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Executives

Katie M. Turner - Senior Vice President

Michael C. MacDonald - Executive Chairman and Chief Executive Officer

Brendan N. Connors - Chief Financial Officer

Margaret E. MacDonald-Sheetz - President, Chief Operating Officer, Director and Member of Executive Committee

Analysts

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Michael Halen - Sidoti & Company, LLC

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Scott Van Winkle - Canaccord Genuity, Research Division

Medifast (MED) Q2 2012 Earnings Call July 26, 2012 4:30 PM ET

Operator

Greetings, and welcome to the Medifast Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Katie Turner for opening remarks.

Katie M. Turner

Thank you. Good afternoon, and welcome to Medifast's Second Quarter Fiscal 2012 Earnings Conference Call. On the call with me today are Michael MacDonald, Executive Chairman of the Board of Directors and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; as well as Brendan Connors, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ending June 30, 2012, that went out this afternoon at approximately 4:05 p.m. Eastern Time. If you've not received the release, it is available on the Investor Relations portion of Medifast's website at www.choosemedifast.com. This call is being webcast and a replay will be available on the company’s website.

Before we begin, we’d like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. The words 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 release or posted on our call that is on our website.

Medifast does not comment on issues or items currently or potentially in litigation with adversarial third parties and/or under investigation by appropriate regulatory or law enforcement agencies of the state or federal government. All of the forward-looking statements contained herein speak only as of the date of today's call.

And with that, I'd like to turn the call over to Medifast's Executive Chairman and CEO, Michael MacDonald.

Michael C. 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 business initiatives. I will also provide more color on areas of the business we are seeing improvement and discuss the areas that we plan to address to best position Medifast for future growth and profitability. Brendan will review the financial results for the second quarter in more detail, and discuss the second quarter 2012 revenue and EPS outlook. I will then provide some closing remarks. We will open up the call to take your questions.

I'm pleased to report we realized strong sales momentum across each of our primary distribution channels: Take Shape for Life, Direct Response Marketing, Medifast Weight Control Centers and Wholesale Physicians. As a result, we exceeded our expectations on the top line, as well as the bottom line after backing out a $3.7 million expense, which I will discuss in more detail in a few minutes.

In the quarter, our executive team remain focused on reviewing and optimizing our overall cost structure to further leverage our sales momentum, improve our margins and deliver improved earning results, while continuing to focus on enhancing the customer experience in each of our sales channels.

After just one quarter of implementing our Medifast Weight Control Center cost realignment, we were able to generate a profit in the segment. We believe this illustrates that we're taking the right steps to best position Medifast for increased earnings and strong cash flow generation, long-term.

Now I'll provide an overview of our second quarter results. The number of active health coaches was flat sequentially at 10,200 from the first quarter of 2012. In the quarter, we continued to work on improving our health coach client acquisition and retention. The average revenue per health coach per month increased to $1,683 from $1,615 in the second quarter of 2011, an increase of 4%. We're pleased with this acceleration in health coach productivity in the quarter, as we begin to see positive results from our efforts to improve overall performance in Take Shape for Life.

Take Shape for Life celebrated its 10th anniversary in Maryland last week, with 2,400 health coaches in attendance at the annual convention. I had the opportunity to attend it, and it was great to see some of you from the investment community there. The convention was a tremendous success, as our team, led by Meg Sheetz and Michelle Jones, continues to work diligently to provide our health coaches with the necessary education, tools and support to generate business outside of their circles of influence or war [ph] market, which often includes families and friends and their community. At these events, leaders are taught skills and techniques to help further develop their own team of health coaches that they mentor.

This year, we launched 11 new products including new Medifast to go! meal replacements, with our Mixed Berry and Cinnamon & Brown Sugar Cereal Crunch, Parmesan and Chili Nacho Cheese Puffs, and a Mocha Ready-to-Drink Shake. We understand that our clients lead busy lives. And in listening to their needs, we saw that expanding our portable Medifast products is critical to their success, as we help support our clients' weight loss and health goals.

