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Tivity Health, Inc. (NASDAQ:TVTY)
Q4 2019 Earnings Call
Feb 19, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Tivity Health Fourth Quarter and Full Year 2019 Financial Results Conference Call. [Operator Instructions] 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 2019 and beyond.

For this purpose, any statements made during this call that are not statements of historical facts 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 important factors, among others, set forth in Tivity Health's filing with the Securities and Exchange Commission in today's news release. And consequently, actual operations and finance 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 Chairman, Mr. Kevin Wills. You may begin, sir.

Kevin G. Wills -- Chairman of the Board

Thank you, and welcome to everyone who has joined the call today. I'd like to start off thanking the 1,000-plus Tivity Health colleagues whose dedication and commitment are central to everything we do here. Today, I'm joined on the call by fellow Board member, Bob Greczyn; Adam Holland, our CFO; and Tommy Lewis, our Corporate Chief Operating Officer, who also leads our Investor Relations and integration initiatives. We will conduct a question-and-answer session following our prepared remarks. To begin the call, I would like to acknowledge today's press release announcing the departure of Donato Tramuto. Donato joined the Board in 2013 and was appointed CEO effective in the fall of 2015. During Donato's tenure, he have repositioned the company by exiting the unprofitable population health business. He then grew the core business, while also diversifying the model to include nutrition and social connection solutions. We want to thank Donato for his leadership and many contributions to the company. Notwithstanding those accomplishments, after much thought and discussion, the Board determined that it would be in the best interest of all stakeholders to transition to a new CEO. The legacy Healthcare business continues to perform well.

However, we have not been satisfied with the performance of our Nutrition business, and we believe the company will benefit from a transition to a new CEO. The Board has a thorough transition plan in place, and we have initiated a comprehensive CEO search, which is being led by leading national executive search firm. We appreciate that current Director, Bob Greczyn, with his vast industry and leadership experience, has agreed to serve as Interim CEO, as we conduct the search. Bob has been a member of our Board since 2015 and has over 30 years of experience in leadership roles in managed care and healthcare at some of the nation's leading organizations, including serving as CEO of Blue Cross and Blue Shield of North Carolina for more than a decade. Bob will lead the Tivity Health executive team and will also be supported by Director, Ben Kirshner, Founder and Chairman of digital performance marketing firm, Tinuiti. Kirshner will provide Board support for the Nutrition business units' digital marketing efforts. Under Bob's leadership, we will continue to make improvements with a particular focus on driving profitable growth within the Nutrition business, as the CEO search is under way.

I will now turn the call over to Bob. Bob?

Bob Greczyn -- Interim Chief Executive Officer

Thank you, Kevin, and good afternoon, everyone. I would like to add my appreciation for Donato's leadership over the years. Let me first say that I'm excited to take on the role of Interim CEO, while our Board conducts the search for Tivity Health's next leader. I have great respect for our colleagues who are so committed to solving big problems and addressing some of the most critical issues facing our healthcare system. Now let me turn my attention to the business, as we look back on 2019. Our Healthcare business remained strong, is performing well and is profitable. That business has a strong leadership team and generate significant free cash flow. As Adam will discuss, we expect increased top line growth in 2020. Admittedly, the Nutrition business has not worked out as well as planned since the completion of the acquisition in March of 2019. We have made some good progress in the past 10 months, particularly in our approach to digital marketing, and we're seeing some promising results in certain key growth metrics for our Nutrisystem brand. We believe there are areas where we can improve our operational execution and although performing well below its potential, the Nutrition business unit remains profitable and generates free cash flow.

As announced today, Tommy Lewis, who is currently Tivity Health's Corporate Chief Operating Officer and Investor Relations Lead, will serve as Interim Nutrition business unit President, following Keira Krausz's decision to resign to pursue other opportunities in the New York area. I do want to emphasize that Keira's departure is not something we thought, but I do respect her decision. Tommy's transformational experience and leadership style as well as his already substantial involvement with the Nutrition business unit make him the perfect person to assume this interim role. The current emphasis will be on supporting the Nutrition team, execution of the 2020 plan, increasing operational focus and setting 2021 up for success. Now let me turn my attention to the Healthcare business unit. SilverSneakers utilization continues to be strong, with nearly 26 million visits in the fourth quarter and just over 104 million visits for the year. Prime subscribers grew by over 15% to more than 340,000 compared to just over 295,000 at the end of 2018.

Turning to 2020. SilverSneakers' January eligibles of 16.1 million are in line with our expectations to achieve 16.4 million eligibles by year-end. This is reflected in the guidance we are announcing today. Also, as expected, we did retain a portion of UnitedHealth individual lives, slightly more than we anticipated, and we have extended the agreement with UnitedHealth for group lives for another two years beyond 2020. For Prime Fitness, you will recall that as previously reported, we launched a fitness offering to Walmart's 1.5 million associates. Those associates have access to more than 9,000 fitness centers in a network customized for Walmart. Walmart is actively marketing this fitness benefit to its associates. Our early view of enrollment is exceeding our historical experience with the Prime offering. While we are currently expecting increased visit costs in 2020, which Adam will discuss more later, I want to emphasize that we are happy to report that we continue to maintain positive relationships with our fitness network and expect to expand our fitness network partnerships in the near term.

