Tivity Health, inc (TVTY) Q2 2021 Earnings Call Transcript

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Tivity Health, inc (TVTY)
Q2 2021 Earnings Call
Aug 4, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. And welcome to the Tivity Health Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Matt Milanovich, Vice President of Investor Relations. Please go ahead.

Matt Milanovich -- Vice President of Investor Relations

Good afternoon, and welcome to the Tivity Health second quarter 2021 financial results conference call. Before we begin, if you do not already have a copy the earnings release, supplemental information and related 8-K filed with the SEC are available on our website at tivityhealth.com.

I would also like to highlight that our financial presentation within today's press release and supplemental materials are reflective of the divestiture of the Nutrition segment. Therefore, all results of operations related to that business are now reported within discontinued operations. 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 2021, 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 SEC 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 Ashworth -- President & Chief Executive Officer

Good afternoon, and thanks, Matt. Thank you for joining the call today to discuss Tivity Health's second quarter earnings results. Joining me on the call is Adam Holland, our CFO; Tommy Lewis, our COO and Matt Milanovich, who you just heard from, our VP of IR.

I want to start by thanking all of our Tivity Health colleagues whose dedication, discipline and focus has led to many accomplishments in my first year as CEO of Tivity Health. Over the past year, we responded to COVID impact on our business with the safety of our colleagues as our number one priority and continued to deliver important solutions for our members and our partners. We launched and built a strong virtual fitness offering. We successfully divested Nutrisystem allowing us to focus on growth in our core business, and significantly deliver the company. We recently refinanced our debt, which increased our financial flexibility, and we invested in digital engagement tools positioning Tivity to become a member-centric platform engagement company with omni-channel capabilities using our new tools, new data and creating new experiences. These are just a few of the accomplishments I'm proud of, and I believe the best is yet to come.

As you saw in today's press release, our performance for the second quarter of 2021 was characterized by a stronger than expected recovery in both our SilverSneakers and Prime businesses. And we reported revenues of $120.1 million in adjusted EBITDA from continuing operations of $41.5 million. SilverSneakers revenue for the second quarter increased by 85% from the prior year, when the pandemic had forced our gym partners to temporarily close for much of the quarter. Total SilverSneakers visits continue to gain momentum growing 24% over the first quarter of 2021 to 15.3 million. In-person visits of 14.5 million delivered 30% sequential growth from the first quarter. As expected, this robust return to the gym contributed to a sequential decline in our digital visits consistent with industry trends, but still at 900,000 during the quarter. The mix shift to more in-person visits underscores the important social aspect that SilverSneakers experience and our brand provides.

As immunizations of adults over 65 continue to be the highest in the nation, with 90% having received at least one dose according to the CDC. We remain confident and our expectation that in-person visits will continue to accelerate through the remainder of 2021. Our SilverSneakers poll surveys indicate that our members increasingly intend to return to the gym. This improvement in visits and participation during the second quarter, along with continued increases in visits through July gives us confidence that SilverSneakers is on track to achieve our annual expected total visits for 2021.

Our gym network remains robust, and we ended the second quarter of 2021 with approximately 16,000 SilverSneakers locations in line with where we started the year. This compares to an industry wide contraction in gyms by approximately 17% over the past year. On average, our national gym network offers member access to SilverSneakers location within 3.5 miles of their homes and 1.5 miles in urban and suburban market. Additionally, our network renewals have been progressing well this year with multi-year contract, which provides both strong visibility and stability. Our partnerships reflect our shared goal to raise the bar on senior wellbeing, as seniors continue to return to the gym as part of their health and wellness goals. Our virtual visits of nearly 900,000 are an important and growing channel for our SilverSneakers members.

In the first half of 2021, 40% of the participants that are live with instructor virtual visit had never participated in SilverSneakers before compared to 25% of in-person participants, demonstrating that our proprietary virtual channel attract and engages eligible SilverSneakers members who may not otherwise have engaged with us.

