Tivity Health, Inc.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good afternoon, and welcome to the Tivity Health Second Quarter 2019 Financial Results Conference Call. Today's call is being recorded and will be available for replay beginning today and through August 14, 2019, by dialing [phone]. The replay passcode is 9579725. The replay may also be accessed for the next 12 months on the company's website. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] To the extent any non-GAAP financial measures are discussed on today's call, you will be able to find a reconciliation of that measure to the most directly comparable financial measure calculated in accordance with GAAP 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, including statements among others, regarding Tivity Health's 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 may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Tivity Health's filings with Securities and Exchange Commission and in today's news release. And consequently, actual operations and results may differ materially from the results discussed in the 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 now, I'd like to turn the call over to the company's Chief Executive Officer, Mr. Donato Tramuto. You may begin, sir.

[Donato Tramuto:]

Welcome and thank you to everyone who has joined the call today. I have with me Dawn Zier, Tivity Health’s President and Chief Operating Officer and Former CEO of Nutrisystem; Adam Holland, our CFO; as well as Tommy Lewis, our Investor Relations and Integration Initiatives, who will be available during the question-and-answer session following our prepared remarks.Before we provide an update on our progress, I want to take this moment to remember Chip Wochomurka, who passed away last week after battling brain cancer for the last 18 months. Those of us who worked closely with him knew Chip as a dedicated professional, whose commitment to the success of this company was unwavering. He will be missed and his contributions will be everlasting. And we send our warm thoughts and condolences to his wife Jayne and their three sons.I will begin today with an overview of our enterprise level results and then discuss the healthcare business unit. Dawn will provide an update on the nutrition business unit; Adam will cover the financials as well as our outlook. But first allow me a moment to highlight the core strengths of the company. Our business clearly aligns with the needs of our health plan customers, SilverSneakers members, and where policymakers are directing the future of healthcare, namely to address the social determinants of health.There are no scores of articles and numerous policy decisions that have been already enacted and rapidly moving health plans and providers to recognize the importance of addressing the underlying issues of health such as lack of transportation, food insecurity, loneliness and inactivity. All variables that when addressed earlier in the healthcare cycle can have significant reduction in cost and improvement in quality.Medicare Advantage membership is growing in popularity because it's been shown to keep costs lower for patients while providing members with additional benefits that they value. It is also being expanded with more innovation to address well-care and not sick care, integrating solutions to address these very opportunities to keep people healthier. With regard to social determinants of health, Medicare Advantage beneficiaries are increasingly likely to be affected by socioeconomic and demographic factors, stressing the importance of plans, providing non-medical benefits targeted for these high cost, high need patients.In early April 2019, CMS finalized a rule giving Medicare Advantage plans regulatory flexibility to provide benefits directed at addressing social determinants of health such as buying fresh produce, providing food for beneficiaries with cardiovascular conditions. We believe that Tivity Health will be successful. In this area because of our experience and capable leadership team and we are one of the few companies addressing at scale, a bundled social determinants of health package coupled with a stable cohort of nearly 70 health plan customers with relationships that are unmatched in the industry.Our growth in the health business unit is rebounding and we are implementing new and creative ideas in the nutrition business unit that will leverage our health plan and fitness partnership relationships. Our balance sheet is strong and our robust free cash flow is allowing us to pay down our debt ahead of schedule. Additionally, our cost synergies are on track and our revenue synergies are beginning to take shape. We continue to make progress with both our operational and sales initiatives to leverage both our National Fitness Center Network and health plan partners as new distribution channels for the nutrition business.The healthcare business unit is also capitalizing on the synergies from the media expertise of Nutrisystem and their customer context center, which we've consolidated during the last quarter. We believe as evidence by the success of our first quarter media campaign that those last two synergistic benefits of the acquisition will be indispensable to the continued growth in SilverSneakers eligible lives and road members and increased visits. We’re just five months out from the closing of our Nutrisystem acquisition. We are fiercely executing on our plan to leverage the assets of these two businesses to drive significant long-term shareholder value.And with that I’d like to focus on a few key highlights specific to our second quarter results, which include first increased strong momentum in our healthcare business; secondly, early success in revenue synergies; and thirdly, optimization and expansion of our nutrition business. To the first point, we are experiencing increased momentum in our healthcare business and therefore I am pleased to share with you that we are raising our 2019 revenue guidance for the healthcare business unit. Additionally, and now that our selling season is over, our preliminary 2020 projections for revenue growth in the healthcare business for 2020 are somewhere between the high single to low double digits, driven by growth both in SilverSneakers and Prime.Additionally, I'm also pleased to share that we expect our total eligible lives will grow to between 16 million and 16.5 million eligibles as well as an additional growth of new eligibles for Prime by over 1 million as a result of a new Medicare supplemental plan and this is all for 2020. It's important to emphasize that the success we are experiencing today in the healthcare business was not by chance, it was by design. It was a direct result of the careful re-engineering and transformation plan that we launched in 2016. Back then, we identified several key issues causing lag in the healthcare business. And then we uncovered opportunities to correct those issues and position the business for growth.As a result, we're seeing the re-acceleration of this business that we knew was possible. For example, the re-engineering of the sales organization back in 2016 has unquestionably delivered the following year-to-date results. First, the successful 2019 selling season has generated more than 600,000 new lives for SilverSneakers going into 2020. These news lives came from both new health plan customers adding a fitness benefit to their covered benefits as well as from the welcome return of past clients. These gains in new lives coupled with the organic growth and Medicare Advantage will we believe increased our eligibility of SilverSneakers lives by nearly 8% in 2020 over 2019.Second, our launch of the intense customer and member first mindset back in 2016 prompted a change in the organization and as such we have forged stronger relationships with three of our core stakeholders

[Dawn Zier:]

