Q1 2022 CareMax Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the chair Max incorporated first quarter 2022 financial results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
<unk>.
It is now my pleasure to turn today's call over to Samantha Swerdlin, Vice President of Investor Relations Ma'am. Please go ahead.
Thank you and good morning, everyone welcome to care Max's first quarter 2022 earnings call I'm, Samantha Swerdlin, Vice President of Investor Relations and I'm joined this morning by Carlos to sell all our Chief Executive Officer, and Kevin <unk>, Our Chief Financial Officer.
During the call we will be discussing certain forward looking information. These forward looking statements are based on assumptions and assessments made by <unk>.
Management in light of their experience and assessment of historical trends current conditions expected future developments and other factors they believe to be appropriate.
Forward looking statements made during the call are made as of today and <unk> undertakes no duty to update or revise such statements whether as a result of new information future events or otherwise important factors that could cause actual results developments and business decisions to differ materially from the forward looking statements are.
Described in the company's filings with the SEC, including the section entitled Risk factors in today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial metrics to the most comparable GAAP measures can be found in this morning's earnings press release with that I'd now like to turn the call.
All over to Carlos.
Thank you Amanda good morning, everyone and thank you for joining our call today, we had a solid start to the year as our quarter results continued to demonstrate the effectiveness and consistency of our model. We delivered a medical expense ratio of 72, 6% and if we exclude the estimated impacts of course.
It would have been 71, 8%.
Additionally, we ended the quarter with over 34000 Medicare advantage members.
As we mentioned during our last call. We recently opened our first two centers in Memphis, Tennessee, and our first center in New York City.
We had the opportunity to spend time at all three centers over the last few weeks and are extremely impressed by all of the hard work. Our team has done to bring our vision and model to these new communities.
We're excited about the strong demand we're seeing in these new markets and the opportunity we have in bringing our transformative whole person health model to improve health outcomes and overall wellbeing to those patients that will benefit the most.
Turning now to our performance for the first quarter in 2022 revenue grew 55% over the prior year to $137 million pro forma for the business combination of <unk> and IFC.
Notably we saw over three quarters of our members during the quarter and continued to see reimbursement rates returned to pre COVID-19 levels.
Our first quarter GAAP net loss was $16 $8 million, our first quarter. Adjusted EBITDA was approximately $6 million, which included roughly $1 million in COVID-19 related cost despite impacts from COVID-19 in the quarter. We believe we remain on track to deliver 2022 adjusted.
EBITDA in the range of $30 million to $40 million, excluding de Novo losses.
As announced this morning, we have entered into a new credit agreement to refinance our current debt facility to support our accretive de Novo strategy.
We knew our pivot to a de novo growth strategy from M&A will fundamentally alter the course of our EBITDA and ability to support our existing bank debt.
Today, we remain as confident as ever in the long term returns of the de Novo strategy and have a financing solution that would both give us significant flexibility from a covenant standpoint to invest in de Novo and also the <unk>.
Also provide us with additional liquidity to fund those initial operating losses as well as pursue opportunistic tuck ins that augment our de Novo unit economics.
Later in the presentation, Kevin will provide additional details on the terms of this facility.
Our total membership at quarter end was over 84000 in Medicare advantage membership was over 34000, typically our membership growth slower in Q1, when compared to the rest of the year in part due to a significant share of duals, who were able to enroll throughout the year.
We continue to expect that our focus on de Novo openings in combination with our affiliated physician practices and our own grassroots marketing efforts will continue will contribute to strong membership growth throughout the year.
Similar to others in our industry early in the first quarter, we experienced higher COVID-19 hospitalizations related to omicron variant. However lengths of stay were lower than under prior variance, which paralleled the decrease in virulence of army crime.
Our medical staff continues to be diligent about the outreach and educating our members, which has led to early diagnosis and more effective treatment plans for Covid in turn this has helped to mitigate some of the high cost associated with Covid treatment.