I'll now turn the call over to Tommy to discuss the Nutrition business. Tommy?

Tommy Lewis -- Chief Operating Officer

Thank you, Bob, and good afternoon, everyone. Our goal is to return the Nutrition business unit to healthy, consistent and profitable growth. With that, we will continue our emphasis on digital, work to optimize the value of the brand and address areas that are underperforming. Today, I'll share how the 2020 diet season is going, and then give some color into what we're doing for the remainder of 2020 to put us on the path to sustainable growth. To set the stage, I'll be candid. The Nutrition business unit generated over $600 million in revenue in 2017, 2018 and 2019. But while it still produced over $70 million in adjusted EBITDA in 2019, last year was a step backward. To return to growth as the Nutrition team prepare for 2020, the team's first and foremost objective was to deliver customer growth for the Nutrisystem brand. Nutrisystem's DTC business delivers the lion's share of the Nutrition unit's revenues and profit. And within Nutrisystem DTC, customer acquisition is the single most powerful lever. We also know that after experiencing a year of decline in new customers, industry history shows it's a tremendous challenge to reverse the trends for the next diet season.

With that in mind, we are encouraged by Nutrisystem's start to diet season 2020. Through mid-February, we are up double-digit and year-over-year customer starts versus the same period of time in 2019. And based on these starts and an expected return to regular cadence of orders for the remainder of the year, we anticipate customer growth in the mid-single digits for full year 2020 versus the full year 2019. While this is certainly encouraging, a lower anticipated average selling price is expected to provide a headwind to Nutrisystem revenue and EBITDA growth in 2020. I'll provide a bit of color behind the numbers. First, we introduced the personalized plans by Nutrisystem, likely the most innovative approach since Fast five launched in 2014. Customers can now receive programs tailored to their body type, food preferences and unique goals.

The advantage of the Nutrisystem program is that while highly personal, like everything Nutrisystem delivers, it remains as easy to follow as ever and offers the convenience busy people require. Second, the team developed new creative that is delivering higher response across all DTC channels, helping us achieve a lower cost per order and evolving the brand to broaden its appeal. And third, we expanded in digital. As I just mentioned, DTC growth is a result of higher response. Thus far, in 2020, we have significantly increased the number of new people we reach at an efficient cost per impression, thanks to a dramatic increase in digital marketing. Our digital marketing team had been profitably ramping up our digital spend in upper funnel digital channels in the back half of last year, and the team was building to be in the position we're in now. As this has happened, our media mix has shifted significantly. Television remains an important part of our media mix, but a much smaller one than years past. I'd like to talk for a minute about the BOGO offer and Nutrisystem pricing strategies during diet season 2020. BOGO, or Buy one, Get One free, is a compelling offer that the team tested quietly in 2019.

A few facts about BOGO. This offer has effectively raised response. It's not the sole driver of the growth in customers, but it is a contributing factor. While those who take the BOGO offer pay less for each shipment. Test results show that they stay on the program longer, such that revenue per customer is pretty much flat. We started the year with the BOGO, and guidance assumes promotional activity remains throughout the year. While BOGO is the offer we're using in advertisements, we do offer different price points and options around length of commitment. Our most popular option is the monthly auto ship. As 2019 progressed to generate incremental orders, the team lowered the monthly auto ship price. Moving into 2020 to support customer acquisition, the lower prices were continued. This is lowering the average selling price in January and February year-over-year and driving lower margin in 2020, at least we believe there's upside potential on pricing, and I'll touch on that in a moment. Now I'd like to talk about the current plans for the rest of the year. Our Nutrisystem's diet season 2020 is off to an encouraging start. The team and I know there's more to be done to return Nutrisystem revenue and EBITDA to growth. Here's what we're focused on.

We will further enhance personalization and improve our innovation process. We need to raise price to improve margin. The Nutrisystem customer retention team was responsible for growing revenue per customer 30% in total over the past several years, largely through price increases, greater upsell of a la carte items and the introduction of improved product configuration. In fact, our team is testing various offers as we speak. We believe we will find ways to raise average selling price and gross margin. We will continue to grow reach to new customers and push for marketing efficiency. We've shared in the past that Tivity Health invested in the Nutrition business unit's marketing technology stack in the back half of 2019 and into early 2020. While we are leveraging it in diet season, we have not begun to use it at its full potential, as we are still onboarding our new consumer data platform. This will be a key driver to our planned digital media expansion later in 2020. We therefore expect marketing efficiency to improve as the year progresses.

Now I'll talk about the South Beach Diet and our retail channel. While South Beach is much smaller than the DTC Nutrisystem business, we're in need of a strategic adjustment because they are pressuring financial results. I'll start with South Beach. We believe that South Beach Diet has wide brand awareness and appeal in today's market. We believe its original sustainable nutritional approach was ahead of its time, and the keto-friendly adaptation is on trend. Having said that, the original hypothesis is that it would be straightforward, stand up a business, paralleled to Nutrisystem in the DTC space is not yielding acceptable EBITDA level. In order to reduce our losses, we have pulled back media spend dramatically, which lowers revenue but increases EBITDA versus 2019. We have much work to do here. We'll be quickly assessing the strategic options for South Beach Diet, and we'll say more on future calls. Retail and QVC have business models different enough from DTC Nutrisystem and South Beach Diet that we talk about them separately, even though they are channels through which we sell Nutrisystem and a small number of South Beach items.

