Q4 2019 Earnings Call
[music].
Good afternoon, and welcome to the to the T. Health fourth fourth quarter and for year 2019 financial results Conference call.
At this time, all participants' lines are any listen only mode. After the speakers presentation, there will be a question and answer session.
To ask a question during the session you when each press star one on your telephone to the extent any non-GAAP financial financial measure is discussed in today's call.
You'll also find a reconciliation of that measure to the most directly comparable financial measures calculated in accordance with those with gap in today's news release.
Which is also posted on the company's website.
This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Any statements among others regarding to the T helper expected quarterly and annual operating and financial performance for 2019 and beyond.
For this purpose any statements made during this call that are not statements of historical fact, maybe deemed to be forward looking statements.
Without limiting though foregoing the worst believes anticipates plans expects and similar expressions arent in its identify forward looking statements.
Youre hereby cautioned that these statements may be affected by important factors among others set forth antibody hills filing with the Securities and Exchange Commission and today's news release.
Consequently, actual operations and finance.
Results may differ materially from though results discussed and a forward looking statements. The company undertakes no obligation to update publicly any forward looking statements, whether as a result of new information future events or otherwise and I and now I'll turn the call over to the company's share.
<unk> Mr., Kevin Wells, you, maybe can you maybe cancer.
Thank you and welcome to everyone, who has joined the call today.
I'd like to start off take into 1000 plus to be up colleagues, whose dedication and commitment are central to everything we do here.
Today I'm joined on the call, but fellow board member, Bob Gretchen, Adam Holland, our CFO and Tommy Lewis, our corporate Chief operating officer.
Also leads or Investor relations and integration initiatives.
We will conduct a question and answer session following our prepared remarks.
To begin the call I would like to knowledge todays press release announcing the departure of Donato Tramuto.
An auto joined the board in 2013, it was appointed CEO effective in the fall of 2015.
Your engine honest junior you have repositioned the company exiting unprofitable population health business.
In grew the core business well also diversifying the model to include nutrition and social connections loose.
We want to think Donato for his leadership and many contributions to the company.
Notwithstanding those accomplishments after much call and discussion the board determined that would it be and the best interest of all stakeholders to transition to a new CEO.
The legacy health care business continues to perform well.
However.
We have not been satisfied with the performance of our nutrition business and we believe the company will benefit from it transition to a new CEO.
The board has a thorough transition plan in place and we have initiated a comprehensive CEO search, which is being led by leading national executive search firm.
We appreciate that current director brought Gretchen with his vast industry and leadership experience has agreed to serve as interim CEO as we conduct a surge.
Bob has been a member board since 2015 and has over 30 years of experience and leadership roles in managed care.
Care at some of the nation's leading organizations, including serving as CEO of Bluecross Blueshield, North Carolina from more than a decade.
Bob will lead the Tivity health executive team and will also be supported by director been Kirschner, founder and chairman of digital performance marketing firm to Nuti.
Mr will provide board support for the nutrition business units digital marketing efforts.
Hi, Good Bob's leadership, we will continue to make improvements with a particular focus on driving profitable growth within the nutrition business.
As the CEO search is underway.
I'll now turn the call over to Bob Bob.
Kevin and good afternoon, everyone I.
I would like to admire appreciation put them out of his leadership over the years.
Let me first say that I'm excited to take on the role interim CEO, while our board conducts the search Protiviti helps next leader I.
Great respect for our colleagues who are so committed to solving big problems and addressing some of the most critical issues facing our health care system.
Now, let me turn my attention to the business as we look back on 20 Nike.
Our health care business remains strong is performing well and is profitable.
That business has a strong leadership team and generates significant free cash flow.
It's Adam will discuss we expect increase topline growth and 2020.
Admittedly the nutrition business has not worked out as well as plan. That's the completion of the acquisition in March of 29 King.
We have made some good progress in the past 10 bodes, particularly at our approach to digital marketing, we're seeing some promising results in certain key growth metrics for our Nutrisystem brand.
We believe there are areas, where we can improve our operational execution.
And although performing well below its potential the nutrition business unit remains profitable and generates free cash flow.
As announced today Toby Lewis.
It's currently Tivity holds corporate Chief operating officer add Investor Relations lead will serve as interim nutrition business unit President following cure across his decision to resign to pursue other opportunities in the New York area.
I do want to emphasize the Curis departure is not something we saw it.
But I do respect her decision.
Hobbies transformational experience and leadership style as well as already substantial involvement with the nutrition business unit makes him the perfect person.
Two assumed a central enroll.
The current emphasis will be on supporting the nutrition team execution of the 2020 player.
Increasing operational focus and setting 2021 up for success.
Now, let me turn my attention to the health care business unit.
Silversneakers utilization continued to be strong with nearly 26 million visits in the fourth quarter and just over 104 billion visits for the year.
Pride subscribers grew by over 15% to more than 340000.
Compared to just over 295000 at the end of 2018.