We also unveiled plans for an online community and new mobile apps coming this fall, including the My TSFL virtual support program for coaches and clients to track their weight, meals, measurements, as well as communicate through virtual support groups. And more, all from the mobile device or their dedicated webpage.

Our Office In Motion, back-office mobile app and health coach web page is also coming this fall, will help coaches to track their client's daily, weekly, monthly, as well as access key data, including business progress reports. In addition, we upgraded our replicated websites with new functionalities for our coaches, and launched new client acquisition and business opportunity tools. We are specifically creating high-impact learning experiences at every event we host for our health coaches, as well as creating a full year of calendar incentives to drive client and health coach acquisition.

As our leaders continue to develop their training and mentoring skills, we'll be able to more effectively recruit new health coaches. While these are strong steps in the right direction for the Take Shape for Life sales channel, our team is continuing to invest in dedicated resources to support our corporate and field leadership team through an emphasis on simplifying the opportunity, training, new market development, events and incentives. We believe these events, along with all of our other exciting Take Shape for Life initiatives, should help provide momentum in 2012, and place Take Shape for Life in a position to experience growth and health coaches and revenues long-term.

Now I'll spend a few moments discussing our Direct Response Marketing channel. Our team continues to effectively manage this business and strategically spend on marketing and advertising to drive sales. In the quarter, Direct Response revenue increased 17% to $22.5 million and achieved a 2.8:1 revenue-to-spend ratio. We continue to generate more targeted and effective advertising of Medifast portion-controlled meal replacements. Our marketing team continues to focus on the overall integrated marketing strategy by effectively spending advertising dollars via the Web, print, radio, TV and direct mail. We have developed exciting new marketing materials and our Become Yourself advertising campaign using real Medifast success stories.

Following to that, I'd like to spend some time discussing our Medifast Weight Control Centers and Medifast Wholesale Physicians sales channel. We experienced strong unit growth in 2011 and in the second half of 2012. We have consistently increased our same-store sales with a 19.3% same-store sales increase in the second quarter of 2012.

We continue to evaluate ways to provide superior customer service and support to meet the needs of clients seeking additional support and accountability in their weight loss and weight management. We're very pleased with our ability to realize a second quarter pretax earnings of $700,000 as compared to a $2.2 million loss in the first quarter of 2012 in the Medifast Weight Control Center and wholesale sales channel, as we drive sales and have done an excellent job executing on our cost-savings initiatives. In the second quarter of 2012, we opened 13 new corporate centers, and ended the quarter with 88 corporate and 32 franchise centers.

Recently, our executive team made the strategic decision to focus on new and existing franchise unit growth versus corporate center growth in the Medifast Weight Control Center sales channel to further reduce our corporate capital investment and create higher returns in this sales channel long-term. We will finish 2012 with 89 corporate centers, and in 2013, focus on optimizing the customer experience, sales and profit of the current corporate center base. In addition, we will allow existing and new franchisee partners to expand into additional cities in 2013.

In the second quarter, we also announced the strategic partnership with Medix, a leader in pharmaceutical obesity products in Mexico. Medifast has an exclusive license to distribute Medifast meal replacement products and programs through physicians and Weight Control Centers in Mexico under the Medifast brand. Medix will introduce the Medifast product line through its extensive physicians network, and plans to open approximately 30 Weight Control Centers over the next 2 years. We believe this partnership offers us the opportunity to grow internationally with very little capital outlay and attractive returns long-term.

Finally, I'd like to discuss our bottom line performance for the second quarter. Net income was $2.8 million or $0.20 per diluted share, compared to net income of $5.9 million or $0.41 per diluted share in the comparable period last year. These results reflect a proposed agreement with the FTC. This agreement resolves the FTC's nonpublic investigation of certain statements in our advertising for weight-loss programs. The FTC expressed concerns that some of the company's advertising contained claims which were not compatible with current standards for substantiation. For example, in line with the FTC's recently-published consumer research, the FTC objected to the company's use of the words "up to" in conjunction with advertised weight-loss claims. As a leader in the weight-loss industry, we are committed to fairly providing consumers with as much information as possible, and have agreed to modify certain advertising claims in this regard.

