Greetings and welcome to the Medifast First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Katie Turner. Thank you. You may begin.

Good afternoon. Welcome to Medifast's first quarter 2014 earnings conference call. On the call with me today are Michael MacDonald, Chairman and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; and Timothy Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending March 31, 2014 that went out this afternoon at approximately 4:05 pm Eastern time. If you have not received the release, it's available on the Investor Relations portion of Medifast's website at www.medifastnow.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 statement. Medifast assumes no obligation to update any forward-looking projections that may be made in today's release or on today's. 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 strategic initiatives and discuss areas of our business where we realize greater efficiencies and an effort to improve Medifast's future growth and profitability long term. Tim will review the financial results for the first quarter in more detail and discuss the second quarter and full year 2014 revenue and EPS outlook. I will then provide closing remarks, and we'll open up the call to take your questions. We are off to a solid start in 2014, generating earnings results ahead of our expectations. Our team remained focused on driving operational excellence throughout our Take Shape for Life, Medifast Direct, Medifast Weight Control Center and Wholesale Physician sales channel as well as our internal support department. And I am extremely pleased with our team's ability to closely manage the controllable aspects of our business. This allowed us to achieve 110 basis point improvement and operating margin for the first quarter and deliver earnings per share increase of 6% to $0.45 which was $0.10 above the high end of earnings guidance range of $0.32 to $0.35 for the first quarter. Net revenue fell within our guidance range and we were able to deliver the strong earnings results despite of reduction in revenue year-over-year. Tim will discuss our financial in more details in few minutes. But I want to briefly touch on what we have experienced to date in 2014 from a top line perspective. Heading into the first quarter our net revenue guidance implied a decrease versus the first quarter of 2014. And while our first quarter sales performance was in line with our expectations, we want to address the few other dynamics that we believer are impacting…

Thanks Mike. I'll now review our financial results for the first quarter ended March 31, 2014 in more detail. For the first quarter net revenue decreased 10% to $86.5 million within our guidance expectations from net revenue of $96 million in the first quarter of the prior year. The Take Shape for Life sales channel accounted for 65.8% of total revenue. Medifast Direct accounted for 19.8%. And Medifast Weight Control Centers and Wholesale Physicians accounted for 14.4% of total revenue. Focusing on sales channels in more details, revenue on our direct sales channel Take Shape for Life decreased approximately 4% to $57 million compared to the same period last year. The decrease in revenue for this channel primarily due to slight decrease in number of health coaches and the decline in revenue per health coach. We entered the first quarter at approximately 11,100 active health coaches and the average revenue per health coach per month during the quarter was $1,626. Our Medifast's Direct segment revenue decreased 26% to $17.1 million as compared to $23 million in the first quarter of 2013. The decrease in revenue in this channel was primarily due to a reduction in sales and marketing spend as the company continues to monitor consumer spending patterns. Our Medifast Direct segment represents approximately 20% of overall revenues, while the majority of our advertising spends attributed to this channel. Increased focused on this dynamic had a significant impact on overall company profitability. To drive future revenue growth, we'll be strategically investing in marketing throughout the remainder of the year while continuing to focus on efficient management of those investments. In the first quarter our sales and marketing expense decreased by $3.1 million or 30.3% versus the prior year first quarter. In the first quarter, the Medifast Weight Control Centers and…

Thanks, Tim. In closing, we are pleased with our start to 2014. Our multi channel weight loss and weight management business model allows us to benefit from an overall more diversified go to market approach. We are excited about our future prospects in each of our sales channels; we are consistently working to make necessary adjustments to improve our operational efficiencies and overall effectiveness. The strength of Medifast business model has allowed us to realize consistent top and bottom line growth as well as strong cash flow generation. We are continued to use this to our advantage as we expand and explore both organic and acquisition related growth opportunities to maximize long-term shareholder value. We appreciate your interesting in Medifast. And with that overview, Tim, Meg and I are available to take your questions. Operator?

