Greetings and welcome to the Medifast Inc. Fourth Quarter and Fiscal Year 2011 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. Thank you Ms. Turner, you may begin.

Good afternoon, and welcome to Medifast's Fourth Quarter and Fiscal Year 2011 Earnings Conference Call. On the call with me today are: Michael MacDonald, Chairman of the Board and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; and Brendan Connors, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending December 31, 2011, 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 on the call posted on our website. Medifast does not comment on any 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 Chairman and CEO, Michael MacDonald.

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. On today's call, I will provide you with an update on our business initiatives. I also will provide more color in areas of the business we are seeing improvement, and discuss the areas that we plan to address to best position Medifast for long-term growth and profitability. Then we will review the financial results for the fourth quarter and full year 2011 in more detail, and review the first quarter 2012 revenue and EPS outlook. I will then provide some closing remarks, and we will open up the call to take your questions. First, let me start with a brief introduction on my career experience as most of you had not had the opportunity to meet me. Most recently, I served as an Executive Vice President at OfficeMax Inc., where I led the Contract division, a $3.6 billion unit. Prior to OfficeMax, I spent 33 years serving in a variety of senior corporate officer positions for Xerox Corporation, including Senior Vice President of Worldwide Operational Effectiveness, President of Marketing Operations and Global Accounts and President of Xerox North America. Among my most significant roles was leading the turnaround in North America from 2000 to 2004 as President of the North American Solutions Group, a $6.5 billion division of Xerox. I have been on the Medifast board for over 13 years, and seen the weight-loss industry evolve and grow to approximately a $60 billion industry. I had a great opportunity to learn from my brother, Brad MacDonald, over these years as a member of the executive committee. At the same time, I've had the opportunity to experience the growth and evolution of Medifast from being offered only through a physician's office to the current diversified business model, offering the…

Thanks, Mike. Net revenue for the 3 months ended December 31, 2011, increased 10% to $69.6 million from net revenue of $63 million in 2010. Take Shape for Life sales channel accounted for 62.2% of total revenue, Medifast Direct accounted for 22.4%, Medifast Weight Control Centers and Wholesale Physicians accounted for 15.4% of total revenue. Focusing on our sales channels in more detail. The Direct Sales channel, Take Shape for Life, experienced revenue growth of 4% to $43.3 million compared to the same period last year. Take Shape for Life was driven by increased customer product sales as a result of an increase in active health coaches. The number of active health coaches increased 7% to approximately 9,600 compared to 9,000 in the fourth quarter last year. Medifast Direct Sales channel revenue increased 6% to $15.6 million. Medifast Direct marketing and advertising expenses increased approximately 4% to $5.5 million. And as Mike mentioned earlier, it achieved a 2.8:1 revenue-to-spend ratio in the fourth quarter of 2011, equal to the revenue-to-spend ratio in 2010. Revenue in the Medifast Weight Control Center and Medifast Wholesale Physicians sales channel increased 57% to $10.7 million. This is due to strong organic growth due to the opening of new corporate and franchise locations, and a year-over-year improvement in comparable store sales of 19% from corporate centers open greater than 1 year. The company opened 10 new centers in the fourth quarter for a total of 70 corporate and 30 franchise centers at December 31, 2011. Gross profit for the fourth quarter of 2011 increased 12% to $52.3 million compared to $46.8 million in the fourth quarter of the prior year. Our gross profit margin increased 100 basis points to 75.2% versus 74.2% in the fourth quarter of 2010. Gross profit margin improvement was primarily the…

Thanks, Brendan. I would like to conclude our prepared remarks by stating that we remain excited about our future growth in each of our 3 primary distribution channels. But our executive team is not satisfied with our performance in 2011. We're working diligently to improve our operational efficiencies and effectiveness across our sales channels to improve profitability long term and realize greater shareholder value. Now Brendan, Meg and I are available to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Scott Van Winkle from Canaccord.

A few questions. So first, before I forget, Brendan, what was the share count in the fourth quarter?

Share count, 13.83 million shares.

Okay. I was having trouble getting to that $0.08. All right. So to go through a couple of channels, so Take Shape for Life, Mike, you had a comment about typically, there's a decline in the number of health coaches Q4 from Q3, sequentially. I've actually seen it flat to up in the numbers I have in the past. I'm wondering if that trend reverses here into Q1 seasonally strong, given that was a little sharper decline than I thought probably would have been likely from Q3 to Q4?

