Medifast Inc (MED) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Medifast third-quarter2011 earnings conference 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 introduce your host, Ms. Katie Turner, of ICR. Thank you, Ms. Turner. You may begin.

Good afternoon, and welcome to Medifast's third-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 September 30, 2011, which went out this afternoon at approximately 4.05 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, expects, 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 posted on their website this afternoon.

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 as of the date of today's call.

And with that, I'd like to turn the call over to Medifast's CEO, Michael McDevitt.

Thank you, Katie, and good afternoon, everyone and thank you for joining us.

On today's call I'll provide comments on our business strategy and highlights of our third-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 growth in the third quarter of 2011. Medifast has evolved over the last 30 years from being offered only through a physician's office to a multi-tiered support business model. This business model evolution has allowed us to realize tremendous top- and bottom-line growth and generate strong cash flow. The offering of the Medifast products and programs through multiple channels allows us to both meet different consumers' wants and needs, while also creating a business structure that can move rapidly with the changing times and hedge against industry fads.

Our executive team is focused on building the infrastructure to support each growing sales channel. With our multichannel model we have the ability to experience growth in certain channels while we invest in the future growth of other areas. This past quarter our prior investment in the divisions of Direct Response and the Weight Control Centers clearly showed the ability to create growth trends that we believe will continue, as we enhance our investment in the Take Shape for Life infrastructure of training and systems.

With each level of growth we continue to add top talent throughout the entire organization to meet our ever changing and growing business needs. In the year of 2011 we successfully integrated new executive talent in the areas of sales and marketing, retail, supply chain, IT, HR, and most recently the direct selling arm of Take Shape for Life.

In what appears to be an uncertain economic environment, one environment is certain, and that is the worsening health and wellness of our nation. As the obesity statistics continue to decline globally the Medifast program, with its 30-plus years of clinical heritage, continues to help consumers in search of improving their health through weight management. The support options of an online community, a personal health coach, or a weekly visit to a Medifast Weight Control Center continue to meet the consumer needs, all with tremendous proven weight loss and weight maintenance results.

To put Medifast's long-term growth opportunity in perspective, as of the third quarter of 2011, of the 200 million Americans with weight loss needs, Medifast had 10,300 active health coaches, with only 7 major US cities generating 60% of the Take Shape for Life segment sales. And we had 60 corporate Medifast Weight Control Centers in only 6 states. We clearly have a lot of runway opportunity ahead of us to expand Medifast's clinically proven business model to support many more years of future growth.

We have started to lay the groundwork to break all three of our major sales channels into additional first-tier and second-tier markets in 2012. 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 third-quarter 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 and Wholesale Physicians, delivering increased sales growth. Revenue in the direct sales channel, Take Shape for Life, increased 6% to $46.4 million in the third quarter of 2011.

The number of active health coaches increased 14% to approximately 10,300 compared to 9,000 in the third quarter of 2010. On a sequential basis, active health coach count was comparable with the second quarter of 2010 (sic - see Press Release). The average revenue per coach decreased sequentially to $1,560 from what was $1,615 in the second quarter of 2011. As a reminder, we recognize the number of active health coaches as the number of health coaches receiving income from a product sale in the last month of the quarter.

We will continue to execute on the need for enhancements to our health coach training platform. Our team continues to work diligently to provide our health coaches with the necessary education, tools, and support to generate business outside of their circle of influence or their warm market, which often includes family and friends in their community. In addition, we have had a strong group of mid-level health coaches across the United States that we believe are on the cusp of building strong teams. And we have more support available for them than ever before to help them get their business to the next level of growth.

To enhance our health coach training platform, we released our official Trilogy Training website at the Take Shape for Life Annual Conference in late July. The new site will allow for best practices in training to be delivered in a format that permits more user interaction and distance learning. The site is made up of trainings that were delivered by our health coach field leaders, and provide insightful how-to information on all the needs of a new health coach, while it also provides powerful skill-sharpening lessons for our veteran leaders.

Previously, training for the health coach fields was done primarily through the utilization of print materials. We have created and are working on additional content available on the training website to simplify our existing print materials, to maximize the long-term effectiveness of health coaches. Health coaches will be able to easily go through our three training competencies, including health coach, business coach and soon-to-be business leader.

