Healthways, Inc. (NASDAQ:HWAY)
Q1 2016 Earnings Conference Call
April 28, 2016 5:00 p.m. ET
Chip Wochomurka - VP of IR
Donato Tramuto - CEO
Alfred Lumsdaine - CFO and Administrative Officer
Nick Hiller - William Blair
Please standby, we're ready to begin.
Good afternoon. This is Chip Wochomurka, Vice President of Investor Relations for Healthways, and I'd like to welcome you today to our First Quarter 2016 Conference Call. Today's call is being recorded and will be available for replay beginning today and through May 5 by dialing 719-457-0820, and the replay pass code is 1982993. The replay may be also accessed for the next 12 months on the company's Web site. 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 according to GAAP in today's news release, which is also posted on our company's Web site.
This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others, regarding Healthways' expected quarterly and annual operating and financial performance for 2016 and beyond. For this purpose, any statements made during the call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.
We hereby caution that these statements may be affected by the important factors among others, set forth in Healthways' filings with the Securities and Exchange Commission and in today's news release. And consequently, our 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 for our opening remarks, I will turn the conference over to our Chief Executive Officer, Mr. Donato Tramuto.
Thank you, Chip, and good afternoon everyone. Thank you for being with us today for Healthways first quarter 2016 conference call. In addition to Chip, I'm here today with Alfred Lumsdaine, our Chief Financial and Administrative Officer.
Alfred will lead off this afternoon with some remarks about our results for the first quarter, our guidance for the full year of 2016, and our progress in our reorganization and cost rationalization plans. Following those remarks, I also have some comments on how I see our progress since we last spoke, as well as our achievements since assuming the CEO role six months ago. And following those comments, we will open the call for your questions. Alfred?
Thank you, Donato, and good afternoon everyone. First, I'd like to take just a minute and explain where we stand with regard to financial reporting and disclosure in the context of our new divisional structure. We've made significant progress in modifying our financial systems and the internal reporting infrastructure that's required to support our new divisional organization.
We're currently in the process of finalizing these changes and preparing to put them into production. Although our perspective on precisely what we will be reporting at a divisional level is still in development, this work will be complete by the time we finalize our strategic review by the end of the second quarter. Accordingly, you can expect us to begin recording certain divisional financial information when we report our second quarter results.
Turning next to our first quarter 2016 results, I'd like to start by recapping some of the key financial metrics. First quarter revenues were 189 million compared to 190 million for the first quarter of 2015. A significant reason for this slight reduction is the approximately 8 million less revenue resulting from the previously discussed sale of our Navvis subsidiary, and our amended relationship with HMSA, both of which occurred in the fourth quarter of last year. This reduction was substantially offset by growth in revenue from existing contracts as well as new business inside our network solutions division.
Our adjusted net loss per share for the first quarter was $0.08, while we incurred a GAAP net loss of $0.39 per share. There are five adjustments that reconcile the GAAP net loss to our adjusted net loss for the quarter. First $0.03 per share for non-cash interest expense, second, $0.10 per share for expenses associated with restructuring and cost rationalization plan. Third, $0.14 per share for establishing a deferred tax asset valuation allowance, fourth, $0.04 per share for non-cash compensation expense. And then finally, $0.01 per share for CEO transition-related expenses.
Turning next to other key financial highlights for the first quarter, adjusted EBITDA was 11.8 million, which was just above our internal expectations for the quarter. Cash flow from operations was approximately 7 million, while our capital expenditures were approximately 6 million. We repaid just over 2 million of debt, and our ratio of total debt to EBITDA as calculated under our credit agreement remained just under three times.
I'd like to briefly discuss the 5 million deferred tax asset valuation allowance that we recognized in the first quarter of 2016. The rationale for this allowance is quite similar to the deferred tax valuation allowance that we recognized in Q4 of 2015, primarily as a consequence of the tax benefit that resulted from the net loss in the first quarter we had an increase in our deferred tax assets. And consistent with Q4 of 2015, we determined that we couldn't simply rely on the reversal of taxable temporary differences in order to support the full amount of our deferred tax assets. As a result, we reported the $5 million valuation allowance within the first quarter.
