Good afternoon, and welcome to the Medifast Second 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 second 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 June 30, 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 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 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.

I want to start by thanking you all for joining today's call. With me today is Jim Maloney, Medifast's Chief Financial Officer. Before I get into the specific dynamics of the second quarter, I want to share how Medifast is evolving to create sustainable success in the changing marketplace. As we have mentioned previously, the market has experienced some significant shifts in the last year, caused in part by changes in the macroeconomic and competitive environments. In both areas, shifts have impacted the nature of the demand and demand creation and caused Medifast and other companies to reassess drivers for long term growth. With that in mind, we have now embarked on an aggressive path to make meaningful investments to evolve our business model for growth in the new environment. Going forward, we will use our Coach-guided lifestyle program and products to extend beyond the $8 billion structured weight loss market, where we are a major player. To be clear, the traditional weight loss management sector will remain important and we will continue to implement plans designed to increase our share of this dynamic segment. Including extending our offer to better integrate with the emerging trends in medically supported weight loss and continuing to broaden our demographic focus to the Hispanic market, which will lay the groundwork for future expansion into Latin America. However, at the same time, we are also moving forward with some exciting new initiatives, which we expect will be drivers for future performance, focused on monetizing multiple Healthy Habits. I'll spend some time talking about those today. What is not changing is our mission to offer the world lifelong transformation one healthy habit at a time, utilizing our six macro habits of health and our more than 53,000 active earning coaches to help people achieve their…

Thank you, Dan. Good afternoon, everyone. Second quarter 2023 results were ahead of our guidance, as we continue to advance key initiatives aimed at optimizing profitability and reenergizing growth. Revenue of $296.2 million exceeded the upper end of our guidance range of $250 million to $270 million, but decreased 34.7% versus, the year earlier period, primarily driven by a decline in the number of active earning OPTAVIA Coaches and lower productivity per active earning coach. Customer acquisition continues to be pressured by less prospects being identified by coaches, impacted by competition from GLP-1 drugs, inflationary pressures and social media algorithm changes. We ended the quarter with approximately 53,100 active earning OPTAVIA Coaches, a decrease of 21.9% from the second quarter of 2022. Average revenue per active earning OPTAVIA Coach for the second quarter was $5,578, a year-over-year decline of 16.3%, reflecting the continued headwinds to customer acquisition, partially offset by a price increase we implemented in November last year. Gross profit decreased 34.5% year-over-year to $210.7 million, driven by lower revenue, while gross profit margin improved 10 basis points to 71.1%. SG&A expense was down 36.9% year-over-year to $172 million and decreased 210 basis points as a percent of revenue, primarily reflecting lower compensation expenses due to lower volumes and fewer active earning coaches as well as the absence of charitable donations that we did in the prior year period. Another significant factor that favorably impacted SG&A, this quarter versus second quarter of 2022, was our continued progress on several cost reduction and optimization initiatives. Income from operations was $38.7 million in the second quarter of 2023, down 21% versus the year earlier period, driven by lower gross profit, partially offset by lower SG&A. As a percentage of revenue, income from operations was 13.1% in the second quarter, a 230…

Thank you [Operator Instructions] Our first question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Yes. Hello. So I guess I would just like to ask about your coach decline sequentially in the quarter, I think it was about 10%, if I calculate it right. And that was quite a bit bigger than in the first quarter, where the decline was 4%, sequentially. So I'm just curious about like what to expect there. I know you don't want to get into giving guidance, but is this - do you think this is the worst trough point in terms of sequential decline of coaches? Or do you think it's going to get worse? Or is there something you can tell us about the cadence of the progress on the coach front. Thank you.

Sure. Thanks, Linda. The coach - active running coach number is highly influenced, as you know, by clients coming in since over 95% of our clients - excuse me, our coaches were clients previously. So it all comes back to that headwind that we continue to experience around client acquisition. So what we believe is that the three things that we've talked about, specifically the launch of the active line that took place a convention and expands our addressable market and brings in a new type of customer who are looking for exercise as part of their health journey along with moving from exploring or monitoring the medically supported weight loss segment that's creating a lot of noise and then as well as the continued progress we're making in the Hispania segment, all have the potential of increasing that overall client acquisition number. And as our client acquisition number improves, what we know is that our conversion rate, meaning the percentage of those customers who become coaches has remained at historical norms. So at this stage, we continue to focus really on that last metric that has been disrupted and focusing on those three different areas. And I feel confident that as we improve our client acquisition number that the active earning coach number will start to improve as well as the productivity per active earning coach.

