Medifast Inc (MED) 2013 Q4 法說會逐字稿

Greetings and welcome to the Medifast fourth-quarter and full-year 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Katie Turner. Thank you, Ms. Turner, you may now begin.

Good afternoon, and welcome to Medifast's fourth-quarter and full-year 2013 earnings conference call. On the call with me today are Michael MacDonald, Chairman and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; and Timothy Robinson, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ending December 31, 2013 that went out this afternoon at approximately 4:05 PM Eastern time. If you have not received the release, it's available on the investor relations portion of Medifast's website at www.MedifastNow.com. This call is being webcast, and a replay will be available on the Company's website.

Before we begin, we would 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 believe, expect, anticipate, and other similar expressions generally identify forward-looking statements.

These statements do not guarantee future performance, and therefore undue reliance should not be placed on them. Actual results could differ materially from those projected in any forward-looking statements.

Medifast assumes no obligation to update any forward-looking projections that may be made in today's press release or on the call today. All of the forward-looking statements contained herein speak only as of the date of today's call. With that, I would like to turn call over to Medifast's Chairman and CEO, Michael MacDonald.

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

On today's call, I will provide you with an update on our strategic initiatives, and discuss areas of our business where we continue to work on generating efficiencies to improve Medifast's future growth and long-term profitability. Tim will review the financial results for the fourth quarter and the full year in more detail. Finally, I will provide closing remarks, and we will open up the call to take your questions.

In 2013, we executed on our strategic initiatives to improve profitability and better position Medifast for long-term growth. These results were achieved despite a difficult consumer environment, and a challenging year for many weight loss industry players. We remain focused on reaching our profit objectives, and managing our operational performance.

In particular, our team showed strong business management skill, as we generated increased operational efficiencies, resulting in an annual improvement and operating margin of 290 basis points. As many of you know, our team has a comprehensive multi-year strategic plan in place.

Since I joined the Company, my focus for our team has been to drive profitability, while balancing our investments and revenue initiatives with careful expense management, in order to maximize our earnings potential and cash flow generation long term. It is clear that economic headwinds have impacted our business and our industry, and limited our top line growth over the last few quarters.

However, I believe that the steps we have taken better position Medifast to achieve long-term growth and profitability across each of our sales channels. Then I will share an update on these initiatives and discuss the new and exciting products we have in the pipeline for 2014.

In 2013, our net revenue was $356.9 million, as compared to $356.7 million in the prior year. Despite nominal revenue growth, we are pleased to report earnings of $1.73 per diluted share, in line with our full-year revenue guidance.

I would like to focus on our results for the fourth quarter and full year 2013. Revenue in our direct sales channel, Take Shape For Life, was $51.7 million, which was comparable to the $51.8 million in the same period last year.

The Company ended the quarter with approximately 10,500 active health coaches, an increase of 300 health coaches from the fourth quarter of 2012. The average revenue per health coach per month for the quarter was $1,477, a decline of 6% from $1,571 in the fourth quarter of 2012. Historically, we have seen a decrease in health coach count in the fourth quarter of each year, as health coaches are less likely to grow their business during the holiday season.

Full-year TSFL revenue was $228.7 million, as compared to $216.1 million, an increase of 6% above the 4% DSA average across multi-level companies. Beginning in the second half of 2013, our team launched several initiatives to increase health coach growth, client acquisition and retention.

Following our most well-attended national convention in TSFL history in July, Dr. Andersen launched his new book, Discover Your Optimal Health, which became a New York Times and USA Today bestseller. The media tour that followed introduced thousands of new people to the Medifast brand and the innovative teachings of Dr. A and the TSFL program.

In September, we launched a new integrated compensation plan. Health coaches have responded positively to the changes of this new plan, which was designed to promote the expansion of coach teams in the field, while increasing the necessary front line volume to drive current revenues and future organizational growth.

Also in September, Medifast health coaches across the country took part in the first-ever Discover Your Optimal Health Day. In Owings Mills, at our corporate offices, we hosted one of 250 walks that took place across the United States. We believe that this event was extremely beneficial in raising awareness for Take Shape For Life, and also continuing to position Take Shape For Life as a key player in helping people create a healthy, active lifestyle.

We are pleased with our initiatives in Take Shape For Life, and believe they're essential in gaining traction, and increasing health coach and client acquisition and retention moving forward. Already in 2014, we have launched our Stop Challenge Choose 12 week health transformation, with over 20,000 participants.

We kicked off the year with another media tour with Dr. Andersen that saw over 86 million impressions nationally for Take Shape For Life. We also hosted successful and well-attended regional events in San Diego, Portland, New York, St. Louis and Orlando, to introduce new coaches and clients to Take Shape For Life.

The Medifast Direct channel revenue decreased 24% to $13.9 million in the fourth quarter of 2013, and decreased 11%, to $75.5 million for the full year of 2013. As you can see, we conserved our advertising spend in the back half of 2013. This was a planned approach as we chose to focus on consistently driving higher operating margins, as opposed to investing in fourth-quarter sales growth at the expense of full-year profitability.