This is a non-cash charge, and has no impact on our debt covenant compliance. We'll continue each quarter to evaluate the amount of the valuation allowance relative to trends within both our operating result, and the composition of our deferred tax balances. At the point at which the company returns to a pattern of GAAP profit, some or all of the allowance would likely be reversed.
Next, I'd like to make a few comments to update you on the progress of the cost rationalization work that began in 2015, and the related restructuring charges. I'm pleased to say that this work is progressing on schedule. Our estimate of the cost necessary to implement the restructuring plan remains at approximately 25 million. These restricting charges are mostly cash costs primarily representing severance, lease termination, and consulting costs. We incurred a total of approximately 6 million in restructuring charges during the first quarter, and have incurred approximately 21 million in total, since the plan began last year. We continue to expect our cost rationalization efforts will be complete by the end of the third quarter of 2016. And that we'll realize the full gross savings in 2017. We now expect the gross savings to be in a range of 40 million to 45 million.
As indicated in our earnings release today, and consistent with our plan, we've begun to reinvest some of these savings to strengthen the business, fund certain growth initiatives, and provide appropriate performance incentives to our colleagues. As you saw in the release today, we've reaffirmed our adjusted EBITDA guidance for 2016 in a range of 85 million to 90 million. And I'll comment briefly about the expected shape of that adjusted EBITDA as we move through the year. The first quarter of the year typically represents the lowest level of adjusted EBITDA for a few specific reasons. First, the timing of recognizing performance-based fees is typically heavily weighted to the second half of the year.
In fact, for 2016, we currently expect approximately two-thirds of our performance-based fee recognition to occur in the second-half of the year. Second, as we proceed through the year, we experience growing revenue from new business, as well as increasing membership and enrollment in a number of our programs. This ramping revenue typically lags certain implementation and enrollment costs that occur early in the year. This year, a third meaningful factor is the net cost savings from the restricting and cost rationalization plan that we expect will grow each quarter.
In addition to affirming our guidance for adjusted EBITDA for 2016, we've also affirmed our outlook for the revenue percentage growth rate in a range of low-to-mid single digits from our adjusted 2015 revenue base of approximately 732 million, which excludes the impact of the previously noted Navvis sale and restructured HMSA contract. For the quarter, our total revenue was split among our divisions as follows, 66% for network solutions, 30% for total population health services, and finally, 4% for emerging businesses.
Finally, our capital investment of approximately 6 million for the quarter was down from approximately 9 million in the first quarter of last year. And we continue to expect to pay down our long-term debt by at least 30 million for the full year of 2016.
So with that, I'd like to turn the call back to Donato for some additional remarks.
Thank you, Alfred. Let me begin this afternoon by saying that I am very, very pleased with the company's progress during the first quarter and during the 63 days since our last conference call. As a reminder, the last was the first full quarter in my role as CEO. And even within that relatively short period, time span there are several important achievements I would like to highlight as both important and key takeaways from our release and discussion today.
The first is that our financial results for the question were consistent with our expectations. Given the far-reaching changes that are occurring at Healthway's, as well as the anticipated top line impact from the HMSA contract renewal and the sale of Navvis, our financial results for the quarter reflect both strong execution by our colleagues, and continued market demand for our services and solutions.
As a result, the second important takeaway is that we are reaffirming financial guidance for the year that includes growth in adjusted revenue and adjusted EBITDA, and additional debt reduction. Third, the adjusted revenue growth we produced for the quarter was drive by strong growth in our network solution business, growth which continues to support our confidence, and the long-term growth potential of this division and the respective markets that the various networks serve.
As I have described in pervious calls, we have three networks within this business. The prime commercial fitness network as well as the physical medicine networks are growing nicely, and have excellent additional growth potential for 2016 and beyond.
As you also know, we have a strong and valuable brand in SilverSneakers, and we're clearly the market leader. On average, 11,000 individuals turn 65 every single day. Industry analysts expect the largest growth component of this market, Medicare Advantage Membership to expand at a five-year annual compound growth rate of 6.4% from 2015 through 2020, moving from the current enrollment of more than 18 million members to as much as 24 members in the next four years.
