Q3 2020 Evolent Health Inc Earnings Call
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As a reminder, this conference call is being recorded.
Your host for the call today is Mr., Scott Blackley, Chief Executive Officer of Evolent Health.
This call will be archived and available later this evening and for the next week via the webcast on the company's web site in the section entitled Investor Relations.
Here's some important introductory information. This call contains forward looking statements under the U.S. Federal Securities laws.
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For those of you that we are unable to join the webcast replay and presentation are available on the Investor relations portion of our website.
Open the call. This evening with a summary of our recent results, including an update on the key elements of our strategic plan communicated at the Investor Day, which are one strong organic growth in the core.
We raised full year guidance range for 2020.
With respect to our first focus theme of strong organic growth, we continue to be on or ahead of our plan for growth objectives. As we utilize our core solutions to serve as a bridge between healthcare providers and payers as we mentioned that our Investor day, We signed two new partners in the third quarter.
Additionally, we are excited to announce an agreement, we recently signed with Florida Blue Medicare for our specialty management platform New century health.
This brings our total new partners for the year to eight at the high end of our previously communicated range of six to eight new partners expected for 2020.
And the results, thus far exceeding our expectations.
Further or seen expanding gross margins and fixed cost leverage and continue to have confidence in reaching our medium term goal of mid teen EBITDA margins and.
And with respect to our third theme I want to provide a short update on our balance sheet and our strategic portfolio review.
Adjusted EBITDA margin expansion versus our 2020 results. This margin expansion is due both to our targeted overhead cost initiative as well as expanding gross margins.
So the business is scaling and we look forward to continue building towards a strong 2021, and we continue to have confidence in reaching mid teens adjusted EBITDA margins in the medium term.
It again or target certain tack, regardless of the pace of value base care adoption, and regardless of who controls Washington for example, well it's not part of the pipeline today given the Nascency. The program. The Trump administrations direct contracting model could be an accelerator for a total cost of care solution <unk> care partners and there's certainly.
It would be policy accelerators, a bite and when's the white house, so policies for us, mostly upside and limited downside.
A third we're starting to see increased pressure on managed care plans as the impacts from Covid and unemployment continue and even accelerate into the future. This pressures, creating sales opportunities for all three of our solutions as those managed care plans look for ways to contain costs and improve quality by collaborating with providers.
Run rate revenue by the second half of the year just on the Medicare population and just with the oncology solution.
Inks of our performance based arrangements and our overall cost reduction effort.
An important validation of the strength of our model and lays the foundation for future expansion, not just an oncology, but in cardiology as well.
Finally, we continue to focus on operational disciplined and again drove positive cashflow for the quarter.
We continue to expect cashflow to be positive for the full year of 2020.
Barely driven by new partner editions, and cross sell expansions within our existing partner base.
As of September 30th we had approximately 3.5 million lives on our full service as platform, which excludes members covered by our life service offering.
Our average P. M. P. M P for the quarter was $23.73 compared to $16.20 in the third quarter of 2019 and $21.92 in the second quarter of 2020.
Adjusted EBITDA from our services segment for the quarter was 13.8 million compared to $3.1 million and the prior year.
As we continue to progress on our strategic review of our health plan asked us including to help new Mexico. This quarter, we had premium revenue of 29.5 million down 14.3 million from the same quarter last year.
Decreased principally driven by the termination of a reinsurance agreement we had during 2019.
Claims expenses as a percentage of premium revenue with 72.1%.
Adjusted EBITDA from true health for the quarter was a loss of 1.1 million.
As expected upon the clothes or the sale of certain of passports assets and transfer of the plans membership. Some melena on September 1st we consolidated with the remaining assets a passport into evidence reported financials.
The plan continues to perform well with 930 year to date operating income margin of 2%, excluding certain wind down accruals.
Statutory capital in the plan on September 30th with an excess of 140 million.
We have begun the process to return capital out of the regulated entity to enable debt pay down according to our plans and we continue to expect a portion of the cash to transfer this fall with the remainder coming in the spring.
Turning to the balance sheet, we finished the third quarter with $387 million in cash and cash equivalents and investments, which included 228 million in cash held unregulated accounts related to the wind down a password.
It's in our organic growth strategy, and our mid teens growth target.
Turning Florida Blue Medicare and opening up the Blue Cross segment is an important step and the outlook for new century health is strong.
Our other two solutions are also making important contributions highlighted by our expansion at Somos as well as the two new physician group partners announced in the quarter.
Second the business is scaling.
The cost initiative has been a success and we see a clear path to mid teens adjusted EBITDA overtime, starting with margin expansion in 2021.
And finally, we are efficiently deploying capital as evidenced by the focus effort to monetize our health plan assets and use that capital to de lever as communicated at IR day.
So in summary, we are executing and you can see that the company is at an inflection point.
Im proud of our talented and committed team and I'm excited about the bright future. We have ahead of us, particularly with the strong momentum that we are seeing heading into 2021.
Thanks, everyone for participating in tonight's call and with that we'll end our formal remarks, and we're happy to take questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our though there.