We're going to see in the -- we're seeing an uptick in our coaches in the first quarter. So we are seeing an improvement in the health coach count so far in the beginning of the year.

Okay. And then on Direct Response, and maybe you said it, I apologize if I didn't catch it, but you had the 2.8:1 revenue-to-spend ratio held nice and constant. But you spent a lot less than the growth rate of spending had been over the prior 3 quarters. Why did you dial that back, and what should we take away from that?

I think one of the things we're trying to do is get a balance in our marketing between what we're spending in Direct Response, what we're spending to support the Weight Control Centers, and we are building up, obviously, expenses in advertising and spending more in the Weight Control Centers. So we want to make sure we have the right balance. We feel we're getting a good return from the Medifast Direct advertising. And we did have, Scott, some expenses. We developed a new TV ad, as I talked about, and there's probably about $900,000 worth of cost that go into the creation of that ad. Some of it hit in the first quarter, some will hit in the third quarter, but what we're going to really try to do is then use that ad over all of our channels and be able to customize that to help all of the Medifast channels. So we feel we've got a good marketing strategy that I think we can execute, but we're trying to balance what we're doing so we can flow through better profitability.

And the goal, Scott, in 2012 for Direct Response in general, in the Direct Response channel, we'd like to spend about 10% to 15% more advertising dollars and at least maintain that 2.8:1 effectiveness in 2012.

Yes, I mean I can appreciate the idea of kind of a comprehensive branding. I guess I always thought of the marketing spend as being very distinct between clinics and Direct Response. Clinics, you're using local radio, in Direct Response, a lot of it's online. It's very easy to measure. And I wonder, how can you or how are you going to be able to measure that kind of immediate return on your advertising spend that you typically have in Direct Response if you're using more of a, maybe like an umbrella approach, if that's probably oversimplifying?

I think it is harder to measure, Scott. I think your point is very valid. But one of our issues is that the awareness of Medifast is only about 2% across the United States. And one of the things we do need to do is raise the awareness of our brand, period, to help all of our 3 channels. And I think we're still going to try to be very discrete, as you talked about, to have very specific programs for Direct Response, very specific to the clinics. But we are working on what's called a One Medifast Cross Channel Synergy project to look at how we can develop synergies between our channels, and also using our website to support that. In fact, we're doing pilots right now in Baltimore, Austin and Orlando on television that allow us to really test this in the marketplace. And our early returns are pretty good.

Okay. And then it's obvious, the spending on the clinic side, you gave some detail there, what I was surprised that the revenue was a lot better in the clinic division. And then if I look at this first quarter, you're indicating some pretty strong revenue [indiscernible] by the way, thank you very much for giving some guidance on the out quarter. It's a great, refreshing change. But I'm having trouble getting up to your revenue that you're indicating for Q1, kind of given the Q4 trend. And I'm wondering if I'm missing something. I mean, I've got 10% to 15% type of growth in direct to consumer, which is what Brendan just mentioned on advertising spend, Take Shape for Life should be relatively consistent, certainly be up year-over-year but not -- probably not a lot. Are the clinics a lot more productive? I mean, are we really going to see some big growth in Q1 at clinics? Is that what's driving that strong Q1 revenue relative to the Q4 trend?

Well, we're not going to speak on each specific channel, Scott. I just want to give overall guidance. And all we can really say is, the clinics, we're seeing positive revenue same-store sales growth, but at the same time, we're really looking at our cost base right now. You saw the loss in the fourth quarter for the clinics. We are adjusting that in the first quarter into the second quarter to address the profitability there. I mean right now, we're very happy with the sales there. The momentum in the Take Shape for Life division has started to return. And like we said, Direct Response, we're spending at least 10% to 15% more advertising dollars, and we're currently satisfied with the effectiveness of that spend.

