Medifast, Inc. (MED) CEO Dan Chard on Q2 2019 Results - Earnings Call Transcript

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About: Medifast, Inc. (MED)
by: SA Transcripts
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Earning Call Audio

Medifast, Inc. (NYSE:MED) Q2 2019 Earnings Conference Call August 1, 2019 4:30 PM ET

Company Participants

Katie Turner - ICR

Dan Chard - CEO

Tim Robinson - CFO

Conference Call Participants

Linda Weiser - DA Davidson

Steph Wissink - Jefferies

Doug Lane - Lane Research

Operator

Hello, and welcome to the Medifast Second Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to your host today, Katie Turner. Please, go ahead.

Katie Turner

Good afternoon, and welcome to Medifast second quarter 2019 earnings conference call and webcast. On the call today are Dan Chard, Chief Executive Officer; and Tim Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended June 30, 2019, that went out this afternoon at approximately 4:05 P.M. Eastern Time. If you've not received the release, it's available on the Investor Relations portion of Medifast's website at www.medifastinc.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 on today's call. All of the forward-looking statements contained herein speak only as of the date of this call.

And with that, I'd like to turn the call over to Medifast's Chief Executive Officer, Dan Chard.

Dan Chard

Thank you, Katie. Good afternoon, everyone. Thanks for joining us, and as always, for your interest in Medifast. I'll begin by providing a brief overview of our business performance for the second quarter, then Tim will review our financial results in more detail and share our third quarter and full year guidance. After our initial remarks, Tim and I will take your questions.

This has been yet another transformative quarter for Medifast. We saw revenue growth of approximately 60%, which was very strong and ahead of the 55% growth we saw in the same quarter last year. This marks the ninth consecutive quarter of year-over-year revenue growth and the 10th consecutive quarter of sequential revenue improvement. The second quarter was the largest revenue quarter in the history of the Company, resulting in record diluted earnings per share, outstanding results to say the least. Powered by the strength of our coach, coaching-led model, the Company has been in rapid phase of growth which is reflected in the results we've shared today and during the past two years or so.

As a management team, we're sharply focused on delivering sustainable shareholder value for the long-term as the business continues to develop and grow. We've been consistent in our view that we can double revenue every three to four years, and that we can continue to deliver on that goal well under the foreseeable future. We're investing wisely in our organization, our capabilities and our footprint to deliver on that goal. And today's results are yet another affirmation of the positive strategic direction we embarked on a couple of years ago. Our OPTAVIA Coach community continues to grow and develop every single day. We added more active earning coaches during the quarter, just completed, than in any other quarter in the Company's history.

We've delivered well ahead of the schedule on our goal of having 30,000 coaches by the end of 2019. Coach productivity also continues to increase, with average revenue per coach growing by 7% versus the prior-year period. Coaches remain absolutely essential to our vision and differentiation in the health and wellness space. The support they provide is crucial to helping clients on their journey to achieve optimal health and well-being as we pursue our mission to offer the world life-long transformation, one healthy habit at a time.

We continue to optimize our training, development and fill the line on processes to optimize the organization and our field leadership around a repeatable business rhythm that's scalable and is wholly focused on empowering this business to achieve its long-term growth objectives. Accelerating the success of our OPTAVIA Coaches will be at the core of our growth over the next several years. Having successfully achieved our goal of 30,000 active earning coaches by the end of 2019, we're now focused on reaching 50,000 coaches by the end of 2021. This metric will be central to our stated objective of achieving $1 billion in revenue with an operating margin in excess of 15%. There are a series of projects and initiatives that we're working on now to help deliver on these goals, and we're already seeing significant progress across the board.

Just last week, we held our annual OPTAVIA Convention, bringing together our coaches and field leadership. Our annual OPTAVIA Convention is an opportunity for our entire OPTAVIA community of coaches, clients and corporate executives to align behind our shared vision, to celebrate success, to train, align and develop new coaches, who joined OPTAVIA during the last year and to further develop experienced coaches who continue to build their OPTAVIA businesses.