For the first quarter, we recorded a solid 72, 6% medical expense ratio. This increased 110 basis points from the fourth quarter of 2021, primarily due to the aforementioned impacts from army crime seasonality was also a factor.
<unk> tend to be higher than Q1 due to a number of factors, including an increase in utilization driven from members accessing new health plan benefits as well as the reset of both stop loss insurance and the reset of pharmacy limits at the beginning of the calendar year.
Our model also continues to perform well on the provider side.
We had no physician turnover in Q1 and have had strong demand in recruiting providers in our in our new markets and what would otherwise be a difficult labor markets. We believe this is a testament to our strong culture and mission here at Coeur Max.
With that I will turn it over to Kevin to provide greater detail on our first quarter results.
Thanks, Carlos and good morning.
We're off to a good start to the year and continue to be cautiously optimistic that COVID-19 headwinds will be less of an impact this year than last.
As a reminder, a reconciliation of our GAAP net income to non-GAAP metrics like adjusted EBITDA can be found in our press release and earnings presentation.
All references and comparisons to 2021 metrics I make are pro forma for the business combination of Carmax and IMC.
As if it had occurred at the start of 2021.
I'll first give an update on the quarter and then discuss the new credit agreement.
First quarter revenue was $137 million, a meaningful step up from fourth quarter revenue of $118 million.
Let me outline some key drivers.
First as we disclosed in March we estimate a COVID-19 risk investment headwinds impacted 2021 revenues by $11 5 million.
This was driven by COVID-19 affecting our ability to document the acuity of our members in 2020, which in turn depressed our Medicare risk premium <unk> in 2021.
Despite COVID-19 waves last year, our providers were able to see over 95% of our members in 2021 and document their condition.
Conditions, allowing us to fully recover those risk adjustment had wins for 2022.
Additionally, as of Q1 alone we have already seen more than three fourths of our members.
Putting us on track to achieve historical levels of visitation by year end.
Second we gained several thousand members towards the end of 2021 from a couple of tuck in acquisitions closed in December and the addition of new members and new markets.
These additions marks our entry into the Tampa and space coast markets and continuing to build upon our scaled platform here in Florida.
Important to remember these Medicare patients range from non risk to full risk with different levels of revenue P. M. P M.
However, we continue to believe that we have the ability to convert Medicare patients to full risk overtime and unlock significant embedded in medical margin.
And third we continue to grow organically through a combination of grassroots cells and assignments from our collaborations with health plans and providers.
Medical expense ratio was 72, 6% compared to 71, 5% in the fourth quarter.
Lets COVID-19 driving about two thirds of the difference and the remainder due to the seasonality from Q4 to Q1.
We think our underlying business continues to perform well and that the 70% MBR range is still an appropriate level of normalized performance for us.
We estimate COVID-19 impacted our external provider cost in Q1 by about $1 million as Omicron peaked and subsided quickly in January.
And despite record hospitalizations in Florida, and the Omicron waves.
We are pleased that the overall volume of Covid admissions among our members still came in below the prior wave.
As you can see in our earnings presentation.
Hospitalizations per thousand in April were immaterial compared to prior quarters, we can never count out the possibility of another wave but.
But we believe we have adapted our care processes effectively to keep our members safe and healthy.
Q1 platform contribution was $17 3 million and then our estimate would have been over 18 million absent COVID-19.
A meaningful recovery back to historical levels of profitability.
Note that this includes centers at all stages of maturity from her most established centers to once more recently opened.
We continue to see capacity in our current Florida centers to nearly double membership, which could drive platform contribution margins to 20% or higher over time.
In addition, our Q1 platform contribution includes the first phase of frontline compensation adjustments, we mentioned last quarter.
We have central it out the remaining increases in Q2 and expect those changes to pay dividends over time in the form of lower turnover better continuity of care and ultimately better patient experience.
On sales and marketing and corporate general and administrative we've been disciplined in keeping those costs on an adjusted basis relatively flat quarter on quarter.
While we still intend to invest to bolster our platform capabilities. We view these shared services and corporate cost as real sources of operating leverage that will help our core business growing profitability as we expand in new markets.