Turning to 2020.
Silversneakers January Eligibles of 16.1 billion or aligned with our expectations to achieve 16.4 billion eligibles by yearend.
This is reflected in the guidance we are announcing today.
Also as expected we did retained a portion of United Health individual lives.
The board than we anticipated add we have extended the agreement with United Health for group lives for another two years beyond 2020.
For Prime fitness, you'll recall that as previously reported we watch the fitness offering to walmarts.
1.5 million associates.
It was a Sochi associates have access to more than 9000 fitness centers in a network customized for wallboard.
Walmart is actively marketing this fitness benefit to its associates.
Early view of enrollment is exceeding our historical experience with the prime off.
Well, we're currently expecting increased visit costs, and 2020, which Adam will discuss more later I want to emphasize that we're happy to report. So we continue to maintain positive relationships with our fitness that work and expect to expand our fitness network partnerships in the near term.
I'll now turn the call over to Tavi to discuss the nutrition business, probably thank you Bob and good afternoon, everyone. Our goal is to return in nutrition business unit to healthy consistent and profitable growth with that we will continue our emphasis on digital worked to optimize the value of the brand and address areas that are underperforming.
Today I'll share how the 2020 diet season is going and then give some color and what we're doing for the remainder of 20 put us on the path to sustainable growth to set the stage I'll be candid nutrition business unit generated over $600 million in revenue in 2017, 18, and 19, but while it's still.
Produced over $70 million, an adjusted EBITDA in 2019 last year was a step backward to return to growth at the nutrition team prepared for 2020, the team first and foremost objective what to deliver a customer growth for the Nutrisystem, Brad Nutrisystem DTC business delivers the lions share of the nutrition.
Units revenue and profit will then Nutrisystem D. C customer acquisition is the single most powerful lever. We also know that after experiencing a year a decline in new customers industry history shows it's a tremendous challenge to reverse the trend for the next diet season with that in my God. We are encouraged.
Hi, Nutrisystem dark to diet season, 2020 through mid February we were up double digits and year over year customer starts versus the same period of time in 2019 and based on these start and an expected returns to the regular cadence of orders for the remainder of the year, we anticipate customer growth in the mid single digits.
For full year 2020 versus the full year 20, 980. This is certainly encouraging a lower anticipated average selling price is expected to brought a headwind nutrisystem revenue and EBITDA growth in 2020, I'll provide a better color behind the numbers first we introduced the personalized plans by Nutrisystem.
Likely the most innovative approach since that five launched in 2014 customers can now is the programs tailored to their body type food preferences and unique go.
Manager the Nutrisystem program is that while highly personal like everything Nutrisystem delivered remains as easy to follow and ever and offers to convenient busy people require second detained develop new creative that is delivering higher response across all DTC channel, helping us achieve a lower cost per order and evolving the.
And to broaden the appeal and third we expanded in digital as I, just mentioned DTC growth as a result of higher response, thus far and 2020, we have significantly increased the number of new people, we reach and an efficient cost per impression thanks to a dramatic increase in digital marketing our digital marketing.
Team had been profitably wrapping up our digital span and upper final digital channels in the back half of last year and the team with building to be in a position. We're in now at this has happened our media mix has shifted significantly television remains an important part of our media mix, but a much smaller one than years past I'd like to talk.
For a minute about the bogo offer and Nutrisystem pricing strategies during diet season, 2020, bogo or buy one get one free as a compelling offer that the team tested quietly and 29 team a few facts about bogo. This offer has effectively raise response, it's not the so driver of the growth in customer.
But it is a contributing factor all those who take the bogo off or pay less per each shipment test results show that they stay on the program longer such that revenue per customer, it's pretty much flat. We started the year with the bogo and guidance assumes promotional activity remains throughout the year, while bogo is the offer.
We are using an advertisement we do all we do offer different price points and options around length of commitment or most popular option. The monthly auto show at 29 pain program to generate incremental orders the team lowered the monthly autoship price moving into 2020 to support customer acquisition.
In the lower prices were continue this is lowering the average selling price in January and February year over year and driving more margin in 2020, but we believe there's upside potential on pricing and I'll touch on that in a moment now I'd like to talk about the current plans for the rest of the year on Nutrisystem diet season, 2020 is often encouraged.
To start the team and I know, there's more to be done to return nutrisystem revenue and EBITDA to growth Here's what we're focused on.
I will further enhance personalization and improve our innovation process.
We need to raise price to improve margin the nutrisystem customer attention team was responsible for growing revenue per customer 30% in total over the past several years largely through price increases greater up sell allow a car item and the introduction of improved product configuration.
Back to our team is testing various offers as we speak we believe we will find ways to raise average selling price and gross margin.
We will continue to grow reach to new customers and push for marketing efficiency. We've shared in the past activity health invested in the nutrition business units marketing technology stack in the back half of 29 team and into early 2020.
