Medifast Inc (MED) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Medifast Incorporated Second Quarter 2011 Earnings Conference Call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Katie Turner, of ICR. Thank you, Ms. Turner, you may now begin.

Good afternoon, and welcome to Medifast's Second Quarter Fiscal 2011 Earnings Conference Call. On the call with me today are Michael McDevitt, Chief Executive Officer, and Brendan Connors, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ending June 30, 2011, which went out this afternoon at approximately 4.05 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Medifast's website at www.choosemedifast.com. This call is being webcast and a replay will be available on the Company's website.

Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words believes, expect, anticipate and other similar expressions generally identify forward-looking statements. These statements do not guarantee future performance and therefore, undue reliance should not be placed on them. Actual results could differ materially from those projected in any forward-looking statement. Medifast assumes no obligation to update any forward-looking projections that may be made in today's release or on the call as well as posted on their website.

Medifast does not comment on issues or items currently or potentially in litigation with adversarial third parties and/or under investigation by appropriate regulatory or law enforcement agencies of a state or federal government.

All of the forward-looking statements contained herein speak only of as today's call. And with that, I'd like to turn the call over to Medifast's CEO, Michael McDevitt.

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. On today's call I will provide comments on our business strategy and highlights of our quarter results, and then Brendan will review the financial results for the quarter in more detail. I will then provide some closing remarks, and we will open up the call to take your questions.

We continued to generate increased sales and earnings growth in the second quarter while focusing on making the necessary infrastructure investments to further our scalability across the Medifast Weight Control Centers, in our Web platforms for Take Shape for Life and Medifast Direct, as well as adding the necessary resources in both personnel and operations to support Medifast's future long-term expansion.

It's no secret that in the past 20 years, there has been a dramatic increase to the obesity rate in the United States. In fact, in 2010, no states had a prevalence of obesity at less than 20%, according to the Centers for Disease Control. These trends are a drag on the physical and financial health of our country. And with the clinically proven efficacy of the Medifast products and programs, we have an opportunity to be the catalyst to get America healthy by further penetrating new and existing markets and utilizing our multiple channels of client education and support to help more customers, therefore drive consistent increases in sales and earnings growth.

With this opportunity and perspective, as of the second quarter of 2011, up to 200 million Americans with weight-loss needs, Medifast had 10,300 health coaches, with only seven major US cities generating 60% of the Take Shape For Life segment sales and 46 corporate weight control centers in only four states.

Over the last few years, Medifast has generated significant growth. But we believe the opportunity going forward is even stronger. And therefore, as an executive team, we want to ensure we have the proper infrastructure in place to support the increased revenue growth across each of our three complementary sales channels.

Our recent infrastructure initiatives have included a new distribution center that opened in July 2010 to better serve our Midwest to West Coast customers and increase the maximum number of orders the Company can ship daily; improve logistics in manufacturing, purchasing, and distribution to support our sales growth; an improved Web platform for all of our sales channels that launched in March 2011 and has improved the customer online experience; and additional call center locations to handle future increased call volume and allow for better time zone coverage.

We also put a significant focus on recruiting top talent with the addition of new senior executives in IT, supply chain, marketing, retail, HR, and accounting. Each of these individuals have joined Medifast in the last three to 12 months. We believe their tremendous consumer packaged goods industry experience has Medifast well positioned with the best team to build a stable and scalable infrastructure and drive long-term growth for the Medifast business.

At Medifast, we are passionate about combating the growing obesity epidemic in America by helping individuals first gain control of their weight and then learn the habits to improve their long-term health. In the past 31 years, over 20,000 doctors have recommended our products to more than 1 million clients, who have lost and maintained their weight. This credibility, our strong team members, and our superior product offering, creates the foundation that supports every channel within the Medifast business model.

Our three primary distribution channels continue to provide a complementary source of personalized support for clients to connect and share Medifast's clinically proven weight-loss programs.

Our second quarter positive sales results were broad based, with each of our three primary distribution channels, including Take Shape For Life, direct response marketing, and our Medifast Weight Control Centers, delivering increased growth.

Revenue in the direct sales channel, Take Shape For Life , increased 17% to $49.3 million in the second quarter of 2011.

