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Medifast (NYSE:MED)
Q4 2019 Earnings Call
Feb 26, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon. And welcome to the Medifast fourth-quarter and full-year 2019 earnings conference call. [Operator instructions] I would now like to turn the conference over to Scott Van Winkle. Please go ahead sir.

Scott Van Winkle -- ICR, Investor Relations

Good afternoon. Welcome to Medifast's fourth-quarter 2019 earnings conference call. On the call with me today are Dan Chard, chief executive officer; and Tim Robinson, chief financial officer. By now, everyone should have access to the earnings release for the period ended December 31, 2019, 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.medifastinc.com. This call is being webcast, and a replay will be available on the company's website. Before we begin, we would 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 believes, 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 upon 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 call.

All the forward-looking statements contained herein speak only as of the date of this call. And with that, I'd like to turn the call over to Medifast's chief executive officer, Dan Chard.

Dan Chard -- Chief Executive Officer

Thank you Scott. And good afternoon to everyone joining us. Thank you as always for your interest in Medifast. I'll start today's call by giving an overview of our fourth-quarter performance, then Tim will review the financial results in more detail and provide our first quarter and full-year 2020 guidance.

We'll then both be available to take any questions. We're pleased with the very strong finish to the year with both revenue and earnings ahead of our guidance. Most importantly, we've seen a solid year-over-year growth in the number of active earning OPTAVIA Coaches reflecting our ongoing efforts to prioritize the development of our coach base in order to drive an ever-expanding community of clients. In 2019, our community grew to more than 30,000 OPTAVIA Coaches and over 500,000 OPTAVIA clients.

Our focus on growing our number of clients which are people who buy our products but do not receive any commission-based payments, is a demonstration of how we continue to redefine the direct-selling model. By doing so, we are driving long-term sustainable growth and building value for our shareholders while remaining devoted to our mission of offering the world lifeling transformation, one healthy habit at a time. Our business is at the very heart of the health and wellness industry, now worth a remarkable $230 billion in the United States alone. The weight loss, weight management and healthy lifestyle health segments of that industry continue to expand and represent a huge addressable market for us, not just at home but also around the world.

We've already established ourselves as a leading player in the market, and we will continue to drive industry share by nurturing and developing OPTAVIA Coaches and serving a growing number of clients across the world. 2019 was a transformational year, focused on building technology and infrastructure aimed at preparing the company for our future growth objectives, while updating our systems to give our coaches and clients the support they need as we drive the business to the next level. Our coaches are the key of the OPTAVIA difference with clinical studies proving weight loss and adopting healthier lifestyle is more approachable and more effective with a human support system. In 2019, we focused on strengthening our coaching community and providing coaches with the vital tools necessary to increase the personal interactions between them and their clients.

Again, by building a strong base of coaches, we are expanding our ability to drive an engaged and energized community of clients. And it's our commitment to nurturing and growing that community that makes us stand out in the direct-selling segment. As a result of having great products and great support, we were able to exceed our challenging goal of hitting 30,000 coaches in the United States, two quarters ahead of schedule. We also made progress with our expansion into Hong Kong and Singapore, gateway markets into Greater China and Southeast Asia, and we are encouraged by the initial response.

We expect the business to develop over time in these two new markets just as it has here in the United States, first, through client development and then through the conversion of clients to coaches. This is the cornerstone of our sustainable business model. We continue to expand our product offerings to create SKUs developed specifically for these markets, and we are now seeing a positive response within our target markets. During the second quarter of 2020, we expect to open a distribution center in Hong Kong to support the region and reduce shipping costs.

We have completed development of our new mobile app for use worldwide with client management ordering and meal planning capabilities as well as the ability to add new languages quickly and effectively as we expand. We have significant initiatives planned for 2020, and we have given ourselves a solid platform for further growth. We have made significant progress in addressing the growing pains we experienced in the third quarter and fourth quarter of last year, and we're confident that these challenges are now behind us. We had seen some impact on coach and client experience caused by migrating to new technology platforms.

