Tivity Health, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Chip Wochomurka:]

Good afternoon. This is Chip Wochomurka, Vice President of Investor Relations for Tivity Health, and welcome to our Second Quarter Conference Call. Today's call is being recorded and will be available for replay beginning today and through August 3rd by dialing 719-457-0820, and the replay pass code is 8810194. The replay may also be accessed for the next 12 months on the company's website. To the extent any non-GAAP financial measures discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to 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 2017 and beyond. For this purpose, any statements made during the 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. We hereby caution that these statements may be affected by the important factors among others set forth in Tivity Health's filings with the 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 to start, I’ll turn the call over to our CEO, Mr. Donato Tramuto.

[Donato Tramuto:]

Thank you, Chip, and happy Thursday, everyone. Thank you for being with us today for Tivity Health's second quarter 2017 conference call. In addition to Chip, I am here today with Adam Holand and just as a friendly reminder, we announced on May 24 that Adam would join Tivity Health, as our new Chief Financial Officer on June 15. We welcome him. I can tell you that in the short period that we have all worked with Adam, I could tell you that we made a very, very good hiring, so welcome Adam. As an overview of our discussion this afternoon, Adam will lead off and take you through our second quarter results in detail, next Chip will review our financial guidance for 2017. I'll then conclude our prepared comments with some additional remarks about our areas of focus in the second half of 2017 with some further insight into the early results from our various pilot initiatives to increase member engagement, enrolment, and participation. Thereafter, we'll open the call for your questions. So without further ado, I'll ask Adam to discuss our second quarter performance. Adam?

[Adam Holland:]

Thank you, Donato and good afternoon everyone. I'd like to start by recapping some of the key financial and operational metrics for the second quarter. Revenues for the second quarter were $138.9 million, compared to $125 million for the second quarter of 2016. Net income from continuing operations was $17.2 million for the quarter, compared to $20 million in the second quarter of last year, and earnings per diluted share from continuing operations was $0.41 compared to $0.54 in the second quarter last year. Please note that in the second quarter of 2016, earnings per diluted share from continuing operations benefited from the absence of a provision for income taxes. This was a result of the reversal within the quarter of a valuation allowance against deferred tax assets that was originally established in 2015. For illustration, utilizing a normalized 40% tax rate, the second quarter of 2016 would have resulted in net income from continuing operations of $12 million and earnings per diluted share of $0.32. Our continuing operations generated EBITDA of $31.7 million for the quarter providing an EBITDA margin of 22.8%. Revenue generation this quarter was influenced by two factors. First, as we expected, SilverSneakers visits declined sequentially by roughly 1 million visits, driven by normal seasonality to approximately 23 million. Of course, this resulted in a bit of a sequential revenue decline as well. However, we maintained roughly the same proportionate mix of visits experienced in the first quarter of this year for members linked to clients who pay us a per visit fee. When we had expected a return to a more normalized mix of visits for the second quarter, the result of this mix helped to partially mitigate the level of revenue drop. Second, in our Prime program, we saw an increase in the member pay enrolment of roughly 3,000 net new members in the quarter. These two revenue factors contributed to the strength of our EBITDA margin this quarter. In addition, regarding EBITDA margins, we continued to experience lower average costs per visit within the SilverSneakers network. That was largely driven by a mix of visits for the quarter on average taking place in lower cost location. The performance underlying the improved generation of EBITDA led to earnings per diluted share for the second quarter of $0.41. In addition to the higher level of EBITDA generation we also benefited from a tax rate of 35.7% compared to the first quarter rate of 37.7% versus our expected rate of 39%. The tax rate continues to be favourably impacted by new accounting standards related to tax benefits from share based payments. In short, the tax consequences from exercises of options and divesting our restricted shares and stock are recognized immediately within the P&L compared to the prior rules isolating certain items to the balance sheet. Moving on to the cash flow and debt repayment. Free cash flow for the second quarter was strong as expected and totalled $36 million. We took advantage of this strength to pay down our term loan A by $30 million, which leaves the loan balance of $40 million. We ended the quarter with almost $8 million of cash on hand. We expect to continue to repay outstanding term loan debt and also to accumulate cash as we move through the remainder of 2017. Our work on strategic growth opportunities continues and will likely continue through the balance of 2017 at which point we will be well-positioned to begin to consider a variety of cash deployment options. With that, I'll turn it over to Chip for an outlook on the remainder of 2017.