We are leveraging it and diet season, we have not begun to use it at its full potential as we are still onboarding, our new consumer data platform. This will be a key driver to our plan digital media expansion later in 2020, we therefore expect marketing efficiency to improve as the year progressive.
Now I'll talk about the South Beach diet, and our retail channel while each is much smaller than the DTC nutrisystem business. We're in need of a strategic adjustment because they are pressuring financial results I'll start with South Beach, We believe that South Beach diet has wide brand awareness and appeal in today's market. We believe it's a rich.
Original sustainable nutritional approach was ahead of its time and the kido friendly adaptation is on track, having said that the original hypothesis that it would be strike board stand up a business parallel to nutrisystem and the DTC space is not yielding acceptable EBITDA level in order to reduce our losses.
Pulled back media spend dramatically, which lowers revenue increases EBITDA versus 29 team. We have much work to do here will be quickly assessing the strategic options for South Beach diet, and we'll say more on future calls.
Retailing QVC have business model different enough from DTC, Nutrisystem and South Beach diet that we talked about them separately, even though they are channels through which we sell nutrisystem and a small number of south beach item.
Channels are expected to decline year over year and generate combined revenue at the top end of our guidance of approximately $25 million, we're doing a strategic assessment of how we operate in the retail space and let's say more about improvement on future calls.
Finally, we believe in the vision and the financial potential of our new wisely well program. Our first combined offering with the healthcare segment. The wisely well portfolio includes nutrition solutions for both health care and consumer needs.
I don't have meal bundled offers seniors and caregivers access to convenient home delivered meal designed to meet senior nutrition and dietary need to be clear. It's still early days for the wisely well concept. So we're optimistic that our approach to partnering with health plans to address nutritional needs will yield long term benefits, especially.
And why did the growth prospect Medicare advantage and supplemental benefit I'm enthusiastic about joining fort Washington team and Rolling and lastly, I believe in the long term potential for the nutrition business and I'm excited about bringing the vast strength of the nutrition and health care teams together to better serve our customers and help Americans live healthier and more can now.
Acted lot now, let me hand, it off to add on to review the financial.
Thank you Tommy and good afternoon, everyone.
I'll cover some additional information related to our fourth quarter results, then I'll discuss our 2020 guidance.
Our health care segment is strong and generated fourth quarter revenues of $159.1 billion, an increase of 4% over the same period last year.
Silversneakers revenue was 122.3 million, which was flat to last year. Despite a decrease ineligible lives.
With 25.6 million visits during the quarter.
We ended the quarter with 15.3 million health plan members eligible for Silversneakers.
We ended the year with 3.7 million Silversneakers members enrolled and saw a 7.7% active must we participation rate in Q4, which was an increase of 25 basis points over Q4 2018.
Prime generated $32 million of revenue in Q4, an increase of 22.6% over last year.
Primes growth was driven in large part by 15% net increase in subscribers, allowing us to finish the year with 340000 total subscribers and this excludes Walmart.
Walmart contributed to the remainder of the year over year Prime revenue increase and we're very pleased with our strong start to this very important relationship.
The Q4 health care adjusted EBITDA was pressured late in the quarter by unfavorable mix in our Silversneakers business as well as higher than expected utilization claims from our acupuncture business inside of home health living.
Turning now to the Q4 results of the nutrition segment.
Fourth quarter nutrition revenues came in at $113.7 million, a 12.2% decrease.
Compared to the same quarter last year.
This decline was primarily driven by decreased and the DTC business, which includes both the Nutrisystem and South Beach diet brands.
The DTC business generated 105.9 million in revenue down 10.8% from last year.
But then the DTC channel Q4 revenues from customers in their initial diet cycle, we're down 16.2% year over year, primarily due to fewer new customers start in Q3, which resulted in lower on program revenue in Q4 also we had promotional pricing.
Implemented within the quarter.
Q4, reactivation revenue made up 40% of total revenue and was down slightly at 3% compared to Q4 2018.
Rounding out Q4 nutrition revenue the retail channel contributed $6.8 million in revenue and QVC was $1 million.
Fourth quarter nutrition, adjusted EBITDA totaled $13.9 billion, including synergies, which was below our expectations and was impacted by several factors.
First lower revenue as I just discussed.
Look at Q4 nutrition gross margin was down reflecting the impact of marketing promotions that were executed in Q4 2019.
Third approximately $2 million and timing of spend and investments made during the quarter in preparation for 2020 diet season and beyond.
Now allow me to talk for a moment regarding the Q4 impairment charge noted in today's press release.
In connection with our annual impairment test of goodwill and indefinite lived intangible assets.
We concluded that the fair values of certain goodwill and intangible assets were below their carrying amount.
As a result, we recorded a non cash impairment charge to lower the carrying amount of goodwill for the nutrition business unit by approximately $137 million, primarily based on a new multiyear operating forecast of nutrition business unit that was established.
Established lower expectations for the coming years.
In addition, we recorded a non cash impairment charge of $240 million to lower the carrying amount of the Nutrisystem trade name.
