Medifast Inc (MED) 2009 Q4 法說會逐字稿

Greetings and welcome to the Medifast fourth quarter 2009 financial results call. At this time, all participants are in a 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 s introduce your host, Brendan Connors, Vice President of Finance for Medifast Incorporated. Thank you, Mr. Connors, you may begin.

Good morning, my name is Brendan Connors and I'm Medifast VP of finance. I'm joined today by Michael McDevitt, our CEO and CFO. I would like to welcome you to Medifast's fourth quarter a and year-end conference call for the period ended December 31st, 2009. Before we begin, I'd like to have Mr. Robert Blum of Lytham Partners read the following statement.

The Company invokes the protection of the Private Securities Litigation Reform Act of 1995 regarding any statements made during this call, and memorializing any or 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 its 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 believes this 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 inability to attract and retain independent associates and members, stability in the pricing of print, TV and direct mail marketing initiatives affecting the cost 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 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 it's 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 made 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, 2009 Medifast reported revenue of $46.2 million versus $25.5 million for the same period in 2008, representing an increase of 81%. Take Shape For Life sales channel accounted for 64% of total revenue. Direct marketing accounted for 25%. Medifast Weight Control Centers accounted for 10% of total revenue and doctors, 1%. Take Shape For Life sales which are composed of product sales to customers supported by our health coaches, increased by 107% compared to the fourth quarter of 2008. As compared to the fourth quarter of 2008, the Direct Response sales channel revenues increased by 42% on a 32% increase in advertising dollars spent as the Company continues to experience more effective advertising spend.

The Company achieved a 2.8 to 1 revenue to spend in the fourth quarter of 2009 as compared to 2.7 to 1 in 2008. This equated to a significant profit contribution increase in the Direct Response segment. The Company's Medifast Weight Control Centers division increased sales by 82% due to an increase in same store sales, an increase in franchise product sales and the opening of seven new corporate centers in 2009. Same store sales increased by 25% for the quarter for clinics open greater than one year as our advertising becomes more effective and closing rates for the clinics increase.

The Company had selling, general and administrative expenses of $29.5 million in the fourth quarter of 2009 which was an increase of $11.4 million for the same period in prior year. As a percentage of sales, selling, general and administrative expenses decreased to 63.8% versus 71.1% in the fourth quarter of 2008 or 730 basis points. The largest increases in SG&A expense were attributed to increased Take Shape For Life commission expense as directed related to product sales, personnel expense and other expenses that include items such as depreciation, amortization and credit card processing fees. Take Shape For Life commission expense, which is directly related to product sales to clients and health coaches increased by $6.8 million as compared to the fourth quarter of 2008, due to the 107% increase in sales.

Salaries and benefits increased by approximately $1.7 million as compared to the fourth quarter of 2008. The increase includes the hiring of additional expertise in critical areas such as Take Shape for Life and the Medifast Weight Control Centers to support the strong growth in 2009 and beyond. Additional personnel were also hired in the call center, manufacturing, distribution, and IT to support the 57% increase in sales. The opening of seven new corporately owned clinics also require the hiring of additional center managers and support staff. The Company believes the investments 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 $700,000 as compared to the fourth quarter of 2008. In the fourth quarter of 2009, the Company experienced a decrease in its gross margin as a percentage of sales to 74.6% as a compared to 76% in prior year. However, this will impact the Company positively moving forward in 2010. The Company revalues the standard costs of its finished goods inventory in the fourth quarter each year. Due to efficiencies gained from machinery in terms of labor and scrap reduction, as well as a reduction in manufacturing overhead, the value of our inventory was reduced. In order to reduce inventory, we posted an inventory adjustment in the fourth quarter which negatively impacts cost of goods sold in that period. However, going forward, we will experience gross margin improvement due to a decrease in the cost of each unit sold.

In the fourth quarter, of 2009 the Company reported net income of $3 million or $0.21 per diluted share compared to $949,000 or $0.07 per diluted share for the fourth quarter of 2008. An increase of 200%. Pre-tax profit as a percent of sales increased to 10.8% in the fourth quarter of 2009 as compared to 4.5% in fourth quarter of 2008, an increase of 630 basis points. Improved profitability in the quarter of 2009 is due to sales growth in Take Shape for Life, Medifast Weight Control Centers and Direct Response marketing. Improved advertising effectiveness in the Medifast Direct response sales channel, as well as leveraging the fixed costs associated with our vertically integrated support structure. The fourth quarter of 2009 represented the Company's 41st consecutive quarter of profitability.

For the year ended December 31st, 2009, Medifast had revenue of $165.6 million, representing a 57% increase compared to $105.5 million reported for the year ended December 31st, 2008. The Company has selling, general, and administrative expenses of $106 million as of December 31st, 2009, which is an increase of $34 million from $71.9 million in 2008. As already discussed, the majority of the impact resulted from increased Take Shape for Life commissions expense related to sales growth, additional personnel expense and increased expenses related to credit card fees, depreciation and amortization. As a percentage of sales, selling, general and administrative expenses decreased to 64% versus 68.2% in 2008 or 420 basis points.