In addition, we agreed to ensure that Medifast clinical studies meet the protocol contained in the proposed consent agreement. As a result, we agreed to pay a civil penalty of $3.7 million without conceding any wrongdoing or liability to resolve the FTC's concern and avoid protracted legal proceedings. This information was also disclosed in a separate release today, and does not affect the ongoing operations of Medifast.

Excluding this expense, net income for the second quarter of 2012 would have been $6.5 million or $0.47 per diluted share, ahead of our expectations for earnings per diluted share in the range of $0.37 to $0.41.

Going forward, I want to reiterate that we are intently focused on improving profitability and continue to implement significant initiatives to address this through the remainder of 2012 and beyond.

The Medifast business model evolution has allowed us to realize strong top and bottom line growth, as well as strong cash flow generation. We believe our multichannel weight-loss and weight management business model allows us to benefit from cross channel synergies and overall more diversified go-to-market approach.

We are excited about our future growth prospects in each of our 3 primary distribution channels, and we'll work consistently to make the necessary adjustments in 2012 to improve our operational efficiencies and overall effectiveness across our distribution channels.

In addition, we continue to believe that our vertically integrated operations and increased capacity will allow us to continually improve the long-term leverage of our business model for increased margin expansion and long-term profitable growth.

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

Brendan N. Connors

Thanks, Mike. Net revenue for the 3 months ended June 30, 2012, increased 20% to $93.6 million from net revenue of $78.3 million in the second quarter of the prior year. The Take Shape for Life sales channel accounted for 60% of the total revenue. Medifast Direct accounted for 24%. Medifast Weight Control Centers and Wholesale Physicians accounted for 16% of total revenue.

Focusing on our sales channels in more detail. Our direct sales channel, Take Shape for Life, experienced revenue growth of 13% to $55.7 million compared to the same period last year. Take Shape for Life growth was driven by increased customer product sales as a result of an increase in active health coaches.

The number of active health coaches at the end of the second quarter of 2010 -- of 2012 was 10,200, and the average revenue per health coach per month increased to $1,683 from $1,615 in the second quarter of 2011, an increase of 4%.

The Medifast Direct sales division revenue increased 17% to $22.5 million as compared with $19.3 million in the second quarter of 2011. Due to a more effective advertising message, more targeted advertising through extensive analytical analysis, additional public relations' success in large national publications and reducing product discounts, the company experienced a 2.8:1 return on advertising or revenue-to-spend ratio similar to the second quarter of 2011.

In the second quarter, the Medifast Weight Control Centers and Wholesale Physicians channel revenue increased 59% to $15.4 million, primarily due to strong organic growth from the opening of new corporate and franchised locations and the year-over-year improvement in comparable store sales of 19% for centers open greater than one year. We had 46 Medifast Weight Control Centers in the comparable store base at June 30, 2012. We opened 13 new centers in the second quarter for a total of 88 corporate and 32 franchise centers.

Gross profit for the second quarter of 2012 increased 19% to $70.1 million, compared to $59 million in the second quarter of the prior year. Our gross profit margin decreased 40 basis points to 75% versus 75.4% in the second quarter of 2011.

The gross profit margin decrease was primarily due to increased commodity and shipping costs, as well as incentives and discounts during the period.

Selling, general and administrative expenses increased $15.6 million to $65.5 million in the second quarter of 2012 versus $50 million last year. As a percent of net sales, selling, general and administrative expenses were 70% compared to 64% in the second quarter of 2011.

As Mike mentioned earlier, the largest increase in selling, general and administrative expenses was related to a $3.7 million expense associated with a proposed agreement with the FTC, resolving the FTC's nonpublic investigation of certain statements in the company's advertising for its weight-loss program and it does not affect the ongoing operating activities of the company.

Excluding this charge, second quarter of 2012 selling, general and administrative expenses would have been $61.8 million or 66.1% of net revenue, primarily due to Medifast Weight Control Centers and Wholesale Physicians channel, improving from a loss of $2.2 million in the first quarter of 2012 to a gain of $700,000 in the second quarter of 2012. Cost savings were primarily realized in personnel and advertising expense.