Our goal remains to maximize the efficiency of our spending, and this is demonstrated by improvement in our overall revenue to spending ratio. Company-wide, we saw a ratio of 41 to 1 in Quarter 4 2013, as compared to 13 to 1 in Quarter 4 of 2012. Of course, this resulted in a reduction in unique visitors, but with our focus on optimizing messaging, and tracking the daily analytics, we were able to improve conversion rates and average order value.

Additionally, the reduction in spending did not stop our e-commerce and digital marketing teams from making some significant improvements to our platforms. This includes tools that allow our technology teams to move faster to introduce new promotions, campaigns, and messaging on-site. We began testing more call-to-action oriented offers, with limited time windows to gauge effectiveness, and we garnered some critical learning that has informed our 2014 plans.

In fact, in the first quarter, we have seen encouraging results from our free shipping days, full-week tip promotion, product offers, and special incentives to generate new interest and motivate retention of purchases. We implemented improvements to our Web analytics tracking, expanded the use of our multi-variant testing software through our e-mail marketing platform, and introduced new cart abandonment recapture capabilities, so every day, not only do we see our revenue details and online analytics, we also see the actual results of all discounting and promotional activities.

We launched our mobile commerce site for Medifast Direct, and continue to expand the use of Web video, across our assets. Moving forward, our spending will be closely tied to the information derived from our new econometrics model, which will allow us to make quick changes to our advertising mix, to optimize spending efficiency.

In the fourth quarter, the Medifast Weight Control Centers and wholesale physicians channel revenue decreased 12% to $11.7 million. In December, we announced the commencement of the implementation of our Weight Control Center strategic plan, and as we have shared, believe this will have a positive impact on our future financial performance.

The first step in our implementation was to close eight underperforming corporate-owned Medifast Weight Control Centers, effective December 31, 2013. Additionally, we expect to settle on the asset sale of approximately 10 to 15 existing corporate-owned Medifast Weight Control Centers to an existing business partner in the first half of 2014, which is then simultaneously transitioned to the franchise model. The closure of these centers in this initial transaction of centers to the franchise model are consistent with our long-term strategy to better position the Medifast Weight Control Center sales channel for profitable growth.

Our current franchise partners opened six new centers in late 2013: California, Alabama and Louisiana, and opened another four locations in California, Alabama and Tennessee, already in 2014. We expect four more locations to open by the end of March. Our efforts to create a favorable environment for our franchise partners, including pricing incentives tied to growth, appear to be taking hold. While some of those incentives put a strain on current revenue growth, we believe they will help position our franchise partners for improved long-term health.

Looking ahead, we are continuing our efforts to identify new franchise partners, and have new marketing initiatives in place to share the opportunity. We also continue to invest resources in the remaining corporate centers during their transition period, to improve the profitability of this channel.

Total Medifast brand awareness continues to increase. As of November, I'm pleased to report that Medifast national awareness has grown to 44% from 25%, when we began tracking this in November of 2011. And from 32% the one year prior, according to our attitude, awareness, and usage study. We believe this is due to the branding investments we made earlier in 2013, the growth of our public relations program, and the continued expansion of our social media properties.

In addition to leveraging our paid media, albeit at a reduced amount to drive more profitable growth, we were able to benefit a great deal from the earned media received from People Magazine, The Huffington Post, The Today Show, Women's Day, First For Women, Runner's World, Ad Week, Fox and Friends, Bloomberg TV and the recognition of Medifast placing 16th in America's best small companies by Forbes, just to name a few.

These national placements, coupled with the regional placements in key markets with Take Shape For Life health coaches, Medifast Weight Control Center counselors and our nutrition experts, helped us build a strong brand presence. These wins, combined with our enhanced efforts to drive engagement on social media, paid dividends.

Our business continues to be driven by customers who want to lead healthier and happier lives. Each day, I am in awe of the amazing success stories of customers who have used our products to dramatically improve their lives through weight loss and healthy living.

Once weight loss success is achieved, it is more important than ever for our customers to utilize Medifast products in the maintenance portion of their programs. This past year, obesity was officially declared a disease by the American Medical Association.

True weight loss management as a lifetime journey, and Medifast wants to be there each step of the way. This is why we are focused on rolling out products and programs that will help customers better achieve long-term weight management in the context of overall healthy living habits. We believe there are many prospective new customers who would trust the heritage of the Medifast clinically proven and doctor-recommended approach for healthy living products, and performance-oriented items.

