Cano Health, Inc.

Good afternoon, and welcome to KNO Health's fourth 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, Chairman and Chief Executive Officer, and Brian Coppe, Chief Financial Officer. The KNO Health Press Release webcast link and other related materials are available on the Investor Relations section of KNO Health's website. These statements are made as of March 14, 2022 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 fiscal year 2022. 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 following 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'll also discuss non-gap 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 result is provided in today's press release and are on the website at the investor relations section. With that, I'll turn the call over to Dr. Marlo Hernandez, Chairman and Chief Executive Officer of Gaino Health. Please go ahead.

Thank you and welcome to the call. We appreciate your joining us this afternoon on short notice. Kano Health reached important milestones and delivered strong results during the fourth quarter and throughout 2021. I want to start by thanking the entire Kano Health team. Together, we've continued to make great strides in the company's growth while improving quality during the worst pandemic of the last 100 years. You lived up to our values, what we call Kano Strong. Over the course of 2021, we more than doubled the size of Kindle Health, both in terms of revenue and membership. This expansion brought the Kindle Health model to five new states and added more than 100,000 new patients. We did all this while adhering to Kindle Health's core mission to provide patients with high-quality, high-touch care while producing better outcomes at lower cost. I'm particularly proud of our model benefits underserved patients, those who would otherwise not be able to receive high quality care. We're saving lives and transforming communities. And with each passing day, we're reaching more patients through our differentiated approach to growth. And as a product of our mission, we are creating value for all of our stakeholders. In 2021, we expanded our own medical center footprint substantially, adding 50 medical centers across the country, ending the year with 130 owned medical centers and over 1,000 affiliates in eight states and Puerto Rico. We're growing fast in markets outside of Florida. In Texas, for example, we now have 11 medical centers located in San Antonio, Corpus Christi, and Rio Grande Valley. In Nevada, we ended the year with eight centers in Las Vegas. By employing our unique build, buy, manage strategy, We are quickly achieving scale and density in these communities and positively impacting the health of our patients, improving access, quality, and wellness. In Las Vegas, where we've been operating for approximately one year, we have reduced admissions per thousand APTs from 287 in the first quarter of 2021 to 209 in the fourth quarter, with a readmission rate below 11%. We have become an integral part of the community with a staff comprised entirely of local professionals who reflect the population we serve. Powered by Canon Panorama, our population health platform, these providers and clinical support staff members are transforming healthcare and redefining primary care in their community. Our strong financial performance is a result of core fundamentals of providing better patient experience and healthcare quality. We measure patient experience using Net Promoter Score, or NPS, which is 83, and we measure quality by our average star rating, which is 4.7. In our Texas and Nevada markets, our early results show NPS scores at or above our company average, solid quality ratings, and better than expected medical cost optimization. This early success demonstrates the scalability of our model. At the end of 2021, we proudly served approximately 227,000 members across eight states in Puerto Rico, a 115% increase from our membership at the end of 2020. Further, we're already seeing strong membership growth across our markets in 2022. We expect to have a total membership at the end of March 22 of 265,000. up from 253,000 members as of January 1st. That expected increase in membership at the end of March represents approximately 127% year over year growth, including 59% organic growth. I should note that acquisitions were an important source of growth for us in 2021. These included the acquisitions of University Healthcare in June and Doctors Medical Centers in July. Performance of these acquisitions has so far exceeded our expectations, and we expect even stronger contributions to revenue and earnings in 2022. Let me now turn to the technical accounting change we implemented over the last two weeks. This was related to a change in the timing of recognizing Medicare risk adjustment revenue. As a result, we have restated our quarterly financials for the first three quarters of 2021. Brian will provide more detail about this accounting change, but it's important for you to know that it has no impact on our cash position or the strong fundamentals of our business. Our long-term opportunities are truly exciting. Primary care and population health management are essential to providing the best quality care while bending the cost curves. These services are not wants, they are needs. Market demand is large and growing. The care we provide is primarily paid for by the federal government, state governments, and employers. And they increasingly want to ensure that their funds are being spent effectively and equitably. Given the importance to national goals, the Centers for Medicare and Medicaid, or CMS, is working to further accelerate the shift to value-based care with an increasing focus on health equity. As an example, CMS recently announced a redesign of the Direct Contracting Entity or DCE program. The new ACO REACH program will begin in January 2023. We are pleased with what we have learned about the new program, and we expect to participate in 2023 and beyond. Despite the tremendous demand for value-based primary care, clinical capacity remains scarce, which means there is a large space to fill. We believe the companies who can step up to serve this demand at scale, improving quality while reducing costs, will become the largest and most influential healthcare companies in our country. In short, our performance and growth prospects continue to reinforce our confidence in Kindle Health's national care platform, designed to improve access, quality, and wellness, and our growth strategy of building, buying, and managing medical centers. We are proud of the critical role account of health plays in the care of underserved populations, and we are committed to becoming America's primary care provider. Now I'll turn the call over to our CFO, Brian Coffey, who will walk you through additional details on our financial performance and the outlook, as well as the impact of the recent accounting change.