Thank you, Donato. I'd like to start-off by addressing the Nutrisystem business results for the first half of the year. On our first quarter calling in May we shared that January and February program starts were down significantly. We worked hard, made several changes and we're pleased with our results in March when programs starts rebounded coming stronger than January and up double-digits from the prior year at a comparable return on investment.April starts came in comparable to February on lower spend, which results are encouraging. The lag [indiscernible] bit behind prior year, which was attributed to Easter timing. Based on all indicators, we believe that for the remainder of the year we will be able to exceed prior year new starts and forecasted as such. However, while we continue to rebuild momentum and show month-over-month improvements as we progress through the second quarter we fell short of being able to deliver the projected year-over-year growth with our current product at an acceptable ROI.Based on this, we’ve now revised our forecast down for the rest of the year. And also not meeting our top-line expectations, it’s important to note that the nutrition business unit continues to generate meaningful EBITDA and free cash flow. 2019 has been a tough year and we’ve assessed and are addressing head-on all the variants that impact our direct-to-consumer nutrition business, including new competitive and trends, product innovation, offer channel expansion and optimization. While we have had major success on our digital expansion initiatives and have improved revenue per new customer, expanded gross margins and reactivated more former customers than prior year, we fell short on the innovation front as our program failed to resonate as strongly as we expected and needed it to in the current competitive environment.As you heard Donato mention, we're investing in several key areas that we believe will fuel a successful 2020 diet season. We are reinstating the handbook that we use from 2013 to 2017 where we drove four successful years of innovation that delivered double-digit revenue growth and are in the process of implementing a major program redesign for Nutrisystem set to launch this upcoming diet season. The dynamics of the marketplace have changed and we've conducted extensive research, received significant consumer input, and are implementing live testing and fully expect to reclaim our leadership position within the industry on the innovation front.We know the simplicity and ease of our Nutrisystem program drives results as demonstrated by the millions of people, men and women of all ages that have tried Nutrisystem and have had success. We have decades of experience and believe our science backed and clinically substantiated results distinguish us from those who are newer to the market and just don't have those assets. In addition to product innovation we're also investing in our Adtech and Martech solutions and are conducting channel expansion test beyond television and digital, which I will touch upon in a minute.We believe we have a strong plan in place for getting the business back on track and ready for the 2020 diet season. One of the many benefits of being part of a larger organization is the collective talent and resources that we now have in place to help address all aspects of our program as well as to develop new channels to augment our direct to consumer efforts. As outlined earlier, we're implementing our OE strategy where we are O optimizing the core business to support the 2020 diet season and return the core business to grow and E expanding the business to launch new revenue channels, so diversify us from singularly dependent on the direct response advertising based approach. It's our belief that the execution of this strategy will lead to stabilization, growth and reduced volatility for the Nutrition segment.To add some color around the O or optimization component of our strategy. I'd like to elaborate on four key initiatives that we are focusing on and investing in to drive 2020 performance. The first is innovation. As I just spoke to, we will be introducing an all new program for Nutrisystem along with some major innovations around the south beach diet as well. We believe that our focus on varying consumer behavior and evidence-based solutions will allow us to lead the industry and offering new and breakthrough solutions to the consumer. As you know, we don't disclose specifics at this time of year due to the competitive nature of our business, but we do look forward to sharing more on future calls.Two, digital acceleration and media mix. Digital spend was up approximately 60% in the second quarter versus prior year and we expect to double year-over-year digital spend per Nutrisystem in the third quarter. Our digital efforts have had an acceptable ROI that is allowing us to target new audiences that we do not reach through traditional television media. We see a lot of opportunity for continued growth here as we head into 2020. This is already resulted [indiscernible] being able to dramatically shift our media mix towards digital reducing our dependency on television.Same 60% of our orders are coming to us through the web. That's not to say that TV won't remain an important part of our go-forward strategy, because of the scale and broad reach it provides, it will. As shared on prior calls, we have updated, leads us to believe that we cut back too much on television in the first quarter, especially as other competitors jumped into the space. Additionally, and it's part of our diversification efforts, we’re testing a brand new marketing channel in the fall outside of the television and digital channels, which we believe have promised. We'll share more when we update you on our diet season plan.Three, agency selection and creative. We're newly collaborating with two known and well-respected agencies to develop our 2020 diet season creative campaigns for the Nutrisystem in South Beach Diet brands. We'll be producing a large amount of television and digital video assets that we can use across our platforms. We will be expanding our social media and content strategy as we build off the wins from this year's influencer and content campaigns, and we will continue to drive engagement through our NuMi and South Beach apps which close to 80% of our customers are actively using.And four, technology – data enabling technology. We're investing in Adtech and Martech capabilities and the talent we use to support that having just launched our demand side and data management platforms, which allow us to do enhanced targeting and segmentation. We've also [indiscernible] funding for our customer data platform targeted to be ready in Q1 2020, which will control, refine and optimize the customer journey. These investments in cutting edge technology will further extend our long acknowledged analytic capabilities and we believe we'll be ahead of the competition. We will also be leveraging this technology with our healthcare business unit.Now some color on the E or expansion part of our strategy, which we [indiscernible] since day one of announcing the combination of these two companies focusing on two key components and underscoring [indiscernible] Health, Nutrisystem combination makes so much sense.First, as Donato mentioned earlier, by capitalizing on our food science capabilities, we plan to differentiate ourselves from our competitors by focusing not just on weight loss, but expanding into broader nutritional segments and providing much needed food solutions for those with food insecurity issues or chronic conditions. Health is the new wealth and we embraced the notion that food is medicine.And two, we are the only company in the weight loss space that has customer relationships with 70 health plans, multiple employers, and 16,000-plus fitness center partners. No one else even comes close to the new scale and reach that we have as a result of Tivity acquiring Nutrisystem. We believe that these new insignificant points of distribution will deliver predictable revenue streams and reduce overall dependency on advertising and promotion spend to drive growth. As a matter of fact, we believe that over the next two years as we diversify and expand a meaningful percentage of the total nutrition business unit revenue will come from these sorts of partnerships and we're excited about the pilots and rollouts already underway.To close my commentary, while we're no way near satisfied with the financial results of the Nutrition business so far in 2019, we are excited about our growth prospects as we look forward. We believe that the combination of science backed food capabilities, marketing expertise, healthcare expertise and unparalleled reach set us apart from the rest. And we are confident that our OE strategy will enable us to take full advantage of our unique competitive position.With that, I'll turn the call over to Adam who will review the financials.