We do not expect these impairment charges to have any impact on future operations, nor affect our liquidity cash flows from operations or compliance with the financial covenants set forth in our credit agreement.
Turning to our yearend balance sheet and cash flow, our Q4 free cash flow came in as expected and we ended the year with 1.3 billion a term loan debt and 104.6 million available capacity on our revolving credit facility.
While our nutrition segments business trends did not meet our expectations. During the year, we were still able to repay 105 million of the initial amounts borrowed during 2019, which is a testament to the strong free cash flow profile of both business units.
So with that I will move into discussion about our 2020 guidance.
We highlighted our 2020 guidance on our earnings released this afternoon.
We estimate our 2020 consolidated revenues should range between 1.24 billion and 1.29 billion.
We estimate consolidated adjusted EBITDA odd to range between $190 million and $205 million, including the benefit synergies.
Within the range of our consolidated guidance, we have the following assumptions for the health care business unit.
And this relates to the top end of our guidance range.
One.
Silversneakers revenue is expected to show high single digit growth boosted by organic membership increases new contracts that were one and 2019 and an improved participation rate driven by our marketing initiatives.
We expect to end the year close to 16.4 million eligible members and our goal is to drive over 114 million visits during 2020.
To our prime revenue is expected to grow in the mid to high teens year over year and will represent about 20% of our total health care units revenue by the end of the year.
Continued growth in both the organic membership and the new Wal Mart businesses are key to these assumptions.
Oh help living is expected to grow modestly in total revenue during 2020.
Moving onto adjusted EBITDA for health care.
We establish the 2020 guidance range between 140 million and $145 million inclusive of synergies.
Now, let me take a moment to discuss the primary reason why our health care adjusted EBITDA is not higher given our robust increase in revenue.
Our fitness partner visit cost for 2020 are expected to increase for both our Silversneakers business and prime networks due to a combination of higher contractual rate.
And expansion into some higher cars cost markets in 2020.
And while this level of increase is more significant compared to prior years, we were able to secure multi year agreements with four of our large national partners, which we believe will help curtail the overall impact of rate increases beyond 2020, as these four partners collectively make up over two.
Set of our entire fitness network.
And although we expect expect the fitness market to continue to be competitive both silversneakers and prime brings substantial volume and value to our fitness partners and we expect to maintain a positive and equitable financial relationship with our 18000 partner locations.
Now moving to do Newton, the Nutrisystem business unit.
Relating to the again to the top end of the guidance range and these comparisons are made on a full year over year basis.
Nutrisystem revenue is anticipated to be up slightly year over year.
While new customer starts are projected to be up for the first time in three years. They are being partially offset by lower revenue per new customer, which is comprised of average selling price program mix up sell rates of bars, and shakes and length of stay.
Net reactor they shouldn't revenue for Nutrisystem is expected to be flat in 2020, reflecting a combination of a higher customer pull size, partially offset by an Asian customer pool on a weighted basis. Following two consecutive years of declines and new customer starts.
As well as a lower average sales price.
For the full year reactivation revenue is projected at roughly 36% of total nutrition segment revenues.
Nutrition DTC gross margin is expected to decline year over year, primarily driven by promotional pricing and it does represent the largest factor and the nutrition units overall EBITDA decline in 2020.
Marketing efficiency is expected to be relatively relatively flat year over year. Despite an increase in direct media expense as we have moved to a more balanced approach with our TV and digital spend.
And as Tom you mentioned earlier.
And is reflected in our 2020 revenue guidance, we expect revenue declines in South Beach retail and QVC.
Which will also contribute to some of the decline in the 2020 EBITDA guidance.
At the macro level relative to other aspects of our guidance, we anticipate free cash flow to range between 60 and $75 million with capital spending between 25 million and $30 million, which includes investments related to widely well.
It is our objective to utilize all available free cash flow to continue to pay down the debt throughout 2020.
Finally, you will note in today's press release that we were we also gave guidance ranges for the first quarter of 2020.
While we're not planning on regularly issuing quarterly guidance going forward. We believe that the Q1 guidance will help clarify management's expectations for the revenue and EBITDA cadence in 2020, given the stub year comparisons for 2019 relating to our acquisition of Nutrisystem.
This concludes my remarks, so let me turn it back over to Bob Bob. Thank you Adam.
Let me leave you with this.
The legacy health care business remains follow the team is solid and the relationships ourselves.
The board and the company are committed to making the nutrition business a success.
Delivering revenue synergies and resolving Irish.
This will be the key operational focus for 2020.
In addition to finding a new leader for the new Tricia business unit.
We will continue to exercise financial discipline as we further de lever.
And we will find the next CEO for Tivity health.
We look forward to updating you on our product.
Thank you that we will now take your question.
Thank you.
First question comes from Alex Fuhrman with Craig Hallum.
Capital.
