Q3 2022 Apollo Medical Holdings Inc Earnings Call
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Greetings and welcome to the Apollo Medical Holdings, Inc. Third quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Carolyne Sohn Investor Relations for Apollo Medical Holdings, Inc. Thank you you may begin.
Thank you operator, and Hello, everyone. Thank you for joining us the press release announcing Apollo Medical Holdings, Inc. 's results for the third quarter and nine months ended September 32022, it's available at the investors section of the company's website at Www Dot Apollo Mad dog.
To provide some additional background on its results. The company has made a supplemental deck available on its website.
Replay of this broadcast will also be made available at Apollo website. After the conclusion of this call.
Before we get started I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
These forward looking statements can be identified by terms such as anticipate believe expect future plan outlook and will include among other things statements regarding the companys guidance for the year ending December 31 2022.
Gross acquisition strategy ability to deliver sustainable long term value.
Ability to respond to the changing environment operational focus strategic growth plans and merger integration efforts as well as the impact of the 2020 novel Coronavirus or COVID-19 pandemic.
Other variants on the company's business operations and financial results.
Although the company believes that the expectations reflected in its forward looking statements are reasonable as of today. Those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected.
There can be no assurance that those expectations will prove to be correct.
Information about the risks associated with investing in Palo Verde has included in its filings with Securities and Exchange Commission, which we encourage you to review before making an investment decision.
The company does not assume any obligation to update any forward looking statements as a result of new information future events changes in market conditions or otherwise, except as required by law regarding.
Regarding the disclaimer language I would also like to refer you to slide two of the conference call presentation for further information.
For those of you following along with a company can supplement there is an overview of the company on slide three.
On today's call the company's co Chief Executive Officer, Brendan Stan will discuss third quarter 2022 highlights in our latest operational developments interim Chief Financial Officer, John Baugh show will follow with a review of polymers results for the third quarter and the first nine months ended September 32022.
Randy will conclude the remarks with an update on the company's outlook and long term growth strategy before opening the floor for questions.
That I'll turn the call over to Paul <unk> Co Chief Executive Officer, Brandon <unk>.
Go ahead Brendan.
Thank you Caroline.
We were pleased to deliver another strong quarter of profitability driven by 40% growth on the top line in Q3, which was primarily due to increased contributions from capita you did revenues.
This was the result of strong organic membership growth in our core care delivery business, a more favorable membership mix and our participation in a value based care model for the Medicare fee for service population.
We reported a 53% year over year increase in cap dated revenues to $227 6 million, which accounted for nearly three quarters of total revenue, which was 317 billion for the quarter.
Before we get into the quarter I want to highlight a very important factor that sets a palm it apart from other providers.
It's our desire to serve our entire communities across all payer types that is original Medicare Medicare advantage, Medicaid and commercial patients and support them across their entire lives.
Our willingness dedication to serving all members of our communities and the unique care model and value based care infrastructure that we have built in order to do so successfully makes us an extremely valuable partner to both payers and providers.
There's also fueled our ability to consistently grow the business profitably, which drives a virtuous cycle as we continue to invest in the long term health and wellness of the communities, we serve and expand our care delivery model into new communities across the country.
We believe that the foundational tenant upon which successful health care delivery is built is the trusted relationship between the patient and provider and we will continue to invest in that secret relationship in order to affect industry, leading clinical outcomes for our patients.
An example of our ability to provide exceptional care, while lowering costs is evident through our care through our accountable care organization stellar performance year after year.
During the third quarter of 2022, we booked a $48 8 million dollar shared savings settlement on the revenue line related to participation in an accountable care model for the 2021 performance here.
Cause of our successful track record and confidence in our care delivery model, we have opted to take to take on a higher risk corridor in that program.
Resulting in a $27 million increase from last year's shared savings settlement on the topline.
We are pleased to have generated meaningful savings, while delivering high quality care with our ACO once again.
Okay.
Going back to the financials, our operating expenses during the third quarter increased by $93 million or 53%, primarily due to return of pre Covid medical expense run rates and the growth in membership which is in line with the increase in <unk> revenues.
As discussed in our last quarterly call. We continue to see an increase in MLR compared to that in 2021 primarily as a result of utilization returning to pre COVID-19 levels.
Despite the increase in Opex, we reported $26 million and net income attributable to Apollo Mitt shareholders and GAAP earnings per share on a diluted basis, a 56 cents for the quarter.
