Q3 2020 Tivity Health Inc Earnings Call

After the speaker's presentation, there will be a question and answer session to ask a question during the session. We will need to press star one on your telephone please.

Please be advised that todays conference is being recorded.

I would now like to hand, the conference over to per Speaker today, Mr., Ryan Wagers, Chief Accounting Officer and Treasurer. Thank you. Please go ahead.

No.

I, especially want to thank our nutrition colleagues have a tremendous amount of respect for you and appreciate your focus on execution and performance.

Our continued disciplined approach to managing these businesses has resulted in strong performance for both businesses again this quarter.

New fitness offerings, and social connectivity to engage more members in the gym, he walked virtual channels and in the community.

The basic some deschanel elements of this business core fitness and physical medicine or sound and secure.

2021 health plan contract renewals or at 99% and this is typical for our business. We renewed one of our top five health plan partners for four years through 2024. We also added 350000 additional lies the new client wins and market expansion.

Around 30% of our pre coded levels those members who have returned our visiting at about the same frequency as they did before.

Our recent Silversneakers pulse survey almost 80% of respondents said they will continue using digital offerings. In addition to the gym. This digital adoption has also opening new partnership opportunities with our health plan. As an example, we've been able to partner with Humana dependent their popular neighborhood centers to a virtual engagement model offer.

Training commercials and member materials as a key element of their 2021 benefits and our specifically highlighting our virtual offerings has exciting features for their beneficiaries to use during the pandemic.

As an example, one of our larger health plan clients has included Silversneakers references in five and gets commercials plus distributed Flyers, we concluded our selling season with the following highlights addition of over 350000, New Silversneakers lies for 2021, including new client and market expansion within our existing clients the new.

Thanks, Richard following up strong first and second quarter, we closed out another solid quarter for the nutrition business in Q3 with revenue up over 10% and adjusted EBITDA up roughly 57% year over year. The Nutrisystem brand DTC continues to perform well.

Delivering revenue growth of approximately 20% in Q3 year over year with strong EBITDA contribution our.

Moving on to home health living and other healthcare revenue.

During Q3, we recognized $5 million in home health living revenue.

This increase was driven by Nutrisystem, new customer revenue of $95 million, which was up 30% year over year, coupled with an increase in reactivation revenue, which was up 6% at $53 million.

Moving on South Beach diet revenue was $6.3 million down 48% year over year, and QVC and retail contributed a combined $5.4 million in revenue.

Around 42% year over year.

Third quarter nutrition, adjusted EBITDA was $28 million or 17% of segment revenues.

This compares to $18 million or 12% segment revenues in the prior year period.

The calculated under our credit facility.

During the third quarter, we recorded a noncash impairment charge to nutrisystem goodwill of approximately $66 million, which reflects the difference between our carrying cost and estimated net proceeds from the transaction with keynotes.

This impairment charge will not have any impact on current or future operations, nor affect our liquidity cash flows from operations or compliance with the financial covenants set forth in our agreement.

Based on the healthcare segment's revenue and adjusted EBITDA performance through.

Through the third quarter of 2020.

Call to your questions.

Operator.

As a reminder to ask a question you will need to press star one telephone to withdraw your question. Please.

Pound key.

And your first question comes from the line of Joe in your Singh from Credit Suisse. Your line is open.

Cylinder thing your line is open.

Sorry, I was on mute Hydrotreating guys. This is actually Jermaine brown filling in for our children. So impressive.

Impressive growth on your digital initiatives.

Given the financial flexibility that you have.

We have posted nutrition sale I'm curious about your long term plans is the is the primary growth opportunity focused.

Focus on the does this the outage digital health initiatives and if so can you just provide any color on the level of investments required to just continue to grow well within these programs.

Yes, Thanks remain Richard ill start and then Adam you want to pick up the investment side of the question I think the growth is going to come in both areas today, and we're going to see as you saw in the.

Physical visits coming back on Silversneakers and in Prime both relative from Q2 to Q3.

What we're seeing so far as a continuation of that trend that we see in visit in participating location visits continuing to grow and of course, you saw the the digital acceleration as well my view is that both of those are going to finish continue to grow and we are going to continue to invest in both.

And the investments we've made on the digital side is what has given us the growth you've seen here the million visits in the quarter over quarter growth.

We continue to do that in.

In terms of the total investment profile, Adam any comments you want to make on on that.

Here in Covid land getting started.

Nobody knows what the output will be but.

Pretty confident that we'll have.

Ah monetize level digital experience along with our monetize level physical visits I don't know Adam if you want to just.

Just point out the 494000 virtual whether instructor visit that we have that's in our supplemental deck, we do get reimbursed for those those are available today.

Okay got it and.

Thank you.

