Good day. And welcome to the Medifast, Inc. First Quarter Fiscal 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Van Winkel. Please go ahead.

Good afternoon. Welcome to Medifast’s first quarter 2020 earnings conference call. On the call with me today are Dan Chard, Chief Executive Officer, and Joe Kelleman, Interim Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended March 31, 2020, that went out this afternoon at approximately 4:05 PM Eastern Time. If you’ve 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 be available on the company’s website. Before we begin, we’d like to remind everyone that the 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 identified forward-looking statements. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. Actual results could differ materially from those projected in any forward-looking statements. Medifast assumes no obligation to update any forward-looking projections that may be made in today’s release or call. All the forward-looking statements contained herein speak only as of the date of this call. And with that, I’d like to turn the call over to Medifast’s, Chief Executive Officer, Dan Chard.

Thank you, Scott. And good afternoon to everyone joining us. Thank you for taking time to be with us today. On the call with me today is Joe Kelleman, who was appointed Interim Chief Financial Officer in early March. Joe has had his distinguished career with Medifast since joining in 2012, serving in a series of senior financial roles since that time, including Corporate Controller and Vice President of Finance. He also served as Interim Chief Financial Officer of the company in 2013. He will lead the finance function until a permanent appointment is made. We are currently conducting an extensive search for a CFO that will lead the company into our next phase of growth. I’ll start today’s call by giving you a brief overview of our first quarter performance and an update on how our business was impacted in the quarter by the economic and social disruption related to the COVID-19 pandemic. I will also share with you what we’re doing in the current quarter to adapt to the new business environment to ensure that we continue to deliver long-term growth in the growing health and wellness marketplace. Then Joe will review Q1 financial results in more detail. We’ll then both be available to take your questions. I’m pleased to report that Medifast delivered above the high end of our guidance on both the top and bottom line during the first quarter, reporting revenues of $178.5 million. Non-GAAP adjusted earnings per diluted share, which excludes expenses in connection with the scheduled 13-D filing and severance costs, was $1.93 in the quarter. This growth was driven by continued improvement in the number of active earning coaches on both a year-over-year and a sequential basis, porting the highest level in the company’s history, with 32,600 coaches at the end of…

Thank you, Dan. Good afternoon, everyone. It’s been a pleasure speaking with some of you over the last couple of months, and I’m honored to be supporting Medifast during a time where our mission is more critical than ever. Let me walk you through our financial results for the first quarter ending March 31, 2020. Revenue for the first quarter of 2020 increased 7.6% to $178.5 million versus $165.9 million in the first quarter of 2019. Dan highlighted, we ended the quarter with our highest level of active earning coaches in the company’s history at 32,600. This represents 19.9% growth as compared to 27,200 coaches in the same period last year. Average revenue per active earning coach for the quarter decreased 8.3% to $5,333 compared to $5,817 for the first quarter last year. Of note, however, is that this metric showed a sequential quarterly improvement of 2%. Discussed in our prior earnings call, the year-over-year decline in revenue per active earning coach was anticipated as a result of the operational headwinds experienced in 2019, resulted in a reduction in the proportion of less tenured clients as a percentage of total clients. Less tenured clients represent a higher average spend versus more tenured clients. This puts downward pressure on this metric. We expect revenue per active earnings coach to normalize in the future, as new client acquisition coach sponsorship approves. Also of note, Optavia-branded products grew to 79% of our total company consumable units sold in the first quarter, up from 73% in the prior period. Gross profit for the first quarter of 2020 increased 8.1% to $135.2 million compared to $125.1 million in the prior year period. Gross profit margin as a percentage of net revenue increased 40 basis points, 75.8% versus 75.4% in the first quarter of 2019. The…

Thank you. [Operator instructions] Our first question comes from Steph Wissink with Jefferies. Please go ahead.

Thank you. Good evening, everyone. First question, Dan, is for you to just take us back a bit in time to your fourth quarter report end of February, you were certainly posturing as a quite conservative outlook for the quarter and came in well above that. Maybe just help us reconcile what changed in the business relative to what you had set out for us? And then I just want to clarify your comments on the April quarter to date, that it’s up slightly year-over-year. Help us just contextualize that relative to your nearly 8% growth you reported for the March quarter?