Great. Thanks for taking my question I'm curious if you could talk more about some of the health care initiatives that that you're exploring with BD nutrisystem business like wisely, well you can give us an update on on how some of those are going and some of the a the pilots that you've been doing over there and how that.
That factors into your guidance for this year will be helpful.
Hi, Alex Tommy Thanks, Thanks for the question.
Good news is that our pipeline continues to grow related to the wisely well suite of offerings. So we're pleased about that we continue to have discussions with our health plan partners.
Virtually every meeting in conversation, we have that the topic of conversation. So we're optimistic related to that as you know we have two pilots that are in play related to a.
Food insecurity, one of those is in the market underway. It at this moment and the other kicks off in the very near future.
In terms of our post discharge meal delivery I think you're aware, we have two relatively small contracts there were shipping meals and so.
Things are are going as planned and those are small contracts they won't add a significant amount to 2020 plan, but it gives us the the information we need to further refine the offering.
Okay. That's helpful. Tommy Thanks, and I can't give us a little bit more about the plan for the Bogo strategy. This year and then the impact of it it sounds like from your prepared remarks that it's something that the team with testing in 2019 did customer response to the bogo.
You know was was that now what you expected in 2020 curious if if people kind of picking between the bogo and the in the monthly auto ship and just the one month at a time any did did did the results of the test sync up with with kind of what you then actually saw during diet season in terms of what people were actually picking I'm just trying to understand.
And how much of the the weak results at the nutrition segment or are the result of that promotion versus perhaps other other factors.
So.
Good question and let me start by saying that the Bogo did its job the purpose of that promotion of the offer would generate responses to generate attention and awareness and it did that so it brought visitors to the website once they got to the website. They had the choice of choosing and a variety of configurations.
And a large majority chose the monthly autoship.
We we like the fact that the bogo is working to generate interest and and attention and we'll continue to refine the pricing and the promotional offers as we move throughout the year I mean.
Clearly, it's our objective to move move pricing up we have a price test in the market as we speak and we'll continue to work to work on that.
Okay. Thanks Tommy.
Thank you al.
And as a reminder to ask a question you need to press star one on your telephone once again that star one on your telephone to ask a question.
Your next question comes from a line of Ryan Daniels with William Blair.
Hey, guys. Thanks for taking the question maybe I missed the additional color on this with free cash flow 60 to 75 million seems pretty low given the 200 million EBITDA on time.
A little capital intensity as a business I know, there's some cost in there with the CEO transition some restructuring so.
Maybe talk a little bit more about the weakness in that metric in particular than what's a more normalized number if we back out.
Those one time expenses.
Yeah, Hey, this is Adam.
The free cash flow remember it it is after the burden of paying the cash interest that is after the.
The payment of cash Capex, so that may be part of the puzzle. We didn't know we didn't outlined specific ranges with the onetime costs you noted, but we did make them in there. We believe we were conservative in our estimates and we will clearly be trying to push that number higher as we push through the year, but for right now we felt like this was an appropriate.
Range.
And I think from your your question its spot on in terms of whats normalized and as I said my prepared remarks.
Both companies have the potential for a lot more free cash flow.
The healthcare end Nutrisystem, and we're going to be focusing on improving the operational aspects with with Tommy focused on getting the average sales price up getting the margin dollars up we believe we can do a lot better as we start to head into 2021.
Thanks for that and then little bit broader question with Dinamo.
Termination, obviously, reflecting disappointment with the transaction subsequent results as the board open any strategic alternatives for Nutrisystems worse is still kind of all systems go.
With that and running is a combined entity.
Ron This is Kevin I'll take that question the board remains committed to our strategy.
Indicated in our prepared remarks, we have been disappointed with the Nutrisystem.
Performance, we believe there number of reasons for that to include increased competition. Some operational missteps lack of innovation, all which we believe we can correct and move forward. It you can get fixed so we remain committed to that to putting these two brands together and moving forward.
Leader, our profitability has decreased over the last couple of years, we see no reason why we keep returned to levels that we were previously.
And if I might add this is Bob.
If I might add just one thing to that and that is that even with all of those issues that we need to fix.
We have a good team of people and the business continues to be profitable and generate free cash flow.
So we will be able to continue to de lever the business as we fixed the issues and move forward.
One final question I'll hop off just a higher visit races, Silversneakers I appreciate what kind of.
Onetime resetting that actually gives you better visibility underwrite going forward.
Uptick why now that's not something.
Tivity for a decade really heard of also why the pressure.
Those routes.
Excellent. Thanks.
Yeah no. Some of these some of these were strategic strategic moves we made and with some of our larger partners.
Vast majority of our contract auto renew every year and in certain circumstances, when we see fit we want to.
Have longer term.
Visibility to these contracts, which most of our PL contracts our year to year that.
There is a little bit of the of the reset sometimes on the upfront to get those deals done and what we're trying to look at is the long term, what's going to be best for the company years, two three and four outside of your 2020, so I'm not saying that we're not going to continue to see Jim Jim cost pressures with part of this was too.