Medifast consumers and Take Shape For Life clients who have achieved successful results through Medifast's clinically proven and physician-recommended products continue to become active health coaches. The number of active health coaches increased 29% to approximately 10,300, compared to 8,000 in the second quarter of 2010. As a reminder, we recognize a number of active health coaches as the number of health coaches receiving income from a product sale in the last month of the quarter.

As a key driver to continue the growth of our active health coach base, and to assist in penetrating new markets, I'm excited to announce that during our Take Shape For Life annual convention this past July, we released our official health coach training site. It was nice to see some of you from the investment community in Orlando and show you first hand how the new site will allow for best practices in training to be delivered in a format that permits your user interaction and also distance learning.

The training website will be a function of the new eCommerce platform that was successfully released back in March of 2011. The site is made up of trainings that were created by our health coach field leadership and provides insight in playful how-to information for all the needs of a new health coach, while it also provides powerful skill-sharpening lessons for our veteran leaders.

At the national convention, we received very positive feedback from our coaches about the new eCommerce platform. It provides health coaches and their clients with a simple approach to view short videos from the key Take Shape For Life leaders aimed at training to recruit clients, recruit health coaches, learn about the products and programs, and understand the different roles of a health coach as they grow their business. I cannot thank our field leadership enough for the time and effort they exerted to make this site a reality.

The training site is in addition to the consumer-facing eCommerce platform, which was released in mid-March of this year. As a reminder, this platform simplified the ordering process for the client, which has led to improvements in the revenue for health coach statistic that was launched in mid-March, and we would expect to see continued improvement in the second half of 2011.

The average revenue for health coaches per month increased sequentially to $1615, up from $1600 in the first quarter of 2011.

At the Take Shape For Life national conference, we continued to demonstrate the importance of new product innovation with the launch of three new meal replacements, including cheese pizza and barbecue bites and a spiced pancake. We also launched a new five-calorie Medifast single-serve maple syrup. These new meals add to our already extensive product lines, all of which are designed to make weight loss more portable and convenient without sacrificing quality or taste.

As a follow-up to our national convention, in the remainder of this year we will host regional events in Las Vegas, Atlanta, and Baltimore, which we focus on the current health coach training and teaching potential health coaches and the opportunity.

We will also have our annual Sundance event, which is four our established Take Shape For Life leaders. At this event, leaders are taught skills and techniques to help further their own business as well as to grow the team of health coaches that they mentor. As our leaders continue to develop their training skills, we'll be able to more effectively recruit new health coaches.

We believe these events, along with all of our other existing initiatives previously mentioned, should carry on momentum we witnessed in Orlando and place Take Shape For Life in a position to experience strong growth in both coaches and revenues well in the future.

In our direct response marketing sales channel, our brand's portion control meal replacements have helped us generated more targeted and effective advertising, leading to a 13% sale increase for the second quarter of 2011. On a 13% increase in marketing and advertising spend, we generated a 2.8-to-1 revenue-to-spend ratio during the second quarter of 2011, equal to the rate in 2010. This also led to strong improvements in direct response divisional operating income for the quarter.

In our Medifast Weight Control Centers and Medifast wholesale position sales channel, a consistent focus on Medifast's clinical research and innovation and personalized support programs continue to meet the needs of clients seeking additional support and accountability. In the second quarter, we generated a 28% revenue increase compared to the prior year. This was largely due to a 5% same-store sales increase and a 59% increase in the number of corporate centers compared to the prior year.

The second quarter, similar to the first quarter of 2011, had a heavy focus on preparation for the expansion of the clinic model. We opened six new corporate centers and are ahead of our expectations for new-center openings for the full year, ending the second quarter with 46 corporate centers in Austin, Dallas, Houston, Orlando, Baltimore, and Washington, DC, along with 24 franchisee centers.

In 2011, we will continue to expand the infrastructure necessary to support the future growth of the Medifast Weight Control Center retail model. In addition, we are continuing to focus on improved advertising effectiveness on [shren] generating through advertising, and improved customer lifetime value through value and service; developing a new operating system to enhance the customer experience and store operations as well as enhancing the employee training and support personnel.

We now expect to open 30 to 35 new centers ahead of our previous plan from 25 to 30 centers in fiscal 2011. The majority of the new centers will open in the second half of the year. While we realized an increased expense associated with the future ramp-ups in the center openings in the second quarter, with this planned expansion, we will also maintain our focus on continued comparable same-store sales growth as we anticipate 2011 full-year same-store sales growth of 5%, with expectations of our new-store operating system providing continued growth in the future.

