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Edited Transcript of HWAY earnings conference call or presentation 27-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Tivity Health Inc Earnings Call

FRANKLIN Apr 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Tivity Health Inc earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chip Wochomurka

* Donato J. Tramuto

Tivity Health, Inc. - CEO and Director

* Glenn Hargreaves

Tivity Health, Inc. - Interim CFO, CAO and Controller

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Conference Call Participants

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* David Anthony Styblo

Jefferies LLC, Research Division - Equity Analyst

* David Samuel MacDonald

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Jailendra P. Singh

UBS Investment Bank, Research Division - Director and Equity Research Analyst - Healthcare Services and Managed Care

* Joshua Richard Raskin

Barclays PLC, Research Division - MD and Senior Research Analyst

* Michael John Petusky

Barrington Research Associates, Inc., Research Division - MD and Senior Investment Analyst

* Mohan A. Naidu

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Ryan Scott Daniels

William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst

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Presentation

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Chip Wochomurka, [1]

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Good afternoon. This is Chip Wochomurka, Vice President of Investor Relations for Tivity Health, and welcome to our First Quarter Conference Call.

Today's call is being recorded and will be available for replay beginning today and through May 4 by dialing (719) 457-0820. The replay passcode is 2140921. And the replay may also be accessed for the next 12 months on the company's website.

To the extent any non-GAAP financial measure is discussed in today's call, you'll 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 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 -- Tivity Health's expected quarterly and annual operating and financial performance for 2017 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You're hereby cautioned 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 any 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 we're going to begin by turning the call over to our Chief Executive Officer, Donato Tramuto.

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [2]

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Thank you, Chip, and good afternoon, everyone. Thank you for being with us today for Tivity Health's First Quarter 2017 Conference Call. In addition to Chip, I'm here today with Glenn Hargreaves, our Interim Chief Financial Officer.

Allow me to give you an overview of our discussion this afternoon. Glenn will lead off and take you through our first quarter results in detail. Next, Chip will review our updated financial guidance for 2017. And then I will conclude our prepared comments with some additional remarks about our areas of focus in 2017 and some early results from some of the initiatives we discussed with you last quarter. Thereafter, we'll open the call for your questions. So without further ado, I'll ask Glenn to discuss our first quarter performance. Glenn?

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [3]

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Thanks, and good afternoon. I'd like to start by recapping some of the key financial and operational metrics for the first quarter.

Revenues for the first quarter were $141 million compared to $126 million for the first quarter of 2016. Net income from continuing operations was $15.5 million for the quarter compared to $19.2 million in the first quarter last year. And earnings per diluted share from continuing operations was $0.38 compared to $0.52 in the first quarter last year. Please note that in the first 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 asset that was originally established in 2015.

For illustration, utilizing a normalized 40% tax rate, the first quarter of 2016 would have resulted in net income from continuing operations of $11.5 million and earnings per diluted share of $0.31. Our continuing operations generated adjusted EBITDA of $31.8 million for the quarter, providing an adjusted EBITDA margin of 22.6%. Adjusted EBITDA for the quarter excludes approximately $2.4 million of restructuring charges and business separation expenses.

The strength of our revenue generation this quarter was influenced by 2 factors: first, SilverSneakers visits were right at $24 million, which met our expectations. But since the mix of the business was more proportionate than expected to members cum clients, who pay us a per-visit fee, this drove a correspondingly increased level of revenue. Second, in our Prime program, we saw an increase in the member pay enrollment of roughly 8,000 new members in March, above our projected levels. These 2 revenue factors also contributed to the strength of our adjusted EBITDA margin this quarter. In addition, 2 cost factors drove adjusted EBITDA margin above our expectations. First, we experienced lower average cost per visit within the SilverSneakers network. This was partially driven by a larger-than-unexpected number of visits coming at locations where the visit costs per member per month are capped and also a function of more visits taking place in lower cost locations. The second larger factor was a result of lower-than-planned technology infrastructure cost for the quarter, as we aggressively managed to ramp up of run rate costs, while we completed our business separation work. These 2 cost-saving factors more than offset the normal first quarter increase in enrollment and marketing expenses and the initial reinvestment of a proportion of the cost savings from restructuring efforts into strategic initiatives. We do not expect either the technology cost or the visit cost saving to continue into the second quarter and beyond.

The performance underlying the improved generation of adjusted EBITDA led to adjusted earnings per diluted share for the first quarter of $0.42, which exceeded our expectations. In addition to the higher level of EBITDA generation, we also benefited from a tax rate of 37.7% compared to our expected rate of 39%. The tax rate was favorably impacted by new accounting standards related to the tax benefits from share-based payments. In short, the tax consequences from the exercise of option and the vesting of restricted shares of stock are now in the P&L compared to prior rules isolating certain benefits to the balance sheet.

Regarding our free cash flow generation for the first quarter, the results reflect seasonality due to the payment of the 2016 colleague bonus and the full year 2016 401(k) Plan matching contributions. Also, the timing of payments from 2 significant long-term customers was unexpectedly delayed. These payments have since been received. Our free cash flow guidance for the full year remains unchanged.

Our restructuring and business separation expenses are essentially complete as we closed out the first quarter. The conclusion of the restructuring activities means that we are now recognizing quarter-by-quarter the full value of the annualized savings that we anticipated.

