Medifast Inc (MED) 2008 Q4 法說會逐字稿

Greetings and welcome to the Medifast fourth quarter 2008 financial results conference call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Brendan Connors, VP of Finance for Medifast. Thank you, Mr. Connors you may begin.

Good morning. My name is Brendan Connors and I am Medifast VP of Finance. I am joined today by Michael McDevitt, our CEO and CFO. I would like to welcome you to Medifast fourth quarter and year-end conference call for the period ended December 31st, 2008. Before we begin, I would like to have Mr. Robert Blum of Lytham Partners read the following statement.

Thank you, Brendan.

The Company invokes the protections of the Private Securities Litigation Reform Act of 1995. Regarding any statements made during this call and memorialized in any our all transcriptions of there that may be forward-looking statements. The Company specifically disclaims the authenticity of any transcriptions other than the transcription created by this conference call vendor. The words believe, expect, anticipate and other similar expressions generally identify forward-looking statements. Participants on this call are cautioned not to place undue reliance on these forward-looking statements which speak only as of their dates.

Similarly, descriptions of Medifast's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. Medifast believe there's call should be considered in conjunction with all of its filings with the United States Securities and Exchange Commission and cautions its listeners that these forward-looking statements are subject to certain events, risks, uncertainties and other factors. Some of these factors include, among others, Medifast's in able to attract and retain independent associates and members, stability in the pricing of print, TV and direct mail marketing initiatives affecting the costs to acquire customers, increases in competition, litigation, regulatory changes and its planned growth into new domestic and international markets and new channels of distribution.

Although Medifast believes that the expectations, statements and assumptions reflected in these forward-looking statements are reasonable, it cautions its listeners to always consider all of the risk factors and any other cautionary statements carefully in evaluating each forward-looking statement during this call as well as those set forth in its latest annual report on Form 10-K and quarterly report on Form 10-Q and other filings filed with the United States Securities and Exchange Commission including its current reports on Form 8-K.

Medifast does not comment on issues or items currently or potentially in litigation with adversarial third parties and are under investigation by appropriate regulatory or law enforcement agencies of the state or Federal Government. All the forward-looking statements contained herein speak only as of the date of this call.

Now I'd like to turn the call over to Mr. Brendan Connors, VP of Finance to go over the financial results. Brendan?

Thank you, Robert. For the three months ended December 31st, 2008, Medifast reported revenue of $25.5 million versus $19.8 million for the same period in 2007 representing an increase of 29%. The Take Shape for Life sales channel accounted for almost 56% of total revenue. Direct marketing accounted for 33%, even with a year-over-year decrease in sales of 11% as a result of reduced advertising budget. The Medifast Weight Control Centers accounted for 9% of total revenue and doctors 2%.

Take Shape for Life sales which are fueled by increased product sales declined supported by active health coaches increased by 76% compared to the fourth quarter of 2007. The Company's Medifast Weight Control Center division increased sales by 55% as compared to the fourth quarter of 2007 as the Company increased sales per store as well as the opening of 10 additional corporate centers throughout 2008.

The Company had selling, general and administrative expenses of $18.1 million in the fourth quarter of 2008 which was an increase of $4.6 million from the same period in prior year. The largest increases in SG&A expense were attributed to increased Take Shape for Life commission expense that is directly related to sales, personnel expense and other expenses that include items such as depreciation, amortization and credit card processing fees.

In the fourth quarter, the Company also experienced a one time charge to earnings for a legal settlement as well as a realized loss in investment securities due to severe decline in overall markets. Combined, these two abnormal events equated to a [$0.02] [two payment] decline in the Company's quarterly diluted earnings per share. Tape shape life commission expense which is directly related to product sales to clients and health coaches increased by $2.8 million as compared to the fourth quarter of 2007 due to the 76% increase in sales.

Salaries and benefits increased by approximately $700,000 as compared to the fourth quarter of 2007. The increase includes the hiring of additional expertise and critical areas such as Take Shape for Life and the Medifast Weight Control Centers to support the strong growth in 2008 and beyond. Also, additional personnel were hired in the call center during first and second quarters of 2008 as the Company brought the outsourced Tape Shape Life call center in-house early in the second quarter of 2008. Savings had been realized on communication expense as a result of bringing the call center in-house and service levels to customers have greatly improved.

The opening of eight new corporately owned clinics in the Houston, Texas market and two in the Dallas, Texas, market also required the additional hiring of center managers and support staff. The Company believes the investment in personnel will lead to revenue growth, cost savings and additional profitability in the near future.