The Company reported net income of $12 million for the year ended December 31st, 2009, or $0.81 per diluted share versus $5.4 million or $0.38 per diluted share in 2008, an increase of 114%. Pre-tax profit as a percent of sales increased to 11.7% in 2009 as compared to 7.4% in 2008, an increase of 430 basis points. For the full year the Company experienced a 38% effective tax rate. In 2010 the Company expects an effective tax rate of 38 to 40%.

The Company's balance sheet remains strong with stockholders equity of $52.9 million working capital of $29.2 million at December 31st, 2009, compared to $38.2 million and $12.7 million at December 31st, 2008. As of December 31st, 2009, the Company had an impressive 6 to 1 current ratio and 4 to 1 quick ratio. During 2009, the Company generated $10.9 million in free cash flow and increased our investment securities by $2.5 million. Now I'd like to turn the call over to Medifast CEO Michael McDevitt.

Thank you very much, Brendan.

The fourth quarter of 2009 was a remarkable quarter for Medifast. As we achieved our highest quarterly revenues for the year during a quarter that is traditionally slower for the weight loss industry due to the holidays. Strong performance by all three of our business segments drove fourth quarter growth and provided a strong starting point for what we feel will be another successful year in 2010. Again, Medifast was proud to say that throughout the year of 2009 seasonality did not impact our revenue growth.

To highlight some of the results that Brendan just discussed, the Company experienced a number of records, milestones and achievements during the year including Medifast revenues grew sequentially every quarter throughout 2009. We exceeded the threshold of 6,000 health coaches at the end of the year, up 76% year over year. There was a strong improvement in our Direct Response revenue to spend metric, which led to significant operating income improvements and a very strong 42% sales growth in this segment during the fourth quarter. We had record clinic revenues from both strong same store sales growth and the expansion of our clinic model into a number of new markets.

Medifast generated $10.9 million in free cash flow and finally, and most importantly we had a record net income of $12 million for the year. As we discussed on every quarterly conference call last year, the key to our success in 2009 was and remains our strategy of providing a top quality product that delivers results and offering our product and program through multiple customer support methods that allows Medifast to best meet the needs of our customers. Medifast is the only Company in the weight loss space that can claim its products have been recommended by more than 20,000 doctors. The credibility of our product and claims continues to resonate soundly with customers.

This credibility is the foundation that supports every segment of the Medifast business model. It is reflected in our Take Shape for Life segment through the personal testimonials and stories of our health coaches and health professionals. It is reflected in our Direct Response segment where this credibility has allowed each advertisement to be more effective leading to 42% sales growth in the fourth quarter and, of course, it is reflected in our Medifast Weight Control Centers which provide the gold standard of weight loss with one on one personal counselors tailoring an individual program for each customer that walks through their doors. In today's environment, we believe that credibility has become a significant factor in the purchasing habits of consumers and our growth demonstrates this belief.

Before I discuss the key metrics and activity which we believe will continue to lead to a strong growth in 2010 I'd like to comment on an important issue. As many of you are aware, the Company has filed a lawsuit against a number of individuals that have made false and/or misleading statements against the Company. As this is an ongoing legal action and as suggested by counsel, I am unable to make any comments relating to this case, and I know you'll appreciate this and support this. The Company intends to pursue all the available legal remedies to protect our dedicated employees -- remedies to protect our dedicated employees, health coach partners, shareholders and the Medifast brand.

Now to review each of our segments. Let me first talk about our Direct Sales channel, Take Shape For Life. During the quarter, the Company experienced record quarterly revenues of $29.6 million, a 107% increase versus the quarter a year ago. The growth in product sales is a result of a larger customer base, supported by an increased number of active health coaches, and greater average revenue generated per health coach. During the year, our average revenue per health coach increased 14% versus last year. This growth was driven by a number of new marketing tools that were introduced throughout the year, and a growth in the number of health professionals who have become health coaches and who each bring significant potential customer base. Looking ahead into 2010, we plan to initiate a number of events that will provide opportunities for us to offer additional training for our existing health coaches and continue to attract new health coaches.

Previously, Medifast had a single annual convention each year that was typically held in July. Last year, we increased our focus on the concept of weekly Super Saturdays where in a selected city, health coaches bring together a group of potential customers to introduce the program and venues to attract current health coaches to offer additional training skills. Thanks to the outstanding work of our field leadership, our Super Saturdays have been a huge success.

This year, we are launching a new series of quarterly held regional events. These events can best be described as mini annual conventions, and will be held at different locations across the country. So far this year we have held events in Philadelphia and Atlanta in January and San Diego, Sarasota and Salt Lake City in February. Results in each city were outstanding. We believe that as our base of health coaches continues to grow, the need for increased outreach and training will be critical to our success. If these early results are any indication of what will continue to occur, 2010 has the potential to be another strong year for Take Shape for Life.

