Good afternoon, and welcome to the Medifast's Fourth Quarter and Full-Year 2019 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, today's event is being recorded. I would now like to turn the conference over to Scott Van Winkle. Please go ahead, sir.

Good afternoon. Welcome to Medifast's fourth quarter 2019 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, 2019, that went out this afternoon at approximately 4:05 P.M. Eastern Time. If you've not received the release, it is available on the Investor Relations portion of Medifast's Web site at www.medifastinc.com. This call is being webcast, and a replay will be available on the company's Web site. 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,' '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 upon 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 may be made in today's release or call. All the forward-looking statements contained herein speak only as of the date of this call. And with that, I'd like to turn the call over to Medifast's Chief Executive Officer, Dan Chard.

Thank you, Scott, and good afternoon to everyone joining us. Thank you as always for your interest in Medifast. I'll start with today's call by giving an overview of our fourth quarter's performance, then Tim will review the financial results in more detail, and provide our first quarter and full-year 2020 guidance. We will then both be available to take any questions. We are pleased with a very strong finish to the year with both revenue and earnings ahead of our guidance. Most importantly, we've seen a solid year-over-year growth in the number of active earning OPTAVIA Coaches, reflecting our ongoing efforts to prioritize the development of our coach base in order to drive an ever-expanding community of clients. In 2019, our community grew to more than 30,000 OPTAVIA Coaches, and over 500,000 OPTAVIA clients. Our focus on growing our number of clients, which are people who buy our products but do not receive any commission-based payments, is a demonstration of how we continue to redefine the direct selling model. By doing so, we are driving long-term sustainable growth and building value for our shareholders, while remaining devoted to our mission of offering the world Lifelong Transformation One Healthy Habit at a Time. Our business is at the very heart of health and wellness, and the health and wellness industry now worth a remarkable $230 billion in the United States alone. The weight loss, weight management, and healthy lifestyle segments of that industry continue to expand and represent a huge addressable market for us, not just at home, but also around the world. We've already established ourselves as a leading player in the market, and we will continue to drive industry share by nurturing and developing OPTAVIA Coaches and serving a growing number of clients across the world. 2019 was…

Thank you, Dan and good afternoon everyone. I'll view the financial results for the fourth quarter ended December 31 2019, and I'll provide our first quarter guidance and discuss our 2020 outlook. Revenue in the fourth quarter 2019 increased 17% to $170.6 million from $145.8 million in the prior-year period. We ended the quarter with 31,800 active earning coaches compared to 24,100 in the same period last year and 32,200 exiting the third quarter. Average revenue per active earning coach for the quarter decreased 9.2% with $5,229 compared to $5,756 for the fourth quarter last year, in line with expectations shared in the last earnings call we anticipated pressure on this metric due to operational headlines experienced in 2019. We believe we are well into the recovery period and expect average revenue per active earning coach to return to normal levels as 2020 progresses. OPTAVIA branded products grew to 79% of our total company consumable units sold in the fourth quarter, up from 72% in the prior-year period. Gross profit for the fourth quarter 2019 increased 17.4% to $128.1 million, compared to $109.1 million in the prior-year period. Gross profit margin as a percentage of net revenue increased 30 basis points to 75.1% versus 74.8% in the fourth quarter of 2018. The improved gross margin reflects our mid-year price increase and reductions in cost related to inventory obsolescence, partially offset by customer concessions. SG&A in the fourth quarter 2019 increased $20.1 million to $109.4 million compared to $89.3 million for the fourth quarter of 2018. The increase is primarily a result of higher OPTAVIA commission's expense, temporary elevated consulting costs related to technology initiatives to support the growth of the business and increased salaries and benefits. Our effective tax rate was a 4.7% benefit in the fourth quarter of 2019…

We will now begin the question-answer-session. [Operator Instructions] Our first question comes from Steph Wissink with Jefferies. Please go ahead.

Thanks. Good afternoon, everyone. Dan, if I could just start with a question for you on the sequential trend, usually we see a nice sequential boost Q4 to Q1, just given the seasonal effect of the category. Can you talk a little bit about the conservativism and your guidance, what you're seeing quarter to-date that would lead you to kind of guide to a flat to even down slightly sequential pattern in your revenue?