Adjusted EBITDA was $57 $1 million compared to $62 9 million in Q3 of last year.
I'm excited to announce that we are raising our revenue net income and EBITDA guidance for full year 2022, as a result of our strong performance in the first three quarters of the year we.
We are reiterating guidance for adjusted EBITDA, because we have revised our adjusted EBITDA calculation, beginning this quarter to exclude add backs for provider bonus payments.
And losses from recently acquired Ipas.
We strive to ensure that our shareholders better understand the clinical and financial outcomes generated by our unique model and removing these add backs will bring adjusted EBITDA closer to free cash flow and highlight the unique level of profitability that our model generates as it grows 40% same quarter year over year.
In summary, our revenue forecast for the full year is increasing from a range of 1.055 to 1.085 billion to a new range of 1.0 95 to 1.115 billion.
Our net income forecast for the full year is increasing from 38% to $57 million to a new range of $55 million to $67 million and our EBITDA forecast is increasing from a range of $81 million to $111 million to a new range of 107, five to $1 $33 5 million.
And despite the revised adjusted EBITDA calculation, which we're moving the add backs related to onetime provider bonuses and losses due to recent growth we are maintaining our adjusted EBITDA guidance of $136 million to $166 million.
Prior to this calculation adjustment, we'd expect it to beat this range with the new calculation, we still anticipate being within this range, but on the lower end.
For future years, we continue to anticipate to grow at 30% revenue growth clip year over year with a target EBITDA margin of 10% to 15%.
Moving to recent operational developments, we made a couple of very exciting announcements a few weeks ago.
We are pleased to have closed on the acquisition of nine primary care clinics in Las Vegas, Houston, and Fort worth operating as Valley Oaks Medical group in mid October .
This marks our official expansion, the Nevada, and Texas markets, and we look forward to delivering positive clinical outcomes and improved care experiences to the underserved patients that these local communities through our unique care model.
We've talked about making bigger moves into new geographies and we are thrilled to begin building trusted relationships with patients and communities in Nevada and Texas.
In late September we announced the signing of a definitive agreement to acquire 100% of the fully diluted capitalization of all American medical group or a M G and.
And for your benefit.
That's why b as well as certain related managed care assets.
A M G as a physician group in the San Francisco Bay area in FY <unk> is affiliated with AMG and is licensed by the California Department of managed health care as a full service restricted Knox Keene license health plan.
We closed on the acquisition of a M. G on October 31 <unk>.
To complete the remaining transactions by the end of the first quarter of 2023 pending regulatory approval.
Okay.
The restricted Knox Keene license that is a part of the F Y B transaction will allow us to assume full financial responsibility, including both professional and institutional risk for the medical costs of its members.
This means that for the first time Apollo will be able to recognize a much larger percentage of the premium dollars revenue for its managed care risk bearing members in California.
Instead of recognizing only 40 to 45 cents of each premium dollar for taking on professional risk, we will now be able to recognize closer to 85 cents.
Ratably of the premium dollar for taking on both professional and institutional risk or global risk and cap data revenues.
Today, we're currently take on taking on facility risk by partnering with hospitals or payers, where we recognize shared savings and incentive revenue and we will translate the success. We have achieved in doing so to better coordinate care for our members in the future via the restricted Knox Keene license.
We view this as a significant opportunity for both revenue and EBITDA, but we do want to note that we anticipate the process of assuming dispersed global across all of our members to be a gradual process.
The a M. G S Y B investment and partnership will also add over 250 physicians dual Parliament network of providers and over 15000, Medicare advantage commercial and Medicaid patients and the city and county of San Francisco and San Mateo County.
We are thrilled to be expanding our presence in northern California. Following the acquisitions of access primary care Medical group and Jade Health care Medical group in the past year.
With the addition of a M G and F Y b to the polymer family. We will now serve over 30000 patients in the San Francisco Bay area.
And the remainder of 2022, we look to continue strengthening our foothold in our core California markets, while continuing to build rapidly in newer markets, such as New York, Nevada and Texas.
As we continue to empower our physicians to deliver exceptional clinical outcomes. We believe theres a great deal of runway for our unique value based care and value based enablement offerings.
With that I'll turn it over to John to review our financial results.
Thank you Brandon.
We continue to deliver strong results reporting total revenue of 317 billion in the third quarter of 2022.