Our first question comes from Ryan Daniels with William Blair. Please go ahead.
Hi, guys. Thanks for taking the questions and all the details thus far I want to hit a little bit more on the blues win that you announced Tonight, obviously, there's a significant market potential there more broadly and I'm curious how.
How you think about targeting through that opportunity kind of across the country. If it's something where in initial blues relationship can be leveraged or if you need some time to kind of ramp this up and get case studies with the blues that they can share with other plans and then any particular salesforce investments you might make to target that big opportunity.
Thanks, Ryan, it's a happy to take that one.
You know look the the Blue segment is one where I think having a proof case with with the Blue is helpful. And so I think just the fact that we have had this relationship in place with with Florida Blue Medicare will be certainly helpful. I'd say second though that you know for some time now we've been developing those really.
Jason ships and.
Probably the most important thing is frankly being able to show and prove that the outcomes are robust from other other partners around the country and we have a lot of that data now and feel very good about being able to share that data and so I think the combination of those two things gives US you know pretty much everything we need with our existing sales force and and approach certainly theres some things.
And there I think abide administration.
There could be some accelerators, even beyond what we have in our outlook, but that would be kind of upside to how we're thinking about things.
Okay, Great I appreciate all that thanks, guys.
Yes.
Our next question comes from Robert Jones with Goldman Sachs. Please go ahead.
Great. Thanks for the questions I guess, maybe just to go back to the Florida Blue. When you guys think you mentioned 125000 lives and you also said the plan I think in totality is like 5 million lives. So just curious about you know the opportunity as far as you know go forward and thinking about to ramp into a bigger portion of the.
Population and then just related the you know based on the math you shared set it seems like the PMPM there would be quite a bit higher than average if if I'm thinking about it correctly, just just curious if a if that's right and b what might be driving.
The the better PMPM dynamics around that around that customer.
Yeah, why don't I.
I'll take the first part of that and I'll pass it to John for the second part.
Hi, So just you know in terms of affordable who it is its 125000 lives its Medicare its oncology and that will ramp across the first part of the year and as I mentioned in the in the prepared remarks, there will be you know $75 million annualized run rate.
Or more by the by the second half of the year.
Obviously, that's just the Medicare lives its just oncology, so I think that the opportunities to go to additional lives, whether it's commercial or other populations is there and certainly the opportunity for cardiology across all I think you know speaking for the new century held team we are really impressed with.
The affordable Medicare team and and Florida Blue generally, it's a fabulous plan very innovative and our first job most important job is to deliver and execute them. So we're very focused there I will pass it to John for your other question.
Hey, Bob that you are right on the math the PMPM is a little higher and that's largely driven by the aggregate scope.
It is in this initial contract with Florida Blue Medicare.
I'm, just a little bit more expansive than some of the other new century arrangement.
Okay. No that's helpful and I guess, just John maybe one more quick one just on the guidance. It seems like you know there there's.
There's obviously the momentum in the business and if I just look at the implied Fourq you guide on both revenue and EBITDA. It seems like it's calling for a sequential downtick from what you posted this quarter just curious if there's any timing dynamics you know anything around churn just what might help.
Bridge that gap from from what you posted in Threeq, you to what you're pointing to for Fourq you yeah.
Yeah. Good question, it's all about timing of some onetime revenues I think I might have mentioned this in the August call. We had some visibility into onetime revenue that we expected to hit in either Threeq or Fourq you did hit in Threeq. You asked why you see the slightly higher revenue here at nothing else really going on habits.
In third and fourth quarters.
Okay, great. Thanks, so much yep. Thanks.
Our next question comes from Matthew Gilmore with Baird. Please go ahead.
Hey, Thanks, just a couple of clarifications I think on not on some of the 2021 commentary up I believe you said that you continue to expect revenue in excess of 900 million, but yes.
The Florida Blue and maybe some of the other pipeline activity. It enhances your visibility around that is that how we should be thinking about sort.
Sort of the 2021 view at this point.
You got it Matt.
This is John obviously is still too early to guide, but as Weve gone across the year I think the continued its strong performance on the growth front has given us incremental confidence and starting to exceed that $900 million number.
The.
Lives on platform across the year have performed pretty close to our expectations that we set out at the beginning of the year, which is the hitting sort of a low point in Q2, and then ramping across the back half of the year here biggest difference between Q2 and Q3 here.
It was actually driven by new go lives in particular neighborhood health plan and going live in New England.
There was a modest amounts couple points percentage points of increase driven by the Medicaid we verification item that I mentioned, but the bulk of the change was driven by new go lives.
Got it and then just a quick follow up on that Centene lives on platform did those come out.
The lights on platform number.
Versus Q2 or Q1, just in light of the fact that they're now on the yen MTGE light.
Correct.
Yes.
You are right. There we do not include the lives from the Centene relationship and our.
Reported lives number because of it.
They are in this light model.
So no change there.
Got it thanks that's helpful.
You got it.
Our next question comes from Charles Rhyee with Cowen. Please go ahead.
