Astrana Health Inc.

Hello, everyone, and welcome to Estrana Health's second quarter 2026 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 Estrana Health, and Chandan Basho, Chief Operating and Financial Officer. The press release announcing Astrona Health's results for the second quarter ended June 30, 2026 is available in the investor relations 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 measures are included in the press release. To provide some additional background on the results the company has made, a supplemental deck available on its website. A replay of this broadcast will be available at Astana Health'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 meanings of the safe harbor provisions 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 and conclude, among other things. Statements regarding the company's guidance, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, liquidity, operational focus, strategic growth plans, and Acquisition Integration Efforts. Although the company believes that expectations reflected in these forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There could be no assurance that these expectations will prove to be correct. Information about risks associated with investing in Estrana Health is included in the filings with the Securities and Exchange Commission, which we encourage you to review before making any investment decisions. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, change in market conditions, or otherwise, except as required by law. Regarding to the disclaimer language, if you would like to refer to slide two, of the conference call presentation for further information. With that, I will turn the call over to Estrana Health's president and chief executive officer, Brandon Sim. Please go ahead, Brandon.

Good afternoon, and thank you for joining us for Estrana Health's second quarter 2026 earnings call. Today, I'll begin with an overview of our financial results, then discuss how our care model and AI Native Operating System for Healthcare are accelerating our ability to deliver high quality patient-centered care at scale. I'll then provide an update on the prospect integration following our first full year together. Finally, I'll discuss our strategic positioning in each line of business and provide color on our guidance before turning the call over to Chan. Estrana delivered another strong quarter. reflecting continued momentum across the business. We saw accelerating demand from payer and provider partners, continued maturation of our value-based care cohorts, disciplined medical cost trend management, and expanding operating leverage driven by our proprietary technology platform. In the second quarter, we generated revenue of $973 million, up 49% year-over-year, and adjusted EBITDA of 69 million, up 43% year over year. Adjusted diluted earnings per share reached a record high 80 cents, up 45% year over year. Our business continues to generate substantial cash. Free cash flow totaled 93 million in the first half of the year, representing approximately 69% conversion of adjusted EBITDA into free cash flow. That cash generation, combined with continued earnings growth, has enabled us to continue deleveraging ahead of schedule. Net leverage declined to 2.26 times on a trailing 12-month basis. As a reminder, when we first announced the prospect transaction, we committed to reducing net leverage below 2.5 times within 24 months. We've already surpassed that goal by approximately a quarter turn in half the time. These results continue to demonstrate the scalability of our AI-native healthcare operating system and the consistency of its execution. There is an important distinction between simply adopting AI and actually creating value from AI. We believe that durable competitive advantage comes from owning the orchestration layer where data, workflows, clinical decision making, Thank you for joining us. is intelligent automation that spans the organization, becomes more capable over time, and creates more value as the platform scales. Building that operating system has required years of healthcare expertise, proprietary data, workflow development, and organizational learning, creating a set of capabilities that we believe are difficult to replicate. Just as importantly, we've paired that operating system with a delegated, pair agnostic business model that captures the economic value that those better decisions create. That foundation is reflected in our execution across our four longstanding strategic priorities. First, we continue to grow responsibly. Our growth has never been constrained by demand. It's constrained by the economics of each new cohort that we onboard. Every new cohort requires upfront investment before reaching at-scale profitability, and our objective is to maximize long-term value by balancing growth with profitability. That equation is changing. As our AI-native healthcare operating system continues to improve, every new cohort we onboard generates stronger risk-adjusted returns. New cohorts become more predictable Thank you for joining us. accelerating growth by onboarding additional high return opportunities while simultaneously exceeding our profitability expectations and raising our guidance for the year. On the payer side, we signed new Medicare Advantage agreements in Hawaii and Texas, expanded existing relationships in California, and saw strong demand across the platform. On the provider side, Both our care partners and care enablement pipelines continued to strengthen, including planned new physician partnerships in the South and on the East Coast that we expect to begin contributing to revenue in 2027. We also continued to execute on disciplined strategic tuck-in acquisitions within our expansion markets, further strengthening our care delivery capabilities. We expect these investments to progress along the same maturation curve and become meaningful contributors to earnings over time. Second, we continue to progress prudently into full risk arrangements. In value-based care, success isn't about avoiding risk entirely. It's about reducing the uncertainty associated with that risk. Our platform continuously strengthens our ability to predict and influence the drivers of performance, fundamentally improving the risk-adjusted economics of value-based care. Our competitive advantage isn't a greater willingness to assume