Take Shape for Life commission expense, which is variable based upon the product sales, increased by approximately $3.5 million as TSFL sales grew 13% compared to the second quarter of 2011.

Salaries and benefits increased by approximately $3.1 million in the second quarter of 2012 as compared to last year. The increase in salaries and benefits is due to hiring of employees to support the Medifast Weight Control Centers and new hires in our information technology, human resources, finance, Take Shape for Life and marketing departments to support growth.

Sales and marketing expense increased by $1.4 million in the second quarter of 2012 as compared to last year. This increase primarily consisted of $1 million of additional advertising in the Medifast Direct channel.

Operating income for the second quarter of 2012 was $4.6 million compared to $9 million in the same period a year ago. Our operating margin was 4.9% in the quarter, compared to 11.6% in the second quarter last year.

The decrease in operating income is due to the previously-described increase in selling, general and administrative expenses. Excluding the previously-mentioned expense, operating income for the second quarter of 2012 would have been $8.3 million or 8.9% of net revenue as compared to 6.9% in the first quarter of 2012, a margin increase of 2%.

Our effective tax rate was 48.9% compared to 35% in the second quarter of 2011. The increased effective tax rate is a result of the FTC-related expense not being deductible for income tax purposes.

We anticipate a tax rate of approximately 38% to 39% in fiscal 2012. This is an increase from the 36% to 37% effective tax rate previously expected as a result of the one-time FTC nondeductible expense.

During the second quarter of 2012, the company recorded a one-time $0.8 million gain in other income associated with the proceeds from a key man insurance policy for the company's former Executive Chairman of the Board. This was offset by accelerated compensation expense of $0.4 million owed to the former Executive Chairman. This was included in the company's second quarter earnings expectation.

Second quarter's net income was $2.8 million or $0.20 per diluted share compared to $5.9 million or $0.41 per diluted share in the second quarter of 2011. Excluding the second quarter expense previously mentioned, net income would have been $6.5 million or $0.47 per diluted share. The company's balance sheet remains strong, with stockholders equity of $79.4 million and working capital of $48.9 million as of June 30, 2012. Cash, cash equivalents and investment security for the second quarter of 2012 increased $22.8 million to $56.6 million compared to $33.8 million at December 31, 2011.

Now focusing on a few items as it relates to our financial outlook. We expect third quarter of 2012 net revenue to increase in the range of 16% to 20% or $88 million to $91 million. Earnings per diluted share are expected to be in the range of $0.37 to $0.40 based on an average weighted diluted share count of 13.8 million to 13.9 million.

The third quarter of 2012 earnings guidance includes $950,000 expense for the annual Take Shape for Life convention. The full cost of the convention is included in the third quarter.

That concludes our financial overview. Now I'd like to turn the call back over to the Chairman and CEO, Michael MacDonald.

Michael C. MacDonald

Thanks, Brendan. In closing, while we are pleased with our improved financial performance for the second quarter, our executive team remains focused on continuing to increase our operating efficiencies and effectiveness across each of our sales channels to improve profitability and increase shareholder value long-term. We believe Medifast is still in the early innings of its business evolution. We're excited about the future growth opportunities and look forward to sharing our future progress with you.

Now Brendan, Meg and I are available to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Mr. John San Marco with Janney Capital Markets.

John P. San Marco - Janney Montgomery Scott LLC, Research Division

With regard to the FTC agreement, how long -- when do you expect to hear back from them? And -- or I guess, when would you expect the $3.7 million offer to become effective?

Michael C. MacDonald

John, I think we should hear back from them in 3 to 4 weeks. But basically, it has to be approved by the commissioners of the FTC, and we should hear back in that timeframe.

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Okay. And then just last question on that topic. Can you explain the relationship between that payment and this disclosure today and the 1992 agreement? What's the relevancy of that 1992 consent order?

Michael C. MacDonald

Well, we had a 1992 consent order and basically, what they've said is, because of some of our claims, they believe we violated the 1992 consent order. And we are basically agreeing to disagree, but we just feel that, as a company -- and I'm trying to make sure that I clean up any issues and get the company to move forward in the proper way. And we just felt rather than having protracted litigation that I felt would have cost us equally as much, if not more, if we did that, that this is the best option because now we've worked out -- I believe, it's a 15-year agreement that we will have guidelines that we feel are ones that we will conform to and take us into the future.