Our expansion into new product and program categories also enable us to capture incremental revenue, as we enhance the lifetime value of our current customers. In 2013, we launched many new meal replacement products, including pineapple, mango, and triple berry smoothies, peanut butter and chocolate chip and cookie dough chewy bars, tomato basil bisque, blueberry muffin soft bake, and ziti marinara. As always, our new products met both the high taste and nutritional expectation of our customers. New meal replacement options add more diversity to our nutritionally-balanced, low calorie product lines, which is essential for the continued enjoyment of Medifast meals by those on their weight loss journey.

As we look ahead, we're very excited about our expansion plans to add complementary products and offerings. To ensure our offerings appeal not only to the person who wants to lose weight, but also to consumers who seek healthy and convenient options to stay in shape and have an overall healthy life.

In the second half of the year, we plan to introduce new healthy living maintenance products, which will be formulated differently for an everyday nutritious option. We'll also be introducing a new line of snacks, and additional options for our flavor infuser line, to help ensure customers consume the recommended amounts of water.

Also exciting and launching in the first quarter are new options that can be used for the lean and green element of our plan. These convenient microwaveable options are the perfect answer to dinner, when life is just too busy for cooking, with the perfect portions of lean protein, vegetables and healthy fat. They can be used daily, or a few times a week.

These expansion opportunities will position Medifast among our broader market, and represent an incremental revenue opportunity. I look forward to updating you more on this later in the year.

To supplement our healthy living products, Medifast seeks to provide the programs, tools and technology needed to maintain an active and balanced lifestyle. In addition, the support provided by our health coaches and programs in the Medifast Weight Control Centers, our team is developing a new desktop and mobile app, that will provide a comprehensive dashboard, tracking eating habits, exercise, water consumption, weight, body measurements, and a host of other things.

This desktop and mobile app also allow Medifast customers to integrate the devices and activity trackers of leading manufacturers with our program, and is planned to launch later this year. We believe that the integration of our products and programs with technology will motivate our customers to better sustain their health, and make better choices. Increased customer longevity is essential to our ability to drive incremental long-term growth for our business.

Also, from a technology standpoint, we have successfully implemented and integrated a new order fulfillment warehouse management system, which will provide us the capabilities to scale our business and to expand our growth. This implementation provides us with a more cost-effective solution, as well as enhanced product traceability and tracking throughout the distribution process.

Other improvements to our supply chain included the installation of the new proportioning system that will allow for greater in-house efficiencies and capacities. Whether it is the improvement of our own facilities or the updated website for purchasing Medifast products, we will continue to invest in technological improvements that drive efficiencies and productivity.

Looking ahead, we believe there is great potential for Medifast to expand internationally. In September, we announced the opening of the first Medifast Weight Control Center in Mexico City, as part of our strategic partnership with Medix.

This was followed in December with the launch of the first center in Bogota, Colombia. We are excited to see continued growth through our partnership with Medix, which allows us to strategically expand the distribution of our products in Mexico, Central America and South America.

Just this morning, we officially expanded our marketing efforts into Canada, and are currently offering a range of products to Canadian customers on two new websites. We plan to quickly expand the product offering in Canada during 2014.

While believe that global expansion is a key strategic initiative long-term, we remain focused on selecting the right growth opportunities. To further product expansion and our international growth, it is essential for us to have the right team in place in order to execute our strategic initiatives.

This past year, we added two seasoned executives to our Board. Carl Sassano joined our Board in July, he's a former President of Bausch & Lomb, and has great consumer, retail, and international experience.

Prior to Carl, Kevin Byrnes joined our Board in July. He has extensive experience in the retail and commercial banking industries, we believe that both Carl and Kevin can strengthen our Board of Directors, and we look forward to their contributions to Medifast.

Additionally, in an effort to improve and increase transparency and improve corporate governance, our Board recently adopted plurality voting to replace the previously-used majority voting standards. We believe it is in the best interest of shareholders.

In addition to changes to our Board of Directors, we have focused on strengthening our management team and improving leadership throughout the Company. I truly believe we have added the right talent in key areas of the Company, and our efforts across the team are starting to take hold. Recently, our COO and President, Meg Sheetz, was named to the Daily Record 2014 list of Top 100 Women in Maryland.

Our CFO, Tim Robinson, received an Executive Management Award in Baltimore from Smart CEO Magazine, and our Lead Director, Barry Bondroff, received a Baltimore Business Journal 2014 Outstanding Directors Award. I believe the benefits of a strong leadership team will continue to pay off and drive the growth of our business.

Our business improvements and strategic initiatives have one common goal in mind, to maximize shareholder value. To that end, I'm pleased to tell you that our Board recently approved an additional 1 million shares to be added to our buyback authorization. We believe that share repurchases at our current valuation are an effective way to increase shareholder value, and we intend to continue with our buyback program in 2014.

Over the next few years, we believe that greater improvements should flow through our business, as we implement our strategic initiatives. In 2014, we will remain focused on the following: Building tools to increase client and coach acquisition and retention in Take Shape For Life.