risk. It's a greater ability to reduce uncertainty through better clinical and operational execution. As a result, we're able to responsibly pursue full risk opportunities that others may view as too uncertain. while maintaining the same disciplined underwriting standards. The full risk contracts that commenced in Q1 continue to perform in line with our underwriting expectations as those cohorts mature. At quarter end, approximately 81% of capitation revenue and 42% of our membership came from full risk arrangements. Our expansion markets continue to validate the portability of our operating model. In Texas, our delegated full risk partnership with a large national payer is now two full quarters into operation and continues to perform in line with our expectations. Based on that performance, we continue to expand our presence in the market, including adding approximately 3,000 new Medicare Advantage professional risk lives with the payer that selected Estrana as its risk partner. Third, we continue to manage medical cost trend through better care. Historically, risk stratification determined which patients received scarce clinical resources. Today, it increasingly determines how every patient receives care. Higher risk patients continue to receive physician and nurse led interventions, while lower risk patients receive AI enabled navigation, outreach, and Longitudinal Monitoring. AI does not replace clinicians. It extends their reach across a much larger portion of the population without compromising quality. On a year-to-date basis, overall medical cost trend remains slightly better than our full year assumption of approximately 5.2%. Medicare Advantage and Original Medicare continue to perform favorably relative to our expectations. Medicaid cost trend is tracking in line with our expectations. And although commercial has run slightly above expectations in the quarter, we are confident in our ability to manage those trends through the clinical and operational levers enabled by our delegated model. For the 2024 performance year, our flagship MSSP ACO ranked seventh out of 476 ACOs nationwide in net shared savings per beneficiary. while our flagship ACO Reach entity ranked in the top 15% nationally in net shared savings. Fourth, we continue to expand operating leverage as we scale. Across the business, our AI agents are creating capacity, improving productivity, and enabling our teams to focus on higher value clinical and operational work. For example, in claims operations and referral management, AI-powered workflows have reduced handling time by more than 50%, creating operational capacity equivalent to approximately 60 full-time employees over the past 12 months. As a result, G&A as a percentage of revenue improved approximately 210 basis points year-over-year in the second quarter. And we continue to expect to exit the year with G&A at approximately 6% of revenue. Taken together, these four pillars demonstrate how Astrana's operating system for healthcare translates into measurable economic value. And we believe that's what fundamentally differentiates Astrana. Now, turning to Prospect. July 1st marks the one-year anniversary of closing the Prospect acquisition. Over the past year, we systematically integrated Prospect onto the Astrana operating system. bringing clinical operations under a unified care model, embedding the workflows and technology that have driven our historical performance across the enterprise, and establishing a unified operating and financial framework across the business. The results continue to validate that approach. Gross provider retention has remained above 99%. We continue to expect operating expense synergies at the high end of our annual target of 12 to 15 million, and medical cost trend within the legacy prospect business continues to run slightly ahead of our expectations. More importantly, we've established the operational and clinical foundation that we believe will continue to drive improvement over the years ahead. Now turning to the positioning of our portfolio. We continue to actively position our business for long-term value creation while remaining disciplined in our planning assumptions. We exited the quarter with approximately 1.5 million members in value-based arrangements, with year-over-year membership changes driven primarily by Medicaid-related attrition that was already contemplated in our guidance. Medicare Advantage membership remained stable during the quarter. In the exchange product, we continue to expect full-year attrition consistent with both our guidance and our internal planning assumptions. And in Medicaid, we continue to see attrition tracking towards the high end of our expectations, while adverse selection continues to be in line with expectations, as we shared last quarter. While these dynamics remain fluid across the industry, we remain comfortable with the assumptions embedded in our outlook and continue to plan conservatively. At the same time, We are continuing to improve the quality and alignment of our portfolio. In California, we're rebalancing portions of our Medi-Cal business by transitioning members from professional risk arrangements into full risk arrangements in response to changes in the state's Medicaid program. We expect these transitions with several of our health plan partners to occur over the next 12 months and view them as a natural progression of the strategy we've discussed over the past several years. Before I turn the call over to Chan, I'd like to provide a bit of color around our raised adjusted EBITDA guidance for 2026. Our underlying performance continues to run ahead of plan. Rather than allowing all of today's outperformance to flow through to earnings, we've deliberately chosen to reinvest a substantial portion of that into the provider and payer growth opportunities that I mentioned earlier. In aggregate, these investments are in the mid to high single digit millions of dollars this year. As I discussed earlier, our operating system continues to improve the economics of growth, giving us the confidence to capture more of the demand available to us, even while maintaining the same disciplined investment standards. We believe that allocating some of our outperformance is among the highest return capital allocation decisions available to us and will continue to compound our earnings power over time. With that, I'll turn the call over to Chan.

