Tivity Health, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Tivity Health Q4 2020 Earnings Conference Call. . I would now like to hand the conference over to your speaker today, Ryan Wagers, Chief Accounting Officer. Thank you. Please go ahead, sir.

[Ryan Wagers:]

Good afternoon, and welcome to the Tivity Health Fourth Quarter 2020 Financial Results Conference Call. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information and related 8-K filed with the SEC are available on our website at tivityhealth.com. I would also like to highlight that our financial presentation within today's press release and supplemental materials are reflective of the divestiture of the Nutrition segment. Therefore, all results of operations and balance sheet data related to that business are now reported within discontinued operations.

[Richard Ashworth:]

Good afternoon, and thank you, Ryan. Thank you all for joining the call today to discuss Tivity Health's fourth quarter earnings results. Joining me on the call is Adam Holland, our CFO; Tommy Lewis, our COO, will join us during Q&A. I want to start by thanking all our Tivity health colleagues whose dedication, discipline and focus continue to drive results for our clients, members and shareholders. Looking back on 2020, I am proud of our colleagues and how they responded to an unprecedented pandemic. We were able to successfully improve the financial health of the company and our fitness business quickly adapted to the changing needs of our members and clients by launching a new and dynamic suite of virtual offerings. We believe these digital offerings not only allow our current homebound members to stay active and connected with the help of SilverSneakers they will be a critical contributor to our new digitally enabled member engagement platform going forward, which we refer to as the SilverSneakers Connect strategy.

[Adam Holland:]

Thank you, Richard. Now on to the fourth quarter results for continuing operations. Revenues for the fourth quarter were $100.6 million, a decrease of 37% from the same period in 2019. SilverSneakers revenue was approximately $74 million, down 39% as expected compared to last year due to fewer revenue-generating visits as a result of COVID-19. Similar to last quarter, SilverSneakers revenue profile during the fourth quarter of 2020 was substantially different from the same period last year. Revenue from per member per month fees represented 58% of our total SilverSneakers revenue compared to 34% in the same period last year. We ended the quarter and the year with 16.7 million health plan members eligible for SilverSneakers, an increase of 9% over 2019. The fourth quarter ended with 3.6 million enrolled SilverSneakers members. Total SilverSneakers visits were 10.1 million during the fourth quarter of 2020, and this compares to 25.6 million last year, with monthly average participation decreasing during the quarter to 2.6% compared to 7.7% last year. Within the 10.1 million visits, approximately 804,000 visits were digital. During Q4, 77% of our gyms reported at least 1 visit. Of note, January 2021 virtual visits of over 400,000 were the highest monthly total we have seen and in-person visits for January 2021 are in line with our expectations, each of which is a very good start to the year. And now to Prime. We generated $21.5 million of revenue in Q4, a decrease of 33% from last year. We ended 2020 with 218,000 paying Prime subscribers compared to 343,000 subscribers at the end of 2019. This subscriber decline accounted for the majority of the year-over-year revenue decline. We had approximately 2.5 million gym visits from Prime in Q4 2020 compared to 4.8 million in the prior year. For WholeHealth Living, during Q4, we recognized $4.9 million of revenue. In summary, COVID-19 and the related gym closures negatively affected our SilverSneakers and Prime revenue for the fourth quarter as expected. Also, we deployed a fourth quarter marketing campaign of approximately $2 million to promote awareness of the SilverSneakers virtual offering and help drive digital visits. Our continuing operations generated adjusted EBITDA of $35.2 million for Q4. And for the year, we generated $147.9 million of adjusted EBITDA from continuing operations. Turning to our year-end balance sheet and cash flow. We ended the year with cash on hand of $100 million and term loan debt of $467 million with a leverage ratio of 2.36x, well below the maximum ratio of 5.25x as calculated under our credit agreement. In January 2021, we paid an additional $45 million of principal amortization, which makes our next quarterly required quarterly payment due in December of 2022. Now turning to our 2021 guidance. We highlighted our 2021 guidance in our earnings release and our supplemental materials this afternoon. Total revenues are anticipated to range between $455 million and $485 million. We estimate adjusted EBITDA from continuing operations to range between $150 million and $155 million. Our assumptions for SilverSneakers performance during 2021 are as follows

[Richard Ashworth:]

Thank you, Adam. We'll now open the call to your questions. Operator?

[Operator:]

. Your first question comes from the line of Jailendra Singh with Crédit Suisse.

[Jermaine Brown:]

This is actually Jermaine Brown filling in for Jailendra. So first, on your guidance, during your prior quarter, you had enough confidence to give Q4 guidance? Curious what factors have emerged that did you increase confidence in giving full year guidance. And can you provide some color on the puts and takes that drive the upper and lower balance of that sales and EBITDA range?