Thank you, Marlo, and thanks, everyone, for joining us today. To start, I would like to express my appreciation to our team for their quick response in addressing the recent change in our revenue recognition accounting. I am proud of the diligent work they did to provide our shareholders with our restated results today. As we have stated, our goal is to achieve consistent growth and operating results as we rapidly increase scale and density in new and existing markets. This quarter's results and our outlook for 2022 affirm our confidence in our ability to do just that. Membership increased 115% year-over-year to approximately 227,000 members in the fourth quarter. This represents an increase of more than 121,000 members from a year ago. In the fourth quarter, 56% of our members were Medicare, 29% were Medicaid, and 15% were ACA. Additional information about our membership mix and our PMPM, our per member per month revenue, by line of business is available in our press release and updated financial supplement slides posted this afternoon on our website. Let me briefly discuss the restatement results due to the change in revenue recognition. While we finalized our order for fiscal year 2021, we and our independent order identified certain non-cash adjustments to revenue under accounting standard ASC 606. Previously, the company recognized Medicare risk adjustment, or MRA, as a change to Medicare PMPM at the date of service. In other words, when we saw the patient. Under this approach, when identifying a member's chronic conditions, such as diabetes, we would accrue the MRA revenue to match the timing of that revenue with the timing of the corresponding patient care costs. With the accounting change, most of the MRA is now recognized as a change to Medicare PMPM in the period of collection. That is, in the year after we documented their health condition. The adjustments only impact the timing of revenue recognition, delaying recognition of current year MRA to the subsequent year. Importantly, the adjustments do not impact Canal Health's cash from operations, cash position, or the estimated collectability of MRA receivables. The impact on 2019 and 2020 financial results were not material. The reason the change in revenue recognition was material in 2021 is the significant membership growth in 2021 and the deferred care due to COVID-19 in 2020 that artificially reduced MRA payments in 2021. Our fourth quarter results are detailed in our press release and 10-K file today. I'd like to spend time walking through what we think investors are most interested in learning about. That is the impact of the accounting change on our 2021 revenue and adjusted EBITDA and our 2022 guidance. So for this portion of the discussion, it may be helpful to refer to slides 12 and 13 in our financial supplement available on our investor relations website, where we illustrate the impact of these changes. As a result of the restatement, approximately $122 million of MRA revenue related to care provided during 2021 that would have previously been recognized in 2021 is now expected to be recognized in 2022. This reduces revenue that would have been reported under our previous accounting methodology by approximately $122 million. This $122 million reduction is partially offset by $10 million in MRA revenue that was previously recognized in 2020 under the previous accounting methodology for a net negative impact to 2021 revenue of approximately $112 million. Importantly, absent the change in accounting, our $1.72 billion in revenue was in line with our November 2021 revenue guidance of approximately $1.7 billion. Turning to 2021 adjusted EBITDA. As a result of the restatement, approximately $101 million of 2021 adjusted EBITDA related to the change in MRA revenue described above as well as other non-cash items is now expected to be recognized in 2022. The $101 million reduction in 2021 is partially offset by $10 million that was previously recognized in 2020 under the prior accounting methodology for a negative impact to 2021 adjusted EBITDA of $91 million. Again, absent the change in accounting, our $118.2 million in adjusted EBITDA was in line with our November 2021 adjusted EBITDA guidance of approximately $118 million. Now turning to the impact of the change on our 2022 guidance. For revenue, the net positive impact from the restatement is expected to add $59 million in revenue to the midpoint of our prior guidance of $2.65 billion. The $69 million change consists of $122 million of MRA revenue related to care provided in 2021, net of $53 million of revenue included in previous 2022 guidance that is now expected to be recognized in 2023. This revenue recognition timing change has the impact of bringing our 2022 revenue guidance midpoint up from $2.65 billion to $2.72 billion. However, incremental to this accounting adjustment, we are now expecting an additional $80 to $180 million of revenue related to improved organic growth. As such, we are further raising our full-year 2022 revenue guidance to a range of $2.8 to $2.9 billion. The accounting change also impacts the reported medical claims ratio, or MCR, in 2021 and our expectations for 2022. In 2021, the restated MCR was 80.5% and would have been 74.9% under the prior accounting methodology. This increase is driven by the change in MRA revenue recognition, which reduced 2021 revenue by $112 million and increases 2022 revenue by $69 million. For 2022, we are projecting an MCR in the range of 76.0% to 76.5%, reflecting the MRA-related accounting change and operational improvements partially offset by higher DCE memberships. And seasonally, the MCR for the first half of the year should be higher than the second half of