[Chip Wochomurka:]

Thanks, Adam. Having completed the second quarter, we've also done a full review of our outlook for the balance of the year. Specifically with regard to revenue, our revenue guidance remains unchanged in a range of $550 million to $558 million, which represents a growth rate of approximately 10% to 11%. As Adam indicated, we have right at 23 million visits within the SilverSneakers program for the quarter, driven by essentially the same total of 14.6 million eligible members we had at the end of the first quarter. The 23 million business represents a sequential quarterly decline as Adam indicated of roughly 1 million visits that we fully expected to see and is representative of the decline that we see and experience every year after a peak in the first quarter. As we said last quarter from this point, we anticipate a relatively constant quarterly visit and revenue profile for the balance of the year. With regard to adjusted EBITDA, our adjusted EBITDA guidance for 2017 remains unchanged in a range of $119 million into $123 million. Moving to the rest of 2017, we would not expect each quarter to maintain quite this level of EBITDA margin. Two factors are expected to modestly reduce the quarterly margins compared to the first half results. The first, a modest uptick in our IT infrastructure support cost that did increase in the second quarter as expected, but are expected to level off slightly higher in the second half of 2017. And then in particular, a second item as we move into the fourth quarter, we typically see a peak in our annual enrolment expenses preceding the start of a new benefit year on January 1. With regard to adjusted diluted earnings per share, our guidance remains in a range of a $1.50 to $1.58. Two items affect our guidance for adjusted earnings per diluted share for the next two quarters compared to the $0.41 we reported in the second quarter. The first is our anticipated tax rate. As Adam indicated, we had a tax rate of 35.7% for the second quarter driven by the new accounting standards related to the tax benefits from share based payments. Going forward for the balance of 2017, we are not able to predict a specific pattern of the exercise of options, nor are we able to predict the stock price at the time grants of restricted shares are scheduled to vest. Thus, we continue to expect a tax rate of 39% in our guidance for adjusted earnings per diluted share in each of the next two quarters. The second item is our deluded share count. Given the significant rise in the stock price, the diluted share count for the second quarter rose to 42.4 million shares. Using the recent trading range of our stock, roughly between $39 and $40 per share, we expect that the average diluted share count will rise to approximately 43.5 million shares by the fourth quarter and that the average for the full year of 2017 will be approximately 42.5 million shares. The implication from the tax rate expectation of 39% for the second half of the year and the increased diluted share count is this, we are likely to achieve adjusted earnings for diluted share for the full year 2017 at or well below the midpoint of our guidance, despite the strength of our adjusted EBITDA margin. Finally, let me reiterate Adam's point, that our free cash flow generation for the second quarter was strong and our guidance for the full year remains unchanged in a range of $90 million to $95 million. And now let me turn this back over to Donato.

[Donato Tramuto:]

