Cano Health, Inc.

Good morning and welcome to Canon Health's second quarter 2021 earnings call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Today's call will be approximately 60 minutes in length. Please be advised that today's conference is being recorded. Hosts in today's call are Dr. Marlo Hernandez, co-founder, chairman, and chief executive officer, and Brian Coppe, chief financial officer. The Cano Health Press release, webcast link, and other related materials are available on the investor relations section of Cano Health's website. These statements are made as of August 12th, 2021 and and reflect management's views and expectations at this time and are subject to various risks, uncertainties, and assumptions. As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the 2021 and 2022 fiscal years. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. We caution you that the forward-looking statements reflect our best judgment as of today based on factors that are currently known to us, and actual future events or results could differ materially. During the call, we will also discuss non-GAAP financial measures. The non-revenue financial measures we will discuss today are not prepared in accordance with GAAP. A reconciliation of the GAAP and non-GAAP results is provided in today's press release and on the investor relations section of our website. With that, I'll turn the call over to Dr. Marlo Hernandez, co-founder, chairman, and CEO of Kano Health. Please go ahead.

Thank you, Phyllis, and welcome everyone to our second quarter earnings call. This is a very exciting time for Kano Health, and I appreciate you taking the time to hear about our progress and our plans for continued growth. I'm proud to report that, once again, we had a very strong quarter of revenue growth, as well as adjusted EBITDA growth and operational expansion. Our company, since its founding in 2009, has consistently delivered results for its patients and stakeholders. We're a company that has made and will continue to make transformational social and financial impacts through our sophisticated population health platform, which we grow through building, buying, and managing medical centers. We started out as a single medical center. Today, we're one of the largest primary care operators in the United States. At its core, Quantum Health has a differentiated growth model with unique assets, both technological and physical, with market leadership in some of the country's largest and most attractive managed care markets. Let me give you an example. In Miami-Dade County, arguably the country's number one market for managed care, we are the number one primary care provider for Medicare Advantage members. And when I say number one, I'm also referring to quality metrics, medical cost management, and membership growth. We have a five-star NCQA rating for a population that is predominantly low income and has been chronically and historically underserved. We also have lower mortality, lower costs, which means more grandmas and more grandpas will be there for their families, living the retirement they deserve or simply following their passions. For those that are new to the Count of Health story, let me give you a brief overview of what makes Count of Health different. What makes us special even beyond our numbers? Our mission is to provide patients with high quality, high touch primary care, producing better outcomes at lower cost, creating significant value for all stakeholders. Our vision is to be the national leader in primary care. Now let me tell you about the canal difference from a business perspective. When you combine our national care platform built on access, quality, and wellness with our flexible growth model, building, buying, and managing, the result is speed, density, and scale, which translates to capital efficiency and profitable growth. We primarily operate in the $800 billion Medicare market, where they focus on Medicare Advantage, or MA, the private sector alternative to traditional Medicare for seniors offered by health insurance companies. This MA market is growing at 8% to 10% per year, and yet less than 20% of Medicare patients are currently receiving care within a comprehensive value-based model. That's our wheelhouse, which explains the enormous growth potential of our company. Canal Health is a leader in value-based primary care. That is, we are paid a flat fee per patient per month rather than a fee per patient visit or procedure. Approximately 96% of our revenue comes in the form of recurring capitated payments from health plans and the Centers for Medicare and Medicaid, or CMS. We are transforming health care from the current analog state, which is transactional and fragmented, to one that is digital, one that is personalized and coordinated. In addition, we are proud of the role we play in making healthcare in America more equitable. We serve predominantly underserved communities. Approximately 80% of our patients are Latinos and African Americans, and we reflect the ethnic and cultural makeup of the communities we serve. Our staff, like our patients, are 80% minority. and that extends all the way to the C-suite and board of directors. This is critical in every industry, but particularly in healthcare, where trust and understanding are absolute necessities to provide optimal clinical outcomes. Let me now address the COVID-19 pandemic. Life expectancy in the United States fell by 1.5 years, the biggest drop since World War II, according to a recent study in the British Medical Journal. Among Hispanic Americans, the decline was even more, 3.9 years. And among African Americans, the decline was similarly head-turning, 3.3 years. Yet, at Canal Health, our COVID mortality for seniors, and remember, our patient population is 80% Hispanic African American, has been far lower than the national average, even though we serve an older, poorer, and sicker population. As published in the American Journal of Managed Care in June 2021, Kindle Health obtained a 60% reduction in COVID-19 mortality compared to a mirror group in Florida. In other words, for the same or lower cost than other primary care providers, we have proven our ability to