Medifast Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 7 speakers on the call.

Operator

Greetings. Welcome to the Medifast Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Steven Denker, Vice President, Investor Relations. You may begin.

Speaker 1

Good afternoon, and welcome to Medifast's 3rd Quarter 2023 Earnings Conference Call. On the call with me today are Dan Charge, 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, 2023 that went out this afternoon at approximately 4:0:5 p. M. Eastern Time.

Speaker 1

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.

Speaker 1

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 Chairman and Chief Executive Officer, Dan Chard.

Speaker 2

Thanks, Steve, and thanks to all of you for joining us on the call. With me today is Jim Maloney, Medifast's Chief Financial Officer. I'll take a few minutes to share some insights from Medifast's journey over the last 12 months and then provide you with some context for where we're taking the business. I'll then turn the call to Jim, who will take you through Q3 financials. There are 2 key takeaways from our latest results.

Speaker 2

First, our financial position remains very strong and we continue to deliver solid profitability despite continued top line headwinds. 2nd, we are making steady progress on several initiatives to expand our offering into the broader health and wellness market and drive sustainable long term growth. Our recent entry into the sports nutrition market with our new OPTAVIA Active line is one example. Weight loss medications are another major opportunity for us as the surging awareness and popularity of these products has prompted a huge change in the way that consumers think about weight loss and lifestyle modification solutions in general. As a result, Earlier this year, we commissioned an extensive independent market research study to understand consumer sentiment in regards to the medications and our coach based What was immediately clear Is that our addressable market is split relatively evenly regarding weight loss medications.

Speaker 2

Around half of those looking for weight loss solutions are accepting of medication based therapies and around half of them reject the idea of using GLP-one medications like Wegovy to support weight loss. The research clearly demonstrates that most of those who are interested in medical weight loss medications are also looking for support beyond a prescription that includes clarity on how they should incorporate healthy eating and exercise into their lifestyle, while using these medical solutions. Additionally, they generally do not see weight loss medications as a lifelong commitment, but rather something that when paired with lifestyle modification can help them to make a long lasting change. So with this in mind, we're focused on developing an approach that will enable us to make this new business environment our sustainable growth environment. We recently launched a pilot initiative with 3 different telehealth companies to explore How we might incorporate weight loss medication into our coach centered business model.

Speaker 2

These pilots have given us some good insights around positioning and approach, What particularly appears to be resonate with customers who are interested in medically supported weight loss is a compelling three way partnership between customer, clinician and coach. Importantly, the efficacy claim of GLP-one medications for weight loss is based specifically on their incorporation with lifestyle changes that include a reduced calorie diet and increased physical activity. As a result, under Medifast's offering, weight loss medications become one important element in an overall tailored lifestyle plan That also includes coaching, community support, healthy habit development and nutritionally balanced meals, along with exercise. This holistic approach we are piloting is collaborative between the customer, coach and clinician, focusing on helping As part of the telehealth pilot program I mentioned, We have been working closely with a set of select coaches to bring them up to speed on the benefits of the OPTAVIA solution For those who are currently using or are considering using GLP-one or other weight loss medications, initial feedback suggests that most coaches involved In the pilot, are optimistic about having another tool at their disposal for use with customers and that the partnership between clinician And Coach is productive for customers who want an approach that fits their own unique needs.

Speaker 2

This pilot program has provided us with some important data and understanding and we'll use this information to inform our thinking now that we have shifted into the 2nd phase of our pilot program. During the 2nd phase, We are measuring key metrics associated with OPTAVIA customers who are combining prescribed medical weight loss medicines with our OPTAVIA program. We believe there is significant potential to maintain our market share and growth position by tapping into this important new market, whether that's through a partnership, Acquisition, investment or an organically developed solution and we expect to provide more details on our approach in the coming months. Of course, for all those people who are not interested in weight loss medications, OPTAVIA continues to offer a compelling lifestyle modification With our clinically proven coach led model that is built on the 6 macro habits of health, providing the cornerstone of reaching a sustainable healthy lifestyle. Customers benefit from the support of an OPTAVIA Coach who understands the challenges one faces when looking to improve their overall health and wellness, with most coaches having started as customers themselves.