Finally other expenses which include items such as credit card processing fees, depreciation and amortization increased by $600,000 as compared to the fourth quarter of 2007. In the fourth quarter of 2008, the Company experienced improvement in its gross margin as a percentage of sales to 76.3%. The margin improved due to efficiencies gained from new machinery purchases in prior year, new shipping rules that resulted in additional shipping revenue from customers, netting against shipping expense as well as a price increase on July 1st, 2008.

In the fourth quarter of 2008, the Company reported net income of $949,000 or $0.07 per basic share, $0.07 per diluted share, compared to $601,000 or $0.05 per basic share, $0.04 per diluted share for the fourth quarter of 2007, an increase in diluted earnings per share of 75%.

In the fourth quarter of 2008, the Company had an effective tax rate of 17% as the Company amended prior year tax returns to properly roll forward prior net operating losses for tax purposes. This resulted in a $162,000 tax refund receivable at December 31st, 2008. For the full-year, the Company experienced a 30.8% effective tax rate which is the same as prior year. In 2009 the Company anticipates an effective tax rate of 35% to 37%.

The fourth quarter of 2008 represented the Company's 32nd consecutive quarter of profitability. For the year ended December 31st, 2008, Medifast had revenue of $105.4 million representing a 26% increase compared to $83.8 million reported for the year ended December 31st, 2007.

The Company has selling, general and administrative expenses of $71.9 million as of December 31st, 2008, which was an increase of $15.3 million from $56.6 million in 2007. As already discussed, the majority of the impact resulted from increased Take Shape for Life commission expense related to sales growth, additional personnel expense and increased expenses related to credit card fees, depreciation and amortization.

The Company reported net income of $5.4 million for the year ended December 31st, 2008, or $0.41 per basic share, $0.38 per diluted share versus $3.8 million or $0.30 per basic share, $0.28 per diluted share in 2007. Diluted earnings per share increased by 36% in 2008.

The Company's balance sheet remains strong with stockholders equity of $38.2 million working capital of $12.7 million at December 31st, 2008, compared to $32.4 million and $10.4 million at December 31st, 2007. As of December 31st, 2008, the Company had an impressive 2.5 to 1 current ratio. In addition, the Company had $4.4 million in funds available on its line of credit at the end of the fourth quarter.

The Company has invested heavily in the past few years on capital expenditures such as new IT systems and infrastructure, clinic build-outs, phone systems and machinery. While there will always be costs associated with maintaining and improving our infrastructure, in 2009 the Company will reduced its CapEx spend by approximately $2 million from 2008 and up which will generate more free cash flow for the business.

Now I would like to turn the call over to Medifast's CEO, Michael McDevitt.

Thank you, Brendan. 2008 was an extraordinary year for Medifast. We posted record revenues of $105.4 million for the year which was a 26% increase versus 2007. We posted record net income with earnings per share of $0.41 basic and $0.38 diluted for the year, a 36% increase versus $0.30 and $0.28 respectively in 2007. And we have set the stage for what we believe will be yet another record year in 2009 for our first quarter of 2009 is off to its strongest start ever.

For the fourth quarter or revenues increased 29% to $25.5 million versus a fourth quarter of 2007. Our diluted earnings per share increased 75% for the fourth quarter to $0.07 versus $0.04 in the comparable quarter a year ago. Both our revenues and earning per share are the highest fourth quarter results the Company has ever reported.

The performance of Medifast this past year in the face of one of the most devastating economic environments is a testament to the strategic business plan implemented by the Company's executive management team and carried out by our employees and independent health coaches. The Medifast program of clinically proven weight loss meal replacements has successfully assisted over a million customers over the past 29 years to lose weight in a safe and effective method.

Being rooted at Johns Hopkins University in 1980, we believe we have one of the premier products on the market. Couple that with a Company's strategic plan to deliver this product through the various support distribution channels that our customers desire and we have positioned Medifast for what we believe to be continued success with our 29 year clinical history. We firmly believe that we are a true weight loss Company that is still in the beginning phases of effectively marketing our products and supporting our customers and not a marketing Company that has simply chosen to deliver weight loss products.

The revenue growth of 29% during the fourth quarter was led primarily by our direct sales segment Take Shape for Life. Take Shape for Life experienced sales growth during the quarter of 76% to $14.2 million. This is another all time quarterly record for this segment. Take Shape for Life represented 56% of total Company sales during the fourth quarter and 47% for the year. This level of growth in revenues in the fourth quarter compared to the third quarter is impressive as consumers typically do not initiate weight loss efforts between the Thanksgiving holiday and the start of the new year. In that regard, the fourth quarter is historically the weakest quarter of the year for weight loss companies. We are very pleased that the just completed fourth quarter for Take Shape for Life was its strongest of all quarters during 2008.

