Tivity Health, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Chip Wochomurka:]

Good afternoon, and welcome to Healthways Third Quarter 2015 Conference Call. Today's call is being recorded and will be available for replay beginning today and through November 7th by dialing 719-457-0820. The replay pass code is 833109. The replay may also be accessed through the next 12 months on the Healthways 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 Healthways’ expected quarterly and annual operating and financial performance for 2015 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. We hereby caution that these statements may be affected by the important factors among others, set forth in Healthways’ 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. At this time, for opening remarks, I’d like to turn the conference over to our brand new President and Chief Executive Officer, Mr. Donato Tramuto.

[Donato Tramuto:]

Good afternoon everyone. Thanks for being with us today for Healthways third quarter 2015 conference call, and my first call as the new CEO at Healthways. With me today are Alfred Lumsdaine, who has been serving as our Interim CEO and is about to return to his role as our Chief Financial and Administrative Officer and Chip Wochomurka, our Head of Investor Relations. Alfred will make some remarks about our results for the third quarter as well as the announcement we made earlier today concerning our reorganization and rationalization plan and our updated guidance for 2015. Following those remarks, I have some comments to make about Healthways and our path forward, as the end the transition from the role as Chairman of the Board to CEO. After that we will open up the call for your questions. However – and before I hand off this section to Alfred allow me this opportunity to thank him for all his hard work and his leadership and commitment during the last six months. And I truly look forward to working closely with him in the next phase of our growth. Alfred?

[Alfred Lumsdaine:]

