And welcome to the Medifast Second Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steven Zenker, Vice President of Investor Relations. Please go ahead.

Good afternoon and welcome to Medifast Second 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 June 30th, 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 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.

Thank you, Steve, and thank you all for joining us today. With me today is Jim Maloney, Medifast's CFO. I'm pleased to report on our business transformation progress and share our vision for Medifast in this fast-moving and exciting time for our sector. Medical innovations are enabling more people than ever before to access transformative health solutions. As we have discussed in previous earnings calls, the rapid expansion in both the availability and acceptance of GLP-1 medications in the United States and beyond is reshaping the weight loss landscape, which we believe presents both significant challenges and opportunities for our company. Our mission, refined over the course of the last 40 years, remains focused on helping individuals achieve healthier lifestyles through integrated, holistic solutions. But now we, in conjunction with our incredible OPTAVIA independent coaches and in collaboration with LifeMD telehealth physicians, expect to be able to put healthy lifestyle transformation within the reach of more people than ever before. Industry projections indicate that as many as 20 million people or more in the US could be utilizing GLP-1 medications by 2030, whether it be medications we already see in the marketplace today or from further innovations that will emerge over the coming years. Indeed, research we have commissioned with BCG finds that the support market for this population could reach $50 billion per year or more by the year 2030, vastly exceeding the $8 billion structure to weight loss market we previously targeted. Nutrition products make up over half of this GLP-1 support market. And it is interesting to note that a recent national survey, commissioned by Capital Coefficient, showed that approximately 90% of GLP-1 users showed interest in food, specifically created for GLP-1 patients. Put simply, as a result of this shift, we are positioning Medifast to address…

Thank you, Dan. Good afternoon, everyone. As Dan mentioned, second quarter 2024 revenue was at the upper end of our guidance range as we continue to make progress on our business transformation initiatives. Revenue for the quarter was $168.6 million, a decrease of 43.1% versus the year earlier period, primarily driven by a decline in the number of active earning OPTAVIA Coaches and lower productivity per active earning OPTAVIA Coach. Customer acquisition continues to be impacted by competition from GLP-1 medications and consumer spending patterns. We ended the quarter with approximately 33,900 active earning OPTAVIA Coaches, a decrease of 36.2% from the second quarter of 2023. Average revenue per active earning OPTAVIA Coach for the second quarter was $4,972, a year-over-year decline of 10.9%, reflecting the continued headwinds to customer acquisition. Gross profit decreased 41.4% year-over-year to $123.4 million, driven by lower revenue. Gross profit margin improved 210 basis points to 73.2%, positively impacted by cost savings from our Fuel for the Future initiatives and efficiencies in inventory management. On a non-GAAP adjusted basis, which excludes the onetime expenses in connection with the company's restructuring of external manufacturing agreements, gross profit decreased 40.2% to $126 million. Non-GAAP adjusted gross profit margin was 74.8%, an increase of 370 basis points from the year ago period. SG&A expense was down 23.7% year-over-year to $131.3 million, primarily reflecting lower compensation expense due to lower volumes and fewer active earning coaches. SG&A as a percentage of revenue increased 1,980 basis points to 77.9%, primarily as a result of the loss of leverage of fixed costs due to lower sales volumes and supply chain optimization costs. We also incurred costs during the quarter to support our business transformation initiatives, which include market research and investment costs related to medically supported weight loss, cost to exit…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jim Salera with Stephens. Please go ahead.

Hi, guys. Good afternoon. Thanks for taking our question. Dan, I believe in your prepared remarks, you mentioned that about one-third of the coaches have someone that they're currently working with that's on GLP-1 drugs. Can you give us some insight into how many of those customers started using GLP-1 through the LifeMD partnership or just -- they did it on their own and they just happened to also have an OPTAVIA Coach?

Yes, Jim, it's a mix. And there are a number of reasons that we think it's a mix. A part of it has to do with some of them were already consulting with their own physicians, so they stuck with their primary care physician. The other part of it is that we're just starting on integrating the full solution. So but we see that as an encouraging sign, as you pointed out, I mean that's reflective of our training. We have about 90% of our coach leaders now who have gone through the training from mentally supported weight loss. So we're starting to see that have an impact on the ability to bring in new clients who are on GLP-1. We also have about 17% of our total active earning coaches who have now been trained. So we believe that training will have a positive impact on that number. The other big thing that we touched on in the prepared remarks relate to the product focus that we have. I think there is -- one of the statistics we shared for the first time was related to a third-party study that continues to -- it's an area that continues to come up and reinforce this area of GLP-1 support, which is 90% of GLP-1 users indicate they're interested in food, specifically formulated for people who are on GLP-1 drugs. And that was also kind of reinforces the other part of what we're looking at for the support market, which is that with our own research, 80% of those who are open to medically supported weight loss medications are also interested in this combined offer that we are putting forward. So we think that this launch of the gap filler in the sense of this nutrition support kit, which sells for…

I appreciate all the detail. Maybe one other thing to drill in on, as you start to ramp the company-supported marketing, you talked about new products, ready-to-drink shakes or I took it as ready-to-drink shakes, maybe if not, please feel free to correct me, as well as the bars. Is that something that if the customer comes to that, driven by the advertisements that are company-led, is there going to be a way for them to order it just direct online without any interaction with a coach or is it still going to require them having a relationship with a coach in order to get the product?

