Tivity Health, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Charles Wochomurka:]

Good afternoon, this is Chip Wochomurka Vice President of Investor Relations and I'd like to welcome you to Healthways Fourth Quarter 2015 Conference Call. Today's call is being recorded and will be available for replay beginning today and through March 5 by dialing 719-457-0820, and the replay pass code is 3970444. The replay may be also 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 calculating 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 meanings of the Private Securities Litigation Reform Act of 1995, including statements among others, regarding Healthways' expected quarterly and annual operating and financial performance for 2016 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. And at this time, for opening remarks, I'm going to turn the conference over to our CEO, Mr. Donato Tramuto.

[Donato Tramuto:]

Thank you, Chip, and good, everyone. Thank you for being here with us today for Healthways fourth quarter 2015 conference call. In addition to Chip, I'm here today with Alfred Lumsdaine, our Chief Financial and Administrative Officer. Alfred will lead off this afternoon with some remarks about our results for the fourth quarter and full year 2015. He will also review our 2016 financial guidance and provide an update on progress and our reorganization and cost rationalization plans. Following those remarks, I also have some comments on what we've accomplished over the last 17 weeks and what we intend to accomplish in the next four months through our strategic review. After that, we'll open the call for your questions. Alfred?

[Alfred Lumsdaine:]

Thanks, Donato and good afternoon, everyone. I'd like to start by recapping the key financial metrics for the fourth quarter of 2015. Fourth quarter revenues were $186 million compared to $199 million for the fourth quarter of 2014. This reduction is driven by having approximately $8.3 million less revenue as a result of the sale of our Navvis subsidiary and our amended relationship with HMSA, both of which we announced last quarter, as well as approximately $6.5 million less in performance-based fees recognized compared to the prior year quarter. You'll recall from our third quarter conference call that we were able to recognize a significantly higher percentage of our performance-based fees in the second quarters and third quarters of 2015 as compared with 2014. Our adjusted net loss per share for the fourth quarter was $0.04, while we incurred a GAAP net loss of $0.54 per share. There are four adjustments that reconcile the GAAP net loss to the adjusted net loss for the fourth quarter. First, $0.03 per share for non-cash interest expense. Second, $0.23 per share for cost associated with the restructuring plan that we announced last quarter. Third, $0.27 per share for establishing a deferred tax asset valuation allowance and finally a $0.03 per share gain from the sale of our Navvis subsidiary. So, let me recap a few highlights for the full year of 2015. Revenue came in at $771 million or just above our revised guidance range of $760 million to $770 million. Our adjusted earnings per diluted share came in at $0.16, also just above our revised guidance range of $0.07 to $0.15. Capital expenditures for the year decreased $235 million and this was a factor in enabling us to reduce our debt from the beginning of 2015 by approximately $25 million. So, I would like to take a minute, just to add a little color around the deferred tax asset valuation allowance that we announced today. When you have a near-term history of GAAP losses, which we've had for the past three years, the accounting rules require you to perform further analysis concerning the reliability of your deferred tax assets. The primary focus of our analysis was an evaluation of the expected reversal pattern of our deferred tax assets and deferred tax liabilities. In Q4, we determined that certain events within the quarter had disproportionately increased our deferred tax assets, such that we could no longer simply rely on the reversal of the taxable temporary differences, in order to support the full amount of our deferred tax assets. As a consequence, we recorded a $9.6 million valuation allowance against our deferred tax assets within the quarter. This is a non-cash charge and has no impact on our debt covenant compliance. Going forward, we'll continue to evaluate the amount of the valuation allowance relative to trends within our operating results and the composition of our deferred tax balances. At the point at which the company returns to a pattern of GAAP profits, [indiscernible] all of the allowance would likely to be reversed. Next I'd like to make a few comments to update you on the progress of the costs rationalization work and the related restructuring charges that we announced last quarter. I'm very pleased to say that this work is progressing on schedule. Our current estimate of the costs necessary to implement the restructuring plan is approximately $25 million. These restructuring charges are mostly cash costs, primarily representing severance, lease termination, as well as consulting costs. A total of $1.8 million was incurred during the third quarter and an additional $13.3 million was incurred in the fourth quarter of 2015. So in total, we've incurred, just over $15 million. We continue to expect our cost rationalization efforts to be substantially completed by the end of the third quarter of 2016. Consistent with our comments last quarter, we still expect to realize a material amount of savings in 2016 and will realize the full gross savings range of $35 million to $45 million in 2017. And I use the term gross savings intentionally as it's important to continue to emphasize that we fully expect some of the savings will be utilized to strengthen the business and fund certain growth initiatives, as well as to provide appropriate colleague performance incentives. So now let's turn to our financial guidance for 2016. Last October, we announced the structural reorganization of the company into two primary operating divisions. For financial reporting purposes, we closed 2015 under our previous organizational framework, which were five customer end markets. We are currently in the process of configuring our financial systems to create the financial reporting infrastructure that's necessary to support this new divisional structure. The earliest point at which we could complete that work and begin reporting externally under our new structure will be in April when we report our first quarter results. Our perspective on what we will report at a divisional level is still in development. Accordingly, in our earnings release today, we've provided 2016 financial metrics at an enterprise level. Given the work we currently have underway with regard to both our cost rationalization program and our strategic review, we've only provided 2016 forward guidance for revenue, adjusted EBITDA and expected debt reduction. When comparing 2016 total company revenue to our 2015 revenue of $771 million, it's important to adjust for the sale of our Navvis subsidiary and the revised structure of our relationship with HMSA. As a reminder, while our amended and extended relationship with HMSA largely retained existing bottom-line economics, it resulted in almost all of our clinical and managerial staff in Hawaii being re-badge from Healthways to HMSA, thereby resulting in meaningfully lower revenue and cost. These two items account for an approximate $39 million reduction in revenue year-over-year. So, as we look into 2016, we anticipate a top line revenue percentage growth rate in a range of low-to-middle single digits from the adjusted 2015 revenue of approximately $732 million. With that, I'd like to add a little more detail around our revenue profile for 2015 and 2016 from a divisional perspective. For 2015, we ended the year with revenue approximately split between our divisions as follows