As noted in our release today, we completed the refinancing of our senior credit facilities. The new facilities include a $100 million revolving credit facility, a $70 million term loan A and a $150 million delayed draw term loan, which provides ability to repay the $150 million cash convertible senior notes due July 1, 2018. We believe that this facility provides us with efficient access to liquidity. Currently, we expect to continue to repay outstanding term loan debt and then reach a point of accumulating cash in the latter part of 2017.

With that said, in light of our ongoing assessment of strategic growth opportunities, we are well positioned to act on a variety of cash deployment options. Also, noncash interest for the quarter was $2.4 million.

Finally, as detailed in today's release, applicable accounting rules require us to reclassify the senior notes as current rather than long-term liabilities at March 31, 2017.

I'll now turn to Chip for our outlook for the remainder of 2017.

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Chip Wochomurka, [4]

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Thanks, Glenn. Having completed the first quarter, we've also done a full review on our outlook for the balance of the year, and we have now increased our 2017 financial guidance.

Specifically, for revenue, we have increased our revenue guidance to a range of $550 million to $558 million from a previous range of $540 million to $550 million, which now represents a growth rate of approximately 10% to 11%. As Glenn indicated, we have right at 24 million visits within the SilverSneakers program for the quarter, and I'll add that we also now have 14.6 million eligible members.

As Glenn also indicated, during the first quarter, we had more visits than anticipated from members who are linked to clients paying us a per visit fee. Going forward, for the balance of 2017, we expect the visit proportions to shift back to a more normalized balance with an increased proportion coming from members linked to clients paying us a flat PMPM fee. We also expect to see the normal modest quarterly decline in the absolute number of visits that we typically experience every year after a peak in the first quarter. Therefore, we anticipate a modest decrease in revenue in the range of $2 million to $3 million as we move into the second quarter and a relatively constant quarterly revenue profile thereafter for the balance of the year.

With regard to adjusted EBITDA, we have increased our adjusted EBITDA guidance for 2017 to a range of $119 million to $123 million from a previous range of $116 million to $120 million. This increase follows our first quarter performance with adjusted EBITDA at $31.8 million and an adjusted EBITDA margin of 22.6%. Moving through the rest of 2017, we would not expect each quarter to maintain a 22.6% margin. Three factors would modestly reduce the quarterly margin from the peak first quarter results. First, more visits from members who are linked to clients paying us under a flat PMPM model, as I mentioned, in covering the revenue outlook. Second, a more normalized level of IT infrastructure support costs that as Glenn mentioned was lower in the first quarter as we finished our business separation initiative. And third, a modest increase in our reinvestment into strategic initiatives in each of the next 3 quarters compared to the first quarter level, but our total reinvestment remains at approximately $7 million for the full year. As with our pattern of revenue, moving into the second quarter, we would expect a modest drop in adjusted EBITDA margin compared to the first quarter and a relatively constant quarterly EBITDA margin profile thereafter for the balance of the year.

With regard to adjusted diluted EPS, we have increased our guidance for adjusted earnings per diluted share to a range of $1.50 to $1.58 from a range previously of $1.44 to $1.52. As with the increase to our adjusted EBITDA guidance, the same factors apply to adjusted earnings per diluted share. The only additional item affecting the level of increased guidance for adjusted earnings per diluted share for the next 3 quarters compared to the $0.42 that we recorded in first quarter is our anticipated tax rate. As Glenn indicated, we had a tax rate of 37.7% for the first quarter, driven by the new accounting standards related to the tax benefits from share-based payments. Going forward for the balance of 2017, we're not able to predict a specific pattern of the exercise of options, plus we continue to expect a tax rate of 39% in our guidance for adjusted earnings per diluted share.

And as with our pattern of revenue and adjusted EBITDA margin, as we move into the second quarter, we would expect a modest drop in adjusted earnings per diluted share compared to the first quarter and a relatively constant quarterly EPS profile thereafter for the balance of the year. And finally, let me reiterate Glenn's point that our free cash flow guidance for the full year remains unchanged in a range of $90 million to $95 million. Now let me turn this back over to Donato.

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [5]

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Thank you, Chip. Let me start off by expressing how pleased I am with the fierce execution behind our first quarter performance. I'm thankful to the colleagues who have embraced our culture of empowerment and accountability and whose mission-driven commitment to both our customers and to our members has allowed us to deliver once again on our quarterly earnings.

Second, allow me this opportunity to remind you that because of the dynamics of our membership-based contracts and our deep experience with participation, we have high visibility as we enter each calendar year as to the financial outcomes we expect for that given year. Thus, we have been and continue to be heavily focused on our A-B-C-D strategy, which as shared with you in the past is our focused attempt to increase growth in 2018 and thereafter.

As we shared with you some of our initial findings from the pilots related to our A-B-C-D strategy, keep in mind that it's much too early for us to fully understand the pauses and the implications of early stage results from the small sample sizes. But based on what we've seen and admittedly speaking, we are encouraged by the potential of our A-B-C-D strategy and what is a very large and growing demographic, namely nearly 11,000 individuals turning 65 every single day and nearly 15,000 turning 50 every single day. Make no mistake about it, we intend to continue to be an unmatched leader in this market.

The A-B-C portion of this strategy, as described at last August investors meeting, is to add more eligible members in all 3 networks and build more empowerment, engagement and participation in the eligible population and collaborate with other partners by leveraging our brand to introduce new products and services that will drive participation. One thing we have learned is that we are a scalable highway of members working for other products that can influence our engagement. Last quarter, we had a discussion with you about the initiatives in pilots underway and/or planned for 2017 to test various ideas to achieve these strategic goals. We would expect to roll out some of these initiatives for the 2018 enrollment season. Let me give you an idea of the progress we've seen on some of these pilots.