Specifically to the fourth quarter, there are a couple of factors that led to this growth. First we hold our Take Shape for Life National Convention in July of each year. We typically see a three month ramp-up after the conference as our health coaches come out energized to expand their customer and health coach base. We believe this leads to increased customer acquisition activity beginning in October and November which should then lead to increased recruiting activity after the first of the year which is in line with what we are currently experiencing.

We are also benefiting from the fact that during an economic downturn certain direct selling of business models such as Take Shape for Life often have the ability to experience increased growth as individuals look for supplemental income opportunities not only in the fourth quarter but throughout the year. At the end of the fourth quarter we had approximately 3,400 active health coaches. This is an increase of 84% from the fourth quarter of 2007. We continue to be extremely pleased by the continuing increases that we are seeing in the number of health coaches and as past results have shown, this is a good indicator for future revenue growth.

Our goal is to continue to work with our field leaders to develop the training and tools necessary to support our ever growing network of health coaches and clients. On December 1st we launched our new Back Office in Motion. This Back Office tool is utilized by the health coaches to effectively manage their client base and their business. It provides step by step instructions, reminders and tools to help increase the efficiency of the coaches. Previously our coaches were utilizing a more archaic system that was originally implemented in 2003. The old system was difficult to use and provided very little assistance for the health coach. The launch of our new Back Office was successful and we are now focused on training our health coaches on the basic capabilities as we look forward to the opportunity that this new platform will provide to our health coaches.

Additionally, we have also launched our new e-commerce site for Take Shape for Life BeSlim customers. It includes easier to use navigation and up sell capabilities. We are already seeing the benefits of this new site in terms of the positive feedback we receive daily from its users.

As we discussed, last quarter approximately 60% of Take Shape for Life sales come from just seven geographic areas. This makes logical sense as our direct sales model is a viral marketing effort that is in its early stages of growth and consists of individuals having had weight loss success, then teaching and replicating that success to their warm market family and friends. This leads to tremendous opportunities that continue to exist for this segment of our business.

To highlight this opportunity, I will share a recent personal experience. A health coach from White Plains, New York, recently hosted an event for current and prospective health coaches at a local hotel. These events that are sponsored by the health coach are being conducted by our top field leaders throughout the US nearly every weekend and are called Super Saturdays. This health coach, while coordinating the details of the event with the corporate Take Shape for Life team, mentioned that he expected a large turnout at this event. Therefore, I chose to attend the event to both touch base with several Take Shape for Life leaders and support the effort from a corporate standpoint. As it turns out, 500 people chose to attend this training event which took place over a Friday night and Saturday at their own expense and on their own time in the middle of winter in White Plains, New York. To put this in perspective, our national conference this past year in Orlando had approximately 800 people in attendance. Now White Plains is not one of those seven concentrated geographic areas I spoke of earlier, but after what I witnessed this past weekend I expect it to be a significant growth market for Take Shape for Life in a very short time period.

If one was to look at the map of obese and overweight individuals in the United States and then to overlap this map with these seven geographical concentrated cities, it becomes very clear as to the opportunity that exists in the Take Shape for Life division. In our Direct Response segment we continue to focus on maximum flexibility and advertising to drive profitable sales. The revenues for the quarter and the year were $8.4 million and $44.3 million respectively. This compares with $9.4 million and $46.9 million in 2007. Our revenue-to-spend ratio during the fourth quarter was 2.7 to 1 and 2.5 to 1 in the year on approximately $17.8 million in advertising dollars spent.

As we messaged on our earnings call last March, our 2008 revenue and profit guidance had the assumption that the Company would attempt to achieve a 2.6 to 1 revenue-to-spend ratio for the full-year of 2008. This figure was not reached. However, in the economic environment we experienced throughout 2008, the Company was not only pleased with the 2.5 to 1 return but showed consistency in our effectiveness and ability to control our spend. Nevertheless, the difference in advertising effectiveness for the projected 2.6 to the actual 2.5 to 1 return resulted in approximately $1.8 million in incremental sales that would have had a large bottom line impact as there would have been no advertising expense associated with that revenue.

