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Medifast, Inc. (NYSE:MED)

Q4 2013 Results Earnings Conference Call

March 10, 2014 04:30 PM ET

Executives

Katie Turner - ICR, Inc.

Michael MacDonald - Chairman and CEO

Meg Sheetz - President and COO

Timothy Robinson - Chief Financial Officer

Analysts

Scott Van Winkle - Canaccord Genuity

Mitch Pinheiro - Imperial Capital

Kurt Frederick - Wedbush

Michael Halen - Sidoti & Company

Operator

Greetings and welcome to the Medifast Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (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 begin.

Katie Turner

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 I would begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements, and the 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 statement. Medifast assumes no obligation to update any forward-looking projections that may be made in today's release or on the call today. 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 Chairman and CEO, Michael MacDonald.

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 then provide closing remarks, and we'll 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 in operating margin of 290 basis points.

As many of you know, our team has a comprehensive multiyear 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 has 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.

Now I will share update us 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’re 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 the direct sales channel Take Shape for Life was $51.7 million which is 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 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 businesses 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 of the second half of 2013 our team launched several initiatives to increase health coach growth, client acquisition and retention. Following our low attended national convention in TSFL history in July, Dr. Anderson launched his new book Discover Your Optimal Health which became The New York Times and USA Today bestseller. The leading 200 followers introduced thousands of new people to the Medifast brand and the innovative teachings of Dr. Ray 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 frontline volume to drive current revenues and future organizational growth. Also in September Medifast health coaches across the country took part of the first-ever Discover Your Optimal Health Day. At Owings Mills at our corporal 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 that Takes Shape for Life and also continuing the position Take Shape for Life is 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 are essential in gaining traction and increasing health coach incline acquisition and retention moving forward.

Already in 2014 we have launched our Stop Challenge Shoes 12 week health transformation with over 20,000 participants we kicked off the year with another media tour with Dr. Anderson 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, Saint 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 and the expense of full year profitability. Our goal remains to maximize the efficiency of our spending and this is demonstrated by improvement in overall revenue to spending ratio, company wide we saw ratio of 41:1 in quarter four 2013 as compared to 13:1 in quarter four 2012. Of course this resulted in a reduction in unique visitors, but with our focus on optimizing messaging and tracking the daily analytics, we are able to improve conversion rates from average order value.

Additionally, the reduction in spending did not stop our ecommerce 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 core action oriented offers with limited time windows to gauge effectiveness and we garnered some critical learning that has informed our 2014 new plans. In fact in the first quarter, we have seen encouraging results from our free shipping days; four week kit promotion, product offers and special incentives to generate new interest in motivate potential purchases.

We implemented improvements to our web analytics tracking, expanded the use of our multi-variant testing software, grew our email marketing platform and introduced new part of (inaudible) recapture capabilities. So every day, not only do we see our revenue details in our analytics we also see the actual results of all discounting and promotional activities. We launched 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 centers strategic plan and as we’ve shared, believe that this we will have a positive impact on our future financial performance.

The first step in our implementation was to close 8 underperforming corporate owned Medifast Weight Control Centers back to December 31, 2013. Additionally, we expect to sell of 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 then simultaneously transition to the franchise mode.

The closure of these centers and this initial transaction of centers to the franchise model are consistent with our long term strategy to better position the Medifast Weight Control Centers sales channel for profitable growth. Our current franchise partners opened 6 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 [sustain] on current revenue growth, 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 that 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% with again tracking this in November of 2011 and then 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 but at a reduced amount to drive more profitable growth, we were able to benefit a great deal from the earned media receipt from People Magazine, The Huffington Post, The Today Show, Women’s Day, First for Women, Women’s World, Adweek, Fox and Friends, Bloomberg TV and the recognition of Medifast placing 16th in America’s Best Small Companies by Forbes, just to name few.

These national placements coupled with the regional places 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 live healthier and happier lives, each day on all of the amazing success stories of customers who’ve 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 is a lifetime journey and Medifast wants to be there each step of the way. This is why we’re 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 in the new product and program categories will 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 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 a nutritionally balanced low calorie product lines which is essential for the continued enjoyment of Medifast meals by those in their weight loss journey.