We've now completed migrating our client-facing mission critical systems including those impacting business intelligence, e-commerce and customer relationship management, and have built a platform that will enable us to scale significantly and expand well beyond our current markets. These migrations were essential as we seek to drive scale and deliver our long-term goal. We are pleased with these implementations. In the supply chain, vastly increased demand meant we needed to dismantle and restructure our existing supply chain operations to allow new systems to come online.

This caused some disruption to our coach and client experience, and as we detailed in our last earnings call, this had an adverse impact on our gross profit margin in the third and fourth quarters. We've now established and implemented solutions to give us the capacity and flexibility to support increased demand in the future. I'm pleased to say that these actions have resulted in increased order accuracy and clients -- and increased client satisfaction. Finally, as we also discussed last quarter, Medifast experienced some issues in the second and third quarters related to a highly organized automated scheme using stolen credit cards to transact business on our e-commerce sites.

These activities led to unanticipated negative effects on profitability and distorted our forecasting. I'm pleased to report that the software and new processes implemented in the third quarter have been successful, and bad debt levels have returned to historical levels throughout the fourth quarter and we expect this continue into 2020. Our guidance for 2020 reflects a residual impact on our revenue growth trends resulting from the operational challenge I just mentioned. The impact on growth in 2020 is the result of the slowed client and coach attraction in the final two quarters of 2019 which in turn impacted the size of our client and coach bases as we begin 2020.

We believe the slowdown in our growth trends is short term in nature, and we are excited for the additional initiatives we have in store to support our long-term growth plans. As a management team, we are firm in our belief that we can deliver growth not just today, but for the long run. As we seek to develop further scale however we must take -- we must make sure that we do so in a responsible way that does not adversely impact our fundamentals. Our coaches are one of the key differentials between OPTAVIA and our competitors, and we must maintain a high quality of service if we are to drive long-term growth.

That means striking the balance between aggressive revenue targets and ensuring an excellent client experience. Based on our current capacity, we -- and understanding of the demand for our current offering, we believe Medifast can sustain a highly predictable baseline annual revenue CAGR in the mid-teens. There's much to be excited about at Medifast as we look forward to 2020. We have recently reorganized our technology operations to support digital technology and client satisfaction to main operational excellence as we drive growth.

We are now well prepared to launch our new cloud-based enterprise resource planning platform in the second quarter which is yet another step to setting the stage for accommodating future growth. We are confident in our top-tier partners and our extensive testing, and we expect a smooth implementation and transition. As mentioned earlier, we have also finalized our mobile platform and have plans to launch a beta version in all markets in the second quarter. This platform is aimed at giving our coaches and clients the necessary tools for increasing productivity and enhancing interactions as well as supporting mobile orders and payments in our new Asian markets.

We're excited to announce that we will also add a satellite office to our footprint midyear in Salt Lake City which will act as our technology hub to support all of our new technologies we have put in place and have coming online in the near future. We are impressed by the talent in Utah, and we are excited to expand our capabilities in this area. Additionally, as I've already mentioned, we expect to open a distribution center in Hong Kong aimed at supporting growth in Asia. Improving -- this will improve transit time and improve margins over time, especially through reduced shipping costs as we expand our footprint in the region.

We remain confident in our market opportunity and our ability to execute. These strong fundamentals are the foundation of our competitive advantage and position us for sustainable, profitable growth in the future. We have a strong balance sheet and cash flow to support our growth aspirations, all while returning cash to our shareholders including an over 50% increase in our dividend during the fourth quarter. We have an incredible group of employees at all levels, dedicated coaches and a compelling effective health and wellness program, fueled by amazing products that collectively are enabling us to fulfill our mission of offering the world lifeling transformation, one healthy habit at a time.

In summary, we are excited to propel this company into the next phase of growth. And with that, I'll turn the call over to Tim.

Tim Robinson -- Chief Financial Officer

Thank you Dan. And good afternoon everyone. I'll review the financial results for the fourth quarter ended December 31, 2019, and I'll provide our first-quarter guidance and discuss our 2020 outlook. Revenue in the fourth quarter of 2019 increased 17% to $170.6 million from $145.8 million in the prior-year period.