Reduce the the year over year burden that might have taken place had we not locked up some of these larger agreements.
Bye bye, taking a step function up and locking them.
We lowered the potential inflation would be the cost of the future will still be similar but another multi year.
Right, having multiyear agreements with these when these Jim this is key and.
For the large ones we have.
Thousands of Jim contracts across our 18000 PL.
So we're always looking at where are the right strategic moves what's best for the company to long term and.
While we did incur this this visit costs increased this year. We may have increases next year, what we're trying to do as is.
Late or reduce the amount of increase and look we're going to continue to to try to increase profitability and other places. So this doesn't mean that this is going to go linear forever.
But for right now, we're seeing a little bit of headwind.
Your next question comes from the line of Mike Suky with Barrington Research.
[laughter] like Petoskey close enough Oh, Hey, so a couple a couple of questions.
I'm just curious is been kirschner is you can spend any more time in terms of supporting the Nutrisystem digital effort.
Good morning, and sort of going forward then.
For the last a year or so or or is that just essentially you're you're just.
Emphasizing that he's.
There to support can you guys just talking about that.
I think we're this is Bob.
I think we're very fortunate that Ben Kerscher actually lives in Fort Washington, Pennsylvania.
He has other commitments and his life.
But we do expect him to spend a little bit more time, and he's going to be providing board support for all of our digital efforts.
And that also entails.
Introducing us to other digital experts that we'll be able to help us move all of this forward.
Okay, and just sticking with Nutrisystem.
When you've had sort of Oh for three in terms of died seasons in the business is shrinking.
Okay.
What does that and I'm not asking for official guidance here, what is a realistic timeframe to turn around the business.
It's been struggling to this extend for this long I mean.
Is it three years is that a reasonable sort of way to think about hey, it's going to its going to take us.
A bit of time here, it's not a fix it in 20 and 21, all the sudden were flat or returning to growth can you just talked about that in general terms to the extent you can think yes, hi, my Tommy Thanks for the question.
The good news here is that the Nutrisystem brand is up double digits year over year through 215, and new customer starts versus same period last year and.
The good news there is that that is a broader customer base that we will be able to turn into reactivation revenue downstream. So it's a strong signal that the creative the message the offer the product are resonating with the prospects out there. So and again. This is the first time that new customer starts.
I have been up it been up and in three years.
The other important factor is cost per order is down and if that continues through the ended the year. This will be the first dominant in seven years or more that cost for orders down. So those are pretty good solid indicators.
The digital team are building out the upper funnel with more targeted more sequence type of messaging.
Migrating from we're shifting the media mix from.
TV to digital so really nothing good can happen without new customer starts and so we're optimistic that that we turn the tide related to that and there will be a flywheel effect downstream.
Okay. So like I guess just sort of.
<unk> trying to.
I guess.
Hi, good.
Drill down on a on a three year I mean, it's three years, the right timeframe to be thinking about a return to sort of overall growth I don't suspect you can be raising prices 10, or 15% on people and have them today.
Yeah, I think we want to stay away from from any guidance outside of 2020, but it's the board subjective and management objective to build sustainable profitable growth here.
Okay.
Okay. So then I was just real cure all right I just want to understand the three on it. This is jumping over to prime the 340000 subscribers. He said did not.
Did not include Walmart do you guys actually have a figure or or a rough.
Since the something you could share there in terms of the Walmart activations on that.
Yeah, we were not give a specific number on that right. Now we may later in the year, but we can tell you that the activation rate has been very positive actually exceeded our expectations as we roll through the holidays and a is that it's still still a smaller part of the overall prime business for now and as it matures over the summer we'll.
I'll have more to say that may give more details.
Okay. Okay.
Okay. Thank you.
Your next question comes from the line of Steve Halper with Cantor Fitzgerald.
Hi, one clarification question and then strategy question during the commentary you talked about nutrition at the upper end the range.
Would be would represent an actual increase in revenue for the full year could you just clarify that because the those numbers don't add up with the.
The.
Nutrisystem or nutrition segment revenue for for 2019.
Yes, Stephen what I was speaking to and those in those areas. The upper it was just the nutrisystem business within the nutrition segment GAAP and so so if you look at the Nutrisystem business, which which makes up the bulk of the overall nutrition business I think yet this year is gonna be.
Thats somewhere.
90% of roughly of the of the total that on the upper end would be slightly up.
Most of the revenue decline year over year is driven by reductions in South Beach retail and QVC.
The reason to EBITDA did not dropdown proportionally as because most of the EBITDA is generated from the nutrition Brandt mid I'm, sorry, the new tricks Nutrisystem brand.
And then thanks for that.
Clarification. So the other question and you have been sort of near term issue that needs to be facts around nutrition and at the same trying to time. The company had been talking about this whole opportunity around social determinants of how does.
Focus on fixing the diet business.
The nutrition business ended up itself take away from some of those efforts.
In that strategic area at least the short term.