Thank you, Donato and good afternoon everyone. I’d like to start just by recapping a few of the key financial metrics for the third quarter. Our third quarter revenues were $196 million and that included approximately $4 million of performance-based fee recognition in the third quarter that we had previously expected would be recognized in the fourth quarter. Our adjusted earnings per diluted share for the third quarter was $0.14, while we incurred a GAAP loss of $0.25 per share. This readjustment that reconciled the GAAP loss to adjusted earnings for the third quarter are; first, $0.03 per share for non-cash interest expense; second, $0.03 per share for the restructuring plan that we announced today; and then finally, $0.33 per share for an impairment of an investment and a related loss on the remaining committed investment. Next, I’d like to make a few comments about the restructuring plan that we announced today and that Donato referenced in his opening remarks. Beginning in 2016 we will organize and run the business with two autonomous business units; one, a Network Solutions business unit and the other Population Health Services business unit. In addition, we will operate a few of what I would refer to as emerging businesses, which will be managed within our strategy office. In particular, right now, our blue zones and Ornish reversal program fit into this emerging business category. In order to give you some perspective on the relative size of these business units, based on our client revenue guidance for 2015, we would expect the Network Solutions business unit to make up approximately 55% of revenue, Population Health Services to contribute approximately 40%, and the remaining roughly 5% of revenues to come from the emerging businesses. As noted in today's release, our current estimate of the costs necessary to implement the restructuring plan is in a range of $22 million to $25 million. These restructuring charges are expected to be almost all cash costs, primarily representing severance, lease termination, as well as consulting costs. While the exact timing of these costs is difficult to predict, a small portion was incurred during the third quarter and more than half are expected to be incurred within the fourth quarter of 2015. The remainder of the costs are expected to be incurred as we move through the first three quarters of 2016, and consequently, we would expect the cost rationalization efforts to be substantially completed by the end of the third quarter of 2016. Although we expect to realize a significant amount of savings in 2016, we wouldn’t expect to realize the full growth savings range of $35 million to $45 million until 2017. The use the term growth savings intentionally as it is important to note that we do intend to reallocate some of the savings to strengthen the business, fund certain growth initiative, as well as provide redesign colleague performance incentives. I’d also like to mention that in connection with our restructuring plan, this week we completed an amendment to our credit facility. This amendment allows us to exclude up to $27.5 million of restructuring costs and certain other consultative fees from the definition of consolidated EBITDA used in our financial covenant calculations under our credit agreement. As a result, we believe that the cost associated with our restructuring activities will not impact our ability to comply with our credit agreement financial covenants. In addition, we’ve reduced the excess and unused capacity of our revolver by $75 million from $200 million down to $125 million. Moving on, I’d like to take just a minute to add some color around the impairment charge and related investment commitment loss or what I’ll refer to as the JV losses that we announced today. These losses pertain to an investment and a joint venture that we initiated three years ago with Gallup to develop certain intellectual property around individual well-being survey instruments. In turn, both Healthways and Gallup sell the survey to their respective customers and pay a license fee to the joint venture. We call the initial survey instrument developed by the JV the Gallup-Healthways Well-Being 5 or WB5. The WB5 is a scientifically validated well-being survey instrument that we deploy with many of our customers in order to drive well-being improvement interventions. During the third quarter, as a product of the ongoing well-being – I’m sorry, as a product of the ongoing review of our operations following our executive leadership changes, we observed indicators that our investment in the JV might be impaired, which led us to perform a fair value assessment of our JV investment and the related commitment. While we expect our deployment of the WB5 survey continue to grow over time based upon our most recent projection, we’ve determined that the timing and the scope of the WB5 rollout will not meet the projection that supported the initial valuation of the JV. So as such, we determined that our investment in the JV was impaired and that there was also a related loss on the remaining investment commitment in the JV. So now I’d like to turn to our financial guidance for the remainder of 2015. In our earnings release today, we noted a modest reduction in our revenue guidance for 2015. This revision is the result of two recent events; first, the pending sale of our Navvis subsidiary that we announced today; and second, the amended and extended relationship with HMSA that we announced last month. Our amended relationship with HMSA results in the majority of our clinical and managerial staff in Hawaii being transitioned from Healthways to HMSA. HMSA’s assumption of our front-line staff meaningfully lowers the cost of servicing, as well as the revenues associated with this contract. Accordingly, our revised revenue guidance for 2015 is a range of $760 million to $770 million. At the same time, the HMSA contract profit contribution is expected to be largely unchanged, and the expected margin contribution from the Navvis business for the remainder of 2015 is negligible. As a result, we’ve affirmed our guidance for adjusted net income per diluted share in a range of $0.07 to $0.15 for 2015, which excludes non-cash interest, restructuring charges, the JV losses and the CEO transition related expenses. Additionally, we're providing guidance for adjusted EBITDA margin in a range of 8% to 8.5%, which excludes the restructuring charges and the JV losses. We’ve now had two consecutive quarters where we experienced a significant amount of earlier than expected recognition of performance-based revenue. When we compare our full-year guidance for revenue and adjusted earnings per share to our results for the first three quarters of 2015, you can clearly see we expect to see a sequential drop in revenue and earnings from the third quarter to the fourth quarter. In fact, given the magnitude of the earlier than expected recognition of performance-based fees in the second and third quarters of 2015, our expectations are for an adjusted net loss per share in the fourth quarter. Again, this is purely timing related, our full-year adjusted earnings expectations have remained unchanged. So with that I’d like to turn the call back to Donato for some additional remarks.

[Donato Tramuto:]