[Donato Tramuto:]

Thank you, Alfred. First, let me provide an update on what we have accomplished and the nearly four months since our third quarter call, as well as what we intend to accomplish over the next four months, which will take us to the end of the second quarter. We are very pleased in a time of significant up people at Healthways. Our revenue and adjusted earnings per share for the year 2015 are above our guidance provided in October. This performance is attributed to the skills and perseverance of our colleagues throughout the company, and to the strengths of our services. Over the last four months, I have met with a wide variety of our customers including most of our top 10, and the message from them has been consistent. Our customers highly value our work. They understand the science that supports it, and they appreciate these substantial and long-term investments in technology that makes our solutions possible. They credit Healthways with having defined the science and the metrics around both total and targeted population health. Same time, our customers also understand that our total population health business is in a turnaround situation from a financial perspective and based on my meetings, they are appreciative and supportive of the work we've undertaken over these past few months to address our operational challenges. In addition, my meetings with customers of our Network Solutions business confirm that we're providing excellent solutions with demonstrated ROI, and that this business has an attractive long-term growth outlook. While this business revolves largely around SilverSneakers, allow me to remind you that it also has two other great networks, our Prime Commercial Fitness solutions business and our Physical Medicine business. Our Physical Medicine business represents over 88,000 complementary alternated and physical medicine practitioners, serving individuals through health plans and employers. Our fitness centering network encompasses over 16,000 U.S. locations, and we use this national network to deliver not just SilverSneakers, but also offer the Prime Fitness program through commercial health plans, employers and insurance exchanges. However, it is our SilverSneakers Senior Fitness program offered to members of Medicare advantage, Medicare supplement and group retirees that is the tool of this business and has been growing at a compound annual rate of roughly 14% over the last eight years. In our last call, I promised that we would do a better job educating you about this somewhat underappreciated business. And we took a very big first step in that direction at the JP Morgan Healthcare Conference last month. So, I strongly recommend you to go to the website to hear that presentation and review our deck. As we have engaged more and more deeply in our restructuring costs rationalization and strategic planning efforts, it has been great to have our customers confirm the tremendous value that exists in our solutions and in our Healthways team members whose strong execution of these solutions engenders such customer allegiance. It also highlights the important point that our focus throughout the changes we are undertaking is not just on recreating the value we provide to our customers, but on redesigning the organizational structure through which we deliver the value. The two part goal of these plans is to improve our performance and the value our customers are expect, while returning Healthways to a state of consistent and strong financial performance. Since the third quarter call, we have made much progress in the organizational restructuring and the costs rationalization. As Alfred described by the end of 2015, over half the anticipated costs related to these efforts have been incurred. And as we change our primary organizational focus from five customer end markets to two autonomous decentralized businesses. These changes have reduce my direct reports from 13 to 6 and one of my primary goals since our last call was to complete this core management team. Therefore, and from a leadership perspective, I'm very happy that Sean Slovenski joined our organization a few weeks ago as President of the total population health business unit. In January, we brought on Steve Schwartz, as Senior Vice President of Strategy and Corporate Development. And as shared with you during the last earnings call, Sid Stolz joined the executive leadership team as President of the network business unit last October. The newly formed Executive leadership team is now in power to make marketing, operating, and business decisions because they are the individuals closest to the customers and they know their markets best. The team understands the benefits derived from decentralized model and while focus on strategic alignment and execution to produce tangible results they and their teams