Thank you, Chip. Tivity’s Health results for the second quarter were very good and in all major respects for even a bit above consensus expectations. As shared with you throughout my tenure, our objective is to perform very consistently with our expectations. And second quarter results further validate the substantial visibility into our performance that our business model provides us ordinarily by the end of the first quarter of each year. Make no mistake about a translating visibility into actual results take fears execution and we continue to focus on developing and supporting a culture at Tivity Health for such execution is sustained. I call it fears execution because it's deliberately based on a culture of empowerment and accountability and so I'd like to take this opportunity to recognize all of the colleagues at Tivity Health for embracing this new culture of performance. As I am nearing the end of my second full year as CEO, I can confirm that the culture is successfully taking root. Beyond continuing to execute quarter by quarter and to achieve our guidance each year, our culture is built on a few key tenets. First, what I call a best-in-class team of outstanding leader. We have been and will continue to be fiscally prudent with our investments and focus on achieving a proper return on those investments. We have been focused on becoming the best partners with our health plan claims. The participating locations and our fitness center networks and of course, partnering with every member of our programs to create the most positive impact possible on their lives. Finally, we have been focused on being a responsible corporate citizen by leading in both thought and actions in areas closely aligned to our core business. Allow me to share one most recent example which occurred in June when Tivity Health partnered with Health eVillages and both the MIT AgeLab and the Jefferson College of Population Health to host the first rural aging connectivity summit, namely it was a catalyst for change in rural aging. We brought together about 80 people who are leaders in health and aging across government business academia and non-profit and community organizations. Our primary goal was to have a clear and actionable steps that we could start taking right away. We are working to refine the processes and investments needed to move forward on specific ideas that emerged in this program, include launching a digital hub to identify and promote best practices and innovation in rural aging and developing public private partnerships to provide affordable access to broadband in rural communities. And why these endeavours we believe will lead to greater awareness of programs like SilverSneakers. Our efforts in this area will continue and we certainly will keep you up to date with our progress. Turning back if I may to our outlook for the balance of 2017 and into 2018, because of the dynamics of our normal financial progression through the year, which Chip just discussed, we can now focus substantial resources on our ABCD strategy, which is designed to increase our future rate of growth. As a reminder to those new to Tivity Health, our ABCD strategy aims to add more eligible members in all three networks, build more engagement enrolment and participation in the eligible population. Collaborate with our partners by leveraging our brand to introduce new products and services that will drive participation and lastly, deepen our relationships with our fitness center partners who make up our national network and their instructors. Our Net Promoter Score of 81 gives us strong momentum and confidence that we can and will succeed with our ABCD strategy. Our work to further this strategy is currently focused on the development and testing of innovative pilot initiatives designed to increase awareness, enrolment and participation among the company's single greatest asset. It's over 14.6 million eligible SilverSneakers members and over 40 million potential Prime members, a large proportion of whom though eligible for our programs are not enrolled and are not participating. Because of the significant improvements in the physical, social and mental well-being of many of our actively participating members, we in our health plan customers and our fitness center partners are aligned and our interest in increasing enrolment and participation among our eligible members. But before you can focus on improving enrolment and participation, it's important to make sure that business is maintaining a solid base of eligible members through renewing contracts each year. I'm pleased to tell you, that we have at this point reached renewal agreements for roughly 98% of the revenue that was up for renewal in 2017. The amount of revenue up for renewal this particular year was significant. And now that most of those contracts are signed, we are focused on the remaining few smaller contracts that are in the process of being finalized. We entered this year believing the potential for our pilot initiatives was quite substantial. First because of the great results we are producing among our participating members, but also because there has not previously been such a concentrated effort at scale to engage these populations. Thus far we have been very encouraged by our initial pilot results. We selected by the increase in the first most important variable which is activity. However and as we cautioned in our last call, it's much too early for us to fully understand the cause and effect of our early stage results. So we are continuing to test our ideas to see what works to find supporting proof points and to analyze and refine our methods. From these successes, we intend to launch meaningful and scalable initiatives focused on those ideas that improve engagement, enrolment and participation. By way of example around what I mean by ‘increase in activity’ one pilot initiative we discussed last quarter was to improve the quality and frequency of our online and social media presence. Let me give you a few statistics indicating that we are certainly increasing our visibility. On Facebook which as we've mentioned on our last call is truly the preferred social medium for seniors. At June 30th of this year, almost 300,000 people were seen SilverSneakers content every day versus 8,700 at the end of 2016, 830 fold increase. During the four weeks of June 2.9 million people saw our Facebook content and they viewed over 14 million SilverSneakers impressions versus 76,000 people and about 300,000 impressions for the month of December 2016. To highlight my further - my point further. This equates to almost a 50 fold increase. Last quarter, we also mention the beneficial impact our Facebook advertising has in drawing visitors to our SilverSneakers.com website. In the first half of 2017 about 2.9 million users paid 5.2 million visits to