Good day, and welcome to the Medifast Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Reed Anderson with ICR. Please go ahead.

Good afternoon, and welcome to Medifast's Third 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 September 30, 2022, and went out this afternoon at approximately 4:05 p.m. 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 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 today. On the call with me is Jim Maloney, our Chief Financial Officer. I'll start with an overview of the third quarter and continued evolution of our business. Then Jim will run through our financial results in more detail. Third quarter has been one of calibration and adjustment. We are pleased to see a faster-than-expected recovery in customer retention, which is now back to historical norms following the disruption in Q2 due to consumer spending pressure from higher inflation and interest rates. Customer satisfaction numbers remain at historical highs as our operating infrastructure continue to enable us to deliver a high-quality customer experience that drives retention and brand ambassadorship. Customer experience is one of the key differentiators that allows us to maintain our leadership position, which was recently underscored when Euromonitor, an independent market research firm, named OPTAVIA as the top weight loss program in the U.S. by revenue for last year. Revenue of $390 million in the third quarter was down less than 6% versus the prior year period, representing an improvement on the outlook we provided earlier in the year of a mid-teen double-digit decline. The number of OPTAVIA Coaches increased 8.5% year-over-year to 66,200, while revenue per active earning coach declined 12.9% to $5,897. Gross margin of 72.5% was down year-over-year but improved 150 basis points sequentially. Additionally, we proactively manage our SG&A expenses, taking meaningful steps to bring costs in line with how our business is operating, and we delivered 110 basis point reduction on an adjusted basis versus last year despite lower revenue. We achieved earnings per share of $3.27, a decrease of 8.1% compared to the prior year and earnings per share of $3.32 on an adjusted basis…

Thank you, Dan. Good afternoon, everyone. Revenue in the third quarter of 2022 decreased 5.6% to $390.4 million from $413.4 million in the third quarter of 2021. We ended the quarter with approximately 66,200 active earning OPTAVIA Coaches, an increase of 8.5% from the third quarter of 2021. Average revenue per active earning OPTAVIA Coach from the third quarter was $5,897, a decline of 12.9% driven by a decrease in the number of customers supported by each coach. Gross profit for the third quarter of 2022 decreased 7.9% to $282.8 million compared to $307.1 million in the prior year period, reflecting lower coach productivity. Gross profit was 72.5% in the third quarter of 2022 versus 74.3% in the comparable prior year period. The 180 basis point decline in gross profit margin was mainly due to inflationary economic conditions that are driving higher raw ingredients, shipping and labor costs. SG&A expenses for the third quarter of 2022 decreased 6.8% to $234.7 million compared to $251.9 million for the third quarter of 2021. SG&A as a percentage of revenue decreased 80 basis points year-over-year to 60.1% versus 60.9% in the third quarter of 2021. Non-GAAP adjusted SG&A decreased 7.3% to $233.6 million, and non-GAAP adjusted SG&A as a percentage of revenue decreased 110 basis points year-over-year to 59.8%. The decrease in non-GAAP SG&A was primarily due to lower OPTAVIA Coach compensation expense. Non-GAAP adjusted SG&A excludes expenses related to donations made to support the Ukrainian relief effort. Income from operations decreased 12.7% compared to the prior year period or $7 million to $48.2 million primarily as a result of decreased gross profit partially offset by decreased SG&A. Income from operations as a percentage of revenue was 12.3% for the third quarter of 2022 compared to 13.3% in the same period in 2021.…

Thanks, Jim. In closing, we are confident in the power of our coach-based model and the habits of health transformation system to change lives for the better. It is our unique model backed by an incredible coach community that is highly adept at engaging and nurturing relationships. We have a strong management team with a proven track record of running and scaling businesses and talented and nimble groups of employees with a passion for what we do. More than that, we have a unique, powerful business model that is scientifically proven to be effective and that is changing lives every single day. The core of this business is strong, and we have invested appropriately over the recent years to create a foundation that we can build on for many years to come. There's more work to be done, and we must always fine-tune our operations, processes and initiatives to reflect market conditions. The reality is that the environment today is one of constant change, and that means developing a resilient and strong business capable of succeeding whatever the circumstances. We feel confident that our initiatives and long-term strategy set us up well to deliver our growth and financial objectives for 2023 and beyond. With that, let me turn the call over to the operator for questions.

[Operator Instructions]. And our first question comes from Christina Xue with D.A. Davidson.

This is Christina Xue on for Linda from D.A. Davidson. So firstly, we are really happy to hear that the retention rate is now back on track. A couple of questions. Firstly, do you mind commenting a little about do you expect the coaches to be up or down sequentially in the fourth quarter? I think for the third quarter, we were up quarter-over-quarter, we were down a little sequentially. So just want to get some opinions on the fourth quarter.

