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Edited Transcript of TVTY.OQ earnings conference call or presentation 5-Nov-20 10:00pm GMT

·46 min read

Q3 2020 Tivity Health Inc Earnings Call FRANKLIN Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Tivity Health Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Adam C. Holland Tivity Health, Inc. - CFO * Richard M. Ashworth Tivity Health, Inc. - President, CEO & Director * Ryan Wagers Tivity Health, Inc. - CAO & Controller * Tommy Lewis Tivity Health, Inc. - COO, Senior VP of IR & Interim President of the Nutrition Business Unit ================================================================================ Conference Call Participants ================================================================================ * Alex Joseph Fuhrman Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * David Anthony Styblo Jefferies LLC, Research Division - Equity Analyst * Jermaine Rory Brown Crédit Suisse AG, Research Division - Research Analyst * Michael John Petusky Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst * Nicholas Charles Spiekhout William Blair & Company L.L.C., Research Division - Associate * Sean William Wieland Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Vikram Kesavabhotla Guggenheim Securities, LLC, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Tivity Health Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ryan Wagers, Chief Accounting Officer and Treasurer. Thank you. Please go ahead. -------------------------------------------------------------------------------- Ryan Wagers, Tivity Health, Inc. - CAO & Controller [2] -------------------------------------------------------------------------------- Good afternoon, and welcome to the Tivity Health Third Quarter 2020 Financial Results Conference Call. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated in accordance with GAAP in today's news release, which is also posted on the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Tivity Health's expected quarterly and annual operating and financial performance for 2020 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Tivity Health's filings with the Securities and Exchange Commission and in today's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. And now I'll turn the call over to the company's President and CEO, Richard Ashworth. -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you all for joining the call today to discuss Tivity Health's third quarter earnings results. Joining me today are Tommy Lewis, Chief Operating Officer and Nutrition Division President; and Adam Holland, our CFO. Tommy will share with you more detail about how the nutrition business performed during the quarter, and Adam will cover our third quarter financials. Before I begin, I want to start by thanking all our Tivity Health colleagues who continue to operate and execute with great results. I especially want to thank our nutrition colleagues. I have a tremendous amount of respect for you and appreciate your focus on execution and performance. Our continued disciplined approach to managing these businesses has resulted in strong performance for both businesses again this quarter. On October 19, we announced that Kainos Capital will acquire Tivity Health's nutrition business, which includes Nutrisystem and South Beach Diet for a purchase price of $575 million in cash. The net proceeds will be used to pay down our debt, and the transaction will be materially credit enhancing. We expect our closing date will be before the end of the fourth quarter and will result in a post close debt ratio of no more than 2.8x. The benefit of the reduced leverage will provide a stronger go-forward balance sheet. Another important benefit will be our ability to direct 100% of our focus on to our Healthcare business to drive sustainable growth. We are focusing on the basics. We have talented team members, and we have plans for near-term growth. We are restructuring and reorganizing to position our team to deliver our growth ambitions. We will invest in both our people and our technology. Our goal is to focus on member engagement to become a modern destination for healthy living. Since I joined the company in June, I've been focused on developing a strategy for our Healthcare business that will leverage our great SilverSneakers brand and combine it with new digital engagement tools and data to become a member-centric organization. We will provide better member engagement inside and outside of the gym. We will build upon our strong health plan relationships and deliver new fitness offerings and social connectivity to engage more members in the gym through our virtual channels and in the community. The basic foundational elements of this business, core fitness and physical medicine are sound and secure. Our 2021 health plan contract renewals are at 99%, and this is typical for our business. We renewed 1 of our top 5 health plan partners for 4 years through 2024. We also added 350,000 additional lives through new client wins and market expansions. Every day, 10,000 Americans turn 65 and become eligible for Medicare, and our nationwide partner network has over 17,000 locations. As we build on the basics of our business, we will leverage our strong core business and expand beyond the gym. We will become the modern destination for healthy living. We believe we have the relationships, the brand and the permission. We will invest in data and a data platform. We will partner with best-in-class health care and consumer data partners to provide insights and to power a digital engagement platform. As I mentioned earlier, we will also quickly align our organizational structure and resources to support growth opportunities in both the core Healthcare business and adjacencies. You will be hearing more from me soon on our strategic direction. Now to drill into our Healthcare business. Our SilverSneakers and Prime brands will be powered by new digital engagement tools and data. Our strong health plan relationships will enable us to provide better member engagement inside and outside the gym. We will deliver new fitness offerings and social connectivity to engage more members in the gym through our virtual channels and in the community. We have managed our business prudently through the pandemic with proper expense management, debt repayment and balance sheet preservation. We are now positioning the organization for growth. During the third quarter, our SilverSneakers business saw momentum in a number of areas, including in-person gym visits, live instructor-led virtual visit and growth in eligible lives due to agents. As stay-at-home orders were lifted and gyms continue to reopen, our in-person member visits at 8.6 million are an improvement as compared to Q2. While in-person visits are around 30% of our pre-COVID levels, those members who have returned are visiting at about the same frequency as they did before. Opening is ongoing for our partner locations with approximately 