As we look ahead, we’re very excited about our expansion plans to add complementary products and offerings to ensure offerings appeal not only 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 in launching in the first quarter our new options that can be used for the Lean & Green element of our plan. These convenient microwavable 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 few times a week. These expansion opportunities will position Medifast among a 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 to provide a comprehensive dashboard, tracking eating habits, exercise, water consumption, weight and body measurements and host of other things. This desktop and mobile app will also allow Medifast customers to integrate the devices and activity trackers to 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 a new proportioning system that will allow for greater in house efficiencies and capacities. Whether it’s the improvement of our owned facilities or the updated websites for purchasing Medifast products, we’ll continue invest in technological improvements to drive efficiencies and productivity.

Looking ahead, we believe there is great potential from 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 and in Bogota, Colombia. We are excited to see continued growth through our partnership with Medix which allows us to strategically expand the distribution of products in Mexico, Central America and South America.

Additionally, this morning we efficiently expanded our marketing efforts into Canada and are currently offering a range of products to Canadian customers on two new websites. We have planned to quickly expand the product offering in Canada during 2014. While we believe the global expansion is a key strategic initiative long term, we remain focused on selecting the right growth opportunities.

To further expand -- the further product expansion in our international growth 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 is a former President of Bausch & Lomb and has great consumer retail with international experience. Prior to Carl, Kevin Byrnes joined our Board in July; he’s extensive experience in the retail and commercial banking industries. We believe that both Carl and Kevin have strengthened our Board of Directors and we look forward to their contributions to Medifast.

Additionally in 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 for 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 the Baltimore Business Journal 2014 Outstanding Directors Award. I believe the benefits of the 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 the greater improvements should flow through our business as we implement our strategic initiatives.

In 2014, we remain focused on the following. Building tools to increase client and coach acquisition and retention in Take Shape for Life making 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 at our Medifast Direct sales channel; ensuring we have eCommerce 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, gaining the 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.

Timothy Robinson

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 of 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 8 corporate clinics in the fourth quarter and increased shipping charges related to the transition to our new WMS platform, which acquired shipping from a single location for a 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 and 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. 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 $1.6 million after-tax charge related to the closure of 8 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.

And now to review our guidance briefly, we expect first quarter net revenue to be in the 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 probably dependent on the timing of the transition of our corporate-owned clinics to 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 while we put 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, I’d like to turn the call back over to our Chairman and CEO Mike MacDonald.

Michael MacDonald

Thanks Tim. We believe our multi-channel healthy living business model allows us to benefit from the overall more diversified go-to-market approach in U.S. 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 our innovation in new products, programs and technology.

In closing, I am 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 to 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?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question is from Scott Van Winkle of Canaccord Genuity. Please go ahead.

Scott Van Winkle - Canaccord Genuity

Hi thanks good evening.

Michael MacDonald

Good morning Scott.

Scott Van Winkle - Canaccord Genuity

Hey Tim can we start with the gross margin commentary in Q4? You said refund and then shipping issue, can you go back to that again, I apologize.

Timothy Robinson

Sure, not a shipping issue. So we convert it over in Q4 our distribution center to the new warehouse management system. As you know we ship the West Coast customer from our Texas location and we ship kind of East Coast, (inaudible) East Coast customers from our Eastern Shore, Maryland location.

So we had to shut our Maryland location down and ship to the whole country from Texas and of course the cost of shipping over to the East Coast, we don’t charge the customer for that that was the cost born by us. So we have additional shipping charges for a couple of weeks while we shutdown Eastern Shore and did that transition.

The other things Scott is obviously the clinic closure; we took a charge, an expense charge of about $2.1 million mentioned before tax, $1.50 million after-tax for closure of clinics. But in addition to that part of it was the customers that are in the middle of their cycle and in fairness new customers we refunded money to customers that they had paid for us for joining the program that we're no longer got to deliver those services or we may have let them (inaudible) the food. So we just thought that was the right thing to do to customers that signed up on the program.

