Good day, and welcome to the Medifast Fiscal Fourth Quarter and Full Year 2021 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 note, this event is being recorded. I would now like to turn the conference over to Reed Anderson with ICR. Please go ahead.

Good afternoon, and welcome to Medifast's fourth quarter 2021 earnings conference Call. On the call with me today are Dan Chard, Chairman and Chief Executive Officer; and Jim Maloney, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended December 31, 2021, that went out this afternoon at approximately 4:05 PM Eastern Time. If you have not received the release, it is 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 would 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 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 upon them. Actual results could differ materially from those projected in any forward-looking statements. All the forward-looking statements contained herein speak only as of the date of this call. Medifast assumes no obligation to update any forward-looking projections that may be made in today's release or call. And with that, I would like to turn the call over to Medifast's Chairman and Chief Executive Officer, Dan Chard.

Thank you, Reed, and good afternoon, everyone. Thank you for taking time to be with us. On the call with me today is Jim Maloney, our Chief Financial Officer. I'll start with an overview of the fourth quarter, then Jim will run through our financial results in more detail. Following our prepared remarks, we will open up the call to your questions. 2021 was another record year for Medifast as we continue to demonstrate the power of our coach-centric model to positively impact millions of OPTAVIA clients' lives and drive strong financial performance. In the fourth quarter, revenue increased 42.6% over the prior year period to $377.8 million, reflecting strong execution in all areas of the business. Earnings per diluted share were $2.91, a 23.3% increase over the prior year period. The number of active earning OPTAVIA Coaches grew 35.3% to 59,800 on a year-over-year basis, and productivity per active earning OPTAVIA Coach rose 6.6% to $6,321. Jim will dive deeper into our performance in just a few minutes, but I want to take the opportunity to dig into why the Board, the leadership team and I are so aligned in our belief that Medifast has an unparalleled opportunity ahead of it right now as we move into the next phase of our remarkable growth journey. Five years ago, there were undoubtedly those who are skeptical about the ability of Medifast to deliver on our long-term growth goals. They saw us as a manufacturer and omnichannel distributor of diet products and made some assumptions around what we could achieve. The reality is that time and time again, we have outperformed expectations. Our business is now more than doubled twice since we implemented the strategy to put the coach-centric vision at the heart of the business. That coach-focused approach is clinically…

Thank you, Dan. Good afternoon, everyone. Revenue in the fourth quarter of 2021 increased 42.6% to $377.8 million from $264.9 million in the fourth quarter of 2020. We ended the quarter with over 59,800 active earning OPTAVIA coaches, an increase of 35.3% from the fourth quarter of 2020. Average revenue per active earning OPTAVIA coach from the fourth quarter was $6,321, up 6.6% from the prior year period. We were pleased with the coach growth and productivity gains on a year-over-year basis compared to the record highs we achieved in the third quarter, we believe the sequential declines in the fourth quarter reflects seasonal factors as well as the impact of our supply chain transition earlier in the year that we discussed with you during our Q3 call. Gross profit for the fourth quarter of 2021 increased 39.7% to $278.3 million compared to $199.2 million in the prior year period reflecting strong revenue growth, partially offset by increased cost of sales. Gross profit margin was 73.7% in the fourth quarter of 2021 versus 75.2% in the comparable prior year period. A 150 basis point decline in gross margin was attributable to higher product and shipping costs. We instituted a 3.5% pricing increase in December 2021 to offset the recent inflation pressures we’ve experienced in raw materials and transportation. We continue to expect pricing strategies, productivity programs and scale-related efficiency in distribution and manufacturing to drive improvement in gross margin over the long term. SG&A expenses for the fourth quarter of 2021 increased 43.5% to $231.4 million compared to $161.3 million for the fourth quarter of 2020. SG&A as a percentage of revenue increased 40 basis points year-over-year to 61.3% versus 60.9% in the fourth quarter of 2020. The increase was primarily due to higher OPTAVIA coach compensation expense, increased salaries…

[Operator Instructions] Our first question will come from Steph Wissink with Jefferies. Please go ahead.

Good afternoon, everyone. Thank you for taking our questions. The first one we wanted to explore was just the coach count ending the year. And if you can give us any sense of how your coach recruitment cycle is going year-to-date? Just want to get comfortable with that step down in coach count that you’re seeing some acceleration in that figure to hit your 15% growth guidance?