We believe the timing of our new-center openings will have us well positioned for the important diet season beginning in the (inaudible) of 2012.

Going forward, we intend to remain focused on the investment and advancement of our corporate infrastructure and personnel to increase our consumer reach in new and existing markets, utilizing innovative support, communication, and marketing strategies as well as the introduction of new products through added production and manufacturing capacity to support our future growth.

We are confident that each of our sales channels is better positioned than ever before, with the right team, systems, tools, and training in place to improve our ability to attract new clients and help ensure their success, in turn further accelerating long-term growth. We continue to believe that our vertically integrated operations and increased capacity will allow us to continually improve the long-term leverage of our business model for increased margin expansion and long-term profitable growth.

Now I would like to turn the call over to our Chief Financial Officer, Brendan Connors, to view our financial results in more detail.

Thanks, Mike. Net revenue for the three months ended June 30, 2011, increased 17% to $78.3 million from net revenue of $66.7 million in 2010. The Take Shape For Life sales channel accounted for 63% of total revenue. Medifast Direct Response accounted for 25%, Medifast Weight Control Centers and physicians wholesale accounted for 12% of total revenue.

Focusing on our sales channels in more detail, our direct sales channel, Take Shape For Life, experienced revenue growth of 17% to $49.3 million compared to the same period last year.

Take Shape For Life was driven by increased customer product sales as a result of an increase in active health coaches. The number of active health coaches increased 29% to approximately 10,300, compared to 8,000 in the second quarter last year.

The Medifast direct sales channel revenue increased 13% to $19.6 million, in part due to a 13% increase in advertising dollars spend as Medifast continued to experience a more effective advertising message through more targeted advertising based on extensive analytical research. As Mike mentioned earlier, we achieved a 2.8-to-1 revenue-to-spend ratio in the second quarter of 2011, equal to the revenue-to-spend ratio in 2010.

Revenue in the Medifast Weight Control Center and Medifast wholesale physician sales channel increased 28% to $9.7 million. This is due to a 5% increase in comparable store sales for units open greater than one year, as well as 46 corporate centers being opened in the second quarter of 2011, compared to 29 in the second quarter of 2010.

Gross profit for the second quarter of 2011 increased 19% to $59 million, compared to $49.5 million in the second quarter of the prior year. Our gross profit margin increase 120 basis points to 75.4% in the quarter, versus 74.2% in the second quarter of 2010.

The gross profit margin improvement is primarily due to decreased shipping costs associated with the second distribution center, opened in the second quarter of 2010 in Dallas, Texas, as well as improved labor and overhead absorption, partially offset by increased raw material cost.

Selling, general, and administrative expenses increased $9.8 million, or 24%, to $50.1 million in the second quarter of 2011. As a percent of net sales, selling, general, and administrative expenses increased 370 basis points to 64%, compared to 60.3% in the prior-year period.

Take Shape For Life commission expense increased $3 million in the third (sic) quarter of 2011 due to the 17% increase in sales.

Salaries and benefits increased by approximately $2.7 million as compared to the second quarter of 2010. This increase was due to the expansion of executive expertise in areas such as supply chain, information technology, marketing, human resources, and accounting. To support the growth of 30 to 35 new corporate center openings in 2011, to prepare for future growth, we expanded the employee infrastructure of the Medifast Weight Control Center field team with the addition of retail trainers, district and area managers, and nutrition expertise.

Sales and marketing increased by $1.7 million in the second quarter of 2011 as compared to prior year, primarily due to an $800,000 increase in Medifast direct advertising as well as increased advertising spend in Medifast Weight Control Centers.

In the second quarter of 2011, we also realized a nonrecurring expense of $500,000, which included items such as accounting fees and legal fees as well as IT consulting expense related to the new website launch in mid-March 2011.

Operating income for the second quarter of 2011 decreased 3% to $9 million compared to $9.3 million in the same period a year ago. Our operating margin of 11.5% decreased 240 basis points compared to the same period last year. The decrease in operating income is due to the increased selling, general, and administrative expenses I previously discussed which, as a result, led to a sequential decrease of $700,000 in operating income in the Medifast Weight Control Center sales channel due to the $1.7 million, or 35%, increase in the segment's SG&A expenses related to the addition of six new-center openings in the second quarter of 2011 and expenses associated with 17 to 19 new-center openings in the third quarter of 2011.