(Operator Instructions). Our first question comes from the line of Scott Van Winkle with Canaccord. Please proceed with your question.

Hi, thank you very much. I have a few questions if you don't mind. So first got to start with your guidance. So the second quarter guidance, it is kind of hard to get down to that EPS guidance for Q2 given the revenue and given the margins we saw in Q1. Is there anything that we should think about significant increase in that spending Q2 or incremental gross margin pressure in Q2?

Yes, it is not margin pressure really, Scott. I mean we will see margins -- we expect margins a little better than we saw in Q1. I think we do expect more ad spend.

Okay so if I did my math right was the ad spent down $3 million year-over-year in Q1?

Yes.

So in Q2, are we expecting an increase year-over-year?

Not an increase year-over-year but not as large as decrease.

Okay so we won't see that SG&A ratio falling into percentage sales like we saw in Q1?

Yes, what I will say Scott a we model in that daily, weekly so as we get throughout the quarter we will adjust if necessary but at this point, if you look at the first quarter, we spent significant amount of quarter advertising in January into February and we slowdown in the March, similar pattern would start off here in the second quarter and we've gone fairly strong here in April, and we will continue to monitor its effectiveness

If you think about the sale of the clinics, I was thinking that selling dozen clinics might kind of take off $0.5 million to $1 million in losses from the sale of those clinics. We are getting an offset there I mean that's benefiting you selling those 12 centers, correct, from the standpoint of earnings.

Yes, but that's not going to happen, schedule closed towards the end of the year second quarter. So that's not going to impact in the second quarter.

Got you, got you, okay. And so you expect the gross margin improve a little bit in Q2, what is that -- is that -- I don't think that mix is changing standpoint of program fees, is it?

No, you have little bit-- not quarter-over-quarter but obviously for 11 clinics that we sold last year, your program fees that come out of that, obviously come out your, very, very high margin, it has small impact on the first and second quarter but not in the impact between the two quarters. Impact on margins in the first quarter really made of a couple of things. We had -- we did up increase shipping cost from our carriers which will carry into second quarter. We made some adjustments on the shipping size and our box sizes to reduce the average number of boxes that we use per order especially with our new Flavors from Home meals, they are larger physically and we are finding that they don't actually fit in the same box that we used before so we need some adjustments that will help in the second quarter that kind of a hurt little bit in the first quarter. And we did have some raw material pricing challenges with a few products. We rectified some of those for the second quarter. We have some products availability; there are a couple raw ingredients that cause us some price escalations. So we think some of those things will improve in the second quarter so we expect better margin in the second than in the first.

We expect Scott to get continual operational productivity as we move forward.

Great and then last question. So you obviously are expecting a boost from the new product launch. And I agree with you the products are very, very good. Where should we see that in by channel most significantly? Probably not in the clinics, is that going to show up more in Take Shape for Life or more in Direct Response do you think?

Well, I believe definitely Take Shape products are already poised to sell more healthy living oriented products. I think the customers that are in Medifast Direct will better asking for that the ones you are transitioning out of weight loss into maintenance. The ones in Take Shape for Life I think it would be huge opportunity for them to actually go out and answer people who don't necessarily have weight loss but wanted to just have a healthier lifestyle which is what is taught me habits of health, but I think Take Shape products has a greater capacity this year to work with these products and in the future we have strategies against how to expand into other channel.

And Meg do you -- where average revenue per health coach has been trending, little bit lower for the last four quarters, what's the goal? Is your goal or expectation to see revenue per health coach increase year-over-year?

I mean I am uncomfortable with the numbers that it is sitting at right now. I think our biggest thing is to just getting obviously we are more focused on acquiring new clients and sponsoring more health coaches which obviously this quarter was tad bit disappointing. But we see like we have got some really good initiative coming at the end of Q2 when we watch convention and at beginning of Q3, that will really help drive significant differentiation for Take Shape for Life it had before.

