Good afternoon. And welcome to Medifast Second Quarter 2022 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 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 second quarter 2022 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 quarter ended June 30, 2022 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 of 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 second quarter and the continued evolution of our business, then Jim who will run through our financial results in more detail. Following our prepared remarks, we will open up the call to take your questions. Second quarter results were strong with revenue up 15% to $453 million, another company record, driven by continued growth in the number of OPTAVIA Coaches. Active earning coach numbers reached 68,000 in the second quarter, a 14.9% increase versus a year ago, and up 6.4% sequentially from the first quarter of 2022. Revenue per active earning coach, which is a measure of productivity of coaches supporting customer's was $6,667, slightly above levels in the prior year period and up 2% sequentially. Moving to our financial results. Earnings per share of $3.87 on an adjusted basis were better than expected and just below the $3.96 we reported in the second quarter of 2021, reflecting the impact of some short-term transitional factors on near-term gross margins as discussed last quarter. We've seen impressive results from our essential start customer acquisition program, which launched in March of 2022 and extended through May 10th. The program was highly effective in attracting a new cohort of customers in the first and second quarters. We first leveraged a program similar to this in April of 2020 at the height of the pandemic to both attract new customers to OPTAVIA and to reactivate lapsed customers who are interested in reengaging with the coach and the OPTAVIA program. The data and learning we gathered from the original cohort provided valuable insights that were integrated into this year's…

Thank you, Dan. Good afternoon, everyone. Revenue in the second quarter of 2022 increased 15% to $453.3 million from $394.2 million in the second quarter of 2021. We ended the quarter with approximately 68,000 active earning OPTAVIA coaches, an increase of 14.9% from the second quarter of 2021. Average revenue per active earning OPTAVIA Coach for the second quarter was $6,667, slightly above year-earlier levels and up sequentially. Coach growth and productivity continued to rise in the quarter driven by successful customer acquisition program and growth in the number of customers supported by each coach. Gross profit for the second quarter of 2022 increased 9.5% to $321.7 million compared to $293.7 million in the prior year period, reflecting strong revenue growth, partially offset by increased cost of sales. Gross profit margin was 71% in the second quarter of 2022 versus 74.5% in the comparable prior year period. The 350 basis point decline in gross profit margin was attributable to customer acquisition program run in the quarter, and the elevated product and labor expenses as a result of continued inflationary pressures. SG&A expenses for the second quarter of 2022 increased 17.4% to $272.7 million compared to $232.3 million for the second quarter of 2021. SG&A as a percentage of revenue increased 124 basis points year-over-year to 60.2% versus 58.9% in the second quarter of 2021. Non-GAAP adjusted SG&A increased $31 million to $263.3 million, and non-GAAP adjusted SG&A as a percent of revenue decreased 84 basis points year-over-year, to 58.1%. The increase in non-GAAP SG&A was primarily due to higher OPTAVIA Coach compensation expense, incremental costs related to the continued investment in information technology and distribution, and increased credit card fees resulting from higher sales. Income from operations decreased 20.3% compared to the prior year period, or $12.5 million to $49…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stephanie Wissink at Jefferies.

Hi, morning. It's Chris Neamonitis for Steph. Thanks for taking the questions. I just want to take a look kind of stepping off the second quarter. Obviously, you just mentioned Jim, that the guidance calls for double-digit declines in the third quarter. So, maybe help us reconcile how that works and maybe a little more color in terms of the step change following a pretty strong 15% growth quarter? Can you maybe just talk about the trends you saw in kind of pretty big step function down.

Yes. So thanks for the question, Chris. The reason we're calling out a double-digit decline in Q3 is because we -- when we look at the history of macro events, we have seen when you think about the pandemic, we saw that our retention rates of customers dropped at the beginning of the pandemic, and it took, I'll call it, six months to recover fully. But through that time, we saw there was a deeper issue in the early months and then it got better over time. So, even though this is different than the pandemic, we do have some data points early on in Q3 that retention rates are stabilizing and that's a good sign that we can build back to a more normal level of retention rates later on this year.