We recorded $3.2 million in income tax expense, which represents an effective tax rate of 35%, compared to 39.8% in the second quarter last year. The decline in the effective tax rate in 2011 due to general tax planning, which generated state tax savings during the quarter and will result in a lower effective tax rate moving forward.

Second quarter net income was $5.9 million, or $0.41 per diluted share, calculated on 14.5 net diluted shares outstanding, compared to $5.5 million, or $0.38 per diluted share, for the second quarter of 2010.

The Company's balance sheet remains strong with stockholders' equity of $74 million and working capital of $44.4 million as of June 30, 2011. Cash, cash equivalents, and investment securities increased 37%, or $12.6 million, to $47.1 million as a result of improved operating cash flow.

Now focusing on a few items as they relate to our financial outlook for fiscal 2011. We expect the full-year advertising spend to increase by 16% to 20% as compared to 2010, while successfully maintaining a revenue-to-spend ratio of 2.8-to-1.

Gross profit margin is expected to improve 50 basis points in fiscal 2011 as compared to the prior year.

We anticipate a tax rate of approximately 36% to 37% in fiscal 2011.

In the third quarter of 2011, we plan to open 17 to 19 new Medifast Weight Control Centers in new and existing markets with expectations for 30 to 35 new corporate centers to open throughout the year, with same-store sales expected to increase approximately 5% for centers open greater than one year.

That concludes our financial overview. Now I'd like to turn call back over to our CEO, Michael McDevitt.

Thank you, Brendan. I would like to conclude our prepared remarks by reiterating that we believe Medifast's three primary sales channels are better positioned than ever before and we look forward to continuing to deliver improved financial results far into the third quarter of 2011.

We would now like to open up the call for questions. Operator?

(OPERATOR INSTRUCTIONS) Scott Van Winkle, Cannacord Genuity.

Hi, thanks. I have a few questions, guys. First, in the numbers. If I add up the segment revenue of three channels I get $78.6 million versus the $78.2 you had consolidated revenue. Did I get one of the numbers wrong, or is there double-counting in there or something?

It could just be a rounding error. I could read the numbers off again if you'd like, Scott.

Yes, if you would, please.

Sure. Med direct, $19.6 million; Take Shape For Life, $49.3 million, MWCC, $9.4 million.

Oh, I had $9.7; sorry about that. And then, in the guidance. I think last quarter you were talking about gross margin improving maybe 50 to 100 basis points. So that came down, yet the margin was pretty good in Q2. What are you seeing in the back half -- higher shipping costs, or what's the expectation?

Of all the different things that are impacting those margins right now, I'd say (inaudible)

We're anticipating to still see that 50 basis points (inaudible) for the full year.

Okay. You cut out a little bit, Mike -- I assume that means you're expecting gross margin in the back half that's relatively flat with last year?

Yes, we're expecting gross margins to stay flat for the remainder of the year.

Okay, perfect. And then, if I look at Take Shape For Life, you added 300 health coaches sequentially off of -- last year 900 in the same period, 1,000 added in Q1 from Q4. What was the change -- was it lower recruiting or higher turnover that led to deceleration of the absolute numbers from the last couple of quarters?

Sure. The higher piece of that is going to be the slower recruiting figure on a revenue per health -- on a recruits per health coach number. Attrition for the quarter was probably around that 13% figure, a little bit up from the 10% average, but that's not the real driver there.

It kind of speaks to exactly what we talked on in that last call. I mean, in the first quarter call we mentioned how excited we were for the launch of our training cycle that's going to be coming this year at conference. We know that the biggest challenge while our field organization continues to grow is going to be having effective training and consistent education driven to a much larger organization of individuals.

What we have with this trilogy training system site is a place where all health coaches, brand new and veterans, can go and receive the just-in-time types of training that they need to understand (1) how to better recruit clients; (2) how to turn those clients into health coaches; and (3) how to turn your health coaches into business leaders.

So very excited for that launch of how it was taken at conference this year and for the training you're going to see coming out of conference in recruiting figures as opposed to the first half of this year.

Got you. And then, if you kind of roll that into the sequential improvement in revenue per health coach, isn't the improvement really driven by the slower recruitment? I would assume a more mature coach is more productive than a new health coach. So that improvement sequentially might have just been the lower recruiting figure?

