Greetings, and welcome to the Medifast Inc. First 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. Thank you. Ms. Turner, you may now begin.

Good afternoon, and welcome to Medifast's First Quarter Fiscal 2012 Earnings Conference Call. On the call with me today are Michael MacDonald, Executive 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 March 31, 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 projection that may be made in today’s release or posted 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.

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'll 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 long-term growth and profitability. Brendan will review the financial results for the first quarter in more detail and discuss the second quarter 2012 revenue and EPS outlook. I will then provide some closing remarks, and we'll open up the call to take your questions. To begin, I'd like to spend a moment to remember Bradley T. MacDonald, former Chairman and CEO of Medifast. My brother, a great man and a valiant leader. He believed in Medifast's vision and mission wholeheartedly and was responsible for creating a contagious excitement in building a business capable of making a difference in the lives of millions of people. Brad's vision continues to come to fruition, due in large part to the hard work and dedication of our amazing employees. Although he is no longer with us, his legacy, values and principals are infused in every aspect of our day-to-day activities. We will carry on by working together to see Brad's vision fully realized by continuing the work he felt so passionate about. Together, we will make him proud. We thank all of you for your recent support and prayers. Now focusing on our business operations and our strategic initiative, I'm very pleased to report we started 2012 with 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 for net revenue in the first quarter. However, we remain focused…

Thanks, Mike. Net revenue for the 3 months ended March 31, 2012, increased 20% to $88.9 million from net revenue of $74.3 million in the first quarter of the prior year. The Take Shape for Life sales channel accounted for 59.6% of total revenue. Medifast Direct accounted for 25.4%. Medifast Weight Control Centers and Wholesale Physicians accounted for 15% of total revenue. Focusing on our sales channels in more detail. Our direct sales channel Take Shape for Life experienced revenue growth of 12% to $53 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 first quarter of 2012 increased to 10,200, a sequential increase of 6% compared to 9,600 in the fourth quarter of 2011. The Medifast Direct sales division revenue increased 19% to $22.5 million as compared with $19 million in the first quarter of 2011. Due to a more effective advertising message, more targeted advertising through extensive analytic analysis, additional public relations successes in large national publications and reducing product discounts, the company experienced a 2.9:1 revenue-to-spend ratio during the first quarter of 2012 as compared to 2.8:1 in the first quarter of 2011. In the first quarter, the Medifast Weight Control Centers and Wholesale Physicians channel revenue increased 63% to $13.4 million, primarily due to strong organic growth from the opening of new corporate and franchise locations and a year-over-year improvement in comparable store sales of 21% for centers opened greater than 1 year. We had 40 Medifast Weight Control Centers in the comparable store base at March 31, 2012. We opened 5 new centers in the first quarter for a total of 75 corporate…

Thanks, Brendan. I would like to conclude our prepared remarks by stating while we remain excited about our future growth in each of our 3 primary distribution channels, our executive team is focused on improving our performance in 2012, and we're working diligently to improve our operational efficiencies and effectiveness across our sales channels to improve profitability long term and to improve shareholder value. Now Brendan, Meg and I are available to take your questions. Operator?

[Operator Instructions] Our first question comes from Mark Sigal from Canaccord Genuity.

This is Scott Van Winkle. So a couple of questions. I guess for Brendan, did you say the loss per clinic in the quarter was $2.2 million? Or was that the decline year-over-year?

No, that was the loss for the clinic segment lost $2.2 million. The decline year-over-year is approximately $3.4 million, total.

Okay. And in that $2.2 million, does that include the $700,000 of severance cost?

For the clinic segment, that includes approximately 400k of severance costs, and the other 323k would be in the Medifast segment.

If I just do a quick pack of the envelope, were earnings in the non-Weight Control and everything else, the Direct Response, direct-selling, were they up slightly year-over-year?

They actually were down slightly, primarily because of the branding spend we had in the quarter. That was a larger change between Q1 of 2011 and Q1 of 2012. We had that $1.2 million of branding spend of this year. So in that segment, it was down because of that. Or if we did not have that expense, it would have been up approximately 20 basis points.

Okay. And then the $200,000 for write-off of third party inventory, can you throw a little more detail behind that?