[Adam Holland:]

Thank you, Dawn and good afternoon to everyone. Similar to the last quarter, we provided supplemental financial information on the investor relations page of our website that we hope will aid you in understanding our Q2 results and updated 2019 guidance. Further, please note today's press release includes non-gap reconciliation tables with related explanations.Turning now to our second quarter combined results. Total revenue for the second quarter of 2019 was $340.4 million, an increase of 124% over the same period last year. That income was $18.1 million compared to income from continuing operations of $22.7 million in the second quarter of last year. Adjusted net income in Q2 2019 was $31.2 million compared to $22.8 million in Q2 last year. Adjusted net income for the second quarter excludes certain pretax and post-tax items incurred in connection with the acquisition of Nutrisystem. Q2 GAAP earnings per diluted share was $0.37 with adjusted earnings per diluted share of $0.64. Adjusted EBITDA for the second quarter of 2019 was $70.3 million and this amount includes the benefit of approximately $1.3 million of realized cost synergies during Q2.Moving on to Healthcare. Our healthcare segment continues to perform well. The segment generated second quarter revenues of $157.5 million, an increase, a 3.7% over the same period in 2018. SilverSneakers revenue represented 78% of segment revenues or $122.9 million slightly higher than SilverSneakers revenue in Q2 of 2018. It’s important to note that this higher revenue came despite having 700,000 fewer eligible members this year. As an auto state that we are very pleased with this outcome and believe a validates revenue potential of the A-B-C-D strategy. Total SilverSneakers visits for Q2 of 2019 or $25.6 million relatively flat compared to last year.Although of those visits, more generated revenue this year versus last year. We ended the quarter with $14.9 million eligible SilverSneakers members with approximately $3.5 million enrolled and an 8% active monthly participation rate during Q2. Prime Fitness accounted for 19% of total revenue or $29.8 million for the quarter, an increase of 18% over the same period last year. Prime's growth over Q2 of 2018 was primarily driven by 15% net increase in subscribers hitting the quarter with over 334,000.Our Healthcare segments non-GAAP adjusted EBITDA for the second quarter totaled $35.7 million or 22.7% of segment revenues. This compares to $35.1 million or 23.1% of segment revenues for Q2 of last year. Note, this amount includes approximately $300,000 in benefits from cost synergies. There were three primary factors influencing Q2 healthcare EBITDA. First, our year-over-year cost per visit has increased as described on last quarter's call. They put pressure on EBITDA. That said, we experience some cost relief because the percentage of Q2 2019 visits from PMPM members was approximately 23.6% or 70 basis points less than Q1 in 2019. This sequential reduction of PMPM visits was beneficial to our Q2 EBITDA compared to Q1 because we experienced fewer non-revenue generating visits.Second, our whole health living business experienced higher than expected acupuncture utilization rate. Putting pressure on Q2 EBITDA as we operate this business primarily under a capitated arrangement. These two decreases to adjusted EBITDA margin were slightly offset by a year-over-year reduction in our Q2 2019 total marketing expense, which was $3.9 million in Q2 of 2019. Importantly, even with our planned lower marketing investment for the back half of the year, we expect continued strong performance in both SilverSneakers visits and prime subscriptions for the remainder of 2019.Turning now to the nutrition segment, the second quarter revenues for the nutrition segment came in at $182.9 million, a 4.4% decrease compared to the same quarter last year. This decline was primarily driven by decrease in the DTC business, which generated $170.4 million in revenue, a 4.7% decrease from last year. Within DTC Q2 revenues from customers and their initial diet cycle were down 11% year-over-year primarily due to fewer new customer starts. Based on the trends we have seen in our second quarter in July, we have projected that the total 2019 new customer program starts will be down single digits versus prior year. Q2 2019 reactivation revenue, which made up approximately 37% of our total DTC revenue was up 8% year-over-year helping offset some of the decline in new customer revenue.Based on these trends, we expect reactivation program starts and revenue to be up compared to last year. We continue to see positive momentum in growing both our upsale and a la carte items, and we've also been exiting from gains and customer length of stay on the program. Rounding out Q2 revenue for the nutrition segment, QBC contributed $3.5 million in revenue and that revenue from the retail channel was $8.7 million. While the retail channel met our revenue expectations for Q2, we now anticipate a reduction in year over year revenue for the remainder of the year due to reduced orders from some of our retail customers.Nutrition segment gross margin as a percentage of revenue showed improvement compared to last year, by balancing promotional offers and optimizing supply chain costs. Although marketing expense increased to $50.6 million in Q2 or 27.7% of segment revenues in the second order. As a result, our Q2 adjusted EBITDA for the nutrition segment was $34.7 million or 19% of segment revenues and this amount includes approximately $1 million in benefits from cost synergies.Turning now to our balance sheet. In conjunction with the closing of the acquisition of Nutrisystem on March 8th we entered into the credit agreement that provided Tivity as senior secure term-loan A and term-loan B facility totaling $1.18 billion as well as a $125 million revolving facility. I'm pleased to report that as of today's call; we have repaid $90 million of that initial amounts borrowed under the term-loan facilities. Because we are over a year ahead of our mandatory immunization schedule. We do not expect to pay down material amounts through the remainder of 2019 we expect to meet our objectives of achieving a leverage ratio of less than three and a half times by end of 2020. In May of 2019 we entered into an interest rate swap agreements to manage our exposure to fluctuations and interest rates. As of June 30th, 2019 these interest rates swap agreements had current notional amounts totaling $900 million.Turning to our outlook for 2019. As noted in today's press release we updated our February 2019 consolidated guidance in conjunction with updates to the outlook for our healthcare and nutrition segments. The healthcare segment revenue guidance has been raised to arrange of 625 million to $630 million driven by expected continued momentum and our SilverSneakers business where we now expect a slight year-over-year growth rate and stronger back half growth in prime as we layer in Walmart's new business.We're narrowing our standalone adjusted EBITDA range to $140 million to $143 million as we expect our PMPM mix as well as a higher than anticipated claims utilization rate from our WholeHealth Living network mentioned earlier to continue to pose a challenge through the remainder of 2019. The Nutrition segment revenue guidance, which includes projected results from March 8, 2019 through December 31st of 2019 has been lowered to $502 million to $512 million. Driven by an anticipated reduction in DTC revenue from fewer programs starts and lower retail revenue.Adjusted EBITDA for the March 8th or December 31st period had been lowered to a range of $80 million to a $84 million reflecting the lowered revenue range and new investments to prepare for a successful 2020 diet season. These combined segment adjustments resulted in the following consolidated guidance. First, as a reminder the consolidated guidance reflects the nutrition segments results starting on March 8th and is not reflective of the full-first quarter of 2019. We anticipated total revenue in the range of approximately $1.127 billion to $1.142 billion.Non-gap adjusted EBITDA of approximately $229 million to $239 million, which includes our commitment to deliver costs synergy savings of $9 million to $12 million in 2019. This would equate to adjusted earnings per diluted share in the range of $2.14 to $2.32. Our guidance contemplates depreciation expense of $17 million, interest expense including non-cash interest between $77 million to $79 million, a tax rate of approximately 29% for quarters three and quarter four and weighted average diluted shares of approximately $47 million for the full-year. Free cash flow including cash paid for interest is expected to be approximately $55 million to $60 million reflecting capital expenditures of approximately $22 million to $24 million.I will now turn the call back over to Donato.