Okay. Also, can you comment on the wide range for EPS guidance for the second quarter? It seems unusually wide, whereas the revenue guidance is not kind of typical. So I'm just wondering - what is it that's dictating that wide range? And what would have to happen to get to the bottom end of the range versus the top end in the second quarter? Thanks.

Yes. This is Jim, Linda. So the range of EPS guidance is twofold. One is the - as we see - if we actually hit the bottom end of the range of revenue, we start losing leverage on our fixed cost, which will impact operating income. The second thing is when you look at the tax rate, the difference between 23% and 25% is the other major difference that causes EPS to be at that lower range. So it's really those two factors that caused that. It's the loss of leverage on fixed costs and the tax rate at the higher rate.

Okay. I mean you really don't have any international operations anymore. So I'm just curious what dictates the wide range of tax rates.

Yes. The wide range of tax rate is dictated actually when you - at the lower operating income levels, it doesn't - the way our tax rate works, it will go - it will climb to a higher rate. So typically, our rate over the last several years has been about anywhere between 22% and 24%, but it could climb to 25% at the lower amounts of operating income. And that's what causes that rate decline.

Okay. Got you. And then - it's sort of interesting when you listen to other weight loss companies like, for example, Herbalife is another direct seller of some weight loss products. They say the GLP-1 drugs are really not affecting their business, at least not yet. So I'm curious why you think it would be affecting your business more? Do you think it's the relative cost of the program? You're selling a $400 per month program, whereas Herbalife is selling something that's less expensive or even individual SKUs more. So maybe their client base is different in terms of demographic? Or what do you think accounts for the difference on the business between yourself and Herbalife?

It's hard to comment on Herbalife's business, but it certainly can help clarify what we're seeing. There are three things that have affected us in the last year, and you're very well aware of this. One is the macroeconomic environment, which primarily took place last year, took out a portion of our clients who typically would have added significant value even moving into this year. The second one is change in the social media algorithms. And then the third one is one that we're talking about now, which we didn't see during the - say, until late last year, and at that point, we started looking at to try to understand exactly what the impact was. So here's what we know. We know that roughly across the country over the last several years, 10% of Americans or people in the United States have used the - some kind of medically prescribed drug. And that's inclusive of the ones that are considered the GLP-1 drugs as well as any other prescribed drug, and they currently about 3% are using. The more interesting part for us, and we've done some quantitative research to better understand this is that among our target consumer, 44% don't want medically supported weight loss or the medicines to be part of their health journey or their weight loss journey. However, 41% of our target customers do want medicine as part of their weight loss program or their health journey. So that's a significant portion of our target group. The good news related to that is that we tie back to what we launched a convention as well as the pilots that were only engaged in. We have the - it's a good fit in several areas. First, these medications work in conjunction with lifestyle as specifically called…

Okay. And then finally, you mentioned in your comments that certain expenses, I think it was the SG&A line, certain expenses were pushed out to later in the year. Can you comment on the nature of those expenses and quantify how much were pushed out to later in the year?

Yes. So - in those expenses, so we're looking at - and we mentioned this also in the prepared remarks about investments that are going to hit the P&L during the third quarter. So we're looking at about - in total, this includes the convention, Linda, but not - which was planned for the third quarter. So - but in total, when you look at our total spend of initiatives that really didn't occur other than the convention in 2022 in Q3. It's about 565 basis points. So there's additional initiatives that - some of it was thought to occurred - that would have occurred more in Q2 that got pushed out into the July, August and September time frame. So the convention, obviously, that was planned for Q3 and was one of the bigger impacts to Q3 which is included in that number.

Okay. All right. Thanks a lot. That's it for me.

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

We'd like to thank everyone for joining today, and we look forward to speaking to you next quarter and hope to see many of you at the Wells Fargo Consumer Conference in Southern California in late September. Have a nice evening.

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