understand, they must be flexible and innovative. As it means to constantly improve our performance and thereby their customers experienced with Healthways. Enterprise-wide, we also wanted to drive our turnaround efforts by putting peers focus on personal accountability and creating a sense of urgency throughout the entire organization. With these guiding principles, we are well into a transformation of the organization to one whereby everyone is empowered and accountable and where these values are supported by a strong performance based program that will reward for delivering results. As I repeated since the last earnings call, the decentralization of decision-making and the move to right size our corporate operation means that the office of the CEO and me in particular is not the sole entity that will make all of the decisions and nurture all of the relationships, I believe that that approach limits our opportunities and stifles. The outstanding human talent that is one of Healthways greatest resources. So let me stop here for a brief summary, of what has been accomplished at Healthways over the last six months, as I moved from Chairman of the Board to CEO first, we have continue to strengthen the composition of our Board of Directors and we have successfully executed a CEO transition. Number two, during that period of transition, we undertook a process of study and action planning that resulted in both structural reorganization and a cost rationalization plan that are deep into implementation and on track to be finish by the end of the third quarter this year. Number three, we completed our commitment to assemble a best-in-class leadership in the first 120 days of my tenure and we completed that. Number four, we are well into a key piece of work that is the process of cultural transformation focused on a decentralized approach to empowerment and accountability with clearly delineated metrics supported by a strong performance-based rewards program. This begins with the executive teams having a fully aligned reward structure based on creating total shareholder return. Number five, we delivered the revenue and adjusted earnings in the fourth quarter of 2015 that we committed to achieve. Number six and finally, we are now deeply engaged in the strategic assessment and review that will determine the direction we proceed as a company. Let me expand for a moment on that sixth and final point. Though our cost rationalization work is largely focus on the turnaround efforts of the total population health business unit. The strategic assessment work is equally focused on the entire business so that we can purposefully create strong growth strategies in our network solutions business and our emerging businesses too. In the spirit of transparency but without defining specific strategies today, I can tell you that our plan will include the following. A focusing of our efforts through a portfolio review, a better defined clinical quality model, organic growth in our businesses and a focus on operating excellence. The results should be improved outcomes for our members and even deeper customer relationships, revenue growth and increased EBITDA margins. As I've said on a number of occasions, Healthways has tremendous strength in its science, its IT infrastructure, its solutions and its people. Through this top to bottom strategic assessment, we intend to build on these strengths with a focus on, a investing in and expanding those capabilities and services that clearly provide an acceptable return on investment. B, capital allocation decisions, driven by opportunities in existing and new markets, where we can sustain the leadership position or be in a strong second position. And lastly. Strong consideration, to pursuing areas, where our services are differentiated. Where we are earning an acceptable return or where we are likely to sustain the leading our second strongest market position. I again asked for your patience with this process. I am committed to full transparency in our communication, but only when the work is complete. The work on our strategic review is on schedule to be completed during the second quarter. Until that time, however, we will not have specific details to discuss. In closing, let me say that our executive management and our board are focused on long-term value creation. The changes in which we are engaged, we will regain the company's strong focus on the fundamentals of our business, and financial discipline, and on our historic culture of accountability. We look forward to sharing more details with you in April, about how we built on the changes we are making today to drive long-term growth and stockholder value. This concludes my prepared remarks. Operator, we are now ready to proceed with the Q&A.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from Ryan Daniels with William Blair.