[Donato Tramuto:]

Thank you, Adam and Dawn and thank all of you for joining us to discuss our second quarter. In closing let me summarize and leave you with these important points. First, the healthcare business unit is exceeding our expectations and we expect to enter into 2020 with high-single-digit to low-double-digit revenue growth returning us back to where we were in previous years.Second, our solid free cash flow supports our ability to continue to pay down debt aggressively on top of the $90 million we have already paid one-year ahead of schedule. Third, just five months after the closing of Nutrisystem, our revenue and cost energy initiatives are on track according to plan and further momentum will occur as the year unwinds. Fourth, the nutrition division is a business unit that has had many years of success and while it may have missed the innovation spark this year, the program works, the market is growing and it now benefits from the collective talent in this organization. The increase of new investments of approximately $3 million coupled with unparalleled access to the health plans and fitness and member networks will, we believe afford that business with a successful diet season in 2020.Lastly, and as we noted in our press release today, we are pleased to welcome to the board a new member Dan Tully from Altaris Capital Partners, a well respected long-term oriented investment firm that focuses on the healthcare industry. Altaris is a significant Tivity Health shareholder who recognizes the value creation opportunity of our strategy and we look forward to Dan's contributions to the Board as we continue to execute on our plans.And now before I turn it to the Q&A, I’d like to close by once again thanking all of our colleagues for their heroic efforts during our integration and the results that have come out of that integration thus far. Without them, quite honestly our innovation and successes would not be possible.Operator, I'd like to now open the call for questions, please.

[Operator:]

[Operator Instructions] Your first question comes from Steve Halper with Cantor Fitzgerald. Your line is open.

[Donato Tramuto:]

Hi, Steve.

[Steve Halper:]

Hi, thanks for the – yes hi, thanks for the commentary and all the updates around the business. So I just wanted to ask about the comment that you made with about Humana and you're working with them on food insecurity, and there's more to come. So from your knowledge, right did Humana create their 2020 MA plans with some sort of nutritional benefit in there [indiscernible] with a placeholder and perhaps that's the part that – if you could just expand on what you think Humana is doing around that component would be really helpful?

[Donato Tramuto:]

Yes, great question Steve. And as I stated earlier, listen the Medicare advantage plans now and what CMS passed not only this year in the years previous, it's giving these plans regulatory flexibility and you've got to take your head off to Humana with the bold goal initiative that they undertook a number of years ago. They are clearly ahead of the pack and yes to your question they envision and these pilots certainly will unveil the – what I call true outcomes of lowering cost and improving if you will, overall what they're calling healthy days.Humana looks at healthy days with these membership. We know that if you're 65 and older, you're living in rural America and you've identified yourself as being food insecure, the number of unhealthy days per month is about 26. So these are the areas we will begin to measure and quite honestly, we're not in the pilot business. We're in the revenue business and the pilots we have to prove and demonstrate their success and that will lead to what I truly believe contractual relationships with these plans.

[Steve Halper:]

And do you think that's more of a 2021 plan year?

[Donato Tramuto:]

Well, I'll tell you one thing. I'm 63; I don’t have a long time to wait for this stuff. We will move very quickly and those are the updates that we will provide to you. Like I tell you, we have a great relationship with Humana. Humana wants to see us succeed. They have a great respect for the SilverSneakers brand and it's in our hands to move fast, quick and demonstrate value and stay tuned.

[Steve Halper:]

Great. Thank you.

[Operator:]

Your next question comes from Alex Fuhrman with Craig-Hallum. Your line is open.

[Alex Fuhrman:]

Great. Thanks very much for taking my question. Wanted to ask about the strong selling season for the SilverSneakers business, that’s certainly encouraging to hear that you're projecting high-single-digit to low-double-digit growth. I guess as we head closer to 2020, what are some of the variables that are going to impact whether you come out at the high-end of that or the low-end of that. Is it primarily enrollment in the plans that you're partnered with? Is it visits to the gym and your PMPM or hybrid markets? Just curious, what could cause results to be on the higher or lower end of that range?

[Donato Tramuto:]

Well I have a saying in the company and I'll use it on this line. Be like a carpenter, measure three times and cut ones. And so, listen we don't have the eligibility files. We don't get those files until January. However I do believe based on the information – we've given you a lot of information today that we normally have not provided this early. The fact that we have the news on United, the fact that we have now regained new clients, the fact that we have retained the current clients, all this really gives me confidence that we can inch towards that higher range.However, I would be absolutely foolish if I didn't say I need to wait until the eligibility files come in and we'll get those obviously in January. And you're reading the same reports that we're reading. Many of the customers that we're doing business with are having good growth this year and that is another kind of feather in our cap. But at this point, I think that we clearly see the line of sight toward that higher end.

