. So, the new product activity really takes place and is announced at convention and as you pointed out and as I mentioned earlier, it will likely be focused on continued emphasis on the healthy habit of hydration as well as that lean and green component of our 5&1 plan.

Okay. And just lastly, are you looking to take any just outright price increases? Or you just going to manage the mix like you’ve been doing lately?

No, Doug, we always look at that. We look at our supply chain and we look at any pressures that are coming from costs and we evaluate that few times per year. So, we will do that evaluation coming up some time this first half and make that determination. But historically, that’s not been an issue for us. So, I think, from a price elasticity perspective we feel confident that we have an opportunity periodically to take price.

Okay. Thanks guys.

Okay. This concludes our question and answer session. I would like to turn the conference back over to Dan Chard for any closing remarks.

Thank you very much and thank you for all of those who are able to join us this evening. We appreciate all the participation and Tim and I look forward to speaking with you again when we report our first quarter 2019 results. Have a great evening.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.