[Nick Hiller:]

Hi, good afternoon. This is Nick Hiller in for Ryan Daniels. I was just wondering, is there anymore granularity on the $35 million to $40 million of savings you could offer. Meaning a more definite level for 2016 based on the earlier work you've done. And how much of that might be reinvested versus dropping to the bottom line?

[Alfred Lumsdaine:]

Yeah. I think our comments that we've provided historically would still stand, I mean clearly we're early in the year that we've got several more quarters to get through to plan. And it will be influence by what Donato just outlined with the strategic review. So, I think anymore granularity would be premature.

[Donato Tramuto:]

Yeah. The only thing I will add to that, year know this very well, you don't make a business profitable by just simply liquidating it. And so there will be investments, and I think as we get the insights from the new executives that have joined is that we will be making investments to grow this business. But the majority, the majority we've been saying the majority of those savings will be realized.

[Nick Hiller:]

Okay. Okay, great. Thanks. And then Donato, I know you were involved with the organization as a board member, but as CEO and digging into the business war, is there any novel opportunities or challenges that have surfaced that maybe have surprised you?

[Donato Tramuto:]

It's a great question and I think I will answer it. Listen, it's a lot different being Chairman of the Board and being in the operating seat. I think the advantages that perhaps I bring as I - I bring 25 years of CEO experience. I think that one of the lessons that I've learned in the past is that you can't get to the fundamental growth if you don't have the right culture and I've tried to define that in my narrative today is that I think what we have done and I do think that is beginning to take hold is to define a culture of empowerment and accountability. To redefine the value and the behaviors that we want in terms of that cultural implementation and to divide - and to design, if you will, a reward system, that will reward the organization for performance. And so, for me that has been in many respects one of the greatest opportunities, because it's a way I have developed businesses in the past and what is worked for me in terms of success. So, I think that has been an enormous opportunity and at the same time, perhaps somewhat of a surprise that perhaps those three elements were not as integrated - integrated as I would've like them to have been.

[Nick Hiller:]

Okay. Thanks. And just one last one for me. Could you talk a little bit about the sales pipeline and how that's played out in the second half of the year after the management change and the restructuring announcement? And I mean how existing clients reacted and what has retention been, Mike?

[Alfred Lumsdaine:]

Sure. I'll start and then Donato may have some comments. I think from a client retention standpoint, I think we're very satisfied in terms of the retention of key customers and you know as Donato mentioned, he's visited most of our top customers and he's a getting a consistent message in terms of their or you call dependence on Healthways and strategic alignment with Healthways - it's hard to say in terms of what didn't happen that might have happened without some of the - what we'll call the transition that happened in the year, but we are committed to developing a world-class sales team, growing the pipeline, and we've seen nice conversion out of the pipeline, we always wanted to be more and we I think ---- clear expectations will be that our pipeline grow throughout this year and that as we - going to 2017 that it be much bigger.