Thank you, Brandon, and good afternoon everyone. Our second quarter results reflect disciplined execution across the platform. Adjusted EBITDA finished towards the higher end of our guidance range and Free Cash Flow Generation remain strong. Also, we made meaningful progress on the balance sheet, retiring $92 million of debt during the quarter. Today, I will cover three areas, our second quarter financial performance, including medical cost trends, the balance sheet and free cash flow, and our updated outlook for the year. Total revenue for the second quarter was $973 million. up 49% versus the prior year period, driven by organic growth in our care partner segment, the prospect acquisition, and continued ramp up of our full risk contracts. Second quarter revenue was impacted by a one-time $15 million reduction related to CMS's implementation of the adjustments for significant anomalous and highly suspect billing activity for the ACO REACH 2025 performance year. Despite this, we are reaffirming our full-year revenue guidance of $3.8 to $4.1 billion. Adjusted EBITDA for the quarter was $69 million, up 43% versus the prior year period and near the high end of our guidance range of $65 to $70 million. This reflects controlled trend, solid performance across our full risk arrangements, continued realization of prospect synergies, and disciplined cost management. Net income attributable to Estrana was $20 million. Adjusted EPS was a record $0.80 per share, up 45% versus the prior year period. Turning to GNA, we expect to be approximately 6% of revenue for the full year. Free cash flow for the first six months was $93 million, an increase of $29 million from Q1 2026. We remain on track to deliver full-year free cash flow within our guidance range of $105 to $132.5 million. On the balance sheet, deleveraging moved from commitment to execution this quarter. We used our strong cash generation and position to retire $92 million of debt, bringing pro forma gross leverage down to 3.8 times from 4.2 times at the end of the first quarter. We ended the quarter with $401 million in cash, $579 million of net debt, and pro forma net leverage of 2.26 times on a trailing 12-month basis. As Brandon discussed, we're raising our full-year 2026 adjusted EBITDA guidance to $255 to $280 million. The increase reflects broad-based outperformance across the business, including the continued maturation of our full-risk cohorts, continued realization of prospect synergies and operating leverage from our AI native operating system. We are raising guidance even while continuing to reinvest a substantial portion of our outperformance into attractive long-term growth opportunities. These investments include growth in our core and expansion markets, newly onboarded pair contracts, plan provider partnerships, disciplined strategic tuck-in acquisitions, and recently converted risk cohorts that remain early in their maturation curves. We continue to believe these investments will generate attractive long-term returns while further strengthening our earnings power over time. On revenue, despite the one-time 2025 ACO REACH billing related adjustment, the continued ramp up of our full risk contracts keeps us comfortably within our previously communicated range. Accordingly, We are reaffirming our full-year revenue guidance of $3.8 to $4.1 billion, as well as our free cash flow guidance of $105 to $132.5 million. Our outlook continues to assume zero contribution from HQAF and conservative Medicaid membership trends. We expect greater clarity on both items as the year progresses. For the third quarter of 2026, We expect revenue between $1 and $1.03 billion and adjusted EBITDA between $72.5 and $77.5 billion. Taken together, our first half performance, including record profitability and earnings growth, strong free cash flow generation, and continued operating momentum gives us confidence in our updated outlook. We enter the second half of the year with momentum, strong balance sheet, and confidence in the long-term trajectory of our business. With that, operator, we're happy to take questions from the audience.