Our recent surveys indicate that members will continue to use both virtual and in-person workout, reinforcing that our omnichannel strategy is the correct path forward and is aligned with the needs and preferences of our members. Omnichannel is part of the new normal. And in this context, our SilverSneakers brand demonstrated its leadership and breadth across in-person and virtual channels. Additionally, I'm proud of our team's agility in identifying and executing on this opportunity. Finally, we continue to believe that our virtual channel will provide a competitive advantage and add -- added financial stability of COVID-19 variants or outbreaks negatively affect in-person visits in the future.

Moving on to Prime, our gym network remains strong and our Prime business continues to exceed our expectations, as subscriber rates improve. We ended the second quarter with approximately 12,500 partner locations. Similar to where we began the year and nearly 228,000 active Prime subscribers slightly higher than where we began the year. We now anticipate that our subscriber base will be approximately 230,000 for the remainder of 2021, which positions us nicely to continue growing subscribers in January at the beginning of gym season. Our second quarter Prime visits increased sequentially by 7% to 3.3 million from 3.1 million in Q1 and our Prime subscribers, whose average age is the early 40s, continue to return to in-person gym visit at utilization rates nearing pre-COVID level.

Innovation is an important part of our Prime strategy. And we're pleased to announce a new partnership with well-known brand, Les Mills, an internationally recognized fitness content provider. We expect this partnership to benefit us by providing new digital capabilities, attracting new subscribers and driving increased retention. Our focus for the remainder of 2021 will be on continued deployment of these new virtual features, which we believe will broaden and further differentiate our value to subscribers and our plan partners.

Next, I want to touch on SilverSneakers renewal season. Despite the uncertainties the pandemic has brought, we are pleased with the strength of our strategic client relationships. This year's renewal season was successful, in the high 90% range consistent with prior years and some of our largest accounts are now committed to contract length longer than our average duration. UnitedHealth Group recently notified us that they'll reduce approximately half of their group lives next year, reducing 2022 revenue by approximately 20 million. While this was somewhat unexpected, we continue to have a strong relationship with the United, and I'm pleased to say we're going to now anticipate that we'll renew the contract beyond 2022 retaining a portion of the group lives with SilverSneakers.

We are well-positioned for 2022 and expect to drive revenue growth and adjusted EBITDA growth as well as free cash flow, thanks to progress we've made on several fronts; one, strong client renewals; two, robust geographic expansions and new lines of business with our existing clients; three, new client wins which include competitive takeaways; four, the addition of SilverSneakers connect with two large plans; and five, the launch of our omni-channel MarTech capabilities, which will allow for data driven personalization. This progress is bolstered by organic growth and Medicare Advantage and the expected continued recovery in SilverSneakers, utilization and Prime growth.

Now, moving to an update on our strategy. You'll recall that we first articulated a strategy in January to expand beyond a gym access company into a member focused data driven engagement platform company. Our objective of engaging members through our trusted 30 years SilverSneakers brand beyond physical fitness by utilizing these new tools, new data and new experiences is beginning to materialize.

In July, we deployed our data infrastructure and omni-channel marketing platform on schedule. We will leverage tools from these platforms along with our expertise, and consumer research, segmentation and data driven personalization to engage members in entirely new ways and seek to activate eligible members who have not previously participated with us. We will continue to focus on testing and optimizing for personalization that drives increased revenue. During future calls, I'll provide specific examples of how our digital engagement strategy can drive increased utilization in 2022.

As I mentioned earlier, I'm pleased that we'll begin combating seniors social isolation with our SilverSneakers Connect offering, which delivers a personalized social network for our seniors intended to improve health and wellness. The pandemic dramatically exacerbated feelings of isolation, and we are excited and ready to help our members make meaningful social connections. SilverSneakers Connect will go live with two large clients and beginning in January of 2022. And I look forward to updating you on our progress.

In conclusion, I'm pleased with the strong growth in revenue and visits during the second quarter, underscoring that our expectations for a return to pre-COVID participation level in 2022 are on track. Our continued momentum on our strategic initiative is advancing our progress toward becoming the modern destination for healthy living. I continue to be impressed with our team and their focus and attention on supporting our members on their path to better health.

I'll now turn the call over to Adam.