These channels are expected to decline year-over-year and generate combined revenue at the top end of our guidance of approximately $25 million. We are doing a strategic assessment of how we operate in the retail space, and we'll say more about improvements on future calls. Finally, we believe in the vision and the financial potential of our new Wisely Well program, our first combined offering with the Healthcare segment. The Wisely Well portfolio includes nutrition solutions for both healthcare and consumer needs. The wellness meal bundles offer seniors and caregivers access to convenient home delivered meals designed to meet senior nutrition and dietary needs. To be clear, it's still early days for the Wisely Well concept, but we are optimistic that our approach to partnering with health plans to address nutritional needs will yield long-term benefits, especially in light of the growth prospects in Medicare Advantage and supplemental benefits. I'm enthusiastic about joining the Fort Washington team and rolling up my sleeve. I believe in the long-term potential for the Nutrition business, and I'm excited about bringing the vast strength of the Nutrition and Healthcare teams together to better serve our customers and help Americans live healthier and more connected lives.

Now let me hand it off to Adam to review the financials.

Adam Holland -- Chief Financial Officer

Thank you, Tommy, and good afternoon, everyone. I'll cover some additional information related to our fourth quarter results, then I'll discuss our 2020 guidance. Our Healthcare segment is strong and generated fourth quarter revenues of $159.1 million, an increase of 4% over the same period last year. SilverSneakers revenue was $122.3 million, which was flat to last year despite a decrease in eligible lives, with 25.6 million visits during the quarter. We ended the quarter with 15.3 million health plan members eligible for SilverSneakers. We ended the year with 3.7 million SilverSneakers members enrolled and saw a 7.7% active monthly participation rate in Q4, which was an increase of 25 basis points over Q4 of 2018. Prime generated $32 million of revenue in Q4, an increase of 22.6% over last year. Prime's growth was driven in large part by a 15% net increase in subscribers, allowing us to finish the year with 340,000 total subscribers, and this excludes Walmart. Walmart contributed to the remainder of the year-over-year Prime revenue increase. We're very pleased with our strong start to this very important relationship.

The Q4 Healthcare adjusted EBITDA was pressured late in the quarter by an unfavorable mix in our SilverSneakers business as well as higher-than-expected utilization claims from our acupuncture business inside of WholeHealth Living. Turning now to the Q4 results of Nutrition segment. Fourth quarter nutrition revenues came in at $113.7 million, a 12.2% decrease compared to the same quarter last year. This decline was primarily driven by a decrease in the DTC business, which includes both the Nutrisystem and South Beach Diet brands. The DTC business generated $105.9 million in revenue, down 10.8% from last year. Within the DTC channel, Q4 revenues from customers in their initial diet cycle were down 16.2% year-over-year, primarily due to fewer new customer starts in Q3, which resulted in lower on-program revenue in Q4. Also, we had promotional pricing implemented within the quarter. Q4 reactivation revenue made up 40% of total revenue and was down slightly at 3% compared to Q4 of 2018. Rounding out Q4 Nutrition revenue, the retail channel contributed $6.8 million in revenue and QVC was $1 million.

Fourth quarter Nutrition adjusted EBITDA totaled $13.9 million, including synergies, which was below our expectations and was impacted by several factors: first, lower revenue, as I just discussed; second, Q4 Nutrition gross margin was down, reflecting the impact of marketing promotions that were executed in Q4 of 2019; third, approximately $2 million in timing of spend and investment made during the quarter in preparation for 2020 diet season and beyond. Now allow me to talk for a moment regarding the Q4 impairment charge noted in today's press release. In connection with our annual impairment test of goodwill and indefinite-lived intangible assets, we concluded that the fair values of certain goodwill and intangible assets were below their carrying amounts. As a result, we recorded a noncash impairment charge to lower the carrying amount of goodwill for the Nutrition business unit by approximately $137 million, primarily based on a new multiyear operating forecast of the Nutrition business unit that was established that established lower expectations for the coming years.

In addition, we recorded a noncash impairment charge of $240 million to lower the carrying amount of the Nutrisystem trade name. We do not expect these impairment charges to have any impact on future operations nor affect our liquidity, cash flows from operations or compliance with the financial covenants set forth in our credit agreement. Turning to our year-end balance sheet and cash flow. Our Q4 free cash flow came in as expected, and we ended the year with $1.03 billion of term loan debt and $104.6 million available capacity on our revolving credit facility. While our Nutrition segment's business trends did not meet our expectations during the year, we were still able to repay $105 million of the initial amounts borrowed during 2019, which is a testament to the strong free cash flow profile of both business units. So with that, I will move into a discussion about our 2020 guidance. We highlighted our 2020 guidance on our earnings release this afternoon. We estimate our 2020 consolidated revenues should range between $1.24 billion and $1.29 billion.

