Astrana Health Inc.

Good day, everyone, and welcome to today's Astrana Health second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session, and instructions will be provided at that time. Today's speakers will be Brandon Sim, President and Chief Executive Officer of Astrana Health, and Sean Basho, Chief Operating and Financial Officer. The press release announcing Astrona Health, Inc.' 's results for the second quarter ended June 30, 2024, is available at the Investors section of the company's website at www.astronahealth.com. The company will discuss certain non-GAAP measures during this call. Reconciliations to the most comparable GAAP measure are included in the press release. To provide some additional background on its results, the company has made a supplemental deck available on its website. A replay of this broadcast will also be made available at Astrana Help's 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 company's guidance for the year ending December 31st, 2024, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to changing environment, operational focus, strategic growth plans, and merger integration efforts. 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 materially from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in Astrona Health is included in its filings with the 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 the disclaimer language, I would also like to refer you to slide two of the conference call presentation for further information. With that, I'll turn the call over to Astrana Health President and Chief Executive Officer, Brandon Sim. Please go ahead, Brandon.

Thank you, operator. Good evening and thank you all for joining us today. Continuing our strong start to the year, the second quarter results we reported today reflect the progress and momentum we continue to build here at Astrana Health as we drive towards our mission to empower entrepreneurial providers and deliver high quality, high value, and accessible healthcare to local communities across the country. I'll start with some key financial and operational updates for the quarter, which continue to deliver on our strategic roadmap of one, increasing membership to drive sustainable growth, two, increasing alignment through total cost of care responsibility in value-based arrangements, and three, empowering our providers with our technology and clinical infrastructure in order to achieve superior patient outcomes while managing costs. Then I'll cover the partnerships and acquisition we announced since the quarter closed, and Sean will discuss our financial performance and guidance outlook. Starting with financial highlights, We continued to execute at a high level as Astrana Health revenue grew to $486.3 million, a 40% increase compared to the same period last year. And adjusted EBITDA rose to $47.9 million, a 34% increase year-over-year. This resulted in an adjusted EBITDA margin of approximately 10%, continuing to demonstrate our differentiated ability to drive profitable growth. Our strong revenue and profitability growth was driven primarily by robust organic growth in our care partners segment, as well as the successful completion and integration of the community family care acquisition. Along with continued success in managing the total cost of care for our members and value-based risk bearing arrangements. Moving on to business updates, Astrana continued to execute on our first strategic pillar. increasing membership in new and existing geographies. During the second quarter, we entered the state of Arizona through our Care Partners segment, partnering with an anchor primary care physician group with over 45 primary care providers serving over 50,000 patients across Medicare, Medicaid, and commercial lines of business. Estrana will serve as the group's exclusive care enablement provider with providers anticipated to onboard into our care enablement platform by the end of 2024 and expected to begin participating in value-based arrangements in 2025. We also continue to make progress on our second goal, increasing our responsibility for members' total cost of care in value-based arrangements. From a timing perspective, the movement of several partial risk contracts into full risk arrangements is expected to occur in the second half of the year. As of July 1st, 2024, our full risk business makes up approximately 60% of total capitation revenue, compared to 46% as of July 1st of 2023. And we continue to be on track to meet our previously stated goal of having around two-thirds of our capitation revenue coming from a full risk ecosystem by January 1st of 2025. Finally, consistent with recent quarters, our utilization and cost trends in the second quarter have remained within expectations for our Medicare Advantage, managed Medicaid, and commercial books of business, given our continued focus on ensuring members are receiving timely and appropriate care in the right settings. We are noticing a small uptick in inpatient utilization related to a surge in COVID-19 cases throughout California, but we believe we remain within expectations in terms of current year guidance, and we will continue to monitor the situation. As it relates to our Medicare ACOs, we have noticed an uptick in cost trends, but that increase remains lower than national trends. Moving on to recent activity, we continue to believe that our platform consisting of clinical capabilities, proprietary technology, and a strong operating team drives our differentiated ability to produce operating leverage, great patient outcomes, and ultimately our goal of sustainable high growth with effectively managed costs. And after the quarter ended, We continue to be active in order to capitalize on those advantages, investing in continued organic and inorganic growth through several partnerships as well as an acquisition. First, we deepened our relationship with one of our important payer partners, Anthem Blue Cross, by entering