It could be partial to it. I mean, we did have a little bit of an up-tick on the revenue per health coach, about $15, even with the higher coach count from 10,000 and 10,300 first and second.

But year over year, I believe that the biggest piece in how to improve revenue per health coach is going to be the addition of client acquisition. The more clients you have, the more revenue you're driving per health coach. So having that training piece that we're very effective now on teaching individuals how to approach potential clients and close potential clients. I think between that and the eCommerce platform, having some very simplistic way for consumers to order the product and research the product, we've got a great combination for the remainder of this year and well into 2012.

Great. And then, the last question is cost related. Brendan, when you said $1.7 million of higher SG&A clinics, was that sequentially versus Q1 or is that year over year?

That was sequentially versus Q1.

Okay. So we expected to see some higher costs for stores in Q3; I guess I didn't expect it to be so significant kind of pre-opening cost in Q2. Do you have an idea about $1.7 million -- maybe how much was related to the openings in Q3?

In terms of Q3 openings, we opened six centers. To go through really how a new center opening works in terms of the expense and the short-term drag on earnings -- really each center, we do start incurring expenses about two months prior to a center opening. You'd anticipate -- it takes about $30,000 a month in expenses in SG&A for each center. So those start two months before that. And then as the center ramps up, you do start reducing that net profit. However, you'll see a total ramp of additional -- impact on earnings about $75,000 to $95,000 per new-center ramp over a period of about five months.

I think in the past, Scott, we'd always talked on the build-out costs, which are the capital (inaudible) piece to the clinics, so it'd be about $100,000 to $125,000 per center. What we're now seeing is the clinics become a much large investment for us moving forward just due to the success they have.

In fact, you're going to see a bit more of an investment prior to the clinics being opened. Whether it's in personnel, advertising, and leases, you have about -- if it's a new city, you're going to have probably a $95,000 what you could call a bit of a drag before the clinic is up to a break-even point. And if it's a current city, because it's up to speed quicker in its revenue rate, you're going to see about a $75,000 drag per se up until it's break-even point.

So having the 18 clinics that are getting ready to go live in Q3, a portion of them, along with the additional six that were launched in Q2, had that pre-opening number that we speak to now.

Perfect. And that cumulative loss you said is about 5 months?

It's about a five-month period from two months before the doors open and then three months from once they're open till they reach the point of break-even. Of course, that's going to vary depending on the market that it's in and if it's a new center in a new city or if it's in a current marketplace.

Great, thank you. I'll yield the floor; thanks.

Thank you.

Kurt Frederick, Wedbush Securities.

Thanks. Good afternoon. A couple of questions on the weight control centers as well. The first just on the openings -- I guess this year you're really focusing on the East Coast. I'm just wondering, for 2012, if that's going to continue or if you're going to start migrating across the country.

We are in the process of starting to look at the locations. You want to have those leases pretty much ready to roll by the end of the third quarter. We're happy with where we're at right now for the remainder of this year, going to be largely in the Texas, Florida, and Philadelphia markets. And we've got a couple of other places in place for 2012 to be expanded to; just not ready to release where they are just yet.

Okay. And then, for the timing of those next year, is that going to be back-half loaded or are you just going to do it as soon as you can find the space?

It's going to be very different than this past year. I mean, this past year we spent the first six months really getting our infrastructure allowing us to be prepared to step on the gas for scalability. You're going to see -- we have roughly about 25 to 27 clinics coming in the back half of this year. So we are ready to start next year out of the gate building clinics. So it won't be that second half of the year loading like we did this past year. You're going to see more of an equal distribution throughout the course of the year.

Okay. And then, just in terms of, I guess, hiring regional area managers and that for the centers, kind of building up that infrastructure -- is that going to be largely in place by the end of this year, or is that going to continue into 2012?

It will be in place by the end of this year for all current markets, and that is the model we're going to be going with for all additional markets that we open -- having the center managers overlooked by a district manager and having an area manger overlooking the district managers. So it helps to have consistency, much like we talked in Take Shape For Life, in education and training. It's going to be, I think, a great way to show how to get that consistency in the clinic which can help increase the revenue per clinic per month.

So if you're going to go into a new market, how far in advance do you go and hire these people? Like, what's the cost on that side of it?