Your next question comes from the line I'm, Brian Daniels from William Blair. Your line is open.

Hey, guys next week, even design thanks for taking.

The questions I guess to start off.

Disney kind of the ship and seniors just discussing kind of digital.

Homebase fitness are you anticipating or have you been experiencing kind of any pricing pressures coming from plan design and see that's a little bit cheaper Avenue to provide fit.

Fitness services.

Thanks, Dick short answer is no longer answer is we.

We need to make sure that the combination value proposition for our plans works for them and for us and so so far we haven't had any any issues on the on the right or the reimbursement for for digital vs physical et cetera, but we're getting through covid and as they come out on the other end will work in partnership with our <unk>.

Plans to make sure that.

The.

The amount of money that they're spending on their members behalf as valuable and working for them. So far that feedback is very positive and so we're happy to see that more importantly, I think on our survey data tells us that members really want this and post covid. They believe a few things. They believe digital will still continue to be a part of their workout routine.

They'll move more into community and outside they'll still use the gym, but they're going to think about their fitness a little broader than they did going into covid and so our health plans care about the health of the member as do we and so working together in that in that pursuit I believe will will mean that digital and physical will both be a part of the.

The experienced any for our members and that both will be will be available.

Great. Thanks, and then kind of.

On the other side of that pre Covid. It seems kind of a silversneakers fitness division was experiencing a little bit of the cost pressures coming up on the gym.

We're kind of asking too.

You kind of pull a little bit of that of that Margaret from you guys I'm assuming given the.

Kind of a decrease in visits that kind of some sign a little bit I was just wondering kind of what youre updated outlook there on as.

We continue to kind of normalized.

Do you anticipate any increased pressure there that mostly kind of been shaken out at this point.

Yes, I'll start and then had them if you want to weigh in on this I think one for me is that there's always network pressure on the top side and the bottom side right, rather be the product or delivering or the the person who is funding it and so I think those dynamics are still at play, but with what's happening in the market.

What we've provided for queue for us to give you a view of kind of where we see.

Our performance to be in within that is our view of what happens on the network side in terms of costs, but Adam anything you want to add yes, I think I think overall the relationship with the with our gym partners are still very positive it's been a very tough year for them.

We have lost I believe less than 2% of our gym network during the quarter. So we typically have some some churn in our in our network 16000 gyms that we've been very pleased to see that we maintain a relative level similar to free covid.

And we will look forward to working with them.

Through the pandemic, because it's Richards said, they're still going to be an important outlet for the Silversneakers brand folks have been crystal clear they want to return to the gym. They want the social aspect and we want to make sure that we still provide that and we're working with them to make sure. It works similar to health plans works good for us in the gym partners, Yes, I think the relationship that.

We have on the plan side are strong and the relationships. We have on the gym side are just as strong and so we want as members to be healthier and for many of our members that means they want to go to the gym and for maintaining a robust network and good places to go is going to continue to important for us.

Awesome. Thank you for taking the questions you guys have a good night.

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Your next question comes from a line of Alex Firmin from Craig Hallum Capital. Your line is open.

Great. Thank you very much for taking my question.

Wanting to talk about the healthcare segment, which which I guess is going to be the the bulk of the business going forward now after the sale of the nutrition segment I know, it's so hard.

Give a forecast for next year, but considering some of the new wins and the enrollment growth ineligible alive, and what you're going to be seeing and considering.

And have a better plan for bond monetizing your digital engagement I mean, it seems like I'm sure. The plans are happy to you that you had a million.

Digital and print like that clearly your members why are you working on maybe more formal way to capture that and really measure that with the health plan.

Yes.

Thats for sure. So that's a big part of what we're doing right now is working in partnership with our health plans to understand what the combination looks like the key here. So the plan is to keep members physically active mentally stimulated and socially connected and working out actually does all three of those right and so the plan knows that our offering is.

Tier to your point is value the value of our offering is resonating well in terms of the monetization in the go forward future of it. Yes. We are we have very strong plans for that.

Do today, all in pursuit of working with our health plan partners to activate engage members overall and that could be more than just physical fitness in more than just in the gym and Jim will still continue to be important but so outside.

Of the gym and looking at the adjacent these market.

You can see many different choices that we can go out and we'll bring in will bring more clarity clarity for you on that end.

In Q4, one thing I want you to know as we approach that conversation is that we're going to do that very methodically very thoughtfully, you'll see some tests and pilots you'll see some sequence of events for us to get in there we're not going to.

Just kind of jump in and then try and figured out we're going to be very disciplined in the way that we we do that but still just a little early for me to get into the details of what those are but we plan to do that on the Q4 call.

Okay.

How about thoughts on capital deployment. After the deal is closed I will.