Speaker 2

The active role the Coach takes, as well as the support of thousands of like minded individuals in the OPTAVIA community who are also on their own health and wellness journeys is what continues to make our solutions so effective. What is clear to the Medifast leadership team is that medical weight loss solutions Have to sit within an overall health and wellness ecosystem. Medications alone are not a long term solution And only by helping drive holistic lifestyle shifts can we help customers achieve lifelong transformation. Exercise is one important element of that, which is why we're excited by our entrance into the sports nutrition market That took place in mid September with the launch of our new OPTAVIA Active product line. Initial products In our new OPTAVIA Active line consists of essential amino acids, whey protein powders and a digital exercise program offered through a partnership With Aptiv, the products are aligned with the habits of Health Emotion, one of the 6 macro habits that underpin our business health model and can be used by individuals actively looking to move forward along the health spectrum by adding exercise to their health routine, whether as part of a medication supported or non medication supported approach.

Speaker 2

The products include 2 flavors of essential amino acids or EAAs as well as 2 flavors of whey protein and are developed to help support healthy muscle maintenance in conjunction with both exercise and everyday activity. Aging and weight loss are 2 common causes of reduced muscle mass, which is why it is important to have a diet that is inclusive of EAAs and quality protein and is nutritionally balanced. The objectives of this launch are threefold. First, we believe these products expand our addressable market, allowing our coaches to attract a new demographic to OPTAVIA. 2nd, they are expected to extend the lifetime value of OPTAVIA customers by extending their time with OPTAVIA as they learn to live the habits of healthy motion during and after achieving their healthy weight.

Speaker 2

And lastly, they extend our offering by adding exercise to the lifestyle program, making it ideal for those who are interested and using lifestyle modifications along with the support of medical weight loss. All the products are designed to be used in conjunction with Our existing OPTAVIA plans. The new OPTAVIA Active product line expands the breadth of our overall addressable market in an important way. The business opportunity within the sports nutrition market is substantial with a total addressable market that is over 3 times the size of the structured weight management market in which our products operated exclusively in the past. We expect to add further active products to the line next year.

Speaker 2

The work with weight loss medications and the entry into the sports nutrition market are really just the first steps in Medifast's work to transform into a total lifestyle company, helping our customers make a healthy lifestyle second nature. Regardless of whether a customer wants to explore weight loss with or without a medical solution, Medifast has a compelling option for them. Long term success is driven by the adoption of a healthier lifestyle built on nutrition, exercise and other lifestyle habits. Our scientifically developed products are effective in achieving weight loss when following our clinically proven plans, including the support of our independent coaches. In a clinical study, it was shown that those on the optimal weight 5 in-one program Who had the support of a coach lost 10 times more weight than the self directed group.

Speaker 2

Our approach is flexible and inclusive and we're excited by the opportunities that lie ahead. Turning to the 3rd quarter numbers. Our revenues for the quarter were at the high end of our guidance, though down year over year by 39.6%, as challenges faced earlier in the year continued as expected. We continue to believe that the efforts we are taking to expand our product offerings, Incorporate medical weight loss into our programs and diversify our customer base will aid in improving these trends. However, we would not expect to see this improvement until 2024.

Speaker 2

The operating margin for the quarter Of 10.8% was ahead of our expectations as cost reduction actions taken as part of our Fuel for the Future initiative Continue to generate savings ahead of schedule. Operating margin is down approximately 150 basis points compared to last year As investments in customer acquisition and the loss of leverage of fixed costs due to lower revenues year over year Had a negative impact on the margin. As a reminder, 70% to 75% of our expenses Are typically variable in nature, which speaks to the adaptability and resiliency of our business model. As we move into the Q4, we continue to focus on a number of growth initiatives using our strong debt free balance sheet and are Fuel for the Future expense reduction initiatives to help fund them. As mentioned earlier, in addition to our new OPTAVIA Active product line And the medically supported weight loss opportunities we are assessing, we are also pursuing the expansion of our customer base by focusing on demographic groups in the U.