The other thing, Scott, this is Mike. We have a better compare in the second half. So we can be consistent with our advertising and then launch all these new products and get them out there, and a lot of them are in the last six months. We feel that's really a good opportunity for us because of the compare where we had a strong compare in the beginning.

Our next question comes from the line of Mitch Pinheiro with Imperial Capital. Please proceed with your question.

Yes, hi, good afternoon. So just following up on Meg where you said you were little disappointment with the health coaches is being down. Why do you think it was down slightly year-over-year? Or what were the driving factors on that?

So I think one of the biggest pieces from health coach acquisitions as last year in January, we launched the success from home magazine which was the great acquisition tool and really help our number and this year we didn't do a large initiative like that. But certainly one so the compare from last quarter to this quarter did not have as many tools in it. And then again from a compensation perspective, I just got back from Go Global, our leadership present, it was in Austin, Texas, and we had a lot of readers at the very top rank who said it took me, grandfathering was over December 31, they admitted it took them a month or two to really figure out the best balance of growing depth and then growing front line volume for their businesses so for them to be able to teach it, when they got to Go Global, they are absolutely more confident in the month of April than they were in the first quarter. So I would say that might have something to do with as well.

Okay, second question. So the Medifast Direct business so a $6 million year-over-year revenue drop is big. I mean it is a third consecutive 20% kind of the year-over-year decline and I need to understand, I don't understand how you can be pleased with that kind of drop. You said you are pleased with the efficiencies --

We are not pleased with the revenue, be sure of that, Mitch, the revenue is disappointing. I think we are still searching for the right answer and we put a lot of money into it and if you look at it we probably spend, I would say we spent $26 million in clinics and Medifast Direct; it might be $100 million. We are still spending a lot of money on -- money we actually advertise on and we are not happy with that. We are going to be meeting some major agencies and looking at that. We feel we could have done better there. So we are happy with our efficiency, we are not happy with the how the money has been driving the revenue for sure.

Okay, that's very helpful, thank you.

So we are not. I just want you to understand that for my perspective. We have a lot of work to do there and our real issue the reason we got efficient was because we weren't effective.

Right, last question, actually two more. What were the raw materials that we were seeing some price pressure on?

So the price pressure occurred with an egg vendor, we have raw material that went into all our product and they were bought out and therefore for now while we search for substitute, it is very unique formulation that we use in our product and we are in the process of continuing to garner some different suppliers for that.

Okay, thank you and then last question on the weight loss centers. Does the SG&A expense in that segment, does that scale down in proportion to the number of centers you have? As you continue to suffer down 50% in company owned centers, will we see SG&A scale down 50%?

No, because you still have corporate overhead that you have to get up, Mitch, on that so you -- you will see improvement in SG&A but over time some of the headquarters we get devoted to the franchise model, some of them will go away. So as we do the transition, it might a little be a little more SG&A in the corporate center and so you fully make the transition in some of the resources in it.

Also it is not off centre, they are obviously the exact same situation, so we have some large centers that cuts and carry much higher SG&A than some of the smaller centers so.

It's good theory but it all depends on which the timing and which center and when.

(Operator Instructions) Our next question comes from the line of Alex Jaslow with Midtown partners. Please proceed with your question.

Hey, guys, good evening. I was just wondering and trying to get little bit of understanding on Med Direct and the decline there. Did you find that the breakdown of customers, there is less new customers or you may be could talk about the customers they are more reactivating from prior years or mostly new customers?

If you -- we break the revenue down, it is clearly a customer acquisition issue so we can -- some of our new metrics and new data that we are able to see it is kind of breaks the revenue down to just seeing returning, it is not true annuity business right but it is returning business versus new customers. And the issue is really on the customer acquisition side. And that's why we kind of really attributed really directly to our advertising dollar which is what brings in new customer so we try lots of different things in the first quarter. Some very short term led even for a single day trying different offers. We've also tried some pricing offers for one full month during the quarter where we lowered our total monthly cost to see what kind of impact that would have. So we are trying a number of different things while changing up the media that we are trying to see, which has the biggest impact.