Sure; that was in that number that we spoke to prior, too -- it's usually about two months in advance you start the hiring process. You'll even start advertising a bit prior, too. And of course, you have the lease prior to opening the doors. So that $30,000 per month for those two months prior to opening is where those different expenses fall into.

And that includes your district and area manager as well? Their salary?

That would include the overlap of the district and area managers, as well as overlap of corporate for those things.

Okay. Just moving on into the advertising side, I wonder if you could talk a little bit of what you're seeing as far as ad rates or like the spend is coming down a little bit more than what you'd previously thought it was going to be for the year. I'm just wondering why that is.

Yes, we went into the full year anticipating that 15 to 20, 25 -- now we're saying 15 to 20. Very confident in reaching that number. The overall economy has just been so soft over parts of the second quarter that we decided to pull back a little bit of our spend.

We were very happy with the successful launch of our eCommerce platform so everything is going great there. We're continuing to see improvements in the user-ability of the site.

We now have just recently -- in the month of September we will be launching a new national cable campaign. So we do anticipate new ways of testing the advertising as well. We've seen a great return on it so it's something we're going to continue to do. It's still a small portion of our spend, roughly about 5% to 7% of our spend, on national cable.

Of course, with the popularity the Web continuing to grow, Web rates do, of course, see a little bit of an up-tick in the cost per them; that's why you might have seen a little bit less spend there as well.

But nothing of any significance as far as ad rates we've seen that changed our strategy. It was more based on overall economic environment as well as just preparing to make a shift towards more of a television piece as well.

All right, sounds good; thank you.

John San Marco, Janney Montgomery Scott.

Hi. Thanks, guys. How did the 3% sequential increase in average health coaches compare to your own expectation? And do you have an updated view on what your year-end health coach number might look like?

Really, it's continued improvement is what we want to see inside the revenue per health cost. I knew that the big catalyst for revenue per health coach was going to be giving the health coaches more capabilities on how to recruit clients. And we knew that that was going to come more so in the launch of the TTS training site, which was launched this past July. So the real catalyst to improve revenue per health coach, I feel, is going to come from better education and training. So we do anticipate that site having a nice impact on the revenue per health coach moving forward.

So don't have an exact number expecting for the year, but quarter over quarter, sequential improvement is what we're aiming for and the results we've seen thus far, the popularity of our TTS training site, of where they're going to be trained on, you're seeing the health coaches really want to be trained heavily on how to acquire clients. So our hunches, I think, were right -- that's where the interest is and that's where we're applying the asset.

I didn't interrupt you because it was helpful to hear that again. But actually, my question -- or what I meant to ask, anyhow, is the number -- I was asking specifically the number of health coaches, that 10,300. Did you expect to have grown that number a little bit more than you did in the first quarter and was that a disappointment for you?

I wouldn't say in any way it was a disappointment. We knew that our challenge we had to execute on was getting consistent training out there, and I think we did just an absolutely tremendous job with the launch of that training site. So although the number is lower than what we had done in the previous year, might be a bit lower than we'd anticipated, we're very excited with the training we're seeing out of conference -- the momentum that we're seeing out of conference, and the excitement we're seeing in that training site.

The key to having more health coaches is having more clients become successful and have more health coaches trained on how to recruit those clients. And that's exactly what that site is aimed at so I think we've got ourselves a great back half of this year and well positioned for the future.

Would you stand behind your view that you can add 3,000 for the calendar year?

I don't have any specific number as far as what we can add for this current year. So just continue to see sequential quarter-over-quarter and year-over-year growth is what we're aiming for.

Okay. And the reason I push the issue a little bit, just because the number seems -- two out of the last three quarters now, it was just surprisingly tepid growth. But I guess we've got to wait to pass judgment until we see this trilogy website generate returns, I guess is what you're saying.

I think it's going to take a bit of time to be seeded into the marketplace, and once it's seeded, you'll see the results very quickly. So again, the number of tracks we're seeing on that site we launched just out of conference has been very strong, so we think it's hitting on the ears that want to be listening.

Is there any traffic data that you can share with us to give us the kind of confidence it sounds like you have it's going to make a difference?

