Cano Health, Inc.

Good morning and welcome to Canada Health's first quarter 2022 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 Canada Health Press Release webcast link and other related materials are available on the Investor Relations section of Canada Health's website. These statements are made as of May 9, 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 2022 fiscal year. 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. In actual future events, our results could differ materially. During the call, we will also discuss non-GAAP financial measures. The non-GAAP 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 on the investor relations section of our website. With that, I'll turn the call over to Dr. Marlo Hernandez, Chairman and Chief Executive Officer of Kano Health. Please go ahead.

Good morning. Thank you and welcome to the call. We appreciate your joining us today. I'd like to take this opportunity to thank the entire Kano Health team for their hard work and dedication to our mission. With strong growth in membership, revenue, and adjusted EBITDA, the Kano Health team delivered yet another strong quarter and continued to position the company for future growth. all while providing quality healthcare and improved outcomes for our now more than 269,000 members. This quarter once again demonstrates the continued momentum of our business. We drove top-line revenue growth 156% year-over-year by continuing to execute on our build, buy, and manage growth strategy. Further, we achieved adjusted EBITDA growth of 157% year-over-year, even while making the investments required by our fast pace of growth. This is important validation of the fundamental earnings power of our business model. We have just begun to build scale and density in many new markets, which we believe will provide us with the opportunities to leverage our investments and generate additional earnings for further growth in a virtuous cycle. While our national care platform has proven to add value to entire populations, A key demographic we serve is Medicare patients. We ended the quarter with more than 160,000 total capitated Medicare members, which included over 119,000 Medicare Advantage members and over 41,000 Medicare Direct Contracting Entity, or DCE, members. We are excited about the significant growth in our DCE membership in 2022, which broadens our potential to provide value-based primary care to Medicare patients who were formerly fee-for-service. DCE members were above our January 1 level by approximately 11,000 members, reflecting 2022 roster reconciliations. The majority of our DCE members are served by our 1,000-plus affiliate physicians, allowing us to serve more patients, gain market insights in places like New York, New Jersey, and Arizona, where we don't presently have owned medical centers, and build scale and density quickly and efficiently. We expect DCE to be marginally accreted to EBITDA in 2022 and expect margins to improve over time as more intensive primary care leads to fewer hospitalizations and better overall health outcomes. Our Medicare Advantage membership grew sequentially in the first quarter, but lower than our January 1 estimates due to ongoing management of our Puerto Rico affiliates, retaining those affiliates that are most committed to value-based primary care. and due to timing of conversions of fee-for-service Medicare patients to Medicare Advantage in new markets, which we expect to pick up in the second half of this year. Combined Medicare Advantage and Medicare DCE membership represented 60% of our total membership compared to 56% in Q4. Even with natural attrition in DCE membership during the year, we expect total membership in Medicare to remain about 60% of total members through 2022, due to growth in our Medicare Advantage membership. Turning to owned medical centers, we ended the quarter with 137 medical centers, up from 130 at the end of Q4. As we have done historically, the majority of our new centers will be added in the second half of the year to coincide with the annual enrollment period. Also, as in the past, we're continuing to grow organically by building centers and adding tuck-ins through the integration of existing affiliates and small independent practices whose patients and facilities are blended with our own nearby medical centers. The average cost of a Tuckton medical center is about $1.5 million, lower than the roughly $1.8 million we typically spend to build a new medical center. Generally, we expect Tuckton medical centers to break even on an EBITDA basis in year one as we add services and offer value-based Medicare programs to fee-for-service Medicare patients and turn profitable in year two with a significantly faster ramp than ground-up builds. Let me tell you about two of our recent tuck-ins. One of this quarter's tuck-ins is an independent medical center in a rapidly growing Las Vegas market. The center is run by a well-respected physician who has been serving her community for many years and serves primarily commercial and fee-for-service Medicare patients. As we add services to this center, we expect to increase the number of value-based capitated Medicare members at this center. Another talking is an affiliate medical center in South Florida that will move to an under construction kind of help the noble by the end of this year. This now former affiliate had about 260 members already contracted with us and brings at least 500 additional fee for service Medicare members. Again, as we add services for patients, expand the medical center, we expect to increase the number of value based Medicare members we serve. Let me now highlight some of our clinical results. Healthy Heart, our cardiovascular prevention program, has significantly improved statin use among participating patients with diabetes and atherosclerotic cardiovascular disease, increasing the number of patients at an LDL goal of less than 70 by 108%. In addition, our clinical operations team is making measurable progress in reducing the progression of chronic kidney disease, or CKD, Their protocols, which are now integrated into Kano Panorama, may be more effective than approved drugs to treat CKD, such as SGLT2 inhibitors. These are just a few of the clinical activities underway to support our demonstrated success in reducing hospital admissions, ER visits, and improving significantly mortality rates. Overall, our performance this quarter reinforces our confidence in Kano Health's national care platform, which is designed to improve access, quality, and wellness, and our growth strategy of building, buying, and managing medical centers to achieve scale and density, which in turn produces profitable growth. We're proud of the critical role Canada Health plays in transforming the U.S. healthcare system and redefining primary care, particularly for underserved communities. Yet, we're only just beginning. I look forward to sharing with you our vision of the future at our upcoming Investor Day on June 7th. Now I'll turn the call over to our CFO, Brian Coppe, who will walk you through on our financial performance and outlook.