Medifast now has one universal communication tool to provide the health coaches with information and also provide updates for the health coaches in real time. To date, we have received positive response on usability of our Trilogy Training website.

As with all technology platform launches, the first goal is a successful launch in the eyes of the end user, and we are pleased with the immediate feedback provided by our coaches regarding the user interface and the new website's ease of use. We were also pleased with the early usage of the site, as tracked by web traffic and page views. We continue to receive consistent and constant feedback from our health coaches on ways to enhance the content for relevance and clarity, making the site an evolving tool with large potential in driving a consistent training message throughout our growing organization. I would like to thank all of the individuals, both internal and those in the field, that helped to make this project a reality.

In addition, we are focusing on regional events throughout the country to ensure participating health coaches receive actionable and relevant content to enhance and grow their businesses long term. We hosted our annual Sundance event, which is for our established Take Shape for Life leaders, in October. At this event leaders are taught skills and techniques to help further develop their business as well as to grow the team of health coaches that they mentor. As our leaders continue and develop their training skills, we will be able to more effectively recruit new health coaches. We believe these events, along with all of our other exciting initiatives previously mentioned, should help provide momentum for 2012 and place Take Shape for Life in a position to experience growth in health coaches and revenue.

Training and support remains our top priority. We have begun the process to organize our curriculum offerings and simplify the health coach enrollment process, making it easier for new health coaches to get started and learn the essential skills necessary to build their business through the acquisition of clients and health coaches. In 2012 we have increased the number of regional events across the country, focusing all training on core competencies such as new client acquisition and helping all clients understand the business opportunity.

Finally, we are focusing on social media as a marketing tool to raise consumer awareness of Take Shape for Life, and we'll be launching in early 2012 a TSFL corporate Facebook page and mobile learning application to support the ever increasing demand of mobile learning tools to deliver just-in-time training and support.

I am very pleased to announce that in October we also enhanced the Take Shape for Life executive team with the addition of a talented industry veteran, Michelle Jones, as our new Senior Vice President of Take Shape for Life. She joins our team with over 15 years of experience in the Avon organization, where she focused on national training and sales development. In Take Shape for Life she will oversee the areas of marketing, training, and field operations. We believe her 15-plus years of direct selling experience will help to implement industry best practices within TSFL, while also aligning the Medifast executive team to improve growth in the new health coach acquisition and retention. As we continue to grow and evolve as a business it is critical to have the right leadership team in place to support and foster that growth.

We are continuing to demonstrate the importance of new product innovation with the public launch of three exciting new meal replacement choices on November 15. These new meal adds are to our already extensive product line, all of which are designed to make weight loss more affordable and convenient without sacrificing quality or taste.

In our Direct Response Marketing sales channel, our brand's portion control meal replacements have helped us generate more targeted and effective advertising, leading to 18% sales increase for the third quarter of 2011. On a 17% increase in marketing and advertising spend we generated a 2.8 to 1 revenue-to-spend ratio during the third 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 Physicians sales channel, a consistent focus on Medifast clinical research, innovation, and personalized support programs continued to meet the needs of clients seeking additional support and accountability. In the third quarter we generated a 44% revenue increase compared to the prior-year period. This was due largely to a 13% same-store sales increase.

The third quarter, similar to the second quarter of 2011, had a heavy focus on preparation for the expansion of the clinic model. We opened 14 new corporate centers and are ahead of our expectation for new center openings for the full year. We ended the third quarter with 60 corporate centers and 26 franchise 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 continue to focus on improving advertising effectiveness and improving consumer lifetime value.

We recently launched a new operating system to enhance the customer experience and store operations, as well as improving the employee training and support personnel.

We now expect to open 30 to 35 new centers in 2011. The majority of new centers are opening in the second half of the year and are anticipated with the investment in the clinic model we realized increased expenses associated with the future ramp up and new center openings in the third quarter. As a reminder, while a new center is being built, until it is at a breakeven point we experience an estimated $100,000 of in-store noncapital expenses. These expenses, which are largely in-store personnel, advertising, and rent, begin 2 months prior to the opening and diminish over the 3-to-5 months post-opening until the store reaches a breakeven point.