[Adam Holland:]

Yes. Yes, sure. Yes. So what gives us confidence if you tick through, and there's some supplemental information in the deck today that may be helpful. One of the key items is the eligible members. We began the year when we thought we would begin, and we expect to end the year with eligible members of 18 million, and that's a critical component. Another critical component is what we mentioned in the prepared remarks, our January visits have started off very well. Over 400,000 virtual visits in January and our in-person gym visits have been right on our expectations. And aside from the weather in February, which we're obviously was going to be an impact, we are still looking good. So the start of the year has been as expected. Prime has begun the year as we've expected and as has WholeHealth Living. And so with that, coupled with the engagement information we've received from members in terms of the desire to return to the gym, the desire to return to community fitness, the desire to continue with virtual, we feel like our guidance expectations are not unreasonable at all. And with -- obviously, more of a back-end view, with more visits in the back half of the year, more margin dollars in the back half, but I feel like this is a just clearly have enough visibility to give the guidance we gave today.

[Jermaine Brown:]

Got it. And on your strategic transformation to member-centric platform engagement company, can you provide some color on the level of resources that are currently available in-house versus those that you'll have to partner with to get access to and those that the company will invest internally for?

[Richard Ashworth:]

Hey, Jermaine, it's Richard. Good question. So it's going to be a combination of both. I would say that we rightsized the organization to be ready for growth and have folks on the team who are really focused on our digital offering, our virtual suite. That's been successful as you've seen from the performance for this year. But a lot of the expertise we are going to get from our partners. As I mentioned, Snowflake and Redpoint, we also have some other companies that are well known that we're bringing on board to help us in our platform capabilities. So I would say the majority of the expertise will come from partners, but we've kept a small and mighty team here with in Tivity as we're orchestrating the overarching member journey and experience we want to create and then using outside capabilities to help us accelerate that.

[Operator:]

Your next question comes from the line of Dave Styblo with Jefferies.

[David Styblo:]

Richard, I'd love to just hear a little bit more about the -- where that question and with the member-centric activities. Can you just give us some more concrete examples of things that you're looking to do there? And how Tivity can monetize those activities? Are those things that are going to be paid for by the senior in some way or from other partners, other MA plans, perhaps? Just to give us a little more sense of what that's going to look like over time.

[Richard Ashworth:]

Yes. So thanks, Dave, appreciate the question. The way we're thinking about this is the engagement platform really drives value across all of the pillars that we put in the supplemental materials. So it's a way to bring eligible participants in and engage with them in a very personalized way. And so getting the information from the member, getting whatever needs and interest they have, and I'll give you an example here in a moment, and using some of our new capabilities with our partners so that we can increase awareness, get more conversion, get more engagement and utilization. Two quick examples. One would just be social connection and social offerings. A lot of our health plan partners are really worried about social isolation and loneliness in this population, not just the COVID-19 impact, but may be exacerbated by that, but a problem even pre-pandemic. And so by launching this engagement platform and having social connection opportunities for our members, we believe that there's value in that and that our health plan partners find value in that as well. And so more to come on that as we begin that process and that offering in the market. Second would be one like nutrition. We obviously have our Wisely Well brand, which is more on food distribution, but we could pivot more toward behavior and more toward up-front content and information and engagement, not just the food delivery and the engagement platform would enable us to do that. And as you know, nutrition is a covered supplemental benefit. To your question on where the pay comes from, generally, my bias is not from the member, and it's more like it is today, traditionally through plan. But over time, there could be other entities that also get a benefit from us being able to engage this population in a better way. So if I think about at risk groups or I think about other partners in the market or other stakeholders in the market that are helping this population. Our platform could be a great way for people to get that engagement and get that utilization. Now we wouldn't be maybe providing that service. The partner may be doing that. We would be the conduit by which they could get the exposure.

[David Styblo:]

Okay. Great. Maybe a question for Adam about the SilverSneakers eligible bridge. So if I think about jumping from 16.7 million at the end of the of 2020 up to 18 million. It's about 7%, 8% growth there. Can you talk us through the bridge components there? I know you guys have talked about some new wins that we're going to add 350,000 or so new lives, then you'd have normal market growth on top of that. So putting those together, I could imagine, and it's not hard to envision where you could have a SilverSneakers eligible growth of double digits, well north of 10% since the underlying market is growing 9% this year. So is there some offset to that? Or is guidance perhaps just bias to the conservative side for now as you're going through the plans?

[Adam Holland:]

Yes, you hit the main components, Dave, and you're right. The biggest bridge component is the open enrollment period, right. And so that's the period of time where members have from October to December to switch plans and start a new plan on the new calendar year January 1. And so for us, we started the year well ahead of the -- where we ended 2020 at 16.7 million, and so we're shy of 18 million, which is typical every year. And every month, we have agents, folks that are turning 65 to become eligible for Medicare, they can join a Medicare Advantage plan. And this is a case every year, we ramp up as those agents occur to get to that 18 million number by the end of the year.

[Operator:]

Your next question comes from the line of Sean Weiland with Piper Sandler.

[Jess Tassan:]

It's actually Jess on for Sean. I think my first question is, in the past, you guys have spoken about some high-frequency members in SilverSneakers membership, driving a significant majority of the business and people who go to the gym kind of 5 or 6 or 7 times a month. Can you just give us maybe an update on the prevalence of those high-frequency members and just what they've been doing through the pandemic? And what your expectations are for then in 2021 and thereafter?