76% of our gyms reporting at least one visit for the month of September. For those members who aren't back in the gym yet, our virtual options are resonating well. Year-to-date, we have engaged our SilverSneakers members in over 1 million live virtual visits. With this live virtual offering, we are attracting brand-new SilverSneakers enrollees. Since we introduced live virtual classes, these new members have consistently represented 25% of our attendee base. Moving from 0 virtual visits at the beginning of this year to over 1 million now and achieving a roughly 28% increase from Q2 to Q3 this year is an amazing growth and speaks to the power of the SilverSneakers brand and our digital engagement. Silversneakers.com continues to be a destination of choice for our members serving as a hub for our in-person and digital experience, including our library of over 200 exclusive SilverSneakers on-demand video classes. We have expanded SilverSneakers proprietary digital programming reach by leveraging increasingly common smart devices, including our recent launch on connected TV with Roku. Now with the SilverSneakers Go application, members can use their smartphones and tablets to register and attend all of our live virtual experiences. Research with our members indicate that these enhanced digital offerings are not a temporary fix to pandemic driven isolation and are becoming a part of a new normal that members expect to persist as the pandemic fades over time. According to a recent SilverSneakers Pulse survey, almost 80% of respondents said they will continue using digital offerings in addition to the gym. This digital adoption is also opening new partnership opportunities with our health plan. As an example, we've been able to partner with Humana to pivot their popular neighborhood centers to a virtual engagement model, offering virtual programs for their members that would have otherwise not been able to occur. Collaborations such as these are a testament to the innovation of our team and the strong partnership we maintained with our clients through the pandemic to continue to deliver value and keep members engaged. A combination of physical locations and digital will be a permanent part of our offerings, allowing our members to use the benefit where they want in gym, at home and in the community. From our recent research on SilverSneakers member activity, we found that members expect to engage in non-gym community locations more often post COVID. This insight is evident from the data we see as well. Our community-based SilverSneakers fitness classes are growing by nearly 40% quarter-over-quarter. These classes not only represent important physical activity for our members but also offer the social connections our members need. Community fitness continues to play a central role in SilverSneakers experiences. SilverSneakers Flex has been offered in nontraditional venues and communities for almost 10 years now, and we anticipate continued accelerated growth in this area because many of our SilverSneakers members expect to do their work out in the community as opposed to in the gym as they had pre pandemic. Our health plan clients remain highly supportive of our efforts to engage their members physically and virtually. They continue to leverage the SilverSneakers brand as a significant differentiator during the Medicare annual enrollment period. Our top clients are integrating SilverSneakers into their sales messaging, broker and agent training, commercials and member materials as a key element of their 2021 benefit and are specifically highlighting our virtual offerings as exciting features for their beneficiaries to use during the pandemic. As an example, one of our larger health plan clients has included SilverSneakers references in 5 of its commercials plus distributed flyers. We concluded our selling season with the following highlights: addition of over 350,000 new SilverSneakers lives for 2021, including new clients and market expansion within our existing clients, the new clients represented by both hybrid and PMPM revenue models. Expansion of our WholeHealth Living acupuncture and massage services with new and existing clients representing 250,000 additional members. And 2021 client renewals are 99% even in this challenging year. Just a reminder that SilverSneakers continues to have the tailwinds of the intrinsic growth of Medicare Advantage with 10,000 Americans turning 65 each day. Add to that, our own organic growth through signing new clients or market expansion. Turning to Prime. Our comprehensive network increased this quarter to more than 12,700 partner locations in the third quarter, Prime accounted for 23% of health care revenue. We ended the quarter with 227,000 paying Prime subscribers, down from 235,000 at the end of the second quarter. We are still adding new lives to Prime, roughly 7,500 of the subscribers joined us in September. We are also engaging members through partnerships for digital expansion of our Prime program. During the pandemic, we were able to introduce live and structure-led virtual classes for Prime members as an alternative to gym location that were unavailable. We also recently finalized a partnership with a leading health and wellness platform to add thousands of on-demand classes offered by hundreds of instructors. This partnership approach is a demonstration of how we intend to rapidly evolve the value of Prime beyond the gym. I'll now turn the call over to Tommy to review the Nutrition business. Tommy? -------------------------------------------------------------------------------- Tommy Lewis, Tivity Health, Inc. - COO, Senior VP of IR & Interim President of the Nutrition Business Unit [4] -------------------------------------------------------------------------------- Thanks, Richard. Following up strong first and second quarters, we closed out another solid quarter for the Nutrition business in Q3 with revenue up over 10% and adjusted EBITDA up roughly 57% year-over-year. The Nutrisystem brand DTC continues to perform well, delivering revenue growth of approximately 20% in Q3 year-over-year with strong EBITDA contribution. Our revenue drivers and key KPIs continue to trend well. Nutrisystem DTC new customer starts have increased 21% year-over-year. We added nearly 6 days to length of stay year-over-year. Revenue per customer increased $70 year-over-year. Due to our ongoing shift to digital and solid execution by our marketing team, cost per order decreased year-over-year for the sixth straight month. These results are a testament to the focus and dedication to excellence of our great team. Like the last 2 quarters, new customer starts for Nutrisystem DTC were strong at a 21% year-over-year increase. That momentum continued in October. Consumers have discovered that we have great-tasting food with a great deal of variety and a program that is simple to use and it works, and we deliver right to the door. In September, we announced the launch of our new Nutrisystem partner plan. Studies