We estimate consolidated adjusted EBITDA to range between $190 million and $205 million, including the benefits of synergies. Within the range of our consolidated guidance, we have the following assumptions for the Healthcare business unit, and this relates to the top end of our guidance range. One, SilverSneakers' revenue is expected to show high single-digit growth, boosted by organic membership increases, new contracts that were won in 2019 and an improved participation rate driven by our marketing initiatives. We expect to end the year close to 16.4 million eligible members, and our goal is to drive over 114 million visits during 2020. Two, our Prime revenue is expected to grow in the mid- to high teens year-over-year and will represent about 20% of our total Healthcare units revenue by the end of the year.Continued growth in both the organic membership and the new Walmart businesses are key to these assumptions. WholeHealth Living is expected to grow modestly in total revenue during 2020. And moving on to adjusted EBITDA for Healthcare. We established the 2020 guidance range between $140 million and $145 million inclusive of synergies.

Now let me take a moment to discuss the primary reason why our Healthcare adjusted EBITDA is not higher given our robust increase in revenue. Our fitness partner visit cost for 2020 are expected to increase for both our SilverSneakers business and Prime networks due to a combination of higher contractual rates and expansion into some higher cost markets in 2020. And while this level of increase is more significant compared to prior years, we were able to secure multiyear agreements with four of our large national partners, which we believe will help curtail the overall impact of rate increases beyond 2020 as these four partners collectively make up over 20% of our entire fitness network. And although we expect the fitness market to continue to be competitive, both SilverSneakers and Prime bring substantial volume and value to our fitness partners. And we expect to maintain a positive and equitable financial relationship with our 18,000 partner locations. Now moving to the Nutrisystem business unit. Relating to again, to the top end of the guidance range, and these comparisons are made on a full year-over-year basis.

Nutrisystem revenue is anticipated to be up slightly year-over-year. While new customer starts are projected to be up for the first time in three years, they are being partially offset by lower revenue per new customer, which is comprised of average selling price, program mix, upsell rates of bars and shakes and length of stay. Net reactivation revenue for Nutrisystem is expected to be flat in 2020, reflecting a combination of a higher customer pool size partially offset by an aging customer pool on a weighted basis, following two consecutive years of declines in new customer starts as well as a lower average sales price. For the full year, reactivation revenue is projected at roughly 36% of total Nutrition segment revenues. Nutrition DTC gross margin is expected to decline year-over-year primarily driven by promotional pricing and it does represent the largest factor in the Nutrition unit's overall EBITDA decline in 2020. Marketing efficiency is expected to be relatively flat year-over-year despite an increase in direct media expense as we have moved to a more balanced approach with our TV and digital spend.

And as Tommy mentioned earlier and as reflected in our 2020 revenue guidance, we expect revenue declines in South Beach, retail and QVC, which will also contribute to some of the decline in the 2020 EBITDA guidance. At the macro level, relative to other aspects of our guidance, we anticipate free cash flow to range between $60 million and $75 million, with capital spending between $25 million and $30 million, which includes investments related to Wisely Well. It is our objective to utilize all available free cash flow to continue to pay down debt throughout 2020. Finally, you will note in today's press release that we also gave guidance ranges for the first quarter of 2020. While we are not planning on regularly issuing quarterly guidance going forward, we believe that the Q1 guidance will help clarify management's expectations for the revenue and EBITDA cadence in 2020 given the stub year comparisons for 2019 relating to our acquisition of Nutrisystem.

And this concludes my remarks. So let me turn it back over to Bob. Bob?

Bob Greczyn -- Interim Chief Executive Officer

Thank you, Adam. Let me leave you with this. The legacy Healthcare business remains solid, the team is solid, and the relationships are solid. The Board and the company are committed to making the Nutrition business a success, delivering revenue synergies and resolving our issues. This will be the key operational focus for 2020, in addition to finding a new leader for the Nutrition business unit. We will continue to exercise financial discipline as we further delever, and we will find the next CEO for Tivity Health. We look forward to updating you on our progress.

Thank you and we will now take your questions.

Questions and Answers:

Operator

Thank you. Your first question comes from Alex Fuhrman with Craig-Hallum Capital.

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Great, thanks for taking my question. You know, Curious if you could talk more about some of the Healthcare initiatives that you're exploring with the Nutrisystem business like Wisely Well? If you can give us an update on how some of those are going and some of the pilots that you've been doing over there? And how that factors into your guidance for this year will be helpful?

Tommy Lewis -- Chief Operating Officer

Alex, Tommy. Thanks for the question. Good news is that our pipeline continues to grow related to the Wisely Well suite of offerings. So we're pleased about that. We continue to have discussions with our health plan partners virtually every meeting and conversation we have, that's a topic of conversation. So we're optimistic related to that. As you know, we have two pilots that are in play related to food and security. One of those is in the market under way at this moment and the other kicks off in the very near future. In terms of our post-discharge meal delivery, I think you're aware, we have two relatively small contracts there, we're shipping meals. And so things are going as planned. And those are small contracts. They won't add a significant amount to the 2020 plan, but it gives us the information we need to further refine the offering.

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Okay. That's helpful, Tommy. And then can you tell us a little bit more about the plan for the BOGO strategy this year and then the impact of it? It sounds like from your prepared remarks that it's something that the team was testing in 2019. Did customer response to the BOGO, was that not what you expected in 2020? Curious if people kind of picking between the BOGO and the monthly auto ship and just the one month at a time. I mean did the results of the test synch up with kind of what you then actually saw during diet season in terms of what people were actually picking? Just trying to understand how much of the weak results at the Nutrition segment are the results of that promotion versus perhaps other factors?