Yes. Thanks, Steph. I think it's probably easiest to kind of go back and revisit what we talked about last year -- or last quarter call, and then talk about how that applies. So, if you look at it, our coaches perform four things, four competencies, they attract clients, support clients, sponsor new coaches, and develop coaches. In the back-half of 2019, we forced them to spend less time doing that, and we consider those are the high value tasks to support dissatisfied clients. So, think about that as answering client complaints, helping them with returns, all the things we've talked about in the fourth quarter. The specific disruptions that we're impacted, I'll give you a little bit more kind of color on these that we had from a technology standpoint, we identified in the back-half moving to the fourth quarter, 218 items that needed to be fixed. So think about those as kind of small things. Some might be a sale on a report that was inaccurate, or a button that has clicked twice gives a mess and error message. So, that was the technology piece. In our supply chain, we were in the process of increasing our overall capacity by 40%. So, in supply chain, we saw a 95% increase in client complaints in the back-half, and then, we're aware of the credit card payments, we had $2.8 million in bad debt. So, those all those things disrupted the coaches and distracted them from performing those two top highest value-added activities, attracting clients and supporting clients. So, when we when we think about how we measure the disruption, we saw a 34% decline in the growth rate of client acquisition, so 34% fewer new clients coming in. That moderated in the fourth quarter to 8% as we implemented…

Okay, that's helpful. And then a second part to that question is just understanding a little bit about what the key measures are that you're looking for, so you just walked through a number of performance indicators that suggests the trend line is improving, but what should we look for in terms of the P&L to suggest that, again, looking at Q4 versus Q1 as a measurement, even on flat sales looks it like your earnings are going to be down quite a bit quarter-to-quarter, so maybe talk a little bit about the earnings profile as [you expand] [ph] through the year, improve the business, should we also expect the incremental margin to expand again?

Yes. Hi, Steph, it's Tim. Yes, that's exactly right. So you know, when you think about the first quarter, we have a higher cost base than entering last year, and we have our ERP implementation take place in the second quarter. So that cost year-over-year will be lower, but we didn't have much cost in the first quarter of last year, we have the costs hitting the first quarter of this year. We're also going through a process really to kind of adjust our spending levels based on our guidance, to make sure that we increased our operating margin year-over-year at the suggested guidance range. So, we finished the year last year at about 12.8% operating margin. We're targeting again in the range of 13.5% for 2020. So we will be able to adjust our SG&A. We also expect some improvements in our gross margin year-over-year. We had a lot of pressure on the gross margin in 2019 as we talked about in the last two earnings calls just related these disruptions with the cost of expedited shipping, the cost of customer concessions. With that behind us, we won't have that downward pressure on gross margins in 2020.

Okay. Final two for us, one is the level of conservativism in your guidance, we look at Q4 as the proxy, you substantially beat the guidance that you had provided just several weeks ago. So maybe talk a bit about how you formulated your guidance for earnings for the year and the level of conservativism. We should think about that similarly to what you just delivered. And then last one just on capital allocation, the stock has been highly volatile, where does it get attracted to you to start putting some of the balance sheet capital to work to support the equity? Thank you.

Sure. So, on the latter question, kind of first, our ability to buy stock depends on a lot of things in addition to our desire. So, as you know in the fourth quarter, Engaged Capital filed a 13D, and on the advice of counsel, we did not repurchase shares during the quarter. Of course we would love to buy back shares at the price that it was at. So, to answer your follow-up question to that, the price was very attractive. Our reason we didn't buy back shares had nothing to do with our desire of repurchase. I apologize not [stepping in] [ph] the first question. I'm sorry. Can you repeat the first question? [Technical difficulty]

Sure. Just wanting to understand a little bit of conservativism in your EPS guidance for the year and kind of what the key assumptions were to get to the guidance level?

Sure. So, we had a nice tailwind behind us in the fourth quarter from a tax perspective. We call it out in our release and in our script that we had about a $0.47 per share benefit in related to stock windfall impact on our income taxes. So based on where the share prices were granted and based on where invested, you get a tax deduction for the full market value of the stock when it best that no longer applies to future grants, the IRS has changed the tax laws, but we were beneficiary of a grandfather for a grant that was to be several years ago. So without that, so, if you look at our EPS, we were about $0.47 higher, but even without that, we would have beat our guidance range, but we would have beat it proportionally to revenue.