Yes, thanks for taking the questions. So.
So just wanted to.
I ask you I think as Mike talked a little bit about it.
Analyst day, which is a.
Direct contracting.
And just curious and I think it's supposed to start sometime next year. It was April and curious as to sort of the appetite within your current customer base in entering that program.
And do you expect that to be something that your clients are going to be a participating in next year.
Sure Charles Happy happy to take that one so the direct contracting program is not something that currently is in the outlook. We have it's a it's a program. We think it's interesting. It's early for the program still on the C.M.I. phase within CMS.
Our experience here over the last eight years is.
Is that the the programs mature over the first year twos I do think it potentially is quite interesting for us over there over the next few years.
Our focus right now is delivering on what we have with the current Evolent care partners network, but over time I think it could be quite interesting, particularly as we see it mature a little bit.
I think it is Charles it's an example, there are other examples like it of what I would call policy accelerators that none of which are you know in any of his outlook that we've shared in the medium term metrics and there are others like it and I think they are interesting and indicates kind of where CMS is going so we'll keep a close eye on that one another programs.
So is it something that you'd you'd want to see how the the first year or so kind of works out in the experience you watch from a distance before maybe developing a program around before your clients is that the right way to think of it yes. That's that's the right way to think about it and just a little more detail on it is the programs always have a set of rules that.
That are attached to them and those rules tend to come out in draft form and they get comments and then they harden over the first year or two and they become more evergreen and that's sort of what we're watching right now, but I do think it could be quite interesting is as those get firmed up.
Great and just a follow up I don't know if you guys mentioned it but did you guys get the lives on the true health plan to help.
For the quarter.
There's about 24000 Charles.
Okay, great. Thanks, a lot guys.
Okay.
Our next question comes from Sandy Draper with true. Please go ahead.
Thanks, very much maybe first just start on just making sure I've got the dynamics right what the.
Passport sale. So the deal is closed but not so balance sheet everything there is still reflect to the passport so when I'm thinking about the cash to.
Statutory capital will that stay on your balance sheet and I'm, just trying to think of the dynamics of how that actually works with the gone recouping. It did could you keep all of that I'm just trying to understand that and then the second part falling is maybe just help me think through the step down in terms of revenue I think you said bill.
For John don't expect a cliff where on January 1st all passport revenue goes away, there's maybe a wind down. So we may have a bigger a bigger impact in the second quarter could you just help me go through those two issues around passport.
Yes happy to Andy So first on the balance sheet look the way to think about it is to focus on the statutory capital number that I mentioned, which is a little over $140 million at 930.
As you think about capital return to Evolent and that sort of the starting point and then we have an opportunity as we've talked about to earn an additional amount from Molina based on membership retention into next year.
The.
Mechanics of that capital return will be subject to regulatory approval and just moving the cash from the regulated entity.
Into the parent entity at which point, we could proceed with our plan to use that cash to pre it to pay down the debt.
That's the balance sheet there.
And I apologize Andy I forgot your second question.
About the revenue just about the damn right right. All passport doesn't go away on January 1st So how do we think about it winding down through the first half of the year yeah. Good so that net change in passport revenue the night at 20% to 21 is probably around $230 million.
Okay.
Ballpark.
And.
Little more than half of that will add to turn off immediately.
On January Onest.
There will be as usual.
A bit of a stub in the first quarter and that's sort of a fraction of a norm.
Normal quarter, and then it will be.
Yes real trail out after that so thats the way to think about it and model it.
Okay, Great. That's helpful. If I could maybe squeeze memorial and for probably perception.
On the Blue Cross Blue Shield.
Ill.
When you guys are going after someone new in talking to the I don't know if you were only talking to the Medicare portion, but is this a situation where their Medicare plan.
Really having issues with oncology costs and so they want to talk to you specific about that and so that's why they are not going to sign up for cardiology, you're not going broader or you know I'm just trying to think of the sales dynamics of.
I think.
As to whether why cardiology why oncology it might just depend on where they are seeing trend in a particular year.
Or where they feel like they have a particular pinpoint but I think what's interesting about new century is the degree to which is 25% of premium. So these are big numbers and anything that we and they can do together to make care better for the patient while reducing costs, that's helping them live their mission right. They are trying to take every dollar they can to court.
<unk> care for vulnerable patients and so.
I think we just find in general.
Any that there is a lot of opportunity with this area and again it might be a particular person has a pain point around oncology one year cardiology. The next key for Avalon, a new century, whatever we do we do an excellent job and we deliver and that's most of the work. We've done has come out of what I call word of.
Mouth or understanding of gosh. This went really well over here, let's do more over there and so that's.
Where the big opportunity comes from and there's not particular nuances of this market that mark it's pretty broad based in the opportunity here.
Okay, that's really helpful, calling thanks, Jeff.
Welcome.
This concludes my question and answer session I would like to turn the conference back up with a set blankly for any closing remarks.
Thanks, everybody for the time Tonight stay safe from we'll look forward to connecting.
The days and weeks ahead.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.