Make it easier for coaches to share our story, while balancing our product offerings to attract new clients and retain existing clients, as they transition to long-term healthy living. Consistently evaluating correlations between our revenue and marketing initiatives in our Medifast Direct sales channel. Ensuring we have the e-commerce technologies and systems to drive the key acquisition, retention, and conversion levers.

Expanding our franchise footprint with both existing and new partners, while we execute the sale of corporate Medifast Weight Control Centers, and transition them to the franchise model. And finally, gain a stronger contribution of revenue internationally through both our expansion with Medix in Mexico, South and Central America, and in new geographies, like Canada. I would now like to turn the call over to Tim Robinson, our Chief Financial Officer, to review our fourth-quarter and full-year 2013 financial results in more detail, and provide you with our outlook for 2014.

Thanks, Mike. I'll now review our financial results for the fourth quarter and the full year ended December 31, 2013, in more detail.

For the fourth quarter, net revenues decreased 7% to $77.3 million from net revenue of $83.2 million in the fourth quarter the prior year. The Take Shape For Life sales channel accounted for 66.9% of total revenue. Medifast Direct accounted for 18%. Medifast Weight Control Centers and wholesale physicians accounted for 15.1% of total revenue.

Gross profit for the fourth quarter of 2013 decreased 8% to $57.7 million, compared to $62.8 million in the fourth quarter of the prior year. Our gross profit margin decreased 80 basis points to 74.6% versus 75.4% in the fourth quarter of 2012. The decrease in gross margin during the quarter was primarily due to refunds related to the closure of eight corporate clinics in the fourth quarter, and increased shipping charges related to transition to our new WMS platform, which required shipping from a single location for brief period during the changeover.

Selling, general and administrative expenses in the fourth quarter of 2013 were $50.6 million versus $59.2 million in the fourth quarter last year, a decrease of $8.6 million. As a percentage of net revenue, selling general administrative expenses improved to 65.5% from 71.1% in the fourth quarter of 2012.

Take Shape For Life commission expense, which is variable based on sales, decreased by approximately $600,000 in the fourth quarter, while revenue was in line with the prior year. The integrated compensation plan was primarily phased in during the fourth quarter of 2013.

Sales and marketing expense decreased $3.9 million in the fourth quarter of 2013, as compared to the fourth quarter of 2012. This is reflected in a significant change in the revenue to spend ratio in the fourth quarter. Operating income was $7 million or 9.1% of net revenue, compared to $3.6 million or 4.3% of net revenue in the fourth quarter of 2012.

Our effective tax rate was 21.3% compared to 48.8% in the fourth quarter of 2012. The decrease in the effective tax rate resulted from our ability to claim research and development credits, which became effective in early 2013, and applied to prior years. Additionally, we were able to take advantage of Maryland multi-state apportionment methodology during 2013. Fourth quarter of 2013 net income includes a $1.6 million after-tax charge related to the closure of eight corporate-owned Medifast Control Centers.

Fourth-quarter net income was $5.3 million or $0.39 per diluted share based on approximately 13.6 million shares outstanding, compared to net income of $1.9 million or $0.13 per diluted share for the comparable quarter last year, based on approximately 13.8 million shares outstanding. The fourth quarter 2012 net income includes a $2 million net of tax, sales tax accrual. Excluding this item, net income in the fourth quarter of 2012 would have been $3.9 million or $0.28 per diluted share.

Turning to our full-year results, net revenue was $356.9 million for the fiscal year ended December 31, 2013, compared to net revenue of $356.7 million in 2012. Net income for the fiscal year 2013 increased $8.1 million to $24 million or $1.73 per diluted share based on approximately 13.8 million shares outstanding, compared to net income of $15.9 million or $1.16 per diluted share for the comparable period last year, based on approximately 13.7 million shares outstanding.

Fiscal year 2013 net income includes the aforementioned $1.6 million after-tax charge related to the closure of the clinics in the fourth quarter. Fiscal year 2012 net income includes a $3.7 million charge from the previously-disclosed FTC charge in the second quarter of 2012, and also the $2 million after tax sales tax accrual. Excluding these items, net income for fiscal year 2012 would have been $21.6 million or $1.57 per diluted share.

Our balance sheet remains strong with stockholders' equity of $98.4 million, and working capital of $64.9 million as of December 31, 2013. Cash, cash equivalents and investment securities for the fourth quarter of 2013 increased $7.8 million to $67.8 million, compared to $60 million at December 31, 2012. As we communicated earlier this year, the Company paid off the remaining value of its outstanding long-term notes, and remains free of interest-bearing debt.

Now to review our guidance briefly. We expect first-quarter net revenue to be in range of $86 million to $88 million, and earnings per diluted share to be in the range of $0.32 to $0.35. Our first-quarter guidance assumes that we will not convert any corporate-owned clinics to franchise clinics in the first quarter.

