Good afternoon, and welcome to the Medifast First Quarter 2023 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, this event is being recorded. I would now like to turn the conference over to Steve Zenker, Medifast's Vice President of Investor Relations. Please, go ahead.

Good afternoon, and welcome to Medifast's first quarter 2023 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 March 31, 2023, 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 also be available on the company's website. Before we begin, we would like to remind everyone that today's 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 on 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 statements 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.

Thanks, Steve. For those of you who missed the announcement in March, Steve Zenker joined the company earlier in the year as our new Vice President of Investor Relations. Sharing the Medifast story with investors is a key priority for us, and we're very happy to have Steve on the team to help us elevate our Investor Relations efforts and investment community interactions. Let me start by thanking you for joining us on the call today. We appreciate your time and interest in Medifast. With me today is Jim Maloney, Medifast's Chief Financial Officer. I'll start the call today with some color and context on the first quarter of 2023 and our continued progress against our mission and strategy. Following that, Jim will walk you through the financials. As a business, we continue to adjust to the challenging dynamics of the market, caused by shifts in the global macroeconomic environment, changes in social media algorithms, the changing competitive landscape and the resulting impact on consumer spending and behavior. Revenue was ahead of our expectations for the quarter, as we continue to place significant operational focus on returning coach and customer metrics to historical levels. Revenue was positively impacted by a policy change around revenue recognition that Jim will discuss in detail, but even excluding the impact of this change, our results fared better than expected. Both EPS and operating income were well ahead of expectations. Our Q4 price increase, commission plan optimization measures and cost control actions had a positive impact on our operating margin, helping offset inflationary pressures on our gross margin. The number of active earning OPTAVIA Coaches in the quarter was down both sequentially and compared to the prior year period. Coach productivity was also down compared to the prior year, but up versus the prior quarter.…

Thank you, Dan. Good afternoon, everyone. First quarter 2023 results were ahead of our guidance, as we continue to make progress on key initiatives to drive growth, efficiency and profitability. Revenue decreased 16.4% versus year earlier period to $349 million, primarily reflecting a lower number of active earning OPTAVIA Coaches, lower average revenue per active earning OPTAVIA Coach. A change in revenue recognition timing provided somewhat of an offset to these factors by including a few days' worth of sales, approximately $9.1 million that would otherwise have been deferred until the second quarter. Starting in the first quarter, we began recognizing sales and resulting coach compensation when the products are shipped, as opposed to when delivered due to changes in the sales order, terms and conditions with our customers. We ended the quarter with approximately 58,700 active earning OPTAVIA Coaches, a decrease of 8.1% from the first quarter of 2022. Average revenue per active earning OPTAVIA Coach for the first quarter was $5,945, a year-over-year decline of 9%, but up from the prior two quarters as ongoing headwinds to customer acquisition more than offset the price increase we implemented in November last year. Gross profit decreased 18.5% year-over-year to $246.4 million, driven by lower revenue, along with cost inflation from raw ingredients, shipping, and labor. Gross profit margin declined 180 basis points to 70.6%, reflecting deleverage of fixed costs due to lower volumes, the impact of programming changes in January aimed at driving customer acquisition, and higher product costs stemming from inflationary factors. SG&A expense was down 22% year-over-year to $192.9 million and decreased 390 basis points as a percent of revenue, primarily reflecting progress on several cost reduction and optimization initiatives as well as decreased coach compensation due to lower sales volume and fewer active earning coaches. Additionally, we…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Hi. So just first, I had a small question. Just to clarify your margin statements, your guidance statements regarding operating margin. When you said in the second quarter and the second half, it would be below 2022 level, do you mean the level for the full year last year, which was 13.5%, or do you mean each of the periods would be down year-over-year in operating margins?

Yeah, Linda, this is Jim. So we're expecting, as we mentioned in the prepared remarks, that due to the accelerated investment in growth initiatives this year, that a lot of the spending in those growth initiatives will occur in the back half of 2023. And due to timing of coach compensation that we're expecting that it would be below each quarter in 2022, to be clear. So hopefully, that's helpful.

So each quarter would be below the prior year quarter?

Yes, correct.

Okay. Got you. And then can you -- I know you kind of gave some of the elements of the March through May promotion, or I don't know if it was a promotion or a program. Can you give a little more color on the specifics of that and how it's either similar or different from some of the other programs recently?