Speaker 2

S. Where we are underrepresented. Specifically, we have been taking steps to further penetrate the Hispanic market And we have made great strides in translating our main materials and website into Spanish to better connect with this group. We have now translated more than 70% of our core materials into Spanish and expect to be completed by the end of the year. In October, in conjunction with the National Hispanic Heritage Month, we executed on our first ever OPTAVIA Spanish language social and digital pilot targeting the U.

Speaker 2

S. Hispanic market. It was intended to begin building the OPTAVIA brand awareness and measure the effectiveness of our efforts to learn how to best market our Clinically proven health benefits and scientifically developed products, plans, coaches and community to this growing demographic. It also enabled us to test and learn how to most effectively match Spanish speaking coaches with U. S.

Speaker 2

Hispanic customers. The goal is to leverage the learning from the social and digital pilot as we anticipate launching a larger, more comprehensive media effort To the U. S. Hispanic market in 2024, we believe that advancing our business in the U. S.

Speaker 2

Hispanic demographic Will help us set the stage for future expansion into Latin America. Also, we continue to evaluate the effectiveness of our customer acquisition initiatives, including our recent limited testing of company led digital marketing, which we conducted over a 3 month period to generate prospects. We are conducting attribution, analytics and path to purchase optimization, which should all result in more efficient advertising spend And scalability. As a company that has a history of marketing directly to consumers, we understand the benefits of corporate advertising to generate prospects for our coaches. It allows our coaches to better optimize their time and focus more on their energy on supporting their customers.

Speaker 2

We just have to ensure that the return we are getting on these expenditures as commensurate with the costs. We also continue to grow our efforts around our corporate social responsibility initiative, Healthy Habits for All. At our OPTAVIA convention in July, our Coach community raised funds for our non profit partners, No Kid Hungry and Living Classroom Foundation. Together with our coaches, we assembled over 6,000 kits for local Metro Atlanta kids. As kids headed back to school, our curriculum reached a new milestone, impacting an estimated 100,000 plus students in thousands of schools across the nation, free of costs Since it launched last fall.

Speaker 2

And in September, we officially opened a new kitchen at the facility of our local partners, Living Classroom Foundation. Medifast provided capital funds to renovate the kitchen. Previously, instructors were teaching healthy cooking classes on hot plates By welcoming kids into the kitchen and inviting them to experiment with healthy ingredients from a young age, we can cultivate a habit in them and can last a lifetime. So to summarize, backed by a strong balance sheet with no debt, We are building out a new approach that better reflects the new realities of the weight loss and health and wellness marketplace and which plays to the competitive strengths of our existing offering. We continue to seek to broaden our offerings To integrate medical weight loss, expand our addressable market and extend our demographic and geographic reach, Along with optimizing our coach compensation and increasing corporate advertising to bring in new customers, These efforts are expected to aid in turning around the recent decline in new customers and coaches we have experienced over the past year.

Speaker 2

We do not expect to start seeing a meaningful impact from these efforts until 2024. And our guidance for our Q4, which Jim will cover in just a minute, Reflects the continued short term challenges we face in customer acquisition in what is seasonally a weaker quarter. However, we do expect our highly variable cost structure and expense reduction efforts under our Fuel for the Future initiative With that, I'll turn it over to Jim to go over the specifics of the quarter.

Speaker 3

Thank you, Dan. Good afternoon, everyone. 3rd quarter 2023 results were at or above our guidance. As we continue to execute our cost reduction initiatives With the savings intended to be utilized for key initiatives to stimulate growth, revenue of $235,900,000 Was at the upper end of our guidance range of $220,000,000 to $240,000,000 but decreased 39.6% 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 pressured by the macroeconomic shift impacting inflation and interest rates and the growth in popularity of weight loss medications.