provide patients with a longer and fuller life even during the COVID-19 pandemic. We intend to continue to grow and bring our care model to more patients across the country. With that, let me summarize our growth strategy, which leverages speed, density, and scale to reach the most patients while ensuring optimal capital efficiency, which has become our clear competitive advantage. Since 2017, approximately 40% of our membership growth has been organic and the balance inorganic. Our financial and clinical performance is a direct result of our ability to execute on our business model and our growth avenues. Simply put, we build, we buy, we manage. First, build. We grow organically by expanding our existing practices and building new medical centers. In the second quarter, our organic membership growth was 30% year over year. It's important to note that not all de novos are created equal. We have found that in a market where we have built scale and density, a de novo will perform better than one built in isolation. This is due to various contractual, local, and operational reasons. Second, buy. CounterHealth grows through targeted acquisitions. We source, evaluate, and rapidly integrate acquisitions, improving their operating and financial performance. Since 2017, CounterHealth has completed 35 acquisitions, and our average adjusted EBITDA growth for acquisitions has been approximately 30% year-over-year in the first year, and 15% in the second year, with continued strong growth thereafter. Like the Nobles, this growth avenues leverages density and scale to optimize performance. Finally, manage. We provide management services to affiliated primary care practices, improving their financial and clinical outcomes. These affiliate relationships serve as a robust source of additional clinical capacity, allowing us to rapidly build scale and density. An important differentiator that I want to talk to you about now is our proprietary technology platform, CanalPanorama. CanalPanorama is the basis for our population health management. It is composed of dozens of modules, hundreds of daily metrics, and thousands of support tools and algorithms. It is a systematic approach which goes beyond just the basics of primary care. Just the basics of testing, treatments, and vaccinations, Canal Panorama is designed to help predict and prevent disease to individualize care for the patient while optimizing the health of an entire community. It is about connecting people, processes, and technology to make everyday miracles happen with the results measured by the lives we touch and by the lives we save. It's about utilizing our protocols to detect cancer at early stages, to identify heart disease before a patient has a heart attack. And when our patients do better, we do better because we have aligned clinical and financial outcomes that benefit communities, staff, payers, and shareholders. As an example, if we extrapolated the results from the 2021 study on COVID-19 outcomes, which I referenced earlier, And every senior citizen in Florida since the start of the COVID-19 pandemic have received canal light care powered by a system like Canal Panorama. We believe more than 10,000 people in Florida would be alive today. From a clinical perspective, this is the canal health difference. Now, let me describe the canal model or canal light care, which is what we call our care delivery model. We provide our members with standardized primary care services based on access, quality, and wellness. This is evidenced by our net promoter score of 77 average over the last 12 months, our five-star NCQA ratings from our largest health plans, and our lower hospitalizations, ER visits, and mortality rates, which are well below Medicare averages. Count on Health delivers more accessible care by providing services like transportation, 24-7 urgent care line, in-home visits, and telehealth. We provide higher quality through care coordination, preventive screenings, and disease management. We provide a wide array of wellness options from exercise classes to nutrition workshops. Another important detail is that dental health doctors see fewer patients than average and spend their time focused on delivering care rather than filling out forms. That's what drew me as a young physician to build the first dental health clinic and partner with an exceptional group of professionals to create our care delivery model. Now I'd like to spend some time discussing specific strategic highlights from the past few months that have me particularly excited about dental health, future growth on april 1st we began managing patients under cms direct contracting entity program or dce dce is today in its infancy but we see great promise in the program account of health is well positioned to be a solution for this and other value-based programs Very few companies have the infrastructure and track record, particularly for the underserved population, that Kano Health has, which is in perfect alignment with CMS goals of measurably increasing quality while controlling costs. On June 4th, Kano Health shares began trading on the New York Stock Exchange as a newly publicly traded company. On June 11th, we acquired University Healthcare with 13 facilities and approximately 24,000 Medicare Advantage members. And a few weeks later, on July 2nd, we acquired Doctors Medical Center, or DMC. While this is a third quarter event, it's an important development that adds additional scale and density to our operations in Florida and allows us to deliver more targeted services to our members. DMC operates 18 facilities, serves 52,000 members, including approximately 7,000 Medicare Advantage members, 31,000 Medicaid members, and 14,000 ACA members. We have also entered into other smaller yet important transactions over the past couple of months that reflect our strategy to build density in our markets. In June, we purchased two small practices in Texas, one in San Antonio, where we have four de novo centers, and one in Corpus Christi, where we'll be opening multiple de novo centers. In July, we signed an agreement to acquire practice with two medical centers in Las Vegas, Nevada, adjacent to our three existing Las Vegas