Adam Holland -- Chief Financial Officer

Thank you, Richard. Today, we reported adjusted EBITDA of $41.5 billion, reflecting the continued strength of our business. Revenues for the second quarter were $120.1 million SilverSneakers revenue were at $90.7 million, an increase of $42 million or 85% over the prior year period, driven by an increase in revenue generating visits. As expected, revenue from fixed per member per month fees declined to 47% of our total SilverSneakers revenue compared to 88% in the same period last year. We expect this percentage to continue to decline as we move through the remainder of 2021 and generate more member visits as part of our overall revenue mix getting us closer to our more typical mix as the country continues to emerge from the pandemic.

We ended the quarter with 17.7 million health plan members eligible for SilverSneakers, an increase of 8% year-over-year. And we are on track to meet our expectations of approximately 18 million eligible members by year end through monthly agents. Total SilverSneakers visits were 15.3 million during the second quarter of 2021 compared to 3.1 million for the same period last year, with monthly average participation of 3.8% compared to 1.1% last year. Within the 15.3 million visits 875,000 visits were live virtual with instructor. And now the prime. We generated $23.4 million of revenue in Q2, an increase of $4.3 million over the same period last year. We ended the quarter with 228,000 active prime subscribers compared to 235,000 subscribers at the end of the second quarter in 2020.

Although, we average the lower subscriber count during the second quarter of 2021, compared to last year, prime revenue was higher due to the reactivation of certain large corporate clients such as Walmart, which has temporarily suspended its prime program during the height of the pandemic last year. We had approximately 3.3 million gym visits from Prime in the second quarter of 2021 compared to 800,000 in the prior year period. For WholeHealth Living during Q2, we recognized $5.7 million in revenue, a slight increase to last year. Finally, other revenue decreased by approximately $9 million over the second quarter of 2020, due to a decrease in wireless Wisely Well revenue, as well as revenue from a well-being program with a large employer. Consistent with our remarks in last year's Q2 call, the revenue for this well-being program did not recur this year.

Turning to our Q2 2021 balance sheet and cash flow. We ended the second quarter with cash on hand of $24.2 million, total liquidity of 124 million and a leverage ratio of 2.18 times. As previously announced, we successfully completed refinancing of our term loan and revolving credit facilities for $400 million and $100 million, respectively. The new credit agreement strengthens our financial position and provides increased flexibility by lowering our annual amortization and extending the maturity date. It is also expected to result in cash interest savings of over $3 million during the first 12 months. As of June 30th 2021, net debt totaled $361.4 million. Our first quarterly amortization payment of $1 million is due on September 30th 2021.

Now turning to guidance, we affirmed our 2021 revenue and adjusted EBITDA guidance in today's press release, given our continued strong recovery in both, SilverSneakers and Prime. As we've mentioned throughout the pandemic, we anticipate our second half, total gross margin percentage will decline relative to the first half of 2021, as the number of in-person SilverSneakers and Prime visits increase. We also anticipate a slightly elevated level of operating expenses compared to the first half of 2021, driven by investments in omnichannel marketing, SilverSneakers Connect, and data capabilities related to the engagement platform, all of which are investments intended to drive growth in 2022. Together, these items are expected to reduce our adjusted EBITDA on the back half of 2021, which is why we are maintaining adjusted EBITDA guidance at the top end of $155 million. Finally, our 2021 guidance does not reflect, any impact for ownership in Sharecare.

Today, we own approximately $11.1 million shares of Sharecare's common stock. From an accounting standpoint, beginning in July of 2021, we record these shares at their fair value in accordance with U.S. GAAP and recognize any changes in fair value and net income as unrealized gains or losses. There can be no assurance as to what value our shares will have in the future or when we will sell our shares.

I'll now turn the call back over to the Operator to open the call for Q&A. Swain.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have our first question coming from the line of Steve Halper with Cantor. Your line is open.

Steve Halper -- Cantor -- Analyst

Hi. Just a couple of financial follow-ups, first on the united impact for 2022, you said it was $20 million. So if you annualize that, you say it's a $40 million contribution this year. But is that, how should we think about that relative to COVID? Was that impacted by COVID, or is the $20 million assuming that it was a more normal year in 2022?