As announced on our Q4 call. We've opened our first clinics outside of Florida, two in Memphis, Tennessee, and one in Brooklyn, New York.
We have care teams in place seeing patients and our building grassroots oriented sales force leveraging relationships with local community organizations to attract seniors.
And of course, we are leveraging the related companies real estate footprint in underserved areas to help us target seniors, particularly dual eligible whose lives can benefit most from carmax as whole person health model.
We have more centers on the way in Q2, including center supported by our health plan relationships and remain on track to opening a total of 15 centers this year.
Following these results we have reiterated our prior 2022 guidance for 38000 to 40000 Medicare advantage members by year end $540 million to $560 million in revenue.
$30 million to $40 million and adjusted EBITDA, excluding de Novo losses.
And 15 de Novo center openings.
As noted last quarter, we expect revenue to be fairly consistent quarter to quarter. This year.
Organic growth in membership is offset by the phasing in of Medicare sequestration in Q2, and the back half of the year.
Additionally, while we expect our operating expenses will continue to grow we expect to experience declining N E. R. As elective utilization moderates from Q1.
Beneficiaries hit various coverage limits and more patients had reinsurance deductible over the course of the year.
In addition to core profitability, we expect de Novo EBITDA losses to total approximately 10 million this year, mostly weighted towards the back half.
So far of the $1 million of de Novo losses reported in Q1 about half are related to losses in core Florida centers opened in the last 18 months and half are related to the initial operating losses in new markets.
As Carlos mentioned today, we announced we entered into a credit agreement for a new five year facility, consisting of $190 million initial term loan and $110 million delayed draw facility for a total of $300 million.
After repayment of our existing credit agreement and associated expenses, our net proceeds from the new initial term loan are expected to be approximately $57 million.
Pro forma for the raise our cash on hand at the end of Q1 would have been approximately $90 million.
The effective interest rate on the new facility based on a spread of sofa is approximately 10% upon close of which 4% can be paid in kind.
Importantly for purposes of calculating EBITDA leverage ratios the facility allows us the ability to add back the novo operating losses for up to 36 months after opening of the center as well as a significant amount of pre opening de novo cost.
Additionally, the new facility has built in flexibility to add an uncommitted revolver and an incremental facility to the base loan if our leverage permits.
Between these sources of liquidity and de Novo loss add backs, we feel secure in our capital position and ability to fund de novo growth in the years to come.
With that I'll turn it back to Carlos for closing remarks.
Thanks, Kevin in closing I want to recognize the continued contribution of our team members their hard work and commitment every day is improving the overall quality of life of our patients for this reason I have deep conviction that we have what it takes to expand our model to those communities who need it most.
Operator, we'll now open it up for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Andrew Mok with UBS. Your line is open.
Hi, good morning.
Adjusting for some of the timing differences on working capital it looks like cash from operations may have been closer to a deficit of a few million.
Given expectations for increasing EBIT development year as positive cash from operations.
A reasonable target for 2022.
Hey, Andrew it's Kevin.
Yeah, I I would respond to that by saying that.
Our core <unk>.
The operations, we believe we'll be able to produce positive cash flow I think were overall operations will probably come in at a negative cash flow is due to those funding at the de Novo losses in the last half of the year.
Got it okay.
Can you comment on some of the inflationary cost pressures, you're seeing as it relates to de Novo centers, what kind of impact do you suspect that you might have on planned openings this year.
Yeah.
Yes.
We're still planning on opening the 15 de novo's as expected.
We had some margin for error, we add additional centers that we were that we were building out obviously with the supply chain, we've had to get creative and ordering materials ahead of time to make sure that.
We have everything in place to complete our build outs, but we're confident in our ability to complete these.
These build outs within within 2022 to hit the target number of 15 medical centers.
With respect to.
Some of the inflationary pressures on cost of some of those goods I think that was already baked into our to our model.
Got it okay. That's helpful.