Again, to put in perspective what we perceive is our ability to closely monitor and adjust to the trends facing consumers, we had a 2.5 to 1 ratio for the first quarter, second quarter and third quarter in 2008 and as I mentioned, a 2.71 ratio for the fourth. This is a comparison to variability in 2007 that saw one quarter as low as 2.2 to 1. While we always strive to improve upon generating the most effective revenues for every dollar spent, we believe that equally important is having a strong grasp on the marketplace dynamics keeping ourselves flexible and nimble to adjust spend where necessary to achieve profitable returns.

Looking to 2009, we have come out of the chute with a run rate of $17 million for a full-year ad budget. We will continue to look to improve upon the ratios of this business to generate incremental profits. We believe that there is room to grow both in effectiveness and in the amount of our ad spend and we believe it can be done even in this environment by fine tuning our message, improving our call conversions and upgrading our web card for easier and enhancing the opportunity to up sell additional products. The upgraded web cards expected to go live in the third quarter of this year.

In the Medifast Weight Control Centers we finished the year with 20 corporate centers and five franchise centers. Revenues for the segment in the fourth quarter were $2.3 million versus $1.5 million in the comparable quarter a year ago, a 55% increase. For the year revenues increased 79% to $8.4 million. We are extremely pleased with the results of our Medifast Weight Control Centers during 2008.

For fiscal year 2008, we averaged $38,000 per month per center versus $36,000 in 2007, a 6% increase. We continue to see strength in our centers in the Dallas market where we have 10 centers up and running. Average monthly store sales in Dallas, which is our longest standing city of Medifast weight control centers, were $42,000 during the quarter versus $40,000 a year ago.

As the virgin markets of our centers are built out such as Houston in 2008 and Austin will be in 2009, it takes a period of time to open this market and brand the Medifast Weight Control Center business. We believe that the city's selection of these markets has and will continue to pay benefits to the Company as the overall economic impact in these cities where the centers are currently located has not been impacted as severely as the country as a whole. Over time this branding improves. The advertising effectiveness and effect raises the same store sales in that market.

The opening of these 10 centers in what was a very difficult macroenvironment although will cause for a slightly lengthened drag on earnings out of the gate we believe will put the business in a very favorable position in the near future as competition continues to diminish allowing Medifast Weight Control Centers to gain on the ever-present market share of the weight loss clinic model. We look to see continuous improvement in all markets through 2009 and especially in the market of Houston where we anticipate a strong year-over-year same store sales growth.

Looking to 2009, we expect to open five additional corporate centers, four in Austin and one in the Houston market. With the rapid expansion of clinics in 2008 from 10 at the end of 2007 to 20 at the start of 2009 we want to be cautious with the expansion in the face of overall economic environment. This will also help to improve free cash flow by lowering the CapEx associated with opening each new store as well as improving overall earnings by limiting the ramp-up expenses which had a slight drag on our earnings in 2008.

We are pleased to have exceeded our revenue guidance provided in early 2008 and achieved the high-end of our earnings per share guidance. Given the difficulty in trying to pinpoint an exact number or even a general range as we exceeded our revenue guidance for 2008 as opposed to providing a full-year guidance in the uncertain market conditions, we have chosen to give investors an idea of where the business is trending out of the gates for 2009 and we believe in this environment that is what is most important.

As mentioned, we witnessed 26% year-over-year growth in 2008 and we are pleased to announce that year-to-date we are continuing to experience approximately that same growth rate in 2009 first quarter revenue versus first quarter revenue of 2008. The growth we are experiencing thus far in 2009 is coming from a combination of growth in Take Shape for Life revenue attributed to the growth in the number of Take Shape for Life active health coaches and clients being supported, growth in our Medifast Weight Control Center revenue from both total corporate sales as well as franchisee sales, and continued improvements in our advertising effectiveness as measured by our revenue-to-spend ratio of our direct response model. Those results would mark the 38th consecutive quarter of profitability and another record revenue quarter for Medifast.

We look forward to a strong 2009 as we continue on the hard work of 2008 of effectively and efficiently helping to solve the enormous problem in America that is the obesity epidemic.

We thank you for your time and I look forward to your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from the line of Chris Krueger with Northland Securities. Please state your question.

All right. First, you went through a lot of data pretty quickly in the call, but near the beginning you were talking about a one time charge for legal settlement as well as a loss in securities and I believe you said it hurt EPS probably about $0.02. Can you go over that just a little bit more and where those would have hit on the income statement?

Of course, the aspect of the legal settlement would hit in the SG&A figure. You're looking at roughly about a $200,000 figure. Equally was about a $200,000 loss in investment securities that came from the October market decline. That was also about a $200,000 decrease in investment securities. That would be below SG&A. So you would have the $200,000 of the legal and SG&A and the $200,000 of investment below the line.