No specific numbers. Again, it's really just expectations where that we would have our health coaches leave conference and go home and check out this site and see what's underneath the hood. And that's exactly what's occurring. We had 2,500 individual strong at our national convention, and we're seeing much more of that traffic than that on the website as of right now. So not only are they checking out, but they're telling their friends and family and other coaches about it as well. So it seems to be spreading very nicely and we're hoping to make that number continue to rise.

Got it. And just one last one, because I think this certainly was the critical number for me, going to this release. So one last one on the subject and I'll pass it on. The distributors didn't -- excuse me, the health coaches didn't have this website in 1Q either or in 2Q of the prior year. So what do you think it is that was different in April, May, June, that maybe slowed the progression of health coaches down?

I think the first thing that would be there is that there's just more numbers of people. And with more numbers of people comes the potential for more confusion and the need for more consistent education and training. As your field organization grows, not only in numbers but it grows in depth as far as levels away from the top of the leadership, you have to have the ability to reach those individuals who are new into the system and might be in a marketplace that does not have a current leader living in that same marketplace. So not having the ability to have distance training and not having a place where they could all go for consistency, I think was what was our Achilles heel, and I think we've answered both of that with the launch of our TTS site. So we've seen the larger masses with the same message, that consistency plays very loud in this business.

Great. Well, thank you for taking the questions, guys.

thank you.

Chris Krueger, Northland Capital Markets.

Hi, good afternoon.

Good morning, Chris.

Hi It does look like on first question from Scott that in your press release you listed your weight control center at $9.7 million. But just to confirm, it's $9.4 million -- correct?

$9.4 million; correct.

Okay. Can you give us a little insight into the month-to-month trends as the quarter rolled out -- were they consistent? Was there -- did the Easter have any impact that you could see?

I think the month-to-month trends for the business were pretty consistent throughout the course of the second quarter. We are starting to see some positive training as well in the Take Shape For Life business post-conference, so as far as I'm concerned, everything was rather consistent; I'm rather happy with where it was.

Okay. And -- I'm sorry, you said so far, since the Take Shape For Life, you see a little bit of an up-tick and turn there?

There's a lot of excitement, a lot of momentum. We were lucky enough to have you in the conference; appreciate you attending. So you can kind of see there's a lot of emotion and lot of people looking to leave conference and just get running. So we are seeing that in the traffic we're seeing on our website from the TTS and the Take Shape For Life side.

Okay. Last question -- you've added a lot of people, especially for the weight control centers. How many people have you added there?

From the corporate perspective, you're probably looking, in the weight control centers, of roughly about five to 10. When you're looking at the actual centers, the best way to picture a center is you're going to have four employees per center once it's up to speed. So this past quarter -- then you're also going to have, of course, the attrition of employees so the hiring process is more. But the expense would be about four employees per center.

All right. That's all I've got, pal; thanks.

Thank you.

Gary Albanese, Capstone Investments.

Hi, guys. Thanks for taking my question. I was wondering if you could talk about, I guess, the pricing power through the quarter. You initiated a price increase pretty early on in the quarter and then you got a little bit more promotional as the quarter went on and actually, I think you just went out with another promotion over the past few days. I was just wondering if you could talk about that.

Sure. The price stabilization that was active for two of the three months in the quarter, I was very happy with how it went off, both internally from the supply chain side, making sure that went off without a hitch. And from the consumer side, which really a lot of good praise we got from the consumers just for the simplicity of having all products be the same price. What it equates out to is going to vary depending on consumer movement of which products they're buying, of course, with the stabilization. But we're seeing about a 3% overall up-tick in revenue due to that price stabilization, which is more than covering, right now, the additional costs of our margins that we're seeing increase. So it's about equal right now.

Okay. And what was the drive between -- behind the increase in the promotional activity? I mean, was that initially planned, just going through the doldrums of the summer, or is that because you've seen a little bit of slacking off with the economy.

More so just, of course, to get some new eyes on the business in the summer months -- our summer-slash-promotion that we had go out there. So as far as overall percentage of revenue that's being put towards couponing, it has not changed. It's just some of the messaging and the delivery of those messages has shifted a bit. So it might be, in front of your eyes, a bit more, but no change from the bottom line of the business.

Okay. And regarding Take Shape For Life, any changes in the geographic concentrations that you've mentioned it the past?

Well, we are starting to see, of course, more dots bubble up on the US map right now, so we are starting to see some great trending occurring in the state of Texas. But as far as the major seven markets, still driving 60%, right there is where the majority of it still is.