We ended the quarter with 31,800 active earning coaches compared to 24,100 in the same period last year and 32,200 exiting the third quarter. Average revenue per active earning coach for the quarter decreased 9.2% to $5,229 compared to $5,756 for the fourth quarter last year, in line with expectations shared in the last earnings call and we anticipated pressure on this metric due to the operational headwinds experienced in 2019. We believe we are well into the recovery period and expect average revenue per active earning coach to return to normal levels as 2020 progresses. OPTAVIA-branded products grew to 79% of our total company consumable units sold in the fourth quarter, up from 72% in the prior-year period.

Gross profit for the fourth quarter of 2019 increased 17.4% to $128.1 million compared to $109.1 million in the prior-year period. Gross profit margin as a percentage of net revenue increased 30 basis points to 75.1% versus 74.8% in the fourth quarter of 2018. The improved gross margin reflects our midyear price increase and reductions in cost-related inventory obsolescence partially offset by customer concessions. SG&A in the fourth quarter of 2019 increased $20.1 million to $109.4 million compared to $89.3 million for the fourth quarter of 2018.

The increase is primarily a result of higher OPTAVIA commissions expense, temporary elevated consulting costs related to technology initiatives to support the growth of the business and increased salaries and benefits. Our effective tax rate was a 4.7% benefit in the fourth quarter of 2019 compared to 22.4% expense in the fourth quarter of 2018. The fourth-quarter tax benefit was a result of discrete federal tax benefits from share-based compensation partially offset by increases in the effective state tax rate of approximately 2%. Net income in the fourth quarter of 2019 was $19.9 million or $1.66 per diluted share based on approximately 11.9 million shares outstanding.

Discrete federal tax benefits from share-based compensation had a $5.7 million impact on net income in the fourth quarter or $0.47 per diluted share. This compares to fourth-quarter 2018 net income of $15.7 million or $1.30 per diluted share based on approximately 12 million shares outstanding. Our balance sheet remains very strong with stockholders' equity of $104.8 million and working capital of $74.8 million as of December 31, 2019. Cash, cash equivalents and investment securities as of December 31, 2019, decreased $8.3 million to $92.7 million compared to $101 million at December 31, 2018.

The company remains free of interest-bearing debt. Inventory increased $9.9 million to $48.8 million as of December 31, 2019, compared to $38.9 million at December 31, 2018. The increase is related to inventory investment to support the growth of the business including the introduction of approximately 32 SKUs related to our Asian expansion in 2019, the initial production of the new Habits of Health system and continued efforts to maintain inventory levels to meet current and future demand. Our board of directors declared a quarterly cash dividend in the fourth quarter of $13.4 million or $1.13 per share which was paid on February 6.

As Dan noted, this reflected approximately a 51% increase in the quarterly dividend. During the fourth quarter, the company did not repurchase any additional shares, leaving approximately 2,369,000 shares of common stock remaining under our share repurchase program. Now turning to our guidance. We expect first-quarter revenue to be in the range of $166 million to $171 million and EPS to be in the range of $1.35 to $1.42.

For the full-year 2020, we expect revenue in the range of $715 million to $745 million and EPS to be in the range of $6.25 to $6.55. Our fiscal year 2020 guidance assumes a 22.5% to 23.5% effective tax rate. As we've discussed, 2019 provided some operational challenges that we believe are now largely behind us. Dan noted these challenges temporarily muted coach and client attraction.

Our guidance reflects the time we expect it to take to regain momentum. Our full-year guidance reflects steady improvement as the year progresses and a full-year rate of growth that will meet or exceed industry growth expectation. We executed effectively through some challenges in 2019 and ended the year in a strong financial position, and we believe strongly in the business that we have worked very hard to build. That concludes our operational and financial overview.

We appreciate your interest in Medifast, and Dan and I are now available to take your questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Steph Wissink with Jefferies. Please go ahead.

Steph Wissink -- Jefferies -- Analyst

Thanks. Good afternoon everyone. Dan, if I could just start with a question for you on the sequential trend. Usually, we see a nice sequential boost Q4 to Q1, just given the seasonal effect of the category.