This year's event was an incredible milestone for the Company as our first-ever global convention and the largest OPTAVIA event in our history. More than 11,000 coaches registered for the event in Orlando, Florida, nearly doubling the size of last year's event. Our expectations around continued growth in a number of active earning coaches prompted our announcement last week that the 2020 convention will take place at the 21,000 capacity State Farm Arena in Atlanta, Georgia.

Expanding our geographic footprint is also a key priority for the year ahead. And just last month, we took our first steps in the Asia Pacific region with our official launch in Hong Kong and Singapore. There were OPTAVIA Coaches, who reside in Hong Kong and Singapore, attended this year's convention to share their early experiences and to learn more about the business from US business leaders in the OPTAVIA community. OPTAVIA business leaders are the foundation of our domestic and international expansion strategy, and we're excited by the early signs we're seeing in our business outside the United States.

Driving product and process innovation is another important plank of our strategy. Attendees of the OPTAVIA Convention were introduced to our new Habits of Health transformational system, which is a comprehensive developmental pathway, which gives OPTAVIA and clients the tools to help take control of their health and well-being. The new system is an enhancement to the original Habits of Health system, and now includes a supporting life book and Habits of Health app and will be available -- which will be available starting August 1st. By leveraging our brand, scientifically-proven plans and our new Habits of Health system, we believe, we can significantly extend our ability to support a growing client base. Additionally, our product development team, working closely with a select group of OPTAVIA leaders continues to make strides in our five-year product pipeline, designed to create products that support healthy habit creation and further support expansion of coach and client lifetime value.

The final element of our growth strategy is utilizing technology to optimize the effectiveness of our coaches and our organization. To support our long-term growth opportunities, we continue to make key investments in areas, such as technology, supply chain and the acquisition of new talent. In addition to rolling out a new e-commerce platform in Q1, we successfully launched our international capabilities with the capacity to handle multiple currencies as well as a new global, seamless compensation plan designed to promote growth in our two international markets, Hong Kong and Singapore. We've also made significant enhancements to our coach back office to allow them to see their progress more clearly and to help them focus on activities that will drive future growth.

In just months, we'll also launch our new mobile platform, which will enhance interactions between coaches and their clients, as well as support mobile orders and payments in our new Asia markets. Eventually, this technology will be made available to our US-based coaches and clients as well. We continue to make solid progress in our ERP implementation, and we expect to go live in the first quarter of 2020. Our corporate business and technology teams have been working tirelessly to deliver these new capabilities, which will enable us to continue our expansion in our current markets and beyond.

All this work underscores our commitment to our central mission to offer the world lifelong transformation, one healthy habit at a time. That's the mission that drives our coaches and our employees alike, but it extends way beyond commercial goals. At last year's convention, we officially launched our Healthy Habits For All platform, designed to bring healthy habit creation to those in underserved communities through education and access. To date, through this important initiative, we've helped provide kids in need with up to 2 million healthy meals. This year, we announced Healthy Habits For All Week, a unique opportunity for thousands of OPTAVIA Coaches and Company employees in the United States, Hong Kong and Singapore to conduct service activities in their own communities, starting on September 9th.

Capturing the energy behind this mission-led business and using that to deliver long-term sustainable growth is critical to our success. And one of the many things that I believe makes Medifast standout from its peers. In conclusion, we're building an incredible business, one that doesn't just deliver on individual quarters, but that instead enables long-term sustainable growth.

Our three-year goals to grow revenues to $1 billion, to grow active earning coaches to 50,000 and to achieve an operating margin of 15% or better are challenging. But this is a Company that has consistently delivered on its goals, and will continue to do so for many years to come. Medifast is well-positioned to create value for shareholders as an innovator in health and wellness, with differentiated products that can enable us to address a large and increasing market opportunity around the world. We're supported by the strength of our business fundamentals, including our healthy balance sheet and cash flow.

We believe our 2019 and long-term guidance demonstrates the confidence in our ability to continue to grow the business both in the US and internationally. And we've created tremendous momentum that will drive us the value going forward.

With that, I'll turn the call over to Tim.

Tim Robinson

Thank you, Dan, and good afternoon, everyone. I'll review our financial results for the second quarter ended June 30, 2019, then I'll provide our third quarter guidance and discuss our 2019 outlook. As Dan commented, revenue in the second quarter of 2019 grew strongly, increasing 59.5% to a record $187.1 million from $117.3 million in the prior-year period. We ended the quarter with a record 30,600 active earning coaches, compared to 19,700 coaches in the same period last year and 27,200 coaches in the first quarter this year.