our website versus 1.8 million users and 3.5 million visits in the same period last year. Eligibility checks increased by about 130,000 year-over-year to a total of 416,000 for the first half of 2017 and location searcher's increased by 735,000 to well over 1 million. We've even had 265,000 additional people opt in check email contacts during the first half of the year, increasing the SilverSneakers.com subscribers to about 830,000 from 500,000 last December. What does all this mean?. To increase enrolment and engagement. You need first to ignite the awareness to the eligible members that the SilverSneakers benefit is either available and or they have an option during open enrolment to select a Medicare Advantage plan that offers this unique program, hence our A strategy to add and drive more members. So as I said we are clearly getting increased awareness and even as we continue to analyze the results and we find the processes, we are taking the next steps to focus on our test market awareness campaigns and participation data with the goal of finding and understanding the links between increased member digital media awareness and engagement and greater program enrolment and participation. We expect to report on our progress with this initiative in our October earnings call. But it will likely be after the Medicare Advantage open enrolment period and is in December and then into the first and second quarter of 2018 before we have sufficient maturity of the data and subsequent analysis to be able to share definitive participation statistics with you. Let me if I may update you on another initiative we discussed last quarter, relating to what I believe is an important element and that is deepening our relationships with our fitness center partners and instructors. The instructors play a pivotal role in the success of our program, both in giving new participants an excellent first experience and getting them back for more visits. There is in fact a meaningful increase in long-term participation when and if a member attends more than three or four times and so you can appreciate why this strategy is so important to us. Earlier this year, we mentioned that we plan to launch an inaugural SilverSneakers Instructor of the Year Award to recognize so many of these instructors who make such a daily difference in our member’s lives. I am therefore delighted to report that we've received over 3200 nominations for over 500 instructors and on June 8th we announced that Ti Blair, an instructor at the Platt Park Recreation Center, the Highland Recreation Center, and Cook Park Recreation Center, all in Denver, Colorado has been awarded Instructor of the Year. Congratulations team. We are proud of you and we are gratified by the success of this inaugural outreach to our members and instructors. And again by this display of how much they care about each other. The pilot initiative to deepen our relationship with our centers and instructors will continue with the goal of aligning our mutual interests and increasing awareness and participation, just like you have physicians who see patients and can encourage the program. Think of our 13000 locations with many instructors and owners and staff that can encourage participation. In the month of May, reinitiate [ph] an incentive compensation program with 19 fitness locations in one geographic area. The program was structured with variable compensation tied to increase member participation. In that one month of May, over 70% of the 19 fitness locations received a bonus for improving member participation and the result was 7500 additional visits compared to the same month in 2016. As you can see, our ability to engage our membership as a first step, then driving enrolment and participation is only limited in my mind by our ability to innovate and execute. We expect to get into those next steps, will take more work, but we are encouraged by the innovation designed into the pilots we have initiated to test our ideas. We are optimistic that the broader initiatives we launched, based on these pilots will accelerate our future growth rate to a rate above our historical growth rate. We intend to keep you informed about these initiatives and their impact as we go forward. We also expect the financial implications of succeeding in these efforts to be meaningful and as a public company committed to building shareholder value, we are excited about the opportunities inherent in our existing membership. In addition, it's important to understand the physical, social and emotional results we produce for our members and the difference to these results are happening on their lives is exactly what the Tivity Health mission is all about. While that might sound a bit soft and harder to quantify than earnings per share, let me be clear with it. Those results and the difference we make in each individual life and our Net Promoter Score of 81 is what will drive even deeper relationships with our health plan partners and lead to the long-term growth and our company's earnings and shareholders value. In closing, let me give you an example of a member's experience as I have for the last several quarters to help personalize why our members are so loyal to SilverSneakers and why we have a Net Promoter Score of 81. I recently attended a member gathering of nearly 60 members and I met a 76 year old woman by the name of Judy, who has been a SilverSneakers participant for more than 10 years. In fact, she left her health plan at the end of 2014 when they dropped SilverSneakers and she joined another plant here in Tennessee that does offer SilverSneakers. This last March she suffered a mild heart attack that required surgery and a stent in one artery. However she told me her doctor quickly allowed her to return to her SilverSneakers class. And not to an extensive rehabilitation program because she said ‘you have been keeping yourself active and in good overall shape, clearly the SilverSneakers program has kept you from any serious impairment” With this woman in mind you can understand why SilverSneakers is such a highly appreciated and well-known brand. She is indeed a great example of why we keep saying that our programs are about so much more than going to the gym. They are about the physical, social and emotional well-being of people who choose not to take that well-being for granted. Taking a further step back. Our programs are fundamentally about enabling our members to live their best lives with vitality and dignity and purpose. That's quite a value proposition for one that we are delivering to millions of people and members across the country. Thank you for your interest in Tivity Health and once again, I'm very proud of where we are today. Operator, we now like to open this up to questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from A.J. Rice with UBS.