[Richard Ashworth:]

Yes. Thanks, Jess. Richard here. I'll start. Adam, if you want to clean up here. I think, first of all, I would say that our average participant per member has been stable, if not slightly higher through pandemic for those that are actually going to the gun, which stand some rationale to that right, that people that really want to go to gym are finding a way to do that to the pandemic. The virtual channel is showing even a higher propensity for frequency, which is a good thing. So I think it's the ease of the vehicle, easy to use our tools to be able to do the workout plus they're at home, right. So they don't have some of the barriers that may prevent them from hitting that frequency when they're going to a regular gym. So what I would say in terms of the behavior is that the average visit per participant is stable, it's not a little higher through the pandemic. We would expect that to come back to some other levels back to previous levels, but maybe a little bit better with our engagement platform coming online. And then the digital seems to be a higher-frequency channel, which I think is a positive thing for plans and for members. But Adam, anything you want to add there.

[Adam Holland:]

Yes. The only thing I'd add, Jess, is one of the components of the core fitness strategy is to help improve that frequency even further. And so I think as those tools are deployed over the year, the omnichannel platform that we're putting into place this year is going to be critical to that have member-centric customized communications to the members. You'd be amazed at just how much an e-mail or communication from even an instructor can produce an additional visit and engagement experience. So I think we've got upside there. Happy to have where we are. We talked about, I think, in January, how strong that was, but I think we can do better.

[Jess Tassan:]

Okay. And then just a follow-up. I think we heard that you said 2021 marketing and SG&A should be less than 2020. Can you just help us understand that commentary just versus the new engagement engine coming online and maybe the responsibility to inform members that have face again to go to the gym and that things are kind of open and operating in as usual?

[Tommy Lewis:]

Jess, Tommy here. We will not be using television in 2021, at least that's our plan at this point. So there's your increase from 2020 to 2021. We're planning on using digital to support our marketing efforts. We want to be more precise to use very targeted marketing approaches with search and social and e-mail and other digital techniques. Now well, Adam mentioned in the prepared remarks that the marketing will be loaded a little more heavily toward the back half. We want to reserve some marketing dollars when people feel more comfortable going to the gym so that we can put some promotional efforts in place at that point.

[Richard Ashworth:]

Yes. I think it's just really focusing more higher ROI strategies than maybe some others. I would say TV actually was -- we used some TV in Q4 quite successfully to build momentum here. But our build on the SG&A side and on the marketing side is somewhat predicated on vaccine distribution and people wanting to go back to the gym, the horsepower or firepower that Tommy just mentioned and also the digital means by which we use those engagement capabilities.

[Operator:]

. Your next question comes from the line of Vikram Kesavabhotla with Guggenheim.

[Vikram Kesavabhotla:]

I wanted to start on the free cash flow guidance for 2021. And Adam, I think you talked about a handful of drivers around CapEx this year that may be a little more unique. Can you just walk through those in a little more detail? And I guess on a longer-term basis, as you think about the business going forward, how should we think about the free cash flow profile of the company relative to what we've historically seen in the Healthcare segment?

[Adam Holland:]

Yes. You could really just bridge it, Vikram, with a few key components. So if you start with adjusted EBITDA, you're going to have cash taxes, you're going to have cash interest, you're going to have CapEx. I think the other big component is probably a negative move on working capital that's assumed in there. As our visits ramp up, there's a differential in when we get paid versus when we pay plan or when we pay gyms, rather, we pay gyms faster typically. And so as visits ramp, there may be a little bit of a dynamic in the back half of the year, which puts pressure on that. I think from a historical perspective, we're free cash flow was a bit higher. I think you have to take into account we didn't have any cash interest to speak of or at least a lot less. And we had a -- paying virtually no cash taxes as well. We had an NOL that have been carried forward from our divestiture with Healthways. So there are some kind of unique dynamics, I think, from 3 to 4 years ago that aren't here today, which bridges that difference.

[Vikram Kesavabhotla:]

Okay. Great. And then maybe just one follow-up question. I think historically, you've talked about each year, just seeing some natural inflation and the gym costs that you pay to your network partners. Just curious if you can talk about how that dynamic played out in 2021, and if there's anything unique around that in this year. And any updated thoughts on that front?

[Tommy Lewis:]

Vikram, Tommy. Our conversations with the gyms have been rational and constructive in what's really a very turbulent year. Every network has its puts and takes. The majority of our larger gym partners are in multiyear agreement, so we feel good about that. From time to time, there's pressure. But this is core to our business. We've been doing this effectively for 30 years. So we're comfortable with how those discussions are going.

[Operator:]

There are no further questions at this time. I will turn the call back over to Richard Ashworth.

[Richard Ashworth:]

I just want to thank everybody for their time, listening to our Q4 2020 earnings release, and have a good evening. Thank you.

[Operator:]

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