Adam Holland -- Chief Financial Officer

Hey, Steven, good question, this is Adam. The United business was a PMPM business that was not affected by COVID. So the $40 million in revenue that we have this year, which we've disclosed before, is essentially getting cut in half for next year. So we're going from 440 million to $20 million. And that's what we expect in 2022 from a revenue perspective.

Steve Halper -- Cantor -- Analyst

And then, how would you characterize the margin on that business?

Adam Holland -- Chief Financial Officer

We can't get into specific margin, the dynamics with specific customers. But I'd say, it's generally in line with our other major clients.

Steve Halper -- Cantor -- Analyst

And then last question, over the last two quarters, your accounts receivable have crept up a little bit, sort of pinching the operating cash flow? Could you just sort of explain that?

Adam Holland -- Chief Financial Officer

Yes. Part of that's the dynamic theme, of when we get reimbursed from our payers versus when we pay our gyms. And as last year as all the gyms shut down, we basically saw AR go to-go to-go to zero, because we were collecting and had a big cash and few confusion and then have to reimburse the gyms, because the gyms were shut down. So this year, the gyms are spinning back up, what we're seeing is a little working capital headwind where we're paying the gyms faster than we're giving reimbursed from the health plans. Now, it's not a-it's not a big difference in the terms of number of days, but when you've got a dynamic where you're ramping up gym visits as rapidly as we are, you're seeing that headwind.

Now, what we've seen the back half of the year, Steve, is that headwind is diminishing. And so that's not going to be as big as the working capital drags that you saw in the first quarter. It was a little-it was a lot less than Q2.

Steve Halper -- Cantor -- Analyst

Okay. Thank you.

Operator

We have our next question coming from the line of Ryan Daniels with William Blair. Your line is open.

Nick Spiekhout -- William Blair -- Analyst

Hey, guys, Nick Spiekhout in for Ryan. Thanks for taking my question. I guess to start, do you guys know kind of what portion of those UNH lives does eligible lives that are coming off look active, or do you have any sort of kind of, way to splice that out? And how many eligible lives are kind of in that that 20 million that's coming off next year?

Richard Ashworth -- President & Chief Executive Officer

Yes, thanks, Nick. It's Richard. You know, pretty, pretty consistent utilization across the lives that will be remaining versus staying. So I would say, they're kind of in the mid-kind of fairway position, if you think of it that way. And in terms of the live, it's really half the live, kind of half the revenue as the way to think about it. So it's coming down. And even though they were a PMPM client, a lot of the clients, we're adding new for this year, also PMPM clients. So we're seeing, our hybrid is going to grow because our big clients continue to grow and getting more agents and are getting the more market, the hybrid model is the one that aligns our incentives with payers. But I think all in with the United stepping back a little bit it's pretty much in the middle of utilization, half the lives and half the revenue.

Nick Spiekhout -- William Blair -- Analyst

Got it, thanks. And then, looking back over kind of the last call it two years then fairly, but I'm wondering, when you guys see yourselves more heading into kind of a steady state now with the virtual visit aspect and in person, where do you kind of see your target gross margins leveling out in more of a steady state over the next call three years?

Richard Ashworth -- President & Chief Executive Officer

I'll start and then let Adam weigh in here. The way I think about that is on the core fitness business, I think, that margin Adam weigh in, but I think that margin will get back kind of pre-COVID consistent levels and we see -- the puts and takes of the supplier network, our gyms and virtual I know which is helpful in margin vis-a-vis giving our payers-what they need for good value. But as we think about the non-fitness revenue, I see there's areas to offset the margin compression with consistent or maybe slightly higher margin. Sum all that together will depend on how well that non-fitness revenue takes off and to what degree. But Adam, anything you want to add [Phonetic]?

Adam Holland -- Chief Financial Officer

No. I think no more to add. We just feel confident. We can certainly get back to that circa 30% gross margin level. And then exactly what Richard said, upside opportunity with the new digital initiatives and on top of that.

Nick Spiekhout -- William Blair -- Analyst

Great. Thanks, guys. I appreciate the color.

Richard Ashworth -- President & Chief Executive Officer

Thanks, Nick.