One such initiative was to begin more focused marketing efforts in collaboration with our Prime Fitness clients. We began our efforts with a few of these clients in the first quarter. And in March, as you heard from Glenn and Chip, we unexpectedly added 8,000 new Prime members above our own growth projections. As my favorite philosopher Yogi Berra once said, it's tough to make predictions, especially about the future. In that vein and all kidding to the side, let me be clear, it's too early to know if the pilot marketing efforts had anything to do with these new memberships or if it did have an impact, what does it mean for the future. But what I can share with you, we do know that the 8,000 new members came from the clients we collaborated with and that these additional memberships contributed to the growth in revenue above the expectations for the first quarter.

We also mentioned last quarter that with SilverSneakers specifically, we wanted to increase the quality and frequency of our online and social media presence to improve new member awareness enrollment and engagement. One effort that we did undertake was to overhaul and enrich our Facebook community content. As we have learned and as we have validated, Facebook is a preferred social medium for seniors. Hence, we began some advertising on Facebook. The initial results have been better than we expected, and not just on Facebook, but also due to the traffic that Facebook has driven to the SilverSneakers' website. For example, in the first quarter in 2017, we added 11x more Facebook followers compared to the same period last year. Even better, we nearly doubled the amount of new followers in April compared to the total number of new followers in Q1 2017. Additionally, visits to the SilverSneakers website nearly doubled to 1.7 million. Those visits drove a 155% increase in people performing location lookups and a 109% increase in visitors checking their program eligibility. Obviously and as noted, we want to make sure that this activity does correlate in the actual enrollment and actual engagement. That will take time to determine and validate. So again, we caution you just as we caution ourselves that more analysis is required to understand these results, especially in terms of any correlation between these improvements and increased enrollment and participation, which at this point, we would not expect to see as the data is still being analyzed. We plan to shed more light on our progress in the next couple of quarters as we analyze the data. We will share with you those results.

We also plan to test new directed content campaigns in the second quarter focused on converting online eligibility checks to enrollment, with additional proactive outreach in the third quarter focused on first-experience follow-up. So you can begin to get a sense of the multiplying opportunities we are studying to influence the member decision to engage and to participate. As I'm sure you've noticed, we added the letter D to our strategy to formalize our intention to leverage the opportunities we see in deepening our relationships with our Fitness center partners, who make up our national network, as well as their instructors. We've come to understand how critical the first visit is for a member in leading to sustainable participation. Hence, we are developing ideas we believe can improve the overall experience and increase engagement and participation among the large numbers of those one-and-done members and others with low participation rates.

Any ideas we have are better with our partners [buying], and we want to take advantage of their expertise in improving the member experience as well. So we are making specific efforts to visit the executive teams of our partners, and we've created an advisory board to be staffed separately by not-for-profit and commercial center partners. We're offering joint marketing programs, an unprecedented sharing of insights, research and data from which we can all benefit. Given the strength of the SilverSneakers brand, we are even piloting center-based SilverSneakers apparel sales to generate additional revenue for our network.

In order to make the first-member experience a great experience, we are working to support instructors and other Fitness center personnel who are in contact day-to-day with members. The support includes enhanced training for instructors and others on how to deliver a consumer experience to the SilverSneakers standard. We are testing whether we can align incentives and rewards through, among other means, different forms of compensation for centers and personnel doing the best job of increasing participation. You may have also seen our recent news release announcing our inaugural Instructor of the Year Awards to honor exemplary fitness instructors. Through these pilots and others that will run throughout 2017 and into next year, we expect to refine the methods and the incentives that we can use to drive increased enrollment from our growing base of eligible members and increase visits from our participating members.

We also believe that by providing a member experience to the SilverSneakers standard, we can increase utilization and improve the physical and social fitness of our members, which is also the goal, I believe, of our health plan clients. In so doing, we expect to strengthen our competitive differentiation and market leadership. This thought provides, I believe, a great segue to our announcement today of the 3-year renewal of our contract with UnitedHealth, extending our 20-year relationship with one of our largest and oldest clients. We believe UnitedHealth values our ongoing commitment to reinvest in SilverSneakers, and they understand the strength of our brand because of both its importance to the Medicare Advantage membership and the results we produce. This improved depth of understanding led to a renewal that was completed on favorable terms.

However, let me also note here for the record that our overall contract renewals are on track with many other clients for 2018 and beyond, including if I may add, winning back some former clients that have tried other providers. Since our fourth quarter call, a little more than 8 weeks ago, I have continued my travels to meet our health plan clients. And I plan to continue this practice because of the importance of these relationships in understanding exactly what our clients want and need from our relationship. It has been a pleasure for me to see these industry leaders as they grow in their understanding of the value of SilverSneakers and why we have a Net Promoter Score of 81 and as they advocate for the reinvestment in our A-B-C-D strategy that we have launched and started.

For instance, I recently met a CEO of one of our largest health plan clients and before we even addressed any business issues and opportunities, he acknowledged the value and stickiness behind the SilverSneakers brand. We clearly understand the value of our brand, because we've seen in person its value to our members. In addition to my travels to visit our clients, I am passionate about continually meeting with our members. I have been reporting to you some of the amazing observations I've made and experiences I've had and seen to help you better understand the strength of our brand, although I must admit, unless you see it for yourself or through the eyes of a family member or friend, it is very difficult to truly appreciate.