40% increase from $227 1 million in the prior year quarter.
This was primarily driven by increased competition revenue, resulting from organic membership growth in our core ipas and participation in a value based Medicare fee for service model.
Capitation revenue increased 53% to $227 6 million during the period accounting for 72% of total revenue for the quarter ending September 30th.
2022.
Rich full settlements and incentive revenue increased 8% to $64 8 million during the period from $59 9 million in the prior year period, primarily driven by a $27 million increase in shared savings settlements earned from Apollo's participation in an ACO related to the 20th.
'twenty one performance here.
This was.
Partially offset by reduced risk pool payments due to an increase in utilization post the COVID-19 public health emergency period.
Fee for service revenue increased 77% to $12 9 million from $7 3 million in the prior year quarter.
The increase was primarily due to a $4 million increase from the consolidation of some labs, beginning August 2021, and DMG beginning October 2021.
As well as increased visits to our surgery center.
Our membership remained at approximately $1 2 million managed lives at the end of the third quarter ending September 30th 2022.
Approximately 600000 or half of our members were under capital risk bearing arrangements to our consolidated ipas.
Total operating expenses increased about 53% to $266 9 million in the third quarter of 2022 from $174 million in the prior year period.
This was primarily a result of increased cost of services.
Due to a return to pre COVID-19 medical expense run rates and growth in membership, which was commensurate with our increase in competition revenue.
Net income attributable to our parliament was $26 million compared to $34 3 million in the third quarter of 2021.
Earnings per share on a diluted basis were <unk> 56.
Compared to 74 cents in the prior year period, mainly due to an increase in operating expenses mentioned earlier.
We reported EBITDA of $48 2 million in the third quarter of 2022, which compares to negative EBITDA of <unk> 3 million in a prior year period.
Adjusted EBITDA was $57 1 million compared to $62 9 million in the prior year period.
We placed great emphasis on adjusted EBITDA figures as these numbers back out the impact of excluded assets stock based compensation other income income from equity method investments.
The adjusted EBITDA figure for Q3, 2022 takes into account a significantly lower noncash unrealized loss of $3 9 million as a result of a decrease in fair value associated to the passive investment and a pair partner shares held as marketable securities.
And other investments, which compares to $69 2 million in unrealized losses as a result of a one to three conversion of a pair partners preferred shares to common stock in the prior year period.
As a reminder, these per partner shares are in the excluded asset bucket that we've described in the past.
As they slowly benefit our affiliate a P C and its shareholders.
With that I'll go over a few financial highlights for the nine months ending September 31 2022.
Total revenue was 850 mill up 47% from $578 8 million in the prior year period, primarily attributable to organic growth of membership and participation in a value based fee for service model.
Operating expenses increased to $758 3 million from $482 9 million in the prior year period, primarily due to an expected return to pre COVID-19 medical expense run rates and growth in membership.
Which was commensurate to our increase in revenue.
Net income attributable to Apollo bed.
It was $51 6 million for the nine months ending September 32022, compared to $60 1 million for the nine months ending September 30th 2021.
Diluted EPS was $1.12 for the nine months ended September 32022, compared to $1 33 in the prior year period.
Turning over to the balance sheet, we remain well capitalized and well positioned to execute on our growth initiatives we.
We ended the third quarter with $184 million in cash and cash equivalents compared to $233 1 billion at the end of 2021 are.
Our working capital was $287 four.
4 million compared to $283 4 million at the end of 2021.
Total stockholders equity increased to $513 5 million.
At September 30th 2022 from $460 5 million at December 31, 2021.
Total debt at the end of the third quarter was $205 9 billion.
Yeah.
I'd now like to turn it back to Brendan for a discussion of our growth strategy and outlook for the remainder of 2022 branded.
Thanks, John .
We expect to close out 2022 on a strong note.
The Valley Oaks and E. M. G F Y E transactions represent several of the growth levers we have discussed in the past geographic expansion of our care delivery model and increasing the amount of risk we can take the other restricted Knox Keene license.
We are working closely with the S Y b team to complete this transaction and believe these investments will continue to drive strong growth in revenue and EBITDA.
We also continue to be in active discussions with provider groups and health care organizations, all over the country and we continue to be energized by the amount of enthusiasm we are seeing from physicians about our unique position enablement model and technology platform.
