Cano Health, Inc.

Good morning, and welcome to Kano's Health Third 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. Please be advised that today's conference is being recorded. Hosting today's call are Dr. Marlo Hernandez, co-founder, chairman, and chief executive officer. and Brian Coffey, Chief Financial Officer. The KanoHealth press release, webcast link, and other related materials are available on the investor relations section of KanoHealth's website. These statements are made as of November 9, 2021, and reflect managers' 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 year. We intend these forward-looking statements to be covered by the Safe Harbor Prohibition 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 the factors that are currently known to us. And actual future events or results could differ materially. we undertake no obligation to revise or update any forward-looking statements, whether as a result of a new information, future events, or otherwise. 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. Our reconciliation of the historical gap and non-gap result 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 Cano Health. Please go ahead.

Thank you, and welcome everyone to our third quarter earnings call. We appreciate you joining us to discuss our third quarter in which KanoHealth delivered strong results and operational expansion. As a result of our continued momentum, we're once again raising guidance for 2021 and 2022. Before I go into more detail in the quarter, I want to thank, first and foremost, the entire KanoHealth team, our 3,600 dedicated professionals who, through their passion and commitment, provide patients with industry-leading health care, and perhaps more importantly, they provide patients with hope and dignity. Every day, we're bringing new solutions to patients and communities across the country, and we're transforming health care from the inequitable and unsustainable status quo that it presently is to a 21st century model, thanks to our team. This 21st century model is about removing barriers to optimal patient outcomes by ensuring access, quality, and wellness for all patients. This is the basis for KanoHealth's vision to become America's primary care provider. And that vision got closer to becoming reality this past quarter. Once again, we drove strong revenue and earnings growth through increased membership and medical care optimization. Today, we have the privilege of serving more members than ever because we have continued to produce better outcomes for our patients at lower costs. Our strategy to build, buy, and manage medical centers drives scale and density in key markets, which is in turn continuing to fuel our profitable growth. We're also enhancing care delivery by launching novel programs such as Healthy Heart by Dr. Juan Rivera to tackle the high incidence and high cost of cardiovascular disease in America. At the core of our strong financial and clinical performance this quarter is our tech-enabled value-based care model that helps control costs while keeping our members healthy and out of the hospital. The backbone of that model is Canal Panorama. I've discussed this in previous calls. Canal Panorama is a unique population health platform that provides an end-to-end solution for patients, clinicians, and healthcare professionals to improve the health of an individual patient while optimizing the health of an entire community. During these difficult times, Canal Panorama has helped us navigate the COVID-19 pandemic by allowing us to coalesce real-time actionable data from multiple sources, including hospital admissions, emergency room visits, laboratory diagnostic, primary care visits, and specialist consults. Taken together, this integrated data are used by primary care providers and other clinicians to assess risk and guide customized treatment plans while allowing Cattle Health to optimize the well-being of our entire patient population. In addition, The Kano Panorama platform supports the rapid scalability of our operations by empowering medical centers to achieve Kano Health's high standards for clinical quality and financial performance within just a few months. Drive growth through building, buying, and managing medical centers. In fact, It's because of our technical infrastructure and growth avenues that I'm pleased to announce that we have already accomplished our stated 2021 goal of being operational in eight states plus Puerto Rico. As I've discussed in the past, our corporate strategy is to build scale and density in key markets, which we define as those with high Medicare advantage density and underserved populations. And we achieved that through a flexible growth model. An important component of that growth model is the opening of de novo medical centers. As I've shared with you before, a de novo in a market where we have already built scale and density will always outperform a de novo in isolation. So far this year, we have entered several new markets and increased our density in existing markets. We're especially excited about our recent market entries into Los Angeles and Chicago. We believe the opportunity in these markets is substantial, which is why we think, in due time, they will rival our presence in our largest current markets in Florida. In addition, we are very excited to have expanded our presence in New Mexico and southeastern Texas, including de novos in Florida and Nevada. We have thus far opened 16 de novo medical centers in 2021, on pace for 20 by the end of this year. Turning to our acquisitions, we are very happy with our performance to date. Both of our major acquisitions this year, University Healthcare and Doctors Medical Centers, or DMC, have validated the rigorous standards which we apply when we selected them. We objectively evaluate their clinical quality, track record of care management and compliance, and potential for membership growth, as well as other synergies. We then enhance performance in these key areas through Canon Panorama-empowered integration. At Canon Health, newly onboarded clinicians and healthcare professionals can leverage Canon Panorama to measurably improve patient care in the way that they have always wanted to. Moreover, they can also participate in various equity ownership programs. The combination of professional fulfillment and ownership stake makes Canon Health a great and unique place to work. The results speak for themselves. For example, within university and DMC, we have a voluntary clinician retention rate of nearly 100%. Let me now talk to you about an exciting new program within our medical centers. We're constantly refining primary care delivery and setting new industry standards. That is why we believe that Healthy Heart by Dr. Hwang will