[Donato Tramuto:]

Let me just add to that. Listen - when you're in a turnaround situation that you're always concerned about whether or not you're losing any customers material perspective. We have not lost one customer from the material perspective during this process. And we also see give you some good news is that we have applied disciplines. We are not looking just to take on contracts, but looking to take on contracts that are profitable and great news is that we won a Fortune 50 customer here over the last few months. And we applied the metrics that I have been ensuring with all of you since I became the CEO that is that we have to have profitable contracts those contracts had deliver scale and they have to align with our ability to have unmatched service and those are the metrics that we will apply and I think that's with the customers are also saying to as they like that language. They want us to succeed and at the same time they want us to tap into those areas that we know we can perform very well and that's what scaling is all about and to be able to service it in a way that puts us in a very unique position with our customers. And so - you had ask the question about investments I think one of our opportunities is to invest dollars into the sales organization, which is going to be part of our strategic plan.

[Nick Hiller:]

Okay. Great. Thank you for taking my questions.

[Donato Tramuto:]

Thanks. Thanks.

[Operator:]

Next we'll hear from Dave Styblo with Jefferies.

[Dave Styblo:]

Good afternoon. Thanks for taking the questions. First one, I just want to make sure, I understand the revenue guidance here. So the way to look at it is, take the back out $38 million, so your base is $732-ish million and grow low to mid-single digits of that, so that maybe roughly $760-ish million, is the right way do we thinking about that?

[Alfred Lumsdaine:]

The way you articulated, it is correct.

[Dave Styblo:]

Okay. So, can you guys help me, I know you parsed out segments and sort of what's growing with now. But I guess, expectations for the street and as were quite a bit higher of, but even accounting for the losses or the sales. It sounds like early in the year, there is a guidance cut on the top line, because of longer lead times, on existing work for things like the Ornish program, and then I think there was some high risk and feel members think coordinated care programs for shorter periods of time. And it sounded like, those were going to be corrected or more of a push, more of a deferral of revenue not something that was permanently gone. So, is there something going on there, or another area that is just causing revenue to not be closer to the high single-digit area that I guess we sort of grow in a customs here?

[Alfred Lumsdaine:]

Well, I think, I have to speak again at the divisional level that I talked about in my prepared comments, that we are saying, what we would think is nice growth sort of inside of our network solutions business, and clearly our emerging businesses is growing, where we're not seeing growth that we expect longer-term, is in the total population health services business, which is where, as Donato indicated, we are not going to grow, just to grow. We are going to get the right kind of business there and we're going to want to ensure that we get the right conversion to the bottom-line, better than what we've experienced over the past few years. So, other than what - I've already said David, I don't have a lot more commentary to add to that.

[Dave Styblo:]

Okay. And then, on the adjusted EBITDA being at 80% to 85% now. What is - can you let us know how much the non-camp, but the non-cash share camp is for 2016, what they done?

[Alfred Lumsdaine:]

Yeah. I think, you're referring to adjusted for 2016, our guidance is $85 million to $90 million.

[Dave Styblo:]

Yeah.

[Alfred Lumsdaine:]

And it's a roughly $12 million.

[Dave Styblo:]

$12 million. Okay.

[Alfred Lumsdaine:]

Yeah.

[Dave Styblo:]

All right. That's helpful. And then, I guess, the EBITDA on the quarter was - in the fourth quarter was stronger. What drove the upside there?

[Alfred Lumsdaine:]

Yeah. I've said amalgamation of a lot of things. We started clearly, we started down our work has to cost rationalization. I would - it would be appropriate to think that we had some impact there from earlier than expected the cost they get it. It's probably small, but small things make a difference, and other than that I think it was just the focus of the business, the work we've done even early to put the businesses into the business units and create that kind of accountability to the bottom-line results. And I think, we've got managers who have really a rally - if you well, around the new culture of accountability and empowerment. So, I think - I couldn't point you to one thing, it was an amalgamation of a lot of little things.

[Dave Styblo:]

Okay. And then, just last the kind of coming back to the - the growth savings plan, and I know obviously you guys are trying to work it so that you - I think you use the term, the majority of that you would be able to keep by the out year. Can you add a little bit more precision to that. And once you finished that in 2017, do you think there's any more savings to be had on top of that?