We realized a pretax earnings drag of $1.9 million compared to the second quarter of [2011] associated with the opening of 6 new centers in the second quarter of 2011, 14 centers in the third quarter, and expenses associated with the opening of 10 to 12 centers in the fourth quarter of 2011. We believe the timing of our new center openings will have us well positioned heading into the important diet season at the beginning of 2012.

Based on our experience from this year, the current overall economic outlook, and our continued focus on improving same-store sales, in 2012 we now plan on opening approximately 35 additional corporate Medifast Weight Control Centers versus the 60 centers we originally discussed. Our team remains focused on growing a successful weight control center model. We will continue to review our annual store growth rate based on our view of the internal and external opportunities and challenges in the marketplace.

Clearly, unemployment and consumer confidence are currently impacting spending habits. We believe Medifast is a business that can have success in all economic environments. To ensure this, we are enhancing our Take Shape for Life business opportunity message to better highlight the supplemental income possible through a health coach home-based business. The purpose of Medifast and Take Shape for Life is to get America healthy. And the more coaches we generate, the more Americans that will improve their long-term health.

We also announced today that Colonel Bradley T. MacDonald resigned from his Executive Chairman of the Board position effective immediately due to health issues. Our entire company wishes Brad their best, as he focuses his time and energy toward improving his health. And we appreciate his leadership, visionary attributes, thoughtful guidance and significant contributions to building the Medifast business and culture over the past 15 years. On a personal note, I cannot thank Brad enough for the mentoring and friendship he has provided me over the years at Medifast. Brad will continue as a director of the Company.

Michael C. MacDonald, a longstanding Medifast board member, has been selected as Brad's successor as Executive Chairman of the Board. Most recently Michael served as an Executive Vice President at OfficeMax Incorporated. Prior to his employment with OfficeMax, Mr. MacDonald served in a variety of senior corporate officer positions for Xerox Corporation, including Senior Vice President of Worldwide Operational Effectiveness, President of Marketing, Operations, and Global Accounts, and President of Xerox North America. Michael has an extensive resume in the areas of sales, marketing, operations, and human resources. We are pleased to have him as Executive Chairman of the Board and look forward to his leadership and contributions to Medifast.

In the past 30 years, over 20,000 doctors have recommended our products and more than 1 million clients have used the Medifast program to lose and maintain their weight. This credibility, our strong team members, and our superior product offering create the foundation that supports every channel within the Medifast business model. We are confident that each of our three primary sales channels is well positioned for the all important diet season beginning in January 2012. 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 review our financial results in more detail.

Thanks, Mike.

Net revenue for the three months ended September 30, 2011 increased 13% to $76.1 million from net revenue of $67.3 million in 2010. The Take Shape for Life sales channel accounted for 61% of total revenue; Medifast Direct accounted for 25%; Medifast Weight Control Centers and Wholesale Physicians accounted for 14% of total revenue.

Focusing on our sales channels in more detail, our direct sales channel, Take Shape for Life, experienced revenue growth of 6% to $46.4 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 14% to approximately 10,300 compared to 9,000 in the third quarter last year.

The Medifast Direct sales channel revenue increased 18% to $19 million, in part due to a 17% increase in advertising dollars spent. As Medifast continues to experience a more effective advertising message, through more targeted advertising based on extensive analytical research, enhanced advertising content and, in turn, improved call center and web conversion rates. As Mike mentioned earlier, we achieved a 2.8 to 1 revenue-to-spend ratio in the third quarter of 2011, equal to the revenue-to-spend ratio in 2010.

Revenue in the Medifast Weight Control Centers and Medifast Wholesale Physicians sales channel increased 44% to $10.6 million. This is due to strong organic growth due to the opening of new corporate and franchise locations and a year-over-year improvement in comparable store sales of 13% for corporate centers open greater than 1 year. The Company opened 14 new centers in the third quarter for a total of 60 corporate and 26 franchise centers.

Gross profit for the third quarter of 2011 increased 12% to $56.4 million compared to $50.5 million in the third quarter of the prior year. Our gross profit margin decreased 80 basis points to 74.2% versus 75% in the third quarter of 2010. The decreased gross profit margin is primarily due to increased third-party manufacturing costs, raw material costs, shipping costs to customers associated with increased fuel prices, and transportation costs between distribution centers and from vendors associated with the $3.7 million increase in inventory on hand during the quarter.