Okay. Next question, in your current recruiting efforts in the first quarter it sounds like it's gone very well. Can you give us an idea of a range we would look for another 2 to 400 coaches to be added this quarter or what should we look for?

I'll speak first to the fourth quarter. As you saw, the fourth quarter increased. In the fourth quarter due to people's travel for the holidays, we decided to postpone several of the Super Saturdays just because of what we expected to be lack of attendance. That's the kind of the time of year people are more focused on income, so customer acquisition in Take Shape for Life in the fourth quarter was very positive. However, recruiting was a bit of a slowed rate from what we saw the first three quarters. Thus far trending in the 1st quarter is very strong and I would say it's about identical to the growth rates of the percentage that we saw throughout the first three quarters in 2008.

Okay. As far as your advertising spending, I know you can shift things around fairly quickly to see what's working effectively. Is there any certain areas right now that you seem to have even a stronger handle on in the current environment than maybe a year ago and maybe any other areas that just clearly are not working that you're maybe shifting things around in?

The good news is that we're continuing to see improvement in all the different areas of advertising. If you look at a graphical pie of where we spend our advertising dollars obviously the majority of those dollars have been on the web and we do believe that they are continuing to show improved effectiveness.

We are also very excited throughout the first quarter thus far we have been spending a bit of money on a national television advertising campaign. That campaign has increased significant web traffic to our overall website which, of course, helps with our web advertising after the fact. So we are also excited to see that the increase in print has improved in effectiveness from what it was last year. So we attribute that really to message as well as the capabilities of our internal call centers as they continue to improve to help close on those interested parties.

No question it is a bit tougher for people to pull their wallets out of their pockets right now with the overall macroenvironment as you hear in the media, but as we did mention we do have a new web cart going live in the third quarter which we anticipate will increase overall closing rates on the web as well as increase up sell which would increase average per person sales per sale.

All right, thank you. That's all I got.

Thank you. Our next question is from the line of Scott Van Winkle with Canaccord Adams. Please state your question.

Congrats on the good momentum. Things are going well at Take Shape for Life. A couple of questions. So you just mentioned, Mike, that I think you were answering Chris' question about recruiting. You talked about the first three quarters in health coaches, if I got that correctly, and it looks to me like the fourth quarter was fairly consistent with the first. Is there something that maybe I have a bad number or why were you talking about the first three quarters rather than the fourth?

Well, I was speaking I believe the first three quarters is a percentage of active health coaches is actually a bit stronger than the fourth quarter of 2008. So the fourth quarter as a percentage was only up about 6% where the other quarters were up a bit more. What we're seeing thus far in 2009 is referring back to the first three quarters of 2008 with very strong recruiting percentages.

Oh, got you, sorry. Sequential. I was looking year-over-year.

Yes, sequential, year-over-year. We went from 32 to 3,400 in the fourth quarter which although terrific was a little bit less than the averages we were seeing sequentially throughout the course of that year.

Got you, okay. And can you refresh us as to when and I have a lot of unrelated questions, so sorry for throwing them at you, but when did you open the stores, the clinics you opened this year? Can you give us the timings of when those opened?

Yes. That was no problem. The majority of these clinics opened throughout the second half of the year. We opened roughly about four of those clinics in late in the first quarter. We opened three in June. We opened two in August and we opened an additional one in September and one in the fourth quarter. So traditionally it takes about six months for one of these -- these were the later half of the year were all in the Houston market. So it takes usually about six months for one of these clinic models to real get up to the speed where it's producing profit.

Now a couple of virgin markets such as Houston where you have to get brand awareness on top of the fact where that six month figure was largely hitting in the fourth quarter, a quarter that is largely known in the clinic business to be seasonality affected for weight loss. That's why you saw a bit of a longer drag. Pleased to say out of the gates those Houston markets are in the first quarter of 2009 have seen strong year-over-year growth rates as far as what the sequential growth rates and what they've seen in average store sales.

Okay. And probably for you, Brendan, the $200,000 loss on investment securities, I'm trying to jive that with the balance sheet and it didn't look like $40,000 decline sequentially in the value of those investment securities but there was a couple hundred thousand decline Q2 to Q3. Is there a timing difference between the balance sheet?

No. It's a realized loss that's going to show up in the income statement. It happened in Q4. We actually sold the equity securities and that will show up in the other income and expense line of the income statement. The other area on the balance sheet is just unrealized losses. It shows up in other comprehensive income.