Speaker 3

We ended the quarter with approximately 47,100 active earning OPTAVIA Coaches As a decrease of 28.9 percent from the Q3 of 2022, Average revenue per active earning OPTAVIA Coach for the Q3 was $5,008 A year over year decline of 15.1%, reflecting the continued headwinds to customer acquisition, partially offset by a price increase we implemented in November of last year. Gross profit decreased 37.3 percent year over year to $177,400,000 driven by lower revenue, While gross profit margin improved 270 basis points to 75.2%, Positively impacted by efficiencies in inventory management and lower supply chain costs, including benefits From the optimization of our distribution center footprint, SG and A expense was down 35.3% year over year $251,900,000 due to the decreased coach compensation on lower volumes and fewer active earning coaches as well as progress on several cost reduction and optimization initiatives And the impact of charitable donations in 2022. SG and A as a percentage of revenue increased 430 basis points, primarily reflecting the loss of leverage on fixed costs due to lower sales volumes compared to 2022 as well as market research and investment costs in this year's Q3 related to medically supported weight loss activities. Income from operations was $25,500,000 in the Q3 of 2023, down 47% versus The year earlier period, driven by lower gross profit, partially offset by lower SG and A and aided by The Fuel for the Future cost reduction efforts.

Speaker 3

As a percentage of revenue, income from operations was 10.8% in the 3rd quarter, 150 basis point decline versus the year earlier level. The effective tax rate of 12.9% was lower than expected and meaningfully lower than the 24.5% recorded in the prior year's Q3 due to an increase in the tax benefit For charitable donations of inventory, an increase in research and development tax credits and a decrease in state income taxes. During the quarter ended September 30, 2023, the company completed its 2022 Federal income tax return, which included an update to the estimated tax basis, cost of charitable donations of inventory And the estimated research and development tax credits. Net income in the Q3 of 2023 was $23,100,000 or $2.12 per diluted share compared to $36,200,000 or $3.27 per diluted share in the year earlier period. Turning to our balance sheet and cash flows.

Speaker 3

Our financial position remains strong With $157,800,000 in cash, cash equivalents and investment securities and no interest bearing debt as of September 30, 2023. Cash flow from operations continue to be strong at $137,100,000 From the 9 months ended September 30, 2023, relatively in line with a year ago period. Turning to the guidance. While our Q3 results were ahead of our guidance, the operating environment remains challenging and we continue to Expect that future growth initiatives will take time to gain traction and deliver meaningful results. For the full year 2023, We are estimating revenue in the range of $1,050,000,000 to $1,070,000,000 and diluted EPS to be in the range of $8.65 to $9.55 Our guidance assumes a 20.5% To 21.5 percent effective tax rate.

Speaker 3

In summary, we remain confident That our strong financial position, coupled with the progress we are making towards exciting new growth opportunities discussed by Dan, Will enable us to evolve our business like we have successfully done in the past and allow us to continue to generate significant cash flow and strong returns on capital in the years ahead. With that, let me turn the call back to the operator for questions.

Operator

Thank you. And at this time, we will be conducting a question and answer session. Our first question comes from the line of Linda Bolton Weiser with D. A. Davidson.

Operator

Please proceed with your question.

Speaker 4

Yes, hello. So your gross margin was very impressive in the quarter, the 75% number. It sounds like those are kind of permanent type improvements you've made along the lines of the supply chain. Is that 75% gross margin level, is that something that's roughly sustainable going forward or how should we think about that

Speaker 3

Yes. Linda, this is Jim. So the gross margin improvement we saw In Q3, at the 75%, We saw that through our Fuel For the Future initiatives. We're starting to see The benefits of optimizing our distribution centers, which we've seen improvement in our inventory controls with Less obsolescence compared to the prior year. And we've also seen improvement in our procurement Practices which have lowered costs.

Speaker 3

The thing when you're we're not really going to talk to the gross At a gross margin level since we haven't provided guidance going forward, but what I can say on that is There is some fixed cost within our cost of sales. As we see lower Revenues that are forecasted, we will lose some leverage on our P and L within the gross margin level, so that will impact Q4, so right now we're projecting the revenue range in Q4 Between $170,000,000 $190,000,000 in Q4 and that loss on leverage will impact gross margin.