Although it sounds like you attributed some of the slower EMEA growth a higher mix of tools, which will see which can enroll throughout the year can you give us a sense of the MA membership growth on the non dual mix sequentially from <unk> to <unk>.
Yes, most of it so about 70% of our growth comes from dual members. So about 20% to 30% comes from comes from non duals.
And then generally with duals you can enroll those members all year long. So generally after in an open enrollment period you have some movement on some of those doors just coming back after after a large push so this has been typical of our business over the past 11 years.
Where Q1 is generally a slower growth quarter.
Quarter for us, it's protecting our business and stabilizing what we've grown in that open enrollment period.
And then really ramping up growth for that second third and fourth quarter.
Got it that's helpful last one for me.
The success in retaining existing positions in recruiting new physicians in expansion markets can you help us understand whats what youre doing there to drive the positive results there.
Yeah look I think that's a testament to our culture here at Coeur Max.
Using that PCP, and really allowing him to be the quarterback of.
The ecosystem.
How we provide care so I think from a perspective of employee satisfaction physician satisfaction I think we're best in class I think second to that is also the way we've structured our comp model.
Really benefit the physician.
Compared to where independent physicians are able to make or even those of hospital systems because.
So much of the heavy lifting falls on the physician in terms of quarterbacking that patients care program.
So I think because of those two factors we've been very successful in keeping those those physicians happy and have very very little turnover.
Got it thanks for all the color.
Your next question comes from the line of Josh Raskin with Nephron Research. Your line is open.
Hi, Thanks, I just wanted to stay on the new markets and I'm curious how the progress has been in those new markets.
Specifically around the member recruiting and it sounds like a little bit of a physician recruiting I'd be interested in new markets. How that works. If you don't have a local presence.
And maybe help us with that membership ramp and then lastly, any update on New York City and anthem on the situation there.
Yes. So we didn't we just started in both markets. We did the soft opening earlier in the year. We just finished the ribbon cutting a couple of weeks ago in our center in Brooklyn.
Two weeks before that in Memphis, Tennessee, Yes, I could say, we're building a very solid pipeline for.
For growth in those markets and are fairly confident in our ability to drive membership growth due.
Due to our strategic.
Collaborations in both of those and both of those markets.
Yes.
Typically we are working with.
Anthem on another center that should be coming soon.
In the New York area. Additionally, we we work very closely with related on all of the sites that we opened up and really allowing us to embed ourselves with all of the different.
Community groups in New York, and we've got several other centers.
Coming soon in collaboration with with related as well.
Perfect. Thanks, and then Carlos as you think about you know maybe next year next year or two should we be thinking about additional further market entry or is the.
Sort of intermediate term focus going to be growing within that existing footprint.
Yes, I think I've said that a lot on calls it's really important for us to gain density in specific markets. So as I've said, we're not going to be planting flags just to be in many many different markets. So everywhere. We go into has to have a strategy that we believe will deliver significant growth in <unk>.
Period of times. So there are several other markets that we will be going into but but again, we're going to be very focused on the markets that we're in today in Tennessee, New York, expanding our current market in Florida, and then there are several other markets that.
That we are that we're looking to go into but those again will be as part of strategic collaborations with.
Payers or community groups.
Perfect and then just last one for me on the external medical costs I know the numbers, a little tough to compare year over year, and COVID-19 impacts et cetera, but should we think of <unk>. When I think about the external provider cost at 72, 6% is that the high watermark for the year should we think about a slow ramp down or kind of similar.
<unk> <unk> and then you start getting the benefit of stop loss and all the other stuff in the second half.
Hey, Josh it's Kevin Yeah, I think Thats right I think historically, we've seen that Q1, obviously without COVID-19.
Has historically been kind of the high watermark. So yeah, you can anticipate kind of a steady gradual improvement quarter on quarter.
Okay.
Your next question is from the line of Brian <unk> with Jefferies. Your line is open.
Hey, Good morning, guys. This is Jackson on for Brian .
Kevin I just wanted to touch on cost of care line came in a little bit higher than we were expecting.