But I'm very confident -- one of the reasons for that was the challenge for distance marketing -- for distance learning inside the Take Shape For Life business. If your health coach is able to be in the same market, prior to that it was much easier to be trained. Now with this TTS training site, you have the ability to be trained no matter where you are in the country on a consistent message. So I think you're starting to see more dots not only pop up but grow rapidly, just because you have the ability to be anywhere from a distance learning perspective.

Okay. Do you guys have a feel for how long -- what kind of a lead time you're talking about with a new training site? How long it's going to take before you start to see tangible results from that?

Activity on the site is one thing as far as receiving the training. Seeing the results in regards to sales, you're most likely probably three months out from something on those lines because it takes time for them to really understand it and put it into action. So some people might have immediate results, just understanding better how to acquire clients. One of the things about how to return those clients into health coaches, that of course takes them losing their weight first. So there's always a time lag from the TTS training perspective.

Okay. And lastly, with the new products that you announced -- are they being done in house or are they being outsourced?

Two of those are outsourced and one of those is done in house. So you'll see -- the bites were actually created outsourced, and the pancake is done in house.

And that still goes through your distribution centers?

All goes through our distribution; correct.

Okay; thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) Scott Van Winkle, Canaccord Genuity.

Thanks. Brendan, what was the share count at the end of the quarter where we see the full impact of the buy-back?

The share count at the end of Q2 is up 14.4 million shares. Now the buy-back, we did buy back 590,000 shares in Q2 but because we're using a weighted average in how we bought them throughout the quarter, only about 150,000 reduced the weighted average share count, Scott.

So the ending was still 14.4?

Yes, 14.4 [bought].

Oh, I would have thought it was even lower. Okay. And then, with the [cranks] being a huge piece, now, of the future growth and the big ramp-up there, can you go through kind of what the model is that you expect -- kind of a revenue per center profitability? It used to be break-even in three months, cumulative break-even and payback in nine, on the cost to open. I wonder if that's changed or if you can kind of go through the model so we can have an idea as you ramp up the growth here in the next year or two.

Of course. The basic model which we spoke to outside of the investment piece, which I'll start with -- it costs about $100,00 to $125,000 of CapEx to build out a center. Once that center is built out, the goal for total revenue of that center would reach about that $60,000 per month. It usually takes about three to four months, depending on what market you're in and, of course, it's a new market or current market, to reach a break-even point.

That break-even point's around that $250,000 total year run rate. And then we'd like to see it up to about full speed at the end of the year, at that $60,000. Now, we are continuing to see same-store sales growth -- this year the goal is 5%. Very confident with the new operating system being put in place we can continue to see that number grow as well.

From the investment standpoint, as we mentioned, from the time a clinic is located where we want it to be to the time that it is no longer having a drag on earnings is about a five- to six-month period. The first two months is about $30,000 per month, which is an investment in people, advertising, and leases, and office expense. And then once that clinic door is opened, you're going to see that number decrease based on the revenue ramp rate. So up until about that third month is when you're going to finally see that reach that zero point.

And as you look at the future markets you're opening, do you have expectations of maybe new markets where you're going to be a little less or a little more productive? I wonder kind of how you're planning through that. Obviously, this track record of success in clinics -- I'm wondering how you're looking market by market, and if you adjust your costs and infrastructure, etc., based on what your expectations are for a New York versus an Orlando or something.

Yes, sure. As far as of right now, we have had different levels of success in different markets. But it's still so young to really have an exact model, and exact equation, of what the success rate would be and what's the best markets. So the good news is there's a need for these clinics across the entire nation. As I mentioned, every state now has reached over 20% in the obese numbers, so every state has a need.

Finding the best marketplace for us -- right now we're going with the markets that have a good population and a good average income in those populations. So there's plenty of those states left and major markets that are left. We'll most likely attack the major markets first and then go into secondary markets after that fact. So there's not an exact equation right now; it's more based on the trending of the different cities and how their economies are as well as what their acceptance of weight loss has been in the past -- seeing the trending of other weight loss companies there.

Great. Thank you much.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions in the queue at this time. I'd like to turn the floor back to Mike McDevitt.

I'd like to thank you all for your participation today and we look forward to speaking with many of you while we're on the road at investor conferences over the next few weeks. Have a great evening.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.