[Donato Tramuto:]

Well, let me say this, as that we are always, keep an eye on savings, and one of the things that I think that we have disciplined the organization, I think with the performance reward program that we now have in place. I think you have every single person in the organization that understands that we have the most cost-effective providers. So yes, and I think that should be something we should do all the time. It shouldn't become an event. Secondly, as that I do think that we still have to get through the strategic review process because as Yogi Berra once said, you don't want to make the wrong mistake. I think we have an opportunity to identify where we need to invest, and he is alluded to it with the growth trajectory and I think that's what we're trying to figure out, but I don't want to lose sight of that 65% of our business has been defined by growth. And I think if you look at the Network Solutions, especially the SilverSneakers, the Medicare population by its own right has this venue of growth for the organization. So we're going to continue to capitalize on that, but we also have to kind look beyond just the organic opportunities and that's what the strategic review was doing. This is not just a strategic review for the Total Population Health, I think we'll be making a huge error to focus the efforts on one side. We have to now look at how we can expand and grow in the other segments.

[Dave Styblo:]

Okay. Thanks for taking the question.

[Donato Tramuto:]

Thanks, Dave.

[Operator:]

Next, we'll hear from Mike Petusky with Barrington Research.

[Michael Petusky:]

Good afternoon. Alfred, I guess, with the lack of kind of revenue - I understand that there is on a kind of apples to apples organic revenue growth, but basically just year-over-year lack of revenue, obviously you're expecting some margin expansion, to get your EBITDA guidance. And I guess I'm wondering, does - I'm assuming most leverage comes on the SG&A lines. But are you guys thus also assuming some expansion of the gross margin line?

[Alfred Lumsdaine:]

Yeah. I actually wouldn't necessarily make that assumption, Mike. Meaning as we've been very clear, the focus of the cost rationalization work is been inside of the total population health services division. So, while we certainly applied the thinking across the enterprise in terms of taking an unsparing all of our cost structure. I think that you would find a substantial preponderance of cost inside of the total population health division, as we think of it today, with the divisional business structure.

[Michael Petusky:]

So, I mean are - what a good way to model gross margin, essentially be flatter, do you actually expect deterioration there?

[Alfred Lumsdaine:]

Again, I would actually and part of the work we're doing now in terms of the underpinnings of the financial system is to, Donato as articulated his move from 13 direct reports to six. We have changed the reporting relationship to embed support functions into the business. So, there is going to be, as I'd say, this is going to be a little bit of apples and oranges going on. But at the end of the day, we would expect margins to expand.

[Donato Tramuto:]

And I think as we scale and we gave you the example of the Fortune 50 Company that we just won the contract on. There is a great opportunity of leveraging if you will, what we do well and not customizing. And I think as we do more of that you will start to see improvements as well.

[Michael Petusky:]

Yeah. I may have gotten lost, a little bit lost in the answer, are you assuming a little bit improvement in gross margin in the next couple of years or you not or did you not say that where your remarks really around EBITDA margin?

[Alfred Lumsdaine:]

Both meaning EBITDA margin, but I would expect gross margins to expand at the same time.

[Michael Petusky:]

Okay. All right great. And then just I didn't hear if you mentioned it, did you give any kind of guidance around CapEx for this year?

[Alfred Lumsdaine:]

I did pretty simple that it would be lower than what we spend in 2015, which was under $35 million.

[Michael Petusky:]

Okay.

[Alfred Lumsdaine:]

All Right.

[Michael Petusky:]

I think that's all I've got. Thanks.

[Donato Tramuto:]

Great. Thanks, Mike.

[Operator:]

Mohan Naidu with Oppenheimer has a next question.

[Mohan Naidu:]

Thanks for taking my questions. You maybe a - look at a little bit on the emerging business programs, can you talk to us about Ornish Program, I know there are some sluggishness in 2015, but you're talking about 20% plus growth if I heard that right on that segment?

[Donato Tramuto:]

That's correct. We were talking 20 plus of course half of a small base and the primary businesses that are inside of our emerging or is the Ornish Program as you articulated and our blue zone solution as well. And we expect both to grow in 2016 - I think we are saying nice demand for the Ornish Program, we had - we had a release at the end of the year for number of new health systems that signed up and we feel very bullish on that program.