In addition to the potential growth from adding new members, either through demographics-driven market expansion or increased market share, we believe we have a substantial long-term growth opportunity and increasing the number of visits among our existing members.
Allow me this opportunity to highlight some data points. In order to give you an appreciation of this opportunity in a value-based healthcare system, studies have shown that our SilverSneaker clients experienced a reduction in annual claim costs in their members who are engaged in SilverSneakers between 11% and 37%. We have demonstrated that increased weekly attendance by a member who is actively participating in SilverSneakers also lowers medical claims. Given that the average number of visits across all are eligible, as opposed to actively engaged members was just 6.1 visits for all of 2015, we see a great growth opportunity by working with the health plans and engaging members directly to increase this average.
Our decentralized model is helping to advance our focus on expanding both member and market share in this respective business.
The fourth takeaway, and as Alfred as described, -- is that structural reorganization and cost rationalization plans are on track. It's easy to see the impact of these plans in the charges we are incurring and the net savings we're producing that will become more evident in the second quarter and through the rest of 2016 and beyond as we focus on the full year turnaround of the Population Health Services business.
Our newly appointed President of that business, Sean Slovenski has quickly [indiscernible] in the last eight weeks, and is making. Those critical changes [technical difficulty] stabilizing that business. What is more difficult to see in this regard is the impact we've already achieved, and will continue to enhance by reinvesting in the people at Healthways. This impact began with the creation of our best-in-class leadership team that is empowered to make key decisions, affecting their function, while also being responsible for their results with clearly defined goals that are supported by strong performance-based reward system.
With their leadership, we have already put in place and enterprise incentive program for all of our colleagues. In so doing, we're transforming the mindset at Healthways into a company in which everyone is empowered to make the key decisions to do their jobs efficiently, and with a clear understanding that everyone is accountable for the results of their decisions.
My own experience in leading successful businesses has taught me the valuable lesson around; first, getting the culture and the values right, and secondly, have a solid performance system in place that we want for both execution and results.
The last takeaway is that we're deeply engaged in our strategic assessment. This process is raising the right questions and providing the insights we need to take Healthways forward. And we continue to expect the complete process and communicate the outcomes therein before the end of the second quarter.
As I have discussed before, I'm not going into the specifics of the assessment until it is complete. However, -- and as anticipated, our assessment is focusing on efforts. Number one, a comprehensive portfolio review; number two, a better defined clinical quality model; number three, analyzing the opportunities for organic growth in our core businesses; and number four, planning how to drive operating excellence.
We continue to believe that executing the plans that result from this assessment should improve outcomes and satisfaction for our members, and create deeper and expanded relationships with our customers, and drive revenue growth and increase profitability for Healthways.
The changes that have already taken place at Healthways, and that will continue in the coming months reflect a fundamental and fierce commitment to long-term value creation by our leadership team and the full Board of Directors. As will be evident when we discuss the results of our strategic assessment, we intend to drive value creation through a highly disciplined approach by investing in and expanding our capabilities and services that provide a clear and acceptable return on investment, by allocating capital in existing and new markets where we can sustain the number one or two leadership position. And by exiting businesses in which our services are undifferentiated, and we are not earning an acceptable return or we are unlikely to sustain the first or second market leadership position.
We expect that focused execution of the strategy will enable Healthways to leverage our most compelling opportunities, and create long-term profitable growth and increase shareholder value.
In closing, let me thank you again for your past and continued patience. As we work through the completion of our strategic assessment, and the announcement of our business plans for Healthways, our best days are truly unfolding. And I look forward to discussing the assessment and resulting growth strategies with all of you later in the second quarter. Again, my thanks for being with us today and for your interest in Healthways.
Operator, we are now ready for you to proceed with Q&A.
Thank you. [Operator Instructions] And we'll go first to Ryan Daniels with William Blair.