We expect full-year 2014 net revenues to be in the range of $340 million to $380 million, and earnings per share, diluted share, are expected to be in the range of $1.80 to $1.90. This range of revenue guidance is partly dependent on the timing of the transition of our corporate-owned clinics to the franchise model, which will reduce revenue while improving profitability. Our guidance includes our expectation that the effective tax rate will be in the range of 33% to 34% in 2014.

As you can see, we anticipate a continued pressure on revenue in 2014. We plan to focus on continued profit delivery by putting the elements in place that Mike mentioned throughout this call, in order to position Medifast for long-term success.

That concludes our financial overview Now let's turn call back over to our Chairman and CEO, Mike MacDonald.

Thanks, Tim. We believe our multi-channel healthy living business model allows us to benefit from an overall more diversified go to market approach in the US and abroad. We will continue to work to deliver our profit objectives, as we gain a greater share of the broader and growing health and wellness industry, through recommendation of new products, programs, and technology.

In closing, I'm pleased with our team's consistent ability to deliver results in 2013. Going forward, we remain intently focused on managing the controllable aspects of our business model, introducing initiatives that drive sales across our vertically-integrated business model, and further enhancing shareholder value.

Our Medifast team continues to be optimistic about our long-term growth prospects, and we will continue to execute our strategic plan. We appreciate your interest in Medifast, and with that overview, Tim, Meg, and I are available to take your questions. Operator?

(Operator Instructions)

Scott Van Winkle, Canaccord Genuity. Please go ahead.

Tim, can we start with the gross margin commentary in Q4? You said some refunds, and then a shipping issue. Can you go back through that again, I apologize?

It's not a shipping issue. We converted over in Q4 our distribution center into a new warehouse management system. As you know, we ship to West Coast customers from our Texas location, and we ship to our east coast customers from our eastern shore of Maryland location.

So we had to shut our Maryland location down, and ship to the whole country from Texas. In the cost of shipping over to the East Coast, we don't charge the customer for that, that was a cost borne by us. So we had additional shipping charges for a couple of weeks, while we shut down the eastern shore and did that transition.

The other piece is obviously the clinic closure. We took a charge, an expense charge of about $2.1 million mentioned before tax, $1.6 million after-tax for closing the clinics, but in addition to that, part of it was we have customers that are in the middle of their cycle, and in fairness to the customers, we refunded money to customers that they had paid to us for joining the program, that were no longer able to deliver those services, or we may have let them keep the food. We thought that was the right thing to do to customers that had signed up on the program.

What happens when you re-franchise a unit, and say someone has prepaid the service component of their program, do you end up transferring that to the franchisee?

The customer is not affected at all. So whether we're operating the center or the franchisee is operating the center, of the customer is certainly entitled to that service that they paid for. So these were just for the eight centers that closed.

So as we get into Q1, we should see a more normalized gross margin, I would assume?

Yes.

Okay got it. So with that I have this weird little quandary. I have trouble getting down to your Q1 guidance. But to be honest, I have trouble getting up to your full-year guidance, based on the revenue. Is there something we should expect to really be delevered in Q1, and then as we go through the remainder of the year, what gives you confidence that revenue growth is going to reaccelerate?

Scott we really looked at a lot of our investments, a lot of our product launches, and as an example we just opened today four new centers in Seattle. A lot of our activity happens toward the middle of the year. So we see the compare being much better through the second half of the year for us.

So we feel there is an opportunity in the second half as we go through, with all the things that we're doing, and it's significant, the amount of things we're going to announce. So that's why we have that plan, so even in our operating plan, we did plan that in our planning assumptions.

Because the other thing we did do in the beginning of this year, we did go out January and February with a full spending on advertising, that we have not done in the fourth quarter. And again, by the way, we did not see great effectiveness, especially on the Med Direct advertising, so we did cut that a little bit back, going into the March time period. But we basically feel like with all the product things that were coming out, with all the different launches, that it really is going to have a bigger impact in the back half of the year.

Okay. So you have quite a bit of spending in Q1, and maybe not expecting to see that into translating into direct-to-consumer revenue here in the first quarter?

I think the new product launches we have going on throughout March and beyond, through midyear, are going to be significant in the sense of incremental revenues, outside of our current base.

A lot of these products aren't the traditional meal replacement, Scott, like the three lean and green meals are going to be microwaveable. They are meals we haven't sold before. So as an example, we're going to launch new meal replacements too, but generally, the meal replacements might cannibalize another meal that somebody is using.

Are those lean and green substitutes, are those frozen, or shelf-stable?

They're shelf-stable. Obviously, as we continue to grow Medifast, we continue to explore multiple options for that lean and green meal, as well.

Okay. And then last question from me. Advertising in the fourth quarter, did I hear correct, that the revenue to spend was like $41 million or something?

You heard correct.

So you spent less than $2 million in advertising in the fourth quarter?

That's about right. It's just shy of $2 million.

Wow, and that's all in? Across all segments that you would spend against?

