Greetings. Welcome to the Medifast First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to your host, Steven Zenker, Vice President of Investor Relations. You may begin.

Good afternoon, and welcome to Medifast First Quarter 2024 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, 2024, that 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 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 these 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.

Thank you, Steve, and thank you all for joining us today. With me today is Jim Maloney, Medifast's CFO. I'll give you an update on the progress we're making in our continued business transformation, and Jim will then provide an update on our quarterly financial results. Medical innovation is empowering more people than ever before to achieve their weight loss goals, and that presents a remarkable opportunity for Medifast as an organization. The expanding use of GLP-1 medications for weight loss, as well as expected further innovations in the medically-supported weight loss space is creating new markets in both the care and support segments of the weight-loss industry. It is anticipated that these 2 areas will become an integral part of the health and wellness journeys of many individuals. As more and more people begin to use medication and make the necessary lifestyle modifications to help achieve greater long-term health and wellness outcomes. For Medifast, the focus of our business transformation is to build a set of differentiated capabilities that will allow us to be a leader in this dynamic and changing health and wellness space. Consistent with our historical focus, we will also continue to support other related health outcomes that are tied to adopting healthy lifestyle habits. With our recent moves to expand our product offerings and target supporting individuals in the medically supported weight loss market, we believe we have significantly expanded our total addressable market by broadening the scope of our consumer offer. Independent research that we commissioned shows that approximately 50% of our prospective customers would consider using GLP-1 medications to aid in their weight loss. As such, it is clear that this high-growth area offers considerable opportunity and fits well with our expertise with over 40 years of history of helping people improve their…

Thank you, Dan. Good afternoon, everyone. 2024 first quarter results were in line with our guidance as we continue to execute our business transformation initiatives that we believe are integral to our success. Revenue for the first quarter of $175 million was at the upper end of our guidance range of $155 million to $175 million, a 49.9% decrease versus the year earlier period, primarily driven by continued pressure on customer acquisition amid the growth in popularity of weight loss medications, which has led to a decline in the number of active earning OPTAVIA coaches and lower productivity per active earning OPTAVIA Coach. We ended the first quarter with approximately 37,800 active earning OPTAVIA coaches, a decrease of 35.6% from the first quarter of 2023. Average revenue per active earning OPTAVIA Coach for the first quarter was $4,623, a year-over-year decline of 22.2%, reflecting the continued headwinds to customer acquisition. Gross profit decreased 48.3% to $127.3 million for the first quarter of 2024, driven by lower revenue. Gross profit margin improved 220 basis points to 72.8% positively impacted by efficiencies in inventory management and cost savings from the fuel for the future initiatives, partially offset by increased shipping costs. SG&A expense was down 38.1% to $119.4 million for the first quarter of 2024, primarily due to fewer active earning coaches and decreased coach compensation on lower volumes, partially offset by the start of company-led advertising expenses, which continues to be in the early stages, as well as market research and investment costs related to medically supported weight loss. SG&A as a percentage of revenue increased 1,300 basis points to 68.3%, primarily as a result of the loss of leverage of fixed costs due to lower sales volumes, as well as factors I just mentioned. On a non-GAAP adjusted basis, which…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of James Salera with Stephens Inc.

I wanted to start with the 2Q revenue guide. If I just take the midpoint, it looks like it's down around 46%, which isn't much different than 1Q. But I would think between the easing comp in 2Q and then the ramp-up of the company-led marketing that there would be a more significant improvement there. Is there something I'm overlooking? Or any color you could offer on that would be helpful.