Selling, general and administrative expenses increased $8.4 million, or 20%, to $49.8 million in the third quarter of 2011. As a percent of net sales, selling, general and administrative expenses increased 390 basis points to 65.4% compared to 61.5% the prior-year period. The largest increases in selling, general and administrative expenses were primarily related to an increase in Take Shape for Life commission expense, which is completely variable based upon product sales. In addition, the aggressive expansion of the Medifast Weight Control Center model with 6 centers opening in the second quarter of 2011, 14 corporate centers opening in the third quarter, as well 10 to 12 centers opening in the fourth quarter of 2011 led to additional expenses with minimal sales during the new centers' ramp-up phase. Also, in late 2010 and throughout 2011 the Company has invested in key executive hires in the areas of supply chain, IT, HR, finance, and marketing in order to support current and future growth.

Salaries and benefits increased by approximately $2.8 million as compared to the third quarter of 2010. The increase includes the hiring of additional expertise in critical areas such as the Medifast Weight Control Centers division. We've hired additional expertise in regional trainers, regional managers, operations and marketing to support the growth of 30 to 35 new corporate center openings in 2011, including the 60 corporate centers and 25 franchise centers in operation as of September 30, 2011.

Sales and marketing expense increased by $1.6 million in the third quarter of 2011 as compared to prior year, primarily due to a $1 million increase in Medifast direct advertising, as well as increased advertising spend for the new and existing Medifast Weight Control Centers.

Operating income for the third quarter of 2011 decreased 26% to $6.7 million compared to $9 million in the same period a year ago. Our operating margin of 8.8% decreased 460 basis points compared to the same period last year. The decrease in operating margin is due to the increased selling, general and administrative expenses as well as the decrease in gross margin which I previously outlined.

We recorded $1.7 million in income tax expense in the third quarter of 2011, which represents an effective tax rate of 25.5%. For the third quarter of 2010 we recorded income tax expense of $3.3 million, which reflected an effective tax rate of 36.7%. The decline in the effective tax rate in the third quarter of 2011 was as the result of extensive tax planning and reconciliation performed by the Company. This resulted in a favorable true-up adjustment in the third quarter of 2011 tax provision expense when the Company filed its 2010 federal and state tax returns in mid-September 2011.

As a manufacturing entity based in the State of Maryland we adopted the single sales tax apportionment method in addition to claiming state new jobs credits that reduced our overall state tax dramatically when applying this methodology to the 2010 tax returns. In the third quarter of 2011 the same single sales tax apportionment and new job credits true-up accounted for an over 8% reduction in the effective rate during the quarter. The tax provision to tax return true-up to determine what the tax return filing was in the third quarter accounted for the remaining reduction in the effective tax rate. Going forward, we anticipate a tax rate of approximately 34% to 35% in 2011.

Third quarter net income was $5.1 million, or $0.36 per diluted share, compared to $5.8 million, or $0.39 per diluted share in the third quarter of 2010.

The Company's balance sheet remained strong with stockholders' equity of $71.6 million and working capital of $42.7 million as of September 30, 2011. Cash, cash equivalents and investment securities were $37 million for the first nine months of 2011.

Now, focusing on a few items as it relates to our financial outlook for the 2011 full year. We expect the full-year advertising spend to increase by 15% 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 40 to 50 basis points in fiscal 2011 as compared to prior year.

We anticipate a tax rate of approximately 34% to 35% in fiscal 2011.

In the fourth quarter of 2011 we plan to open 10 to 12 new corporate Medifast Weight Control Centers in new and existing markets, with expectations for 30 to 35 new corporate centers for the full year. Going forward, we will continue to review our annual store growth rate based on our view of the internal and external opportunities and challenges in the marketplace.

That concludes our financial overview. Now I would like to turn the 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 for the 2012 diet season and we look forward to continuing to deliver improved financial results.

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

Thank you. (Operator Instructions) Scott Van Winkle; Cannacord Genuity.

First question -- I have some questions on Take Shape for Life, but I want to start on the clinic side. What was the driver of the [comp] acceleration from Q2 to Q3? I think it went from 5% to 13%. Did you pick up marketing spend or something like that?