Average revenue per active earning coach for the quarter increased 7.1% to $5,863, compared to $5,474 for the second quarter last year. Growth and productivity resulted in part from business initiatives, accelerating the number of new coach conversions and new clients starting our plans, aided by the ongoing transition to higher-priced OPTAVIA products. OPTAVIA-branded products represented 75% of our total Company consumable units sold in the second quarter, compared to 64% in the prior-year period. Gross profit for the second quarter of 2019 increased 58.5% to $140.7 million compared to $88.8 million in the prior-year period.

Gross profit margin, as a percentage of net revenue, decreased 50 basis points to 75.2% versus 75.7% in the second quarter of 2018. The decrease in gross margin percentage was driven by higher product cost, obsolescence cost associated with a specific slow moving product and the cost of client with new FDA labeling requirements. It's important to note that we recently announced a price increase, effective August 1st, designed to bring our gross profit margin back to expected levels. SG&A for the second quarter 2019 increased $41.7 million to $113.4 million, compared to just $71.7 million for the second quarter of 2018, primarily a result of higher OPTAVIA commission's expense, increased consulting costs related to IT projects, increased salaries and benefits, and increased credit card fees, resulting from higher sales.

SG&A, as a percentage of sales, decreased 50 basis points to 60.6% of total revenue, compared to 61.1% in the second quarter of 2018. As OPTAVIA revenue increased in our overall sales mix, the commission rate, as a percentage of total Company revenue, increased 240 basis points to 41.7% of total revenues in the second quarter of 2019, compared to 39.3% in the second quarter last year. We've been able to more than offset this increase, along with strategic investments with the operating efficiencies we have in other areas of SG&A. Our effective tax rate was 23%, compared to 19.8% in the second quarter of 2018. This increase is primarily a result of a 2.1% decrease related to discrete accounting for tax associated with share based compensation and a 1.2% decrease related to a benefit from net operating losses due to state apportionment.

Net income in the second quarter of 2019 was $21.4 million, or $1.75 per diluted share based on approximately 12.2 million shares outstanding. Second quarter 2018 net income was $14.1 million or $1.16 per diluted share based on approximately 12.2 million shares outstanding.

Our balance sheet remains very strong with stockholder's equity of $126 million and working capital of $95.9 million as of June 30, 2019. Cash, cash equivalents and investment securities as of June 30, 2019, increased $12.5 million to $113.5 million, compared to just $101 million at December 31st, 2018. The Company remains free of interest-bearing debt. Inventory increased $9.6 million to $48.5 million as of June 30th, 2019, compared to $38.9 million at December 31st, 2018, due to advanced preparations for international launch, initial production of new habit to health system and a continued effort to maintain inventory levels to meet current and future demand.

Our Board of Directors declared a quarterly cash dividend in the second quarter of $8.9 million or $0.75 per share, payable on August 7th. The Company also repurchased approximately 71,000 shares during the second quarter, and there are approximately 594,000 shares of common stock remaining under our existing share repurchase program. Our management team and Board of Directors remain committed to enhancing the value for our shareholders.

Now turning to our guidance. We expect third quarter revenue to be in the range of $190 million to $195 million and earnings per diluted share to be in the range of $1.30 to $1.35 per diluted share. For the full-year 2019, we are raising our guidance and now expect revenue in the range of $730 million to $750 million and earnings per diluted share in the range of $6.75 to $6.95 per diluted share. Our fiscal year 2019 guidance assumes a 21.5% to 22.5% effective tax rate, exclusive of any discrete tax benefits from share-based compensation awards best seen in the fourth quarter. While we're pleased with recent launch in Hong Kong and Singapore, we do not expect the financial results of these international activities to be material in 2019. We do not anticipate reporting these results separately during the year.

Our third quarter guidance reflects an increased cost for the convention, just held in July, and higher-than-normal IT spend primarily due to the current development stage of our new ERP system. We expect our spending to normalize during the fourth quarter as convention costs are behind us and our ERP implementation costs begin to line down. Well, that concludes our operational and financial overview. We appreciate your interest in Medifast.