Sure, Jim. This is Dan. I'm going to let Jim answer that question, but I just wanted to make a couple of points that will kind of help inform how we're thinking about that guidance. As you know, we've made some significant progress that started at the end of last year with the collaboration agreement. And importantly, as we're looking at how we look forward at the new market. We're specifically focused on the support market, which for the first time, we're measuring and we're doing this through a study that was commissioned by us with BCG, that has the support market, GLP-1 support market at $13 billion this year, growing to $50 billion. Again, importantly, we've now launched a new product bundle, which is now bundled with what is offered by LifeMD. And that bundle is going to be selling for now $282. It includes both the clinician prescription, blood work and insurance support, as well as our traditional support of the coach community, nutrition support, which is the nutrition dense fueling, our OPTAVIA app and the habits of health. So that number, $282 is roughly, well, it compares to $400 of what we used to offer our introductory bundle for our five in one plan. So, you can see there's a pretty significant change in that. We also are going to be launching a new set of products by the end of the year, and also, we'll be announcing in Q3 and Q4, some additional integration that will create a seamless payment and ordering system for the 2 platforms. And so, we expect -- what we expect in the back half of the year is to start to see the impacts of these initiatives. So Q3, Q4, first with improved coach productivity, so driven by client acquisition, and revenue per coach. And then going beyond that to improved client retention as we're able to keep particularly GLP-1 clients for a longer period of time. And with that, I'll turn it to Jim to answer the question about guidance.

Yes. So, when you consider our guidance for Q2, Jim, we're assuming the current headwinds on customer acquisition continue in the near-term. The rollout of the advertising will not happen until the very -- the latter part of Q2. So, our guidance does not show that impact. And the amount of spend that will happen is really tilted towards Q3. There will be a little bit higher level of advertising versus Q1 and Q2. But really, the spend is going to occur more rapidly in Q3. So, that's what you're seeing there. Regarding -- we're making headway with LifeMD. We are seeing -- and we're happy with the level of support that we've been able to do with LifeMD. So, the number of customers that are going and using the LifeMD solutions is increasing, but we do believe it's going to take continued time. And we're hopeful that we're going to see that into Q3 and beyond, as we have the integrated solution fully up and running in Q3. So hopefully, that helps us.

Yes. I appreciate the color, guys. Jim, if I can maybe ask you a follow-up just on the cadence of the marketing. If I read the slide deck right, you guys spent about $2.5 million in 1Q, which means you have $27.5 million for the rest of the year. Can you just give us a sense for how steep the ramp is in the back half? Like whether dollars or percentage, how much of that 3Q to 4Q?

Yes. So, it is very steep. We're expecting that the level will be a little bit higher in Q2, and that's why you're not seeing -- the benefit of that happen in Q2 versus our guidance. So, it's slightly higher, but it's not to any degree that would be meaningful. So, we're still in the learning phase of this, and I tried to indicate that in my part of the script that we're in the early stages of this. We are going to launch new messaging in Q2, but it's going to be at the very end of Q2. And the ramp of it is going to happen into Q3. So the majority -- to answer your question specifically, the majority of the $30 million of spend will happen in Q3.

Our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

Can you please talk about -- so, in terms of the pricing for the new integrated program, my understanding is LifeMD charge is very low for the drug itself. So, the $282 per month is sort of all inclusive, right? I mean, it's the coaching, the Rx script, to the blood work and really most of the drug cost. Am I understanding that correctly? And also, can you explain how is the revenue going to be booked? Are you going to record a portion of that $282 in revenue, or is it split? Or how is that revenue split going to work?

Yes. Let me answer the first part of your question, and then I'll let Jim answer the revenue question. So, the $282 is inclusive of both of the services from our OPTAVIA program as well as LifeMD. It does not include the cost of medication. And you pointed out, Linda, that there's some different, very price competitive options through LifeMD that are both branded and compounded, but the $282 does not include the cost of the medication. And the split between the 2 is roughly $217 for the product and coaching bundle, and roughly $65 for a 6-month commitment to LifeMD.

Yes. So, Linda, we're not going to be recording the $65 that Dan is referring to for LifeMD's portion of this. So, they're going to -- they would record the $65, and we would record the $217. The $65 LifeMD requires a 6-month commitment. So that's the commitment that you have to make for LifeMD. The $217, there is no commitment for that number, from a customer.

Sure. And then the $217 million includes some full products, some fuelings, or clarify what they --?

It includes our active way protein supplement and fuelings. So, both of them at a kind of program designated amount for a full month. And in addition to that, it includes the time from a coach, personalized coach. Access to the community access to the OPTAVIA app that includes the recipes as well as weight trackers, which is integrated with a Wi-Fi scale, and it also includes the access to the Habits of Health transformation system.