Tommy Lewis -- Chief Operating Officer

Yes. So good question. And let me start by saying the BOGO did its job. The purpose of the promotion of the offer was to generate response, to generate attention and awareness, and it did that. So it brought visitors to the website. Once they got to the website, they had a choice of choosing in a variety of configurations and a large majority chose the monthly auto ship. We like the fact that the BOGO is working to generate interest and attention, and we'll continue to refine the pricing and the promotional offers as we move throughout the year. I mean clearly, it's our objective to move pricing up. We have a price test in the market as we speak, and we'll continue to work on that.

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Okay, thanks, Tommy.

Tommy Lewis -- Chief Operating Officer

Yep, thank you

Operator

[Operator Instructions] Your next question comes from the line of Ryan Daniels with William Blair.

Ryan Daniels -- William Blair -- Analyst

Hey, guys, thanks for taking the question. Maybe I missed the additional color on this, but free cash flow at $60 million to $75 million seems pretty low given the $200 million in EBITDA and kind of the low capital intensity of the business. I know there's some cost in there like the CEO transition and some restructuring. So maybe talk a little bit more about the weakness in that metric in particular? And then what's a more normalized number, if we back out some of those onetime expenses?

Adam Holland -- Chief Financial Officer

Yes. This is Adam. The free cash flow, remember, it is after the burden of paying the cash interest, that is after the payment of cash capex. So that may be part of the puzzle. We didn't outline specific ranges with the onetime costs that you noted, but we did bake them in there. We believe we were conservative in our estimates. And we will clearly be trying to push that number higher as we push through the year. But for right now, we thought like this was an appropriate range. And I think from your question, it's spot on in terms of what's normalized.

And as I said in my prepared remarks, both companies have the potential for a lot more free cash flow, Healthcare and Nutrisystem. And we're going to be focusing on improving the operational aspects, with Tommy focused on getting the average sales price up, getting the margin dollars up, we believe we can do a lot better as we start to head into 2021.

Ryan Daniels -- William Blair -- Analyst

And then a little bit broader question. With Donato, his termination, obviously, reflecting disappointment with the transaction and subsequent results. Has the Board opened any strategic alternatives for Nutrisystems? Or is it it's still kind of all systems go with integrating that and running it as a combined entity?

Kevin G. Wills -- Chairman of the Board

Ryan, this is Kevin. I'll take that question. The Board remains committed to our strategy. As indicated in our prepared remarks, we have been disappointed with the Nutrisystem performance. We believe there are a number of reasons for that to include increased competition, some operational missteps, lack of innovation, all of which we believe we can correct and move forward and get fixed. So we remain committed to put in these two brands together and moving forward. Obviously, our profitability has decreased over the last couple of years, but we see no reason why we can't return to levels that we were previously at.

Bob Greczyn -- Interim Chief Executive Officer

And if I might add this is Bob. If I might add just one thing to that, and that is that even with all of those issues that we need to fix, we have a good team of people, and the business continues to be profitable and generate free cash flow. So we will be able to continue to delever the business as we fix the issues and move forward.

Ryan Daniels -- William Blair -- Analyst

And final question, I'll hop off. Just the higher visit rates in SilverSneakers. I appreciate that's kind of a onetime reset and then it actually gets you better visibility to underwrite going forward. But what drove that uptick? Why now? That's not something hovering Tivity for a decade that I've really heard about. So why the pressure visit rates suddenly into 2020?

Adam Holland -- Chief Financial Officer

Yes. Now some of these were strategic moves we made and with some of our larger partners. Vast majority of our contracts auto renew every year. And in certain circumstances, when we see fit, that we want to have longer-term visibility to these contracts, which most of our PL contracts are year-to-year, that there is a little bit of a reset sometimes on the upfront to get those deals done. And what we're trying to look at is the long term, what's going to be best for the company, years two, three and four outside of year 2020. So I'm not saying that we're not going to continue to see gyms cost pressures, but part of this was to reduce the year-over-year burden that might have taken place had we not locked up some of these larger agreements.

Ryan Daniels -- William Blair -- Analyst

By taking a step function up and locking them, you lower that potential inflation with these accounts in the future? Or will it still be similar, but now they're multiyear?

Adam Holland -- Chief Financial Officer

Right, having multiyear agreements with these gyms is key, and these were four large ones. We have thousands of gym contracts across our 18,000 PLs. So we're always looking at what are the right strategic moves, what's best for the company in the long term. And while we did incur this visit cost increase this year, then we may have increases next year. What we're trying to do is delay or reduce the amount of increase. And look, we're going to continue to try to increase profitability in other places. So this doesn't mean that this is going to go linear forever. But for right now, we're seeing a little bit of a headwind.

Operator

Your next question comes from the line of Mike Petusky with Barrington Research.

Mike Petusky -- Barrington Research -- Analyst

Like the tusky close enough today, so a couple questions. I'm just curious, is Ben Kirshner, is he going to spend any more time in terms of supporting the Nutrisystem digital effort in 2020 and sort of going forward than, say, for the last year or so? Or is that just essentially you're just emphasizing that he's there to support? Can you guys just talk about that?

Bob Greczyn -- Interim Chief Executive Officer

I think we're this is Bob. And I think we're very fortunate that Ben Kirshner actually lives in Fort Washington, Pennsylvania. He has other commitments in his life, but we do expect him to spend a little bit more time, and he's going to be providing Board support for all of our digital efforts. And that also entails introducing us to other digital experts that will be able to help us move all of this forward.