As we mentioned in press release issued earlier today, we ended the year of 2009 with 6,000 active health coaches, representing a growth rate of 76% for the full year. Consistent with our prior years, we saw a slight decrease in recruiting rates during the holiday season. This decrease has always been shown to be offset with the incremental growth rate in the first quarter of the next year. I'm happy to say that thus far through 2010, this trend has continued as we closed month of February with 6,650 active health coaches, up over 10% from the start of the year. We believe this growth has been a direct result of these super regional events, the continued training on our updated business in a box, and the consistent hard work of our field leadership.

I feel it important for all to understand that in the Take Shape for Life business, approximately 99% of sales are for Medifast product, with the remaining 1% coming from the sale of our health coach starter kit, which is a noncommissionable item. Of the 99% of our sales relating to product, approximately 8% of the sales are to health coaches for their own personal consumption, and the remaining 91% are sales of Medifast product to end-using customers of the health coaches. Also, let me remind everybody again that a a large percentage estimated to be approximately 60% of Take Shape for Life sales is generated from just seven cities. So there continues to be tremendous opportunity for strong future growth.

Turning to our Direct Response segment, we had an outstanding quarter. Throughout 2008, the Company focused on fine tuning our advertising to ensure every dollar spent provided consistent revenue contribution. In 2009, we concentrated our message on credibility and customer results, and continued to make improvements in our advertising analytics, advertising mix and the call center closing rates. I am proud to say we achieved a a 2.7 to 1 revenue to spend in the full year of 2009 and a 2.8 to 1 in the fourth quarter of 2009. This compares with 2.5 revenue to spend for the full year of 2008. Moving from 2.5 to 2.7 to 1 from 20082 to 2009 leads to significant profit gains as technically there is no advertising expense for the additional sales.

With continued improvement and marketing operations throughout 2009, we increased ad spend 32% in the fourth quarter, leading to a 42% increase revenues for the Direct Response segment. Out of the gates for 2010, we anticipate increasing our ad spend by 15% to 20% for the year and maintaining or improving on the 2.7 to 1 effectiveness rate achieved in 2009 which we believe will positively impact the future growth of Medifast Direct response. I am happy to announce that through the first two months of 2010, the Company has achieved a 2.8 to 1 revenue to spend on an estimated 15% increase in advertising spend versus the first two months of last year.

Turning to our Medifast Weight Control Centers segment, traditional holiday seasonality did not impact our financial results. As the segment has recorded fourth quarter revenues of $4.6 million, an increase of 82% compared to the fourth quarter a year ago. Same store sales for stores open greater than one year increased 25% during the quarter with contributions from the Dallas, Orlando and Houston markets. For markets open less than a year we saw stronger than anticipated ramp-up in sales, especially from our Austin market. We ended the year with 27 corporate and 18 franchise centers.

Looking to 2010 and beyond, we believe that there's a very strong demand for the Medifast Weight Control Centers model. Delivering Medifast credibility in this supportive one on one environment enters a real support level need for many consumers to meet their weight loss and health goals. Our plans for the future are to pursue a robust expansion plan, utilizing 2010 to make sure that the infrastructure is in place to manage and build out the process of this retail model. We anticipate adding 13 to 15 clinics throughout 2010, an increase of an estimated 50% from the number of corporate centers at the beginning of the year while still focusing on continued same store sales growth and with even more robust growth expected in years to come.

Overall, 2009 was an incredibly successful year for Medifast. We experienced a 57% increase in revenues with growth contributions coming from all three of our channels. We experienced 114% increase in diluted EPS as we successfully leveraged our vertical infrastructure and prudently managed our corporate expenses. We experienced operating margin expansion in our clinic model as a result of same store sales increases and increased program sales per customer. Profitability in our Direct Response model grew substantially as a result of more effective advertising spend. We believe as the plans for growth in each one of our segments comes to fruition the future looks very bright for Medifast and with that we thank you for your time and we look forward to your questions.

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions). One moment, please, while we poll for questions. Our first question is from the line of Scott Van Winkle with Canaccord Adams. Please go ahead with your question, sir.

Congrats, and thanks for the indications on January and February. So first, health coaches, did you see -- so you've added what, 650 through the first two months of the year. Do you see that spike after these events, the five events you run this far in the first two months?

There definitely is a correlation between these events occurring and the spikes. What we're seeing is very typical to what we saw last year. We're out of the gates. Because of the January season it takes a little bit of time before that recruiting starts. February was actually a stronger month than January in recruiting and we anticipate that trend continuing for the remainder of the quarter.

And at these events is there like a store for product sales like you would do in the July event?