[Jailendra Singh:]

Hi. This is Jailendra Singh filling in for A.J. First, quickly want to follow up on your comments around renewal rate. Can you provide some more color there? Has there have been any change in terms, pricing, etc., and do these renewals also include some kind of opportunity for more penetration?

[Donato Tramuto:]

Yes. Yes. So I'm not going to get into the specifics, but certainly it's been a very - I'm very satisfied in terms of the end point here. We have had some where we have additional markets. We've had some where we've had you know favourable pricing, but all in all I'm going say to you without getting into the details, I'd be more than happy to take it offline. I am very, very happy and I give a lot of credit to our Chief Growth Officer, Steve Janicak as you know, we brought Steve in last September. He and his entire team have done a great job. And as we said, this was a substantial renewal year. So I don't take that live. So all in all, I'm very satisfied.

[Jailendra Singh:]

Great. And just clarifying on, like health insurance fees coming back in 2018, it looks like more likely at this point. Is that come up in any conversation you're having with the health plans as they were putting together MA bid [ph] for next year?

[Donato Tramuto:]

No, it has not.

[Jailendra Singh:]

Okay. Then a couple of questions for the second half guidance, When I take your second quarter revenue and use that run rate for Q3 and Q4, I actually get to your – close to pretty high end of your full year revenue guidance. Can you give us some sense what is reflected at the low end of your revenue outlook for second half?

[Chip Wochomurka:]

Yeah. This is Chip. I can jump in on that. I mean, you know, your math is correct. I would just say that if we were to fall into that mid to lower end, it would simply mean that there's been a fall off in visits primary to SilverSneakers or we couldn't enrol members in Prime, not an expectation that we have, but those would be the two factors that would drive it.

[Jailendra Singh:]

Otherwise, I mean, you probably should assume that Q3 and Q4 revenues should look very similar when we think about the split between two quarters in second half right, on revenue?

[Chip Wochomurka:]

Yeah, yeah. Again, we tried to be clear that the third and fourth quarter should be pretty close in their overall profile, particularly in the revenue line with regard - matching the second quarter.

[Jailendra Singh:]

And EBITDA margin third quarter higher than fourth quarter. Given that, do you expect some OEP preparation cost MA in Q4?

[Chip Wochomurka:]

I think that's fair.

[Jailendra Singh:]

Okay. And then last question, so the company paid down some debt in the quarter, to get this leverage - close to 1.5. I believe you guys have talked about being open to relatively higher leverage. Should I read anything into this move to reduce leverage? Is it because of lack of tuck-ins, M&A, or partnership opportunities? And is there any update on - I think company has been reviewing its capital allocation priorities in all for next year, any update on that?

[Adam Holland:]

Sure. This is Adam. I can comment on that. First, we're happy to be in a position where we're building cash and we're able to pay down the debt. It’s something we first communicated earlier in the year. There is no change in that plan. And I think what we'll say is we’re talking with our board and working with management, we will have more to say at the end of the year regarding capital allocation.

[Donato Tramuto:]

And I'll just add one thing to that is that listen, you know, we have a lot with ABCD as we share it with you. And I think that the benefit that we all have right now is that you know, we have learned a lot about this SilverSneakers in terms of being a highway of members. And so, we will not shy away from looking at other opportunities. But I do think it is important as I said on October 29, 2015, focus, focus, let's be focused, and I think we are very focused on executing the ABCD strategy.

[Jailendra Singh:]

Okay. Thanks a lot.

[Donato Tramuto:]

Thank you.

[Operator:]

Our next question comes from Ryan Daniels with William Blair.

[Ryan Daniels:]

Yeah. Chip, another quick housekeeping question to follow up there to those, in the fourth quarter when you ramp up the marketing and engagement ahead of open enrolment, is that going to be in cost of goods sold or do you guys classify that in the SG&A line?

[Chip Wochomurka:]

No, that would fall into the gross margin in cost of goods sold.

[Ryan Daniels:]

Okay. Thank you. And then if we think about some of the trends you're seeing with driving more utilization among members in your client base. Have you had conversations with your payer customers about number one, you know, their willingness to continue to pay higher fees for that and kind of recognition that it does drive returns. And number two, are any of them yet concerned that there's a level of diminishing returns, i.e. when you get someone going you know, too frequently that were paying more, but maybe don't get the patient satisfaction or medical claims benefit?