[Alfred Lumsdaine:]

And that's...

[Donato Tramuto:]

Go ahead. Thank you.

[Alfred Lumsdaine:]

Sure. That's another one its going - through now we have Steve Schwartz on Board Steve has really been devoting quite a bit of time to assess that business and see where we might be able to drive greater growth, and again I've been very, very optimistic by his early assessment. So, putting some fresh eyes and understanding. By the way, today on forbs.com, there was a great interview on ownership might want to take a look at it, but it really does speak to what we feel is a significant demand in the marketplace.

[Mohan Naidu:]

That's helpful. Thanks a lot for that, Donato. It is - well, you guys to be able to talk to us about, maybe some metrics around [indiscernible] programs to the number of clients or users or patients that growth the program. Just to give us a sense of what's really going on in that segment?

[Donato Tramuto:]

Yeah. I think we would had a reasonable amount of scale, but as you can appreciate.

[Mohan Naidu:]

Yeah.

[Donato Tramuto:]

It is only 4% of our revenues coming out of our emerging businesses that would - one of the things that we've committed to as a greater amount of transparency. You've heard, not to you've heard to me talk more at the abouts for example - our network solutions business, and I don't want to ignore the elephant, who are the Mikes to watch the mice and that's area really do, I think giving greater clarity and transparency as we get to this divisional structure around the -driver or the really economic drivers of our business is going to be much more board. And I think, just add of an operator is saying is that again, I think this strategic assessment. I think we're going to be able to have if you will a clear sense of some other questions that he will or asking. So, I don't want to say everything is in the strategic review. However, I think this particular one is.

[Mohan Naidu:]

Okay. All right. May be one last question around population health, you're not - you talked about owning that around that segment. What's going on the - with the hospitals, are they taking on more risk and how do you see that business evolving - from the calls that we have been having in the past month or so. The hospital spending has not been that great, at least for this technology and solutions, around population health. Anything that you can just talk to us about, what's going on in the hospital environment?

[Donato Tramuto:]

Well, listen, I don't look at this just simply by hospital. I think that there is a food chain of interested customer segments that are looking at population health, hospitals happen to be one, but we also have the employer market. We all know what's going on with the payer market with the exchanges, the indigestion that they've had with respect to higher cost. And we know that the Cadillac Tax has been delayed to 2020, but we also know that employers now are scattering around and asking what do they need to do to address some of the challenges they have with elevated medical costs. I think what we have to look at is, what problem are we trying to solve and we know that medical cost is elevating that there is a lot of pain points out there. And so, as we tear apart the strategic review, I'm not getting nearing towards one customer segment, what I'm getting nearing more towards is, what do we bring to the table, where we can win and scale it. And solve some of these challenges that maybe in the hospital side or maybe on the employer side. And again, I ask that you give us that chance to do that review and come back with you what we think that plan will look like.

[Mohan Naidu:]

Yeah, definitely. Thanks for taking my questions.

[Donato Tramuto:]

Thanks, Mohan.

[Operator:]

We'll hear from A.J. Rice with UBS.

[Rice:]

Thanks. Hi, everybody. A couple of questions, if I could ask. On the $25 million of total spending, $10 million left to be spent for the restructuring this year. You mentioned things like severance and the lease, getting out lease, et cetera. What is - what sort of left? Is there one bucket of that $10 million is going to go for that's left to be done?

[Alfred Lumsdaine:]

I think, you've identified where most of its going to be, it will be in that those two segments.

[Rice:]

Yeah.

[Alfred Lumsdaine:]

...inflation cost, with a little bit amount - a little bit of consulting cost.

[Rice:]

Okay. And then, on the comment about $30 million of pay down in debt for the year. Is that - should I just go that is effectively your free cash flow guidance for the year, or is there other discretionary funds that will be available that are going to some other years, is that pretty much what you think you'll have?

[Alfred Lumsdaine:]

That's right, Jeff. That's probably fair.

[Rice:]

Okay. In the last year 2015, the recognition of performance fees and how that flow through was a little different than what the historical pattern was, how are you thinking about what we're likely to see there this year?