Chris, maybe even a slightly, kind of, a different way of looking at it, but consistent with what Jim just said. As you know, our model depends on bringing in a healthy number of new clients. That happened in Q1 and Q2, which was reflected by our guide up after Q1 and as we went through Q2, we saw the demand for the product to continue to increase. The stub function down was really related to what we talked about earlier, which is, I'll say, a little bit of a shock to the system as consumers began to feel the effect of the inflation. What that did was that those customers who have been brought in a disproportionate number didn't repeat after the first month. But not only did that happen, there was a group even in those previous cohorts of customers who also did not repeat when we would have expected they would. So it basically creates a significant downward pressure on the productivity per active earning coach because there are fewer clients or customers in the system. And so that's -- that change to overcome that change, we need to reestablish the cadence of the business, which starts over again at attracting clients and remember that's the program that we have in place now is motivating coaches -- current coaches to sponsor new coaches and to bring in that new client base in that downward pressure in Q3 is reflective of beginning to reset that productivity that was lost as a result of that macro disruption to our retention curves.

Yes. So Chris, when you think of our customer acquisition program that occurred in March through May, we actually saw better-than-anticipated results during that time frame. So we can conclude that it's really not a demand thing that health and wellness is still a need for consumers and it's really the macro environment that is causing this moderation in retention rates. So hopefully, that's helpful.

That is. I guess, on specialty intrigued, just given kind of previous commentary around the acquisition program being so strong and repeat order rates holding up in line with historical. So I think you're saying that there was, in fact, a deviation from kind of that high 70%, mid-70% repeat order rates. But, I guess, looking forward, right to the back half of the year into 2023. What gives you confidence that these, kind of, repeat order rates will improve if, kind of, the underpinning reason is the macro. I think about if we move into a, kind of, a prolonged period of a tougher macro, what gives you confidence that you and the coach base can kind of overcome this?

I think the best example we have of going through a macro event like this is the pandemic that happened two years ago. What we saw in those initial months were an adjustment to, I'll say, consumer sentiment as they face something they hadn't faced before. We think that's what we're seeing now. We saw in the early phases or the early months in Q1 and the first part of the second quarter our retention curves held just like they normally would in a normal year. It wasn't until the news started getting bad, and they start filling, I think probably the simplest way of thinking about it is the effect when you put gas in your tank or when you go buy groceries. So what we believe is that, there will be some adjustments made, including decisions on how you -- and how -- and what the consumer spend on. And that just as before, the -- kind of Q2 shock, if you will, around inflation, that the spending on things related to health and wellness will be prioritized higher again, and that's what we'll bring it back in -- bring back our product, our service and our ability to grow back into focus.

Okay. Last one for me, just on the guidance. So could you give us a little more color on how you ultimately arrive to the numbers? I'm just curious about what it assumes in terms of trends from July, which I think you suggested things were stable. So should we take away that the guidance just takes July trends and run rates through the back half of the year? Is that the right way to think about it?

Yes. So the guide is taking into account what we saw in the latter part of Q2, because we don't have enough data points for Q3 to extrapolate that through the rest of the year at this point. But we -- as Dan mentioned, we are confident that there will be a normalization getting back to normal levels of retention, taking into consideration the -- what we've seen before with macro events.

Just one other point that's important that we're watching closely, and it's reflected in the programming as well. Typically, in these kinds of environments, the attractiveness of a coaching business becomes enhanced. And we believe that will be the case here as well. So we're watching very closely how our conversion rates translate in this environment. And the program that we have running currently is reflective of that belief and helping move that along. So that's -- what I'd say is, we're not sitting back waiting to see what happens. We've seen the adjustments in people spending and we're making the adjustments as we have in the past, whether it's through a macro disruption or in some cases, disruption through some of our own operational initiatives and making the adjustments that will allow the business to kind of go back into a normalized state. So the confidence you're hearing about the return is the trends that we're watching. And also the historical success we've had with making the adjustments to the business and bringing the business and bringing the cadence of the attraction, the ability to support clients on plan, the conversion of coaches and developing the business consistently that we've been able to accomplish in the past.

This concludes our question-and-answer session. I will now turn the conference back over to Dan Chard for any closing remarks.

I'd like to thank all of you who have been able to have joined, including employees, coaches and OPTAVIA clients. I just want to end with a few closing comments, as we move through the current quarter. As I said, while we experienced headwinds in the changing macro environment during the quarter, we've quickly made the adjustments to reflect the new market dynamics. We have a stated mission to expand our business in the broader $230 billion health and wellness segment by leveraging the Habits of Health Transformational System. And we believe that our outsized share and share leadership in the United States in the weight management category segment is reflective in our access and expanding beyond those who simply want to lose weight. And we're actively building new segments in the United States with a particular focus on the Hispanic segment. And we view this as preparation for future steps on international expansion. And lastly, we continue to invest in technology that we believe will support our long-term -- the long-term productivity of our coaches. So we look forward to sharing the results of our current quarter and our progress against our long-term goals, as we move through this quarter and have our next earnings release. Thank you, everyone, for joining.

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