centers. Also, In July, we acquired a behavioral health specialty group in South Florida with 27 providers, 14 clinics co-located within current Kano Health medical centers, and two standalone clinics to better serve the mental health needs of Kano Health members. We have worked with these providers for several years, and as a result of this transaction, we're excited to now have this specialty service in-house to directly provide behavioral health care to our patients. which is particularly timely during the COVID-19 pandemic. I'm also proud to report that in August 2021, we deployed approximately $140 million of cash and $30 million in equity to acquire medical practices and infrastructure, managing affiliates in four states, Florida, New York, New Jersey, and New Mexico. For these medical practices and affiliates in 2021, we expect to recognize approximately 14 million of fee-for-service and other revenue and 5 million of adjusted EBITDA. In 2022, we expect to recognize approximately 200 million of capitated revenue and 16 million of adjusted EBITDA from 15,000 capitated Medicare members served by these medical practices and affiliates. The projected increase in revenue in adjusted EBITDA in 2022 is due to our expected success converting patients in these medical practices and affiliates into KanoHealth value-based members. While each of these events serve as an important marker of KanoHealth's expansion, taken together, they represent the mosaic we're building across our markets to serve more patients while accelerating growth. Our overarching goal is to be able to measurably improve health outcomes profitably and sustainably all while building lifelong bonds with communities and the people we serve as a result of the positive events outlined above we also announced this morning's press release that we are increasing our guidance for 2021 and 2022 we have built considerable density and scale in our home markets fueling profitable growth and accelerating our build by managed strategy across the country. Brian will provide the details shortly, but before Brian begins, I want to thank all KanoHealth employees who did the hard work of delivering this strong quarter. It's been an extraordinary couple of years for our company for many reasons, and through it all, our employees have proven themselves skilled, committed professionals who regularly achieve the impossible. With that, I'm happy to introduce our Chief Financial Officer, Brian Coffey, who joined us just before our public listing and since made himself an integral and valuable member of the KanoHealth family.

Thank you, Marlo, and thank everyone for joining us today. I'm extremely proud to be part of this great company and its 3,000-plus employees. From my experience of 20-plus years in the healthcare industry, I truly believe KanoHealth who is patient-centered, service-focused, and mission-driven to deliver superior primary care of medical services as the right strategy, build, buy, and manage to deliver long-term, sustainable, profitable growth. Turning now to our results. In the second quarter, we demonstrated that our core business continues to meet our high expectations. We produced healthy top line, membership, and adjusted EBITDA growth numbers this quarter. showcasing not only the strength of our core business and growth strategy, but also our cost and operational management. We have continued to execute on our flexible growth model and through speed, density, and scale, we expect to continue to achieve consistent growth. The positive trends in our performance and the effective integration of our new medical centers and affiliates will provide continued revenue and earnings performance to achieve our guidance. Our focus on membership growth saw our membership increase 57% to 156,000 members in the second quarter. This is a 99,000 member increase from a year ago. In the second quarter, 72% of our members were Medicare, 16% were Medicaid, and 12% were ACA. Note that our quarter-end Medicare membership also includes roughly 24,000 Medicare Advantage members from our June 11th acquisition of University Healthcare. Medicare membership also includes about 8,000 beneficiaries assigned to us under CMS's DCE program. This was the first quarter we reported DCE results as the program began on April 1st, 2021. Following the quarter, we closed on the DMC acquisition. Looking at membership post the DMC acquisition or pro forma as of June 30th, our membership is now approximately 208,000 And we have 108 medical centers with over 1,000 employed and affiliate providers ready to serve our members. Additional detail about our membership mix and our PMPM or per member per month revenue by line of business is available in our press release and updated investor slides posted this morning on our website. Total revenue in the second quarter was $393 million. which included capitated revenue of $370 million and other revenue of $14 million, was up 130% year-over-year and reflects strong membership growth and operational expansion. Total capitated Medicare revenue in the second quarter was $335 million and includes DCE revenue of approximately $29 million. The Medicare revenue PMPM was approximately $1,180, up 40% year-over-year, primarily driven by improvements in our Puerto Rico operations. Medicaid revenue PMPM was approximately $610. Projecting Medicaid PMPMs going forward, it is important to note that the Medicaid membership acquired through our DMC acquisition runs at a lower PMPM than our current book due to its higher pediatric enrollment and therefore will lower the overall Medicaid PMPM outlook. The medical claims expense ratio for the second quarter of 2021 was 77.0%, compares to 73.0% in the first quarter for 2021. The increase was driven primarily by the inclusion of BCE members who we initially expect to have higher medical costs and to a lesser extent by higher elective procedure utilization and costs related to COVID-19. For the first half of 2021, the medical claims expense ratio was 75.3%. For the full year of 2021, we are projecting a medical claims expense ratio of approximately 75%. We expect a stable second half medical claims expense ratio, primarily due to ongoing