Q2 2022 CareMax Inc Earnings Call
Good day and welcome to the Cemex incorporated second quarter 2022 financial results Conference call. Please note today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer says.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star followed by the number one again.
Thank you at this time I would like to turn the conference over to Samantha Swerdlin, Vice President of Investor Relations.
Thank you and good morning, everyone welcome to <unk> second quarter 2022 earnings call I'm, Samantha Swerdlin, Vice President of Investor Relations and I'm joined this morning by Carlos to sell 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.
Made by term exit management in light of their experience and assessment of historical trends current conditions expected future developments and other factors. They believe to be appropriate any 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 decision to differ materially from the forward. Looking statements are described in the company's filings with the SEC, including the section titled 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 over to Carlos.
Thank you Samantha good morning, everyone and thank you for joining our call today.
I'm proud to report that we delivered strong second quarter results, which built on our first quarter momentum and demonstrated our disciplined execution and the demand for our whole person health model.
We grew revenues by 87% versus the combined care Max IMC business last year and ended with Medicare advantage membership of 37000 up 72% versus the prior year.
Medical expense ratio came in at 73, 6% and adjusted EBITDA grew to $9 4 million up from <unk> 5 million for the prior year second quarter.
Medical expense ratio and our care centers, excluding MSR members was below 70%, giving us continued confidence in the performance of our care teams.
As a result of our strong performance to date, we are raising our full year Medicare advantage membership and revenue outlook, which Kevin will provide greater detail.
Our business continues to outperform especially on the operational side all of our Florida de Novo's opened in the last 18 months or profitable as measured by platform contribution and we are seeing high levels of patient engagement with 88% of our patients seeing year to date.
On the provider side physician retention remains robust and we are experiencing strong demand when recruiting new physicians, despite a tight labor market.
The interest we're seeing from physician and so to our differentiated model and desirable care model, which allows professionals to make a holistic impact on patient's wellbeing.
Earlier this year, we began opening centers outside of Florida, expanding our presence to Memphis, and New York City, while still early we are pleased with the demand thus far and look forward to ramping up membership in the coming months.
We're also excited to announce that we recently established our first center in Houston, Texas in close proximity to a steward network.
In addition, we opened two centers in South, Florida and Brooklyn.
Our center in Brooklyn is expected to be the first center opened as part of our strategic collaboration with element health previously known as anthem.
We believe our expansion into these markets will serve as a building block to bring our transformative whole person health model to more communities throughout the U S.
To further accelerate our national expansion plans, we announced earlier this quarter that we signed a definitive agreement to acquire the Medicare value based care business of Steward health care system.
This transaction will create one of the largest independent senior focused value based care platforms in the U S.
Following the close of the transaction <unk> will serve as the exclusive value based management services organization across Steward's Medicare network.
You should be managing approximately 161000 senior value based care patients and 1800 providers across its three membership programs MSP Medicare advantage and ACO reach.
Okay.
Storage network also includes an additional 380000 Medicare advantage fee for service beneficiaries and approximately 480000 traditional Medicare patients, which.
Which we will look to transition into value based arrangements over time consistent with our track record.
Since we founded <unk> and establish our whole person health model, we have taken an innovative approach to building our proprietary system, which blends targeted technology and comprehensive high touch care and drives our leading results.
We are excited to build on our foundation of innovation and further accelerates our vision by bringing immediate national scale to our MSR platform, which we have successfully operated in Florida for over 10 years.
Our national MSL expansion plans are designed to provide us economies of scale to allow that business to grow in a capital efficient manner.
We believe this national scale will also allow us to leverage preferred networks of hospital systems and in turn provide alignment in caring for our patients across the entire continuum of care.
Further we intend to strategically deploy de novo's in two markets with existing <unk> membership density and where we already have strategic relationships in place, which we believe will reduce the initial cash burn we would otherwise have when entering new markets without having established patients.
We believe our hybrid delivery model of a capital light NSO combined with our high performing centers.
Firmly establishes our foundation for industry leadership, as we expand access to value based care across the country.
We continue to diligently work through the closing process and remain on track to complete the transaction by the end of 2022.
Last quarter, we also announced that we entered into a new $300 million credit agreement, which was used to repay our prior debt facility and will be used to fund the Stewart transaction as well as future growth plans and working capital needs.
The Stewart transaction is expected to be immediately accretive to revenue and adjusted EBITDA upon close and we believe it will generate cash flow to support leverage and liquidity requirements under this new term loan.