have such a dramatic and positive impact in U.S. healthcare. Dr. Juan Rivera is a highly respected leader in cardiovascular care. After completing his cardiovascular fellowship at Johns Hopkins, he built a thriving private practice, became a national medical thought leader, and serves as chief medical correspondent for the Univision TV network. He's a trusted healthcare figure, particularly within the Hispanic community, and we are honored to be working with him on this important endeavor The Healthy Heart Program is designed to predict and prevent cardiovascular disease through early detection, individualized treatment or risk factors, and education about healthy lifestyle choices. The program is designed to significantly reduce the probability of a patient suffering heart attack or stroke. And when our patients live healthier lives, we all do better. because through our value-based model, our clinical and financial objectives are aligned. Speaking about keeping our patients healthy, let me give you an update on COVID-19 and how that has been impacting our patients since our last quarterly call in August. In the financial supplement deck posted on our website this morning, you will find slides showing our seven-day daily average for COVID-19 case incidence and hospital admissions. It also illustrates our average monthly total in COVID-19 admissions per 1,000 patients since May of 2020. As you can see in the illustration, our case incidence and hospitalizations have fallen dramatically over the last two months, which were already below Cano's pandemic peaks. As we continue to manage successfully through the cases and admissions experienced by our members, we're evolving our protocols to address variants like Delta and stand ready to adopt new antiretrovirals and other therapies which have strong clinical data. We are very proud of the success we've achieved in protecting our patients from the virus with a mortality rate that is at least 50% lower than the senior population in Florida. I've said this before. But it bears repeating. Statistically, one of the safest places for patients to be during this pandemic or at any time is at a Canon Health Medical Center as one of our members. Lastly, I want to touch on the Canon Health value proposition. We have provided additional slides in our financial supplement posted today on our website to illustrate this topic. we perform a necessary service to a growing population under a recurring revenue model supported by the government. Our services are substantially different from other models, offering significantly more benefits to members for the same or lower cost. We can provide more services because our outsized investment in primary care, where we focus on prevention, and thereby lower downstream costs. CounterHealth spends about 12% of the revenue it receives from payers on primary care. That's roughly two times more than the national average. By investing more to see our patients who come to our centers on average 20 times per year, we can identify new conditions earlier, actively manage chronic conditions better, and coordinate care more efficiently. Our providers serve as the trusted source for members' healthcare needs, keeping our members healthier and out of the emergency rooms. Our focus and investment in primary care reduces medical waste and other third-party medical expenditures, and that in turn lowers the cost to patients while improving their physical and economic health so that they can be there for their families and pursue their passions. Our operating model has demonstrated the benefits of our investment in primary care by improving quality while driving down overall medical costs. Our cohort analysis of Medicare Advantage capitated revenue for our members illustrates that revenue increases by a 6% CAGR as members' age and chronic conditions are identified. But here's the more important news. We find that due to Cano Panorama, our platform for managing those chronic conditions combined with our ability to change member behavior through removing the barriers to access quality and wellness, the medical costs decline by a 6% CAGR. There's repeating because that is a dramatic change contrast, not only to the 6% increase in revenues because of aging chronic conditions, but we would expect a 9% CAGR increase for the similar cohort of Medicare Advantage patients outside of the Townhill Health model. The bottom line is this. Our improvement in our medical claims ratio is primarily driven by medical cost reductions, not premium increases. In summary, our achievements this quarter have advanced our vision to become America's primary care provider because we have continued to produce better outcomes at a lower cost, and this creates significant value for all stakeholders. Now I will turn the call over to our Chief Financial Officer, Brian Coffey, who will walk you through additional details on our financial performance and outlook.

Thank you, Marlo, and thanks, everyone, for joining us today. We posted excellent financial results in the quarter, which are a testament to our employees who work every day to provide patient-centered, service-focused, and mission-driven primary care medical services to our members. We continue to execute on our build, buy, and manage strategy to deliver long-term, sustainable, profitable growth. Our goal is to achieve consistent growth and operating results as we grow rapidly in key markets. This quarter demonstrates our ability to do just that. We produced healthy revenue, membership, and adjusted EBITDA growth. We controlled our third party and direct patient care expenses while expanding our corporate spending and anticipation for future growth into new markets. We also continued the effective integration of our newly acquired medical centers and affiliates. This quarter's solid results puts us on track to beat our prior guidance for 2021 and 2022. Membership increased 105% year over year to approximately 211,000 members in the third quarter. This is an approximate 108,000 member increase from a year ago. In the quarter, 57% of our members were Medicare, 30% were Medicaid, and 13% were ACA. Note that our quarter-end membership includes roughly 7,000 Medicare Advantage members, 31,000 Medicaid members, and 14,000 ACA members from our July 2nd acquisition of Doctors Medical Center, or DMC. 