On the last call, I mentioned that one of our oldest member was 102 years old and that she started SilverSneakers when she was 89. I recently traveled to Long Island to attend her 103rd birthday party. In fact, yesterday was her actual birthday. And if I may just add, Happy Birthday, [Nan] . I was there with the CEO of her Medicare Advantage plan, and nearly 75 of her current and former SilverSneakers classmates and instructors were there. Can you imagine what that community means to her and to each of those 75 people, especially when you consider the isolation that so often befalls our parents and grandparents as they age.

In the same vein, I recently spoke with a 92-year-old woman who began SilverSneakers when she was 85. At that time, she had become immobile to a point where she couldn't tie her own shoes. She was encouraged to participate in SilverSneakers. And 2 very capable instructors tailored activities to her specific needs in the early days. She is still going strong today and as a fully participating member. And by the way, she is now able to tie her sneakers before every class. We are making a difference one member at a time. Again, think about what those instructors and her classmates mean to her and to each other. SilverSneakers is as much about social interaction as it is about physical activity. Our services create loyalty, an emotional attachment, because they improve our members' physical, social and mental health, the latter of which at some point for most people will be one of the most important things in their lives.

I -- we do not know of another organization in the country that offers our comprehensive services to older Americans in the trustful way that is the hallmark of SilverSneakers or that produces the results we achieve or that which approaches the scale that we have. As a result, we believe we have an exceptional long-term opportunity to serve this population.

In closing, I'd like to once again recognize and thank all of the colleagues at Tivity Health. They have worked through a lot of change over the last 18 months but there can be no doubt about their intense commitment and dedication or about their fierce execution. We have deliberately created a culture of empowerment and accountability at all levels of our company, supported by a performance-based reward system. And my colleagues have done nothing but respond strongly ever since. I look forward to work with them and as we continue to move the needle forward.

Thank you very much for your interest in Tivity Health and for being with us today. Operator, we now like to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take your first question from Ryan Daniels from William Blair.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [2]

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Congrats on a strong start to the year and the contract renewal. A quick follow-up on that in particular. I know you mentioned that it was on favorable terms for the organization. But I'm curious, number one, if there's any changes in the model between fixed fee, per member, per month, per visit, number one. And then number two, were you able to protect the margin profile from that? Or given the strength United has seen in their MA clients with very good growth, was there any dilution to that we need to think about for 2018?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [3]

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First, Ryan, thank you very much for your question and also for your warm congratulations. As we noted in my script is that we renewed on favorable terms, we don't get into the specifics. And all I can tell you, as I have shared with you over the last few months, the relationship with United continues to be very strong. And we are very pleased with the terms that we have.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [4]

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And is it a similar revenue model going forward? I don't know if you want to mention that. But is there any big switch between the way that contract is structured?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [5]

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No. And as I shared, it's favorable terms. And we just don't get into those specifics.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [6]

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Okay, I appreciate that. And then if we think about the nuance in the quarter, we're seeing kind of more visits in markets where you do get a per visit fee and more visits in markets where your costs are capped or lower cost, does that have anything to do with your marketing initiatives, i.e., the ability to target those markets with investments that will maximize your revenue and reduce the cost of that revenue? Or was it really just normal volatility in the business?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [7]

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Yes. First of all, let me just say, answer the question in 2 parts. It's still too early, and I think that one of the things that we are doing is fleshing out all of these activity-based results that are coming in and being able to correlate it to the right outcomes and data. And so some of it is volatility. I think that Glenn and Chip alluded to that. But you know what, I think I'm going to be more excited, as we get through the next 2 quarters, is to come back with a greater granularity and clarity as to how that correlation is in fact working. I think the good news is if you're having -- it's kind of like what I always say to my staff, when you drive by McDonald's and it says 3 billion people visited there, doesn't tell how many ate there. So what I want to start to see is how many of this good activity is converting into engagement. And I'm comfortable to say that I think by year-end, we'll know that.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [8]

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Okay, that's helpful. And then final question for you just related to that engagement, some of the marketing initiatives. I'm curious and you mentioned this with Prime. So I'll ask it specific to SilverSneakers, given the scale of that business relative to the revenue stream. Are you seeing a lot of cooperation there as well amongst the health plans to enable you with more data to allow you to do more targeted marketing? Or is the marketing initiatives that you're putting in place there are really more focused on stuff you can do internally, like your website, like social media, like training the Fitness members? So how cooperative, if you will, are the plans in that venture?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [9]

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It's a great question. And I think I had shared this in the last few months as I've been on the road. First of all, I don't think I've seen -- I've been here now -- unbelievable as it may sound, I'm going to my 19th month. But I don't think I have seen a time in this organization where our relationships with our customers are just so remarkably strong. And I want to thank our Chief Growth Officer, Steve Janicak, and his team. They're working it from a level that really allows me to go in at the more senior level. But I can tell you this without hesitation that the interest in the A-B-C-D strategy is very, very significant. And so if you look at the macro and the micro, I think that what's changed there is that we are taking a much more aggressive approach on the macro, making sure that we do our own kind of high macro approach on digital strategy. But then we are partnering with our customers. It's interesting, tomorrow, I'm heading off to meet with one of our top customers. Next week, I'm with another top customer. And we're talking about these opportunities of how we can partner together. I think one of the most significant changes at how we've changed the conversation that we are not a product waiting for members. We have the scalable highway of members that can continue to partner with other organizations and also with our own customers to use the brand, to get these members to get more engaged, because we know when they're engaged, they're going to have better outcomes with respect to addressing their social isolation, addressing some of their physical challenges. So this has been a partnership that I think I've been just really amazed at how our key customers and partners have stepped up and said, listen, we want to partner with you.