Scott Van Winkle - Canaccord Genuity

Yes, now and then what happens when you refranchise unit and based on one has prepaid the service component of their program do you end up transferring that to the franchisee?

Timothy Robinson

Yes. The customers not affect at all. So, whether we're operating the center or the franchisee is operating a center, the customer is certainly entitled to that service, that they paid for so no effect. This was for either just for the eight centers that closed.

Scott Van Winkle - Canaccord Genuity

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

Timothy Robinson

Yes. Right.

Scott Van Winkle - Canaccord Genuity

Okay. So with that, I have this weird little quandary, I have trouble getting down to your Q1 guidance. But to be quite 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 re-accelerate?

Michael MacDonald

Yes. Scott, we really look at it, 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 towards 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 sort of have that plan. So and in 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 the 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 we’re coming out with all the different launches that it really is going to have a bigger impact in the back half of the year.

Scott Van Winkle - Canaccord Genuity

Okay. So, you’ve got a quite a bit of spending in Q1 and may be not expecting to see that kind of translate into direct to consumer revenue here in the first quarter?

Meg Sheetz

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

Michael MacDonald

Lot of these products are not just traditional meal replacement Scott, like the 3 Lean & Green meals are going to be microwaveable, their meals we haven’t sold before. So as an example we’re going to launch some new meal replacements too, but generally the meal replacements might cannibalize another meal that somebody is using.

Scott Van Winkle - Canaccord Genuity

So, are those Lean & Green substitutes, are those frozen or are they shelf stable?

Meg Sheetz

They’re shelf stable. And we’re obviously as we continue to grow Medifast, we continue to explore multiple options for that Lean & Green meal as well.

Scott Van Winkle - Canaccord Genuity

Okay. And then last question for me, advertising in the fourth quarter, did I hear correct that the revenue you spend was like 41 or something?

Timothy Robinson

You heard correct.

Scott Van Winkle - Canaccord Genuity

So, you’re still less than $2 million in advertising in the fourth quarter?

Timothy Robinson

That’s right. It’s [just odd too].

Scott Van Winkle - Canaccord Genuity

Well and that’s all-in, I mean across all segments that you will spend against?

Timothy Robinson

Well, yes. 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 really is not impact on Take Shape for Life at all it’s really Med Direct. So that’s really where most of the spend is. There is certainly some spend in the clinics as well. But as we came out of the third quarter and entered the fourth quarter we mentioned we were going to closely monitor that spend. We were focused very much on profitability, but also kind of measuring out the last history to see when we spent the money on the advertising what was the lag effect from the spend and what was the result. And in the fourth quarter it’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.

Michael MacDonald

The other thing Scott when you look at it, 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 in advertising, you are spending that on a hundreds of millions. So advertising spend on a percentage against what we really are targeted to is still pretty good spend.

Scott Van Winkle - Canaccord Genuity

So then you come in, in January, February kind of turning the facet back on so to speak in advertising and you don’t get a return I hope, not putting words in your mouth on that spending. What do you think it is? I mean it’s, look at the terrible weight loss mass market weight loss environment out there I think everybody knows that sees it, is it just the environment.

Michael MacDonald

I see it as more the environment because I think we are working with Google, we are even 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 have done more like free shipping. We have done more certain discounting. So we are actually trying many things not just the advertising but also the offers along with the advertising. So we’ve been really working a lot more too on the offers to make sure, we are being aggressive enough thinking maybe, like example, our general customers generally somebody 30 to 65, 65% female $50,000 income, or maybe some of the people’s income have dropped a little bit and if you go after bringing someone back in as new customers.

So we are 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 can spend more money and still not really get the returns.

Scott Van Winkle - Canaccord Genuity

I think what I am trying to do too is to figure out where is the most affective place of spend, so the same dollar spend in two places is kind of a very different result and in some of the places where we traditionally spend digitally have become very expensive, just become crowded space?