At these super regionals this is the ability to obtain products that are mainly such as CDs and DVDs and training materials. The super Saturdays because they are a smaller venue and run by health coaches specifically, there's not as much opportunity for product sales, but each of them has the opportunity to both recruit health coaches and also recruit new clients of our customers of those health coaches.

I know the Super Saturdays I think are distributor led, but who kind of leads those regional events? Is that company management or distributors?

It's actually a partnership between the field leaders who are representing the areas which we're going into and the corporation itself. The corporation's going to share about half of the expense associated with that specific event. What we're seeing is that the field leaders in those specific areas have been very aggressive and very successful in spending advertising dollars in the local markets to drive awareness of events on their own dime and they're being rewarded with the great attendance of these events which turn into more clients and more potential health coaches.

And is this the kind of thing where a coach would have to pay to go to the event or is it just free?

The event is free.

Okay, okay. And you have something coming in like the Chicago market. What's the timing on that this year?

This is going to be held this year probably around mid-May in Chicago market. This is something we are very excited about. This is going to be the first test of a Medifast corporate event and a field led event sharing a city where we do not have large penetration of current health coaches. Medifast is going to be reaching out to the current Medifast Direct response customers in this market making them aware of this potential event and field leadership will continue to reach out to the market as well as they have done in the super regionals to drive awareness of a recruiting type of event in a new city looking to help put more dots on the map. As we mentioned, we get about 60% of our sales from about seven dots on the map right now. We've got dots of health coaches in all the major cities but this is kind of an expedited approach to how to get that dot up and running quicker than we've done before.

Okay. And then you're moving over to Direct Response, you certainly look at the landscape out there and the investors certainly saw what Weight Watchers and Nutri System has done in the last several days. What do you attribute the relative outperformance at least on a growth basis to some of your larger competitors? I know you always talk about, you know, you're a young company and size is different, but is there something that's going on out there that Medifast diet, is it the hot diet now or I mean it's just massive relative outperformance.

I'm not going to claim that I think we're the hot diet that is out there. I think it's really about resonating with the consumers and meeting them where they want to be met. The Medifast Direct response program offers tremendous results and what we feel is tremendous value for the client's health and I think achieving those results we've clinically proven for two to five pounds per week in weight loss is

I have seen the results of our competition. I don't really believe -- some people have asked me do I feel our success is related to their failure. I don't really think that's the case. I do not believe that in order for Medifast to be successful that the competitors out there have to fail. What we look to do in Medifast is not really compare ourselves to the competition. What we look to do in Medifast is make ourselves better at what we do year over year and continuing to listen to that customer base to see what is working, what is not working I feel we have the ability right now to really turn on a dime on how to help our customers. And continuing to focus on what their wants are and delivering on those is what we attribute our success to.

Okay. And typically if I'm not mistaken your spending kind of builds throughout the first quarter. Is that the case this year? Are we going to see more spending in March than we saw in January?

So far this year we are up 15% from what we spent last year and much like health coach recruiting, the month of February was more positive in the spend than the month of January. So we have seen the trending continue. I would anticipate that growth in advertising spend to continue comparatively versus what we spent last year but also potentially month over month as we move forward in the year.

Okay. And sorry to tie up all the questions but just three quick numbers. The inventory adjustment in the fourth quarter, was that about $700,000?

Right around there, 650 or, so yes.

That wasn't done in past years, correct?

It was done two years ago. It's done on a random basis based on what is determined by the auditors.

Okay. It's been a long time since I had an accounting class. Can you kind of just, you know, dumb it down a little bit one more time and tell me what the reason behind it is?

Sure. Every year annually in the fourth quarter we reevaluate the values of our standard costs for our finished goods. So when we're producing 50, 57% more packets a year, we're getting a lot more efficiencies on both our labor per machine hour as well as scrap and the overhead that we have with our vertical infrastructure. Essentially we revalue the inventory every year, initiate what the growth is our machines more with our costs being somewhat fixed we have to do that adjustment. So the reduced inventory, credit the inventory and you need to hit cost of goods sold with the inventory adjustment during that period. Going forward, however, this will give us the benefit as each packet we sell will be a lower value and a larger gross margin.

So going forward the cost of new products produced were going to be lower anyway. That's obviously your standard. Costing is telling you that and then now you just revalue the inventory that's sitting in the warehouse to the "future level" and you don't have any kind of first in, first out type of impact on the gross margin. It's all pretty much the same right now. Correct?

That is correct, yes.

And what was the advertising spend in the fourth quarter? You said up 32%. I had it three million last year. Am I right there?

It was $4.1 million spent in the fourth quarter.

And did you give a number of guidance for the number of franchise clinics opening this year? I might have missed that. I'm sorry.

That is something that we really don't give guidance to. It's out of our control, it's about the traction that the franchisee market comes to us with, and the partners we're able to find. We did give the guidance on the corporate centers hooking to open 13 to 15 throughout the course of the year and how that new clinic opening operation will basically occur on a timeline we're looking at most likely about six in the second quarter, having about five in the third quarter and an additional four in the fourth quarter.