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Operator [10]

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We'll hear next from David MacDonald from SunTrust.

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David Samuel MacDonald, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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A couple of quick questions. First, just a point of clarification, did you guys say that all 8,000 on the Prime side were exclusively from the folks that you collaborated with?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [12]

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Yes.

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [13]

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Yes.

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David Samuel MacDonald, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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Okay. And then can you give us a sense of, just kind of building on that, what percentage of your Prime book have you collaborated with? And should we expect further outreach in collaboration throughout '18 with some of the other folks in the Prime book?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [15]

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Well, we do -- it's a very interesting question. One of the key drivers in terms of Prime is that we do have a significant partnership with one of our customers, who before my time has really pushed for a greater collaboration. And we met with them back -- and just to give you a little bit of history, we met with them back in October, the executive team. And it was really at that point that we saw a very quintessential opportunity to partner with them even more. And so there is now a activity-based marketing copromotional effort to increase, if you will, activation. Remember, we have the population through this partnership, but the true opportunity is activating them. So I think you're going to see a significant effort in the next months. I don't want to go into it, because I think then we're kind of tipping our hat in terms of what we're doing. But I think you're going to start to see one of the cultural [monitors] in this organization is to have best partnerships in a way that really allows win-win and to make sure that the incentives align with our partners so that they also benefit from this increased marketing activity.

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David Samuel MacDonald, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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And then, guys, one other question just in that same vein, is there any -- within the Prime kind of collaboration, are you doing any specific marketing within that to kind of that 50 to 65 sweet spot, essentially the folks who're going to age into SilverSneakers in the coming years?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [17]

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Well, it's a great question. One of the things I always say is, well, sell what's available today. We have such a great opportunity. When you look at the total members in Prime, 40 million-plus who are eligible, and the activation is less than 1%. So we have a huge opportunity across all age groups. But where you're heading is exactly where our mission and vision is. We do believe that the 50-plus age group, especially in Prime, can be a nice conduit to getting them into SilverSneakers when they age in. But right now, to be honest with you, when you only have less than 1% activation on Prime, you have an enormous base of opportunity. And that's where I'm focused right now. I'm a firm believer of stay focused. As you heard me in my first earnings call, focus, focus, let's be focused. That 1% is unacceptable to me. And imagine if we got it to 2%, you could double your revenues. So that's really where we're focused right now, and that does involve the 18- to 64-year-old population.

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David Samuel MacDonald, SunTrust Robinson Humphrey, Inc., Research Division - MD [18]

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Okay. And then, guys, just last question. Was wondering if you could provide just a little more detail on maybe some of these incentives for either the instructors or the folks who're working at the gym. I would assume that would be something where they participate somehow financially if the loyalty, i.e., the amount of visits or the number of swipes starts to move higher. Is that kind of generally what you guys are thinking?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [19]

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Yes. And again, I really don't want to get into the specifics, because I think it's tipping our competitive hand. But let's just say this, we intend to ensure that the strategic positioning of what we are talking about that it gets aligned appropriately. As you know, David, when we had our conversation with you, I believe, in New York, you know that the alignment could not be any better. When that card gets swiped, our physical locations benefit from it. And so we've got to be able to build a partnership that allows us to be a win-win. Now those are the activities that we are working on.

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Operator [20]

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(Operator Instructions) We'll move next to Dave Styblo from Jefferies.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [21]

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Wanted to start out on taking a step back, and you guys are running several different pilots, looking at different growth initiatives. I'm curious, as you're going through this, what you're learning in terms of what might be the biggest thing for your buck? I traditionally thought it'll be more in SilverSneakers side. Obviously, you're having some success in Prime. Is it ranking one over the other that you could point to, especially on these folks who are either one-and-dones or aren't really participating? How would you sort of stack rank those? And then as you go forward to perhaps trying to seize this opportunity, how do you balance whatever investing that might be required on this against trying to maintain margins? How adamant are you about making sure margins don't degrade over the next year or 2 versus perhaps thinking about things in the longer term that's best for shareholders?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [22]

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Yes, let me -- I'll let Glenn and Chip answer the latter part of the question. Let me answer the first. First of all, I have a saying, make it stupid for people to say no. I think I'm prying. The way our potential members have to activate, they've got to go through to 5 or 6 or 7 steps, we learned that in the last number of months as we've gotten deeper. So how do you make that easier? And that's what we're trying to do is break the barriers down there. The other is, those who know us love us, not enough know about the program. And that's where the marketing comes in. So I think there we're doing, I think, all the efforts that we believe can really move the needle. With respect to the SilverSneakers, I want to be careful in terms of not getting too deep in terms of what we're learning, because I think that just, again, tips the hat to our competitors. But let me just say this, we know that this is a 3-act play. We know we have an opportunity for increased awareness. And we have pilots now that are directed towards there. We also know that it's just -- it's common sense that we know that if somebody goes to the Fitness center for the first time that they have to have a very delightful experience. So if they don't have that delightful experience, then that's going to be a very significant loss not only to us, but it's going to be a loss to the physical location. Those are the things that we are learning. And there's like 4, 5 key nuggets that we have, in fact, extracted out that have now aligned our ability to put pilots into place. And so rather than going to the detail, I'm more than happy to talk offline one-on-one with you, but I would prefer not to get into the exact information. Do you want to answer?