Meg Sheetz

Yes. I mean as you know we were one of their early ones to get into web and investing on the web and now that certainly crowded space, the web investments are going up and so that price per lead or price per customer’s going up.

Scott Van Winkle - Canaccord Genuity

Okay, thank you very much.

Michael MacDonald

Welcome.

Operator

Thank you. The next question is from Mitch Pinheiro of Imperial Capital. Please go ahead.

Mitch Pinheiro - Imperial Capital

Yes, good aftertoon.

Michael MacDonald

Hi, Mitch.

Timothy Robinson

Hi, Mitch. How are you?

Mitch Pinheiro - Imperial Capital

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

Michael MacDonald

Yes. So Mitch to spread out a little bit, you will see in the release and other income, you will see a good portion of it there, you will see in depreciation, accelerated depreciation from the clinical assets are there and there is -- some of it was in netted out was in our deferred revenue, because you have to do -- basically eliminate deferred revenue. So, it’s spread a few different places in the income statement.

Mitch Pinheiro - Imperial Capital

So, is that going to be to delineated in the K?

Timothy Robinson

Yes, it’s all (inaudible) clearly in the K.

Mitch Pinheiro - Imperial Capital

Okay. There was some revenue impact you are saying…

Timothy Robinson

Revenue wasn’t a real material mix, but it -- there was some revenue impact. Yes.

Mitch Pinheiro - Imperial Capital

Yes, okay. And then second, what are you doing; I mean, where do you think health coaches grow to if at all in 2014?

Meg Sheetz

Yes, I definitely I think we’ll continue to see moderate health coach growth. I think that we obviously have the new compensation structure. Our [overall] compensation went live, other 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, they were watching coaches adjust; we’re seeing a lot of coaches who used to have high frontline volume trying to convert to more structure and were thinking who had only structure trying to create more frontline volume.

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

Mitch Pinheiro - Imperial Capital

Will you see health coach growth in the first quarter sequentially?

Meg Sheetz

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

Mitch Pinheiro - Imperial Capital

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

Michael MacDonald

Certain parts of the decline are coming from the fact that last year we did shutdown 13 total Weight Control Centers. You had revenue decline there. The other thing is we offered higher incentives to our franchisees who are now opening. As 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 4, 1 opened in Seattle, and in Washington. So, basically, we're up to 49 franchise centers now operating. But we used percentage of our revenue to help make it an attractive preposition for them to expand.

So we’ll see some revenue decline because of that. So, you’re see some of the decline come from things we’re doing intentionally to drive franchise opportunity. So clearly we have 49 franchises now and we convert the other 15 that we’re working on for Medifast centers, we’d have 59, 64 hopefully by the time we get to the end of the second quarter.

Mitch Pinheiro - Imperial Capital

Okay, that was helpful. So for the full year, a wide range, $340 million to $380 million on revenue; at the $340 million level, what does that assume as far as company owned weight-loss center to franchise conversion?

Timothy Robinson

It assumes, the majority of them convert over.

Mitch Pinheiro - Imperial Capital

Okay. And $380 million assumes no conversion?

Timothy Robinson

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

Mitch Pinheiro - Imperial Capital

Okay. And then last question from a gross margin perspective; is the Lean & Green microwavable meals, are they at the same margin level or is that a lower margin than your typical product?

Michael MacDonald

It’s a lower margin than our typical products, still very healthy margin but it’s a lower margin than our -- the products that we manufacture for the meal replacement.

Mitch Pinheiro - Imperial Capital

Are the other new products sort of similar to the current margin?

Meg Sheetz

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

Timothy Robinson

It’s a mix Mitch of things that are traditional margins than at somewhat of a lower margin.

Mitch Pinheiro - Imperial Capital

Okay.

Timothy Robinson

Still very healthy margin.

Michael MacDonald

Still healthy margin.

Meg Sheetz

Right.

Michael MacDonald

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

Timothy Robinson

And they’re all incremental, obviously were incremental dollars at the 6 meal today we only sell the first 5 meal, so there will be incremental dollars, but again a slightly lower margin.

