Greetings, and welcome to the Medifast Third Quarter 2024 Earnings Conference Call. At this time, all participants are in 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. Thank you, sir. You may begin.

Good afternoon, and welcome to Medifast's Third 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 September 30, 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. 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.

Thanks, Steve, and thanks to everyone for joining us on the call today. With me is Jim Maloney, Medifast's CFO. We'll give some color on our third quarter results and provide an update on the progress we're making on our business transformation. The weight loss segment of the health and wellness industry continues to experience profound change; widespread consumer adoption of GLP-1 medications has fundamentally shifted the way people think about weight management and health. The growth is, in many ways, staggering given that it's not quite 12 months since the FDA approved the second generation of GLP-1 medications for use in weight loss regimens. A recent Kaiser Family Foundation poll showed that one in five U.S. overweight and obese adults have used one of these medications. Like many of our peers, we've naturally seen significant impact on our business fundamentals. Adjusting to market realities has not been easy. However, we continue to believe that there is a significant opportunity to return the company to growth. Our goal is to build the health and wellness company of the future, one that is designed to grow in a GLP-1 world. With that in mind, we've been steadily executing on our strategic transformation plan, focusing on our core mission, while broadening our reach and improving solutions to address the changing nature of the marketplace. We continue to make progress in several key areas and are working with OPTAVIA coaches and customers, as we shift to reflect this new environment. To establish a thriving health and wellness business that can grow in today's market, we've developed distinct coach-supported program offerings tailored to meet the unique needs of three specific customer segments on their health and wellness journeys. The first offer is targeted at individuals using GLP-1 medications as a core element of their weight loss program. The second offer is for people looking to maintain weight loss and improve health when they come off GLP-1 medications for whatever reason; those could include cost, side effects, or any other cause. And the third offer is for people who have never used medications and want to use coach-supported, habit-based programs as the core of their weight loss journey. I want to take a look at each of those target markets separately. Starting with those who want to use GLP-1 medications at the core of their weight-loss efforts. We've expanded training for our independent OPTAVIA coaches to better equip them to help customers develop a healthy lifestyle while using GLP-1 medications. Currently, over 95% of coach leaders have completed this specialized training, and according to our latest survey, approximately 40% of active coaches are now supporting at least one client on a GLP-1 medication. Research commissioned by Medifast suggests the GLP-1 support market could grow to $50 billion or more by 2030, making this audience a core focus for our business. GLP-1 medications have been shown to be highly effective in aiding healthy and lasting weight loss when used in conjunction with healthy habits like diet and exercise. As such, we believe there is strong compatibility with our experience of helping people through our coach-guided Habits of Health Transformation System. Around 12% of our customers have used GLP-1 medications over the last 12 months compared with around 4% at the beginning of the year. We expect this penetration to increase over the coming months as coaches continue to successfully help these individuals with their weight loss goals and making a healthy lifestyle second nature. The next target segment reflects growth in the number of people transitioning off medications for any reason. We're very encouraged by the potential of OPTAVIA to help people maintain weight loss and improve health when they stop using medications. External research shows that individuals who stop medication usage regain two-thirds of their lost weight and fail to maintain associated health improvements if they do not adopt a modified healthy lifestyle during or after using GLP-1 medications. This is particularly important because of early indications that GLP-1 medications are not being used for the long term. Recent KFF analysis showed that about one-third of users quit taking the medication after six months and by one year, this number can rise to half or more. That same poll showed that one in eight U.S. adults have taken GLP-1 medications at some point, with only half saying they are currently on the medication. By 2030, our internal estimates suggest that as many as 50 million or more people could have started and then stopped GLP-1 usage. A huge potential market. We are actively exploring this area in more depth and expect to launch a program later this year that meets this group's needs. Lastly, we continue to focus on finding new customers and reactivating past customers who have no interest in GLP-1s, but who are motivated to lose weight by focusing on wellness, healthy habits, and a healthy lifestyle. Central to our efforts in this area is an initiative to improve the overall customer experience, whether new to our program or reactivating after an absence. Improvements include better tracking dashboards and advanced data capabilities, enabling customers and coaches to stay aligned on their progress and goals, and allowing for greater personalization. We saw an increase in engagement for those on our newly enhanced website in recent months, with an average session time up double-digits and unique visitors and sessions also increasing. Regardless of the need state segment, our integrated coach-supported lifestyle-based approach accurately reflects the behaviors and priorities of the consumer in a positive way. We differentiate ourselves by offering holistic solutions that include scientifically developed nutrition products, individualized coach and