Mike Petusky -- Barrington Research -- Analyst

Okay, And then just sticking with Nutrisystem. When you've had sort of over three in terms of diet seasons and the business is shrinking, what is the and I'm not asking for official guidance here, but what is a realistic time frame to turnaround a business that has been struggling to this extent for this long? I mean when is it three years? Is that a reasonable sort of way to think about, "Hey, it's going to take us a bit of time here, it's not a fix it in 2020 and in 2021, all of a sudden we're flat or returning to growth?" I mean can you guys just talk about that in general terms to the extent you can?

Tommy Lewis -- Chief Operating Officer

Mike, Tommy. Thanks for the question. The good news here is that the Nutrisystem brand is up good double digits year-over-year through 2015 in new customer starts versus same period last year. And the good news there is that, that is a broader customer base that we will be able to turn into reactivation revenue downstream. So it is a strong signal that the creative, the message, the offer, the products are resonating with the prospects out there. So and again, this is the first time that new customer starts that have been up in three years.

The other important factor is cost per order is down. And if that continues through the end of the year, this will be the first time in seven years or more that cost per order is down. So those are pretty good solid indicators. The digital team are building out the upper funnel with more targeted, more sequence type of messaging. We're migrating from we're shifting the media mix from TV to digital. So really, nothing good can happen without new customer starts. And so we're optimistic that we've turned the tide related to that, and there will be a flywheel effect downstream.

Mike Petusky -- Barrington Research -- Analyst

Okay. So I guess, just sort of trying to, I guess, like a drill down on the three year I mean, is three years the right time frame to be thinking about a return to sort of overall growth? I don't suspect you can be raising prices 10% or 15% on people and have them stay.

Tommy Lewis -- Chief Operating Officer

I think we want to stay away from any guidance outside of 2020, but it's the Board's objective and management's objective to build sustainable profitable growth here.

Mike Petusky -- Barrington Research -- Analyst

Okay. So then I was just real curious all right. I just wanted to understand the 300 this is jumping over to Prime. The 340,000 subscribers, you said did not include Walmart. Do you guys actually have a figure or a rough sense of something you could share there in terms of the Walmart activations on that?

Adam Holland -- Chief Financial Officer

Yes. We're not giving a specific number on that right now. We may later in the year, but we can tell you that the activation rate has been very positive. It actually exceeded our expectations as we roll through the holidays. And is that it's still a smaller part of the overall Prime business for now. And as it matures over the summer, we'll have more to say and may give more details.

Mike Petusky -- Barrington Research -- Analyst

Okay, thank you.

Operator

Your next question comes from the line of Steve Halper with Cantor Fitzgerald.

Steve Halper -- Cantor Fitzgerald -- Analyst

Hi, one clarification question. and then a strategy question. During the commentary, you talked about Nutrition at the upper end of the range would be would represent an actual increase in revenue for the full year. Could you just clarify that? Because those numbers don't add up with the Nutrisystem or Nutrition segment revenue for 2019.

Adam Holland -- Chief Financial Officer

Yes. Steven, what I was speaking to in those areas was just the Nutrisystem business within the Nutrition segment. And so if you look at the Nutrisystem business, which makes up the bulk of the overall nutrition business, I think this year is going to be somewhere 90% roughly of the total. That, on the upper end would be slightly up. Most of the revenue decline year-over-year is driven by reductions in South Beach, retail and QVC. The reason that EBITDA did not drop down proportionally is because most of the EBITDA is generated from the Nutrition I'm sorry, the Nutrisystem brand.

Steve Halper -- Cantor Fitzgerald -- Analyst

And then so the other question is, you have this sort of near-term issue that needs to be fixed around Nutrition, and at the same time, the company had been talking about this whole opportunity around social determinants of health. Does the focus on fixing the diet business the Nutrition business in and of itself, take away from some of those efforts in that strategic area, at least in the short term?

Bob Greczyn -- Interim Chief Executive Officer

Steve thanks for the question. This is Bob. I would say no to that. I think we will continue to focus on Wisely Well and the work we're doing across our business unit segments. I think we have the headroom to do the work that's necessary to fix the issues that we have without undermining our ability to that. And we are continuing to make significant investments in the Nutrition business unit to make sure we are prepared for that.

Steve Halper -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

Your next question comes from the line of Dave Styblo with Jefferies.

Dave Styblo -- Jefferies -- Analyst

Hi, there thanks for the questions. I got distracted for a quick second there with Steve's question. So maybe this is part of it. But I think that guidance implies for the Nutrition segment to be down about 9%, high single digits in revenue. And I think you're talking about customer growth for the full year being up mid-single digits. So is the delta there that simply the average selling price is down 15% or so? Or was there a little bit of mixing apples and oranges within that?

And I guess, the other element of that is, what does guidance assume for some of the initiatives and efforts that you're doing to improve the average selling price for the year, you talked about some of the new products and so forth that you wanted to add in and some of the other efforts, but just wanted to get a sense of what is or what is not in that guidance?

