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. 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'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.

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 during 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 the 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 showed that approximately 90% of GLP-1 users expressed interest in food specifically created for GLP-1 patients. Put simply, as a result of this shift, we are positioning Medifast to address a market that is projected to be more than six times larger than that where we previously operated. The strategic pivot not only broadens our addressable market but also draws upon our expertise in lifestyle modification, which has always been central to our approach. A focus on medically supported weight loss is a natural extension of our core competencies, allowing us to provide what we believe is an even more robust solution and support system for our customers. We will position ourselves effectively against competitors in this evolving market structure by leveraging our capabilities in science-based product development and clinically proven plans. We are enhancing our product offerings, expanding customer acquisition channels, and elevating the customer experience to drive engagement and retention, all to enable us to take advantage of the potential opportunities that lie ahead. We are focusing on initiating two incremental channels for growth: company-led advertising to drive brand awareness and customer acquisition and we're also testing a new channel approach through our collaboration with LifeMD to support their patients who are seeking lifestyle support beyond medication. We believe our new comprehensive solution provides us with a differentiated position in the marketplace, providing a more inclusive approach that encompasses nutrition support, dedicated coaching, community engagement, and through our collaboration with LifeMD, access to medications and clinical support when appropriate. Our mission of helping customers achieve healthier lifestyles remains unchanged, and as we evolve to provide the necessary tools and resources to meet their needs, this approach ensures that our customers receive the best possible care and support, regardless of where they are in their health journey. Turning to our second quarter results. Revenues came in within our guidance range at $169 million. We continue to face macroeconomic challenges, including increased competition in the health and wellness space, including the expansion and disruptive effect of GLP-1 regimen adoption and a broad slowdown in consumer spending. While we do not expect these pressures to ease in the short term, we anticipate that our initiatives will positively impact our top line late this year and as we move into 2025. These initiatives include strategic investments in marketing and product development that are essential to driving long-term growth. Although these investments will negatively impact our EPS in the near term, we believe that they are critical to positioning Medifast for long-term success. These investments are supported by our strong balance sheet, which provides the financial flexibility needed to execute our strategy effectively. We're not only making use of our strong balance sheet but also our strong historical understanding of the market and how to compete effectively in the changing landscape. The new products and plans we are developing are targeted for individuals on GLP-1 medications as well as those who are looking to transition off GLP-1 medications, whether because they have reached their weight loss goal, have plateaued in their weight loss, or no longer have GLP-1 insurance coverage. These products and plans are also designed to help customers maintain their weight loss and overall health and wellness as they work with an OPTAVIA Coach to learn healthy habits that make a healthy lifestyle second nature. In May, we introduced a new product and service offer, which included a GLP-1 nutrition support kit, a dedicated and independent OPTAVIA Coach, and access to clinician support through LifeMD. This package is priced at $282 per month for a six-month commitment, plus the cost of medications. This represents our first bundled solution for this demographic. We're also developing additional targeted products designed to help minimize the side effects of weight loss medications, provide appropriate nutrition, and aid in lean muscle mass retention. All this targets those groups that are looking to GLP-1 medications as part of their efforts to improve their overall health and wellness. These new products, which we expect to launch by year-end, will feature more protein, fiber, and calcium. They will be available in various forms, including bars and shakes, with an enhanced flavor profile to appeal to customers who are using GLP-1 medications. We also anticipate introducing vitamin and mineral supplements around the end of this year. These new offerings will be integrated into comprehensive plans supported by personalized coaching and community engagement. Later in 2025 and into 2026, we anticipate releasing additional products, which extend beyond our current offer and tap into additional ways to enhance one’s health and wellness, including targeting categories in which we do not currently have products. The company-led marketing efforts, which I mentioned earlier, are ramping up in the third quarter with the aim of building brand awareness and highlighting our new GLP-1 support solutions. We conducted a series of advertising pilots over the last two quarters to refine our strategies and optimize our future efforts. Our advertising is planned to span various platforms, including social media, Internet search, digital display, connected TV, and radio. As the campaign kicks into full gear, we'll launch earned PR and influencer campaigns along with online video to further support awareness and demand generation. We are targeting three key audiences: those curious about GLP-1 medications, current GLP-1 users seeking support as they use or transition away from the medications, and individuals aiming for a healthy lifestyle without using weight loss medications. In total, we spent $4.6 million on these company-led marketing activities in the second quarter. Year-to-date, that number is $9.7 million. We expect that our focus on targeted advertising will drive customer acquisition and engagement. Our goal is to create a seamless experience for our customers from initial interest to a long-term relationship. We are committed to building on this progress, delivering a highly personalized solution for customers at various stages in their weight loss journeys. By creating digital ecosystems that utilize dashboards and tracking methods, we enable better monitoring of individual progress. This information will be accessible to customers and coaches, fostering greater engagement and longer customer retention. Enhanced tools for coaches will provide deeper insights into their customer base, allowing them to offer more personalized support. Our efforts to enhance the customer experience are driven by our belief that personalized support is the key to helping customers achieve long-term success. By integrating digital tools and personalized coaching, we can provide our customers with the support they need to achieve their health and wellness goals. We believe that this approach will not only improve customer satisfaction but also drive higher engagement and retention rates, ultimately contributing to our long-term growth. So to summarize, we are making significant strides in our business transformation. Based on a survey we conducted, we estimate that approximately 10,000 or one-third of our active coaches are now supporting at least one client using GLP-1 medications, reflecting our continued learning in this market. Our product and plan development shows continued progress, with new offerings set to launch around year-end, and we expect to make significant enhancements to the customer experience as we move through the rest of the year, which we believe will make it easier for customers to sign up for our integrated solutions and will result in them staying longer with our programs. The weight loss market is undergoing significant transformation, presenting substantial opportunities. There is work to be done, and we must be agile to ensure that we shift and adapt to meet the needs of a market that is rapidly changing. However, Medifast's holistic approach, combining customers, coaches, and clinicians through LifeMD, positions us uniquely to support GLP-1 users in achieving their long-term health goals. With our financial strength, strategic flexibility, and expertise, we believe we are well-equipped to capitalize on these opportunities. I am confident in our team's ability to execute our strategy and drive growth in this rapidly evolving space. Thank you for joining us this afternoon. Now I'll turn it over to Jim to review the quarterly financial details.