into a partnership where we will build and operate primary care clinics that are jointly branded between AstronaCare and Anthem Blue Cross. The partnership underscores our organization's commitment to increasing access to care, and in particular, we'll be focused on providing a convenient, delightful consumer experience, complete with readily available walk-in visits, same-day telemedicine, online appointment scheduling, and the latest technology. Our very first AstroniCare Anthem Blue Cross Clinic has already opened in Whittier, California, and we look forward to continuing our partnership with a pipeline of clinics across the state of California. Next, we announced that we joined forces with Alation Health, a primary care-focused electronic health record company serving over 32,000 clinicians in order to form a nationwide partnership to empower primary care providers in value-based care. The first part of our partnership is a collaboration to build and scale risk-bearing entities, including accountable care organizations and clinically integrated networks anchored by providers on Alation's platforms. Salation will support providers in these networks with its EHR and billing technology, while Estrana will serve as the exclusive care enablement partner for these risk-bearing entities, as well as take on risk when appropriate in our care partners' business. In combination, we believe that this partnership will demonstrate that the right tools and organizational capabilities can jointly scale sustainable value-based care. The second part of the partnership is to put that model into practice. We entered the state of Hawaii as part of this collaboration, partnering with a provider organization of over 100 primary care providers serving just under 20,000 primarily Medicare patients in Hawaii. Operationally, we have already onboarded the organization onto our care enabling platform with full integration expected to be completed by the end of the third quarter of 2024. In addition, we expect to begin participating in risk-bearing arrangements through our care partner segment in that state by 2025. Finally, I'm excited to share more about our recently announced definitive agreement to acquire Collaborative Health Systems, or CHS, a value-based care enablement organization serving around 2,500 primary care providers and 100,000 primarily senior members, and a company of Centene Corporation. The acquisition of CHS further supports our mission to expand our footprint in order to provide high-quality and high-value care to all Americans. Strategically, CHS is a natural fit in three ways. First, CHS's provider network bolsters and complements our existing Texas network, as well as provides us meaningful density across states in the South and along the East Coast, including New Mexico, Alabama, Georgia, Florida, Virginia, Maryland, and Connecticut. We believe that there exists an opportunity for us to further develop clinical processes and care models and drive operational efficiencies across the CHS enterprise through our care enablement platform, a playbook that we've deployed successfully before across multiple markets. Third, CHS and its existing full-risk contracts across multiple payers and geographies advances our ability to participate in value-based arrangements that will allow us to make greater investments in local communities. and the line reimbursement with outcomes. The intended acquisition of CHS requires regulatory approval and is not expected to close until later this year. The business is expected to run up to a $10 million loss on a standalone basis in 2024, but the pro forma impact to Estorana will be dependent on the close date, which we expect to occur in the fourth quarter of this year. Upon closing, we plan to rapidly integrate the business and anticipates an annualized run rate revenue of around $450 million in 2025 with a break-even adjusted EBITDA contribution. Over a three- to four-year period, we expect to operate the business at a more normalized adjusted EBITDA margin profile, like that of the core Estorana business. With the deployment of our technology and clinical capabilities, and with the synergies we believe exist across our complementary organizations, we believe that we can drive access and high-quality care for CHS's members, while also capturing the embedded EBITDA in the business in the near to midterm. As you've now heard, Estrana Health is entering a new phase of scale. Through the three new partnerships and the acquisition I discussed today, we continue to not only reinforce our existing markets in California, Nevada, and Texas, but also plant meaningful footholds into nine new states across the Hawaiian Islands, the South, and the East Coast. Beginning in 2025, we anticipate that, pro forma the CHS acquisition, Estrana Health will proudly serve over 1.1 million patients in value-based care arrangements across 12 states. And we plan to continue to grow at a rapid pace while maintaining a focus on ensuring long-term sustainability and profitability. As we've demonstrated in partnerships and acquisitions in the past, we intend to do this by driving the Astrona flywheel of one, using our technology platform and operating leverage to drive efficiencies, two, reinvesting those savings into patient access to care and local clinical capabilities, all powered by our scalable care models and analytics, which should ultimately, three, drive better patient outcomes and savings in risk-bearing arrangements. We believe that our continued growth validates the Astrona flywheel, reinforces our depth in core markets, expands our organic growth opportunities, and continues to prove that value-based care can be done successfully in communities across the country. In closing, I want to thank all our teammates, providers, and partners for their unwavering belief in our mission. With that, I'll now turn it to Chon Basho to discuss our financial performance and guidance outlook. Chon?