Yeah. Sure, Steph. So, as you remember, coming out of the fourth quarter, that was a quarter where we - the third and fourth quarter or this quarter is when we had some operational challenges that we focused on fixing in the fourth quarter. The headwinds associated with those challenges is what we faced in the early first quarter, which is what led us to guide on a relatively modest growth year-over-year. At the same time, we were dealing with toward the back end of the quarter, the impact of the pandemic, which also create a lot of uncertainty. So, at the same time, we were cutting expenses to ensure that we could understand how we would sustain profitability in an uncertain environment. So, we worked intensively to focus on creating a strong March, including putting in place an incentive to focus our coaches on client acquisition, and that helped us finish the quarter up stronger than we had anticipated. And with the expenses that we cut, that helped the bottom line over-deliver versus our guidance. To give you a little bit more context to April. April included two specific promotional - well, one promotion and one incentive. So, the incentive, it was the same one that we ran in March, which specifically encourages through a bonus structure for our coaches to acquire new clients. And the second is a price promotion on our essential kit, which is focused specifically on new clients. And so, with those two promotion - that one promotion and an incentive in place, we were able to achieve a year-over-year increase in April. So, that’s kind of the context, is challenging headwinds coming in to at the end of March and beginning of April that we’re able to turn around and achieve year-over-year growth. But we’re still very early in the quarter. We need to understand how that growth and momentum or, we’ll say, the growth will sustain through the rest of the quarter. And that’s what we’re specifically focused on understanding is how this new promotion that - that’s withstanding on the surface appears to have been very successful. We’ll maintain throughout the rest of the quarter.

Okay. That’s very helpful. And then just one final question is to take this one level deeper on the promotions. You did run a promotion, if I recall, in November and December or early part of December. It sounds like another - maybe more incentive driven activation in the first quarter. April quarter to date, we’ve got another incentive and promotion. How should we think about, number one, the receptivity to some of these activation campaigns you’re putting in the market? And then I think you’ve mentioned now on all of them, it’s really about customer acquisition. So, help us think through also about the building of that customer base into future coaches and what you might look for over the course of the next couple of quarters to convert more of your customers into active coaches?

Sure. I mean, as you know, we don’t promote our business a lot. And certainly, this is the departure from what we’ve done in the past. And so, we - I mean we were specifically focused on a couple of things. Our main objective was giving our coaches the tools they needed to break through a challenging environment from a communication standpoint. I think it’s not lost on anybody that what’s been on people’s mind is the global pandemic. So, refocusing them on client acquisition was the first purpose and then giving them the tool in the form of a price discount was the mechanism to help execute that. And so, as Joe stated earlier, we saw that improvement in the April results being tied to increased client acquisition, as well as co-sponsorship. So, the question you’re asking is exactly what we’re focused on is now that we have a healthy influx of new clients, as we’re moving through April, how do we continue to maintain that through the rest of the quarter? So we’ve extended that promotion that we ran in April into May as well and our coaches are specifically focused on doing what they do very well, which is supporting those clients. And as they support them and those clients achieve a health result, a portion of those become coaches and go on to recreate that cycle of bringing in other new clients. So, I think we feel good about what we’ve seen so far. But we also recognize that along with every other company in the country and really the world, we’re trying to understand how the overall populations react and how the continuing changing economy is going to impact our business. But that’s as much as we know right now, and we wanted to make sure that we gave investors and you, as analysts, as much information as we have about our current situation.

Okay. That’s great. And Joe, just one more housekeeping question for you is just on the promotion - price promotion versus the incentive. Can you help us think through the impact to the P&L, is it a net sales adjustment when you price promote or does that come through in an advertising and promotional expense line within SG&A? Maybe help us think through just the mechanics of a price discount.

Sure. I mean, it’s a little bit of both there. I mean, the Forward and Health actually had an impact on the SG&A cost for the business here. We’re looking at profit of roughly approximately 130 to 170 basis points impact regarding that. As far as the essential kit promotion, that would have an impact on our gross margin. And we are seeing a - we will be seeing an impact on the gross margins here. But I believe that we’ve extended that into May, we’re not necessarily sure exactly how that’s going to play out for the third quarter.

Okay. Thank you. That’s it for us.

Thanks, Steph.

[Operator instructions] Our next question comes from Doug Lane with Lane Research. Please go ahead.

Yeah, hi. Good evening, everybody. Just looking at - there's a lot of cross currents here, and there has been for the past several quarters that we’ve been talking about. And I’m trying to get a feel for how operating margins, which were under pressure in the second half down 200 basis points or so, all of a sudden turned around and increased as much as they did to what are really - as far as I can tell, record operating margin levels. And meanwhile, your sales growth, although it was better than expected, is still decelerating. So help me understand what’s going on from a margin standpoint?