As I noted earlier I'm excited that we are able to raise our previously disclosed guidance projections for revenue net income and EBITDA for the full year of 2022, we.
We are maintaining our guidance for adjusted EBITDA for the year, given the aforementioned revisions to our adjusted EBITDA calculation you.
We have shared these details on slide 11 of our earnings supplement.
Please keep in mind that the net income and EBITDA guidance do take into account.
Pencil impact of E. P CS passive investment and a payer partner, which John also mentioned in his comments earlier.
For this reason we place greater emphasis on the net income attributable to Apollo met shareholders and adjusted EBITDA metrics.
Is there any material developments arise you'll be sure to update the markets and reevaluate guidance as appropriate.
In closing we have made investments thus far in 2022, and our people technology and communities in order to give us strong visibility into an exciting 2023 and beyond.
We continue to prioritize the foundational trust that patients have enough in our providers and we will continue to invest the long term health of our communities.
Together I'm confident that we will transform the way health care is delivered across the country.
Accelerating our health care system towards the future, which all Americans, regardless of age race circumstance or socioeconomic status has access to a high quality health care experience.
With that operator, let's open it up for Q&A.
Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the camp.
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Our first question comes from the line of Ryan Daniels with William Blair. Please proceed with your question.
Yeah. Thanks for taking the question and congrats on the strong quarter, Brandon can you talk a little bit more about the RK K process and how quickly you'll be able to transition to more of a full risk model in the 85 cents on the dollar or is that something that you'll go through kind of over a three four year period as you contract renew with the managed care plans.
Thanks.
Hey, good morning, Ryan. Thank you for joining great to hear from you Yeah, Youre absolutely correct.
Not going to be an instant process are we.
We anticipate having regulatory approval from.
The Department of managed health care in California sometime in Q1 of next year, and we'll certainly update the.
Investor base when that happens.
But afterwards, there is a fairly lengthy process every time tracking.
All of our 20, plus pairs hospital partners and so on and so forth in order to make sure that all of our patients are covered under the restricted asking license. So I would I would probably guide for <unk>.
The large range of.
Two to two to four years for everyone to be in that higher restrict across the book.
That makes sense and then you know.
Ahead of and during that process are there incremental technology investments that you need to make to the platform as you take on more institutional risk or are you already kind of deploying those models to ensure that the shared savings in.
In the risk pool line, such that you don't have to make a ton of investments to move to that risk level.
Yeah.
Yeah. Thanks, Sean So I think they are going to be a few investments on the technology as well as on the clinical side to ensure that we have all of the risk controls in place to take on global risk and all of the new geographic regions that we have.
We've entered them, we're very used to doing that.
Can see the results of that and the shared risk pool and settlement line item here.
Historically, but especially as we move into new geographies, there will be a little bit of investment required on the clinical side to make sure everything.
Continues to run as smoothly as we have run it in the past, but we don't anticipate it to be a very large investment that we want to make given our historic.
Our ability to take on global risks and so forth okay.
Great.
And then a couple of questions on kind of the core, California Medicaid business, obviously, some new awards there in counties in which you participate I assume you already have relationships with all or some of the winners of those contracts. So number one is that the case and number two if not do you envision any turnover in your.
Membership base of capital risk with managed Medicaid plans or do you think you can kind of re contract with new winners and keep that intact overtime.
Yeah absolutely.
That's one of the beauty of the model that we have which is that where we're pair ignostic. So we have contracts with all of the large winners of the rebid process in Medicaid in California.
We already have members with them.
So if members were to move from one of the losers for example to do a.
Payroll had one new contract in the county.
We wouldn't anticipate any disruptions in care for those patients.
Okay, Perfect and then my final question.
Any thoughts on Medicaid Redetermination and it sounds like you know all else equal that will probably start to begin end of January early February I know states have effectively a year to go through that but do you envision that having a big impact on the book of business. I know you know, California Medicaid has an extremely low payer so maybe even if you lose lives.
There you can just absorb that with growth with a much smaller amount of Medicare advantage lives, but any any thoughts there would be helpful. Thank you.
Yeah.
Absolutely we're.
Still on the look out for when the.
The emergency will end in the beverage information will happen.
We anticipate the impact to be somewhere between 5% to 15% of our Medicaid book of business.
<unk> of course, we're working very hard to make sure that everyone is re enrolling as is necessary. So that they don't experience any disruptions in their care and we do anticipate that some of them will.