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Okay. That's helpful. And then switching subjects to health coach growth. How do I -- how should we think about the way you guys balance your short-term incentives and promotional programs that you -- it seems like you've been using more of recently to boost health coach growth, versus simply improving the everyday terms of the compensation structure? What are the pros and cons to the approach it seems like you've taken this year. And correct me if I'm wrong, it seems like you've taken an approach this year to use more promotions and, sort of, create some short-term excitement.

Michael C. MacDonald

By the way, we have not changed -- our compensation plan has stayed the same. So we have a very good compensation plan that I think is perceived very favorably by our Take Shape for Life health coaches. And basically, a lot of the incentives are small things that get people motivated like an iPad you could win, or this or that. But, Meg, why don't you comment?

Margaret E. MacDonald-Sheetz

Yes. And the incentives that we've been driving, like, the last 2 months to get this to the convention that was just last week, we drove small incentives where people would enjoy luggage [ph] for and it could have been anything from new client acquisition to bringing a certain percentage of their team to convention. So we've -- the positive things for us is that the incentives are driving multiple actions within our field, and we don't feel like those incentives are driving the current behavior. They're existing and kind of motivating people in the actions. But they're not -- if we stopped incentives tomorrow, we wouldn't see a change. We feel like the things we've implemented along with the current comp plan is incentivizing folks correctly.

Operator

Our next question is coming from the line of Mr. Michael Halen with Sidoti.

Michael Halen - Sidoti & Company, LLC

I just have a couple quick questions. I guess one is just a modeling question. At the Investor Day, you mentioned that the corporate Weight Control Center expansion was finished. But were there any opened in July?

Brendan N. Connors

There was just one additional center opened in July, so we had 88 open at the end of Q2, one additional in July and that will finish up the year -- so we'll finish the year with 89 corporate centers, Mike.

Michael C. MacDonald

And the other thing to clarify, Mike, the ones that Medix opens in Mexico are really Medifast-branded by their company. They're really not franchises. They're Medix opening with Medifast as a name. But they're a company owned by Medix and we'll make the money on those.

Michael Halen - Sidoti & Company, LLC

Okay. So they'll work like a franchise but technically, they're not called a franchise.

Michael C. MacDonald

Yes, they're not...

Brendan N. Connors

It's not a franchise agreement with them.

Michael Halen - Sidoti & Company, LLC

Okay. Also, I'd like to back out the one-time expense. Would you be able to give me the exact figure of the FTC charge or is $3.7 million, is that exact?

Michael C. MacDonald

Until it's approved by the commission of the FTC, we can't really -- $3.7 million is what's in the agreement that we signed and sent back to them. But the commissioners could change that if they felt that was appropriate, but we feel fairly comfortable that we've had good honest negotiations with them and are hoping that it stays in that range.

Michael Halen - Sidoti & Company, LLC

Okay, great. And last one. Can you just talk a little bit about the radio and TV ad spending? And what kind of increase you're going to look at in terms of the back half of this year?

Michael C. MacDonald

Yes, we've -- one of the things we're trying -- I think we've had pretty consistent -- we're spending quite a lot of money and have increased our spending by probably 15% in the marketing areas. One of the things we're trying is starting in September, we are going to go national in Notre Dame radio to 12 million viewers on about 140-something stations through a deal with Notre Dame as a partner with Westwood One. So we'll have 4 Medifast ads, 2 30-second spots and 2 15-second spots. And I think that's the first time we've done something that comprehensive to get our name out at a national level.

Operator

[Operator Instructions] Our next question is coming from the line of Mr. Kurt Frederick with Wedbush Securities.

Kurt M. Frederick - Wedbush Securities Inc., Research Division

I've got a question on the shift over to the franchise centers. Do you have an idea as far as growth in the franchise centers over, I guess, the remainder of 2012 and then into 2013?