Speaker 4

Right. Okay. And I'm curious about, Dan, you're talking about the testing or trying out some digital marketing Methods. And that's a little unusual being that you pay a lot of commissions to your coaches to kind of drive demand. Do you think down the road, like if you were to adopt some kind of permanent method of digital marketing, is there any way to quantify like what percentage of revenue you might Spend on that?

Speaker 4

Are we talking it's like just a few percentage points of revenue or could it be higher than that? Thanks.

Speaker 2

Yes. Linda, we're at the very beginning stages of doing these tests. As you know, from the past, This is not new to us. In the past, we had a direct marketing organization that marketed directly to End users, we, as you pointed out, moved away from that, letting our coaches Use their word-of-mouth campaign over social media rather than Us spending our dollars to do that. The reality is that the environment has changed.

Speaker 2

And Through some of the things that we've talked about in the past, including changes in social media algorithms as well as a more crowded And more, I'll say, dynamic messages going on out there. We think it's a good time for us to Take some of those learnings that we have from the past, some of the learnings that we talked about in the future around medical weight loss and to introduce A new message through the company's led advertising. We've been doing small tests. We feel good about what we've seen so far. Anything that we do will be done only once we understand The benefits from a financial standpoint of doing it.

Speaker 2

So I'd say the important thing is, assume that we are going to Test right now, which is what we've been doing both in the Hispanic market and more broadly, understand how we improve That client acquisition cost and use it to get a new message out there It ties to our broader offering that includes, the things that we're learning about, the ability to Offer medical weight medically supported weight loss, our ability to offer a broader Offering, which includes inclusive of the active program and we believe all this will help make our coaches more productive and return to So the productivity levels would

Speaker 5

have been in the past.

Speaker 4

Okay. And then I was just wondering about If you could give any color on what you saw in October, with the return to people paying Educational loan payments, like are you seeing kind of worsening trends or Kind of the same, what are you seeing kind of so far in the most recent couple of weeks?

Speaker 3

Yes. I mean, when you look at our metrics and really I'll just speak to our metrics. When you look at Retention of customers, when you look at average revenue per order, Those types of metrics have held steady in the month of October. It's really The customer acquisition is the one metric that we're seeing that It's below our historical norms and that is reflected in the guidance we provided.

Speaker 4

Okay. And then, I guess I I can do the math, but Jim, what are you guiding for tax rate for the Q4?

Speaker 3

Yes. For the Q4, Just to step back on the tax rate, so we're actually Seeing that the so as we noted in the earnings release, We finalized our 2022 tax return in Q3 and as a standard practice we adjust Prior estimates to the actual amounts per the tax return during this timeframe, Typically, it's not this large of an adjustment and we actually weren't anticipating it to be that Size, but it's really just a one time adjustment. You can see that we're projecting on a full year basis Our tax rate to be between 20.5 percent to 21.5% On a full year basis, so on the quarter basis, I wouldn't expect that you're going to see 12.9% Again, you're just going to you're going to see something much closer to the 20% level.

Speaker 4

Okay. And is that one time tax benefit, is that cash or non cash?

Speaker 3

That was a cash benefit that We got in 2023.

Speaker 4

So it's essentially reflected in your year to date cash flows?

Speaker 3

Correct. Yes.

Speaker 4

Okay. Got you. Thank you very much.

Speaker 6

Thank you.

Operator

Our next question comes from the line of Jim Celera with Stephens Inc. Please proceed with your question.

Speaker 6

Hi, guys. Thanks for taking our question. I wanted to ask a little bit around the consumer that Seems to not want to engage with the medically supported weight loss. To be honest, the fifty-fifty split is Frankly, better than we would have anticipated, just given all kind of the headline news about the GLP-one drugs. Can you maybe offer some color around what their hesitation is To use kind of the pharmaceutical option on that, is that something that maybe over time their opinion could change?