Any color on the dynamics there how we should think about that pacing throughout the year and maybe just as an add on to that how should we think about the remaining 12 centers that you plan to open this year and the pacing throughout the quarters.
Okay.
Yeah great.
Great question, Yes, so to your point the cost of Caroline.
Includes a few items.
So as we as we discussed historically it includes the cost of the boxes right and as a from a de novo loss standpoint, it's a separate segmented item towards the bottom of the financials. So it does include those costs, which.
No revenue associated to them essentially.
In addition to that we are investing to ensure that we're getting additional specialists in our facilities. We believe it's the best return on our investment and really leads to that continuity of care and the ability to for the PCP to be the quarterback.
For the care of our patients and so having those specialist and <unk>.
<unk> in and having more specialists in our clinics is really important for us.
The other pieces that there's components of our new patients that are coming in that are not full risk and from a revenue recognition standpoint, we are not recognizing full revenue premiums on those patients and so as the year progresses in those patients.
Move into those full risk contracts, we will get the step up from the premium side, even though we have the cost there. So there's going to be a little bit of some geography, that's happening on the financials, but I would from our standpoint.
Point that investment and cost of care is really critical.
Got it makes sense and then I think I appreciate the comments on.
Really high engagement with patients in the quarter, I guess coming out of.
Covid a lot of the discussion has been around patients that maybe haven't gotten this <unk> potential.
Disease progression and that could have happened and I know you guys are really on the forefront of including a lot of diagnostics and within your facilities anything to call out or interesting to pick up from what <unk> seen with patients that are sort of re entering the health care system or.
Or engaging more with the health care system earlier this year.
Yes, I think the great thing about our model is that last year, we saw close to 95% of our members.
This year, we've already seen 75% of our members. So our members throughout this period of time, even throughout Covid, we've been able to see them. So.
So we don't expect to have any of those headwinds going into.
2020 through some other groups that may not have been able to access their members I think are going through some of those some of those issues today, but we don't expect that to be.
To be a problem for a procurement just because of our model we have been able to either see our members at.
The medical centers or send somebody out to see them in their homes. If they are unable to come in so I think there's a real benefit there for us.
Awesome. Thanks, guys.
Thank you.
Your next question is from the line of Jessica <unk> with Piper Sandler Your line is open.
Hi, Thanks, so much for taking my question.
So just interested to know on the Brooklyn in Tennessee Center.
Those centers going to start taking risk and then do the <unk> membership numbers include members at each of these.
And these centers are for kind of when should we start to see membership associated with that.
Kathy.
We're already growing in those in those centers today with respect to risk.
Any any time before a to two year period is when we will trigger risk we have the ability to trigger sooner. So we will be closely watching all of these individual centers and we can trigger risk based on our agreements that we have sooner than that.
So it will depend on bringing in new members.
The acuity of these members and making sure that we understand what the medical expense ratio is of that.
Cohort of patients before we trigger that risk, but but definitely by by year two will be at full risk could be significantly sooner than that.
Got it.
500, net and they add.
Add <unk> <unk> reflect.
Reflect recruitment efforts that Brooklyn in Tennessee, as well as with any existing base.
Yes, our total our total membership.
The final numbers, our total membership growth, there's 20, I believe new add ons over the last couple of weeks.
Okay got it and then just on the medical cost ratio for the year, the 70% normalized and then you've got a $1 billion of Covid related expenses Q1I guess barring that or is that 1 million barring kind of another wave of COVID-19. The only exception to this 70% normalized.
For the full year 2022.
Yeah, Jessica it's Kevin.
We believe that our platform has consistently contributed 70% medical loss ratios kind of pre COVID-19.
That's correct that's exactly the way to look at it that $1 billion, you kind of have to exclude COVID-19 related and to your point and barring any other.
Covid waves, we would expect a 70% MBR for the full year.
Got it and then I think you said you made an investment and just cost of care, especially expect an incremental sort of step up in that line in Q2, reflecting the full extent of investment there or.
How should that line.
Over the next couple of quarters.
Yeah that line will continue to increase.