Michael C. MacDonald

Yes, Kurt, so far, we feel a terrific opportunity. We have some of our bigger franchise owners already committing to look at over 40 units over the next 3 years just from 3 individuals. So we see a great opportunity here as we go out and recruit more potential franchise operators. And I think what we want to try to do is create people -- create potential partners who want to do 4, 5 or 6. We don't want to do "one at a time" type of things. So we're going to work hard on that. But we feel very, very confident that if you look at Mexico and if you look at what some of our own franchise operators are going to do that we can make this a very, very positive movement for us as a company.

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Okay. So is a lot of it going to pick up, then, probably next year?

Michael C. MacDonald

Yes. We will start to implement more franchises and we'll give more guidance on that as we get towards the end of the year, but we expect franchise units to open next year, yes.

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Okay. And then, just quickly on the profitability of your existing centers. Pretty big swing from last quarter to this order to get profitable as far -- what's profitability going to look like going forward?

Michael C. MacDonald

We -- I expect to make continued progress in profitability. I am focused on really optimizing our profitability and trying to make sure Medifast becomes not only a revenue producer, as I talked to you about before, but that we consistently improve our productivity. So we're looking at all areas of the company. In fact, right now, we're working on a 5-year plan for the company where we're talking about how we consistently improve our cost productivity and how we've got to consistently improve our ability to drive revenues. So we're going to continually look at that, and I expect our clinic profitability to continue to improve.

Operator

Ladies, and gentlemen, our next question is coming from the line of Mr. Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity, Research Division

So I joined the call late, I apologize if I repeat anything. But so at Take Shape for Life, the metrics look good with the exception of kind of flattish health coach figures. When you're giving guidance for Q3 -- you don't have to give me a number, I'm not expecting a guidance to a health coach number, but are you kind of assuming or embedding in that forecast kind of a flattish type of health coach number, net quarter-to-quarter?

Margaret E. MacDonald-Sheetz

Yes. We don't for -- what we talked about before is by the next earnings call, we would actually like to be able to give more data around Take Shape for Life to give you a bit bigger and better picture of what the future of Take Shape for Life looks like. We are very excited that we have quite a bit of new clients coming on board, which actually is the key -- one of the key indicators in how many health coaches we'll end up with. We feel confident on the health coach number will move, so the plan is not to have flat quarter-over-quarter. We do feel like dropping the training in the middle of the second quarter. It's just taking time to slow that training through, but we are seeing progress, and we've launched even more materials at convention to drive that progress further.

Michael C. MacDonald

Let me put it this way. From my standpoint, I've been in business for over 40 years in big companies, I thought that was one of the best events I've been to and I complimented our management team on the execution. And that's really where we want to go to. We want to go to being a company that executes better than other people, and that's really what our focus is on.

Scott Van Winkle - Canaccord Genuity, Research Division

Yes. So speaking with that, Meg, at the end of that convention, I'm sure you had a thousand conversations. What was the 1 or 2 things that health coaches kind of mentioned was the big takeaway from the event?

Margaret E. MacDonald-Sheetz

Yes. Number one thing that I've heard of, without a doubt, is that -- in previous calls I've mentioned that Take Shape for Life is really missing some of the how-to resources for coaches to walk away and understand how to do something. We did a lot of talking at people's, at convention this year. Our leaders provided how they actually did it to our other health coaches, and that was what the health coaches themselves told me that they took away was: their time management skills were stuck, they got a whole lesson on time management; they were afraid to go outside of their realm of influence, the leaders taught how is -- who they go to, how they create lists to get out there. And that was the most fundamental takeaway for most everyone I talked to was that how do I do it and now they know how and actually have the physical document that they can retrain with themselves and coach their young coaches under them.

Michael C. MacDonald

And Scott, I also think Tony Geary and Robin Sharma did a good job as outside people coming in and really talking about things that can help a health coach. And I thought that was extremely positive.

Margaret E. MacDonald-Sheetz

And we did get some good kudos in the fall, and you heard at the convention, we are launching the back office in an app format and upgrades to the back office, which will be tremendous to helping people look at their businesses more effectively. And we're also launching a new -- like My TSFL community along with stuff like meal tracking and all related to the TSFL side of the business. So that was another -- they're excited for that to come this fall.