Thanks Alfred. Before we go to Q&A, let me take a few minutes to address the changes announced today and our priorities going forward. I'll start first by saying that since I joined the board more than two and one half years ago, I have become deeply familiar with Healthways mission, its operations, its customers and market position and its people. Across this time, I confirm what I thought about the company before I joined. At its core Healthways is driven by its commitment to improve the health and well-being of the population it serves, and we have been successfully on this very important mission in terms of our delivery. We have built an outstanding team of smart dedicated people who have developed great assets that have great potential to create long-term shareholder value. That said, the company's financial performance has been simply unacceptable that has to change. In the last few months and since the announcement of my appointment as CEO last August, I have been working closely with Alfred, the board and other members of the leadership team to develop a plan that will transform our company and return our performance to a level consistent with our peers. We have begun to put plans in motion to address the most pressing issues, as evidenced by the restructuring plan announced today, however it is important to note that we are still early in our strategic assessment to the business and it will take some time to achieve our longer-term potential. In a time of enormous industry change and economic pressures brought on by the recession, I believe Healthways suffered the loss of focus on the fundamentals of its business, as well as from significant erosion in its historic culture of accountability. In today's dynamic healthcare markets, we need to make it easier for our customers and prospective customers to understand who we are, the value of what we do, and how we can help address some of the their most exciting opportunities and solve some of their most pressing problems. I strongly believe that one of the key benefits behind our decision around a decentralized business model is the creation of a more empowered leadership team that will be more accountable and better positioned to make effective operating decisions. Additionally, these leaders will be the ones who are closest to the customers and will have better knowledge of their markets and sharing prudent deployment of capital. Today's announcement of our structural reorganization and cost rationalization plan is our first public step in a process that started last June with Alfred in conjunction with the board and our outside advisors Alvarez & Marsal. And taking an unstaring, the company has to look at everything, our organization, business structure, cost, product offerings, and how we deliver those. While much work has been done, we will be continuing our efforts over the next coming months. This review led management and the board to make the tough decisions necessary to create the plan that we announced and launched today. Simply put, we have a lot of work to do to return the company to a state of consistent strong performance, but make no mistake, we are beginning today. Our Population Health business is for lack of a better turn a turnaround situation, a turnaround meaning we must and will drive better financial performance. This will take time and it will not be easy. But the plan we announced today will get the business on a more stable footing. Our Network Solutions segment, which revolves largely around SilverSneakers is a wonderful business with a dominant position and an attractive long-term growth outlook. In some respects this business has been an underappreciated asset even within Healthways. And so we are excited to educate you about this business over the coming months. We expect the reorganization and the cost rationalization plan to sharpen our focus and strengthen our accountability, producing improvements in our performance and our customers’ experience. By increasing the value we provide our customers, we expect in trying to increase stockholder value. These improvements will not be easy and maybe painful, and they won't happen overnight. Although a much more has already taken place and more is a motion. We are still in the early stages in our strategic review and want the output of that continued work to speak in a fact-based manner of what direction and where we will head. So we will deliver those information when we have it. So while today we don't have all the answers yet, our focus for this for you and for going forward after we complete the reorganization and the cost rationalization is very clear, we will build on our strengths in those services that provide an acceptable return on capital. We intend to invest and expand those capabilities in which we’re an industry leader and in markets, which we can sustain the number one or number two position. The corollary to this strategy is that we will strongly consider exiting those parts of our current business where we are unable to differentiate our services or where we cannot become number one or number two in that market position, or where we cannot earn an acceptable return on capital. This I can assure you we will be as transparent with you as we can as we move forward with this review. Skillful execution of this plan will require innovation, discipline and accountability, and we are rebuilding our senior management team to be the best in the industry. To that end, I am pleased to share with you that our first significant hire to join the executive leadership team is Sid Stolz, who just joined us this this past Monday as President of our Network Solutions business unit. Throughout his career as a successful executive and board member with a number of company's Sid has helped to evaluate consider and actioned many similar issues and challenges to those that are before Healthways today. We all look forward to benefiting from these invaluable insights, experience and commitment to serving our company and interest of our shareholders, and I look forward over the next number of months to introduce him and the entire management team to all of you. Since August, I have been actively recruiting for two additional key positions, a President of the Population Health Services business and a Chief Strategy Officer, and also look forward to sharing with you further announcements about these positions as they unfold in the upcoming months. In closing, we understand that our company has suffered from a lack of focus and accountability. And while the job in front of us will not be easy, we are committed to restoring that focus and responsible accountability to earn back your trust as investors over the coming months and years. Our senior management team and our board are fully aligned in our focus on creating long-term stockholder value. I thank you sincerely for attending this call today, and I really look forward to meeting many of you in the coming months and quarters. Operator, we’d now be glad to open the floor to questions.