And Dan and I are now available to take your questions. Operator?

Question-and-Answer Session

Operator

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Linda Bolton Weiser with D.A. Davidson.

Linda Weiser

So in terms of the higher IT spending in the third quarter is -- can you just give a little more color? Because you had been planning these various IT projects the whole year long, and we had put in some additional spending into the guidance for these types of things. So is it that something has gone awry with the implementation of the projects? Or are things taking longer? Or is the cost being higher than the budget? Or just give a little bit more color. And then also, if costs are going to be normalized in the fourth quarter, I had normalized in my model, so what is making me now shift the $0.30 of EPS from the third to the fourth quarter? In other words, why am I raising my fourth quarter by $0.20 or $0.30 a share in order to get to the annual guidance? What's going to be better than I would've expected, if you're saying costs will just be normalized, which I already had in my model? Thanks.

Tim Robinson

Sure. Linda, it's Tim. Yes. So a couple of things. So our ERP project is going -- actually it's going very, very well. The total expected spend for the project has not changed, but there's been a shift in the timing of some of that spend. The Q3 now will be kind of the pinnacle quarter as far as spend based on where we are now in the project plan. So we had looked at tangible go-live date in early Q4. We made a determination that it is a better decision now to make that go-live date in very early Q1. So we've shifted a lot of our testing work into the third quarter. So, the Q3 by far is a highest spent quarter. The spending starts to wind down in Q4. And there's -- there will be a little bit of spending in Q1 of next year, but not very significant. So we're on-track. The scope of the project has expanded a little bit more in the areas of supply chain that will help us with some efficiencies. There's been some delay in a few of the interfaces that were being built that has now -- just about now caught up. But there's definitely a little bit of a more spend focused in to the third quarter than the fourth quarter. And that differential is -- between quarters is about $1 million -- $1 million plus in Q4 than in Q3. That's kind of on the IT spend.

The other side of things is, in Q3, we've messaged all along, that we have the cost of convention in Q3 in addition to half the cost of the International Leadership Advancement Trip. I know you were -- you actually mentioned, you saw that this is, by far, the biggest event we've ever had, approximately double the attendees we had last year. The venue did an awesome job, but was not the most efficient venue, and that we had to coordinate a lot of logistics between four locations to move people around. So it was a little more costly as a percentage of revenue than we've had in the past.

On the other hand, we will make up for that with the International Leadership Advancement Trip -- is a smaller cost, proportionally, than it was last year. So we'll see in Q4, we will not have the cost of -- the extra cost associated with ERP. You will not have the cost of convention, and you'll have less cost associated with International Leadership Advancement Trip. So roughly speaking, our SG&A expenses in Q4 is expected to be a little more than $3.5 million less than what you're going to see in Q3. And that includes, still in Q4, half the cost of ILAT. So you can see we're getting some great leverage on our other areas in SG&A. This is a bit of a timing issue. And as you saw, we've raised over full-year guidance. So we're confident that the spending is under control. It's a bit of a timing difference, and timing of not only IT, but the timing where we're getting leverage on our event expense. We'll get the leverage in Q4 with loss -- little leverage in Q3.

Linda Weiser

Okay. So I haven't done the math, but that $3.5 million shift -- that's $0.30 or so, $0.25, $0.30 so whatever it is, per share of EPS, I guess, roughly?

Tim Robinson

Yes.

Linda Weiser

Okay, all right. So you also mentioned some labeling costs. Is this completely new FDA regulations or is this pertinent to some of the issues raised by a report that went out about mislabeling? So this is just new FDA requirements or is this to correct some of the labeling on your products? Thanks.