Unfortunately, not be renewable properly so you probably.
Kind of mid single digit percentage.
Attrition and in Medicaid and the Medicaid book of business, which as you mentioned.
Not quite as high in terms of P. M P M and probably will be absorbed.
We don't anticipate there would be a material impact to overall financials due to that.
Termination, but we are focused on making sure people continue to have access to care.
Okay, great. Thank you for that and I also applaud the new EBITDA calculation I think it's a lot more consistent with how people look at the model and your cash flow. So I appreciate that thanks, guys have a good day.
Absolutely. Thank you take care.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Sarah James with Barclays. Please proceed with your question.
Thank you congrats on a great quarter, and I Echo the sentiment and I think the switch in accounting policy is going to make it a lot easier.
Compare you to your peer group.
So I just wanted to unpack a little bit what's happening in the risk pool and incentive line.
You know if we look at kind of the.
The core of that with your settlements from hospital partners, how did that trend this year versus Q 'twenty, one because I know last year, you had that benefit from low COVID-19 utilization. So how is that looking for you guys are you back to a normal run rate level or are you.
Still getting some benefit from low utilization on that line.
Hey, good morning, Sarah it's good to hear from you. Thanks for the question.
Yeah. So we are.
MLR this quarter that are back to normal and we don't anticipate any future increases in MLR them in our core business.
And that is stable stabilized as to kind of in the low to mid eighties.
In MLR across all of our businesses, both the core and the new which we're now kind of lumped together given the new accounting policies as far as kind of how that impacted this year at risk pool and settlements incentive line item.
We had disclosed the ACO payment was $29 million higher than it was same quarter last year the.
Shared savings from our hospital partners was down around $25 million relative to same quarter last year and so it has been essentially a wash in a $4 million increase relative to last quarter I'm, sorry last year same quarter and we don't anticipate.
There are no more COVID-19 tailwind.
Kind of baked into that.
Hospital payer partner, so far and we don't anticipate there to be.
Any kind of in our guidance with reach either.
Great.
Help us understand what the benchmarks are thresholds are for those hospital bonuses.
What type of metrics argue.
Being evaluated and how you're falling in the range.
The first is you know the escalation there.
Right, So far hospital payer partners.
Pretty simple arrangement actually they receive caffeine of dollars as a percentage of premium for them.
For each member that they have on a P. M. P M basis, and we essentially charge all facility costs against that capital pool, whatever is left we will split.
Some percentage to the hospital and some percentage due to us and so those arrangements range from us keeping 50% the excess surplus in that pool to perhaps 80% in some of our contracts and so.
That's essentially the only metric that is measured just how much is left their school, you're splitting that amount and a pre determined fashion of.
Of course, those are correlated to clinical measures that we are monitoring very carefully all the time in terms of our inpatient bed days and readmissions and so on and so forth.
We've seen those numbers stabilize as well in a post COVID-19 world.
As much as I can make it happen.
Great.
The last question is if you could just refresh us on how you view organic growth and you guys have have branched out geographically I think since you last guided on that so how are you thinking about organic growth. These days.
Yeah, absolutely. So we as you know we've raised guidance of revenue this year and we continue to see strong growth even throughout the year and of course. It is a P. Now so we will anticipate to see a kind of more chunky growth in Q1 of next year.
But that being said, we're still guiding towards.
Mid teens.
Teens organic growth and kind of look forward to make sure making sure that our new investments in new geographies are contributing kind of much more rapidly to that overall book of business and that being said I would I would temper expectations slightly by saying that in other states that we've entered its interesting that in Texas.
We are not yet fully.
Foley catheter heated global risk arrangements the way that we are used to doing in California.
Some of that book of business, there's still a fee for service for example, and so over the next two years 18 months, we would work to ensure that the model lines kind of from a reimbursement perspective more smoothly with what we've had historically in California, but we view those as kind of opportunities until wins to increase revenue.
And some of these other states that we've entered.
Great. Thank you.
Thank you so much sir.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to management for any final comments.
Well. Thank you all for attending the.
Our earnings call today, and thank you for your time, we're always open to a dialogue with investors and I would welcome any of you draw offices in Alhambra with any of you being the Los Angeles area. Please feel free to reach out to us or our Investor relations firm the equity group with any additional questions. We look forward to speaking to you all again on our next quarterly call. Thank you. So much have a great day.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.