Oh, got you, okay. So that is the reversal down in the comprehensive income, perfect. And then on the legal costs did you mention what specifically that was?

That was in reference to the settlement of a case that really dates back all the way to 1996. It was something that had been on and off for some period of time and finally now reached the settlement point where it's now gone. Currently there is no open litigation inside the business.

Okay. And, Mike, talking about you've got some tools going out for coaches and obviously putting a lot of effort into that business which is acting well, what specifically does that new Back Office program do for the (inaudible). Is there down line? Does it help them close sales? What's it going to give them?

It's not going to be as much on the closing sales end. It's more about managing their business, but what it gives you is a complete view of your business. So it's going to tell you where you stand as far as currently at this given time on what you need to do to continue to excel. It does an amazing job of putting the next five things recommended for you to do as an individual together. So it puts a focus and prioritization on the health coaches for them that will say something along the lines of you have an individual that has not reordered and it's been 30 days. Give that individual a call. It will say you're just one order away from achieving the next rank. Go out there and get that additional order.

So it gives a little bit of prioritization that is extremely important. With you think about an individual that is health coach, it is a part time job for these individuals. Their time has to be used as effectively as possible in order to be efficient in the business. This helps increase their overall efficiency by simply taking out the question for them of what do I do next.

Now we also did enhance some of the front-end aspects of the web cart, the BeSlim cart. That will indeed touch upon some of the closing rates that customers might help to see improvements upon. And throughout the course of the year we have several new tools that are being launched, some in April and some in July, that are going to be focused on how to help improve recruiting rates of customers, recruiting rates of health coaches as well as how to help increase the efficiencies and the training of those health coaches to make them more effective.

And I assume things like generating e-mails and communications, that's all packaged in there as well.

That is. That will be in the April release.

The April release, okay. And back on the clinics, you mentioned the ramp time. I'm wondering is there a break-even point on a corporate-owned center either in time or dollars that you could give us an idea as we try and model out how that business contributes?

Yes. As far as break-even it's really going to depend upon which market it's opening up in. If it's the initial clinic in a virgin market, you're probably looking at about a three to six month, about a six to nine month ramp time. The goal is to get to that about $20,000 a month revenue figure. That's going to be the break-even point for that clinic model.

Now when you're in a city such as Dallas that already had nine centers in that and we added additional center, you're going to see that break-even point reached almost in that first two months of the business model simply because you're expanding the overall environmental area which you're covering. So it takes them much less time to do so. So I'd say around that 20 to 25,000 in month in per center store revenue run rate is that break-even point.

Okay. And when you open a franchise unit, how do you treat - - I assume there's an up front franchise fee. Is that revenue immediately or is that ratably over the term of the contract?

When a franchisee is opened that is immediate revenue within the time of the contract being signed. That revenue is currently estimated about 20,000 for the first center, 10,000 for each additional.

Okay, okay. And then when you were giving us indications of trends currently you talked about growth in Take Shape for Life, growth in the clinic revenue and then you mentioned, I think, improved efficiency on the marketing spend-to-revenue ratio in the direct response side.

Correct.

But I would assume if your spend is going to be flat to maybe slightly down you're probably not growing year-over-year. You're probably just a little more efficient.

You're exactly correct. The revenue rates we talked to, the 26% increase, that is not heavily impacted at all by the direct response business as we're coming out of the gates with a $17 million run rate in advertising spend versus last year where we spent more than that point. I believe last year we spent a total of $18 million or so? $17.8 million. So the increase is there. It's going to be more profitable than it will be in the top line figure.

Okay. And just so I have some figures to work off of in the first quarter. Brendan, I don't think you'll have the numbers handy right in front of you, but I'm showing revenue of about $10 million Take Shape for Life last year in the first quarter '08. Does that sound about right? Because I don't think you were breaking it out specifically.

Yes, right. I don't know about that - - yes, pretty close.

It came out, I believe, in February had their first $3 million month, so about 9.5 would probably be about right for the first quarter.

Yes. Q1 MDNA section I have the percentage of sales there for Take Shape for Life, Scott, so I can get you that real quick.

Okay. The SG&A is higher than I expected to be in the fourth quarter. Obviously you got $200,000 in there on the legal settlement and I think you mentioned the clinics maybe ramping up on the staffing side. Is there any incremental growth we should see first quarter other than naturally you've got a stronger business in the first quarter than the fourth quarter. Is there any specific items that are going to pop into the expense ratio that we should consider in the first quarter?