Yes, what I feel good about, Scott, is that basically, if you look at our issues, we have a cost issue in terms of probably trying to expand a little bit too quick. We're going to try to cut back on some of the expenditures that have probably been too aggressive in terms of what we really need. And I believe that the revenue is going to be in good shape, and the good news is what we have to fix is very controllable. And I'm really trying to work on improving the efficiency and effectiveness in the organization, so we have much better discipline, better line of sight and improvement in our cost management so we can expand at a pace where we're flowing through better profitability and not just looking at the term clinic drag or whatever.

Our next question comes from the line of John San Marco from Janney Montgomery Scott.

My question is about the $4.5 million of weight center hiring expenses that you called out. I guess, how far along are you in the process of hiring corporate personnel for the weight center buildout? Is there more incremental hiring spending you're going to do in 2012? Or just if you can give a comment on that $4.5 million bucket?

Yes, this is Meg Sheetz. We are -- the staff is filled, we got the right positions in place and at this point, that cost should stop.

Okay, got it. And then the -- also another housekeeping on the $1.3 million of "additional charges". I was surprised you called those out. I mean, do you mean to characterize those technology, rent and depreciation expenses related to the weight centers, do you mean to characterize them as onetime in nature? How should we think about that?

Certainly, the ones I would characterize as onetime, out of that $1.3 million, John, I'd characterize like $800k as onetime, where the other $500k is just more on business as usual we needed to complete during the quarter on our major systems, IT systems.

Okay, got it. And then I guess more generally, there was a lot of commentary, both in the press release and your script, and I think even one of the last questions, just more than normal about the cost structure. And it sounds like some things are already underway to attack your cost structure. Can you just clarify what you're doing now or have done recently to enhance the cost structure?

What we're doing is we're looking at -- as I mentioned earlier, we built up a cost structure that's probably too heavy for the revenue we have, and we're going to make the appropriate adjustments to the cost structure and do it as quickly as possible so we can get costs in line and start flowing through greater profitability. And our goal is to execute these plans quickly. We're really focused on operational excellence. We're going to focus on doing things, doing them fast, increasing the clock speed in the company, and that's what we're working on. So I feel very confident that we will get the costs under control, because to me, the fourth quarter costs were unacceptable and way too high given where the revenue was. And we're going to look at improving the bottom 10 clinics and focusing on low-performing clinics, focusing on opening clinics more effectively from a cost perspective, and really try to improve that.

Got it. So are you still in the planning phases of finding these cost baskets that you can shrink or, I mean, have you identified items that...

We have identified it, so we know exactly what we need to do. We want to -- we're into now focusing on the execution of our strategy, not so much the planning of it. I've been looking at this over the last 3 months and clearly identified the issues of too much expenditures in our clinic base. We have changed the management in the clinic area and we are moving forward with a much more prudent plan that allows us to keep growing, but do so where we have a plan that actually grows revenue and improves profitability together.

Our next question comes from the line of Anand Vankawala from Avondale Partners.

Just on the clinics. When can we expect the segment to really achieve operating breakeven, given that we are focusing -- given that you are focusing on reducing the cost structure in 2012?

Right now, all I can comment, we'll be giving quarterly guidance, Anand. We will talk on it quarterly. However, just 2012, you will not see a breakeven in the clinic, the corporate clinic division, just due to the carryover of the 31 centers from prior years, as well as the 25 to 30 additional this year. And that won't be having breakeven, but every quarter, we look forward to updating you on our plan to achieve that as fast as possible.

Okay. And I guess, just keeping on the clinics, is there any reason that we should not be expecting the same-store sales to keep in the mid-to-high teens range in the first half of this year, just given the fact that we do have the significant base of clinics that are still in the ramping phase?

I think definitely, during the first half of this year, it's management's expectation to see at least low double-digit improvements in same-store sales for centers opened greater than 1 year. That would be a fair assessment.

All right. And I guess just trying to get a gauge for how the training initiatives are going. Can you give us an update on what percent of health coaches have used the TTS site? And just what feedback you received from the channel as far as -- if they're actually finding it useful?