have indicated that dieting with a partner leads to greater success and helps people maintain their weight loss. We know that eating is a social event. And now we have a solution that allows partners to experience the journey together and hold each other accountable while enjoying great meal occasions. It's still early, but we are seeing good uptake on the partner plan and it is yielding a meaningful increase in revenue per customer as well as length of stay. In the retail channel, our all-new Nutrisystem Body Select lineup has been well received by our retail partners. Our new lineup includes new 5-day weight loss kits, protein and probiotic shakes, plant-based fuel me up snacks to help power you through the day and night cap snacks for a little evening indulgence that limits late night sugar spikes. In conclusion, we are very pleased with another strong quarter for Nutrisystem. Our ongoing efforts around modernizing our brand, transforming our marketing, innovating around product and a supportive customer experience ecosystem are all working together to generate continued momentum in our business. We believe this momentum will serve us well as we transition from Q4 into diet season. Now I'll turn the call over to Adam to review the financials. Adam? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [5] -------------------------------------------------------------------------------- Thank you, and good afternoon, everyone. Tivity's Healthcare segment generated revenues of $95.5 million, a decrease of 40% from the same period in 2019. SilverSneakers revenue was approximately $69 million, down 45% compared to last year, as expected, due to fewer revenue-generating visits as a result of COVID-19. Similar to last quarter, SilverSneakers revenue profile during the third quarter of 2020 was substantially different from the same period last year. Revenue from per member per month fees represented 59% of our total SilverSneakers revenue compared to 33% in the same period last year. We ended the quarter with 16.6 million health plan members eligible for SilverSneakers, an increase of 9% over the same time in 2019. Total SilverSneakers visits were 9.1 million during the third quarter of 2020 compared to 26.2 million during the third quarter of 2019. With average monthly participation decreasing during the quarter to 2.4% compared to 7.8% last year. Approximately 494,000 visits during Q3 were digital. The third quarter ended with 3.6 million enrolled SilverSneakers members. And now to Prime. We generated $21.7 million of revenue in Q3, a decrease of 29% from last year. We ended Q3 2020 with 227,000 paying Prime subscribers compared to 342,000 subscribers at the end of Q3 last year. This subscriber decline accounted for the majority of the year-over-year revenue decline. We had approximately 2.3 million gym visits from Prime in Q3 this year compared to $4.8 million last year. Moving on to WholeHealth Living and other health care revenue. During Q3, we recognized $5 million in WholeHealth Living revenue, up 6% from Q3 last year. Our Wisely Well revenue during the third quarter was immaterial. As a summary, for our Healthcare division, COVID-19 and related gym closures negatively affected our SilverSneakers and Prime revenue for the third quarter as we expected. As we discussed on the August call, the considerable drop in variable gym visit costs allowed for a strong flow-through of revenue to gross margin. Additionally, the Healthcare division continued to benefit from earlier cost reduction initiatives. Therefore, this division ended Q3 with $41 million of adjusted EBITDA, a 4.6% increase over Q3 last year. Turning our attention to the Q3 results for the Nutrition segment. Total Nutrition segment revenues came in at approximately $159 million, a 10.8% increase compared to the same quarter last year. Following strong performance all year, the Nutrisystem brand DTC business generated approximately $147 million in revenue, an increase of 20% compared to the prior year. This increase was driven by Nutrisystem new customer revenue of $95 million, which was up 30% year-over-year, coupled with an increase in reactivation revenue which was up 6% at $53 million. Moving on, South Beach Diet revenue was $6.3 million, down 48% year-over-year, and QVC and retail contributed a combined $5.4 million in revenue, down 42% year-over-year. Third quarter nutrition adjusted EBITDA was $28 million or 17% of segment revenues. This compares to $18 million or 12% of segment revenues in the prior year period. This year-over-year increase was driven by a decrease in marketing and general and administrative costs both in dollars and as a percentage of segment revenues compared to last year. Turning to our Q3 balance sheet and cash flow. We ended the third quarter with cash on hand of $56 million. We ended Q3 with $975 million of term loan debt, and we prepaid $39.7 million of principal amortization during the third quarter. Our next quarterly amortization payment is not due until March of 2022. We ended the quarter with a maintenance covenant ratio of 3.81x, well below the maximum ratio of 5.75x as calculated under our credit agreement. Our free cash flow for Q3 was strong at $31 million, reflecting the positive operational performance of both divisions partially offset by working capital dynamics. Year-to-date, we have produced free cash flow of $152 million. As Richard mentioned, we expect the transaction with Kainos to close before the end of the fourth quarter. We will use a significant majority of the net proceeds of the transaction to pay down our term loan A and term loan B in proportion to their outstanding balances as required by our credit agreement. Following the close of the transaction, we estimate a trailing 12-month covenant ratio of no more than 2.8x at year-end, as calculated under our credit facility. During the third quarter, we recorded a noncash impairment charge to Nutrisystem goodwill of approximately $66 million, which reflects the difference between our carrying cost and estimated net proceeds from the transaction with Kainos. This impairment charge will not have any impact on current or future operations nor affect our liquidity, cash flows from operations or compliance with the financial covenants set forth in our agreement. Based on the Healthcare segment's revenue and adjusted EBITDA performance through the third quarter of 2020 and the outlook for the remainder of 2020, we are providing guidance for annual Healthcare segment revenue in a range of $425 million to $432 million, and adjusted EBITDA in a range of $143 million to $145 million. We believe the financial and operational performance of our Healthcare segment in the second and third quarters reflect the ability of our business to address the challenges of the pandemic. Based on early fourth quarter activity, we anticipate some pressure in our Prime revenue coupled with an increase in utilization costs for both Prime and WholeHealth Living as compared to the third quarter. We remain focused on managing the business with financial discipline and completing the Nutrition segment divestiture, and we also look forward to investing in our Healthcare business for 2021 and beyond. I'll now turn the call back over to Richard. Richard? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [6] -------------------------------------------------------------------------------- Thank you, Adam. I'd like to thank our dedicated colleagues for their efforts and for the results this quarter. We are pleased with our performance, and I am particularly excited about the possibilities around our strategic initiatives and plans to organize our teams to deliver growth. The Nutrisystem transaction is a good outcome for Tivity Health and its stakeholders. As mentioned, it will allow us to focus on our core Healthcare business and build value for shareholders. We will now open the call to your questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And your first question comes from the line of Jailendra Singh from Credit Suisse. -------------------------------------------------------------------------------- Jermaine Rory Brown, Crédit Suisse AG, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Sorry, I was on mute. This is actually Jermaine Brown filling in for Jailendra. So impressive growth on your digital initiatives. Given the financial flexibility that you'll have post the nutrition sale. I'm curious about your long-term plans. Is the primary growth opportunity focused focus on the health -- digital health initiatives? And if so, can you just provide any color on the level of investment required to just continue to grow while within these programs? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Thanks, Jermaine. Richard here. I'll start, and then, Adam, you want to pick up the investment side of the question. I think the growth is going to come in both areas, Jermaine. We're going to see -- as you saw in the physical visits coming back on SilverSneakers and in Prime both relative from Q2 to Q3. What we're seeing so far is a continuation of that trend. So we see in visit in participating location visits continuing to grow. And of course, you saw the digital acceleration as well. My view is that both of those are going to continue to grow, and we are going to continue to invest in both. And the investments we've made on the digital side is what has given us the growth you've seen here, the 1 million visits and the quarter-over-quarter growth. And we'll continue to do that. In terms of the total investment profile, Adam, any comments you want to make on that? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [4] -------------------------------------------------------------------------------- Yes. I think, Richard, hard to add on top of that. The important thing to remember is that this is a -- we're unlocking new members through this. As we’ve said in the prepared remarks, we've got about 25% similar to last quarter of SilverSneakers members that are branded the program. They are coming in via digital channel. And I think that's important. I think it shows the opportunity for the SilverSneakers brand to branch out and tap members who may not be able to or want to go to a physical gym. And so we'll invest appropriately behind that. The good news is we have a solid platform to build off of. We're not doing this from scratch. We have a network of members and instructors who understand how to use digital. And so we'll have more to say as we get through probably our February earnings call, I expect we'll lay out some more details in terms of how much of investments each of these channels will require. But very excited to see the growth. -------------------------------------------------------------------------------- Jermaine Rory Brown, Crédit Suisse AG, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- Got it. And then just a follow-up on that. Any update on the ability to monetize this further in the future? Is the plan primarily to grow the user base, improve the engagement, improve their retention and then focus on monetizing somewhere down the road? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [6] -------------------------------------------------------------------------------- Well, yes. I mean -- so yes and no, I guess. What I would say is that digital will be a part of our offering going forward. I think the new world will be a combination of physical visits and digital visits. And we're working in partnership with our plans to make sure that those visits are realized as viable business and have appropriate remuneration attached to them. It's still -- we're still here in COVID land getting started, where nobody knows what the output will be, but pretty confident that we'll have a monetizable digital experience along with our monetizable physical visits. I don't know, Adam, if you want to... -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [7] -------------------------------------------------------------------------------- Yes. I'd just point out, the 494,000 virtual other instructor visits that we have that's in our supplemental deck, we do get reimbursed for those. So those are billable today. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from the line of Ryan Daniels from William Blair. -------------------------------------------------------------------------------- Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [9] -------------------------------------------------------------------------------- Nick Spiekhout on for Ryan. I guess to start off, given kind of the shift of seniors that we've just been discussing kind of digital at home-based fitness are you anticipating or have you been experiencing kind of any pricing pressures coming from plans because obviously, that's a little bit cheaper avenue to provide fitness services? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Thanks, Nick. Short answer is no. Longer answer is we need to make sure that the combination value proposition for our plans works for them and for us. And so, so far, we haven't had any issues on the rates or the reimbursement for digital versus physical, et cetera. But we're getting through COVID. And as we come out on the other end, we'll work in partnership with our plans to make sure that the amount of money that they're spending on their members' behalf is valuable and working for them. So far, that feedback is very positive. And so we're happy to see that. More importantly, I think on a survey data tells us that members really want this. And post COVID, they believe a few things. They believe digital will still continue to be a part of their workout routine. They'll move more into community and outside, but still use the gym, but they're going to think about their fitness a little broader than they did going into COVID. And so our health plans care about the health of the member as do we. And so working together in that pursuit, I believe, will mean that digital and physical will both be a part of the experience journey for our members and that both will be billable. -------------------------------------------------------------------------------- Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [11] -------------------------------------------------------------------------------- Great. And then kind of on the other side of that, pre COVID, it seems kind of the SilverSneakers, the fitness division was experiencing a little bit of cost pressures coming up on the gyms who are kind of asking to kind of pull a little bit of that margin from you guys. I'm assuming, given the kind of decrease in visits that kind of subside a little bit. I was just wondering kind of what's your updated outlook there as we continue to kind of normalize? Do you anticipate any increased pressure there? Or is that mostly kind of been shaken out at this point? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes, Nick, I'll start and then, Adam, if you want to weigh in on this. I think one for me is that there's always network pressure on the top side and the bottom side, right, whether it be the product you're delivering or the person who's funding it. And so I think those dynamics are still at play. But with what's happening in the market, what we provided for Q4 is to give you a view of kind of where we see our performance to be. And within that is our view of what happens on the network side in terms of costs. But Adam, anything you want to add? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [13] -------------------------------------------------------------------------------- Yes. Yes. I think, overall, the relationship with the -- with our gym partners are still very positive. It's been a very tough year for them. We have lost, I believe, less than 2% of our gym network during the quarter. So -- and we typically have some churn in our network of 16,000 gyms that we've been very pleased to see that we've maintained a relative level similar to pre COVID. And we will look forward to working with them through the pandemic because, as Richard said, they're still going to be an important outlet for the SilverSneakers brand. Folks have been crystal clear, they want to return to the gym, they want the social aspect, and we want to make sure that we still provide that. And we're working with them to make sure it works similar to the health plan, works good for us and the gym partners. -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes. I think the relationship that we have on the plan side are strong. And the relationships we have on the gym side are just as strong. And so what we want is members to be healthier. And for many of our members, that means they want to go to the gym. And so maintaining a robust network and good places for them to go is going to continue to be important for us. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Your next question comes from the line of Alex Fuhrman from Craig-Hallum Capital. -------------------------------------------------------------------------------- Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [16] -------------------------------------------------------------------------------- Wanted to talk about the Healthcare segment, which I guess is going to be the bulk of the business going forward now after the sale of the Nutrition segment. I know it's so hard to give a forecast for next year, but just considering some of the new wins and the enrollment growth in eligible lives and what you're going to be seeing and considering, it sounds like the ultimate EBITDA number for this year is going to end up pretty close to where you thought it was at the beginning of the year, even at the high end of the guidance. Is there any reason to think that, that sort of base of $143 million to $145 million is a good or maybe not a good sort of base case to build off of for 2021? Are there maybe opportunities to grow that given the 350 new eligible lives that you think you're going to have next year? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [17] -------------------------------------------------------------------------------- Alex, it's Adam. Good to hear your voice. Well, can't comment on EBITDA levels for 2021 yet. We plan on doing that when we have our February Q4 call. So more to come there. I think the dynamics we've seen this year are highly unusual. Never seen them before with the higher flow-through of PMPM dollars going to gross margin with low gym visits. I think the important thing to understand is the dynamic of the business is such that as gym visits come back, you'll probably see margin levels go back to pre-COVID levels, which is a good thing because that means we're coming out of the pandemic. But the foundational strength of the business, that being the membership base, the gym contracts, the health plan contracts are all intact. And so we feel like we can, certainly, over the long term, grow off of this base, although I don't want to be specific to what exactly next year would look like compared to this year because this year is so unusual. -------------------------------------------------------------------------------- Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [18] -------------------------------------------------------------------------------- Okay. That makes a lot of sense. And just thinking about the fact that retention has been so strong. I mean clearly, seems as though health plans are valuing you as a partner. How do you kind of work with the health plan to have a better plan for monetizing your digital engagement. I mean it seems like I'm sure the plans are happy to -- that you've had 1 million digital in print like that, clearly, your members wanted. Are you working on maybe more formal way to capture that and really measure that with the health plan? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Yes. Alex, for sure. That's a big part of what we're doing right now is working in partnership with our health plans to understand what the combination looks like. The key here for the plan is to keep members physically active, mentally stimulated and socially connected. And working out actually does all 3 of those, right? And so the plan knows that our offering is, to your point, is the value of our offering is resonating well. In terms of the monetization and the go-forward future of it, yes, we are -- we have very strong plans for that. And working with our health plans so far, I would say that the responses have been very strong. Do one of these virtual workouts, get a little sweat in, get some fun in with your other members and the instructor, and you can see why there's value in these live with instructor-led visit. It's a pretty powerful social connecting and physical experience. So I think that's why it's being received well, it’s because it works. And I think that's the biggest testament to the experience. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question comes from the line of Dave Styblo from Jefferies. -------------------------------------------------------------------------------- David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [21] -------------------------------------------------------------------------------- Richard, first one is for you. I know earlier you were -- you’re talking about, at some point, talking to adjacencies that you'd want to grow into. And I took from your comments that for now, the growth would be to focus in on the in-person visits and then you talked a little bit about expanding on the digital, of course. But beyond that, can you give us a preview a little bit of what you're thinking in terms of adjacencies that make sense to help augment the growth? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- Yes. Good question, Dave. I mean we're still a little early in coming out with the details of the strategy, but a lot of work has been done here. And we plan to do that on the next earnings call. So we can get you more definitive information here. But in the supplemental materials, we put out just kind of a graphic to kind of lay out the idea. One of them, not specific to your question on adjacencies, which I'll get to, is the engagement platform and our ability to engage members better than we do today, more efficiently than we do today, all in pursuit of working with our health plan partners to activate and engage members overall. And that could be more than just physical fitness and more than just in the gym. And gym will still continue to be important, but so will outside of the gym. In looking at the adjacencies market, you can see many different choices that we can go out, and we'll bring more clarity for you on that in Q4. One thing I want you to know is we approach that conversation is that we're going to do that very methodically, very thoughtfully. You'll see some tests and pilots, you'll see some sequence of events for us to get in there. We're not going to just kind of jump in and then try and figure it out. We're going to be very disciplined in the way that we do that. But still just a little early for me to get into the details of what those are, but we plan to do that on the Q4 call. -------------------------------------------------------------------------------- David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [23] -------------------------------------------------------------------------------- Fair enough. Okay. How about thoughts on capital deployment after the deal is closed? I know there's some options that we can continue to put money to work organically. I'm curious about after that, do you have any sort of bias to maybe opening up and just doing share repurchases or given the uncertain times, are you inclined to let the cash accumulate on the balance sheet? And then maybe to the expense, you do want to talk about M&A. Is there anything maybe that would fold in with the strategy that you're going to maybe talk about if there's a small asset that makes sense to build off to augment strategy. But any color on that topic would be great. -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- I'll start and Adam, you can weigh in here, too. So the first thing I would say is we're going to keep some optionality here in the short-term so that we can deploy the capital in the exact right spot that's the most beneficial for our stakeholders. My preference is to put that into the business to drive long-term terminal value growth. And I think our strategy is compelling that we'll be sharing with you soon. And inside there, I think you can see a lot of places for us to invest that can give good returns and better member experiences and enhance our relationships with all of our partners. With that said, we still have some remaining debt, as you know, based off the materials that we presented. So one option is to put some there. One could be, as you suggested in a repurchase, another one be just invest it in the business. There's a couple of different choices. As I sit here now, we want to deploy the capital in the most efficient way that gives us the greatest full stakeholder return. So we won't share any specific set on what we're going to do there. Definitely understand the root of the question. Adam, anything to... -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [25] -------------------------------------------------------------------------------- Nothing to add on top of that, Richard. -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [26] -------------------------------------------------------------------------------- Yes, Good question. Thank you. -------------------------------------------------------------------------------- David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [27] -------------------------------------------------------------------------------- Sure. And just the last one. So I think the guidance right now is assuming that the EBITDA in the fourth quarter declined about $9.5 million from the third quarter and revenues only declining by about $4.5 million. Can you help us understand the mechanics behind why the EBITDA set down is so much steeper? Are there just some elements where you're making more investments? Or is it the flip side where some of the visits are starting to come online? And as that happens, the natural hedge that was in effect in the second and third quarter starts to unwind? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [28] -------------------------------------------------------------------------------- I appreciate that question, Dave. Yes, it's more of the latter. So what we called out in the prepared comments was the Prime business and the WholeHealth Living business, as you know, those are both kind of fixed revenue models. We have seen a decline at Prime subscribers. And there's a -- what we're seeing right now is that, that could go down further in Q4. And that's more, I think, due to just some of the seasonality effects of how that membership kind of rolls off. Conversely, we also see an increase in visits in Prime. So you've got kind of a smaller subscription base with more folks who want to go to the gym. And we saw strong visits in October. And you'll notice, just compare it to SilverSneakers, the Prime profile visits is really like 50% of historical pre COVID, whereas SilverSneakers is more of 1/3. And I think that just kind of goes to [spell], it's a very different gym going base than SilverSneakers. And so when you have a smaller revenue input in Q4, you've got more visit costs, higher cost, you're going to have some Q3 to Q4 margin decline. With WholeHealth Living, a completely different business, obviously, than gyms, but those benefits are typically booked in on a calendar basis. And so as we reach the end of the year, a lot of folks have pent-up visits to their alternative care practice clinician, whether it be a chiropractor, acupuncture or massage therapists. And they have to use it or lose it in a sense. And so with the end of the year approaching, and a lot of folks not going out at all earlier in the year, we think we're going to have some increased utilization costs in the fourth quarter. So combo of those 2 things. And we typically sometimes see a smaller gross margin in SilverSneakers due to seasonality in the fourth quarter, and that's more around the holidays, Thanksgiving, Christmas, they’re not having quite the same average visit profile. But there -- all that said, there is room to -- for some small investment as we get launch on a strategy before we get into the new year. But the primary bulk, I’d say, is going to be driven in the gross margin arena. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Your next question comes from the line of Sean Wieland from Piper Sandler. -------------------------------------------------------------------------------- Sean William Wieland, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [30] -------------------------------------------------------------------------------- Are there any major renewals coming up at the end of the year that are worth calling out? And if so, how is the conversation going on pricing with those given the changing dynamics of utilization here? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [31] -------------------------------------------------------------------------------- Yes. Good question. And so what we put in our retention numbers in our net new lives is a total reflection of all of the ongoing discussions or negotiations for the year. So we feel good about that. And that's pretty cyclical for us over the history, having that 99% renewal. In terms of the economics, obviously, not sharing individual deal dynamics. But overall, we're pleased with the way that the margin is coming in on these plans relative to history and to what our expectations were. So what I would do right now is healthy relationships with the plan, very healthy renewals at 99% plus above-market growth with market expansions and new clients. That's across our business, not just in SilverSneakers, but also in WholeHealth Living with 250,000 there. So feeling good about the selling season and the renewal season, which is a reflection of those numbers. So overall, very strong. -------------------------------------------------------------------------------- Sean William Wieland, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [32] -------------------------------------------------------------------------------- All right. And how many of the gyms do you think are going to -- in your network are going to survive this pandemic? Like do you see any risk to lose in any of those? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- Yes, good question. And something, obviously, we watch very, very closely. The market -- our network is down about 2%. Could that deteriorate further if COVID continues to cause some states to maybe reopen restrictions, et cetera, it's possible. You've seen some of the news with some liquidity challenges and others. But other of our gym providers are actually very strong financially and can weather much longer COVID impact. So it's hard to tell. What I would say is there's many, many choices of gyms for our members to choose within a community. And we're working with -- in partnership with our gyms to help them as well. They're taking COVID very seriously, following protocol, making sure they're doing their safety and distancing and following whatever state restrictions or guidelines are there. But it's really a hard question to answer. Would I think that the network would go down a little bit more over time? I think that could be likely, but I really don't know the full weight of that. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Vikram Kesavabhotla from Guggenheim Securities. -------------------------------------------------------------------------------- Vikram Kesavabhotla, Guggenheim Securities, LLC, Research Division - Analyst [35] -------------------------------------------------------------------------------- Just to follow-up on a previous question. I think in your prepared remarks, you talked about your new clients having a mix of both hybrid and PMPM contracts. Can you just talk about how the mix of those contract structures among your new clients and renewals compares to your existing book of business? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [36] -------------------------------------------------------------------------------- It's very similar, very similar mix. We have clients who prefer hybrid model. We have clients who prefer PMPM, and we're happy to serve both. -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- Yes. I would say that we haven't seen any intention change based off COVID relative to those 2 models. It still seems to be about the same. And part of that is our health plan clients see the world in longer horizons than just a few months of a pandemic hitting us, and they're really wanting to make sure that their supplemental offerings. And for us, it's obviously primarily around fitness is still there for their members and the way that they contract for that. Haven't seen a material change in any of the approaches thus far. -------------------------------------------------------------------------------- Vikram Kesavabhotla, Guggenheim Securities, LLC, Research Division - Analyst [38] -------------------------------------------------------------------------------- Okay. Great. And then maybe just a follow-up. I'm curious if you can talk about how the current environment is impacting your overall marketing strategy and spending on the health care side in order to drive utilization and just how that strategy might evolve as you start to think about 2021? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Yes. Good question. And something we've been talking a lot about here inside these walls. We're shifting the investment from the traditional marketing behaviors that we used to of reminding people to go to the gym, et cetera. And we've done it in 2 ways. One is, we moved a lot of that -- well, some of the investment has gone down. So we've taken some savings and reduce some of the costs. But the other way that we've done it is moved it into digital and really making sure that our members on silversneakers.com and through our streaming platform have the availability and understanding of how to get to our live with instructor-led billable visits. And so the world just looks very different right now. I would say that our plans have continued to advertise or market SilverSneakers in a pretty consistent fashion to previous years. We're prominently displayed on commercials. We're put on flyers that are going to home. Many of our health plans still want SilverSneakers to be a prominent part of their AAP material. In terms of our own marketing, it's really been a shift toward digital and a slight reduction in the total marketing spend. As we're putting together our plans for next year, depending on how COVID is behaving in the country will depend on how we deploy that -- those marketing dollars. But I'm a firm believer in continuing to press on digital. And working to get numbers activated. One key thing is 25% of our digital visits are from members who are newly enrolled to SilverSneakers. These are folks that potentially never would have gotten activated outside of this situation. And so we want to take advantage of that. That makes better for our health plan, it makes it better for these individuals who are getting activated. And so we want to continue to invest behind that. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Your next question comes from the line of Mike Petusky from Barrington Research. -------------------------------------------------------------------------------- Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [41] -------------------------------------------------------------------------------- I think you may have just answered my first question. So of that 494,000, 25% were brand-new or 25% of the folks that make up that 494,000? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [42] -------------------------------------------------------------------------------- It's 25% of the folks that make up the 494,000. You got it. -------------------------------------------------------------------------------- Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [43] -------------------------------------------------------------------------------- Okay. And I didn't quite catch it at the beginning. You said something about 80% will use digital offerings. Was that from a survey of SilverSneakers eligibles or active? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [44] -------------------------------------------------------------------------------- So that was across our SilverSneakers base. So all of the folks that we have, the ability to connect with. So most of those would be enrollees, but it's not 100% enrollees, but I would say the majority of them are. -------------------------------------------------------------------------------- Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [45] -------------------------------------------------------------------------------- Okay. So that 80%, those are folks that are already using -- are already in the program are somewhat at least somewhat active, correct? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [46] -------------------------------------------------------------------------------- Yes. Those are folks that are SilverSneakers members. That's the way I would say it, yes. -------------------------------------------------------------------------------- Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [47] -------------------------------------------------------------------------------- All right. Great. And I didn't catch it if you mentioned it. The collaboration on the virtual in Prime, did you say who that was with? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- Yes. We did not disclose the backbone of the digital. We didn't disclose that. So we're keeping that in-house. But it's a digital platform that enables thousands of videos to be available for members, also helps us on the logistics of how people get on and how they're tracked and those types of things, the data coming out of it. -------------------------------------------------------------------------------- Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [49] -------------------------------------------------------------------------------- And just in terms of Prime, do you have a sense of -- in terms of the membership, and I guess, particularly the membership or subscribers that are still left, I mean, I would assume that a lot of that is sort of business, travel, usage. I mean -- and given that has been curtailed and probably will continue to be curtailed. I mean is that something that's concerning? Is that top of mind in terms of when you think about that business or how should I think about it? -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [50] -------------------------------------------------------------------------------- No, I can see why you think that, but actually, it's the opposite. So what we don't see business travelers using multi locations and because, obviously, travel is reduced in the country that, that's an impact. That's actually not what we're seeing. I think it just comes down to you’re investing in a benefit or a gym that you're used to go into and whatever the restrictions are in your area, can only be there at certain times or they limit capacity in there or you have to wear a mask the whole time you're working out. Whatever the things are that may be a hindrance to you or you may just be uncomfortable because of the situation at home with kids or with grandparents, et cetera, and so with parents. And so we're not seeing that it's business travel related. We're just see it's people that are being thoughtful about how they're going to get back to their routine. The encouraging thing for me, and Adam, I think you just said this, but just to reiterate it, we're back to 50% of pre-COVID activity levels across our Prime book. And I think that speaks to the kind of accelerated return that active subscribers are coming back to the gym. And as we see different pockets of the country, depending on what state it might be and what time it reinstitute restrictions or opens up restrictions, we do see that, that has a material impact on visits and how Prime users are utilizing. -------------------------------------------------------------------------------- Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [51] -------------------------------------------------------------------------------- Okay. Great. And Adam, forgive, I didn't catch this. The $143 million to $145 million that was guidance for fiscal '20 on the SilverSneakers side, is that right? -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [52] -------------------------------------------------------------------------------- Yes, Healthcare only. -------------------------------------------------------------------------------- Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [53] -------------------------------------------------------------------------------- So that's for Healthcare. -------------------------------------------------------------------------------- Adam C. Holland, Tivity Health, Inc. - CFO [54] -------------------------------------------------------------------------------- Yes. Yes. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- There are no further questions. Mr. Richard Ashworth, I'd turn the call back over to you for some closing comments. -------------------------------------------------------------------------------- Richard M. Ashworth, Tivity Health, Inc. - President, CEO & Director [56] -------------------------------------------------------------------------------- I just want to thank everybody for their time and for the conversation today, and look forward to connecting. Thank you. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.