[Donato Tramuto:]

Yes, let me answer the first. You know, we could not be more aligned even in some of the contract renewals if we in fact completed, but there is you know an interest from a number of our partners to reward us in terms of driving more engagement. And so, I think that we have a huge opportunity to continue to implement that. I don't think there is a diminishing return, at least I have not. In fact, I think one of the most significant aspects that we are seeing and is funny, I was at this event for 60 members and it's amazing that - and I always say this, those who know us love us, not enough people know us and I think that the clients and partners are really saying we want to get more, you've demonstrated the value, you share the story that I just share with you about Judy, I could have shared a dozen more stories today because I met 60 different members. And so, I think there is this reality. By the way, one of our oldest members turned 107 last month and started at ninety. And again, attribute this to you know SilverSneakers and is going several times a week. So I don't think there is any you know concerns that there is a diminishing return if they go more often or the fact that they have to pay us more for that.

[Ryan Daniels:]

Okay. That's helpful color. And then, maybe a final one, another big picture question, given the success you've had with renewals and maybe the opportunity that opens up to pursue new contracts in the second half of the year versus focusing on renewals. Can you talk a little bit more about the new business sales pipeline both number one, with some of the larger payers you don't currently have relationships with, which noticed barely de minimis. And number two, curious if you put more thought in approaching the larger pay fighters like the Kinders or the World or some of the bigger providers and also run fairly sizable Medicare Advantage plan?. Thank you.

[Donato Tramuto:]

I was going to be a little bit generic, but you do seem to have been very good in terms of either speaking [ph] in our office or. So what I'm going to say is yes, yes, yes. There is a plan, you know, one of the clear statements I have in this organization, the time to renew a contract it's not 30 days before, it's you know, 3 years before. And so we have a very - I don't want to you know, announce it here, but I would be more than happy on you know, a private Q&A to give you more specifics. But we have a very, very calculated plan to now win back clients that we've lost. And as you know, we have one in particular a large one that we believe very strongly that we would like to focus our time and attention. I think a lot of this is going to come out of the execution of ABCD. ABCD is not just about greater awareness and it's not just about getting more members engaged, it's about demonstrating to our current clients and to future interested clients that we want to win back. That we are focused every single day in being their partner, that we're focused every single day in helping to influence their star rates, that we're focused every single day and improving the well-being of this population. The more we execute there then I think the activity behind the pipeline of new business will materialize.

[Chip Wochomurka:]

And Ryan, I’ll just add on a little more color even with Donato just said, we did win one back for next year that we had previously lost. And you're right, this is now the time now in the next 8, 9, 10 months to be focused on those that we can selectively go after and work with for 2019. So there's a very active pipeline in that regard.

[Ryan Daniels:]

Okay, great. Thanks, guys. Congrats.

[Operator:]

Well take our next question from David McDonald with SunTrust.

[David McDonald:]

Good afternoon, guys. Last quick question, I'm wondering are you doing anything in terms of an initiative to engage existing members, asking them about additional services that they think would be helpful if you guys could provide you know, kind of poke away at your existing numbers to maybe get some incremental ideas in terms of M&A or capital deployment would be my first question?

[Donato Tramuto:]

Superb, superb question, is one of the reasons why I'm out in the field meeting with members and it's one of the reasons why we do and we have and without letting it, we've narrowed down into some opportunities that we think we should explore later in the year and into next year. But absolutely you know, you'll be there at once, so you don't want to make the wrong mistake and so we want to listen to our members. But not just the members, we're also speaking to our current customer base in terms of what they would want. The one thing is I tried to stress in today's prepared remarks, when you have Net Promoter Score of 81 what you have is trust and this population they trust us and why I think we can go further north, further south. But again, you know, my mantra is that we want to make sure whatever decision we make going forward is that we're number one, number two in that business, that it has been a very solid investment return, that is capital light and that is incremental to free cash flow. So I'm pretty strict you know, this is a man here, we have to make sure that whatever we look at meets those criteria’s.

[David McDonald:]

Okay. One other follow up question, just on the incentive program that it sounds like you guys rolled out one market. How long would it take you know, how many months do you guys want to see before you would potentially entertain rolling that out in a more aggressive fashion. And are there any - you know I can't really think of any, but are there any kind of gating factors in terms of you know, the ability to roll that out across multiple different markets?