It wasn't so much of what's going on outside the store as what's going on inside the store. We've been able to enhance and improve our training to the sales consultants and also to the counselors inside that store. You need a higher caliber of individuals inside those stores. We also continued to enhance and improve the overall operations, making sure we're more focused on the customer. And I do think that new point-of-sale system that was launched inside the stores has helped to take a little bit of the kind of spend on the accounting and inventory and put it more towards the customer. So we think as we continue to enhance and refine those systems and our overall employee training we're going to continue to see great things to our sales growth moving forward.

Okay. And then we all recognize the spending on the new stores. Was that division -- did the entire clinic division have a loss in Q3 and --

Yes.

I assume it had to have. If that's the case, do you have an idea of when that turns?

In terms of the overall loss in Q3 that is indeed correct, Scott. There was about a $400,000 gain in Q2 in that segment. And in Q3 the division did about $1.5 million loss.

And what we're looking for is that as the number of stores in the comp begins to equal out to the number of stores that are beginning to come into that comp, you're going to start to see that number turn. So next year we plan on having all those stores we got opened throughout the course of this year -- there's 30 or 35 -- some point in this year and then for 2012 will come into that comp-store, same-store sales number. And that's when we think that overall number is going to change. Because next year opening up 30 or 35 will of course have less of a drag than if we had opened up the full 60 we anticipated.

So I'm guessing that last year in the Q3 you probably made $1 million, a little over $1 million in the clinic division, lost $1.5 million, so the majority -- actually the entire operating income decline year over year was driven by the clinic division and the efforts there. Correct?

You are correct. Of the entire decline year over year, you're going to have about $1.9 million coming from the clinic division. I think it's a total of about $2.3 million overall. The other pieces are going come from the area, mainly, of gross margin, which is about 0.9 decrease. So those two numbers together almost equate to that entire difference.

Great. Thank you. So and then on Take Shape for Life, you got growth year over year in distributors lapped sequentially. So going into Q4 where December's going to be a soft month, as you would expect with the diet holiday season, so you're going to have a sequential decline. What's going to happen to change the momentum in that health coach figure? I mean, you're coming out of convention and didn't really have any growth sequentially. What's the plan to kind of engage people on kind of spreading the good word and bringing new people in the door?

Great question. I mean, no, we were very ecstatic at the launch and conference of the TTS system. As I mentioned on the call, well, the first and foremost thing about a technology launch is to do no harm. It was launched successfully. Coaches have been able to see it. What's going on now is that when you have 10,000 coaches out there across the country who, prior to the TTS system were utilizing their own training platform, we're now having these coaches come on board and get used to this training system [and start] to learn it and start to shift from what their prior habits were to what their future habits will hopefully be on the TTS system.

Now of course you have January, which is diet season, which always has a bit of a jump for our business both from the excitement of health coach recruiting and in customer acquisition. But getting all these coaches to be comfortable with this training system between now and January, and more importantly, training and how we continue to enhance and refine what the content on that system is. We continue every day to get great feedback from our field leaders and our field overall about what it is that they need to see on that site, what it is they're missing to make themselves be able to get that next client acquisition, or turning that client into that next health coach.

So we're very confident with what we brought on board with Michelle coming on board as our new Senior Vice President -- her industry best practices and getting the coaches to understand goal setting and getting these coaches to understand what's the next step for success. That's what she's yet going to be able to do. And I think once they have all become familiar with it which will occur between now and the end of the fourth quarter, I think we'll continue to see enhancement of that as we move forward. And my guess is that at conference next year in 2012, the focus again is going to be on training. But now it's going to be on a system that they're already comfortable with, they're already familiar with. So it's not about getting them introduced to it. It's about getting more people learning from that. So very excited about what I think that's going to drive in 2012 from just the overall diet season, the new executive coming on board, and getting that training system effective throughout the entire organization.

Okay. And last question on that, I'm just trying to gauge -- you've got health coaches, say just 10,000 just for a round number. I'm trying to gauge what percentage of that 10,000 is driving the majority of the volume? I mean, is it half of them are driving 80% of the volume or something of that nature? So if we see more attrition in the ending number -- and I'm wondering when should we get concerned about the attrition in that number getting to a point where it's kind of cutting into muscle, rather than fat. No pun intended.