[Alex Fuhrman:]

Okay. Great. Thanks. That’s really helpful. And then just turning gears to the Nutrition business, I mean, it looks like the forecast for the back half of the year is lower than the first half of the year. Can you give us a sense of; is that because of the – some perhaps lower customer starts that you're seeing now? I think you also mentioned lower orders at retail. Is that having an impact as well?

[Adam Holland:]

Yes. Hey, Alex, it’s Adam. You’re right. The back half, it follows a typical cadence, I'd say, which you've in the last few years in terms of the revenue distributions throughout the year and it does reflect what we said in the prepared comments regarding new customers starts.

[Alex Fuhrman:]

Okay. That’s helpful. Thank you.

[Operator:]

Your next question comes from Ryan Daniels with William Blair. Your line is open.

[Nick Spiekhout:]

Hey guys this is Nick Spiekhout for Ryan. Thanks for taking my question.

[Donato Tramuto:]

Hi, Nick.

[Nick Spiekhout:]

Just to start, there’s been a – sorry what’s that?

[Donato Tramuto:]

No, I just said hello to you.

[Nick Spiekhout:]

So just to start off, there has been a couple of studies on the cost savings for broader use of meal delivery. And just wondering if you think couple and there's a bipartisan policy center, so that just came recently that said, like for every dollar you spend, you save a $1.57 on meals. So just wondering if you think studies like that could motivate a traditional fee-for-service Medicare to offer meal delivery. And I guess how confident you are that you could see them doing that in the future?

[Donato Tramuto:]

Well it's a brilliant question and quite honestly it’s not just with food, why not with SilverSneakers as well. And so we continue to see that as an opportunity. We do have a government staff that is working on that, and by the way they're not just looking at that hardcore dollar. What they're looking at, I gave you the information about number of healthy days for every – unhealthy day that a senior experiences, it's costing the health plan $16 in extra costs. So there are a variety of measures that we are looking at. But your question is, it’s a great one. It's not just Tivity that's moving that forward with CMS, I do know that many of the health plans have also tended up the idea. Why not make this available across all membership.So listen it takes a long-time to get these policies through Washington. But right now we're very encouraged by the awareness of the social determinants of health and Tivity has just by coincidence, we've landed on a great sweet spot, not just with physical inactivity but loneliness. A good portion of our members right now are going to the fitness centers, not to bench press 150 pounds. They're going because they're lonely and hats off to the health plans who are saying, we will count that as a gym visit.

[Nick Spiekhout:]

Great. Thanks. And I guess to follow-up, I know you guys mentioned two potential contracts for the post-discharge meals. I'm just wondering kind of how your conversation has been going with the Medicare Advantage plans on that and I guess just further a meal delivery for problem – problem wise, like for instance those with diabetes and things like that. Like how those discussions been going so far?

[Donato Tramuto:]

They've been going very well and very encouraging, but as my great philosopher Yogi Berra once said, you don't want to make the wrong mistake. I am very, very happy that we signed these two. They're not pilots, but it gives the two business units an opportunity to flush out. We will learn from these two. It doesn't mean that we're not going to sign more, that’s just not my style. But what a great opportunity, 3.5 months after we closed the deal with Nutrisystem that we actually signed these contracts.And so Dawn, with her two Presidents will work very closely to understand what that offering has to be? What is the pricing, the packaging, all of the other stuff that will allow us to scale this? Remember we have incredible relationships with these 70 health plans and I don't think what people are understanding is that the media, the fact that we're out there now advertising SilverSneakers, the members trust SilverSneakers with a net promoter score of 81, they trust us.I want to just share with you a story. I think I shared this with you a number of months ago that there was a gentleman that I had actually met; 88 years old, who came up to me and said I've been using Nutrisystem for the last two years. He said, my wife has never been a great cook and she will never be a good cook and Nutrisystem brings food to the home, while his wife fell down about three weeks ago and broke her hip. His daughter wrote to me and said, thank you for Nutrisystem. It is what's keeping my father alive, and this is the type of opportunities we see with the health plans, not just with their members, but the members that can pay for this program.

[Nick Spiekhout:]

Yes. I remember you saying that’s a interesting story. Yes, all right, thanks for color Donato and I appreciate you taking my questions.

[Operator:]

Your next question comes from David MacDonald of SunTrust. Please go ahead. Your line is open.

[David MacDonald:]

Good afternoon, everyone. Donato, just a quick question, just to come back to the bundle sales. I'm curious this selling season when you're going to some of your MA plan partners, are you offering [indiscernible] you want to sign up for just SilverSneakers and also offering a potential bundled sale that would include senior fitness nutrition, social isolation, et cetera. How should we think about that if not this selling season on a go-forward basis? And then I just have one follow up.

[Donato Tramuto:]

David, how’re you doing? Actually a great question. So, I don’t think – listen you go to one plan, you've seen one plan, and I think it varies. First of all some of the wins that we had, while the health plans may not have tapped into nutrition, I could tell you unequivocally one of the big wins that we had back, which represents more than 50% of the lives that we now have, there CEO basically said to me, your company is different than any other company that's out there. While we may not do nutrition right now, because we're now offering the SilverSneakers program. What we liked about what you have right now is this garden variety of services. So when the sales person goes in there, they do assess and evaluate first what the needs are relative to loneliness and physical activity go very well together.And then they begin to tear it apart and they're representing if you will, the nutrition business unit. And it's from there where the discussions can lend itself to the post discharge or lend itself to the chronic care areas. And so like I said, one-size does not fit all. It's really looking at, and that's the benefit of having 25 years of experience with the health sector, that we have. And Dawn was correct in her comments. There was no other nutrition business unit out there that has those kinds of relationships. And so I am very optimistic that our future – we’ll look at the nutrition division as a seller of those goods. The health division will sell it and they will buy it from the Nutrition Business Unit.