[Donato Tramuto:]

Yeah, I think for me, I think that's going to have to be showing you know, consistency for the rest of the year. I don't think that you know, I would be willing to make an investment based on one month of you know, of data. I think it has to be consistent and it should be, because the ability to replicate that same pilot and if it is about touch point and we're learning here, it's funny, I know it sounds like a lot of low hanging fruit, but it really is about touch points. I see this all the time. I have 13000 employees who are not on my payroll and they are at the fitness centers and we've not used those staff members, the instructors to be the conduit to pooling if you will those members back into the respective facility. So that is scalable and that can be sticky. And so I like to see more than just one month, that should be consecutive you know, increases before we're going to pull the trigger and say let's make it a actual program.

[David McDonald:]

Okay. And then just last question, n anything of note to talk about in terms of the renewals with regards to mix in terms of you know, have you guys seen more of your renewals kind of mix towards a visit or utilization driven contract or is it stayed pretty steady state with what you know the levels you've been at historically?

[Chip Wochomurka:]

No, it's Chip, Dave. That's good question. I would expect based on the patterns we've seen so far, that as we enter into 2018 it would not surprise me to see the percentage of member, eligible members that are inside contracts, where it's on a per visit basis works the hybrid model that we've talked about increase versus the level we have in 2017 and for that to continue to. Now that's early and we are – on not all the pieces of the puzzle there. But that's my expectation as we had into ‘18 at this point.

[David McDonald:]

Okay. Thanks very much.

[Operator:]

We'll take our next question from Dave Styblo with Jefferies.

[Dave Styblo:]

Good afternoon. Thanks for the questions guys. I just want to go back to the pilot. Can you give us just a broader sense of how many pilots that you're running, now that you gave several great examples there of some of the things that you're doing, but how many are out in deployment right now? And from a tactical perspective how many do you think you sort of looking to narrow those down through as you roll forward into ‘18. And along those lines, I know you in prior quarters have talked about being conscientious of margins and so forth and that some of these initiatives really are just more manpower of existing folks and wouldn't necessarily require additional investment. But I just wanted to get an update on that and see your comfort level with being able to keep your margins steady next year versus perhaps that you can make some investment to support those new growth initiatives the other pilot?

[Donato Tramuto:]

Yeah, great question. Let me work backwards, so yes, to keep in our margin study. I can assure you of that. Your question about how many pilots, we have close to 40 pilots, now I don't want to scare anyone on this call. You know, some of them are you know, low hanging fruit. For example, you know, we have now - which I give Ulya Khan, our Chief Operating Officer a lot of credit for this, is that we established for example advisory boards both for the for profit and not for profit physical locations, and I am telling you one thing that has been like a Grand Slam being able to understand what their concerns are and how do we get them more engaged. And so that's not an expensive pilot. And so what we will do is certainly not all you know, you know, 40 are not going to survive and we've already eliminated a few you know, over the last number of months. I would suspect that you know, I'm not a betting maintenance, but I would suspect that we'll probably have you know close to 10 or 12 that will be fully integrated into next year and not at a cost that's going to erode the margins.

[Dave Styblo:]

Okay, that's helpful. And maybe I'll put Adam in the hot seat per second, but Adam as you're stepping into the CFO role what are - what's the mandate for you in store and what are the key initiatives that you're looking to really wrap your arms around it, is it areas around growth, are there opportunities for additional expense management that you see, maybe just help us lay us – lay out whether that would be a six month and 12 month plan as you look forward here?

[Adam Holland:]

Well, Dave I appreciate you putting in the hot seat and you somewhat answered your own question. The answer is both, my initiative to help ABCD strategy and to [indiscernible] talk to members and worry about new opportunities and needs for the members to make sure that I marshal the resources and able to provide those results. And look, at my prior life we were out of the margin maniac. We were always – we’re always watching for cost cuts, so to say that wherever at a point where we can push costs out of business that's not the case.

[Dave Styblo:]

Okay, very good. And just my last one comes back down to the CapEx which is you know, obviously modelling, you can see that you guys are modelling a uptick from a $1 million per quarter to roughly $3.5 million per quarter in the back half. Can tell us a little bit more what that's for and what it – just basically what's going to support, what it might be doing for you going forward?