Yes. So the shakes are not ready-to-drink. The shakes are in a powdered form, so to answer that first question. And we sell the products, but these are really part of programs, and the program and we changed to this several years ago. We found that there's far more success for each of these clients to or these customers in terms of achieving their ultimate goals if they are tied in with a coach and the community and understand that the habits of health. So, yes, I mean, it's possible for somebody to kind of continue on their own, but they're always assigned a coach, so that they can have that support if they need it. But it's a little bit of self-service support, if you will. So, yes, they can get it and through the website and but they will be assigned a coach at the same time.

Got it. Okay. Appreciate all the detail. I'll hop back in the queue.

All right. Thanks, Jim.

Next question, Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Linda, if you're speaking, we can't hear you.

Hi. Can you hear me now?

Yes. We can.

Oh, okay. Sorry about that. So if your coaches, if the main problem they're having in acquiring new clients is that the GLP-1 drug is kind of a threat, the question went out of my head. I know what I was going to ask. Can you comment on whether the new client acquisition improved from May to June? Because you started offering the kits in May, so it seems that if the main threat is the GLP-1 drugs, the solution was offered starting in May. So it seems like it would have an immediate effect on improving the number of new clients. So was there a sequential increase in new clients from May to June?

Yes. So it's -- we don't really give detail regarding clients in the quarter. But what I can tell you, Linda, is that our -- as a percent of our business for new clients and reactivated clients, we did see a significant increase of orders as a percent of new clients and reactivated from May to June. So it was a very small percent in the month of May that we were seeing those orders. It did increase dramatically in June, but I would still say it's still a small part of our business. We're hopeful that we see that continue into Q3. And then as Dan mentioned in the prepared remarks, that we're launching new products within that line later on this year. So we're hopeful that will keep increasing as a percent of our business and become much more meaningful as we move into 2025.

Okay. So I guess I'm confused maybe we can talk offline. But so the revenue from new clients increased sequentially from May to June, but the number of new clients did not? I'm confused how that would happen.

No. So, no, as a percent of our business, the orders that we were receiving from customers, that actually increased those people were ordering more of the kit that was associated with the GLP-1 versus our old 5-in-1 program or any other program that we had. So it's just -- that portion of our business grew in June versus May. It doesn't mean the entire business grew in June though, but we're seeing that movement as we move through this transformation.

So a high-level way to look at it, Linda, is we have a higher number of our coaches. We're supporting those on GLP-1 drugs. So that's the one-third of our coaches roughly who are supporting at least one client on GLP-1 drug. And an increasing portion of those clients who are coming in are ordering the nutrition support, GLP-1 nutrition support product kit. And we anticipate that as we continue to train, that proportion of our client base will continue to increase. But there's still a lot of noise out there. So even though we see our coaches and our client community kind of making progress in the sense that we are bringing in a more, I'll say, diverse mix that includes more GLP-1 clients, we are still facing those headwinds that are a result no longer of not being able to offer, but also a very competitive marketplace where a lot of people are offering. I think another interesting statistic that kind of, well, it's stated more as a qualitative measure is that we are seeing more of these clients that we're talking about as well, who are transitioning off GLP-1 products and who are interested in using our program for maintenance. So you can read about some of that obviously in the news, but we're starting to see those clients who feel like they've achieved their weight, but they didn't learn kind of the lifestyle component who are coming to our coaches to make sure they don't achieve the weight gain. So that's, I think, going to be a meaningful target and segment for the long-term.

Okay. And then sorry, again, if you said this and I didn't understand, but you said one-third of your coaches have at least one patient using a GLP-1 drug. Can you say how many or what percentage of your coaches had a client get the prescription through LifeMD?

No, I mentioned that earlier. So we have a mix right now. And what we've seen in these early stages is that quite a few of our customers that are working through coaches are going directly through their primary care physician because that's where they started their conversations. So increasingly, as we kind of integrate the offer more completely, we're seeing more of those go to LifeMD. So we saw improvements in those numbers, but I think we're still at the very early stages of creating the integration and also helping them understand how to use LifeMD if they already have a primary care physician. But we feel like we're making progress there. But right now it's very much a mix.

Okay. And then I guess if you talk about, you gave your numbers for advertising spend, and it does point to a smaller amount in fourth quarter than in third quarter. I guess that would make sense based on the seasonality of the business. Is that the main reason that there would be a sequential reduction? Because I mean you're trying to really make a dent here and get some attention in a very crowded market. So I'm wondering like are you thinking that during seasonal high points, this $10 million per quarter is what you're going to be spending or and also related to that, can you comment on, Weight Watchers said the CAC has become just inordinately high given the election and the Olympics and everything going on in the weight loss space. So is your LTV to CAC coming out different than what you thought when you put together the plan for advertising? Has that projection changed at all?