We believe that we are in a strong capital position today and to have resources and flexibility to fund our future growth plans.
Our core business continues to deliver strong results and our pending acquisition of stored value based care will be a transformative milestone for us. We believe this transaction creates a pathway to completely integrate value based care into the health care delivery system and unlock the value inherent in that.
Model.
All while efficiently managing at risk patients.
We continue to take significant steps to redefine healthcare and firmly establish our industry leadership.
Before I hand, the call over I'd like to thank our dedicated team members. We always appreciate their hard work and commitment without our team we wouldn't be able to deliver on our mission of providing innovative health care with heart to seniors across the country.
With that I will turn it over to Kevin to provide greater detail on our second quarter financials.
Thanks, Carlos and good morning.
Pleased to report a strong quarter coming out ahead of our expectations on membership revenue and adjusted EBITDA.
As a reminder, you can find a reconciliation of our GAAP to non-GAAP metrics like adjusted EBITDA in our press release and earnings presentation.
I will start with an overview of our financial results and then provide an update on guidance.
Total revenue for the second quarter was $172 million, a meaningful increase from $137 million in Q1.
We saw healthy growth in membership across the Medicare and Medicaid lines of business, while commercial membership remained stable.
Medicare members grew by 3000 from Q1, representing growth at both our centers and affiliate providers.
Adjusted EBITDA was $9 4 million for the quarter, a step up from $5 9 million in Q1.
Consolidated Q2 medical expense ratio was 73, 6%. However, if you exclude our growing MSR business <unk> and our centers was below 70% a testament to our care teams ability to keep our patients healthy and safe.
Of note Covid related admissions and expenses were negligible in the quarter, despite a raising new variance.
We are cautiously optimistic this risk remained under control in the back half of the year.
Given the strong growth, we're seeing in our MSL, we may experience some near term deviation from our target medical expense ratio of around 70%. However.
However, if we can achieve <unk> and our new MSR membership of roughly 85% consistent with our legacy MSL.
We believe that that would represent an annualized medical margin opportunity of over $10 million before adding a single new member.
I would also like to highlight recognition of some prior period revenue mostly related to Q1 of 'twenty two that favorably impacted our Medicare risk revenue in the quarter.
As we've discussed a key part of our M&A strategy is re contracting Medicare partial risk or non risk contracts and to full risk value based agreements.
When that occurs.
We recorded the entire net premium which in our markets is typically over $1000 per patient per month as GAAP revenue rather than just the PCP capitation.
We were able to work with several health plans to retrospectively convert about 3000 members to full risk, resulting in a true up of prior period revenues and their corresponding provider costs.
While there is a material increase to our first half revenues.
Impact on adjusted EBITA is more modest due to lower medical margins from new patients.
As a reminder, we define medical margins as Medicare and Medicaid risk revenue less external provider costs.
We believe this resulted in a 240 basis point increase in our reported medical expense ratio in Q2.
External provider cost increased 30% to $120 million compared to Q1, driven by membership growth and expenses related to retroactive risk contracts.
Cost of care increased 13% to $30 million compared to Q1 for a few reasons.
First as mentioned on our first quarter call, we rolled out the remainder of compensation adjustments to frontline associates in April .
Second we saw sequential growth in our pharmacy script volume, resulting in an increase in associated cost of goods.
And third Q2 reflects a full quarter of facility related cost at the de Novo's opened in Tennessee in New York in Q1.
As Carlos noted, we recently opened three more centers first and de Novo in Miami Dade, which will serve as our full service hub center and the homestead area.
Second another center in Brooklyn, New York, which is expected to be our first center opened under our strategic collaboration agreement with element.
And third.
We have entered our fourth state, Texas with a de Novo in Houston adjacent to Stuart's provider network in the area.
We expect the pace of our openings to pick up as we work towards our 15 de Novo goal for 2022.
Therefore, you can expect our cost of care to increase with our center footprint, but these costs will be added back as part of the jumbo losses when building down to adjusted EBITDA.
Okay.
We expect to continue to grow sales and marketing and corporate and general administrative expenses to support our expansion, but at a rate slower than the revenue growth.
Keep in mind that our non-GAAP G&A expenses excludes acquisition related costs stock based compensation and Preopening investments to stand up our platform in new markets.
It does not back out public company expenses are recurring corporate overhead required to operate our business.
De Novo losses were $1 million approximately flat versus Q1.