Scott Van Winkle - Canaccord Genuity, Research Division

And the profitability of Take Shape for Life, I would assume it went up. Did it go up commensurate with sales or at a faster rate to sales? And I wonder what that margin looks like in Take Shape for Life.

Brendan N. Connors

Right now, Scott, we speak on the overall segment, the Medifast segment, which includes both Direct Response and the Take Shape for Life business. That overall segment did about 11.8% pretax profit in the second quarter.

Margaret E. MacDonald-Sheetz

And obviously, my goal within Take Shape for Life is to increase the profit. I always work on the profit of that business division, and every business division we have. So we'll continue to see improvements there.

Scott Van Winkle - Canaccord Genuity, Research Division

Yes. Some of your peers in the publicly-traded direct sellers are generating contribution margins well in excess of what I think Take Shape for Life is doing. So I'm just -- I'm wondering if volume is -- particularly with volume for our health coach rising, I would've assumed that the profitability margin would have gone up. So Brendan, you gave a number, but that was up year-over-year. I haven't seen all the numbers, so I'm...

Brendan N. Connors

That was just for the quarter, 11.8%, yes. And the answer is yes, Scott. I mean with additional volume, the profitability in Take Shape for Life saw a slight incremental uptick.

Michael C. MacDonald

Yes. And by the way, I see that as a big opportunity Scott, going forward. I think I have a great margin opportunity in Take Shape for Life, which I'm very excited about.

Scott Van Winkle - Canaccord Genuity, Research Division

And then on clinics, you took the big, kind of, restructuring the clinic division that's beginning of the quarter, end of last quarter. And you're talking about profits and improving in the clinics division. What drives that from here? Is it just volume? Forget the shift to franchise, that is obviously better for margin. But at this point, what drives incremental profitability of the company on clinics, is it just volume or is it more change likely coming?

Michael C. MacDonald

I would say, it's a accommodation of both. I think one of the things we're going to get is we're going to get more volume of sales from the clinics as some of them mature. Because as an example, we have clinics in Texas 2 years ago that weren't that profitable and this year, their performance is very, very good. And as they're out there longer, they mature and they get better, and we're going to make sure we're looking at that and continuing to try to be effective with our balance between personnel, marketing, looking at the cost structure. And I think the professionalism of the management now that we have in there is going to give us someone who has a very good understanding of how to make money out of this business, and that's what we're going to do.

Scott Van Winkle - Canaccord Genuity, Research Division

And then last question on the FTC. If I were to look at a print ad 6 months from now versus 6 months ago for Medifast, what would be the difference that I'd see in that message as a result of this change?

Michael C. MacDonald

The difference in the message, in my mind, would be of -- not a whole lot, very minimal change. It's just a few small areas. And I think the issue here, I think, is it creates a highway for us in the future that just makes it much easier for us to operate. And we'll be descriptive in the message, more descriptive to say exactly, make the necessary adjustments. But there's nothing here that our marketing group would say is really going to be a difficult thing for Medifast to deal with. So I feel very good about it, Scott. One of the things I'm trying to do coming into the company is, as we try to create a company that can grow to $1 billion in the future, I want to make sure I'm dealing with all the issues of the past that we need to clean up and do the right thing to make this the kind of company our shareholders would be proud of.

Scott Van Winkle - Canaccord Genuity, Research Division

And just to keep on that, I saw the "up to" commentary in the press release. What about the 20,000 doctors? Did that change? Is your -- your focus on that kind of medical heritage, does that change at all?

Michael C. MacDonald

It's largely going to be the same in the doctor area. I mean, you could debate how many of those doctors have died over the years, because we had 20,000 from the beginning. But it depends on how you want to look at that. But the doctor claim will basically be very similar to what it is today.

Operator

[Operator Instructions] It appears there are no more questions at this time. I would like to turn the floor back over to Mr. Michael MacDonald for any closing comments.

Michael C. MacDonald

We appreciate your participation today, and we look forward to speaking with many of you while we're on the road and in investor meetings, and we really appreciate, overall, your coverage in Medifast. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful evening.

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