Tim Robinson

Yes. There's nothing wrong with the labeling of our products that I know of. This is a FDA regulation. It effects all packaged consumer food products. It's a change in the nutrition fact panel on all foods. So where you put the calories and where you put the percentage of different elements of vitamin A, vitamin D, all those kind of things. So every food manufacturer has to make this change. There's a deadline to make it. So you have to choose when to implement it. We've made a decision to implement that in July of this year. So starting with all products made from this point forward will have a new label on it. There was discussion about trying to phase it in, but the logistics of phasing are very complicated. There's slightly less cost if we phased it in. But what you're seeing is basically, all the packaging that's left over in our manufacturing operation that no longer can be used because it has the old nutrition fact panel on it. So it's a one-time event. This represents the full cost of all that packaging for every SKU we have. There'll be no ongoing cost associated with this. But it's aligned with the timing when we began to implement the new label. So one-time event.

Linda Weiser

And that was all in the second quarter, actually. Right?

Tim Robinson

Along the second quarter.

Linda Weiser

Okay, got it. And then, in terms of the app development, which is kind of tied to the international launch, I guess, I'm surprised, you said in a couple of months because I really thought -- I got the impression it would be maybe just in a few more weeks that it would be available. Are you just trying to be conservative, or do you really think it's going to be pretty soon? And if it's really is a couple of months from now, that's a couple of months after you've actually launched the international. So does that kind of somehow slowdown the -- I know you don't have anything in the numbers for international, but is it going to somehow flow the ramp though or impede the expansion of that initiative because that app is not available more quickly?

Dan Chard

Hi, Linda this is Dan. The focus is to get it out in September. So that with the reference, it's a more specific day for you. And with regards to whether that slows anything down, the answer is no. We're rolling out -- we opened up the two websites and the English only right now. Those are -- will also be translated as we go forward. We're rolling out the material as we go forward. So this is the -- the app is one of many additional implementations that's going to be part of the opening period, but we're actively signing up coaches, signing up clients, shipping products.

And the training is actively taking place in Hong Kong and Singapore by U.S. leaders and very soon to be taken over by the international leaders. We had -- as you know, because you were there at the convention, where we had our first two coaches from Hong Kong and from Singapore, the international convention, as well as a brief discussion from there -- the coaches who trained them. And so, I think it showed everybody kind of what the process is and what we've been doing to get ready for the opening. So we're very optimistic and feel good about what we've seen so far, including what you saw at the convention.

Linda Weiser

Okay. And just one last thing, can -- do you have to have a commission expense number in the quarter? I know you gave it in the Q, but do you happen to have that?

Tim Robinson

The actual number?

Linda Weiser

Well, you usually say in the Q how much it increased year-over-year in millions of dollars, usually that's what...

Tim Robinson

Yes, that'll come out tomorrow in the Q.

Linda Weiser

Okay. Thanks a lot.

Tim Robinson

Thanks, Linda.

Operator

Thank you. And the next question comes from Steph Wissink with Jefferies.

Steph Wissink

Good afternoon, everyone. I would like to unpack the productivity that you saw in the quarter, really nice, strong high single-digit gain. I think you suggested some business initiatives, if you could just extrapolate a little bit more on the growth and productivity, that'd be great.

Dan Chard

Sure. How are you doing, Steph? This is Dan. Productivity is a function of a lot of things and started growing as almost immediately as we started to focus the message. So creating a simple, easy to communicate, focused message as part of that. It also has a lot to do with the training. So if -- as you know we have three, kind of, critical training events that start in October of every year with our advanced leadership training trip. Those -- that happens at Sundance, Utah. It's followed-up by the International Leadership Advancement Trip, which is part of an incentive trip, but also includes a lot of training. And then, the last one is the convention, which we just held, which is, in this case -- we had over 11,000 registered attendees. And so, each of those trainings plays a fundamental role of moving the message forward about how to communicate, about how to train the rest of the coaches outside of those events. And so, that training is a -- also a fundamental and critical part of it.

Another part of it is the launch of our OPTAVIA brand, which took place two years ago. We still sell our Medifast-branded products, by focusing on the lifestyle brand that has some attributes that are very favorable to market trends, we believe that's also had a -- had been an important health. There's been a small portion of that improved productivity that has to do with the prices -- the higher price associated with OPTAVIA products, but the majority of it is those other things that I mentioned.

Steph Wissink

Okay, that's great. And then, two more tactical questions. One is on your comments on cost inflation. So if we back out the pieces that Linda asked about on the growth margin side, on the FDA labeling, and I think you mentioned some obsolescence as well, but if we just look at the higher product costs, how should we think about inflation over the course of the next six to 12 months? And then your pricing increase going into effect today, how should -- how does that compare to the anticipated inflation over the course of the next year?