Theres some options that we can continue to put money to work organically I am curious about.

After that is do you have any sort of bias seems to maybe opening up and considering share repurchases or or given the uncertain times are you inclined to let the cash accumulate on the balance sheet.

And then maybe extension you do want to talk about M&A is there anything.

Maybe that was sold and with the strategy that you're going to maybe talk about if there is a small assets that make sense to build off to augment strategy, but any color on that topic would be great.

I'll start and Adam you can weigh in here too. So the first thing I would say is we are going to keep some optionality here.

In the short term so that we can deploy the capital and the exact right spot thats the most beneficial for for our stakeholders.

My preference is to put that into the business to drive long term terminal value growth and I think our strategy is compelling that we'll be sharing with you soon and inside there I think you can see lots of places for.

For us to invest that can can give good returns and better member experiences and enhance our relationships with all of our all of our partners with that said, we still have some some remaining debt as you as you know based on the materials that we presented so.

So one option is to put some there one could be as you suggested in a repurchase another one Peter just you know.

Tested in the business, there's a couple of different choices as I sit here now we.

I want to deploy the capital in the most efficient way that gives us the greatest full stakeholder return.

So we won't share any specific set of what we're going to do there definitely understand the root of the question Adam anything to nothing add on top of that Richard.

Good question. Thank you Sir.

Sure and just the last line I think guidance right now assuming that the EBITDA in the fourth quarter declined about $9.5 million from the third quarter and revenues only declining by about $4.5 million can you help can you help us understand the mechanics behind why the EBITDA that down so much deeper.

At or just some elements were you, making more investments or is that the flip side. There were some of the visits are starting to come online and as that happens.

The natural hedge that was in effect in the second and third quarter starts to unwind.

I appreciate that question Dave.

Yes, it's more the latter so what we called out in the in the prepared comments was the prime business in the whole health living business. As you know those are both kind of Ics fixed revenue models.

We have seen a decline in crime subscribers and.

Yes, there is.

What we're seeing right now the deck that could go down further in Q4.

And that's that's more I think due to just some of the seasonality effects of how that membership kind of rolls off.

Conversely, we also see increase in visits in prime so you've got kind of a smaller subscription base with more folks who want to go to the gym and we saw strong visits in October and you'll notice just compare to Silversneakers Prime profile visits is really like 50% of historical pre coded, whereas silversneakers more of a third and I think.

Just kind of go to spell that it's a very different Jim going based in Silversneakers in so when you have a smaller revenue.

Input in Q4, you've got more visit cost higher cost you're going to have some Q3 to Q4 margin decline with home health living.

Completely different business, obviously than gyms, but.

Those benefits are typically booked.

Bookings and on a calendar basis and so as we reached the end of the year lot of folks have pent up visits to their alternative care practice.

Clinician, whatever the chiropractor acupuncture massage therapists and they have to use it or lose it in a sense and so with with the end of the year approaching and a lot of folks not going out at all earlier in the year. We think we're going to have some increase utilization cost in fourth quarter. So kind of those two things and we typically sometimes see smaller gross margin in silversneakers due to season.

Now in the fourth quarter net is more around the holidays. Thanks.

Thanksgiving Christmas and not having not having quite the same average visit profile, but.

They are all that said there are there is there is room to for some small investments as we get launched on the strategy before.

Before we get into the new year, but the primary bulk I'd say, it's going to be driven in the gross margin arena.

Very helpful. Thanks, guys.

That.

Your next question comes from the line of Sean Wieland Piper Sandler Your line is open.

Hi, Thanks very much.

Are there any major renewals coming up at the end of the year that are worth calling out and if so how's the how's the conversation going on pricing with those given that the changing dynamics a utilization here.

Yes, good question and so what we put in our retention numbers and on net new lives as a total reflection of all of the ongoing.

Discussions or negotiations for the year. So we feel we feel good about that and that's pretty typical for us over the history, having that 99% renewal in terms of the economics, obviously not sharing individual deal.

Dynamics, but overall, we're pleased with the way that the margin is coming in on these plans relative to history and to what our expectations were so what I would say right now is healthy relationships with the planned very healthy renewals at 99% plus above market growth with market expansions and new clients that's across our our business not just in Silversneakers.

But also and will help living with 250 pounds. There so feeling good about the selling season and the renewal season.

Which is a reflection of those those numbers so overall very strong.

All right.

Thanks for that and.

How many.

James do you think are going to have in your network or going to survive. This pandemic accuse you see any any risk to losing any of those.

Yes, good question and it's something obviously, we watch very very closely the market our network is down about 2%.

Could that deteriorate further if cove it continues to cause some states to may be Rio.

Reopened restrictions et cetera, it's possible you.

We have seen some in the news with them.