Speaker 2

Yes, Jim, this is Dan. I think this has been an interesting part for us too, because I think what we we would have expected something Slightly different as well. But I think that set of consumers are those who are, I'll say, more confident And their ability to do it on their own and don't feel like they are ready for medical intervention. What we do know is that as The amount of weight loss an individual has to lose goes up, their interest in medically supported weight loss Goes up as well. But equally important for us was that we saw That those individuals who were interested in medically supported weight loss We're also those individuals who are most interested in the OPTAVIA program.

Speaker 2

So we tested a variation On our program that's specifically designed and focused on helping those who are either thinking about Using medically supported weight loss or who are currently using medically supported weight loss. And that group was Roughly 4 times as interested in our program as Those who are not interested in medically support weight loss. So really it's about their confidence in doing on their own and their ability or their need For greater weight loss in terms of overall weight to lose.

Speaker 6

That's helpful. I think in your prepared remarks, you mentioned that you were working with a select group of coaches to Help kind of train them on the cross sell with the GLP-one drugs. Could you just give us an idea for what was just kind of a random selection of coaches and you just wanted to have a Smaller pilot program or were they selected based on maybe their existing customer base That might be more susceptible or more likely to pair the GLP-one drugs with your program?

Speaker 2

Yes. Typically, what we do is, and this is this rotates depending on what we're trying to test. So we work Quite consistently with our coach leadership to identify different things that we want to test. So these coaches We're selected based on their ability to pivot to test A new message and based on their, I'll say performance in the past of being able to generate activity from their client base. So they're not So we didn't go out and try to find though we didn't pre screen them to find out whether They were open to the idea.

Speaker 2

We took a small subsample of our Over 40,000 coaches and with a very specific focus on understanding how clients that they Paul then would respond and also how coaches would respond to this new model of Creating a partnership between clinician, coach and client. And what we found was very positive. I think there was initially A lot of questions from our coaches about how this might work. And as we have proceeded through the pilot, What we have found is that there are there is an increasing number of clients who are being coached, who are currently on medical weight loss and this addition of the ability to offer This service, if you will, of prescription formatically supported weight loss along with the program Supported by an OPTAVIA Coach has significant appeal. So with that in mind, we have moved from Phase 1 of that pilot to Phase 2.

Speaker 2

So now what we're really specifically focused on is understanding what a medically supported weight loss client or customer looks like as they move through their health transformation journey with the coach. But initial results were positive enough For us to move to the next phase and we have a strong belief that there's some that The OPTAVIA program, lifestyle program that now includes the active line is actually more relevant Than it ever has been before, but it requires us to be able to offer that ability for that 3% who want medically supported weight loss to be complete.

Speaker 6

Thanks. That's helpful color. Maybe since you mentioned the active line, If I could shift to ask a question or 2 there. It sounds like it's really meant to be Complimentary to someone who's already engaged with the broader program. Do you have a sense for If there's an opportunity to lead with active for maybe a customer that's At kind of their target weight already, but wants to help, wants to maintain that and wants a kind of a collaborative environment where they can work with a coach?

Speaker 6

Or is it really something that comes in after the clients already signed up for the broader program and that just kind of helps them as they get closer to their weight loss goal? I

Speaker 2

think it's actually a little bit of both. What it does is it expands our addressable market Significantly. And it does that by both the examples that you use for those who are coming in And interested in weight loss specifically, it allows our coaches to include the habit of healthy motion or exercise And as part of that program, from that standpoint, it helps drive up lifetime value both by Increasing expenditure while they're on program as well as extending the lifetime value as they transition off. It also allows us to extend that target to those who are already closer to their healthy weight and are focused on moving more towards an optimal health state in their health journey. And so in that case, it can take somebody to who is already at a healthy weight and improve their overall health by adding exercise to it.