Sure. Thanks, Steph. Good to hear from you. Yes, as we talked about in the last quarter, we’ve seen some downward pressure on client-to-coach conversion really related to the earlier transitions we had in the first half of the year tied to the transformation of our supply chain or the increase of our capacity and supply chain. So it was expected. And what we’ve seen coming out of it, we ran our essential star promotion in the fourth quarter, which resulted in the expected number of new client cohort moving into the new year. So we feel confident with where our coach count is going as we move into Q1.

Okay. Very helpful. And then on a related note, the productivity per coach just continues to surprise us to the positive. So I wanted to just give you a little bit more airtime to talk about the initiatives that you think are contributing to that advancement in that figure. It’s representing a larger percentage of the growth overall for the company. I just want to make sure we’re thinking about 2022, the balance between coach count growth and productivity embedded in your 15% growth guidance?

You bet. When we started out and made the coach-centric model in the forefront of our overall business growth strategy, we at the same time focused on creating ways to make our coaches more efficient. And there are a lot of ways to do that. Part of it relates to technology. Part of it relates to other people’s technologies that are helping our coaches be more efficient. Right now, what we are focused on is leveraging our investment in digital apps for one thing, to help our coaches manage more clients. We also, over the period of the last couple of years, have found ways to move people to the more, I’d say, a higher value product line of OPTAVIA. That’s been another piece. Going forward, though, it has to do with leveraging technology, leveraging data, and we continue to feel like there’s a lot of upside to that coach productivity number. Did we make clients more happy or we improved their experience with coaches and we make coaches more effective by allowing them to manage more clients with less time, allowing them to perform the more value-added activities that we know drive the business growth and drive productivity.

Okay. That’s helpful. My last one is on inventory. And I know, Jim, you talked a little bit about last year’s comparable year-end inventory was just far too low. So part of this is just the optics of that comparison, but it was up quite a bit year-over-year. Help us think through the portion of that that’s inflation-related, timing-related? Is there anything that would be in transit that we would need to consider in that year-end inventory balance? And then what do you think about the optimal inventory balance as we go forward? What do you want to carry in terms of just-in-time versus just-in-case? Thank you.

Sure. So as I mentioned in the remarks, so inventory, when we came into 2021, we’re exceptionally low as a percent of our business. And if you remember, Steph, we were having stock outs at that time. So we intentionally invested and got levels of inventory to a more proper state. So the way I see 2022, revenue levels will increase with the growth of the business. So obviously, this past year, revenues surpassed and outpaced our revenue growth. But I would expect it will get back to a more normal flow based on the growth of our business. As we came into the beginning of this year, we wanted to make sure that we didn’t have any disruption. And as of right now, we’re not seeing any disruption due to inventory. And we’re not expecting any for the foreseeable future. To your question about inflation, we are seeing inflation. And I mentioned that we took a price increase of 3.5%. And we did that in December of last year. So we didn’t really see a lift in revenues due to that price increase because it was really the last several weeks of the fiscal year, but our expectations for that price increase was to cover our costs. So the 3.5% increase is basically mirroring the increase in our raw ingredients and transportation. So hopefully, that helps.

That’s very helpful. Thank you. I’ll pass it along.

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

Yes. Thank you. So I was just curious about if you could give some general directionality on the gross margin and SG&A ratio for the next year. I mean with the price increase kind of kicking in to be a positive factor, do you think you can kind of maintain gross margin roughly going forward where it is? Meaning, it would be kind of flattish for 2022? Or any color you could give kind on that would be helpful. Thanks.

Yes. So as I mentioned, Linda, we’re expecting that the price increase is going to offset much of the inflation in 2022. So the good news about our business is we can basically see the inflation costs because we lock in a lot of our costs for about a six to seven-month period. So we have a good view of how inflation is going to affect 2022. So I would expect that gross margins on an overall basis to basically hold like you’re suggesting. The other comment about investing. So we’re going to continue to invest and that’s going to be in technology and supply chain in the coming months and quarters. So you would expect that the SG&A line item, where most of that investment will be – will occur – will impact the operating income margin by 60 to 80 basis points.

Okay. Thank you. That’s helpful. And Dan, when you talk about kind of the evolution and growth of the company and the fact that you’re now thinking of your addressable market as this much bigger number, the overall health and wellness market. I kind of wonder how that goes along with the coaches and how they kind of view what they’re providing to customers? Because you’ve always talked about how they really have a message. They have the Habits of Health, the Teachings of Dr. A, and this is what they’re essentially "selling" is a lifestyle more than anything. So how do you transition that to them having a message that somehow addresses a much broader market? I mean if they’re going to be selling maybe something that’s offered through an app, I mean that gets into something a little bit different. So can you explain your thoughts behind that a little bit more?