Let's say the real segment that benefits from the advertising really is Med Direct. Take Shape For Life is not really an advertising model. So when you look at things like spending, or you look at Google search things, and so forth, that's really not an impact on Take Shape For Life at all, it's really Med Direct, so that's really where most of the spend is.

There's certainly some spend in the clinics as well. But if we came out in the third quarter and into the fourth quarter, we mentally were going to closely monitor that spend. We would focus very much on profitability, but also measuring that elasticity to see when we spent money on the advertising, what was the lag effect from the spend, and what was the result.

The fourth quarter's kind of a tough time to really build momentum with advertising, with all the holidays and everything. So we decided that a better time to do that would be in the first quarter, and we pulled back on our spend in the fourth quarter.

The other thing, Scott, when we look at the advertising now, Take Shape For Life really, our brand advertising does some things to help that. But clearly, if you looked at it, say for the full year, we spent $26 million or so on advertising. You're spending that on $100 million, so our advertising spend on a percentage against what we really are targeted to, is still pretty good spend.

So then you come into January and February, you turn the faucet back on, so to speak, in advertising, and you don't get a return -- I hope I'm not putting words in your mouth on that spending. What do you think it is?

Look, it's a terrible weight loss, mass-market weight loss environment out there. I think everybody knows that and sees it. Is it just the environment?

I see it as more the environment. But we're working with Google. We've been experimenting with lots of different processes.

We even went, Scott, and what we decided to do in the beginning of the year, as we mentioned in the script, we've done more like free shipping, we've done more certain discounting, so we're actually trying many things. Not just the advertising, but also the offers, along with the advertising.

So we've been working a lot more too on the offers, to make sure that we are being aggressive enough, thinking, example our general customers, generally someone 30 to 65, 65% female, $50,000 income. We even thought, well, maybe some of the people's income dropped a little bit, and we need to go after bringing some of them back in as new customers, you know what I mean?

So we're really trying to experiment with the different things. But I see it more as an environment thing than I do see it as -- I think we could spend more money and still not really get the returns.

What we're trying to do too is to figure out where is the most effective place to spend. So the same dollar spent in two places can have a very different result. Some of the places where we've traditionally spent digitally have become very expensive, become crowded space.

As you know, we were one of the early ones to get into web and investing on the web, and now it is certainly a crowded space. But the web investments are going up, and so that price per lead or price per customer is going up.

Great. Thank you very much.

Mitch Pinhiero, Imperial Capital. Please go ahead.

So let me ask you a couple questions. In the fourth quarter, where was the expense, the charges for the closure of the Company-owned weight-loss centers?

So, Mitch, they're spread out a little bit. So you will see in the release, in other income, you will see a good portion of it there. You'll see in depreciation, accelerated depreciation of some of the clinic assets are there.

Some of it was in our deferred revenue. Because you have to -- basically you have to eliminate deferred revenue. So it's spread a few different places in the income statement.

Is that going to be delineated in the K?

Yes. It's all set out very clearly in the K.

Okay. So there was some revenue impact, you are saying.

Revenue wasn't real material Mitch, but there was some revenue impact, yes.

Okay. And then second. What are you doing, where do you think health coaches grow to, if at all, in 2014?

I definitely think we will continue to see moderate health coach growth. I think we obviously have the new compensation structure, our evolved compensation that went live, although it went live in the fall. All the grandfathering is complete, and as of January 1 this year, the new comp plan is all that everyone is in.

So we're watching coaches adjust, we're seeing a lot of coaches who used to have high front-line volume trying to convert to more structure. We're seeing people who had only structure trying to create more front-line volume.

So as we see those behaviors, we will start to see, most likely, some more health coach growth. We also have a couple different initiatives that we are running in the first quarter, that will also help encourage the incentives to help encourage the growth of health coaches, as well.

We see health coach growth in the first quarter, sequentially?

Over the fourth quarter of last year to the first quarter of this year, yes, we should see health coach growth.

Okay. So when you look at your first-quarter revenue, where is the decline coming from? How do you parse that out?

Certain parts of the decline are coming from the fact that last year we did shut down 13 total Weight Control Centers. You had a revenue decline there. The other thing is, we offered higher incentives to our franchisees, who are now opening, as you just saw, we had, I think it was five in December and then we had another four, and then we just opened today, by the way, four of them opened in Seattle and in Washington.

So basically, we're up to 49 franchise centers now operating. But we used a percentage of our revenue to help make it in attractive proposition for them to expand. So we will see some revenue decline because of that.

So you're seeing some of the decline come from things we are doing intentionally, to drive the franchise opportunity. So clearly if we have 49 franchises now and we convert the other 15 that we are working on for Medifast centers, we would have 59, 64 hopefully by the time we get to the end of the second quarter.

Okay that was helpful. So for the full year, so a wide range, $340 million to $380 million of revenue? At the $340 million level, what does that assume as far as Company-owned Weight Loss Centers to franchise conversion?