And back on the franchise, are there more -- have you sold more rights to franchise units than are currently opened?

That question, no. The openings in the most recent Birmingham, Alabama market was the last franchise we have sold.

Okay. Great, thank you.

Our next question is coming from the line of Chris Krueger with Northland Securities. Please go ahead with your question.

Hi, guys. This is actually Ryan Wright. Chris is on the road and couldn't make the call.

Hi, Ryan, how you doing today?

Good. Congratulations on a great quarter.

Thank you very much.

So for the past couple of years it appears that first quarter sales grew sequentially by roughly 30% over the fourth quarter due to the diet seasonality. Even with this seasonality not showing up in the fourth quarter are you experiencing similar sequential trends this winter?

No. We're not going to expect to see that same percentage jump we normally see in the fourth quarter to first quarter basically not because success is not occurring because in the fourth quarter in the past we would usually see about a 20% decrease in sales sequentially versus the third quarter and that would be more than made up for by the growth in the first quarter. So we're not expecting or forecasting towards that same sequential growth that we've seen in the past from fourth into first.

Okay. And I know you said average revenue per health coach increased by 14% in 2009. Could you provide a same coach sales growth figure so we can get a better idea of growth rates of health coaches that have been in the system for over a year?

What we've seen basically for a health coach is in 2008 the average health coach was producing roughly $1,500 a month in product sales to end consumers. What we saw in 2009 is that number grew to $1,700 a month in product sales to end consumers which would equate to that 14% growth rate we spoke to.

Okay. How much capacity do you have and do you see a need for another distribution facility in the west?

Currently as a business we have strong capacity from both manufacturing and distribution to reach significant growth rates in 2010. We are pursuing and actively opening in the most likely be third quarter of this year a new distribution center which will help to drive both gross margin improvements and increased customer satisfaction with quicker shipments getting to the West Coast. We don't have a specific date of which this will occur. We're looking for the third quarter. Throughout the course of the year Medifast is also going to continue to invest and enhance and improve manufacturing capabilities which should also continue to drive gross margin improvement as we have move forward and increase capacity and with we have both of these things up and running by the end of 2010 we would anticipate having capacity reach well over $700 million in both manufacturing and distribution.

Turning toward recruiting, how often are you seeing the super Saturday events occurring and how does this compare to last year?

The super Saturday events are occurring at a much higher rate than they were last year. This is an event where there could be several of these going on on the same Saturday, and what we've seen every weekend thus far is these are actually occurring. These are actually driven by health coaches and they're done under our guidance, however, the health coaches are the ones running those events. The super regionals which we're expecting to have roughly eight to 10 throughout the course of the year we've already had the ones that I mentioned on call in the first half of the year and we have the cities planned but not yet announced for the second half of the year after conference.

All right. And when and where is the national convention this year?

National convention will be held in Dallas, Texas. It will be the weekend following July 4th. I believe that is July 7th through 9th, whatever the dates of that Thursday through Sunday are in Dallas, Texas, that weekend following July 4th.

All right. Thank you very much and congratulations again.

Thank you very much.

(Operator Instructions). Our next question is from the line of Barry Haimes with Sage Asset Management. Please go ahead with your question.

Thank you, great quarter. Couple follow-up questions. One is the Take Shape for Life 107% growth rate, you took the seven cities that accounted for roughly 60% of the revenue, how is their revenue growth, in arguably the more penetrated cities compared with that 107% for the average?

That's a very interesting question, one I do enjoy talking on. As I did mention before, if you look at a map of the United States, we do have health coach representation in every major city and we're seeing strong growth rates in all those major cities. The exciting part is those seven major cities that account for that 60% are still growing at equal or greater growth rates than all those other cities I'm mentioning with smaller numbers of health coaches right now, which shows that not only have we not reached a point of saturation across the entire US, which we're very far from with 200 million individuals needing what Take Shape For Life has to offer we haven't even reached the since 2003 and have been very much growing at this high growth rate since 2007. So specifically to answer your question, the growth rates inside those seven cities are equal or greater to the growth rates of Take Shape for Life as a whole.

Great, thanks, sound great. Second question, on the clinics could you just talk about on average how many months break even and how many months is the payback period?

Of course. The basic time to break even based upon buildout costs and your initial capital costs for advertising and employees is roughly about a three and a half month basis on a current what we've seen thus far. So the break evens are roughly three and a half and what we're seeing is we've been able to meet that more so in the most recent ones we've opened up. So we're actually improving upon that break even point with each city we open up learning from the different ways we've opened up markets in the past.

I'm sorry, the payback period?

The payback period we're looking at roughly nine months from the point of investment to total payback of the investment.

Great. Thanks very much, appreciate it.

Our next question is going to be from the line of Josh Goldberg with G2 Partners. Please go ahead with your question.