Mitch Pinheiro - Imperial Capital

Right. And then just last question, so what should we expect for advertising spend in the coming year?

Timothy Robinson

So our plan for the year advertising spend was to ramp spend back up to more traditional level for us which in our Med Direct area, it’s typically around 30% of revenues and we’ll gauge that, monitoring that closely, and we spend the dollar if we don’t see a return, we’ll reinvest that dollar in the promotions or other things. And then in our clinic model, we advertise roughly about 15% of our revenues in that model. So, that’s kind of been somewhat of the traditional approach here at Medifast last year was a departure from that but that’s baked into our plans.

Mitch Pinheiro - Imperial Capital

Okay. All right, thank you very much.

Michael MacDonald

Thank you.

Operator

Thank you. The next question is from Kurt Frederick of Wedbush. Please go ahead.

Kurt Frederick - Wedbush

Hi, thanks. Just a few questions, one is on the share buyback activity. What is the current share authorization?

Timothy Robinson

It’s just over 1.3 million shares total. That includes the additional 1 million shares just recently authorized.

Kurt Frederick - Wedbush

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

Timothy Robinson

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

Kurt Frederick - Wedbush

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

Timothy Robinson

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

Kurt Frederick - Wedbush

Okay. And it’s been I guess a little over a year since you laid out the five year plan; a lot of stuff has happened I guess since then. I just wonder if you could maybe talk about where you are kind of at or ahead or behind plan and kind of what your expectations are?

Michael MacDonald

Yes, 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 are starting to ramp up. So we feel good that they are making improvements in Mexico. We just started with our first two websites in Canada opening up today. So, we are now in Canada; we started -- we are in Colombia now in 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 M&A committee within Medifast with our Board and we are going to be looking at adjacent opportunities to expand into healthy living. So, we are with our cash position and our health, and we have tremendous cash generation as you saw again in 2013. We see -- there is opportunities out there that maybe 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.

Meg Sheetz

So, I think from a strategy perspective, the difference in the strategy previously was it was [turned ] around expansion with the current weight loss products that we have, and I think what’s great about our newer updated strategy over there, we feel we can accomplish really good things over the five years is more around the healthy living which definitely puts us in a broader market place than just weight loss.

Kurt Frederick - Wedbush

Okay. And just one just to know (inaudible) weather on the call, I just wonder if you can maybe comment kind of what you’re seeing maybe across the different segments in Q4 and Q1?

Michael MacDonald

I mean clearly we haven’t had good weather but we’ve had a lot of centers shutdown and all those kind of things, but I don’t want to use natural events as any reasons for anything happening. So, I am sure there is issues out there but from our standpoint, I mean I think the real issue is we’ve got to execute very, very well in the core business, while we are trying to focus on other growth opportunities and growth areas. And we are 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 are going to be in a tremendous place with less SG&A and improved profitability and we feel the track we’re on is 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 to 180 and never left it despite the fact we probably missed our plan in revenue by $40 million.

Kurt Frederick - Wedbush

Okay. All right, that’s helpful. Thank you.

Operator

Thank you. The next question is from Michael Halen of Sidoti & Company. Please go ahead.

Michael Halen - Sidoti & Company

Good afternoon. With soybean prices down year-over-year, do you expect some improvement in gross margin in 2014?

Meg Sheetz

We were always looking for improvements in gross margin, I’d say that this as much as that’s gone down, there are other areas that have gone up significantly from a raw material perspective. So I think at this point, we would think that they would be pretty stable as to what they are today.

Michael MacDonald

Yes, we didn’t expect Mike in our guidance, in our plans for next year, we're not expecting a decline in raw materials cost overall.