[Operator:]

And our first question comes from Ryan Daniels with William Blair & Company.

[Ryan Daniels:]

Yeah, good evening guys and thanks for taking the questions. Congrats on the momentum and the restructuring, I think it will be well received. A couple questions on that; first, pretty large savings target there. So Alfred, as you kind of look at that $35 million to $45 million that you’re anticipating annually by 2017, can you give us a little bit better feel where the bigger part of the savings are going to be if it’s more COGS related to personnel, or is it more technology, changing in the business model towards more automated higher-margin solutions? Just give us a little more insights there?

[Alfred Lumsdaine:]

Sure Ryan. Thanks for the question. Yeah, happy to break that down a little bit for you in terms of where we expect to get the savings around, and of course, it will be a little bit of moving target, but we've done a lot of work with our partners. I would tell you, none of its around changing the business model. Donato referenced, the work we’re doing relative to the strategic direction and that's all work to come. So when we talk about the plan we’re looking at the business as it fits today. I want to tell you, if I had to break it down, you could think maybe 40% to 45% is going to come from overhead. You can imagine as we have realigned the business, reorganized the business that there is – we’ve renewed duplication and overhead structures that supported these multiple end customer markets and move to simplified structured if you will, an autonomous. So that in and of itself creates efficiency and eliminate redundancy. Technology is clearly a piece of it, it’s not going to be a surprise to anyone that – we’ve spent a lot on technology and that creates a large opportunity as we look at how to most effectively support the businesses that we have. If I had to put a percent of the savings on and I would say that's roughly a quarter of where it comes from, and the rest is going to be a combination of efficiencies in the COGS line, part of which you could think of is even down as tactical as consolidation of the real estate footprint.

[Ryan Daniels:]

Okay, very helpful color. And then maybe talk a little bit more broadly about how you think this restructuring will help you drive sales and stronger client service or stronger value proposition in the future? I completely appreciate reorganizational cost savings, but also how about reinvigorating kind of the sales outlook for the company.

[Donato Tramuto:]

Let me take that question, so as you heard in my remarks and the press releases, I truly believe in a decentralized model, that being able to bring if you will responsibility and accountability to these business unit leaders who will know there are markets better than we do. Who will have the kinds of customer relationships and allocate capital that has the best opportunity for return, I think will begin to move if you will a better opportunity for increased sales and increase contracts. So I think the decentralized model is more just a cost savings approach, it’s really empowering, unleashing the talent, allowing these folks to hire the best among the best and to let them drive if you will the understanding of how to grow their business in those segments.

[Ryan Daniels:]

Okay. Thank you for that Donato, that’s much appreciated. And then maybe a final question I can hop back in the queue, or take the rest offline, but how do you guys envision this impacting 2016, if we try to think about the changes at the organization? Do you think this could derail the organic growth into 2016, or are most of the contracts kind of signed and ready to go, such that this shouldn’t have a material impact on the core operations as we look forward?

[Alfred Lumsdaine:]

Sure. Good question Ryan. Obviously, we’re not prepared to talk specific guidance as it relates to 2016, but I can tell you Donato and I both expect growth in 2016. So I don't think it derails our growth story. At the same time, I think Donato’s comments are well taken in terms of how we’re going to focus and how we believe that this will actually accelerate growth going forward. So I do want to be clear that our expectations are for growth.

[Donato Tramuto:]

Let me answer to that, Ryan. I think it's the kind of segment – the segment result to be denominator and the numerator. The numerator in terms of the fundamentals of our business is there, we have a business, we have revenues, we have customers. There is a very, very strong market heading the right direction. Our improvement is on the denominator. That we have to get better in terms of understanding how we have a responsibility for greater and smart allocation of capital, ensuring that we have a type of increasing free cash flow those are all the areas that we are improving here. But make no mistake about it is that we do have an understanding that there will be growth next year and the numerator is very strong in terms of our fundamentals on the business.