Hey, guys, I wondered, if you can, to talk a little bit more about depth of your product line in terms of some of the new products they have out there besides just the shakes and the bars and how that could give you some more uplift in terms of your prospects for the next 12 to 18 months.

Of course. Continuing product innovation is something we've always focused on at Medifast with our R&D division, always accurately pursuing new venues as well as pursuing new types of products. This year we anticipate the launch of roughly 12 to 14 new products throughout the course of the year and what we're really focusing on is that outside of our current core product line of the shakes and bars doing new things such as want most recent launch of the Medifast brownie, which out of the gates jumped into one of the top five products of Medifast and it gives something above and beyond the normal shakes and bars because it actually represents something more of a dessert. It's surprising to the Company but the biggest concern or complaint from the customer base around this program is that they're just not hungry enough to take down that fifth meal. So giving them something that's more appetizing at the end of the day such as a brownie and other products that are going to be coming in the near future that represent that dessert type, which we think is going to help to listen to the consumers concerns and answer those concerns.

We've also began the movement into supplementation which is outside of the meal replacement program with the launch of the Omega 3 last year and the launch of the digestive health product last year as well. What these products really Al l how to us do is to go above and beyond just those weight loss type consumers, continuing to put forth top quality products that are something the consumer needs not just during a weight loss phase but beyond the weight loss phase and incorporating that with the Medifast maintenance program which is the program once you've lost your weight moving on to the Medifast maintenance program of three Medifast meals a day and two regular meals a day is something to not only maintain weight but continue to improve health. So moving to getting above and beyond those bars and shakes and getting into products such as the breakfast, such as the pretzels and the puffs and the desserts we're adding convenience to the consumer base and also answering their concerns of what they did not have prior to and moving into the supplementation area we're moving into a whole new type of potential customer above and beyond the weight loss customer.

Okay. Can you talk obviously a lot of the concerns from some of your critics have been around the coaches and the size of opportunity and how long you can last in the average revenue per month based on the product that they sell. Can you just kind of quantify, if you can, how big this opportunity could be in terms of the direct marketing, how many coaches that are in just the five or six cities cities right now and why you think the average revenue per month can stay at this level. Thanks.

As far as how big the potential is I'd kind of point to a number I looked at earlier. Today in America there are 77 estimated million individuals on a diet and there are over 200 million Americans who are either overweight or obese. That is our potential market from a weight loss standard want as I mentioned we're moving above and beyond just a weight loss standard. Today at the end of the year we had roughly 6,000 health coaches we're attributing to roughly about $100 million in revenue. If you look at that 6,000 health coach figure and comparatively speaking to the potential market which I just mentioned, I'd say it's fair to say we are very far from any point of saturation, and I'll even double back on the point made on those seven cities that we talked on earlier, even those seven cities which have been up and running since 2003 mainly continue to grow at accelerated growth rates.

So I think that our potential in this business to continue growing is very strong. I see no real point of saturation being met and I'll even continue that on to the other divisions of our business. You look at the Medifast Weight Control Centers, roughly in nine cities across America right now, as we all know obesity is rearing its ugly head across the entire country. We're not just picking the markets that are heavily obese. So I think that the Medifast Weight Control Centers business has enormous potential to continue to grow into additional markets, and in the Direct Response business, spending roughly $17.4 million in advertising last year, that is only a portion of what some of our competitors in the industry have spent. I think we have major potential improvement to grow in that business as well. So as far as from a saturation point, only having 6,600 health coaches active now at the end of February, only having nine cities in America that contain Medifast weight control centers and only having spent $17.5 million on direct response advertising, I would say that we have a very bright future ahead of us.

And the average revenue per month for the coaches you said are up to close to $1,700 for 2009?

Yes. In order to understand the average revenue per coach per month you have to understand what it is that it's really equating to. The Medifast program costs roughly about $10 a day, so about between $275 and $300 a month for a consumer. That's for the Medifast meals.

So if you're spending say $300 a month in order to have the current revenue run rates, you only need six clients a month to go on the program and then they're continuing that program so you have the waterfall impact of them continuing to order while they're on that weight loss phase and if you just take a walk down the street, go to the grocery store or walk in your office I'm pretty sure people are passing on the streets every day much more than six number of potential customers on a given month that they're walking down the streets and going to their office. So maintaining that number, I think it can continue to increase if not maintain and I think that it's going to be very much up to the Company to continue to provide better training materials and better coaching to our coaches on how to continue to do that.

Okay, great. Thanks so much.

Our next question is a follow-up from the line of Scott Van Winkle with Canaccord Adams. Please go ahead with your question.

Brendan, a couple numbers questions. What's going on with the share count? Why it was down sequentially in the Q4 over Q3 despite the stock price being up?

We did treasury stock method at year-end. So that's just our year-end calculation. That's impacted by the share increase throughout the year. That's why there's a little bit of fluctuation there. Year-end we finished about 14.7 million shares.