Okay. Can I also ask, how much -- in terms of the LifeMD use of the compounded product, has there been any change in availability of that compounded product? Because we know that at some point, it may kind of go away. Is there any update on that? And what do you anticipate as a strategy if there is constraint of a compounded availability? Like if the drug becomes $1,000 a month for the customer, how does the customer afford to pay another $300 a month? What's the strategic thoughts on that?

Yes. We're working very closely with the LifeMD team who's very keyed into this key part of the questions. The strategy to date has been to offer a branded solution for those who are insured, or who can afford to pay the out-of-pocket. There are cases either that they may not be insured, or in some cases, because of the shortages, the branded solutions are not available, whereas the compound solutions have been readily available. In the case of how long that this current structure will last, I think, will be determined largely by the FDA. As you know, compounders are operating under an exception, which is that they're allowed to offer a compounded solution when we're in a period of scarcity. And we continue to be in this period of scarcity that's projected to last, I believe, several years as the pharmaceutical companies build more capacity. I think there are some other elements that will impact us as well, which could include how quickly insurance companies and Medicare cover the drugs beyond the current exceptions. So, what I would say is we feel confident and comfortable that the approach, which is offer both branded and the compounded solution where appropriate, is appropriate -- is relevant for the short-term and even the next several years.

Okay. And then one of the issues, I guess, that is going to happen here is that you have a large number of coaches, even though they've declined, just a moderate amount of new people running the drug, LifeMD only has a small number of clinicians. So, I think it's somewhere around 550 clinicians that they have. How are that number of clinicians going to be able to handle such a large potential number of new customers for the script? Like are they planning to ramp up the number of clinicians? Or can you give a little color on that?

Yes. specifically uses physicians in their services that are licensed in all 50 states. So, that helps with part of it. They can support patients across the country. They also have a very specific and focused hiring strategy, which has allowed them to keep up with their demand. And we work in close collaboration with -- we're working in close collaboration with them to ensure that they understand how our demand could increase. And at this point, we believe they have the capacity in the short-term as well as the capability in the long-term to scale that number of clinicians to support the growing demand.

Okay. And then is there any -- just on the timing difference thing that the $9.1 million, can you just kind of explain what that is? And does that shift $9.1 million of revenue from first to second quarter? Or can you just explain more about that?

That's referring to -- that's actually -- I believe what you're referring to, Linda, is last year, we did a change in revenue recognition. So, there's no impact to 2024. That was actually 2023, and it was in the earnings release, we just were referring back to 2023. The reason for the change of the revenue recognition was due to the change that was made with the terms and conditions that we have with our customers, and that all occurred in Q1 of last year. So, there's -- once we get past Q1, there's no impact for the remainder of 2023 or going into 2024 at all.

Okay. Got you. And do you have an anticipation of how much capital spending will be in 2024?

Yes. I mean, we're looking at spending at the same levels were a little bit more than 2023. So, we didn't really give guidance all the way for 2024. But I would say it's going to be at least the same level as 2023, if not a little bit more than that just because of the investments that we're making regarding the seamless offer and the technology spend that's going to be hitting capital spend in those areas.

Okay. And then finally, I just wanted to ask about gross margin. I guess that was the area of the report that was most below my modeling, but I kind of think I didn't fully recognize the seasonality, like usually gross margin is kind of lower in the first quarter anyway. But do you kind of foresee like stability in gross margin percent? Or like for some reason, I had modeled for the full year kind of flattish, but is there any color you can give to help us on the gross margin outlook?

Yes. I mean when you look at the gross margin, we were 220 basis points higher than 2023. And most of that impact versus the prior year was due to the fuel for the future initiatives that we referred to, which helped gross margins. So, I would expect that gross margins would be steady for the next quarter. The reason is because we're really -- when you look at commodity inflation, we're basically seeing it to be flat for at least the next quarter. So, I would expect it to be very similar.

So you mean flat with -- compared with first quarter, flat sequentially?

Correct. Flat sequentially, correct.

Okay. That's very helpful. That's all I have.

Thank you. And since we have no more questions, I will now turn the call back over to CEO, Dan Chard, for closing remarks.

I want to thank you all for joining us today, and we look forward to speaking with you at upcoming conferences and on our second quarter earnings call in early August. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.