Yes. Scott, this is Meg. I just want to clarify. I decided in this -- in the first quarter, we had a vendor that no longer met our standards, and it was necessary for us to stop utilizing them. And therefore, we had to take a write-off of raw materials.

And you can't recoup that from the vendor for not meeting standards?

We can, but it's not going to hit this quarter. So we're working on that.

Got you, okay. So I was surprised that the revenue growth in the Take Shape for Life channel relative to the health coach growth on a year-over-year basis. You mentioned training, but it seems like a pretty rapid response to training to have the sales per health coach rise like that. Is there anything else in there? You mentioned the promotion. Was there any price promotion that maybe pushed a little more product forward? Or maybe just a little more detail if there's anything beyond the training about that, that nice productivity gain.

Sure. Basically one of the things we started doing in January, and actually we started in December, is running short 30-day incentive periods. So in January -- or actually in February, we ran one. It was a sponsoring incentive. So we were out there incentivizing via cash, via get an iPad to grow your businesses in that way, and we saw that was a great success. And then in March, we did another 30-day incentive, but it was a client acquisition incentive, so help your people find clients. And there was cash incentives for that as well. So we will continue, as Mike said, to carry out those incentives through. We have a new incentive program right now that's leading everyone into our national convention in July. So those seem to be really exciting people to jump into the behavior that we've been looking for.

Great. And when you do something like that, can you measure what the impact is on the sales expense relative to Take Shape for Life? I'm wondering, did that go up materially? Or did the incremental volume kind of offset the incentive?

Yes. The incremental volume offset the incentive. So it is not -- I mean, it's small. It's amazing how people are driven, as far as -- you don't need to spend a lot of money to have behavior change. It's all about the fun and the excitement of hitting a goal.

Okay. And then if I look for Take Shape for Life, obviously, you guys know I'm keenly focused on the health coach number.

Yes.

Just kind of backing into your guidance and obviously a lot of assumptions on my part to get what you guys were assuming, if I could expect kind of a continuation of the advertising spend in Direct Response and kind of the clinic productivity and new units and how you roll them out. I'm coming up -- assume kind of a similar type of growth year-over-year, a 2% type of growth in health coach. Does that sound right? And can you give us any indication of maybe it's a little bit better or should we look kind of more flattish on a sequential basis with health coach?

Definitely, Scott. In the guidance, we are looking -- no, I'm not giving a specific percentage increase. However, we are looking at a percentage increase in the active health coach count in the second quarter. And I'll have Meg speak to some of the key reasons why -- with the most recent Go Global event, as well as the new tools that we're launching. We're excited with what we're seeing. And I'll have Meg speak a little bit more on the Go Global and the new tools.

Yes, I mean, Go Global is a phenomenal event. Launching the -- we were able to showcase the new Trilogy Training site, 2 training platforms to increase client acquisition and sponsoring. Those will be handed out on the 15th, which obviously is into the second quarter. So I'll update you more on that one, and that will lead through more things popping out all the way through the convention. So we feel that these tools that we're giving to people should help continue the path we're on in getting Take Shape for Life to continue to grow. So we feel very, very positive about it. I'm extremely thrilled and excited that we find -- I mean, it's just -- it's taking a year to get into it, but the alignment between the field leadership and our organization in the corporate office is just phenomenal. And I'm really proud of those groups who are really uniting to -- our leaders walked out of Go Global with a different mindset on where they want this business to go, and I'm excited to see where they take it.

Great. And I'm sorry, a couple more questions. So on the Weight Control Center, obviously, where you got the losses currently, you've taken the headcount reduction and the severance charges in the quarter. Are there any severance cost that are going to hit in the Q2? And did you remove enough cost to bring that business back to breakeven by the end of the year?

We will have immaterial severance costs in Q2, Scott. And by that, I mean about less than 30k. And we believe at this time, that we will be heading towards breakeven by the end of the year, yes, based on these actions.

Yes. And not only these actions, Scott, but this is the first step. The second step is we have some really amazing reporting that's been coming out over the last 6 weeks to help drive P&L ownership at the manager, the center manager level, which has not been done before. So our center managers will now have access to truly understanding their cost structure. And we're going to hold them accountable to it. So we should see some real shift in how we run the business in general.