Losses in Q2 were entirely attributable to centers and new markets, namely, Tennessee in New York.
The handful of de Novo's, and our core Florida markets have reached profitability prior to the 18 month, Mark after which we stopped adding back to novo losses.
Cash as of June end was $68 million, reflecting proceeds from our term loan refinancing in may.
Remember in the first half of the year, we typically have a working capital use of cash due to differences in timing between revenue accruals and payments for the mid year and final settlements.
Those payments generally occur in the third quarter of the year.
Yeah.
Now, let me turn to 2022 guidance.
We now expect year end Medicare advantage membership to be greater than 40000.
Up from the range of 38000 to 40000 previously.
We believe member growth and new market should pick up as we expand our clinic footprint and contract with our health plans.
In addition, as part of the integration of our acquisitions, we believe our rebranding efforts over the past several months, we will position us strongly for this annual enrollment period.
Due to higher membership and the retro risk recognition I discussed earlier, we are increasing our full year revenue outlook from $540 to $560 million to $580 million to $600 million.
A few factors to consider when looking at the full year revenue.
First Medicare sequestration is a headwind to Medicare risk revenue phased in at 1% in Q2 and 2% onwards.
Second we typically see a mixed driven seasonal decline throughout the year and Medicare risk revenue <unk> as more tenured patients patients churn and are replaced by newer lower <unk> patients.
While we do not guide specifically to medical expense ratio the onetime nature of the retro risks impacts suggest MBR in the back half should be down from Q2, barring any new COVID-19 wave.
We tend to see favorable <unk> seasonality in the back half as Medicare patients hit stop loss deductibles and prescription drug limits.
We are reiterating adjusted EBITDA in the $30 million to $40 million range.
I do want to highlight a few factors that we are closely monitoring which may impact our back half performance.
First member growth from NSO providers and de Novo clinics is anticipated to initially earn lower medical margins.
And second we expect to continue to support our growth by investing in our center staff facilities shared services and technology infrastructure.
Further as we prepare to close the Stewart transaction, we anticipate incurring additional expenses related to pre closing integration activities.
De novo losses will likely come in below the $10 million estimate given previously.
Driven by cost discipline and back half weighted timing of center openings.
Before I conclude I would like to echo Carlos with sentiment on the degree of transformation that has occurred in our company over just the past few months, our new debt facility totaling $300 million gives us significant flexibility and capital to continue our de Novo strategy.
The acquisition of Stewart will become one of the largest value based care organizations in the country and operate a truly complementary platform serving seniors across the risk spectrum.
We expect to be accretive to adjusted EBITDA and cash flow and to improve our leverage profile.
We look forward to bringing in more details by the time the deal closes towards year end.
Operator, we will now open it up for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad again Star then the number one to ask a question.
Okay.
Your first question comes from the line of Andrew Mok with UBS.
Hi, Good morning wanted to follow up first on the out of period revenue can you give us that out of period premium number to help us understand the normalized pricing yield and your commentary around <unk> trends, that's excluding the out of period revenue correct.
The seasonality.
Yeah, Hey, Andrew it's Kevin.
Yes, that's right I think the best way to look at how the out of period was impacting us to really look at the first half in totality.
So because of the fact that a lot of that out of period was related to really Q1.
When you look at our total first half we're right around 200, I'm, sorry $309 million of revenue.
About $9 million of that is what I would consider nonrecurring.
Occurring out of out of 'twenty, two type revenue and that's it.
Again not included in our normalized <unk> P M.
Got it okay. So I think thats still suggest that year over year PM PFS throughout the year will be up.
Versus last year is that correct.
Yes, that's correct.
Yeah.
Got it that's helpful. And then in your prepared remarks, you mentioned that the new Brooklyn Center is the first in partnership with Alabama.
I'm just curious what's been your experience there. So far can you give us an idea of membership that Alabama is able to deliver.
In the first year of the clinic.
Yeah and.
Drew this is Carlos yes.
Yes, we just opened that syndrome, and we are finalizing the collaboration agreement for that specific center. So we expect that to start that collaboration to start shortly and we'll be prepared to give you numbers probably towards the end of the end of this year.
Okay great.
Last question prior to the Stewart deal you had plans to end this year at 60 centers. This year and opened another 60 or so through the end of 2024 and partnership with anthem and related it sounds like Youre still doing the 15 this year to get you to six be but over the next two years. Once this deal closes Stewart deal closes how many.
60, new centers contemplated would remain intact and how many would be redirected toward the steward footprint.