Can you talk a little bit about the conservatism in your guidance, what you're seeing quarter to date that would lead you to kind of guide to a flat to even down slightly sequential pattern in your revenue?

Dan Chard -- Chief Executive Officer

Yeah. Thanks Steph. I think it's probably easiest to kind of go back and revisit what we talked about last year or last quarter call and then talk about how that applies. So if you look at it, our coaches performed four things, four competencies.

They attract clients, they support clients, sponsor new coaches and develop coaches. In the back half of 2019, we forced them to spend less time doing that -- let's consider those the high-value tasks, to support dissatisfied clients. So think about that as answering client complaints, helping them with returns. All the things we talked about in the fourth quarter.

The specific disruptions that were impacted, and I'll give you a little bit more kind of color on these. We had, from a technology standpoint, we identified in the back half moving to the fourth-quarter 218 items that were -- that needed to be fixed. So think about those as kind of small things. Some might be a sell-on report that was inaccurate or a button that if it's clicked twice gives an error message.

So that was the technologies. In our supply chain, we were in the process of increasing our overall capacity by 40%. And so in supply chain, we saw a 95% increase in client complaints in the back half. And then you're aware of the credit card payments, we had $2.8 million in bad debt.

So those -- all those things were disruptive to the coaches and distracted them from performing those two top highest value-added activities, attracting clients and supporting clients. So when we think about how we measure the disruption, it -- we saw a 34% decline in the growth rate of client acquisition, so 34% fewer new clients coming in. That moderated in the fourth quarter to 8% as we implemented the changes. If you look at cosponsoring, in the third quarter, we saw a 25% decline in the growth rate and that moderated to 17% in the fourth quarter.

In the fourth quarter, we also said that we would make fixes to all three of these areas. So I wanted to share with you what those fixes have resulted in. On the supply chain side, complaints are now down to 70 -- are now down to 74% at the end of 2019. In fact, January 2020 represents the lowest complaint rate that we've had for the previous 12 months.

So at a new low point. So that confirms that we have fixed those supply chain issues that were challenges and headwinds to us in the fourth quarter -- in the third and fourth quarter. On the technology side, all 218 identified technology items were fixed for releases in the fourth quarter. So all the work that's currently being done in that -- being done now is to improve user experience moving from good to excellent.

But we're back to where we were during our high-growth rates. From a credit card payment standpoint, we have software in place and processes that have changed, and our bad debt levels are back to where they've been in terms of historical norms. So more specifically, to your question, what that means for 2020 and how we guided, our two key metrics that drive growth were impacted by these numbers. So new client acquisition and cosponsoring.

So the impact is on the proportion of new clients to existing. So think about new clients and new coaches as being the most active portion of our business building engine, if you will. New clients are the ones who are just coming in on the five and one Plan, and they have a higher spend level. So they drive up productivity per active earning coach, one of the key metrics that we share with you.

If you think about new coaches, they're the ones who are most active in bringing in new clients. So those are the two groups that were impacted by the disruption. So we're going into 2020 with fewer new clients as a ratio to existing and fewer new coaches as a ratio to existing. So those are the two things that have caused us to guide down for the first quarter.

And then what we anticipate as those ratios turn back to where they normally are and where they normally have been historically during our times of growth, we'll start to see the growth return as our business returns are normal without our coaches facing these operational disruptions that we experienced in the back half of last year.

Steph Wissink -- Jefferies -- Analyst

OK, that's helpful. And then a second part to that question is just understanding a little bit about what the key measures are that you're looking for. So you just walked through a number of performance indicators that suggest the trend line is improving. But what should we look for in terms of the P&L to suggest that again looking at Q4 versus Q1 as a measurement even on flat sales, it looks like your earnings are going to be down quite a bit quarter to quarter.

So maybe talk a little bit about the earnings profile as you expand through the year, improve the business. Should we also expect the incremental margins to expand again?

Tim Robinson -- Chief Financial Officer

Yeah. Hi Steph. It's Tim. Yes, that's exactly right.

So even when you think about the first quarter, we have a higher cost base than entering last year. And we have our ERP implementation taking place in the second quarter. So that cost year over year will be lower, but we didn't have much cost in the first quarter of last year. We have the costs hitting the first quarter of this year.