Thank you.

You welcome.

Our next question comes from Doug lane with Lane Research. Please go ahead.

Hi, yes. Just to piggyback on Steph's question. I'm just wondering, and I know Dan, you mentioned a lot of things as far as your forecasting is concerned, but back in November, you're still looking for a billion in revenue in 2021. Obviously, we're not going to get there, you deliver it on the top line in both coaches in revenue in the fourth quarter. So what were the two or three key learnings between November and now that got you more cautious on your growth prospects for the next two years?

I think as the year -- the last three months transpired we took a very close look into exactly how our coaches and our clients had been impacted by the operational challenges that they faced. Allow us to look more closely at what we're doing to improve and assess how quickly things will get back to normal. So we think, Doug, that we're back to normal from a standpoint of coaching client experience being what it was run our heart high growth periods, what is different and what always takes just a little bit of time to recreate is what I mentioned earlier, which is that proportion of new people coming in, both in forms of coaches and clients versus existing. So that takes place as the sponsoring of new coaches gets back to normal and the attraction of new clients gets back to normal. So there's nothing that we see that prevents that from happening. It just is taking a much larger base than we've had in the past and getting that ratio to return to where it needs to be to show those rates of client acquisition and co-sponsoring. It goes back to where they have been.

Good, I mean, your active coaches in the December quarter were better than what I have. But it sounds like maybe there's going to be fallout in the first and second quarter where we could see that number actually go down sequentially.

We don't guide to the number of active coaches, but coaches -- active earning coaches typically are correlated, for obvious reasons with the growth of the revenue. So, yes, I mean, I think we'll see based on those same two things that I mentioned earlier, we need to bring in, our current coaches need to bring in new clients, and a portion of those new clients will become coaches, and a portion of those coaches go on to be business leaders and they bring in new coaches, as well as the coaches, other hosts, the new coaches, bringing in new clients. So that's how the business builds the slowdown that we're projected that you're pointing out is really related to that ratio of new coming in, versus the existing being there. So our existing coaches are what will get us back on track. So the growth we've seen in the past and that will happen throughout the year, quarter-by-quarter.

Okay.

And as that happens, obviously clients, I mean, it starts with clients increasing. So the number we derive over 90% of our revenue from clients. And so, it's about coaches bringing in new clients and a portion of those clients becoming coaches. So that's what we look for to get our growth engine back.

And I guess what remains uncertain is the timing of that. Do you have any examples or in your experience? How long do you think this reset, if you will be and how long before you think things will get back to normal now that you fix the issues to cause this right, the service issues, the ERP, and certainly the credit card issue was a distraction, but is there any anything that you can point to as to the timing of a recovery of the kind of growth you're looking for, looking for guidance, doubling the business now every four to five years, that kind of pace?

Yes, I mean, if you go back to the first part of your question, what we have seen in the past, when we put together the right mix of products and programs and support in going into 2017. That's when we started to see the growth happening, and that happened because a lot of new clients were coming in and a lot of those new clients are becoming coaches. So if you think about '16 to '17 and then '17 to '18. That's where we saw the business begin to grow. I don't think, and this is, it was clear in the earliest script. We believe that our growth rate to the point you made is going to be more in the mid-teens, rather than in the 20% to 25% range, largely because we're a bigger business now, and with our increased understanding of how we best support and the coaches and the training system, we view ourselves as a long-term grower in the mid-teens.

Okay. Thank you.

Our next question comes from Linda Bolton Weiser with D.A. Davidson. Please go ahead.

Hi, I know that in the modeling process in the past, you had always said you thought about the productivity kind of being flat going forward just to assume that. Do you suggest we do that in our models now, or do you think that revenue per active coach is going to kind of invert up? Or do you think we should just assume flat going forward? Can you just give a little color on that?

Sure. Hi, Linda. Yes, I think we expect to see it start to build again, as Dan mentioned, productivity comes from really two things a number of clients that you're supporting, and the value of each client and newer clients are the most valuable clients from an average revenue per month perspective. So as new clients come in, coaches, start to spend more of their time when there is more valuable things as opposed to supporting customer issues. They start spending time on coaching clients and developing clients into coaches that we'll start to see that productivity move back up. So as we've modeled right now, and you can see we finished the last quarter to about $50 to $100 -- a little more than $50 to $10,. And we had gotten as high as $5,800. We wouldn't expect it's going to move back to $5,800 quickly, but we do think it'll start moving in that direction throughout 2020.