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 one-time 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, costs to exit hotel commitments for our annual OPTAVIA Convention in future years, reflecting a change in strategy and costs for our company-led acquisition initiatives. On a non-GAAP adjusted basis, which excludes expenses related to the company's supply chain optimization costs, costs to exit hotel commitments for our annual OPTAVIA Convention in future years, and costs for the collaboration with LifeMD, SG&A decreased 33.8% to $113.8 million and moved 940 basis points higher as a percent of revenue to 67.5%. Loss from operations was $7.9 million in the second quarter of 2024 versus a gain of $38.7 million in the prior period, driven by lower gross profit, partially offset by lower SG&A. As a percentage of revenue, loss from operations was 4.7% in the second quarter, a decrease of 1,780 basis points versus the year-earlier period. On a non-GAAP adjusted basis, which excludes the adjustments described previously, income from operations decreased 68.4% to $12.2 million as a percentage of revenue. Non-GAAP adjusted income from operations was 7.3%, a decrease of 580 basis points from the year-ago period. The effective tax rate of 23.4% was higher than the 22.6% recorded in the prior year's second quarter due to the net loss position in 2024 and the corresponding rate impact from research and development tax credits, partially offset by the rate impact from the limitation for executive compensation. On a non-GAAP adjusted basis, the effective tax rate in the first quarter was 26.2%. Net loss in the second quarter of 2024 was $8.2 million or $0.75 per diluted share compared to net income of $30.3 million or $2.77 per diluted share in the year-earlier period. On a non-GAAP adjusted basis, net income in the second quarter of 2024 was $10.1 million or $0.92 per diluted share. Turning to our balance sheet. We ended the quarter with $163.5 million in cash, cash equivalents and investments in no interest-bearing debt. This is up from $150 million as of December 31st, 2023. Now I'll turn to our guidance. We are expecting third quarter revenue to range from $125 million to $145 million, reflecting a continued decrease in the number of active earning OPTAVIA Coaches as a result of near-term challenges to customer acquisition due to the growing acceptance of GLP-1 medications in the marketplace. We expect our loss per share for the quarter to range from $0.05 to $0.70. The guidance includes expectations of spending $9 million during the quarter on company-led marketing and another $4 million on our coach convention. However, it excludes the cost related to the initiation of our LifeMD collaboration and any gains and losses from changes in the market price of our LifeMD common stock holding, which we are unable to estimate. I do want to note that while we initially expected to spend around $30 million on marketing this year, we now expect that number to be approximately $25 million. We have made a conscious decision to better align our spending with the availability of the full complement of our new offer, which includes the new products and enhanced customer experience that we expect will be ready for the start of resolution season at the beginning of 2025. In summary, we believe that our strong balance sheet will allow us to weather the current market conditions while making the strategic investments necessary to execute our business transformation while maintaining a strong financial position, and that transformation of our business is the most effective way to provide lasting value for the company and stockholders. With that, let me turn the call to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. 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 they did it on their own, and they just happened to also have an OPTAVIA Coach?

