Medifast, Inc. (MED) Q1 2012 Earnings Report, Transcript and Summary

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 to an increased improvement in profitability and believe we took a positive step forward by realigning our Medifast Weight Control Center personnel cost structure late in the quarter, which I will discuss in greater detail in a few minutes. For the first quarter of 2012, the number of active health coaches increased 6% sequentially from the fourth quarter to approximately 10,200. The average revenue per health coach per month increased to $1,650 from $1,600 in first quarter 2011. We're pleased with this acceleration in health coach productivity in the quarter as we begin to see the positive results from our efforts to improve our overall performance in Take Shape for Life. We continue to see an increase in the usage by our health coaches of the Trilogy Training website as it simplified training materials that helped drive increased productivity in the quarter. In addition, Take Shape for Life launched incentives in the months of February and March that drove client and coach acquisition and resulted in monthly revenue per health care coach increase. While these are strong steps in the right direction for the Take Shape for Life sales channel, our team is continuing to invest to dedicated resources to support our corporate field leadership team through an emphasis on training, new market development, events and incentives. The first 30 days are crucial in helping a health coach be successful. And we are leveraging our Trilogy Training site to provide easy steps for them to successfully launch and grow their businesses. Recently, we launched 2 new e-mail learning modules on the Trilogy Training website, including helpful information on how to acquire a client and how to sponsor a new health coach. Our how to acquire a client information is accompanied with a short video on health coach client acquisition. In addition, we created new Take Shape for Life brochures that address the business opportunity as well as the Take Shape for Life brand video, both of which have been extremely well received by our field leaders. The new training materials will be launched to all health coaches on May 15. Our team continues to work diligently to provide our health coaches with the necessary education, tools and support to generate business outside of their circle of influence, or warm market, which often includes family and friends in the community. As many of you know, we continue to host regional events throughout the country to ensure participating health coaches receive actionable and relevant content to enhance and grow their businesses long term. I recently had the opportunity to attend our annual Go Global event for our top Take Shape for Life field leaders in Tucson, Arizona. It was a tremendous event. We had 20% increase in attendees versus the prior year, and it was the best Take Shape for Life event that I've ever attended, including all previous conventions. Events like Go Global, which promotes simplification and duplication, should lead to continued improvement in our coaches' ability to attract new clients and coaches into their businesses and help ensure their success. At these events, leaders are taught skills and techniques to help further develop their own team of health coaches that they mentor. 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 skills, we'll be able to more effectively recruit new health coaches. We believe these events, along with all our other exciting Take Shape for Life initiatives, should help provide momentum for 2012 and place Take Shape for Life in a position to experience growth in health coaches and revenues long term. Now I will 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 19% to $22.5 million, and marketing and advertising increased 15%. We continue to generate more targeted and effective advertising of Medifast portion-controlled meal replacements, which has helped us generate a 2.9:1 revenue-to-spend ratio during the first quarter of 2012 compared to 2.8:1 in the same period last year. This also led the strong improvements in Direct Response divisional operating income for the quarter. The 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. Finally, 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 the first quarter of 2012. We've consistently increased our same-store sales results with the 21% same-store sales increase in the first quarter. We continue to evaluate ways to provide a superior customer service and support to meet the needs of clients seeking additional support and accountability in their weight loss and weight maintenance. In the first quarter of 2012, we opened 5 new corporate centers and ended the quarter with 75 corporate and 32 franchise centers. In 2012, we'll continue to expand the store level infrastructure necessary to support the future growth of the Medifast Weight Control Center model. We will balance this growth with the pursuit of increased cost efficiencies across our Weight Control Centers, as we continue to evolve the model to be as consistent and effective as possible across our new and existing corporate store base. As a result, late in the first quarter of 2012, we took a positive step forward by implementing a realignment of our Medifast Weight Control cost structure in order to further improve profitability. This includes reducing advertising spend as a percentage of sales for each corporate center, focusing on the 4-wall staffing strategy of each corporate center and the amount of corporate support required to -- for the Medifast Weight Control Centers. Approximately 70 positions were eliminated or realigned in order to enhance the profitability of the Weight Control Center and wholesale sales channel. These efforts generated a $723,000 severance charge in the first quarter. However, we expect an annual cost savings of approximately $3 million, as we continue to make our existing corporate center base the most profitable it can be long term. We realized a pretax earnings loss of $2.2 million in the first quarter of 2012 in the Medifast Weight Control Center and wholesale sales channel associated with the opening of 31 new Medifast centers in 2011, 24 of those being opened in the second half of the year and 5 new centers in the first quarter. Based on our experience in this year, the current overall economic outlook and our continued focus on improving same-store sales and profitability, in 2012, we continue to plan to open approximately 25 to 30 additional Medifast Weight Control Centers. Our team remains focused on growing this successful Weight Control Center model. We will continue to review our annual store growth rate based on our view of internal and external opportunities and challenges in the marketplace. Finally, I'd like to discuss our bottom line performance in the first quarter. Net income was $4 million or $0.29 per diluted share compared to net income of $6.4 million or $0.44 per diluted share for the comparable period last year. These results were below our guidance for earnings in the range of $0.36 to $0.38. The decrease in profitability for the first quarter of 2012 is primarily a result of the expansion of the corporate Medifast Weight Control Center model, which I previously discussed. In addition, there were 3 primary variables that impacted our earnings late in the quarter that were not reflected in our outlook in the first quarter. These items included $200,000 third-party inventory write-off, $200,000 in additional health insurance expenses as a result of the company being self-insured and an additional $200,000 associated with Medifast branding efforts. Going forward, I want to reiterate that we are intensely focused on improving profitability and have already undertaken significant initiatives for the remainder of 2012 and beyond. Medifast has certainly evolved over the last 30 years. Our business model evolution has allowed us to realize strong top and bottom line growth and generate strong cash flow. The offerings of Medifast products and programs through multiple channels allows us to meet different consumer wants and needs. We're a multichannel model. We benefit from cross channel synergies and our overall more diversified go-to-market approach. Going forward, we remain excited about our future growth prospects in each of our 3 primary distribution channels. That said, we're not yet satisfied with our financial performance. However, we are pleased with our current initiatives and believe we are in the right path to improved profitability. Our executive team is continuing to review and optimize our overall cost structure to further leverage our sales momentum, improve our margins and deliver improved earnings results, while continuing to focus on enhancing the customer experience in each of our sales channels. We will work to make the necessary adjustments and improvements in 2012 to improve our operational efficiencies and overall effectiveness across our sales channels. In addition, we continue to believe that our vertically integrated operations and increased capacity 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 our Chief Financial Officer, Brendan Connors, to review our financial results in more detail.