Yeah. Thanks, Doug. Since you asked about last year, you’re right, we were - our operating margins were under pressure, largely because of a quickly changing forecast. So we won’t revisit all the reasons for that, but it had to do with our ability to manage spending in the face of a decline in our revenue. Really just the opposite happened in the first quarter, meaning we were - because these were macro impacts and things, we were already aware of. We began adjusting our spending early in the quarter and then finished the quarter in March stronger than we had anticipated. And so, in that case, we had less spending than anticipated because of - we’re aggressively managing our SG&A and then we finished the quarter stronger than we had anticipated. So, that’s what’s created the outsized operating margin and it’s still very strong, but more modest off-line revenue growth.

Okay. Well, that makes sense. And taking that out, Dan, you’re not spending as much on in-person meetings. I get that, given the environment, but that’s not a permanent change, right? I mean, you’re still going to have to have the in-person connectivity as a direct seller. So really should we think about perhaps unusually high margins this year and then maybe adjusting back to normal, assuming there is anything close to normal in 2021?

We’re taking this a quarter at a time and trying to understand what we learn as we go through it. So, I think we’ve - as you point out, we’ll achieve some savings in the back half of the year, which is typically - I mean, our two biggest expenses there are the convention and the accrual for the next year’s leadership advancement trip. So in the case of the convention, as you pointed out, we’re going to be doing a virtual event, which we anticipate will generate some savings. We’ll be using those savings either to ensure profit for the back half of the year, so operating margin or as we understand more about how to support our coaches, spend back to drive revenue as well. So, we’re kind of taking a little bit of a wait and see approach to better understand what the environment is as we go forward. And in our favor - I mean what we favor is to continue to help our coaches growth through client acquisition and at the same time, make sure that we’re being responsible in managing our P&L effectively. As far as what it means for future years, I think there is very likely that there will be some things that we learn in this environment that we’ll continue to use as we transition. So, we’ll evaluate what this new – what we learned from these promotions. As Joe pointed out, we are not accruing in the back half of the year for the next year’s leadership advancement trip. We’ll look at how we use our funds to help support and recognize our leaders as they develop as coaches. And beyond that, again, we’re just - we’re trying to understand how to best support in a very different environment. So, we’re going to take it one quarter at a time. And as soon as we have more clarity into the environment and what we’re doing, we’ll be sharing it with you as analysts and with broader investors.

Okay. No, that’s fair. And I understand that Dan, but not everybody’s full guidance because of COVID. And certainly, companies like you that come in with a better sales and margin number, indicating demand seems to be in pretty good shape. You mentioned you grew in April. The supply chain seems to be in pretty good shape. So, as somebody here from the outside, what am I looking for from the COVID situation. Is this something you’re concerned about that might happen with - at the coach level or the demand level? I mean, you sell food products, but that’s a preferential product. Is there anything in the supply chain we should be looking for, or is it just general conservatism, which would be understandable as well?

No. I think what we’re looking at certainly is - we want to make sure that we understand what the impact is of an economic downturn on our business. I think that’s what we’re now potentially facing. It could be positive if we’re viewed as an income opportunity. Could also be negative if we’re viewed as an expense that goes beyond what people are willing to spend if their incomes are tightened up. So, we feel good about where we are, particularly as it relates to our very strong balance sheet with no debt and plenty of cash. So, in terms of - what we’re looking for or what you should be looking for is a return to an understanding of where the future is. So, with every state in a slightly different point in time in terms of returning to work, that has an impact. So, we want to see how the economy returns to normal. We want to make sure that we’re able to continue to keep our employees, particularly what are deemed as essential employees in our supply chain, healthy. We have gone to great lengths, including putting full time nurses, both at our manufacturing facility, as well as at our distribution facility. And we have a screening process. We also are going through a very strict policy around quarantining for anybody who travels. But this is all new to us. We haven’t had to worry about that in the past. And so, that’s - those are the uncertainties along with understanding how the long-term impact of promoting our business, and what that looks like. So that’s kind of what we’re looking for, and those outcomes of those different activities, what we’ll be sharing with you.

Okay. Fair enough. Thanks, Dan.

Thank you.

Our next question comes from Bill Baker with GARP Research. Please go ahead.