Adam Holland -- Chief Financial Officer

Yes. Dave, maybe I'll take the first part of your question, and then Tommy can take the second part. In regard to the guidance, the while the customer starts are up, they're going to be offset, and you said it right, you got it right. It's going to be offset by average selling price. So while you do have the new starts up, your revenue is going to be less than that. At the upper end of our range, the and this is all within the realm of just the Nutrisystem business, not South Beach, retail or QVC, you would be slightly positive at the top end of that range.

Tommy Lewis -- Chief Operating Officer

And Dave, in terms of the second part of your question, guidance assumes that we'll continue with promotional efforts. It may be the BOGO or it may not. We're going to try to land on, on promotions and offers that resonate with the target audience, but guidance currently assumes continuation of what we're doing. So if we were able to have successful tests around pricing, you could see some potential upside.

Dave Styblo -- Jefferies -- Analyst

Okay. And on the Healthcare side, so it looks like margins are compressing by about 200 basis points year-over-year. And I think there's probably some cost synergies even helping that business a little bit. But either way, is that solely attributable to the rate increases that you're having to absorb from the network? Or is there other elements of business mix shift, perhaps, Walmart coming on that might not be as profitable? Any other color about bridging that contraction in margins. And is there more pressure to come over time? Or we sort of, you think, hit a four in 2020 with this?

Adam Holland -- Chief Financial Officer

Yes. It's I think the right way to look at it, it is primarily with our rate increases with the PLs. There's always moving parts with new business. And we don't get into individual contractual terms and margin profiles. But that PL increase is the primary marketing things below, I think, gross margin, you actually see some improvement on year-over-year, even aside from the synergy benefits from 2020. So I can't predict what the future is going to hold in terms of how the gym industry is going to evolve. It's a very fluid environment with that many gyms.

So I think what we're doing here is with the big partners that we have, if we can secure some visibility in outward years, and we will do what we need to do next year to make the right decisions for the long term. I think there could be continued pressure on gross margin. I hope it's not to the same degree we saw year-over-year this year. I can't guarantee that, but that's what we're trying to do is we're trying to stem the decreasing gross margin profile. And we're not going to just sit back and say that's the way it is either. We're going to work hard below the line to make sure we're streamlining operations as much as we can to maintain EBITDA and cash flow.

Dave Styblo -- Jefferies -- Analyst

Okay. And the last one is, initially you guys were looking for $30 million to $35 million of cost savings. Has that changed now, given the dynamics of what's happening in the business? And or has the trajectory of the ramp in years one, two and three, is that unchanged?

Tommy Lewis -- Chief Operating Officer

Dave, Tommy here. Good question. No. Actually, we're on track with what we originally committed to. So I think you see the numbers in the communication today is that we hit our year one objective. And so we're pleased about that. In year two, we expect to have about $26 million to $30 million embedded within adjusted EBITDA by the end of the year. And we're still on track for the $30 million to $35 million that we committed to at the end of the third year.

Dave Styblo -- Jefferies -- Analyst

Okay, got it. Thank you.

Operator

Your next question comes from the line of Jailendra Singh with Credit Suisse.

Jailendra Singh -- Credit Suisse -- Analyst

Thanks a lot. So with respect to the search for the new permanent CEO, just can you help us understand what kind of skills or expertise you're going to focus on? And do you have a time line by when you expect to announce the permanent replacement?

Kevin G. Wills -- Chairman of the Board

Yes. This is Kevin. I'll take that. Good question. I'm not going to get into the specifics of the job spec, if you will, but I can comment that we are looking for an individual who is going to be a strong leader, someone with healthcare experience, someone who can profitably grow and further integrate our two brands, and finally, someone who understands consumers and how to deeply engage with the users of our products. So that's kind of a broad outline of skill set that we're looking for.

As it relates to the time line, we have no preset time line. As indicated in our remarks earlier, we are fortunate that Bob has agreed to step in as interim CEO. The Board has full confidence in Bob. And so that gives us the ability to take our time. The most important thing is we find the right person for the job. We're going to work judiciously, but we're going to take our time and find the right person.

Jailendra Singh -- Credit Suisse -- Analyst

Okay. And then for Adam, can you I mean, you talked about some impact of unfavorable mix on margin trends in Healthcare segment. Can you provide more color there? And what are you thinking about those factors in 2020?

Adam Holland -- Chief Financial Officer

Yes, sure. And what the comment related to is the fourth quarter results and what we as you know, we have a mix of different two primarily two different types of contracts. One is a PMPM, pure PMPM and the other is what we refer to as the hybrid. And the hybrid, we get paid primarily through the visits. PMPM is just a flat rate. And as we have visits that come from PMPM members where we don't receive a revenue stream that can put pressure on our cost of sales. And while most of the time that visit profile kind of matches off to the mix of members you have. There was there are some factors, some timing in geographies where you see an outsized amount of PMPM visits, which create pressure, and that's what we saw in the fourth quarter. To answer the second part of your question, Steve Janicak and his team have been focused all throughout 2019 and through 2020, and we are developing tactics to address some of these, such as digital target marketing with some of the SilverSneakers members who are hybrid members to encourage more visits.

We certainly don't want to discourage our PMPM members from coming to SilverSneakers classes. That's not what we're in business to do. We welcome them all and treat them all the same. That said, when we see periods of pressure, one of the remedies is to try to offset that with more hybrid visits. And we're still working through that, and hopefully, we'll have more to say as we move through the year.