Thanks. And then -- I'm sorry, I missed the very beginning of the call. So I didn't hear your whole commentary. But is the international launch kind of going as you would expect, or is it a little slower to ramp than you had thought? And should we be thinking about next markets at some point internationally, or is that kind of put on hold at the moment? Thanks.

Well, I think to answer that question, one is the growth is happening the way would expect in terms of the metrics showing that clients come on and spend and stay the way we would expect them to stay, and they -- the client to coach conversion is nice, a little bit higher than what we see in the United States. So that's a bit -- it's a new market, and lower numbers, so that part of the international expansion has gone as expected. As you can imagine, we picked Hong Kong as an example, as a gateway market to Greater China, and almost immediately, we were dealing with the political unrest, which had certainly a headwind and now we're faced with as well the virus scares. So that's been a challenge, even including Southeast Asia, but we view those as a short-term impact and certainly, because those two markets are still small relative decided the United States. We didn't call those out because we don't think they're having -- they don't have a material impact on the quarter or normally they haven't material impact on next year. In terms of like how we view this, we continue to work kind of on the think about it as looking forward 3 to 5 years in terms of how we plan our initiatives, including investment in technology and including our expansion plan. So we continue to believe that international will be a very important part of our business long-term and continue to assess how to best do that and where we go and when we open those new markets. But at this point, we don't have anything to announce related to that.

Okay. Thanks very much.

Our next question comes from Bill Baker with GARP Research. Please go ahead.

Yes, GARP Research. Yes, I just wanted to get a sense, I know you addressed a lot of what I was going to ask, but can you just pick one thing here is the G&A expense, which was fairly high in the second-half of '19, and obviously you're guiding for to receive halfway in the first quarter and continue for the rest of the year, if you kind of work through the top and bottom line guidance? Can you give us a little better sense of how -- is that driven by commissions of the older reps versus the newer reps being paid at different rates, or is it extra expenses from the ERP or fixing the supply chain? What's really driving that ratio, and how does it mend itself as the quarters progress in 2024?

Hi, Bill. So, first, just from a seasonality perspective, where our year kind of goes right as we have higher spend in the back year than we do in the front of the year primarily related two of our events that take place, our convention in July each year, last year, we had about 10,000 people there. So, pretty big event. We also have something called our International Leadership Advancement Trip, which is a recognition and training event that gets expense in the back-half of the year to third and fourth quarter evenly. The event takes place in the following year. So we always have a high amount of spend in Q3 and Q4. What was unique about this year is that in Q4 we've been implementing a new ERP initiative, which we said we'd spend approximately $7 million in 2019. We spent slightly in excess of $7 million last year, and in 2019, that was all flow through directly to expense. There was no capitalization of the implementation based on the accounting rules in place for 2019. The accounting rules that are going in place for 2020 to allow you to capitalize that and while we expect to spend about $2.5 million in 2020, it'll -- only about $500,000 will actually hit the P&L in 2020. So, we'll get some leverage there for sure. So think of that as kind of a one-time expense hitting last year that will benefit us for a long time. A couple other areas from a headcount perspective, we have increased our employee base to support clients and our distribution centers to support growth. So, labor on a year-over-year basis is also uniting to point out as far as an increase, and they're largely the key items, the rest is variable. So, when you think commission, that's our largest expense, SGA expense, and it's really completely variable with the business. So that of course would grow as the business grows, but we view the percentage of commissions to be about the same, and how we pay compensation really it is -- doesn't have to do with your tenure, it has to do with your activities, so, we kind of think that will be somewhat consistent year-over-year. Other items of variability are things like shipping, and things like transactional fees, credit transactional credit card fees, and our call center is an outsourced operation. So that is somewhat variable as well as the call line fluctuates. So hopefully that answers your question.

Yes, it does. Thank you.

You are welcome.

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

Thank you, Operator, and thank you all for your interest in Medifast. We appreciate all your participation today's call, and Tim and I look forward to speaking to you again next quarter. Thank you.

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