I think what we’ve seen in this – in the first part of our transformation, as you were saying, which started in 2017, was putting the coaches at the center of everything we do, which meant they receive a greater degree of support from the company and no channel conflict. So that was the first phase. The second phase has been about building an operational infrastructure capable of supporting the growth. And the last phase, which is the question you’re asking, as we move out of this building out our operations is about creating higher levels of productivity. And that productivity, I would say, includes new products. So these are products that are consistent with and part of the Habits of Health story that they already talked about. New services. So think of a service as anything we do that make our coaches more productive. A good example there is we fairly recently did a test to understand how we can make our coaches more effective and efficient in attracting new clients. And what we found is that there was a significant opportunity, we believe, and it played out in bringing lapsed clients back to connect with our coaches. So these are clients who previously had a positive experience on using our structured plan to get healthy and who may have lost the connection with their coach. So by using technology and data and our mobile apps, we create the ability to bring them back in, so in other words, increasing the lifetime value of clients. And then the other side of this is just tied to making, again, on the service side, our coaches more capable of supporting more clients. So there’s a product component. There is a component to help bring higher lifetime value by bringing former clients back in. And there's a component around helping our coaches to be more efficient in supporting clients by giving them – meaning clients more opportunities to use technology to go through our health transformation plan.

Okay. And then just, again, just the question about kind of the seasonality of the Coach decline here a little bit in the fourth quarter. You have these promotions in September. And I kind of thought that would be like a special push that actually maybe you could have coach growth in the fourth quarter sequentially. Did the promotions work as expected? Or were they a little less effective than what you had planned?

No, the objective and the outcome we were looking for from the promotions was to bring in a new cohort of clients in the fourth quarter. And we had some specific objectives around how many clients will be brought in. That outcome was achieved in the way we expected. As you know from the past that the way our cycles begin is new clients come in, they go on plan. A portion of those clients become coaches, and then they go on and get more new clients. And achieving the right ratio of tenure and client and coach mix is what drives our continued growth. So what you saw in the fourth quarter, so a sequential decline, not significant, but relevant, was a reflection of, again, the transition that we made earlier in the year to add $1 billion of capacity. So during that transition, when our – Q1 and Q2, in particular, when our carb to curve orders were significantly higher than normal. It had that weight on client experience create a downward pressure and that has a delayed impact in Q4. So what we saw in the fourth quarter was a new client cohort coming in. And all of our client experience metrics returning to normal as we headed out – as we finished the year and started the new year. So we're confident in where we were at the end of the year with new clients coming in and confident with where we are now with client experience being where it is and being the beginning of the high point of our seasonality, which is kind of January, February and March.

Okay. And then just finally, I didn't go back and look, but do you happen to recall what you guided to in terms of revenue growth in 2021 at the beginning of the year? Because you certainly probably didn't guide to 60% revenue growth. So I'm just curious if this guidance that you're giving, which is totally in line with your long-term growth objective, is it somehow represents like significant slowing? I mean if you go from 60% to 15% growth in 2022, that is a pretty significant slowing. So just maybe your thoughts on that.

Yes. So Linda, – in Q1, if you remember, we did not provide guidance. We didn't start providing guidance since we entered the pandemic. I think we started providing guidance in the July time frame of last year. So we don't have that reference going back to the beginning of 2021.

Okay, all right. Thanks a lot.

Yes, thank you.

[Operator Instructions] Our next question will come from Doug Lane with Lane Research. Please go ahead.

Hi, good evening, everybody. Dan, the stats that you quoted on the success of Medifast in the weight loss market here in the U.S. is pretty impressive. I'd like to just probe that a little bit more. How does OPTAVIA go-to-market different than some of your other competitors? Again, without naming names, but maybe just from a style or type what is it about OPTAVIA that differentiates it? And maybe you can even start with why there's no real apparent seasonality in this business or at least there hasn't been since you rebranded OPTAVIA four or five years ago?