Yes, I think we're going to do is once we closed the Stewart transaction, which is expected to close in <unk> of this year, we will be giving new guidance.
In terms of numbers and in terms of de Novo openings one of the things I can tell you is we are going to focus the majority of our de Novo centers and all of the areas that have high density around the steward network. So that we can use that.
To greet our ceded de novo's. It makes a lot more sense for us to start medical centers. When we have a physician and a base of patients similar to what we're doing in the Houston de Novo that we just opened so we're going to take full advantage of that and we will be giving new guidance on the center openings and we're definitely going to be opportunistic.
Taking advantage of that density in those and the geographic reach of <unk>.
What we acquired within the store network.
Got it so there will be a significant change in just the nature of an expansion of the clinics versus the prior plan.
Yes, definitely okay, perfect I'll hop back in the queue. Thank you.
Okay.
Your next question comes from the line of Josh Raskin with Nephron research.
Hi, Thanks, good morning.
Question on Stewart as well I was looking at that proxy filed last night and I. Appreciate you guys putting in the pro forma is and then the steward projections as well. So I just wanted to better understand the big ramp as you kind of get to 2025.
Really a significant ramp in 25% and 26 on revenues and then EBITDA going 100 $200 million or so so could you speak to the plan I assume that's all from converting lives to risk why does that start in 2025, what are the milestones we should be looking for is there an opportunity for that to start sooner after.
Deal closes this year, just any color there would be great.
Yes, that's all predicated on shifting the contracts from non risk to risk or from partial risk to risk rate in the initial years, we're going to be focus on professionalizing that book of business educating the physicians opening up de novo's in and around those.
Those areas that have the density in the network that we discussed.
Once we've begun that process, you'll see that ramp in both revenue and EBIT based on.
That book of business, that's operating at a favorable MLR being shifted from non risk to two risk based financials. There is there is definitely some conservatism in the numbers and theres always an opportunity to accelerate that trend.
Pending on how quickly we're able to ramp the network educate those physicians deploy.
Deploy the infrastructure of the coating team all of which we've already began the hiring process and gotten ready to build out the team to execute on that on that strategy.
Got you and so.
That's helpful.
So when you talk about sort of whats up against the revenue is it is it correct to assume that if you've got these physicians and these members in other types of arrangements, whether theyre seeing them just on a fee for service basis or even on a partial risks is it fair to assume that the EBIT dollar ramp on those patients is faster meaning that.
You already know the patients you've got the care protocols you have the doctor in place is that sort of thinking about that versus startup de novo losses in a center should we think about the EBITDA coming through a lot faster when you're converting those contracts.
Yeah, absolutely I think this completely changes the outlook for <unk> and our ability to generate free cash flow and positive EBITDA much quicker because we're managing the MSR business, which as you mentioned those physicians are there, it's a matter of staffing and educating for that network.
And then as we started thinking about de Novo's Theyre no longer de novo's that are going to take a seven year ramp they're going to be what we call either aqua hires are seeded de novo's, where we would expect to start with a physician.
It's already been working with us that has a base of patients.
It a lot easier.
Shorten the duration of the J curve to profitability.
That makes sense and then just last one for me on <unk> walking away from the New York City contract I'm, just curious how that changes the trajectory of growth in New York or is all of this moot because the if.
<unk> mentioned question, where you answered well, we're shifting strategy to.
Our focus on centers around Stuart is it is it sort of solved itself.
Yes, I think definitely.
Stuart has solved the one of the hardest parts of this business, which is growth in membership right. So I think that has given us that with respect to the the retirement business. It wasn't something we had ever contemplated in the numbers in our projections. We have looked at it if it's something that happened that could help our business.
Great, but it wasn't something that we were counting on in our strategy in New York with elements really wasn't predicated upon them getting that book of business, we really looked at it as gravy.
Okay Alright.
Your next question comes from the line of Brian <unk>.
Ken Quillet with Jefferies.
Good morning, you got GE Philips on for Brian . Thanks for taking my question and great job on the quarter. So my first question is around external provider costs. So that line it came in higher than our expectations and I do recall.
Acknowledgment of that in prepared remarks, but I guess my question is how should we be thinking about that and the progression of that in the final two quarters of the year. Maybe you can provide any color on that for modeling purposes.
Sure absolutely.
Yeah. So for the for this quarter I think it's a little difficult to isolate the quarter because of the prior period revenue and associated provider costs that are coming through.