[David MacDonald:]

And then you mentioned a growing percentage of Nutrition revenue coming from non-traditional diet revenues on a go forward basis. Can you talk about the marketing benefit of something that's more senior focused, a silver nutrition so to speak?And then just final question on, in terms of the change to EBITDA guidance on the nutrition side, how much of that relative to last – the prior guidance is incremental investment spend as opposed to the low revenue numbers?

[Donato Tramuto:]

Perfect. I'll let Dawn take the first and then we'll switch over to Adam on the second.

[Adam Holland:]

And they will go backwards, David. Hey, this is Adam. I can answer quickly. This is a supplemental material as well. It is approximately $3 million of investment that's embedded in that lower EBITDA guidance for the nutrition segment.

[David MacDonald:]

Okay.

[Dawn Zier:]

Hi, let me talk a little bit about our ability to address the senior market. First off, we know that one of the most relevant topics out there is the issue of food insecurity and the health plans are obviously embracing it as, as are we. And one of the things that Nutrisystem has is a whole team of food scientists and people that create different programs back at our offices in Fort Washington.And while we've been widely known as a weight loss company, you can see how quickly we were able to bring the South Beach Diet to market. And you can envision how we can also design programs around areas of food insecurity or chronic conditions, if you will. And we believe that will be a driver of growth for us as we go forward.In addition, again it's about having the weight loss programs but going beyond that, and then also using new channels such as – new channels to the nutrition division to legacy Nutrisystem to reach into the health plans, reach into the fitness providers to bring in new customers to those channels that again can derive healthy revenues and growth that are not dependent on our current advertising and marketing strategy.So from our perspective the distribution that we are getting from this combined – the combination of the two companies as well as the food science abilities to be able to reimagine ourselves from a weight loss company into a broader nutrition solution is what both Donato and I'm referring to when we talk about the exciting growth prospects ahead for the nutrition division. In addition to the growth that we expect to have in our core business.

[David MacDonald:]

Thank you very much.

[Operator:]

The next question comes from the line of Mike Petusky of Barrington Research. Please go ahead. Your line is open.

[Mike Petusky:]

Hey, guys. Adam, can you just give me roughly if you guys do like 625 in healthcare, I mean, what will United represent roughly in terms of the percentage of revs in 2020?

[Adam Holland:]

Yeah, I mean, the best way to think about it is in 2019 we've got about $60 million of revenue with United, about $40 million of that relates to the group business and the remainder relates to individual.

[Mike Petusky:]

Okay. So that number should be down a little bit in 2020?

[Adam Holland:]

Yeah. You – and this goes back to Donato’s point. You may have a little growth through the open enrollment season depending upon to add a new group contracts for next year. And you will have a reduction in the individual lives based on what we said in prepared remarks, but the good news there is that we have previously not expected to retain any individual lives for 2020. Now that does not look to be likely the case.

[Mike Petusky:]

Okay, all right, great. And then a question on the food side, did – I didn't hear it if this was called out, did South Beach show any growth either in the second quarter or for the first half?

[Dawn Zier:]

The South Beach is not showing growth for the first half of the year, but again a lot of that is – because we've refined our media strategy on that front and are repositioning it towards – more focused on digital and less on TV as we look to distance the two brands from one another.

[Mike Petusky:]

Okay, all right. And then, Donato, I guess on television, which you credited with some of the success on SilverSneakers, what changes going forward? Is it more? Is it for longer periods of time? What changes as you think about the television advertising and just increasing awareness for SilverSneakers via TV?

[Donato Tramuto:]

Yeah, let me hand it off to Dawn.

[Dawn Zier:]

Hey, great. Thank you. It's Dawn. It's very timely that you asked that question because we actually have a cross – across business unit team in town this week to actually discuss the strategies as we get ready for 2020 with our television advertising. I think what you'll see is a little bit more of a niche focus on certain markets as we go forward and that again probably most in the Q1 investment area, but we're kind of refining that strategy as we go forward. But again, given the success that we had from the initial testing, we're very confident that this will be a nice driver to rev – not only revenue growth in terms of getting more enrolled leads, but also in engaging people to have more visits to the gym. So, again, it was an all-out success and we'll refine that as we go forward to make it even more powerful.

[Mike Petusky:]

Great. Let me sneak one last one in for Adam. So you're looking at $55 million, $60 million of free cash generation as an independent company Tivity withdrawn off $100 million a year for the last couple of years in free cash. How quickly can you guys get back to $100 million of free cash generation or better as sort of – as you look out going forward? Thanks.

[Adam Holland:]

Yeah. And remind you that $100 million had a very low interest burden and that was an illustrative both companies without a burden of the debt. We certainly think of where there are opportunities in terms of optimizing the working capital and cash flow. I mean, you'll note that we were able to pay down as much as we were through a combination of better cash on hand at the start of the year. Our Chief Accounting Officer, Ryan Wagers, did an excellent job of streamlining the cash flow mechanics within the combined company, which allowed us to accelerate some of our collections and pay down of debt. And so, we're laser focused on that. As you can see, I mean, it's a – in the finance, if you were walking down to hallway, it's the – the top thing we think about is how do we improve free cash flow grow it as efficiently along with earnings, and then utilize that to pay down the debt and then in turn get interest the cost down.

[Mike Petusky:]

I mean, can you get back there in three years? Is that realistic?

[Adam Holland:]

Well, I don't want to get into a long range forecast speculation, but I'm optimistic. And again, you have to apples – apples to apples with what the 55 to 60 represents, which is after the payment of interest. But as the company grows, we think there's things and levers we can pull to help optimize free cash flow.

[Mike Petusky:]

All right, thanks guys for all the answers. Thank you.

[Adam Holland:]

Thank you.

[Operator:]

Your next question comes from Mohan Naidu of Oppenheimer. Please go ahead. Your line is open.

[Donato Tramuto:]

Hello, Mohan.

[Mohan Naidu:]

Thanks for – hi, Donato. Thanks for taking my question. Fostering a quick clarification on the United Health individual lives about 20% to 25%, is that going to be just a transitional lives in 2020? Or is there an opportunity for you to hold on to that subset?