Sure. Thanks, Doug. Yes, that's a great question. We have consistently, as we moved to our new model, we moved away from anything that was in our past that looked like marketing a diet. So what that really means is that when a client becomes part of the OPTAVIA plan, they're getting a number of services that are unique to that plan. So it starts with coaching. And as you know, an OPTAVIA Coach, the majority of them have been clients previously. So they have a shared experience, and we know that makes a big difference. It also is a plan that Coaches execute that's very personalized to the individual. So it's the coaching plan. Next thing is that it helps them learn a set of healthy habits. The first habit is healthy eating, which is eating six small meals a day. And so it's – even though their objective and the outcome of that healthy eating plan is weight loss, the objective is to establish a healthy habit that will last a lifetime. So that's another difference. So the products are really in the service of learning those healthy habits. The next area of difference is the Habits of Health system. So that's a proven system that teaches people the whys behind what they're doing. So again, still focuses on instilling the series of micro habits that then extend well beyond the time that they are using our OPTAVIA fuelings to help them learn the habits and goes beyond just a habit of healthy eating to include a habit of healthy hydration, healthy exercise, healthy sleep. So again, not just a caloric restriction education program. And the last one is the community. People we know from our research lack the ability often to do something that can be difficult, which has changed your way of thinking and changing the way you're acting, some things that you've learned for, in some cases, your whole life, to a new way of thinking, a new way of acting. And so it's – that ties back to the OPTAVIA community. We have ways to connect the OPTAVIA community together. So they help each other answer questions, support each other. And so the tie into the OPTAVIA community goes even beyond just the coaching relationship to support it. So we specifically target people who have failed on diets and who are ready to try a new approach all tied to habits using coaches, community, Habits of Health and our products to help them establish those habits.

That's interesting. Do you have any data on what percentage of your clients have actually been on other weight loss programs before they came to OPTAVIA?

Since the majority of Americans have at some point, been on some kind of diet, so when I say the majority, I would say, 80% to 90% of Americans have, at some point, tried to lose weight. We assume and we have some support for this that the majority, so say, 80% to 90% have tried some other means of doing before OPTAVIA. And we did clinical research a couple of years ago to kind of bear out the importance of having the coach and learning healthy habits and that clinical research supports our claims of our approach being more effective than just based on the diet so – yes, go ahead.

Okay. I didn't mean to interrupt, sorry. I was just going to move on to see what kind of – what is the typical OPTAVIA demographic vis-à-vis the broader weight loss market demographic?

Yes. Our demographic is typically – I mean, our target is really women – middle-aged women around 40. And the demographic of weight management, I don't have those numbers. What I can say about our demographic is that it continues to expand on both ends. We're getting younger people who are focused on getting healthy. And we're getting older people who are focused on getting healthy. All of them looking for a holistic approach to their health and well-being, the other side to this, that's part of the Habits of Health system is, goes even into how you start to think about health in a more productive way. So we focus on not only healthy body, but also healthy mind and healthy mindset. So yes, the demographic is expanding on both sides. I think particularly though, it's interesting to see the demographic going to the younger group who are anxious to learn how to break what they were – break the habits that they were grew up with. Learn more about healthy nutrition, healthy exercise, healthy hydration, healthy sleep and apply it into their lives.

Thank you. That's helpful. And just one last thing. With your expanded target market, should we look for an entry into something beyond meal replacement? Is it in more traditional nutritional supplements?

Yes. I mean, as I said before, we look at – I mean, if you look at that broader health and wellness market, a portion of it is product-based. So food, supplements, those kinds of things. And we think we can continue to offer more to our clients in that area. But there are large areas of service focus as well and large areas of technology support as well, so we think we can also play in those other areas. So think of it as expanding into additional service offerings, all using our Coaches, leveraging technology. As you heard from our script, we've launched – the two apps that we've launched, we have had over 300,000 downloads with 90,000 of those in the fourth quarter for our clients. We also have accelerated the development of those apps. We've had year-to-date over six releases of each of those apps, both the Coach app and the Client app, which means roughly we have a release per week of each. And so you can see us moving more quickly and more aggressively as well as thoughtfully into leveraging these apps to support our coaching structure. And we think that's going to be a meaningful changer for us and part of what helps us expand further into health and wellness market.

Okay, that’s helpful. Thanks Dan.

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Chard, Medifast's Chairman and CEO, for any closing remarks.

We want to thank everybody who has been able to join the Medifast call today. We particularly appreciate the work of our coaches in their effort to transform the lives of now last year, over one million people who participated in the OPTAVIA plan. We are confident and looking forward to the upcoming year. We feel like we've shown our ability to work through environmental and macro challenges as well as continue to add innovation and new ways of thinking about our business and the broader market and look forward to speaking with our investors again as well as our analysts in the – to report our next quarterly results. Thank you.

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