Sure, Linda. This is Dan. To give you a little bit of context, I mean, you heard what our quarter was. We surpassed expectations on top and bottom line. But the pressure on customer acquisition can still be seen in our year-over-year declines, both in revenue, active earning coaches and coach productivity, which was down year-over-year, but up sequentially for the last two quarters. We're really focused right now on taking what we have solved for, which is customer retention. So that remains at historical levels, despite the significant disruption from last year. And then building in the programs needed to help us reestablish our growth with them. So our Q2 guidance reflects the continued pressure on the coach productivity, and that's really what we're focused on. So the Q2 program that we mentioned is really putting into the front end of our compensation structure a bonus that compensates each coach for bringing in three new customers or five new customers. So if it's three new customers, it's an additional 3% on frontline qualifying volume. If it's five, new customers, it's 5%. So this is really optimizing our compensation structure to allow us to focus the behaviors from our coaches or their efforts in the right place. So that's why that's being put in place. And then additionally, we -- because we have the ability now to understand a little bit more about what the environment has in store for us, where actually, as Jim mentioned, making some very specific strategic investments in the business to transition us to a more competitive position. So specifically, the investments are going to be continued in both refinement of training, programs and our offer. We're also very specifically announcing a new product line that will be shared with our coaches in the July…

Okay. And then I've had some questions from investors. And I guess, it's highlighted even more here about your dividend because it's $1.65 per quarter and yet your EPS guidance for the second quarter is $1.32 to $1.44. So it's below the dividend levels. So, just kind of wondering if this situation persists, clearly, you have cash on the balance sheet and you have an untapped revolver. How long would you tap into the revolver and/or use cash on the balance sheet to pay your dividend, if necessary?

Yes. So, we -- our capital allocation strategy or principles, Linda, have really not changed that significantly. So, first, we are going to continue to invest in organic growth opportunities, and we're also evaluating inorganic opportunities, all to achieve getting back to 15% or better growth. We do believe we have sufficient funds for the foreseeable future regarding our cash flows for the dividend. So, we believe that we have significant funds that should cover the dividend. As we invest in this growth and get back to growth, we believe that the dividend is not at risk at all. So, excess cash flows from organic growth opportunities and the dividend, we still will continue to look at opportunities and stock repurchases.

Okay. And then with regard to the drugs, the GLP-1 drugs, I would assume, but correct me if I'm wrong, that it wouldn't make a lot of sense for you to acquire a telehealth platform or something like that, like Weight Watchers did. But correct me if I'm wrong on that. And if that's the case, then do you plan to modify your program such that it's kind of -- is complementary in some way to usage of the drug?

Yes. So, we're obviously spending a lot of time thinking about this. Our heritage, our history, and actually our founding was all in the medical side, originated with the doctor who is trying to help physicians help their patients in their health and wellness journey. So, that remains at the core of who we are and what we do. And as a result, that's why we have a lot of health care professionals who are among our coach ranks. And that's why we invest in clinical studies. That's why we invest in the science, all tied to that background. So as we see the drugs, which mean this set of drugs are new, but drugs and other medical interventions are not new. We evaluate those changes individually and try to understand how they can -- how we can help use those with one singular goal, which is to help the customers of our coaches get healthy. So what we're seeing right now is that it's generating a lot of noise. I think we're all seeing it. There's -- GLP-1 drugs are in the news. There's a lot of advertising going on. It's throughout social media. And so there's a lot of noise right now. And we're starting to get more questions coming up through clients that to our coaches about, how they should be looking at GLP-1 drugs. We do, as you are aware, fairly frequent national surveys to understand what the sentiment is around health and wellness, what people are doing. And our most recent national survey show that customers prefer 3:1 a lifestyle and behavioral change solution to their weight management versus a drug therapy. Now having said that, those numbers have probably changed since the beginning, so we'll continue to watch that and track this number closely.…

Okay. And then just one last question. Can you just – do you have an operating cash flow and a CapEx number for the quarter?

Yes. So the operating cash flow for the quarter, Linda, was -- we were actually better by 47%. So the operating -- the net cash flow provided by operating activities was $64 million and CapEx was $2 million for the quarter.

CapEx was, I'm sorry, $2 million?

$2 million, correct, yes.

Okay. Thank you very much.

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

I'd just like to conclude by thanking everyone for your time on the call today and for the questions. We appreciate your interest in Medifast and the work we do to deliver lifelong transformation, one healthy habit at a time. As you've listened to our message, I think it's clear that as a business, we're continuing to take proactive steps to adjust to the changing dynamics of the market. We've galvanized our team to adjust our existing work and customer acquisition, enhancing our efforts in coach-led training, programming, and positioning to activate new and former clients. At the same time, we're intensely focused on a series of growth initiatives such as development of the US Hispanic market and expansion into adjacent product categories. We have the investment firepower to grow and the deep management experience to take advantage of opportunities that lie ahead. Most importantly, we have a uniquely differentiated model that provides us with a powerful platform to achieve our long-term sustainable growth goals. We're as dedicated to our mission as we have been ever. And I'm excited by the journey that lies ahead. Thank you, as always, for your interest in Medifast, and we look forward to speaking with you again next quarter.

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