community support, as well as access to weight loss medications through LifeMD where clinically appropriate. With new products in development as well as enhanced technology to help coaches provide a highly personalized experience to each of their customers, our offer has never been more compelling. Personal coaching, a support community, tailored plans, and personalized solutions have always been at the heart of our offer, and they remain just as relevant in a GLP-1 world. We've spent over 40 years walking alongside people and offering integrated solutions to those learning to live healthy lifestyles. Now, with the evolving dynamic of the weight loss market, we're positioning Medifast to address a broader spectrum of customer needs, working alongside our independent OPTAVIA coaches and in collaboration with LifeMD's physicians. As part of that strategy, we need to ensure that we have the right products, pricing strategies, and positioning in place to drive engagement and retention. We expect to launch a new program at the beginning of 2025, featuring a series of entirely new products under the new OPTAVIA ASCEND brand. These products and associated meal plans are specifically designed for those on GLP-1 medications. We also plan to simultaneously launch a supplement pack with vitamins and minerals to help support the program and to provide a complete and balanced diet. This program will be competitively priced to ensure we capture consumers who are already spending money on the medications themselves. OPTAVIA ASCEND products are high in protein and fiber to help retain lean muscle mass and promote digestive health and also include calcium to support bone health. These products will be paired with the support of a coach and community and access to GLP-1 medications through LifeMD. OPTAVIA ASCEND also supports a new program designed to facilitate the key transition and weight maintenance phase of customers' weight loss journey, empowering lifestyle changes and providing essential nutrients. We know that once customers lose the weight, OPTAVIA Coaches can teach them how to keep it off. OPTAVIA ASCEND has a different nutrition profile and the plan was developed in response to coach feedback, requesting a simpler, more tailored approach for clients transitioning from active weight loss to weight maintenance. We're also testing starter kits for new customers who want to try OPTAVIA before making a longer-term commitment. This program allows us to show customers the effectiveness of our products and familiarize them with our coach community at an attractive initial price point. By offering additional ways to drive affinity with our program, we believe we can bring in more customers, which in turn will drive higher numbers of active coaches. Development of these products took about half the time of previous launches. And as we move through 2025 and beyond, we'll continue to consider further product line extensions and modular add-ons that will extend beyond weight loss and support those using medications. So, we have a differentiated offer that is designed specifically for the key audience need states, and we have products and programs in place to drive sampling, engagement, and retention, as well as to support the transition to long-term weight maintenance. We're about to embark on a clinical study to assess the health outcomes associated with the integration of OPTAVIA nutrition and lifestyle programs alongside medications. We believe this study will provide valuable insights into the performance of our products and our support for customers on their health journey. The results will add to our existing scientific evidence, as we continue to offer differentiated holistic lifestyle programs that serve all clients from weight loss to weight maintenance. Through all of this, we must use marketing and partnerships to maintain competitive white space, drive brand awareness, and power client acquisition. Our company-led marketing campaigns reflect an approach that targets key demographics across the three core groups I mentioned earlier. This is a competitive market, and it's not easy breaking through the noise in a crowded environment. We have learned some valuable lessons and have been fine-tuning our strategy with a focus on channels that yield the highest return on investment. We are optimizing spending accordingly and have scaled back in less effective areas. We now expect total marketing spend for 2024 to range between $20 million and $25 million. This reflects a disciplined approach that prioritizes efficiency and value. Our collaboration with LifeMD also continues to show promise. As we begin piloting joint marketing campaigns, highlighting the complementary solutions that both companies offer, these efforts should help us reach new customers and broaden our customer acquisition strategy. The full impact of all these initiatives will take time to materialize. But with resolution season coming up, we see a real opportunity. With our newly refreshed website up and running, as well as the availability of our new products and enhanced interface, we are well positioned to begin seeing improved performance in 2025 and beyond. As we continue to develop and refine our solutions, we feel cautiously optimistic about our ability to drive further adoption and engagement. Our strong balance sheet gives us the financial flexibility needed to invest in these key growth initiatives for the business. We're managing our capital prudently, focusing on areas that we believe will deliver long-term value for our stakeholders. We have also identified additional cost savings opportunities as part of our ongoing Fuel for the Future initiative. And we believe that these further efforts will further strengthen our financial position as we execute our transformation. The weight loss market has been revolutionized, and Medifast is committed to moving with it to meet changing needs. Our focus on providing integrated solutions that combine lifestyle modification, clinical guidance, and community support puts us in a strong position, and I'm confident in our team's ability to execute on our strategy to position the company for growth in the quarters and the years ahead. Now, I'll turn it over to Jim to review the quarterly financial details.