Operator

[Operator Instructions] Our next question coming from the line of Matthew Shea with Piper Sandler. Your line is open.

Matthew Shea -- Piper Sandler -- Analyst

Hey, thanks for taking the question. One for you Richard, as you've talked about this transition from a fitness company to engagement company one common theme has been this new employee test and learn strategies you roll out, new adjacencies. Wondering what you've been able to pass in, you know, as a result learned so far, and how that's helped inform where you're going next?

Richard Ashworth -- President & Chief Executive Officer

Yes, great question, Matt. Thanks. I think there's a couple of things from my point of view. One is that we needed to get the foundational elements in place. So now that we've been able to get [indecipherable] and the omnichannel capabilities in in place, this new kind of test and learn discipline is one that we're bringing into the market, and that philosophy is one of getting member specific feedback and putting the investment dollars to make sure yes, we're getting the appropriate returns, of course, but we're actually creating those right experiences. We've got some really good partnerships. You know, Les Mills [Phonetic] is a great example of that. We've got a few others. We haven't maybe publicly announced, but they're really helping us in our capabilities to deliver new experiences for our seniors. The big one is helping us drive SilverSneakers Connect in the marketplace. So, what I've seen with the two large clients buying on to connect, and our early testing trials there is, got a lot of optimism for our ability to engage seniors outside of fitness.

The other big thing is, is trying to get, you know, more people activated. And what we're finding with these new tools is that they're activating a different subset of the eligible SilverSneakers population. So I think that's another positive. With 40% of people engaging with us digitally being first time users for SilverSneakers, compared to about 25% for the ones that are going to the gym. That tells us this is a great activation channel. And then, all of that to say that once the engagement platform is fully up and running, meaning we've got some more first party data, a little time under our belt, we know exactly how and when to talk to them, starting to activate the other services over time is going to be a big future driver of value creation for all of our stakeholders.

Matthew Shea -- Piper Sandler -- Analyst

Got it? Yes. And then maybe just following up on that, during the quarter, you guys launched the BI weekly senior healthy living survey, kind of intended to be an always on barometer, and then share that data with stakeholders, has there been enough time to produce any actionable insights? And if so, how have you used them? And if not, how do you kind of envision to use them go forward?

Richard Ashworth -- President & Chief Executive Officer

Yes, short answer is yes. It's Richard again. Longer answer is, they were working directly with the government too as we're getting into different phases of the COVID kind of pandemic, and really just putting some questions in our surveys that are specific questions that they may want answers to. And we're also seeing a lot of our partnerships with other associations, whether that be those that are focused on people that are ageing in rural communities, and we can target urban versus suburban, the surveying capability is quite mature and modern. So we're able to get all kinds of slices of data plus the amount of respondents that we get are statistically significant. So we're able to have findings that are actionable and usable. But actually, where we're finding most of the values in our own business right now, so, Tommy's team really uses this data to help us, you know, either lens, the way we're marketing and how we're doing it, or even in our product and innovation team around what's the next experience that we want to bring to members. We ask them what they're missing, what they want or what they're experiencing, and we're using that data in real time to help fuel some of our new our new product launches.

You know, the pilot we did with nutrition, I think we announced that last quarter the one before that's continuing to progress really well. We're using a lot of the data and insights to help us feel that that pilot so we can have, the right actions to take when the time is right to scale.

Matthew Shea -- Piper Sandler -- Analyst

Got it. Appreciate it. Congrats on the quarter guys.

Richard Ashworth -- President & Chief Executive Officer

Thanks.

Operator

Thank you. There are no further questions at this time. I will now turn the call back over to Richard Ashworth for any closing remarks.

Richard Ashworth -- President & Chief Executive Officer

I want to thank everybody who dialed in to listen to the to the earnings. I hope everyone has a fantastic week. Thanks for your time.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Matt Milanovich -- Vice President of Investor Relations

Richard Ashworth -- President & Chief Executive Officer

Adam Holland -- Chief Financial Officer

Steve Halper -- Cantor -- Analyst

Nick Spiekhout -- William Blair -- Analyst

Matthew Shea -- Piper Sandler -- Analyst

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