Liquidity challenges and others, but other of our gem providers are actually very strong financially and can weather much longer cobot impact so it's hard to tell.

Offerings and for US is obviously, primarily around fitness is still down for their members and the way that they contract for that haven't seen a material change in in any of the approaches.

Thus far.

Okay, Great and then maybe just a follow up I'm curious if you can talk about how the current environment is impacting your overall marketing strategy and spending on the healthcare side in order to drive utilization and just how that strategy might've ball basically start thinking about 2021. Thanks. Good question and something we've been talking a lot about here.

These walls.

We're shifting the investment from the traditional marketing behaviors that we used to reminding people to go to the gym et cetera, and we've done it in two ways. One as we move a lot of that some of the investments gone down. So we've taken some savings and reduce some of the some of the costs, but the other way that we've done it has moved it into digital and.

Really making sure that our members on Silversneakers dot com and through our streaming platform have have the availability and understanding of how to get to our live with instructor led billable visits and so the world just look for a different right now I would say that our plan to continue to advertise or market silversneakers in a pretty consistent fashion previous years, where.

Prominently displayed on commercials were put on Flyers that are going to home many of our.

Health plans still want silversneakers to be prominent part of their AP materials.

Things of our own marketing, it's really been a shift toward digital and a slight reduction and the total marketing spend as we're putting together our plans for next year depending.

Depending on how Covid is behaving in the country will depend on how we deploy that that those marketing dollars, but I'm a firm believer in continuing to press on digital and working to get members activated one key thing is 25% of our digital visits are from members who are newly enrolled the silver.

<unk>. These are folks that essentially never would've gotten activated outside of the situation and so we want to take advantage of that that that makes it.

Better for our health plan. It makes it better for these individuals who are getting activated until we wanted to continue to invest behind that.

Great. Thank you.

Yep.

Your next question comes from the line of my Patootie Barrington Research line is open.

Good evening I think you may have just answered my first question. So.

That's 490, 425% were brand brand, new or 25% of the folks that make up that for.

494000.

25% of the folks that make up the 494, you got it okay and I didn't quite catch it at the beginning.

You said something about 80% will use digital offerings was that was that.

Survey of Silversneakers eligible or or active.

So that was that was across our Silversneakers base. So all of the folks that we have the ability to connect with so most of those would be enrollees, but it's not 100% enrollees, but I would say the majority of them are.

Okay. So that 80% of those are folks that are already using.

Are already in the program are somewhat at least somewhat active correct.

Yeah. Those are folks are silversneakers members and that's the way I would say yes.

And.

Catch it if you mentioned it the collaboration on the virtual.

A prime did did you say who that was with.

We did not disclose the backbone of the digital we didn't disclose that so we're keeping that.

In house, but it's it's a digital platform that enables thousands of videos to be available for members.

Helps us on the logistics of how people get on and how they're attract and.

Those types of things the data coming out of it.

Okay and.

And.

Yeah.

In terms of in terms of pine.

You have a sense of.

In terms of the membership.

Particularly the membership to earn subscribers that are still left I mean, I would assume that a lot of that is sort of business travel usage, I mean and given that.

It has been curtailed and probably will continue to be curtailed I mean that is that is that is that something that's concerning as that top of mind in terms of when you think about that business or how shall I think about it.

I can see why you think that but actually it's the opposite so what we don't see.

Business travelers using multilocation, because obviously travels reduced in the country that that's an impact that's actually not what we're seeing I think it just comes down to.

Your your.

Investing in a benefit for a gym that you used to go into and whatever the restrictions are in your area can only be there at certain times or are they limit capacity in there or you have to wear a mask the whole time, you're working out whatever the things are that may be a hindrance to you.

Or you may just be uncomfortable because of the situation at home with the kids are with grandparents et cetera, et cetera parents and so we're not seeing that it's business travel related where to see if people that are being thoughtful about how they're going to.

Get back to the routine the encouraging thing for me and Adam I think you just said this but just to reiterate it is.

We're back to 50% of pre covid activity levels across our Prime book and I think that speaks to the kind of accelerated return that.

Active subscribers are coming back to to the gym and as we see different pockets of the country, depending on what state it might be and what time. It reinstitute restrictions are opens up restrictions that we do see that that is a material impact on on visits and how prime users are utilizing.

Adam forgive I didn't catch this but the 143 to 145 that with guidance for.

His skull 20 on on on the silver Stinker side is that right, Yeah health health cared only.

Yep Yep Yep, Okay. All right. That's all got thank you. Thank.

Thank you.

And there are no further questions Mister Richard Ashworth, I turn the call back over to you for some closing comments.

And I just wanted to thank everybody for their time and and for the conversation today and look forward to to connecting thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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