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [23]

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This is Glenn. And just very briefly, the part of the rigor around the pilots is a measurement methodology to fully vet and understand and evaluate the ROI out of each initiative. So we, by no means, would leave -- enter into this with the concept of diluting margins from this activity.

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Chip Wochomurka, [24]

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And this is Chip, and I'd add too. You asked the question about rank order. And I think the very basis of running a series of pilots is to try to understand the outcome of those pilots and then pick from those what you would actually deploy on a more full scale. So it's way too early to rank order anything until we get deeper into the data analysis. And I echo Glenn's comment about not wanting any margin degradation. So in terms of not on a quarterly basis, but on a full year basis, not looking at any kind of margin degradation.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [25]

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Yes. Sure, that's fair. I appreciate the answers there. As far as some of the customers that you had lost in the past and you're having ongoing conversations with, what's sort of the time line that we'd be looking at for you to have an opportunity to convert that business over to you? And is it large enough that would move the needle, or are these sort of a series of smaller customers that were once yours?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [26]

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Yes, the first part of your question, this is all for 18 and beyond. And these are more regional players. As you know, we have 8 of the 10 largest Medicare Advantage customers. We are focused. If you look at my scorecard that the board approved, I think we have an opportunity. Given the position we're in right now and the focus on investing in the strategy, we have an opportunity to win back the clients that we have lost in the past. And I can tell you, I've been involved in a number of those discussions. I have to tell you that when you open the door to meet the CEO of a customer base that we lost in the past, they are very happy to see us. They understand. When you look at the Net Promoter Score of other branded names out there, I'm not going to announce them on this call here. But to have a Net Promoter Score of 81, I'm telling you, that just really floors people. And I can tell you that -- I remember speaking to one CEO who said that the day he canceled SilverSneakers, it was the worst day of his life that he realized that the stickiness of that brand was just an amazing, powerful reaction from the members. So the discussions, I think, are going very well, and we'll give you more as the year progresses.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [27]

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Okay. And then lastly, just on capital deployment. It sounded like -- if I heard you're right, you guys are going to be pretty aggressive in paying down the rest of the debt up to the $150 million loan that's out there. Is -- it sounds like that's going to happen this year. I want to confirm that. And then two, at what point are you guys going to communicate a strategy after you pay down the excess debt that you wanted to in terms of what you might be investing in or possibly returning to shareholders. I know investing has been high in the list. What sort of forms does that perhaps look like?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [28]

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Yes, it's -- listen, it's a great question. It's funny, the problems I have today are a lot different than problems I had a year ago. So listen, one of the things, certainly, we are going to invest back in the company. You're right to say we are going to pay debt down. And I do think that, listen, any good company, I think any good executive team, any good board should constantly be observing what the next strategy expansion should be. And I can tell you that we're doing that with the board. I'm very, very pleased with the board dynamics and the interactions we have with the board. We have a strategy review committee. And I think that, that right now -- again, I don't want to distract this organization. I think one of the challenges we had in the past is that the organization took too much on. And I think right now is to execute on A-B-C-D and keep our eyes wide open. When I talk about this highway, this significant member stickiness, we will be absolutely foolish if we did not keep our eyes wide open to see what else is out there. But I don’t think that, that should, at this point, our key focus.

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Operator [29]

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We'll move next to Mike Petusky from Barrington Research.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD and Senior Investment Analyst [30]

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A few from me. Donato, I know you're not wanting people to kind of run beyond what you actually know here. But I just want to make sure, or I guess, I want to understand, were there specific targeted efforts at trying to get a higher visit count out of those locations where you get paid for those incremental visits? I'm not saying you're tying the result to that. But were there specific targeted efforts of doing that?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [31]

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Again, too early. One thing I hope you all know, and I'm pretty transparent guy, and -- but I'm also a pretty cautious guy in making sure we have the right data. I think it's still too early. And certainly, you always want to make sure that you're focused on the precise venues that are going to get you the greatest return. And I can certainly assure you of that. But let's make sure we get all the data in. And then I can say to you without hesitation, yes, we pushed that button and this happened and it happened in the right area. Is that fair?

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD and Senior Investment Analyst [32]

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Yes. I mean, what I'm taking away from that is you did try to move the needle there. The needle was moved, but you're not essentially ready to take a victory lap. Is that a fair reading of what you're saying?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [33]

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Wow, you said it better than me. Yes. And I love to take victory taps on my chest, but I want to make sure I'm taking the right one.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD and Senior Investment Analyst [34]

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Yes, absolutely. All right. And then just going to -- I think Chip mentioned that there's now 14.6 million eligible members. I was wondering, do you have an -- I didn't catch it if you mentioned an active member figure.