[Donato Tramuto:]

I don't know. And one of the things that I think has been our greatest sense of expansion of relationships with all of our health plans has been the investments quite frankly we've made into this business. And quite frankly, they've been sequential because we want to make sure that we're making the right investments. But the digital, the fact that we're addressing loneliness, the media, I have to tell you that my regret is I wish we would have done it a few years ago. Actually, I wish we could have done it eight years ago. But the fact of the matter is when you look at those investments and then you look at the net promoter score of 81, quite frankly, we're waking up members.We're waking up individuals who have the program and didn't know it and they talked to their friends and their friends say it's one of the best programs out there. And so, what we have to do and we've been playing this out in a very careful script is execute, is do the things that we say we are going to do to drive greater member value. And I think that's where we will win on getting customers back. Look, many of the customers that you're seeing quite frankly in that 600,000 lives, our customers who left us before and have come back. And so I will bet – and we'll commit to all of you that we will continue to fiercely execute and allow our investments to carry the tall water if you will.

[Mohan Naidu:]

Thanks for that color. Maybe one more on the Humana Bold Goal initiative, is this a combination program with the RelaDyne initiative or is this a separate program? And the second one on that is, you know, there are other fewer – I guess other larger plans that seem to have some form of nutrition pilots and how well your conversations with them? Go ahead.

[Donato Tramuto:]

They do. And I guess maybe – I have to clear up the muddy water and I'm probably the one who is not articulating correctly. We have something that nobody else has. And I really want to remind everyone, it's called SilverSneakers. It's called we have the members. And we have the members that trust when we call them and that's what the plans are saying to us. You have the members. You have the relationships. They may have gone off and partnered with other nutritional companies, you know, quite frankly because we didn't have that offering. But what we have to show is how we can drive value in the nutritional segment in terms of how we're modifying and developing elder care and senior care programs.However, make no mistake about it. The leveraging opportunity we have is with the net promoter score of 81 and the great brand equity we have with those members. And the ability to get things from those members that quite frankly others cannot, this is not just a fly in and drop nutrition in their homes. This is about managing the guest stall – managing the totality of that member when it comes to physical inactivity, social isolation and then knowing that they have nutritional needs. That's what we're going to win on. And I think that's why you're seeing already non-pilot contracts getting signed.

[Mohan Naidu:]

Thanks, Donato. That's it for me.

[Operator:]

Your next question comes from David Styblo of Jefferies. Please go ahead. Your line is open.

[David Styblo:]

Hi, good afternoon. Thanks for the questions.

[Donato Tramuto:]

Good afternoon.

[David Styblo:]

Donato, I think, I’ll start out in the healthcare segment. And if – I was hoping you guys could provide a little bit more color around the 2020 guidance of high single-digit to low double digits, if you would maybe help break that down into two key sub-components or drivers for example are you thinking about end market growth in the MA business being 7%, 8% and then you're taking away, I think maybe about two points of growth headwind from the United peeling off to some extent. Then plus whatever new customer wins plus perhaps increased participation, is there something along those lines that you can provide us to give us a little more sense that the key components that's adding up to the high single-digit, low double-digit outlook?

[Donato Tramuto:]

When I think we've done that – when I've given you between 16 million and 16.5 million of eligibles into next year, so I think, you know, the way you just articulated David I think is right on. You'll take off what you're losing on the left pocket. Our whole concept, left pocket to right pocket. And then obviously the new lives that are in the right pocket and the growth with Medicare. So I think you're kind of…

[Adam Holland:]

And to add-on that the other thing, Dave. Hey, this is Adam, that also that high single to the double, which also includes Prime. I don't want that to be lost. With new business coming into that segment, that's going to be a key component of the driver as well.

[Donato Tramuto:]

And we remember we – I'm surprised that nobody has asked this question. We are adding a significant Medicare sub non-planned customer. They don't want their name mentioned right now. And we normally don't mention names anyway, but to Adam's point, it is a combination, but you're right. Moving the needle in the total eligibles to 16 million to 16.5 million, remember we had a decline this year, so now we're back to real growth.

[David Styblo:]

Right, right, yes. Kind of a follow-up was with the Prime, that million lives, is that Prime members that you're adding did I hear correctly? Or is that for eligibles that you're adding?

[Donato Tramuto:]

Yeah, these should be – would be eligibles.

[David Styblo:]

Okay.

[Donato Tramuto:]

This is a pretty interesting program that we are now offering understanding what the competitive space is like and what our customers want. So it is a Prime. What I call more optimized program. And you're correct. It's about 1.2 million of eligibles. So obviously they have to sell into them.

[David Styblo:]

Sure.

[Donato Tramuto:]

Just like – yes, just like we do with all the other Prime customers.

[David Styblo:]

Right. All right, and then just on the nutrition side for Dawn, obviously, growth was really strong for a period of a year’s up to 2017, 2018 you guys faced some challenges and in 2019 faced some challenges and seemingly got worse. I'm wondering if you can kind of walk us through the challenges that you're experiencing either in the competitive environment, innovation, maybe response time. What might – if you could compare and contrast what those look like in 2018 versus those that you're facing in 2019? And sort of maybe any color that you could anticipate for an outlook for next year. I know you guys went and provided a revenue outlook on the healthcare side. I am curious are you expecting that business to hold stable next year or continued pressure as you recalibrate that business?