[Adam Holland:]

Sure. You know, there is going to be an uptick in the back half compared to the front half in terms of capital outlay. Some of it's going to be basic infrastructure costs, some of it's going to relate to the IT infrastructure that Chip mentioned in his prepared remarks and some of it is going to relate to the initiatives and some pilot. But we'll have more to say on that as we move through Q3 and if we need to update that annual expenditure we will at that point.

[Dave Styblo:]

Got it. Thanks for the question.

[Operator:]

We'll take our next question from Nina Deka with Piper Jaffray.

[Nina Deka:]

Hi, everyone. Thanks for taking the question.

[Donato Tramuto:]

Sure.

[Chip Wochomurka:]

Hi, Nina.

[Nina Deka:]

Hi. Can you provide some insight regarding the account that you mentioned previously that you lost and how you won it back and are there any metrics you can provide regarding that client cost is switching away and looking back?

[Donato Tramuto:]

Yeah, I would maybe actually take that off line, be more than happy to answer that question without making it public.

[Chip Wochomurka:]

Yeah, I just think at the end of the day Nina that's the kind of thing we won one back. I mean, you know they are trying to improve their offerings at their best.

[Donato Tramuto:]

Yeah. Again, I'd be more than happy, we want to take that offline and...

[Nina Deka:]

Sure, yeah. That’s okay. I'll move on to my next question. Regarding the targeted Facebook advertising, can you provide a little bit more insight on that, is this 10 members and non-members and what happens when Facebook drives the members to SilverSneakers, do they then register once on the SilverSneakers site?

[Donato Tramuto:]

Great question. So now you get me very excited and so yes, because you know it's a broad macro, you can think of this as a macro awareness. And there is two things that come out of this, because you might be thinking, oh Jesus they go to SilverSneakers.com, if they're not an eligible member what happens, that is absolutely superb. You know, we have close to 200,000 that are not eligible, but you probably are thinking now about what we're going to do with that. There's an opportunity to hand that off to brokerage firms and you know, for ourselves to communicate. Once we have their email permission to go back and forth to encourage them to seek out if you will a Medicare Advantage plan that offers the program. And so the fact that they registered to SilverSneakers is the fact that they're engaged on Facebook, that tells you right away that there's an interest. And so we see that as a very - a very great venue in terms of a digital connection.

[Nina Deka:]

Okay. And then in terms of the actual registration process, you mentioned a couple of years ago that you were looking to simplify that, so its a little bit less cumbersome for the eligible [ph] members. Can you describe any new initiatives in a way where you've been able to simplify that process?

[Donato Tramuto:]

Oh, okay. Very good, okay. I had to think for a second, I'm getting old. I'll be 61 on Sunday. So one of our major partners that makes up the bulk of the earned membership. There were 12 steps and I don't know how you are Nina, when I'm registering online if there's more than one you know I terminate the activity. And so through great partnerships are bringing our technology folks out there and a joint collaborative effort. We're now having that down to five and they're going to work even get it down to even more. And so, I don't know. I know enough to be dangerous here. But our Chief Technology Officer, Paul understand and again our Chief Operating Officer Ulya Khan and their team members really did a great job in bridging if you will their groups with this major partner, which has by the way about 27 million eligible members. And so you can only imagine now. I'll give you a funny story. I was not just meeting members of the SilverSneakers, I was on a plane and I met a Prime member and you know, he started saying, my gosh it's so difficult to get registered and I love the program, but I'm your greatest promoter. You got to get those steps down. So we know that this is an issue for them and we think that that's going to have a huge impact once it gets some hurdle.

[Nina Deka:]

Great, thanks. Thanks for the question.

[Operator:]

And it appears that no further questions at this time. Mr. Tramuto, I'd like to turn the conference back to you for any additional or closing remarks.

[Donato Tramuto:]

Very, very good. You know, once again, I just want to summarize you know. It takes a great team to get to where we are today and I really want to thank the entire Tivity Health colleagues who have worked incredibly hard, who have embraced if you will the belief that first execution can be rewarding and that we can win again. So thank you all again for attending our call and please don't hesitate to contact Chip, Adam or myself if you have any further questions. Make it a great evening everyone. Thank you so much.

[Operator:]

And that does conclude today's conference. We thank you for your participation.