So Steve Thanks for the question this is Bob.
I would say no to that I think we will continue to focus on.
Wisely, well and the work we're doing across our business unit segments.
I think we have we have the head room to do the work that's necessary to fix.
The issues that we have.
Without undermining our ability to that and we are continuing to make significant investments in the nutrition business unit to to make sure we are prepared for that.
Thank you.
Question comes from the line that as a Dave Styblo with Jefferies.
Hi, there thanks for the questions I I, just got strike to for quick second there with Steves question. So maybe this is this is part of it but I think that guidance implies front for the nutrition segment to be down about 9% high single digits on revenue.
And I think you're talking about customer growth for the full year being up mid single digit. So is the delta there that they fit but simply the average selling prices down 15% or so or or was there a little bit of mixing apples and oranges within that and I guess the other another element to that is what does what does guidance assume.
For some of the initiatives an effort that you're doing to improve.
The average selling price for the year, you talked about some of the new products and so forth that you wanted to add in and.
Some of the other efforts, but just wanted to get a sense of what is or what is not in and that guidance, Yes, Hey, Dave I could maybe I'll take the first part of your question and then and then probably take the second part.
In regard to the guidance the while the customer starts are up.
They are they're going to be offset and you said it right you got it right, it's going to be offset by average selling price. So while you you do have the new starts up your revenue is going to be less than that.
Upper end of arranged a neutral and this is all within the realm of just the Nutrisystem business not South Beach retailer QVC, you would be slightly positive at the top into that range.
And Dave in terms of the second part of your question guidance assumes that we will continue with promotional efforts. It may be the bogo or it may not we're going to try to land on on promotions and offers that resonate with the target audience that guidance car currently isn't a continuation of what we're doing so if we.
We're able to have successful test around pricing you could see some potential upside.
Okay and on on the health care side. So it looks like margins are compressing by about 200 basis points year over year.
And I think there's probably some some cost synergies in helping that business, a little bit, but but either way is that solely attributable to the rate increases that you're having to absorb from the network or is there other elements of business mix shift.
Perhaps in a walmart coming on that might not be as profitable any other color about bridging that.
Contraction in margins and and is there more pressure to come over time or if we sort of do you think had a floor and 2020 with us.
Yeah. It's.
I think right way to look at it it is primarily with our rate increases with with the with the T cells Theres always moving parts with new business and we don't get into individual contractual terms and margin profiles, but it that that PEO increase is is the primary.
Marketing it things below I think gross margin you actually see some improvement on year over year, even aside from the synergy benefits from 2020 so.
I can't I can't predict what the future is going to hold.
In terms of how the gym industry is going to evolve it's going up.
It's a very fluid environment would that many Jim So I think what we're doing here is with the big partners that we have if we can secure some visibility and outward years.
We will.
What we need to do next year to make the right decisions for the long term I think there could be continued pressure on gross margin I hope it's not to the same degree we saw year over year. This year I can't guarantee that but thats what were trying to do as we're trying to stem. The decrease in gross margin profile and we're not going to sit back and say that's the way it is either.
We're going to work hard below the line to make sure we're streamlining operations as much as we can you maintain a EBITDA and cash flow.
Okay. Thanks, and last one is.
The initially you guys were looking for $30 million to $35 million of cost savings has has that changed now given the dynamics of what's happening that business and.
Or has the trajectory of the ramp in years, one two and three bids that are unchanged.
Hey, Dave Tommy here, a good question no AG actually we're on track with what we originally committed to so.
Thank you see the numbers and.
Communication today that we hit our year one objective. So we're pleased about that near two we expect to have about 26, the 30 million embedded within adjusted EBITDA by the end of the year and we're still on track for the 30 to 35 that we committed to.
At the end of the third year.
Okay got it thanks.
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Your next question comes from a line of Challenger Singh with Credit Suisse.
Hey, Thanks, a lot.
With respect to the search for the new phenomenon CEO I just can you help us understand what kind of skills sought expertise that you're going to focus on and you have a timeline by when you expect to analysis.
Central basement.
Yes. This is Kevin I'll take that good question I'm not going to get into specifics of the job spec. If you will but I can comment we're looking for an individual who is going to be a strong leader.
Someone with healthcare experience.
Someone who can profitably grow in further integrate or two brands and finally someone who understands consumers and how to deeply engage with the users of our products. So that's kind of a broad outline of the skill set that we're looking for is it relates to the timeline, we have no preset timeline.
As indicated in his remarks earlier, we're fortunate that Bob as agreed stepped in as interim CEO. The board has full confidence and Bob.
And so that gives us the ability to take your time on the most important thing is we found the right person for the job we're going to work.
Judiciously, but we're going to take our time is on the right person.
Okay. Thanks, and then what Adam can you I mean, you talked about some of the impact of unfavorable mix on margin trends in healthcare segment can you provide more color data and what are you thinking about those factors in 2020.
Yeah sure and then what that comment related to is the fourth quarter.