And going forward I assume there's got to be, some kind of growth, not a decline off of that number.

Slightly increasing in 2010, yes.

Off of that 14.7 million?

Base, yes.

And these regional events you say you share the costs, a little modeling question here. What kind of number we talking about, you're going to do six, seven of these events in the quarter?

Just to give you a ballpark figure, what, Medifast is incurring a cost on is providing Medifast products in the events and also sharing the cost of renting the room for event. So all in you're maybe looking at roughly $5,000 for an event. Roughly having eight of those throughout the year is pretty much a nonmaterial item for increase in expenses.

And the inventory obviously was affected by the year-end adjustment. It wasn't up as much as I would have expected heading into that seasonally strong first quarter. Was that due to the strong -- probably stronger sales than you anticipated in Q4 or, if I look back historically had a bigger build in 2008? Are you just, better at forecasting?

That's exactly it, Scott. It's also leveraging our new ERP system and we have much better forecasting tools in there. So we have a lower lead time in how long we have to order our raw materials in advance. There's also much better ordering from our third-party vendors. It's a better reporting tool so we have to hold less on hand due to our ordering partners.

Great. Thank you.

Our next question is from the line of Matt Short of Emerson Capital. Please go ahead with your question.

Hey, guys. In regard to the health coaches obviously if you can continue the ramping that you've seen in the last couple months and get I guess close to 7,000 at quarter end, is there a target that you guys have or some type of range you can give us for what you hope to achieve for year-end?

There's not really a specific target. I mean we have our hopes to really continue supporting our health coaches to the degree where they can continue supporting their potential clients to become health coaches. This is a business that really -- it's not about looking at how the number of health coaches acquired versus last year and this year. It's about looking at the continued growth rates month over month on a continued basis on, a compound basis really. I feel we're being very effective in listening to the coaches and provide them what they need to continue a similar type of compound growth rate that we saw last year that's going to be determined based on the month to month basis. So we do have goals of continuing to feed growth into the Take Shape for Life business but not a specific number that we can forecast to as far as expectations. Right now this is a business that is in a positive momentum maintaining that momentum is our number one goal.

Well, it doesn't seem like it would be too much of a stretch to get probably at north of 9,000 coaches for the year based on the trends you guys have been showing over the past couple quarters. If we can generate that type of coach growth, how should we think about that translating to revenue growth? Obviously last year revenue growth significantly exceeded coach growth due to the productive improvements.

I believe that we can continue to look for slight increases in the revenue for health coach generated per month as we continue to put forth new products that allow individuals once they're done with the weight loss program to continue on the program with maintenance and supplements and as we continue to put a focus on our health professionals which have a countless number of potential clients walking through their doors every day that have a need for what the Medifast and Take Shape for Life program have to offer. I don't have a specific number as far as I'm going forecast to as far as that month to month growth rate in the revenue for health coach but die feel there is still room for growth in that even with the number of health coach growth that you were speaking to.

Okay. And obviously 2009 you guys had tremendous SG&A leverage. The revenue growth you guys were putting up and you guys have told us you've got I guess 50 to 100 bips of gross margin improvement in 2010. If we can generate 40%, 50% plus revenue growth which it seems like isn't a stretch just based on Take Shape for Life and the growth in direct to consumer, how should we have think about SG&A? Where can you show leverage during 2010?

We are a business that is vertically integrated. We manufacture the product. We ship the product. We have make the marketing materials. We do everything in-house. So for every additional revenue dollar above and beyond our current run rates, we do have additional leverage we see towards that bottom line. I think also we did a tremendous job in our advertising effectiveness last year and if the trend's what we talked on earlier this call on what we've seen in January and February are any indication of what could come this year, I think there is still room for leveraging that advertising expense even on an additional advertising spend. At the same time we are going to be growing the clinic model this year with 13 to 15 new corporate centers and we have seen that that is a model that does have tremendous leverage to it as well. So I think that those three key areas of the vertically integrated business model, the more effective advertising spend and the focus on growing that clinic business which is a very profitable model all lead to additional leverage year over year versus last year.

Okay. So we should think about the definite SG&A leverage opportunities but maybe a little bit less than last year just because of productive improvements?

I believe that's safe.

All right. Thanks.

Thank you.

Want next question is from the line of Tim Kurtz with Micro Capital.

Hi. Actually it's Ian Ellis here. I've got a couple of questions. The first relates to seasonality. I would assume because of the recurring order nature of the Take Shape for Life business that the seasonality is lower than for Direct Response or the clinics. I mean can you just compare and this is obviously because of the underlying growth hard to come up with definitive numbers, but can you just compare the different seasonality curves that you're experiencing within the three different lines of business and then I've got a question on -- I've got a follow-up question on an unrelated matter.

Yes, of course. First I'll speak to the seasonality of the Take Shape for Life business. I'll speak more to the actual business model than I will to the specific dollar figures in that seasonality.