Jailendra Singh -- Credit Suisse -- Analyst

Okay. And then on higher visit costs, you talked about putting pressure on margin in that segment. Is this something you can go back to health plans and try to put that in your pricing with them while you renew contracts for I know it can't be done for 2020, but for 2021, something you can pass on to health plan partners? Or it's probably not that possible?

Adam Holland -- Chief Financial Officer

Well, I wouldn't say it's not possible. I think there are always unique circumstances, and it's hard to synthesize all the moving parts in our gym network down to single examples, but I think where you've got pockets of pressure, there are sometimes opportunities to work with health plans to see if we can come to something that make sense for both parties. In some cases, you can't. And we will continue to work and refine our network. One of the advantages of having 18,000 is that you have some gyms that are higher cost, and you have some gyms that are lower cost. And over time, sometimes you can shift membership to lower cost gyms with marketing and other tools we have, but it's not a quick process. So it's something we're focused on. But there are usually no quick remedies.

Jailendra Singh -- Credit Suisse -- Analyst

Okay, thanks a lot.

Operator

Your next question comes from the line of Jessica Tassan with Piper Sandler.

Jessica Tassan -- Piper Sandler -- Analyst

Hi, thank you for taking the question. I'm just interested to know with regard to Nutrisystem, just historically, if you could speak at all to average length of stay for a customer, and then just what impact does the Buy One, Get One promotion had on average length of stay per customer and kind of speak to what is assumed in guidance with regard to length of stay?

Tommy Lewis -- Chief Operating Officer

Jessica, this is Tommy. So the BOGO has extended the length of stay. That's one of the things that we like about it, and it gives us an opportunity to continue to move them into additional month downstream.

Jessica Tassan -- Piper Sandler -- Analyst

And so just with regard to the historical length of stay per customer, can you speak at all to the, I guess, just the incremental impact of the Bogo promotion?

Tommy Lewis -- Chief Operating Officer

Yes. I think that's a information that we wouldn't share for competitive reasons.

Jessica Tassan -- Piper Sandler -- Analyst

Okay. Got it. And then just if you could speak at all to like revenue per customer over the course of the diet cycle, does that typically remain flat? Or does it is there any kind of trend that we should be aware of?

Tommy Lewis -- Chief Operating Officer

Yes. Good question. We've had the opportunity to increase revenue per customer. And it's been increasing over the past several quarters. The average selling price does impact that, but we've proven that we've been able to increase RPC over a three year period, and we'll continue to look for ways to do that.

Jessica Tassan -- Piper Sandler -- Analyst

Now, thank you.

Operator

Your last question comes from the line of Mike Petusky with Barrington Research.

Mike Petusky -- Barrington Research -- Analyst

Fully, but thanks for the follow up. We're just going to go through it and maybe I didn't hear this, but did you guys disclose South Beach revenues for the quarter?

Adam Holland -- Chief Financial Officer

We did not. We have not broken that out all throughout 2019.

Mike Petusky -- Barrington Research -- Analyst

Okay. Would you be willing to say how much that business was down for the quarter?

Adam Holland -- Chief Financial Officer

I can say for the year, the and this is the and correct me if I'm wrong, the full year, I believe it was $55 million in total revenue, $53 million for the full 12 months, and I believe that compares to around $65 million in the prior year in 2018.

Mike Petusky -- Barrington Research -- Analyst

Okay. Can you guys talk about because it does seem like it's certainly a the brand name, I think there's some power in South Beach and it's attractive, and it hits some good demographics and then also the low-carb dieting aspect of it does continue, I think, to resonate with most people that are looking at losing weight. What's sort of gotten wrong in the first quarter that you guys are pulling back media spend there?

Tommy Lewis -- Chief Operating Officer

Yes. Mike, Tommy. I think you're right. It is a well-known, well-regarded brand, and it is on trend with the low carb and it also plays into the healthy lifestyle, which is very popular at this point in time. But having said that, the original hypothesis that we could stand up a business in parallel to Nutrisystem is not yielding the acceptable EBITDA levels. And over time, that product has evolved to become very similar to Nutrisystem. And so I think we need to pull back our spending at this point in time, preserve EBITDA and just do a recalibration on what the go-forward model should but we like the brand, and we want to continue to offer the brand, we just need to do more work there.

Mike Petusky -- Barrington Research -- Analyst

Is that potentially transitioning that into almost completely digital? I mean is that the sort of thing that may turn that for you?

Tommy Lewis -- Chief Operating Officer

Yes. That's a possibility, and there are other possibilities as well related to fresh and otherwise. But I think we need to do more work on that and report back later.

Mike Petusky -- Barrington Research -- Analyst

Fair enough. Thanks, guys.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Kevin G. Wills -- Chairman of the Board

Bob Greczyn -- Interim Chief Executive Officer

Tommy Lewis -- Chief Operating Officer

Adam Holland -- Chief Financial Officer

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Ryan Daniels -- William Blair -- Analyst

Mike Petusky -- Barrington Research -- Analyst

Steve Halper -- Cantor Fitzgerald -- Analyst

Dave Styblo -- Jefferies -- Analyst

Jailendra Singh -- Credit Suisse -- Analyst

Jessica Tassan -- Piper Sandler -- Analyst

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