Of course, but pun's pretty funny actually. I think that the actual attrition rates, we have not seen any increase in the attrition. So it's more of, I think, people who have been in the system for a long period of time getting used to learn this new training so they can go out there and begin to recruit at a higher rate. So we're not seeing people churn more; we're just seeing less people brought on board as people are learning this new system.

What percentage is driving the overall growth in that organization? You're probably looking at about a 10 percentile that is driving the growth, with the 90% being more learning the overall organization and kind of being first students before they become the teachers. So I would say about between 500 to 1,000 coaches are the real drivers. And we're seeing that number continue to grow year over year. So we're not starting to see anything cut into muscle as of right now. I think if you look at the overall white space in the map, having this TTS system and be able to train these coaches and these leaders who are in markets where leaders are currently not -- the top leaders are currently not. You're going to start to see a lot more dots pop up on that map.

And at the same time, with Michelle's expertise in sales and training, she's also well versed in how to break new markets inside a direct selling organization. So with that expertise coming on board we do anticipate some of our regional events next year being in those new markets and helping to drive more of that near in the future.

Thanks, Mike. All my best to Brad.

John San Marco; Janney Capital Markets.

Did you say what the attrition rate is or was in the quarter?

We did not say. We just said it maintained throughout the course of the quarter.

Is that something you're unwilling to disclose or -- ?

At this time we have not publicly disclosed the attrition rates of the overall business. But we have seen it consistent over the past two years.

Okay. So it's a new recruit issue that has slowed down that health coach down. And so not to beat a dead horse, the last line of questioning, but I'm not sure that I heard sort of a backward-looking reason on why you think the headcount slowed to 0 growth in the third quarter.

Yes, certainly. And it's all to me about time allocation of the health coaches. And when health coaches are presented an entire new platform to learn and to be educated on, they're going to be taking the time they were utilizing their old system to learn this new system. So I think the long-term -- it's an investment in the short term for a long-term gain. Now it will be a consistent message driven throughout the entire organization. But it's very common for when you have a field of sales reps that are given a new training module to take some time to learn. It's actually going to see a little bit of slowdown. But we believe wholeheartedly that that's going to drive future growth significantly.

And do you have any data or anything? I wouldn't -- I don't expect that you would want to share it. But it would be comforting to know that you have the data internally that health coaches who picked up Trilogy right away, say, were heavy users back in July you're already seeing -- I mean is that -- or maybe you can just tell me where you get that comfort from that the payday is coming through TTS.

I think the comfort comes from both industry best practices as well as just a history of watching sales organizations learn training and then accelerate after the fact. We can say that -- we don't have any specific numbers on it for the call, but we have seen well over half the current active health coaches be live on the Trilogy Training System thus far. If we can get that number to a much higher percentage by now and the end of the year and getting that number continue to grow and effectiveness of their time spent on that, I think you've got a great future ahead of us for TTS.

Okay. So half of the 10,000 have used it at some point since you launched in July? Is that what that number means you just gave?

That is correct.

Okay. And last one and I'll pass it on. You mentioned -- I think the word you used was "enhancement" to the TSFL comp plan. What specifically does that mean? What are the enhancements? Are you paying folks more or --

No, we actually said there was an enhancement to the TTS Trilogy System. There was no changes made to the comp plan in the course of the quarter.

Oh, okay. Well, then I guess one follow-on there, given that that's the answer. Is there a Plan B if the returns don't materialize on TTS? And is there a plan for diet season, some way you can goose that health coach count?

Oh, of course, and I think continuing to do more of what we already were doing is going to be in the future, as well as these regional events. We have increased the number of regional events for 2012. Some of these regional events are in current major cities, others in new markets for the business model.

So just overall simplifying the entire process of becoming a health coach and simplifying all the current training we have inside this system, even outside of TTS, the original Business-in-a-Box. We've seen over the course of years, when we launched it in 2007 it had a great impact, Business-in-a-Box. We refined it and simplified it in 2009. We do plan on refining and simplifying the overall training system, both on TTS as well as in the Business-in-a-Box in 2012 and beyond.

Okay. Thank you very much.

(Operator Instructions) Kurt Frederick; Wedbush Securities.

Just a couple questions on the Weight Control Centers. Was just wondering what is the timing of the new openings in 2012? Is it going to be kind of spread throughout the year?