Yes, hi. Kind of two question that are interrelated, really. I’m kind of curious if you could put a little perspective on when you acquire new coaches, historically, versus what’s happening now in this COVID-19 kind of an environment. I mean, historically, I think of you getting coaches from people who work in an office environment and being noticed for having lost a lot of weight and recruiting at their job site. And then I think of you adding new coaches from social media and relationships that aren’t in an office. And I’m wondering how important one is versus the other, historically, versus today where people may not be going to work, but they might be spending a lot of time on social media. And then the related question is, I know you don’t spend a lot of money on advertising anymore, but you have this whole tool set to help with social media. And I’m wondering if you’re seeing any changes in trends now that we’re in COVID-19 environment? And can you help your coaches and tweak things or advise them in this brave new dystopian world?

Sure. I think the first question, social versus in-person or virtual versus in-person. If you went back five or six years, I’d say there was probably more of a balance. In the last three years, in particular, our coaches have been - become far more adept at working through social media. And so, it’s far more important for us, which is why I think we feel like we’re in a good position to be able to operate successfully or to help support our coaches in that endeavor, as they continue to use social media as a way to tell their story. And that’s - so that’s - because the majority of our approaches were clients first, that’s how they were attracted to coaching. And so, that, in turn, becomes how they move forward and continue to train other new clients. As far as advertising, that’s an interesting question because we actually view the 43% of revenue that we spend as compensation for our coaches for in-person advertising. And so, we view every year that we have a significant word of mouth campaign that goes on across the United States and in Hong Kong and Singapore to attract new clients. And as that relates to your last part of your question, which is do we help? How can we help? I think the answer is, yes, we started being - started to be far more proactive in leveraging our PR wins, which include everything from magazine placements to TV placements to then push out to our field of coaches and they, in turn, share it - share those things on social media. So, we think that that’s a - not only has been an important part of the last several years, but will become an increasingly important part of our future in terms of how we attract clients and support our coaches.

Okay. Are you finding that the message - I mean, one of the risk factors for COVID-19 is obesity? Is that a message that is resonating?

Yeah. We’ve deliberately told our coaches to kind of stay away from trying to focus on our products being a solution in the face of COVID-19. I think that’s maybe part of the question. But I think there’s an aspect that we’re seeing and we believe we’ll see more of, which is that the majority of the world being on lockdown are doing - more eating and less exercising than they typically would. So, you can read about it. You can see what the trends are. So, I think we believe, particularly as the lockdown starts to loosen up that - and I think we’re seeing it already even through search trends. People are less consumed with understanding the pandemic, more focused on - and understanding how they are going to emerge and become the person they want to be. If that means 10 or 15 pounds lighter, that’s part of it. But really, our focus goes far beyond weight. It focuses on achieving lifelong health. And so, I think being healthy is going to continue to be on everyone’s mind, which means we will continue to have a large addressable market. And the way they do that, we know from experience is helped by having a partnership or the support of a coach in doing that and a program that helps people learn healthy habits, which is exactly what we focus on. So, I think our coaches are in a great position to help the population emerge from the lockdowns and the focus on their collective health.

If I could just squeeze in one quick one here, too. Do you think the first quarter would have looked any different if COVID-19 hadn’t have happened and if so, how much at all?

I mean, the answer to the first part of the question is, yes. We saw significant pressure in the back half of March as soon as the country was going through a very uncertain time. In terms of projecting what the difference would be, I think, it’s likely, we would have been stronger. We haven’t tried to calculate and communicate that, but we did not - I mean, it didn’t have a negative impact on our business.

But did that sort of heal itself in the beginning of April, you were talking positively about April?

We feel good about where we ended April, but the growth in April was driven by a set of tools that we haven’t used before.

Okay.

And so, what we feel good about is that our coaches were extremely engaged and very successful in communicating our message, and we’re going to continue to monitor very closely to understand how those new clients are coming in - perform compared to what our clients looked like in the past and then how they - what portion of those convert to coach. So, there is no reason for us to be pessimistic about that, but it’s one of those uncertain areas for us right now.

Thanks. Thanks for answering all my questions.

You bet. Thanks, Bill.

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

I’d like to thank everybody for joining and appreciate all of our shareholders who have joined listening on the calls, in particular. Also I would want to recognize our coaches, our clients and our employees during this challenging time. I think we feel good about how we’ve weathered the headwinds coming in. And we feel confident and good about our future and our long-term prospects as we continue to focus on helping the world become healthier. With that, look forward to speaking with many of you soon.

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