But we're also going through a process really to kind of adjust our spending levels based on our guidance to make sure that we increase our operating margin year over year at the suggested guidance range. So we finished the year last year at about 12.8% operating margin. We're targeting to be in the range of 13.5% for 2020. So we will be able to adjust our SG&A.

We also expect some improvements in our gross margin year over year. We had a lot of pressure on our gross margin in 2019, as we talked about in the last two earnings calls just related to these disruptions. With the cost of expedited shipping, the cost of customer concessions, with that behind us, we won't have that downward pressure on gross margins in 2020.

Steph Wissink -- Jefferies -- Analyst

OK. Final two for us. One is just level of conservatism in your guidance. If we look at Q4 in the proxy, you substantially beat the guidance that you had provided just several weeks ago.

So maybe talk a bit about how you formulated your guidance for earnings for the year and the level of conservatism, we should think about that similarly to what you just delivered? And then last one, just on capital allocation. The stock has been highly volatile. Where does it get attractive to you to start putting some of the balance sheet capital to work to support the equity? Thank you.

Tim Robinson -- Chief Financial Officer

Sure. So on the latter question, kind of first. Our ability to buy stock depends on a lot of things, in addition to our desire. So as you know, in the fourth quarter, Engaged Capital filed a 13D on the advice accounts, so we did not repurchase shares during the quarter.

We would -- of course, we would love to buy back shares at the prices that it was at. So to answer your follow-up question to that, the price is very attractive. It was -- our reason we didn't buy back shares had nothing to do with our desire of repurchase. I apologize.

Now it's still going the first question. I'm sorry. Steph, can you repeat the question?

Steph Wissink -- Jefferies -- Analyst

Sure. Just wanted to understand a little bit of conservatism in your EPS guidance for the year? And kind of what the key assumptions were to get to the guidance level?

Tim Robinson -- Chief Financial Officer

Sure. So we had a nice tailwind behind us in the fourth quarter from a tax perspective. We called out in our release and in our script that we had about $0.47 per share benefit related to stock windfall impact on our income taxes. So based on where the share prices were granted and based on where they vested, you get a tax deduction for the full market value of the stock when it vests.

That no longer applies to future grants. The IRS has changed the tax laws, but we were the beneficiary of -- grandfathered for a grant that was based several years ago. So without that -- so if you look at our EPS, we were about $0.47 higher. But even without that, we would have beat our guidance range, but our -- we would have beat it proportionately to revenue.

Steph Wissink -- Jefferies -- Analyst

Thank you.

Tim Robinson -- Chief Financial Officer

You're welcome.

Operator

Our next question comes from Doug Lane with Lane Research. Please go ahead.

Doug Lane -- Lane Research -- Analyst

Hi. Yeah. Just to piggyback on Steph's question. I'm just wondering -- and I know, Dan, you mentioned a lot of things as far as your forecasting is concerned.

But back in November, you're still looking for $1 billion in revenue in 2021. Obviously, we're not going to get there. You delivered on the top line in both coaches and revenue in the fourth quarter. So what were the two or three key learnings between November and now that got you more cautious on your growth prospects for the next two years?

Dan Chard -- Chief Executive Officer

I think as the year -- the last three months transpired, we took a very close look into exactly how our coaches and our clients have been impacted by the operational challenges that they faced, allow us to look more closely at how we -- what we are doing to improve and assess how quickly things will get back to normal. So we think, Doug, that we're back to normal from a standpoint of coach and client experience being what it was during our high-growth periods. What is different and what always takes just a little bit of time to recreate is what I mentioned earlier which is that proportion of new people coming in, both in forms of coaches and clients versus existing. So that takes place as the sponsoring of new coaches gets back to normal and the attraction of new clients gets back to normal.

So there's nothing that we see that prevents that from happening. It just is taking a much larger base than we've had in the past and getting that ratio to return to where it needs to be to show those rate of client acquisition and cosponsoring, get those back to where they have been.