Sure. We started in -- Michelle came in, in November, October, November, so we started going out to the field and getting feedback. One of the biggest things was, too much all over the site, too much information, don't know where to go first. So on the TTS site, as of February, we have a whole new look and feel, which is basically, here's what you do on your first day, here's what you do on -- within your first 30 days. Here -- it even breaks it down into the week, every week, what you need to be doing and what you need to be training on. That was an initial feedback and we were able to respond to that feedback within just a few weeks. So that is up and running and done. So right now, we're getting a lot of positive feedback. We're really looking forward to Go Global, which is the end of April, to really continue to push out. Our 2 biggest training initiatives are to sponsor health coaches and acquire more clients. And so those 2 training pieces have been created and are being launched at our Go Global at the end of April. And so once those are launched, they also come with the new look and feel of future training that we'll be doing. We're very excited for the coaches to get their hands on those to be able to make some traction.

Great. And then I guess, what are we seeing in terms of conversion rates? I know last year, I remember seeing you talk about the conversion rates of customers, the health coaches dipping down below historical rates. Have we seen that come back up and where are you seeing that trending?

We'll talk -- Anand, we're not going to -- we can't give that information, unfortunately, at this time as our guidance did include the active health coach count. However, we will be happy to talk once our numbers are public in early May on Q1 trending, on conversion, as well as active health coach count. But I apologize, we can't answer that at this time.

Our next question comes from the line of Kurt Frederick from Wedbush Securities.

Just a couple of quick ones on the Weight Control Centers, the openings of, I guess, 20 or 25 -- or excuse me, 25 to 30 for the year. I just wonder, is that going to be more spread out than originally planned? I think before, it was really going to be first half-weighted.

Yes, we are actually going to be opening new centers in both existing markets and into new markets. So you'll see some in the Philadelphia market, Dallas market, and then we're launching into the North Carolina market, so -- and adding some into Virginia, so we're excited with the -- it's a mix of both. We really want to get -- yes, we can get -- we can gain great efficiencies in some of the current markets we have that has room for continued growth.

Assuming kind of evenly spread, the openings, throughout the year?

I'm sorry, they'll be about half and half. So you'll see about 10 to 15 in the first half of the year and 10 to 15 in the back half.

Okay. And then on the same-store sales number, you've seen a pretty big acceleration the last few quarters. I'm just wondering, what is driving that?

In terms of same-store sales, I mean, we saw in the fourth quarter -- we're very happy with the 19% uptick. And that's really driven by -- we have 3 to 4 of our existing markets that are really doing very well with our new structure, a lot more corporate overhead, corporate people, regional managers, regional trainers. And you're seeing -- we launched that training a few months back and you're seeing that training really impact the center managers, and in turn, the sales of those existing centers. So it really comes down to better training and better oversight. And we're seeing that trending, we're positive, what we're going to see in 2012 as well.

Okay. Is that bringing in a lot more people? Are you able to keep your existing customers longer?

We're able to do both, actually. We're able to keep our existing customers longer, but we're also celebrating that we're getting more sign-ups per store. So that is one of our big metric changes, not really metric change, but the view is the centers are excited that they're getting new members. It's not just about increasing actual sales per store, but you can increase the sales per store by the rev -- the new members coming on. So that mental shift has helped significantly in bringing that up.

And just the last one is just on you talked about that the, I guess, the cost structure is too high. I'm just wondering what type of margins you think you would like to get to and kind of like a timeframe?

Kurt, on this one, I will have to defer to our guidance for Q1 again. I will be -- we'll be happy to talk to every quarter now, we will be providing guidance with complete transparency into our plans to execute on both our sales strategy for all of our sales channels, as well as our cost structure plans to realign and improve profitability. But we'll give you quarterly updates on that plan.

Our next question comes from the line of Chris Krueger from Northland Capital Markets.

Most of my questions have been answered, but another one on the Weight Control Centers. As you open up these new ones and all these others, you've opened, really, in recent years, are there any certain markets that really stand out in either a positive or a negative way?

Yes. The positive markets that were -- are the ones that have been opened the longest, the Dallas, Baltimore, some great markets for us. And then yes, that's all. Sorry, [indiscernible] at this point.

Okay. And then as far as the most recent openings throughout 2011, do you feel like you have those clinics up and running and positioned well enough to start taking advantage of the diet season once we got through the holidays and into the month of January or February?

Yes, I think we're well positioned for the diet season. I think you're seeing good growth in our clinics. I think, as I mentioned before, I think it's more of an issue of us creating the right balance between the expansion plans we have, which we're doing, and ensuring the most effective cost structure. We're also really looking at our clinic model to make sure we're delivering the same experience for every customer that goes in every clinic. So we've developed a consistent model and consistent approach that's repeatable in every location. So you have the same experience in Dallas, which is a good performing area, as you would in Baltimore.