It assumes the majority of them convert over.

Okay. And $380 million assumes no conversion?

$380 million assumes that 10 to 15 that we already announced.

Okay. And then last question, from a gross margin perspective. Is the lean and green microwaveable meals, are they at the same margin level, or is that a lower margin than your typical product?

It's a lower margin than our typical products. Still very healthy margin, but it's a lower margin than the products that we manufacture, the meal replacements.

Are the other new products similar to the current margin?

We have several new products coming out, so there are some of those new products that are manufactured by us in our plants, so they would have the same margin, and others that are outsourced or co-manufactured.

It's a mix, Mitch, of things that are traditional margins and at somewhat of a lower margin, still very healthy margins.

We don't see margin being a big problem for us.

They're incremental. Obviously, with incremental dollars. It's the sixth meal. Today, we only sell the first five meals, so it will be incremental dollars, but again, at a slightly lower margin.

Right. Last question. What should we expect for advertising spend in the coming year?

Our plan for the year of advertising spend was to ramp the spend back up to more traditional levels for us, which in our Med Direct area is typically around 30% of revenues. We will gauge that, monitor that closely, so if we spend a dollar, if we don't see a return, we will reinvest that dollar into promotions or other things. And then in our clinic model, we advertised roughly about 15% of our revenues in that model. So that's been somewhat of the traditional approach here at Medifast last year, was the departure from that, but that's baked into our plans.

Thank you very much.

Kurt Frederick, Wedbush. Please go ahead.

Just a few questions. One is on the share buyback activity, what is the current share authorization?

Just over 1.3 million shares, total. That includes the additional 1 million shares recently authorized.

Okay. So when are you free to buy? Could you be out buying tomorrow?

We could be free out buying, not tomorrow, but yes this week, but not tomorrow.

This week, okay. And then does your guidance include any additional share repurchases?

We are expecting to do some share repurchases, Kurt, so we have baked some into the guidance.

And then I guess it's been a little over year since you laid out the five-year plan. A lot of stuff has happened, and I was wondering if you could maybe talk about where you're at, ahead or behind plan, and what your expectations are?

Let me cover that with you, Kurt. I think we're starting to see, by the way, Medix is starting to have higher activity in Mexico, as they're starting to ramp up, so we feel good that they're making improvements in Mexico.

We just started with our first two websites in Canada opening up today. So we are now in Canada. We're in Colombia now, Bogota with a clinic, in Mexico City with a clinic.

And Medix feels very good about their plans to expand their clinics as we go through the year. So I think we are making progress there, and I think we will see improved revenue performance. Also, we have created an M&A committee within Medifast of our Board.

And we will be looking at adjacent opportunities to expand into healthy living. So we are, with our cash position and our health, we had tremendous cash generation, as you saw again in 2013. We feel there's opportunities out there that may be good opportunities for Medifast, especially given the need for us to expand our marketplace beyond just purely clinical weight loss, into other segments of the opportunity around healthy living.

I think, from a strategy perspective, the difference in the strategies previously, was it was centered around expansion with the current weight-loss products that we have. I think what's great about our newer, updated strategy, although we feel the we can accomplish really good things over the next five years, is more around the healthy living, which definitely puts us in a broader marketplace than just weight loss.

There's been no mention really of weather on the call. I wondered if you could maybe comment on what you're seeing across the different segments in Q4 and Q1?

I didn't want to -- clearly, we've had a weather impact.

Clearly, our centers have shut down.

We've had a lot of centers shut down and all those things. I didn't want to use natural events as any reasons for anything happening. I'm sure there is issues out there.

But from that standpoint, I think the real issue is, we have to execute very, very well in the core business while we're trying to focus on other growth opportunities and growth areas. We're also going through a very complicated transition from shutting down clinics and taking our revenue down to improve our profitability, and in the longer-term, when we exit the transition, we're going to be in a tremendous place with less SG&A and improved profitability, and we feel the track were on is a good one.

Would I like to have higher growth, like I had 20% growth in 2012? Yes. But I don't think we're running the business any differently. And the one thing I would say Kurt, for last year I gave guidance of $170 million to $180 million and never left it, despite the fact we probably missed our plan in revenue by $40 million.

Okay, that sounds good. Thank you.

Michael Halen, Sidoti & Company. Please go ahead.

With soybean prices down, year-over-year, do you expect some improvements in gross margins in 2014?

We're always looking for improvement in gross margin. I would say that just as much as that has gone down, there is other areas that have gone up significantly from a material perspective. I think at this point, we would think that they would be pretty stable as to what they are today.

We didn't expect, Mike, in our guidance and our plans for next year, we're not expecting a decline in raw materials costs overall.

Okay. Thanks. How much of the decline in Med Direct year-over-year revenue is cannibalization by Take Shape For Life?

I don't really think there is a whole lot of cannibalization. To be honest, Mike, I go to most of the major Take Shape For Life meetings. I just got back from one of the recognition trips they had, and we don't really hear a lot about that.