Doug Lane -- Lane Research -- Analyst

Now, if you -- I mean your active coaches in the December quarter were better than what I have. But it sounds like maybe there's going to be fall out in the first and second quarter where we could see that number actually go down sequentially?

Dan Chard -- Chief Executive Officer

I mean, we don't guide to the number of active coaches, but coaches, active earning coaches, typically are correlated for obvious reasons with the growth of the revenue. So yes. I mean, I think we'll see -- based on those same two things that I mentioned earlier, we need to bring in -- our current coaches need to bring in new clients, and a portion of those new clients will become coaches, and a portion of those coaches go on to be business leaders, and they bring in new coaches as well as the coaches and other -- the new coaches bringing in new clients. So that's how the business builds.

The slowdown that were projected that you're pointing out is really related to that ratio of new coming in versus the existing being there. So our existing coaches are what will get us back on track. So the growth we've seen in the past, that will happen throughout the year quarter by quarter.

Doug Lane -- Lane Research -- Analyst

OK.

Dan Chard -- Chief Executive Officer

And as that happens obviously clients -- I mean, it starts with clients increasing. So the number -- we derive over 90% of our revenue from clients. And so it's about coaches bringing in new clients, and a portion of those clients becoming coaches. So that's what we look for to get our growth engine back.

Doug Lane -- Lane Research -- Analyst

And I guess what remains uncertain is the timing of that. Do you have any examples or in your experience, like how long do you think this reset if you will, will be? And how long before you think things will get back to normal now that you fixed the issues that caused this, right, the service issues, the ERP, and certainly, the credit card issue was a distraction. But is there anything that you can point to as to the timing of a recovery of the kind of growth you're looking for I guess doubling the business now every four to five years, that kind of pace?

Dan Chard -- Chief Executive Officer

Yeah. I mean, if you -- back to the first part of your question, what have we seen in the past. When we put together the right mix of products and programs and support going into 2017, that's when we started to see the growth happening. And that happened because a lot of new clients were coming in, and a lot of those new clients are becoming coaches.

So if you think about '16 to '17 and then '17 to '18, that's where we saw the business begin to grow. I don't think -- and this is -- it was clear in the earlier script, we believe that our growth rate, to the point you made, is going to be more in the mid-teens rather than in the 20% to 25% range, largely because we're a bigger business now. And with our increased understanding of how we best support the coaches and the training system, we view ourselves as a long-term grower in the mid-teens.

Doug Lane -- Lane Research -- Analyst

OK. Thank you.

Operator

Our next question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Hi. I know that in the modeling process in the past, you had always said you thought about productivity kind of being flat going forward, just to assume that. Do you suggest we do that in our models now or do you think that revenue per active coach is going to kind of invert up or do you think we should just assume flat going forward? Can you just give a little color on that?

Tim Robinson -- Chief Financial Officer

Hi Linda. Yeah, I think we expect to see it start to build again. As Dan mentioned, productivity comes from really two things, the number of clients that you're supporting and the value of each client. And newer clients are the most valuable clients from an average revenue per month perspective.

So as new clients come in, coaches start to spend more of their time on those more valuable things as opposed to supporting customer issues. They start spending time on coaching clients and developing clients into coaches. That will start to see that productivity move back up. So as we've modeled right now, you can see, we finished last quarter at about 5,200 -- a little more than $5,200, and we had gotten as high as $5,800.

We wouldn't expect it's going to move back to $5,800 quickly. But we do think it will start moving in that direction throughout 2020.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Thanks. And then -- I'm sorry, I missed the very beginning of the call, so I didn't hear your whole commentary. But is the international launch kind of going as you would expect or is it a little slower to ramp than you had thought? And should we be thinking about next markets at some point internationally or is that kind of put on hold at the moment?

Dan Chard -- Chief Executive Officer

I think two answers to that question. One is, the growth is happening the way we would expect in terms of the metrics showing that clients come on and spend and stay the way we would expect them to stay. And the client-to-coach conversion is nicely -- a little bit higher than what we see in the United States. So that's -- it's a new market and lower numbers.