No. I don't think so. I think you're going to see more efficiency there's in the first quarter. What we have not talked on on the fourth quarter, this is the first fourth quarter where we did have the Take Shape for Life call center in house. And witnessing the current growth rates we were seeing in that business, we did have to ramp up on the employee expense for the Take Shape for Life call center in the fourth quarter for proper training so that they could be live in the first quarter. So that along with also a one time expense we had for a clinical study which was paid for in fourth quarter, those two pieces might have been small outliers there that affected that. I think you're going to see continued efficiency quarter in the first quarter.

Yes. You you expect, I would assume expect to see some pretty good leverage on your expenses in 2009 given your revenue growth.

No question. As we spoke to I think on that last call we built an infrastructure here that on the $100 million revenue point, any dollar of revenue above and beyond that $100 million is going to allow more to fall to that bottom line. So I would look to see continued efficiency growth throughout 2009 as we have now overcome that $100 million point.

Okay. And just one last quick one on inventory. It was a little bit higher than I thought it might have been coming out of the Q4. Are you building there for Q1 and Take Shape for Life or was this right exactly where you expected it to be or just some thoughts on the working capital investment.

Well, the main thing that's going to increase specifically to the fourth quarter, I know in the second quarter and third we talked to the raws ramp-up due to expected increases in raw material pricing. But in the fourth quarter, as you're probably aware, in the first quarter we released 10 new Medifast Crunch Bars. These are not manufactured by the Company. They are are outsourced. Therefore we had to go out and load up from our minimum quantity from these outsource materials.

So we had a doubling of our bar inventory from the old bars that we were running through as well as the entire lot of the new 10 Crunch Bars that have not only launched inside Medifast and Take Shape for Life but have launched in a very strong way becoming one of our top sellers out of the gate. So the turn rate on these bars is going to be something pretty significant I think because customers are really showing they appreciate the efficiencies of having that bar which can now be consumed five times a day in the weight loss phase as opposed to the old bars you could only eat one a day.

Okay. And has the call volume of people asking about peanuts started to taper off?

Yes. I would say it's almost at a complete nill right now. We were very glad to say that we were not impacted by that total scare. I don't know per se if it did increase our peanut butter sales because we were the only place you could get Peanut Butter bars but I know that Peanut Butter bar is our number one selling bar right now. It's a hot item.

Okay. Thank you very much.

Thank you very much, Scott.

(Operator Instructions) Our next question is from the line of Tim Hasara with Kennedy Capital Management. Please state your question.

Yes, good morning, guys. Yes, first of all, how many Super Saturdays do you normally plan to hold over the next six months here roughly?

That's a great question. I would say over the past year we probably were holding three Super Saturdays a month. The majority of those Super Saturdays were actually attended by our top two leaders in Take Shape for Life but a major initiative for us as a Company over the course of 2009 is to allow the additional leaders that have come about our field to start to host their own Super Saturdays. That would allow to us have more than one going on at a given time. That's a major focus point for to us train our top leaders on how to host these Super Saturdays. So to give you an exact number I would say it's going to be a duplicatible number right now, so it's going to be much stronger than it was in the past. But I do know that the current forecast has our top leaders on the road every week between now and the end of the first six months. So four a month is what's expected, but I anticipate that to grow throughout the course of that time.

Sounds great. And if you could speak about any new products coming up or if not specifically just what the schedule would be for any new products this year.

We've seen tremendous response to products that we launched last year. Our research and development team did a tremendous job of providing plenty of new product lines that consumers show that they had a strong interest for. So we will be doing incremental new product launches throughout the course of the year. The major launch time for those products is usually at Take Shape for Life conference which is in July of this year and you're going to see product extensions both in the Medifast meal replacement range as well as continued add-on project extensions such as in the past our Momentum Flavor Infusers and our Omega-3s. You'll see additional supplementation pieces like that coming out in 2009 as well.

Okay and just one other question. Any anticipated attendance for your Take Shape for Life conference in July?

I'll go off of trending and the history and what we've usually seen over the past three years is pretty much a doubling of the prior year. Last year we had 800 individuals at our conference. This year we have the ability to ramp up to well, around 2,000. I would anticipate around that 1,600 figure is what we're expecting, but again last year they beat our expectations. This year they may do that again.

Okay. Sounds great. Thanks a lot.

Thank you very much.

Thank you. Our next question is from the line of Bill Smith with William Smith & Co. Please state your question.

Hi, Mike. First congratulations on a great year and great quarter to you and all of your team members. Just terrific numbers. Good follow-through.

Thank you very much.