population health management, which leverages the analytics and treatment protocols of Cano Panorama. comprehensive care management programs, which we expect to maintain stable hospital admissions, as well as lower DCE medical costs per member as they are integrated into the Cano Health platform. Also, high vaccination rates for our Medicare members, which about 87% of these members are vaccinated, adding a level of protection against the current COVID-19 surge, which is a surge of the unvaccinated, and expectations for normal seasonality. We typically realize lower medical claims in the second half as compared to the first half. Moving on to direct patient expense. For the second quarter, direct patient expense was $44 million, an increase of $21 million versus the prior year quarter. The increase was generally volume-driven due to our growth. Overall, our direct expense ratio improved 200 basis points to 11.1%. Selling, general and administrative expenses were $47 million for the second quarter of 2021, an increase of $25 million. The increase was encouraged to support the continued growth of our business and expansion into other states. Overall, our SG&A ratio improved 100 basis points to 11.8%. The company recorded stock-based compensation expense of $3.2 million for the second quarter. For the full year 2021, we expect stock-based compensation expense to be approximately $16 million to $20 million. Adjusted EBITDA of $25 million for the second quarter of 2021 compared to $16 million for the second quarter of 2020 represent a 53% increase. And as a result, our adjusted EBITDA margin for the second quarter was 6.3%. Interest expense was $10 million for the second quarter of 2021, an increase of $4 million as compared to prior year quarter. For the full year 2021, we expect interest expense to be approximately $50 million. Regarding shares outstanding, there are about 477 million shares of combined Class A and Class B shares outstanding as of June 30th. I would note that this morning we also filed a required S-1 registration to authorize employee shares for resale. There is no impact on share count as a result of this filing. Now let me turn to our cash flow and liquidity. We ended the second quarter with about $319 million in cash and $30 million available under our revolving line of credit. Debt at the end of the second quarter was $557 million and includes term debt, capital leases, and payments due to sellers. For the six months ending June 30th, cash use and operating activities was $57 million, an increase of $43 million, and we deployed approximately $618 million for acquisitions. On July 2nd, we closed on our DMC acquisition and used $300 million in cash and subsequently borrowed an additional $250 million. In addition, throughout July and August, we deployed approximately $155 million on the transactions model we discussed. As a result, pro forma for the acquisitions after the end of the second quarter, our net debt is $693 million, and our total net debt to pro forma adjusted EBITDA ratio is 4.3. We expect cash use and operating activities to be approximately $90 million for the full year of 2021, with de novo and maintenance CapEx expenditures in the range of $40 million to $45 million for 2021. However, as our profitable growth continues, we expect to be cash flow positive in the fourth quarter of 2021. And for the full year of 2022, we expect the strength of our existing operations and the recent acquisitions to generate positive cash flows that will continue to support growth and allow us to de-lever over time. Now turning to our updated guidance. For 2021, We expect membership to be approximately $215,000, an increase from the prior range of $205,000 to $210,000. For revenue, revenue is projected to be approximately $1.6 billion, an increase of the prior guidance of $1.5 billion. Adjusted EBITDA, 2021 adjusted EBITDA is now projected to be approximately $115 million, reflecting an increase from the prior guidance of approximately $110 million. For 2021, we remain on pace to open 15 to 20 de novo medical centers. By the end of the third quarter, we expect to have more than half completed. By year end, we expect to be operational in eight states plus Puerto Rico. The states include Florida, Texas, Nevada, New York, New Jersey, New Mexico, and two additional states that will be announced by the end of the third quarter. Turning to 2022 guidance. For membership, we expect membership for 2022 to be in the range of $275,000 to $280,000, an increase from the prior year guidance of approximately $250,000, 250,000 members. Revenue is expected to be between $2.5 billion to $2.6 billion, an increase of the prior guidance of approximately $2.2 billion. Adjusted EBITDA for 2022 is now projected to be approximately $165 million to $170 million, reflecting an increase from the prior guidance of approximately $150 million. In 2022, we expect to open 54 to 59 de novo medical centers in the states I just mentioned as we execute on our market density strategy. The capital expenditures for each of our de novo medical centers are expected to be approximately $1.3 million to $1.8 million each. Additionally, approximately two-thirds of these de novo centers will be expected to be outside of Florida, with the majority expected to be completed in the second half of 2022. Today's guidance is an update from the previous guidance disclosed on July 6, 2021. And consistent with that guidance, the guidance does not include the impact of any additional acquisitions, which the company expects would be accretive to membership, revenue, and adjusted EBITDA. In conclusion, the recent events demonstrate the effectiveness of CalHealth's strategy to leverage multiple avenues to generate growth through building, buying, and managing medical practices. Utilizing these growth avenues individually or in combination, depending on the opportunities available, results in the most efficient use of capital, which we believe allows us to manage the greatest number of patients in the shortest amount of time and with the least amount of risk, which ensures profitable growth and market leadership. With that, I'll ask the operator to open the call to your questions.