So that part of the international expansion has gone as expected. As you can imagine, we picked Hong Kong as an example as a gateway market to Greater China. And almost immediately, we were dealing with the political unrest which had a -- certainly a headwind, and now we're faced with as well the virus scares. So that's been a challenge, even including Southeast Asia.

But we view those as a short-term impact. And certainly, because those two markets are still small relative to the size of the United States, we didn't call those out because we don't think they're -- they don't have a material impact on the quarter or normally have a material impact on next year. In terms of like how we view this, we continue to work kind of on -- think about it as looking forward, three to five years in terms of how we plan our initiatives including investment in technology and including our expansion plan. So we continue to believe that international will be a very important part of our business long term and continue to assess how to best do that and where we go and when we open those new markets.

But at this point, we don't have anything to announce related to that.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

OK. Thanks very much.

Operator

Our next question comes from Bill Baker with GARP Research. Please go ahead.

Bill Baker -- GARP Research -- Analyst

Yes, GARP Research. Yes, I just wanted to get a sense -- I know you've addressed a lot of what I was going to ask, but maybe just pick one thing here is the G&A expense which was fairly high in the second half of '19. And obviously, you're guiding for it to recede halfway first quarter and continue for the rest of the year, if you kind of work through the top and bottom-line guidance. Can you give us a little better sense of how -- is that driven by commissions of the older reps versus the newer reps being paid at different rates or is it extra expenses from ERP or fixing the supply chain? What's really driving that ratio? And how does it mend itself as the quarters progress in 2020?

Tim Robinson -- Chief Financial Officer

Sure. Hi Bill. So first, just from a seasonality perspective, the way our year kind of goes, right, is we have higher spend in the back year than we do in the front of the year primarily related to two of our events that take place, our convention in July each year. Last year, we had about 10,000 people there, so pretty big event.

We also have something called our International Leadership Advancement Trip which is a recognition and training event that gets expensed in the back half of the year, the third and fourth quarter evenly. The event takes place in the following year. So we always have a high amount of spend in Q3 and Q4. What was unique about this year is that in Q4, we've been implementing a new ERP initiative which we said we'd spend approximately $7 million in 2019.

We spent slightly in excess of $7 million last year. And in 2019, that was all flowed through directly to expense. There was no capitalization of the implementation based on the accounting rules in place for 2019. The accounting rules that are going in place for 2020 do allow you to capitalize that.

And while we expect to spend about $2.5 million in 2020, it'll -- only about $500,000 will actually hit the P&L in 2020. So we'll get some leverage there, for sure. So think of that as kind of a onetime expense hitting last year that will benefit us for a long time. A couple of other areas.

From a headcount perspective, we have increased our employee base to support clients in our distribution centers to support growth. So labor on a year-over-year basis is also an item to point out as far as an increase. And they're largely the key items. The rest is variable.

So when you think commissions, that's our largest expense, SG&A expense and it's really completely variable with the business. So that of course would grow as the business grows, but we view the percentage of commissions to be about the same. And how we pay compensation really, it doesn't have to do with your tenure. It has to do with your activities.

So we kind of think that will be somewhat consistent year over year. Other items of variability are things like shipping and things like transactional fees, transactional credit card fees. And our call center is an outsourced operation, so that is somewhat variable as well as the call volume fluctuates. So hopefully, that answers your question.

Bill Baker -- GARP Research -- Analyst

Yes. It does. Thank you.

Tim Robinson -- Chief Financial Officer

You're welcome.

Operator

This concludes our question-and-answer session. I would d like to turn the conference back over to Mr. Chard for any closing remarks.

Dan Chard -- Chief Executive Officer

Thank you operator. And thank you all for your interest in Medifast. We appreciate all your participation in today's call. And Tim and I look forward to speaking to you again next quarter.

Thank you.

Operator

[Operator signoff]

Duration: 45 minutes

Call participants:

Scott Van Winkle -- ICR, Investor Relations

Dan Chard -- Chief Executive Officer

Tim Robinson -- Chief Financial Officer

Steph Wissink -- Jefferies -- Analyst

Doug Lane -- Lane Research -- Analyst

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Bill Baker -- GARP Research -- Analyst

More MED analysis

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