Hi, good afternoon. This is Nick Hiller in for Ryan Daniels. Thanks for taking my questions. So we talk a lot about cost savings. Could you talk about any areas you're investing in to drive growth? And more specifically, any ways that you can drive higher utilization in SilverSneakers, because it seems like you've got a core base of power users, but maybe a lot that don't take advantage of the offering. And are there any new ways that maybe you could market to them?
Yes, let me take that, I'll have Alfred -- thank you for your question. So first, with respect to where we are investing, sales is a very, very critical area that we are investing in, in the sales organization. We stated in my comments that we are investing in the people, the team that we have brought in and the integration of that team in terms of getting close to the customers and building, if you will, their strategic and business plans is a significant investment that we have put into play over the last number of months.
We also have invested in recognizing that you can't have fierce execution if you don't have a reward system that, in fact, rewards those who are in fact not only meeting performance, but also exceeding [ph] performance. And so those are some of the variables with respect to where we're investing. The other area you mentioned with SilverSneakers is that that's part of the strategic plan that we are undertaking right now in terms of defining what investments we'll have to make to drive greater engagement. And I certainly look forward, by the end of this quarter, to reveal not only that strategic path, but also the strategic path for the population health business. Alfred?
I think you stated it well, Donato. Nick, the only other thing I might add is that one important thing to note in terms of -- and I touched on it in my comments, is we think about the shape of EBITDA for the year. These investments actually are highest in the front-half of the year, and ramped down for things like Donato mentioned, sales, investment. We're investing in sales training, for example. Whereas the cost savings naturally ramp up as we move through the year, and in fact they ramp up quite significantly in the back half of the year compared to the front half.
Okay. Thanks for all the color. And then I was just wondering how is the sales pipeline trending in those three segments that you talk about?
Very, very good. Alfred and I just completed a deep dive of each of the business segments, and I could tell you even though I'm in the role, about the last five months, the pipeline continues to expand in all three segments, the network solutions, a very healthy pipeline in fact. That business has always, as you know, done very, very well, but we're at a midyear point where they are at the best position in terms of new opportunities than they have ever been. In the emerging businesses, the Ornish program, very successful closure in the first quarter of an opportunity. We, in the first week of this quarter, we had another successful closure. And that pipeline continues to expand.
And likewise, in the total population health, the leadership focus since the time that we have taken over, last October was to really get that pipeline more defined. And that has happened. There is a number of really neat opportunities that are being processed and expanded over the next number of months. So we remain optimistic. As Yogi Bear once said, you don't want to make the wrong mistake. And so we have corrected one area that I think is important, and that is getting great and better sales training, as well as repositioning that sales focus.
And then I had just one last question. Alfred, did you have the first quarter '15 revenue breakdown between network population health and your emerging segment [ph]?
I don't have that off the top of my head. And in fact, there is even complexity, because -- for example, the commercial fitness business actually lived, we weren't organized this way that business lived inside of our health plan end market. So there's a little bit of clumsiness to getting that comparability. As you know, we ended the year a little differently than how we have started this year. I think we were more like 59% network solutions, 37% total population health, and 4% [ph] emerging businesses, which has stayed the same.
Of course, some of the factors that are driving the change in that split from where we ended the full year 2015 is the higher growth that we've experienced in the network solutions business. Of course, we have the Navvis sale and the HMSA restructure, which both of which removed revenue from the population health business. And then, as I've already touched on, the timing of performance-based revenues which are essentially all inside of the total population health division is skewed towards the back half of the year. So Q1 would be sort of your low watermark for revenues for the total population health division.
Okay, great. Thank you very much.
Yes, I would be remiss -- and my apologies. I didn't mention Blue Zone. Blue Zone also have a very healthy pipeline compared to where we were a year ago. So all three of those segments we are very, very pleased in terms of what has occurred with new opportunities.
Okay, great, thanks. That's it for me.
[Operator Instructions] And it appears there are no further questions. At this time, I'd like to turn it back to Mr. Tramuto for any additional or closing remark.
Thank you very much. Well, thanks to all of you for attending our call today, and for your question. Please don't hesitate to contact Chip, Alfred, or me if you need additional information. Thank you, and make it a great evening.
This concludes today's call. Thank you for your participation. You may now disconnect.
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