All right, that's helpful. And then further I think you mentioned there is some pressure on raw material which I am seeing across the board. Shall we -- assuming you fix some of the shipping issues, do you think raw materials would be an issue towards the second half and later half of the year?

I don't think raw material is a huge issue. I do think you are seeing in a commodity market certainly prices are going up in places. I think we have definitely done a lot of work in getting some price commitment for this year. So I don't see it being a hugely fluctuating event, no.

And the pressures we have Alex was really not so much of schedule or negotiated pricing increase, it was the loss for the key vendor where we have a react by -- again unique formulation, we had to find another vendor that would make for us in a short a period of time so we paid a premium for it.

And it was actually manufacturing company that was bought by another, and their facility that manufactured it was temporary shutdown so now that they're back up we have the product but now they are changing their price structure. So we obviously have other vendors in line and can easily reformulate product, just not -- we didn't have any notice.

Thank you. Our next question comes from the line of Kurt Frederick with Wedbush Securities. Please proceed with your question

Hi, good, how are you doing? I want to talk little bit on the Weight Control Centers. What was the same store sales sale in Q1?

Q1 same store sale were down about 14%.

Okay so how is that look as we go forward the next couple of quarters from the sale of the 12 centers?

Yes, so those specific 12 centers the impact, I don't know have sheet in front -- I don't know the exact answer to that question so I don't want to misspeak. I know that when we look at the sales within these centers, shortly after the first quarter, we launched some new initiatives that seemed to be taking hold; I'll let Meg speak to it. But early indications are very positive.

Yes, so we decided, we have been obviously doing lot of testing of promotions throughout all the channels and so in Medifast, the Weight Control Centers we tested for the month of April, this new -- it is called Fit in Four and basically it is for four weeks you come in you get a program and then you get Medifast meals for that month. And it is a lower cost option of shorter time frame but the success rate we are seeing and the sign-up rates we are seeing are high. It is about $15 a day versus the previous program that Weight Control Centers were offering so it is so offer the other programs, 50% of people are signing up for this new shorter version and 50% are still signing up for the longer program. And I think the added plus there is that people are having difficult time making a long-term commitment but when they find out and see the results immediately, they are more likely to stay longer. And we are actually seeing that. So it is very preliminary obviously April data that they we are looking at, we're anxious to see May as well but so far there is some really good things happening there.

And that's in all the company owned centers.

That's in all of the company owned centers, yes.

If I look at -- I guess come back to revenue guidance and so it looks like on the low end of guidance your revenue would be fairly flat next few quarters. You have kind of mentioned that there is a lot of stuff coming out throughout the year additional products and that. Can you talk about little what the impact of those products is as far as your guidance is concerned?

We are going to have two things happen, Kurt. You are going to have positive revenue with the product and I think we don't know the negative impact of the clinic transition. So really is a balance of both happening and that's what we -- depending on the timing of the sale, if we don't sell some of the clinics until later, revenue could be better but I think very clearly we are coming out with a lot of these products in that mid year time period after our convention and we see an opportunity in the back half to leverage that opportunity. How to quantify it, is difficult because we just don't know how many -- with the clinic sales you are going to be at -- we have got some very good prospects and we feel we are going to make good progress but we don't have the exact view of that yet. And we'll have a better view when we do our next earnings because we will have more time to see it.

Yes, as we talked about before and definitely the Favors at Home, those of you have tried it, it's our lean and green meal, it sold out, so we thought it would have an adoption rate and it surpassed the adoption rate we thought so right now the new product perspective we are extremely happy about the new ones we've launched thus far. But I think it's not only just the product, there is a lot of unique activities and new things coming out in the back half of the year that we are very excited about to improve the products.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Well, I just want to thank everybody for participating on a call and for your interest in Medifast. Thank you very much.