Speaker 2

Equally important and the reason that we've talked about this is adding the active line and an active program completes our overall lifestyle management solution. I don't think it's lost on anyone that all of the Research that was done, clinical research by the medical weight loss pharma companies, Their claims are tied to healthy diet or reduced calorie diet and increased activity In addition to taking the GLP-one drugs, and so the addition of the active line and coaches who can coach to Increased physical activity completes our offer from that standpoint as well, allowing us to be very complementary and even at the center of The long term solution for those who are using GLP-one drugs.

Speaker 6

That's very helpful. Maybe one more question on the Active Line. I know it's still early days. Is there kind of a line of sight to Expand the product offering there beyond just kind of your core protein and amino acid blend. Are there other Products we could think about whether it's like either supplements or like a pre workout that would be complementary or is that Too much kind of outside the core of what you're trying to do?

Speaker 2

Yes. The plan is to extend the line with products being launched next year. Again, reflective of what we learned about this initial launch, but we've already receiving Feedback from and had already identified some close in opportunities to make the line more competitive and more complete. So The intention is to introduce additional products next year.

Speaker 6

Okay, great. I'll hop back in the queue. Thanks guys.

Speaker 3

Thank you. Thanks.

Operator

Our next question comes from the line of Doug Lang with Water Tower Research. Please proceed with your question.

Speaker 5

Yes. Hi. Good evening, everybody. And the case for the GLP-1s is pretty compelling, Dan, that you make here. And I understand wanting to add it to your product offerings.

Speaker 5

I guess, I look at your balance sheet, I would have just assumed that outright acquisition makes a lot of sense. That's what Weight Watchers did, but you mentioned a number of other possible arrangements, partnerships, investments, etcetera. Maybe help us understand why something other than an outright acquisition could make sense here? Well,

Speaker 2

Sure, Doug. It's good to hear from you. We have We've been taking a very thoughtful approach to this. Initially, we were evaluating what Role GLP-one drugs might play in a coach center habit based model. We move from analyzing to exploring By partnering with 3 different telehealth companies and that's allowed us to get a feel for what we have That's complementary what they have that gives us the ability to make this offer compelling for our customers and our coaches.

Speaker 2

What we found is there are some things that we do very well that telehealth companies don't and there are some things that they do Very well. They have a capability of doing that we don't have the capability of doing. But there's a lot Outside of that crossover. So as we're moving into this next phase, We're trying to ensure that we do what is right for the business. And by that, I mean, both coaches, clients, but also our financials.

Speaker 2

There are different levels of success and profitability inside telehealth companies. And as you know, we have one of our success marks in the past has been high cash generation and improved margins. So we're thoughtful about how we maintain that, but also have the potential of leveraging Some of these are outside capabilities. So it's an evaluation and that evaluation is being made on an even deeper level now that we're moving into Phase 2 of these pilots.

Speaker 5

That makes a lot of sense. That's good color. I mean, can we see an instance where You start with an investment or start with a partnership, moves to an investment, moves to an acquisition. I mean, this could be a multistage process, right?

Speaker 2

Yes, absolutely. I think one of the things that we are all very aware of is that this Well, GLP-one drugs in the 1st generation and second generation have been around for a while. There's a lot of changes that are taking place, including insurance coverage, including different types of products that are coming out or currently in testing. So we're Watching very closely, making sure that we remain nimble and we'll do what's right for our investors and what works from a capital standpoint. I think you pointed out Accurately, Doug, we have a lot of flexibility because we have no debt on our balance sheet, strong cash position And the ability to make a lot of good decisions for the long term as we as the long term start continues to unfold and we learn more about The market and how it works inside our model.

Speaker 5

All right. That makes sense. Thanks, Dan.

Operator

Okay. It looks like we have reached the end of the question and answer session. I'll now turn the call Back over to Dan Chari for closing remarks.

Speaker 2

Thank you, and thanks for your continued interest in Medifast. As a team, We're excited by the opportunity that lies ahead and we look forward to sharing more on our progress in the coming weeks And months, we hope that to see many of you at the upcoming investor conference, including the Stephens Annual Conference on November 14th And the ICR Annual Conference in early January. Again, thank you for your time today.

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Earnings Conference Call
Medifast Q3 2023
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