Take Shape for Life is a business where you have a health coach as a consumer helping support you on that program. You see typically in an advertising business that you pull back advertising in that fourth quarter because people are not really paying attention to the advertisements that are on TV and in the print magazines because they're more focused on the holidays, but when you have an actual health coach who is supporting you on the program, they're not going to let up on you like an advertising agency is going to let up on you. They're going want to you to continue to be successful on that throughout that holiday season and because of that TSFL customers continue on the program in a more effective manner than most Direct Response customers would in that holiday season.

Now the clinic business, actually and another point on Take Shape for Life, these health coaches are out there looking to make an income as well. I mean they've got a great financial opportunity in front of them and what better time to earn additional income from selling more products to end consumers than during the holiday season, the time of the year when everybody is looking for additional income because of the additional expenses. So TSFL is a model that does very well quarter-over-quarter from third to fourth because of those different business model aspects. The clinic business is one where the patients and the consumers have already paid for a program and are going through that program during that time frame. So you're not going to stop going to this potential -- to this clinic model because you've already paid for it and you're expected to show up for quarterly meetings -- I'm sorry, for weekly meetings.

So because their focus is on that, that's why that model does very well during the holiday season as well and Direct Response we just continue to enhance where we put our message and continue to be able to track consumers throughout that fourth quarter and at the same time that's when we like to do a lot of remarketing which is a very effective advertising spend in that fourth quarter to help consumers get through that troubling holiday season where weight loss is very difficult and weight gain is much more typical. So hitting on the right messages at the right time is something that the readvertising effects of Direct Response did very well this year.

Okay. That's very helpful, thanks, Mike. Now my follow-up question is really about trying to get some sort of data about the cross marketing effect. Obviously you're in some areas with clinics. You've got 60% of your TSFL business in seven markets. I'm curious to what extent the geographic concentration of your Direct Response business exists and whether there's overlap there with the markets where you have clinics and strong direct business. Then what I'm getting to is trying to understand to what extent the three models or the three channels, where they are in situ in the same market are reinforcing.

Definitely. What I'll speak to and if we had this one completely figured out we'd walk down to Madison avenue and make some waves in some advertising agencies because I think it's something a lot of people are trying to figure out. In today's world, with Internet marketing and brand advertising, you're really trying to find that exact blend of what's best, what we see is that the Medifast Direct response business is a nationally advertised brand. We advertise that across the entire United States and the brand of Medifast is always very well known because of that umbrella advertising that Direct Response does.

So that when a Take Shape for Life health coach presents the product of Medifast to a potential customer, there's a very large percentage of chance they will have heard of Medifast because of its national advertisement that Medifast Direct has. Having heard of that product we feel brings credibility to that health coach and to the program that they're speaking to this customer on which actually helps the Take Shape for Life business. The clinic business is one that's more of a local advertising specific type of advertisement. They're advertising in their local markets usually in a specific mile radius of their clinic. Now because when a clinic opens, Medifast the brand name is already well known inside that market. This is a new venue for potential consumers who want to have that level of support that the clinic can provide can now achieve that level of support, utilizing the brand Medifast which they've come to know from either the Take Shape for Life representation of that market or from the Direct Response national advertising that precluded the clinic inside that market.

So it's kind of like that old saying as the tide rises all ships rise with that. All three divisions are driving the brand of Medifast and all three divisions are greatly benefiting from that brand awareness growing. We see that districtly in Direct Response because our advertising is becoming more effective year over year because the overall brand of Medifast is becoming more effective and it resonates more with consumers. So getting exact data on that one is a very difficult thing to do because there is so much overhang, much like understanding exactly which advertisement is more effective is difficult in today's world because somebody might see a television advertisement and go to a search engine and purchase the product through what they find on the search engine even though the television advertisement is really what drove them.

So it's an initiation of the brand awareness that's so important and it's the follow-up which we meet the consumer in three different spots. We meet them at the Direct Response, we meet them at the consumer to consumer in Take Shape for Life and we meet them in the local clinic for that level of support. So meeting the consumer where they want to be met, utilizing that brand advertisement of Medifast, that's really the business model that we're looking to move forward with as we go forward.

Right. But I mean do you have some geographic concentrations of Direct Response advertising or is it just evenly spread across the whole country?

Direct Response advertising is very much evenly spread across the entire country based on population across the United States.

All right. And what portion of that spend is currently Internet based?

You're going to see about 80% of that business comes through the Internet.

Right. You mean that's the business that comes through the Internet rather than by phone or the advertising spend is on the Internet?

I'm sorry. The revenue that comes into the business is roughly 80% and 20% done in our contact center. The spend of that fluctuates but roughly, you know, we have a majority of our advertising spend this past year was put towards Internet advertising.

Majority, okay, great. Thanks, Mike.

Thank you.

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

thank you very much. We'd like to thank you all for your continued support and we look forward to speaking to you when we announce our first quarter numbers. Have a great day.

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