Michael Halen - Sidoti & Company

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

Michael MacDonald

I don’t really think there is a whole lot of cannibalization. I mean to be honest Mike, I go to most of the major Take Shape for Life meetings and I just get back from one of the recognition trips they had and we don’t really hear a lot about that. I mean they’re complaining once in a while that 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, but…

Meg Sheetz

And if you remember the Take Shape for Life model obviously is more relationship based and so often times the customers don't overlap and must be too slim to overlap. So on every Med Direct order, we ask them if they want a health coach and investigates and we take the first order in the Medifast Direct channel and move them over to Take Shape for Life under 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're 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.

Michael MacDonald

And I think, if you look at it, Mike our leadership in Take Shape for Life, Dr. Andersen and Dan Bell, our Presidentials, we have terrific leadership out there. I think 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 multilevel space. And now some of the other multilevel companies are selling in the multilevel weight-loss space against us.

So, we're seeing more competition than we saw before, but you still have to look at 6% growth last year was, [urban life] I think had about 8% growth in the United States in multilevel and they amounted in the highest and we grew right up there. So, we still had good performance when you look at the U.S. market and most of those other multilevel level firms had huge growths in China and other parts of the world.

Michael Halen - Sidoti & Company

Okay. And last one; excuse me if you had already mentioned it. What were the same-store sales in the corporate centers in the quarter?

Timothy Robinson

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

Michael Halen - Sidoti & Company

Okay. Thank you very much.

Operator

Thank you. The next question is from Scott Van Winkle of Canaccord Genuity. Please go ahead.

Scott Van Winkle - Canaccord Genuity

Hi, thanks. When you look at that guidance for 2014, whether low-end, high-end and the middle wherever you want, is there -- what kind of mix assumption is baked into what would appear to be margin improvement in ‘14 over ‘13 regardless of the revenue? I would think clearly clinics are going to be more profitable, we all know that from what you’ve done, but I would assume that you’re assuming the direct response segment grows at a slower rate than Take Shape for Life given current trends and I think that direct response segment is meaningfully the highest margin business, isn’t it?

Michael MacDonald

Actually Scott, as you get towards, especially towards 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 Med Direct because we’re really slow at spending so much. So we believe if we’re more consistently spending then actually Med Direct will grow healthily in the second half part of the year and of course that improves profitability. The return in that channel is high.

Scott Van Winkle - Canaccord Genuity

Okay. And then lastly on the buyback I think you said 1.3 million shares of authorization to-date, is there any plan on how you deploy that timing is it opportunistic or are you just going to say we’re going to complete this year and I know you don’t want to tip your hand, but what can we think there, obviously you’ve gotten little more aggressive over the last quarter or two on buyback?

Michael MacDonald

Yes, I mean Scott; I personally think our stock is undervalued, so we will grow aggressively in the market to buyback shares because we’re 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.

Timothy Robinson

Yes, Scott as you know we bought back 780,000 shares last year, obviously very end of the year, that’s not the strategy we expect to deploy this year. So it won’t happen right at the end of the year of course it will happen throughout the year.

Michael MacDonald

Yes. As I mentioned before Scott the only reason we waited at the end last year because we couldn’t buyback because of the SEC settlement.

Scott Van Winkle - Canaccord Genuity

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

Michael MacDonald

Yes. And Scott in fact we right now we’re where you are, we haven’t found anything that we see that is attractive enough and we’ve been looking so I mean that hasn’t been something where we haven’t been and we won’t make a move unless we see it being very accretive to Medifast.

Timothy Robinson

Scott, I mean obviously the reason behind that is not just add one on one and get two. So we think that the expansion the preferable 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 could keep that customer for much longer and build confidence in Medifast brand name and take them beyond weight loss than we hold on to a customer much longer. So that initial acquisition cost of a customer and you get a much better return that’s kind of where we are thinking on that.

Scott Van Winkle - Canaccord Genuity

Great, thank you very much.

Operator

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.

Michael MacDonald

Yes. First of all, we appreciate the support of Medifast and everybody’s participation in today’s call. We look forward with providing you with an update in our business. We are actually going to schedule our investor conference in April to go through in more detail a lot of the product plans and detail actions we are going to do to deliver the plan. We will 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 are going to bring forward. So we look forward to that and thank you very much.

Operator

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.

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