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Chip Wochomurka, [35]

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We don't have a detailed active member figure. You're trying to -- I'm assuming for a minute that you're asking did the roughly 1 million active participants number increased. Those are -- those numbers we've categorized in the past are general numbers. We don't have what I would call an updated specific number against that profile yet. And it's the same reason why we're not getting into the outcome of the pilots. We've only got 2 months of actual visit data, January and February, and we've got some presumptive data from March. We've got a long way to go. So to analyze both the pilots to give you a specific answer to that specific question.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD and Senior Investment Analyst [36]

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Okay, all right. And then, I guess -- I'm wondering, are you -- obviously, you're going -- you mentioned you're going back to customers that you guys have done business with previously but aren't doing business with now. Are you in discussions with any of the top 10 Medicare Advantage providers that you currently don't have?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [37]

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Yes.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD and Senior Investment Analyst [38]

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Fantastic. And then the last question. So the gross margin in the first quarter was a little bit below what we had been modeling as well as SG&A expense. Would you expect those -- I guess, both of those items to return to sort of what was more normalized levels or just kind of the new go-forward level for both?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [39]

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I think the SG&A should be consistent. Gross margin, it's going to come down a little bit. We've got some incremental investments in the pilots, but not significantly.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD and Senior Investment Analyst [40]

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Okay. So it will come down from the 27.4?

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [41]

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Yes. Mike, if the EBITDA margin, as we said, is going to come down, SG&A is about the same, then you've got to believe it's going to come around to gross margin.

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Operator [42]

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A.J. Rice with UBS.

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Jailendra P. Singh, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Healthcare Services and Managed Care [43]

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This is Jailendra Singh filling in for A.J. Quickly following up on your point that you're having discussions with health plans, which are not your contracted clients right now. Can you talk about what is really holding them back in terms of going ahead with you guys?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [44]

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Well, listen, I think what has happened here and, I always kind of give this analogy is when we were one company last year, the focus had been on the other side in terms of the execution. And I think that what everyone is seeing now with the new leadership team, with the investment that we are making, it doesn't hurt to have a Net Promoter Score of 81, with our focus on the members and the reality that we are now starting to extract, if you will, a better understanding of the value proposition that we are able to offer, I think all of that and the fact that what we hear is that what they're enjoying is that this team is much more of a partnership-oriented team. So I think that has really helped a lot, and it has gone a long way for us to not only get into the doors -- there's one thing to get into the door, but we're having just remarkable conversations. And we do have a goal to share as an executive team in terms of how many we want to win back. And I believe we'll exceed that goal.

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Chip Wochomurka, [45]

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Well, this is Chip. I'll add to that. I mean, the way you asked that question, Jailendra, was that what would hold anybody back from doing it. I think and I'll make the point that some have already decided to move forward with us for 2018. And the only other factor that I've heard as far as anybody holding back would be a sense of timing as to what their other commitments and obligations are. And I'll just leave it at that.

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Jailendra P. Singh, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Healthcare Services and Managed Care [46]

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And then my follow-up, just want to go back to the -- your discussion around revenue outperformance in first quarter and you expect some decline for rest of the year. I understand -- just give me a color of why would you expect the number of visits to decline from first quarter to second quarter. And then have you seen any early indication in terms of the type of visits you're getting you might not expect in second quarter in terms of, like, okay, some visits are not getting repeated or they are only one-time, so you might be thinking, okay, these are not coming back, these enrollees are not coming back, something like that. Have you seen any early indication which might give you a pause that this outperformance might not continue in the second quarter?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [47]

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Well, I think we did say already, 2 things very specifically. We always see or almost always see a seasonal decline in the absolute number of visits from the first quarter to the second. Very normal type of thing in any size of a population with participation like this in fitness programs, you're going to see some level of fall-off. Obviously, we're trying to -- with our A-B-C-D strategy, we're trying to diminish that. But you're always going to see some level of fall-off. And then you've got the other factor of the mix where we think that mix will move a little bit back towards away from visits where we get paid for that incremental visit to some more visits coming from the flat PMPM model. So at that macro level on those 2 factors, it's natural that you would see a revenue -- a modest decline in revenue. Having said that, I don't think there's anything in the data underlying anything that says there are some specifics around one-and-dones or low participation that's out of the abnormal range in any way, shape or form. I think those 2 macro factors tell it all.

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Jailendra P. Singh, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Healthcare Services and Managed Care [48]

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Okay. And my last, just one specific. Do you have the revenue breakdown across the 3 businesses in first quarter?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [49]

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It would be fundamentally in line with what we projected on a percentage basis for the full year, which was that 82%, 15% and 3% in our supplemental materials on the last call. I don't think anything has changed in that dispersion in the first quarter, and we still expect that for the full year.

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Operator [50]

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We'll hear next from Josh Raskin from Barclays.

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Joshua Richard Raskin, Barclays PLC, Research Division - MD and Senior Research Analyst [51]

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Just a follow-up on that last one. The 82% for the full year, sort of -- or -- I just want to make sure that SilverSneakers number, that implies like $115.5 million in the first quarter. Yes, I just want to make sure that's the right number for SilverSneakers first.

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [52]

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Yes, I think that -- again, Josh, within rounding that 82%, 15% for Prime, 3% for whole health is -- was what we projected for the full year. And essentially, it was there for the first quarter within the rounding of those percentages, yes.

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Joshua Richard Raskin, Barclays PLC, Research Division - MD and Senior Research Analyst [53]

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Okay. And then just another clarification on the 14.6 million eligibles. How many of those were MA versus Med Supp?

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Chip Wochomurka, [54]

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Give me 1 minute, and I'll get you that specific number. Glenn, if you've got...

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [55]

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I thought it was 10.9, 11 or...

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Chip Wochomurka, [56]

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It's about 11 -- it's 11.1 and 3.5.

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [57]

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3.5.