As to the fourth quarter, which I'll speak to first, we're anticipating about 11 new centers. We have 5 in October, 4 in November, 2 in December. For the MWCC business in 2012, it's 30 or 35 for next year. We anticipate that -- which is undisclosed as of right now because of our location selection -- we do anticipate a bit heavier on the front half of the year, most likely about 20 or so in the front half, with 15 -- 10 to 15 following the second half. But of course that's always variable based on outside factors as well as internal factors.

Okay. Even in terms of geography, are you looking at certain region that you're going to focus on or just kind of spread around?

Still to be determined.

Okay. And then just, the centers that were opened in the last, say, 3, 4, 5 months, how are those new centers performing, just in terms of the sales ramp compared to, like, prior store openings?

It's a good question. We've seen the markets -- most recently the Philadelphia market in which that store was the first city that opened that had the new training system for the employee base. It had the new point-of-sale system and it had the new employee structure, with the area manager and district manager. That being the first city launched with all these three changes, it was the fastest ramped city we've had inside the MWCC over the past two years. So we're noticing that the changes we're making are both enhancing the overall potential top-line revenue of the business in MWCC, as well as getting these stores to breakeven at a faster rate. So very well [addressed] for 2012. We're going to keep that model we used in Philly moving forward.

Okay. And then, just on the OpEx, how should we think about that, I guess, for Q4, just the expense from the new openings and then I guess just outside of that your normal OpEx in the quarter?

I'm sorry. The outbacks did you say?

Operating expense.

Oh, operating expense. I would expect that to maintain as far as the clinics and what their drag is from the time of open to the time of breakeven. That $100,000 figure over about that 3 to5 month period is about right.

Okay. That's it for me. Thank you.

Anand Vankawala; Avondale Partners.

Just starting off with the clinic channel, have you shifted your expectation for breakeven given what you are seeing in Philadelphia, as far as timing goes?

You know, Philadelphia is one market and it's a different market from some of the other markets we've had. It's one of the major media markets. So I don't think that our single occurrence is going to associate to a trend just as of yet. But it has shown that even in a major media market we can have additional experience -- additional ramp speed. So not changing our expectations on it just yet, but we are optimistic about the future.

Looking at the gross margins, you guided towards flat in the second half, but we obviously saw some pressure in the third quarter. What makes you think that you're going to see it relent in the fourth quarter, given the expectation of a 40 to 50 step increase for the full year?

Where you're going to see it relent in the fourth quarter is primarily going to be in your shipping costs, both shipping costs to the consumer -- we are seeing our fuel surcharges decline -- and more importantly, the shipping costs to our distribution center in Texas as well as in our vendors. Because we did fill our inventory in the third quarter, we will be unwinding that inventory in the fourth quarter. Therefore you won't have those transportation costs. So that's where the leverage is going to come in Q4 in gross margin. In the short term raw material prices pretty much are maintaining to Q3 levels.

And then, just going back to the clinics, one other question on that one. With the expectation of 30 to 35 new clinics in '12 versus, I think you said it was 50 to 60 previously -- what caused the -- what's the big driver behind the decline right now?

The major driver is just I think we've seen in this third quarter this past year we still have a lot of opportunity to focus on same-store sales growth, seeing that jump at 13%. Refining -- we've had a lot of change go on inside these boxes over the past six months, that being in the point-of-sale system and the employee structure as well as training system. Refining on that and getting more out of what we currently have is something we don't want to deter that focus at a time for a major ramp-up.

Also being said, there's an economic environment. With the overall uncertainty we have in the overall economy right now, we think being a bit more conservative for the next year is the smart way to go. However, based upon the results we had in the first half of the year that's a business model we can always increase the number of boxes as you move forward.

Perfect. And then last question, just quickly on the direct channel, what are you seeing as far as promotional activity? How did it trend during the quarter and then what are you seeing now?

We really saw no change in the promotional activity throughout the course of the quarter. I mean, that is a business that without question can be impacted by the economic environment, people less willing to pull out their wallets to make that order. We continue to train our inside call reps and continue to enhance the messaging on our website to help to defeat that price opposition which might occur from the consumer base. But we've been able to maintain steady Eddie as far as the Direct Response business on the spend as well as the return on that spend.

Perfect. Thank you.