I mean they will complain once in a while about how you put a more aggressive promotion on Med Direct versus Take Shape For Life. And we try to make sure we have the right programs in both channels to drive the business.

You have to remember that the Take Shape For Life model obviously is more relationship -based. Oftentimes the customers don't overlap unless we choose them to overlap. So on every Med Direct order we ask them if they want a health coach, and if that's the case, we take the first order in the Medifast Direct channel, and move them over to Take Shape For Life under a coach for their second and beyond orders.

So currently I don't think that's an issue. I think it's clearly, there is some price sensitivity out there in all channels, related to the weight loss program, and buying food. And I think we are all encountering that, and we're trying to do our best here to find what the customer will buy the product for and maintain our margins.

I think as you look at it, Mike, our leadership in Take Shape For Life, Dr. Anderson, Dan Bell, our Presidentials. We have terrific leadership out there, they are fully engaged and energized and feel good about the business. But the one thing you do have to remember is, for years, we had no competition in the multi-level space, and now some of the other multi-level companies are selling in the multi-level weight loss space against us.

So we are seeing more competition than we saw before. But you still have to look at 6% growth last year was, Herbalife I think had about 8% growth in the United States, in multi-level and they might have been the highest. And we were right up there.

So we still a good performance in the US market. And as you know, most of those other multi-level firms have huge growth in China and other parts of the world.

Okay. And last one. Excuse me if you had already mentioned it. What was same-store sales for the corporate centers in the quarter?

Same-store sales in the corporate centers. I don't know the exact number, Mike, I apologize, but same-store sales were down 15%.

Okay. Thank you very much.

Scott Van Winkle, Canaccord Genuity. Please go ahead.

Hi, thanks. When you look at that guidance for 2014, whether low-end, in the middle. Wherever you want.

What kind of mix assumption is baked into what would appear to be margin improvement in 2014 over 2013, regardless of the revenue? I would think, clearly, clinics are going to be more profitable, we all know that from what you've done.

I would assume that you are assuming the direct response segment grows at a slower rate than Take Shape For Life, given current trends. I think that direct response segment is meaningfully the highest margin business, isn't it?

Actually, Scott, as you get, especially toward the back end of the year, your last statement about Take Shape For Life growing faster, we have a pretty easy compare, I'll say, in the second half of the year for Take Shape For Life versus Med Direct, because we really slowed spending so much. So we believe if we are more consistently spending, that actually Med Direct will grow healthily in the second half of the year, and that, of course, that improves profitability. But the return in that channel is high.

Okay. And then lastly, on the buyback, I think you said 1.3 million shares is the authorization to date. Is there any plan and how you deploy that timing, is it opportunistic? Are you just say we're going to complete this, this year?

I know you don't want to tip your hand. But what can we think there? Obviously, you've gotten a little more aggressive over the last quarter or two on buyback.

Yes, Scott, I personally think our stock is undervalued. So we will go well aggressively in the market to buy back shares, because we are very confident in the Company. So I think that's an important signal for us, and we think there is opportunity there from a Company perspective.

Scott, as you know, we bought back 786,000 shares last year, obviously at the very end of the year. That's not a strategy we expect to deploy this year. It won't happen right at the end of the year, of course it will happen throughout the year.

As I mentioned before, Scott the only reason we waited till the end of the year last year was because we couldn't buy it back because of the SEC settlement.

Mike, on your comment about putting together an M&A team, if you have a lot of confidence in your business, and it's trading at 6 times EBITDA, I don't think you're going to find a good growth business in this environment that you can buy for 6 times EBITDA, out in the M& A market. I would wonder why you wouldn't think about deploying all of your capital towards the buyback, rather than thinking about buying an acquisition outside of your core competency.

Scott, in fact right now we are where you are. We haven't found anything that we see, that is attractive enough. And we have been looking. So it hasn't been something where we haven't been. We won't make a move unless we see it being very accretive to Medifast.

Obviously the reason behind that is not just adding one and one and get two. So we think that the expansion, the peripheral kind of areas around weight loss, if we can take a customer today, and we do a very good job with the customer and they reach their weight goals, we certainly have a high risk of losing them. But if we can keep that customer for much longer and build confidence in the Medifast brand name, and take them beyond weight loss, then we hold onto the customer for much longer. So that initial acquisition of a customer, we get a much better return, that's where we're thinking on that.

Great. Thank you very much.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to management for any closing remarks.

First of all, we appreciate the support of Medifast, and everybody's participation on today's call. We look forward with providing you with an update on our Business.

We are actually going to schedule an investor conference in April, to go through in more detail, a lot of the product plans and detailed actions of what we're going to do to deliver the plan, and we'll have many of our executives there. And by the way, a lot of the products and information, so all of you can touch and feel what we're going to bring forward. So, we look forward to that, and thank you very much.

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