Yes, it's a combination of factors. Some clients were already consulting with their own doctors and chose to stay with them. Additionally, we are just beginning to fully integrate our solution, which is encouraging as it reflects our effective training. Currently, around 90% of our coach leaders have completed training for medically supported weight loss, which is starting to positively influence our ability to attract new clients using GLP-1. About 17% of our active earning coaches have also been trained, and we expect this training to further boost those numbers. Another key point from our earlier remarks was our focus on products. We noted for the first time from a third-party study that 90% of GLP-1 users are interested in food specifically designed for those on GLP-1 medications. Furthermore, our own research shows that 80% of people open to medically supported weight loss medications are also interested in our combined offering. Therefore, we believe that launching our nutrition support kit, priced at about $282 and providing coaching food along with six months of clinician support, is essential to our product lineup. We are already seeing this kit contribute more significantly to our sales, particularly with improvements from May to June. We also recently showcased a new product line during our convention, specifically designed for individuals on GLP-1 drugs, which is a fresh formulation distinct from our current offerings. Lastly, we are enhancing the integration between our technology and LifeMD's, which makes it easier for our coaches to assist their clients within the clinician-supported model. We believe we are still in the early stages of this transformation, and while we're starting to see positive effects, it may take time for these changes to translate into meaningful revenue growth. We recognize the importance of improving our new client numbers to drive our top-line growth, which we expect will significantly reflect in next year's results.

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 we changed to this several years ago. We found that there's far more success for each of these clients to achieve their ultimate goals if they are tied in with a coach and the community and understand 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 through the website, 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.

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

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, 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?

We don’t typically provide specifics about clients within the quarter. However, I can share that there was a notable increase in orders from both new and reactivated clients when comparing May to June. Although the percentage of these orders was quite small in May, it saw a significant rise in June. Nonetheless, it remains a minor aspect of our overall business. We are optimistic about this trend continuing into Q3, and as Dan highlighted in the prepared remarks, we will be launching new products in that category later this year. We believe this will lead to a further increase in this segment of our business and hope it becomes a more substantial contributor as we approach 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 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 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 a GLP-1 drug. An increasing portion of those clients who are coming in are ordering the nutrition support, GLP-1 nutrition support product kit. 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 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 is 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. 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 the lifestyle component, so they are coming to our coaches to make sure they don't achieve weight gain. That is 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 the fourth quarter than in the 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, are you thinking that during seasonal high points, this $10 million per quarter is what you're going to be spending, 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, I can address those questions. We mentioned in our prepared remarks that we're reducing our marketing spend from $30 million to $25 million, partly due to seasonality. However, we still intend to invest more this year compared to Q1 and Q2 to ensure we build additional brand awareness as we approach 2025. Historically, our brand awareness has relied on coaches rather than advertising. We recognize the need for continued investment, which is why we see the second half of 2024 as a critical investment period. As we move into 2025, we hope this investment will yield positive results, even as we reduce spend. We plan to allocate those funds in 2025 during more favorable periods, as events like the Olympics and the election can complicate spending amidst all the social media noise. We’re still relatively new to advertising; regarding the customer acquisition cost, we are seeing it align with our expectations, but we need to reach a lower target, which we aim to achieve throughout 2024. We understand this will take time, which is why we're committed to investing and learning how to effectively communicate our message to attract more customers and reduce CAC.

Okay. Can I also ask, I mean, according to my model, and this is not your guidance, 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, we have a strong balance sheet and we want to maintain that strength. Once we gain more insights on our advertising spending, we plan to increase it, but only if it is beneficial for our shareholders. We are also assessing customer acquisition costs and lifetime value, making decisions based on the return on investment. I understand that I am not directly addressing your question, but we indeed aim to keep a strong balance sheet, and we will ramp up spending when we are confident in delivering 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.

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.

Currently, we are just starting our collaboration, and if you look at the combined offer, we are charging $282 together. This includes $65 for a six-month commitment with LifeMD's subscription and $217 for our GLP-1 kit. This pricing does not include medication, but we are working on it. We don’t have additional details to share on pricing at this time, but we plan to clarify this in the coming months and quarters to emphasize the value of our combined offer. There are many elements in our solution that cater to consumers seeking to improve their health through medication, essentially covering everything a patient or customer would want.

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 has, 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. For example, the ability to check eligibility, schedule time with a clinician, and order product is all now integrated into the OPTAVIA app. The more integrated into the overall solution it is, the greater 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.