I think if you look at the combined first half or so.
We're in that 73% range.
We would anticipate that medical expense ratio, improving and the latter two quarters. The second half of the year tends to be more favorable for us on a medical expense ratio, primarily due to a couple of reasons, one patients kind of hitting limitations either from additional services.
Our prescription drugs.
And then additionally, there is a stop loss credits that will come through those are typically back half weighted as patients begin to hit those deductibles, so <unk> tend to improve.
Over the course of the year.
Great. Thanks for that and then the second question is around guidance you raised your total revenue midpoint by $40 million.
<unk> decided to maintain EBIT guidance.
Can you just provide some color on I guess the <unk>.
Factors driving that decision and anything else, we should be thinking about in relation to revenue flowing into profitability line.
It's not a big part of that is we are also expecting.
We're expecting additional growth we raised our guidance on growth a lot of that growth is also expected to come in from new markets outside of the South Florida markets that are less mature.
When those new members.
Hit our book of business. The MLR initially in those early stages is less favorable so that could potentially impact.
That short term EBITDA, so we want to make sure that.
We are mindful of that and conservative around that.
Additional growth that we've experienced in currently and that we still expect to experience in the near future.
Great. Thank you that's all for me.
Your next question comes from the line of Jessica <unk> with Piper Sandler.
Hi, Thanks, so much for taking the question.
Just thinking a little about steward.
For the out years.
Yes, if you can help us understand kind of the composition of those patients and how you are planning to ship the 387000.
<unk> thousand and a fee for service lives into either full or partial grant.
And kind of over what timeframe.
Yes, I mean, we're going to be focusing on most of that membership initially right. It's the MSP membership.
Membership, which is roughly 50000 and then.
Medicare advantage fee for service and a big part of that is the conversations that we're already having with the health plans. Most of that membership is concentrated on seven national health plans and we've already begun all of those conversations to begin shifting.
Those patients from fee for service to partial risk contracts and then subsequently to full risk agreements.
So.
That's going to be happening initially and what youll see is that process happening over a period of time, we're going to focus on those markets and areas that have the highest density in Texas, and Florida and Massachusetts.
In Ohio, and several other markets and then continue to do that conversion as we as I mentioned earlier professionalize that book of business educate those physicians and then shift over from partial risk or no risk contracts into those are full risk arrangements and that'll happen over the course of the next.
Four years.
Got it that's helpful and then just maybe.
Those kind of one eight or one.
<unk> 8000 providers that youll either employer be affiliated with.
Have you started to have conversations to just talk to them about the potential to bear risk and kind of what is the feedback then.
So far and then if you could just give us a little bit of detail on what profession.
Professionalizing knows Pcp's will entail.
Okay.
Yes, we have already begun that process and have already talked to many of those providers.
They are really all welcoming working with an organization like care Max Stuart had been a really good job at focusing on value based care through their MSP product and.
Working with those positions. So they had already began that process in many of them.
Really we're excited to take to take value based care to the next level. So all of that initial feedback has been has been really positive.
In terms of Professionalizing that it's similar to what how we ran our our MSL, it's deploying our tech enabled services.
We are using our <unk> university to educate those providers on a continuous basis on how to manage or and how to provide care under a value based care arrangements and then providing them with the resources to execute on that strategy and then deploying the team on the ground to assist.
Stuart and that network to achieve those those results and then create a compensation structure that enables them to execute on that strategy.
And that's really helpful. My last one is just I imagine professionalizing and also entails deploying care optimized.
Curious to know if those providers are on a different practice management solution that optimizes displacing and if so what that is.
What the potential yield that the care optimized deployment might be thanks.
Yes, we're still we're still in the process of evaluating.
How we're going to deploy the technology solution into the store network Theyre currently using the majority of those providers are using Athena, which is a positive because all of the SMG, which are the owned assets are under the same unified platform and then a substantial portion of the affiliates as well so.
Whatever we do decided to do is going to be made easier by the fact that they are the majority on a on a on a single unified platform.
Got it thanks, so much.
Thank you Jessica.
Again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad again Thats Star then the number one to ask a question.
Yeah.
There are no further questions at this time I will now turn the call over to Carlos to solo for any closing remarks.
Yes.
Thanks to everyone for joining our call today and for continuing to support the company. We're very pleased with the strength of our business and the ongoing execution of our strategy and we look forward to updating you on our progress.
Everybody and have a good day.
Thank you for participating you may disconnect at this time.
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