Yes. Let me see if I can address those questions. So in the prepared remarks, we mentioned that we're going to reduce our marketing spend from $30 million to $25 million. That does have some to do with the seasonality. We do want to continue to invest in this year at a higher degree than we did in Q1 and Q2 because we want to make sure that we're spending enough to get additional brand awareness as we move into 2025. Because as you know, Linda, that the brand itself, the awareness has been done through coaches and not through advertising in the past. So we believe we need to continue to invest at a good rate, but those, that's why we're considering the second half of 2024 to be an investment period of time. So as we go into 2025, we're hopeful that, that investment will pay off in those periods, plus pulling back a little bit on the spend. And we would spend that money in 2025 in better periods like you just said the -- things like the Olympics and the election those do make it more difficult to spend the dollars when there's a lot of noise out there in social media and other means. So we're relatively -- we're obviously much newer at advertising. I would say that on the CAC question, we're seeing that the CAC is relatively what we expected, but we need to hit a target that is lower and we're looking to do that as we move through 2024. So we realized that this is going to take us some time. And that's why we're willing to invest and learn and what that right message is to get to the amount of customers or potential customers that lower that CAC.

Okay. Can I also ask, I mean, according to my model, and this is not your guidance, of course, but I've got like $25 million of free cash flow for the year, significantly down. Are you pretty committed to maintaining, you've got cash on your balance sheet. So you've got an ability to invest in the business meaning negative free cash flow. Are you pretty committed to keeping free cash flow positive or do you think that you could just take some time here and invest heavily in the next year or two?

Yes. So we don't -- we're -- as you articulated, we do have a strong balance sheet. We do want to continue having that strong balance sheet. Once we have more learnings on our advertising spend, we are expecting to accelerate that, but we won't do that unless the investment is right for the shareholders. So we're looking at the CAC also and we're looking at LTV and we're making those calls based on the return on investment. So I know that's a -- I'm not really directly answering your question, but we do, again, we want to keep a strong balance sheet. We will increase the amount of spending once we know there is a good return to shareholders.

Okay. Yeah. That's helpful. Let's see. What else was I going to ask? I guess that's all I had for now. I will take the rest offline. Thank you.

Thanks Linda.

Thanks.

[Operator Instructions] Next question comes from David Larsen with BTIG. Please go ahead.

Can you talk about your relationship with LifeMD and the go-forward model? Like how much will you be charging for a bundled solution? What does that bundled solution look like? And how much of the money goes to you? How much goes to LifeMD? And what sort of uptake do you expect in terms of members going to your platform and LifeMD's platform at a steady state? Any more color there would be very helpful. Thank you.

I mean, currently, the way we're working together, and we're obviously just at the start of this, if you look at the combined offer, we're charging together $282, $65 is for the -- a six-month commitment that LifeMD's subscription and our GLP-1 kit is $217. So that's how you get to the $282. That does not include the medication, but we're going to work through this. We don't really have any more to communicate on pricing, but we're going to work through this over the coming months and coming quarters to make sure that we're highlighting the value that we bring as an offer. When you think about it, we have a lot of elements that consumers are looking for when you consider someone that's going on medication to become more healthy. So we have pretty much all the elements that you would want as a patient or a customer.

It certainly makes a lot of sense to me. You have a GLP-1, you have a diet coaching piece as well. How are your top-performing coaches responding to the relationship with LifeMD? Like, I guess, if you take these GLP-1s, maybe you're not as hungry, so you order less food. How convinced are they that you'll make more money with LifeMD? Thanks.

Yes. I'd say there is a growing confidence in LifeMD. LifeMD is, over the years, built a great service with their primary care physicians. We actually now, for the second year in a row, had a LifeMD physician come and present and run a panel for our coaches, most recently two weeks ago at our OPTAVIA Convention. So the confidence is growing, and part of the growth in that confidence comes from their physicians being trained, specifically on what the OPTAVIA program is. Part of the confidence comes from the improvement in the technology integration, which means that they're our customers and our coaches customers have a much better experience. So for example the ability to check eligibility to schedule time with a clinician and to order product is all now integrated into the OPTAVIA app. And so the more integrated into the overall solution it is, the greater the, we'll say the confidence becomes I think. So I think where we believed we would be at this stage, but we also expect to see improvements in that as we continue to integrate the service between the two companies.

Okay, great. Thanks very much. Appreciate it.

Thank you. I would like to turn the floor over to Dan for closing remarks.

I'd like to thank everybody for joining us today and we look forward to seeing many of you at the Canaccord Genuity Growth Conference next week and then at the Wells Fargo Consumer Conference in September. Thank you for joining.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.