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 and 32 franchise centers. Gross profit for the first quarter of 2012 increased 18% to $66.8 million compared to $56.7 million in the first quarter of the prior year. Our gross profit margin decreased 120 basis points to 75.1% versus 76.3% in the first quarter of 2011. The gross profit margin decrease was primarily the result of increasing commodity and shipping costs that occurred throughout 2011. The company's reported gross profit margin for fiscal year 2011 was 75.3%. Selling, general and administrative expenses increased $14 million to $60.6 million in the first quarter of 2012 versus $46.6 million last year. As a percent of net sales, selling, general and administrative expenses were 68.2% compared to 62.8% in the first quarter of 2011. The largest increases in selling, general and administrative expenses were primarily related to increased expansion of the Medifast Weight Control Center model, with 5 corporate centers opening in the first quarter and 31 new corporate centers in 2011, which led to additional expenses with minimal sales during the new center ramp-up phase. We also spent $1.2 million in the quarter on a Medifast branding test including video production, television and web advertising in 3 of the markets that all of our distribution channels are active. In addition, the first quarter of 2012, we recorded a $723,000 severance charge as part of a workforce reduction and realignment in the corporate centers to enhance profitability long term. As Mike mentioned and disclosed in our press release today, we expect these actions to result in approximately $3 million in annualized cost savings. Salaries and benefits increased by approximately $4.4 million as compared to the first quarter of 2011. The increase includes the hiring of additional expertise in critical areas such as the Medifast Weight Control Centers division that hire additional expertise in regional trainers, district managers, area managers, mobile managers, dietitians, HR recruiters, operations support and marketing support to support the growth of 31 new corporate centers that opened in 2011, 5 that opened in the first quarter of 2012, as well to support existing centers which includes a total of 75 corporate centers and 32 franchise centers in operation as of March 31, 2012. Sales and marketing expense increased by $3.1 million in the first quarter of 2012 as compared to prior year, primarily due to the increase in Medifast Direct advertising, as well as an increase in advertising spend for the new and existing Medifast Weight Control Centers and an increase in expense associated with the Medifast branding campaign in 3 test markets. Operating income for the 3 -- for the first quarter of 2012 was $6.1 million, a decrease of $4 million compared to $10.1 million in the same period a year ago. Our operating margin was 6.9% in the quarter compared to 13.6% in the first quarter of last year. The decrease in operating income is due to the previously described decrease in gross profit margin and the increase in selling, general and administrative expenses. First quarter net income was $4 million or $0.29 per diluted share compared to $6.4 million or $0.44 per diluted share for the first quarter of 2011. The company's balance sheet remains strong, with stockholders' equity of $78.1 million and working capital of $48.3 million as of March 31, 2012. Cash, cash equivalents and investment securities for the first quarter of 2012 increased $18.2 million to $52 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 second quarter 2012 net revenue to increase in the range of 15% to 19% or $90 million to $93 million. Earnings per diluted share are expected to be in the range of $0.37 to $0.41 based on an average weighted diluted share count of 13.8 million to 13.9 million shares. And we anticipate a tax rate of 36% to 37%. In the second quarter of 2012, the company plans to open 11 to 13 new Medifast Weight Control Centers in new and existing markets, with expectations to open 25 to 30 new corporate centers by year end. In 2012, we remain focused on improving operational effectiveness and efficiency in both new and existing corporate centers as we balance sales growth and profitability. We will continue to review our annual store growth rate based on our view of internal and external opportunities and challenges in the marketplace. That concludes our financial overview. Now I would like to turn the call back over to our Executive Chairman and CEO, Michael MacDonald.

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.