Okay. And then, Mike, it's been, I guess, 4 months with you at the helm on an active role. And obviously, you've got involved at the end of last year. If this were a baseball game, what inning are we in relative to what you think you have to do here in the relative near term?

Yes, I think we're very much executing our plans, Scott. I think the only unexpected thing was a couple of these at the last minute where we had this inventory hit. We had an insurance charge that, and I'd be honest with you, I was very disappointed about. We're going to improve our close process. But I don't think anything is changed from what I said to all the investors that I met with in Boston and New York. I think, as you can see, we took swift action. We'll get around $2.5 million of that $3 million this year in cost savings. So my objective is that we deliver strong profit results in the second half, which is consistent with what I said before. And I think our processes are improving. We've now have expense plans at every level. I think 97% of the operations now have expense plans in place. And I think we're getting better operational focus and management on these areas. And the good news is that revenue was in very, very good shape. And our issue really is a cost issue. And that's something we can address internally, and we also have to do a better job understanding potential write-offs and things like that at the end of the quarter. I think we need to improve in that area. And I think Brendan's working to do that and our team. And I think that's really the opportunity for us and we're going to get better at that. So I think, overall, I would say, I was a little disappointed. We didn't get to the earnings without -- with just the severance charge, which I was hoping for. But I feel that the actions I'm taking will offset any of the issues that we have in the first quarter to deliver full year results. So I'm excited about the balance of the year and where we can go, and I'm very excited about our revenue growth. I mean, I think that having the revenue growth that we've had has been terrific. And I think we're doing a lot of the things operationally to turn around the revenue in the various business segments. So overall, I would say, we're about where we want to be, just a little disappointed in some of the -- some of those charges that affected the earnings this quarter.

Our next question comes from Anand Vankawala from Avondale Partners.

Just quick one on the clinic segment. I'm just trying to understand, given the strong 21% comp in the quarter, just the new store contributions, is that trending downwards, or what are you seeing as far as trends from new store contributions? Can you give any -- any commentary on that will be helpful.

Yes, I would tell you that we have -- we're looking at the performance of stores over a year and the comps are very, very good. But we still have start-up issues with stores that we've just put in. Like we opened a lot of stores in South Florida, and we've got issues with getting some of them up the curve. So I would say to you that we're focused on the top 10 stores. We have great performance. Right now, as an example, in Texas. And we have weaker performance in some of the other markets, and we're really trying to manage that. So we're really focused on the lower performing units that are early on and improve their results.

At what point would it be too early to -- at what point would you think it would be appropriate to address closing some of these underperforming stores?

Well, that's something that we have not had a process to do, which we need to do. So I think that's a priority for us to look at ones we've had for a little while, and if we -- because we're not putting that much capital in some. But we have to have a process to shut stores down and possibly move to different locations. In fact, I myself have visited a store that we have in Florida, and I would say we should have been in the mall across the street or down the road. We're not in a bad place, but it's not a great place. So I think some of these locations need to be looked at. And we need to determine where we might have ones that could be not as effective as if they were in another spot and potentially shut them down and do it in other location.

And that's in process now. So we're actively pursuing that.

Okay, that's very helpful. And then I guess going back to the health coach, and revenue per health coach specifically. Can you give me an idea of the cadence of the revenue per health coach in the quarter? I mean, were you trending down in January and then put a decent -- place the incentives that which drove it up?

No. We've been -- we definitely have gone up from about -- like we keep -- we're comfortable with the $1,600 to $1,650 range. And that's -- the incentives certainly helped, but our coaches are working hard. And again, I want to remember, the more coaches we can bring in, that number will go between $1,600 and $1,650. So that's an update there for you.

Our next question comes from Kurt Frederick from Wedbush Securities.

I'd like to go back to the, I guess the charges in the quarter. I think they're all $200,000 or so. And if I back that out, isn't that basically, $0.03? So wouldn't you have gotten shorter of your guidance even without the charges?

Yes, Kurt. Those are the 3 largest ones, and we just want to make sure we broke it out for you. And there are few other smaller ones, but those were the largest.

Okay. So I guess the next question is as you gave guidance on Q2 EPS, how do we -- you're comfort there you're going to be able to make that?