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Joshua Richard Raskin, Barclays PLC, Research Division - MD and Senior Research Analyst [58]

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Okay, perfect. And then just in terms of timing and how we should be thinking about contract updates, the Medicare Advantage plans have their bids due on June 5. And I'm assuming this is kind of the height of the "let's make sure we have our benefit design ducks in a row." And so any other color -- obviously, it's great you've got United behind you. Any other color on big contracts, both positively or negatively, in terms of that 2018, I guess, what I would call the selling season now?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [59]

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What I can say to you and I hope now that the level of confidence is there, we did say to you last month or it may have been 2 months ago we had our last earnings call that we were going to get this United wrapped up. Let me tell you, I am absolutely pleased at the intensity of the renewals and where we are at this point. In fact, I would say we're ahead of the -- ahead of what I would have had as my milestone. So it's a very solid outlook.

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Joshua Richard Raskin, Barclays PLC, Research Division - MD and Senior Research Analyst [60]

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Okay, all right. So it sounds like doing well on the renewal side and probably...

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [61]

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Absolutely. The renewals and the win backs, I think that the 2 are -- have met and my team is kind of nodding their heads, because I have high expectations. It has exceeded my expectations.

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Joshua Richard Raskin, Barclays PLC, Research Division - MD and Senior Research Analyst [62]

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Okay. And then just last one on the cash flow. I understand there is some seasonal weakness and other issues. But the AR, it sounded like that was related to 2 large customers. I guess, I'm just a little curious as to how they paid late. And I'm just curious, is that at all related to any contract negotiations or anything like that, or was that just completely anomalous?

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Glenn Hargreaves, Tivity Health, Inc. - Interim CFO, CAO and Controller [63]

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Josh, this is Glenn. It was, to use the word, fluke. Maybe not the best choice, but it was an anomaly. We had a large customer who had paid inside of term for the last 12 to 18 months, and for whatever reason, did not do that in the month of April. They have since caught up the payment and made the payment early again. So we're back on track.

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Chip Wochomurka, [64]

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Yes, we did 1 day more in March. That's exactly what it turned out to.

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Operator [65]

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Mohan Naidu from Oppenheimer.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [66]

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So a couple of quick questions. Maybe, Donato, first on the model mix around PMPM versus visit fee. What brings the client to go with one model versus the other? Is there a like certain factors that drive a health plan clients to pick one?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [67]

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Well, it's a great question. I think we have to kind of do just a little bit of a reflection on the memory lane. What moved a number of clients over to the PMPM. After Obamacare, I think there were significant pressure from CMS. That's gone. What I can tell you, I've been in the room of those few who remain in the PMPM. And I tell you, it's a very interesting observation. As we now walk through, what we're doing with the A-B-C-D strategy, it is amazing. And I'm not trying to be overly optimistic in terms of what I am observing. But they are now having their own internal debate to say, whoa, timeout. If in fact this is an organization that's able now to get people engaged, I mean, know that further engagement does a number of things. There is member retention and there is an opportunity to reduce overall medical cost. Why are we not there? So what we need to do, which is why I'm excited -- a lot of us are talking about activity and correlating it to "does it really increase engagement." There is a third residual benefit out of this investment, and that is my being able to go back to those few that are in the PMPM and show them what's happening here. And so I could tell you, without getting into the details, one of our renewals was a very interesting debate. They were going back and forth in terms of whether or not it should remain in the PMPM or go after the hybrid. And I think what they want to see is that -- they're from Missouri. They want to see, does this investment really pay off? Can we really move the needle? And I think that, that is going to be that antecedent that can convert those last few into the bucket that we would prefer to have them in.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [68]

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Okay, okay. And on the utilization and awareness efforts that you guys are drawing -- doing, the Facebook effort looks very, very attractive. How do you model that towards these 2 type of revenue models? Do you -- at this point, you don't focus on that and you just try to increase awareness in general and hope to convince the clients who are in the PMPM model to just convert them to visit fee as you discussed right now?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [69]

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Well, but there's another step there that is very important. That whole Facebook traffic is to get them into silversneakers.com to allow us to get to know more about the members. And so that allows us then to really use, if you will -- they opt in into silversneakers.com. That gives us the opportunity then to really be more precise in terms of the interaction and the type of engagement that we are driving. So Facebook is a great conduit. It's kind of the macro. You're not going to able to separate one from the other, but get the awareness out about what SilverSneakers is and then get them into silversneakers.com, where our ability to engage them and to have a relationship with them becomes much greater. Does that make sense?

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [70]

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Yes, yes, that make sense. Maybe last one question on the United contract. The prior contract, I thought, was much longer, or am I misunderstanding that?

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [71]

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No, no, no. Same amount of time.

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Operator [72]

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And with no additional callers in the queue, gentlemen, I would like to turn the conference back to Mr. Tramuto for any additional or closing comments.

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Donato J. Tramuto, Tivity Health, Inc. - CEO and Director [73]

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Thank you very much. And I want to thank all of you for joining us today. I had mentioned to you all this is my 19th month as the CEO, and I have to tell you that I'm very, very pleased that the way this organization is operating and the focus to how we are bringing the attention to the A-B-C-D strategy. Have patience with us. I think the next few quarters will tie the activity to what I think we're all looking for, and that is what do the results show. Thank you very much. Please don't hesitate to contact Chip, Glenn or myself if you have any further questions. Make it a great evening for yourselves.

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Operator [74]

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That does conclude today's teleconference. We thank you all for your participation.