Thank you, Dan. Good afternoon everyone. Third quarter 2024 revenue was at the upper end of our guidance range, and EPS was above the high end of the range as we move forward with the significant business initiatives Dan just mentioned and strategically timing our company-led customer acquisition spending. Revenue for the quarter was $140.2 million, a decrease of 40.6% 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 30,000 active earning OPTAVIA Coaches, a decrease of 36.3% from the third quarter of 2023. Average revenue per active earning OPTAVIA Coach for the second quarter was $4,672, a year-over-year decline of 6.7%, reflecting the continued headwinds to customer acquisition. Gross profit decreased 40.4% year-over-year to $105.7 million, driven by lower revenue; gross profit margin improved 20 basis points to 75.4%. SG&A expense was down 31.8% year-over-year to $103.6 million, primarily reflecting lower compensation expenses due to lower volumes and fewer active earning coaches, as well as reduced costs for coach-related events, including convention and a decrease in employee compensation, partially offset by costs for our company-led customer acquisition initiatives. SG&A as a percentage of revenue increased 950 basis points to 73.9%, primarily as a result of the loss of leverage of fixed costs due to lower sales volumes in cost for our company-led acquisition initiatives. On a non-GAAP adjusted basis, which excludes the final $1.7 million of expenses related to the company's overall $10 million collaboration with LifeMD, SG&A decreased 32.9% to $101.9 million and moved 830 basis points higher as a percent of revenue to 72.7%. Income from operations was $2.1 million in the third quarter of 2024 versus $25.5 million in the prior period, driven by lower gross profit, partially offset by lower SG&A. As a percentage of revenue, income from operations was 1.5% in the third quarter compared to 10.8% in the prior year period. On a non-GAAP adjusted basis, which excludes the adjustments described previously, income from operations decreased to $3.8 million. As a percentage of revenue, non-GAAP adjusted income from operations was 2.7%, a decrease of 810 basis points from the year-ago period. The effective tax rate in the quarter of 28.5% was higher than the 12.9% recorded in the prior year's third quarter due to a decrease in the tax benefit for donations of inventory compared to 2023. On a non-GAAP adjusted basis, the effective tax rate in the third quarter was 26%. Net income in the third quarter of 2024 was $1.1 million or $0.10 per diluted share compared to net income of $23.1 million or $2.12 per diluted share in the year-ago period. On a non-GAAP adjusted basis, net income in the third quarter of 2024 was $3.9 million or $0.35 per diluted share. Turning to our balance sheet. We ended the quarter with $170 million in cash, cash equivalents and investments and no interest-bearing debt. This is up from $150 million as of December 31, 2023. Given our healthy cash position that is projected to be maintained through the expiration of our credit facility and beyond, we have canceled our credit agreement effective October 30. This action was made as part of our Fuel for the Future initiative as we incurred $50,000 of cash expenses related to the termination, and we will achieve annual savings of approximately $500,000 in commitment fees. The credit agreement termination was done in accordance with its terms. As of the date of the termination, the company did not have any borrowings under the credit agreement, and the company was in compliance with all covenants. Now I will turn to our guidance. We are expecting fourth quarter revenue to range from $100 million to $120 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 $0.10 to $0.65. The guidance includes expectations of spending $7 million during the quarter on company-led marketing. However, it excludes any gains or losses from changes in the market price of our LifeMD common stock holdings, which we are unable to estimate. As we discussed on our last call, 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 continuing to execute our key business initiatives and supplementing those initiatives with marketing dollars at the right time will allow us to take full advantage of the changes we are making today.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Jim Salera with Stephens Inc. Please proceed with your question.

Yes, good afternoon. Thanks for taking our question. I wanted to start maybe on the marketing spend because, if my notes served me correct, I think initially, we had talked about like $30 million in company-led marketing for the year. If I kind of back into where we're at now, Jim, based on what you said for 4Q, that's about half, $7 million in 3Q and $7 million in 4Q. And then in the supplemental, you mentioned scaling back on some less effective areas. So, maybe you could just give us some color on some of the areas that you've scaled back the spend and for the areas that you still are driving some of the company-led marketing, what the response has been so far and any learnings that we might be able to take into 2025.