Thank you, Brandon, and good evening, everyone. We achieved strong financial performance in Q2, thanks to focused execution of our strategy while operating in a dynamic environment. We're pleased with the continued progress we are making in Q2 towards meeting our financial and company-wide commitments. Total revenue this quarter increased 40% to $486.3 million compared to the prior year period. with care partners contributing 463.3 million in revenue, an increase of 44% compared to the prior year period. This growth was mainly fueled by higher capitation revenue, which resulted from the shift of full risk arrangements within our core risk-bearing organizations and the incorporation of CFC earlier this year. Adjusted EBITDA was 47.9 million in the quarter, which represents a 34% increase from $35.8 million in the prior year period. Net income attributable to Astrana Health was $19.2 million, an increase of 46% from $13.2 million in the prior year quarter. Earnings per share on a diluted basis were $0.40, up 43% from $0.28 in the prior year period. Now, focusing on our balance sheet, our liquidity position remains strong with $325 million in cash and cash equivalents and total debt amounting to $446 million compared to $335 million in cash and cash equivalents and total debt of $393 million last quarter. Our total debt changed due to a strategic drawdown on our credit facility to finance the CFC acquisition. Cash flow from operating activities in the first half of 2024 were 29.2 million, which is a decline of 4.3 million compared to the prior year period, primarily driven by increase in working capital associated with the ACO REACH program and income tax payments. We continue to expect our cash flow from operating activities for the year to be approximately 50 to 55% of adjusted EBITDA. as I've mentioned previously. Finally, I'll wrap up my remarks by sharing our financial outlook for the year. After taking our recent initiatives and capital allocation strategy into account, we are raising the bottom end of our revenue guidance to $1.75 billion while maintaining the top end of the range of $1.85 billion. We're maintaining our full-year outlook for adjusted EBITDA as we continue to invest incremental profitability into developing new markets, such as Arizona and Hawaii. In addition, due to the purchase price allocation related to the acquisition of community family care IPA and health plan, we're updating our amortization of intangibles. As a result, we're revising our EPS guidance to a range of $1.12 to $1.36 per share. For a closer look at the quarterly cadence for the remainder of the year, we expect revenue to come in at around a $455 million run rate as we continue to move members into full risk arrangements in the latter part of the year. In terms of adjusted EBITDA, consistent with comments on our Q1 call, we expect the second quarter adjusted EBITDA contribution to represent the highest quarter this year, followed by a step down in the third quarter and another in the fourth. This deviates from historical patterns due to the inclusion this quarter of sweeps and quality incentive payments in the high single-digit millions range. which we typically recognize during the third quarter in previous years. Overall, we believe that our year-to-date results and revised guidance continue to demonstrate the strength and differentiation of the Astrana Health platform. Moving forward, we will continue to prioritize execution, operational efficiency, and strategic capital allocation to position us for driving sustained growth and improving the market presence of our business. With that, I'll leave it to you, operator, for questions.