[Donato Tramuto:]

Yeah. I could - it's still the reason we don't give quarterly guidance is the clunkiness of predicting and the only thing we're share of is that we'll be wrong if we predict. I do think, again as I sit here today, I would expect to more normal pattern, what I'll call normal than, we saw in this past year, where we saw that preponderance in Q2 and Q3, whereas I think we would actually expect it to be distributed much more heavily weighted to the back half of the year than the front half of the year, something like a one-third, two-third split. But, again I'm much more confident in my half one, half two assessments than I would be trying to be predictive of any code. But where we are pretty well historically accurate is that we don't see a lot flow through in the first quarter, which is why we always see the most earnings pressure in Q1.

[Rice:]

And the level of performance fees, is that probably fairly similar year-to-year or is there any reason to think it would change materially?

[Donato Tramuto:]

It'll actually be a little bit lower than the last few years, I think we've talked about the new arrangement, the amended and extended arrangement with HMSA.

[Rice:]

Okay.

[Donato Tramuto:]

Excluded fees at risk. So, it will be down.

[Rice:]

Okay. And then just, and I don't know whether this is for future conversation or maybe just some flavor. When I think about the population health and you're saying - if I've heard you right, you're saying actually divested business and the restructured HMSA contract, you're still sort of flat to down not necessarily going through what the plan for the future is, but when you sort of asses that business is that sort of the underlying growth that you associate with the services you're currently offering and you need to have new services to get growth, do you think - what is sort of the one or two reasons why it's doing what it's doing versus where you hope it to be at some point in the future.

[Donato Tramuto:]

Well, I think that's a number of things. First of all, I think that this is all what I think the strategy we view is hopefully going to deliver. As I said in my previous answer here is that - one thing we know for sure is that national healthcare spending is growing and we know that there is an opportunity here in terms of helping just not employers and hospitals, but helping the entire food chain of users of healthcare to get those costs down. And so what I do believe is that we have to look at what we do well and that's what we're tearing apart right now. We are talking to customers and by the way we have customers where we are winning and so we're trying to extract from those customers where we can scale those opportunities in a way where we take smart. We will win business in the future, but I want to win smart business. And that's what I think we need to assess in this next few months and give us that careful time to come back with where we know we can win and I think well by the way I think when you look at the network solution, I think that's a classification case of where we're winning, but where we utilize if you will our offerings in a way that we're smart and scalable. I used to laugh at the analysts, I love making money when I sleep and I think that that's a great example where we make money when we sleep, and I think it's scalable and we had to kind of replicate that another sectors of our business and I think that that will come out during the strategic review process.

[Rice:]

So maybe just asking it one other way and then I'll pass the baton onto somebody else. If you - if you look at your three buckets today relative to what you're generating, where is - where do you think the greatest opportunity for improvement is, is it obviously you got a much bigger business in Population Health versus the new businesses and my sense has been that the network solutions is very strong, but it's relatively steady. But maybe that's not the right way to think about, where is the greatest opportunity for you to make a difference in new management team?

[Donato Tramuto:]

Well, let me say this, if we can't improve across all these businesses then there is something wrong with us. And so, you know my intent and my commitment and even you know you mentioned the network solutions, but I'm not eager to just sit idly and accepting organic growth. And so that's what we're looking at all the businesses. Where those opportunities are and what we need to do to be number one, number two and where we can allocate capital and get the greatest return and that's - that should be applied as a discipline across all those businesses.

[Rice:]

Okay. All right. Thanks a lot.

[Donato Tramuto:]

Thank you.

[Operator:]

That does conclude our question-and-answer session. I'll turn the conference over to Mr. Tramuto, for any additional or closing comments.

[Donato Tramuto:]

Thank you very much. Thank you all who attended our call today and for your interest in Healthways. I really do appreciate the questions and very pleased that there were more than two questions today from what appeared to be in the last call. Please don't hesitate to contact Chip, Alfred or me, if you have any further questions and thank you and make it a great evening.

[Operator:]

That does conclude today's conference. Thank you for your participation.