Michael Halen; Sidoti & Company.

Take Shape for Life -- was the decrease in revenue per health coach, was that due completely to discounting? Or were unit sales down as well?

That does not mean from discounting. That's more likely -- that is due to the fact of less customers coming on board. That's where you probably have seen a bit of, one, coaches focusing on that training, studying, as opposed to going out and getting new clients. Two, the overall economic environment. As I mentioned, our inside website and our inside call center are very well trained on price opposition. Our health coaches have not had as much training on that, which is a huge opportunity for us on the Trilogy Training System moving forward to continue to train these health coaches on price opposition and client acquisition. So we do anticipate that to continue to climb in the future. But this past quarter was due to decrease in customer acquisition.

Okay. And can you speak to us at all about price points at Med Direct versus Take Shape for Life?

Of course. Yes, price points for the food are equal across all three channels, so you're going to see the same price point for the food from the Take Shape for Life health coach to that of the clientele. Inside the MWCC center of course you have a program fee on top of the food cost, so it is a bit different of a model inside that.

Got you. And the last one, I just was wondering in terms of op margin, if there's anything else in there besides the increased ad spend due to the expansion of MWCCs?

That can be personnel. I mean, as part of that $100,000 drag that I spoke to, it's going to be inside personnel, inside the four walls. It's going to be rent and it's going to be advertising. You're also going to see an increase in the corporate staff on the MWCC team because they're going to be supporting a larger staff and overall clinics. So that number as well as the inside-four-walls people are going to be the biggest numbers inside that operating change.

All right. Thanks, guys.

(Operator Instructions) Chris Krueger; Northland Capital Markets.

Most of my questions have been answered, but when you talk to your health coaches and your leaders within that and the veterans that have been there a while, do they comment at all about competitive diet plans, whether it's either the Weight Watchers or Herbalife or other types of regional chains or things like that as being an emerging factor?

Simply put, not at all. I mean, our top leaders, they are immersed in the Medifast business, the Take Shape for Life business. They know that they have something that works. They have something with a clinical credibility, a 30-year history and the Medifast brand, as well as the Take Shape for Life Habits of Health. They've got what they consider is the best thing out there, as do we, and that's really all they think of.

Okay. And any initial changes due to the hiring of Michelle Jones? Anything that you think she brings to the table that you might have been missing before?

Well, I think you're going to have a lot of industry best practices come on board. Something that she brings to the table as well is anytime a new executive of that caliber comes on board they're able to see some low hanging fruit of which we who've been in the business for some time just do not see. So I think we'll see some immediate. But I think the better is the long term of what's going to occur inside that overall business, largely from how this organization supports a direct selling organization from the inside, how we help our health coaches have the right business support as well as help the clients get the support they need from their health coaches.

All right. Thanks a lot, guys.

Gary Albanese; Auriga.

I was wondering if you could talk about the rationale for bringing Michelle on. Is it because of just the growth within the Company? Is it because you found somebody who was just available at the time and you thought it would be a good fit? Or is there a specific need given? You already put in place a pretty extensive training changes earlier in the year. Are there going to be changes to the changes that you already made?

Well, you know, we're a business model that does always continue to evolve. And whenever you have the opportunity to bring in an industry expertise such as that level inside an organization I think it's obviously the right move. She brings just the 15 years of experience from that of the Avon world. The Avon world is a bit different than the Take Shape for Life world. However, there are a lot of similarities and a lot of common points.

So already she's had quite an impact. She was able to attend our Sundance event. So she's still getting adapted to the culture of Take Shape for Life and Medifast, but I expect Michelle to provide just tremendous opportunity and growth for the overall business.

But, yes, we're going to continue to change what we created and evolve as the times change. That's how we continue to stay in the growth mode.

Okay. And you alluded to the new products in the middle of the month. Can you elaborate on that?

We've three new meal replacements coming out November 15th, very excited for them. I have tried them all and of course love them all. But that's about all I can say at this time.

Are they going to outsourced or are they internally produced?

These are internal products.

Internal. Okay. Thanks, guys.

Thank you. I would now like to turn the floor back over to Mr. McDevitt for any closing remarks.

I would 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 over the next few weeks, and speaking to you again when we report the fourth quarter next year.

Thank you very much and have a great day.

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