Thank you, Marlo, and thanks everyone for joining us today. The total membership increased 130% to approximately 269,000 members in the first quarter. This represents an increase of more than 150,000 members from the first quarter of 2021. In the first quarter, 44% of our members were Medicare Advantage, 15% were Medicare DCE, 25% were Medicaid, and 15% were ACA. Total revenue for the quarter was approximately $704 million, up from approximately $275 million a year ago, and $492 million in the fourth quarter. Total capitated revenue was approximately $674 million in the quarter, up from approximately $465 million in the fourth quarter. This 45% sequential increase was driven by a mixed shift toward Medicare members, a 22% increase in member months, and a 19% increase in total capitated revenue per member per month, or PMPM. Our Medicare PMPM in the quarter was $1,283, which is in line with the estimated $1,280 PMPM for 2022 we discussed on our fourth quarter call. Additional information about our membership mix and our PMPM, or revenue per member per month by line of business, is available in our press release and updated financial supplement slides posted this morning on our website. Our medical cost ratio, or MCR, in the quarter was 79.5% compared to 74.6% a year ago. driven by the significant increase in new DCE members. Excluding DCE, our MCR was 74%, which was below our Q1 2021 MCR prior to the start of the DCE program. As we have discussed in the past, DCE members initially have an MCR in the mid to high 90s, which we expect to decline over time as we provide value-based primary care services to improve management of chronic conditions. For 2022, we expect to maintain in the range of 76% to 76.5% as discussed on our fourth quarter call. This reflects our expectation that total MCR in the second half will be significantly lower than the total MCR in the first half. This is primarily due to the positive impact of stop-loss insurance as members with higher cost medical conditions reach the maximum amount we are responsible for under our policies, in addition to lower elective procedures during the holidays and the continued integration of DCE patients into our population health platform. Direct patient expense was 8.6% of revenue. This was lower than the usual 11% to 12% we see each quarter, primarily as a result of higher Medicare DCE revenue which has lower direct patient expense than other capitated revenue. SG&A in the quarter was 13.9 percent of revenue, or 11.7 percent, excluding stock-based compensation. Adjusted EBITDA in the quarter was $45 million, up from $17.5 million a year ago, producing an adjusted EBITDA margin of 6.4 percent. Now let me turn to our cash flow and liquidity. We ended the first quarter with about $113 million in cash, and our $120 million revolving line of credit was undrawn. Total debt at the end of the first quarter was $938 million and includes long-term debt, capital leases, and payments due to sellers. Our total net debt was $825 million, defined as total debt less cash. During the first quarter of 2022, cash used in operating activities was $37 million. This is largely related to working capital requirements. For the full year of 2022, we continue to expect to generate positive operating cash flows as a result of the strong start of the year for the company. And as we discussed, the Medicare risk adjustment payments will continue to come in throughout the year with the largest payment expected in June or July. As Marla the quarter with 137 medical centers. Within those centers, we had over 400 employed providers. We are now on track to expand our own medical centers to the range of 184 to 189 by the end of the year. So now let me summarize our 2022 outlook, which remains unchanged since our last guidance in March. We expect membership for 2022 to be in the range of 290,000 to 295,000. 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%. We expect to operate 184 to 189 owned medical centers by the end of 2022. And our adjusted EBITDA is expected to be $230 million to $240 million. Additionally, we expect interest expense of $60 million to $65 million, stock-based compensation expense of $60 to $65 million, and capital expenditures of $40 to $60 million. As we announced a few weeks ago, we will be holding Investor Day on June 7th at 9.30 a.m. Eastern Time, focusing on the company's strategic priorities, business model, growth drivers, and financial outlook. A live webcast of the Investor Day presentation, along with supporting materials, will be available on the day of the event on Canals Health's Investor Relations website. With that, I will ask the operator to open the call to your questions.