Thanks for the question, Jim. So, yes, we did spend $7 million this past quarter, and we are intending on spending an additional $7 million in Q4. So year-to-date, we are at $17 million through September 30. And we've made a lot of progress in this area. As we mentioned to investors and in our last several calls, this is a new initiative for the company, and we continue to evaluate this marketing effort. We are making progress in this area, and we are continuing to look at what are the best ways to optimize these initiatives to improve our customer acquisition costs and the timing of that spend. We feel it's better to do it in other times of the year, and that's why some of the pullback happened in Q3. So you're correct in saying that we were going to spend more amounts in 2024, but we believe that it's more appropriate to invest in this spend in the coming months and quarters. So you'll see us continue to do this type of spending into 2025 through resolution season. So hopefully, that answers your question.

Are there any specific channels or formats in the company-led advertising that you've experienced more or less success with? I understand that TV and social media have different approaches, but have you noticed more or less engagement in any particular advertising channel?

Yes, this is Dan. As Jim mentioned, we've continued to improve our social media channels, which have proven to be very effective. Interestingly, some of our most effective methods for capturing emails and engaging visitors to our website have been instrumental in attracting new clients. Additionally, 90% of our client acquisition still originates from our coach channel. It's essential to recognize that although company-led acquisition is a newer aspect of our strategy, it represents a smaller portion of our overall approach. We have been incorporating a GLP-1 medication message, available to us through LifeMD, for nearly a year. To emphasize some points from our prepared remarks, 95% of our coach leaders are now trained to support GLP-1 medications. This is significant because it enables them to train the remaining coaches. The effectiveness of this effort is evident as 40% of our coaches, up from 33% last quarter, are now assisting at least one client using a GLP-1 drug. This corresponds to approximately 12% of our current client base, who have used or are currently using GLP-1 medications in the past year. Additionally, we believe it is crucial to highlight the product development initiatives that have been underway, set to launch at the beginning of next year and during the resolution season. These new offerings under the OPTAVIA Ascend brand are specifically designed to support individuals using GLP-1 drugs and those transitioning to a maintenance program. This applies to both clients moving off GLP-1 medications and those exiting our traditional coach-led, habit-based program. Our coaches have been advocating for these products for a long time. Alongside the clinical research we plan to undertake to demonstrate that our lifestyle program effectively complements the use of GLP-1 medications or supports individuals in maintenance, these developments are a vital part of our future.

Yes, that's great. If I could ask one more question, my rough calculations suggest that the midpoint of your fourth-quarter revenue guidance indicates a deceleration of nearly 200 basis points compared to the previous quarter. Could you explain why you anticipate that the decline in revenue would accelerate in the fourth quarter, especially considering it has improved gradually over the years? Is this related to marketing support or the product rollout scheduled for 2025? Any insights on this would be appreciated.

Yes. When you look at our guidance at the midpoint, we are experiencing ongoing pressure on client acquisition, which is affecting the number of coaches. As we approach the upcoming quarter, we are reducing some of our company-led advertising efforts. At this time of year, it’s crucial to provide guidance that we are confident we can meet. Historically, the fourth quarter has been more challenging than others, as people tend to be less focused on their health and wellness, with a rebound expected in January and beyond.

Our next question comes from Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

Yes. Hello. So, I was wondering, of the 12% of your clients who were on or currently are on a GLP-1 drug. Can you give us some ideas to what portion got their script from LifeMD?

We're not sharing that specific number publicly. It's clearly a combination of factors. What we've observed is that a segment of the people included in that 12% has transitioned off and are discovering our services in various ways. Some of these individuals have received their prescriptions from their own doctors and are now looking for assistance in maintaining their weight loss. Others have come through LifeMD. I want to highlight that we have some very effective coaching groups collaborating closely with LifeMD physicians who specialize in this area. As we enhance the integration of our technology, the experience for our coaches is becoming more appealing. We expect that this number will continue to rise and play a more significant role in how our coaches assist those seeking medically supported weight loss.

I recently signed up with LifeMD for compounded semaglutide and asked my clinician about OPTAVIA during our online meeting. She didn’t offer any details, and when I inquired about it, she seemed unfamiliar or only vaguely aware of it. I'm curious about the value of the partnership with LifeMD if their clinicians aren't knowledgeable about OPTAVIA and why my clinician wasn’t informed about it.