Tim Robinson

Sure. So our -- if you think about our long-term goals, we've laid out pretty clearly we're -- we anticipate about a 76% gross profit margin now through 2021. And you can see, the past couple of quarters we've been slightly below where we'd like to be, and we knew that we planned to implement a price increase truthfully from the beginning of the year. We were trying to find the right timing to do it. So part of the slowdown, I'll say, in the gross profit margin, was really a delay in this price increase. So what'll happen is, when we do the price increase, you'll see our margins bounce back. I'd anticipate for Q3 that our gross profit margin will be in excess of 76%, and that we hope by the end of the year, we may be able to bring the annual gross margin back to that 76% level. So it's really intended, really just to bring us back to those levels. So for -- potentially depending on what our long-term inflation is in product cost, the margins could exceed 76% next year. We don't have clear line of sight to inflation in the first half of next year, but we did have some very specific products, primarily products that we don't manufacture, like bars. We use partners to manufacture. We had cost increases that came into beginning of the year and effected, primarily, a little bit of the second quarter more than the first quarter. So we view this as bringing on our gross profit margins back to the desired levels. It may bring it back a little bit higher than that.

Steph Wissink

Okay, that's great. And last one for us is just on the buyback. I think you mentioned 71,000 shares in the quarter, almost 600,000 left in the program. How should we think about capital allocation with the stock having pulled back quite substantially? How do you prioritize the use of that buyback program opportunistically? Thank you.

Tim Robinson

Sure. So we've talked about our capital allocation strategy in kind of three components, primarily two. Right? So we've demonstrated, over a number of years, that we've given back to shareholders the majority of our free cash flow. So I think the correct measure is over five years, about 70% of our free cash flow. When we initiated dividend in 2015, we began to focus a little bit more on the dividend, attracting some different mix in our shareholders. And our dividend, today, is very strong, as you know, we've increased it numerous times. But along with that, we've been very successful in our business. We've generated a lot of cash flow, and we've been supplementing the dividends with buybacks. And we've been spending a fair amount of time with our Board as well talking about the cadence of those buybacks and what our long-term strategy will be there. What you've seen so far is not a consistent rhythm of buybacks. You've seen more opportunistic buybacks, but that is something we're definitely thinking about for a long term. We have very, very strong cash flow generation, and we want to make sure we're using that cash in a way that gives our shareholders the best value.

So I think you can continue to expect buybacks from the Company. You can continue to expect to see strong dividends from the Company. And that's primary use of our cash flow. We're not very capital intensive, a little bit more this year than most years with the expansion of manufacturing, but we're not that capital intensive. So we expect to use it primarily just to drive shareholder value.

Steph Wissink

Great, thank you.

Operator

Thank you. And the next question comes from Doug Lane with Lane Research.

Doug Lane

Hi, good afternoon everybody. While we're on the subject, Tim, do you have a CapEx number for this year with the added spending that you're doing?

Tim Robinson

Yes. We estimated our CapEx to be about $15 million for the year.

Doug Lane

Okay. And will we see something similar to that next year or will it start to come back to more traditional levels?

Tim Robinson

It'll roll back to -- I'll say, proportionally, more historical levels to -- the CapEx this year -- the unusual CapEx is in our manufacturing operation, which is just building capacity in our distribution center in Maryland building capacity. So those'll be -- those projects will be completed this year.

Doug Lane

Okay, thank you. Moving on, I want to see what changed over the last three months because I don't think people are expecting the lumpiness in the quarterly EPS growth that you're telling us for the third quarter. After going 50% plus in the first half then mid-to-high teens in the third quarter then back to 50% plus in the fourth quarter. So I know you had a bigger convention this year, everybody expected that because you've got more coaches. And you said you're going to redo the ILAT trip. So did anything change on convention expenses and the ILAT trip from where we were three months ago?