Right.
What we as you know we have a mix of.
Different to two primarily two different types of contracts one is a PMPM pure PMPM and the other is what we refer to the hybrid and the hybrid.
We get paid primarily through the visits PMPM, it's just a flat rate and as we have visits that come from PMPM members, where we don't receive a revenue stream that can put pressure on on our cost of sales and while.
Most of the time that visit profile kind of matches off to the mix of members. You have there was there are some some factors some timing in geographies, where you see an outsize amount of.
MPM visits which create pressure and and that's what we saw in fourth quarter.
To answer the second part of your question, Steve Janet check and his team had been focused all throughout 2019 through 2020, and we are developing tactics to address some of these such as such as digital target marketing with some of the Silversneakers members, who are hybrid numbers to encourage more visits.
We certainly don't want to discourage RPM team members from coming to Silversneakers classes, that's not what Reed business to do we welcome them all and treat them. All the same that said when we see pick period. The pressure one of the remedies is to try to offset that with more hybrid visits and we're still working through that and and hopefully we'll have more to say as we've moved through the year.
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Okay on done on a higher because it costs you talked about not putting pressure on margin in that segment.
So something you can go back to health plans and try to put that in your pricing with them a value of the new contracts for I know it can be done for 2020, but for a full 2021, something you can pass onto a health plan partners.
It's probably not that's possible.
Well I wouldn't say, it's not possible I think.
There are always unique circumstances, and it's hard to synthesize all the moving parts in our Gen that work down to single examples, but I think I think where you've you've got pockets of pressure. There there are sometimes opportunities to work with health plans to see if we can get come to something that makes sense for both parties.
In some cases, you can't and we will continue to work and refine our our network what are the advantages of having 18000 is that you have some some jim's there are higher costing you have some jump that are lower cost and over time.
Sometimes you can shift membership to lower cost gyms.
With marketing and other in other tools we have.
But it it's not a quick process. So it's something we're focused on but there are usually no quick remedies.
Okay. Thanks, a lot.
Your next question comes from the line of Jessica Texan with Piper Sandler.
Hi, Thank you for taking my question I'm, just interested now with regard to Nutrisystem just historically, if he could speak at all to average length of stay for a customer and then just what impact does that buy one get on promotion had on average length of stay per customer and I'm kind of because.
And this assumed in guidance I feel like that said thank you.
Yeah, Hey, Jessica this is Tommy so the Bogo has extended the length of stay that's one of the things that we like about it and gives us an opportunity to continue to move them into additional months downstream.
And so just with regard to the historical length of stay per customer and can you speak at all to the I guess, just the incremental impact of the Bogo promotion.
Yeah, I think that's information that we wouldn't share for competitive reasons.
Okay got it and then just if you could seek it all to like revenue revenue per customer over the course of the diet cycle, just typically remain flat or does that.
Is there any kind of trend that we should be later on.
Yeah. Good good question.
We've had the opportunity to increase revenue per customer and it's been increasing over the past several quarters on the average selling price does impact that but we've proven that we've been able to to increase RPC over three year period, and and we'll continue to look for ways to do that.
Got it thank you.
Your next question well your last question comes from a line of sight.
Sorry, My pet Suky with Barrington research.
Absolutely Thanks, a follow up.
We're just going to go and maybe I Didnt hear this but did you guys disclose the south beach revenues for the quarter.
Okay.
Oh, we did not we have not broken that out all throughout 2019 <unk>.
Would you be willing to say how much that business was down for the quarter.
Uh huh.
I I can say for the year.
The and this is the.
Correct me, if I'm wrong, the full year I believe it was $55 million in total revenue 50, 53 53 for the full 12 months.
Okay, and I believe that compares around 50 65 million in the prior year and 22018.
Can you guys talk about because it does it does seem like it's certainly a <unk>.
The brand name I think theres, some power in South beach, and its attractive and it hit some good demographics and then also the low carb dieting aspect of it does continue I think to resonate with most people that are looking at losing weight, what what's sort of gone wrong.
In the first quarter that you guys are pulling back media.
Then there.
Yeah, Hey, Mike Tommy.
I think you're right. It is it has a well known well regarded brand and it is on trend with the low car.
It also plays into the healthy lifestyle, which is a very popular at this point in time that having said that the original hypothesis that we could stand up a business in parallel to nutrisystem is not yielding the acceptable EBITDA levels and and overtime that that product has has evolved to.
To become very similar to Nutrisystem and so I think we need to pull back our spending at this point in time preserve EBITDA and just do a recalibration on what to go forward model should be but you know we like the brand and we want to continue to offer the brand we just need to do more work there.
Okay is that a a potentially transitioning that into.
Completely digital I mean is that is that the sort of thing that that may turn that for you.
Yeah, that's a possibility and there are other possibilities as well related depression, and otherwise, but I think we need to do more work on that and report back later.
Fair enough thanks, guys.
Yes.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
We appreciate you being part of the goal.
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