Yes, I think your experience may be quite different from most. LifeMD has a team of trained physicians who are knowledgeable about the OPTAVIA program. Our technology directs customers who access our services through our website or through a coach to these specific physicians. It seems you may not have followed that pathway. I believe we could review the process you used. If you reached out to LifeMD independently rather than through your coach or our website, you might have connected with a physician who is generally supportive of the LifeMD program, rather than one specifically trained to assist OPTAVIA customers. Yes, that seems likely to be the case. However, I would need to provide more details.

So the whole partnership is not designed for you to take advantage of their customer base. It's more for your customer base; they have access to LifeMD, right?

The initial phase of the collaboration is for our coaches and their clients to offer access to medically supported weight loss through LifeMD. The second phase, which we're starting to integrate now, and I mentioned in the prepared remarks, has to do with co-marketing and leveraging the program, the lifestyle program to support their patients who are either looking for a lifestyle program or those who are potentially transitioning off. So, we're at the very beginning of that part of it, but you're correct that the initial phase has been largely for our customer base. But the second phase is to access their customer base as well to leverage that in some different ways.

Okay. So, switching a little bit to the cost side. I was a little surprised to see the magnitude of the loss expected in the fourth quarter. I guess it's deleverage more than anything. But the clinical trials that you talked about or the clinical studies, is there a cost associated with that? And does that spending start in the fourth quarter or does it start in 2025?

The majority of the cost of the studies will occur in 2025 and beyond, so very little will be spent in Q4. You are correct in saying that the leverage on fixed costs due to volume pressures are impacting us in Q4. We are also continuing to invest in marketing and exploring the best ways to approach that. There are some timing differences as well. We performed better than our guidance on the bottom line in Q3, which has shifted into Q4, partly due to the work with the plan that Dan mentioned regarding OPTAVIA Ascend.

Okay. But in terms of the clinical studies, I mean I'm not a drug person, so I mean I don't know what to imagine for the cost of such a thing. Is it like $10 million or $15 million or $50 million? Like what type of costs are we talking about for these studies that you're planning?

Yes. So right now, the initial estimates, most of it will occur in 2025 and beyond, would be less than $2 million.

Okay. And then, in terms of the vitamins and supplements that you talked about offering in 2025, are these as well the new programs going to be ready right at January 1 when people are doing their resolution or a little before January 1? Like when are we actually going to see them kind of launch?

We'll be introducing those to coaches next month, and then they will be available for new clients and our current client base during resolution season. To provide some insight into our decision, our traditional approach has been to include vitamin supplements in our products. This new product line was tested with individuals on GLP-1 drugs and those transitioning to weight maintenance. As a result, we removed the vitamins from our fuelings, which we now refer to as mini meals, to enhance the taste profile. We were successful in this change and are providing a supplement to be taken separately. We believe this will offer a better product experience for this new segment of consumers, and it will be ready for resolution season.

And so can you give us some rough idea as to the price point? Is it like a vitamin pack or something? Is it a monthly cost of like $30, $40? Like can you give us some idea?

Those are all being discussed internally. We're going to be announcing that shortly, so there's more to come on that as we launch that product in the coming weeks.

Okay. And then my last question was just on what you said about cash flow or cash balance. You said your cash balance is now something you expect to continue as the cash balance for how long? I didn't quite understand what your comment was there.

Yes. We are currently reviewing our forecast. What we intended to communicate is that we believe the credit facility would not be utilized, which is why we decided to cancel it. The credit facility was set to expire in 2026, and we did not plan to use it unless we pursued an inorganic opportunity, in which case we would require a different type of facility, not a revolver. Therefore, we made the deliberate choice to cancel it and save on the associated fees because, at this moment, there is no necessity for it. Of course, if circumstances change, we would work with our banking partners to establish a facility when needed.

Okay. So what you're just basically saying is so you don't expect to need financing to fund your operations or something in 2025. That's basically what you're saying, right?

That is correct. That's exactly right.

Yes. Okay. And then do you have the operating cash flow number either in the quarter or the nine months year-to-date?

I can provide that to you offline, Linda.

Okay. All right. Those were all my questions. Thank you very much.

There are no further questions at this time. I would now like to turn the floor back over to Dan Chard for closing comments.

I want to thank you all for joining us today, and we look forward to seeing many of you at the upcoming Stephens Annual Conference that will take place in several weeks. Have a good evening.

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