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 financial supplement slides posted this morning on our website. Total revenue in the third quarter was $527 million, which included capitated revenue of $502 million and other revenue of $25 million. It was up 100% year over year. This reflects strong membership growth and operational expansion. Total capitated Medicare revenue in the third quarter was $447 million, Medicare revenue PMPM was approximately $1,241, an increase primarily driven by recent acquisitions, improvements in our Puerto Rico operations, and increased member engagement. Medicaid revenue PMPM was approximately $271. As mentioned on our second quarter call, the acquisition of DMC, with its high pediatric enrollment, reduced our Medicaid PMPM in the quarter. We expect this lower PMPM to continue in future periods. The medical claims expense ratio for the third quarter of 2021 was 75.6% compared to 77% in the second quarter of 2021. The sequential decline was primarily driven by the continued effectiveness of our Cano Panorama-powered care and utilization management programs based on data-driven prediction, prevention, and intervention. We expect a fourth quarter medical claims expense ratio of approximately 74%. As discussed last quarter, we typically realize a lower medical claims expense ratio in the second half as compared to the first half. The fourth quarter tends to have the lowest medical claims expense ratio of the year because members and specialists defer elective procedures due to the holidays and more of our higher cost members are covered by stop loss insurance. For the full year of 2021, we continue to project a medical claims expense ratio of approximately 75%. Moving on to direct patient expense. For the third quarter, direct patient expense was $58 million, an increase of $14 million versus the second quarter of 2021. The increase was generally volume-driven due to our growth. Overall, our direct patient expense ratio sequentially improved approximately 10 basis points to 11%. Selling general administrative expenses were $76 million for the third quarter of 2021, an increase of $29 million from the second quarter of 2021. Overall, our SG&A ratio increased 260 basis points sequentially to 14.4%. The primary drivers of the sequential increase were higher stock compensation expense and higher professional fees, primarily related to transactions. The company recorded a stock-based compensation expense of approximately $9 million for the third quarter. For the full year 2021, we expect stock-based compensation expense to be approximately $27 million based on currently granted awards, which is higher than the previous estimate. The increase from the prior estimate was primarily driven by the implementation of the company's Employee Stock Purchase Plan, or ESPP, as well as employee stock grants awarded during the quarter. The rollout of our ESPP plan was very well received by our employees, and we are encouraged by the participation rate, which further aligns our employees with creating long-term value for our shareholders. Adjusted EBITDA was $35 million for the third quarter of 2021, compared to $23 million for the third quarter of 2020, a 53% increase. As a result, our adjusted EBITDA margin for the third quarter was 6.7% versus 6.3% last quarter. Interest expense was $16 million for the quarter of 2021, for the third quarter of 2021, which includes $3.5 million in one-time expenses related to our recent financing activities. For the full year 2021, we expect interest expense to be approximately $50 million. And as a reminder, regarding shares outstanding, there are about 480 million shares of combined Class A and Class B shares outstanding as of today. This includes approximately 2.7 million shares issued as consideration for an acquisition in the third quarter that are currently held in escrow and which will be released to the seller upon the satisfaction of certain performance metrics in 2022 and 2023. Now let me turn to our cash flow and liquidity. We ended the third quarter with about $209 million in cash and $60 million available under our revolving line of credit. Total debt at the end of the third quarter was $952 million and includes term debt, capital leases, and payments due to sellers. Our total net debt is $743 million, defined as total debt less cash. Our ratio of total net debt to adjusted EBITDA pro forma for completed acquisitions is 4.8. For the nine months ending September 30th, cash use and operating activities was $91 million, an increase of $70 million from the prior year, and we deployed approximately $1.1 billion for acquisitions. For the full year 2021, we expect cash use and operating activities to be approximately $90 million, confirming our previous estimate that cash use and operations in the fourth quarter will be slightly positive. De novo and maintenance CapEx expenditures are expected to be approximately $50 million for 2021. For the full year of 2022, we expect the strength of our existing operations and the recent acquisitions to generate positive operating cash flows that will continue to support growth and allow us to deliver over time. Now turning to our updated 2021 guidance. We expect membership to be approximately $218,000, an increase from the prior range of approximately $215,000. Revenue is projected to be approximately $1.7 billion versus prior guidance of $1.6 billion. Adjusted EBITDA is now projected to be approximately $118 million compared to our prior guidance of approximately $115 million. We expect to open 20 de novo medical centers and operate approximately 130 owned medical centers by year-end. For 2022, we are also improving our outlook. We expect membership for 2022 to be in the range of $280,000 to $285,000 from the previous estimate of $275,000 to $280,000. Revenue is expected to be approximately $2.6 billion to $2.7 billion compared to the previous estimate of $2.5 billion to $2.6 billion. And adjusted EBITDA is expected to be $170 to $175 million, an increase from the previous estimate of $165 million to $170 million. Importantly, as the 2022 open enrollment period is underway, we will provide updated projections early next year. In 2022, we continue to expect to open 54 to 59 de novo medical centers to support our market density strategy. A majority of these de novas will be built outside of Florida, and most are expected to be completed in the second half of 2022. The capital expenditures expected for each of our de novo medical centers remains at approximately $1.5 million. In conclusion, our ongoing success continues to build momentum and demonstrate the effectiveness of Kennell Health's strategy to build scale and density by generating growth through building, buying, and managing medical practices. Using these growth avenues individually or in combination, depending on the opportunities available, results in the most efficient use of capital. This allows us to manage the greatest number of patients in the shortest amount of time and with the least amount of risk, ensuring consistent, sustainable, and profitable growth and market leadership. With that, I'll ask the operator to open the call to your questions.