Probably not at the same steady state that we're seeing right now.
But as we as we open new centers.
And those centers come online the cost of those centers will go into that that cost of Caroline Preopening costs, right now or an adjustment to EBITDA, they're kind of kind of below the lines are not baked into that cost of Caroline.
So yeah, I would that as an investment for us and it's a component that we believe makes for a really strong medical expense ratios and obviously it leads to better outcomes for our patients. So that we will continue to see a steady investment there, but not not what youre seeing in Q4 to Q1 range.
Got it and then my last one is just are you guys considering tuck ins in that 15 center target for the year and then can you just remind us kind of what is the cost of a typical tuck in and what happens in membership revenue and adjusted EBITDA. When you do tuck in center. Thank you.
Okay.
Yes, yes.
We're always looking at Yeah go ahead Kevin.
No I was just kind of stuff.
Sorry, Carlos I was going to say that the 15 does not include tuck ins.
Those are going to be de Novo center openings.
And just from a not.
They're not all one size fits all.
Tuck ins are going to range.
A range of unit economics.
Some of the tuck ins specifically here in South, Florida, some providers would be at full risk contracts. We've also seen providers that are PCP cap only with no risk and so it really when you've seen one you've seen one.
They range from a multitude of different levels of sophistication.
What I was going to say as we see tuck ins as an opportunity to grow our de novo so to the extent that we identify a small tuck in providers.
One or 200 members that can fit into one of our de Novo centers, that's where we really take advantage and see and see an opportunity on that.
Got it that's helpful. Thank you.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question is from Gary Taylor with Cowen Your line is open.
Hi, good morning.
Couple of questions first I just wanted to start with the new credit agreement and make sure we're thinking about the numbers.
Correctly.
The go forward.
Interest rate.
Closer to 10%.
Are you anticipating that you'll be paying cash interest I know you said there is an opportunity to 4%.
Capitalization, but we're just trying to think about does the income statement interest expense from spent a trailing like $6 million is that is that headed towards 19, the 10% level.
But would that be all cash.
Yeah, I think internally right now.
We're looking at that Pik option.
To your point to kind of conserve cash and redeploy out.
From a de Novo standpoint, so that's right.
And then the GAAP interest expense would still be at the 10% level, regardless of that decision, though right.
That's correct.
Okay.
And then the other thing I just want to make sure I understand so I know the guidance for the year excludes $10 million of de Novo losses, but.
But theres still a lot of.
Other nonrecurring expenses, you're excluding on a trail.
Trailing basis it's.
$23 million was $6 million this quarter can you just.
Give us a little insight on that six point outside 5 million what splits in that.
Is it all cash and kind of what's the trajectory of that over the course of the year.
Yeah. Thanks here yet.
So I'll start with that.
The trailing 12.
And in the kind of the Q2 range, there's a lot of costs associated to the destock components. So you can see there is a meaningful step down from Q2 to Q3, obviously I don't expect that to continue.
For Q1 this year.
Not all cash there are some noncash items in there the biggest item that we had in there though for the quarter is we did engage with a big four consulting firm to assist us with some operational strategic initiatives.
So as a consulting engagement that kind of started the.
The middle of Q4 ended early or mid Q Q1.
And so that was a onetime.
Fee that we have in there thats kind of makes up about.
About half of that Delta.
Yeah.
Okay.
Coming down to some degree sequentially, but then.
<unk>.
We're still anticipating there will be items running through there in the back half.
Yes, there are still items running through there in the back half what I'd say is based off of our internal estimates today.
Paying north of 65% of those we are falling off in Q1.
And there is a remaining 15 or 20% that we anticipate to kind of slowly roll off.
Throughout the end of the year.
Okay. Thank you.
Yeah.
There are no further questions at this time I will now turn the call back over to Mr. Carlos to solo.
Great. Thank you all for joining our call today and continuing to support the company and as you can see our team continues to execute we've had a solid start to the year and remain confident that we will continue the momentum for the remainder of the year. We look forward to updating you on our progress. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
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