the year. For 2022 adjusted EBITDA guidance, the net positive impact from the restatement is expected to add approximately $58 million to the midpoint of our prior guidance of $170 to $175 million. The $58 million change consists of $100 million of adjusted EBITDA that will now be recognized in 2022 partially offset by $43 million in adjusted EBITDA included in previous 2022 guidance that is now expected to be recognized in 2023. Once again, this increase is related to the change in the accounting methodology. Also, because of the improved fundamentals of our business, we are further increasing our 2022 adjusted EBITDA guidance to a range of $230 to $240 million. We view our updated 2022 adjusted EBITDA guidance as our new baseline, and we fully expect to further grow from this level in 2023. Now let me turn to our cash flow and liquidity. We ended the fourth quarter with about $163 million in cash, and our $120 million revolving line of credit was undrawn. Total debt at the end of the fourth quarter was $953 million and includes long-term debt, capital leases, and payments due to sellers. Our total net debt was $790 million, defined as total debt less cash. During 2021, cash use and operating activities was $129 million, an increase of $36 million sequentially due to working capital needs and our growth. 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 drive growth. We ended 2021 with 130 medical centers and more than 1,000 affiliates. This included 20 de novos completed during the year in line with our guidance. In addition, we expanded our square footage at a number of our centers, expanding additional clinical capacity to serve our growing membership base. Our strategy is to continue to build scale and density in our targeted markets. Creating capacity and taking market share in a timely and capital-efficient way is paramount to our growth plans. We utilize each of our three growth avenues, building, buying, and managing, either individually or in combination, depending upon the opportunities available. This 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 with the least amount of risk. We believe this, in turn, ensures sustainable, profitable growth and market leadership. Our growth strategy provides our market leaders with the necessary tools to grow their markets as efficiently as possible. What do I mean by this? As we discussed in the past, we do not have a one-size-fits-all strategy for growth. We allow the local market leadership to determine the best course of action to grow profitably. All healthcare is local, and our leadership in the markets have P&L responsibility. That means as market dynamics change, particularly in relation to the cost-benefit trade-off between building a medical center and purchasing small medical practices as tuck-ins, local leaders can make a business case for adapting their growth strategy and deploying capital in the most efficient manner. As we executed on our strategy throughout 2021 and now into 2022, we are seeing interesting market dynamics as we analyze our build strategy compared to some of the many small tuck-in opportunities that come our way. As it relates to de novo's built from the ground up, we are seeing higher construction costs and longer construction lead times due to labor and supply chain challenges. Conversely, more small medical practices are becoming available. And importantly, the valuations of these tuck-in medical practices are lower than a year ago. As a result, when we look at the deployment of capital, in some areas the risk-reward tradeoff is skewing more favorably toward adding small tuck-in practices versus building de novos from scratch. The basic math we look at is that it typically costs approximately $1.5 to $2 million to build out a medical center, and that center will lose approximately $1.5 million in the first two years. for a net CapEx and OpEx cost of $3 million to $3.5 million. However, we are finding many attractive tuck-in practices that we can officially add for less than this sum. Notably, these practices will come with physicians and staff who know and understand the patient population, along with membership, revenue, and adjusted EBITDA. In addition, we get greater speed to market and more rapid access to scarce clinical capacity and market intelligence. So as we move into 2022, that more of our new medical centers will come from tuck-ins than we had previously anticipated. It's important to note that at the end of the year, we still expect to have approximately 184 to 189 medical centers. we believe that our flexible growth strategy of buying, building, and managing will allow us to achieve the planned medical center count more efficiently. Now let me summarize our 2022 outlook for you. We expect membership for 2022 to be in the range of 290,000 to 295,000 from the previous estimate of 280,000 to 285,000. Membership as of March 31, 2022 is expected to be approximately $265,000. Total revenue is expected to be approximately $2.8 billion to $2.9 billion. For the full year 2022, we expect our MCR will be in the range of 76% to 76.5%. Our adjusted EBITDA is expected to be $230 million to $240 million, which we view as our new baseline for expected growth in 2023. Our own medical centers at the end of 2022 are expected to be in the range of 184 to 189, up from 130 at the end of 2021. Additionally, we expect interest expense of 65 to $70 million, stock-based compensation expense of 60 to 65 million, and capital expenditures of 40 to $60 million. And as noted in today's earnings release, we expect to be able to achieve our 2022 guidance without the need for additional financing. With that, I'll ask the operator to open the call to your questions.