I think the key is, Kurt, is we added a lot of new finance talent over the last 8 to 10 months. With that, we've also added tremendous amount of new reporting for the last, really, 90 days. So we have additional reporting. And the key is really the communication. We've enhanced our communication greatly over the last 60 days between the finance function as well as every single business partner internally. And with that communication and that reporting, we are much more able to forecast more accurately to gain comfort to the market, as I completely understand your point here, and we feel like we've come a long way fast to improve the reporting as well as the internal communication of between finance and all of our business units.

What do you mean by improved communication?

In terms of having monthly meetings with our business partners, sitting down with them to go over the monthly P&Ls, really at the quarter end before we give guidance, sit down everyone and make sure that there's no surprises that we're not aware of. That's what I mean by enhanced communication.

Okay. And then can we talk a little bit about the -- like your television branding campaign? Just kind of what your thoughts were, how successful it was, if you have any plans on continuing it. Just any color you can provide?

Yes. So far, we're really excited about the branding campaign. It's still going on. The test is not complete, so it will go through Q2, so we'll be able to give you some more color on that in the future call. But right now, we're satisfied with them. We're continuing to work the test until it ends later in Q2, Q3. For one thing, I guess I could add color there. One color I can tell you is we're actually kind of -- we're using the branding campaign also to our different channels. So you'll see the same branding campaign. But at the end of the commercial, it will actually have a pitch for a particular business unit. So it could be the Medifast Direct pitch, it could be a MWCC, like our weight loss center pitch. It could be our Take Shape for Life pitch. So it is getting a lot of usages. So the 500k we spent in the first quarter on production, that will not be there. And we'll also have this opportunity to use it elsewhere.

Okay. So we should we expect a similar level, like the $700,000, I guess, with the balance type of level of spending in Q2 related to this?

It will be slightly less. We will not have the 500k from production cost. That will not be in Q2. And it will be closer to 500k, 600k. So it will be about 100k to 150k or so less in Q1 spend.

Okay. And then just on, I guess, other cost like gross margin line. Is there anything that we should be aware of as far as like raw materials or freight costs? Anything unusual during the balance of the year?

No. I mean, obviously diesel costs are on the rise in the second quarter, so we are seeing a higher increase in those with an anticipated drop in Q3. There are no major commodity issues at this point right now, so we're satisfied with that. And we feel we can keep the gross margin just about the same for the rest -- for the remainder -- through Q2.

[Operator Instructions] Your next question comes from Gary Albanese from Auriga.

I was wondering with the 11 to 13 Weight Control Centers planned for the second quarter, how much of the preopening cost of that impact on the first quarter?

You would have approximately of those about 8 of those centers that did impact Q1. Those 8 centers are doing about 25k to 30k a month of expense in Q1. That's mostly the preliminary people hires, as well as seating the marketed advertising. And finally, that is rent expense.

Okay. And obviously, you'll have a little bit more of that in the second quarter for third quarter and fourth quarter planned openings?

Yes. The planned openings...

Yes, the third quarter and fourth quarter planned openings are only 3 to 4 per quarter. So up to 8, which is really switching from what we did last year.

Okay. And with the coach growth, can you give us some dynamics on how it transpired through the quarter? Was it primarily higher at the beginning of the quarter than at the end?

No. It's been gradually up ticking since January. We feel that we've done a lot of initiatives internally. We've had a lot of leadership meetings with our field. We've had a lot of creation of new materials going out right at Go Global. So we feel like the trend will continue.

Okay. And with the commodity cost, it's my understanding you guys borrowed a lot at year end. If that's the case, wouldn't some of that, this higher cost, go run through the rest of the year?

Year end we had inventory balance over $19 million. We've done a great job reducing that in the first quarter by about $4.6 million. However, no, there's not a whole lot of additional cost in there. Our primary area that we're keeping a close eye on is shipping cost, because of our large direct selling business -- direct sale business. That's the primary driver. We have no real commodity issues in our COGS line item.

[Operator Instructions] I will turn the floor back to our speakers for closing comments.

Well, we appreciate your participation today, and we look forward to speaking with many of you while we're on the road meeting with investors over the next few months. So I just want to thank you for your participation, and I'll be happy to speak to any of you at any time. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.