[Dawn Zier:]

Okay, thanks for the question. I'll start and go backwards. So, we're not giving any projections at this point on the nutrition division going forward, but again, as my prepared remarks indicated, we have a lot of things moving in the right direction, most notably the digital work that we're doing and our ability to expand reach as well as the technology components that we're putting in place, which will allow us to drive very efficient revenue opportunities. So I am excited about a lot of things that we're doing over the next couple of months as we get ready for a diet season. I think, again, the focus of what I spoke about was our need to continue to innovate. And as we prepare for 2020 looking to become more aligned with the work we did in 2014 through 2017 where we introduced something that was truly new on Nutrisystem and actually launched South Beach from scratch.I would say and we talked about this in the past, going from 2017 to 2018, and the two years are different stories. So the fact that 2019 did not do as we had hoped on the innovation front is very different from the story in 2018. In 2018, we didn't really innovate. We've talked about that quite candidly and how coming off from 2017, which was extraordinary growth for the Nutrisystem – legacy Nutrisystem business. We had planned pretty much staying with the same thing that we had been doing going into 2020 as we went from 2017 to 2018. So we didn't focus that much on innovation given the fact that we felt the strength of our 2017 would carry us forward.Moving into 2019 we did address that, but the truth of the matter is we addressed it in a way that varied from the amount of – from the work that we did in 2014 and 2007 where we did it, we did it in a different way and did more of it in the – in those times. And what we're seeing now is that the dynamics of the marketplace have changed. And again, we've been conducting extensive research, received significant consumer input and we're implementing live testing as we go forward and believe that we do have really strong things coming up for us and as we head into 2020.So it's hard to go through and really say, you know, what is exactly different from our methodology that we used in 2018 to get ready to 2019. But again, we're going back more to our handbook in 2014, which is what much more live testing, live implementation and things along those lines. And really focused and I think it doesn't go unnoticed that the second half of last year for the nutrition. For Nutrisystem we were –while we were focused, we had a lot of other things that we were working on. Also, that's not an excuse, but again, as we look towards 2020, all hands on deck and again, going back to the formula around innovation that we know works.

[David Styblo:]

Okay. Thanks for the perspective.

[Dawn Zier:]

Okay.

[Operator:]

Your next question comes from Sean Wieland with Piper Jaffray. Your line is open.

[Sean Wieland:]

Hi, thank you. I'm so sorry to hear about Chip.

[Donato Tramuto:]

Yes.

[Sean Wieland:]

We always put a smile on our face and I won't miss him.

[Donato Tramuto:]

Yes, tough – tough week for us.

[Sean Wieland:]

Yes. So, first on healthcare, the growth that you hinted out in 2020. Can – how much of that is driven by the new Prime agreement that you're hinting at?

[Adam Holland:]

No, we're not breaking that out yet, Sean. We will as we get probably to our – in JPMorgan conference [indiscernible] typical February when we give the components. It is not an insignificant piece. The – while that new contracts as Donato mentioned, it’s a great win. We do have business that we won this year with Walmart that is just now sort of ramping up in the late 2019. That's going to be a piece of it. And we also have just – we've got great organic growth of success with the base member pay Prime business that we've had for several years now that we've been getting smarter to how we're implementing the right type of advertising at the right time of the year to activate that base of the original 41 million eligible Prime members.

[Donato Tramuto:]

Sean, keep in mind, listen, the majority of our revenue still is with SilverSneakers. So, you know, you can use that. I mean, SilverSneakers are still carrying that growth, that growth trajectory.

[Sean Wieland:]

Yeah, I understand. What do you think the conversion rate could be of the 1.2 million members? How many of those would you expect to have become members?

[Donato Tramuto:]

Yeah, we haven't typically talked about the conversion rates before. I will say that it is exciting because I do look at this as a brand new fishing license with a cohort of individuals from a very different demographic from what I would say our base Prime membership is from. And I think there's a potential for a newness factor that goes along with that Med Sup insurance product they have. And so, I'm optimistic, but I'm not ready to go out there with estimates yet.

[Adam Holland:]

Yeah. And let me just say those, one thing we've learned about Prime and now we've learned about SilverSneakers is your willingness to co-market, your willingness to market will be a great determinant factor on how you get activations going. And I have to say that this particular partner is very committed to partnering and putting co-marketing programs together. So...

[Sean Wieland:]

Okay. Switching gears, marketing expense, what is – what does that look like? Can you tell us first up was there – how much of that marketing expense was for healthcare? And then what does that spend look like for the remainder of the year?

[Donato Tramuto:]

Yeah, you had about – bear with me one second, Sean. You had about $4 million of that healthcare expense related to the healthcare segment with a remainder in the nutrition. But I want to point out that the number – that $4 million for healthcare. We still expect a $12 million media spend for all of 2019. The number that you see in the line item the $4 million is inclusive of other overhead payroll benefits, some other items, I'd say about roughly 70% of that number relates to media with the remainder relates to other overhead. So the point is being you may not see it add up to $12 million because there are other costs items associated with that, which we had reclassed out of our cost of sales under this separate line item in 2019.

[Sean Wieland:]

Okay, thanks for that. And then on the nutrition side of the business, I just haven't heard any commentary on the pricing environment and if that has had any impact on the revised guide?

[Dawn Zier:]

And well, actually, one of the things that we've been able to do on a regular basis is increased price. So, this year we did go out with some promotional offers and – but very recently in July we ended up increasing the price on both the men's and women's program across the board by $10. I believe it was. And we also are removing some of the – are removing the promotion from the men's program. So it's something we constantly look at and we are always testing and validating the impact that it has not just only on – on response – response to calls or the traffic to the website, but also on conversion. So that was a nice win for us that we have going into the second half of the year and that will roll into 2020.

[Sean Wieland:]

Okay, thank you.

[Operator:]

Your next question comes from Mike Petusky with Barrington Research. Your line is open.

[Mike Petusky:]

Yes, just a quick follow up for Dawn. Dawn, I understand you can't get into specifics, but I'm just curious as you think about innovation and messaging is sort of low-carb, keto, paleo, this sort of manner of eating, which frankly does have a lot of following on Instagram and various digital outlets. I mean is that going to be a bigger part of what you guys do going forward or not? Thanks.

[Dawn Zier:]

That's a good question. I would say remember that we've the two different brands, so we have both Nutrisystem and the South Beach Diet and I won't disclose anything specifically about the future for either brands in terms of what we're doing on the innovation front, but the South Beach Diet is entirely focused on low-carb keto-friendly options.

[Mike Petusky:]

Okay, thank you.

[Dawn Zier:]

You’re welcome.

[Operator:]

There are no further questions at this time. I will now turn the call back over to Mr. Donato Tramuto.

[Donato Tramuto:]

Very good, thank you very much. And again, I want to thank all of you for joining us. We apologize for the length of the call. However, as you can tell, a lot of updates. Make it a great evening everyone. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.