Yes, Christina, this is Dan. I'll give you a little bit of color around that and let Jim ask the -- answer the specific detail that you talked about or that you questioned about related to coaches. So it's important to kind of go back and understand where we've been, to kind of give some context and some rounding for where we're going. As you know, we finished 2021 strong, growing 60%. We finished our supply chain build-out initiatives, which allows us to grow into the future, and we initiated a 3.5% price increase to counter some of the inflationary pressures. So that's where we ended last year. As we started 2022, we had a strong start. We focused on bringing in new clients and executed a similar program to what we had executed in 2022 -- excuse me, in 2020. And importantly, what we saw was that we were able to bring in the highest number of new customers in the history of the company, just under 0.25 million new customers came in. Equally important is that our coach productivity was the highest in company history. So those coaches, who we're acquiring, and this was during an inflationary period, we're able to do so at a high rate. The challenge we brought into in the latter half of Q2, as you know, was that our client retention was disrupted. Or another way of thinking about that is our repeat rates were disrupted. So we lost approximately 15% of our active clients across all cohorts. That's true regardless of whether they joined in 2020, 2021 or more recently. And what we know is after surveying those customers is the primary reason for leaving was inflation as well as uncertainty around what the economic future was going to bring with it.…

Yes. So Christina, as Dan mentioned, the guidance we provided assumes the macro headwinds. And as Dan mentioned, we believe it's conservative guidance. And the good news is retention has recovered in Q3, which is really good news. However, the carryforward impact from Q2 of the retention issues left us with suboptimal coaching customer tenure that put pressure -- that will put pressure on Q4. So in Q3 and beginning in Q4, what we're seeing is lower-than-anticipated customer acquisition, which we expect will impact the productivity in Q4. So productivity, we're expecting to be lower, and we'll have a more modest headwind in coach count in Q4. So as Dan mentioned, the good news is we'll be heading right into January, which is the best time for client -- customer acquisition for our company, that will help with the 10-year mix with coaches and customers.

Okay. That makes sense. So with regard to the retention rate, I think you mentioned there is going to be another round of price increase roughly starting in November, if I remember correctly. So I wonder what are your thoughts on how do you expect your clients to react on the latest price increase, would it be an issue for retention rate again?

Yes. We approached pricing very thoughtfully and took some extra time to contemplate and actually learn from what we had seen versus last year and also through the year as we've looked at how we can optimize our acquisition offer. So the 4.5% reflects what I'd describe as a modest increase that we believe will be easily absorbed by new clients. And it's being coupled with some initiatives to make our acquisition kits more easily kind of affordable for new clients. So I think a good way to think about this is the client acquisition kit and the pricing and price point is the most important base. What we have seen is once a client will see success on the program, likes the food and likes the coach, that's what ultimately drives the repeat rates or the retention rates. So we feel confident that we can increase the -- we can execute the 4.5% across all of our consumer -- consumable products without creating a significant headwind from a pricing standpoint that will cause any further impact on client acquisition.

And I'll add, Christina, that, when you look at 2023, we have in the longer term to get to our objective of 15% operating income margin. So looking at the long term, we have more than enough margin assurance initiatives. Dan mentioned the price increase, but we also have increased our capabilities over the last 12 months in our procurement organization, which have a significant amount of cost savings opportunities that we'll start seeing in 2023, and it will continue into 2024. We also have value engineering initiatives that not only will reduce overall cost, it will also increase customer satisfaction. And then finally, we are looking at optimizing our coach compensation and G&A costs to support our growth and help us adjust in these new business norms.

Okay. So a follow-up on the price increase. Is it applicable to all customers? Or is it only applied to the new customers?

To all customers.

Okay. Maybe last question from me. So what do you expect your clients to react? Well, actually, maybe -- and sorry, another one. Do you have -- do you possibly like have a rough idea in which quarter of 2023, we will see a positive year-over-year sales growth? Would you be able to comment on that?

Yes. Go ahead.

Yes. So yes, we don't really -- we're not providing guidance for 2023. And so it's difficult to answer that question. But all we really can say is we haven't gone off our long-term objectives of 15% growth in the long term on an annual basis consistently. So that's our objective as a company, and we're building out capacity and technology capabilities, and we're not slowing down with those investments because we know that our offering is well needed, as Dan mentioned about the -- that consumers still need our offerings. So even though they're adjusting their spend, health and wellness is one of the spends that we believe they're going to continue with.

Great. Thank you for your questions and for taking time to join us today. The last 3 years has been interesting for businesses of all shapes and sizes to navigate. First, the global COVID pandemic upended many of the practices we held to be true. And now we're in a period of sustained inflation, interest rate rises and possibly a recession. I can say that at Medifast, we're committed to delivering shareholder value for the long term, regardless of the macro conditions. This means driving for consistent growth, not just today, but in years to come. It's our job to adjust, learn and continue to build, and that's exactly what we plan to do. Thank you, as always, for your interest in Medifast, and we look forward to speaking with you again next quarter.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.