[Operator Instructions] Our next question comes from the line of Gary Albanese from Auriga.

With the -- going back to the coach count in the Take Shape for Life segment, as Scott mentioned at the beginning of the Q&A, it is down year-over-year, and I had the same thing in my -- with my model, that's been flat to slightly up. Was that because of the training procedures and the new systems being put in place? Or was there more of a macro thing going on? And does that -- and those same factors play into the lower revenue per coach trends?

I mean, a couple of things there. I mean, we are seeing sequential growth in the health coach count. So we're very, very excited about that. When we talk about revenue per health coach, it is positively trending. We anticipate it growing to low double digits. So we are certainly excited about that. From a cash perspective, I think what we are doing a better job of right now is really differentiating between training and content. So it's one thing to go to events and just use training online that is driven by just information, and it's another to have role-playing and really active training actually taking place. And that is what you will see very differently after the Go Global event this year than you did when we launched TTS, that convention. TTS last -- when it was first launched was probably more of a content-driven site on a learning management platform. Now, we're going to create training on a learning management platform, which will take us to the next level.

When do you think you can really hit some traction on that and really get the growth, the coach growth back to what you've seen in some prior years?

Yes, we won't really be able to comment on that. I'd like to see Go Global as when we will be launching our new training materials on both sponsoring health coaches and acquiring new clients. And those 2 pieces, we are really excited about what they can do for our coaches who are new, all the way through to our health coaches who've been with us for 10 years.

Okay, okay. And lastly, going to the clinics, I mean are you having to be somewhat promotional when you open a new site?

What do you mean by promotional?

In terms of discounting, the special deals?

We don't typically push discounts in our clinic model. We have different programs in the model, so it's a pay per pound type model, so that's where you're pricing differentiation occurs.

Our next question comes from the line of Michael Halen from Sidoti & Company.

Can you give me a little more color in terms of where the MWCC expansions are going to occur this year? I think it was mentioned that 14 centers or so were going to be opened in New York and New Jersey this coming year. Can you give me any more color on that?

Yes. We are actually looking at the entire openings at this point and deciding where the best openings for this year based on the current expense drag that we are seeing. So we are looking at not proceeding heavily in New Jersey or New York at this time, and looking at focusing on existing markets and markets where we feel like we can get better, for no better word, bang for our buck.

And we will look at southern New Jersey that borders on Philadelphia. So we do have some that are in the Philadelphia advertising market that we would be involved in that are in part of New Jersey. But New York is a very expensive market, and we really want to focus on where we can get a higher return first. And as we grow, then we pursue that market.

Okay. Also, any more plans for share repurchases this year or is that something you're going to be pulling back on?

We currently have 275,000 shares authorized and approved by the board. We're just going to really be looking at throughout the year and as we see fit, we may, throughout the year. However, no decision's been made at this time.

You have a follow-up question coming from the line of Scott Van Winkle from Canaccord.

Brendan, to make sure I have this right, you mentioned $2.8 million loss in clinics during the quarter. Was that the quarterly number?

That was the quarterly number. So for the quarter, the MWCC and Wholesale channel had a $2.8 million loss, that's correct.

And so if I look at the -- in your Qs, when you break your segment detail out, you had $1.5 million loss in Q3. Is that comparable to the $2.8 million and that's the same number?

Yes. So we had a $1.3 million sequential decline in profit quarter-over-quarter. That is correct, Scott.

Perfect. Now if you took out the Weight Control Center, we look just at the Take Shape for Life and Direct Response business, was the contribution or profit percent of sales up, flat, down year-over-year? I assume it was probably up a little bit.

It was up slightly year-over-year. So in terms of the Medifast segment which includes Take Shape for Life and Direct Response, actually, the profit was 9.8% in 2011 compared to 9.6% in prior year.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Okay. I'd like to just thank everybody for participating today on the call. You can be assured that the management team of Medifast is going to be very focused on growing revenue and containing cost and flowing through the maximum profit that we can to our shareholders, and we thank you for participating.

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