Tim Robinson

The expense associated with the convention is a little bit higher than what we would have expected three months ago. The logistics associated with the venue were a little bit more challenging. It kind of a good problem, right, is that we planned these events and these locations years in advance and the sheer numbers of people challenged us in this particular venues. So we had to bust people around. We had to have A and B track sessions with duplicate resources. So fortunately, with next year, with Atlanta, you can see we have a venue that will hold over 20,000 people, everybody in a single venue. So we thing on a percentage of sales basis, the convention will be able to return next year to more historical levels.

Now we knew to some degree, convention was going to be more expenses, don't get me wrong, but where we able to get some leverage is with ILAT, last year was our first year, very successful. This year we raised the bar as far as the qualifications to reach that event. And so, on a percentage of revenue, the cost of ILAT's going down. So in the third quarter, you have kind of two things going in opposite directions, you have convention, a higher percentage of revenue than prior years; you've got ILAT, a lesser percentage than last year; and then in the fourth quarter, the only thing left is ILAT, which is a lesser percentage. And that's why fourth quarter looks so much stronger than the third quarter. It's really just the timing of how those two things play against each other.

Doug Lane

But it sounded like the biggest delta versus three months ago was the ERP moving around of those expenses, where you were going to go live early fourth quarter. And now it sounds like you moved that too early Q1. And so, does that mean some ERP spending in the fourth quarter is now going to be in the first quarter of next year, in addition to the third quarter having more because you're moving up testing projects?

Tim Robinson

Yes, that's exactly right, Doug. I mean, we will -- we'll have a little spillover in the 2020, less than $1 million, a little spillover due to the go-live date being Q1 that cost -- again, a relatively small percentage of the total cost. But the other thing is that, when you delay -- when you change your timing of the event you start to focus on different things, and we were able to pull some things into the project in Q3 that we didn't originally think we were going to be do as far as capabilities go, and we made that decision back in June. So that had an impact on the actual spend in Q3. We think it's definitely the right thing to do for the business. Our total budget for this year will be in line with what we've been forecasting since the very beginning of the year. We feel really good about it. But you're right, that's the timing of spend, but our full year spend will be right in line with what we said we were going to do.

Doug Lane

Okay, all right. And just shifting gears on inventories here, they've been up for the past three or four quarters, and I get the explanation in the verbiage here. But just going forward now with international opening and the launch of the new system, should we start to see inventories come down now in absolute dollar amount beginning in the third quarter?

Tim Robinson

Yes. We're very much focused operationally on improving our inventory turns. When you're growing at the rates that we were growing last year, you can imagine, the one thing you don't want is to not have enough inventory and that stopped their momentum. So we were building inventory at very rapid rates to make sure that didn't happen. And we were fortunate we did that. Right? Because we had what we needed to support the business. We think we locked in a little bit on what that momentum, that trend looks like right now. We're focused on improving our turns. This particular quarter, we had to build international for the first time. We switched over to the new habit to health system and I think that we had double inventory, right? We had inventory, the old habit to health systems and a full production run of new habits to health system, and that was -- that's pretty substantial as well.

So I think you won't see necessarily the gross dollars grow much. We're focused on improving the terms and -- but, proportionally to the business, as the business grows, inventory will grow and roll dollars. But we feel that the inventories are at -- I'm not -- certainly not saying at the maximum level. We feel we can improve our turns and inventory, and we're focused on doing that.

Doug Lane

Okay, that makes sense. Thanks.

Operator

Thank you. And as there are no more questions, I would like to turn the floor to management for any closing comments.

Dan Chard

Thank you, and thank you all for your continued interest in Medifast. I think this completes an important milestone for us this quarter as we set a goal to exceed 30,000 coaches two years ago. We did that in half a year ahead of our anticipated 2019 close, as a reflection of the incredible work that our coaches do day in and day out. So we, now, as the management team are firmly turning our focus on the next set of goals, which we'll focus on, by the end of 2021, achieving 50,000 coaches, $1 billion in revenue and continuing to leverage our operating structure to deliver 15% or better operating margin.

Overall, we feel like as the management team we'll continue to deliver on those goals in the predicable way through our repeatable business rhythm, and we're very focused on delivering long-term sustainable growth to our shareholders. So thank you for your participation and your investment in Medifast.

Operator

Thank you. This concludes today's teleconference. Thank you for attending today's presentation. You may now disconnect.