Yes. I had some questions with regards to Super Saturday as well. What kind of follow-through have you seen from that White Plains meeting and are you able to gauge the number of people that you've signed up and quantify you had a great turnout. What do the results look like?

That's a great question. What does turnout then relate to as far as effectiveness of those Super Saturdays? We do we have the ability to sign up the individuals at Super Saturdays right this on the spot. So we can see significant increases in health coach recruiting right then and there at the Super Saturdays. I do believe - - I know that you can also track customer sales per region and we've seen that White Plains has been growing. It's going to be tough to catch those top seven as they continue to grow significantly as well, so we might have to add an eighth dot on our map coming up very soon.

I would say that as a whole, Super Saturdays is not as much about the attendance levels as it is about the duplication of that process. So although having 500 individuals at White Plains is terrific, at the same time, I'd rather have five Super Saturdays going on with 200 individuals at each all across the US. That's the goal for the first and second quarters of this year to to train those top leader to be able to do that on their own without the corporate support or the support of the top field leaders. So I think that you're going to see those numbers increase significantly and the effectiveness of Super Saturdays continue to increase as we enhance the process. The whole process is only about two years old, therefore, it always has room for refinement and improvement.

Alright. Okay. And so the White Plains event, was that like the first time that you had done it in White Plains or were there others as well?

That was the first White Plains event and by far the White Plains event has not been our largest to date. It was just the largest that was not in one of our current seven concentrated geographic cities.

And is that part of the plan as well, to expand outside of those seven cities and add a certain number of others as well?

That is the exact plan. We're proud to say that we do have health coaches in all different 50 states across the United States and getting those viral markets to continue to grow in support of the corporate as well always the support of those top leaders in those seven geographic cities that's the focus for 2009, getting more dots on that map.

And then so how many other cities do you think that coul be a pirate market, you're in the seven markets, how many more do you think you can see?

I mean, it's a shame to say, but obesity is an epidemic that's hit across the entire nation. There's no reason why any city across America could not be one of those dots in a very short period of time given the viral effect of how Take Shape for Life can does work. So it's about really finding those leaders in those other cities that want to become the next big leader inside Take Shape for Life and really getting them fired up and training them accurately. That's the goal. So I couldn't put a number on the number of cities. It's really every city in the America has the opportunity to become one of those seven.

Okay. Thanks a lot, Mike.

Thank you.

Our next question is from the line of Mike LeConey with Bishop, Rosen. Please state your question.

Thanks. Mike.

Hi, Michael.

Let's see. (inaudible) and I went to the - - remember your Super Saturday and very well. It was quite a turnout.

It's quite an experience.

I think we almost got recruited. That was the only concern I had. Given the state of the broker dealer business these days I probably should have been recruited. Well, enough of that. Anyway (inaudible) your earlier comments and questions. I mean it occurred to me when I looked at the numbers and I found out that you had a couple of nonrecurring items that in the fourth quarter that look like it was closer to $0.10 than it was seven, but that you're setting things up for an awfully good quarter, if I understood. I mean revenues sound like - -with recruitment as strong as it is, revenues should rise substantially and there's good operating leverage.

I think looking at the operating margin - -

Yes.

In 2009 the first thing I would point to is that again we have built the infrastructure that allows us to see tremendous benefit from any revenue dollar over that $100 million figure. Now Take Shape for Life is a business model that although the variable aspect of the commission expense is what it is. You're not going to see profit margin increase from that, you will see continued increase in profit dollars figures. At the same time you'll see increasement from only having the fixed percentage of Take Shape for Life expense be what it is. Therefore, you'll see increased profit margin that way.

Yes. I mean I guess that's what occurred to me and I guess it doesn't sound like there's going to be any more legal expense or those sorts of nonrecurring things in the current quarter.

Well, you never know what can occur with the one time expenses.

But right now everything looks like a normal quarter.

Exactly. Our goal for 2009 is to continue to see stronger bottom line growth and the top line growth.

Yes. Then the top line. I came with up some - - It looked like a hell of a year coming.

Also, we're going to focus on some free cash flow this year. Looking at January at least 3% of our revenue towards free cash flow.

Wow. Really?

That was the goal.

Wow. Maybe we should have been recruited. Sounds terrific. It sounds like a terrific year and frankly a real good start with the first quarter.

Appreciate that.

Thanks a lot.

Thank you.

Great.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Mike McDevitt for closing comments.

Thank you very much for joining us today. We appreciate your continued interest and support of Medifast and we look forward to talking to you again when we announce our first quarter results in early May. Good day.

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