[Ryan Daniels:]

That’s great. Thank you, and welcome, I look forward to working with you.

[Operator:]

We move now to Sean Wieland, Piper Jaffray.

[Sean Wieland:]

Thank you very much. Certainly a lot to get our head wrapped around on this call. I guess for starters Donato, I’m not going to let you out to hook that easily when you say that over the past few year's financial performance has been unacceptable, suffered from a loss of focus and erosion of culture. But I just want to press you on that a little bit, in an environment where population health has been the front burner issue for the industry for the past few years, what – can you be more specific about your views as to the reasons for the lack of execution on the company? And specifically if you can speak to the defensible assets that you see at Healthways from either an intellectual property or a process from a service perspective that you think are the core, the long polls of the value tent, so to speak.

[Donato Tramuto:]

Well, first of all I’m going to reference a great Japanese phrase that I love, you know, we’re not here to fix the blame, but to fix the problem. And so I think that when you have a business that has the revenue that we have, I think we have some strong fundamentals in terms of our science, our technology, the people and the products that we deliver. But I do think that we have to go back to what I said in my comments and that is that we have to be smart in terms of where we can play, where we can win and which products have the greatest opportunity to give us the greatest return and that’s going to take definitely a few months. I’ve only been here a few hours, I need to kind of reference that, I arrived here at noon today and this is my first day. So I would like to come back to you in the next number of months as we get more understanding the strategic value in these assets we have and how do we lead them together to be able to bring that denominator around. But that said, Sean, I do think that there's no question as I talk to customers I've been very active in the last number of months in talking not only to the internal managers, but talking to external customers. There is a common agreement among the customers that our science our technology, some of the traditional focus that we have with respect to disease, management, and coaching all those elements we’re hearing from the customers are absolutely strong assets. But I do think that we lost our focus in going off in other areas, and I think that's the job we’re going to do in the next few months, let’s get that focus back.

[Sean Wieland:]

That’s helpful. Thank you. And then Alfred, on the division breakdown you provided a little bit of information around the revenue, do you care to provide a breakdown on maybe the EBITDA line across those three divisions?

[Alfred Lumsdaine:]

Yeah, we’re certainly not prepared to do that yet Sean. We’re just announcing the reorganization today both from an external and from an internal perspective, so you imagine that as part of the reorganization we have to update and conform our internal reporting. I think at the same time it’s not going to be a surprise that the preponderance of our EBITDA comes from the Network Solutions business, and not from the Population Health Solutions business, but more to come in terms of both what are requirements in terms of external with financial reporting, and then what additional information might we report. But as we sit here today, we are just at the tipping point of reorganizing our internal reporting to support it.

[Sean Wieland:]

Is there anything in Network Solutions that’s not SilverSneakers or maybe what percentage of Network Solutions is SilverSneakers?

[Alfred Lumsdaine:]

Yeah. There is quite a bit of assets in there that are not SilverSneakers. If I had to answer off the top of my head, I would say about 80% of the revenues inside of there is SilverSneakers.

[Sean Wieland:]

All right. Thanks so much.

[Donato Tramuto:]

We have – I would just interject Sean. We’ve actually in terms of the traditional way, we’ve reported our business along those and customer markets. We’ve moved things that were previously not in what we would have called their Medicare advantage market into this Network Solutions market. For example, our commercial fitness program which had previously been in our commercial fitness market, commercial health plan market is now in the Network Solutions division.

[Sean Wieland:]

Okay. Thank you.

[Operator:]

Thank you. And this conclude today’s question and answer session. Mr. Donato, at this time I would turn the conference back to you for any additional or closing remarks.

[Donato Tramuto:]

I just want to thank everyone for participating. And Alfred and I and the management team, executive team look forward to continuing this dialogue, and hopefully meeting many of you in the next number of months. So thank you very much.

[Operator:]

This does conclude today's presentation. We thank you for your participation.